Performance-Based Organizations: Issues for the Saint Lawrence Seaway
Development Corporation Proposal (Letter Report, 05/15/97,
GAO/GGD-97-74).
Pursuant to a legislative requirement, GAO compared the characteristics
of the British government's Next Steps Program and the performance based
organization (PBO) concept, focusing on: (1) the changes and effects the
PBO concept potentially could have on the Saint Lawrence Seaway
Development Corporation (SLSDC); and (2) how PBO status would
potentially affect SLSDC's financing mechanism, management structure,
accountability for performance, and congressional oversight.
GAO noted that: (1) the Next Steps Program and the PBO concept share
certain characteristics, including the relationship of the Next Steps
agency or PBO agency to its parent department; (2) however, important
differences exist between the Next Steps Program and PBO concept; (3)
while the U.S. government has been developing the PBO concept, the
British government has continued to grapple with certain issues related
to the Next Steps Program that may be of particular interest to Congress
and the Administration as they consider the PBO concept; (4) these
issues include the lack of clarity in relationships between agencies and
their parent departments, difficulty in developing and setting
performance goals, and uncertainty concerning who is accountable for
performance; (5) SLSDC's primary funding mechanism would change under
the Administration's proposed legislation from annual congressional
appropriations to mandatory, formula-based payments based in large
measure on the tonnage moved through the Seaway; (6) SLSDC officials
said they needed stable funding to develop an more aggressive
maintenance program and to increase the capital reserve fund; (7)
however, the formula-based payment is not without some risk to SLSDC;
(8) if tonnage does not increase as estimated, annual payments would
fall short of SLSDC's projections and could decline; (9) under the SLSDC
PBO proposal, Congress would no longer have a direct role in setting
SLSDC's funding levels or determining how those funds should be used
once the formula has been enacted and SLSDC would be provided a funding
level derived from the formula irrespective of overall policy goals;
(10) the harbor maintenance tax, which is the source of current
appropriations for SLSDC and the source for the proposed mandatory
payments, has been ruled unconstitutional by the U.S. Court of
International Trade; (11) SLSDC's PBO proposal presents several changes
in the area of accountability; (12) as a PBO, the leadership of SLSDC
would change from a presidentially appointed and congressionally
confirmed administrator to a chief operating officer, competitively
selected by and accountable to the Secretary of Transportation; (13)
SLSDC officials also want changes to SLSDC's management structure which
are to provide greater autonomy from Department of Transportation
activities and requirements to free up staff for SLSDC's primary missio*
--------------------------- Indexing Terms -----------------------------
REPORTNUM: GGD-97-74
TITLE: Performance-Based Organizations: Issues for the Saint
Lawrence Seaway Development Corporation Proposal
DATE: 05/15/97
SUBJECT: Accountability
Federal corporations
Federal agency reorganization
Congressional oversight
Interagency relations
Comparative analysis
Trust funds
Use taxes
IDENTIFIER: Performance Based Organization Initiative
United Kingdom Next Steps Program
Harbor Maintenance Trust Fund
Saint Lawrence Seaway
Great Lakes
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Cover
================================================================ COVER
Report to Congressional Committees
May 1997
PERFORMANCE-BASED ORGANIZATIONS -
ISSUES FOR THE SAINT LAWRENCE
SEAWAY DEVELOPMENT CORPORATION
PROPOSAL
GAO/GGD-97-74
Saint Lawrence Seaway Development Corporation Proposal
(410104)
Abbreviations
=============================================================== ABBREV
COO - chief operating officer
DOT - Department of Transportation
GPRA - Government Performance and Results Act of 1993
HMTF - Harbor Maintenance Trust Fund
OMB - Office of Management and Budget
OPM - Office of Personnel Management
NPR - National Performance Review
PBO - performance-based organization
SLSDC - Saint Lawrence Seaway Development Corporation
Letter
=============================================================== LETTER
B-276199
May 15, 1997
The Honorable Ted Stevens, Chairman
The Honorable Robert Byrd
Ranking Minority Member
Committee on Appropriations
United States Senate
The Honorable John McCain, Chairman
The Honorable Ernest Hollings
Ranking Minority Member
Committee on Commerce, Science and Transportation
United States Senate
The Honorable Bob Livingston, Chairman
The Honorable David Obey
Ranking Minority Member
Committee on Appropriations
House of Representatives
The Honorable Bud Shuster, Chairman
The Honorable James Oberstar
Ranking Minority Member
Committee on Transportation and Infrastructure
House of Representatives
Congress and the administration have introduced various approaches in
recent years to make federal agencies more results oriented and
federal managers more accountable for results. One approach proposed
by the administration is the performance-based organization (PBO)
concept, inspired by the Next Steps program that the British
government introduced in the late 1980s.
As directed by the House conference report on fiscal year 1997
appropriations for the Department of Transportation (DOT) and Related
Agencies dated September 16, 1996, and on the basis of our
discussions with your offices, this report (1) compares the
characteristics of the Next Steps program and the PBO concept and (2)
describes the changes and effects the PBO concept potentially could
have on the Saint Lawrence Seaway Development Corporation (SLSDC).
More specifically, we examined how PBO status would potentially
affect SLSDC's financing mechanism, management structure,
accountability for performance, including safety and regional
economic impact, and congressional oversight.
Because the PBO concept was still in the proposal stage, the PBO
information in our comparisons and discussions is largely based on
PBO concept papers and proposals; template legislation; policy papers
written by officials at the National Performance Review (NPR), Office
of Management and Budget (OMB), DOT, and SLSDC; and our interviews
with many of these individuals. Information on the Next Steps
program is from relevant literature, including assessments made by
both the public and private sectors in the United Kingdom.
RESULTS IN BRIEF
------------------------------------------------------------ Letter :1
The administration has proposed the creation of PBOs modeled after
the British Next Steps program, which reportedly has contributed to
the significant improvement in performance and reduction in costs in
British agencies during the 1990s. The Next Steps program and the
PBO concept share certain characteristics, including the relationship
of the Next Steps agency or PBO agency to its parent department. For
example, both are intended to separate the delivery of services (the
agency's role) from policy functions (the department's role) and to
hold agencies more accountable for results. However, important
differences exist between the Next Steps program and PBO concept.
For example, according to NPR officials, one of the primary goals of
the Next Steps program has been to reduce costs, although that is not
a major goal of the PBO concept.
While the U.S. government has been developing the PBO concept, the
British government has continued to grapple with certain issues
related to the Next Steps program that may be of particular interest
to Congress and the administration as they consider the PBO concept.
These issues include the (1) lack of clarity in relationships between
agencies and their parent departments, (2) difficulty in developing
and setting performance goals, and (3) uncertainty concerning who is
accountable for performance.
SLSDC is one of the administration's initial candidates for PBO
status. According to SLSDC officials, it is seeking PBO status for
several reasons: (1) a more predictable and stable funding
mechanism, (2) an accountable senior management structure working
under a performance contract with clear incentives to improve
efficiency and service, and (3) increased autonomy from day-to-day
DOT activities and reporting requirements.
SLSDC's primary funding mechanism would change under the
administration's proposed legislation from annual congressional
appropriations to mandatory, formula-based payments based in large
measure on the tonnage moved through the Seaway. SLSDC officials
said they needed stable funding to develop a more aggressive
maintenance program and to increase the capital reserve fund, which
has been used in recent years to help finance multiyear maintenance
programs. SLSDC officials estimated that, under the proposed
formula, annual payments would increase from an estimated $11.2
million in fiscal year 1998 to $12.8 million in fiscal year 2002.
However, the formula-based payment is not without some risk to
SLSDC--if tonnage does not increase as estimated, annual payments
would fall short of SLSDC's projections and could decline.
The proposed mandatory funding mechanism would change the
relationship between Congress and SLSDC. Under the SLSDC PBO
proposal, Congress' role would be reduced in setting SLSDC's funding
levels and determining how those funds should be used once the
formula has been enacted. Further, this mandatory funding would
reduce Congress' ability to adjust program priorities and to allocate
resources for other purposes. Considering the relatively small size
of SLSDC's budget, the dollar effect of this change would not be
great. However, the shift from a discretionary account to mandatory
funding raises an issue of precedence in budget policy that Congress
may view as a greater concern.
Moreover, the harbor maintenance tax which is paid into the Harbor
Maintenance Trust Fund, the source of current appropriations for
SLSDC and the source for the proposed mandatory payments, has been
ruled unconstitutional by the U.S. Court of International Trade, and
the ruling has been appealed.\1 This legal challenge further
complicates the decision on whether to have SLSDC become a PBO under
the proposed mandatory payment mechanism because, while the ruling
would affect the source of funding, the ruling would not affect the
mandatory funding formula.
SLSDC's PBO proposal presents several changes in the area of
accountability. For example, as a PBO, the leadership of SLSDC would
change from a presidentially appointed and congressionally confirmed
administrator to a chief operating officer, competitively selected by
and accountable to the Secretary of Transportation, with pay and job
security tied to the achievement of detailed performance goals. The
chief operating officer could be more easily removed for inadequate
performance than a presidentially appointed administrator. However,
Congress would no longer have a formal role in selecting the chief
operating officer, as it now does in approving nominees for
administrator through the Senate confirmation process.
SLSDC officials also want changes to SLSDC's management structure
which are to provide greater autonomy from DOT activities and
requirements to free up staff for SLSDC's primary mission of ensuring
safe and reliable navigation through the Saint Lawrence Seaway System
and the Great Lakes. As a PBO, SLSDC expects to gain greater
independence from DOT, such as freedom from participating in DOT
committees and reporting requirements. Because DOT imposed many of
the requirements from which SLSDC is seeking relief, the department
has the authority to grant SLSDC relief without PBO status. However,
department officials are reluctant to do so.
PBOs in general are to result in improved organizational performance;
however, there are no clear indications of how PBO status would
improve SLSDC's performance. Although general performance goals,
objectives, and measures have been drafted for SLSDC's four
performance areas (safety, long- and short-term reliability of the
Seaway system, trade development, and customer service and fiscal
performance), performance improvement targets for those goals have
generally not been established and would need to be negotiated by the
leadership of the PBO and the department. However, SLSDC officials
expect PBO status to result in a more efficient operation by
eliminating programs and cost areas that do not fully support
performance goals. We do not expect major changes in regional
economic impacts since the changes expected to occur as a PBO would
not directly influence the factors that affect regional impact.
--------------------
\1 United States Shoe Corp. v. U.S., 907 F. Supp. 408 (1995).
BACKGROUND
------------------------------------------------------------ Letter :2
In 1988, the British government assessed the progress of its ongoing
public management reform initiatives and decided to expand its reform
efforts. The expanded reforms, commonly referred to as the Next
Steps program, were initiated in response to the government's desire
to transform the public sector into one in which services are
provided through markets or market-like arrangements and managed by
people with the resources and authority to provide the services for
which they are accountable. The reforms also were in response to the
government's desire to streamline the central government, which was
found to be burdened by high operating costs and a workforce that was
too big and insufficiently focused on results.
THE NEXT STEPS PROGRAM
DEVELOPMENT AND EVALUATION
---------------------------------------------------------- Letter :2.1
The aim of the Next Steps program is to improve the delivery of
government services, obtain better value for the taxpayers' money,
and give staff more satisfying work and working conditions. Under
the Next Steps program, a department's service delivery functions are
broken into discrete management units, referred to as Next Steps
agencies. Agencies are responsible for delivering their respective
services and are accountable to the parent department for their
performance. Policies are to be made by parent departments. In
short, Next Steps seeks to (1) separate service delivery from policy
functions, (2) give agencies more flexibility and autonomy, and (3)
hold agency managers accountable for results.
The Next Steps program has become the British government's
predominant form of service delivery, with about 71 percent of civil
servants employed in Next Steps agencies as of 1996. Next Steps
agencies numbered 125 in 1996, and ranged in size from 25 employees
to nearly 69,000 employees. Because of Great Britain's unitary form
of government, some Next Steps agencies perform functions that are
generally not performed at the federal level in the United States.
Such agencies include Driver and Vehicle Licensing, Fire Service
College (training for the United Kingdom Fire Service), and the
Vehicle Certification Agency. However, other Next Steps agencies are
more directly comparable to U.S. federal functions. These include
the Royal Mint, the Social Security Benefits Agency, the United
Kingdom Passport Agency, and the Patent Office. According to an NPR
review, Next Steps agencies have reduced operating costs an average
of 5 percent each year while continuing to maintain or improve
services to the public.
PBO DEVELOPMENT AND
REQUIREMENTS
---------------------------------------------------------- Letter :2.2
According to the NPR, the proposal to create PBOs in the U.S.
government has been adapted from the Next Steps program. In
explaining the need for PBOs, the Vice President said that, while
much of government can and should operate more the way a top-notch
business does, systems of government presently do not allow them to
operate in that manner. PBOs will change those systems, he said.
According to NPR, a PBO is to be a discrete management unit that
commits to clear management objectives, measurable goals, customer
service standards, and specific targets for improved performance.
The unit is to remain in its current department under the policy
guidance of the department secretary. As appropriate to the specific
PBO, waivers may be sought from governmentwide regulations, policies,
and procedures.
As PBOs, agencies are expected to shift from a focus on adherence to
required processes to a focus on customers and achieving program
results. According to NPR, this can be done by (1) establishing
clear measures of performance (as also required by the Government
Performance and Results Act of 1993 (GPRA)), (2) granting the head of
the agency authority to deviate from specified governmentwide rules,
and (3) holding the head of the agency clearly accountable for
achieving results. Legislation is required to charter PBOs; none
were chartered as of March 1997.
According to NPR, there are several prerequisites for an agency to
become a PBO candidate. It must (1) have a clear mission, measurable
services, and a performance measurement system in place or in
development; (2) generally focus on external, not internal,
customers; (3) have a clear line of accountability to an agency head
who has policy accountability for the functions; (4) have top-level
support to transfer a function into a PBO; and (5) have predictable
sources of funding.
SLSDC AS A PBO CANDIDATE
---------------------------------------------------------- Letter :2.3
SLSDC is one of nine PBO candidates in the President's fiscal year
1998 budget. (A complete listing of the candidates is included in
app. I.) SLSDC is responsible for ensuring safe and reliable
navigation, primarily for commercial vessels, through the Saint
Lawrence Seaway System and the Great Lakes. The Seaway System is
comanaged for the United States and Canada by SLSDC and the Canadian
Saint Lawrence Seaway Authority. SLSDC has direct responsibility for
Seaway operations between Montreal, Canada, and Lake Ontario.
SLSDC is a relatively small component within DOT, with a fiscal year
1997 appropriation of $10.3 million and a workforce of 164 employees.
Of these employees, 147 are located in Massena, NY, next to the
waterway; and 17 are employed at SLSDC's headquarters in Washington,
D.C. Officials from SLSDC and NPR said they believe there is value
in SLSDC being a PBO model for other government agencies, and that
the Seaway would be a low-risk pilot because it already has a
corporate culture, operates in a businesslike manner, and has a small
budget.
SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :3
The House conference report on fiscal year 1997 appropriations for
the Department of Transportation and Related Agencies dated September
16, 1996, directed us to evaluate the PBO concept, with a specific
emphasis on SLSDC. We coordinated our work with the congressional
subcommittees that fund and oversee SLSDC: (1) the Subcommittee on
Transportation, Senate Committee on Appropriations; (2) the
Subcommittee on Surface Transportation and Merchant Marine, Senate
Committee on Commerce, Science and Transportation; (3) the
Subcommittee on Transportation, House Committee on Appropriations;
and (4) the Subcommittee on Water Resources and Environment, House
Committee on Transportation and Infrastructure. As agreed with these
offices, our specific objectives were to (1) compare the
characteristics of the Next Steps program and the PBO concept; and
(2) describe the changes and effects the PBO concept potentially
could have on the Saint Lawrence Seaway Development Corporation's
financing mechanism, management structure, and accountability for
performance including safety and regional economic impact, and on
congressional oversight.
To accomplish our first objective, we reviewed reports and studies
from both the public and private sectors of the United Kingdom,\2
the NPR, the National Academy of Public Administration, and the
Congressional Research Service. Some of these reports provided
information on the history, implementation, operation, and evaluation
of the Next Steps agencies. Other reports and studies provided
information on the concept and history of the U.S. PBO effort. In
addition, we interviewed officials from OMB, the Office of Personnel
Management (OPM), and NPR about PBOs and their relationship to Next
Steps agencies.
To meet our second objective, we reviewed numerous DOT and SLSDC
reports, which provided the key principles for establishing SLSDC as
a PBO, and the management, financing, and budgeting implications for
transition to a PBO. These reports included SLSDC's PBO concept
paper, proposed administrative framework agreement, and financial
plan; budget estimates; proposed legislation; and an economic impacts
study. These papers laid out the foundation that we used to
determine the potential effects to SLSDC of becoming a PBO. However,
DOT and administration officials stressed that the PBO concept
generally and the SLSDC proposal in particular are evolving. Thus,
as these proposals change, the potential effects might also change.
In addition, to better understand the PBO concept, SLSDC proposal,
and its governmentwide and Seaway specific implications, we met with
senior managers of DOT and SLSDC, both in Washington, D.C., and
Massena, NY. We also met with key officials in OMB, OPM, and NPR;
the Executive Board of the American Federation of Government
Employees Local 1968, which represents SLSDC's union employees; and a
senior official at the Canadian Embassy in the U.S. (regarding the
binational nature of the Seaway). Further, we spoke with
representatives from seven Seaway user groups and interviewed staff
of interested congressional representatives of the Great Lakes area
to obtain their views on the proposed PBO and its potential
consequences. While in Massena, we visited the Eisenhower and Snell
locks and Seaway facilities to observe current maintenance projects
and learn how future capital plans would affect lock operations.
One of the proposed PBO changes that the congressional committees
specifically asked us to examine was the mechanism for financing
SLSDC operations and its treatment under the Budget Enforcement Act
of 1990. SLSDC provided us with an analysis of the amount of funding
it would have received had the PBO funding mechanism been in place
for fiscal years 1993 through 1997 and would expect to receive for
fiscal years 1998 through 2002. We compared these funding estimates
with the amount of the appropriation SLSDC actually received during
fiscal years 1993 through 1997 to illustrate the potential impact of
the PBO funding mechanism. We did not independently verify SLSDC's
PBO funding estimates.
We did our work in Massena, NY, and Washington, D.C., from October
1996 through March 1997 in accordance with generally accepted
government auditing standards. In April 1997, we provided the
Secretary of Transportation and the Director of OMB with a draft of
this report for review and comment. DOT and OMB comments are
included with our evaluation at the end of this letter.
--------------------
\2 These studies include Improving Management in Government: The
Next Steps (Mar. 1988); Making the Most of Next Steps: The
Management of Ministers' Departments and their Executive Agencies
(May 1991); Sylvie Trosa, Next Steps: Moving On (Feb. 1994); After
Next Steps: The Massey Report (Jan. 1995); The Strategic Management
of Agencies: Models for Management (Sept. 1995); Next Steps
Agencies in Government Review 1995 (Feb. 1996); and Next Steps
Briefing Note (Apr. 1996). Most of these studies are procurable
through Her Majesty's Stationary Office, Publications Centre, London.
COMPARISON OF NEXT STEPS AND
PBO CHARACTERISTICS
------------------------------------------------------------ Letter :4
Congress and the administration have introduced various approaches in
recent years to make federal agencies more results oriented and
federal managers more accountable for results. For example, the
Government Performance and Results Act of 1993 requires agencies to
set goals, measure performance, and report on their accomplishments.
More recently, the administration has proposed the formation of PBOs,
which the administration said were based on the British government's
Next Steps program.
Information contained in relevant literature illustrated that the
Next Steps program and the PBO concept are constructed alike in many
important ways, but not in all. Both the Next Steps program and the
PBO concept require a discrete organizational unit to provide the
agreed-upon service that separates policymaking from provision of the
service. In exchange for greater accountability for results, PBOs
and Next Steps agencies are to be granted more flexibility than
conventional agencies, such as the authority to deviate from certain
personnel and procurement processes. Next Steps agencies and
potential PBOs are similar in their management structure and
accountability. Both are to be led by a chief executive (under PBOs
to be called the chief operating officer) who is competitively
selected and annually evaluated on the basis of performance and whose
pay and job security are directly tied to that performance. In both
cases, the chief executive is to be directly accountable to the head
of the parent department, which is accountable to Parliament, or
Congress and the President.
Despite the similarities in overall structure, the underlying
philosophies of Next Steps and PBOs differ in some important
respects. For example, a key difference is that Next Steps agencies
have a goal of reducing costs each year, while the PBO concept as
articulated by the administration has a major goal of improving
performance rather than reducing costs. However, senior OMB
officials told us there is nothing inherent in the concept that
precludes future PBO candidates from having a goal of achieving
significant cost reductions.
A further difference in Next Steps and the PBO concept is the
continuing assessment of whether the service function should remain
in the government or not. Under the Next Steps program, agency
charters are to be reviewed at 3- to 5-year intervals or during major
shifts in the policy environment. As part of that review, the
government is to determine if the service should be continued and, if
so, whether it should be provided by the private sector or by the
Next Steps agency. The PBO concept is intended to work somewhat
differently. Within 5 years of operation, an evaluation is to be
made to determine if the PBO (1) should continue as a PBO or (2)
return to the traditional structure in the department.
UNRESOLVED ISSUES FROM
ASSESSMENTS OF NEXT STEPS
---------------------------------------------------------- Letter :4.1
As the British government has designed and implemented its Next Steps
program, it has confronted several difficult challenges with which it
continues to grapple, according to reports and evaluations from both
the public and private sectors of the United Kingdom. Information on
these issues may be useful to Congress and the administration as they
consider the PBO concept. These issues include agency and department
roles, performance goals, and accountability.
Agency and department roles. Although the Next Steps program began
in 1988, the roles of the Next Steps agencies and their parent
departments often remain unclear, according to British program
evaluations, because of the problems inherent in trying to separate
roles.\3 For example, some Next Steps agencies believed they had the
flexibility to change functions, while the parent departments
believed they had the authority to prevent those changes. Some
agencies have characterized parent departments as bureaucratic
obstacles, while some departments have characterized Next Steps
agencies as separate little kingdoms, as stated in one report.\4
These evaluations identified policymaking as one area in which
agencies and parent departments endure confusion of their roles.
They indicated that, while in theory departments make policies and
agencies implement those policies, there has not always been a clean
separation between policymaking and implementation. Management
decisions made by agencies sometimes have had an impact on policy
choices made by the departments, according to evaluations. For
example, if an agency's target is to reduce an operating deficit, it
may propose to do so by creating a user fee. While this proposal may
be viewed as a decision of agency management on how to implement the
policy of reducing an operating deficit, it could also be viewed as
making a policy decision on the type of public program where user fee
funding is appropriate.
The British government has taken steps to address these issues, but
with limited success, according to studies. One mechanism has been
the establishment of the "Fraser Figure," a senior officer who is to
interface between the agency and the department. One evaluation
explained that although the Fraser Figure is used in 40 percent of
the Next Steps agencies, this process has not worked well because the
officer rarely represents the views of both the department and agency
in a balanced way and does not have adequate staff to coordinate
activities. Another mechanism is advisory boards, which have been
used in 30 percent of the Next Steps agencies, also with limited
success. Advisory boards are extremely diverse in composition, ways
in which they work, and in their objectives, as studies have
indicated. For example, boards tend to be unbalanced in their
advisory and monitoring responsibilities, emphasizing one over the
other. Less than 25 percent of the Next Steps agencies use a
combination of the Fraser Figure and advisory boards.
Performance goals. The performance goals and targets for the Next
Steps agencies are set through negotiations between the agency and
department, according to British evaluations. However, the British
experience has underscored that public sector performance measurement
is a complex, iterative process that involves a number of competing
considerations.
A British evaluation suggested that three major concerns have arisen
in connection with Next Steps goal setting.\5 First, goal setting
does not always reflect what is realistic as much as adding
incremental improvements to prior results. There can be a tension
between the agency and department over the target, with departments
generally wanting more ambitious improvement targets, the study
indicated. Second, difficulties exist over what exactly to measure
when measuring core activities of Next Steps agencies. The
evaluation showed that performance measures frequently focus on what
agencies can measure, not what is most important in assessing
performance. In addition, some targets, such as efficiency and
quality, may even be in conflict with each other, requiring a careful
balance. Third, the study stated that target setting can create
difficulties when used in a mechanistic way and without appropriate
evaluation. For example, using unmet targets to criticize agencies,
rather than attempting to examine the reasons why the targets were
not reached, may simply lead agencies to establish more easily
achievable targets. The same would be true if targets were used to
make automatic decisions, such as performance-related pay. The
British government published "The Strategic Management of Agencies:
Models for Management" in September 1995 to provide advice and best
practice guidelines on target setting, such as balancing the
dimensions of output, time, quality, and cost.
Accountability. A recent British study states that Next Steps has
increased agencies' accountability to Parliament by making roles
clearer and by providing much more information through the
publication of each agency's framework document, key annual targets,
and annual report.\6 However, as noted, the distinction between
administration and policy often remains unclear in assessing
accountability, being described as a "complex web of issues."\7 The
distinction is unclear because of the inherent difficulties
departments and agencies face in defining their separate roles. For
example, because policies and their implementation are inherently
linked--the study continued--it is difficult at times to distinguish
who is truly responsible for an outcome, the department minister who
makes the policy or the agency chief executive who implements the
policy. Questions have arisen on whether a poor result was due to
poor policy or inadequate implementation and on who was ultimately
accountable for the resulting performance. To mitigate this concern,
the British government has encouraged greater collaboration between
ministers and chief executives, facilitated by Fraser Figures.
--------------------
\3 Trosa, Next Steps: Moving On (Feb. 1994) and After Next Steps:
the Massey Report (Jan. 1995).
\4 Trosa, Next Steps: Moving On (Feb. 1994).
\5 Trosa, Next Steps: Moving On (Feb. 1994).
\6 Next Steps Briefing Note (Apr. 1996).
\7 After Next Steps: the Massey Report (Jan. 1995).
POTENTIAL EFFECTS OF PBO STATUS
ON SLSDC
------------------------------------------------------------ Letter :5
SLSDC officials told us that it is seeking PBO status for several
reasons: (1) a more predictable and stable funding mechanism, (2) an
accountable senior management structure working under a performance
contract with clear incentives to improve efficiencies and service,
and (3) increased autonomy from day-to-day DOT activities. Officials
from SLSDC and NPR also said that the Seaway would be a low-risk
pilot because it already has a corporate culture, operates in a
businesslike manner, and has a small budget.
FUNDING MECHANISM
---------------------------------------------------------- Letter :5.1
SLSDC currently is funded from three sources: (1) annual
appropriations from the Harbor Maintenance Trust Fund (HMTF), (2)
SLSDC's capital reserve, and (3) miscellaneous revenue such as
interest on the capital reserves. However, the primary funding is
made through annual appropriations, which are paid out of the HMTF.\8
In requesting funds, SLSDC goes through DOT and OMB and is subject to
the budget decisions of these two agencies as well as Congress.
Under the PBO proposal, the funding mechanism for SLSDC would change
from annual congressional appropriations to mandatory, formula-based
payments, based in large measure on the tonnage moved through the
Seaway. SLSDC officials told us that this change in funding is a
major reason for pursuing PBO status. They believe mandatory
payments would give them more reliable and forecastable funding and
that SLSDC needs such stability to better plan operations,
maintenance, and capital improvements. Of course, Congress could
provide a more stable funding stream through the annual
appropriations process without making SLSDC a PBO. In addition to
the stability the formula would provide, SLSDC estimates of
formula-based funding over the next 5 years indicate that funds could
increase yearly, based on projected tonnage figures. However, SLSDC
officials told us that the projected tonnage figures were "rough
estimates," and if tonnage actually declined then funding could also
decline.
This proposed funding would be made through a mandatory payment from
the HMTF, which is financed through the harbor maintenance tax. This
tax has been ruled unconstitutional by the U.S. Court of
International Trade. The court's ruling was appealed and is pending
in the U.S. Court of Appeals for the Federal Circuit. The ultimate
ruling on this issue could affect SLSDC's current funding since its
appropriations now come from that fund. However, should the ruling
be upheld, under the PBO formula-based funding mechanism, SLSDC's
formula would provide for a certain level of funding even though no
tax would be collected.
The proposed PBO funding would be based on a formula that considers
shipping tonnage on the Saint Lawrence Seaway and inflation.
Specifically, the proposed formula is the 5-year average of U.S.
international tonnage (in metric tons) moved through the Seaway
multiplied by a factor of 1.076 and adjusted for inflation by the
percentage difference between the Consumer Price Index for all urban
consumers for the first quarter of calendar year 1996 and for the
first quarter of the calendar year in which an annual payment is
determined.
SLSDC officials told us that the proposed funding mechanism is not
without risk to the agency because it is dependent upon Seaway
traffic. However, they also felt that the formula, because of its
5-year rolling average, would provide a more predictable funding
mechanism than annual appropriations. On the basis of information
provided by SLSDC, as shown in table 1, if the PBO formula had been
in effect in past years, the formula would have provided less than
appropriations in some years and more in others. For the 5-year
period of 1993-1997, there is, on average, no difference between
appropriations and the PBO formula. Because it is unknown what
Congress might appropriate for SLSDC over the 1998-2002 period, we
cannot compare appropriations and the PBO funding formula for future
years. However, as shown in table 1, SLSDC officials estimate that
the funding from the formula will increase each year over the next 5
years, reaching a level of $12.8 million in fiscal year 2002.
Table 1
SLSDC Actual and Projected Funding for
Fiscal Years 1993-2002
(Current dollars in millions)
Difference
between PBO
PBO formula and
Fiscal year Appropriation formula appropriation
---------------------- ---------------- ---------- ----------------
1993 $10.7 $10.5 $-0.2
1994 10.8 10.4 -0.4
1995 10.2 10.3 +0.1
1996 9.9 10.6 +0.7
1997 10.3 10.1 -0.2
1998 None under PBO\a 11.2 \b
1999 None under PBO 12.0 \b
2000 None under PBO 12.6 \b
2001 None under PBO 12.8 \b
2002 None under PBO 12.8 \b
----------------------------------------------------------------------
\a In the President's budget request for fiscal year 1998, no
appropriation is requested for SLSDC since financing is proposed to
be derived from an automatic annual payment from the HMTF.
\b Not applicable.
Source: SLSDC.
Essentially, SLSDC officials worked backwards from an estimate of the
amount of funds they thought they needed in fiscal year 1997 to
generate the funding formula, according to SLSDC and OMB officials.
The formula came about through negotiations among officials from DOT,
SLSDC, and OMB. SLSDC estimated the level of funding it believed it
needed in 1997 to operate and maintain the Seaway and OMB tied that
funding need to tonnage through an adjustment factor.
SLSDC officials cite the failure of recent appropriated funds to
fully cover costs and the resulting drawdown of its capital reserves
as supporting the need for new, more stable funding. The Harbor
Maintenance Revenue Act, which created the HMTF, authorized the trust
fund to fully finance SLSDC's operation and maintenance costs.
However, according to SLSDC officials, the HMTF has not fully funded
operation and maintenance costs since 1987. Figure 1 shows SLSDC's
actual operations and maintenance costs, HMTF appropriations, and a
retrospective look at what the level of funding would have been if
the PBO funding formula had been in effect for fiscal years 1993
through 1996.\9
Figure 1: Comparison of O&M
Costs, HMTF Appropriations, and
Retrospective Application of
the PBO Formula
(See figure in printed
edition.)
Source: SLSDC.
As shown in figure 1, SLSDC has had to augment its appropriations
with capital reserves and miscellaneous revenue to cover its
operations and maintenance costs. According to SLSDC officials, it
is important to have a stable, predictable funding source so that the
agency would be able to better plan for multiyear operations,
maintenance, and capital improvement projects. The Seaway facilities
are about 40 years old and, according to SLSDC officials, require a
lead time for ordering and building unique parts. Over time, the
aging lock and machinery facilities and the long-term concrete
deterioration problems require an aggressive preventive maintenance
program, according to officials. Because the formula would allow
better forecasting of revenues, SLSDC officials said they believe
they could develop a more aggressive maintenance program.
SLSDC's capital reserve fund has allowed SLSDC to smooth out
fluctuations in appropriations and lower-than-anticipated
miscellaneous revenue. SLSDC officials told us that because of the
HMTF appropriations shortfalls, SLSDC has been using its capital
reserves, interest, and other revenue to finance operations and
maintenance. Table 2 provides data on the fluctuations of this fund.
Table 2
Capital Reserve Fund Balance and
Drawdowns
Reserve
Fiscal balance\
year a Significant reserve drawdowns
---------- -------- -- --------------------------------------------
1985 $12.9 None
1986 10.9 Concrete rehabilitation-$2.1 million
1987 8.9 Basic operating expenses, transition year
from tolls-$2 million
1988 10.1 None
1989 11.5 None
1990 11.1 Corps of Engineers structural evaluation
study-$318,000
1991 11.6 None
1992 12.6 None
1993 11.9 Channel maintenance dredging-$528,000
1994 11.8 Concrete repair-$192,000
1995 11.9 None
1996 11.2 Concrete repair and workboat purchase-
$700,000
1997 10.0 Equipment replacement and capital outlay
(estimat programs-$1.2 million
e)
----------------------------------------------------------------------
\a Dollars in millions.
Source: SLSDC.
SLSDC officials told us it is important to maintain a level of $12
million in the capital reserve fund, since this is the amount needed
to replace two gates. Under the PBO funding mechanism, SLSDC
estimates the capital reserve account could increase by yearly
amounts varying from $680,000 in fiscal year 1998 to $1.58 million in
fiscal year 2000. By the end of the initial 5-year PBO period, SLSDC
estimates that the combined effect of the annual increases and the
drawdowns would result in a capital reserve fund's balance of $11.5
million.
The change in funding would bring about several potential effects,
which raise questions of budget policy. SLSDC now competes for
funding with other discretionary programs in the budget, as well as
within the DOT budget. However, the legislation would change SLSDC
from a discretionary to a mandatory program.\10 Providing mandatory
funding for SLSDC would reduce Congress' ability to adjust program
priorities and to allocate resources for other purposes. Considering
the relatively small size of SLSDC's budget, the effect of this
change would not be great; however, the precedent may be of greater
concern.
The Statement of Purpose and Need accompanying the proposed
legislation stated that OMB would score the bill as having a net
effect of zero because the bill would reduce discretionary spending
caps. However, after our audit work was completed, OMB officials
told us that the administration would soon release a revised version
of SLSDC's PBO legislation. We were told that the revised
legislation, when issued, would no longer contain the provision for
reducing the discretionary spending cap. Rather, according to OMB
officials, SLSDC funding would still be treated as a mandatory
payment and would require an offset by cutting spending in other
mandatory programs or increasing revenue. This raises an additional
budget policy issue, beyond the creation of a new mandatory
program--how the increase in spending would be offset by cuts in
other mandatory programs or increases in taxes.
--------------------
\8 HMTF was established by the Harbor Maintenance Revenue Act of
1986. Under law, the Fund's revenue is primarily derived from an
appropriation equivalent to amounts received from an ad valorem tax
(user fee) on commercial cargo loaded and unloaded at specified U.S.
ports open to public navigation.
\9 Table 1 provides data for HMTF appropriations and the
retrospective PBO funding. Actual operations and maintenance costs
for fiscal years 1993 through 1996 are $12.6 million, $11.9 million,
$11.2 million, and $11.8 million respectively.
\10 The proposed bill would reduce discretionary caps for fiscal year
1998 by $11.2 million in budget authority and outlays. Comparable
amounts for fiscal years 1999-2002 are $12.0 million, $12.6 million,
$12.7 million, and $12.8 million respectively.
MANAGEMENT STRUCTURE
---------------------------------------------------------- Letter :5.2
PBO status would change the managerial leadership of SLSDC from an
appointed administrator to a contracted-for chief operating officer.
Currently, SLSDC is headed by a presidentially appointed
administrator who serves a 7-year fixed term and reports directly to
the Secretary of Transportation. As a PBO, SLSDC would be led by a
chief operating officer who would be competitively selected by the
Secretary of Transportation and would be accountable for delivering
results that are spelled out in the chief operating officer's
contract. Pay and job security would be tied to performance, as
measured through such objectives as efficiency, cost, and service.
The chief operating officer of SLSDC would be directly accountable to
the Secretary of Transportation who would, in turn, continue to be
accountable to Congress and the President for the activities and
performance of the SLSDC PBO.
British evaluations of Next Steps have shown that developing and
monitoring a chief executive's contract is a long-term and iterative
process. Since SLSDC is a relatively small part of the Department of
Transportation, the Secretary may have to spend a disproportionate
amount of time to craft and monitor a chief operating officer's
contract with specific and measurable performance goals. This degree
of oversight and accountability has not been applied before to SLSDC.
Furthermore, if SLSDC is one of the first PBOs, administration
architects of PBOs may pay particular attention to the development of
the contract since it could be a model for other PBOs.
As a PBO, SLSDC expects to have greater autonomy from DOT. SLSDC is
part of DOT and as such, DOT requires participation in its activities
and reporting requirements. According to SLSDC officials, SLSDC
personnel are getting pulled into departmental initiatives and away
from the primary mission of SLSDC. For example, according to one
SLSDC official's rough estimate, SLSDC was required to participate in
60 DOT committees within a 1-year period. SLSDC officials said that
since its Washington office is so small (17 employees, including the
Administrator and her staff), participation in DOT functions places a
disproportionate burden on SLSDC staff. DOT provided us with a list
of reporting requirements for SLSDC, which included 93 reports that
are either legislated, required by DOT, or required by other
agencies. This list includes for example, reports on Earth Day event
planning, the Interagency Council on the Homeless, vehicle lease
agreements, and the DOT annual report. The SLSDC Administrator said
she believed many of the reports could be eliminated under PBO
status, although DOT and SLSDC officials would have to negotiate
which reports would be eliminated and which would remain.
Under the PBO proposal, SLSDC would remain part of DOT but have
greater independence from the Office of the Secretary. In addition
to the reporting requirements previously discussed, SLSDC generally
would not clear its reports through the Office of the Secretary or
participate in the department's various multimodal transportation
groups. This would make more staff resources available to work on
SLSDC's core mission, according to SLSDC officials. However, the
degree of independence would depend on negotiations between officials
of SLSDC and DOT.
Many of the reporting requirements between DOT and SLSDC were imposed
by DOT. Therefore, SLSDC could seek waivers from DOT to eliminate
some or all of these reporting requirements. Eliminating some
requirments does not require making the agency a PBO. However, SLSDC
officials told us that because of its size, it is sometimes difficult
to get an audience with DOT officials, and DOT officials have not
been receptive to granting waivers. DOT officials confirmed this,
saying they generally would not look favorably on requests for relief
from participating in departmentwide initiatives and reporting
requirements because the department does not want to set the
precedent of relieving any of its administrations from crosscutting
departmental requirements.
The PBO concept also provides flexibilities from governmentwide
personnel and procurement requirements. These flexibilities are
intended to give managers greater freedom in achieving their
performance goals. According to SLSDC managers, the corporation does
not expect many changes as a PBO in this regard.
Concerning personnel flexibilities, approximately two-thirds of
SLSDC's employees belong to a union and, although the PBO legislation
would allow for changes, the personnel practices affecting the
bargaining unit would not change unless the contract was
renegotiated. For the remaining one third, SLSDC would have more
flexibility regarding personnel and plans in particular to explore
developing and implementing innovative performance and pay systems.
Also, SLSDC would no longer be subject to externally imposed
employment ceilings and would be able to hire more employees as
needed within the limits of its budget.
As for procurement, the PBO proposal states that SLSDC does not make
large numbers of major procurements, and the existing rules have not
posed a problem, although there could be some changes in procurement
actions as a PBO. For example, under the PBO legislation, SLSDC
could direct the majority of its procurement actions to vendors in
Massena and the Great Lakes region.
Even as a PBO, SLSDC would still remain in DOT. The PBO concept
follows the British Next Steps program in attempting to separate
policymaking (in this case, by DOT) from the carrying out of services
(in this case, by SLSDC). SLSDC has started to work on this
separation by drafting a list dividing up the functions to be
performed by itself and DOT under the PBO concept.
According to evaluations of the Next Steps experience, the
relationship between the agency and its parent department is not
always clear. Even when it appears roles are clearly defined, such
as the case of policy (department) versus implementation (PBO), there
will still be overlap of those roles. As previously discussed,
determining the appropriate distribution of roles and
responsibilities between SLSDC and DOT would likely take time,
involve trial and error, and need to be continuously reassessed as
new issues arise. For example, SLSDC has traditionally conducted
trade missions, which are intended to educate potential shippers
about the Saint Lawrence Seaway and serve as a means to encourage
more ships to use that system. As such, they may be viewed as a
method of achieving the goal of increasing traffic through the
Seaway. However, such missions also have policy implications, for
example, if they were to result in shifting the route imports take
into the United States.
PERFORMANCE IMPROVEMENT AND
ACCOUNTABILITY
---------------------------------------------------------- Letter :5.3
Consistent with the requirements of GPRA, under the PBO concept
agencies are to set goals, measure performance, and report on their
accomplishments. Under the PBO proposal, the SLSDC chief operating
officer (COO) would be held accountable for performance--with
opportunities for substantial bonuses when performance goals are met
and possible sanctions, including removing the COO, if goals are not
met. According to OMB and DOT officials, these possible incentives
and sanctions establish a foundation for substantial improvements in
SLSDC's performance by clearly linking SLSDC's leadership's pay and
tenure to performance. SLSDC has drafted general goals and
objectives as well as more specific performance goals and indicators
that could serve as a basis for the contract. However, the actual
measures of performance and performance goals would be established in
the contract between the COO and the Secretary of Transportation.
This provides the flexibility to develop and adjust the measures and
goals based on experience and changing circumstances. Consequently,
there are no clear indications yet of how much SLSDC believes PBO
status would improve SLSDC's performance in key areas.
Next Steps evaluations have shown that determining exactly what to
measure and how to set a performance goal remain a continuing
political and technical challenge. Our work has found that agencies
are confronting similar challenges as they implement GPRA, and we
expect PBOs would also confront such issues.\11
According to SLSDC's PBO proposal, SLSDC is to be held accountable in
four performance areas: (1) safety; (2) long- and short-term
reliability of the Seaway system; (3) trade development, including
regional economic impacts; and (4) customer service and fiscal
performance. According to SLSDC, a focus on these performance areas
will ensure a more efficient operation by eliminating programs and
cost areas that do not fully support performance goals. SLSDC
estimates average annual cost savings in excess of half a million
dollars will be realized based on savings from reductions in rent,
personnel, programs, and elimination of awards. However, a
definitive plan on how these cost savings will be achieved has not
yet been developed. Each of SLSDC's four key performance areas is
discussed below.
--------------------
\11 Managing for Results: Achieving GPRA's Objectives Requires
Strong Congressional Role (GAO/T-GGD-96-79, March 6, 1996) and
Managing for Results: Using GPRA to Assist Congressional and
Executive Branch Decisionmaking (GAO/T-GGD-97-43, February 12, 1997).
SAFETY
-------------------------------------------------------- Letter :5.3.1
SLSDC currently makes safety a key measure of performance. For
example, SLSDC reports that the number of vessel incidents each year
ranged from one to four over the last 3 years. Over this period, the
corporation continued its foreign vessel screening program, including
vessel construction, standard safety equipment, and navigation charts
and logs. During 1995, 166 foreign vessels were inspected under the
program. SLSDC also has to annually maintain its two locks to
provide a safe environment for vessels transiting the Seaway. During
the winter of 1995, SLSDC completed the second phase of a 3-year
concrete replacement project at the U.S. Eisenhower lock.
As a PBO, SLSDC's draft performance goals suggest that the SLSDC COO
would be held accountable for maintaining acceptable levels of safety
and reducing the likelihood of accidents and to demonstrate SLSDC's
preparedness to respond to an environmental emergency. Safety
measures would apply to vessel and workplace safety as well as
environmental protection. For example, one goal would be to reduce
the risk of commercial vessel accidents; this would be measured by
the number of accidents/incidents per 1,000 transits. In addition,
another goal would be to maintain emergency response time (i.e., the
time elapsed from notification to arrival on the scene) at 3 hours or
less. (The measure for this goal is to be the time taken to respond
to actual and simulated emergencies.) SLSDC currently collects these
data on an incident basis, but they are not reported in an aggregated
manner.
According to SLSDC officials, balancing the goals of safety and
increased traffic would not be a new concern if SLSDC should become a
PBO. Both are goals for the Seaway now, and SLSDC officials said
that PBO status is not expected to make a significant difference
because, regardless of the level of traffic, SLSDC must strike a
balance between working safely and moving traffic through the locks.
Seaway officials told us SLSDC has been moving, on average, about 12
vessels a day through the locks, which is about half of its capacity.
These officials said that marginal increases in traffic should not
compromise safety procedures, but a dramatic increase in traffic,
such as doubling current transits, would necessitate a review of
safety procedures and potential impacts.
LONG- AND SHORT-TERM
RELIABILITY
-------------------------------------------------------- Letter :5.3.2
The second proposed performance goal for SLSDC is to ensure a viable
shipping route; the Seaway's shipping season must be as long as
possible with maximum availability to users, according to SLSDC
officials. Proposed measures for reliability include lock
availability, lock or equipment failure, and lock and equipment
inspections.
SLSDC's draft PBO plans seek to maintain a high level of system
reliability and availability of U.S. navigation facilities for
Seaway users. For example, the SLSDC PBO goal is to achieve 95
percent lock/system availability. From 1991 through 1995, SLSDC
averaged 96 percent availability, and during 1995, the waterway's
availability rate climbed to 99 percent. However, the goal of
availability is affected by factors that are outside the control of
SLSDC, such as the weather (e.g., ice, high water).
TRADE DEVELOPMENT AND
REGIONAL IMPACTS
-------------------------------------------------------- Letter :5.3.3
The third proposed performance goal, promotion of trade to generate
new business for the Saint Lawrence Seaway and to enhance the U.S.
Great Lakes economy, is already an important facet of SLSDC's
mission. Changes in Seaway traffic can affect the entire Great
Lakes-Saint Lawrence Seaway area. Regional impacts take such forms
as changes in jobs, personal income, and federal, state, and local
taxes. These impacts are a function of many factors including
tonnage levels, which port is used, commodity mix, and labor and port
productivity.
According to SLSDC, one performance indicator of effective trade
development is cargo tonnage. Over the last 10 years, tonnage has
fluctuated from 31.4 million metric tons per year to 40.6 million
metric tons per year. As a PBO, SLSDC plans to continue to measure
annual U.S. international volume, the actual number of vessels
operating by fleet, and the average tons per loaded vessel. Like
system availability, tonnage is affected by many economic factors
outside the scope of the corporation's control.
However, the factors that affect the regional impacts would not
change if SLSDC should become a PBO. PBO status would change many
things for SLSDC, including its funding mechanism, selecting official
for the agency head, and relationships with DOT and Congress.
However, none of these changes directly affects the factors that
affect regional impact, so changing the management approach to a PBO
should not directly affect the Great Lakes regional economy.
Because of the large number of variables that must be considered, a
sophisticated model is necessary to predict the specific locations
and magnitude of any changes in economic impacts. In the past, SLSDC
has commissioned studies to determine economic impacts of the region.
Its 1995 Annual Report compared impacts on the 1991 (34.9 metric
tons) and 1994 (38.4 metric tons) shipping seasons based on studies
it had commissioned. SLSDC reported increases in the 12-14 percent
range in jobs; personal income; annual revenue by Great Lakes firms;
and local, state, and federal taxes.
CUSTOMER SERVICE AND
FISCAL PERFORMANCE
-------------------------------------------------------- Letter :5.3.4
The PBO concept paper states that the fourth proposed performance
goal for SLSDC is to ensure that the customers and corporate
employees themselves have a voice in evaluating the corporation's
performance and contributing to business decisions. In addition,
SLSDC must ensure that U.S. navigation facilities are in good
working order and reserves are adequate to meet emergency and
critical drawdown needs.
While taking a corporate view of enhancing and protecting its
customer base, SLSDC has surveyed its customers on a regular basis to
determine how satisfied they were with the service SLSDC provided.
SLSDC has had a continuing program of coordination and outreach to
user groups and published customer-service standards in October 1996.
As a PBO, SLSDC plans to continue to ensure that customers have input
into evaluating the corporation's performance and business decisions.
For example, SLSDC intends to measure customer satisfaction and has
set a target of achieving a rating of 3.5 or better based on a 1 to 5
scale. The overall rating for 1995, the only year of the survey, was
4.5. Moreover, according to SLSDC officials, the proposed funding
formula provides an additional incentive to improve customer service
since any increases in tonnage result in increased funding. As a
PBO, SLSDC also expects to continue to work with its employees and
their representatives to promote both employee satisfaction and human
resources management practices. To this end, SLSDC plans to
institute a new measure by conducting an employee satisfaction
survey. This survey would serve as a baseline for future measures
and targets.
The PBO concept and GPRA both require agencies to strive for results
and hold managers accountable for achieving results. However, the
PBO concept is different from GPRA in that the PBO concept provides
for direct, personal incentives for agency leadership for meeting
performance goals and sanctions for nonperformance. Under the PBO
concept, the chief operating officer would be eligible for
substantial rewards and contract renewal for excellent
performance.\12 Conversely, the chief operating officer could be
removed by the President or by the Secretary for misconduct or
failure to meet performance goals. In contrast, the Secretary cannot
remove the SLSDC administrator for not meeting performance goals.
Thus, the chief operating officer could be more easily removed for
inadequate performance than the holder of the administrator position.
Given the level of detail and specificity expected in the chief
operating officer's contract, the Secretary should be able to easily
tell if goals were met or not, and take appropriate action. However,
as evaluations of Next Steps agencies have shown, while determining
if a goal was met may be straightforward, determining why a goal was
not met and the actions needed to meet unmet goals can be
analytically difficult. Moreover, the degree to which a secretary
would be willing to fire a chief operating officer for failure to
meet performance goals is, of course, unknown.
--------------------
\12 A chief operating officer may receive a bonus of up to 50 percent
of base pay, according to the proposed PBO legislation for SLSDC.
CONGRESSIONAL OVERSIGHT
---------------------------------------------------------- Letter :5.4
Since PBOs must be created through the enactment of enabling
legislation, Congress would have an opportunity to define its role in
each PBO. As currently structured, there is uncertainty within the
PBO concept on the relationship between Congress and PBOs. This
includes the level and type of oversight and control Congress would
have over PBOs. In general, a chief operating officer would be
directly accountable to the department head who, in turn, would
remain accountable to Congress. Since the funding mechanism is
expected to be unique to each PBO, it is not possible to generalize
what Congress' role would be in each PBO's budget process.
More specifically, the relationship between Congress and SLSDC as a
PBO would fundamentally change. Because a mandatory funding
mechanism would eliminate appropriations, Congress would no longer
determine the level of funding or direct the use of those funds.
However, even when SLSDC was fully funded by Seaway tolls, it
regularly went to Congress for budget hearings and to receive
Congress' input on spending funds. SLSDC officials told us that such
a requirement could be written into SLSDC's PBO legislation to ensure
congressional oversight, although they also noted they have been
exempt from appropriations hearings in the Senate for many years and
in the House for the past 2 years. Because the chief operating
officer would be selected by the Secretary of Transportation,
Congress would no longer have direct input into the selection of the
agency head. Moreover, under PBO status, SLSDC could have
flexibilities from governmentwide requirements governing personnel
and procurement.
CONCLUSION
------------------------------------------------------------ Letter :6
Reviews of Next Steps agencies have reported substantial improvements
in performance and reductions in costs over the past 7 years. Next
Steps agencies have a management structure that separates a
department's service delivery functions from its policy functions.
Performance-based organizations would seek to emulate Next Steps
agencies in many important ways. Both are designed to operate in a
more businesslike manner, providing flexibility from constraints in
exchange for greater accountability for results. Because of their
similarities, unresolved issues from the Next Steps experience can
provide lessons for the U.S. effort, such as lack of clarity in
relationships between agencies and their parent departments,
difficulty in developing and setting performance goals, and
uncertainty concerning who is accountable for performance.
Based on our evaluation, the effects of PBO status on SLSDC and
congressional oversight would be mixed. On the one hand, the SLSDC
proposal appears to be a workable mechanism for addressing SLSDC's
reported concerns for more predictable funding, an incentive-based
focus on performance standards and measures, and relief from DOT
requirements. If Congress is interested in testing the PBO concept,
SLSDC could be a low-risk pilot because it has a small budget,
businesslike operations, and already has some flexibilities that
would be available to a PBO. On the other hand, other approaches are
also available to address some of SLSDC's stated needs, such as DOT
granting waivers from its reporting requirements or Congress
providing a more stable funding stream through the annual
appropriations process. However, the proposed PBO funding mechanism,
particularly the shift from a discretionary account to mandatory
funding, raises a potentially significant issue of budget policy that
may overshadow SLSDC's condition. Moreover, the legal challenge to
the funding source complicates the final resolution of SLSDC's
status.
AGENCY COMMENTS AND OUR
EVALUATION
------------------------------------------------------------ Letter :7
We provided a draft of this report to the Secretary of Transportation
and the Director of OMB. We received oral comments from senior
officials at the Department of Transportation, including the
Assistant to the Deputy Secretary and SLSDC's Deputy Administrator,
and designated officials at the Office of Management and Budget.
In general, DOT officials told us the report provided a good
historical perspective on SLSDC and much valuable information on the
PBO proposal. However, they thought that the draft did not give
sufficient attention to some key areas.
First, DOT officials said the draft report did not give sufficient
attention to the "power of incentives" that would affect a chief
operating officer's pay and tenure based on SLSDC's performance.
According to DOT officials, this "incentivized management structure"
is a key motivational factor for achieving superior performance. DOT
officials said that while these incentives and consequences would
initially affect only the top level of SLSDC management, "leadership
by example" would filter down to other staff levels, providing the
incentive for improved performance at all levels. Each employee
would better understand how his/her particular job contributes to
organizational goals and consequently each employee would be more
motivated to improve his/her performance. In addition, personnel
flexibilities, including performance-based pay, would allow all staff
to eventually benefit from the improved performance of the
organization.
Second, DOT officials said the draft report also did not give
sufficient attention to the potential improvements in customer
service that would result in a likely increase in Seaway traffic.
For example, because PBO status would allow a change in processes and
promote an aggressive marketing program, SLSDC might be able to
provide better customer service and attract new customers. Further,
the amount of funding SLSDC would receive is directly linked to
tonnage through the Seaway, which provides an additional incentive
for SLSDC to better understand the needs of all Seaway users and thus
increase the number of transits and level of tonnage.
Third, the officials stated that SLSDC's PBO funding mechanism is not
without risk. Officials noted that the tonnage estimates that formed
the basis for SLSDC's estimated funding are only rough projections
and, therefore, actual funding may stay the same or even decline if
traffic does not meet SLSDC's projections.
Fourth, according to the officials, the PBO initiative can have
far-reaching implications and provides the opportunity to
substantially improve performance in many agencies. Because SLSDC
currently operates much like a business, officials felt strongly that
SLSDC is uniquely positioned to become a PBO. The summary of
experience from each PBO can affect how the federal government could
potentially develop new and better business operations and practices,
and officials thought SLSDC would be an excellent candidate to
participate in this experiment.
In general, we believe the draft report adequately addressed the
issues raised by DOT. For example, the draft report stated that
performance incentives and consequences are key design features of a
PBO, and that the PBO concept provides for direct, personal
incentives for agency leadership for meeting performance goals and
sanctions for nonperformance. Nonetheless, we have added additional
language in this report to expand upon this point. We also noted
that, as a PBO, SLSDC would have the flexibility to develop and
implement innovative performance and pay systems for its employees,
and we added language reflecting plans SLSDC officials told us about
in their comments. Regarding customer service, the draft report
stated that SLSDC traditionally has sought to enhance and protect its
customer base and reach out to Seaway user groups, but we added
wording reflecting DOT's view that its funding formula increases the
incentives for SLSDC to be customer oriented.
The draft report noted that the proposed funding mechanism is not
without risk since funding is dependent upon Seaway traffic and those
amounts are estimated. However, we added language to the report
reflecting DOT's view that the tonnage estimates were rough estimates
and that SLSDC funding would decrease if tonnage declines.
In our view, the draft report also provided an appropriate discussion
of the corporation's position on its advantages of becoming a PBO.
For example, we reported that SLSDC and NPR officials said that SLSDC
would be a low-risk pilot because it already has a corporate culture
and has businesslike operations. However, we also noted that the
proposal has important policy implications, which Congress may want
to consider, particularly regarding the mandatory funding mechanism.
OMB provided several overall comments on the draft of this report,
including comments regarding performance incentives, the relevance of
our information on the Next Steps agencies' experience, alternative
approaches to PBO status for SLSDC, and pending changes in SLSDC's
PBO legislation.
OMB, like DOT, stated that we needed to provide more detail and
attention to the performance incentives that are contained within the
SLSDC PBO proposal. OMB also noted that there are real incentives
for improved performance, such as the possibility of a significant
bonus for the chief operating officer when performance goals are met
and possible consequences, such as the firing of a chief operating
officer when goals are not met. OMB also told us that such
incentives and consequences are key performance drivers and provide
the motivation to strive for superior performance.
OMB officials said that some of the draft report's description of the
British Next Steps experiences and lessons learned may not be
particularly relevant to the PBO proposal because of the key
differences between Next Steps agencies and PBO candidates. For
example, OMB officials stated that the U.S. PBO concept does not
provide for a "Fraser Figure" like the Next Steps model. OMB
officials also said that the draft did not sufficiently address
alternative approaches for autonomy from DOT requirements and for a
stable funding mechanism. For example, OMB stated that we did not
elaborate on what other funding alternatives could provide stable
funding.
OMB officials told us that a forthcoming revised draft of the SLSDC
PBO legislation will change certain conditions of SLSDC's PBO funding
mechanism. According to OMB officials, the proposed legislation
would still fund SLSDC through a mandatory payment, but the revised
legislation would no longer adjust the discretionary cap to
accommodate the mandatory payment. Instead, an offset from other
mandatory spending will be required. According to OMB officials,
this revised legislation is consistent with the President's budget.
As we noted in our evaluation of DOT's comments, we believe that the
draft appropriately considered performance incentives; but we added
some language to provide a fuller discussion. As we pointed out in
our draft, we agree that Next Steps and PBOs are different in several
ways. However, the administration's documents on PBOs--including
speeches by the Vice President--repeatedly have referred to Next
Steps agencies as a model for PBOs. In that regard, we highlighted
some of the lessons learned by Next Steps agencies that appear to be
most applicable to the PBO concept. For example, the lack of clarity
in the roles of agencies and departments and the difficultly in
developing performance measures appear to be relevant issues
irrespective of the national context. We also added some language in
the report to reflect OMB's comments about an alternative funding
mechanism.
Revisions to SLSDC's proposed PBO legislation occurred after we
completed our audit work and had not been issued when we met with
OMB. Since we were told that this revision would no longer provide
for a reduction in the discretionary spending cap scored to offset
the mandatory payment, the legislation raises budget policy issues
beyond the creation of a new mandatory program--how the spending
would be offset by cuts in other mandatory programs or increases in
taxes. We added language to that effect in this report.
DOT and OMB also suggested a number of technical clarifications,
which we have incorporated as appropriate.
---------------------------------------------------------- Letter :7.1
We are sending copies of this report to the Secretary of
Transportation; the Administrator of the Saint Lawrence Seaway
Development Corporation; the Director, Office of Management and
Budget; and the Project Director of the National Performance Review.
We will also make copies available to others on request.
Please contact me at (202) 512-8676 if you or your staff have
questions. Major contributors to this report are listed in appendix
II.
L. Nye Stevens
Director, Federal Management
and Workforce Issues
CANDIDATES FOR PBO STATUS, AS OF
JANUARY 1997
=========================================================== Appendix I
Agency PBO candidates
---------------- ----------------------------------------------------
Commerce Technical information dissemination
(National Technical Information Service)
Commerce Intellectual property rights
(Patent and Trademark Office)
Commerce Seafood inspection
(National Marine Fisheries Service)
Defense Defense commissary services (Defense Commissary
Agency)
Housing and Mortgage insurance services
Urban (Government National Mortgage Association)
Development
Housing and Mortgage insurance services
Urban (Federal Housing Administration)
Development
Office of Retirement benefits services
Personnel (Federal Retirement and Insurance Service)
Management
Transportation Saint Lawrence Seaway
(Saint Lawrence Seaway Development Corporation)
Treasury U.S. Mint
----------------------------------------------------------------------
MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix II
GENERAL GOVERNMENT DIVISION
Michael Brostek, Associate Director, (202)512-9039
J. Christopher Mihm, Assistant Director, (202)512-3236
Debra L. McKinney, Program Manager
Matthew D. Ryan, Senior Evaluator
Anthony Assia, Senior Evaluator
*** End of document. ***