Opportunities for Congressional Oversight and Improved Use of	 
Taxpayer Funds: Budgetary Implications of Selected GAO Work	 
(07-MAY-04, GAO-04-649).					 
                                                                 
This report contains in a single document the budgetary 	 
implications of selected program reforms discussed in past GAO	 
work but not yet implemented or enacted. Since 1994, we have	 
prepared annual reports similar to this product, in order to	 
continue to assist congressional committees in identifying	 
approaches to reduce federal spending or increase revenues. This 
year's report contains over 100 examples of budget options	 
organized by budget function. Where possible, budgetary savings  
estimates provided by the Congressional Budget Office (CBO) or	 
the Joint Committee on Taxation (JCT) are presented.		 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-04-649 					        
    ACCNO:   A09951						        
  TITLE:     Opportunities for Congressional Oversight and Improved   
Use of Taxpayer Funds: Budgetary Implications of Selected GAO	 
Work								 
     DATE:   05/07/2004 
  SUBJECT:   Beneficiaries					 
	     Budget administration				 
	     Budget functions					 
	     Cost control					 
	     Eligibility criteria				 
	     Productivity in government 			 
	     Program management 				 

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GAO-04-649

Report to the Committees on the Budget

May 2004

OPPORTUNITIES FOR CONGRESSIONAL OVERSIGHT AND IMPROVED USE OF TAXPAYER
FUNDS

Budgetary Implications of Selected GAO Work

Contents

Tables

May 7, 2004Letter

The Honorable Don Nickles Chairman The Honorable Kent Conrad Ranking
Minority Member Committee on the Budget United States Senate

The Honorable Jim Nussle Chairman The Honorable John Spratt Ranking
Minority Member Committee on the Budget House of Representatives

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

Following the events of September 11, 2001 and the return of unified
budget deficits in fiscal year 2002, the Congress and the administration
face both immediate and long-term challenges. In the near term, Congress
and the administration are faced with the challenge of combating terrorism
and ensuring the security of our homeland. In the long term, the nation
faces immense fiscal and economic pressures created by known demographic
trends and rising health care costs. Both new commitments undertaken after
September 11 and longer-term pressures sharpen the need to look at
competing claims and new priorities. As we have noted in a recent
testimony,1 there is a need to begin reexamining the base of government
programs, policies, and operations to make government more effective and
relevant to a changing society.

In this report, we highlight opportunities for, and specific examples of,
legislative and administrative change that might yield budgetary savings.
These budget options are based on past GAO work. While this report is not
intended to represent a complete summary of all possible options, it does
provide specific examples that demonstrate the programmatic and fiscal
oversight needed as our nation's priorities are reassessed in light of
short and long-term challenges.

As consistent with our prior budgetary implications reports, we have
organized the options presented in this report as falling in one of the
following three areas:

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

o Redefine beneficiaries: Options for revising formulas or eligibility
rules or improving the targeting of benefits or fees.

o Improve efficiency: Options to address program execution problems
through consolidation, reorganization, improving collections methods, or
attacking high-risk activities.

The specific options described in each example are not intended to suggest
the only way to address some of the significant problems identified in our
reviews of federal programs and activities. Each example presents only one
of many possible options available to the Congress, and including a
specific option in this report does not mean that we endorse it or that
the chosen option is the only or the most feasible approach.

Options in this report include a listing of relevant GAO reports and
testimonies and a GAO contact. Although we derived the examples in this
report from our existing body of work, there are similarities between the
specific options presented in this report and other proposals. For
example,

some options contained in this report have also been included in CBO's
annual spending and revenue options publication.2

We are also sending copies of this report to other interested committees
of the Congress. Copies will be made available to others upon request.

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. Specific questions about individual options may be directed
to the GAO contact listed with each option.

David M. Walker Comptroller General of the United States

Explanation of Conventions Used to Estimate Savings and Revenue
GainsAppendix I

The Congressional Budget Office (CBO) and the Joint Committee on Taxation
(JCT) provided cost estimates where possible for many of our options. As
in our April 2002 report, a brief explanation is included with the option
if specific estimates could not be provided.1 Where estimates are
provided, the following conventions were followed.2

o For revenue estimates, the increase in collections reflects what would
occur, over and above amounts due under current law, if the option were
enacted. Most of the estimates come from the JCT, although a few were
produced by CBO.

o For direct spending programs, estimated savings show the difference
between what the program would cost under the CBO baseline, which assumes
continuation of current law, and what it would cost after the suggested
modification.

o For discretionary spending programs the estimates show savings compared
to the fiscal year 2004 funding level adjusted for inflation. Savings for
most defense options are estimated relative to DOD's planned program
levels.

Subsequent savings and revenue estimates provided by CBO and JCT may not
match exactly those contained in this report. Differences in details of
specific proposals, changes in assumptions that underlie the analyses, and
updated baselines can all lead to significant differences in estimates.

Finally, some of the options could not be scored by CBO or JCT. Several of
these involve management improvements that we believe can contribute to
reduced spending or increased revenues but whose effects are too uncertain
to be estimated. A few options are not estimated because they concern
future choices about spending that are not currently in the baseline used
to calculate annual spending and revenue. In other cases, savings are
likely to come in years beyond the 10-year estimation period that CBO
uses.

Budget Options by ThemeAppendix II

As consistent with our previous past budgetary implications reports, this
appendix groups our options in one of three broad themes: reassess
objectives, redefine beneficiaries, and improve efficiency. These three
themes are based on an implicit set of decision rules that encourage
decision makers to think systematically, within an ever-changing
environment, about

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

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

o how services are or should be provided.

Reassess Objectives

The first theme focuses on the objectives of federal programs or services.
These options (see table 1) offer opportunities to periodically reconsider
a program's original purpose, the conditions under which it continues to
operate, and whether its cost effectiveness is appropriate. Our work
suggests three decision rules that illustrate this strategy.

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

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

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

For example, aircraft carrier strike groups are the centerpiece of the
Navy's surface force and significantly influence the size, composition,
and cost of the fleet. Our analysis indicates that there are opportunities
to use less costly options to satisfy many of the carrier 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
Nuclear-Powered Guided Missile Submarines for overseas presence and crisis
response.

Table 1: Reassess Objectives

                                        

Budget function                           Option                           
050             Reduce the Number of Carrier Strike Group Expansions and   
                   Upgrades                                                   
050             Limit Commitment to Production of the F/A-22 Fighter until 
                   Operational Testing Is Complete                            
050             Reassess Business Cases for Selected Weapon Systems Before 
                   Making Further Investments                                 
150             Eliminate U.S. Contributions to Administrative Costs in    
                   Rogue States                                               
150             Reduce International Broadcasting Overlap                  
250             Continue Oversight of the International Space Station and  
                   Related Support Systems                                    
270             Corporatize or Divest Selected Power Marketing             
                   Administrations                                            
300             Terminate Land-Exchange Programs                           
300             Deny Additional Funding for Commercial Fisheries Buyback   
                   Programs                                                   
350             Eliminate or Reduce the Agriculture Department's Market    
                   Access Program                                             
350             Eliminate Public Law 480 Title I Food Aid Program          
350             Reduce or Eliminate the Export Credit Guarantee Program    
370             Eliminate NIST's Advanced Technology Program               
                   Make Further Appropriations on the Pulsed Fast Neutron     
400             Analysis Inspection System Dependent on Results of         
                   Operational Testing                                        
400             Develop a Passenger Intercity Rail Policy to Meet National 
                   Goals                                                      
400             Eliminate Cargo Preference Laws to Reduce Federal          
                   Transportation Costs                                       
450             Reduce or Eliminate the Trade Adjustment Assistance        
                   Program for Firms and Industries                           
550             Improve Fairness of Medicaid Matching Formula              
570             Reassess Medicare Incentive Payments in Health Care        
                   Shortage Areas                                             
600             Revise Benefit Payments under the Federal Employees'       
                   Compensation Act                                           
700             Revise VA's Disability Ratings Schedule to Better Reflect  
                   Veterans' Economic Losses                                  
800+            Improve IRS's Ability to Collect Delinquent Taxes          
Receipt         Implement Tolling or Other Alternative Revenue Sources for 
                   the Fuel Tax on Highways                                   
Receipt         Restrict the Preferential Federal Income Tax Treatment of  
                   Business-Owned Life Insurance                              
Receipt         Reassess Annual Charges for FERC-licensed Hydropower       
                   Projects that Use Federal Lands                            
Receipt         Tax Interest Earned on Life Insurance Policies and         
                   Deferred Annuities                                         
Receipt         Further Limit the Deductibility of Home Equity Loan        
                   Interest                                                   
Receipt         Increase Penalties and Consistency of Disclosure for       
                   Abusive Tax Shelters                                       
Receipt         Authorize IRS to Use Private Collection Agencies to        
                   Collect Certain Delinquent Taxes                           

Source: GAO analysis.

Redefine Beneficiaries

The second theme focuses on the intended beneficiaries for federal
programs or services (see table 2). The Congress originally defines the
intended audience for any program or service based on some perception of
eligibility and/or need. To better reflect and target increasingly limited
resources, these definitions can be periodically reviewed and revised. Our
body of work suggests four decision rules that illustrate this strategy.

o Formulas for a variety of grant programs to state and local governments
can be revised to better reflect the fiscal capacity of the recipient
jurisdiction. This strategy could reduce overall funding demands while
simultaneously redistributing available grant funds so that the most needy
receive the same or increased levels of support.

o Eligibility rules can be revised, without altering the objectives of the
program or service.

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

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

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

Table 2: Redefine Beneficiaries

                                        

Budget function                           Option                           
150             Reduce or Eliminate Eximbank Subsidies                     
270             Recover Power Marketing Administrations' Costs             
270             Increase Nuclear Waste Disposal Fees                       
270             Recover Federal Investment in Successfully Commercialized  
                   Technologies                                               
300             Revise the Mining Law of 1872                              
300             Reexamine Federal Policies for Subsidizing Water for       
                   Agriculture and Rural Uses                                 
370             Recapture Interest on Rural Housing Loans                  
370             Require Self-Financing of Mission Oversight by Fannie Mae  
                   and Freddie Mac                                            
400             Increase Aircraft Registration Fees to Enable the Federal  
                   Aviation Administration to Recover Actual Costs            
450             Eliminate the Flood Insurance Subsidy on Properties That   
                   Suffer the Greatest Flood Loss                             
450             Eliminate Flood Insurance for Certain Repeatedly Flooded   
                   Properties                                                 
500             Improve Targeting of Title I Basic Grants                  
550             Prevent States from Using Illusory Approaches to Shift     
                   Medicaid Program Costs to the Federal Government           
550             Eliminate Federal Funding for SCHIP Covering Adults        
                   without Children                                           
550             Charge Beneficiaries for Food Inspection Costs             
550             Redirect Carcass-by-Carcass Inspection Resources in Meat   
                   and Poultry Plants                                         
                   Implement a Service Fee for Successful Non-Temporary       
600             Assistance for Needy Families Child Support Enforcement    
                   Collections                                                
600             Improve Reporting of DOD Reserve Employee Payroll Data to  
                   State Unemployment Insurance Programs                      
600             Better Congressional Oversight of PRWORA's Fugitive Felon  
                   Provisions                                                 
600             Share the Savings from Bond Refundings                     
700             Discontinue Veterans' Disability Compensation for          
                   Nonservice Connected Diseases                              
800+            Prevent Delinquent Taxpayers from Benefiting from Federal  
                   Credit Programs                                            
800+            Target Funding Reductions in Formula Grant Programs        
800+            Adjust Federal Grant Matching Requirements                 
Receipt         Increase Highway User Fees on Heavy Trucks                 
Receipt         Limit the Individual Tax Exclusions for Employer-Paid      
                   Health Insurance                                           
Receipt         Repeal the Partial Exemption for Alcohol Fuels from Excise 
                   Taxes on Motor Fuels                                       
Receipt         Index Excise Tax Rates for Inflation                       

Source: GAO analysis.

Improve Efficiency

The third theme addresses how the program or service is delivered (see
table 3). This strategy suggests that focusing on the approach or delivery
method can significantly reduce spending or increase collections. Our body
of work suggests the following decision rules that illustrate this
strategy.

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

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

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

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

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

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

As an illustration of this theme, in May 2000, GAO reported that 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; in 2003, the cost was nearly $50
billion annually. Over the past two decades, DOD and VA have entered into
a sharing program that has yielded benefits in both dollar savings and
qualitative gains, illustrating what can be achieved when the two agencies
work together to identify where excess capacity and cost advantages exist.
However, although VA and DOD continue to share resources to provide
quality and cost-effective health care services, existing sharing
agreements are not being taken full advantage of and additional sharing
opportunities could be pursued. Long-standing barriers continue to present
challenges for future collaboration and cost efficiencies, such as the
current inability of VA and DOD to electronically share health data
information in a two-way exchange. Given the changing health care
environment, the criteria and conditions that make resource sharing a
cost-effective option for the federal government need to be reviewed and
strategies for sharing rethought. VA and DOD need to work together to
determine an appropriate course of action to ensure that resource-sharing
opportunities are realized.

Table 3: Improve Efficiency

                                        

Budget function                           Option                           
050             Acquire Conventionally Rather Than Nuclear-Powered         
                   Aircraft Carriers                                          
050             Reorganize C-130 Reserve Squadrons                         
050             Continue Defense Infrastructure Reform                     
050             Improve DOD Procurement Practices Regarding Canceling      
                   Orders                                                     
050             Revising Occupancy Policies Could Reduce Barracks          
                   Requirements                                               
050             Reduce Construction Cost of Military Barracks              
050             Reduce the Corrosion of Military Assets                    
050             Address Overpayments to Defense Contractors                
050             Require DOD Report Its Progress in Implementing the Debt   
                   Collection Improvement Act of 1996 (DCIA)                  
050             Improve the Administration of Defense Health Care          
                   Seek Additional Opportunities for VA and DOD to Increase   
050             Joint Activities to Enhance Services to Beneficiaries and  
                   Reduce Costs                                               
150             Streamline U.S. Overseas Presence                          
                   Improve the Department of Energy's Management of Its       
270             Capital Asset Acquisition, Weapons Refurbishment, and Site 
                   Cleanup Projects                                           
270             Reduce the Costs of the Rural Utilities Service's          
                   Electricity Loan Program                                   
300             Reassess Federal Land Management Agencies' Functions and   
                   Programs                                                   
350             Consolidate Common Administrative Functions at the U.S.    
                   Department of Agriculture                                  
350             Further Consolidate the U.S. Department of Agriculture's   
                   County Offices                                             
370             Reduce Federal Housing Administration's Insurance Coverage 
                   Merging Department of Agriculture and Department of        
370             Housing and Urban Development Single-Family Insured        
                   Lending Programs and Multifamily Portfolio Management      
                   Programs                                                   
370             Consolidate Homeless Assistance Programs                   
370             Reorganize and Consolidate Small Business Administration's 
                   Administrative Structure                                   
370             Improve Reviews of Small Business Administration's         
                   Preferred Lenders                                          
400             Close, Consolidate, or Privatize Some Coast Guard          
                   Operating and Training Facilities                          
400             Convert Some Support Officer Positions to Civilian Status  
400             Improve the Coordination of Transportation Services for    
                   Transportation-Disadvantaged Populations                   
450             Improve Federal Foreclosure and Property Sales Processes   
500             Change Borrower Interest Rate on Federal Consolidation     
                   Loans From Fixed to Variable                               
550             Control Provider Enrollment Fraud in Medicaid              
550             Create a Uniform Federal Mechanism for Food Safety         
570             Adjust Medicare Payment Rates to Reflect Changing          
                   Technology, Costs, and Market Prices                       
570             Increase Medicare Program Safeguard Funding                
570             Modify the New Skilled Nursing Facility Payment Method to  
                   Ensure Appropriate Payments                                
570             Implement Risk-Sharing in Conjunction with Medicare Home   
                   Health Agency Prospective Payment System                   
570             Allow Provisions for Direct Laboratory Payment for Certain 
                   Medicare Pathology Services to Expire                      
                   Require Information on Enrollees from Private Health       
570             Insurers to Improve Identification of Medicare             
                   Beneficiaries with Other Health Coverage                   
600             Improve Social Security Benefit Payment Controls           
600             Simplify Supplemental Security Income Recipient Living     
                   Arrangements                                               
600             Sustain/Expand Range of SSI Program Integrity Activities   
600             Improve the Administrative Oversight of Food Assistance    
                   Programs                                                   
600             Reduce Federal Funding Participation Rate for Automated    
                   Child Support Enforcement Systems                          
700             Reassess Unneeded Health Care Assets within the Department 
                   of Veterans Affairs                                        
700             Reducing VA Inpatient Food and Laundry Service Costs       
800+            Taking a Strategic Approach Could Improve Federal          
                   Agencies' Acquisition of Supplies and Services             
800+            Improper Benefit Payments Could Be Avoided or More Quickly 
                   Detected if Data from Various Programs Were Shared         
800+            Increase Fee Revenue from Federal Reserve Operations       
800+            Eliminate the 1-Dollar Note                                
800+            Better Target Infrastructure Investments to Meet Mission   
                   and Results-Oriented Goals                                 
800+            Identify and Dispose of Unneeded Real Property Assets Held 
                   by GSA                                                     
800+            Consolidate Grants for First Responders to Improve         
                   Efficiency                                                 
Receipt         Enhance Nontax Debt Collection Using Available Tools       
Receipt         Require Corporate Tax Document Matching                    
Receipt         Improve Administration of the Tax Deduction for Real       
                   Estate Taxes                                               
Receipt         Increase Filing of Returns by U.S. Citizens Living Abroad  
Receipt         Increase the Use of Seizure Authority to Collect           
                   Delinquent Taxes                                           
Receipt         Increase Collection of Self-employment Taxes               
Receipt         Increase the Use of Electronic Funds Transfer for          
                   Installment Tax Payments                                   
Receipt         Reduce Gasoline Excise Tax Evasion                         
Receipt         Improve Independent Contractor Tax Compliance              
Receipt         Expand the Use of IRS's TIN-Matching Program               
Receipt         Improve Administration of the Federal Payment Levy Program 

Source: GAO analysis.

Opportunities to Improve the Economy, Efficiency, and Effectiveness of
Federal ProgramsAppendix III

050 National Defense

Reduce the Number of Carrier Strike Group Expansions and Upgrades Acquire
Conventionally Rather Than Nuclear-Powered Aircraft Carriers Reorganize
C-130 Reserve Squadrons Continue Defense Infrastructure Reform Improve DOD
Procurement Practices Regarding Canceling Orders Revising Occupancy
Policies Could Reduce Barracks Requirements Reduce Construction Cost of
Military Barracks Reduce the Corrosion of Military Assets Limit Commitment
to Production of the F/A-22 Fighter until Operational   Testing Is
Complete Reassess Business Cases for Selected Weapon Systems Before Making
     Further Investments Address Overpayments to Defense Contractors Require
DOD Report Its Progress in Implementing the Debt Collection   Improvement
Act of 1996 (DCIA) 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

Reduce the Number of Carrier Strike Group Expansions and Upgrades

Aircraft carrier strike 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 strike group is about $2.2 billion (in fiscal year 2004 dollars)
and is likely to increase as older units are replaced and modernized. The
strike group includes the carrier and its air wing, and the cruisers,
destroyers and other ships that accompany the carrier during its
deployment, as well as the costs to support the carrier strike group. The
Navy has several costly ongoing carrier-related programs: one
nuclear-powered Nimitz-class carrier is under construction ($5.2 billion);
a research and development program ($3.6 billion) for a new
nuclear-powered carrier design is underway; production ($8.7 billion) of
that new carrier is set to begin in 2007; and 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 2006. 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 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
strike groups centered around increasingly capable amphibious assault
ships, surface combatants and Trident SSGNs for overseas presence and
crisis response.

CBO estimates that savings could total $3.7 billion over the 2005-2009
period from retiring one aircraft carrier (CVN-70), and one carrier air
wing. This estimate includes savings from foregoing the overhaul ($2.4
billion) and savings from not operating the carrier ($1.3 billion).

Source: Congressional Budget Office.

Note: The Navy's plans call for production of a replacement carrier
(CVN-21) in 2007 and a refueling complex overhaul of an existing carrier
(CVN-70) in 2006. This option would continue the production of the CVN-21
carrier but would retire the CVN-70 in 2005.

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

Acquire Conventionally Rather Than Nuclear-Powered Aircraft Carriers

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
nuclear-powered surface combatants and nuclear-powered submarines. In
deciding to build nuclear-powered surface combatants, the Navy believed
that the greatest benefit would be achieved when all the combatant ships
in the task force were nuclear-powered. However, the Navy stopped building
nuclear-powered surface combatants after 1975 because of the high cost.
The last nuclear-powered surface combatants were decommissioned in the
late 1990s because they were not cost-effective to operate and maintain.

Our analysis shows that both conventional and nuclear aircraft carriers
have been effective in fulfilling U.S. forward presence, crisis response,
and war-fighting requirements and share many characteristics and
capabilities. Conventionally and nuclear-powered carriers both have the
same standard air wing and train to the same mission requirements. Each
type of carrier offers certain advantages. For example, conventionally
powered carriers spend less time in extended maintenance and, as a result,
can provide more forward presence coverage. By the same token, nuclear
carriers can store larger quantities of aviation fuel and munitions and,
as a result, are less dependent upon at-sea replenishment. There was
little difference in the operational effectiveness of nuclear and
conventional carriers in the 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.1 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
nuclear-powered carriers.

CBO estimates that savings could be achieved if the Congress chose to
acquire a conventionally powered carrier in 2007 instead of a
nuclear-powered carrier.

Source: Congressional Budget Office.

Note: The Navy's plans call for production of a replacement carrier
(CVN-21) in 2007 and a refueling complex overhaul of an existing carrier
(CVN-70) in 2006. This option would replace the CVN-21 carrier with a CVX
carrier.

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.

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

Reorganize C-130 Reserve Squadrons

Currently, the majority of the Air Force's C-130 aircraft is 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.2

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 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 estimates the following budgetary savings with this option.

Source: Congressional Budget Office.

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

Continue Defense Infrastructure Reform

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 costs.3
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.

Secretary of Defense Rumsfeld announced his own management reform program
in 2001, referred to as the DOD Business Transformation program, also with
the intent of improving the effectiveness and efficiency of the
department's business operations. The new management structure-led by the
Senior Executive Council and the Business Initiative Council-recommends
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. While council members have put forth many
new initiatives, they also have endorsed several initiatives that were
part of the DRI program (e.g., family housing and utilities privatization
and public-private competitions under the Office of Management and
Budget's Circular A-76). Further, most of the other DRI initiatives have
continued, although not under the direct oversight of the new business
transformation structure. The new councils plan to 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 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 reported that as
of June 1, 2003 it has met OMB's short-term goal. While OMB has revised
its goals to allow each agency flexibility in order to better reflect
agency missions, DOD's goal is to meet the 50 percent target by 2009.
Regardless, this longer-term goal could be a challenge, requiring
completion of a significantly larger number of positions for study than
has actually been completed in a similar period in the past. 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 projected. Congress authorized
a base realignment and closure (BRAC) round in 2005  4 to reduce unneeded
infrastructure and free up funds for readiness, weapon modernization, and
other needs. DOD projects that 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 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 was not able to determine the budgetary effect of this option.

Related GAO Products

Defense Management: DOD Faces Challenges Implementing Its Core Competency
Approach and A-76 Competitions. GAO-03-818. Washington, D.C.: July 15,
2003.

Defense Management: New Management Reform Program Still Evolving.
GAO-03-58. Washington, D.C.: December 12, 2002.

Military Base Closures: Progress in Completing Actions from Prior
Realignments and Closures. GAO-02-433. Washington, D.C.: April 5, 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.

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/NSIAD-97-127BR. Washington, D.C.: April 4, 1997.

GAO Contact

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

Improve DOD Procurement Practices Regarding Canceling Orders

As of September 30, 2002, Department of Defense (DOD) records showed that
the department had inventory on order valued at about $1.75 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. We
reported in May 2003 that the causes most frequently cited by DOD
inventory managers for excess inventory are (1) buildup of repair parts to
support a new program or for a retrofit, modification, upgrade, or
replacement; (2) foreign military sales program requirements; (3) low or
decreasing demand for a specific part; and (4) retirement or phasing out
of an aircraft. We also 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 was not able to determine the budgetary effect of this option.

Related GAO Products

Defense Inventory: Air Force Item Manager Views of Repair Parts Issues
Consistent With Issues Reported in the Past. GAO-03-684R. Washington,
D.C.: May 21, 2003.

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

GAO Contact

William Solis, (202) 512-8365

Revising Occupancy Policies Could Reduce Barracks Requirements

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. 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 that
consider the contemporary needs of junior servicemembers, quality-of-life
issues, the services' mission requirements, and other relevant data 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. An option for Congress is
to require DOD to revise its barracks occupancy guidance according to our
above recommendation, lowering significantly the future construction and
operation costs for barracks.

Although CBO agrees that the option may result in savings, it could not
develop a savings estimate for this option.

Related GAO Products

Military Housing: Opportunities That Should Be Explored to Improve Housing
and Reduce Costs for Unmarried Junior Servicemembers. GAO-03-602.
Washington, D.C.: June 10, 2003.

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

Reduce Construction Cost of Military Barracks

In June 2003, GAO reported that opportunities existed to reduce costs of
constructing barracks through adoption of private-sector construction
practices. Traditional barracks construction practices call for the use of
steel frame, concrete, and cement block. Similar multi-unit housing in the
private sector, such as college dormitories and hotels, normally use
construction practices that include the use of wood frame construction.

The Army estimated that the use of private-sector wood frame construction
instead of steel frame, concrete, and cement block could reduce barracks
construction costs by 23 percent, or about $11,200 per occupant. Because
of its lower initial construction costs and comparable operations and
maintenance costs, Army analyses also indicate that total lifetime costs
for barracks constructed with private-sector construction practices would
be less than barracks using traditional construction practices. For
example, the Army estimated that using residential construction practices
will cost from $12,600 to $31,800 less per occupant at its pilot project
under construction at Fort Meade, Maryland. However, barriers-including
unanswered questions about durability and the ability of wood-frame
barracks to meet all antiterrorism force protection requirements-have
prevented widespread adoption of these cost saving private-sector
practices.

GAO recommended that the military services jointly undertake an
engineering study to resolve questions about use of private-sector
construction practices for barracks. We also recommended that, if the
engineering study shows that barracks built with private-sector
construction practices can economically meet all force protection
requirements, the military services adopt to the maximum extent practical
private-sector construction practices for future barracks projects. DOD
stated that it supports the study and that the Army Corps of Engineers had
begun a study of private-sector construction practices and compliance with
antiterrorism force protection requirements for barracks.

One option for Congress, providing that the engineering studies show that
barracks built with residential construction practices can economically
meet all force protection requirements, is to require that the funding
amounts that DOD requests for barracks construction projects be based on
use of residential construction practices to the maximum extent practical.

CBO was not able to determine the budgetary effect of this option.

Related GAO Products

Military Housing: Opportunities That Should Be Explored to Improve Housing
and Reduce Costs for Unmarried Junior Servicemembers. GAO-03-602.
Washington, D.C.: June 10, 2003.

Military Housing: Opportunity for Reducing Planned Military Construction
Costs for Barracks. GAO-03-275R. Washington, D.C.: January 7, 2003.

GAO Contact

Barry Holman, (202) 512-8412

Reduce the Corrosion of Military Assets

Congress has recognized the need to significantly reduce the economic
burden on the military services from damage caused by corrosion5 on
military equipment and infrastructure and of the efforts to mitigate its
adverse affects. In fact, corrosion's impact on military costs appears to
be enormous, representing one of the largest life-cycle cost components of
military weapon systems and infrastructure. In a 2001 government-sponsored
study, corrosion was estimated to cost the Department of Defense (DOD) at
least $20 billion a year.

The Bob Stump National Defense Authorization Act for Fiscal Year 2003
required the DOD to take several steps to address corrosion and provide
Congress a long-term strategy for corrosion prevention and mitigation.
Major commands, program offices, and research and development centers
servicewide have made and continue to make improvements in the methods and
techniques for preventing corrosion. For example, durable coatings,
composite materials, and cathodic protection are being incorporated to an
increasing extent in the design and construction of military facilities
and equipment to reduce corrosion-related maintenance. The military
services estimate that as much as 25 to 35 percent of corrosion costs can
be eliminated by using corrosion prevention efforts, amounting to billions
of dollars in potential savings each year.

There is much evidence that corrosion is an extensive problem and impacts
military costs, readiness and safety. For example, in 1993, the Army
estimated spending about $2 billion to $2.5 billion a year to mitigate the
corrosion of wheeled vehicles, including 5-ton trucks. Also, in a 1998
analysis, the estimated cost to repair damage to Army helicopters
attributed to corrosion was about $4 billion. In addition, many proposed
projects-even those with the potential for very large future-cost
savings-are often assigned a low funding priority compared to operations
and repair projects offering more immediate results, potentially costing
billions of dollars in additional net savings annually that would accrue
from a long-term reduction in corrosion of military equipment and
infrastructure. For example, the Naval Sea Systems Command has developed
durable coatings that increase the amount of corrosion protection for
various kinds of tanks (such as fuel and ballast tanks) on Navy ships to
20 years instead of 5 years. While the Navy has installed the coatings on
less than 7 percent of the tanks, it has estimated the net savings at
about $10 million a year. If the Navy fully funded this effort, it
projects than an additional $161 million annual net cost savings could be
achieved.

Without a more systematic approach to corrosion problems, prevention
efforts that have a high return on investment potential will likely
continue to be underresourced and continue to proceed at a slow pace. We
have identified several examples of projects, such as the Army National
Guard's Controlled Humidity Preservation project that pumps dehumidified
air into buildings or equipment to reduce the rate of corrosion, that show
potential for a high return on investment and advances in the technologies
of corrosion prevention but which have not, for various reasons, been
fully implemented. In this case, project officials claimed net savings of
$225 million through the end of fiscal year 2002.

DOD and the military services have not systematically assessed proposals
for corrosion control projects; they have disseminated project results on
a limited, ad hoc basis. This approach has led to readiness and safety
issues as well as billions of dollars of corrosion-related maintenance
costs for DOD and the services annually.

DOD recently submitted its report to Congress on its long-term strategy
for reducing corrosion and its effects on military equipment and
facilities.6 However, the department has had little time to implement the
strategy and, as a result, has not yet demonstrated progress towards
reducing corrosion impacts. To minimize the costs associated with
corrosion-related maintenance, one option for the Congress is to require
DOD to place a high priority on the implementation of its new strategy to
prevent and mitigate corrosion, and that the strategy emphasize
coordination within and among the services and has effective incentives
and priorities.

Although CBO agrees that the option may result in savings, it could not
develop a savings estimate for this option.

Related GAO Product

Defense Management: Opportunities to Reduce Corrosion Costs and Increase
Readiness.  GAO-03-753. Washington, D.C.: July 7, 2003.

GAO Contact

William Solis, (202) 512-8365

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

The fiscal year 2004 Defense Appropriations Act provided funds for
low-rate initial production of 22 F/A-22 aircraft, and Department of
Defense (DOD) plans to procure 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 DOD should minimize commitments to F/A-22
production until completion of initial operational testing, now planned
for October 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 and test program is ongoing. Avionics problems have not been
resolved and the start of initial operational testing has been delayed
another 7 months to March 2004. While the start has slipped 7 months, the
completion date has slipped only 4 months to October 2004, compressing the
time available to complete this testing. With the aircraft still
experiencing problems, the start of testing could be further delayed.
Additionally, if problems occur during initial operational testing, more
time will be needed to complete actual flight testing, analysis of data,
and reporting of the results. These results are needed to prepare the
Beyond Low-Rate Initial Production Report required to start full rate
production.

The Congress for fiscal year 2004 has approved low-rate initial production
of 22 aircraft. To avoid the acceleration of production until completion
of operational testing, the low-rate production could be maintained at 22
aircraft through fiscal year 2005. If Congress were to limit funding to no
more than 22 aircraft in fiscal year 2005, and then proceed with the
planned acceleration of production to 26 aircraft in 2006, and 32 aircraft
in 2007, budget savings could be achieved. 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 277 production
aircraft, lead to difficulties in completing the production program within
the production cost estimate.

CBO estimates the following budgetary savings with this option.

Source: Congressional Budget Office.

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.

GAO Contact

Allen Li, (202) 512-4841

Reassess Business Cases for Selected Weapon Systems Before Making Further
Investments

The Department of Defense (DOD) is currently in the midst of a
modernization and transformation effort that will drive its spending
priorities well into the next decade. Investment in the research,
development, and procurement of major weapon systems is expected to grow
considerably as these efforts progress, rising from $135 billion in fiscal
year 2004 to a projected $166 billion in 2009. DOD's total investment over
this period will, in fact, approach almost $1 trillion. Weapon systems
routinely take much longer to field, cost more to buy, and require more
support than investment plans provide for. This results in reduced buying
power of the defense dollar, delayed capabilities for the war fighter, and
unplanned-and possibly unnecessary-trade-offs in desired acquisition
quantities, as well as an adverse ripple effect among other weapon
programs or defense needs.

The Army dealt with such consequences in its recent decision to end
development of the RAH-66 Comanche helicopter program after almost 16
years of development. Since July 2000, the research and development costs
had grown 41 percent, the unit costs had grown 62 percent and the
quantities had shrunk 46 percent. While the need for an armed
reconnaissance helicopter may remain, the Army in effect decided that the
business case for investing in the Comanche as the best solution for that
need was no longer valid. Instead the Army opted for other investments
that would provide significantly more quantities of less expensive
aircraft and take into consideration lessons learned from recent military
operations. There are several weapon system programs that have experienced
significant cost increases and schedule delays and were conceived before
recent operations such as those in Afghanistan and Iraq. An option for the
Congress is to have the Secretary of Defense reexamine the business cases
for such programs before additional investments are made. Such a business
case analysis should consider (1) the continued need for the capability
and (2) whether the program at hand is still the best way to meet the need
given lessons learned from recent military operations, the likelihood that
the weapon system can be delivered within estimated costs and schedule,
and the viability of alternatives. Weapon system programs that warrant a
renewed look at their business cases follow.

F/A-22 Raptor Fighter

The Air Force's F/A-22 program began in 1986. It was originally planned to
be an air superiority fighter, but is currently planned to also have
air-to-ground attack capability. It is being designed with advanced
features, such as stealth characteristics, to make it less detectable to
adversaries and capable of high speeds for long ranges. It also has
integrated aviation electronics (avionics) designed to greatly improve
pilots' awareness of the situation surrounding them. It is designed to
replace the Air Force's F-15 aircraft.

Factors that affect its business case include:

o A 127 percent increase in development costs.

o A 122 percent increase in unit procurement costs.

o A 111 percent increase in development time.

o A 94 percent increase in testing time.

Instead of buying 750 aircraft as originally planned, the Air Force can
only afford 218 aircraft, assuming a production cost limitation that
Congress has imposed is maintained. Even without the limitation, the Air
Force plans allow for only 277 aircraft.

Furthermore, the development and test program continues to experience
problems and risks further delays. Initial operational testing, to
demonstrate the system's effectiveness and suitability, has not yet
started. The F/A-22's advanced avionics system, maintenance systems and
its reliability are all experiencing problems that could result in further
increases in development costs and delays in delivering the F/A-22 to the
war fighter.

The Air Force has also decided to add, as part of its modernization plan,
an air-to-ground attack capability not previously envisioned but now
considered necessary to increase the utility of the aircraft. The Office
of Secretary of Defense estimated the Air Force would need as much as
$11.7 billion to develop and incorporate the planned modernization efforts
into the F/A-22. Excluding these improvements and assuming no new problems
occur, $33 billion (in fiscal year 2004 dollars) will be needed to
complete the program from fiscal year 2005 on. This does not include the
cost needed to provide new avionics computer processors and architecture,
which are needed to support some planned enhancements. The Air Force
version of the Joint Strike Fighter currently in development will
primarily be an air-to-ground replacement for the F-16 and the A-10, and
should be considered in any review of the F/A-22 business case.

Advanced SEAL Delivery System (ASDS)

The Special Operations Forces' ASDS has been in development since 1994. It
is a battery-powered, dry interior mini-submarine developed for
clandestine insertion and extraction of Navy SEALs and their equipment. It
is carried to its deployment area by a specially configured SSN-688 class
submarine. ASDS is intended to provide increased range, payload,
on-station loiter time, and endurance over current submersibles.

Factors that affect its business case include:

o A 227 percent increase in development costs.

o A 985 percent increase in production costs.

o A 235 percent increase in unit procurement costs.

Two of ASDS's three critical technologies, the battery and the propulsion,
are not fully mature, even though system development began over 9 years
ago. Key technical problems, such as the battery and the propeller, were
discovered late-during testing on the first boat-rather than in component
or subsystem-level testing. Although significant progress has been made in
the past year, not all critical technologies have achieved maturity and
will not meet maturity until the second ASDS boat is produced, currently
estimated to be in 2008. Assuming no new problems are encountered, $1.3
billion (in fiscal year 2004 dollars) will be needed to complete the
program from fiscal year 2005 and beyond.

Extended Range Guided Munition (ERGM)

The Navy's ERGM program began development in 1996. It is a rocket-assisted
projectile that is fired from a gun aboard ships. It can be guided to
targets on land at ranges of between about 15 and 50 nautical miles to
provide fire support for ground troops. ERGM is expected to offer
increased range and accuracy compared to the Navy's current gun range of
13 nautical miles. ERGM requires modifications to existing 5-inch guns, a
new munitions-handling system (magazine), and a new fire control system.

Factors that affect its business case include:

o A 316 percent increase in development costs.

o A 262 percent increase in unit procurement costs.

o A 147 percent increase in development time.

o A 63 percent reduction in quantities.

The ERGM program began development with very few of its critical
technologies mature. Design stability was also not achieved by the design
review in May 2003. Finally, due to several test failures, the program did
not meet a Navy deadline that required successful completion of two
land-based flight tests by November 2003. The Navy is conducting an
independent assessment of the program's readiness to proceed with further
flight-testing.

Program costs may grow because the current estimate is based on a much
lower production quantity than is contained in current program documents
and the Navy has yet to establish a firm ERGM inventory requirement.

In October 2003, the Navy issued a solicitation for alternative
precision-guided munition concepts that could be a complement or
competitor to ERGM. In particular, the Navy is concerned about the unit
cost of the ERGM round and is looking to develop alternatives that could
offer cost savings. The Navy plans to spend $35 million in fiscal years
2004 and 2005 to pursue a technology demonstration of other extended range
munition concepts by September 2005. Assuming no new problems are
encountered, $207 million (in fiscal year 2004 dollars) will be needed to
complete the program from fiscal year 2005 and beyond.

CBO was not able to determine the budgetary effect of this option.

Related GAO Products

Defense Acquisitions: Assessments of Major Weapon Programs. GAO-04-248.
Washington, D.C.: March 31, 2004.

Tactical Aircraft: Changing Conditions Drive Need for New F/A-22 Business
Case. GAO-04-391. Washington, D.C.: March 15, 2004.

Defense Acquisitions: Assessments of Major Weapon Programs. GAO-03-476.
Washington, D.C.: May 15, 2003.

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.

Defense Acquisitions: Advanced SEAL Delivery System Program Needs
Increased Oversight. GAO-03-442. Washington, D.C.: March 31, 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.

GAO Contact

Paul Francis, (202) 512-2811

Address Overpayments to Defense Contractors

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 interest-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 did

not address overpayments stemming from financing payments7-although GAO
found that most overpayments involve contracts with financing payments.
Subsequently, in October 2003, the Civilian Agency Acquisition Council and
the Defense Acquisition Regulations Council revised the FAR 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. In turn, contracting officers, in
coordination with the cognizant payment office, are to promptly provide
instructions to the contractor regarding the timely disposition of the
overpayment.

Given the extent of the overpayment problem 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 estimates the following revenues with this option.

Source: Congressional Budget Office.

Related GAO Products

Financial Management: Status of the Governmentwide Efforts to Address
Improper Payment Problems. GAO-04-99. Washington, D.C.: October 17, 2003.

DOD Contract Payments: Management Action Needed to Reduce Billions in
Adjustments to Contract Payment Records. GAO-03-727. Washington, D.C.:
August 8, 2003.

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

Require DOD Report Its Progress in Implementing the Debt Collection
Improvement Act of 1996 (DCIA)

Department of Defense (DOD) and Internal Revenue Service (IRS) records
showed that over 27,000 contractors registered in DOD's Central Contractor
Registration system owed about $3 billion in unpaid taxes as of September
30, 2002. DOD has not fully implemented provisions of the Debt Collection
Improvement Act of 1996 (DCIA) that would assist IRS in levying up to 15
percent of each contract payment to offset a DOD contractor's federal tax
debt. We estimate that DOD could have collected at least $100 million in
fiscal year 2002 had it and IRS fully utilized the levy process authorized
by the Taxpayer Relief Act of 1997. As of September 2003, DOD had
collected only about $687,000, in part, because DOD provides contractor
payment information from only 1 of its reported more than 20 payment
systems to the Treasury Offset Program (TOP).

IRS's continuing challenges in collecting unpaid federal taxes also
contributed to the problem. In several of our case study contractors, IRS
was not pursuing DOD contractors due to resource and workload management
constraints. For other cases, control breakdowns resulted in IRS freezing
collection activities for reasons that were no longer applicable. For many
of our case study contractors, this resulted in businesses and individuals
continuing to receive federal contract payments without making any
payments on their unpaid federal taxes.

To improve collection of DOD contractor tax debt, we have recommended to
DOD that it immediately provide its contractor payment information to TOP
and to IRS to use the levy program as one of the first steps in the
collection process. Until such time as DOD is able to demonstrate that it
is meeting its responsibilities under DCIA, including providing payment
information to TOP, and to facilitate action by the Department, Congress
may wish to consider requiring that DOD report periodically to Congress on
its progress in implementing DCIA for each of its contract and vendor
payment systems. This report should include details of actual collections
by system and in total for all contract and vendor payment systems during
the reporting period.

We believe that DOD's reporting of its progress in implementing DCIA to
Congress is necessary to facilitate oversight since DOD, until recently,
had taken little action to implement the offset provisions of DCIA since
its passage almost 8 years ago. We believe that Congress may wish to
consider such oversight as the federal government is missing opportunities
to collect hundreds of millions of dollars in unpaid taxes owed by DOD
contractors.

Although CBO agrees that the option may result in savings, it could not
develop a savings estimate for this option.

Related GAO Product

Financial Management: Some DOD Contractors Abuse the Federal Tax System
with Little Consequence. GAO-04-95. Washington, D.C.: February 12, 2004.

GAO Contact

Gregory Kutz, (202) 512-9505

Improve the Administration of Defense Health Care

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 DOD health agency would consolidate the
three military medical systems into one centrally-managed system,
eliminating duplicate administrative, management, and operational
functions. No specific budget estimate can be developed until numerous
variables, such as the extent of consolidation and the impact on command
and support structures, are determined.

Although CBO agreed that improving the administration of DOD health care
had the potential to create savings, it could not develop a savings
estimate without  a specific legislative proposal.

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

Marcia Crosse, (202) 512-7114

Seek Additional Opportunities for VA and DOD to Increase Joint Activities
to Enhance Services to Beneficiaries and Reduce Costs

Together, the Department of Veterans Affairs (VA) and the Department of
Defense (DOD) provide health care services to about 12 million
beneficiaries at a cost of more than $50 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. 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 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
included 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 was not able to determine the budgetary effect of this option.

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

150 International Affairs

Eliminate U.S. Contributions to Administrative Costs in Rogue States
Streamline U.S. Overseas Presence Reduce International Broadcasting
Overlap Reduce or Eliminate Eximbank Subsidies

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

International organizations, such as the U.N. 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 countries falling under section 307, known as rogue states,
have varied over time but have included Burma, Cuba, Iran, Libya, and
Syria. To comply with the legislation, the State Department 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 supports 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.

The State Department has indicated that it would not, as a matter of
policy, withhold U.S. contributions to U.N. organizations for
administrative expenses in these countries. The department believes the
legislative restriction invites politicization and contradicts the
principle of universality for participating in U.N. organizations.

Savings could be achieved if the State Department 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 estimates the following budgetary savings with this option.

Source: Congressional Budget Office.

aLess than $500,000.

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 Contacts

Joseph Christoff, (202) 512-8979 Tet Miyabara, (202) 512-8974

Streamline U.S. Overseas Presence

The U.S. overseas presence consists of more than 90,000 people (including
dependents) at more than 260 overseas posts. The workforce at these posts
has been estimated to comprise as many as 60,000 personnel representing
over 30 U.S. agencies. The State Department employs about a third of the
U.S. overseas workforce, 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 non-foreign affairs agencies.

The costs of overseas operations and related security requirements are
directly linked to the size of the overseas workforce. Reducing the number
of employees at posts where U.S. strategic interests are lower priority,
consolidating functions, establishing regional centers, or relocating
personnel to the United States could significantly reduce the costs of
overseas operations. The average annual cost of stationing an American
(and dependents) overseas varies by location but can amount to several
hundred thousand dollars (not including salary) and has been estimated at
about twice the average cost for Washington-based staff. Reducing the
number of personnel overseas also could substantially enhance the safety
of Americans and other U.S. employees, lower the costly security demands
placed on the State Department, and help control new embassy construction
costs. (The State Department has embarked on a $16 billion program to
build modern, safe, and secure diplomatic facilities.)

In late 1999, the Overseas Presence Advisory Panel concluded that
substantial monetary savings and reductions in security vulnerabilities
could be achieved through streamlining staffing at overseas posts. Because
of the high cost of stationing personnel and their families overseas, The
President's Management Agenda identified rightsizing of embassies and
consulates as a management priority. One administration goal is to develop
accurate staffing projections for new overseas construction. OMB is
leading an interagency effort to develop a cost-sharing mechanism for
funding embassy construction that would provide more discipline for
determining overseas staffing needs and encourage agencies to scrutinize
their overseas staffing more closely.

We have encouraged actions to reevaluate overseas staffing requirements
and levels since the mid-1990s. In 2002, we developed a rightsizing
framework that facilitates basing overseas staffing decisions on a full
consideration of cost, security, and mission factors. In 2003, we reported
that staffing projections for new embassy compounds are developed without
a systematic approach or comprehensive rightsizing analysis. The State
Department gave agencies little guidance on factors to consider in
developing staffing projections, and agencies consequently did not take
consistent or systematic approaches to determining long-term staffing
needs. Limited documentation of embassy staffing projection exercises
further complicated the process. Additionally, the State Department did
not consistently vet overseas posts' staffing projections with agencies'
headquarters.

In 2003, we also reported on the administration's plans for implementing
cost-sharing arrangements, including proposals that would require agencies
to pay rent or a construction surcharge based on their worldwide overseas
staffing levels. The Overseas Presence Advisory Panel had reported that
tenant agencies did not share overseas facility costs, particularly for
capital improvements and maintenance. The panel recommended charging
tenant agencies rent for space in overseas facilities, just as the General
Services Administration would charge agencies for use of domestic office
space. In 2003, we reported that a number of issues needed to be resolved
before effective cost-sharing mechanisms could be implemented, such as how
the mechanism would be structured and how charges would be calculated.
Additionally, we reported that some agencies were reluctant to assume
costs that the State Department had previously paid.

Since our 2003 report, the State Department and OMB have developed a
cost-sharing mechanism. Starting in fiscal year 2005, all agencies with
staff overseas will be required to pay a portion of the cost of State's
embassy construction program. In March 2004, we started a review of the
development and implementation of this new cost-sharing mechanism.

Congress could consider a range of options for streamlining staffing at
overseas posts, such as mandating rightsizing requirements or
across-the-board cuts for overseas staffing. CBO estimates that the
following savings could be achieved for every 1 percent reduction in
overseas staffing.

Source: Congressional Budget Office.

Source: Congressional Budget Office.

Related GAO Products

Overseas Presence: Rightsizing Is Key to Considering Relocation of
Regional Staff to New Frankfurt Center. GAO-03-1061. Washington, D.C.:
September 2, 2003.

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.
GAO-03-557T. Washington, D.C.: March 20, 2003.

Overseas Presence: Framework for Assessing Embassy Staff Levels Can
Support Rightsizing Efforts. GAO-02-780. Washington, D.C.: July 26, 2002.

GAO Contacts

Jess T. Ford, (202) 512-4268 John Brummet, (202) 512-5260

Reduce International Broadcasting Overlap

The Broadcasting Board of Governors oversees 5 broadcast entities that
provide a variety of news and information programming to more than 125
markets worldwide. Each broadcast entity is responsible for a collection
of language services that produce program content.

o The Voice of America provides news and the U.S. position on various
foreign policy matters to a global audience;

o Radio Free Europe/Radio Liberty provides entertainment and regional and
local news to countries in Central, Eastern, and Southeastern Europe;
Russia; the Caucasus; and Central and Southwestern Asia;

o The Middle East Television Network provides entertainment and regional
and local news to countries throughout the Middle East;8 and

o Radio Free Asia and Radio/TV Marti provide regional and local news to
Asia and Cuba, respectively.

In July 2003, we reported that there was about a 55 percent overlap
between the Voice of America and the other broadcast entities9 that was
intended to allow them to achieve their distinct missions by offering

separate program content in the same language.10 This overlap among
language services has been a long-standing issue of concern to the Board
given evolving broadcast priorities and a desire to maximize the use of
limited resources. We recommended that the Board develop a vision of its
target scope-of-operations and more precisely define the appropriate level
of overlap between Voice of America's and other broadcast entities'
language services.

In response to our recommendation, the board conducted a detailed overlap
analysis as part of its 2003 language service review. This analysis
reviewed all overlapping language services in light of several potential
approaches to managing overlap. The Board's 2004 program plan to Congress
proposes the reallocation of $4.9 million in savings generated by this
analysis. The Board plans to conduct this analysis annually to determine
if additional opportunities for savings exist. Although it is difficult to
predict potential future savings, the Board has noted that the Voice of
America's worldwide English broadcasts represent a special case of overlap
that deserves closer scrutiny.11 According to Board records, only a very
small number of individuals listen to the Voice of America's broadcasts
exclusively in English.12 The annual budget for the Voice of America's
worldwide English program is about $14.9 million.

CBO was not able to determine the budgetary effect of reducing
international broadcasting overlap.

Related GAO Products

U.S. International Broadcasting: Challenges Facing the Broadcasting Board
of Governors. GAO-04-627T. Washington, D.C.: April 1, 2004.

U.S. International Broadcasting: Enhanced Measure of Local Media
Conditions Would Facilitate Decisions to Terminate Language Services.
GAO-04-374. Washington, D.C.: February 26, 2004.

U.S. Public Diplomacy: State Department and the Broadcasting Board of
Governors Expand Efforts in the Middle East but Face Significant
Challenges. GAO-04-435T. Washington, D.C.: February 10, 2004.

U.S. International Broadcasting: New Strategic Approach Focuses on
Reaching Large Audiences but Lacks Measurable Program Objectives.
GAO-03-772. Washington, D.C.: July 15, 2003.

U.S. International Broadcasting: Strategic Planning and Performance
Management System Could Be Improved. GAO/NSIAD-00-222. Washington, D.C.:
September 27, 2000.

GAO Contacts

Reduce or Eliminate Eximbank Subsidies

The Export-Import Bank of the United States (Eximbank) is an independent
federal agency that assists in financing the export of U.S. goods and
services to international markets. Eximbank is intended to absorb risks
that the private sector is unable or unwilling to assume and also to help
level the playing field for U.S. exporters by matching the financing that
foreign governments provide to their exporters. Eximbank offers subsidized
direct loans, guarantees of private loans, and export credit insurance;
its congressional mandate is to supplement (but not compete with) private
financing. Eximbank operates under a renewable charter that has been
reauthorized through September 30, 2006.13 The President's fiscal year
2005 budget requests $125.7 million for Eximbank subsidies and an
additional $73.2 million for administrative expenses.14

Eximbank programs require substantial levels of taxpayer support. Our work
has identified two broad options that would allow Eximbank to reduce its
subsidy costs and operate with reduced federal funding while remaining
competitive with foreign export credit agencies. First, Eximbank could
raise its loan risk exposure and insurance fees15 to the mid-range of
those charged by foreign export credit agencies. Currently its fees are as
low as, or lower than, about 75 percent of those charged by other major
export credit agencies. However, Eximbank officials have expressed
concerns that raising fees could affect U.S. export competitiveness and
need to be considered in the broader context of international efforts to
reduce government export finance subsidies. Second, Eximbank could reduce
program risks by capping the maximum allowable subsidies offered, limiting
program availability in high-risk markets, or lowering loan risk
protection.16 Eximbank provides financing in a greater number of high-risk
markets than other major export credit agencies. Although financing
commitments for high-risk markets represent a relatively small share of
Eximbank's total financing commitments-about 15 percent of total
commitments over the period from 1999 to 2003-these markets absorb a
relatively large share of its credit subsidy costs and, under Eximbank's
revised subsidy estimates, the share absorbed by high-risk markets has
increased.17

CBO estimates that providing only short-term coverage in high-risk markets
could produce substantial subsidy savings relative to the President's
request.

Source: Congressional Budget Office.

Another option for achieving savings would be to consider reducing
Eximbank's program budget or eliminating Eximbank altogether.18 In recent
years, there has been considerable debate about whether Eximbank makes a
significant contribution to the U.S. economy by promoting exports and jobs
or unfairly subsidizes large corporations that have adequate access to
private export financing and insurance. Our past work indicates that the
economic benefits of Eximbank's programs are uncertain. However, the
agency's programs may help "level the playing field" for U.S. exporters by
offsetting the subsidies that foreign governments provide to their
exporters.19

CBO estimates that reducing Eximbank's program budget by 5 percent20 or
eliminating Eximbank altogether would result in savings relative to the
President's request.

Source: Congressional Budget Office.

Source: Congressional Budget Office.

Related GAO Products

U.S. Export-Import Bank: Issues Raised by Recent Market Developments and
Foreign Competition. GAO/T-NSIAD-99-23. Washington, D.C.: October 7, 1998.

International Affairs Budget: Framework for Assessing Relevance, Priority,
and Efficiency. GAO/T-NSIAD-98-18. Washington, D.C.: October 30, 1997.

Export-Import Bank: Key Factors in Considering Eximbank Reauthorization.
GAO/T-NSIAD-97-215. Washington, D.C.: July 17, 1997.

Export Finance: Federal Efforts to Support Working Capital Needs of Small
Business. GAO/NSIAD-97-20. Washington, D.C.: February 13, 1997.

Export-Import Bank: Options for Achieving Possible Budget Reductions.
GAO/NSIAD-97-7. Washington, D.C.: December 20, 1996.

Export Finance: Comparative Analysis of U.S. and European Union Export
Credit Agencies. GAO/GGD-96-1. Washington, D.C.: October 24, 1995.

Export Finance: The Role of the U.S. Export-Import Bank. GAO/GGD-93-39.
Washington, D.C.: December 23, 1992.

GAO Contact

Loren Yager, (202) 512-4347

250 General Science, Space, and Technology

Continue Oversight of the International Space Station and Related Support 
    Systems

Continue Oversight of the International Space Station and Related Support
Systems

Since 1990, the National Aeronautics and Space Administration (NASA) has
been on GAO's high-risk list for contract management, in part because the
agency has failed to implement a modern, fully integrated financial
management system. The lack of such a system has hampered NASA's ability
to oversee contracts, control program costs, and ensure an effective human
capital strategy, raising serious concerns about NASA's management of its
largest and most costly programs, including the space shuttle program and
the International Space Station (ISS). Although NASA implemented the Core
Financial module of its Integrated Financial Management Program in June
2003, the agency cannot ensure that the system routinely provides its
program managers with the financial information needed to measure program
performance and ensure accountability.

The importance of resolving this weakness was recently amplified. In
January 2004, President Bush announced a new vision for space exploration
that will provide NASA with increased funding and require the agency to
examine its current space flight and exploration activities and direct
them towards new goals. The President's plan calls for (1) completing
assembly of the ISS by 2010 with its research focused on the long-term
effects of space travel on human biology, and retiring the space shuttle
upon station completion, (2) developing a new multipurpose spacecraft-the
Crew Exploration Vehicle (CEV)-to carry humans into space by 2014, and (3)
returning to the moon by 2020 as a precursor for missions to Mars and
beyond. The plan also calls for the development of enabling technologies,
such as power generation, propulsion, life support, and other systems that
can support more distant travels. The President's estimate for the new
vision is $12 billion over the next five years, $1 billion of which is
additional funding.

The Congress is well aware of the challenges NASA faces in developing,
building, and transporting crew to and from the ISS-challenges that have
in the past resulted in schedule delays and higher program costs. However,
the President's vision offers additional challenges. First, NASA's own
Return to Flight Task Group recently reported that it is too soon to
predict the timing of the next shuttle flight, thus rendering the ISS
completion date uncertain. Second, the CEV is NASA's fourth attempt since
1994 to modernize its human space transportation system. Finally, NASA
will be challenged with effectively managing a larger budget and refocused
programs and contracts. For example, the ISS and shuttle programs must
undergo changes to align with the new vision, while a relatively new
program-the nuclear systems initiative-could provide power generation and
propulsion necessary for journeys to Mars and beyond.

As NASA returns the shuttle fleet to safe flight and refocuses its
programs to implement the President's vision, continued congressional
oversight is critical to ensure that NASA's priorities and supporting
funding are appropriately matched. In addition, continued improvements in
the Agency's financial management infrastructure-people, systems and
processes-must keep pace with anticipated project management challenges.

CBO was not able to determine the budgetary effect of this option.

Related GAO Products

Business Modernization: NASA's Challenges in Managing Its Integrated
Financial Management Program. GAO-04-255. Washington, D.C.: November 21,
2003.

Business Modernization: Disciplined Processes Needed to Better Manage
NASA's Integrated Financial Management Program. GAO-04-118. Washington,
D.C.: November 21, 2003.

NASA: Shuttle Fleet's Safe Return to Flight Is Key to Space Station
Progress. GAO-04-201T. Washington, D.C.: October 29, 2003.

Space Station: Impact of the Grounding of the Shuttle Fleet. GAO-03-1107.
Washington, D.C.: September 12, 2003.

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

Business Modernization: Improvements Needed in Management of NASA's
Integrated Financial Management Program. GAO-03-507. Washington, D.C.:
April 30, 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

Corporatize or Divest Selected Power Marketing Administrations Recover
Power Marketing Administrations' Costs Increase Nuclear Waste Disposal
Fees Recover Federal Investment in Successfully Commercialized
Technologies Improve the Department of Energy's Management of Its Capital
Asset   Acquisition, Weapons Refurbishment, and Site Cleanup Projects
Reduce the Costs of the Rural Utilities Service's Electricity Loan Program

Corporatize or Divest Selected Power Marketing Administrations

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. In addition,
appropriated and other debt that is recoverable through the PMAs' power
sales totaled about $19.5 billion at the end of fiscal year 2002.
Furthermore, our work has demonstrated that the availability of federal
power plants to generate electricity has, in the past, been below that of
nonfederal plants because federal planning and resource allocation
decisions 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 estimates 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.

Dollars in millions                                               
                                    FY05      FY06     FY07     FY08     FY09 
Discretionary spending      
Budget authority                    0         0        0      233      241 
Outlays                             0         0        0      230      237 

Source: Congressional Budget Office.

Note: Figures are based on the most recent audited statements of assets
and liabilities.

Source: Congressional Budget Office.

Note: Figures are based on the most recent audited statements of assets
and liabilities. The receipt in 2007 would be an inflow of cash to the
government from the sale of PMA assets. The loss of receipts after that
would be from the loss of the stream of annual receipts received from the
sale of electricity.

Related GAO Products

Bonneville Power Administration: Long-Term Fiscal Challenges. GAO-03-918R.
Washington, D.C.: July 1, 2003.

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/RCED-99-15.
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

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.21 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.

In part because the PMAs sell power generated almost exclusively from
hydropower and are not required to earn a profit or pay taxes, they are
generally able to sell power more cheaply than other providers. 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 $19.5 billion at the end of fiscal year 2002. This option
would likely also lead to more efficient management of the taxpayers'
assets.

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.

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/RCED-99-15.
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

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. The Nuclear Waste Policy Act
requires DOE to annually assess the adequacy of the fee. Despite this
requirement, DOE has not reported on the fee adequacy since May 2001.
Accordingly, utilities continue to pay a fee of 0.1 cent per
kilowatt-hour, without any adjustment for inflation. To help ensure that
sufficient revenues are collected to cover increases in cost estimates
caused by price inflation, we recommend that the Congress 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.

Source: Congressional Budget Office.

Note: Since this is a mandatory account, the increase in receipts is a
negative number. However, the proposal would end up bringing in more
receipts to the Treasury.

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 Robin Nazzaro, (202) 512-3841

Recover Federal Investment in Successfully Commercialized Technologies

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. We 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. However, we found that DOE
generally has not required repayment of its investment in technologies
that are successfully commercialized. 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 currently exist for substantial repayment in some of
DOE's programs, one option for the Congress is to require repayment under
a flexible policy that would allow the government to share in the benefits
of successfully commercialized technologies, which could result in
significant cost savings. However, repayment provisions would only apply
to future technology development projects not yet negotiated with
industry.

CBO agrees that the option may result in savings, but it could not develop
a savings estimate.

Related GAO Products

Fossil Fuel R&D: Lessons Learned in the Clean Coal Technology Program.
GAO-01-854T. Washington, D.C.: June 12, 2001.

Clean Coal Technology: Status of Projects and Sales of Demonstrated
Technology. GAO/RCED-00-86R. Washington, D.C.: March 9, 2000.

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

Improve the Department of Energy's Management of Its Capital Asset
Acquisition, Weapons Refurbishment, and Site Cleanup Projects

As of January 2002, the Department of Energy (DOE) had at least 42 ongoing
projects estimated to cost more than $100 million at its national
laboratories, weapons production facilities, and other locations. These
projects included the construction of new specialized facilities, such as
the National Ignition Facility at Lawrence Livermore National Laboratory;
the refurbishment of nuclear weapons; and the cleanup of nuclear waste at
active and closed DOE facilities. Our September 2002 review of 16 major
DOE projects found no indication that DOE or its contractors had improved
their management performance as compared with our 1996 assessment of
management performance. Specifically, we found that the estimated cost of
6 of the 16 projects was more than double DOE's initial estimate and that
6 projects had experienced schedule delays of 5 years or more.

DOE has taken several steps to improve the way its major projects are
managed. For example, in 2000 DOE issued new policy, order, and guidance
on managing and controlling projects, including enhancing the project
management skills within the department. The DOE Order requires detailed
project reviews by senior managers at five different decision points
during the project. In addition, DOE's Office of Engineering and
Construction Management set a goal for 2002 that 85 percent of the
projects it tracks (projects costing more than $5 million) will have less
than a 10-percent variance in cost and schedule. For 2004, the office's
goal is that 90 percent of the projects it tracks will have less than a
10-percent variance in cost and schedule.

Even with these project management requirements and controls in place,
performance problems continue. One reason for continuing problems is that
DOE is not consistently applying the requirements and controls to all of
its acquisition, refurbishment, and cleanup projects. For example, some
projects in DOE's Office of Science and its National Nuclear Security
Administration (NNSA) have avoided project validation and other
requirements. As a result, the cost and schedule estimates may not be
reliable and the projects may have a greater likelihood to cost more and
take longer to complete than DOE had estimated.

One option available to the Congress to help minimize cost and schedule
increases on DOE projects is to require that all DOE projects costing more
than $5 million, regardless of the responsible DOE program office, (1)
follow the requirements in DOE's project management order and (2) be
validated and approved by DOE's Office of Engineering and Construction
Management-or a similar office within NNSA for nuclear weapons
refurbishment-before construction funding is requested in DOE's budget
submission to Congress.

CBO was not able to determine the budgetary effect of this option.

Related GAO Products

Nuclear Weapons: Opportunities Exist to Improve the Budgeting, Cost
Accounting, and Management Associated with the Stockpile Life Extension
Program. GAO-03-583. Washington, D.C.: July 28, 2003.

Nuclear Waste: Challenges to Achieving Potential Savings in DOE's
High-Level Waste Cleanup Program. GAO-03-593. Washington, D.C.: June 17,
2003.

Department of Energy: Status of Contract and Project Management Reform.
GAO-03-570T. Washington, D.C.: March 20, 2003.

Contract Reform: DOE Has Made Progress, but Actions Needed to Ensure
Initiatives Have Improved Results. GAO-02-798. Washington, D.C.: September
13, 2002.

Nuclear Waste: Technical, Schedule, and Cost Uncertainties of the Yucca
Mountain Repository Project. GAO-02-191. Washington, D.C.: December 21,
2001.

National Ignition Facility: Management and Oversight Failures Caused Major
Cost Overruns and Schedule Delays. GAO/RCED-00-271. Washington, D.C.:
August 8, 2000.

Nuclear Waste Cleanup: DOE's Paducah Plan Faces Uncertainties and Excludes
Costly Cleanup Activities. GAO/RCED-00-96. Washington, D.C.: April 28,
2000.

Department of Energy: Opportunity to Improve Management of Major System
Acquisitions. GAO/RCED-97-17. Washington, D.C.: November 26, 1996.

GAO Contacts

Bob Robinson, (202) 512-3841 Robin Nazzaro, (202) 512-3841

Reduce the Costs of the Rural Utilities Service's Electricity Loan Program

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 2003
of Rural Development (the U.S. Department of Agriculture agency
responsible for administering RUS), RUS loans receivable totaled about
$40.1 billion as of September 30, 2003. From a financial standpoint, RUS
has successfully operated the telecommunications loan program, but the
agency 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.

The Congress may need to consider options to reduce RUS's vulnerability to
losses in its electricity program such as (1) establishing loan and
indebtedness limits, (2) setting the loan repayment guarantee at a level
below 100 percent, and (3) prohibiting loans to delinquent borrowers or to
borrowers who have caused the agency to incur loan losses.

CBO agrees that the option would result in savings, but it could not
develop a savings estimate.

Related GAO Products

Financial Management: Impact of RUS' Electricity Loan Restructurings.
GAO/AIMD-00-288. Washington, D.C.: September 29, 2000.

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 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

Terminate Land-Exchange Programs

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, problems still exist given the inherent difficulties and
inefficiencies in exchange programs in general. On the basis of these
difficulties and inefficiencies, the Congress may wish to consider
directing both agencies to terminate their land-exchange programs.

CBO could not develop a savings estimate for this option.

Related GAO Products

National Park Service: Federal Taxpayers Could Have Benefited More From
Potomac Yard Land Exchange. GAO-01-292. 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

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 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 continues to be a problem in many fisheries, several additional
buybacks have been proposed and authorized since we last reported on this
issue in June 2000.

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 over-fishing-one option the Congress may wish to consider is
limiting additional funding for proposed programs until these fundamental
weaknesses are resolved.

CBO agrees that the option may result in savings, but it could not develop
a savings estimate for this option.

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

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.

Since we issued our report in 2001, one option that remains available is
to require the payment of fair market value for a patent, or otherwise
modify the requirements for patenting. Without a specific definition of
fair market value or other specific proposals to reform the patenting
system, CBO cannot estimate savings from this option.

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 estimates below that a 5 percent royalty could increase gross
receipts, but the estimates do not account for subsequent receipt-sharing,
if any, with states.

Source: Congressional Budget Office.

Note: Estimates do not account for subsequent receipt-sharing, if any,
with states.

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
Mineral-Producing 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

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.
Although we first raised this issue in 1990, these options remain valid.

The Congress could, for example, consider collecting the full costs of
federal water for large farms. The Reclamation Reform Act of 1982 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, the act does not prohibit multiple landholdings from being
operated collectively as one farm while individually qualifying for
federally subsidized water. Some farmers have reorganized large farming
operations into multiple, smaller land holdings to be eligible to receive
federally subsidized irrigation water. As a result, the flow of federally
subsidized water to large farms has not been stopped, and the government
is not receiving the revenues to which it would have been entitled if the
multiple landholdings were considered collectively as one farm subject to
the act's 960 acre limit.

Another option would be for the Congress to consider restructuring the
subsidies for crops produced with federally subsidized water. According to
the Department of the 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.

CBO was not able to develop a savings estimate without a specific
proposal.

Related GAO Products

Freshwater Supply: States' View of How Federal Agencies Could Help Them
Meet the Challenges of Expected Shortages. GAO-03-514. Washington, D.C.:
July 9, 2003.

Bureau of Reclamation: Water Marketing Activities and Costs at the Central
Valley Project. GAO-01-553. Washington, D.C.: March 4, 2001.

Bureau of Reclamation: Information on Operations and Maintenance
Activities and Costs at Multipurpose Water Projects. GAO/AIMD-00-127.
Washington, D.C.: May 31, 2000.

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 Lawrence J. Dyckman, (202) 512-9692

Reassess Federal Land Management Agencies' Functions and Programs

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 constraints
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.

CBO could not develop a savings estimate for this option.

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

Eliminate or Reduce the Agriculture Department'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 Eliminate Public Law 480 Title I Food Aid Program Reduce or
Eliminate the Export Credit Guarantee Program

Eliminate or Reduce the Agriculture Department's Market Access Program

The Market Access Program is an export promotion program operated by the
Department of Agriculture's Foreign Agricultural Service. 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. About three-quarters of
the program budget supports generic promotions, with the remaining funds
supporting brand-name promotions. Under the Farm Security and Rural
Development Act of 2002, authorized funding for the program has increased
from $110 million in fiscal year 2003 to $125 million in fiscal year 2004,
$140 million in fiscal year 2005, and rising to $200 million in fiscal
years 2006 and 2007.

Beginning in fiscal year 1993, the Congress directed that the program to
increase its 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 brand-name
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 OMB benefit-cost guidelines. In
addition, the evidence from market-level studies is inconclusive regarding
program impact on specific commodities in specific markets. Moreover, it
is difficult to ensure that funds for promotional activities supplement
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
benefit-cost guidelines, and evaluates the additional spending of
participants and additional exports resulting from the program. As of
2003, the Foreign Agricultural Service had not completed this report.
CBO's budget options reports in recent years have included an option to
eliminate the Market Access Program.22 Congress might choose to terminate
the program or significantly reduce its funding 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
(rather than supplants) private sector expenditures.

CBO estimates the following budgetary savings with this option.

Source: Congressional Budget Office.

Related GAO Products

Agricultural Trade: Changes Made to Market Access Program, but Questions
Remain on Economic Impact. GAO/NSIAD-99-38. 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

Loren Yager, (202) 512-4347 Phil Thomas, (202) 512-9892

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

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 currently 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 not all service center employees have 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 still 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. While it has been a few years since we
last reported on this issue, the situation has not materially changed.

CBO agreed that this option would result in budgetary savings, but it
could not develop a savings estimate.

Related GAO Products

Major Management Challenges and Program Risks: Department of Agriculture.
GAO-03-96. 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

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
approximately 100,000 employees are involved in delivering the nearly $25
billion a year farm and rural programs. 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-Farm Service
Agency, Natural Resources Conservation Service, and Rural Development-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 this 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.
USDA's county offices are managed through a state office structure that
could also be streamlined. Currently, USDA maintains a state office for
each of its three service center agencies in each of the 50 states. As
with the county offices, as the client base for USDA's programs change and
as technology offers opportunities for program delivery efficiencies, USDA
could consolidate some state offices to a regional or national level.

CBO agreed that this option would result in budgetary savings, but it
could not develop a savings estimate.

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

Eliminate the Public Law 480 Title I Food Aid Program

Over the past 50 years, the United States has allocated billions of
dollars in food assistance under Title I of the 1954 Agricultural Trade
Development and Assistance Act, commonly known as P.L. 480.23 Under the
Title I program, administered by the Department of Agriculture (USDA),
U.S. agricultural commodities are sold to eligible countries under
concessional terms.24 In support of broad U.S. foreign policy goals, the
program's objectives are to enhance food security, promote broad-based
sustainable development, develop and expand markets for U.S. agricultural
commodities, and prevent conflict. However, the Title I program does not
effectively further these goals.

First, there is little evidence that the Title I program has promoted
broad-based sustainable development. In 1995, we reported that the primary
means by which Title I assistance could contribute to broad-based
sustainable development would be by helping recipient countries save
foreign exchange when importing U.S. agricultural commodities; the savings
could be invested in projects that promote long-term economic development.
However, we found that the value of foreign exchange that countries might
save through purchasing Title I commodities on concessional terms is small
relative to their development needs. Also, the program provides USDA with
little leverage to influence development activities or initiate policy
reforms in recipient countries, and competing objectives dilute whatever
leverage might be associated with the program.

Second, there is little evidence that the Title I program has contributed
to the long-term, foreign market development for U.S. agricultural goods.
None of the many studies of the Title I program that we reviewed
established a link between Title I assistance and the establishment of a
long-term commercial market for U.S. agricultural products. Title I
commodities tend to be price sensitive, making it difficult to transform
the concessional market share established through the Title I program into
commercial market share.

Moreover, we found that legislative requirements impose constraints on
recipient countries that undermine market development efforts. For
example, "cargo preference" provisions require that 75 percent of food aid
tonnage be shipped on U.S.-flagged ships. As a result, some recipient
countries were forced to purchase different commodities than planned based
on the availability of U.S.-flagged ships rather than the availability of
U.S. commodities. Other program requirements severely restrict recipients'
ability to reexport Title I commodities after processing, which
discouraged potential importers from participating and eliminated an
important source of foreign exchange earnings for recipient countries.

Since the 1980s, the Title I program has accounted for a declining share
of total U.S. food assistance. Title I accounted for about 52 percent of
the $15.8 billion in food assistance provided between fiscal years 1980
and 1989 but only about 11 percent of the $9.2 billion in food assistance
provided between fiscal years 2000 and 2004. This decline reflects a
growing need and priority for humanitarian food assistance provided under
other programs (primarily Title II) and concerns about the Title I
program's effectiveness.

In 2001, The President's Management Agenda identified U.S. food aid
programs (including Title I) as 1 of 14 government areas most in need of
reform and characterized these programs as duplicative, wasteful, and
inefficient. The agenda commented on the fact that six different food aid
programs are administered by two government agencies with similar
bureaucracies (USDA and the U.S. Agency for International Development).
The agenda called for more direct feeding of hungry populations as a
primary goal; better analysis of benefits, costs, and performance to
determine priorities; minimizing bureaucratic duplication and
inefficiency; and greater efficiency and transparency in program
management and implementation.

OMB's fiscal year 2004 Program Assessment Rating Tool rated USDA's food
aid programs25 as "results not demonstrated." OMB's assessment concluded
that these programs were not optimally designed, lacked performance
measures linked to strategic goals and the budget, and did not collect
annual performance data or make such data available to the public in a
transparent and meaningful manner. Additionally, OMB's assessment
identified the need for better coordination between USDA and the U.S.
Agency for International Development, but concluded that meaningful steps
to address this and other strategic planning deficiencies had not been
taken.

In summary, there is little evidence that the Title I program has promoted
economic development or contributed to developing long-term foreign
markets for U.S. agricultural goods. Moreover, multiple and sometimes
competing objectives, as well as contradictory program requirements,
encumber the program, making it difficult to create and implement an
effective program strategy. Furthermore, the trend in U.S. food aid
reflects a growing need and priority for humanitarian food assistance
provided under other programs. Thus, one option that Congress may wish to
consider is the elimination of the Title I program.

CBO estimates that eliminating the Title I program would produce savings.

Source: Congressional Budget Office.

Related GAO Products

Food Aid: Experience of U.S. Programs Suggests Opportunities for
Improvement. GAO-02-801T. Washington, D.C.: June 4, 2002.

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.

Food Aid: Competing Goals and Requirements Hinder Title I Program Results.
GAO/GGD-95-68. Washington, D.C.: June 26, 1995.

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.

Public Law 480 Title I: Economic and Market Development Objectives Not
Met. GAO/T-GGD-94-191. Washington, D.C.: August 3, 1994.

GAO Contacts

Loren Yager, (202) 512-4347 Phil Thomas, (202) 512-9892

Reduce or Eliminate the Export Credit Guarantee Programs

Export credit guarantee programs are intended to promote the export of
U.S. agricultural products by facilitating access to export credit for
countries that lack adequate commercial credit. These programs encourage
U.S. lenders to extend credit to approved foreign banks financing imports
of U.S. agricultural products. Under these programs, the Department of
Agriculture (USDA) provides a guarantee to U.S. banks willing to finance
such transactions for exporters shipping U.S. products to foreign
importers in eligible countries. The Export Credit Guarantee Program
covers loans up to 3 years, while the Intermediate Export Credit Guarantee
Program covers loans up to 10 years.26 Through 2007, USDA is authorized to
make a total of $5.5 billion in government loan guarantees available each
year to finance imports of U.S. agricultural commodities, plus an
additional $1 billion for "emerging markets"-countries that are in the
process of becoming commercial markets for U.S. agricultural products.27
The actual level of credit guarantees depends on market conditions and the
demand for financing by eligible (i.e., creditworthy) countries.

Since the export credit guarantee programs began in the 1980s, the U.S.
government has paid billions in claims because foreign country buyers
rescheduled or defaulted on their loan repayments.28 USDA reports that, as
of February 2004, the government had paid claims totaling about $8.9
billion against issued guarantees of about $77.6 billion.29 In 1997, we
reported that the programs had incurred high claims costs because USDA
provided a large amount of loan guarantees to high-risk countries (such as
Iraq and the former Soviet Union) for market development reasons and
foreign policy considerations. According to USDA officials, claims have
been lower in recent years because fewer guarantees have been issued for
exports to high-risk countries.30 USDA reports that activity in fiscal
year 2003 for both export credit programs totaled $2.55 billion. The major
recipient countries were Turkey ($532 million), South Korea ($372
million), and Mexico ($177 million). Guarantees have helped facilitate
sales of a broad range of commodities but, according to CRS, have mainly
benefited exports of wheat, wheat flour, oil seeds, feed grains, and
cotton.31

Proponents of the export credit guarantee (and other export assistance)
programs, including USDA and some industry groups, maintain that these
programs benefit the overall U.S. economy, benefit the U.S. agricultural
sector, counter competitor nations' agricultural export programs, and
promote U.S. trade negotiating objectives. However, we reported in 1997
that there is limited evidence that these programs have (1) measurably
expanded aggregate employment and output, (2) reduced trade and budget
deficits, or (3) provided income and employment benefits in the U.S.
agricultural sector. These programs largely reallocate production,
employment, and income between sectors or targeted markets. Regarding
competitor nations' programs, we reported that that lack of openness in
other nations' agricultural assistance efforts makes it difficult to
determine conclusively how effectively U.S. export programs counter these
foreign practices. Additionally, several economic studies indicated that
foreign competitors find U.S. export subsidies relatively inexpensive to
offset.

Concerning U.S. trade negotiating objectives, we reported in 1997 that
there are widely divergent views about the amount of leverage these
programs have provided in the past. Although USDA views the credit
guarantee programs as commercial programs, the European Union and other
trading partners charge that these programs have a subsidy element that
gives the United States an unfair competitive advantage. In September
1999, U.S. negotiators presented a comprehensive proposal for significant
disciplines on the use of agriculture export credit programs to the
Organization for Economic Cooperation and Development. Many in the U.S.
agricultural community have expressed concern that these programs-which
they regard as effective tools for expanding agricultural exports-not be
adversely affected by trade negotiations. The Trade Act of 2002 (P.L.
107-210) makes preservation of export credit programs a principal U.S.
negotiating objective for the current round of multilateral trade
negotiations. Nevertheless, CRS reports that U.S. officials have indicated
a willingness to discuss new disciplines on export credit programs. These
new disciplines would mainly focus on limiting the repayment period of the
credit programs.

Congress may wish to consider reducing these programs' costs. One option
would be to reduce credit guarantees to high-risk countries, which would
lessen the potential for additional program costs due to defaults. A
second option would be to reduce USDA's annual program budget for credit
guarantees, allowing USDA to determine where to make reductions. A third
option would be to eliminate one or both of the programs.

Although CBO agreed that these options could result in budgetary savings,
it could not develop savings estimates.

Related GAO Products

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.

Former Soviet Union: Creditworthiness of Successor States and U.S. Export
Credit Guarantees. GAO/GGD-95-60. Washington, D.C.: February 24, 1995.

GSM Export Credit Guarantees. GAO/GGD-94-211R. Washington, D.C.: September
29, 1994.

U.S. Department of Agriculture: Issues Related to the Export Credit
Guarantee Programs. GAO/T-GGD-93-28. Washington, D.C.: May 6, 1993.

Loan Guarantees: Export Credit Guarantee Programs' Costs Are High.
GAO/GGD-93-45. Washington, D.C.: December 22, 1992.

International Trade: Iraq's Participation in U.S. Agricultural Export
Programs. GAO/NSIAD-91-76. Washington, D.C.: November 14, 1990.

GAO Contacts

Loren Yager, (202) 512-4347 Phil Thomas, (202) 512-9892

370 Commerce and 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 Eliminate NIST's
Advanced Technology Program

Recapture Interest on Rural Housing Loans

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 estimates the following budgetary savings with this option.

Source: Congressional Budget Office.

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

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
government-sponsored 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 estimates the following budgetary savings with this option.

Source: Congressional Budget Office.

Related GAO Products

Housing Enterprises: The Roles of Fannie Mae and Freddie Mac in the U.S.
Housing Finance System. GAO/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

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.

CBO could not provide an estimate for this option.

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 Department of Agriculture and Department of Housing and Urban
Development Single-Family Insured Lending Programs and Multifamily
Portfolio Management Programs

The Department of Agriculture (USDA), primarily through its Rural Housing
Service (RHS), has jurisdiction over most federal rural housing programs.
The Department of Housing and Urban Development (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.

Although CBO agrees that the option may result in savings, it could not
develop a savings estimate for this option.

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

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
long-term 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 2001, the targeted programs were funded at roughly $1.7 billion.

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.

CBO was not able to estimate the budget savings for this option.

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-RCED-00-187.
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

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. In October 2003, GAO reported that SBA had
made some progress in implementing the first phase of its transformation
but that further progress could be hampered by budget staff realignment
challenges. 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

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

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

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

Related GAO Products

Small Business Administration: Progress Made, but Transformation Could
Benefit from Practices Emphasizing Transparency and Communication.
GAO-04-76. Washington, D.C.: October 31, 2003.

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

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 in recent 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, including
ranking SBA lenders based on their projected financial risk to the agency.
However, SBA has yet to fully develop and implement effective oversight
programs that assess lenders' decisions on borrowers' creditworthiness and
eligibility.

To improve its reviews of preferred lenders, SBA should develop specific
criteria to apply to the "credit elsewhere" standard,32 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.

CBO could not estimate the budget savings for this option.

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

Eliminate NIST's Advanced Technology Program

The Advanced Technology Program, administered by the National Institute of
Standards and Technology (NIST), was established in 1988 to improve the
competitive position of U.S. businesses by supporting private industry
research that accelerates the development of high-risk technologies with
potential for broad-based economic benefits for the nation. The Advanced
Technology Program is designed to fund research that businesses alone
would not fund. While NIST has reported successes, NIST cannot ensure that
the business or a competitor would not conduct this research in the same
time period without government assistance. For example, our April 2000
retrospective look at three Advanced Technology Program research projects
found that their goals were similar to research goals already being funded
by the private sector.

In 2004, U.S. businesses are in a markedly improved competitive position
compared with Japanese and other foreign businesses competing in the
global economy. In addition, NIST cannot ensure that Advanced Technology
Program funding is critical for the timely development of generic
technologies that may be vital to the U.S. and global economies. For these
reasons, one option for the Congress is to terminate the Advanced
Technology Program.

CBO estimates the following budgetary savings with this option.

Dollars in millions                                                 
                                            FY05    FY06   FY07   FY08   FY09 
Change from the 2004 funding level    
Budget authority                          172     174    178    181    186 
Outlays                                   173     171    173    176    180 

Source: Congressional Budget Office.

Related GAO Products

Advanced Technology Program: Inherent Factors in Selection Process Could
Limit Identification of Similar Research. GAO/RCED-00-114. Washington,
D.C.: April 24, 2000.

Federal Research: Information on the Advanced Technology Program's Award
Selection. GAO/RCED-99-258R. Washington, D.C.: August 3, 1999.

Federal Research: Information on the Advanced Technology Program's 1997
Award Selection. GAO/RCED-98-82R. Washington, D.C.: February 24, 1998.

National Institute of Standard and Technology: Carryover Balances for
Fiscal Year 1997. GAO/RCED-97-144R. Washington, D.C.: April 30, 1997.

R&D Funding Sources for ATP Applicants. GAO/RCED/OCE-96-258R. Washington,
D.C.: September 20, 1996.

Measuring Performance: The Advanced Technology Program and Private-Sector
Funding. GAO/RCED-96-47. Washington, D.C.: January 11, 1996.

Federal Research: Advanced Technology Program's Indirect Cost Rates and
Program Evaluation Status. GAO/RCED-93-221. Washington, D.C.: September
10, 1993.

GAO Contacts

Bob Robinson, (202) 512-3841 Robin Nazzaro, (202) 512-3841

400 Transportation

Make Further Appropriations on the Pulsed Fast Neutron Analysis  
Inspection System Dependent on Results of Operational Testing Close,
Consolidate, or Privatize Some Coast Guard Operating and Training  
Facilities Convert Some Support Officer Positions to Civilian Status
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 Improve the Coordination of Transportation
Services for Transportation-  Disadvantaged Populations

Make Further Appropriations on the Pulsed Fast Neutron Analysis Inspection
System Dependent on Results of Operational Testing

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.
Four government agencies-the Transportation Security Administration (TSA),
Bureau of Customs and Border Protection (CBP), Department of Defense
(DOD), and Federal Aviation Administration (FAA)-are currently involved in
two separate joint efforts to test and demonstrate PFNA's capabilities at
ports of entry. As we reported initially in 1999 and in subsequent budget
options reports for Congress, the agencies involved in developing PFNA
believed that PFNA was too expensive33 and too large for operational use
in most ports of entry or other sites. TSA continues to believe that PFNA
will not meet its operational requirements for maritime and land
applications. While CBP also believes PFNA will not be able to meet its
operational requirements, it also believes PFNA shows enough promise to
continue with the operational test. DOD now prefers not to express an
opinion on whether PFNA would satisfy its requirements or be too expensive
until after operational testing and a cost benefit analysis are completed.

The first PFNA effort,34 is a DOD-led joint operational evaluation with
CBP and TSA at the Ysleta border crossing in El Paso, Texas. This
operational evaluation will test PFNA's ability to detect drugs,
explosives, chemical warfare agents, currency, and nuclear materials. It
is currently scheduled for completion in October 200435 with a final
report due in December 2004, and a cost benefit analysis scheduled for
completion in March 2005. It is estimated to cost $17.8 million36 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 $17.8 million
total consists of $6.7 million from DOD, $4.8 million from TSA, and $6.3
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.

The second PFNA effort,37 is a demonstration at the George Bush
Intercontinental Airport in Houston, Texas. TSA is currently in
discussions with FAA and Ancore's parent company, OSI Systems, Inc., to
conduct a joint demonstration. A total of $8 million in government funds
has thus far been allocated for the demonstration-$4 million each from TSA
and FAA with an additional $4 million to be provided by OSI Systems. TSA
began the discussions in February 2004 and could not provide additional
information at this time. TSA also stated that this demonstration is
unrelated to a previous cooperative agreement it had made with Ancore to
test PFNA in a laboratory for aviation applications, which could have led
to an operational test at an airport, as we reported last year. TSA stated
that it discontinued funding the cooperative agreement before systems
development was completed.

One option is for the Congress to make further appropriations dependent
upon a careful evaluation of the results of both the Ysleta land border
crossing operational test and the Bush Intercontinental Airport
demonstration.

CBO said that it could not estimate the savings from this option, since it
is subject to appropriation, which could be higher or lower, depending on
the results of the evaluation.

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

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

The Coast Guard could achieve budget savings by downsizing its facilities.
One such facility is the Curtis Bay facility, which the Coast Guard
abandoned plans to close 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. A
second group of facilities includes over 20 small boat stations, which in
fiscal year 1996, GAO testified that if closed or consolidated, could save
the Coast Guard $6 million. Third, GAO recommended in 1996 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 year 1995, GAO recommended that
the Coast Guard close one of its large training centers in Petaluma,
Calif.-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, Calif.,
would help the Coast Guard to achieve these required savings.

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/RCED-97-110. 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

Margaret Wrightson, (415) 904-2200

Convert Some Support Officer Positions to Civilian Status

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.

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

Margaret Wrightson, (415) 904-2200

Develop a Passenger Intercity Rail Policy to Meet National Goals

The National Railroad Passenger Corporation (Amtrak) operates the nation's
intercity passenger rail service. As a private corporation, it operates
trains in 46 states, and, in fiscal year 2002, served 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 has proposed a
fundamental restructuring of intercity passenger rail in the U.S. The
administration's proposal would transition the responsibility for Amtrak
operations to the states. The federal government would support capital
costs. States and multi-state compacts would decide the type and amount of
passenger rail service to be provided, and states would select operators
for passenger trains based on competition. Various members of Congress
have also proposed other legislative visions for intercity passenger rail.

One option for the Congress is to develop a passenger intercity rail
policy to meet national goals, based on an evaluation framework. In
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 was not able to estimate the budgetary savings of this option.

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

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. Our work showed that four federal
agencies-the Departments of Defense, Agriculture, Energy, and the Agency
for International Development-were responsible for almost all of the
government cargo subject to cargo preference laws and that these laws
increased these agencies' transportation costs substantially. In recent
years, the Office of Management and Budget's Program Assessment Rating
Tool summaries have stated that the Public Law 480 Title II food aid
program would be more cost effective if these laws were eliminated,
because they increase delivery cost and time.

CBO estimates the following budget savings if cargo preference laws were
eliminated.

Source: Congressional Budget Office.

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 Contacts

Loren Yager, (202) 512-4347 Phil Thomas, (202) 512-9892

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

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 2003, 334,594 aircraft were registered in the
United States. In fiscal year 2003, 61,074 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.

CBO estimates additional revenue could be achieved if the FAA recovers the
full cost of processing aircraft registration applications.

Source: Congressional Budget Office.

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

Improve the Coordination of Transportation Services for
Transportation-Disadvantaged Populations

The ability to access personal or public transportation is fundamental for
people to connect with employment opportunities, health and medical
services, educational services, and the community at large. However,
transportation-disadvantaged persons-those who may have an age-related
condition, a disability, or income constraints-lack the ability to provide
their own transportation or have difficulty accessing whatever
conventional public transportation may be available. This is a sizeable
group; according to the 2000 U.S. Census, 35.1 million people were over
the age of 65, 44.5 million were over age 21 and disabled, and 33.9
million people were living below the poverty line.

Providing transportation services to these populations and coordinating
them across program lines are becoming more critical issues as the
transportation-disadvantaged populations grow and financial constraints on
the federal government and other government levels increase. With these
trends, it will become more important to maximize efficiency wherever
possible to avoid having to reduce services. The coordination of
transportation services-through pooling resources, consolidating
transportation services under a single state or local agency, or sharing
information about available services-has been found to improve the
cost-effectiveness and quality of service. At the state and local levels,
some agencies have realized substantial benefits by coordinating their
transportation services while others that do not coordinate have
experienced overlapping, fragmented, or confusing services. In locations
where coordination among programs has occurred, agencies and users are
realizing significant benefits such as improved customer service. In areas
without coordination, local officials reported some examples of (1)
overlapping services, such as the transportation provider who often runs
two vehicles on the same route at nearly the same time to accommodate
different paperwork requirements; (2) fragmented services, when
transportation services by different counties or programs do not connect
and riders have difficulty scheduling complete trips; and (3) confusion,
when both providers and users are overwhelmed by the sheer number of
programs and their different requirements.

Although decision makers face numerous obstacles in trying to coordinate
transportation services for the transportation-disadvantaged, GAO
identified several options to mitigate the obstacles and improve
coordination among federal, state, and local agencies. We grouped the
obstacles into three categories: (1) reluctance to share vehicles and fund
coordination activities due to concerns about possible adverse effects on
clients; (2) different eligibility requirements, safety standards, and
other programmatic requirements that can limit programs' ability to share
transportation resources; and (3) lack of leadership and commitment to
coordinate, as evidenced by the limited guidance and information provided
by federal and state agencies on the possible techniques for coordinating
services. The options for addressing these obstacles include:

o Harmonizing program standards among federal programs so that programs
can serve additional populations or better share transportation resources,
e.g., providing more flexible regulatory language that would allow
providers to serve additional client groups, developing consistent cost
accounting methods, and adopting common safety standards.

o Expanding interagency forums that would facilitate communication among
agencies involved in coordination efforts and sharing additional technical
guidance and information on coordination among federal and state agencies
through a central clearinghouse or improved Web site.

o Providing financial incentives or mandates that would give priority in
federal funding to those grant applicants that show a strong commitment to
coordinate or requiring specific coordination efforts among grant
recipients as a condition of receiving federal funding.

CBO could not estimate a budget savings for this option.

Related GAO Products

Transportation-Disadvantaged Populations: Some Coordination Efforts Among
Programs Providing Transportation Services, but Obstacles Persist.
GAO-03-697. Washington, D.C.: June 30, 2003.

Transportation-Disadvantaged Populations: Many Federal Programs Fund
Transportation Services, but Obstacles to Coordination Persist.
GAO-03-698T. Washington, D.C.: May 1, 2003.

Transportation Coordination: Benefits and Barriers Exist, and Planning
Efforts Progress Slowly. GAO/RCED-00-1. Washington, D.C.: October 22,
1999.

Hindrances to Coordinating Transportation of People Participating in
Federally Funded Grant Programs: Volume I. GAO/RCED-77-119. Washington,
D.C.: October 17, 1977.

GAO Contact

Kate Siggerud, (202) 512-6570

450 Community and Regional Development

Eliminate the Flood Insurance Subsidy on Properties That Suffer the  
Greatest Flood Loss Eliminate Flood Insurance for Certain Repeatedly
Flooded Properties Reduce or Eliminate the Trade Adjustment Assistance
Program for Firms   and Industries Improve Federal Foreclosure and
Property Sales Processes

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

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 low-interest loans from the Small Business Administration
or grants from Federal Emergency Management Agency (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 estimates the following budgetary savings with this option.

Source: Congressional Budget Office.

Related GAO Products

National Flood Insurance Program: Actions to Address Repetitive Loss
Properties. GAO-04-401T. Washington, D.C.: March 25, 2004.

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

William Jenkins, Jr., (202) 512-8757

Eliminate Flood Insurance for Certain Repeatedly Flooded Properties

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 estimates the following budgetary savings with this option.

Source: Congressional Budget Office.

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

William Jenkins, Jr., (202) 512-8757

Reduce or Eliminate the Trade Adjustment Assistance Program for Firms and
Industries

The Trade Adjustment Assistance Program for Firms and Industries is
designed to assist domestic firms that have been adversely affected by
imports. The Department of Commerce's Economic Development Administration
(EDA) administers the program. EDA is responsible for certifying firms'
eligibility to receive assistance and approving the certified firms'
business plans for economic recovery. Twelve regional centers help firms
prepare petitions for certification, assess their economic viability,
develop business recovery plans, and fund and oversee consultants' efforts
to implement the business recovery plans. In 2002, Congress extended the
Trade Adjustment Assistance Program through fiscal year 2007 at an
authorized annual funding level of $16 million. The President's fiscal
year 2003 budget request was for $13 million.

Between fiscal years 1995 and 1999, EDA annually certified an average of
157 firms as eligible for assistance38 (about 13 per regional center) and
127 firms had certified recovery plans (about 11 per regional center).
During this period, most Trade Adjustment Assistance 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 business recovery plans. The remainder of the
program funding-an annual average of $3.8 million, or approximately 39
percent of the total-was used to fund technical assistance to implement
the business recovery plans.

In December 2000, we reported that the impact of the Trade Adjustment
Assistance Program was unclear. EDA had not developed appropriate outcome
measures to demonstrate the program's value in achieving its goal of
assisting firms adversely affected by imports and did not formally monitor
and track program outcomes for program recipients. In April 2003, the
Congressional Research Service reported that evaluation of the program had
been largely inconclusive. An independent study suggested that the Trade
Adjustment Assistance Program had been helpful to firms at the margin;
however, this study had several flaws that may have biased its results.
EDA added new performance measures for the Trade Adjustment Assistance
Program for fiscal year 2003 to better track outcomes of the assistance
provided by the regional centers. However, we have not evaluated whether
these new measures are sufficient to assess how the program is helping
firms adjust to import competition.

Given the low percentage of program funds used to implement the business
recovery plans and the lack of information about the program's impact,
Congress may wish to consider several options for this program:

o Direct the Commerce Department to consolidate the 12 regional centers to
reduce administrative and overhead costs.

o Direct the Commerce Department to co-locate the regional centers with
other programs (such as the department's Manufacturing Extension
Partnership) to reduce administrative and overhead costs and provide some
synergy with other federal efforts to assist firms.

o Reduce or eliminate the Trade Adjustment Assistance Program.

CBO estimates that the following budgetary savings would occur if the
Congress chooses to terminate the program.

Source: Congressional Budget Office.

aEstimate reflects savings if the Trade Adjustment Assistance Program is
eliminated.

Related GAO Product

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

GAO Contacts

Loren Yager, (202) 512-4347 Phil Herr, (202) 512-8509

Improve Federal Foreclosure and Property Sales Processes

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.39 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 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 recommended 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 December 2003 conversation, a VA official
said that the department expects to complete its review in early calendar
year 2004.

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 was not able to determine if this option would result in a budget
savings.

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

500 Education, Training, Employment, and Social Services

Improve Targeting of Title I Basic Grants Change Borrower Interest Rate on
Federal Consolidation Loans From   Fixed to Variable

Improve Targeting of Title I Basic Grants

Title I is the largest federal program supporting elementary and secondary
education. While state and local funds account for the vast majority of
total education expenditures nationally, Title I is an important source of
funding for many high-poverty districts and schools. Created in 1965 as
part of the War on Poverty, Title I is designed to help educate
disadvantaged children-those with low academic achievement attending
schools serving high-poverty areas.

To distribute Title I funds to school districts, the law authorizing the
program provides for several types of grants; "basic grants," however, are
the primary vehicle for Title I funding and are the easiest grants for
which school districts can qualify. Districts are eligible for basic
grants if they have at least 10 poor children and the number of poor
children is more than 2 percent of the district's school-age children.
Nationally, about 92 percent of school districts (containing over 99
percent of poor children) received basic grants in fiscal year 1999,
accounting for about 85 percent of total Title I funds.

Title I grants have sometimes been criticized because the poverty
threshold for basic grant eligibility is so low that nearly all school
districts can participate in the program. It is often noted that by
funding nearly all districts, less funding is available for districts with
higher concentrations of poverty. One policy option to further target
funding for higher poverty districts would be to raise the basic grant
eligibility threshold, making fewer districts eligible. With fewer
districts eligible, the remaining districts would receive more funds per
poor child, even if total Title I funding were to remain constant. Another
policy option would be to raise the basic grant eligibility threshold, but
redistribute only half of the funds resulting from fewer districts being
eligible, while reducing federal expenditures by retaining the remaining
funds. Yet another option would be to raise the basic grant eligibility
threshold without redistributing any of the funds obtained from doing so.
We reported in 2002 that increasing the poverty threshold for basic grant
eligibility from 2 to 10 percent would reduce the percentage of school
districts qualifying for basic grants from 92 to 74 percent of school
districts nationwide. Such an increase in the eligibility threshold would
have generated over $570 million, which could have been used to
redistribute to school districts remaining eligible for Title I basic
grants and/or to reduce federal expenditures.

CBO estimates no budgetary savings from this option with a decrease in
appropriation.

Related GAO Product

Title I Funding: Poor Children Benefit Though Funding Per Poor Child
Differs. GAO-02-242. Washington, D.C.: January 31, 2002.

GAO Contact

Marnie S. Shaul, (202) 512-7215

Change Borrower Interest Rate on Federal Consolidation Loans From Fixed to
Variable

Student consolidation loans, available under the Department of Education's
two major student loan programs-the Federal Family Education Loan Program
(FFELP) and the William D. Ford Federal Direct Loan Program (FDLP)-were
created to help borrowers cope with large amounts of federal student loan
debt. Consolidation loans allow borrowers to combine loans, extend their
repayment period, and reduce monthly repayments, thereby helping to reduce
the government's costs of paying for defaults. Consolidation loans also
allow borrowers to lock in a fixed interest rate, unlike most other
federal student loans, which carry an interest rate that varies from year
to year. Between fiscal year 2000 and 2002, the number of borrowers
consolidating their federal student loans nearly doubled to almost 1
million, and the total amount of loans being consolidated rose from $12
billion to over $31 billion. Lower interest rates and the increased
consolidation loan volumes of recent years have increased the estimated
long-term cost-or subsidy cost-to the government of guaranteeing FFELP
consolidation loans. The estimated subsidy costs for FFELP consolidation
loans grew from $1.3 billion for loans made in fiscal year 2002 to nearly
$3 billion for loans made in fiscal year 2003. Interest rates and loan
volume also affected costs for FDLP consolidation loans by reducing the
net gain to the government to $286 million for loans made in fiscal year
2003, down from $460 million the year before.

The surge in the number of borrowers consolidating their loans suggests
that many borrowers who face little risk of default are choosing
consolidation as a way of obtaining low fixed interest rates. If borrowers
continue to consolidate their loans in the current low interest rate
environment, and interest rates rise, the government will continue to
assume relatively high subsidy costs for FFELP consolidation loans due to
the payments the government must make to lenders to ensure their
statutorily guaranteed rate of return on the loans they make. (Lenders'
guaranteed rates of return vary, based on prevailing market interest rates
and are projected to be higher in the future.) Providing for higher
subsidy costs for consolidation loans may outweigh any government savings
associated with the reduced costs of loan defaults for the smaller number
of borrowers who might default in the absence of the repayment flexibility
offered by consolidation loans.

One option for the Congress is to change the interest charged to borrowers
on consolidation loans from a fixed to a variable rate that is consistent
with the interest rates carried by most other federal student loans-which
underlie borrowers' consolidation loans. Such an option might reduce
overall federal costs by reducing the volume and subsidy costs of
consolidation loans. When low fixed interest rates are no longer an option
on consolidation loans, borrowers who are not experiencing difficultly in
managing their student loan debt would have less incentive to consolidate
their loans.40 For borrowers who are, however, experiencing difficulties
in paying their student loans and at risk of default, the program would
continue to be an important tool to help them manage their educational
debt by consolidating multiple loan repayments into one and extending
their repayment term, thereby reducing their monthly repayments.

CBO was not able to determine if this option would result in a budget
savings.

Related GAO Product

Student Loan Programs: As Federal Costs of Loan Consolidation Rise, Other
Options Should be Examined. GAO-04-101. Washington, D.C.: October 31,
2003.

GAO Contact

Cornelia M. Ashby, (202) 512-8403

550 Health

Improve Fairness of Medicaid Matching Formula Prevent States from Using
Illusory Approaches to Shift Medicaid Program   Costs to the Federal
Government Control Provider Enrollment Fraud in Medicaid Eliminate Federal
Funding for SCHIP Covering Adults without Children Charge Beneficiaries
for Food Inspection Costs Redirect Carcass-by-Carcass Inspection Resources
in Meat and Poultry   Plants Create a Uniform Federal Mechanism for Food
Safety

Improve Fairness of Medicaid Matching Formula

The Medicaid program provides medical assistance to individuals who are
low-income, aged, blind, or disabled. 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 was not able to determine if this option would result in a budget
savings.

Related GAO Products

Medicaid Formula: Differences in Funding Ability among States Often Are
Widened.  GAO-03-620.  Washington, D.C.: July 10, 2003.

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

Kathryn G. Allen, (202) 512-7114

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

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, which
limits such payments to unreimbursed Medicaid and uninsured costs for
state-owned facilities, (2) the Balanced Budget Act of 1997, which further
limits Medicaid payments to state psychiatric hospitals, and (3) the
Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of
2000,41 which directed the Health Care Financing Administration (HCFA) to
issue a final regulation that further curtailed states' ability to claim
excessive federal matching funds through financing schemes, which HCFA,
now called the Centers for Medicare & Medicaid Services (CMS), did in
January 2001.

Despite these legislative and regulatory restrictions, our ongoing work
has demonstrated that some states continue to benefit from financing
schemes to draw down federal Medicaid payments that substantially exceed
costs. Moreover, while CMS has taken steps to strengthen its oversight of
states' financing arrangements, these steps have not gone far enough to
ensure that federal funds are used for the purposes for which Medicaid
funds are intended. For example, a 2001 regulation limited the use of
these arrangements and provided for transition periods for states to phase
out their excessive claims for federal matching funds. Our ongoing work
has found that CMS's decisions to grant 8-year transition periods to two
states with nursing home arrangements were not consistent with the stated
purpose of the agency's regulation intended to curtail these financing
schemes. We are also currently examining the extent to which states are
hiring private consulting firms to inappropriately maximize federal
reimbursement through the Medicaid program.

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 agrees that the option may result in savings, but it could not develop
a savings estimate for this option.

Related GAO Products

Medicaid: Intergovernmental Transfers Have Facilitated State Financing
Schemes. GAO-04-574T. Washington, D.C.: March 18, 2004.

Medicaid: Improved Federal Oversight of State Financing Schemes Is Needed.
GAO-04-228. Washington, D.C.: February 13, 2004.

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

Kathryn G. Allen, (202) 512-7118

Control Provider Enrollment Fraud in Medicaid

Continuing prosecutions of provider fraud in the California Medicaid
program, which have resulted in more than $134 million in restitution and
550 criminal convictions since 1999, 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. Since 1999, California has
coupled its increased enforcement with closer monitoring of providers and
increased scrutiny prior to enrollment.

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 reported 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 & 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.

CBO agrees that the option may result in savings, but it could not develop
a savings estimate for it.

Related GAO Products

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

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

Leslie G. Aronovitz, (312) 220-7767

Eliminate Federal Funding for SCHIP Covering Adults without Children

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. In January 2004, we reported that HHS
has continued to approve waivers that allow states to use SCHIP funds to
cover childless adults. We concluded that it appeared likely that HHS
will, in the absence of action in response to the matters for
congressional consideration raised in our July 2002 report, continue to
allow states to use SCHIP funds to cover childless adults.

CBO estimates the following budgetary savings with this option.

Source: Congressional Budget Office.

Related GAO Products

SCHIP: HHS Continues to Approve Waivers That Are Inconsistent with Program
Goals. GAO-04-166R. Washington, D.C.: January 5, 2004.

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) 512-7118

Charge Beneficiaries for Food Inspection Costs

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 currently 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.
While it has been a few years since we last reported on this issue, the
situation has not materially changed. Accordingly, an option the Congress
may want to consider is to set the user fees to cover the full cost of
USDA inspection services provided to meat and poultry slaughter and
processing plants.

CBO estimates the following budgetary savings with this option.

Source: Congressional Budget Office.

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

Redirect Carcass-by-Carcass Inspection Resources in Meat and Poultry
Plants

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.

Currently, 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 relies on outdated, labor-intensive inspection
methods. Under current law, USDA inspects each of the over 8 billion
livestock and bird carcasses slaughtered annually. 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 most
microbial contamination. While USDA has implemented a risk-based meat and
poultry inspection system, it still maintains a carcass-by-carcass
inspection system under current law.

Legislative revisions could allow FSIS to further emphasize risk-based
inspections. Much of the funding used to fulfill current meat and poultry
carcass-by-carcass inspection activities could be redirected.

CBO agrees that the option may result in savings, but it could not develop
a savings estimate for this option.

Related GAO Products

Meat and Poultry: Better USDA Oversight and Enforcement of Safety Rules
Needed to Reduce Risk of Foodborne Illnesses. GAO-02-902. Washington,
D.C.: August 30, 2002.

Food Safety: Weaknesses in Meat and Poultry Inspection Pilot Should Be
Addressed Before Implementation. GAO-02-59. Washington, D.C.: December 17,
2001.

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

Create a Uniform Federal Mechanism for Food Safety

Today, a multitude of agencies oversees food safety. Two agencies account
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 brings 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 inspection activities in
an existing department, such as USDA or HHS.

CBO agrees that the option may result in savings, but it could not develop
a savings estimate for this option.

Related GAO Products

Food Safety: Continued Vigilance Needed to Ensure Safety of School Meals.
GAO-02-669T. Washington, D.C.: April 30, 2002.

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,
Risk-Based 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

570 Medicare

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 New Skilled
Nursing Facility Payment Method to Ensure   Appropriate Payments Implement
Risk-Sharing in Conjunction with Medicare Home Health   Agency Prospective
Payment System Allow Provisions for Direct Laboratory Payment for Certain
Medicare   Pathology Services to Expire Require Information on Enrollees
from Private Health Insurers to Improve   Identification of Medicare
Beneficiaries with Other Health Coverage

Reassess Medicare Incentive Payments in Health Care Shortage Areas

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 2002,
Medicare Incentive Payments totaled $104 million.

This program, however, may not be the most appropriate means of addressing
medical underservice.

o 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.

o 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.

o 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.

o The program provides no incentives or assurances that physicians
receiving bonuses will actually treat people who have problems obtaining
health care.

o 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 was not able to determine if this option would result in a budget
savings.

Related GAO Products

Physician Workforce: Physician Supply Increased in Metropolitan and
Nonmetropolitan Areas but Geographic Disparities Persisted. GAO-04-124.
Washington, D.C.: October 31, 2003.

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

A. Bruce Steinwald, (202) 512-7114

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

Medicare's supplementary medical insurance program (Medicare Part B) spent
almost $9.4 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 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 that the Congress has recently acted upon is
to give CMS the authority to implement competitive bidding for durable
medical equipment, prosthetics, orthotics, and supplies. Competitive
bidding creates incentives for providers to provide items and services at
lower costs to obtain business. The Medicare Prescription Drug,
Improvement, and Modernization Act of 2003 requires CMS to develop
programs for the competitive acquisition of durable medical equipment and
supplies and off the shelf orthotics in 10 of the largest statistical
metropolitan areas in 2007, 80 of the largest metropolitan statistical
areas in 2009, and in additional areas thereafter. Priority may be given
to those items and services that represent the highest cost and volume to
the Medicare program or have the greatest potential for program savings.
CMS can use information on the payments determined through competitive
bidding in these localities for specific items to adjust the amounts
Medicare will pay for them in other localities.

In November 2003, CBO estimated that giving CMS authority to conduct
competitive bidding for durable medical equipment, off-the-shelf orthotics
and supplies and other changes in payment for these items in the Medicare
legislation could result in a net reduction of Medicare spending of $6.8
billion from fiscal years 2004 through 2013.

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 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.

CBO was not able to determine if this option would result in a budget
savings.

Related GAO Products

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 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/HEHS-97-157R.
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/T-HEHS-95-75. Washington, D.C.: February 6, 1995.

GAO Contact

Leslie G. Aronovitz, (312) 220-7767

Increase Medicare Program Safeguard Funding

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 was not able to determine if this option would result in a budget
savings.

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-HEHS-97-165.
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

Leslie G. Aronovitz, (312) 220-7767

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

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 higher payments relative to service costs for some categories 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. This is true despite the fact
that Medicare margins were high-a median of almost 19 percent for
free-standing facilities in 2000. 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. Under the PPS, 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
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 agrees that improved payment methods and oversight could reduce
spending. However, by convention, CBO only estimates the costs or savings
of proposals that change current law, not administrative changes.

Related GAO Products

Skilled Nursing Facilities: Medicare Payments Exceed Costs for Most but
Not All Facilities. GAO-03-183. Washington, D.C.: December 31, 2002.

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

Laura A. Dummit, (202) 512-7114

Implement Risk-Sharing in Conjunction with Medicare Home Health Agency
Prospective Payment System

Following a dramatic increase in Medicare spending for home health
agencies (HHA), the Balanced Budget Act of 1997 (BBA) required the
implementation of a prospective payment system (PPS) for HHAs. Under the
PPS, which began October 1, 2000, Medicare pays a fixed, predetermined
amount for each 60-day episode of care, adjusted for patient
characteristics that are expected to affect the costs of providing care.
Under this system, agencies are rewarded financially for keeping their
per-episode costs below the payment rate and thus 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 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, 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, on average, the Medicare program is paying HHAs considerably more
than the estimated costs of care beneficiaries are actually 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 was not able to determine if this option would result in a budget
savings.

Related GAO Products

Medicare Home Health Payment: Nonroutine Medical Supply Data Needed to
Assess Payment Adjustments. GAO-03-878. Washington, D.C.:  August 15,
2003.

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: Clarifying the Homebound Definition Is Likely to
Have Little Effect on Costs and Access. GAO-02-555R. Washington, D.C.: 
April 26, 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

Laura A. Dummit, (202) 512-7114

Allow Provisions for Direct Laboratory Payment for Certain Medicare
Pathology Services to Expire

Hospitals receive fixed, predetermined amounts under Medicare's hospital
inpatient and outpatient prospective payment systems (PPS) for providing
necessary services to Medicare beneficiaries. By paying hospitals fixed
amounts under a PPS, Medicare seeks to encourage them to operate
efficiently, because hospitals retain the difference if payments exceed
their costs to provide necessary services. Hospitals that outsource
services for their patients generally pay suppliers of those services
directly, and the suppliers do not receive payment from Medicare.

In 2000, the Congress enacted provisions in the Medicare, Medicaid, and
SCHIP Benefits Improvement and Protection Act of 2000 (BIPA) to delay for
2 years application of a rule issued by the Health Care Financing
Administration (HCFA), now called the Centers for Medicare & Medicaid
Service (CMS). The rule terminated an exception to the inpatient and
outpatient PPS that permitted one type of supplier-laboratories-to receive
payment directly from Medicare when providing technical pathology
services42 to beneficiaries who are hospital patients. The BIPA provisions
applied only to "covered hospitals," those hospitals that had agreements
with laboratories for outsourced technical pathology services in effect as
of July 22, 1999, the date HCFA proposed the rule. By terminating direct
payments to laboratories, HCFA's 1999 rule would have resulted in
hospitals either paying laboratories for outsourced services or providing
the services themselves.

Although the BIPA provisions expired at the end of 2002, CMS made an
administrative decision to continue directly paying laboratories for
technical pathology services provided to hospital patients. In the
Medicare Prescription Drug, Improvement, and Modernization Act of 2003,
the BIPA provisions were amended to also apply to technical pathology
services provided during 2005 and 2006.

We reported in 2003 that if laboratories had not received direct payment
for services to hospital patients, Medicare spending would have been an
estimated $42 million less in 2001, with $18 million and $24 million in
savings for inpatient and outpatient services, respectively. In addition,
overall beneficiary cost sharing would have been reduced by $2 million. We
believe hospitals are unlikely to experience a large financial burden from
paying laboratories to provide technical pathology services.

In light of expected Medicare savings, we suggest that for calendar year
2005, the Congress may wish to consider permanently removing the exception
that allows direct Medicare payment to laboratories for technical
pathology services provided to hospital patients.

CBO estimates the following budgetary savings with this option.

Source: Congressional Budget Office.

Related GAO Product

Medicare: Modifying Payments for Certain Pathology Services Is Warranted.
GAO-03-1056. Washington, D.C.: September 30, 2003.

GAO Contact

A. Bruce Steinwald, (202) 512-7119

Require Information on Enrollees from Private Health Insurers to Improve
Identification of Medicare Beneficiaries with Other Health Coverage

Until 1980, the Medicare program was the primary payer for covered health
services for all beneficiaries, except those involving workers'
compensation or veterans benefits. Since 1980, new laws have made Medicare
the secondary payer for individuals with certain employer group health
plan coverage43 and other categories of beneficiaries. The Centers for
Medicare & Medicaid Services (CMS) uses a contractor to conduct a variety
of activities to identify whether beneficiaries might have other sources
of health insurance coverage with primary payment responsibility for their
health care claims. For example, CMS's contractor matches Medicare data
with employment and earnings data maintained by the Internal Revenue
Service and the Social Security Administration to identify beneficiaries
who may have health insurance through their or their spouse's employer.
However, there can be a 2-year time lag between when a beneficiary or
spouse is employed and when contractors can confirm the information about
employment. As a result, even with current data match activities, Medicare
can have paid for claims long before another liable insurer is identified.

GAO has long recognized that private health insurance companies and
employers sponsoring their own health plans are in the best position to
routinely identify enrollees who might also be Medicare beneficiaries.
Currently, private health insurance companies are under no obligation to
inform CMS that some of their enrollees are Medicare beneficiaries, unless
there is a court settlement requiring such data sharing. CMS has entered
into voluntary data sharing agreements with some private health insurers
and employers to obtain data on their working enrollees and dependents.
These private health insurers and employers represent over 40 percent of
Medicare beneficiaries and their voluntary data sharing agreements
resulted in at least $61 million in Medicare savings in fiscal year 2003.

We believe if private health insurers were required to share the names and
identifying information on their enrollees, CMS could more effectively
identify beneficiaries with other primary health insurance coverage. As a
result, one option we have suggested is that the Congress consider
requiring private health insurers to provide CMS information on their
enrolled beneficiaries, on a schedule and using a format determined by
CMS. The President's budget made a similar proposal for fiscal year 2003,
with a cost savings estimate of $1.0 billion over a ten-year period.

CBO estimates the following budgetary savings with this option.

Source: Congressional Budget Office.

Related GAO Product

Medicare: HCFA Could Do More to Identify and Collect Overpayments.
GAO/HEHS/AIMD-00-304. Washington, D.C.: September 7, 2000.

GAO Contact

Leslie G. Aronovitz, (312) 220-7767

600 Income Security

Revise Benefit Payments under the Federal Employees' Compensation Act
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 Sustain/Expand
Range of SSI Program Integrity Activities Better Congressional Oversight
of PRWORA's Fugitive Felon Provisions Improve the Administrative Oversight
of Food Assistance Programs Share the Savings from Bond Refundings Reduce
Federal Funding Participation Rate for Automated Child Support  
Enforcement Systems

Revise Benefit Payments under the Federal Employees' Compensation Act

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 Spendable Earnings

For almost all totally disabled individuals, FECA benefits are 66 and two
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 (take-home 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.

CBO was not able to determine if this option would result in a budget
savings.

Revising Benefits for Retirement-Eligible Beneficiaries

Retirement-eligible federal workers who continue to be disabled as a
result 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.

CBO estimates the following budgetary savings with this option.

Source: Congressional Budget Office.

Source: Congressional Budget Office.

FECA Cases Involving Third Parties

FECA authorizes federal agencies to continue paying employees their
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.

CBO estimates the following budgetary savings with this option.

Source: Congressional Budget Office.

Comparability of FECA and Other Compensation Laws

We identified three major ways in which FECA differs from other federal
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. Only six states authorize additional benefits for
dependents (about $5-$10 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.

CBO estimates the following budgetary savings with this option.

Source: Congressional Budget Office.

Source: Congressional Budget Office.

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

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

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, about 80 percent of the total cases
were non-TANF cases-about 45 percent were former TANF recipients and about
36 percent had never received TANF benefits.

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.

CBO made the following estimates based on a service fee of 5 percent for
each successful non-TANF child support collection.

Source: Congressional Budget Office.

Note: Estimates based on a service fee of 5 percent for each successful
non-TANF child support collection.

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.
Washington, D.C.: 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 Programs

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 showed that some Reserve personnel were receiving improper benefit
payments from state UI programs. In the seven states in our analysis, we
estimated 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 were 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 Homeland Security'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
cost-effective and commensurate with potential savings, it does not intend
to take further action to respond to this recommendation. According to
DOD, 13 states effectively exempt Reserve wages from any unemployment
insurance payment offset, and there could be significant costs associated
with providing automated data on the earnings of part-time reservists. We
do not agree that implementation costs would necessarily outweigh savings.
We found millions of dollars in unemployment insurance overpayments for
just 7 states and 27 percent of the reservists, which would likely lead to
even greater levels of overpayments for the remaining states that offset
reservist wages. The potential for overpayments may be even greater given
current national security conditions that involve a greater role for
reservists.

CBO estimates the following budgetary savings with this option.

Source: Congressional Budget Office.

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

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
1998 report, 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. In 2003, 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.

CBO estimates the following budgetary savings with this option.

Source: Congressional Budget Office.

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

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 self-reporting 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.

Related GAO Products

Supplemental Security Income: SSA Could Enhance Its Ability to Detect
Residency Violations. GAO-03-724. Washington, D.C.: July 29, 2003.

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

Robert E. Robertson, (202) 512-7215

Sustain/Expand Range of SSI Program Integrity Activities

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 processed 138,000 more
financial redeterminations in FY 2003 than it did in FY 2002, and plans to
increase redeterminations in FY 2004. SSA should continue to increase the
number of redeterminations processed to the extent feasible.

CBO agrees that this option would result in budgetary savings, but it
could not develop a savings estimate.

Related GAO Products

Supplemental Security Income: SSA Could Enhance Its Ability to Detect
Residency Violations. GAO-03-724. Washington, D.C.: July 29, 2003.

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

Robert E. Robertson, (202) 512-7215

Better Congressional Oversight of PRWORA's Fugitive Felon Provisions

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 felon44 status grounds for termination of tenancy in many
federal housing assistance programs, administered by the Department of
Housing and Urban Development (HUD).

In our September 2002 report, we found that, since PRWORA was enacted the
SSI, Food Stamp, and TANF programs 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. SSA recently reported that, between August 1996
and February 2003, it identified more than 51,000 fugitive felons on the
SSI rolls, incurring savings of over $83 million. In addition, SSA
estimates that it may save an additional $206.9 million through recovery
of fugitive felon overpayments for months up to and including February
2003.

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 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
since the enactment of PRWORA in 1996, 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 may wish to
consider amending the Housing Act of 1937 to explicitly make fugitive
felons ineligible for housing benefits.

CBO was not able to determine if this option would result in a budget
savings.

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

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, about 1 in every 5 Americans receives
nutrition assistance through 1 or more of the 15 programs administered by
this agency. These programs, which accounted for more than half of USDA's
budget authority for fiscal year 2003, provide children and low-income
adults with access to food, a healthful diet, and nutrition education.
Specifically, for fiscal year 2003, the Congress appropriated about $41.9
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 21.3 million individuals with more than $21.4 billion
in benefits in fiscal year 2003. 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
152,000 authorized retail food stores, and in a July 2003 report, USDA
estimated that stores trafficked about $395 million, or about 2.5 cents of
every dollar of food stamp benefits issued per year from 1999 through
2002. 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 1998.45 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. Since that time, they have developed a new
EBT-based technique for fighting trafficking that has become an important
source of findings of trafficking. 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.46 The Food and
Nutrition Service has taken some actions to implement this recommendation,
by providing increased financial incentives for states to be more
aggressive in pursuing recipients who traffic food stamp benefits and by
assisting states in the use of EBT data to identify traffickers.

USDA also faces fraud and abuse challenges in other nutrition programs,
including the Child and Adult Care Food Program (CACFP), which for fiscal
year 2003 was funded at $1.9 billion, and the National School Lunch and
School Breakfast programs, which for that year were funded at $8.8
billion. In fiscal year 2003, CACFP provided subsidized meals for a daily
average of 2.9 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
recommendation47 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.

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.

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

Share the Savings from Bond Refundings

During the 1970s and early 1980s, the Department of Housing and Urban
Development (HUD) administered programs to develop housing for low-income
households using various types of financing arrangements and long-term
Section 8 rental housing assistance contracts. While some properties were
financed by loans and grants from HUD, others were financed by bonds
issued by state and local housing finance agencies. During the late 1970s
and early 1980s, the cost to finance housing development rose to
unprecedented levels. In response, HUD authorized higher Section 8 rental
assistance payments to cover the higher bond financing costs, first in
1980 and then in 1981. Since then, as interest rates declined, many state
and local housing finance agencies have refunded the bonds they issued and
issued new bonds at lower interest rates. This action has generated
substantial savings for the state agencies. These savings represent the
difference between the amounts needed to repay the original bonds and the
lower amounts needed to repay the new bonds. Agencies typically use these
savings to provide affordable housing in their states.

In 1999, we reported that HUD had not issued clear guidance on when state
agencies are required to share the savings associated with bond refundings
with the federal government. The need for clearer guidance specifically
relates to state agency compliance with the bond refunding provisions in
an October 1992 amendment to Section 1012 of the McKinney Act. The
amendment was unclear as to whether the states were required to share the
savings from bond refundings with the federal government for all
properties covered by Section 8 rental assistance contracts that were
entered into from 1979 through 1984. In the absence of clear guidance from
HUD, we found that some state agencies have shared the savings from bond
refunding for such properties with the federal government while other
agencies have retained the savings.

Legislative changes could be made to clarify the Congress'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 agrees that this option would result in budgetary savings, but it
could not develop a savings estimate.

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

Reduce Federal Funding Participation Rate for Automated Child Support
Enforcement Systems

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 2002, the states
reportedly spent about $7.0 billion to develop these systems, including
about $5.0 billion from the federal government.

The 90 percent funding participation rate for development costs 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 for development costs, 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 costs.

The Congress could choose to reduce the federal funding participation rate
for modification and operation of these systems from 66 percent to the 50
percent rate now common for such costs in other programs, such as Food
Stamps and other welfare programs.

CBO estimates the following budgetary savings with this option.

Source: Congressional Budget Office.

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

700 Veterans Benefits and Services

Discontinue Veterans' Disability Compensation for Nonservice Connected  
Diseases Revise VA's Disability Ratings Schedule to Better Reflect
Veterans'   Economic Losses Reassess Unneeded Health Care Assets within
the Department of Veterans   Affairs Reducing VA Inpatient Food and
Laundry Service Costs

Discontinue Veterans' Disability Compensation for Nonservice Connected
Diseases

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
service-connected 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 service-connected
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.

CBO estimates the following budgetary savings with this option.

Source: Congressional Budget Office.

The Congress may also wish to consider enacting legislation proposed by VA
to prohibit the payment of compensation for a disability related to drug
or alcohol abuse, even if it is secondary to a service-connected
disability such as Post-Traumatic Stress Disorder. Payment of VA
compensation for alcohol or drug abuse related disabilities as a primary
service-connected condition has been expressly prohibited by law since
1990. VA proposed this legislation in response to a February 2001 court
decision that allowed VA to compensate veterans for substance
abuse-related disabilities if they arose secondarily from a
service-connected disability. VA estimated that this legislative change,
if enacted, would lead to savings of $55.1 million in fiscal year 2004,
and $2.8 billion over 10 years.

Source: Congressional Budget Office.

Related GAO Products

VA Benefits: Fundamental Changes to VA's Disability Criteria Need Careful
Consideration. GAO-03-1172T. Washington, D.C.: September 23, 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.

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

Revise VA's Disability Ratings Schedule to Better Reflect Veterans'
Economic Losses

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
service-connected conditions had on the average individual's ability to
perform jobs requiring manual or physical labor. Although the ratings in
the schedule have not changed substantially since 1945, dramatic changes
have occurred in the labor market and in society. The results of an
economic validation of the schedule conducted in the late 1960s indicated
that ratings for many conditions did not reflect the actual average loss
in earnings associated with them. Therefore, it is likely that some of the
ratings in the schedule do not reflect the economic loss experienced by
veterans today. Hence, the schedule may not equitably distribute
compensation funds among disabled veterans.

The Congress may wish to consider directing VA to determine whether the
ratings for conditions in the schedule correspond to veterans' average
loss in earnings due to these conditions and adjust disability ratings
accordingly. Generally accepted and widely used approaches exist to
statistically estimate the effect of specific service-connected conditions
on veterans' average earnings. These estimates could be used to set
disability ratings in the schedule that are appropriate in today's
socioeconomic environment. 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.

CBO was not able to determine the budgetary effect of this option.

Related GAO Products

VA Benefits: Fundamental Changes to VA's Disability Criteria Need Careful
Consideration. GAO-03-1172T. Washington, D.C.: September 17, 2003.

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

Reassess Unneeded Health Care Assets within the Department of Veterans
Affairs

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. 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 in
early calendar year 2004. Continued congressional oversight is warranted
to review VA's plans and assess their impact on costs and services.

CBO was not able to determine the budgetary effect of this option.

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

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 because its
general counsel determined that VA could not use Veterans Health
Administration appropriations for such studies without specific
authorization from the Congress. VA has requested that Congress grant it
this authorization.

CBO agrees that the option may result in savings, but it could not develop
a savings estimate for this option.

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

800 General Government; 900 Net Interest; 999 Multiple

Taking a Strategic Approach Could Improve Federal Agencies' Acquisition  
of Costs of Supplies and Services Improper Benefit Payments Could Be
Avoided or More Quickly Detected if   Data from Various Programs Were
Shared Prevent Delinquent Taxpayers from Benefiting from Federal Credit  
Programs Increase Fee Revenue from Federal Reserve Operations Eliminate
the 1-Dollar Note Better Target Infrastructure Investments to Meet Mission
and Results-  Oriented Goals Identify and Dispose of Unneeded Real
Property Assets Held by GSA Target Funding Reductions in Formula Grant
Programs Adjust Federal Grant Matching Requirements Consolidate Grants for
First Responders to Improve Efficiency Improve IRS's Ability to Collect
Delinquent Taxes

Taking a Strategic Approach Could Improve Federal Agencies' Acquisition of
Supplies and Services

Federal agencies procured more than $250 billion in goods and services
during fiscal year 2002. Additionally, federal civilian agencies spent
over $15 billion using purchase cards in fiscal year 2002. 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 procurement 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 requirements, 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. 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.

Thus far, our work has focused on applying best practices to improving
Department of Defense (DOD) acquisition of services-an agency where
spending on information technology, administrative support, research and
development and a wide range of other services is approaching $100 billion
annually. Recent legislation intends for DOD to manage its services
procurement more effectively by promoting the use of best commercial
practices. As a result, DOD is in the early stages of 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. The military
departments are also in the early stages of separate initiatives that may
lead them to adopt a strategic approach to buying services at lower cost.
Such commercial best practices could also benefit civilian agencies'
procurement by leveraging buying power to reduce costs of supplies and
services.

CBO was not able to determine if this option would result in a budgetary
savings.

Related GAO Products

Contract Management: High-Level Attention Needed to Transform DOD Services
Acquisition. GAO-03-935. Washington, D.C.: September 10, 2003.

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.

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.

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

Improper Benefit Payments Could Be Avoided or More Quickly Detected if
Data from Various Programs Were Shared

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, based on a study that matched
Department of Education (Education) and Internal Revenue Service (IRS)
income information, the Education estimates that it made approximately
$602 million in grant overpayments during fiscal years 2001 and 2002.
Access to IRS taxpayer information could have helped Education prevent
some of these overpayments. Improper payments could also be avoided or
detected more quickly in other programs. For example, four states and the
District of Columbia estimate that they prevented about $16 million in
improper 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. The
Administration's fiscal year 2004 budget estimates that access to IRS
income data could save $638 million in Pell Grant costs over 2003-2004.

CBO was not able to determine if this option would result in a budgetary
savings.

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

Prevent Delinquent Taxpayers from Benefiting from Federal Credit Programs

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 $246 billion at the
end of fiscal year 2003. 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, GAO reviews of unpaid taxes conducted as part of its
annual audits of IRS's financial statements, and as part of other
financial management work at the agency, indicate that 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 implementing the prohibitions contained in 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 was not able to determine if this option would result in a budgetary
savings.

Related GAO Products

Financial Management: Some DOD Contractors Abuse the Federal Tax System
with Little Consequence. GAO-04-95. Washington, D.C.: February 12, 2004.

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

Increase Fee Revenue from Federal Reserve Operations

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.

CBO estimates 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.

Source: Congressional Budget Office.

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

Eliminate the 1-Dollar Note

Replacing the 1-dollar note with the new gold-colored 1-dollar coin would
save the government hundreds of millions of dollars annually. Substituting
a dollar coin for a 1-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-dollar 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-dollar
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-dollar 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-dollar note.

CBO estimates that budgetary savings could be achieved by eliminating the
1-dollar note.

Source: Congressional Budget Office.

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

Mark L. Goldstein, (202) 512-2834

Better Target Infrastructure Investments to Meet Mission and
Results-Oriented Goals

The federal government plays a prominent role in identifying the nation's
infrastructure investment needs and spent $160.6 billion on the nation's
infrastructure in 2002. 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.

The Office of Management and Budget (OMB) has developed a Capital
Programming Guide to assist agencies with developing a disciplined capital
programming process. OMB strongly recommends, but does not require,
agencies to follow its guidance. In addition, GAO's Executive Guide:
Leading Practices in Capital Decision-Making summarizes fundamental
practices that have been successfully implemented by organizations that
are recognized for their outstanding capital decision-making practices and
provides examples of leading practices from which the federal government
may draw lessons and ideas. In a review of seven federal agencies' U.S.
infrastructure 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 infrastructure 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. Similarly, in a January 2004 review of four
agencies' use of capital planning, GAO found that, while some of these
agencies have long-term planning documents, none has a comprehensive plan
that defines its long-term investment decisions.

Given the importance of federal infrastructure investment to the nation,
developing long-term agency capital plans and following other leading
practices are critical for sound infrastructure investment. One option for
improving capital planning is to have the OMB require that agencies comply
with the principles and practices of its Capital Programming Guide.
Requiring agencies to link the benefits of investment projects to the
achievement of mission goals and long-term strategic 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.

CBO was not able to determine if this option would yield budgetary
savings.

Related GAO Products

Budget Issues: Agency Implementation of Capital Planning Principles Is
Mixed. GAO-04-138. Washington, D.C.: January 16, 2004.

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

Identify and Dispose of Unneeded Real Property Assets Held by GSA

Despite significant changes in the size and mission needs of the federal
government in recent years, the federal portfolio of real property assets
in many ways still largely reflects the business model and technological
environment of the 1950s. Many of the assets are no longer aligned with,
or responsive to, agencies' changing missions, and are therefore no longer
needed. Retaining unneeded assets presents significant potential risks for
(1) lost dollars because such properties are costly to maintain; and (2)
lost opportunities because the properties could be put to more
cost-beneficial uses, exchanged for other needed property, or sold to
generate revenue for the government. According to government data, as of
September 2002, the federal government owned about 3 billion square feet
of building floor space in the United States, and the General Services
Administration (GSA) was the second largest nondefense holder of this
space, after the U.S. Postal Service. GSA provides real estate services
for federal agencies and owns approximately 1,700 facilities with about
200 million square feet of building floor space. GSA facilities include
office buildings, courthouses, and border stations.

In June 2001, GSA started an overall effort, commonly referred to as the
portfolio restructuring initiative, where it is reviewing its real
property inventory nationwide to identify and remove all vacant and
underutilized assets that are not financially self-sustaining, or for
which there is not a substantial, long-term federal purpose. The objective
of this initiative is to better align GSA's properties with its mission of
providing quality space and services at a cost that is competitive with
the private sector. GSA plans to complete implementation of the portfolio
restructuring initiative by 2007 and expects by that time to have a
portfolio of strong, income-producing properties that is much more
responsive to changing agency mission needs. As of October 1, 2002, GSA
reported that it had 236 vacant and underutilized properties with about
18.4 million square feet of space.

As part of its oversight of this effort, Congress could consider having
GSA provide information on the status of properties it has identified as
candidates for disposal or transfer and identify the specific steps
Congress could take to facilitate the disposal or transfer of these
properties. Oftentimes, GSA is hampered by factors outside of its control.
Our work has shown that decisions about real property often do not reflect
the most cost-effective alternative that is in the interest of the agency
or the government as a whole but instead reflect other priorities. In
particular, this situation often arises when the federal government
attempts to consolidate facilities or otherwise dispose of unneeded
assets. Congress's direct involvement could serve as a catalyst for action
on individual properties. This would be particularly important in light of
the cost of securing and maintaining these unneeded properties; the
opportunity costs associated with not selling or exchanging these assets;
and the image of government waste and inefficiency that these facilities
present to the public.

CBO was not able to determine if this option would yield budgetary
savings.

Related GAO Products

Federal Real Property: Vacant and Underutilized Properties at GSA, VA, and
USPS.  GAO-03-747. Washington, D.C.: August 19, 2003.

High-Risk Series: Federal Real Property.  GAO-03-122. Washington, D.C.:
January 2003.

GAO Contact

Mark L. Goldstein, (202) 512-2834

Target Funding Reductions in Formula Grant Programs

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 1998,48 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. There are a
variety of ways in which budgetary savings could be achieved to improve
the targeting of these programs, including the following:

o Reduce the minimum federal reimbursement rate to below 50 percent for
Medicaid, for example. 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.

o 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.

o 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.

o 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. The
estimated 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 estimates the following budgetary savings with this option.

Source: Congressional Budget Office.

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/AIMD-98-137. 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.

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

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
inflation-adjusted maintenance-of-effort requirements because current
state spending levels are not reported consistently. However, it was
possible to estimate the impact of changes in the matching rates on many
close-ended federal grants. For example, many such grants do not require
any state or local matching funds. The federal share of these programs
could be reduced modestly, for example from 100 percent to 90 percent, a
reduction unlikely to discourage states from participating in the program.

CBO estimates the following budgetary savings with this option.

Source: Congressional Budget Office.

Related GAO Products

Disadvantaged Students: Fiscal Oversight of Title I Could Be Improved.
GAO-03-377. Washington, D.C.: February 28, 2003.

Welfare Reform: Challenges in Maintaining a Federal-State Fiscal
Partnership. GAO-01-828. Washington, D.C.: August 10, 2001.

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

Consolidate Grants for First Responders to Improve Efficiency

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 example of this fragmentation, in September 2003 GAO
identified at least 21 different grant programs that can be used by the
nation's first responders to address homeland security needs. 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, Congress' alternatives might include consolidating existing
grants, using performance partnerships, and simplifying and streamlining
administrative and planning requirements. 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 was not able to determine if this option would yield budgetary
savings.

Related GAO Products

Homeland Security: Reforming Federal Grants to Better Meet Outstanding
Needs. GAO-03-1146T. Washington, D.C.: September 3, 2003.

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

Improve IRS's Ability to Collect Delinquent Taxes

From fiscal years 1996 through 2001, the Internal Revenue Service's (IRS)
compliance and enforcement programs experienced almost universal declines
in workload coverage, cases closed, direct staff time used, productivity,
and dollars of unpaid taxes collected. While IRS has other efforts to help
taxpayers comply with tax laws, such as ensuring the clarity of tax forms
and instructions, IRS's enforcement programs are viewed by many as
critical for maintaining the public's confidence in our tax system. The
Congress and others have expressed concern about the compliance and
collections trends for their potential to undermine taxpayers' motivation
to fulfill their tax obligations. IRS's inventory of delinquent accounts
continues to grow and age as the gap in workload and capacity to complete
work increases. For example, in 2002, IRS was deferring collection action
on tax debts at a rate equal to one out of three new collection cases. One
way to reverse the declines in IRS's compliance and enforcement programs
would be to: devote more resources to them. This would enable IRS to close
more delinquent tax cases and collect more unpaid tax revenues.

Congress has two basic alternatives if it wishes to devote more resources
to IRS's enforcement programs. One, increase IRS's budget with additional
funds targeted to compliance and collection staff and two, reallocate
resources from other IRS programs. In recent years, IRS has proposed
increasing enforcement staff funded partly out of budget increases and
partly by reallocating resources from other areas within IRS. Despite
budget requests that were almost fully funded and despite realizing some
savings, the number of skilled enforcement staff actually declined between
1998 and 2003 because of other priorities including unbudgeted expenses.

JCT was not able to estimate a revenue effect for this option because the
JCT does not estimate discretionary re-allocations of IRS resources.
Nevertheless, we believe that should IRS succeed at increasing its ability
to collect delinquent taxes, it would bring in additional revenues.

Related GAO Products

Tax Administration: IRS Should Continue to Expand Reporting on Its
Enforcement Efforts. GAO-03-378. Washington, D.C.: January 31, 2003.

Tax Administration: Impact of Compliance and Collection Program Declines
on Taxpayers. GAO-02-674. Washington, D.C.: May 22, 2002.

GAO Contact

James R. White, (202) 512-9110

Receipts

Enhance Nontax Debt Collection Using Available Tools Increase Highway User
Fees on Heavy Trucks Implement Tolling or Other Alternative Revenue
Sources for the Fuel Tax   on Highways Restrict the Preferential Federal
Income Tax Treatment of Business-Owned   Life Insurance Reassess Annual
Charges for FERC-licensed Hydropower Projects that Use   Federal Lands Tax
Interest Earned on Life Insurance Policies and Deferred Annuities Further
Limit the Deductibility of Home Equity Loan Interest Limit the Individual
Tax Exclusions for Employer-Paid Health Insurance Repeal the Partial
Exemption for Alcohol Fuels from Excise Taxes on   Motor Fuels Index
Excise Tax Rates for Inflation Require Corporate Tax Document Matching
Improve Administration of the Tax Deduction for Real Estate Taxes Increase
Filing of Returns 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
Increase Penalties and Consistency of Disclosure for Abusive Tax Shelters
Authorize IRS to Use Private Collection Agencies to Collect Certain  
Delinquent Taxes

Enhance Nontax Debt Collection Using Available Tools

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 annually in recent 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 a Treasury
official, as of October 2003 only two of the nine large agencies, the
Departments of Housing and Urban Development and Education (for
administrative debts), 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 a Treasury official,
FMS has implemented a new Internet-based program to assist agencies in
identifying delinquent debtors. As of June 17, 2003, SBA is using this
system to initiate searches of limited information from the TOP database
to determine whether SBA applicants owe delinquent nontax debt. FMS is
planning for additional agencies to participate in the future.

We have recommended that agencies begin implementing AWG and that FMS
enhance or supplement information in the TOP database to assist agencies
in identifying delinquent debtors to prevent them from obtaining access to
future federal financial assistance in the form of loans, loan guarantees,
and loan insurance. 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 agrees that the option has the potential for increased revenue, but it
cannot be estimated without additional specification.

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

Increase Highway User Fees on Heavy Trucks

To develop and maintain highways, the federal 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 2002,
about $33.9 billion was collected from general federal 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.

JCT made the following revenue estimates, effective the taxable years
beginning after December 31, 2004.

Source: Joint Committee on Taxation.

Note: JCT provided its revenue estimates in billions of dollars.

Related GAO Products

Freight Transportation: Strategies Needed to Address Planning and
Financing Limitations. GAO-04-165. Washington, D.C.: December 19, 2003.

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

Implement Tolling or Other Alternative Revenue Sources for the Fuel Tax on
Highways

The Transportation Equity Act for the 21st Century (TEA-21) expired on
September 30, 2003, and while the Congress has passed a short extension,
it is considering a new reauthorization bill this session. The House has
passed a $275 billion bill over six years, and the Senate has passed a
$318 billion bill. To provide the necessary revenues needed, proposals
such as spending down the balance in the Highway Trust Fund and
transferring some gasohol tax revenues (currently deposited in the General
Fund) into the Highway Trust Fund have been discussed.

Other sources of funding are available to supplement the current gas tax
structure. Tolling has perhaps the most widespread support and appeal as
an additional revenue source, and this method is more closely aligned with
the "user pays" principle supported by GAO and most transportation
experts. It is recognized, for example, that motor fuel taxes have the
attribute of being a pay-as-you-go form of user charge. However, the
amount of excise tax a user pays is only weakly related to the costs
generated. Heavier trucks, for example, pay a smaller share of the
expenditures highway agencies incur to serve them. Therefore, it may
appear that these trucks are a less expensive means for shippers to
transport their goods than railroads or other modes, resulting in a
distortion of the competitive environment. From the standpoint of
efficiency, motor fuel taxes are not entirely sufficient because it is not
possible for government agencies to provide incentives to vehicle
operators to change the nature of their road use. Improved pricing of
transportation facilities could yield large payoffs in efficiency and
promote competition. The more widespread use of tolling to raise revenues
could provide this system benefit.

Congress may wish to consider several other revenue sources, including
tolling and a weight-distance tax (where vehicles are charged based on the
distance driven and the weight of the vehicle). Tolling of our nation's
most congested highways could provide needed revenue as well as change
driving patterns to reduce congestion. Based on estimates developed in a
recent Federal Highway Administration (FHWA) study, we estimate that net
revenues derived from peak-period tolling at the nation's 26 most
congested urban areas would amount to $1.9 billion annually. However, one
challenge in implementing congestion pricing is that, at present, greater
use of pricing is limited by statutory restrictions. Another challenge
involves effectively addressing concerns raised about equity and fairness.
One equity concern that has frequently been raised about congestion
pricing of public roads has been the potential effects of surcharges or
tolls on lower-income drivers. Because a surcharge would represent a
higher portion of the earnings of lower-income households, it imposes a
greater financial burden on them and, therefore, is considered unfair.
Other revenue approaches, such as a weight-distance tax, would also
provide a more equitable tax form that would tie more closely to the "user
pays" principle.

JCT agrees that the option has the potential for increased revenue, but it
cannot be estimated without additional specification.

Related GAO Products

Freight Transportation: Strategies Needed to Address Planning and
Financing Limitations. GAO-04-165. Washington, D.C.: December 19, 2003.

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 Contacts

JayEtta Z. Hecker, (202) 512-8984 Kate Siggerud, (202) 512-6570

Restrict the Preferential Federal Income Tax Treatment of Business-Owned
Life Insurance

Business-owned life insurance-permanent life insurance on employees where
the business is both the owner and the beneficiary-receives preferential
federal income tax treatment because the policies' accumulated earnings
are tax-deferred and death benefit payments are tax-free. Businesses
purchase such policies for various reasons, such as to insure against
financial losses associated with the deaths of key employees and to fund
employee benefits. Questions have been raised about whether these policies
should continue to receive preferential tax treatment, particularly when
they cover other than key employees, and legislative proposals have sought
to limit the preferences. Federal revenue estimators have estimated
forgone tax revenues from the tax preferential treatment on policies'
accumulated earnings for the 5-year period 2004-2008 as $7.3 billion to
$9.5 billion, not including the forgone tax revenues on additional income
from death benefit payments.

Disagreement exists over the appropriateness of preferential tax treatment
on business-owned life insurance policies when businesses use policy
proceeds to meet their general business needs, including the payment of
employee benefits. Some assert that the purchase of business-owned life
insurance is often related to employee benefit liabilities and that the
tax preferential treatment is needed to help reduce these costs. Others
state that allowing preferential tax treatment of business-owned life
insurance undermines the laws Congress enacted that define the type and
scope of preferential tax treatment businesses should receive for
providing employee benefits. Also, the preferential tax treatment of
business-owned life insurance provides this investment vehicle an
advantage over other investments that lack such preferences.

IRS and others have expressed concern that businesses may be borrowing to
indirectly finance life insurance purchases, even though 1986, 1996, and
1997 laws sought to restrict such borrowing. However, firms increase their
liabilities for many purposes, making it difficult to make a direct
connection between borrowing and purchasing life insurance. The Health
Insurance Portability and Accountability Act of 1996 provided that no
deduction is allowed for interest paid or accrued on any debt with respect
to a life insurance contract, with an exception which allowed deduction
for interest paid to insure key persons. The Taxpayer Relief Act of 1997
provided that no deduction is allowed for that portion of a business's
total deductions for interest expense equal to the portion of its total
assets invested in permanent life insurance, with an exception for life
insurance on 20-percent owners, officers, directors, and employees. An
amendment was offered during the House Budget Committee's mark up of the
Fiscal Year 2004 Concurrent Budget Resolution in March 2003, as well as in
prior Clinton administration budget proposals, to change the exception to
only apply to key persons, but the change was not adopted. The
Congressional Budget Office included a similar proposal in its March 2003
budget options.

Several other congressional proposals have attempted to limit the tax
preferential treatment of business-owned life insurance. In May 2003, a
bill was introduced in the House of Representatives and an amendment was
offered in the Senate to repeal the preferential tax treatment of the
proceeds related to certain business-owned life insurance policies. In
addition, an amendment passed the Senate Finance Committee in September
2003 that would have required businesses to treat life insurance policy
payments received as gross income, if the insured had not been an employee
in the year preceding his or her death. These various proposals generally
made an exception for insuring against the death of a key employee and may
have included other exceptions, such as when the life insurance was held
by a qualified retirement plan. Also, these various proposals would have
generally grandfathered existing policies, allowing businesses to continue
receiving tax-preferenced proceeds from existing policies. None of the
proposals was enacted by the end of the first session of the 108th
Congress.

To the extent that only new purchases of business-owned life insurance are
taxed, revenues from changes in the tax treatment of the policies will be
more limited because, without preferential tax treatment, purchases of the
policies will likely decline. Because it is unclear what alternative
investments businesses will make, the tax implications of their actions
cannot be determined. Nonetheless, without further restrictions on the
tax-preferred treatment of business-owned life insurance, the federal
government will continue to forego tax revenue attributable to deferred
policy earnings and tax-free death benefit payments.

In light of the potential for collecting tax revenues on business-owned
life insurance and reducing the amount of foregone federal tax revenue
attributable to business-owned life insurance, Congress may wish to
consider further  restrictions on the tax-preferred treatment of these
policies.

JCT made the following revenue estimates, effective the taxable years
after December 31, 2004.

Source: Joint Committee on Taxation.

Note: JCT provided its revenue estimates in billions of dollars.

Related GAO Product

Business-Owned Life Insurance: Preliminary Observations on Uses,
Prevalence, and Regulatory Oversight. GAO-04-191T. Washington, D.C.:
October 23, 2003.

GAO Contact

Davi M. D'Agostino, (202) 512-8678

Reassess Annual Charges for FERC-licensed Hydropower Projects that Use
Federal Lands

The Federal Power Act directs the Federal Energy Regulatory Commission
(FERC) to establish and collect reasonable annual charges from hydropower
projects that use federal lands. Since 1987, FERC's annual charges for the
use of federal lands have been based on a linear rights-of-way fee
schedule that was originally used to determine the annual fees other
agencies charged for the rights to locate, among other things, powerlines,
pipelines and communications lines on federal lands-uses that are
generally less valuable than hydropower. FERC chose this system because it
was simple and predictable and would not subject the commission to appeals
from the electricity industry. However, this system has no relationship to
the economic benefit of the federal lands used to produce hydropower.

The annual charges FERC currently collects for the use of federal lands
are significantly less than the fair market value of these lands,
according to our analysis of a stratified random sample of 24 hydropower
projects that use federal lands. On the basis of this analysis, FERC is
receiving less than 2 percent of the fair market value for the use of
these lands. In total, the estimated fair market value of the land used by
our sample of projects is at least $157 million annually and, under some
market conditions, the value of these lands is worth hundreds of millions
more. In comparison, FERC collected about $2.7 million in annual charges
from the 24 sample projects in 2002.

One option would be for Congress to direct FERC to develop new strategies
for assessing annual charges for the use of federal lands that are
proportionate with the benefits conveyed to hydropower project owners. If
FERC decides to collect annual charges that more closely reflect the fair
market value of federal lands, it would need to take into account the
Federal Power Act's requirement to seek to avoid unreasonable rate
increases to consumers, and the act's goal of encouraging the development
of hydropower.

CBO agrees that this option would result in budgetary savings, but it
could not develop a savings estimate.

Related GAO Product

Federal Energy Regulatory Commission: Charges for Hydropower Projects' Use
of Federal Lands Need to Be Reassessed. GAO-03-383. Washington, D.C.: May
20, 2003.

GAO Contact

Barry T. Hill, (202) 512-3841

Tax Interest Earned on Life Insurance Policies and Deferred Annuities

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. Investment income from annuities
purchased as part of a qualified individual retirement account would be
tax-deferred until benefits were paid.

JCT estimated the following revenues, effective the taxable years after
December 31, 2004.

Source: Joint Committee on Taxation.

Note: JCT provided its revenue estimates in billions of dollars.

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

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.

JCT made the following revenue estimates, effective the date of enactment.

Source: Joint Committee on Taxation.

Note: JCT provided its revenue estimates in billions of dollars.

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 Individual Tax Exclusions for Employer-Paid Health Insurance

The current tax treatment of health insurance gives few incentives to
workers to economize on purchasing health insurance. Employer
contributions for employee health protection are considered deductible,
ordinary business expenses and employer contributions are not included in
an employee's taxable income. The same is true for a portion of the
premiums paid by self-employed individuals. Although some employers or
employees could drop employer-sponsored coverage without the tax
exemption, some analysts believe that the tax-preferred status of these
benefits has contributed to the overuse of health care services and large
increases in our nation's health care costs. In addition, the primary tax
benefits accrue to those in high tax brackets who also have above average
incomes.

Placing a cap on the amount of health insurance premiums that could be
excluded-including in a worker's income the amount over the cap-could
improve incentives and, to a lesser extent, tax equity. Alternatively,
including health insurance premiums in income but allowing a tax credit
for some percentage of the premium would improve equity since tax savings
per dollar of premium would be the same for all taxpayers. Incentives
could be improved for purchasing low-cost insurance if the amounts given
credits were capped.

One specific option the Congress may wish to consider would be to tax all
employer-paid health insurance, while providing individuals a refundable
tax credit of 20 percent of premiums that they or their employers would
pay, with eligible premiums capped at $500 and $200 per month for family
coverage and individuals, respectively.

JCT agrees that the option has the potential for increased revenue, but an
estimate is not available.

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

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 for
transportation. 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. (As of 2002, alcohol fuels still accounted for
less than 1 percent of U.S. energy consumption for transportation.) 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.

JCT estimated the following revenues, effective January 1, 2005.

Source: Joint Committee on Taxation.

Note: JCT provided its revenue estimates in billions of dollars.

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

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.

JCT made the following revenue estimates, for beverages and tobacco
removed after December 31, 2004.

Source: Joint Committee on Taxation.

Note: JCT provided its revenue estimates in billions of dollars.

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

Require Corporate Tax Document Matching

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.

JCT agrees that the option has the potential for increased revenue, but it
cannot be estimated without additional specification.

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

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 state governments that 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. JCT agrees
that the option has the potential for increased revenue, but it cannot be
estimated without additional specification.

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.

JCT made the following revenue estimates, effective for rebates issued
after December 31, 2004, and amounts reported on tax bills after December
31, 2005.

Source: Joint Committee on Taxation.

Note: JCT provided its revenue estimates in billions of dollars.

aGain of less than $50 million.

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 Filing of Returns by U.S. Citizens Living Abroad

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.

JCT agrees that the option has the potential for increased revenue, but it
cannot be estimated without additional specification.

Related GAO Products

Tax Administration: Nonfiling Among U.S. Citizens Abroad. GAO/GGD-98-106.
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

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.

Since the enactment of the IRS Restructuring and Reform Act of 1998
(Restructuring Act), IRS's use of seizure authority has declined. In
fiscal year 1997, IRS carried out 10,090 seizures compared to only 399 in
fiscal year 2003. At this greatly reduced level of seizures, IRS is at
risk of foregoing the collection of millions of dollars as indicated in
our 1999 report. We reported that, 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.

Our 2002 survey of IRS employees showed that nearly two-thirds of those
who collect tax debts said that their likelihood of recommending a seizure
of a taxpayer's assets had decreased due to concerns about the
Restructuring Act's requirements. According to an IRS official in 2003,
the level of seizures is expected to remain substantially below the level
before the Restructuring Act 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, and (3) increased time available to taxpayers to
exercise rights to challenge seizures.

At the greatly reduced level of seizures that IRS has implemented since
1997, it is at risk of foregoing the collection of millions of dollars.
Although it may not be necessary to revert back to the 1997 levels, the
Congress may want to ask IRS whether it is making full appropriate use of
its seizure authority.

JCT agrees that the option has the potential for increased revenue, but it
cannot be estimated without additional specification.

Related GAO Products

Tax Administration: IRS and TIGTA Should Evaluate Their Processing of
Employee Misconduct under Section 1203. GAO-03-394. Washington, D.C.:
February 14, 2003.

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 Self-employment Taxes

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
self-employment income, most self-employed taxpayers are required to make
estimated tax payments. However, as of September 1997, about 90 percent of
the delinquent self-employed taxpayers required to make estimated tax
payments did not.

In the past, there have been proposals to deny social security credits to
taxpayers that fail to pay their self-employment taxes and to require
withholding on certain self-employment income. No actions were taken on
these proposals. One way to collect self-employment taxes before taxpayers
become delinquent that does not require a law change would be to encourage
more self-employed individuals to make their required estimated tax
payments. IRS could do this by establishing a program to remind previously
noncompliant taxpayers (i.e., those who were assessed an estimated tax
penalty the previous year) to make such payments.

JCT cannot estimate the revenue effect of this option without additional
specification.

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

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 April
2003, IRS had about 251,000 installment agreements outstanding, worth
about $2.3 billion. At the end of fiscal year 2000, approximately 35
percent of such 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.

JCT cannot estimate the revenue effect of this option without additional
specification.

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

Although no current and reliable estimate of gasoline excise tax evasion
exists, the most recent Federal Highway Administration estimate, from
1992, was that evasion amounted to between 3 and 7 percent of gasoline
excise tax revenue. From a tax administration perspective, moving the
collection point for gasoline excise taxes from the terminal to the
refinery level may reduce tax evasion because (1) gasoline would change
hands fewer times before taxation, (2) refiners are presumed to be more
financially sound and have better records than other parties in the
distribution system, and (3) fewer taxpayers would be involved. However,
industry representatives raise competitiveness and cost-efficiency
questions associated with moving the collection point.

In a May 1992 report, we suggested that the Congress explore the level of
gasoline excise tax evasion and, if it was found to be sufficiently high,
move tax collection to the point at which gasoline leaves the refinery.

JCT made the following revenue estimates, effective January 1, 2005.

Source: Joint Committee on Taxation.

Note: JCT provided its revenue estimates in billions of dollars.

aGain of less than $50 million.

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

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.

While there have been various proposals on clarifying the definition of
independent contractors and improving related information reporting, as
well as various congressional hearings that have dealt with some of these
bills, there remain opportunities for change. One option the Congress may
consider is to require the IRS clarify the definition of independent
contractors and extend information reporting requirements for
unincorporated independent contractors to incorporated ones. We believe
that revenues from this option could possibly increase by billions of
dollars.

JCT agrees that the option has the potential for increased revenue, but it
cannot be estimated without additional specification.

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

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 match 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.

JCT estimates the following revenue for contracts entered into or after
December 31, 2004.

Source: Joint Committee on Taxation.

Note: JCT provided its revenue estimates in billions of dollars.

aGain of less than $50 million.

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

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
because of expected impact on workload. The sooner IRS unblocks these
accounts, the more likely it is to collect the delinquent taxes.

JCT agrees that the option has the potential for increased revenue, but it
cannot be estimated without additional specification.

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

Increase Penalties and Consistency of Disclosure for Abusive Tax Shelters

Abusive tax shelters tend to be very complicated transactions promoted to
corporations and wealthy individuals to exploit tax loopholes by providing
these taxpayers with large, unintended tax benefits designed to lower
their overall tax bills. By their nature, abusive tax shelters are varied,
complex, and difficult to detect and measure.

Recently, Internal Revenue Service (IRS) has been giving abusive tax
shelters substantially increased attention. IRS's strategy for combating
the use of abusive tax shelters includes assessing penalties and requiring
taxpayers to disclose information about their use of abusive transactions.
IRS has data that suggest the tax loss to be in the tens of billions of
dollars. As of September 2003, an IRS database of tax avoidance
transactions contained information estimating a tax loss of $33 billion,
the majority of which concentrated from tax year 1993 to the present.

Measures such as increased penalties and consistency of disclosure could
possibly reduce the use of abusive shelters and the resulting loss of tax
revenues. In 2002, the Treasury Department developed an enforcement
proposal to increase penalties and uniformity of disclosure for taxpayers
and promoters of abusive tax shelters. Similar enforcement measures are
contained in the President's FY 2005 budget proposal, which has provisions
for expanded penalties and more uniform disclosure rules for taxpayers and
promoters involved in abusive tax shelters.

Congress has considered various options for expanding abusive shelter
penalties including the Treasury proposal. To reduce the use of abusive
shelters and the loss of tax revenues, one option the Congress may want to
consider is enacting legislation to expand penalties and make disclosure
more uniform for taxpayers and promoters of abusive tax shelters.

JCT agrees that the option has the potential for increased revenue, but it
cannot be estimated without more specifics of penalties and disclosures to
be required.

Related GAO Products

Internal Revenue Service: Challenges Remain in Combating Abusive Tax
Schemes. GAO-04-50. Washington, D.C.: November 19, 2003.

Internal Revenue Service: Challenges Remain in Combating Abusive Tax
Shelters. GAO-04-104T. Washington, D.C.: October 21, 2003.

Internal Revenue Service: Efforts to Identify and Combat Abusive Tax
Schemes Have Increased, but Challenges Remain. GAO-02-733. Washington,
D.C.: May 22, 2002.

GAO Contact

Michael Brostek, (202) 512-9110

Authorize IRS to Use Private Collection Agencies to Collect Certain
Delinquent Taxes

The Department of the Treasury has proposed that Congress authorize the
Internal Revenue Service (IRS) to contract with private collection
agencies (PCA) to help collect the growing inventory of tax debts.
According to IRS, as of May 2003, the total amount of outstanding tax
liabilities was $283.5 billion, of which IRS believes $85.4 billion has a
realistic possibility of being collected. Treasury and IRS have identified
a portion-as much as 25 percent of the $85.4 billion-as potentially being
eligible for referral to PCAs. In addition, IRS is continuing to assess
the inventory of outstanding tax liabilities to determine whether
additional amounts may be appropriate for referral to PCAs.

In pursing the private collection of tax debts, IRS would have to address
certain important issues, including selecting cases appropriate for PCAs
and assuring the protection of taxpayer rights. IRS's 1996-1997 pilot
program using private collection agencies showed that various challenges
must be overcome to assure the success of such a program. As of January
2004, IRS has taken a number of steps to address critical success factors
for this proposed program. For example, IRS has (1) developed program
performance measures and goals, (2) been planning to implement a computer
system to transmit data to PCAs, (3) been developing a method to select
PCA cases based on collection potential, and (4) written draft contract
provisions to govern the security of taxpayer data and PCAs' interactions
with taxpayers.

The proposal would allow IRS to pay PCAs from money collected. According
to Treasury, using PCAs would yield $1.5 billion over 10 years. One option
the Congress may wish to consider is allowing IRS to contract with private
collection companies to collect delinquent taxes.

JCT agrees that the option has the potential for increased revenue, but it
cannot be estimated without additional specification.

Related GAO Product

Compliance and Collections: Challenges for IRS in Reversing Trends and
Implementing New Initiatives. GAO-03-732T. Washington, D.C.: May 7, 2003.

GAO Contact

Michael Brostek, (202) 512-9110

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