Opportunities for Oversight and Improved Use of Taxpayer Funds:  
Examples from Selected GAO Work (01-AUG-03, GAO-03-1006).	 
                                                                 
This report is submitted pursuant to section 301(e) of the	 
Concurrent Resolution on the Budget for Fiscal Year 2004,  which 
directs the Comptroller General to submit to the Committees on	 
the Budget a comprehensive report identifying instances in which 
the committees of jurisdiction may make legislative changes to	 
improve the economy, efficiency, and effectiveness of federal	 
programs within their jurisdiction.				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-1006					        
    ACCNO:   A07803						        
  TITLE:     Opportunities for Oversight and Improved Use of Taxpayer 
Funds: Examples from Selected GAO Work				 
     DATE:   08/01/2003 
  SUBJECT:   Congressional oversight				 
	     Balanced budgets					 
	     Budget administration				 
	     Fiscal policies					 
	     Productivity in government 			 
	     GAO High Risk Series				 
	     Performance and Accountability Series		 
	     2003						 
                                                                 

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GAO-03-1006

                                       A

Report to Committees on the Budget

August 2003 OPPORTUNITIES FOR OVERSIGHT AND IMPROVED USE OF TAXPAYER FUNDS

Examples from Selected GAO Work

GAO- 03- 1006

Contents Letter 1 Appendixes

Appendix I: Opportunities to Improve the Economy, Efficiency, and
Effectiveness of Federal Programs 4

050 National Defense 5 Examples from Selected GAO Work 7

Reduce the Number of Carrier Battle Group Expansions and Upgrades 7 Limit
Commitment to Production of the F/ A- 22 Fighter until Operational Testing
Is Complete 9 Reassess the Need for the Selective Service System 13
Consolidate Military Exchange Stores 15 Reorganize C- 130 Reserve
Squadrons 17 Acquire Conventionally Rather Than Nuclear- Powered Aircraft
Carriers 19

Improve the Administration of Defense Health Care 22 Seek Additional
Opportunities for VA and DOD to Increase Joint

Activities to Enhance Services to Beneficiaries and Reduce Costs 24
Continue Defense Infrastructure Reform 27 Reduce Funding for Renovation
and Replacement of Military Housing until DOD Completes Housing Assessment
33

Improve DOD Procurement Practices Regarding Canceling Orders 35 Reduce
Planned Military Construction Costs for Barracks 37 Take a Strategic
Approach to Department of Defense Acquisition of Services 39

Address Overpayments to Defense Contractors 42 CBO Options Where Related
GAO Work Is Identified 45

050- 05 Cancel the Army*s Comanche Helicopter Program 45 050- 10 Reduce
Purchases of the Air Force*s F/ A- 22 Fighter 45 050- 11 Slow the Schedule
of the F- 35 Joint Strike Fighter Program 46 050- 19 Replace Military
Personnel in Some Support Positions with

Civilian Employees of the Department of Defense 46 050- 22 Have the
Departments of Defense and Veterans Affairs Purchase Drugs Jointly 46

150 International Affairs 47 Examples from Selected GAO Work 48

Eliminate U. S. Contributions to Administrative Costs in Rogue States 48

Streamline U. S. Overseas Presence 50 CBO Options Where Related GAO Work
Is Identified 52

150- 01 Eliminate the Export- Import Bank, the Overseas Private Investment
Corporation, and the Trade and Development Agency 52 150- 02 End the
United States* Capital Subscriptions to the European Bank for
Reconstruction and Development 52

250 General Science, Space, and Technology 53 Example from Selected GAO
Work 54

Continue Oversight of the International Space Station and Related Support
Systems 54

270 Energy 56 Examples from Selected GAO Work 57

Corporatize or Divest Selected Power Marketing Administrations 57 Recover
Power Marketing Administrations* Costs 60 Increase Nuclear Waste Disposal
Fees 64 Recover Federal Investment in Successfully Commercialized

Technologies 65 Reduce the Costs of the Rural Utilities Service*s
Electricity and

Telecommunications Loan Programs 67

300 Natural Resources and Environment 69 Examples from Selected GAO Work
70

Terminate Land- Exchange Programs 70 Deny Additional Funding for
Commercial Fisheries Buyback Programs 72

Revise the Mining Law of 1872 74 Reexamine Federal Policies for
Subsidizing Water for Agriculture and Rural Uses 76

Reassess Federal Land Management Agencies* Functions and Programs 78

350 Agriculture 81 Examples from Selected GAO Work 82

Terminate or Significantly Reduce the U. S. Department of Agriculture*s
Market Access Program 82 Consolidate Common Administrative Functions at
the U. S. Department of Agriculture 85 Further Consolidate the U. S.
Department of Agriculture*s County Offices 87

370 Commerce and Housing Credit 89 Examples from Selected GAO Work 90

Recapture Interest on Rural Housing Loans 90

Require Self- Financing of Mission Oversight by Fannie Mae and Freddie Mac
92 Reduce Federal Housing Administration*s Insurance Coverage 94 Merging
U. S. Department of Agriculture and Department of Housing and Urban
Development Single- Family Insured Lending

Programs and Multifamily Portfolio Management Programs 96 Consolidate
Homeless Assistance Programs 98 Reorganize and Consolidate Small Business
Administration*s Administrative Structure 100

Improve Reviews of Small Business Administration*s Preferred Lenders 102
CBO Options Where Related GAO Work Is Identified 104

370- 01 End the Credit Subsidy for the Small Business Administration*s
Major Business Loan Guarantee Programs 104 370- 05 Charge All Banks and
Thrifts Deposit Insurance Premiums 104

400 Transportation 106 Examples from Selected GAO Work 107

Eliminate the Pulsed Fast Neutron Analysis Inspection System 107 Develop a
Passenger Intercity Rail Policy to Meet National Goals 109 Eliminate Cargo
Preference Laws to Reduce Federal Transportation Costs 111

Increase Aircraft Registration Fees to Enable the Federal Aviation
Administration to Recover Actual Costs 113 Apply Cost- Benefit Analysis to
Replacement Plans for Airport

Surveillance Radars 114 Close, Consolidate, or Privatize Some Coast Guard
Operating and

Training Facilities 116 Convert Some Support Officer Positions to Civilian
Status 118 CBO Options Where Related GAO Work Is Identified 120

400- 01 Reduce Federal Subsidies for Amtrak 120 400- 02 Eliminate the
Essential Air Service Program 121 400- 03 Eliminate Grants to Large and
Medium- Sized Hub Airports 121 400- 04 Increase Fees for Certificates and
Registrations Issued by the Federal Aviation Administration 122

400- 08 Eliminate Funding for the *New Starts* Transit Program 122

450 Community and Regional Development 123 Examples from Selected GAO Work
124

Limit Eligibility for Federal Emergency Management Agency Public
Assistance 124 Eliminate the Flood Insurance Subsidy on Properties That
Suffer the Greatest Flood Loss 126

Eliminate Flood Insurance for Certain Repeatedly Flooded Properties 128
Consolidate or Terminate the Department of Commerce*s Trade

Adjustment Assistance for Firms Program 130 Improve Federal Foreclosure
and Property Sales Processes 132 CBO Options Where Related GAO Work Is
Identified 135

450- 02 Eliminate Region- Specific Development Agencies 135 450- 05 Drop
Flood Insurance for Certain Repeatedly Flooded Properties 135

500 Education, Training, Employment, and Social Services 137 CBO Options
Where Related GAO Work Is Identified 138

500- 02 Repeal the Safe and Drug- Free Schools and Communities Act 138
500- 11 Eliminate the Senior Community Service Employment Program 138

550 Health 139 Examples from Selected GAO Work 140

Improve Fairness of Medicaid Matching Formula 140 Charge Beneficiaries for
Food Inspection Costs 142 Implement Risk- Based Meat and Poultry
Inspections at USDA 144 Prevent States from Using Illusory Approaches to
Shift Medicaid Program Costs to the Federal Government 146

Create a Uniform Federal Mechanism for Food Safety 149 Control Provider
Enrollment Fraud in Medicaid 152 Eliminate Federal Funding for SCHIP
Covering Adults without Children 154

CBO Option Where Related GAO Work Is Identified 155 550- 06 Require All
States to Comply with New Rules About Medicaid*s Upper Payment Limit by
2004 155

570 Medicare 156 Examples from Selected GAO Work 157

Reassess Medicare Incentive Payments in Health Care Shortage Areas 157
Adjust Medicare Payment Rates to Reflect Changing Technology, Costs, and
Market Prices 159 Increase Medicare Program Safeguard Funding 163 Modify
the New Skilled Nursing Facility Payment Method to Ensure Appropriate
Payments 166

Implement Risk- Sharing in Conjunction with Medicare Home Health Agency
Prospective Payment System 169 Eliminate Medicare Competitive Sourcing
Restrictions 171

Change Pricing Formula for Medicare- Covered Drugs and Biologicals 173 CBO
Options Where Related GAO Work Is Identified 175

570- 10 Reduce Medicare Payments for Currently Covered Prescription Drugs
175 570- 11 Require Competitive Bidding for High- Volume Items of Durable
Medical Equipment 176 570- 15 Simplify and Limit Medicare*s Cost- Sharing
Requirements 176 570- 19 Reduce Medicare Payments for Home Health Care 176

600 Income Security 178 Examples from Selected GAO Work 179

Develop Comprehensive Return- to- Work Strategies for People with
Disabilities 179 Revise Benefit Payments under the Federal Employees*
Compensation Act 182 Increase Congressional Oversight of PBGC*s Budget 187
Share the Savings from Bond Refundings 189 Implement a Service Fee for
Successful Non- Temporary Assistance for Needy Families Child Support
Enforcement Collections 191

Improve Reporting of DOD Reserve Employee Payroll Data to State
Unemployment Insurance Programs 193 Improve Social Security Benefit
Payment Controls 196 Simplify Supplemental Security Income Recipient
Living Arrangements 198

Reduce Federal Funding Participation Rate for Automated Child Support
Enforcement Systems 200 Obtain and Share Information on Medical Providers
and Middlemen to Reduce Improper Payments to Supplemental Security Income
Recipients 202

Sustain/ Expand Range of SSI Program Integrity Activities 204 Revise
Government Pension Offset (GPO) Exemption 206 Better Congressional
Oversight of PRWORA*s Fugitive Felon Provisions 208

Improve the Administrative Oversight of Food Assistance Programs 211 CBO
Option Where Related GAO Work Is Identified 215

600- 07 Reduce the Federal Matching Rate for Administrative and Training
Costs in the Foster Care and Adoption Assistance Programs 215

700 Veterans Benefits and Services 216 Examples from Selected GAO Work 217

Revise VA*s Disability Ratings Schedule to Better Reflect Veterans*
Economic Losses 217 Discontinue Veterans* Disability Compensation for
Nonservice

Connected Diseases 219 Reassess Unneeded Health Care Assets within the
Department of

Veterans Affairs 221 Reducing VA Inpatient Food and Laundry Service Costs
224 CBO Options Where Related GAO Work Is Identified 226

700- 01 Narrow the Eligibility for Veterans* Disability Compensation to
Include Only Veterans with High- Rated Disabilities 226 700- 02 Narrow the
Eligibility for Veterans* Disability Compensation to Veterans Whose
Disabilities Are Related to Their Military Duties 226 700- 03 Increase
Beneficiaries* Cost Sharing for Care at Nursing Facilities Operated by the
Department of Veterans Affairs 227

800 General Government; 900 Net Interest; and 999 Multiple 228 Examples
from Selected GAO Work 229

Prevent Delinquent Taxpayers from Benefiting from Federal Programs 229
Target Funding Reductions in Formula Grant Programs 231 Adjust Federal
Grant Matching Requirements 235 Replace the 1- Dollar Note with a 1-
Dollar Coin 237 Increase Fee Revenue from Federal Reserve Operations 239
Recognize the Costs Up- front of Long- term Space Acquisitions 241 Seek
Alternative Ways to Address Federal Building Repair Needs 244 Improper
Benefit Payments Could Be Avoided or More Quickly Detected if Data from
Various Programs Were Shared 246

Better Target Infrastructure Investments to Meet Mission and Results-
Oriented Goals 249 Information Sharing Could Improve Accuracy of Workers*
Compensation Offset Payments 251

Determine Feasibility of Locating Federal Facilities in Rural Areas 254
Leverage Buying Power to Reduce Costs of Supplies and Services 256
Consolidate Grants for First Responders to Improve Efficiency 259 CBO
Options Where Related GAO Work Is Identified 261

800- 03 Eliminate Federal Antidrug Advertising 261 920- 03 Impose a Fee on
the Investment Portfolios of

Government- Sponsored Enterprises 261

Receipts 262 Examples from Selected GAO Work 263

Tax Interest Earned on Life Insurance Policies and Deferred Annuities 263
Further Limit the Deductibility of Home Equity Loan Interest 264 Limit the
Tax Exemption for Employer- Paid Health Insurance 265 Repeal the Partial
Exemption for Alcohol Fuels from Excise Taxes on Motor Fuels 267

Index Excise Tax Rates for Inflation 269 Increase Highway User Fees on
Heavy Trucks 270 Require Corporate Tax Document Matching 272 Improve
Administration of the Tax Deduction for Real Estate Taxes 273

Increase Collection of Returns Filed by U. S. Citizens Living Abroad 274
Increase the Use of Seizure Authority to Collect Delinquent Taxes 276
Increase Collection of Self- employment Taxes 278 Increase the Use of
Electronic Funds Transfer for Installment Tax Payments 280

Reduce Gasoline Excise Tax Evasion 282 Improve Independent Contractor Tax
Compliance 283 Expand the Use of IRS*s TIN- Matching Program 285 Improve
Administration of the Federal Payment Levy Program 287 Enhance Nontax Debt
Collection Using Available Tools 288

Slowing the Long- Term Growth of Social Security and Medicare 291 CBO
Options Where Related GAO Work Is Identified 292

Constrain the Increase in Initial Benefits 292 Raise the Retirement Age
292

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Letter

August 1, 2003 The Honorable Jim Nussle Chairman The Honorable John Spratt
Ranking Minority Member Committee on the Budget House of Representatives
The Honorable Don Nickles Chairman The Honorable Kent Conrad Ranking
Minority Member Committee on the Budget United States Senate This report
is submitted pursuant to section 301( e) of the Concurrent Resolution on
the Budget for Fiscal Year 2004, 1 which directs the Comptroller General
to submit to the Committees on the Budget a comprehensive report
identifying instances in which the committees of jurisdiction may make
legislative changes to improve the economy, efficiency, and effectiveness
of federal programs within their jurisdiction.

In this report, we highlight opportunities for and specific examples of
legislative and administrative change that might yield budgetary savings.
We identify illustrative examples from GAO work of changes or steps that
would improve the economy, efficiency, and effectiveness of given
programs, sorted by budget function. We indicate whether an example
appeared in our 2002 report, Supporting Congressional Oversight: Budgetary
Implications of Selected GAO Work for Fiscal Year 2003, 2 and whether a
Congressional Budget Office (CBO) estimate was included in that report.
Each specific example included in this report is not presented as the only
way to address the significant economy, efficiency, and effectiveness
issues identified in our reviews of federal programs and operations but
rather as one of many possible approaches available to the

1 H. R. Rep. No. 108- 71, Sec. 301( e) (2003). 2 U. S. General Accounting
Office, Supporting Congressional Oversight: Budgetary Implications of
Selected GAO Work for Fiscal Year 2003, GAO- 02- 576 (Washington, D. C.:
Apr. 26, 2002).

Congress. The inclusion of a specific example does not mean we endorse it
as the only feasible or appropriate approach.

We drew on GAO*s work that highlights opportunities to improve the
economy, efficiency, and effectiveness of government programs. The report
is based on program design and operational issues that we have identified
in reports for the Congress. Major risks and challenges faced by federal

agencies are summarized in the Performance and Accountability Series. 3
The High- Risk Series 4 is designed to help the Congress focus its
attention on the most important issues and challenges facing the federal
government. Although we derived the examples presented in this report from
our existing body of work, there are similarities between the specific
examples presented here and those presented by CBO*s annual spending and
revenue options report. To assist the Congress, we also have listed GAO
reports identified as relating to options included in the CBO March 2003
Budget Options report. 5 We included GAO reports if they related to the
topic of the CBO option, regardless of whether our work supported the
option or not.

Addressing the myriad of issues reflected in this volume will help improve
economy, efficiency, and effectiveness and reduce costs. The budget
process should prompt us to periodically focus not only on new proposals
but on existing programs. Hard questions need to be asked not only about
the economy and efficiency of our existing programs, but about their need,
fit, relevance, priority and sustainability in the 21 st century. Given
the fiscal

challenges the United States faces in both the near and the longer term,
tough choices will be required in connection with what government does,
how it does business, and sometimes even who does the federal government*s
business. We are also sending copies of this report to other interested
committees of the Congress. Copies will be made available to others upon
request.

3 U. S. General Accounting Office, Major Management Challenges and Risks:
A Governmentwide Perspective, GAO- 03- 95 (Washington, D. C.: January
2003). 4 U. S. General Accounting Office, High- Risk Series: An Update,
GAO- 03- 119 (Washington, D. C.: January 2003). 5 Congressional Budget
Office, Budget Options (Washington, D. C.: March 2003).

This report was prepared under the coordination of Paul L. Posner,
Managing Director and Susan J. Irving, Director, Federal Budget Analysis,
Strategic Issues, who may be reached at (202) 512- 9573 or (202) 512-
9142, respectively. The examples provided in the appendix draw on work
from across GAO. Specific questions about individual examples may be
directed to the GAO contact listed with each example.

David M. Walker Comptroller General of the United States

Appendi xes Opportunities to Improve the Economy, Efficiency, and
Effectiveness of Federal

Appendi x I

Programs This appendix is organized by budget function. The following two
sections are included, where available, for each budget function.

Examples from Selected GAO Work

We identify illustrative examples based on GAO*s work that highlight
opportunities to improve the economy, efficiency, and effectiveness of
federal programs. We indicate whether an example appeared in our 2002
report Supporting Congressional Oversight: Budgetary Implications of

Selected GAO Work for Fiscal Year 2003 1 and whether a CBO estimate was
included in that report.

CBO Options Where Related GAO Work Is Identified

We list GAO reports identified as relating to options included in the CBO
March 2003 Budget Options report. 2 Only those CBO options for which we
identified related GAO products are included. We included GAO reports if
they related to the topic of the CBO option, regardless of whether our
work supported the option or not.

1 U. S. General Accounting Office, Supporting Congressional Oversight:
Budgetary Implications of Selected GAO Work for Fiscal Year 2003, GAO- 02-
576 (Washington, D. C.: Apr. 26, 2002).

2 Congressional Budget Office, Budget Options (Washington, D. C.: March
2003).

050 National Defense Examples from Selected GAO Work

Reduce the Number of Carrier Battle Group Expansions and Upgrades Limit
Commitment to Production of the F/ A- 22 Fighter until Operational Testing
Is Complete

Reassess the Need for the Selective Service System Consolidate Military
Exchange Stores Reorganize C- 130 Reserve Squadrons Acquire Conventionally
Rather Than Nuclear- Powered Aircraft Carriers Improve the Administration
of Defense Health Care Seek Additional Opportunities for VA and DOD to
Increase Joint Activities to Enhance Services to Beneficiaries and Reduce
Costs

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

Improve DOD Procurement Practices Regarding Canceling Orders Reduce
Planned Military Construction Costs for Barracks Take a Strategic Approach
to Department of Defense Acquisition of Services

Address Overpayments to Defense Contractors

CBO Options Where Related GAO Work Is Identified

050- 05 Cancel the Army*s Comanche Helicopter Program 050- 10 Reduce
Purchases of the Air Force*s F/ A- 22 Fighter 050- 11 Slow the Schedule of
the F- 35 Joint Strike Fighter Program

050- 19 Replace Military Personnel in Some Support Positions with Civilian
Employees of the Department of Defense 050- 22 Have the Departments of
Defense and Veterans Affairs Purchase Drugs Jointly

Examples from Selected GAO Work

Reduce the Number of Carrier Battle Group Expansions and Upgrades

Primary agency Department of Defense Accounts Multiple Spending type
Discretionary Budget subfunction 051/ Department of Defense* Military

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 $2 billion (in fiscal year 2000 dollars) and
is likely to increase as older units are replaced and modernized. The Navy
has several costly ongoing carrier- related programs: two nuclear- powered
Nimitz- class carriers are under construction ($ 9.6 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 the
third ship is

scheduled to begin in 2005; 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 battle groups centered around increasingly capable amphibious
assault ships, surface combatants and Trident SSGNs for overseas presence
and crisis response. In the past, CBO concluded that savings could be
achieved if the Congress chose to retire one aircraft carrier, the CVN-
70, and one

active air wing in 2005.

CBO 5- Year Cost Estimate Yes. 3

Included in GAO*s 2002 Budgetary Implications Report 3

Related GAO Products Force Structure: Options for Enhancing the Navy*s
Attack Submarine Force. GAO- 02- 97. Washington, D. C.: November 14, 2001.

Navy Aircraft Carriers: Cost- Effectiveness of Conventionally and Nuclear-
Powered Carriers. GAO/ NSIAD- 98- 1. Washington, D. C.: August 27, 1998.

Aircraft Acquisition: Affordability of DOD*s Investment Strategy.

GAO/ NSIAD- 97- 88. Washington, D. C.: September 8, 1997.

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

Cruise Missiles: Proven Capability Should Affect Aircraft and Force
Structure Requirements. GAO/ NSIAD- 95- 116. Washington, D. C.: April 20,
1995.

Navy*s Aircraft Carrier Program: Investment Strategy Options.

GAO/ NSIAD- 95- 17. Washington, D. C.: January 1, 1995.

Navy Carrier Battle Groups: The Structure and Affordability of the Future
Force. GAO/ NSIAD- 93- 74. Washington, D. C.: February 25, 1993.

GAO Contact Henry L. Hinton, Jr., (202) 512- 4300 3 Throughout this
document, *GAO*s 2002 Budget Implications Report* refers to U. S. General
Accounting Office, Supporting Congressional Oversight: Budgetary
Implications of Selected GAO Work for Fiscal Year 2003, GAO- 02- 576
(Washington, D. C.: Apr. 26, 2002).

Limit Commitment to Production of the F/ A- 22 Fighter until Operational
Testing Is Complete

Primary agency Department of Defense Account Aircraft Procurement, Air
Force (57- 3010) Spending type Discretionary Budget subfunction 051/
Department of Defense* Military

The fiscal year 2003 Defense Appropriations Act provided funds for lowrate
initial production of 20 F/ A- 22 aircraft, and DOD plans to procure 22
aircraft in fiscal year 2004, 24 aircraft in fiscal year 2005, 26 aircraft
in fiscal year 2006, and begin full- rate production of 32 aircraft in
fiscal year 2007.

In several reports over the last 8 years, and as recently as March 2003,
GAO concluded that the Department of Defense (DOD) should minimize
commitments to F/ A- 22 production until completion of operational
testing, now planned for fiscal year 2004. Limiting initial production
rates until completion of operational testing 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 could be adequately tested has
resulted in buying

systems that require modifications to achieve satisfactory performance.
The F/ A- 22 development program did not meet key performance, schedule,
and cost goals in fiscal year 2002. We reported in March 2003 that the
program continues to address technical problems that have limited the
performance of test aircraft, including excessive movement or *buffeting*
of the vertical tail fins, weakening of materials in the horizontal tail,
and instability of avionics software. Air Force officials cannot predict
when they will resolve the avionics problem.

Further, commercial and DOD best practices have shown that completing a
system*s testing prior to 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 plan to procure
276 production aircraft,

lead to difficulties in completing the production program within the
production cost estimate.

Low- rate initial production of 20 aircraft has been approved by the
Congress for fiscal year 2003. The Air Force subsequently determined that
21 aircraft could be purchased for the amount of funding provided in the

fiscal year 2003 defense appropriations act. To avoid the acceleration of
production until completion of operational testing, low- rate initial
production could be maintained at 21 aircraft through fiscal year 2004. If
the Congress were to limit funding to no more than 21 aircraft in fiscal
year 2004, and then proceed with the planned acceleration of production to
24 aircraft in fiscal year 2005, 26 aircraft in 2006, and 32 aircraft in
2007, budget savings could be achieved.

CBO 5- Year Cost Estimate No* the number of aircraft associated with this
option has increased since

Included in GAO*s 2002 the CBO estimates were published.

Budgetary Implications Report Related GAO Products Best Practices: Better
Acquisition Outcomes Are Possible If DOD Can

Apply Lessons from F/ A- 22 Program. GAO- 03- 645T, Washington, D. C.:
April 11, 2003.

Tactical Aircraft: Status of the F/ A- 22 Program. GAO- 03- 603T.
Washington, D. C.: April 2, 2003.

Tactical Aircraft: DOD Should Reconsider Decision to Increase F/ A- 22
Production Rates While Development Risks Continue. GAO- 03- 431.
Washington, D. C.: March 14, 2003.

Tactical Aircraft: DOD Needs to Better Inform Congress about Implications
of Continuing F/ A- 22 Cost Growth. GAO- 03- 280. Washington, D. C.:
February 28, 2003.

Tactical Aircraft: F/ A- 22 Delays Indicate Initial Production Rates
Should Be Lower to Reduce Risks. GAO- 02- 298. Washington, D. C.: March 5,
2002.

Tactical Aircraft: Continuing Difficulty Keeping F- 22 Production Costs
Within the Congressional Limitation. GAO- 01- 782. Washington, D. C.: July
16, 2001.

Tactical Aircraft: F- 22 Development and Testing Delays Indicate Need for
Limit on Low- Rate Production. GAO- 01- 310. Washington, D. C.: March 15,
2001.

Defense Acquisitions: Recent F- 22 Production Cost Estimates Exceeded
Congressional Limitation. GAO/ NSIAD- 00- 178. Washington, D. C.: August
15, 2000.

F- 22 Aircraft: Development Cost Goal Achievable If Major Problems Are
Avoided. GAO/ NSIAD- 00- 68. Washington, D. C.: March 14, 2000.

Defense Acquisitions: Progress in Meeting F- 22 Cost and Schedule Goals.

GAO/ T- NSIAD- 00- 58. Washington, D. C.: December 7, 1999.

Fiscal Year 2000 Budget: DOD*s Procurement and RDT& E Programs.

GAO/ NSIAD- 99- 233R. Washington, D. C.: September 23, 1999.

Defense Acquisitions: Progress of the F- 22 and F/ A- 18E/ F Engineering
and Manufacturing Development Programs. GAO/ T- NSIAD- 99- 113.
Washington, D. C.: March 17, 1999.

F- 22 Aircraft: Issues in Achieving Engineering and Manufacturing
Development Goals. GAO/ NSIAD- 99- 55. Washington, D. C.: March 15, 1999.

1999 DOD Budget: DOD*s Procurement and RDT& E Programs.

GAO/ NSIAD- 98- 216R. Washington, D. C.: August 14, 1998.

F- 22 Aircraft: Progress of the Engineering and Manufacturing Development
Program. GAO/ T- NSIAD- 98- 137. Washington, D. C.: March 25, 1998.

F- 22 Aircraft: Progress in Achieving Engineering and Manufacturing
Development Goals. GAO/ NSIAD- 98- 67. Washington, D. C.: March 10, 1998.

Aircraft Acquisition: Affordability of DOD*s Investment Strategy.

GAO/ NSIAD- 97- 88. Washington, D. C.: September 8, 1997.

F- 22 Restructuring. GAO/ NSIAD- 97- 100BR. Washington, D. C.: February
28, 1997.

Tactical Aircraft: Concurrency in Development and Production of F- 22
Aircraft Should Be Reduced. GAO/ NSIAD- 95- 59. Washington, D. C.: April
19, 1995.

Weapons Acquisition: Low- Rate Initial Production Used to Buy Weapon
Systems Prematurely. GAO/ NSIAD- 95- 18. Washington, D. C.: November 21,
1994.

Tactical Aircraft: F- 15 Replacement Is Premature As Currently Planned.

GAO/ NSIAD- 94- 118. Washington, D. C.: March 25, 1994.

GAO Contact Allen Li, (202) 512- 4841

Reassess the Need for the Selective Service System

Primary agency Department of Defense Spending type Discretionary Budget
subfunction 054/ Defense- related activities

No one has been drafted since 1973 and the advent of the all- volunteer
force. Since 1980, after the Soviet invasion of Afghanistan, males from
ages of 18 through 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. One reason for this
is that any 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.
In the past, CBO concluded that savings could be achieved if the Congress
chose to terminate the Selective Service System.

CBO 5- Year Cost Estimate Yes.

Included in GAO*s 2002 Budgetary Implications Report

Related GAO Product Selective Service: Cost and Implications of Two
Alternatives to the Present System. GAO/ NSIAD- 97- 225. Washington, D.
C.: September 10, 1997.

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

Consolidate Military Exchange Stores

Primary agency Department of Defense Accounts Multiple Spending type
Discretionary Budget subfunction 051/ Department of Defense* Military

Since 1968, studies by GAO, the Department of Defense (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 in a decision memorandum dated May 9, 2003,
decided that a single optimized Armed Service exchange system would best

serve the department and exchange patrons. DOD has established a task
force to produce, within 24 months, a plan to consolidate the three
exchange systems (Army and Air Forces Exchange Service, Navy Exchange, and
the Marine Corps Exchange) into one. The consolidation will affect
management and *back room* operations of the exchanges.

However, it will be transparent to the exchange workers and shoppers as
sailors, for example, will still go to a Navy Exchange. The director of
this effort believes it is too early in the process to estimate savings
from the consolidation. While savings are expected to accrue to the
exchange system and benefit Morale, Welfare and Recreation funding, it
appears that any savings to appropriation accounts would be limited
because the exchanges only indirectly receive benefits from appropriated
funds. For example, they do not pay (1) rent for use of properties owned
by the U. S. government, (2) the salaries of military personnel working
for the

exchanges, and (3) utilities associated with overseas exchanges.
Significant savings to appropriated funds are likely to result only to the
extent that reductions occur in military personnel and facilities. It is
not clear at this point to what extent, if any, that will occur as part of
this effort.

CBO 5- Year Cost Estimate Yes.

Included in GAO*s 2002 Budgetary Implications Report

Related GAO Products Defense Management: Industry Practices Can Help
Military Exchanges Better Assure That Their Goods Are Not Made by Child or
Forced Labor. GAO- 02- 256. Washington, D. C.: January 31, 2002.

Excess Equipment for Former Castle AFB (BXMART). GAO/ NSIAD- 98- 94R.
Washington, D. C.: February 27, 1998.

Morale, Welfare, and Recreation: Declining Funds Require DOD to Take
Action. GAO/ NSIAD- 94- 120. Washington, D. C.: February 28, 1994.

GAO Contact Barry W. Holman, (202) 512- 8412

Reorganize C- 130 Reserve Squadrons

Primary agency Department of Defense Accounts Multiple Spending type
Discretionary Budget subfunction 051/ Department of Defense* Military

Currently, the majority of the Air Force*s C- 130 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. However, active Air Force wings flying the
same aircraft are generally organized in two to three squadrons of 14 C-
130 aircraft. Given this organizational approach, reserve component C- 130
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 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, we reported in 1998 that 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. 4 Several
alternatives could be developed to redistribute existing reserve

component C- 130 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

4 To the extent that alternatives are selected that would cause civilian
personnel reductions that exceed the thresholds established in 10 U. S. C.
2687, the department would have to follow the procedures provided in that
section.

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 by redistributing aircraft
from 13 C- 130 squadrons to other squadrons.

CBO 5- Year Cost Estimate No.

Included in GAO*s 2002 Budgetary Implications Report

Related GAO Product Air Force Aircraft: Reorganizing Mobility Aircraft
Units Could Reduce Costs. GAO/ NSIAD- 98- 55. Washington, D. C.: January
21, 1998. GAO Contact Henry L. Hinton, Jr., (202) 512- 4300

Acquire Conventionally Rather Than NuclearPowered Aircraft Carriers

Primary agency Department of Defense Accounts Multiple Spending type
Discretionary Budget subfunction 051/ Department of Defense* Military

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 nuclearpowered 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 1991 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.
5 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. During fiscal year 2003,
a new nuclear- powered carrier replaced a retiring conventionally powered
carrier, leaving a mix of 10 nuclear and 2 conventionally 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. In the past, CBO concluded that savings could be
achieved if the Congress chose to acquire a conventionally powered carrier
in 2007 instead of a nuclear- powered carrier.

CBO 5- Year Cost Estimate Yes.

Included in GAO*s 2002 Budgetary Implications Report

Related GAO Products Navy Aircraft Carriers: Cost- Effectiveness of
Conventionally and Nuclear- Powered Carriers. GAO/ NSIAD- 98- 1.
Washington, D. C.: August 27, 1998.

Nuclear Waste: Impediments to Completing the Yucca Mountain Repository
Project. GAO/ RCED- 97- 30. Washington, D. C.: January 17, 1997.

Navy Carrier Battle Groups: The Structure and Affordability of the Future
Force. GAO/ NSIAD- 93- 74. Washington, D. C.: February 25, 1993.

5 The State Department has noted that the entry of nuclear- powered
vessels into Japanese ports remains sensitive in Japan and there would
have to be careful consultations with the government of Japan should the
U. S. Government wish to homeport a nuclear- powered carrier in Japan.

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

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

Improve the Administration of Defense Health Care

Primary agency Department of Defense Account Defense Health Program (97-
0130) Spending type Discretionary Budget subfunction 051/ Department of
Defense* Military

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 the Department
of Defense (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 in the past CBO agreed that improving the administration of
Defense health care had the potential to create savings, it could not
develop a savings estimate without a specific legislative proposal.

CBO 5- Year Cost Estimate No.

Included in GAO*s 2002 Budgetary Implications Report

Related GAO Products Defense Health Care: TRICARE Resource Sharing Program
Failing to Achieve Expected Savings. GAO/ HEHS- 97- 130. Washington, D.
C.: August 22, 1997.

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

TRICARE Administrative Prices in the Northwest Region May Be Too High.
GAO/ HEHS- 97- 149R. Washington, D. C.: June 24, 1997.

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

Defense Health Care: Despite TRICARE Procurement Improvements, Problems
Remain. GAO/ HEHS- 95- 142. Washington, D. C.: August 3, 1995.

Defense Health Care: DOD*s Managed Care Program Continues to Face
Challenges. GAO/ T- HEHS- 95- 117. Washington, D. C.: March 28, 1995.

Defense Health Care: Issues and Challenges Confronting Military Medicine.
GAO/ HEHS- 95- 104. Washington, D. C.: March 22, 1995.

GAO Contact Marjorie E. Kanof, (202) 512- 7101

Seek Additional Opportunities for VA and DOD to Increase Joint Activities
to Enhance

Primary agencies Department of Defense

Services to Beneficiaries

Department of Veterans Affairs

and Reduce Costs

Accounts Multiple Spending type Discretionary Budget subfunctions Multiple

Together, the Department of Veterans Affairs (VA) and the Department of
Defense (DOD) provide health care services to more than 12 million
beneficiaries 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 1982 the Congress passed 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.

VA and DOD continue to be hampered by long- standing barriers, including
inconsistent reimbursement and budgeting policies and burdensome agreement
approval processes. These long- standing barriers, along with changes in
how VA and DOD provide medical care, present challenges for

future collaboration and cost efficiencies. Although VA and DOD have taken
some actions to address these barriers and seek more opportunities to
maximize resources, challenges still remain. In a February 2002 staff
report to the House Committee on Veterans* Affairs, new opportunities for
enhancing sharing authority between the VA and DOD were discussed and
legislation recommended to achieve more VA and DOD resource sharing.
Further, in May 2003, the President*s Task Force to Improve Health Care
Delivery For Our Nation*s Veterans submitted its final report, which
includes a series of recommendations to remove barriers and improve
collaboration between VA and DOD. It is too early to determine what impact
the findings and recommendations of the Presidential Task Force will have
on joint activities between VA and DOD.

VA and DOD sharing partners generally believe the sharing program yielded
benefits in both dollar savings and qualitative gains. Recognizing joint
purchasing as an area where efficiencies could be achieved, in June 1999,
VA and DOD signed a memorandum of agreement to combine their buying power
and eliminate contracting redundancies for certain items, including

pharmaceuticals and medical and surgical supplies. In 2001, we reported
that VA and DOD saved over $170 million annually by jointly procuring
pharmaceuticals. However, as we testified in June 2002, VA and DOD had not
awarded joint contracts for medical and surgical supplies, as envisioned
by their memorandum of agreement. In fiscal year 2001, VA spent about $500
million and DOD spent about $240 million for medical and

surgical supplies. Our analysis of about 100 identical medical and
surgical items that VA and DOD now contract for separately indicates that
jointly purchasing these items will yield additional savings, although we
were unable to quantify the full potential. For example, in fiscal year
2001, if VA had collaborated with DOD and obtained a discounted price from
one of

DOD*s regions for needle and syringe disposal containers, VA could have
saved tens of thousands of dollars on this one item alone. Similarly, DOD
could have realized additional savings if it had obtained VA*s lower
national contract price on one type of intravenous tubing. While it is
difficult to quantify the potential savings that joint contracting

and other shared approaches could yield, as we reported in 2002, these
savings could be meaningful given that VA*s and DOD*s separate approaches
to procuring surgical and medical supplies have yielded an estimated $19
million annually in savings. However, much needs to be done to take
advantage of additional savings opportunities. At this point, neither
department has accurate, reliable, and comprehensive procurement
information* a basic requirement for identifying potential medical and
surgical items to standardize. Furthermore, because DOD has opted to
follow a regional rather than a national approach to standardization,
opportunities for national joint procurement will be more difficult to

achieve. Other types of potential sharing exist to maximize each system*s
capacities and result in the most effective delivery of health care. For
example, having DOD use VA*s consolidated mail outpatient pharmacies 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.

CBO 5- Year Cost Estimate No.

Included in GAO*s 2002 Budgetary Implications Report

Related GAO Products VA and Defense Health Care: Potential Exists for
Savings through Joint Purchasing of Medical and Surgical Supplies. GAO-
02- 872T. Washington, D. C.: June 26, 2002.

DOD and VA Pharmacy: Progress and Remaining Challenges in Jointly Buying
and Mailing Out Drugs. GAO- 01- 588. Washington, D. C.: May 25, 2001.

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

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

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

GAO Contact Cynthia A. Bascetta, (202) 512- 7101

Continue Defense Infrastructure Reform

Primary agency Department of Defense Accounts Multiple Spending type
Discretionary Budget subfunction 051/ Department of Defense* Military

Although the Department of Defense (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 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 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 21st century fighting force. The
Senior Executive Committee, which includes the Secretary and deputy
secretaries of Defense and the service secretaries, is expected to meet
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

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.

agendas of these committees are not clear at this time, their members have
endorsed several 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,
as the following illustrate.

 A major efficiency initiative is to subject 226,000 government positions
to public- private competition using OMB Circular A- 76 or to subject
those positions to alternative sourcing such as partnering or divestiture.
Competitive sourcing is one of the five governmentwide initiatives in the
President*s Management Agenda. Under this initiative, OMB has

directed agencies to compete 15 percent of positions deemed commercial in
their fiscal year 2000 Federal Activities Inventory Reform Act inventories
by the end of fiscal year 2003, with the ultimate goal of

at least 50 percent through fiscal year 2008. DOD expects that they will
meet these goals predominately through A- 76 competitions. DOD has not
attached savings targets to these goals, although it has in the past.
Nevertheless, we have noted that these efforts can produce significant
savings regardless of whether governmental organizations or private
contractors win the competitions. However, we have raised questions about
the precision of DOD*s past savings estimates and the likelihood that the
savings will not be realized as quickly as DOD projected.

 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. 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 March 2003, almost 6 years
after the goal was established, DOD had privatized only 38 of the
approximately 1,700 systems being considered for privatization under
existing legislation. 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 administration also continues to emphasize the need for at least one
additional base realignment and closure round in 2005 to reduce unneeded
infrastructure and free up funds for readiness, weapon modernization, and
other needs. 7 DOD projects that additional base closure rounds could save
several billion dollars annually 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. 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.

CBO 5- Year Cost Estimate No.

Included in GAO*s 2002 Budgetary Implications Report

Related GAO Products Defense Management: New Management Reform Program
Still Evolving.

GAO- 03- 58. Washington, D. C.: December 12, 2002.

Major Management Challenges and Program Risks, Department of Defense. GAO-
01- 244. Washington, D. C.: January 2001.

Future Years Defense Program: Risks in Operation and Maintenance and
Procurement Programs. GAO- 01- 33. Washington, D. C.: October 5, 2000.

7 The National Defense Authorization Act for Fiscal Year 2002 authorized
another Base Realignment and Closure (BRAC) round to be conducted in 2005.

Defense Infrastructure: Improved Performance Measures Would Enhance
Defense Reform Initiative. GAO/ NSIAD- 99- 169. Washington, D. C.: August
4, 1999.

Defense Reform Initiative: Organization, Status and Challenges.

GAO/ NSIAD- 99- 87. Washington, D. C.: April 21, 1999.

Defense Reform Initiative: Progress, Opportunities, and Challenges.

GAO/ T- NSIAD- 99- 95. Washington, D. C.: March 2, 1999.

Force Structure: A- 76 Not Applicable to Air Force 38th Engineering
Installation Wing Plan. GAO/ NSIAD- 99- 73. Washington, D. C.: February
26, 1999.

Major Management Challenges and Program Risks: Department of Defense. GAO/
OCG- 99- 4. Washington, D. C.: January 1999.

Army Industrial Facilities: Workforce Requirements and Related Issues
Affecting Depots and Arsenals. GAO/ NSIAD- 99- 31. Washington, D. C.:
November 30, 1998.

Military Bases: Review of DOD*s 1998 Report on Base Realignment and
Closure. GAO/ NSIAD- 99- 17. Washington, D. C.: November 13, 1998.

Defense Infrastructure: Challenges Facing DOD in Implementing Reform
Initiatives. GAO/ T- NSIAD- 98- 115. Washington, D. C.: March 18, 1998.

Best Practices: Elements Critical to Successfully Reducing Unneeded RDT& E
Infrastructure. GAO/ NSIAD/ RCED- 98- 23. Washington, D. C.: January 8,
1998.

Future Years Defense Program: DOD*s 1998 Plan Has Substantial Risk in
Execution. GAO/ NSIAD- 98- 26. Washington, D. C.: October 23, 1997.

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

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

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

Defense Acquisition Organizations: Linking Workforce Reductions With
Better Program Outcomes. GAO/ T- NSIAD- 97- 140. Washington, D. C.: April
8, 1997.

Defense Budget: Observations on Infrastructure Activities. GAO/ NSIAD97-
127BR. Washington, D. C.: April 4, 1997.

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

Reduce Funding for Renovation and Replacement of Military Housing until
DOD

Primary agency Department of Defense

Completes Housing

Accounts Multiple

Assessment

Spending type Discretionary Budget subfunction 051/ Department of Defense*
Military One of the Department of Defense*s (DOD*s) most pressing problems
is its

outsized and decaying infrastructure, and this problem is prominent in the
family housing program. By DOD*s March 2002 estimates, about 60 percent of
military housing is inadequate and would require as much as $16 billion 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 2001, an initiative started to eliminate the
service members* out- ofpocket

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

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 within 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. In the past, CBO could not estimate the savings for this option
unless the funds needed for noncritical construction and renovation
projects were identified. Although CBO agreed some savings would result
from this option, it estimated that some of those savings would be offset
in future years by additional spending for projects that are delayed but
ultimately funded.

CBO 5- Year Cost Estimate No.

Included in GAO*s 2002 Budgetary Implications Report

Related GAO Product Military Housing: DOD Needs to Address Long- Standing
Requirements Determination Problems. GAO- 01- 889. Washington, D. C.:
August 3, 2001. GAO Contact Barry W. Holman, (202) 512- 8412

Improve DOD Procurement Practices Regarding Canceling Orders

Primary agency Department of Defense Accounts Multiple Spending type
Discretionary Budget subfunction 051/ Department of Defense* Military

As of September 30, 2001, Department of Defense (DOD) records showed that
the department had inventory on order valued at about $1.6 billion that
would not have been ordered based on current requirements. We have issued
several reports in the past few years highlighting weaknesses in the
department*s requirements determination processes for materials and its

procedures for canceling orders for items that are no longer needed. For
example, we reported in May 2001 that the Army was unable to accurately
identify its requirements for war reserve spare parts because (1) it was
not

using the best available data concerning the rate at which spares would be
consumed during wartime and (2) a potential mismatch existed between how
the Army determined spare parts requirements for war reserves and

how the Army plans to repair equipment on the battlefield. Additional
budgetary savings in this area can be anticipated because the department
has a number of initiatives underway to better define spare parts
requirements and to more efficiently cancel orders for items it determines
are no longer needed.

The Congress may wish to continue to monitor the DOD*s annual reports on
the value of its unneeded inventory in order to ensure that the value
continues to decrease. In addition, the Congress could consider requiring
that the department*s logistics transformation initiatives include (1)
enhancements to its models for computing inventory requirements to

ensure greater accuracy and (2) more efficient procedures for canceling
orders it determines are no longer needed. CBO 5- Year Cost Estimate

No, this is a new example. CBO could not develop an estimate for this
Included in GAO*s 2002

example. Budgetary Implications Report

Related GAO Product Major Management Challenges and Program Risks:
Department of Defense. GAO- 03- 98. Washington, D. C.: January 2003.

GAO Contact William Solis, (202) 512- 8365

Reduce Planned Military Construction Costs for Barracks

Primary agency Department of Defense Accounts Multiple Spending type
Discretionary Budget subfunction 051/ Department of Defense* Military

In January 2003, GAO reported that over the next few years the military
services plan to eliminate barracks with gang latrines and provide private
sleeping rooms (to meet the Department of Defense*s (DOD) 1+ 1 barracks
design standard) for all permanent party service members. The Navy has

an additional goal to provide barracks for sailors who currently live
aboard ships when in homeport. To implement these goals, the services plan
to spend about $6 billion over the next 7 years to construct new barracks.

GAO reported that the DOD Housing Management manual, which provides policy
guidance about who should live in barracks, appears to be out of date and
is under revision, and the military services have adopted different
barracks occupancy requirements. The rationale for the services*
requirements, and in particular for the requirement that more experienced
junior service members live in barracks, appears to be a matter of
military judgment and preference with less emphasis on systematic,
objective analyses. Requiring more personnel (more pay grades) to live in
barracks than is justified results in increased barracks program and
construction costs and may be inconsistent with DOD*s policy to maximize
reliance on civilian housing to the extent this policy is applied to
barracks. There are also quality- of- life implications because most
junior service members prefer to live off base. GAO reported that the
timely resolution of these matters could potentially affect future budget
decisions by reducing the number of new barracks to construct.

GAO recommended that DOD revise its barracks occupancy guidance based, at
least in part, on the results of objective, systematic analyses to
determine who should be required to live in barracks on base or permitted
to reside off base and seek to ensure greater consistency in requirements

among the military services to the extent practical. DOD agreed, in
principle, to base the department*s barracks policy revision and the
services* barracks occupancy requirements* at least in part* on the
results of systematic analyses, but left unclear the extent to which it is
likely to do so. GAO continues to believe that, given the variations noted
in

the report, the services requirements determinations should be supported
with more objective analyses to the extent practical. If the Congress
required DOD to revise its barracks occupancy guidance according to GAO

recommendations, then future construction and operation costs for barracks
could be significantly lowered.

CBO 5- Year Cost Estimate No, this is a new example.

Included in GAO*s 2002 Budgetary Implications Report

Related GAO Product Military Housing: Opportunity for Reducing Planned
Military Construction Costs for Barracks. GAO- 03- 257R. Washington, D.
C.: January 7, 2003.

GAO Contact Barry W. Holman, (202) 512- 8412

Take a Strategic Approach to Department of Defense Acquisition of Services

Primary agency Department of Defense Accounts Multiple Spending type
Discretionary Budget subfunction 051/ Department of Defense* Military

Over the last decade, much of the Department of Defense*s (DOD) management
control of the billions it has spent in procuring services has been
inefficient and ineffective. Today, DOD spending on a wide range of
services* such as information technology, administrative support, and
research and development* is approaching $100 billion annually. All too
often, our work* and the work of the DOD Inspector General* has found that
DOD organizations have not clearly defined service contract requirements
nor adequately pursued competition. Award of these contracts has been
widely dispersed, and DOD or the military services have had limited
control on a servicewide or DOD- wide basis. Recent legislation requires
DOD to improve procurement practices to achieve savings and

other benefits. Like the federal government, private companies
increasingly rely on services and also struggle with methods to better
manage their purchasing. To reduce costs and more effectively procure
services, many companies have adopted a strategic approach* centralizing
and reorganizing their operations to get the best value for the company as
a whole* that is based on the implementation of a variety of best
practices. These range from learning much more about their service
spending to buying services on an enterprisewide rather than business unit
basis.

A strategic approach pulls together participants from a variety of places
within an organization who recommend changes that can constrain rising
acquisition costs. These changes can include analyzing spending to
identify opportunities to leverage their buying power; instituting
companywide

purchasing of specific services; reshaping a decentralized process to
follow a more center- led, strategic approach; and increasing the
involvement of the enterprise procurement organization, including working
across units to help identify service needs, select providers, and manage
contractor performance.

Studies have reported significant cost savings in the private sector, with
some companies achieving reported savings of 10 to 20 percent of their
total procurement costs through the use of a strategic approach to buying
goods and services. A recent Purchasing Magazine poll finds that companies
employing procurement best practices* including employing effective spend
analysis processes* are routinely delivering a 3 percent to 7 percent
savings on their procurement costs.

One option for achieving significant savings is for DOD to adopt the very
same strategic approach and practices employed by the private sector. In
response to recent legislation requiring management improvements in
service contracts, DOD is beginning a pilot to analyze spending data from
a DOD- wide perspective. The pilot is expected to identify 5 to 10
categories of smaller service requirements that can be consolidated for
large- scale savings opportunities and other efficiencies over the current
decentralized

contracting environment. Although moving in the right direction, DOD has
not yet adopted best practices to the same extent as the companies we
studied. Whether DOD can adopt these practices depends on its ability to

make long- term management changes necessary to implement a more strategic
approach to service contracts. DOD cites a number of challenges that may
hamper adoption of these practices. These include the size and complexity
of DOD*s service needs, the fragmentation of spending data

across multiple financial and procurement systems, and socioeconomic goals
for contracting with small businesses that may constrain its ability to
consolidate smaller requirements into larger contracts. While seemingly
daunting, each of the challenges to be faced by DOD has been faced and
overcome by private sector companies. Given that DOD*s spending on service
contracts is approaching $100 billion annually, the potential benefits of
overcoming the challenges and using best practices to establish an
effective spending analysis program are significant* achieving total
spending perspective across DOD; making the business case for
collaboration in joint purchasing rather than fragmented purchasing;
organizing an effective management structure to assign accountability and
exercise oversight; and identifying potentially billions of dollars in
procurement savings opportunities by leveraging buying power.

CBO 5- Year Cost Estimate No, this is a new example. CBO could not develop
an estimate for this

Included in GAO*s 2002 example.

Budgetary Implications Report

Related GAO Products Best Practices: Improved Knowledge of DOD Service
Contracts Could Reveal Significant Savings. GAO- 03- 661. Washington, D.
C.: June 10, 2003.

Sourcing and Acquisition: Challenges Facing the Department of Defense.
GAO- 03- 574T. Washington, D. C.: March 19, 2003.

Major Management Challenges and Program Risks: Department of Defense. GAO-
03- 98. Washington, D. C.: January 2003.

Best Practices: Taking a Strategic Approach Could Improve DOD*s
Acquisition of Services. GAO- 02- 230. Washington, D. C.: January 18,
2002.

Contract Management: Trends and Challenges in Acquiring Services.

GAO- 01- 753T. Washington, D. C.: May 22, 2001. GAO Contact David E.
Cooper, (617) 788- 0555

Address Overpayments to Defense Contractors

Primary agency Department of Defense Accounts Multiple Spending type
Discretionary Budget subfunctions Multiple

Ensuring prompt, proper, and accurate payments is a key element of a sound
contract management process. Yet, for the Department of Defense (DOD),
completing such basic tasks has long been a challenge. GAO first reported
problems with contractor overpayments in 1994. That report, and those
issued subsequently, noted that contractors were refunding hundreds of
millions of dollars to DOD each year, for a total of about $6.7 billion
between fiscal year 1994 and 2001. GAO also found that a substantial
portion of overpayments was not repaid promptly* in some cases for years.
As an example, in a 1999 review of 13 contractors, GAO found that it took
about a year, on average, before overpayments of $56.2 million were
refunded to DOD. The time taken for repayment ranged from 2 weeks to
nearly 6 years.

While DOD has a number of initiatives underway to address its payment
problems, it will be some time before the problems are resolved. Until
then, DOD contractors will continue receiving a sizable amount of cash
beyond what is intended to finance and pay for the goods and services DOD
is purchasing. In effect, such overpayments provide an interes- free loan
to contractors. In December 2001, in response to GAO*s work, the Federal
Acquisition

Regulation (FAR) was revised to require contractors receiving overpayments
on invoice payments to notify the government and seek instructions for
disposing of the overpayment. However, the revision does not address
overpayments stemming from financing payments 8 *although GAO found that
most overpayments involve contracts with financing

8 Contract payments involve payments for the delivery of goods and
services and financing payments. Financing payments include (1) progress
payments to cover a contractor*s costs as they are incurred during the
construction of facilities or the production of major weapons systems and
(2) performance- based payments that are based on the accomplishment of
particular events or milestones* typically used on production contracts.

payments. In June 2003, the Civilian Agency Acquisition Council and the
Defense Acquisition Regulations Council were proposing to require
contractors to notify the government when they received overpayments
stemming from either invoice or financing payments on commercial item and
non- commercial item contracts.

While we have recommended that the Secretary of Defense require
contractors to promptly notify the government of overpayments made to
them, given the extent of the overpayment problem, one option is for the
Congress to require contractors to notify the government of overpayments
when they become aware of them, for all types of contracts, and to return
the money promptly upon becoming aware of the overpayments. Additional
steps could be taken to create incentives for contractors to

refund money they have not earned. For example, a requirement could be
established for contractors to pay interest on overpayments at the
discretion of DOD on a facts and circumstances basis if they do not return
the money promptly.

CBO 5- Year Cost Estimate No, this is a new example. However, CBO
indicated it could probably make

Included in GAO*s 2002 an estimate for this example.

Budgetary Implications Report Related GAO Products Major Management
Challenges and Program Risks: Department of Defense. GAO- 03- 98.
Washington, D. C.: January 2003.

Financial Management: Coordinated Approach Needed to Address the
Government*s Improper Payments Problems. GAO- 02- 749. Washington, D. C.:
August 9, 2002.

DOD Contract Management: Overpayments Continue and Management and
Accounting Issues Remain. GAO- 02- 635. Washington, D. C.: May 30, 2002.

Department of Defense: Status of Achieving Outcomes and Addressing Major
Management Challenges. GAO- 01- 783. Washington, D. C.: June 25, 2001.

Contract Management: Excess Payments and Underpayments Continue to Be a
Problem at DOD. GAO- 01- 309. Washington, D. C.: February 22, 2001.

DOD Contract Management: Greater Attention Needed to Identify and Recover
Overpayments. GAO/ NSIAD- 99- 131. Washington, D. C.: July 19, 1999.

Recovery Auditing: Reducing Overpayments, Achieving Accountability, and
the Government Waste Corrections Act of 1999. GAO/ T- NSIAD- 99- 213.
Washington, D. C.: June 29, 1999.

DOD Procurement: Millions in Contract Payment Errors Not Detected and
Resolved Promptly. GAO/ NSIAD- 96- 8. Washington, D. C.: October 6, 1995.

GAO Contact David E. Cooper, (617) 788- 0555

CBO Options Where 9

Related GAO Work Is Identified 9

050- 05 Cancel the Army*s Comanche Helicopter Program Related GAO Product
Defense Acquisition: Comanche Program Objectives Need to Be Revised

to More Achievable Levels. GAO- 01- 450. Washington, D. C.: June 7, 2001.
GAO Contact William Graveline, (256) 922- 7514

050- 10 Reduce Purchases of the Air Force*s F/ A- 22 Fighter

Related GAO Products Tactical Aircraft: DOD Should Reconsider Decision to
Increase F/ A- 22 Production Rates While Development Risks Continue. GAO-
03- 431. Washington, D. C.: March 14, 2003.

Tactical Aircraft: DOD Needs to Better Inform Congress about Implications
of Continuing F/ A- 22 Cost Growth. GAO- 03- 280. Washington, D. C.:
February 28, 2003.

GAO Contact Michael Hazard, (937) 258- 7917 9 We list GAO reports
identified as relating to options included in the CBO March 2003

Budget Options report. Only those CBO options for which we identified
related GAO products are included. We included GAO reports if they related
to the topic of the CBO option, regardless of whether our work supported
the option or not.

050- 11 Slow the Schedule of the F- 35 Joint Strike Fighter Program

Related GAO Product Joint Strike Fighter Acquisition: Mature Critical
Technologies Needed to Reduce Risk. GAO- 02- 39. Washington, D. C.:
October 19, 2001.

GAO Contact Brian Mullins, (202) 512- 4384 050- 19 Replace Military
Personnel in Some Support Positions with Civilian Employees of the
Department of Defense

Related GAO Product DOD Competitive Sourcing: Some Progress, but
Continuing Challenges Remain in Meeting Program Goals. GAO/ NSIAD- 00-
106. Washington, D. C.: August 8, 2000.

GAO Contact Barry W. Holman, (202) 512- 5581 050- 22 Have the Departments
of Defense and Veterans Affairs Purchase Drugs Jointly

Related GAO Products VA and DOD Health Care: Factors Contributing to
Reduced Pharmacy Costs and Continuing Challenges. GAO- 02- 969T.
Washington, D. C.: July 22, 2002.

DOD and VA Pharmacy: Progress and Remaining Challenges in Jointly Buying
and Mailing Out Drugs. GAO- 01- 588. Washington, D. C.: May 25, 2001.

GAO Contact Cynthia A. Bascetta, (202) 512- 7101

150 International

Examples from Selected GAO Work

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

Streamline U. S. Overseas Presence CBO Options Where Related GAO Work Is
Identified

150- 01 Eliminate the Export- Import Bank, the Overseas Private Investment
Corporation, and the Trade and Development Agency

150- 02 End the United States* Capital Subscriptions to the European Bank
for Reconstruction and Development

Examples from Selected GAO Work

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

Primary agency Department of State Account International Organizations and
Programs

(19- 1005) Spending type Discretionary Budget subfunction 151/
International development and

humanitarian assistance

International organizations, 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 international 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 projects
in states prohibited from receiving U. S. funds. We did not attempt to
calculate

the total amount that the United States contributes to all international
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 international organizations that are subject to
section 307 of the Foreign Assistance Act of 1961.

CBO 5- Year Cost Estimate No.

Included in GAO*s 2002 Budgetary Implications Report

Related GAO Products Multilateral Organizations: U. S. Contributions to
International Organizations for Fiscal Years 1993- 95. GAO/ NSIAD- 97- 42.
Washington, D. C.: May 1, 1997.

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

Streamline U. S. Overseas Presence

Primary agency Department of State Accounts Multiple Spending type
Discretionary Budget subfunction 153/ Conduct of foreign affairs

The U. S. overseas presence at more than 260 overseas posts consists of
more than 90,000 people (including dependents). The workforce has been
estimated at as many as 60,000 personnel representing over 30 U. S.

agencies. The Department of State employs about a third of the U. S.
workforce overseas and its embassies and consulates have become bases for
the operations of agencies involved in hundreds of activities. U. S.
direct hire staffing levels have increased over the years, most notably in
the nonforeign affairs agencies. The costs of overseas operations and
related security requirements are directly linked to the size of the
overseas workforce. By reducing the number of employees at posts where U.
S. interests are lower priority, consolidating functions, establishing
regional centers, or relocating

personnel to the United States, the costs of overseas operations could be
significantly reduced. The average annual cost of an American at a post
overseas varies by location, but can cost several hundred thousand
dollars, not including salary. The costs to station an American overseas
have been estimated to be about two times as much as for Washington- based
staff. In addition, reductions in the number of personnel overseas could
substantially enhance the safety of Americans and other U. S. employees,

reduce the costly security demands placed on the State Department, and
help control the costs of new embassy construction estimated to cost as
much as $16 billion.

Since the mid- 1990s, we have encouraged actions to reevaluate overseas
staffing requirements and levels. In late 1999, the Overseas Presence
Advisory Panel concluded that substantial monetary savings and reductions
in security vulnerabilities could be achieved through

streamlining posts. In August 2001, The President*s Management Agenda
noted that the U. S. overseas presence is costly, increasingly complex,
and of growing security concern. The President*s Management Agenda
concluded that cost and security considerations demand that the overseas
staffing process be improved. We have developed a rightsizing framework

that encourages overseas staffing decisions to be based on a full
consideration of cost, security, and mission factors. In the past, CBO
estimated that savings could be achieved if the Congress chose to reduce
overseas staffing by 1 percent, either through domestic reallocation or
elimination.

CBO 5- Year Cost Estimate Yes.

Included in GAO*s 2002 Budgetary Implications Report

Related GAO Products Embassy Construction: Process for Determining
Staffing Requirements Needs Improvement. GAO- 03- 411. Washington, D. C.:
April 7, 2003.

Overseas Presence: Rightsizing Framework Can Be Applied at U. S.
Diplomatic Posts in Developing Countries. GAO- 03- 396. Washington, D. C.:
April 7, 2003.

Overseas Presence: Systematic Processes Needed to Rightsize Posts and
Guide Embassy Construction. GAO- 03- 582T. Washington, D. C.: April 7,
2003.

Overseas Presence: Conditions of Overseas Diplomatic Facilities. GAO03-
557T. Washington, D. C.: March 20, 2003.

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

CBO Options Where Related GAO Work Is Identified 10

150- 01 Eliminate the ExportImport 10

Bank, the Overseas Private Investment Corporation, and the Trade and
Development Agency

Related GAO Product Export Promotion: Mixed Progress in Achieving a
Governmentwide Strategy. GAO- 02- 850. Washington, D. C.: September 4,
2002.

GAO Contact Ginny Hughes, (202) 512- 5481 150- 02 End the United States*
Capital Subscriptions to the

European Bank for Reconstruction and Development

Related GAO Product Foreign Assistance: International Efforts to Aid
Russia*s Transition Have Had Mixed Results. GAO- 01- 8. Washington, D. C.:
November 1, 2000.

GAO Contact Celia Thomas, (202) 512- 8987 10 We list GAO reports
identified as relating to options included in the CBO March 2003

Budget Options report. Only those CBO options for which we identified
related GAO products are included. We included GAO reports if they related
to the topic of the CBO option, regardless of whether our work supported
the option or not.

250 General Science,

Example from Selected GAO Work

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

Systems

Example from Selected GAO Work

Continue Oversight of the International Space Station and Related Support
Systems

Primary agency National Aeronautics and Space Administration

Accounts Multiple Spending type Discretionary Budget subfunction 252/
Space flight, research, and supporting

activities

Recent events associated with the National Aeronautics and Space
Administration*s (NASA) human space flight programs have generated major
congressional concern. First, the Space Launch Initiative* a planned $4.8
billion research and development effort* was significantly downsized in
November 2002. This decision made the prospect of a Shuttle replacement
unlikely for the foreseeable future and necessitated investment in
extending the life of the Shuttle fleet. Second, the tragic loss of
Shuttle Columbia has engendered intense scrutiny by the Columbia Accident
Investigation Board and NASA*s congressional oversight committees into
various aspects of the agency*s activities* from budgetary decisions to
emphasis on flight safety. Third, the uncertain status of the unfinished
International Space Station (ISS) is worrisome. Construction has halted
due to postponement of shuttle flights and a crew size larger than three
is still being negotiated among the international partners. As a result,
the projected scientific benefits from this orbital laboratory have been
further delayed.

The Congress is well aware of the challenges NASA faces in developing,
building, and transporting crew to the ISS* challenges that have in the
past resulted in schedule delays and higher program cost estimates to
complete development. Although assembly of the ISS is well underway, it
warrants continued congressional oversight because the ISS will impose
continued demands on future budgets and will require critical decisions on
Shuttle modernization and replacement efforts. As NASA returns the Space
Shuttle fleet to safe flight by incorporating the accident board*s
recommendations and more clearly defines the future of human space

flight and commensurate financial commitments, continued congressional
oversight will help to ensure that NASA*s priorities and supporting
funding are appropriately matched. CBO 5- Year Cost Estimate

No. Included in GAO*s 2002 Budgetary Implications Report

Related GAO Products NASA: Major Management Challenges and Program Risks.
GAO- 03- 849T. Washington, D. C.: June 12, 2003.

Major Management Challenges and Program Risks: National Aeronautics and
Space Administration. GAO- 03- 114. Washington, D. C.: January 1, 2003.

Relocation of Space Shuttle Major Modification Work. GAO- 03- 294R.
Washington, D. C.: December 2, 2002.

Space Transportation: Challenges Facing NASA*s Space Launch Initiative.
GAO- 02- 1020. Washington, D. C.: September 17, 2002.

NASA Management Challenges: Human Capital and Other Critical Areas Need to
be Addressed. GAO- 02- 945T. Washington, D. C.: July 18, 2002.

Space Station: Actions Under Way to Manage Cost, but Significant
Challenges Remain. GAO- 02- 735. Washington, D. C.: July 17, 2002.

NASA: Compliance With Cost Limits Cannot Be Verified. GAO- 02- 504R.
Washington, D. C.: April 10, 2002.

GAO Contact Allen Li, (202) 512- 4841

270 Energy Examples from Selected GAO Work

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

Examples from Selected GAO Work

Corporatize or Divest Selected Power Marketing Administrations

Primary agency Department of Energy Spending type Direct

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 (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. 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 outlined 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 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 estimated previously that divesting the federal hydropower assets for
Southeastern, Southwestern, and Western would result in budgetary savings.
The savings assumed that the divestiture would not occur for 2 years and
was based on the net present value of outstanding debt for the
Southeastern, Southwestern, and Western PMAs.

CBO 5- Year Cost Estimate Yes.

Included in GAO*s 2002 Budgetary Implications Report

Related GAO Products Budget Issues: Effective Oversight and Budget
Discipline Are Essential* Even in a Time of Surplus. GAO/ T- AIMD- 00- 73.
Washington, D. C.: February 1, 2000.

Potential Candidates for Congressional Oversight. GAO/ OGC- 00- 3R.
Washington, D. C.: November 1, 1999.

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

Federal Power: PMA Rate Impacts by Service Area. GAO/ RCED- 99- 55.
Washington, D. C.: January 28, 1999.

Federal Power: Regional Effects of Changes in PMAs* Rates. GAO/ RCED99-
15. Washington, D. C.: November 16, 1998.

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

Federal Power: Options for Selected Power Marketing Administrations* Role
in a Changing Electricity Industry. GAO/ RCED- 98- 43. Washington, D. C.:
March 6, 1998.

Federal Electricity Activities: The Federal Government*s Net Cost and
Potential for Future Losses. GAO/ AIMD- 97- 110 and 110A. Washington, D.
C.: September 19, 1997.

Federal Power: Issues Related to the Divestiture of Federal Hydropower
Resources. GAO/ RCED- 97- 48. Washington, D. C.: March 31, 1997.

Power Marketing Administrations: Cost Recovery, Financing, and Comparison
to Nonfederal Utilities. GAO/ AIMD- 96- 145. Washington, D. C.: September
19, 1996.

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

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

Recover Power Marketing Administrations* Costs

Primary agency Department of Energy Spending type Direct

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. 11 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 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 unknown. Until
an effective monitoring system is implemented, the federal government will
continue to be exposed to financial loss due to the underrecovery of
powerrelated costs.

11 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.

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 in the past, CBO agreed that savings would occur if the PMAs were
directed to fully recover power- related costs or set their power at
market rates, it could not develop an estimate for this option without a

specific proposal. CBO 5- Year Cost Estimate

No. Included in GAO*s 2002 Budgetary Implications Report

Related GAO Products Congressional Oversight: Opportunities to Address
Risks, Reduce Costs, and Improve Performance. GAO/ T- AIMD- 00- 96.
Washington, D. C.: February 17, 2000.

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

Federal Power: PMA Rate Impacts, by Service Area. GAO/ RCED- 99- 55.
Washington, D. C.: January 28, 1999.

Federal Power: Regional Effects of Changes in PMAs* Rates. GAO/ RCED99-
15. Washington, D. C.: November 16, 1998.

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

Federal Power: Options for Selected Power Marketing Administrations* Role
in a Changing Electricity Industry. GAO/ RCED- 98- 43. Washington, D. C.:
March 6, 1998.

Federal Electricity Activities: The Federal Government*s Net Cost and
Potential for Future Losses. GAO/ AIMD- 97- 110 and 110A. Washington, D.
C.: September 19, 1997.

Federal Power: Issues Related to the Divestiture of Federal Hydropower
Resources. GAO/ RCED- 97- 48. Washington, D. C.: March 31, 1997.

Power Marketing Administrations: Cost Recovery, Financing, and Comparison
to Nonfederal Utilities. GAO/ AIMD- 96- 145. Washington, D. C.: September
19, 1996.

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

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

Federal Electric Power: Operating and Financial Status of DOE*s Power
Marketing Administrations. GAO/ RCED/ AIMD- 96- 9FS. Washington, D. C.:
October 13, 1995.

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

Increase Nuclear Waste Disposal Fees

Primary agency Department of Energy Spending type Direct

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.

CBO 5- Year Cost Estimate Yes.

Included in GAO*s 2002 Budgetary Implications Report

Related GAO Products Status of Actions to Improve DOE User- Fee
Assessments. GAO/ RCED- 92- 165. Washington, D. C.: June 10, 1992.

Changes Needed in DOE User- Fee Assessments. GAO/ T- RCED- 91- 52.
Washington, D. C.: May 8, 1991.

Changes Needed in DOE User- Fee Assessments to Avoid Funding Shortfall.
GAO/ RCED- 90- 65. Washington, D. C.: June 7, 1990.

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

Recover Federal Investment in Successfully Commercialized Technologies

Primary agency Department of Energy Accounts Multiple Spending type
Discretionary Budget subfunctions Multiple

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 would be 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 significant cost savings. However,
repayment provisions would only apply to future technology development

projects not yet negotiated with industry. CBO 5- Year Cost Estimate

No. Included in GAO*s 2002 Budgetary Implications Report

Related GAO Product Energy Research: Opportunities Exist to Recover
Federal Investment in Technology Development Projects. GAO/ RCED- 96- 141.
Washington, D. C.: 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
Telecommunications Loan

Primary agency Department of Agriculture

Programs

Accounts Multiple Spending type Discretionary Budget subfunction 271/
Energy supply

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 facility systems
through direct loans and through repayment guarantees on loans made by
other lenders. According to the Financial Statements For Fiscal Year 2002
of Rural Development (the U. S. Department of Agriculture agency

responsible for administering RUS), RUS loans receivable totaled about
$39.5 billion as of September 30, 2002. 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, since fiscal year 1992, RUS
wrote off the debt of 9 electricity loan borrowers totaling more than $4.9
billion.

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. In the past, CBO could not develop an estimate for
this option

unless specific proposals to improve efficiency were identified. CBO 5-
Year Cost Estimate

No. Included in GAO*s 2002 Budgetary Implications Report

Related GAO Products Rural Utilities Service: Status of Electric Loan
Portfolio. GAO/ AIMD- 99- 264R. Washington, D. C.: August 17, 1999.

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

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

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

Rural Utilities Service: Risk Assessment for the Electric Loan Portfolio.

GAO/ T- AIMD- 98- 123. Washington, D. C.: March 30, 1998.

Rural Utilities Service: Opportunities to Operate Electricity and
Telecommunications Loan Programs More Effectively. GAO/ AIMD- 98- 42.
Washington, D. C.: January 21, 1998.

Federal Electricity Activities: The Federal Government*s Net Cost and
Potential for Future Losses. GAO/ AIMD- 97- 110. Washington, D. C.:
September 19, 1997.

Rural Development: Financial Condition of the Rural Utilities Service*s
Electricity Loan Portfolio. GAO/ T- RCED- 97- 198. Washington, D. C.: July
8, 1997.

Rural Development: Financial Condition of the Rural Utilities Service*s
Loan Portfolio. GAO/ RCED- 97- 82. Washington, D. C.: April 11, 1997. GAO
Contacts Bob Robinson, (202) 512- 3841 Lawrence J. Dyckman, (202) 512-
3841 McCoy Williams, (202) 512- 6906

300 Natural Resources

Examples from Selected GAO Work

and Environment Terminate Land- Exchange Programs

Deny Additional Funding for Commercial Fisheries Buyback Programs Revise
the Mining Law of 1872 Reexamine Federal Policies for Subsidizing Water
for Agriculture and Rural Uses

Reassess Federal Land Management Agencies Functions and Programs

Examples from Selected GAO Work

Terminate Land- Exchange Programs

Primary agencies Department of the Interior Department of Agriculture

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

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.
Between fiscal years 1989 and 1999, BLM and the Forest Service acquired
about 1,500 total 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 fiscal year 2002, BLM contracted with the Appraisal Foundation to
conduct a review of the agency*s appraisal organization, policies, and
procedures. The Appraisal Foundation*s report listed numerous problems
with BLM*s

appraisal process and concluded *violations of law may have occurred.* The
report contained seven principal recommendations including the
recommendation that the *previously recommended moratorium on BLM land
exchanges be implemented immediately.* The Foundation performed a similar
evaluation for the U. S. Department of Agriculture (USDA) Forest

Service in 2000. That study resulted in a number of recommendations, which
the Foundation noted, *have been successfully implemented.* 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. In the past, CBO was
unable to develop a savings estimate for this option.

CBO 5- Year Cost Estimate No.

Included in GAO*s 2002 Budgetary Implications Report

Related GAO Products National Park Service: Federal Taxpayers Could Have
Benefited More From Potomac Yard Land Exchange. GAO- 01- 292. Washington,
D. C.: March 15, 2001.

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

Deny Additional Funding for Commercial Fisheries Buyback Programs

Primary agency Department of Commerce Account Operations, Research, and
Facilities (13- 1450)

Spending type Discretionary Budget subfunction 306/ Other natural
resources

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 from 1994 to
2002 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. In the past, CBO could not develop a savings
estimate without a more specific proposal.

CBO 5- Year Cost Estimate No.

Included in GAO*s 2002 Budgetary Implications Report

Related GAO Products Commercial Fisheries: Effectiveness of Fishing
Buyback Programs Can Be Improved. GAO- 01- 699T. Washington, D. C.: May
10, 2001.

Commercial Fisheries: Entry of Fishermen Limits Benefits of Buyback
Programs. GAO/ RCED- 00- 120. Washington, D. C.: June 14, 2000.

GAO Contact Anu Mittal, (202) 512- 9846

Revise the Mining Law of 1872

Primary agencies Department of the Interior Department of Agriculture

Spending type Direct

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.
Furthermore, miners do not pay royalties to the government on hardrock
minerals they extract from federal lands.

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, such as a 5 percent royalty on net smelter returns.

CBO 5- Year Cost Estimate Yes.

Included in GAO*s 2002 Budgetary Implications Report

Related GAO Products Bureau of Land Management: Improper Charges Made to
Mining Law Administration Program. GAO- 01- 491T. Washington, D. C.: March
29, 2001.

Bureau of Land Management: Improper Charges Made to Mining Law
Administration Program. GAO- 01- 356. Washington, D. C.: March 8, 2001.

National Park Service: Agency Should Recover Costs of Validity
Examinations for Mining Claims. GAO/ RCED- 00- 265. Washington, D. C.:
September 19, 2000.

Review of the Bureau of Land Management*s Administration and Use of Mining
Maintenance Fees. GAO/ AIMD- 00- 184R. Washington, D. C.: June 2, 2000.

Mineral Royalties: Royalties in the Western States and in Major
MineralProducing Countries. GAO/ RCED- 93- 109. Washington, D. C.: March
29, 1993.

Natural Resources Management Issues. GAO/ OCG- 93- 17TR. Washington, D.
C.: December 1992.

Mineral Resources: Value of Hardrock Minerals Extracted From and Remaining
on Federal Lands. GAO/ RCED- 92- 192. Washington, D. C.: August 24, 1992.

Federal Land Management: The Mining Law of 1872 Needs Revision.

GAO/ RCED- 89- 72. Washington, D. C.: March 10, 1989. GAO Contacts Bob
Robinson, (202) 512- 3841 Barry Hill, (202) 512- 3841

Reexamine Federal Policies for Subsidizing Water for Agriculture and Rural
Uses

Primary agency Department of the Interior Spending type Direct

Federal water programs to promote efficient use of finite water resources
for the nation*s agricultural and rural water systems have been used to
provide higher subsidies than Congress may have intended. To improve the
effectiveness and efficiency of federal water programs, the Congress could
consider several options to reduce duplication or inconsistencies.

The Congress could, for example, consider collecting the full costs of
federal water for large farms. Under the Reclamation Reform Act of 1982,
as amended, some farmers have reorganized large farming operations into
multiple, smaller 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. According to the Department of Interior, a portion of the acreage
served by the Bureau of Reclamation was used to produce crops that were
also eligible for USDA commodity subsidies. Farmers received the water

subsidy for using irrigated water from Interior as well as USDA subsidies
per crop production. Another option would be for the Congress to consider
restructuring the subsidies for crops produced with federally subsidized
water. CBO 5- Year Cost Estimate

No. Included in GAO*s 2002 Budgetary Implications Report

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

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

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

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

Rural Water Projects: Federal Assistance Criteria. GAO/ RCED- 98- 204R.
Washington, D. C.: May 29, 1998.

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

Rural Development: Patchwork of Federal Water and Sewer Programs Is
Difficult to Use. GAO/ RCED- 95- 160BR. Washington, D. C.: April 13, 1995.

Water Subsidies: Impact of Higher Irrigation Rates on Central Valley
Project Farmers. GAO/ RCED- 94- 8. Washington, D. C.: April 19, 1994.

Natural Resources Management Issues. GAO/ OCG- 93- 17TR. Washington, D.
C.: December 1992.

Reclamation Law: Changes Needed Before Water Service Contracts Are
Renewed. GAO/ RCED- 91- 175. Washington, D. C.: August 22, 1991.

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

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

Reassess Federal Land Management Agencies* Functions and Programs

Primary agencies Department of the Interior Department of Agriculture

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

The responsibilities of the four major federal land management agencies-
the National Park Service, the Bureau of Land Management (BLM), the Fish
and Wildlife Service within the Department of the 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 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
colocated 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.

In the past, CBO was unable to estimate savings without a specific
restructuring proposal that would eliminate certain programs or revise how
the land is managed, due to shared resources among the four major land
management agencies. Savings would depend on the extent of a workforce

restructuring and implementation proposal. CBO 5- Year Cost Estimate

No. Included in GAO*s 2002 Budgetary Implications Report

Related GAO Products Wildland Fires: Better Information Needed on
Effectiveness of Emergency Stabilization and Rehabilitation Treatments.
GAO- 03- 430. Washington, D. C.: April 4, 2003.

Severe Wildland Fires: Leadership and Accountability Needed to Reduce
Risks to Communities and Resources. GAO- 02- 259. Washington, D. C.:
January 31, 2002.

The National Fire Plan: Federal Agencies Are Not Organized to Effectively
and Efficiently Implement the Plan. GAO- 01- 1022T. Washington, D. C.:
July 31, 2001.

Land Management Agencies: Ongoing Initiative to Share Activities and
Facilities Needs Management Attention. GAO- 01- 50. Washington, D. C.:
November 21, 2000.

Federal Wildfire Activities: Current Strategy and Issues Needing
Attention. GAO/ RCED- 99- 223. Washington, D. C.: August 13, 1999.

Land Management: The Forest Service*s and BLM*s Organizational Structures
and Responsibilities. GAO/ RCED- 99- 227. Washington, D. C.: July 29,
1999.

Ecosystem Planning: Northwest Forest and Interior Columbia River Basin
Plans Demonstrate Improvements in Land- Use Planning.

GAO/ RCED- 99- 64. Washington, D. C.: May 26, 1999.

Land Management Agencies: Revenue Sharing Payments to States and Counties.
GAO/ RCED- 98- 261. Washington, D. C.: September 17, 1998.

Federal Land Management: Streamlining and Reorganization Issues.

GAO/ T- RCED- 96- 209. Washington, D. C.: June 27, 1996.

National Park Service: Better Management and Broader Restructuring Efforts
Are Needed. GAO/ T- RCED- 95- 101. Washington, D. C.: February 9, 1995.

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

Forest Service Management: Issues to Be Considered in Developing a New
Stewardship Strategy. GAO/ T- RCED- 94- 116. Washington, D. C.: February
1, 1994.

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

350 Agriculture Examples from Selected GAO Work

Terminate or Significantly Reduce the U. S. Department of Agriculture*s
Market Access Program

Consolidate Common Administrative Functions at the U. S. Department of
Agriculture

Further Consolidate the U. S. Department of Agriculture*s County Offices

Examples from Selected GAO Work

Terminate or Significantly Reduce the U. S. Department of Agriculture*s
Market Access Program

Primary agency Department of Agriculture Account Commodity Credit
Corporation (12- 4336) Spending type Mandatory Budget subfunction 351/
Farm income stabilization

The Market Access Program is an export promotion program operated by the
Foreign Agricultural Service of the Department of Agriculture. The 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. Under the Farm Security
and Rural Development Act of 2002, authorized funding for the program

has increased from $100 million in fiscal year 2002 to $110 million in
fiscal year 2003, $125 million in fiscal year 2004, $140 million in fiscal
year 2005, and rising to $200 million in fiscal years 2006 and 2007. About
threequarters 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, 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. The Foreign
Agricultural Service has not completed this report. Absent 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. In the past, CBO estimated that savings could be achieved if the
Market Access Program was eliminated.

CBO 5- Year Cost Estimate Yes.

Included in GAO*s 2002 Budgetary Implications Report

Related GAO Products Agricultural Trade: Changes Made to Market Access
Program, but Questions Remain on Economic Impact. GAO/ NSIAD- 99- 38.
Washington, D. C.: April 5, 1999.

U. S. Agricultural Exports: Strong Growth Likely, but U. S. Export
Assistance Programs* Contribution Uncertain. GAO/ NSIAD- 97- 260.
Washington, D. C.: September 30, 1997.

Farm Bill Export Options. GAO/ GGD- 96- 39R. Washington, D. C.: December
15, 1995.

Agricultural Trade: Competitor Countries* Foreign Market Development
Program. GAO/ T- GGD- 95- 184. Washington, D. C.: June 14, 1995.

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

U. S. Department of Agriculture: Improvements Needed in Market Promotion
Program. GAO/ T- GGD- 93- 17. Washington, D. C.: March 25, 1993. GAO
Contacts Bob Robinson, (202) 512- 3841 Lawrence J. Dyckman, (202) 512-
3841

Consolidate Common Administrative Functions at the U. S. Department of
Agriculture

Primary agency Department of Agriculture Accounts Multiple Spending types
Discretionary/ Direct Budget subfunction 352/ Agricultural research and
services

In accordance with the Federal Crop Insurance Reform and Department of
Agriculture Reorganization Act of 1994, the U. S. Department of
Agriculture (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) colocating 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* colocation of county offices, little has changed in how the
three agencies serve their customers. Each of its agencies emphasizes a
different client base and the delivery of different programs.
Consequently, little has changed in how the three agencies work together
to serve their customers, particularly in terms of cross- servicing and
sharing of information. On the other hand, USDA has made substantial
progress in deploying personal computers and a telecommunications network
to link

its service centers, and deployed a shared network server. However, the
full range of service delivery efficiencies has not yet been realized
because the agencies* program applications are not fully integrated and
all service center employees have not been trained to use the system.

In terms of merging and streamlining administrative functions, some
progress has been made in sharing space and equipment and agreeing upon
some common human capital practices. However, 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. In the past, CBO agreed 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 could
lead

to budgetary savings. CBO 5- Year Cost Estimate

No. Included in GAO*s 2002 Budgetary Implications Report

Related GAO Products Major Management Challenges and Program Risks:
Department of Agriculture. GAO/ 00- 96. Washington, D. C.: January 2003.

U. S. Department of Agriculture: State Office Collocation. GAO/ RCED- 00-
208R. Washington, D. C.: June 30, 2000.

USDA Reorganization: Progress Mixed in Modernizing the Delivery of
Services. GAO/ RCED- 00- 43. Washington, D. C.: February 3, 2000.

U. S. Department of Agriculture: Administrative Streamlining is Expected
to Continue Through 2002. GAO/ RCED- 99- 34. Washington, D. C.: December
11, 1998.

U. S. Department of Agriculture: Update on Reorganization and Streamlining
Efforts. GAO/ RCED- 97- 186R. Washington, D. C.: June 24, 1997.

GAO Contacts Bob Robinson, (202) 512- 3841 Lawrence J. Dyckman, (202) 512-
3841

Further Consolidate the U. S. Department of Agriculture*s County Offices

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

The U. S. Department of Agriculture (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. About one- third of USDA*s over
100,000 employees are involved in delivering the $55 billion a year farm
program. As the client base for the USDA programs changes and as
technology offers

opportunities for program delivery efficiencies, USDA needs to consider
alternative program delivery approaches. In this regard, the service
center agencies need to reassess the types of services they now provide
and how they can work more efficiently to deliver these services in the
future with fewer office locations.

At various times, the Congress has attempted to reduce the number of
county offices serving farmers and/ or reduce county office staffing. 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 in the past CBO agreed that closing offices that serve few
farmers would produce savings, it could not develop a savings estimate
without a specific proposal.

CBO 5- Year Cost Estimate No.

Included in GAO*s 2002 Budgetary Implications Report

Related GAO Products Major Management Challenges and Program Risks:
Department of Agriculture. GAO- 03- 96. Washington, D. C.: January 2003.

USDA Reorganization: Progress Mixed in Modernizing the Delivery of
Services. GAO/ RCED- 00- 43. Washington, D. C.: February 3, 2000.

Farm Service Agency: Characteristics of Small County Offices.

GAO/ RCED- 99- 102. Washington, D. C.: May 28, 1999.

U. S. Department of Agriculture: Status of Closing and Consolidating
County Offices. GAO/ T- RCED- 98- 250. Washington, D. C.: 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.
Washington, D. C.: May 1, 1998.

Farm Programs: Administrative Requirements Reduced and Further Program
Delivery Changes Possible. GAO/ RCED- 98- 98. Washington, D. C.: April 20,
1998.

Farm Programs: Impact of the 1996 Farm Act on County Office Workload. GAO/
RCED- 97- 214. Washington, D. C.: August 19, 1997.

GAO Contacts Bob Robinson, (202) 512- 3841 Lawrence J. Dyckman, (202) 512-
3841

370 Commerce and

Examples from Selected GAO Work

Housing Credit Recapture Interest on Rural Housing Loans

Require Self- Financing of Mission Oversight by Fannie Mae and Freddie Mac

Reduce Federal Housing Administration*s Insurance Coverage Merging U. S.
Department of Agriculture and Department of Housing and Urban Development
Single- Family Insured Lending Programs and Multifamily Portfolio
Management Programs

Consolidate Homeless Assistance Programs Reorganize and Consolidate Small
Business Administration*s Administrative Structure

Improve Reviews of Small Business Administration*s Preferred Lenders

CBO Options Where Related GAO Work Is Identified

370- 01 End the Credit Subsidy for the Small Business Administration*s
Major Business Loan Guarantee Programs 370- 05 Charge All Banks and
Thrifts Deposit Insurance Premiums

Examples from Selected GAO Work

Recapture Interest on Rural Housing Loans

Primary agency Department of Agriculture Account Rural Housing Insurance
Fund (12- 2081) Spending type Direct Budget subfunction 371/ Mortgage
credit

The Housing Act of 1949, as amended, requires U. S. Department of
Agriculture*s (USDA) 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 is 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*s 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*s 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. Actual savings could
differ depending on how this proposal would affect the rate at which homes
are sold. CBO 5- Year Cost Estimate

Yes. Included in GAO*s 2002 Budgetary Implications Report

Related GAO Product Rural Housing Programs: Opportunities Exist for Cost
Savings and Management Improvement. GAO/ RCED- 96- 11. Washington, D. C.:
November 16, 1995.

GAO Contact Thomas J. McCool, (202) 512- 8678

Require Self- Financing of Mission Oversight by Fannie Mae and Freddie Mac

Primary agency Department of Housing and Urban Development

Account Office of Federal Housing Enterprise Oversight, Salaries and
Expenses (86- 5272)

Spending type Direct Budget subfunction 371/ Mortgage credit

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 budgetary savings but would also enable HUD to strengthen its oversight
activities.

CBO 5- Year Cost Estimate Yes.

Included in GAO*s 2002 Budgetary Implications Report

Related GAO Products Housing Enterprises: The Roles of Fannie Mae and
Freddie Mac in the U. S. Housing Finance System. T- GGD- 00- 182.
Washington, D. C.: July 25, 2000.

Federal Housing Enterprises: HUD*s Mission Oversight Needs to Be
Strengthened. GAO/ GGD- 98- 173. Washington, D. C.: July 28, 1998.

Government- Sponsored Enterprises: Advantages and Disadvantages of
Creating a Single Housing GSE Regulator. GAO/ GGD- 97- 139. Washington, D.
C.: July 9, 1997.

Government- Sponsored Enterprises: A Framework for Limiting the
Government*s Exposure to Risks. GAO/ GGD- 91- 90. Washington, D. C.: May
22, 1991.

GAO Contact Thomas J. McCool, (202) 512- 8678

Reduce Federal Housing Administration*s Insurance Coverage

Primary agency Department of Housing and Urban Development

Account FHA- Mutual Mortgage Insurance Program Account (86- 0183)

Spending types Discretionary/ Direct Budget subfunction 371/ Mortgage
credit

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 was
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.

In the past, CBO could 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. CBO 5- Year Cost
Estimate

No. Included in GAO*s 2002 Budgetary Implications Report

Related GAO Products Mortgage Financing: Changes in the Performance of
FHA- Insured Loans. GAO- 02- 773. Washington, D. C.: July 10, 2002.

Mortgage Financing: FHA*s Fund Has Grown, but Options for Drawing on the
Fund Have Uncertain Outcomes. GAO- 01- 460. Washington, D. C.: February
28, 2001.

Homeownership: Potential Effects of Reducing FHA*s Insurance Coverage for
Home Mortgages. GAO/ RCED- 97- 93. Washington, D. C.: May 1, 1997.

GAO Contact Thomas J. McCool, (202) 512- 8678

Merging U. S. Department of Agriculture and Department of Housing and
Urban Development Single- Family

Primary agencies Department of Agriculture

Insured Lending Programs Department of Housing and Urban

and Multifamily Portfolio

Development

Management Programs

Accounts Multiple Spending types Direct/ Discretionary Budget subfunction
371/ Mortgage credit

The U. S. Department of Agriculture (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*s single- family guaranteed loan program and FHA*s
single- family insured loan program both primarily target low- and
moderate- income households, use the same qualifying ratios, and operate
in the same markets. Even though RHS*s 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 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. In the past, CBO could not
estimate savings for this option without a more specific proposal.

CBO 5- Year Cost Estimate No.

Included in GAO*s 2002 Budgetary Implications Report

Related GAO Product Rural Housing: Options for Optimizing the Federal Role
in Rural Housing Development. GAO/ RCED- 00- 241. Washington, D. C.:
September 15, 2000.

GAO Contact Thomas J. McCool, (202) 512- 8678

Consolidate Homeless Assistance Programs

Primary agency Department of Housing and Urban Development

Accounts Multiple Spending types Direct/ Discretionary Budget subfunctions
Multiple

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 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.

The 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 responsible for administering most of the funds for 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. In the past, CBO was
unable to estimate the potential savings for this option without a
specific legislative proposal.

CBO 5- Year Cost Estimate No.

Included in GAO*s 2002 Budgetary Implications Report

Related GAO Products Homelessness: Improving Program Coordination and
Client Access to Program. GAO- 02- 485T. Washington, D. C.: March 6, 2002.

Homelessness: Consolidating HUD*s McKinney Programs. GAO/ T- RCED00- 187.
Washington, D. C.: May 23, 2000.

Homelessness: State and Local Efforts to Integrate and Evaluate Homeless
Assistance Programs. GAO/ RCED- 99- 178. Washington, D. C.: June 29, 1999.

Homelessness: Coordination and Evaluation of Programs Are Essential.

GAO/ RCED- 99- 49. Washington, D. C.: February 26, 1999.

Homelessness: McKinney Act Programs Provide Assistance but Are Not
Designed to Be the Solution. GAO/ RCED- 94- 37. Washington, D. C.: May 31,
1994.

GAO Contact Thomas J. McCool, (202) 512- 8678

Reorganize and Consolidate Small Business Administration*s Administrative
Structure

Primary agency Small Business Administration Accounts Multiple Spending
type Discretionary Budget subfunction 376/ Other advancement of commerce

The Small Business Administration*s (SBA) complicated and overlapping
organizational relationships and a field structure that does not
consistently match mission requirements have combined to impede staff
efforts to deliver services effectively. Some of the complex
organizational relationships stem from legislative requirement. Others
result from past

SBA realignment efforts that changed how the agency performs its functions
but left aspects of the previous structure intact.

For example, district staff working on SBA loan programs report to their
district management, while loan processing and servicing center staff
report directly to the Office of Capital Access in headquarters. Yet,
district office loan program staffs sometimes need to work with the loan
processing and servicing centers to get information or to expedite loans
for lenders in their district. Because loan processing and servicing
centers report directly to the Office of Capital Access, requests that are
directed to the centers sometimes must go from the district through the
Office of Capital Access then back to the centers. District managers and
staff said that sometimes they cannot get answers to questions when
lenders call and that they have trouble expediting loans because they lack
authority to direct the centers to take any action. Lender association
representatives said that the lines of authority between headquarters and
the field can be confusing and that practices vary from district to
district.

In 2002, GAO reported that SBA drafted a 5- year workforce transformation
plan. The draft plan recognizes SBA*s need to restructure its workforce,
privatize noncore functions, adjust incentives and goals, and streamline
its headquarters* operation. Improvements in SBA*s organizational
structure could lead to savings in human capital and office space costs.

Some options that the Congress could consider to assist SBA in its
transformation effort include

 rescinding or combining some of the legislatively mandated offices,
programs, or aspects of existing programs,

 rescinding some of the reporting relationships, grades, or types of
appointments for senior SBA officials, and

 giving the agency the ability to close or consolidate some of its
inefficiently located field offices.

CBO 5- Year Cost Estimate No, this is a new example. CBO could not develop
an estimate for this

Included in GAO*s 2002 example.

Budgetary Implications Report Related GAO Products Small Business
Administration: Workforce Transformation Plan Is Evolving. GAO- 02- 931T.
Washington, D. C.: July 16, 2002.

Small Business Administration: Current Structure Presents Challenges for
Service Delivery. GAO- 02- 17. Washington, D. C.: October 26, 2001. GAO
Contact Davi D*Agostino, (202) 512- 8678

Improve Reviews of Small Business Administration*s Preferred Lenders

Primary agency Small Business Administration Account Business Loans
Program Account (73-

1154) Spending types Direct/ Discretionary Budget subfunction 376/ Other
advancement of commerce

The Small Business Administration*s (SBA) largest business loan program,
the *7( a) program,* is intended to serve small business borrowers who
cannot otherwise obtain financing under reasonable terms and conditions
from the private sector. As of September 30, 2002, SBA had a total
portfolio of about $46 billion, including $42 billion in direct and
guaranteed small business loans and other guarantees. SBA delegates full
authority to preferred lenders to make loans without prior SBA approval.
In fiscal year 2002, preferred lenders approved 55 percent of the dollar
value of all 7( a) loans* about $7 billion. Because SBA guarantees up to
85 percent of the 7( a) loans made by its lending partners, there is risk
to SBA if the loans are not repaid. The default rate for each of the last
3 fiscal years has been around 14 percent.

SBA is required by law to review preferred lenders at least annually. SBA
has made progress in developing its lender oversight program, but it has
not fully developed effective oversight programs that assess lenders*
decisions on borrowers* creditworthiness and eligibility and the impact of
lenders* decisions regarding risk posed to SBA*s portfolio.

SBA should incorporate strategies into its reviews of preferred lenders to
adequately measure the financial risk lenders pose to SBA, develop
specific criteria to apply to the *credit elsewhere* standard, 12 and
perform qualitative assessments of lenders* performance and lending
decisions. Implementation of these recommendations could lead to lower
defaults on 7( a) loans and/ or a smaller 7( a) loan program.

12 The *credit elsewhere* standard is a test to determine whether the
borrower can obtain credit without the SBA guarantee.

CBO 5- Year Cost Estimate No, this is a new example. CBO could not develop
an estimate for this

Included in GAO*s 2002 example.

Budgetary Implications Report Related GAO Product Small Business
Administration: Progress Made but Improvements

Needed in Lender Oversight. GAO- 03- 90. Washington, D. C.: December 9,
2002. GAO Contact Davi D*Agostino, (202) 512- 8678

CBO Options Where Related GAO Work Is Identified 13

370- 01 End the Credit Subsidy for the Small Business Administration*s
Major Business Loan

Guarantee Programs Related GAO Products Small Business Administration:
Progress Made but Improvements

Needed in Lender Oversight. GAO- 03- 90. Washington, D. C.: December 9,
2002.

Small Business Administration: Section 7( a) General Business Loans Credit
Subsidy Estimates. GAO- 01- 1095R. Washington, D. C.: August 21, 2001. 13
GAO Contacts Davi D*Agostino, (202) 512- 8678 Linda Calbom, (202) 512-
8341

370- 05 Charge All Banks and Thrifts Deposit Insurance Premiums

Related GAO Product Deposit Insurance Funds: Analysis of Insurance Premium
Disparity Between Banks and Thrifts. GAO/ AIMD- 95- 84. Washington, D. C.:
March 3, 1995.

13 We list GAO reports identified as relating to options included in the
CBO March 2003

Budget Options report. Only those CBO options for which we identified
related GAO products are included. We included GAO reports if they related
to the topic of the CBO option, regardless of whether our work supported
the option or not.

GAO Contact Thomas J. McCool, (202) 512- 8678

400 Transportation Examples from Selected GAO Work

Eliminate the Pulsed Fast Neutron Analysis Inspection System Develop a
Passenger Intercity Rail Policy to Meet National Goals Eliminate Cargo
Preference Laws to Reduce Federal Transportation Costs Increase Aircraft
Registration Fees to Enable the Federal Aviation Administration to Recover
Actual Costs

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

CBO Options Where Related GAO Work Is Identified

400- 01 Reduce Federal Subsidies for Amtrak 400- 02 Eliminate the
Essential Air Service Program 400- 03 Eliminate Grants to Large and
Medium- Sized Hub Airports 400- 04 Increase Fees for Certificates and
Registrations Issued by the Federal Aviation Administration

400- 08 Eliminate Funding for the *New Starts* Transit Program

Examples from Selected GAO Work

Eliminate the Pulsed Fast Neutron Analysis Inspection System

Primary agency Multiple Account FAA* Research, Engineering and Development
(69- 8108)

Spending type Discretionary Budget subfunction 402/ Air transportation

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 we reported in our April 1999 report, officials from
the government agencies responsible for developing PFNA still do not
believe that the current PFNA system would meet their operational
requirements because it is too expensive (estimated at between $10 million
to $15 million per unit to acquire) and too large for operational use in
most ports of entry or other sites. Those responsible agencies are the
Bureau of Customs and Border Protection (CBP), Transportation Security
Administration (TSA), and Department of Defense (DOD). 14 However, at the
direction of the

Congress, 15 DOD is currently leading a joint effort with CBP and TSA to
conduct an operational evaluation of PFNA at the Ysleta border crossing in
El Paso, Texas. This evaluation will test PFNA*s ability to detect drugs,

14 Previously we included the views of U. S. Customs Service and Federal
Aviation Administration (FAA) officials. However, since our last budgetary
implications report in April 2002, Customs and its responsibilities were
transferred to CBP and TSA assumed the PFNA program from FAA. CBP and TSA
are part of the Department of Homeland Security, which was established in
November 2002. In addition, the DOD Counterdrug Technology Development
Program Office assumed responsibility for the PFNA program from the Office
of the Assistant Secretary of Defense for Special Operations and Low
Intensity Conflict.

15 Senate Report 107- 109, Department of Defense Appropriation Bill, 2002,
and Supplemental Appropriations, 2002, December 5, 2001, page 155.

explosives, chemical warfare agents, currency, and nuclear materials. It
is currently scheduled for completion by June 2004 and estimated to cost
$13.9 million to the government, which includes $8.5 million for a firm,
fixed- price contract with PFNA*s manufacturer, The Ancore Corporation, to
deliver a system to Ysleta and provide support and maintenance for the
test. The $13.9 million total consists of $5.4 million from DOD, $3.5
million from TSA, and $5 million from CBP.

DOD officials stated that its lead role in the joint Ysleta operational
test is as an independent evaluator and does not indicate an endorsement
of the system for use by DOD. CBP officials question whether PFNA will be
a viable and affordable technology for widespread use but stated that PFNA
shows enough promise that CBP agreed to help fund the joint operational
test. Similarly, while TSA officials do not believe the current PFNA
system will meet operational requirements for maritime and land
applications, they stated that a definitive assessment would be made at
the completion of the joint test. For aviation applications, TSA has
decided to pursue a cooperative agreement with The Ancore Corporation to
test a PFNA system design in the laboratory, which could lead to an
operational test at an airport if the system meets specific detection
criteria. TSA officials stated that dates and costs for this separate
effort would not be available until after The Ancore Corporation completes
its systems development.

One option is for the Congress to eliminate the PFNA. In the past, CBO
estimated that savings could be achieved if the PFNA was eliminated.

CBO 5- Year Cost Estimate Yes.

Included in GAO*s 2002 Budgetary Implications Report

Related GAO Product Terrorism and Drug Trafficking: Testing Status and
Views on Operational Viability of Pulsed Fast Neutron Analysis Technology.

GAO/ GGD- 99- 54. Washington, D. C.: April 13, 1999. GAO Contact Laurie E.
Ekstrand, (202) 512- 8777

Develop a Passenger Intercity Rail Policy to Meet National Goals

Primary agency National Railroad Passenger Corporation Accounts Multiple
Spending type Discretionary Budget subfunction 401/ Ground transportation

The National Railroad Passenger Corporation (Amtrak) operates the nation*s
intercity passenger rail service. As a private corporation, it operates
trains in 46 states, serving about 23.4 million riders (about 64,000

per day). Amtrak plays only a small part in the nation*s overall
transportation system with the exception of some short- distance routes.
It has sizeable market shares (compared to travel by air) between certain
relatively close cities. However, by far, the automobile dominates most
intercity travel. 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 Amtrak with
operating and capital assistance and in the past 5 years, it has provided
Amtrak an average of about $1 billion each year.

Throughout its existence, Amtrak*s financial condition has never been
strong and the corporation has been on the edge of bankruptcy several
times, most recently in 2002. Current levels of federal funding are not

sufficient to support the existing level of intercity passenger rail
service being provided by Amtrak. Amtrak has indicated that it will need
about $2 billion annually* about twice the amount provided in recent
years* in federal operating and capital assistance over the next few years
to stabilize

its system and to cover operating losses. Additional assistance would be
needed to expand or enhance service or develop high- speed rail corridors.
Amtrak and the administration have offered differing views on Amtrak and

the future of intercity passenger rail service in America. Amtrak focuses
primarily on the importance of Amtrak*s receiving the funding it needs to
improve the condition of its equipment, its reliability and utilization,
and its infrastructure. In contrast, the administration is looking toward
a fundamental restructuring of the manner in which federal assistance is
provided for intercity passenger rail service that it argues will create a
rail service driven by sound economics, competition, and a long- term
partnership between states and the federal government to sustain an
economically viable system.

An evaluation framework could be useful to help the Congress consider
intercity passenger rail policy. Based on extensive analyses of federal
investment approaches across a broad stratum of national activities, we
have found that the key components of a framework for evaluating federal
investments include (1) establishing clear, nonconflicting goals, (2)
establishing the roles of governmental and private entities, (3)

establishing funding approaches that focus on and provide incentives for
results and accountability, and (4) ensuring that the strategies developed
address diverse stakeholder interests and limit unintended consequences.
CBO 5- Year Cost Estimate

Yes. Included in GAO*s 2002 Budgetary Implications Report

Related GAO Products Intercity Passenger Rail: Issues for Consideration in
Developing an Intercity Passenger Rail Policy. GAO- 03- 712T. Washington,
D. C.: April 30, 2003.

Intercity Passenger Rail: Potential Financial Issues in the Event That
Amtrak Undergoes Liquidation. GAO- 02- 871. Washington, D. C.: September
20, 2002.

Intercity Passenger Rail: Amtrak Needs to Improve Its Decisionmaking
Process for Its Route and Service Proposals. GAO- 02- 398. Washington, D.
C.: April 12, 2002.

Intercity Passenger Rail: Congress Faces Critical Decisions in Developing
a National Policy. GAO- 02- 522T. Washington, D. C.: April 11, 2002.

GAO Contact JayEtta Z. Hecker, (202) 512- 8984

Eliminate Cargo Preference Laws to Reduce Federal Transportation Costs

Primary agencies Multiple Accounts Multiple Spending type Discretionary
Budget subfunction 403/ Water transportation

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,
savings could be achieved.

CBO 5- Year Cost Estimate Yes.

Included in GAO*s 2002 Budgetary Implications Report

Related GAO Products Management Reform: Implementation of the National
Performance Review*s Recommendations. GAO/ OCG- 95- 1. Washington, D. C.:
December 5, 1994.

Maritime Industry: Cargo Preference Laws* Their Estimated Costs and
Effects. GAO/ RCED- 95- 34. Washington, D. C.: November 30, 1994.

Cargo Preference: Effects of U. S. Export- Import Cargo Preference Laws on
Exporters. GAO/ GGD- 95- 2BR. Washington, D. C.: October 31, 1994.

Cargo Preference Requirements: Objectives Not Significantly Advanced When
Used in U. S. Food Aid Programs. GAO/ GGD- 94- 215. Washington, D. C.:
September 29, 1994.

GAO Contact JayEtta Z. Hecker, (202) 512- 8984

Increase Aircraft Registration Fees to Enable the Federal Aviation
Administration to Recover

Primary agency Department of Transportation

Actual Costs

Spending type Direct

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, additional revenue could be achieved.

CBO 5- Year Cost Estimate Yes.

Included in GAO*s 2002 Budgetary Implications Report

Related GAO Product Aviation Safety: Unresolved Issues Involving U. S.-
Registered Aircraft.

GAO/ RCED- 93- 135. Washington, D. C.: June 18, 1993. GAO Contact Gerald
Dillingham, (202) 512- 4803

Apply Cost- Benefit Analysis to Replacement Plans for Airport Surveillance
Radars

Primary agency Department of Transportation Account Facilities and
Equipment (69- 8107) Spending type Discretionary Budget subfunction 402/
Air transportation

Before installing an airport surveillance radar (ASR), the Federal
Aviation Administration (FAA) typically conducts cost- benefit 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.

In 1999, FAA had planned to install technologically advanced ASR- 11
radars to replace its model ASR- 7 and ASR- 8 radars at 101 airports,
without applying its cost- benefit criteria. FAA*s rationale for not
applying its costbenefit 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 cost- benefit criteria and 75 of them
have less air traffic than an airport whose radar request FAA has denied
using its costbenefit criteria. Furthermore, at some of these airports,
the circumstances that originally justified a radar no longer exist.

GAO recommended that FAA apply its cost- benefit 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 its regional offices
to verify the operational need for radars at the 75 airports that had less
traffic than the airport whose radar was denied. As of May 2003, FAA was
still planning to replace aging ASR- 7/ 8 systems with ASR- 11 radar
without the cost- benefit analysis. FAA said the analysis was used to
determine the siting of eight other new ASR- 11 radar systems. We continue

to believe that savings may result if FAA were to perform the cost-
benefit studies at the 101 airports.

CBO 5- Year Cost Estimate No.

Included in GAO*s 2002 Budgetary Implications Report

Related GAO Product Air Traffic Control: Surveillance Radar Request for
the Cherry Capital Airport. GAO/ RCED- 98- 118. Washington, D. C.: May 28,
1998.

GAO Contact Gerald Dillingham, (202) 512- 4803

Close, Consolidate, or Privatize Some Coast Guard Operating and Training
Facilities

Primary agency Department of Homeland Security Account United States Coast
Guard (70- 0600) Spending type Discretionary Budget subfunctions Multiple

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 had been questioned, the Coast Guard had
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, Cal.* 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 and the fundamental
challenges in being able to accomplish new homeland security
responsibilities it has been given while maintaining levels of effort in
its

traditional missions, 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, Cal., would
help the Coast Guard to achieve these required savings. While in the past,
CBO agreed that closing, consolidating, or privatizing Coast Guard
facilities could yield savings, it

could not develop an estimate without specific proposals. CBO 5- Year Cost
Estimate

No. Included in GAO*s 2002 Budgetary Implications Report

Related GAO Products Coast Guard: Challenges During the Transition to the
Department of Homeland Security. GAO- 03- 594T. Washington, D. C.: April
1, 2003.

Coast Guard: Comprehensive Blueprint Needed to Balance and Monitor
Resource Use and Measure Performance for All Missions. GAO- 03- 544T.
Washington, D. C.: March 12, 2003. Coast Guard: Strategy Needed for
Setting and Monitoring Levels of Effort

for All Missions. GAO- 03- 155. Washington, D. C.: November 12, 2002.

Coast Guard: Budget Challenges for 2001 and Beyond. GAO/ T- RCED- 00- 103.
Washington, D. C.: March 15, 2000.

Coast Guard: Review of Administrative and Support Functions. GAO/ RCED-
99- 62R. Washington, D. C.: March 10, 1999.

Coast Guard: Challenges for Addressing Budget Constraints. GAO/ RCED97-
110. Washington, D. C.: May 14, 1997.

Marine Safety: Coast Guard Should Address Alternatives as It Proceeds With
VTS 2000. GAO/ RCED- 96- 83. Washington, D. C.: April 22, 1996.

Coast Guard: Issues Related to the Fiscal Year 1996 Budget Request.

GAO/ T- RCED- 95- 130. Washington, D. C.: March 13, 1995.

Coast Guard: Improved Process Exists to Evaluate Changes to Small Boat
Stations. GAO/ RCED- 94- 147. Washington, D. C.: April 1, 1994.

GAO Contact JayEtta Z. Hecker, (202) 512- 8984

Convert Some Support Officer Positions to Civilian Status

Primary agency Department of Homeland Security Account United States Coast
Guard (70- 0600) Spending type Discretionary Budget subfunctions Multiple

The Coast Guard uses officers in operational positions* to command boats,
ships, and aircraft that can be deployed during times 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 pay 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 active- duty
commissioned officers in the positions we reviewed is, on average, 21
percent more costly than filling the same positions with comparable
civilian employees. 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 July 31, 2001 through February 28, 2003, the Coast Guard had
converted 68 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. In the past, CBO agreed
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.

CBO 5- Year Cost Estimate No.

Included in GAO*s 2002 Budgetary Implications Report

Related GAO Product Coast Guard Workforce Mix: Phased- In Conversion of
Some Support Officer Positions Would Produce Savings. GAO/ RCED- 00- 60.
Washington, D. C.: March 1, 2000.

GAO Contact JayEtta Z. Hecker, (202) 512- 8984

CBO Options Where Related GAO Work Is Identified 16

400- 01 Reduce Federal Subsidies for Amtrak Related GAO Products Intercity
Passenger Rail: Potential Financial Issues in the Event That

Amtrak Undergoes Liquidation. GAO- 02- 871. Washington, D. C.: September
20, 2002. 16

Intercity Passenger Rail: Amtrak Needs to Improve Its Decisionmaking
Process for Its Route and Service Proposals. GAO- 02- 398. Washington, D.
C.: April 12, 2002.

Intercity Passenger Rail: The Congress Faces Critical Decisions About the
Role of and Funding for Intercity Passenger Rail Systems. GAO- 01- 820T.
Washington, D. C.: July 25, 2001.

High- Speed Rail Investment Act of 2001. GAO- 01- 756R. Washington, D. C.:
June 25, 2001.

Intercity Passenger Rail: Amtrak Will Continue to Have Difficulty
Controlling Its Costs and Meeting Capital Needs. GAO/ RCED- 00- 138.
Washington, D. C.: May 31, 2000.

GAO Contact JayEtta Z. Hecker, (202) 512- 8984 16 We list GAO reports
identified as relating to options included in the CBO March 2003

Budget Options report. Only those CBO options for which we identified
related GAO products are included. We included GAO reports if they related
to the topic of the CBO option, regardless of whether our work supported
the option or not.

400- 02 Eliminate the Essential Air Service Program

Related GAO Products Commercial Aviation: Issues Regarding Federal
Assistance for Enhancing Air Service to Small Communities. GAO- 03- 540T.
Washington, D. C.: March 11, 2003.

Commercial Aviation: Factors Affecting Efforts to Improve Air Service at
Small Community Airports. GAO- 03- 330. Washington, D. C.: January 17,
2003.

Options to Enhance the Long- Term Viability of the Essential Air Service
Program. GAO- 02- 997R. Washington, D. C.: August 30, 2002. GAO Contact
JayEtta Z. Hecker, (202) 512- 8984 400- 03 Eliminate Grants to Large and
Medium- Sized Hub Airports

Related GAO Products Airport Finance: Past Funding Levels May Not Be
Sufficient to Cover Airports* Planned Capital Development. GAO- 03- 497T.
Washington, D. C.: February 25, 2003.

Aviation Finance: Implementation of General Aviation Entitlement Grants.
GAO- 03- 347. Washington, D. C.: February 11, 2003.

Aviation Infrastructure: Challenges Related to Building Runways and
Actions to Address Them. GAO- 03- 164. Washington, D. C.: January 30,
2003.

Airport Finance: Using Airport Grant Funds for Security Projects Has
Affected Some Development Projects. GAO- 03- 27. Washington, D. C.:
October 15, 2002.

Aviation Finance: Distribution of Airport Grant Funds Complied with
Statutory Requirements. GAO- 02- 283. Washington, D. C.: April 30, 2002.

GAO Contact JayEtta Z. Hecker, (202) 512- 8984 400- 04 Increase Fees for
Certificates and Registrations Issued by the Federal Aviation
Administration

Related GAO Product Aviation Safety: Unresolved Issues Involving U. S.-
Registered Aircraft.

GAO/ RCED- 93- 135. Washington, D. C.: June 18, 1993. GAO Contact Gerald
Dillingham, (202) 512- 4803

400- 08 Eliminate Funding for the *New Starts* Transit Program

Related GAO Products Mass Transit: Status of New Starts Program and
Potential for Bus Rapid Transit Projects. GAO- 02- 840T. Washington, D.
C.: June 20, 2002.

Mass Transit: FTA*s New Starts Commitments for Fiscal Year 2003. GAO02-
603. Washington, D. C.: April 30, 2002.

GAO Contact Katherine Siggerud, (202) 512- 6570

450 Community and

Examples from Selected GAO Work

Regional Development Limit Eligibility for Federal Emergency Management
Agency Public

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

Improve Federal Foreclosure and Property Sales Processes

CBO Options Where Related GAO Work Is Identified

450- 02 Eliminate Region- Specific Development Agencies 450- 05 Drop Flood
Insurance for Certain Repeatedly Flooded Properties

Examples from Selected GAO Work

Limit Eligibility for Federal Emergency Management Agency Public
Assistance

Primary agency Department of Homeland Security Account Emergency
Preparedness and Response

(70- 0700) Spending type Discretionary Budget subfunctions Multiple

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. From 1990 through 2001,

FEMA has expended over $39 billion (in fiscal year 2001 dollars) 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 acted
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. 17 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

17 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.

courses) which generate portions of their operational revenue through user
fees, rents, admission charges, or similar fees. In the past, CBO
estimated that eliminating eligibility for all private nonprofit
organizations would

yield budgetary savings. CBO 5- Year Cost Estimate

Yes. Included in GAO*s 2002 Budgetary Implications Report

Related GAO Products Disaster Assistance: Improvement Needed in Disaster
Declaration Criteria and Eligibility Assurance Procedures. GAO- 01- 837.
Washington, D. C.: August 31, 2001.

Disaster Assistance: Information on Federal Costs and Approaches for
Reducing Them. GAO/ T- RCED- 98- 139. Washington, D. C.: March 26, 1998.

Disaster Assistance: Improvements Needed in Determining Eligibility for
Public Assistance. GAO/ RCED- 96- 113. Washington, D. C.: May 23, 1996.

Disaster Assistance: Improvements Needed in Determining Eligibility for
Public Assistance. GAO/ T- RCED- 96- 166. Washington, D. C.: April 30,
1996.

GAO Contact JayEtta Z. Hecker, (202) 512- 8984

Eliminate the Flood Insurance Subsidy on Properties That Suffer the
Greatest Flood Loss

Primary agency Department of Homeland Security Account National Flood
Insurance (70- 4236) Spending type Mandatory Budget subfunction 453/
Disaster relief and insurance

The National Flood Insurance Program is not actuarially sound because
approximately 30 percent of the 4.3 million policies in force are
subsidized. Federal Insurance Administration officials estimate that total
premium income from subsidized policyholders is about $500 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 lowinterest 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.

CBO 5- Year Cost Estimate Yes.

Included in GAO*s 2002 Budgetary Implications Report

Related GAO Products Flood Insurance: Information on Financial Aspects of
the National Flood Insurance Program. GAO/ T- RCED- 00- 23. Washington, D.
C.: October 27, 1999.

Flood Insurance: Information on Financial Aspects of the National Flood
Insurance Program. GAO/ T- RCED- 99- 280. Washington, D. C.: August 25,
1999.

Flood Insurance: Financial Resources May Not Be Sufficient to Meet Future
Expected Losses. GAO/ RCED- 94- 80. Washington, D. C.: March 21, 1994.

GAO Contact JayEtta Z. Hecker, (202) 512- 8984

Eliminate Flood Insurance for Certain Repeatedly Flooded Properties

Primary agency Department of Homeland Security Account National Flood
Insurance (70- 4236) Spending type Mandatory Budget subfunction 453/
Disaster relief and insurance

Repetitive flood losses are one of the major factors contributing to the
financial difficulties facing the National Flood Insurance Program (NFIP).
A repetitive- loss property is one that has two or more losses greater
than $1, 000 each within any 10- year period. In 2002, approximately
45,000

buildings insured under the NFIP have been flooded on more than one
occasion and have received flood insurance claims payments of $1, 000 or
more for each loss. As we reported in July 2001, these repetitive losses
account for about 38 percent of all program claims historically (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 repetitive-
loss 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. The Federal Emergency Management
Agency (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. 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 NFIP to increase the number of
buyouts of properties that

suffer repetitive losses. CBO 5- Year Cost Estimate

Yes. Included in GAO*s 2002 Budgetary Implications Report

Related GAO Products Flood Insurance: Information on the Financial
Condition of the National Flood Insurance Program. GAO- 01- 992T.
Washington, D. C.: July 19, 2001.

Flood Insurance: Information on Financial Aspects of the National Flood
Insurance Program. GAO/ T- RCED- 00- 23. Washington, D. C.: October 27,
1999.

Flood Insurance: Information on Financial Aspects of the National Flood
Insurance Program. GAO/ T- RCED- 99- 280. Washington, D. C.: August 25,
1999.

GAO Contact JayEtta Z. Hecker, (202) 512- 8984

Consolidate or Terminate the Department of Commerce*s Trade Adjustment
Assistance for

Primary agency Department of Commerce

Firms Program

Account Economic Development Assistance Programs (13- 2050)

Spending type Discretionary Budget subfunction 452/ Area and regional
development

The Trade Adjustment Assistance (TAA) for firms program is administered by
the Department of Commerce*s Economic Development Administration. This $11
million program (obligations in fiscal year 2002) 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 added performance measures in fiscal
year 2002 to better track outcomes of the assistance provided by the

regional centers. However, we have not evaluated whether these new data
are sufficient to assess how the program is helping firms adjust to import
competition.

Given 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 colocate 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. In the past, CBO estimtated that budgetary
savings would occur if the Congress chooses to terminate the

TAA for Firms Program.

CBO 5- Year Cost Estimate Yes.

Included in GAO*s 2002 Budgetary Implications Report

Related GAO Product Trade Adjustment Assistance: Impact of Federal
Assistance to Firms Is Unclear. GAO- 01- 12. Washington, D. C.: December
15, 2000.

GAO Contact Loren Yager, (202) 512- 4128

Improve Federal Foreclosure and Property Sales Processes

Primary agencies Department of Housing and Urban Development Department of
Veterans Affairs

Accounts Multiple Spending types Direct/ Discretionary Budget subfunctions
Multiple

Opportunities exist to reduce the time necessary to sell foreclosed
properties and minimize costs to the federal government. Federal programs
in the Department of Housing and Urban Development*s Federal Housing
Administration (FHA), the Department of Veterans Affairs (VA), and the
Department of Agriculture*s Rural Housing Service (RHS) promote mortgage
financing for, among other groups, low- income, first- time, minority,
veteran, and rural home buyers. Fannie Mae and Freddie Mac are private
corporations chartered by the Congress that also promote mortgage
financing and home ownership opportunities. Although these programs have
expanded home ownership opportunities, many home owners fall behind in
their mortgage payments each year due to unemployment, health problems, or
the death of a provider. When mortgage lenders cannot assist

home owners in meeting their payments, FHA, VA, RHS, Fannie Mae, and
Freddie Mac (the organizations) may instruct the lenders to begin
foreclosure proceedings. Once foreclosure proceedings have been initiated,
it is generally in the best interests of the organizations and communities
that foreclosed properties are adequately maintained and resold as quickly
as feasible. Otherwise, property conditions can deteriorate, thereby
resulting in lower sales prices, which could limit the government*s
ability to recover the costs that it incurs. 18 In addition, vacant and
poorly maintained properties that are on the market for extended periods
contribute to neighborhood decay.

FHA procedures can delay the initiation of critical steps necessary to
preserve the value of foreclosed properties and to sell them quickly.
While 18 Generally, FHA, VA, and RHS pay claims to mortgage servicers to
cover the outstanding loan balances on foreclosed mortgages and interest
and other expenses. If foreclosed properties are resold at relatively low
prices, then the organizations* ability to recover their claim payments
may be limited.

Fannie Mae, Freddie Mac, VA, and RHS designate one entity as responsible
for the custody, maintenance, and sale of foreclosed properties, FHA
divides these responsibilities between its mortgage servicers and
management and marketing contractors. We found that FHA*s divided approach
to foreclosed property custody can prevent the initiation of critical
maintenance necessary to make properties attractive to potential buyers,
such as the timely removal of all exterior and interior debris, and
results in disputes between servicers and contractors. Because FHA*s
divided approach delays maintenance and other steps necessary to preserve
the value and marketability of foreclosed properties, the properties may
be sold at lower prices than would otherwise be the case. In fact, we
estimated that FHA takes about 55 to 110 days longer to sell foreclosed
properties than the other organizations. In a June 2003

conversation, an FHA official said that the agency continues to consider
unified custody as the best means of managing its inventory of foreclosed
properties. Given legal and other complexities associated with changing
its

approach to selling foreclosed properties, FHA does not expect to complete
its ongoing review of the best means of implementing unified custody until
October 2004.

FHA and VA together spent about $31.5 million in 2000 on new title
insurance policies to help establish that they had clear title to
foreclosed properties, while Fannie Mae, Freddie Mac, and RHS generally
did not purchase new title insurance policies. Neither FHA nor VA collects
data to determine the need for these expenditures, and available
information suggests they are not cost effective. In 1995, VA*s Office of
Inspector General (OIG) issued a report that questioned whether VA*s title
insurance expenditures offered value to the government, and VA has not
implemented recommendations contained in the report to assess the
expenditures* cost effectiveness. In addition, Fannie Mae, Freddie Mac,
and RHS report few title- related problems when they sell foreclosed
properties. We make recommendations that FHA and VA collect additional
data and reevaluate the cost effectiveness of their title insurance
expenditures. In a June 2003 conversation, an FHA official said that FHA
expects to complete its review of purchasing title insurance during the
foreclosure process by October 2004. In a June 2003 conversation, a VA
official said that the department expects to complete its review during
the fall of 2003.

As an option, Congress may wish to consider enacting legislation to
establish unified custody as a priority for the sale of foreclosed
properties that FHA takes into its inventory and directing the agency to
complete its

review of the best means of implementing unified custody by the close of
fiscal year 2004.

As an option, Congress may wish to consider enacting legislation directing
FHA and VA to complete their ongoing reviews of the cost effectiveness of
purchasing new title insurance policies during the foreclosure process by
the close of fiscal year 2004.

CBO 5- Year Cost Estimate No, this is a new example. CBO could not develop
an estimate for this

Included in GAO*s 2002 example.

Budgetary Implications Report Related GAO Product Single- Family Housing:
Opportunities to Improve Federal Foreclosure and Property Sales Processes.
GAO- 02- 305. Washington, D. C.: April 17,

2002. GAO Contact Thomas J. McCool, (202) 512- 8678

CBO Options Where Related GAO Work Is Identified 19

450- 02 Eliminate RegionSpecific Development Agencies

Related GAO Products Economic Development: Multiple Federal Programs Fund
Similar Economic Development Activities. GAO/ RCED/ GGD- 00- 220.
Washington, D. C.: September 29, 2000. 19

Budget Issues: Effective Oversight and Budget Discipline Are Essential*
Even in a Time of Surplus. GAO/ T- AIMD- 00- 73. Washington, D. C.:
February 1, 2000.

GAO Contact Thomas J. McCool, (202) 512- 8678 450- 05 Drop Flood Insurance
for Certain Repeatedly Flooded Properties

Related GAO Products Flood Insurance: Challenges Facing the National Flood
Insurance Program, Statement for the Record. GAO- 03- 606T. Washington, D.
C.: April 1, 2003.

Flood Insurance: Extent of Noncompliance with Purchase Requirements Is
Unknown. GAO- 02- 396. Washington, D. C.: June 21, 2002.

19 We list GAO reports identified as relating to options included in the
CBO March 2003

Budget Options report. Only those CBO options for which we identified
related GAO products are included. We included GAO reports if they related
to the topic of the CBO option, regardless of whether our work supported
the option or not.

Flood Insurance: Information on Financial Aspects of the National Flood
Insurance Program. GAO/ T- RCED- 00- 23. Washington, D. C.: October 27,
1999.

Flood Insurance: Information on Financial Aspects of the National Flood
Insurance Program. GAO/ T- RCED- 99- 280. Washington, D. C.: August 25,
1999.

Flood Insurance: Financial Resources May Not Be Sufficient to Meet Future
Expected Losses. GAO/ RCED- 94- 80. Washington, D. C.: March 21, 1994.

GAO Contact JayEtta Z. Hecker, (202) 512- 8984

500 Education,

CBO Options Where Related GAO Work Is Identified

Training, Employment, 500- 02 Repeal the Safe and Drug- Free Schools and
Communities Act

and Social Services 500- 11 Eliminate the Senior Community Service
Employment Program

CBO Options Where Related GAO Work Is Identified 20

500- 02 Repeal the Safe and Drug- Free Schools and Communities Act

Related GAO Product Safe and Drug- Free Schools: Balancing Accountability
With State and Local Flexibility. GAO/ HEHS- 98- 3. Washington, D. C.:
October 10, 1997. 20

GAO Contact Marnie S. Shaul, (202) 512- 6778 500- 11 Eliminate the Senior
Community Service Employment Program

Related GAO Product Older Workers: Employment Assistance Focuses on
Subsidized Jobs and Job Search, but Revised Performance Measures Could
Improve Access to Other Services. GAO- 03- 350. Washington, D. C.: January
24, 2003.

GAO Contact Sigurd R. Nilsen, (202) 512- 7033 20 We list GAO reports
identified as relating to options included in the CBO March 2003

Budget Options report. Only those CBO options for which we identified
related GAO products are included. We included GAO reports if they related
to the topic of the CBO option, regardless of whether our work supported
the option or not.

550 Health Examples from Selected GAO Work

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 Control Provider
Enrollment Fraud in Medicaid Eliminate Federal Funding for SCHIP Covering
Adults without Children

CBO Option Where Related GAO Work Is Identified

550- 06 Require All States to Comply with New Rules About Medicaid*s Upper
Payment Limit by 2004

Examples from Selected GAO Work

Improve Fairness of Medicaid Matching Formula

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

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. 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.

CBO 5- Year Cost Estimate Yes.

Included in GAO*s 2002 Budgetary Implications Report

Related GAO Products Medicaid Formula: Effects of Proposed Formula on
Federal Shares of State Spending. GAO/ HEHS- 99- 29R. Washington, D. C.:
February 19, 1999.

Medicaid Matching Formula: Effects of Need Indicators on New York*s
Funding. GAO/ HEHS- 97- 152R. Washington, D. C.: June 9, 1997.

Medicaid: Matching Formula*s Performance and Potential Modifications.

GAO/ T- HEHS- 95- 226. Washington, D. C.: July 27, 1995.

Medicaid Formula: Fairness Could Be Improved. GAO/ T- HRD- 91- 5.
Washington, D. C.: December 7, 1990.

GAO Contact William J. Scanlon, (202) 512- 7114

Charge Beneficiaries for Food Inspection Costs

Primary agency Department of Agriculture Accounts Multiple Spending type
Discretionary Budget subfunction 554/ Consumer and occupational health and

safety

User fees* charges individuals or firms pay for services they receive from
the federal government* are not new but 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.
Office of Management and Budget (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. The U. S. Department of Agriculture (USDA)
Food Safety and Inspection Service (FSIS) provides a special benefit to
meat and poultry slaughter and processing plants that incidentally
benefits the general public.

USDA inspection agencies recovered through user fees only about $403
million of the $1.3 billion they spent in 2002 to inspect, test, grade,
and approve agricultural commodities and products. Federal appropriations
have traditionally funded the agencies* remaining inspection expenses.

CBO 5- Year Cost Estimate Yes.

Included in GAO*s 2002 Budgetary Implications Report

Related GAO Products Food Safety: Opportunities to Redirect Federal
Resources and Funds Can Enhance Effectiveness. GAO/ RCED- 98- 224.
Washington, D. C.: August 6, 1998.

Food- Related Services: Opportunities Exist to Recover Costs by Charging
Beneficiaries. GAO/ RCED- 97- 57. Washington, D. C.: March 20, 1997.

Food Safety and Quality: Uniform Risk- based Inspection System Needed to
Ensure Safe Food Supply. GAO/ RCED- 92- 152. Washington, D. C.: June 26,
1992.

GAO Contacts Bob Robinson, (202) 512- 3841 Lawrence J. Dyckman, (202) 512-
3841

Implement Risk- Based Meat and Poultry Inspections at USDA

Primary agency Department of Agriculture Account Food Safety and
Inspection Service (12- 3700)

Spending type Discretionary Budget subfunction 554/ Consumer and
occupational health and

safety

Foodborne illness in the United States is extensive and expensive.
Foodborne diseases cause about 76 million illnesses, 325,000
hospitalizations, and 5,200 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
U. S. Department of Agriculture (USDA) 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 ($ 730
million in 2002), 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. In the past, CBO agreed that this option could
potentially yield

savings, but could not develop an estimate without specific proposals.

CBO 5- Year Cost Estimate No.

Included in GAO*s 2002 Budgetary Implications Report

Related GAO Products Food Safety: Overview of Federal and State
Expenditures. GAO- 01- 177. Washington, D. C.: February 20, 2001.

Food Safety: Opportunities to Redirect Federal Resources and Funds Can
Enhance Effectiveness. GAO/ RCED- 98- 224. Washington, D. C.: August 6,
1998.

Food Safety: Risk- Based Inspections and Microbial Monitoring Needed for
Meat and Poultry. GAO/ RCED- 94- 192. Washington, D. C.: September 26,
1994.

Food Safety and Quality: Uniform Risk- Based Inspection System Needed to
Ensure Safe Food Supply. GAO/ RCED- 92- 152. Washington, D. C.: June 26,
1992.

GAO Contacts Bob Robinson, (202) 512- 3841 Lawrence J. Dyckman, (202) 512-
3841

Prevent States from Using Illusory Approaches to Shift Medicaid Program
Costs to the Federal Government

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

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
stateowned facilities, (2) the Balanced Budget Act of 1997 that further
limits Medicaid payments to state psychiatric hospitals, and (3) the
Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of
2000, 21 which mandated that the Health Care Financing Administration
(HCFA)

21 SCHIP is the State Children*s Health Insurance Program.

issue regulations to curtail financing schemes involving excessive
payments to local government providers.

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 & 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.

CBO 5- Year Cost Estimate No.

Included in GAO*s 2002 Budgetary Implications Report

Related GAO Products Major Management Challenges and Program Risks:
Department of Health and Human Services. GAO- 03- 101. Washington, D. C.:
January 2003.

Medicaid and SCHIP: Recent HHS Approvals of Demonstration Waiver Projects
Raise Concerns. GAO- 02- 817. Washington, D. C.: July 12, 2002.

Medicaid: HCFA Reversed Its Position and Approved Additional State
Financing Schemes. GAO- 02- 147. Washington, D. C.: October 30, 2001.

Medicaid: State Financing Schemes Again Drive Up Federal Payments. GAO/ T-
HEHS- 00- 193. Washington, D. C.: September 6, 2000.

Medicaid: Managed Care and Individual Hospital Limits for Disproportionate
Share Hospital Payments. GAO/ HEHS- 98- 73R. Washington, D. C.: January
28, 1998.

Medicaid: Disproportionate Share Payments to State Psychiatric Hospitals.
GAO/ HEHS- 98- 52. Washington, D. C.: January 23, 1998.

Medicaid: Disproportionate Share Hospital Payments to Institutions for
Mental Disease. GAO/ HEHS- 97- 181R. Washington, D. C.: July 15, 1997.

State Medicaid Financing Practices. GAO/ HEHS- 96- 76R. Washington, D. C.:
January 23, 1996.

Michigan Financing Arrangements. GAO/ HEHS- 95- 146R. Washington, D. C.:
May 5, 1995.

Medicaid: States Use Illusory Approaches to Shift Program Costs to the
Federal Government. GAO/ HEHS- 94- 133. Washington, D. C.: August 1, 1994.

Medicaid: The Texas Disproportionate Share Program Favors Public
Hospitals. GAO/ HRD- 93- 86. Washington, D. C.: March 30, 1993.

GAO Contact William J. Scanlon, (202) 512- 7114

Create a Uniform Federal Mechanism for Food Safety

Primary agency Department of Agriculture Accounts Multiple Spending type
Discretionary Budget subfunction 554/ Consumer and occupational health and

safety

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 the U. S.
Department of Agriculture (USDA), is responsible for the safety of meat,
poultry, eggs, and some egg products, while the Food and Drug
Administration (FDA), under the Department of Health and Human Services
(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 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. In the past, CBO agreed that these
options could potentially yield savings, but could not develop savings
estimates due to the uncertainty of the extent to which improved
efficiencies could actually lead to budgetary savings.

CBO 5- Year Cost Estimate No.

Included in GAO*s 2002 Budgetary Implications Report

Related GAO Products Food Safety: CDC Is Working to Address Limitations in
Several of Its Foodborne Surveillance Systems. GAO- 01- 973. Washington,
D. C.: September 7, 2001.

Food Safety: Federal Oversight of Shellfish Safety Needs Improvement.

GAO- 01- 702. Washington, D. C.: July 9, 2001.

Food Safety: Overview of Federal and State Expenditures. GAO- 01- 177.
Washington, D. C.: February 20, 2001.

Food Safety: Federal Oversight of Seafood Does Not Sufficiently Protect
Consumers. GAO- 01- 204. Washington, D. C.: January 31, 2001.

Food Safety: Actions Needed by USDA and FDA to Ensure That Companies
Promptly Carry Out Recalls. GAO/ RCED- 00- 195. Washington, D. C.: August
17, 2000.

Food Safety: Improvements Needed in Overseeing the Safety of Dietary
Supplements and *Functional Foods.* GAO/ RCED- 00- 156. Washington, D. C.:
July 11, 2000.

Meat and Poultry: Improved Oversight and Training Will Strengthen New Food
Safety System. GAO/ RCED- 00- 16. Washington, D. C.: December 8, 1999.

Food Safety: Agencies Should Further Test Plans for Responding to
Deliberate Contamination. GAO/ RCED- 00- 3. Washington, D. C.: October 27,
1999.

Food Safety: U. S. Needs a Single Agency to Administer a Unified,
RiskBased Inspection System. GAO/ T- RCED- 99- 256. Washington, D. C.:
August 4, 1999.

Food Safety: Opportunities to Redirect Federal Resources and Funds Can
Enhance Effectiveness. GAO/ RCED- 98- 224. Washington, D. C.: August 6,
1998.

Food Safety: Federal Efforts to Ensure the Safety of Imported Foods Are
Inconsistent and Unreliable. GAO/ RCED- 98- 103. Washington, D. C.: April
30, 1998.

Food Safety: Changes Needed to Minimize Unsafe Chemicals in Food.

GAO/ RCED- 94- 192. Washington, D. C.: September 26, 1994.

Food Safety and Quality: Uniform Risk- Based Inspection System Needed to
Ensure Safe Food Supply. GAO/ RCED- 92- 152. Washington, D. C.: June 26,
1992.

GAO Contacts Bob Robinson, (202) 512- 3841 Lawrence J. Dyckman, (202) 512-
3841

Control Provider Enrollment Fraud in Medicaid

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

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 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,

in the past CBO could not develop an estimate of the savings for this
option without specific strategies. Moreover, savings would be net of the
additional resources required to implement such procedures.

CBO 5- Year Cost Estimate No.

Included in GAO*s 2002 Budgetary Implications Report

Related GAO Products Medicaid: State Efforts to Control Improper Payment
Vary. GAO- 01- 662. Washington, D. C.: June 7, 2001.

Medicaid: HCFA and States Could Work Together to Better Ensure the
Integrity of Providers. GAO/ T- HEHS- 00- 159. Washington, D. C.: July 18,
2000.

Medicaid: Federal and State Leadership Needed to Control Fraud and Abuse.
GAO/ T- HEHS- 00- 30. Washington, D. C.: November 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. Washington, D. C.: October 5, 1999.

Medicaid Fraud and Abuse: Stronger Action Needed to Remove Excluded
Providers From Federal Health Programs. GAO/ HEHS- 97- 63. Washington, D.
C.: March 31, 1997.

Fraud and Abuse: Providers Excluded From Medicaid Continue to Participate
in Federal Health Programs. GAO/ T- HEHS- 96- 205. Washington, D. C.:
September 5, 1996.

Prescription Drugs and Medicaid: Automated Review Systems Can Help Promote
Safety, Save Money. GAO/ AIMD- 96- 72. Washington, D. C.: June 11, 1996.

GAO Contact William J. Scanlon, (202) 512- 7114

Eliminate Federal Funding for SCHIP Covering Adults without Children

Primary agency Department of Health and Human Services Account State
Children*s Health Insurance Fund (75-

0515) Spending type Mandatory Budget subfunction 551/ Health care service

In July 2002, we reported both legal and policy concerns about the extent
to which the Department of Health and Human Services (HHS) has ensured
that approved demonstration waivers, authorized under Section 1115 of the
Social Security Act, were consistent with the goals and fiscal integrity
of the Medicaid and State Children*s Health Insurance Program (SCHIP). The
legal concern was that HHS approved a waiver to allow a state to use
unspent SCHIP funding to cover adults without children, despite the

program*s statutory objective of expanding health coverage to low- income
children. We also reported policy concerns that approved waivers may
increase the federal liability for program expenditures. Specifically,
despite HHS*s oversight responsibilities for ensuring that states*
demonstration programs do not put the federal government at risk for
spending more on Medicaid than it would have without such programs, two of
the four approved waivers we reviewed could potentially cost the federal
government at least $330 million more than if they had not been approved.
We recommended that the Congress consider amending title XXI of the Social
Security Act to specify that SCHIP funds are not available to provide

health insurance coverage for childless adults. We also recommended that
the Secretary of HHS better ensure that valid methods are used to
demonstrate budget neutrality and appropriately adjust the federal
obligation for the reviewed waivers.

CBO 5- Year Cost Estimate No, this is a new example. However, CBO
indicated it could probably make

Included in GAO*s 2002 an estimate for this example.

Budgetary Implications Report Related GAO Product Medicaid and SCHIP:
Recent HHS Approvals of Demonstration Waiver

Projects Raise Concerns. GAO- 02- 817. Washington, D. C.: July 12, 2002.
GAO Contact Kathryn G. Allen, (202) 512- 7114

CBO Option Where Related GAO Work Is Identified 22

550- 06 Require All States to Comply with New Rules About Medicaid*s Upper
Payment Limit by 2004

Related GAO Products Major Management Challenges and Program Risks:
Department of Health and Human Services. GAO- 03- 101. Washington, D. C.:
January 2003. 22

Medicaid: HCFA Reversed Its Position and Approved Additional State
Financing Schemes. GAO- 02- 147. Washington, D. C.: October 30, 2001.

Medicaid: State Financing Schemes Again Drive Up Federal Payments.

GAO/ T- HEHS- 00- 193. Washington, D. C.: September 6, 2000. GAO Contacts
Kathryn G. Allen, (202) 512- 7114 Katherine Iritani, (206) 287- 4820

22 We list GAO reports identified as relating to options included in the
CBO March 2003

Budget Options report. Only those CBO options for which we identified
related GAO products are included. We included GAO reports if they related
to the topic of the CBO option, regardless of whether our work supported
the option or not.

570 Medicare Examples from Selected GAO Work

Reassess Medicare Incentive Payments in Health Care Shortage Areas Adjust
Medicare Payment Rates to Reflect Changing Technology, Costs, and Market
Prices

Increase Medicare Program Safeguard Funding 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 and Biologicals

CBO Options Where Related GAO Work Is Identified

570- 10 Reduce Medicare Payments for Currently Covered Prescription Drugs
570- 11 Require Competitive Bidding for High- Volume Items of Durable
Medical Equipment 570- 15 Simplify and Limit Medicare*s Cost- Sharing
Requirements 570- 19 Reduce Medicare Payments for Home Health Care

Examples from Selected GAO Work

Reassess Medicare Incentive Payments in Health Care Shortage Areas

Primary agency Department of Health and Human Services Account Federal
Supplemental Insurance Trust Fund

Account (20- 8004) Spending type Direct Budget subfunction 571/ Medicare

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 (HHS) as having a shortage of primary care physicians. In
1997, bonus payments paid from the Medicare Supplemental Medical Insurance
trust fund 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, 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 & 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 goals and
better structure the program to link limited federal funds to intended
outcomes. For example, if the program*s goal 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.

CBO 5- Year Cost Estimate Yes.

Included in GAO*s 2002 Budgetary Implications Report

Related GAO Products Physician Shortage Areas: Medicare Incentive Payments
Not an Effective Approach to Improve Access. GAO/ HEHS- 99- 36.
Washington, D. C.: February 26, 1999.

Health Care Shortage Areas: Designations Not a Useful Tool for Directing
Resources to the Underserved. GAO/ HEHS- 95- 200. Washington, D. C.:
September 8, 1995.

GAO Contact William J. Scanlon, (202) 512- 7114

Adjust Medicare Payment Rates to Reflect Changing Technology, Costs, and
Market Prices

Primary agency Department of Health and Human Services Account Federal
Supplementary Medical Insurance

Trust Fund (20- 8004) Spending type Direct Budget subfunction 571/
Medicare

Medicare*s supplementary medical insurance program (Medicare Part B) spent
almost $7 billion for durable medical equipment, prosthetics, orthotics,
and supplies in 2002 on behalf of its beneficiaries. For most medical
equipment and supplies, Medicare payments are primarily based on
historical charges, indexed forward, rather than current costs or market
prices.

We have reported that Medicare payments for some medical equipment and
supplies are out of line with actual 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 payment rates. In fact, through the years, the Congress has
legislatively adjusted Medicare rates for some products and services, such
as home oxygen, clinical laboratory tests, intraocular lenses, computed
tomography scans,

and magnetic resonance imaging scans. To address 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.) The agency issued an interim final rule
to implement its authority in December 2002.

However, in the rule, the agency severely limited its ability to use its
new authority to bring its payment rates into line with market prices by

indicating that it would adjust Medicare payment rates only when they were
at least 15 percent above or below a realistic and equitable amount.

An additional limitation to effectively using this new authority is that
CMS frequently does not know specifically what Medicare 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 products of comparable quality and price. 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.

Several options could help to better align Medicare fees with actual costs
and market prices. One option would be for the Congress to give CMS the
authority to implement competitive bidding for durable medical equipment,
prosthetics, orthotics, and supplies. Competitive bidding uses the
dynamics of the marketplace to create incentives for providers to provide
items and services efficiently. In the Balanced Budget Act of 1997, the
Congress required the agency to test competitive bidding for Part B

services and supplies (except for physician services) through a
demonstration. In the spring of 1999, HCFA selected competing suppliers to
provide oxygen supplies and other supplies and equipment to beneficiaries

in Polk County, Fla. In 2000, HCFA began competitive bidding in a second
site* three counties near San Antonio, Tex.* for oxygen supplies,
nebulizer inhalation drugs, and other equipment. The new payment rates

for the items bid averaged 17 to 22 percent below existing Medicare rates
for those states. Despite this reduction in the amount paid, the
demonstration*s evaluators found little evidence of problems with
beneficiary access to products. In addition, the demonstration required
bidders to meet more stringent quality standards than are customary in the
Medicare program. CMS*s authority to conduct these competitive bidding

demonstrations ended December 31, 2002. Without new legislative authority,
the agency cannot use a competitive bidding approach.

A second option for paying more appropriately for medical equipment and
supplies would be to base 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 also need legislative authority to pursue
this option. Yet another approach would be to develop separate fee
schedules that distinguish between wholesale and retail acquisition to
ensure that large suppliers do not receive inappropriately large Medicare
reimbursements. Although none of these options 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.

In 2002, CBO agreed that aligning Medicare payment rates with costs and
market prices could yield savings and estimated that giving CMS authority
to conduct competitive bidding for durable medical equipment, prosthetics,
orthotics and supplies could result in a net reduction of Medicare
spending of $5.8 billion from fiscal years 2003 through 2012.

CBO 5- Year Cost Estimate No.

Included in GAO*s 2002 Budgetary Implications Report

Related GAO Products Medicare: Challenges Remain in Setting Payments for
Medical Equipment and Supplies and Covered Drugs. GAO- 02- 833T.
Washington, D. C.: June 12, 2002.

Medicare Payments: Use of Revised *Inherent Reasonableness* Process
Generally Appropriate. GAO/ HEHS- 00- 79. Washington, D. C.: July 5, 2000.

Medicare: Access to Home Oxygen Largely Unchanged; Closer HCFA Monitoring
Needed. GAO/ HEHS- 99- 56. Washington, D. C.: April 5, 1999.

Medicare: Progress to Date in Implementing Certain Major Balanced Budget
Act Reforms. GAO/ T- HEHS- 99- 87. Washington, D. C.: March 17, 1999.

Medicare: Need to Overhaul Costly Payment System for Medical Equipment and
Supplies. GAO/ HEHS- 98- 102. Washington, D. C.: May 12, 1998.

Medicare: Home Oxygen Program Warrants Continued HCFA Attention.

GAO/ HEHS- 98- 17. Washington, D. C.: November 7, 1997.

Medicare: Problems Affecting HCFA*s Ability to Set Appropriate
Reimbursement Rates for Medical Equipment and Supplies. GAO/ HEHS97- 157R.
Washington, D. C.: June 17, 1997.

Medicare: Comparison of Medicare and VA Payment Rates for Home Oxygen.
GAO/ HEHS- 97- 120R. Washington, D. C.: May 15, 1997.

Medicare Spending: Modern Management Strategies Needed to Curb Billions in
Unnecessary Payments. GAO/ HEHS- 95- 210. Washington, D. C.: September 19,
1995.

Medicare High Spending Growth Calls for Aggressive Action. GAO/ THEHS- 95-
75. Washington, D. C.: February 6, 1995.

Medicare: Excessive Payments Support the Proliferation of Costly
Technology. GAO/ HRD- 92- 59. Washington, D. C.: May 27, 1992.

GAO Contact William J. Scanlon, (202) 512- 7114

Increase Medicare Program Safeguard Funding

Primary agency Department of Health and Human Services Accounts Multiple
Spending type Discretionary/ Direct Budget subfunction 571/ Medicare

Medicare program safeguard activities designed to combat fraud, waste, and
abuse have historically returned about $10 in savings for each dollar
spent, and Centers for Medicare & Medicaid Services (CMS) reported a
return of $16 for each dollar spent in fiscal year 2002. 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 the agency now called CMS with increased funding for
program safeguard activities. CMS has taken a number of actions under MIP
to promote more efficient and effective contractor safeguard operations.

While funding has increased, in 2002 it remained 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. 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
have suggested that the Congress consider increasing the agency*s MIP
funds to allow an expansion of postpayment medical review 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 CMS evaluate the effectiveness of prepayment and postpayment
activities to determine the relative benefits of various safeguards.

CBO 5- Year Cost Estimate No.

Included in GAO*s 2002 Budgetary Implications Report

Related GAO Products Major Management Challenges and Program Risks:
Department of Health and Human Services. GAO- 03- 101. Washington, D. C.:
January 2003.

Medicare: Opportunities and Challenges in Contracting for Program
Safeguards. GAO- 01- 616. Washington, D. C.: May 18, 2001.

Major Management Challenges and Program Risks: Department of Health and
Human Services. GAO- 01- 247. Washington, D. C.: January 2001.

Medicare: HCFA Could Do More to Identify and Collect Overpayments.

GAO/ HEHS/ AIMD- 00- 304. Washington, D. C.: September 7, 2000.

Medicare: Health Care Fraud and Abuse Control Program Financial Reports
for Fiscal Years 1998 and 1999. GAO/ AIMD- 00- 257R. Washington, D. C.:
July 31, 2000.

Medicare Contractors: Further Improvement Needed in Headquarters and
Regional Office Oversight. GAO/ HEHS- 00- 46. Washington, D. C.: March 23,
2000.

Medicare: Program Safeguard Activities Expand, but Results Difficult to
Measure. GAO/ HEHS- 99- 165. Washington, D. C.: August 4, 1999.

Medicare Contractors: Despite Its Efforts, HCFA Cannot Assure Their
Effectiveness or Integrity. GAO/ HEHS- 99- 115. Washington, D. C.: July
14, 1999.

Medicare: Improprieties by Contractors Compromised Medicare Program
Integrity. GAO/ OSI- 99- 7. Washington, D. C.: July 14, 1999.

Medicare: Fraud and Abuse Control Pose a Continuing Challenge.

GAO/ HEHS- 98- 215R. Washington, D. C.: July 15, 1998.

Medicare: Health Care Fraud and Abuse Control Program Financial Report for
Fiscal Year 1997. GAO/ AIMD- 98- 157. Washington, D. C.: June 1, 1998.

Medicare: HCFA*s Use of Anti- Fraud- and- Abuse Funding and Authorities.
GAO/ HEHS- 98- 160. Washington, D. C.: June 1, 1998.

Medicare: Improper Activities by Mid- Delta Home Health. GAO/ OSI- 98- 5.
Washington, D. C.: March 12, 1998.

Medicare Home Health: Success of Balanced Budget Act Cost Controls Depends
on Effective and Timely Implementation. GAO/ T- HEHS- 98- 41. Washington,
D. C.: October 29, 1997.

Medicare: Recent Legislation to Minimize Fraud and Abuse Requires
Effective Implementation. GAO/ T- HEHS- 98- 9. Washington, D. C.: October
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. Washington, D. C.: October 9,
1997.

Medicare: Control Over Fraud and Abuse Remains Elusive. GAO/ T- HEHS97-
165. Washington, D. C.: June 26, 1997.

Nursing Homes: Too Early to Assess New Efforts to Control Fraud and Abuse.
GAO/ T- HEHS- 97- 114. Washington, D. C.: April 16, 1997.

Medicare: Inherent Program Risks and Management Challenges Require
Continued Federal Attention. GAO/ T- HEHS- 97- 89. Washington, D. C.:
March 4, 1997.

Medicare. GAO/ HR- 97- 10. Washington, D. C.: February 1, 1997. GAO
Contact William J. Scanlon, (202) 512- 7114

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

Primary agency Department of Health and Human Services Account Federal
Hospital Insurance Trust Fund (208005)

Spending type Direct Budget subfunction 571/ Medicare

The Balanced Budget Act of 1997 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 &

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, and inadequate data used to establish rates 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
unnecessary services, such as additional therapy services, and by changing
their patient assessment practices to qualify patients into higher paying
payment categories. Consistent with the PPS incentives to minimize costs,

SNFs have provided fewer therapy services to patients categorized into
rehabilitation payment groups. Without adequate adjustments, this could
result in payments for some categories of patients that are higher
relative to service costs than payments for other groups of patients. We
are also

concerned that increases in payments intended to encourage SNFs to
increase their nursing staff appear to have been ineffective in increasing
staffing ratios. In addition, excluding certain services from the daily
rate,

and paying for them 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.

Changes in beneficiary eligibility and inadequate planned oversight of
claims for payment may undermine efforts to control Medicare spending on
SNF services. As part of the PPS, 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 believe 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. CMS should also increase its vigilance over claims review and
provider oversight so that payments are appropriate and made only for
eligible beneficiaries.

CBO 5- Year Cost Estimate No.

Included in GAO*s 2002 Budgetary Implications Report

Related GAO Products Skilled Nursing Facilities: Available Data Show
Average Nursing Staff Time Changed Little after Medicare Payment Increase.
GAO- 03- 176. Washington, D. C.: November 13, 2002.

Skilled Nursing Facilities: Providers Have Responded to Medicare Payment
System By Changing Practices. GAO- 02- 841. Washington, D. C.: August 23,
2002.

Skilled Nursing Facilities: Services Excluded From Medicare*s Daily Rate
Need to be Reevaluated. GAO- 01- 816. Washington, D. C.: August 22, 2001.

Nursing Homes: Aggregate Medicare Payments Are Adequate Despite
Bankruptcies. GAO/ T- HEHS- 00- 192. Washington, D. C.: September 5, 2000.

Skilled Nursing Facilities: Medicare Payments Changes Require Provider
Adjustments But Maintain Access. GAO/ HEHS- 00- 23. Washington, D. C.:
December 14, 1999.

Medicare: Better Information Can Help Ensure That Refinements to BBA
Reforms Lead to Appropriate Payments. GAO/ T- HEHS- 00- 14. Washington, D.
C.: October 1, 1999.

Skilled Nursing Facilities: Medicare Payments Need to Better Account for
Nontherapy Ancillary Cost Variation. GAO/ HEHS- 99- 185. Washington, D.
C.: September 30, 1999.

Medicare Post- Acute Care: Better Information Needed Before Modifying BBA
Reforms. GAO/ T- HEHS- 99- 192. Washington, D. C.: September 15, 1999.

Balanced Budget Act: Any Proposed Fee- for- Service Payment Modifications
Need Thorough Evaluation. GAO/ T- HEHS- 99- 139. Washington, D. C.: June
10, 1999.

Medicare: Progress to Date in Implementing Certain Major Balanced Budget
Act Reforms. GAO/ T- HEHS- 99- 87. Washington, D. C.: March 17, 1999.

Balanced Budget Act: Implementation of Key Medicare Mandates Must Evolve
to Fulfill Congressional Objectives. GAO/ T- HEHS- 98- 214. Washington, D.
C.: July 16, 1998.

Long- Term Care: Baby Boom Generation Presents Financing Challenges.

GAO/ T- HEHS- 98- 107. Washington, D. C.: March 9, 1998.

Medicare Post- Acute Care: Home Health and Skilled Nursing Facility Cost
Growth and Proposals for Prospective Payment. GAO/ T- HEHS- 97- 90.
Washington, D. C.: March 4, 1997.

GAO Contact William J. Scanlon, (202) 512- 7114

Implement Risk- Sharing in Conjunction with Medicare Home Health Agency
Prospective Payment

Primary agency Department of Health and Human Services

System

Account Federal Supplementary Medical Insurance Trust Fund (20- 8004)

Spending type Direct Budget subfunction 571/ Medicare

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 paid 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, or to lower the number of visits provided below that
used to develop the episode payment, thereby increasing their profits.
While the episode payment was set based on the assumption that about 32
visits would be provided, agencies can provide as few as 5 visits. In
fact, since the PPS, agencies have reduced the number of visits provided
to beneficiaries and furnished on average about 22 visits per episode by
the first half of 2001. As a result, the Medicare program is paying HHAs
for services that beneficiaries did not receive and on average
considerably more than the estimated costs of care beneficiaries are
receiving. Some

HHAs that face extraordinary costs not accounted for by the payment
groups, however, may be financially disadvantaged.

In order to reduce these incentives, the Congress could require CMS 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 5- Year Cost Estimate No.

Included in GAO*s 2002 Budgetary Implications Report

Related GAO Products Medicare Home Health Care: Payments to Home Health
Agencies Are Considerably Higher than Costs. GAO- 02- 663. Washington, D.
C.: May 6, 2002.

Medicare Home Health Care: Prospective Payment System Could Reverse Recent
Declines in Spending. GAO/ HEHS- 00- 176. Washington, D. C.: September 8,
2000.

Medicare Home Health Care: Prospective Payment System Will Need Refinement
as Data Become Available. GAO/ HEHS- 00- 9. Washington, D. C.: April 7,
2000. GAO Contact William J. Scanlon, (202) 512- 7114

Eliminate Medicare Competitive Sourcing Restrictions

Primary agency Department of Health and Human Services Account Program
Management (75- 0511) Spending type Discretionary Budget subfunction 571/
Medicare

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 fiscal

intermediaries and carriers. Fiscal intermediaries process claims from
hospitals and other institutional providers, generally for Part A
services, while carriers process Part B claims. The fiscal 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, allows contractors to
earn profits, and

requires contractors to perform until the end of the contract term. The
Secretary of the Department of Health and Human Services (HHS), however,
is authorized to enter into contracts with fiscal intermediaries and
carriers without regard to federal procurement statutes under Social
Security Act provisions that originated when Medicare was established.
There is no full and open competition for fiscal intermediary or carrier
contracts. Rather, fiscal 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 the act does not expressly provide
for profit. Furthermore, the Medicare statute 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.

CBO 5- Year Cost Estimate Yes.

Included in GAO*s 2002 Budgetary Implications Report

Related GAO Products Major Management Challenges and Program Risks:
Department of Health and Human Services. GAO- 03- 101. Washington, D. C.:
January 2003.

Medicare: Improvements Needed in Provider Communications and Contracting
Procedures. GAO- 01- 1141T. Washington, D. C.: September 25, 2001.

Medicare: Comments on HHS* Claims Administration Contracting Reform
Proposal. GAO- 01- 1046R. Washington, D. C.: August 17, 2001.

Medicare Contracting Reform: Opportunities and Challenges in Contracting
for Claims Administration Services. GAO- 01- 918T. Washington, D. C.: June
28, 2001.

Medicare Contractors: Despite Its Efforts, HCFA Cannot Ensure Their
Effectiveness or Integrity. GAO/ HEHS- 99- 115. Washington, D. C.: July
14, 1999. GAO Contact Leslie G. Aronovitz, (312) 220- 7600

Change Pricing Formula for Medicare- Covered Drugs and Biologicals

Primary agency Department of Health and Human Services Account Federal
Supplementary Medical Insurance

Trust Fund (20- 8004) Spending type Direct Budget subfunction 571/
Medicare

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 spending for drugs and biologicals* by the program and its
beneficiaries through their copayments* has been increasing rapidly.
Between 1997 and 2001, spending more than doubled* from $2.76 billion to

$6.41 billion. 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. 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 and other providers of Medicare- covered drugs are able to
obtain thesed drugs at prices significantly below current Medicare
payments. We reported in 2001 that the difference between widely available
prices and AWP for physician- administered drugs in a GAO sample study
varied from 13 percent to 34 percent. For a sample of pharmacy-
supplierprovided drugs, prices ranged from 14 percent to 85 percent. In
2003, we reported that the two main types of suppliers of blood clotting
factor to beneficiaries also were able to obtain the product at prices
considerably below the Medicare payment.

Medicare could achieve significant savings on Part B drug benefits if it
reimbursed providers at levels that reflected actual acquisition costs.

CBO 5- Year Cost Estimate No.

Included in GAO*s 2002 Budgetary Implications Report

Related GAO Products Medicare: Payment for Blood Clotting Factor Exceeds
Providers* Acquisition Cost. GAO- 03- 184. Washington, D. C.: January 10,
2003.

Major Management Challenges and Program Risks: Department of Health and
Human Services. GAO- 03- 101. Washington, D. C.: January 2003.

Medicare: Challenges Remain in Setting Payments for Medical Equipment and
Supplies and Covered Drugs. GAO- 02- 833T. Washington, D. C.: June 12,
2002.

Medicare Outpatient Drugs: Program Payments Should Better Reflect Market
Prices. GAO- 02- 531T. Washington, D. C.: March 14, 2002.

Medicare: Payments for Covered Outpatient Drugs Exceed Providers* Cost.
GAO- 01- 1118. Washington, D. C.: September 21, 2001.

Medicare Part B Drugs: Program Payments Should Reflect Market Prices.

GAO- 01- 1142T. Washington, D. C.: September 21, 2001. GAO Contact William
J. Scanlon, (202) 512- 7114

CBO Options Where Related GAO Work Is Identified 23

570- 10 Reduce Medicare Payments for Currently Covered Prescription Drugs

Related GAO Products Medicare: Payment for Blood Clotting Factor Exceeds
Providers* Acquisition Cost. GAO- 03- 184. Washington, D. C.: January 10,
2003.. 23

Medicare: Challenges Remain in Setting Payments for Medical Equipment and
Supplies and Covered Drugs. GAO- 02- 833T. Washington, D. C.: June 12,
2002.

Medicare Outpatient Drugs: Program Payments Should Better Reflect Market
Prices. GAO- 02- 531T. Washington, D. C.: March 14, 2002.

Medicare: Payments for Covered Outpatient Drugs Exceed Providers* Cost.
GAO- 01- 1118. September 21, 2001.

GAO Contact Laura A. Dummit, (202) 512- 7119 23 We list GAO reports
identified as relating to options included in the CBO March 2003

Budget Options report. Only those CBO options for which we identified
related GAO products are included. We included GAO reports if they related
to the topic of the CBO option, regardless of whether our work supported
the option or not.

570- 11 Require Competitive Bidding for High- Volume Items of Durable
Medical Equipment

Related GAO Product Medicare: Challenges Remain in Setting Payments for
Medical Equipment and Supplies and Covered Drugs. GAO- 02- 833T.
Washington, D. C.: June 12, 2002.

GAO Contacts Leslie G. Aronovitz, (312) 220- 7600 Sheila Avruch, (202)
512- 7277 570- 15 Simplify and Limit Medicare*s Cost- Sharing Requirements

Related GAO Products Medicare Reform: Modernization Requires Comprehensive
Program View. GAO- 01- 862T. Washington, D. C.: June 14, 2001.

Medicare: Cost- Sharing Policies Problematic for Beneficiaries and
Program. GAO- 01- 713T. Washington, D. C.: May 9, 2001.

GAO Contact Laura A. Dummit, (202) 512- 7119 570- 19 Reduce Medicare
Payments for Home Health Care

Related GAO Products Medicare: Utilization of Home Health Care by State.
GAO- 02- 782R. Washington, D. C.: May 23, 2002.

Medicare Home Health Care: Payments to Home Health Agencies Are
Considerably Higher than Costs. GAO- 02- 663. Washington, D. C.: May 6,
2002.

Medicare Home Health Care: Prospective Payment System Could Reverse Recent
Declines in Spending. GAO/ HEHS- 00- 176. Washington, D. C.: September 8,
2000.

GAO Contact Laura A. Dummit, (202) 512- 7119

600 Income Security Examples from Selected GAO Work

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 Employee 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

Sustain/ Expand Range of SSI Program Integrity Activities Revise
Government Pension Offset (GPO) Exemption Better Congressional Oversight
of PRWORA*s Fugitive Felon Provisions Improve the Administrative Oversight
of Food Assistance Programs

CBO Option Where Related GAO Work Is Identified

600- 07 Reduce the Federal Matching Rate for Administrative and Training
Costs in the Foster Care and Adoption Assistance Programs

Examples from Selected GAO Work

Develop Comprehensive Return- to- Work Strategies for People with
Disabilities

Primary agency Social Security Administration Accounts Multiple Spending
type Direct Budget subfunctions Multiple

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 2002, DI benefits paid to disabled workers
totaled about $59.9 billion and SSI benefits paid to beneficiaries with
disabilities amounted to about $26.2 billion. SSA data show that over the
past 10 years, the size of the working- age disabled beneficiary
population increased 38 percent, from about 6.0 million to 8.2 million.
Such growth has raised concerns that are compounded by the fact that few
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 return to

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 stepped up its return- to- work
efforts, in part, in response to mandates from the Ticket to Work and Work

Incentives Improvement Act of 1999, which contains provisions to safeguard
medical coverage for workers with disabilities, enhance vocational
rehabilitation services for beneficiaries, and demonstrate the
effectiveness of allowing working beneficiaries to keep more of their
earnings. For example, SSA has (1) recruited more than 400 public or
private entities to provide vocational rehabilitation, employment, and
other support services to beneficiaries under the Ticket to Work Program;
(2) raised and indexed to a measure of wage growth the limit on the

amount a DI beneficiary can earn from work and still receive benefits to
encourage people with disabilities to work; (3) funded 12 state
partnership agreements that are intended to help the states develop
services to increase beneficiary employment; (4) provided funding to more
than 100

community- based organizations to help provide work incentives planning
and assistance to beneficiaries; and (5) completed a pilot study on the
deployment of work incentive specialists to SSA field offices and is
determining how to best implement the position nationally. Further, SSA
has progressed in researching issues related to return- to- work through
its Disability Research Institute. Research that is underway includes (1)
designing a demonstration to provide earlier return- to- work services to

DI applicants who are likely to be found eligible; (2) exploring the paths
DI applicants and beneficiaries took to the benefit program to determine
whether SSA might be able to redirect some applicants to work rather than
a prolonged stay on the benefit rolls; (3) examining how the onset of

disability early in life affects later employment outcomes; and (4)
analyzing and facilitating the transition to employment of youths with
disabilities.

While these efforts represent positive steps in trying to return people
with disabilities to work, SSA still needs to move forward in developing a
comprehensive return- to- work strategy. Such a strategy is likely to
require improvements to staff skill levels and areas of expertise, as well
as changes

to the disability determination process. It will also require fundamental
changes to the underlying philosophy and direction of the DI and SSI
programs, as well as legislative changes in some cases. Policymakers will
need to carefully weigh the implications of such changes. Nevertheless, we
remain concerned that the absence of such a strategy may hinder SSA*s

efforts to make significant strides in the return- to- work area. An
improved return- to- work strategy could benefit both the beneficiaries
who want to work and the American taxpayer.

CBO 5- Year Cost Estimate No.

Included in GAO*s 2002 Budgetary Implications Report

Related GAO Products SSA Disability: SGA Levels Appear to Affect the Work
Behavior of Relatively Few Beneficiaries, but More Data Needed. GAO- 02-
224. Washington, D. C.: January 16, 2002.

SSA Disability: Other Programs May Provide Lessons for Improving Return-
to- Work Efforts. GAO- 01- 153. Washington, D. C.: January 12, 2001.

Social Security Disability: Other Programs May Provide Lessons for
Improving Return- to- Work Efforts. GAO/ T- HEHS- 00- 151. Washington, D.
C.: July 13, 2000.

Social Security Disability: Multiple Factors Affect Return to Work.

GAO/ T- HEHS- 99- 82. Washington, D. C.: March 11, 1999.

Social Security Disability Insurance: Multiple Factors Affect
Beneficiaries* Ability to Return to Work. GAO/ HEHS- 98- 39. Washington,
D. C.: January 12, 1998.

Social Security: Disability Programs Lag in Promoting Return to Work.

GAO/ HEHS- 97- 46. Washington, D. C.: March 17, 1997.

People With Disabilities: Federal Programs Could Work Together More
Efficiently to Promote Employment. GAO/ HEHS- 96- 126. Washington, D. C.:
September 3, 1996.

SSA Disability: Return- to- Work Strategies From Other Systems May Improve
Federal Programs. GAO/ HEHS- 96- 133. Washington, D. C.: July 11, 1996.

SSA Disability: Program Redesign Necessary to Encourage Return to Work.
GAO/ HEHS- 96- 62. Washington, D. C.: April 24, 1996.

GAO Contact Robert E. Robertson, (202) 512- 7215

Revise Benefit Payments under the Federal Employees* Compensation Act

Primary agency Department of Labor Accounts Multiple Spending types
Direct/ Discretionary Budget subfunction 609/ Other income security

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 on For almost all totally disabled individuals,
FECA benefits are 66 and two

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. In the
past, CBO estimated the savings that would occur, assuming that the new
FECA benefit formula would equal 80 percent of spendable earnings and 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.

Revising Benefits for Retirement- Retirement- eligible federal workers who
continue to be disabled as a result

Eligible Beneficiaries of work- related injuries could receive tax- free
workers* compensation 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. In the past, CBO estimated that savings would occur,
assuming 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.
Assuming 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.

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
responsible. We recommended that the Congress amend FECA to expressly
provide for refunds of amounts paid as COP when employees receive third-
party recoveries. In the past, CBO estimated that savings would occur 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. 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, 2003, maximum authorized
weekly FECA benefits were equal to $1,596, 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 six states

authorize additional benefits for dependents (about $5-$ 10) benefit
amounts per week per dependent. However, one state authorizes an
additional flat rate of $25 per week for dependents, regardless of the
number of dependents. In all cases, the total benefits are not to exceed
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, in the
past, CBO estimated that savings would occur by eliminating augmented
compensation benefits for dependents and

establishing a 5- day waiting period immediately following the injury, and
before the continuation of pay period. CBO 5- Year Cost Estimate

Yes. Included in GAO*s 2002 Budgetary Implications Report

Related GAO Products Federal Employees* Compensation Act: Percentages of
Take- Home Pay Replaced by Compensation Benefits. GAO/ GGD- 98- 174.
Washington, D. C.: August 17, 1998.

Federal Employees* Compensation Act: Issues Associated with Changing
Benefits for Older Beneficiaries. GAO/ GGD- 96- 138BR. Washington, D. C.:
August 14, 1996.

Workers* Compensation: Selected Comparisons of Federal and State Laws.
GAO/ GGD- 96- 76. Washington, D. C.: April 3, 1996.

Federal Employees* Compensation Act: Redefining Continuation of Pay Could
Result in Additional Refunds to the Government. GAO/ GGD- 95- 135.
Washington, D. C.: June 8, 1995.

GAO Contact Robert E. Robertson, (202) 512- 7215

Increase Congressional Oversight of PBGC*s Budget

Primary agency Department of Labor Account Pension Benefit Guaranty
Corporation fund

(16- 4204) Spending types Direct/ Discretionary Budget subfunction 601/
General retirement and disability

insurance

The Pension Benefit Guaranty Corporation (PBGC) insures the benefits of
about 44 million participants against default of their employer- sponsored
defined benefit pension plans. Established in 1974 as a self- financing
government corporation, PBGC*s primary responsibility is to assume
administration of underfunded plans that either terminate or become
insolvent. In 2002, about 345,000 retirees received more than $1.5 billion
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 $227 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 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 $215.5 million

in fiscal year 2002. During this period, PBGC*s limitation budget
decreased from $40 million to $11.7 million.

In 2000, we reported that PBGC*s failure to strategically manage its
longer term 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. Also, we have reported that PBGC does not have a
reliable basis for estimating its administrative expenses subject to the
legislative limitation. As a result, PBGC*s estimates for its activities

covered by the limitation are not meaningful and thus are ineffective in
controlling administrative costs. In addition, PBGC does not have a
meaningful basis for reporting adherence to the limitation, since it does
not accumulate and allocate actual expenses for activities subject to the
limitation.

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 appropriation 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. In the past, CBO was
unable able to estimate savings from this option without a more specific
proposal.

CBO 5- Year Cost Estimate No.

Included in GAO*s 2002 Budgetary Implications Report

Related GAO Products Pension Benefit Guaranty Corporation: Statutory
Limitation on Administrative Expenses Does Not Provide Meaningful Control.
GAO- 03- 301. Washington, D. C.: February 28, 2003.

Pension Benefit Guaranty Corporation: Contracting Management Needs
Improvement. GAO/ HEHS- 00- 130. Washington, D. C.: September 18, 2000.

GAO Contact Barbara D. Bovbjerg, (202) 512- 7215

Share the Savings from Bond Refundings

Primary agency Department of Housing and Urban Development Account Housing
Certificate Fund (86- 0319) Spending types Discretionary/ Direct Budget
subfunction 604/ Housing assistance

During the 1970s and early 1980s, the Department of Housing and Urban
Development (HUD) administered programs to develop housing for lowincome
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*s 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 5- Year Cost
Estimate

No. Included in GAO*s 2002 Budgetary Implications Report

Related GAO Product Multifamily Housing: HUD Missed Opportunities to
Reduce Costs on Its Uninsured Section 8 Portfolio. GAO/ RCED- 99- 217.
Washington, D. C.: July 30, 1999.

GAO Contact Thomas J. McCool, (202) 512- 8678

Implement a Service Fee for Successful Non- Temporary Assistance for Needy
Families Child Support

Primary agency Department of Health and Human Services

Enforcement Collections

Account Payments to States for Child Support Enforcement and Family
Support Programs (75- 1501)

Spending type Direct Budget subfunction 609/ Other income security

The Child Support Enforcement program is a Federal/ state/ local
partnership designed 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 support orders, and collecting and distributing
child support payments. From fiscal years 1984 through 1998, non- TANF
caseloads and costs rose about 500 percent and 1200 percent, respectively.
For fiscal years 1999 through 2002, non- TANF cases represented about 80
percent of the total caseload. The federal government pays 66 percent of
the Child Support Enforcement

program costs. While states have the authority to fully recover the costs
of their services, states have exercised their discretion and most have
charged only minimal application and service fees. 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, in the past, CBO
estimated 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.

CBO 5- Year Cost Estimate Yes.

Included in GAO*s 2002 Budgetary Implications Report

Related GAO Products Child Support Enforcement: Clear Guidance Would Help
Ensure Proper Access to Information and Use of Wage Withholding by Private
Firms. GAO- 02- 349, March 26, 2002.

Child Support Enforcement: Effects of Declining Welfare Caseloads Are
Beginning to Emerge. GAO/ HEHS- 99- 105. Washington, D. C.: June 30, 1999.

Welfare Reform: Child Support an Uncertain Income Supplement for Families
Leaving Welfare. GAO/ HEHS- 98- 168. Washington, D. C.: August 3, 1998.

Child Support Enforcement: Early Results on Comparability of Privatized
and Public Offices. GAO/ HEHS- 97- 4. Washington, D. C.: December 16,
1996.

Child Support Enforcement: Reorienting Management Toward Achieving Better
Program Results. GAO/ HEHS/ GGD- 97- 14. Washington, D. C.: October 25,
1996.

Child Support Enforcement: States* Experience with Private Agencies*
Collection of Support Payments. GAO/ HEHS- 97- 11. Washington, D. C.:
October 23, 1996.

Child Support Enforcement: States and Localities Move to Privatized
Services. GAO/ HEHS- 96- 43FS. Washington, D. C.: November 20, 1995.

Child Support Enforcement: Opportunity to Reduce Federal and State Costs.
GAO/ T- HEHS- 95- 181. Washington, D. C.: June 13, 1995.

GAO Contact Cornelia M. Ashby, (202) 512- 8403

Improve Reporting of DOD Reserve Employee Payroll Data to State
Unemployment Insurance

Primary agency Department of Labor

Programs

Account Unemployment Trust Fund 20- 8042 Spending type Direct Budget
subfunctions Multiple

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 were also among the 800, 000
personnel who participated in National Reserve forces (Army National
Guard, Army Reserve, Naval Reserve, Marine Corps Reserve, Air National
Guard, and the Air Force Reserve) in fiscal year 2002.

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 1996 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 accounted 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 Department of Defense and the Department of Transportation*s Coast
Guard have 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
Department of Labor 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 was 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 reports that, given its effort to ensure any action taken be
costeffective 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. The potential for overpayments may be
even greater given current national security conditions that involve a
greater role for reservists.

In the past, CBO estimated that budgetary savings would result from the
reduction in overpayments if DOD was required to report Reserve payroll
and personnel data to states on a quarterly basis.

CBO 5- Year Cost Estimate Yes.

Included in GAO*s 2002 Budgetary Implications Report

Related GAO Product Unemployment Insurance: Millions in Benefits Overpaid
to Military Reservists. GAO/ HEHS- 96- 101. Washington, D. C.: August 5,
1996.

GAO Contact Sigurd R. Nilsen, (202) 512- 7215

Improve Social Security Benefit Payment Controls

Primary agency Social Security Administration Account Federal Old Age and
Survivor*s Insurance

Trust Fund (20- 8006) Spending type Direct Budget subfunction 651/ Social
security

The 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 from $129 million to $323 million from 1978 to about 1995.

In 1998 we recommended that SSA work with the Internal Revenue Service
(IRS) to revise the reporting of pension income on IRS tax form 1099R. IRS
has subsequently advised SSA that it needs a technical amendment to the
Tax Code to obtain the information SSA needs. This year, we testified that
complete and accurate reporting of government pension income is still
needed. Given the IRS response to our previous recommendation, we have
provided the following matter for congressional consideration. *To
facilitate complete and accurate reporting of government pension income,
the Congress should consider giving IRS the authority to collect this
information, which could perhaps be accomplished through a simple
modification to a single form.* 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. In the past, CBO estimated that improved payment
controls could result in budgetary savings.

CBO 5- Year Cost Estimate Yes.

Included in GAO*s 2002 Budgetary Implications Report

Related GAO Products Social Security: Issues Relating to Noncoverage of
Public Employees. GAO- 03- 710T. Washington, D. C.: May 1, 2003.

Social Security: Better Payment Controls for Benefit Reduction Provisions
Could Save Millions. GAO/ HEHS- 98- 76. Washington, D. C.: April 30, 1998.

GAO Contact Barbara D. Bovbjerg, (202) 512- 7215

Simplify Supplemental Security Income Recipient Living Arrangements

Primary agency Social Security Administration Account Supplemental
Security Income Program

(28- 0406) Spending types Direct/ Discretionary Budget subfunction 609/
Other income security

The 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 have 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. In light of the potential cost savings associated with
addressing this issue, we recommended in September 2002 that SSA identify
and move forward in implementing cost- effective options for simplifying
complex

living arrangement policies, with particular attention to those policies
most vulnerable to fraud, waste, and abuse. We also suggested that an
effective approach may include pilot testing various simplification
options to better

assess their effects. SSA told us that it will use sophisticated computer

simulations to assess the potential impacts of various proposals on
recipients, but has not completed these efforts yet. Although in the past
CBO agreed that some changes that would simplify living arrangement
policies have the potential to create savings, it could not develop a
savings estimate without a specific legislative proposal.

CBO 5- Year Cost Estimate No.

Included in GAO*s 2002 Budgetary Implications Report

Related GAO Products Supplemental Security Income: Progress Made in
Detecting and Recovering Overpayments, but Management Attention Should
Continue.

GAO- 02- 849. Washington, D. C.: September 16, 2002.

Supplemental Security Income: Status of Efforts to Improve Overpayment
Detection and Recovery. GAO- 02- 962T. Washington, D. C.: July 25, 2002.

Supplemental Security Income: Action Needed on Long- Standing Problems
Affecting Program Integrity. GAO/ HEHS- 98- 158. Washington, D. C.:
September 14, 1998.

GAO Contact Barbara D. Bovbjerg, (202) 512- 7215

Reduce Federal Funding Participation Rate for Automated Child Support
Enforcement Systems

Primary agency Department of Health and Human Services Account Payments to
States for Child Support

Enforcement and Family Support Programs (75- 1501)

Spending type Direct Budget subfunction 609/ Other income security

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

2000, the states spent about $5.3 billion to develop these systems,
including about $3.8 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. 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. In the past, CBO estimated that a
reduced participation rate would produce budgetary savings. CBO 5- Year
Cost Estimate

Yes. Included in GAO*s 2002 Budgetary Implications Report

Related GAO Products Human Services: Federal Approval and Funding
Processes for States* Information Systems. GAO- 02- 347T. Washington, D.
C.: July 9, 2002.

Child Support Enforcement: Leadership Essential to Implementing Effective
Automated Systems. GAO/ T- AIMD- 97- 162. Washington, D. C.: September 10,
1997.

Child Support Enforcement: Strong Leadership Required to Maximize Benefits
of Automated Systems. GAO/ AIMD- 97- 72. Washington, D. C.: June 30, 1997.
GAO Contact Joel C. Willemssen, (202) 512- 6408

Obtain and Share Information on Medical Providers and Middlemen to Reduce
Improper Payments

Primary agency Social Security Administration

to Supplemental Security

Account Supplemental Security Income Program

Income Recipients

(28- 0406) Spending types Direct/ Discretionary Budget subfunction 609/
Other income security

The Supplemental Security Income (SSI) program guarantees a minimum level
of income for needy, aged, blind, or disabled individuals. In fiscal year
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 in the past, CBO agreed that efforts to
reduce fraud in the SSI program through greater information sharing about
medical providers and middlemen have the potential to create savings, it
could not develop a savings estimate without a specific legislative
proposal.

CBO 5- Year Cost Estimate No.

Included in GAO*s 2002 Budgetary Implications Report

Related GAO Products High- Risk Series: An Update. GAO- 03- 119.
Washington, D. C.: January 2003.

High- Risk Series: An Update. GAO- 01- 263. Washington, D. C.: January
2001.

Supplemental Security Income: Additional Action Needed to Reduce Program
Vulnerability to Fraud and Abuse. GAO/ HEHS- 99- 151. Washington, D. C.:
September 15, 1999.

Supplemental Security Income: Disability Program Vulnerable to Applicant
Fraud When Middlemen Are Used. GAO/ HEHS- 95- 116. Washington, D. C.:
August 31, 1995. GAO Contact Barbara D. Bovbjerg, (202) 512- 7215

Sustain/ Expand Range of SSI Program Integrity Activities

Primary agency Social Security Administration Account Supplemental
Security Income Program

(28- 0406) Spending types Direct/ Discretionary Budget subfunction 609/
Other income security

The 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 and costly to administer because even small changes in
income, available resources, or living arrangements can affect recipients*
monthly benefit amounts or continued eligibility. To a significant extent,
SSA relies heavily on recipients to accurately report important
eligibility information. The agency also verifies certain income and
resource information through computer matching with the records of other
federal and state agencies. To determine whether a recipient remains
eligible for SSI benefits, SSA also periodically conducts financial
redetermination reviews, which involve personal contact with recipients to
document their income, resources, living arrangements, and other
eligibility factors. Recipients are reviewed at least every 6 years, but
reviews may be more frequent if SSA determines that changes in eligibility
are likely.

We recently reported that SSA has made a variety of changes to improve its
ability to detect SSI payment errors and recover overpayments. We also
noted that SSA officials had estimated that conducting substantially more
redeterminations would yield hundreds of millions of dollars in additional
overpayment detections and preventions annually. In 2001, SSA estimated
that it would be cost beneficial to do another 2.5 million
redeterminations.

The additional reviews would produce $1.1 billion in overpayment benefits
(additional overpayment recoveries and future overpayments prevented).
Subsequently, we recommended that SSA sustain and expand its program
integrity activities. SSA plans to process 200,000 more financial
redeterminations in 2003 than it did in 2002.

CBO 5- Year Cost Estimate No, this is a new example. However, CBO
indicated it could probably make

Included in GAO*s 2002 an estimate for this example.

Budgetary Implications Report

Related GAO Products Supplemental Security Income: Progress Made in
Detecting and Recovering Overpayments, but Management Attention Should
Continue.

GAO- 02- 849. Washington, D. C.: September 16, 2002.

Supplemental Security Income: Action Needed on Long- Standing Problems
Affecting Program Integrity. GAO/ HEHS- 98- 158. Washington, D. C.:
September 14, 1998.

GAO Contact Robert E. Robertson, (202) 512- 7215

Revise Government Pension Offset (GPO) Exemption

Primary agency Social Security Administration Account Federal Old- Age and
Survivors Insurance

Trust Fund (20- 8006) Spending types Direct/ Discretionary Budget
subfunction 651/ Social security

The Social Security Administration (SSA) administers the Government
Pension Offset (GPO) provision. The GPO requires SSA to reduce benefits to
persons whose social security entitlement is based on another person*s
social security coverage (usually a spouse*s). The GPO prevents workers
from receiving a full Social Security spousal benefit in addition to a
pension from government employment not covered by Social Security.
However, the law provides an exemption from the GPO if an individual*s
last day of

state/ local employment is in a position that is covered by both Social
Security and the state/ local government*s pension system. In these cases,
the GPO will not apply and Social Security spousal benefits will not be
reduced.

While we could not definitively confirm the extent nationwide that
individuals are transferring positions to avoid the GPO, we found that in
Texas and Georgia 4, 819 individuals had performed work in positions
coverd by Social Security for short periods to qualify for the GPO last-
day exemption. SSA officials also acknowledged that use of the exemption
might be possible in some of the approximately 2,300 state and local
government retirement plans in other states where such plans contain
Social Security covered and noncovered positions. The transfers we
identified in Texas and Georgia could increase long- term benefit payments
from the Social Security Trust funds by $450 million. 24 While this
currently represents a relatively small percentage of the Social Security
Trust funds, costs could increase significantly if the practice grows and
begins to be

adopted by other states and localities. 24 We calculated this figure by
multiplying the number of last- day cases reported in Texas and Georgia
(4,819) by SSA data on the average annual offset amount ($ 4,800) and the
average retiree*s life expectancy upon receipt of spousal benefits (19.4
years). This estimate may over- underestimate costs due to the use of
averages, the exclusion of inflation/ cost- ofliving/ net present value
adjustments, lost investment earnings by the Trust Funds, and other
factors that may affect the receipt of spousal benefits.

Considering the potential for abuse of the last- day exemption and the
likelihood for its increased use we believe that timely action is needed.
In our report and testimony on this topic we presented a matter for
congressional consideration that the last- day GPO exemption be revised to
provide for a longer minimum time period, and the House has passed
necessary legislation that is pending in the Senate. This action would
provide an immediate *fix* to address possible abuses of the GPO
exemption. CBO 5- Year Cost Estimate

No, this is a new example. However, CBO indicated it could probably make
Included in GAO*s 2002

an estimate for this example. Budgetary Implications Report

Related GAO Products Social Security: Congress Should Consider Revising
the Government Pension Offset *Loophole.* GAO- 03- 498T. Washington, D.
C.: February 27, 2003.

Social Security Administration: Revision to the Government Pension Offset
Exemption Should Be Considered. GAO- 02- 950. Washington, D. C.: August
15, 2002.

GAO Contact Barbara D. Bovbjerg, (202) 512- 7215

Better Congressional Oversight of PRWORA*s Fugitive Felon Provisions

Primary agencies Multiple Accounts Multiple Spending types Direct/
Discretionary Budget subfunctions Multiple

In response to concerns that individuals wanted in connection with a
felony, or violating terms of their parole or probation, could receive
benefits from programs for the needy, the Congress added provisions to the
Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA)
of 1996 that prohibit these individuals from receiving Supplemental
Security Income (SSI) administered by the Social Security Administration
(SSA), Food Stamp benefits administered by the Department of Agriculture
(USDA), and Temporary Assistance to Needy Families (TANF) administered by
the Department of Health and Human Services (HHS). These provisions also
make fugitive felon 25 status grounds for termination of tenancy in many
federal housing assistance programs, administered by the Department of
Housing and Urban Development (HUD).

Since PRWORA was enacted, the SSI, Food Stamp, and TANF programs have
identified over 110,000 beneficiaries who are fugitive felons* largely
through computer matches of automated arrest warrant and recipient files.

When these programs took the initiative or were in a position to match
automated recipient and warrant data, many fugitive felons were
identified, which led to substantial cost savings. SSA, for example,
conducted the most comprehensive matches, comparing data from its entire
SSI applicant and recipient files each month to warrant data it obtained
from various federal, state, and local law enforcement agencies. As a
result, SSA reported that, in 2000 and 2001, it identified more than 36,
000 fugitive felons on the SSI rolls, incurring projected savings of over
$96 million.

Use of computer matches of benefit recipient and arrest warrant files to
prevent fugitive felons from collecting benefits varies widely across
programs, however. While SSA had by far the most comprehensive

25 Here, the term *fugitive felons* also refers to probation and parole
violators.

computer matching initiative, fewer than one- third of the state agencies
administering the TANF and Food Stamp programs used periodic computer
matching, to any extent. HUD had not conducted any matches of this kind,
but our own match of HUD*s recipient file and arrest warrant files in a
single year turned up nearly 1,000 housing assistance recipients for whom
there were arrest warrants in Ohio and Tennessee, alone. We estimated that
HUD could have saved $4.2 million annually in program costs if the

housing assistance these individuals received had been terminated. Given
the savings SSA and some state Food Stamp and TANF programs have incurred
using computer matching to identify and drop fugitive felons from their
benefit rolls, and the potential savings we demonstrated HUD could achieve
in the same way, use of computer matching for this purpose by additional
state Food Stamp and TANF programs, as well as the HUD housing assistance
program, represent opportunities for greater cost savings in this area.

Moreover, the law, as it applies to housing assistance programs, states
that fugitive felon status is only grounds for termination of tenancy and
not that fugitive felons are ineligible for housing assistance. Therefore,
according to HUD officials, while public housing agencies and landlords
have the

authority to evict fugitive felons, they are not required to do so. This
may explain why HUD has done little to ensure that fugitive felons do not
receive housing assistance. The Congress should consider amending the
Housing Act of 1937 to explicitly make fugitive felons ineligible for
housing benefits.

CBO 5- Year Cost Estimate No, this is a new example. However, CBO
indicated it could probably make

Included in GAO*s 2002 an estimate for this example.

Budgetary Implications Report Related GAO Products Welfare Reform:
Implementation of Fugitive Felon Provisions Should be

Strengthened. GAO- 02- 716. Washington, D. C.: September 25, 2002.

Social Security Administration: Fugitive Felon Program Could Benefit from
Better Use of Technology. GAO- 02- 346. Washington, D. C.: September 6,
2002.

Social Security Programs: The Scope of SSA*s Authority to Deny Benefits to
Fugitive Felons and to Release Information About OASI and DI Beneficiaries
Who are Fugitive Felons. GAO- 02- 459R. Washington, D. C.: February 27,
2002.

GAO Contact Robert E. Robertson, (202) 512- 7215

Improve the Administrative Oversight of Food Assistance Programs

Primary agency Department of Agriculture Accounts Multiple Spending types
Direct/ Discretionary Budget subfunction 605 /Food and nutrition
assistance

The U. S. Department of Agriculture (USDA) continues to face serious
challenges in ensuring that eligible individuals receive the proper
benefits from the food assistance programs administered by its Food and
Nutrition Service. Each day, 1 in every 6 Americans receives nutrition
assistance through 1 or more of the 15 programs administered by this
agency. These

programs, which accounted for slightly more than half of USDA*s budget
authority for fiscal year 2002, provide children and low- income adults
with access to food, a healthful diet, and nutrition education.
Specifically, for fiscal year 2002, the Congress appropriated about $38.8
billion to operate these programs, including the Food Stamp Program and
child nutrition programs, such as the school- breakfast and school- lunch
programs. This high level of support dictates that USDA must continually
address and minimize the amount of fraud and abuse occurring in these
programs in order to ensure their integrity.

USDA*s Food Stamp Program, the cornerstone of its nutrition assistance
programs, provided 17.3 million individuals with more than $15.5 billion
in benefits in fiscal year 2001. As noted in the President*s Management
Agenda, USDA must continue to address the challenge of accurately issuing
food stamp benefits to those who are eligible. Specifically, USDA

estimated that about $1.4 billion in erroneous payments were made to food
stamp recipients in fiscal year 2001* about $1 billion of the benefits
issued were estimated to be overpayments and more than $370 million of the
benefits issued were estimated to be underpayments* an error rate of
approximately 9 percent. To deal with the complexity of the Food Stamp
Program and the high error rate, the 2002 Farm Bill contained a number of

administrative and simplification reforms, such as allowing states to use
greater flexibility in considering the income of recipients for
eligibility purposes and to extend simplified reporting procedures for all
program recipients.

In addition to ensuring that eligible individuals receive proper benefits,
USDA faces the challenge of minimizing the illegal sale of benefits for

cash* a practice known as trafficking. Food Stamps are accepted by about
149,000 authorized retail food stores, and in a March 2000 report,
estimated that stores trafficked about $660 million, or about 3.5 cents of
every dollar of food stamp benefits issued per year from 1996 through
1998. In addition, store owners generally do not pay the financial
penalties assessed for

trafficking. In May 1999, we reported that USDA and the courts collected
only $11.5 million, or about 13 percent, of the $78 million in total
penalties assessed against storeowners for violating food stamp
regulations from 1993 through 1998. 26 USDA reduced the remaining amount
owed by storeowners by about $49 million, or about 55 percent, through
waivers, adjustments, and write- offs. While weaknesses in debt collection
practices contribute to low collection rates, USDA officials noted that
these rates also reflect the difficulties involved in collecting this type
of debt, including

problems in locating storeowners who have been removed from the Food Stamp
Program and the refusal of some storeowners to pay their debts.

Better use of information technology has the potential to help USDA
minimize fraud, waste, and abuse in the Food Stamp Program. For example,
in our May 1999 report we recommended that the Food and Nutrition Service
make better use of data from electronic benefit transfers (EBT) to
identify and assess penalties against storeowners who violate the Food
Stamp Program*s regulations. Also, we recommended in March 2000 that the
Food and Nutrition Service work with the states to implement best
practices for using EBT data to identify and take action against
recipients engaged in trafficking of food stamp benefits. 27 The Food and
Nutrition Service has taken some actions to implement our recommendations,
such

as assisting states in the use of EBT data to identify traffickers, and
has other actions under way.

USDA also faces fraud and abuse challenges in other nutrition programs,
including the Child and Adult Care Food Program (CACFP), which for fiscal
year 2002 was funded at $1. 8 billion, and the National School Lunch and
School Breakfast programs, which for that year were funded at $7.4
billion. In fiscal year 2001, CACFP provided subsidized meals for a

26 U. S. General Accounting Office, Food Stamp Program: Storeowners Seldom
Pay Financial Penalties Owed for Program Violations, GAO/ RCED- 99- 91
(Washington, D. C.: May 11, 1999). 27 U. S. General Accounting Office,
Food Stamp Program: Better Use of Electronic Data Could Result in
Disqualifying More Recipients Who Traffic Benefits, GAO/ RCED- 00- 61
(Washington, D. C.: Mar. 7, 2000).

daily average of 2.6 million participants in the care of about 215,000 day
care providers. Over the years, USDA*s Office of Inspector General (OIG)
has identified examples of the intentional misuse of CACFP funds,
including cases in which program sponsors created fictitious day care
providers and inflated the number of meals served. In response to our
November 1999 recommendation 28 and reports by the OIG, legislation was
enacted in June 2000 to strengthen CACFP management controls and to reduce
its vulnerability to fraud and abuse. As a result, the Food and

Nutrition Service has intensified its management evaluations at the state
and local levels and has trained its regional and state agency staff on
revised management procedures.

Furthermore, in its strategic plan for fiscal years 2000 through 2005,
USDA specifically identified the challenge it faces in ensuring that only
eligible participants are provided benefits in the National School Lunch
Program.

In fiscal year 2001, this program provided nutritionally balanced, low-
cost or free lunches for over 27 million children each school day in more
than 98,000 public and nonprofit private schools and residential child
care

institutions. Data show that the number of children certified as eligible
to receive free lunches in this program may be as much as 27 percent
greater than the number of children estimated eligible for this benefit.
However, these estimates are based on a broad review of certain Census
data and are

best seen as indicators of a problem rather than precise measures of
program misuse. USDA has taken some initial steps to develop a
costeffective strategy to address this integrity issue, such as pilot-
testing potential policy changes to improve the certification process, and
other

measures may be considered as the Congress moves to reauthorize this
program.

CBO 5- Year Cost Estimate No, this is a new option.

Included in GAO*s 2002 Budgetary Implications Report

Related GAO Products Food Stamp Program: Better Use of Electronic Data
Could Result in Disqualifying More Recipients Who Traffic Benefits. GAO/
RCED- 00- 61. Washington, D. C.: March 7, 2000.

28 U. S. General Accounting Office, Food Assistance: Efforts to Control
Fraud and Abuse in the Child and Adult Care Food Program Should Be
Strengthened, GAO/ RCED- 00- 12 (Washington, D. C.: Nov. 29, 1999).

Food Assistance: Efforts to Control Fraud and Abuse in the Child and Adult
Care Food Program Should Be Strengthened. GAO/ RCED- 00- 12. Washington,
D. C.: November 29, 1999.

Food Stamp Program: Storeowners Seldom Pay Financial Penalties Owed for
Program Violations. GAO/ RCED- 99- 91. Washington, D. C.: May 11, 1999.

GAO Contacts Sigurd R. Nilsen, (202) 512- 7003 David Bellis, (415) 904-
2272

CBO Option Where Related GAO Work Is Identified 29

600- 07 Reduce the Federal Matching Rate for Administrative and Training
Costs in the Foster Care and Adoption Assistance Programs

Related GAO Product Child Welfare: HHS Could Play a Greater Role in
Helping Child Welfare Agencies Recruit and Retain Staff. GAO- 03- 357.
Washington, D. C.: March 31, 2003. 29

GAO Contact Cornelia Ashby, (202) 512- 8403 29 We list GAO reports
identified as relating to options included in the CBO March 2003

Budget Options report. Only those CBO options for which we identified
related GAO products are included. We included GAO reports if they related
to the topic of the CBO option, regardless of whether our work supported
the option or not.

700 Veterans Benefits

Examples from Selected GAO Work

and Services Revise VA*s Disability Ratings Schedule to Better Reflect
Veterans*

Economic Losses Discontinue Veterans* Disability Compensation for
Nonservice Connected Diseases Reassess Unneeded Health Care Assets within
the Department of Veterans

Affairs Reducing VA Inpatient Food and Laundry Service Costs

CBO Options Where Related GAO Work Is Identified

700- 01 Narrow the Eligibility for Veterans* Disability Compensation to
Include Only Veterans with High- Rated Disabilities

700- 02 Narrow the Eligibility for Veterans* Disability Compensation to
Veterans Whose Disabilities Are Related to Their Military Duties

700- 03 Increase Beneficiaries* Cost Sharing for Care at Nursing
Facilities Operated by the Department of Veterans Affairs

Examples from Selected GAO Work

Revise VA*s Disability Ratings Schedule to Better Reflect Veterans*
Economic Losses

Primary agency Department of Veterans Affairs Account Compensation and
Pensions (36- 0102) Spending type Direct Budget subfunction 701/ Income
security for veterans

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 2002, VA paid more than
$22 billion in compensation to more than 2.3 million veterans, and more

than 300,000 veterans* survivors and children, for these service-
connected disabilities.

The disability ratings schedule that VA uses is still primarily based on
physicians* and lawyers* judgments made in 1945 about the effect
serviceconnected 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. In 1997, we reported 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 $22 billion VA paid in
disability compensation to veterans and their families in fiscal year
2002. 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. In the past, CBO was unable to
estimate any costs or savings that could result because a specific
proposal

for revising the disability ratings schedule had not been presented. CBO
5- Year Cost Estimate

No. Included in GAO*s 2002 Budgetary Implications Report

Related GAO Products Department of Veterans Affairs: Key Management
Challenges in Health and Disability Programs. GAO- 03- 756T. Washington,
D. C.: May 8, 2003.

SSA and VA Disability Programs: Re- Examination of Disability Criteria
Needed to Help Ensure Program Integrity. GAO- 02- 597. Washington, D. C.:
August 9, 2002.

VA Disability Compensation: Disability Ratings May Not Reflect Veterans*
Economic Losses. GAO/ HEHS- 97- 9. Washington, D. C.: January 7, 1997.

GAO Contact Cynthia A. Bascetta, (202) 512- 7101

Discontinue Veterans* Disability Compensation for Nonservice Connected
Diseases

Primary agency Department of Veterans Affairs Account Compensation and
Pensions (36- 0102) Spending type Direct Budget subfunction 701/ Income
security for veterans

In fiscal year 2002, the Department of Veterans Affairs (VA) paid more
than $18.5 billion in compensation to more than 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 were 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 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. In the
past, CBO estimated that budgetary savings would occur if disability
compensation payments to veterans with nonservice connected, disease-
related disabilities were eliminated in future cases.

CBO 5- Year Cost Estimate Yes.

Included in GAO*s 2002 Budgetary Implications Report

Related GAO Products SSA and VA Disability Programs: Re- Examination of
Disability Criteria Needed to Help Ensure Program Integrity. GAO- 02- 597.
Washington, D. C.: August 9, 2002.

VA Disability Compensation: Disability Ratings May Not Reflect Veterans*
Economic Losses. GAO/ HEHS- 97- 9. Washington, D. C.: January 7, 1997.

Disabled Veterans Programs: U. S. Eligibility and Benefit Types Compared
With Five Other Countries. GAO/ HRD- 94- 6. Washington, D. C.: November
24, 1993.

VA Benefits: Law Allows Compensation for Disabilities Unrelated to
Military Service. GAO/ HRD- 89- 60. Washington, D. C.: July 31, 1989.

GAO Contact Cynthia A. Bascetta, (202) 512- 7101

Reassess Unneeded Health Care Assets within the Department of Veterans
Affairs

Primary agency Department of Veterans Affairs Account Medical Care (36-
0160) Spending type Discretionary Budget subfunction 703/ Hospital and
medical care for veterans

The Department of Veterans Affairs (VA) health care system owns 4,900
buildings and 15,500 acres of land. Its health care delivery system
includes over 160 major medical facilities and over 500 community based
outpatient

clinics. VA spends about a fourth of its $23 billion budget to operate,
maintain, and improve these assets. To improve the delivery of health care
services, VA has shifted emphasis from inpatient to outpatient care in
many

instances and shortened lengths of stay when hospitalization was required.
This change in health care delivery has resulted in excess inpatient
capacity at many locations. As a result, VA*s infrastructure is not
efficiently aligned to meet veterans* needs. Without a realignment of its
infrastructure, VA will continue to spend millions of dollars to operate
unneeded VA facilities and miss the opportunity to reinvest the savings it
could realize from asset realignment into better health care for all
veterans.

In response to GAO concerns, VA initiated its Capital Asset Realignment
for Enhanced Services (CARES) program to realign its assets and resources
to better serve veterans. Any realignment* which could include facility
closings* will take into consideration future directions in health care
delivery, demographic projections, physical plant capacity, community
health care capacity, and workforce requirements. VA plans to reinvest
savings generated through the implementation of CARES to meet veterans*
health care needs. VA plans to announce its proposed realignment plan by
the end of calendar year 2003. Continued congressional oversight is
warranted to review VA*s plans and assess their impact on costs and
services.

Although in the past CBO agreed that reducing unneeded health care assets
at the VA had the potential to create savings, it could not develop a
savings estimate without a specific legislative proposal.

CBO 5- Year Cost Estimate No.

Included in GAO*s 2002 Budgetary Implications Report

Related GAO Products Department of Veterans Affairs: Key Management
Challenges in Health and Disability Programs. GAO- 03- 756T. Washington,
D. C.: May 8, 2003.

VA Health Care: Improved Planning Needed for Management of Excess Real
Property. GAO- 03- 326. Washington, D. C.: January 29, 2003.

VA Health Care: VA Is Struggling to Address Asset Realignment Challenges.
GAO/ T- HEHS- 00- 88. Washington, D. C.: April 5, 2000.

VA Health Care: Improvements Needed in Capital Asset Planning and
Budgeting. GAO/ HEHS- 99- 145. Washington, D. C.: August 13, 1999.

VA Health Care: Challenges Facing VA in Developing an Asset Realignment
Process. GAO/ T- HEHS- 99- 173. Washington, D. C.: July 22, 1999.

Veterans* Affairs: Progress and Challenges in Transforming Health Care.

GAO/ T- HEHS- 99- 109. Washington, D. C.: April 15, 1999.

VA Health Care: Capital Asset Planning and Budgeting Need Improvement.
GAO/ T- HEHS- 99- 83. Washington, D. C.: March 10, 1999.

VA Health Care: Closing a Chicago Hospital Would Save Millions and Enhance
Access to Services. GAO/ HEHS- 98- 64. Washington, D. C.: April 16, 1998.

VA Health Care: Opportunities to Enhance Montgomery and Tuskegee Service
Integration. GAO/ T- HEHS- 97- 191. Washington, D. C.: July 28, 1997.

VA Health Care: Lessons Learned From Medical Facility Integrations.

GAO/ T- HEHS- 97- 184. Washington, D. C.: July 24, 1997.

Department of Veterans Affairs: Programmatic and Management Challenges
Facing the Department. GAO/ T- HEHS- 97- 97. Washington, D. C.: March 18,
1997.

VA Health Care: Opportunities for Service Delivery Efficiencies Within
Existing Resources. GAO/ HEHS- 96- 121. Washington, D. C.: July 25, 1996.

VA Health Care: Opportunities to Increase Efficiency and Reduce Resource
Needs. GAO/ T- HEHS- 96- 99. Washington, D. C.: March 8, 1996.

VA Health Care: Challenges and Options for the Future. GAO/ T- HEHS- 95-
147. Washington, D. C.: May 9, 1995.

GAO Contact Cynthia A. Bascetta, (202) 512- 7101

Reducing VA Inpatient Food and Laundry Service Costs

Primary agency Department of Veterans Affairs Account Medical Care (VA)
(35- 0160) Spending type Discretionary Budget subfunction 703/ Hospital
and medical care for veterans

The Department of Veterans Affairs (VA) provides inpatient food services
and laundry processing for thousands of inpatients a day in hospitals,
nursing homes, and domiciliaries. In fiscal year 1999, VA spent about $324

million (food service) and $52 million (laundry) for these activities and
employed 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.

As of November 2000, VA had consolidated 28 of its food production
locations into 10, begun using less expensive Veterans Canteen Service
(VCS) workers in 9 locations, and contracted out in 2 locations. For
laundry services, VA had consolidated 116 of its laundries into 67
locations and used competitive sourcing to contract with the private
sector in other locations.

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, VA could consolidate food production locations
within a 90- minute driving distance of each other and laundry locations
within a 4- hour driving distance of each other. VA could also use less
expensive VCS employees at all inpatient food locations. In addition,
competitive sourcing could be a cost effective alternative for providing
both food and laundry services. VA has established a plan to complete
studies of competitive sourcing of

55,000 positions, including about 13,000 laundry and food service
positions, by 2008. However, VA has suspended this effort, except for its
Veterans

Canteen Service, 30 because its general counsel determined that VA could
not continue these studies using appropriations from the Veterans Health
Administration without specific authorization from the Congress. VA plans
to ask the Congress for authorization to carry out these studies.

In the past, CBO estimated that budgetary savings could occur if the
Congress required VA to consolidate and competitively bid its food service
and laundry operations and use VCS employees at all inpatient food
locations.

CBO 5- Year Cost Estimate Yes.

Included in GAO*s 2002 Budgetary Implications Report

Related GAO Products VA Health Care: Consolidations and Competitive
Sourcing of Laundry Service Could Save Millions. GAO- 01- 61. Washington,
D. C.: November 30, 2000.

VA Health Care: Expanding Food Service Initiatives Could Save Millions.

GAO- 01- 64. Washington, D. C.: November 30, 2000.

VA Health Care: Laundry Service Operations and Costs. GAO/ HEHS- 00- 16.
Washington, D. C.: December 21, 1999.

VA Health Care: Food Service Operations and Costs at Inpatient Facilities.
GAO/ HEHS- 00- 17. Washington, D. C.: November 19, 1999.

GAO Contact Cynthia A. Bascetta, (202) 512- 7101 30 VA is continuing its
competitive sourcing study of the Veterans Canteen Service because
operations are funded from nonappropriated funds. The Canteen Service
generates revenues from its sales of food and other retail items in its
food court, and from retail

operations in VA hospitals to fund operations. VA expects to complete the
competitive sourcing study on the food service part of the Canteen Service
during the fourth quarter of fiscal year 2003.

CBO Options Where Related GAO Work Is Identified 31

700- 01 Narrow the Eligibility for Veterans* Disability Compensation to
Include Only Veterans with HighRated Disabilities

Related GAO Product VA Disability Compensation: Disability Ratings May Not
Reflect Veterans* Economic Losses. GAO/ HEHS- 97- 9. Washington, D. C.:
January 7, 1997. 31

GAO Contact Cynthia A. Bascetta, (202) 512- 7101 700- 02 Narrow the
Eligibility for Veterans* Disability Compensation to Veterans Whose
Disabilities Are Related to Their Military Duties

Related GAO Products VA Disability Compensation: Disability Ratings May
Not Reflect Veterans* Economic Losses. GAO/ HEHS- 97- 9. Washington, D.
C.: January 7, 1997.

31 We list GAO reports identified as relating to options included in the
CBO March 2003

Budget Options report. Only those CBO options for which we identified
related GAO products are included. We included GAO reports if they related
to the topic of the CBO option, regardless of whether our work supported
the option or not.

Disabled Veterans Programs: U. S. Eligibility and Benefit Types Compared
With Five Other Countries. GAO/ HRD- 94- 6. Washington, D. C.: November
24, 1993.

VA Benefits: Law Allows Compensation for Disabilities Unrelated to
Military Service. GAO/ HRD- 89- 60. Washington, D. C.: July 31, 1989.

GAO Contact Cynthia A. Bascetta, (202) 512- 7101 700- 03 Increase
Beneficiaries* Cost Sharing for Care at Nursing Facilities Operated by the
Department of Veterans Affairs

Related GAO Products VA Aid and Attendance Benefits: Effects of Revised
HCFA Policy on Veterans* Use of Benefits. GAO/ HEHS- 97- 72R. Washington,
D. C.: March 3, 1997.

VA Health Care: Better Data Needed to Effectively Use Limited Nursing Home
Resources. GAO/ HEHS- 97- 27. Washington, D. C.: December 20, 1996.

VA Health Care: Potential for Offsetting Long- Term Care Costs Through
Estate Recovery. GAO/ HRD- 93- 68. Washington, D. C.: July 27, 1993.

VA Health Care: Offsetting Long- Term Care Costs by Adopting State
Copayment Practices. GAO/ HRD- 92- 96. Washington, D. C.: August 12, 1992.

GAO Contact Cynthia A. Bascetta, (202) 512- 7101

800 General

Examples from Selected GAO Work

Government; 900 Net Prevent Delinquent Taxpayers from Benefiting from
Federal Programs

Interest; and 999 Multiple

Target Funding Reductions in Formula Grant Programs Adjust Federal Grant
Matching Requirements Replace the 1- Dollar Note with a 1- Dollar Coin
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
Leverage Buying Power to Reduce Costs of Supplies and Services Consolidate
Grants for First Responders to Improve Efficiency

CBO Options Where Related GAO Work Is Identified

800- 03 Eliminate Federal Antidrug Advertising 920- 03 Impose a Fee on the
Investment Portfolios of GovernmentSponsored Enterprises

Examples from Selected GAO Work

Prevent Delinquent Taxpayers from Benefiting from Federal Programs

Primary agency Internal Revenue Service Spending type Direct

The federal government*s operations are funded primarily through tax
revenue collected from the nation*s taxpayers. In fiscal year 2002, the
federal government, through the Internal Revenue Service (IRS), collected
over $2 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 $249 billion at the
end of fiscal year 2002. Of this amount, the IRS estimates that only $20
billion, or about 8 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. Federal law, generally, 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, revised,
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.

In order to fully realize this benefit, the Congress could enact
legislation codifying the provisions of OMB Circular A- 129, as revised,
that relate to this matter. A key aspect of this legislation would be to
ensure that IRS*s efforts to modernize its business systems are successful
in enabling it to generate timely and accurate information on the
taxpayer*s status to assist other agencies in making determinations about
eligibility for federal benefits and payments.

CBO 5- Year Cost Estimate No.

Included in GAO*s 2002 Budgetary Implications Report

Related GAO Products Debt Collection: Barring Delinquent Taxpayers From
Receiving Federal Contracts and Loan Assistance. GAO/ T- GGD/ AIMD- 00-
167. Washington, D. C.: May 9, 2000.

Unpaid Payroll Taxes: Billions in Delinquent Taxes and Penalty Assessments
Are Owed. GAO/ AIMD/ GGD- 99- 211. Washington, D. C.: August 2, 1999.

Tax Administration: Billions in Self- Employment Taxes Are Owed.

GAO/ GGD- 99- 18. Washington, D. C.: February 19, 1999. GAO Contacts
Steven J. Sebastian, (202) 512- 3406 James R. White, (202) 512- 9110

Target Funding Reductions in Formula Grant Programs

Primary agencies Multiple Accounts Multiple Spending types Discretionary/
Direct Budget subfunctions Multiple

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, as we pointed out in 1996 and in 1998, 32 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,
Medicaid reimburses approximately 57 percent of eligible state spending,

with the federal share ranging from a minimum of 50 to a maximum of 77
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 the following:

 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. 32 U. S. General
Accounting Office, Deficit Reduction: Better Targeting Can Reduce Spending
and Improve Programs and Services, GAO/ AIMD- 96- 14 (Washington, D. C.:
Jan. 16, 1996), and School Finance: State Efforts to Equalize Funding
Between Weathly and Poor School Districts, GAO/ HEHS- 98- 92 (Washington,
D. C.: June 16, 1998).

 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, Conn., received five

times more funding per person in poverty in 1995 than that provided to
Camden, N. J., 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. 33 In
the past, CBO estimated that the savings achieved through this option
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.

CBO 5- Year Cost Estimate Yes.

Included in GAO*s 2002 Budgetary Implications Report

Related GAO Products Formula Grants: Effects of Adjusted Population Counts
on Federal Funding to States. GAO/ HEHS- 99- 69. Washington, D. C.:
February 26, 1999.

Medicaid Formula: Effects of Proposed Formula on Federal Shares of State
Spending. GAO/ HEHS- 99- 29R. Washington, D. C.: February 19, 1999.

Welfare Reform: Early Fiscal Effect of the TANF Block Grant. GAO/ AIMD98-
137. Washington, D. C.: August 22, 1998.

Public Housing Subsidies: Revisions to HUD*s Performance Funding System
Could Improve Adequacy of Funding. GAO/ RCED- 98- 174. Washington, D. C.:
June 19, 1998.

School Finance: State Efforts to Equalize Funding Between Wealthy and Poor
School Districts. GAO/ HEHS- 98- 92. Washington, D. C.: June 16, 1998.

School Finance: State and Federal Efforts to Target Poor Students.

GAO/ HEHS- 98- 36. Washington, D. C.: January 28, 1998.

School Finance: State Efforts to Reduce Funding Gaps Between Poor and
Wealthy Districts. GAO/ HEHS- 97- 31. Washington, D. C.: February 5, 1997.
33 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.

Federal Grants: Design Improvements Could Help Federal Resources Go
Further. GAO/ AIMD- 97- 7. Washington, D. C.: December 18, 1996.

Public Health: A Health Status Indicator for Targeting Federal Aid to
States. GAO/ HEHS- 97- 13. Washington, D. C.: November 13, 1996.

School Finance: Options for Improving Measures of Effort and Equity in
Title I. GAO/ HEHS- 96- 142. Washington, D. C.: August 30, 1996.

Highway Funding: Alternatives for Distributing Federal Funds.

GAO/ RCED- 96- 6. Washington, D. C.: November 28, 1995.

Ryan White Care Act of 1990: Opportunities to Enhance Funding Equity.

GAO/ HEHS- 96- 26. Washington, D. C.: November 13, 1995.

Department of Labor: Senior Community Service Employment Program Delivery
Could Be Improved Through Legislative and Administrative Action. GAO/
HEHS- 96- 4. Washington, D. C.: November 2, 1995.

GAO Contact Paul L. Posner, (202) 512- 9573

Adjust Federal Grant Matching Requirements

Primary agencies Multiple Accounts Multiple Spending types Discretionary/
Direct Budget subfunctions Multiple

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 approximately 660 in 2001 with outlays of
$317 billion, about 17 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* 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 1996 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. In the past, CBO
estimated that the introduction of a 10 percent matching requirement on
some of the largest federal discretionary grant programs that at the time
were 100 percent federally funded, and a corresponding 10 percent

reduction from the appropriated grant levels, would result in budgetary
savings. 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 increased

levels of program spending in order to receive federal funding. CBO 5-
Year Cost Estimate

Yes. Included in GAO*s 2002 Budgetary Implications Report

Related GAO Products Welfare Reform: Early Fiscal Effects of the TANF
Block Grant.

GAO/ AIMD- 98- 137. Washington, D. C.: August 22, 1998.

Federal Grants: Design Improvements Could Help Federal Resources Go
Further. GAO/ AIMD- 97- 7. Washington, D. C.: December 18, 1996.

Block Grants: Issues in Designing Accountability Provisions.

GAO/ AIMD- 95- 226. Washington, D. C.: September 1, 1995. GAO Contact Paul
L. Posner, (202) 512- 9573

Replace the 1- Dollar Note with a 1- Dollar Coin

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

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 $522 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, neither the Congress nor the executive branch has supported
the replacement of the $1 note with a coin. 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
released a new gold- colored dollar coin in 2000. While initial demand for
the coin had been strong, for it to realize its savings potential, the
note has to be eliminated. Most of the coins that were issued 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 Department
of the Treasury 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
would not yield savings over the first 5 years. 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.

CBO 5- Year Cost Estimate No.

Included in GAO*s 2002 Budgetary Implications Report

Related GAO Products New Dollar Coin: Marketing Campaign Raised Public
Awareness but Not Widespread Use. GAO- 02- 896. Washington, D. C.:
September 13, 2002.

A Dollar Coin Could Save Millions. GAO/ T- GGD- 95- 203. Washington, D.
C.: July 13, 1995.

1- Dollar Coin Reintroduction Could Save Millions if It Replaced the 1-
Dollar Note. GAO/ T- GGD- 95- 146. Washington, D. C.: May 3, 1995.

1- Dollar Coin: Reintroduction Could Save Millions if Properly Managed.

GAO/ GGD- 93- 56. Washington, D. C.: March 11, 1993.

National Coinage Proposals: Limited Public Demand for New Dollar Coin or
Elimination of Pennies. GAO/ GGD- 90- 88. Washington, D. C.: May 23, 1990.

GAO Contact Bernard L. Ungar, (202) 512- 4232

Increase Fee Revenue from Federal Reserve Operations

Primary agency Federal Reserve Board Spending type Direct

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.
In the past, CBO estimated that budgetary savings could be achieved if
fees

were assessed similar to those charged national banks, with a credit
allowed for fees paid to state regulators.

CBO 5- Year Cost Estimate Yes.

Included in GAO*s 2002 Budgetary Implications Report

Related GAO Products Federal Reserve System: Update on GAO*s 1996
Recommendations. GAO- 02- 774. Washington, D. C.: September 25, 2002.

Federal Reserve System: Current and Future Challenges Require Systemwide
Attention. GAO/ T- GGD- 96- 159. Washington, D. C.: July 26, 1996.

Federal Reserve System: Current and Future Challenges Require Systemwide
Attention. GAO/ GGD- 96- 128. Washington, D. C.: June 17, 1996.

Federal Reserve Banks: Internal Control, Accounting, and Auditing Issues.
GAO/ AIMD- 96- 5. Washington, D. C.: February 9, 1996.

GAO Contact Thomas J. McCool, (202) 512- 8678

Recognize the Costs Upfront of Long- term Space Acquisitions

Primary agency General Services Administration Account Federal Buildings
Fund (47- 4542) Spending type Discretionary Budget subfunction 804/
General property and records

management

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 the General Services Administration (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 eight cases, 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 for GSA 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 using this option. These scorekeeping rules require the
total budget authority for lease- purchases and capital leases to be
recognized and recorded up- front in the year that the acquisition is
approved. 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 longer term 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 the Congress from
committing the government to future payments that may exceed future
resources and spending priorities.

Since lease- purchases are not an option for improving the cost
effectiveness 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 decision- making by the Office of Management and Budget
and the 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, lease- purchases, 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 discretionary spending caps similar to those
contained in the expired BEA are enacted, their levels should take into
account the additional budget authority that would be needed to fully fund
capital up front. Also, for existing leases, the additional budget
authority would need

to be provided at once. 34 It also would be difficult to reach agreement
on what constitutes long- term space needs that would warrant this up-
front budgetary treatment. And finally, even though in the past CBO
estimated that this option should result in long- term savings, it
concluded that it would not yield savings over the first 5 years.

CBO 5- Year Cost Estimate No.

Included in GAO*s 2002 Budgetary Implications Report

34 Existing contracts could also be *grandfathered* in as occurred under
the lease- purchase rule.

Related GAO Products High- Risk Series: Federal Real Property. GAO- 03-
122. Washington, D. C.: January 2003.

Budget Scoring: Budget Scoring Affects Some Lease Terms, but Full Extent
Is Uncertain. GAO- 01- 929. Washington, D. C.: August 31, 2001.

Federal Buildings: Funding Repairs and Alterations Has Been a Challenge*
Expanded Financing Tools Needed. GAO- 01- 452. Washington, D. C.: April
12, 2001.

General Services Administration: Comparison of Space Acquisition
Alternatives* Leasing to Lease- Purchase and Leasing to Construction.

GAO/ GGD- 99- 49R. Washington, D. C.: March 12, 1999.

Space Acquisition Cost: Comparison of GSA Estimates for Three
Alternatives. GAO/ GGD- 97- 148R. Washington, D. C.: August 6, 1997.

Budget Issues: Budgeting for Federal Capital. GAO/ AIMD- 97- 5.
Washington, D. C.: November 12, 1996.

Budget Issues: Budget Scorekeeping for Acquisition of Federal Buildings.
GAO/ T- AIMD- 94- 189. Washington, D. C.: September 20, 1994.

Federal Office Space: Increased Ownership Would Result in Significant
Savings. GAO/ GGD- 90- 11. Washington, D. C.: December 22, 1989.

GAO Contact Bernard L. Ungar, (202) 512- 4232

Seek Alternative Ways to Address Federal Building Repair Needs

Primary agency General Services Administration Account Federal Building
Fund (47- 4542) Spending type Discretionary Budget subfunction 804/
General property and records

management

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.

In August 2002, we reported that the estimated backlog of GSA- identified
repair and alteration needs in GSA- owned buildings was $5.7 billion. 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 public- private partnerships,
where such approaches would achieve the best economic value for the

government. Furthermore, it seems reasonable to allow GSA to retain some
of the proceeds from disposal of unneeded properties to cover the costs
associated with disposal and for reinvestment in its portfolio, where a
need exists. However, in considering whether to allow agencies to retain
proceeds from real property transactions, it is important for the Congress

to ensure that it maintains appropriate control and oversight over these
funds, including the ability to redistribute these funds to accommodate
changing needs.

CBO 5- Year Cost Estimate No.

Included in GAO*s 2002 Budgetary Implications Report

Related GAO Products High- Risk Series: Federal Real Property. GAO- 03-
122. Washington, D. C.: January 2003.

General Services Administration: Status of Achieving Key Outcomes and
Addressing Major Management Challenges. GAO- 01- 931. Washington, D. C.:
August 3, 2001.

Public- Private Partnerships: Pilot Program Needed to Demonstrate the
Actual Benefits of Using Partnerships. GAO- 01- 906. Washington, D. C.:
July 25, 2001.

Federal Buildings: Funding Repairs and Alterations Has Been a Challenge*
Expanded Financing Tools Needed. GAO- 01- 452. Washington, D. C.: April
12, 2001.

Federal Buildings: Billions are Needed for Repairs and Alterations.

GAO/ GGD- 00- 98. Washington, D. C.: March 30, 2000. GAO Contact Bernard
L. Ungar, (202) 512- 4232

Improper Benefit Payments Could Be Avoided or More Quickly Detected if
Data from Various Programs

Primary agencies Multiple

Were Shared

Accounts Multiple Spending types Direct/ Discretionary Budget subfunctions
Multiple

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. 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
Office of Inspector General estimates that underreported income
contributed to over $100 million in excess Pell Grant awards in 2000.
Access to Internal Revenue Service 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 Temporary Assistance to Needy Children (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* TANF,
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. In the past, CBO could not estimate savings without a more
specific option.

CBO 5- Year Cost Estimate No.

Included in GAO*s 2002 Budgetary Implications Report

Related GAO Products Public Assistance: PARIS Project Can Help States
Reduce Improper Benefit Payments. GAO- 01- 935. Washington, D. C.:
September 6, 2001.

The Challenge of Data Sharing: Results of a GAO- Sponsored Symposium on
Benefit and Loan Programs. GAO- 01- 67. Washington, D. C.: October 20,
2000.

Benefit and Loan Programs: Improved Data Sharing Could Enhance Program
Integrity. GAO/ HEHS- 00- 119. Washington, D. C.: September 13, 2000.

GAO Contact Robert E. Robertson, (202) 512- 7215

Better Target Infrastructure Investments to Meet Mission and
ResultsOriented Goals

Primary agencies Multiple Accounts Multiple Spending type Discretionary
Budget subfunctions Multiple

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 through 1998. 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 review of seven federal agencies* investment practices, GAO found
that none of them followed leading practices for capital decision- making.
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 long- term 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 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*s capacity to make better
investment decisions. In the past, CBO could not develop a savings
estimate without a specific proposal.

CBO 5- Year Cost Estimate No.

Included in GAO*s 2002 Budgetary Implications Report

Related GAO Products U. S. Infrastructure: Agencies* Approaches to
Developing Investment Estimates Vary. GAO- 01- 835. Washington, D. C.:
July 20, 2001.

U. S. Infrastructure: Funding Trends and Opportunities to Improve
Investment Decisions. GAO/ RCED/ AIMD- 00- 35. Washington, D. C.: February
7, 2000.

Executive Guide: Leading Practices in Capital Decision- Making.

GAO/ AIMD- 99- 32. Washington, D. C.: December 1998. GAO Contact Katherine
Siggerud, (202) 512- 6570

Information Sharing Could Improve Accuracy of Workers* Compensation Offset
Payments

Primary Agency Social Security Administration Accounts Multiple Spending
type Direct Budget subfunctions Multiple

In 2000, workers received almost $46 billion in cash and medical benefits
through the nation*s workers* compensation (WC) programs to cover
workrelated 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. In December 1999, the SSA Inspector General reported 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. Health Care Financing Administration (HCFA), now
the Centers for Medicare & Medicaid Services (CMS), 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. In the past, CBO could not
develop a savings estimate without more information on the key details of
the requirements* such as which insurers would be covered and how
frequently they would be required to report.

CBO 5- Year Cost Estimate No.

Included in GAO*s 2002 Budgetary Implications Report

Related GAO Product Workers* Compensation: Action Needed to Reduce Payment
Errors in SSA Disability and Other Programs. GAO- 01- 367. Washington, D.
C.: May 4, 2001.

GAO Contact Barbara D. Bovbjerg, (202) 512- 7215

Determine Feasibility of Locating Federal Facilities in Rural Areas

Primary agency General Services Administration Accounts Multiple Spending
type Discretionary Budget subfunctions Multiple

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. 35 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 2001 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
costconscious, 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.

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

35 Government agencies have different definitions of what constitutes a
rural area. See GAO- 01- 805, p. 25 for more detail.

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. In the past,
CBO could not estimate cost savings because specific options had not been
proposed.

CBO 5- Year Cost Estimate No.

Included in GAO*s 2002 Budgetary Implications Report

Related GAO Product Facilities Location: Agencies Should Pay More
Attention to Costs and Rural Development Act Has Had Limited Impact. GAO-
01- 805. Washington, D. C.: July 31, 2001.

GAO Contact Bernard L. Ungar, (202) 512- 4232

Leverage Buying Power to Reduce Costs of Supplies and Services

Primary agencies Multiple Accounts Multiple Spending type Discretionary

Federal agencies procured more than $235 billion in goods and services
during fiscal year 2001. Additionally, federal civilian agencies spent
almost $14 billion using purchase cards in fiscal year 2001. Overall,
contracting for goods and services accounted for about 24 percent of the
government*s discretionary resources in fiscal year 2001. Further growth
in contract

spending, at least in the short term, is likely given the President*s
request for additional funds for defense and homeland security, agencies*
plans to update their information technology systems, and other factors.

The growth in contract spending, combined with decreases in the
acquisition workforce, creates a challenging acquisition environment. The
degree to which individual agencies contract for goods and services also

underscores the importance of ensuring that acquisitions are managed
properly. This money, however, is not always well spent. Our work, as well
as the work of other oversight agencies, continues to find that millions
of dollars of service contract dollars are at risk at defense and civilian
agencies because acquisitions are poorly planned, not adequately competed,
or poorly managed. Moreover, because agency procurement processes are
decentralized and uncoordinated, it is not apparent that the federal
government is fully leveraging its enormous buying power to obtain the
most advantageous terms and conditions for its purchases. With the events
of September 11, and the federal government*s short- and long- term budget
challenges, it is more important than ever that agencies effectively
transform business processes to ensure that the federal government gets
the most from every dollar spent.

In view of these challenges, we have examined alternative ways developed
by leading companies to manage their spending on goods and services in
order to reduce costs, stay competitive, and improve service levels.
Leading companies are taking a strategic approach* centralizing and

reorganizing their operations to get the best value for the company as a
whole. Taking a strategic approach involves a range of activities from
developing a better picture of what the company was spending to buying
goods and services on a corporate rather than business unit basis.

A strategic approach pulls together participants from a variety of places
within an organization who recommend changes in personnel, processes,
structure, and culture that can constrain rising acquisition costs. These
changes can include adjustments to procurement and other processes such as
instituting companywide purchasing of specific services; reshaping a
decentralized process to follow a more center- led, strategic approach;
and increasing the involvement of the enterprise procurement organization,
including working across units to help identify service needs, select
providers, and manage contractor performance.

The procurement best practices of leading companies should be considered
in reforming the acquisition of goods and services in the federal
government. Taking a strategic approach clearly pays off. One recent
survey of 147 companies in 22 industries indicated a strategic approach to
procurement had resulted in savings of more than $13 billion in one year.
Studies have reported some companies achieving reported savings of 10 to
20 percent of their total procurement costs through the use of a strategic
approach to buying goods and services. A recent Purchasing Magazine poll
finds that companies employing procurement best practices are

routinely delivering a 3 percent to 7 percent savings from their
procurement costs. The leading companies we studied reported achieving and
expecting to achieve billions of dollars in savings by developing
companywide spend analysis programs and strategic sourcing strategies. The
very same strategic approach could serve as a foundation for

leveraging the federal government*s buying power to reduce costs of
supplies and services.

CBO 5- Year Cost Estimate No, this is a new example. CBO could not develop
an estimate for this

Included in GAO*s 2002 example.

Budgetary Implications Report Related GAO Products Best Practices:
Improved Knowledge of DOD Service Contracts Could

Reveal Significant Savings. GAO- 03- 661. Washington, D. C.: June 10,
2003.

Federal Procurement: Spending and Workforce Trends. GAO- 03- 443.
Washington, D. C.: April 30, 2003.

Contract Management: Taking a Strategic Approach to Improving Services
Acquisition. GAO- 02- 499T. Washington, D. C.: March 7, 2002.

Best Practices: Taking a Strategic Approach Could Improve DOD*s
Acquisition of Services. GAO- 02- 230. Washington, D. C.: January 18,
2002.

Contract Management: Trends and Challenges in Acquiring Services.

GAO- 01- 753T. Washington, D. C.: May 22, 2001. GAO Contact David E.
Cooper, (617) 788- 0555

Consolidate Grants for First Responders to Improve Efficiency

Primary agency Department of Homeland Security Accounts Multiple Spending
type Discretionary Budget subfunctions Multiple

GAO*s work over the years has repeatedly shown that mission fragmentation
and program overlap are widespread in the federal government and that
crosscutting program efforts are not well coordinated. As far back as
1975, GAO reported that many of the fundamental problems in managing
federal grants were the direct result of the proliferation of federal
assistance programs and the fragmentation of responsibility among
different federal departments and agencies. While we noted that the large
number and variety of programs tended to ensure that a program is
available to meet a defined need, we found that substantial problems occur
when state and local governments attempt to identify, obtain, and use the
fragmented grants- in- aid system to meet their needs.

In a specific and timely example of this fragmentation, in April 2003 GAO
identified at least 16 different grant programs that can be used by the
nation*s first responders to address homeland security needs. These grants
are currently provided through two different directorates within the
Department of Homeland Security, the Department of Justice, and the
Department of Health and Human Services and serve state governments,
cities and localities, counties, and others. Multiple fragmented grant
programs can create a confusing and administratively burdensome process
for state and local officials seeking to use federal resources for
pressing homeland security needs.

It now falls to the Congress to redesign the nation*s homeland security
grant programs in light of the events of September 11, 2001. In so doing,
the Congress must balance the needs of our state and local partners in
their call for both additional resources and more flexibility for meeting
the nation*s goals of attaining the highest levels of preparedness. In
addressing the fragmentation prompted by the current homeland security
grant system, the Congress has several alternatives, including block
grants, performance partnerships, and grant waivers. These approaches
could provide state and local governments with increased flexibility while

potentially improving intergovernmental efficiency and homeland security

program outcomes. An example of how consolidation of first responder
grants might be achieved would be to merge the existing Emergency
Management Performance Grant, the State Homeland Security Grant Program,
and the Urban Area Security Initiative into one new grant program. If such
a consolidation can be assumed to yield administrative efficiencies, then
the Congress might reduce the amount of the combined grant by, for
example, 10 percent. Alternatively if the Congress did not want to reduce
the overall amount of the consolidated grant, efficiencies achieved
through consolidation could possibly result in an improved level of
program performance given the current level of funding. CBO 5- Year Cost
Estimate

No, this is a new example. CBO could not develop an estimate for this
Included in GAO*s 2002

example. Budgetary Implications Report

Related GAO Products Federal Assistance: Grant System Continues to Be
Highly Fragmented.

GAO- 03- 718T. Washington, D. C.: April 29, 2003.

Multiple Employment and Training Programs: Funding and Performance
Measures for Major Programs. GAO- 03- 589. Washington, D. C.: April 18,
2003.

Workforce Investment Act: States and Localities Increasingly Coordinate
Services for TANF Clients, but Better Information Needed on Effective
Approaches. GAO- 02- 696. Washington, D. C.: July 3, 2002.

Managing for Results: Continuing Challenges to Effective GPRA
Implementation. GAO/ T- GGD- 00- 178. Washington, D. C.: July 20, 2000.

Fundamental Changes are Needed in Federal Assistance to State and Local
Governments. GAO/ GGD- 75- 75. Washington, D. C.: August 19, 1975.

GAO Contact Paul L. Posner, (202) 512- 9573

CBO Options Where Related GAO Work Is Identified 36

800- 03 Eliminate Federal Antidrug Advertising

Related GAO Products Anti- Drug Media Campaign: Aspects of Advertising
Contract Mismanaged by the Government; Contractor Improperly Charged Some
Costs. GAO- 01- 1017T. Washington, D. C.: August 1, 2001. 36

Anti- Drug Media Campaign: Aspects of Advertising Contract Mismanaged by
the Government; Contractor Improperly Charged Some Costs. GAO- 01- 623.
Washington, D. C.: June 25, 2001.

GAO Contact Bernard L. Ungar, (202) 512- 4232 920- 03 Impose a Fee on the
Investment Portfolios of Government- Sponsored Enterprises

Related GAO Products Government- Sponsored Enterprises: Federal Oversight
Needed for Nonmortgage Investments. GAO/ GGD- 98- 48. Washington, D. C.:
March 11, 1998.

Housing Enterprises: Potential Impacts of Severing Government Sponsorship.
GGD- 96- 120. Washington, D. C.: May 13, 1996.

GAO Contact Thomas J. McCool, (202) 512- 8678 36 We list GAO reports
identified as relating to options included in the CBO March 2003

Budget Options report. Only those CBO options for which we identified
related GAO products are included. We included GAO reports if they related
to the topic of the CBO option, regardless of whether our work supported
the option or not.

Receipts Examples from Selected GAO Work

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 Rates 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 Improve
Administration of the Federal Payment Levy Program Enhance Nontax Debt
Collection Using Available Tools

Examples from Selected GAO Work

Tax Interest Earned on Life Insurance Policies and Deferred Annuities

Primary agency Internal Revenue Service Spending type Direct

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. In the past, JCT estimated that this option

would result in budgetary savings. Investment income from annuities
purchased as part of a qualified individual retirement account would be
tax- deferred until benefits were paid.

JCT 5- Year Estimate Included in Yes.

GAO*s 2002 Budgetary Implications Report

Related GAO Product Tax Policy: Tax Treatment of Life Insurance and
Annuity Accrued Interest. GAO/ GGD- 90- 31. Washington, D. C.: January 29,
1990.

GAO Contact James R. White, (202) 512- 9110

Further Limit the Deductibility of Home Equity Loan Interest

Primary agency Department of the Treasury Spending type Direct

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. In the past, JCT estimated that this option would generate
additional

revenues. JCT 5- Year Estimate Included in

Yes. GAO*s 2002 Budgetary Implications Report

Related GAO Product Tax Policy: Many Factors Contributed to the Growth in
Home Equity Financing in the 1980s. GAO/ GGD- 93- 63. Washington, D. C.:
March 25, 1993.

GAO Contact James R. White, (202) 512- 9110

Limit the Tax Exemption for Employer- Paid Health Insurance

Primary agency Internal Revenue Service Spending type Direct

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
selfemployed

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.

In the past, JCT could 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.

JCT 5- Year Estimate Included in No.

GAO*s 2002 Budgetary Implications Report

Related GAO Product Tax Policy: Effects of Changing Tax Treatment of
Fringe Benefits.

GAO/ GGD- 92- 43. Washington, D. C.: April 7, 1992. GAO Contact James R.
White, (202) 512- 9110

Repeal the Partial Exemption for Alcohol Fuels from Excise Taxes on Motor
Fuels

Primary agency Internal Revenue Service Spending type Direct

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,
as we reported in 1997, 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 were 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. Our report concluded
that 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, 2007;
the equivalent blender*s tax credit is scheduled to expire

on January 1, 2008. In the past, JCT estimated that this option would
result in budgetary savings.

JCT 5- Year Estimate Included in Yes.

GAO*s 2002 Budgetary Implications Report

Related GAO Product Tax Policy: Effects of the Alcohol Fuels Tax
Incentives. GAO/ GGD- 97- 41. Washington, D. C.: March 6, 1997.

GAO Contact James R. White, (202) 512- 9110

Index Excise Tax Rates for Inflation

Primary agency Internal Revenue Service Spending type Direct

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. In the past, JCT estimated that this option
would generate additional revenues.

JCT 5- Year Estimate Included in Yes.

GAO*s 2002 Budgetary Implications Report

Related GAO Products Alcohol Excise Taxes: Simplifying Rates Can Enhance
Economic and Administrative Efficiency. GAO/ GGD- 90- 123. Washington, D.
C.: September 27, 1990.

Tax Policy: Revenue Potential of Restoring Excise Taxes to Past Levels.
GAO/ GGD- 89- 52. Washington, D. C.: May 9, 1989. GAO Contact James R.
White, (202) 512- 9110

Increase Highway User Fees on Heavy Trucks

Primary agency Department of Transportation Spending type Direct

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 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. In the past, JCT

estimated that removing the $550 cap on the Heavy Vehicle Use Tax would
generate additional revenues.

JCT 5- Year Estimate Included in Yes.

GAO*s 2002 Budgetary Implications Report

Related GAO Products Highway Financing: Factors Affecting Highway Trust
Fund Revenues.

GAO- 02- 667T. Washington, D. C.: May 9, 2002.

Highway User Fees: Updated Data Needed To Determine Whether All Users Pay
Their Fair Share. GAO/ RCED- 94- 181. Washington, D. C.: June 7, 1994.

GAO Contact Katherine Siggerud, (202) 512- 6570

Require Corporate Tax Document Matching

Primary agency Internal Revenue Service Spending type Direct

The Internal Revenue Service*s (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 Department of 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*s 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*s annual costs would have been 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.

In the past, JCT agreed that the option had the potential for increased
revenue, but it could not develop estimates of revenue gain.

JCT 5- Year Estimate Included in No.

GAO*s 2002 Budgetary Implications Report

Related GAO Product Tax Administration: Benefits of a Corporate Document
Matching Program Exceed the Costs. GAO/ GGD- 91- 118. Washington, D. C.:
September 27, 1991.

GAO Contact James R. White, (202) 512- 9110

Improve Administration of the Tax Deduction for Real Estate Taxes

Primary agency Internal Revenue Service Spending type Direct

Based on the Internal Revenue Service*s (IRS) last compliance measurement
study, individuals overstated their real estate tax deductions by about
$1.5 billion nationwide in 1988. We estimate that this resulted in about
$400 million federal tax loss 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 that 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.

In the past, JCT estimated that the proposals would increase federal
fiscal revenues.

JCT 5- Year Estimate Included in Yes.

GAO*s 2002 Budgetary Implications Report

Related GAO Product Tax Administration: Overstated Real Estate Tax
Deductions Need To Be Reduced. GAO/ GGD- 93- 43. Washington, D. C.:
January 19, 1993.

GAO Contact James R. White, (202) 512- 9110

Increase Collection of Returns Filed by U. S. Citizens Living Abroad

Primary agency Internal Revenue Service Spending type Direct

U. S. citizens residing abroad are generally subject to the same filing
requirements as citizens residing in the United States. 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.

In the past, JCT agreed that the option had the potential for increased
revenue, but it could not develop estimates of revenue gain.

JCT 5- Year Estimate Included in No.

GAO*s 2002 Budgetary Implications Report

Related GAO Products Tax Administration: Nonfiling Among U. S. Citizens
Abroad. GAO/ GGD98- 106. Washington, D. C.: May 11, 1998.

IRS Activities to Increase Compliance on Overseas Taxpayers.

GAO/ GGD- 93- 93. Washington, D. C.: May 18, 1993. GAO Contact James R.
White, (202) 512- 9110

Increase the Use of Seizure Authority to Collect Delinquent Taxes

Primary agency Internal Revenue Service Spending type Direct

The Internal Revenue Service*s (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*s use of seizure authority has declined since the
enactment of the IRS Restructuring and Reform Act of 1998. Seizures
declined from 10, 090 in FY 1997 to 234 in FY 2001* a decline of about 98
percent. In 2002, the number

of seizures was essentially unchanged with IRS completing 296 seizures.
According to an IRS official the number of seizures is not expected to
change in 2003. At this greatly reduced level of seizures, IRS is at risk
of

foregoing the collection of millions of dollars as indicated by the 1997
data. IRS employees told GAO in 2000 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 officials indicated to GAO that they expected the future level of
seizures to be substantially below the level before the Reconstruction Act
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. GAO has recently reported that the number of revenue
officers* the IRS staff responsible for making seizures* decreased about
35 percent from 1997 to 2002.

To help ensure that revenue officers have clear guidance for the use of
seizure authority, GAO has made a number of recommendations to IRS. In

part, GAO recommended that IRS provide written guidance to describe 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. GAO also has
recommended that IRS develop a computer based information system to
monitor compliance with the seizure guidance. IRS has issued the revised
seizure guidance and will implement a limited seizures monitoring system
this fall. In the past, JCT agreed that the option has the potential for
increased revenue, but it could not develop estimates of revenue gain.

JCT 5- Year Estimate Included in No.

GAO*s 2002 Budgetary Implications Report

Related GAO Product IRS Seizures: Needed for Compliance but Processes for
Protecting Taxpayer Rights Have Some Weaknesses. GAO/ GGD- 00- 4.
Washington, D. C.: November 29, 1999.

GAO Contact James R. White, (202) 512- 9110

Increase Collection of Selfemployment Taxes

Primary agency Internal Revenue Service Spending type Direct

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. We reported in
1999 that, 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.

In the past, JCT agreed that the option had the potential for increased
revenue, but it could not develop estimates of revenue gain.

JCT 5- Year Estimate Included in No.

GAO*s 2002 Budgetary Implications Report

Related GAO Product Tax Administration: Billions in Self- Employment Taxes
Are Owed.

GAO/ GGD- 99- 18. Washington, D. C.: February 19, 1999. GAO Contact James
R. White, (202) 512- 9110

Increase the Use of Electronic Funds Transfer for Installment Tax Payments

Primary agency Internal Revenue Service Spending type Direct

The Internal Revenue Code authorizes the Internal Revenue Service (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. In 1998, we
reported on two states* use of EFT. 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 had 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*s outstanding

installment agreements were EFT agreements. In the past, JCT agreed that
the option had the potential for increased revenue, but it could not
develop estimates of revenue gain.

JCT 5- Year Estimate Included in No.

GAO*s 2002 Budgetary Implications Report

Related GAO Products Tax Administration: Increasing EFT Usage for
Installment Agreements Could Benefit IRS. GAO/ GGD- 98- 112. Washington,
D. C.: June 10, 1998.

Tax Administration: Administrative Improvements Possible in IRS*
Installment Agreement Program. GAO/ GGD- 95- 137. Washington, D. C.: May
2, 1995.

GAO Contact James R. White, (202) 512- 9110

Reduce Gasoline Excise Tax Evasion

Primary agency Internal Revenue Service Spending type Direct

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. In
the past, JCT agreed that the option had the potential for increased
revenue, but it could not develop estimates of revenue gain.

JCT 5- Year Estimate Included in No.

GAO*s 2002 Budgetary Implications Report

Related GAO Product Tax Administration: Status of Efforts to Curb Motor
Fuel Tax Evasion.

GAO/ GGD- 92- 67. Washington, D. C.: May 12, 1992. GAO Contact James R.
White, (202) 512- 9110

Improve Independent Contractor Tax Compliance

Primary agency Internal Revenue Service Spending type Direct

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 its Employment Tax Examinations program. For
fiscal year 2002, 90 percent of the examinations found misclassified
workers and associated unpaid taxes. 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. In the
past, the Congress considered but rejected extending 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.

There have been various proposals on clarifying the definition of
independent contractors and improving related information reporting.
Congressional hearings dealt with some of these bills.

We believe that revenues from this option could possibly increase by
billions of dollars. In the past, JCT agreed that the option had the
potential for increased revenue, but it could not develop estimates of
revenue gain.

JCT 5- Year Estimate Included in No.

GAO*s 2002 Budgetary Implications Report

Related GAO Products Tax Administration: Estimates of the Tax Gap for
Service Providers.

GAO/ GGD- 95- 59. Washington, D. C.: December 28, 1994.

Tax Administration: Approaches for Improving Independent Contractor
Compliance. GAO/ GGD- 92- 108. Washington, D. C.: July 23, 1992. GAO
Contact James R. White, (202) 512- 9110

Expand the Use of IRS*s TIN- Matching Program

Primary agency Internal Revenue Service Spending type Direct

The Internal Revenue Service*s (IRS) and the Department of Treasury*s
Financial Management Service (FMS) have 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*s 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. In the past, JCT estimated that savings would result

from this option. JCT 5- Year Estimate Included in

Yes. GAO*s 2002 Budgetary Implications Report

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

Improve Administration of the Federal Payment Levy Program

Primary agency Internal Revenue Service Spending type Direct/
Discretionary

The Internal Revenue Service (IRS) and the Department of Treasury*s
Financial Management Service (FMS) have initiated the Federal Payment Levy
Program, which is designed to continuously levy federal payments made to
taxpayers that owe federal taxes. The potential effectiveness of this
program will be reduced because IRS has blocked certain delinquent
taxpayers from being levied.

Since July 2000, IRS has been levying federal payments of delinquent
taxpayers. Certain taxpayers are not levied because they meet certain
exclusion criteria, such as taxpayers who are paying their taxes through
installment agreements or those who have contacted IRS and demonstrated
that they currently do not have the means to pay their taxes. However,
there are many other delinquent taxpayers who do not meet IRS*s exclusion
criteria but are not having their federal payments levied. In a March 2003
report, we found that about 112,000 delinquent taxpayers were collectively
receiving about $6.8 billion in federal payments and owed about $1.6
billion in delinquent taxes that IRS had blocked from the levy program.
While IRS began to unblock about 20,000 of these accounts in January 2003,
it does not plan to unblock the remaining portion until sometime in 2005.
The sooner IRS unblocks these accounts, the more likely it is to collect
the delinquent taxes.

JCT 5- Year Estimate Included in No, this is a new example. CBO could not
develop an estimate for this

GAO*s 2002 Budgetary example.

Implications Report Related GAO Product Tax Administration: Federal
Payment Levy Program Measures,

Performance, and Equity Can Be Improved. GAO- 03- 356. Washington, D. C.:
March 6, 2003.

GAO Contact Michael Brostek, (202) 512- 9110

Enhance Nontax Debt Collection Using Available Tool s

Primary agency Department of the Treasury Spending types Direct/
Discretionary

Nontax federal debt delinquent more than 180 days continues to be a
significant problem governmentwide. The Department of Treasury reported
that such debt totaled over $60 billion for each of the last 4 fiscal
years. As delinquent debts age, they become increasingly difficult to
collect. In 1996, the Congress enacted the Debt Collection Improvement Act
of 1996 (DCIA) to provide for more aggressive pursuit of delinquent debt.
Treasury*s Financial Management Service (FMS) has been instrumental in
helping agencies identify and refer more seriously delinquent nontax debts
to FMS for additional effort. FMS has had some success in these
centralized efforts; however, two key aspects of the 1996 legislation have
lagged behind other initiatives. In particular, the law authorized federal
agencies to perform administrative wage garnishment (AWG) for certain
delinquent debt. Debt collection

experts have emphasized that AWG is a powerful instrument for collecting
debt since the mere threat of using it is often enough to motivate
voluntary payment. Properly used in tandem with other debt recovery
techniques such as Treasury*s centralized debt collection program, AWG
should generate collections and provide leverage for agencies to obtain
voluntary payments from delinquent debtors. However, few agencies are
using AWG. Although the Department of Education had implemented AWG
granted under separate authority, none of the nine large Chief Financial
Officers Act agencies we reviewed in fiscal year 2001 had fully
implemented AWG as authorized by the DCIA. According to Treasury
officials, as of March 2003, only one of the nine large agencies, the
Department of Housing and Urban

Development, had authorized Treasury to perform AWG as part of its
centralized debt collection efforts. Although AWG is not mandatory, by
failing to employ this tool* more than 7 years after the DCIA*s enactment*

agencies have missed collection opportunities. DCIA also called for steps
to prevent certain delinquent debtors from receiving additional federal
financial assistance in the form of loans, loan guarantees, and loan
insurance. Our March 2002 report discussed three

major information sources that contain data on delinquent federal debtors:
credit bureau reports, the Department of Housing and Urban

Development*s Credit Alert Interactive Voice Response System, and the
Department of the Treasury*s offset program (TOP) database. Each
information source contained certain information on delinquent federal
nontax debtors, but none provided all- inclusive, timely data or
maintained data long enough to be an adequate basis for successfully
barring future financial assistance to current or prior delinquent
debtors. According to Treasury officials, FMS is in the initial
implementation phase of a new Internet- based program to assist agencies
in identifying delinquent debtors. As currently envisioned, the program
will allow agencies to initiate

searches of limited information from the TOP database to determine whether
applicants for direct or guaranteed loans owe delinquent federal nontax
debt. We have recommended that agencies begin implementing AWG and that

FMS augment its current plans for using the TOP database to bar delinquent
debtors from obtaining access to future federal financial assistance.
Because it is not clear at this time how much federal agency debt is
eligible for AWG, an estimate of additional receipts from full
implementation of this debt collection tool would only be a preliminary
indication. The same uncertainty exists for estimated benefits related to
full implementation of the delinquent debtor bar provision. Given the pace
of implementation, it may be desirable for the Congress to establish
certain milestones and performance expectations for the debt collection
function.

JCT 5- Year Estimate Included in No, this is a new example. CBO could not
develop an estimate for this

GAO*s 2002 Budgetary example.

Implications Report Related GAO Products Debt Collection: Agriculture
Making Progress in Addressing Key

Challenges. GAO- 03- 202T. Washington, D. C.: November 13, 2002.

Debt Collection Improvement Act of 1996: Major Data Sources Inadequate for
Implementing the Debtor Bar Provision. GAO- 02- 462. Washington, D. C.:
March 29, 2002.

Debt Collection Improvement Act of 1996: Status of Selected Agencies*
Implementation of Administrative Wage Garnishment. GAO- 02- 313.
Washington, D. C.: February 28, 2002.

Debt Collection Improvement Act of 1996: Department of Agriculture Faces
Challenges Implementing Certain Key Provisions. GAO- 02- 277T. Washington,
D. C.: December 5, 2001.

Debt Collection Improvement Act of 1996: Agencies Face Challenges
Implementing Certain Key Provisions. GAO- 02- 61T. Washington, D. C.:
October 10, 2001.

GAO Contact Gary T. Engel, (202) 512- 8815

Slowing the Long- Term

CBO Options Where Related GAO Work Is Identified

Growth of Social Constrain the Increase in Initial Benefits

Security and Medicare Raise the Retirement Age

CBO Options Where Related GAO Work Is Identified 37

Constrain the Increase in Initial Benefits Related GAO Products Social
Security: Analysis of Issues and Selected Reform Proposals. GAO03- 376T.
Washington, D. C.: January 15, 2003. 37

Social Security Reform: Analysis of Reform Models Developed by the
President*s Commission to Strengthen Social Security. GAO- 03- 310.
Washington, D. C.: January 15, 2003.

GAO Contact Barbara Bovbjerg, (202) 512- 7215 Raise the Retirement Age
Related GAO Product Social Security Reform: Implications of Raising the
Retirement Age.

GAO/ HEHS- 99- 112. Washington, D. C.: August 27, 1999. GAO Contact
Barbara Bovbjerg, (202) 512- 7215

37 We list GAO reports identified as relating to options included in the
CBO March 2003

Budget Options report. Only those CBO options for which we identified
related GAO products are included. We included GAO reports if they related
to the topic of the CBO option, regardless of whether our work supported
the option or not.

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GAO United States General Accounting Office

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Page 1 GAO- 03- 1006 Opportunities for Oversight United States General
Accounting Office Washington, D. C. 20548

Comptroller General of the United States A

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