Status of Open Recommendations: Improving Operations of Federal
Departments and Agencies (Chapter Report, 01/30/98, GAO/OP-98-1).

GAO reported on the conclusions and recommendations resulting from its
audits and other reviews of federal departments and agencies. GAO
provided summary information on the status of all recommendations that
have not been fully implemented in the areas of national security,
international affairs, community and economic development, natural
resources, human resources, justice, general government, and financial
and information management for use in congressional review of budget
requests.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  OP-98-1
     TITLE:  Status of Open Recommendations: Improving Operations of 
             Federal Departments and Agencies
      DATE:  01/30/98
   SUBJECT:  Information resources management
             Health care programs
             National defense operations
             Defense contingency planning
             Financial management
             Public administration
             International relations
             Tax administration
             Natural resources
             Law enforcement

             
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Cover
================================================================ COVER


Annual Report to the Chairmen and Ranking Minority Members, Senate
and House Committee on Appropriations

January 1998

STATUS OF OPEN RECOMMENDATIONS -
IMPROVING OPERATIONS OF FEDERAL
DEPARTMENTS AND AGENCIES

GAO/OP-98-1



Abbreviations
=============================================================== ABBREV

  ADP - automatic data processing
  AFDC - Aid to Families With Dependent Children
  AID - Agency for International Development
  APHIS - Animal and Plant Health Inspection Service
  AOUSC - Administrative Office of the U.S.  Courts
  ATF - Bureau of Alcohol, Tobacco, and Fire Arms
  BIF - Bank Insurance Fund
  CBO - Congressional Budget Office
  CDC - Centers for Disease Control
  CDR - continuing disability reviews
  CFO - Chief Financial Officers
  CIO - Chief Information Officer
  CPA - certified public accountant
  CTR - cooperative threat reduction
  DEA - Drug Enforcement Agency
  DFAS - Defense Finance and Accounting Service
  DI - Disability Insurance
  DLA - Defense Logistics Agency
  DOD - Department of Defense
  DOE - Department of Energy
  DOL - Department of Labor
  DOT - Department of Transportation
  EEOC - Equal Employment Opportunity Commission
  EPA - Environmental Protection Agency
  EZ/EC - Empowerment Zone/Enterprise Community
  FAA - Federal Aviation Administration
  FAR - Federal Acquisition Regulation
  FAIR - Federal Agricultural Improvement and Reform Act
  FASAB - Financial Accounting Standards Advisory Board
  FBI - Federal Bureau of Investigation
  FDA - Food and Drug Administration
  FDIC - Federal Deposit Insurance Corporation
  FEMA - Federal Emergency Management Agency
  FHA - Federal Housing Administration
  FHWA - Federal Highway Administration
  FRA - Federal Railroad Administration
  FRF - Federal Savings and Loan Insurance Resolution Fund
  FSIS - Food Safety and Inspection Service
  FTA - Federal Transit Administration
  GAO - General Accounting Office
  GNMA - Government National Mortgage Association
  GPRA - Government Performance and Results Act
  GSA - General Services Administration
  HACCP - Hazard Analysis and Critical Central Point
  HCFA - Health Care Financing Administration
  HHS - Department of Health and Human Services
  HMO - health maintenance organizations
  HUD - Department of Housing and Urban Development
  IG - Inspector General
  INS - Immigration and Naturalization Service
  IRM - information resources management
  IRS - Internal Revenue Service
  IT - Information Technology
  JOBS - Job Opportunities and Basic Skills Training Program
  JTPA - Job Training Partnership Act
  MRI - magnetic resonance imaging
  NASA - National Aeronautics and Space Administration
  NHSC - National Health Service Corporation
  NHTSA - National Highway Traffic Safety Administration
  NIH - National Institutes of Health
  NPR - National Performance Review
  NRC - Nuclear Regulatory Commission
  NSF - National Science Foundation
  NSLDS - National Student Loan Data System
  OBRA - Omnibus Budget Reconciliation Act of 1993
  OCC - Office of the Controller of the Currency
  OCSE - Office of Child Support Enforcement
  OIG - Office of the Inspector General
  OMB - Office of Management and Budget
  OPM - Office of Personnel Management
  OSHA - Occupational Safety and Health Administration
  PASS - self-supporting program
  PTO - Patent and Trademark Office
  RTC - Resolution Trust Corporation
  SAIF - Savings Association Insurance Fund
  SAMSA - Substance Abuse and Mental Health Services Administration
  SBA - Small Business Administration
  SBIC - Small Business Investment Company
  SEC - Securities and Exchange Commission
  SES - Senior Executive Service
  SRO - self-regulating organizations
  SSA - Social Security Administration
  SSI - Supplemental Security Income
  STARS - Standard Accounting and Reporting System
  TSM - Tax Systems Modernization
  TVA - Tennessee Valley Authority
  USDA - United States Department of Agriculture
  USEC - United States Enrichment Corporation
  USPS - United States Postal Service
  USTF - Uniformed Services Treatment Facilities
  VA - Department of Veterans Affairs

Letter
=============================================================== LETTER


B-205879

January 30, 1998

The Honorable Ted Stevens
Chairman
Committee on Appropriations
United States Senate

The Honorable Robert C.  Byrd
Ranking Minority Member
Committee on Appropriations
United States Senate

The Honorable Robert L.  Livingston
Chairman
Committee on Appropriations
House of Representatives

The Honorable David R.  Obey
Ranking Minority Member
Committee on Appropriations
House of Representatives

This is our annual report on the status of open recommendations
resulting from the General Accounting Office's (GAO's) audits,
evaluations, and other review work in federal departments and
agencies.  To encourage prompt, responsive actions on our
recommendations, we systematically followup on them and annually
report on their status. 

We are sending copies of this report to the Office of Management and
Budget and federal departments and agencies so that they may respond
to inquiries during appropriations and oversight hearings.  We are
also sending copies to the Chairs and Ranking Minority Members of all
House and Senate committees and subcommittees to better inform them
of our open recommendations. 

James F.  Hinchman
Acting Comptroller General
of the United States


PREFACE
============================================================ Chapter 0

Each year, GAO's work contributes to many legislative and executive
branch actions that result in significant financial savings and other
improvements in government operations.  Some, but not all, are
identified through GAO's system for periodically following up to
determine the status of actions taken on the recommendations made in
its audit and evaluation reports.  About 70 percent of the
recommendations made over the past 5 years have been implemented. 

This report includes summaries highlighting the impact of GAO's work
and associated key open recommendations--those recommendations which
have not been fully implemented.  It also includes a set of computer
diskettes with details of all open recommendations.  This information
should help congressional and agency leaders prepare for upcoming
appropriations and oversight activities and stimulate further actions
to achieve the desired improvements in government operations. 

The diskettes have several menu options to help users find
information easily.  For example, a user may search for an open
recommendation by using product numbers, titles, dates, names of
federal entities, congressional committees, or any other word or
phrase that may appear in the report.  Instructions for operating the
electronic edition have been enclosed with the diskettes and are also
in appendix I of this publication. 

The name and telephone number of the GAO manager to contact for
information or assistance about a product is included in the
diskettes.  Information or questions not related to a specific
product or recommendation should be referred to GAO's Office of
Congressional Relations on 202/512-4400. 

Copies of complete GAO printed products may be ordered by calling
202/512-6000 (or TDD 202/512-2537) or by facsimile at 202/512-6061. 

This report along with the complete database on open recommendations
is also available on the INTERNET.  For information on how to access
this and other GAO reports on the INTERNET, visit GAO's World Wide
Web Home Page at: 

http://www.gao.gov


IMPROVING NATIONAL SECURITY AND
INTERNATIONAL AFFAIRS PROGRAMS
============================================================ Chapter 1


   DEFENSE ACQUISITIONS ISSUE AREA
   (BUDGET FUNCTION 050)
---------------------------------------------------------- Chapter 1:1

GAO Contact:  Louis Rodrigues, 202/512-4841


      IMPACT OF GAO'S WORK
-------------------------------------------------------- Chapter 1:1.1

Although the national defense budget has declined significantly over
the past decade, the Department of Defense (DOD) still spends almost
$80 billion annually to research, develop, and acquire weapon
systems.  DOD's leadership has emphasized its commitment to
streamlining and improving the acquisition process to reduce
acquisition costs while ensuring technological leadership and a
strong, competitive industrial and technology base.  The National
Aeronautics and Space Administration (NASA) has similar efforts
underway. 

During fiscal year 1997, we reviewed (1) the justifications for new
and modified systems to determine whether they are reasonable and
support the national military strategy, (2) system development
programs to determine whether systems are being acquired in an
effective and efficient manner, and (3) acquisition strategies to
determine whether DOD and NASA have selected the lowest risk and
least costly acquisition strategies consistent with the need for the
planned system or modification.  Our reviews included systems such as
the B-2, F/A-18E/F, F-22, C-17, and F-14 aircraft and unmanned aerial
vehicles.  We also continued our work on DOD's development of space
systems, including the Defense Satellite Communications System and
Expandable Launch Vehicle Program. 

To determine whether DOD and NASA are streamlining and improving
their acquisition processes, practices, and infrastructure, we
evaluated the implementation of governmentwide acquisition reform
legislation and reviewed new proposals.  We also assessed DOD's
efforts to utilize opportunities for international cooperation in the
development and production of weapon systems.  In addition, we
assisted the Senate and House Appropriations Committees, the Senate
Armed Services Committee, and the House National Security Committee,
by examining DOD's fiscal year 1998 budget and prior years'
appropriations and identifying opportunities to reduce DOD's
procurement and RDT&E funding by about $1.38 billion. 

We provided Congress with information to assist in its oversight
responsibility on many occasions.  For example, we reported that DOD
needs to reorient its aircraft investment strategy to recognize the
reality of a constrained overall defense budget for the future. 
Otherwise, a significant imbalance is likely to result between the
funding requirements, particularly the major commitments for the
initial procurement of all the planned aircraft programs (such as the
F/A-18E/F and F-22) over the next several years, and available
funding. 

Our work on the use of major weapon systems warranties resulted in
Congress repealing 10 U.S.C.  2403 and reducing DOD's procurement
budget by $75 million for fiscal year 1998 to account for potential
savings.  We reported that Theater High Altitude Area Defense project
had not achieved a successful intercept during the four tests
conducted in the engineering, manufacturing, and development phase of
RDT&E.  Subsequently, Congress denied DOD's program request for $262
million for fiscal year 1998. 

Our work regarding defense industry restructuring showed that DOD did
not include data on grants provided by the Department of Labor in its
annual restructuring reports to Congress.  As a result, DOD agreed to
include such information in future reports in order to provide
Congress more complete information about federal funding used to
assist workers affected by restructuring.  We also found that tracing
savings into contract prices was extremely difficult given other
factors that affect a contractor's operations and costs. 
Subsequently, Congress requested that we determine whether defense
contract prices are lower than they would have been had restructuring
not occurred and to evaluate the impact of defense industry
consolidation on competition. 

Our work on the Federal Acquisition Computer Network (FACNET) showed
that agencies had good business and technical reasons for not using
FACNET and recommended that the government needs a coherent strategy
and flexibility to implement alternative electronic commerce
technologies and purchasing methods that make good business sense and
are aligned with commercial applications.  As a result, the fiscal
year 1998 Defense Authorization Act repealed the mandated use of
FACNET.  In addition, the President's Management Council tasked a
high-level management committee to review electronic commerce
implementation government wide and develop a more integrated federal
strategy. 

Our work on whether DOD provides Congress accurate information on
contracts for advisory and assistance services showed that DOD may be
significantly underreporting those costs.  In the President's budget
submission, DOD reported fiscal year obligations of about $3 billion
on advisory and assistance service contracts.  Our analysis of DOD's
contract data indicated fiscal year 1996 obligations of almost $12
billion for services involving advising or assisting DOD management. 
As a result, the Congress reduced DOD's budget by $300 million and
attributed this reduction to our work.  Subsequently, the Senate
Appropriations Committee requested a review to more fully examine the
reasons for the underreporting on contracts for advisory and
assistance services. 


      HIGH-RISK AREAS
-------------------------------------------------------- Chapter 1:1.2

Defense Acquisitions is the point of contact for three areas that
have been designated as high- risk--Defense Weapon Systems
Acquisition, Defense Contract Management, and NASA Contract
Management. 


         DEFENSE WEAPON SYSTEMS
         ACQUISITION
------------------------------------------------------ Chapter 1:1.2.1

In fiscal year 1997, we reported that despite DOD's past and current
efforts to reform its acquisition system, wasteful practices still
add billions of dollars to defense acquisition costs.  Many new
weapon systems cost more and do less than anticipated, and schedules
are often delayed.  Moreover, the need for some of these costly
weapons is questionable, particularly since the collapse of the
Soviet Union. 

DOD's goal is to become the world's smartest buyer, continuously
reinventing and improving the acquisition process while taking
maximum advantage of emerging technologies that enable business
process reengineering.  DOD is pursuing a number of positive
initiatives that could, over time, improve the cost-effectiveness of
its acquisition processes and is reporting some success in terms of
cost savings or avoidance and other benefits.  The ultimate
effectiveness of these initiatives cannot be fully assessed because
many are in various stages of implementation.  Therefore, it may be
several years before tangible results can be documented and
sustained. 


         DEFENSE CONTRACT
         MANAGEMENT
------------------------------------------------------ Chapter 1:1.2.2

Further, as with many other elements of defense, contract
administration and audit resources have been reduced, and further
reductions are planned.  At the same time, DOD continues to look to
additional outsourcing opportunities, and it plans to significantly
increase its procurement budgets in the coming years.  Both these
actions may increase contracting actions and the need for effective
contract administration and audit.  To maintain appropriate controls
over contract expenditures with reduced resources, DOD will need to
improve the efficiency of its contract management. 


         NASA CONTRACT MANAGEMENT
------------------------------------------------------ Chapter 1:1.2.3

Over the past several years, NASA has improved its contract
management by changing its policies and practices to better influence
its contractors' performance and improve oversight of its procurement
activities.  Since NASA spends about $13 billion annually, it is
likely to have problems periodically.  The key is early
identification to prevent the problems from becoming systemic.  We
are concerned about the systems and processes NASA uses to oversee
its procurement activities and the ability of these systems and
processes to routinely produce accurate and reliable management
information.  NASA has told us that it has made improvements in these
areas. 


      KEY OPEN RECOMMENDATIONS
-------------------------------------------------------- Chapter 1:1.3

Our work in contract management concluded that unless DOD achieves
cost-effective control over its payment process, it will continue to
risk hundreds of millions of dollars in potential overpayments and
other financial management and accounting control problems.  Further,
improving the efficiency of the payment process could save additional
millions of dollars annually in reduced processing costs.  We
recommended that DOD (1) thoroughly evaluate the information
requirements of the user, procurement, and accounting communities in
terms of their impact on the payment process' ability to produce
useful information; (2) evaluate whether the structure that the
Columbus Center uses to charge its customers for accounting services
needs to better reflect the cost of servicing contracts; (3)
establish a DOD-wide policy for closing out existing contracts that
cannot be reconciled because accurate and complete data are lacking;
and (4) explore increased opportunities for using best practices. 
(GAO/NSIAD-97-37, GAO/HR-97-4)

In May 1995, we reported that the unclear lines of jurisdiction over
stealth-related items may lead to the inappropriate export of
military sensitive materials and technology.  We recommended that the
State Department clarify the licensing jurisdiction between the
Commerce Control List and U.S.  Munitions List for all
stealth-related commodities and technologies with a view towards
ensuring adequate controls under the Arms Export Control Act for all
sensitive stealth-related items.  (GAO/NSIAD-95-140)

Our work on the Defense Satellite Communications System (DSCS) showed
(1) DOD's anticipated increase in requirements for high capacity
satellite communications, (2) the relative high cost of leasing
commercial satellite communications and apparent cost-effectiveness
of acquiring commercial-like satellites instead of leasing equivalent
services from commercial providers, and (3) the potential for saving
about $2.8 billion in future years if the first launch of the
replacement satellite were to occur in fiscal year 2003.  We
recommended that DOD accelerate the introduction of a DSCS
replacement system from fiscal year 2006 to 2003, or as soon as
practicable, if the emerging requirements are deemed valid, the
estimated acquisition and commercial costs are considered credible,
and the necessary acquisition funds can be made available. 
(GAO/NSIAD-97-159)

In our work on the Navy's Cooperative Engagement Capability program
on the transfer of certain frequency spectrum to the Federal
Communications Commission for reallocation to the private sector, we
reported that fragmented DOD management responsibilities have
resulted in inadequate coordination within DOD on spectrum issues and
preparation of long-range plans.  We recommended that DOD assign
responsibility for overall DOD spectrum management to a specific
organization.  (GAO/NSIAD-97-131)

In May 1997, we reported that the Army's current Hellfire missile
requirement of 12,722 may be overstated by over 8,300 missiles and
that significant cost reductions can be achieved with lower missile
quantities.  We recommended that the Army (1) reduce Longbow Hellfire
missile procurement requirements to reflect the current information
on the number of missiles that the Apache can carry, the correct
residual readiness computational procedures, and the appropriate
Hellfire II to Longbow Hellfire mix ratio and (2) prepare a new
procurement strategy that reflects the reduced equipment and
recomputed expected cost.  (GAO/NSIAD-97-93)

See also chapter 5, Financial and Information Management Programs,
Defense Financial Audit Issue Area and Information Resources
Management Issue Area Systems. 



   DEFENSE MANAGEMENT ISSUE AREA
   (BUDGET FUNCTIONS 050)
---------------------------------------------------------- Chapter 1:2

GAO Contact:  David R.  Warren, 202/512-8412


      IMPACT OF GAO'S WORK
-------------------------------------------------------- Chapter 1:2.1

Defense managers are confronted with many challenges to their ability
to continue accomplishing their missions as they strive to streamline
operations, reduce existing infrastructures, improve the management
of closed/realigned facilities, enhance the effectiveness and
efficiency of the defense supply chain, and better control high
interest programs. 

Our overall strategy for Defense Management issues is to identify new
initiatives that are innovative, efficient, and cost effective
approaches to improving DOD's management and in reducing defense
costs.  It focuses on the implementation and effectiveness of DOD
cost reduction initiatives as they apply to DOD's support
infrastructure activities with special emphasis on logistics-related
business activities which include operations and functions such as
depot maintenance, the purchase of parts and supplies for inventory,
storage and disposal, and transportation.  Our work encourages the
reengineering and streamlining of DOD operations through new
processes and best management practices and, where appropriate, the
privatization or outsourcing of defense functions and activities. 

Defense logistics-related business activities and infrastructure
functions consume a major share of DOD's budget--perhaps as much as
$80 billion in fiscal year 1997.  DOD recognizes the need to cut
these costs and is seeking a reduction of $20 billion annually in
order to fund acquisitions for weapon systems modernization. 
Initiatives DOD has undertaken to achieve reductions include
privatization, acquisition reform, technology insertion,
organizational streamlining and consolidation, management process
reengineering, base and facility closures, personnel reductions,
inventory reductions, and private sector use of facilities. 

Key areas we focused on in fiscal year 1997 included the transition
of former bases to civilian use, depot maintenance workloads,
inventory management, property disposal activities, and opportunities
to improve operations through the use of best management practices. 
We also addressed DOD environmental costs and programs and problems
associated with the disposal of the chemical weapons stockpile. 


      HIGH-RISK AREAS
-------------------------------------------------------- Chapter 1:2.2

Defense Management is the point of contact for the following two
high-risk areas:  Defense Inventory Management and Defense
Infrastructure. 


         DEFENSE INVENTORY
         MANAGEMENT
------------------------------------------------------ Chapter 1:2.2.1

It is estimated that about half of DOD's secondary inventory--spare
and repair parts, clothing, medical supplies, and other items--are
not needed to be on hand to support war reserve or current operating
requirements.  DOD has clearly had some success in addressing its
inventory management problems.  However, it has not yet succeeded in
developing the management tools needed to solve these problems on a
long-term basis.  In the near term, DOD needs to emphasize the
efficient operation of its existing inventory systems.  In the long
term, DOD must establish goals, objectives and milestones for
changing its culture and adopting new management tools and practices. 
Further, DOD must continue to explore other alternatives such as
using business case analysis to identify opportunities for
outsourcing logistics functions and to implement best management
practices. 


         DEFENSE INFRASTRUCTURE
------------------------------------------------------ Chapter 1:2.2.2

Over the past 7 to 10 years, DOD has taken actions to reduce its
operations and support costs, however, billions of dollars continue
to be wasted annually on inefficient and unneeded activities.  In
recent years, DOD has substantially downsized its force structure yet
it has not achieved commensurate reductions in operations and support
costs.  Progress in reducing the cost of excess infrastructure
activities is critical to maintaining high levels of military
capabilities and in providing the funding source for weapon systems
modernization.  Reductions of this nature are difficult and painful
because achieving significant cost savings requires up-front
investments, the closure of installations, and the elimination of
military and civilian jobs. 


      KEY OPEN RECOMMENDATIONS
-------------------------------------------------------- Chapter 1:2.3

To achieve management improvements, increase operations efficiencies,
and produce dollar savings, DOD needs to take action on the following
key recommendations. 

The Secretary of Defense should identify options and take steps to
minimize the impediments to interservicing to realize potentially
significant savings in base support costs through interservicing-type
arrangements.  (GAO/NSIAD-96-108)

The Secretary of Defense should establish reasonable timeframes for
concluding negotiated sales of surplus real property and when
practical, rent unoccupied, surplus housing and other facilities as a
means of preserving property pending final disposition. 
(GAO/NSIAD-96-149)

The Secretary of the Army should begin the disposal determination
process for (1) all excess real property not needed for replenishment
requirements at the Kansas, Louisiana, and Sunflower Army Ammunition
plants, and (2) all inactive plants retained only for their unique
capabilities when those capabilities can be adequately provided by
other sources.  An integral part of this process will be identifying
the costs involved in accomplishing the disposal of unneeded
properties.  (GAO/NSIAD-97-56)

The Secretary of the Navy, working with the Defense Logistics Agency,
should develop a demonstration project to determine the extent to
which the Navy can apply best practices to its logistics operations. 
The specific practices that should be tested are (1) inducting parts
at repair depots soon after they break, (2) reorganizing repair
workshops using the cellular concept to reduce repair time, (3) using
integrated supplier programs to shift consumable inventory
responsibilities to suppliers, (4) using local supplier distribution
centers for quick shipment of parts to mechanics, and (5) expanding
the use of third-party logistics services to store and distribute
spare parts.  (GAO/NSIAD-96-156)

The Secretary of Defense should direct the defense transportation
reengineering efforts to simultaneously address process and
organizational structure improvements including (1) the need for
separate traffic management component command headquarters staff, (2)
the consolidation of separate field subordinate command traffic
management staff, and (3) the elimination of all remaining
duplicative field-based subordinate command support staff.  Further,
the Secretary of Defense should clarify which U.S.  Transportation
Command mobilization costs should be passed along to its customers. 
(GAO/NSIAD-96-60)

The Secretary of Defense should, at a minimum, explain the
methodology used to estimate savings in future Base Realignment and
Closure (BRAC) budget submissions and these submissions should note
that all BRAC-related costs are not included.  (GAO/NSIAD-96-67)

In order to strengthen DOD's budgeting process and ensure that
correct assumptions are being made regarding expected reductions in
base operating costs, DOD needs to improve its periodic updating and
reporting of savings projected from prior BRAC decisions. 
Accordingly, the Secretary of Defense should provide guidance to
ensure that its components have and follow a clear and consistent
process for updating savings estimates associated with prior BRAC
decisions.  (GAO/NSIAD-97-151)

Further, if Congress authorizes future BRAC rounds, the Secretary of
Defense should (1) work with the Task Force on Defense Reform and the
National Defense Panel to address the important organizational and
policy issues in various cross-service areas, (2) convene a DOD joint
working group, as soon as practical, to develop policy guidance,
improve BRAC processes and decision-making tools, and (3) ensure full
audit access to all parts of DOD's BRAC process.  (GAO/NSIAD-97-151)

If Congress considers legislation for future BRAC rounds, it may wish
to (1) model it on the 1990 BRAC legislation as a starting point, (2)
pass such legislation early to allow the lead time needed for DOD and
the Commission to organize their processes, and (3) consider the
relationship between new BRAC authority and section 277 of the
National Defense Authorization Act for Fiscal Year 1996 pertaining to
laboratories and test and evaluation facilities.  (GAO/NSIAD-97-151)

See also chapter 5, Financial and Information Management Programs,
Defense Financial Audit Issue Area and Information Resources
Management Issue Area. 



   INTERNATIONAL RELATIONS AND
   TRADE ISSUE AREA (BUDGET
   FUNCTION 150)
---------------------------------------------------------- Chapter 1:3

GAO Contact:  Benjamin F.  Nelson, 202/512-4128


      IMPACT OF GAO'S WORK
-------------------------------------------------------- Chapter 1:3.1

The Congress is continuing to rethink the U.S.  role in international
affairs, including the level of resources devoted to and the
effectiveness of current programs in advancing U.S.  political and
economic interests.  To assist the Congress in this regard, our work
focused on assessing the relevancy, priority, effectiveness, and
management of international affairs activities, and addressed issues
of current national concern, such as U.S.  involvement in Bosnia,
North Atlantic Treaty Organization (NATO) enlargement, and the North
American Free Trade Agreement (NAFTA).  Our reviews examined the
rationale, structure, and reform agenda of the international
organizations that receive U.S.  funding, and examined the cost,
management, and results of the U.S.  bilateral programs and
activities in critical regions of the world, including the broad
range of programs designed to enhance U.S.  security and those aimed
at reducing the flow of illegal drugs into the United States.  In
addition, we completed work that assisted the debate on current trade
issues and examined the need for U.S.  government export and
investment promotion programs.  The work has had a significant impact
on efforts to address major international relations and trade issues. 

Our assessment of the Bosnia peace operation concluded that only
limited progress had been made toward achieving the Dayton
Agreement's goal of establishing a unified, democratic government
that respects the rule of law.  This situation, we noted, was due
principally to the failure of Bosnia's political leaders to fulfill
their obligations under the Dayton Agreement and to promote political
and social reconciliation.  This report was a seminal assessment of
the Bosnia issue and was instrumental in influencing the
administration's decision to revise its Bosnia strategy.  Our
assessments of U.S.  programs and those of other NATO member
countries showed that they are helping former Eastern Bloc countries
prepare for possible membership in the NATO.  In a separate study
that examined the likely cost of NATO enlargement, we concluded that
DOD'S estimated cost of about $27-35 billion was speculative and that
the actual enlargement costs could be substantially higher or lower. 
This work led to a request for GAO to testify at an October 1997
hearing as additional congressional concerns were raised about the
impact of NATO expansion on DOD's budget.  Our work on NAFTA
addressed concerns about the economic impact of the agreement,
examined the implementation of the supplemental side agreements on
labor and the environment, and described the agreement's dispute
settlement process and the efforts made to help workers displaced by
imports from Mexico or Canada. 

We continued to examine the extent to which U.S.  participation in
multilateral institutions advance U.S.  interests and whether there
are opportunities to reduce costs.  Our examination of U.N. 
peacekeeping operations showed that there are eight costly,
long-standing, and marginally effective operations for which the
State Department had not established clear exit strategies.  In
response to our recommendation, the State Department outlined exit
strategies and criteria for these operations and notified the
Congress that it would continue to review this matter to ensure
effective reforms were implemented.  We also completed a major review
of the United Nations Development Program (UNDP)--the central
financing and coordinating mechanism for development assistance
within the U.N.  system--to determine the progress that it had made
in reducing administrative costs and improving its management of
projects.  The recommendations we made for improved project
management are currently being implemented. 

Our comprehensive examination of the U.S.  Agency for International
Development (USAID) found that 5 years of reform have resulted in a
smaller aid bureaucracy that has achieved some operational
efficiencies but that the full benefits were not yet clear and
fundamental questions about the effectiveness and relevance of these
programs remain. 

Our evaluations of how the federal government manages its overseas
real estate identified deficiencies that resulted in additional and
unnecessary costs.  We recommended that DOD negotiators obtain and
use estimates of the market value of installations in negotiating
with foreign governments on recouping the residual value of closed
overseas facilities.  The additional revenue realized in fiscal years
1996 and 1997 from implementing this recommendation was estimated to
be $222 million.  During fiscal year 1997, the State Department sold
three of the properties, we identified as unnecessary, for $7.6
million. 

With respect to arms control, we reported that progress has been made
in reducing the threat from weapons of mass destruction through the
dismantling of nuclear weapons in the former Soviet Union, the
provision of better international accountability for nuclear
materials, and the imposition of effective export controls.  Acting
on a recommendation we made in our 1995 report on DOD's Cooperative
Threat Reduction program, DOD improved its reporting on program
management and assistance.  Our evaluation of whether U.S.  export
control policy toward Hong Kong will adequately protect U.S. 
national security interests after Hong Kong's reversion to China
revealed Hong Kong will continue to have easier access to sensitive
technology that is more tightly controlled for China.  We also found
that the U.S.  government has limited ability to monitor such
technology to ensure that it is not diverted.  We made
recommendations to improve these weaknesses.  This report could form
the cornerstone of any congressional deliberations to change the
application of U.S.  export controls to Hong Kong.  We also reported
on issues surrounding the sales of high performance computers to
Russia's nuclear weapons laboratories.  This testimony influenced the
legislative debate over whether the recently relaxed export control
rules need to be reexamined. 

The Congress has a continuing interest in the operations and the
effectiveness of U.S.  counternarcotics programs.  Our comprehensive
report on the U.S.  drug control effort was based on over 10 years of
review of various aspects of U.S.  drug control strategy.  The report
concluded that despite long-standing efforts and expenditures of
billions of dollars--about $20 billion over the past 10 years--these
efforts have not materially reduced the availability of drugs. 

During the past year, we completed comprehensive reviews of U.S. 
programs aimed at promoting U.S.  interests through export and
investment promotion and greater market accessibility.  These reviews
focused on the continuing relevance of these programs and whether
increased efficiencies and reduced costs are possible.  Our reports
on the U.S.  Export-Import Bank (Eximbank) (1) presented options for
saving millions of dollars in subsidy costs by raising fees or
reducing program coverage in higher-risk markets, (2) documented the
amount of the funding and programs of competitor nations, and (3)
summarized the results of the Eximbank's efforts to meet the
financing needs of small business and to comply with laws governing
the financing of dual-use (civilian and military) defense exports. 
Our work at the Overseas Private Investment Corporation (OPIC)
identified important changes in the private sector's willingness to
invest in foreign markets and ways that the risks of OPIC's programs
could be reduced.  We also discussed a number of issues that would
need to be addressed if the agency were not reauthorized.  Our review
of the 1994 U.S.-Japan Insurance Agreement found that most U.S. 
insurance providers in Japan were of the opinion that Japanese
government actions to implement the agreement did not result in
significant liberalization and had no effect on their ability to
compete in the Japanese insurance market.  Our assessment of U.S. 
agricultural export assistance programs found mixed evidence
regarding the continued relevance of these programs. 


      KEY OPEN RECOMMENDATIONS
-------------------------------------------------------- Chapter 1:3.2

In 1994, we recommended that the State Department develop a fully
integrated, objective, quantifiable methodology to help ensure a
sound basis for allocating personnel in line with U.S.  interests
overseas.  State plans on using this methodology in making its
staffing resource decisions in fiscal year 1998.  Because stationing
staff overseas is costly, State must be able to ensure that it places
no more staff than is needed at each of its overseas posts. 
(GAO/NSIAD-94-228)

In 1995, we recommended that the Congress terminate USAID's Housing
Guarantee Program because it was not achieving its original goals and
objectives.  This program was not terminated by the Congress, but its
appropriation was reduced in fiscal years 1996 and 1997. 
(GAO/NSIAD-95-108)

In 1996, we reported that the State Department had done relatively
little to implement reforms and streamline its operations to save
money.  We concluded that State needed to (1) plan how it could
become a smaller, more efficient, and less expensive organization;
and (2) conduct a fundamental rethinking of functions, locations, and
practices to determine what is essential and affordable to support
U.S.  interests.  In addition, we reported that State could generate
millions of dollars by selling unneeded real estate at its overseas
locations.  We identified a number of options that the State
Department could take to address possible budget reductions,
including developing a downsizing strategy for adjusting to
potentially lower funding.  Actions have not been taken on these
recommendations because State objects to the report's overall premise
that major budget reductions will occur, saying that such reductions
could undermine the U.S.  foreign policy infrastructure. 
(GAO/NSIAD-96-124)

In 1996, we recommended that the Director of the Office of National
Drug Control Policy (ONDCP) develop a regional action plan focused on
the Caribbean transit zone for cocaine coming to the United States. 
This plan should determine resources and staffing needs and delineate
a comprehensive strategy to improve Caribbean nations'
antidrug-trafficking capabilities and commitment to counternarcotics
interdiction.  ONDCP is considering our recommendation as part of an
ongoing evaluation of the entire drug control strategy.  In 1997, we
recommended that the Director, ONDCP, develop a long-term plan with
meaningful performance measures and multiyear funding needs that are
linked to the goals and objectives of the international drug control
strategy.  ONDCP says that in fiscal year 1998 it will present the
Congress with a 10-year strategy with multiyear budget plans and
measurable performance objectives.  (GAO/NSIAD-96-119 and
GAO/NSIAD-97-75)

Also in 1996, we recommended that the Secretary of the Treasury
monitor and periodically report to the Congress measurable indicators
of the World Bank's progress in reforming its operations to improve
their effectiveness.  If the indicators do not show satisfactory
progress, we recommended that the Secretary should report on the
actions taken to do so.  The Treasury Department is monitoring the
World Bank's new reform initiative, called the Strategic Compact, and
will report on the results of this initiative in the upcoming year. 
(GAO/NSIAD-96-212)



   MILITARY OPERATIONS AND
   CAPABILITIES ISSUE AREA (BUDGET
   FUNCTION 050)
---------------------------------------------------------- Chapter 1:4

GAO Contact:  Mark E.  Gebicke, 202/512-5140


      IMPACT OF GAO'S WORK
-------------------------------------------------------- Chapter 1:4.1

DOD faces unprecedented challenges as it strives to plan and budget
for military operations that range from peacekeeping and disaster
relief to humanitarian assistance and warfare at the highest level of
intensity.  To effectively meet these challenges, DOD must maintain a
high readiness level and strike the proper balance between the need
to fund weapons modernization and the need to maintain dedicated and
high-quality personnel. 

Our overall strategy to assist Congress with military operations and
capabilities issues is to:  (1) identify potential reductions to
operations and maintenance budgets, while recommending ways to
improve planning for future military operations; (2) identify
shortfalls and excesses in capability in relation to military
requirements; (3) alert Congress to existing or projected readiness
shortfalls that could leave military forces ill-prepared to conduct
effective operations; and (4) recommend ways to improve DOD's ability
to recruit, train, and retain a high-quality active, reserve, and
civilian workforce. 

In fiscal year 1997, we completed reviews of DOD's fiscal year 1998
budget requests for operations and maintenance and military personnel
programs, and identified changes to other military programs that
could save millions of dollars.  We also provided Congress with
information on the readiness of war reserve equipment prepositioned
afloat; reviewed DOD's chemical and biological defense capabilities;
identified DOD efforts to protect U.S.  forces from terrorist
attacks; assessed the telemedicine strategies among DOD, other
federal agencies and the private sector; and evaluated DOD's study on
the need to increase the number of general and flag officers. 

During our review of DOD's $94 billion operations and maintenance
budget requests, we identified potential budget reductions of about
$3.7 billion.  Of this amount, about $1.6 billion is for the purchase
of inventory in excess of current operating and war reserve
requirements.  Likewise, we identified potential reductions of about
$390 million in the services' military personnel requests.  Of this
amount, about $304 million can be reduced because the services began
fiscal year 1998 with 12,300 fewer active military personnel than
budgeted for. 

We identified significant per-year dollar savings that could result
from our recommended changes in other military programs.  For
example, the Navy could save about $140 million annually by turning
over the operation of eight multiproduct (oil, ammunition) ships to
the Military Sealift Command for crewing with civil service mariners. 
These savings are due primarily to a much smaller crew size than has
been traditional on military crewed auxiliary ships.  Likewise, DOD
could save as much as $95 million annually by converting roughly
9,500 administrative and support positions, now held by military
officers, to lower-cost positions that could be filled by civilians. 
Since the 1950s, a DOD Directive has required the services to staff
positions with civilian personnel unless the services deem a position
military essential.  Moreover, DOD could save about $54 million per
year in personnel costs once the Army removes unneeded war reserve
equipment from central Europe and aligns its resources with the
reduced mission. 

During our assessment of the readiness of the Army's war reserve
equipment prepositioned on ships, we found that 25 percent of the
unit sets do not meet the Army's readiness goal for full mission
capability.  We reported that, as of April 1997, equipment in 13 of
51 reportable unit sets did not meet the 90-percent readiness goal. 
Factors contributing to lower readiness status include the
deterioration of the equipment while in storage aboard ships and the
limited ability to conduct maintenance on the equipment while in
storage.  The Army plans to conduct maintenance on prepositioning
ships every 30 months. 

Our examination of U.S.  chemical and biological defense capabilities
resulted in two classified reports.  One report contained a series of
recommendations to the Secretary of Defense aimed at improving the
protection of U.S.  forces from biological agents.  DOD is in the
process of implementing several corrective actions, after concurring
with all of our recommendations.  The other report addressed U.S. 
chemical and biological protection at critical ports and airfields in
high threat areas overseas.  This work contributed to a refocusing of
some Commander-in-Chief's priorities, doctrinal changes, and other
actions designed to improve various aspects of chemical and
biological defense. 

Our work on DOD's efforts to protect U.S.  forces overseas from
terrorist attacks showed these forces to be better protected today
than in June 1996, when a bomb detonated near the Khobar Towers
military complex and killed 19 U.S.  service personnel.  During our
visits to 30 overseas sites, we found security improvements were most
evident where the risk of terrorism appeared greatest, such as Turkey
and the Middle East.  DOD has initiated several changes aimed at
improving its antiterrorism program, including a newly-created office
for combating terrorism on the Joint Staff. 

During our work examining DOD's use of telemedicine (the use of
communications technology to help deliver medical care without regard
to the distance that separates the participants), we found that DOD
was the largest federal investor between fiscal years 1994 to 1996. 
Of the nine federal departments and independent agencies that
collectively invested at least $646 million in telemedicine projects
during this period, DOD invested more than any other agency and is
considered a leader in developing this technology.  Opportunities
exist for federal agencies to share lessons learned and exchange
technology.  In 1995, the Joint Working Group on Telemedicine was
created within the Department of Health and Human Services to help
coordinate federal programs. 

The National Defense Authorization Act for Fiscal Year 1997 required
us to examine DOD's study on general and flag officer requirements. 
Due to DOD's delay in issuing a final report, we issued an interim
report on DOD's draft report.  Our review showed that DOD's draft
does not clearly identify requirements for general and flag officers
and does not explain the basis for its recommendations to increase
the number of officers by 54 active and 32 reserve positions.  We
estimate the cost of implementing DOD's draft recommendations would
be at least $1.2 million annually, assuming the services reduce the
number of colonels/Navy captains by the same amount as the increase
in general and flag officers.  However, the cost will exceed $1.2
million if the services do not reduce their colonels/Navy captains. 


      KEY OPEN RECOMMENDATIONS
-------------------------------------------------------- Chapter 1:4.2

We made several recommendations to the Secretary of Defense to
address the weaknesses we identified in 1996 in the chemical and
biological defense areas.  Among them was a recommendation that the
Secretary reevaluate the priority and emphasis given to this area
throughout DOD.  Also included was a recommendation that the
Secretary consider modifying the services' readiness reporting
requirements so that unit reports would more directly capture the
units' chemical and biological readiness status and more accurately
reflect shortcomings in their abilities to meet existing chemical and
biological training standards.  (GAO/NSIAD-96-103)

U.S.  Special Operations Forces are considered highly capable, elite
forces that are trained and maintained to address critical U.S. 
national security objectives.  In response to our questionnaire, many
unit leaders of these special forces are convinced that the high use
has adversely affected readiness, retention, and morale.  To maintain
the readiness of these forces to support national security objectives
and help ensure that readiness is not degraded through overuse or
improper use, we recommended that the Secretary of Defense direct the
Commander of the U.S.  Special Operations Command to complete efforts
to develop an information system for monitoring how the Command's
forces are used and establish a methodology for periodically
comparing these forces' usage with the Commanders-in-Chief's
priorities and special forces training needs.  We also recommended
that the Secretary direct the Commander to exploit potential
opportunities to reduce deployments that do not prepare these forces
for unique missions in support of national security objectives and
that can be performed by conventional forces.  (GAO/NSIAD-97-85)

During the Cold War, the Army stored about nine brigade sets of
equipment in central Europe.  The Army plans to remove seven brigade
sets of equipment due to its reduced European mission.  Since DOD
could save about $54 million per year in personnel costs once the
equipment is removed, we recommended that the Secretary of Defense,
among other things, direct the Secretary of the Army and the
Commander of the Army Materiel Command to develop a specific and
timely disposition plan for all equipment not needed in central
Europe.  (GAO/NSIAD-97-158)

Thousands of recruits are separated from military service in the
first 6 months because the services do not adequately screen
applicants for disqualifying medical conditions or for preservice
drug use.  All military services agree that reducing early attrition
is desirable.  To this end, three services have attrition-reducing
targets that could realize immediate short-term annual savings
ranging from around $5 million to $12 million.  Possible long-term
savings could range from more than $15 million to $39 million.  To
reduce the attrition of enlisted personnel during the first 6 months
of their terms of enlistment, we recommended that the Secretary of
Defense, among other things, issue implementing guidance on DOD's
separation codes and direct the services to strengthen their
recruiter incentive and medical screening systems.  We also
recommended that drug testing for all the services be moved to the
Military Entrance Processing Command.  (GAO/NSIAD-97-39)

See also chapter 5, Financial and Information Management Programs,
Defense Financial Audit Issue Area and Information Resources
Management Issue Area. 



   NATIONAL SECURITY ANALYSIS
   ISSUE AREA (BUDGET FUNCTION
   050)
---------------------------------------------------------- Chapter 1:5

GAO Contact:  Richard A.  Davis, 202/512-3504


      IMPACT OF GAO'S WORK
-------------------------------------------------------- Chapter 1:5.1

DOD continues to face difficult policy, programmatic, and budgetary
decisions as it seeks to strike a balance between maintaining
sufficient force structure to address current dangers, while also
investing in the new systems and technologies needed for the future. 
DOD's recently completed Quadrennial Defense Review (QDR) stated a
preference for reducing the size and cost of defense infrastructure
in order to make the investments needed to modernize the future
force.  The QDR also recognized the challenge of making these choices
in a fiscally constrained environment, marked by a national consensus
to balance the Federal budget by year 2002.  Our reports and
testimonies on budget, force structure, strategy implementation, and
intelligence issues have been cited frequently by the Congress as it
debates how best to prepare America's armed forces for this new
environment. 


         BUDGET
------------------------------------------------------ Chapter 1:5.1.1

For the fourth straight budget year since 1995, DOD's execution of
its overall program has been inconsistent with its goals of reducing
infrastructure costs and increasing funding for weapons
modernization.  DOD wants to increase procurement spending to $60
billion a year by shifting resources from infrastructure activities
to modernization of weapon systems.  However, our analysis showed
that DOD has not been successful enough in reducing and streamlining
infrastructure.  Our analysis of DOD's 1998 budget and Future Years
Defense Program (FYDP) show substantial risks that the current
defense program will not be executed as planned.  For example, the
1998 FYDP projects billions of dollars in savings due to management
initiatives, but DOD does not have details on how all of the savings
will be achieved.  Further, DOD projects no real growth in the costs
of the Defense Health Program during 1998-2003.  This appears to be
unrealistic, given that operation and maintenance (O&M) funding of
DOD's health program increased 73 percent in real terms during
1985-96.  After we informed Congress that DOD's future health program
costs were likely to exceed their estimate, DOD submitted a budget
amendment to redress its understated funding request for the program. 
Another reason we believe the 1998 FYDP poses risks is that the
estimates for procurement spending, in relation to DOD's operation
and maintenance projections, run counter to DOD's own experience over
the last 30 years.  Specifically, DOD estimates it can increase
procurement spending over 40 percent and concurrently reduce O&M
resources by 8 percent.  Historically, O&M costs do not decline but
rise in proportion to increases in procurement. 

We provided Congress with detailed analyses of DOD's appropriations
to show the trends over the years by various program categories.  Our
analysis has identified infrastructure activities that could be
consolidated and streamlined to gain more efficiency.  We also
continued to inform Congress of the projected cost of U.S.  military
operations in Bosnia.  For its deliberations on the supplemental
request for fiscal year 1997 funds, we provided Congress with the
most up-to-date information on the status of costs.  In July 1997 we
reported that recent operational decisions will increase the cost
estimate for 1998 and that other decisions, such as changes in the
size and composition of the force and the timing of withdrawal, could
lead to further increases in the O&M cost estimate for 1998. 


         FORCE STRUCTURE
------------------------------------------------------ Chapter 1:5.1.2

There is continued congressional interest and debate over the size
and composition of U.S.  military forces.  Our analysis of the active
end strength requirements of the Army, Navy, and Air Force helped the
Congress assess DOD's efforts to shape its force for the post cold
war world and prepare for the next century.  For example, our
analysis of Army active endstrength showed that while a smaller
active Army support force could increase the Army's risk of carrying
out current defense policy, new initiatives being explored by the
Army regarding its combat and nondeployable support forces could lead
to a smaller active Army in the future.  We identified areas where
the Army could improve its process for assessing its need for
deployable support forces, and recommended that the Army develop an
analytical basis for assessing its requirements for nondeployable
support personnel.  In response, the Army implemented a number of our
recommendations, and the House National Security Committee cited our
analysis in its deliberations on Army civilian personnel management. 

Our prior work identified considerable Army National Guard combat
structure that was not needed to meet the National Security Strategy. 
Building on that analysis, we recommended that the Secretary of
Defense, as part of the Quadrennial Defense Review, validate
requirements for the Guard's combat structure.  We also recommended
that he eliminate structure which is not needed to carry out the
strategy.  DOD's Quadrennial Defense Review determined that excess
structure existed in the Guard.  Subsequently, the Guard agreed to
cut 17,000 personnel over the next three fiscal years. 

Our report on Air Force endstrength issues found that potential
exists to reduce the active Air Force below the minimum level set by
Congress, without adversely affecting the Air Force's war-fighting
capability.  Our analysis showed that approximately two-thirds of the
Air Force's 381,000 active duty personnel are now allocated to
infrastructure functions such as installation support and
acquisition.  Further, internal Air Force analyses showed that the
Air Force could support reductions in its endstrength by 9,400
positions in fiscal year 1998 and by as many as 75,000 beyond fiscal
year 1998 in order to free up resources for modernization.  These
reductions would primarily occur in infrastructure related positions. 

We also helped Congress evaluate recent reductions in Navy personnel
by assessing past, ongoing and planned actions to achieve force level
objectives, how various segments of the force were affected by the
reductions, and the adequacy of the force to implement the national
military strategy.  We also noted that the long-standing lack of
adequate management attention to the shore-based personnel
requirements process could preclude programs intended to further
reduce personnel levels from achieving their purpose, or ensure the
force is appropriately sized.  We made suggestions to strengthen
management oversight. 

As Congress debated the modernization of tactical air power, we
testified on the results of our extensive study of air power
documented in a series of reports issued in 1996 and 1997.  We
provided the Congress with detailed information on the size and
capabilities of U.S.  combat air power and contrasted this with the
limited air defense capabilities of potential adversaries.  We
described the type of joint mission assessments that need to be
completed to aid the Chairman of the Joint Chiefs of Staff to carry
out his responsibilities as the senior military advisor to the
Secretary of Defense on the requirements, programs, and budgets of
the military services. 


         STRATEGY IMPLEMENTATION
------------------------------------------------------ Chapter 1:5.1.3

Presence is a key element of U.S.  national security strategy, and
the U.S.  spends large sums to maintain presence throughout the
world.  To help Congress assess this aspect of strategy, we examined
changes in DOD's approaches to achieve overseas presence since the
Cold War and DOD's process for allocating resources to meet presence
requirements.  We reported that DOD does not have a specific process
for determining requirements nor does it currently compile
information on presence approaches.  We recommended that DOD compile
and analyze information on requirements in a manner that would allow
it to assess the effectiveness of current levels and mixes of forces
and activities used to achieve presence and whether more
cost-effective alternatives exist.  DOD agreed with our suggestion
and is taking action to improve its assessment of certain presence
requirements and approaches. 

In recent years, the threat of terrorism has clearly been of
increasing concern, prompting the National Security Council to issue
expanded U.S.  policy, strategy, and operational guidelines on
combating terrorism both at home and abroad.  In response to
Congressional requests, we examined this issue across
government---identifying the roles, responsibilities, programs, and
activities of the numerous federal agencies, bureaus, and offices
involved in implementing the national policy and strategy, as well as
mechanisms in place for interagency coordination.  Our discussions
with various congressional oversight committees suggest the report
will help them understand what federal agencies are expected to do to
prevent and counter terrorism in this more than $6 billion
crosscutting program.  We expect continued congressional interest in
terrorism issues, and have been asked to perform additional analysis
evaluating interagency counterterrorism preparedness and how DOD and
other agencies are implementing legislation requiring training of
local first responders to deal with terrorists using weapons of mass
destruction.  The legislation is aimed at establishing local
capabilities to provide immediate response to such incidents. 


         INTELLIGENCE
------------------------------------------------------ Chapter 1:5.1.4

Missile defense for the United States has been one of the most
frequently discussed and debated security issues during the past few
years.  As requested, we assessed the adequacy of the Intelligence
Community's National Intelligence Estimate on the foreign missile
threat to the United States, and subsequently testified before the
Senate Select Committee on Intelligence.  Our work was cited by a
former Director of Central Intelligence in his critique of the threat
estimate and was also used by a panel created by the National Defense
Authorization Act for Fiscal Year 1997 that reviewed the estimate. 


      KEY OPEN RECOMMENDATIONS
-------------------------------------------------------- Chapter 1:5.2

A key recommendation stemming from our work on aircraft requirements
calls for the Secretary of Defense to direct the Secretary of the Air
Force to develop and use supportable and consistent criteria to
justify backup aircraft inventories and future procurement of backup
aircraft as the Navy is doing.  (GAO/NSIAD-95-180)

After assessing key combat air power missions, we recommended that
the Secretary of Defense develop an assessment process that yields
more comprehensive information on joint mission requirements and
capabilities than current processes provide.  Our recommendation
described the scope of these assessments and the general procedures
for conducting them.  The Department of Defense plans to spend
hundreds of billions on new fighter and attack aircraft over the next
several decades, and tens of billions of dollars more on weapons for
combat air power missions.  If implemented, these assessments would
improve the information available to assist decisionmakers in making
key decisions on air power plans, programs, and budgets. 
(GAO/NSIAD-96-177, GAO/NSIAD-96-72, GAO/NSIAD-96-45)

In our report assessing Air Force aircraft, we recommended that the
Secretary of Defense, in his efforts to reduce the Department of
Defense's infrastructure costs, should require the Secretary of the
Air Force to develop an implementation plan to operate the Air
Force's fighter force in larger, more cost-effective squadrons.  If
the Secretary of Defense believes that the plan could reduce costs,
he should seek congressional support for it.  (GAO/NSIAD-96-82)

See also chapter 5, Financial and Information Management Programs,
Defense Financial Audit Issue Area and Information Resources
Management Issue Area. 


IMPROVING RESOURCES, COMMUNITY,
AND ECONOMIC DEVELOPMENT PROGRAMS
============================================================ Chapter 2


   ENERGY, RESOURCES, & SCIENCE
   ISSUE AREA (BUDGET FUNCTION
   250, 270, 300)
---------------------------------------------------------- Chapter 2:1

GAO Contact:  Victor S.  Rezendes, 202/512-3841


      IMPACT OF GAO'S WORK
-------------------------------------------------------- Chapter 2:1.1

The Energy, Resources, and Science issue area encompasses a broad and
diverse group of agencies with concerns and topics ranging from
cleaning up the nuclear weapons complex--estimated to cost up to $265
billion--to finding better ways to manage the 650 million acres of
land owned by the federal government, equal to almost one-third of
our Nation's total land surface.  Agency responsibilities include the
Department of Energy (DOE) and related agencies, such as the Nuclear
Regulatory Commission (NRC), the Federal Energy Regulatory
Commission, and Tennessee Valley Authority (TVA).  A second grouping
encompasses various land management and natural resource agencies,
including the Department of the Interior, the Forest Service within
the Department of Agriculture, and the Army Corps of Engineers. 
Finally, there's an array of science and technology-related agencies,
including the National Science Foundation (NSF), the Department of
Commerce's National Institute of Standards and Technology, the Patent
and Trademark Office, the National Oceanic and Atmospheric
Administration, and the National Technical Information Service. 
Programs and activities within these agencies account for over $60
billion in gross federal obligations each year with annual revenues
of about $10 billion spanning 10 of the government's 19 budget
functions.  But, more importantly, the activities of these agencies
pose significant implications for the nation's security, environment,
and economic well-being. 

Our primary objective is to assist the Congress in examining the role
of government in this broad area of responsibility, with particular
emphasis on finding ways to promote a more efficient and
cost-effective government.  Our efforts this past year have gone a
long way in contributing to this objective and many of our key open
recommendations, as outlined in the section below, are intended to
help focus the debate on some difficult choices that still need to be
made. 

Examples of our contributions this past year include helping the
Congress: 

  -- continue to assess questions and issues regarding the role and
     missions of DOE and how to restructure it in a post-Cold War
     environment;

  -- better ensure that the government will receive a fair price in
     the planned sale of the Naval Petroleum Reserves at Elk Hills,

  -- deliberate on the potential privatization of DOE's five power
     marketing administrations,

  -- continue its search for an acceptable alternative for disposing
     of nuclear waste and in assessing the safety, reliability, and
     security of our nation's nuclear arsenal;

  -- evaluate U.S.  vulnerability to oil disruptions;

  -- develop legislation to prevent U.S.  funding to the United
     Nations from going to the development of Cuban reactors;

  -- deliberate on the U.S./North Korean nuclear reactor agreement;

  -- leverage the use of "carry-over" balances and find other ways to
     reduce DOE's, NRC's and Commerce's budgets;

  -- consider legislation that was ultimately passed to terminate the
     federal helium refining program;

  -- receive the first-ever comprehensive accounting of western water
     projects, including the costs associated with providing
     interest-free financing of irrigation projects; and

  -- make more informed decisions about the future of the Patent and
     Trademark Office. 

Other recommendations led to administrative actions to improve
government programs.  For example, based on our work: 

  -- DOE postponed and later canceled an unneeded waste vitrification
     project at its Hanford site, reducing costs $823.3 million. 

  -- DOE strengthened its controls over the amount and type of
     litigation expenses it will reimburse its contractors, resulting
     in a savings of $25 million. 

  -- NRC established criteria for determining when states' radiation
     regulatory programs are in compliance with NRC's requirements
     and developed procedures for suspending or terminating certain
     state programs that are in non-compliance. 

  -- DOE began consolidating the purchase of laboratory analyses and,
     since then, has experienced a 30 percent reduction in its costs. 

  -- DOE developed a strategic plan for spending U.S.  funds to
     upgrade Soviet-designed nuclear reactors. 

  -- NSF terminated its Academic Research Infrastructure Program, as
     a savings of $50 million. 

  -- The Forest Service took action--for the first time ever--to
     recover the costs of granting special use permits within the
     national forests even though it had authority to do so since
     1952. 

  -- The Bureau of Reclamation took action to recoup or share future
     costs to operate and maintain recreation facilities at
     reclamation projects. 

  -- The Department of the Interior adopted regulations to strengthen
     its ability to prevent unauthorized activities on hardrock
     mineral claims on federal lands. 

  -- The Department of Interior revised its regulations to ensure
     that lessees on federal lands will not be issued new coal mining
     leases unless they have met statutory coal production
     requirements. 

  -- The National Park Service took action to correct erroneous
     financial information and made significant progress in its
     financial reporting. 


      HIGH-RISK AREA
-------------------------------------------------------- Chapter 2:1.2

We designated DOE contracting as a high-risk area in 1990 based on
its vulnerability for waste, fraud, and abuse. 


         DOE CONTRACTING
------------------------------------------------------ Chapter 2:1.2.1

Contracting was considered particularly vulnerable because DOE's
missions rely heavily on contractors and DOE has a history of weak
contractor oversight, stemming from the Manhattan Project where
special contracting arrangements, such as least interference in the
contractor's work and indemnification of a contractor's liability,
were considered necessary steps in developing the atomic bomb during
World War II.  Decades later, DOE continued to enter into contracts
in which competition was the exception, reimbursement of virtually
any contractor cost was the practice, and lax contractor oversight
was the norm. 

Over the years, we issued a series of reports and testimonies
documenting DOE's contracting practices and problems and identifying
some of the costly effects.  These products have contributed to the
Congress' budget deliberations and provided an impetus for DOE to
reform its practices.  However, changing the way DOE does business
has not come easily or quickly.  DOE has taken various actions in the
past to improve its contracting, and a recent contract reform effort
that has received high priority and visibility appears promising. 
Given the magnitude of these reforms, implementation problems are to
be expected.  However, they must be identified and corrected for
contract reform to succeed.  Therefore, DOE's continuance of
high-level monitoring and oversight will be needed to further
identify problems, standardize the best practices, and make needed
corrections as DOE makes its way through these changes. 


      KEY OPEN RECOMMENDATIONS
-------------------------------------------------------- Chapter 2:1.3


         DECOMMISSIONING OF
         NUCLEAR FACILITIES
------------------------------------------------------ Chapter 2:1.3.1

In May 1989, we recommended that to enhance regulatory oversight of
nuclear facilities' decommissioning efforts, the Chairman of the NRC
should ensure that licensees decontaminate their facilities in
accordance with guidelines from NRC before NRC releases a site for
unrestricted use.  NRC agreed and in June 1992 issued a regulatory
guide on acceptable radiological surveys in support of license
termination.  In addition, NRC, in cooperation with the Environmental
Protection Agency and the Departments of Energy and Defense, is
developing a manual that uses a common survey method to determine
residual radioactive contamination.  NRC expects to issue the manual
in January 1998.  Finally, in July 1997, NRC published a final rule
establishing radiological criteria for license termination and
expects to issue related guidance for implementing these criteria in
1998.  (GAO/RCED-89-119)


         NATIONAL LABORATORIES
------------------------------------------------------ Chapter 2:1.3.2

In January 1995, we recommended that the Secretary of Energy evaluate
alternatives for managing the laboratories that more fully support
the achievement of clear and coordinated missions, including
strengthening the Department's Office of Laboratory Management.  If
DOE is unable to refocus the laboratories' missions and develop a
management approach consistent with these new missions, we suggested
that the Congress may wish to consider alternatives to the present
DOE-Laboratory relationship.  Such alternatives, we said, might
include placing the laboratories under the control of different
agencies or creating a separate structure for the sole purpose of
developing a consensus on the laboratories' missions. 

DOE's Laboratory Operations Board, created to provide focus and
direction for DOE's laboratories, has developed an initial strategic
plan for the laboratories.  Among other things, the Board is trying
to determine whether some of DOE's laboratories--particularly the
small, missions specific ones--are still needed or whether they could
be closed or privatized.  Further, the Board is taking steps to
implement the recommendations made by the Galvin Task Force, an
independent panel created by DOE to recommend better ways to manage
the national labs.  Many of the Task Force's recommendations address
issues raised in our report.  The Board has also recommended that DOE
streamline its organizational structure.  The current Secretary of
Energy recently announced that the Board's work will continue. 
Meanwhile, various bills have been introduced in the Congress calling
for restructuring the laboratories.  (GAO/RCED-95-10)


         NUCLEAR REGULATION
------------------------------------------------------ Chapter 2:1.3.3

In May 1994, we recommended that the NRC--in order to ensure the
health and safety of workers the public--establish acceptable limits
for radioactivity in sludge, ash, and related by-products at sewage
treatment plants that receive radioactive materials from NRC
licensees.  NRC has been working with the Environmental Protection
Agency (EPA) and other interested parties to develop a national
approach to ensuring the protection of treatment workers and the
public.  Among other things, they are conducting a national survey to
assess the extent of radioactive contamination in sludge, ash, and
byproducts, and plan to issue final guidance on radioactive
materials, including acceptable levels of radioactivity--in 1998. 
(GAO/RCED-94-133)

In another report--in May 1997--we recommended that NRC develop
strategies to more aggressively act on safety deficiencies they
discover in commercial nuclear power plants.  Specifically, we urged
NRC to better document how plant owners are addressing their problems
and to advise owners on how NRC will respond to uncorrected problems. 
We also recommended that NRC assess the competency of plant
management.  NRC acknowledges weaknesses in their regulatory program
and is making changes in response to our report.  They are
streamlining their process for identifying potential problem plants
at an earlier stage, and are improving the way they track plant owner
commitments to address safety problems.  NRC also plans to study ways
of evaluating management competency.  (GAO/RCED-97-145)


         CONTRACT MANAGEMENT
------------------------------------------------------ Chapter 2:1.3.4

In August 1994, we recommended that DOE, in contracting with the
University of California for the management of three national
laboratories, (1) adopt standard contract clauses where there is not
a sound basis for deviating from them, (2) require advance DOE
approval for University-sponsored research projects at the
laboratories, and (3) ensure that fees paid to contractors for
increased financial risks are cost-effective by developing criteria
for measuring their costs and benefits.  DOE has reviewed the
non-standard clauses in the contracts with the University of
California, identified the relevant changes that are needed, and
plans to have the new contract completed by late 1997.  Modifications
have also been made to the contracts requiring that information
regarding university-sponsored research be submitted to DOE for
review.  DOE is still in the process of developing a new fee policy
for profit and nonprofit management and operating contractors which
relates fees to anticipated risk.  DOE anticipates sending the policy
to the Office of Management and Budget (OMB) in early 1998 for
publication in the federal register.  (GAO/RCED-94-202)

In another report--in December 1996--we recommended that DOE (1)
clearly link management and operating contract goals with its
strategic plan and annual performance goals, (2) include a mandatory
standard clause in all management and operating contracts that gives
DOE the exclusive authority to set contract goals and incentives that
support the strategic plans and missions of the Department, and (3)
adopt federal contract pricing policies such as those contained in
the Federal Acquisition Regulation (FAR).  DOE agrees with these
recommendations and is in the process of developing implementing
policies.  (GAO/RCED-97-18)


         NUCLEAR WASTE DISPOSAL
------------------------------------------------------ Chapter 2:1.3.5

In September 1991, we recommended that DOE plan for the increasing
likelihood that it might not be able to accept utilities' nuclear
waste for storage or disposal beginning in 1998.  We also suggested
that the Congress explore whether additional legislation is desirable
to address the likelihood that DOE will be unable to begin accepting
the waste by that year.  Recently, a federal circuit court of appeals
ruled that DOE is obligated to begin accepting nuclear waste in 1998. 
Also, the Congress has been considering legislative proposals that
would, among other things, authorize and require DOE to store
utilities' nuclear waste at a federal facility until DOE completes a
facility for permanent disposal of the waste.  (GAO/RCED-91-194)


         URANIUM ENRICHMENT
------------------------------------------------------ Chapter 2:1.3.6

In September 1995, we recommended that the Congress require the
Secretary of the Treasury, not the Board of Directors of the United
States Enrichment Corporation (USEC), take the lead role on behalf of
the Nation's taxpayers throughout the privatization process for the
USEC, which was authorized by the Energy Policy Act of 1992.  Our
September 1995 report also found fault with how USEC had calculated
its value in its July 1995 privatization plan and suggested that the
Secretary of Treasury consider options to ensure that the government
obtains a fair price for the corporation if it is privatized.  In
April 1996, the President signed into law the USEC Privatization Act
which, among other things, requires the Secretary of the Treasury to
take a more active role in the USEC privatization process.  However,
the President has not yet directed USEC and the Secretary of the
Treasury to proceed with the privatization plan and thus a final
decision on whether the corporation will be sold directly to a
private company or through a public stock sale has not been made. 
(GAO/RCED-95-245)


         TECHNOLOGY INVESTMENT
------------------------------------------------------ Chapter 2:1.3.7

In June 1996, we recommended that the Secretary of Energy develop and
implement a Department-wide policy for requiring repayment of the
federal investment in successfully commercialized cost-shared
technologies.  We said the policy should provide criteria and
flexibility for determining which programs and projects are
appropriate for repayment.  DOE officials agree with this
recommendation and is conducting a comprehensive review of its
existing authorities, the experiences of other agencies, and other
matters as a basis for adopting a new policy to accommodate it. 
(GAO/RCED-96-141)


         INTELLECTUAL PROPERTY
         FEES
------------------------------------------------------ Chapter 2:1.3.8

In May 1997, we noted in our report to the Senate Committee on the
Judiciary that the Congress may wish to reconsider whether
intellectual property fees should be more closely aligned with the
costs of the services provided by the government.  Regarding patent
fees, we suggested considering whether (1) the fee differentials
between large and small businesses should be continued, (2) a larger
proportion of the fees should be tied to the actual examination
process, and (3) applicants requiring more examination time and/or
creating delays in examination should pay larger fees.  Regarding
copyright fees, we suggested considering whether the Copyright
Office, like the Patent and Trademark Office (PTO), should be
self-sustaining through fees.  We recommended that the Copyright
Office itself, also like PTO, raise fees to account for inflation
when given the authority to do so administratively.  Since the
issuance of our report, the Congress has been using our analyses in
their deliberations on bills to restructure PTO, although final
action has not yet taken place.  The Copyright Office has assured us
that it will raise fees administratively in the future as we
recommended.  (GAO/RCED-97-113)


         FAIR MARKET VALUE
------------------------------------------------------ Chapter 2:1.3.9

In April 1996, we reported that the Forest Service is not receiving
fair market value for right-of-way fees on Forest Service lands.  We
recommended that an appropriate fee system be implemented.  Both the
Forest Service and major industry groups, representing private
companies that have rights-of-way to operate power lines, pipelines,
and communications lines across Forest Service lands, agree on the
need for a new fee system.  The Forest Service is working with the
Bureau of Land Management to develop a common fee system for rights
of way, more reflective of fair market value and expects to implement
it by fiscal year 1999.  (GAO/RCED-96-84)


         NATIONAL PARK SERVICE
         EMPLOYEE HOUSING
----------------------------------------------------- Chapter 2:1.3.10

While the Park Service has a long-standing tradition of providing
housing to some of its employees, the backlog of housing repair,
rehabilitation, and replacement needs, currently estimated at more
than $500 million, and a tight federal budget dictate that the Park
Service examine options to deal with its housing needs.  In an August
1994 report, we made recommendations that, if implemented, would (1)
better define the Park Service's housing needs and identify
opportunities for reducing its inventory and (2) obtain nonfederal
funds to help the Park Service meet its housing needs.  In November
1996, the Congress passed Public Law 104-333 that, among other
things, requires the Park Service to (1) review and revise its
criteria for providing employees housing, and (2) assess the
conditions of, and need for, its employee housing units.  The Park
Service is currently reviewing the scope of its employee housing
program and is exploring ways to increase private sector involvement
in helping to address the housing need.  (GAO/RCED-94-284)


         OIL AND GAS ROYALTIES
----------------------------------------------------- Chapter 2:1.3.11

The federal government receives royalties from offshore oil and gas
leases, calculated using the volume and price of the oil and gas sold
and a royalty rate.  It is essential that oil and gas production be
verified to help ensure accurate determination of royalties.  In an
August 1990 report we concluded that Interior's Minerals Management
Service had been slow in verifying offshore oil and gas production,
and we recommended that the agency implement an ongoing production
verification program.  The Service conducted a pilot program and now
plans to develop regulations for a permanent program, with a target
for issuance by early 1998.  (GAO/RCED-90-193)


         FEDERAL WATER SUBSIDIES
----------------------------------------------------- Chapter 2:1.3.12

Water subsidies, in which rights to use water are bought and sold,
are seen by many resource economists as a mechanism for reallocating
scarce water to new users by allowing those who place the highest
economic value on the water to purchase it.  At the same time, such
transactions may allow Interior's Bureau of Reclamation to share in
the profits, thereby reducing the costs to the government of
providing the subsidized water.  In a May 1994 report, we (1)
identified several matters for the Congress to consider if it decides
to further encourage water transfers and (2) recommended several
actions that the Secretaries of the Army and the Interior could take
to clarify guidance on approving water transfers to more clearly
outline the requirements that must be met.  The Bureau of Reclamation
has taken various actions to implement these recommendations and the
Army Corps of Engineers is coordinating with the Bureau to take
others.  (GAO/RCED-94-35)



   ENVIRONMENTAL PROTECTION ISSUE
   AREA (BUDGET FUNCTION 300)
---------------------------------------------------------- Chapter 2:2

GAO Contact:  Peter F.  Guerrero, 202/512-6111


      IMPACT OF GAO'S WORK
-------------------------------------------------------- Chapter 2:2.1

Protecting the environment will remain an important and challenging
objective for the nation as we move into the next century.  The
Environmental Protection Agency (EPA) has designed its new strategic
plan to assist the Congress with its renewed interest in
environmental protection.  Since EPA's inception more than 25 years
ago, the nation has seen and come to expect continued improvements in
the quality of its air, water, and other resources.  These
improvements, moreover, have come with increasingly higher compliance
costs.  Further increases are expected.  Real spending for
environmental compliance grew 7.3 percent in 1994--according to the
government's latest available estimates.  This growth rate represents
the largest single-year increase in a decade.  (Prior year increases
were about 3 percent.) In 1994 the nation spent $122 billion in
current 1996 dollars on environmental protection--or 3 percent of the
Gross Domestic Product.  Thus, EPA's almost $7 billion budget has a
significant impact on the nation's economy. 

Rising costs, demands for more environmental protection, and efforts
to reduce government spending highlight the need for innovative
approaches and demonstrated results.  In the past, the nation has
taken a strict "command and control" approach toward environmental
protection.  Under this approach, EPA has set specific limitations on
pollutant discharges and prescribed, in detail, how these limits are
to be met.  While this strategy may have served its purpose in the
past, a consensus among industry, regulators, and even some in the
environmental community is growing that this approach will not
effectively control future sources of pollution.  This prescriptive
approach has also strained relationships between EPA and the states. 
Both the Congress and EPA seem poised to allow states, localities,
and business more flexibility to carry out their environmental
responsibilities without extensive direction or oversight from EPA. 

Our work has been in the forefront, highlighting our nation's
recurring environmental problems and recommending ways in which the
Congress and EPA can effectively address those concerns.  In an
effort to seek a more realistic balance between environmental
expectations and available resources, we have continued to review
EPA's efforts to incorporate strategic planning into the agency's
management and operations.  This approach would help ensure that
limited resources are targeted to high-risk environmental and public
health problems.  For example, we have recommended that the agency
establish benchmarks for implementing and monitoring a complex
project directed towards integrating its management processes for
planning, budgeting, and ensuring accountability.  This project's
success is important for EPA to better measure the costs and results
of its programs.  Finally, our work over the past several years has
stressed the need to adequately fund those programs that address high
risks to the public and to adopt more cost-effective methods of
achieving environmental results through alternatives and supplements
to traditional regulatory approaches, including pollution taxes,
pollutant trading, public disclosure of emissions, and pollution
prevention.  EPA has started to implement these key
recommendations--several of which will require years to fully put in
place.  Also, EPA and the Congress appear increasingly open to
alternatives to traditional regulatory approaches as the
environmental statutes go through the reauthorization process. 


      HIGH-RISK AREA
-------------------------------------------------------- Chapter 2:2.2

We designated EPA's Superfund program management as a high risk area.


         SUPERFUND PROGRAM
         MANAGEMENT
------------------------------------------------------ Chapter 2:2.2.1

EPA's Superfund program began in 1980 as a relatively short-term
project to clean up abandoned hazardous waste sites.  At that time,
the country's hazardous waste problems were thought to be limited. 
Since then, thousands of waste sites have been discovered. 
Furthermore, cleaning up these sites--many of which are owned by the
federal government--has proved to be far more complicated and costly
than anticipated.  Recent estimates show that cleaning up these sites
could amount to over $300 billion in federal costs and many billions
more in private expenditures. 

Under the Superfund law, EPA can compel the private parties
responsible for abandoned or inactive hazardous waste sites to clean
them up, or it can conduct the cleanup and demand reimbursement of
its costs from the responsible parties.  Currently, EPA has
negotiated with private parties to do over 70 percent of the
cleanups.  To pay for EPA's cleanups, the agency draws on a
legislatively established trust fund that is primarily financed by a
tax on crude oil and certain chemicals and by an environmental tax on
corporations.  (In December 1995, the authority to collect these
taxes expired and taxes are no longer being collected.  However,
because the trust fund still has an unappropriated balance, it has
continued to be used to finance the Superfund program.) Federal
agencies generally use their annual appropriations to finance
cleanups of the facilities under their jurisdiction. 

In 1990, GAO identified Superfund as one of its high-risk programs
because of certain long-standing management problems.  First, EPA and
other federal agencies have not consistently allocated their cleanup
resources to reduce the most significant threats to human health and
the environment.  Second, although EPA is responsible for pursuing
reimbursement when it funds a cleanup, the agency has recovered from
responsible parties only a fraction of the moneys that it has spent. 
Finally, while about half of the Superfund program's budget annually
goes to contractors, EPA has had long-term problems with controlling
the contractors' costs. 

EPA and other federal agencies have taken steps toward addressing
these areas.  For instance, EPA has begun using a risk-based process
to set priorities and allocate some of its cleanup funds.  Other
federal agencies have made uneven progress in (1) taking the first
step toward setting priorities--that is, developing a complete
inventory of the waste sites that need cleanup--and (2) implementing
systems to rank sites for cleanup according to risk. 

EPA has also made some improvements in its cost recovery program,
although it still recovers only a small percentage of its costs when
it does the cleanup work.  While some costs are not expected to be
recovered, EPA's historically low recovery rate in part results from
the agency's slow pace in revising its policy that limits the
recovery of indirect program costs.  EPA estimates that the value of
these excluded costs has grown to $3.8 billion through fiscal year
1995--up from a value of $1.1 billion 3 years earlier. 

Finally, while EPA has focused attention on strengthening its
management of Superfund contracts, past problems still persist:  (1)
EPA's regions are still too dependent upon the contractors' own cost
proposals to establish the price of cost-reimbursable work, (2) EPA
continues to pay its cleanup contractors a high percentage of total
contract costs to cover administrative expenses rather than ensuring
that the maximum amount of available moneys is going toward the
actual cleanup work, and (3) little progress has been made in
improving the timeliness of audits to verify the accuracy of billions
of dollars in Superfund contract charges. 

Thus, despite improvements, further actions are needed to safeguard
the government's investment. 


      KEY OPEN RECOMMENDATIONS
-------------------------------------------------------- Chapter 2:2.3


         AIR QUALITY
------------------------------------------------------ Chapter 2:2.3.1

The Clean Air Act Amendments of 1990 required EPA to issue a series
of regulations--many with ambitious milestones--to address some of
the more serious air pollution problems facing the nation.  Because
of the billions in estimated annual costs to implement these
requirements, the Congress required EPA to report on the benefits and
costs of the agency's regulatory actions pursuant to this act.  We
found that EPA's benefit-cost analyses were inconsistent in their use
and reporting of certain key economic assumptions and recommended
that EPA make several changes to ensure that its analyses were more
consistent in using and reporting key economic assumptions. 
Consequently, EPA is taking such steps.  In addition, because the
act's statutory mandates requires EPA to develop and issue rules at
an unprecedented rate, we recommended that EPA implement a tracking
system that would allow the agency to identify and correct problems
in its rulemaking process.  In response, EPA has modified several of
its existing information systems and plans to use the previously
mentioned accountability system that is being developed as well as
governmentwide cost accounting requirements to obtain this
information.  (GAO/RCED-97-38, GAO/RCED-95-70)


         CLEAN WATER
------------------------------------------------------ Chapter 2:2.3.2

Interest continues to grow in the use of pollutant trading as an
economical means for addressing remaining pollution problems.  This
approach uses cost savings as an incentive for reducing pollution. 
For example, to address water pollution, a pollutant trading approach
allows a group of dischargers of wastewater to help determine (with
EPA or state assistance and approval) how their collective discharges
can be reduced to preapproved levels in a cost-effective manner.  We
have reported that pollutant trading could be an economical
supplement to traditional regulatory programs.  However, trading had
been limited and, under the Clean Water Act, this limited use has
been attributed largely to the uncertainties surrounding its legal
status.  Accordingly, we suggested the Congress consider amending the
act to explicitly authorize trading.  (GAO/RCED-92-153)


         TOXIC SUBSTANCES
------------------------------------------------------ Chapter 2:2.3.3

We made a number of recommendations in 1994 to help strengthen EPA's
ability to regulate toxic chemicals.  Under the Toxic Substances
Control Act, EPA can limit or prohibit the manufacture, distribution,
and use of toxic chemicals.  However, EPA has issued only a few
regulations under the act because the act's legal standards are very
high, and the burden of proof is essentially on EPA.  EPA has
reviewed the risks of only a small percent of some 62,000 chemicals
and must use cumbersome procedures to acquire test data.  New
chemicals are marketed without EPA having sufficient data to fully
assess potential risks.  EPA also believes that industry has made
excessive claims of confidential business information for data
submitted under the act.  Among other things, we suggested the
Congress consider improving EPA's ability to conduct chemical reviews
by requiring industry to submit additional data on new chemicals and
by shifting to industry some of the burden for compiling data on
existing chemicals.  (GAO/RCED-94-103)

Because little is know about the risks posed by many chemicals, EPA
is planning to develop a Chemical Use Inventory.  Debate on this
effort has focused on certain key issues, such as the chemicals to be
included.  Although EPA has not made final plans, the agency has
considered collecting data on up to 12,000 chemicals.  Many think the
number should be substantially smaller.  Also, our past work has
shown that EPA does not have the resources to effectively compile and
analyze data on such a large number of chemicals.  Consequently, we
recommended that EPA begin its inventory with a smaller number of
chemicals--such as those suspected of presenting the greatest risk to
human health and the environment--and then expand the inventory as
appropriate.  EPA is taking our recommendation into account as it
develops its proposal to establish an inventory.  (GAO/RCED-95-165)


         HAZARDOUS WASTE
         MANAGEMENT
------------------------------------------------------ Chapter 2:2.3.4

As previously mentioned in the High-Risk Area section, we suggested
the Congress consider amending the Superfund legislation to develop a
consistent process for assessing and ranking the relative risks of
hazardous waste sites and employ this process as a factor in setting
priorities for federal hazardous waste cleanups nationwide.  Also, we
recommended that EPA expeditiously broaden its definition of indirect
costs that it could recover and increase the program costs that it
seeks to recover.  EPA is planning to review its Superfund cost
accounting system in light of the new government cost accounting
standards and to provide data describing the indirect costs that
result from the new standards.  Beginning in fiscal year 1998, the
agency intends to use that data to determine what and how site costs
would be affected if the new accounting definitions were used to set
indirect rates for cost recovery.  On the basis of that analysis, EPA
will decide what steps need to be taken next to increase the recovery
of its indirect program costs.  (GAO/RCED-96-150, GAO/RCED-94-196)

In the Superfund program, EPA has used incineration to clean up some
of the most toxic forms of contamination at hazardous waste sites. 
To promote the safe operation of incinerators at hazardous waste
sites, EPA relies on four methods, such as establishing site-specific
standards for incinerator's emissions and providing for on-site
observation.  However, the agency has not used two other
techniques--inspections of incinerators and the compiling and sharing
of lessons learned--that it also intended to use.  We recommended
that EPA use these two additional methods as it originally planned to
better ensure the safe operation of these on-site incinerators.  The
agency is taking steps to do so.  (GAO/RCED-97-43)

Moreover, after spending nearly two decades and billions of dollars
for cleanups, the nation still has thousands of hazardous waste sites
to address.  To reduce this backlog of contaminated sites, some
states have created voluntary cleanup programs, which rely on
incentives not enforcement to accomplish cleanups.  Some incentives
include the reduction in requirements to expedite cleanups and reduce
costs and some assurance of relief from future state liability.  Our
review of these voluntary programs found that the federal role in
these cleanups needed clarification.  Since EPA has been working with
states to establish some guidance in this area, we recommended that
EPA, in its final guidance, provide some criteria that would better
define when EPA would enter into agreements that would limit its
involvement at such sites.  (GAO/RCED-97-66)


         STATE/FEDERAL RELATIONS
------------------------------------------------------ Chapter 2:2.3.5

Most federal environmental programs are designed to be administered
at state and local levels.  Accordingly, once a state demonstrates
that it is capable of implementing an environmental program, EPA
authorizes states to implement most of the day-to-day
responsibilities.  After authorization, EPA regions, with guidance
from headquarters, continue to set goals for the states, provide them
with financial assistance, and monitor their performance in meeting
grant and program requirements.  States authorized to manage federal
environmental programs have been unable to meet some of the
requirements to implement these programs.  Many states have had
difficulty in performing key functions, such as monitoring
environmental quality, issuing permits, and enforcing compliance.  As
a result, states have become increasingly reluctant to accept
additional responsibilities associated with recent environmental
laws.  Resource limitations have been identified as a major factor in
the states' reluctance.  Federal funding has not kept pace with these
new requirements, and the states have been unable to make up the
funding difference.  We recommended that EPA work with states to
identify how each state's limited funds can be most efficiently
allocated within each program to address the state's highest
environmental priorities and take steps to increase the agency's
flexibility in dealing with states to achieve improvements in
environmental quality.  We also recommended actions that EPA could
take to strengthen its working relationships with states.  EPA has a
number of initiatives underway to improve its communication with the
states and bring greater flexibility in its oversight of state
activities.  (GAO/RCED-95-64)

See also chapter 5, Financial and Information Management Programs,
Information Resources Management Issue Area. 



   FOOD AND AGRICULTURE ISSUE AREA
   (BUDGET FUNCTION 350)
---------------------------------------------------------- Chapter 2:3

GAO Contact:  Robert A.  Robinson, 202/512-5138


      IMPACT OF GAO'S WORK
-------------------------------------------------------- Chapter 2:3.1

The Food and Agriculture Issue Area covers the domestic food and
agriculture programs at the U.S.  Department of Agriculture (USDA),
the third largest civilian agency in the federal government, with a
budget of about $57 billion.  USDA, and the food and agriculture
industry it supports, is a vital part of the lives of millions of
Americans.  Approximately two-thirds of the Department's budget, or
about $39 billion, is spent on federal food and nutrition assistance
programs for needy citizens.  Each year, American agriculture
accounts for about 13.5 percent of the gross domestic product and for
about 10 percent of all exports.  In addition, about 23 million
Americans have jobs related to the food and agriculture economy. 

In 1997, many of USDA's programs changed dramatically.  Many of these
changes, most of which were mandated by the Congress in 1994 and
1996, reflect a body of work produced by the Food and Agriculture
Issue Area, particularly in the farm commodity program, farm credit,
and food safety areas.  Specifically, USDA began implementing the
provisions of the 1996 Farm Bill, which, among other things, pushed
farm assistance programs to a more market-oriented approach and
strengthened the integrity of the farm lending programs.  USDA also
began to implement the provisions of Hazard Analysis and Critical
Control Point (HACCP), which fundamentally changes the approach to
food safety inspections.  Additionally, USDA's Food Stamp Program has
changed significantly as the result of the major changes to federal
welfare programs.  While these program changes are occurring, USDA is
undergoing the most massive reorganization in its history. 

During the past year, we have assisted the Congress and the
Department in assessing USDA's implementation of these changes.  For
example, we

  -- reported on conflict-of-interest problems within the newly
     organized Farm Service Agency's state and county offices;

  -- reported on the progress USDA has made in meeting
     congressionally mandated reorganization and streamlining
     changes;

  -- identified opportunities for reducing government costs to
     deliver crop insurance through private sector companies;

  -- analyzed the strengths and weaknesses of options to increase
     availability of credit to rural America;

  -- evaluated the financial condition of $43 billion loan portfolio
     held by USDA's Rural Utilities;

  -- evaluated alternatives for improving the delivery of the more
     than $6 billion federal school meal programs; and

  -- evaluated the impact of the 1996 Farm Bill on USDA's county
     office workload. 

Furthermore, during this past year, a number of our prior
recommendations have been implemented by USDA and the Congress.  For
example, the following occurred as a result of our work: 

  -- The Congress enacted legislation requiring states to ensure that
     prisoners are not counted in households for purposes of
     providing food stamps. 

  -- USDA will routinely monitor the expenses of crop insurance
     reinsurance companies to ensure that the administrative expense
     reimbursement is reasonable for the service provided. 

  -- The Congress did not provide any budget authority for the
     enrollment of additional acres in the Conservation Reserve
     Program in fiscal year 1997, which reduced the federal budget by
     $48.6 million, because the program had already reached its
     legislative acre limit. 

  -- The Congress combined two USDA food distribution programs to
     streamline administration of these programs. 

  -- USDA agreed to improve the monitoring and administration of food
     service management companies' contracts to ensure that these
     contracts comply with federal requirements. 

  -- USDA submitted a legislative proposal that would allow it to
     recover overpayments to farmers regardless of whether the
     overpayments were made in error or the repayment would cause the
     farmer a hardship. 


      HIGH-RISK AREA
-------------------------------------------------------- Chapter 2:3.2

We designated USDA's farm loan programs as a high risk area in 1992.


         FARM LOAN PROGRAMS
------------------------------------------------------ Chapter 2:3.2.1

USDA's farm loan programs are intended to provide temporary financial
assistance to farmers and ranchers who are unable to obtain
commercial credit at reasonable rates and terms.  In operating the
farm loan programs, USDA faces the conflicting tasks of providing
temporary credit to high-risk borrowers so that they can stay in
farming until they are able to secure commercial credit and of
ensuring that the taxpayers' investment is protected.  We reported on
the federal government's exposure to financial loss in GAO's December
1992 and February 1995 high-risk series reports.  In our most recent
high-risk series report (Feb.  1997), we reported that the Congress
has enacted legislation that, if implemented properly, should
significantly reduce the financial risks associated with the farm
lending programs.  Specifically, Title VI of the Federal Agriculture
Improvement and Reform (FAIR) Act of 1996 made fundamental changes to
the program's loan-making, loan-servicing, and property management
policies.  CBO has projected savings from these actions at
approximately $69 million over 7 years. 

Overall, the extensive reforms mandated by the FAIR Act, combined
with USDA's actions to improve compliance with program standards,
should reduce the farm lending programs' vulnerability to loss. 
However, USDA is still in the process of implementing the mandated
reforms, and their impact on the loan portfolio's financial condition
will not be known for some time. 


      KEY OPEN RECOMMENDATIONS
-------------------------------------------------------- Chapter 2:3.3


         FOOD SAFETY
------------------------------------------------------ Chapter 2:3.3.1

Our past work has been instrumental in the implementation of the new
HACCP approach to food safety.  This new program may address many of
the problems we identified in our reports, and we will monitor the
progress USDA and the Food and Drug Administration (FDA) make in
implementing the HACCP regulations.  In addition, however, we
identified some shortcomings in the federal food safety program that
need solutions beyond a HACCP-based food inspection program. 
Specifically, we identified the need for Congress to (1) create a
uniform set of food safety laws that are administered by a single
food safety agency, (2) provide that agency with the flexibility to
target its inspection resources to the most serious food safety
risks, and (3) consider extending the Food Safety and Inspection
Service's (FSIS) discretionary inspection authority and requiring
FSIS to implement a discretionary inspection program for meat and
poultry processors.  (GAO/RCED-92-152, and GAO/RCED-94-110)

Similarly, federal programs designed to ensure that foods are not
contaminated with unsafe chemicals need improvement.  To overcome the
fundamental weaknesses in the federal government's programs for
monitoring chemical residues and environmental contaminants in food,
we identified the need for the Congress to enact a uniform set of
food safety laws that includes consistent standards for chemical
residues and contaminants in food and provides the federal agencies
with the authorities needed to effectively carry out their oversight
responsibilities.  (GAO/RCED-94-192)

Regarding a uniform inspection system, the Congress has been
considering action for many years.  Most recently, in its mark-up of
the FSIS' fiscal year 1998 budget, the House Appropriations
Committee, Subcommittee on Agriculture, urged the Administration to
proceed with the development of a single-food safety agency. 
Regarding flexibility to target FSIS' inspection resources and
implementing discretionary inspections, in July 1996, FSIS proposed
redesigning and enhancing the role of FSIS inspectors by moving
traditional carcass-by-carcass examination duties to industry and
having FSIS inspectors concentrate on sampling carcasses for pathogen
reduction checks and verifying HACCP procedures. 


         FOREIGN PESTS AND
         DISEASES
------------------------------------------------------ Chapter 2:3.3.2

Foreign pests and diseases entering the United States cost an
estimated $41 billion annually in lost production and expenses for
prevention and control.  USDA's Animal and Plant Health Inspection
Service (APHIS) is responsible for minimizing the risks of
infestation and disease and protecting the health of U.S. 
agriculture.  On the basis of our review of APHIS, we recommended
several actions to better ensure that APHIS identifies harmful pests
and diseases through the inspections it conducts.  APHIS agreed with
problems noted in our report and is developing an action plan to
correct these problems.  (GAO/RCED-97-102)


         RURAL DEVELOPMENT
------------------------------------------------------ Chapter 2:3.3.3

The Empowerment Zone/Enterprise Community (EZ/EC) program was created
by the Congress in 1993 to help distressed communities develop
comprehensive approaches for dealing with their social and economic
problems.  This program involves significant levels of federal funds. 
In fact, we estimated that federal funding will total more than $1
billion over the 10-year life of the program.  On the basis of our
review, we recommended that USDA and Department of Health and Human
Services (HHS) take several actions intended to better ensure that
these funds are spent in accordance with appropriate financial
standards and that there is sufficient capability to oversee the
progress of the program's implementation.  Both USDA and HHS are in
the process of taking actions to implement these recommendations.  We
will monitor their progress.  (GAO/RCED-97-75)

See also chapter 5, Financial and Information Management Programs,
Information Resources Management Issue Area. 



   HOUSING AND COMMUNITY
   DEVELOPMENT ISSUE AREA (BUDGET
   FUNCTIONS 370, 450)
---------------------------------------------------------- Chapter 2:4

GAO Contact:  Judy A.  England-Joseph, 202/512-7631


      IMPACT OF GAO'S WORK
-------------------------------------------------------- Chapter 2:4.1

There are more than 300 federal programs and activities, scattered
among 28 agencies, that are aimed at providing decent, affordable
housing and healthy, vibrant communities.  The Department of Housing
and Urban Development (HUD), including the Federal Housing
Administration (FHA), is the principal federal agency responsible for
about 240 of these programs and activities.  Other key agencies with
housing or community development programs include the Department of
Veterans Affairs (VA), the Rural Housing Service, the Small Business
Administration (SBA), and the Federal Emergency Management Agency
(FEMA). 

The Congress continues to deliberate significant changes in the
structure and functions of some of the aforementioned agencies. 
Major debate also exists regarding how the federal government should
address the housing needs of its citizens, especially in light of
welfare reform.  Also, heightened sensitivity exists within the
Congress regarding future budget needs--over $100 billion--for these
agencies' programs.  The Housing and Community Development Issue
Area's work has significantly added to congressional debate and
decision-making on the future of housing and community development at
the federal and state levels.  Highlights of some of our work are
listed below. 

In congressional hearings, we (1) discussed HUD's management
deficiencies, its progress on reforms, and remaining challenges; (2)
questioned the need for hundreds of millions of dollars in
potentially duplicative Section 8 funding and premature community
development aid included in HUD's fiscal year 1998 budget request;
(3) discussed the challenges facing HUD's Indian Housing Program; and
(4) discussed SBA's estimates of credit subsidies for the guaranteed
business loan and certified development company programs. 

In our report on a Congressional proposal to dismantle HUD, we
provided the Congress with critical information on the consequences
of coupling reduced federal funding with basic changes in the federal
role in housing and community development. 

Our report on HUD's portfolio reengineering proposal discussed the
potential costs and savings associated with the proposal and key
issues that must be considered in formulating legislation on that
subject. 

Our report on HUD's $1.58 billion HOPE VI-Urban Revitalization
Demonstration Program will assist Congressional decisionmakers on the
future of this program. 

We identified substantial problems with HUD's Preservation Program
that need to be addressed, either through program reforms or its
termination. 

Our report on HUD's Economic Development Loan Fund made
recommendations to correct monitoring and information management
problems we identified. 

We presented the Congress with information on the impact of a
reduction in FHA's insurance coverage on (1) home mortgage lenders,
the home mortgage market, and the types of borrowers served by FHA;
(2) the financial condition of FHA's insurance fund; and (3) HUD's
Government National Mortgage Association. 

The work we have performed in past years has influenced the Congress,
HUD and its agencies to take actions during fiscal year 1997 that
will result in financial benefits and program improvements.  Examples
of these improvements are shown below. 

  -- The Congress did not appropriate $845 million to HUD for bonus
     funding during fiscal year 1997 for high-performing grantees in
     four of its six new block grants since adequate performance
     measures and supporting information systems had not been
     developed. 

  -- HUD, SBA, and FEMA revised their strategic plans to comply more
     fully with the requirements of the Government Performance and
     Results Act. 

  -- HUD directed its field offices to discontinue utilities once HUD
     acquires an FHA foreclosed property.  This will reduce costs by
     $5.5 million over a 2-year period. 

  -- FHA now conducts an annual analysis of recent multifamily rental
     property loan defaults to test the validity of its loan loss
     reserve assumptions about defaults, which will allow FHA to
     better estimate its billions of dollars in loan loss reserves. 

  -- HUD has established procedures to monitor the financial
     performance of facilities in its nursing home portfolio and
     issued new program underwriting guidance, which will help
     prevent loan defaults and make underwriting loans less risky. 

  -- FHA has established a data base that will allow lenders and
     investors to evaluate and price the risk of multifamily housing
     loans and issued new program guidance for participating
     institutions. 

  -- The Rural Housing Service implemented centralized servicing of
     their single family housing loan portfolio, which will save the
     federal government about $69.7 million over a 2-year period. 

  -- The Federal Housing Finance Board issued new regulations that we
     consider key in ensuring that the Federal Home Loan Banks
     continue to meet their statutory and regulatory obligations
     under the Affordable Housing Program. 

  -- HUD has taken steps to improve oversight of approximately 3,000
     public housing authorities through training and increased
     emphasis on mandatory oversight activities. 

  -- HUD implemented new lead-based paint regulations that will help
     ensure safe housing and that children are protected from further
     exposure to lead-based paint hazards. 

  -- For surplus properties to be used to shelter the homeless, HHS
     revised its lease to include language holding the federal
     government harmless for injuries that may occur. 

  -- HUD revised its Community Development Block Grant regulations
     that includes an incentive for grantees to fund projects that
     will produce high quality jobs. 

  -- SBA has improved its oversight and management of its Small
     Business Investment Company (SBIC) Program, which will help
     identify financially troubled firms and allow the federal
     government to recover an estimated $304.4 million in losses. 

  -- We identified an error that substantially inflated SBA's
     estimates of the costs of its loans.  Correction of this error
     enabled SBA to make $2.47 billion in additional small business
     loans. 

  -- FEMA has modified its appropriation request to show the
     estimates of funds required for past disasters, which should
     prevent depletion of the Disaster Relief Fund and subsequent
     suspension of disaster assistance to stricken communities. 


      HIGH-RISK AREA
-------------------------------------------------------- Chapter 2:4.2

We have designated HUD as a high-risk area in 1994.


         HUD
------------------------------------------------------ Chapter 2:4.2.1

HUD's missions have resulted in a Department that is intricately
woven into the nation's financial and social framework and that
interacts with a number of diverse constituencies, such as public
housing authorities, private property owners, and nonprofit groups. 
HUD also spends a significant amount of tax dollars in carrying out
its missions.  The total budget outlays for HUD's programs were just
over $36 billion in fiscal year 1996, the vast majority of which was
for assisted and public housing programs.  HUD is also responsible
for managing more than $426 billion in mortgage insurance, $497
billion in guarantees of mortgage-backed securities, and about $170
billion in prior years' budget authority for which it has future
financial commitments.  In 1994, we designated HUD as a high-risk
area because of four long-standing, department-wide deficiencies: 
weak internal controls, inadequate information and financial
management systems, an ineffective organizational structure, and an
insufficient mix of staff with the proper skills. 

In February 1997, we reported that HUD had formulated approaches and
initiated actions to address these deficiencies.  However, we also
reported that HUD's efforts were far from reaching fruition; that HUD
programs continued to pose a high risk to the government in terms of
their vulnerability to waste, fraud, abuse, and mismanagement; that
HUD needed to complete its corrective actions; and that HUD and the
Congress needed to work together to implement a restructuring
strategy that focuses HUD's mission and consolidates, reengineers, or
reduces HUD's programs so as to bring the Department's
responsibilities in line with its management capacity.  In June 1997,
HUD announced its HUD 2020 Management Reform Plan that seeks to
realign the agency's programs and activities, increase
accountability, and restore the public's trust.  The plan calls for
reducing the number of programs or activities from over 300 to 70;
reducing staffing levels from about 10,600 to 7,500 by the end of
fiscal year 2000; retraining the majority of staff; reorganizing the
81 field offices; modernizing and integrating the financial and
management information systems; developing and strengthening internal
controls; and increasing program monitoring and measurement.  Many of
the reforms are expected to be implemented by the end of fiscal year
1998. 


      KEY OPEN RECOMMENDATIONS
-------------------------------------------------------- Chapter 2:4.3


         LOW-INCOME HOUSING
------------------------------------------------------ Chapter 2:4.3.1

In a July 1994 testimony, we said that we had found deplorable
conditions in various low income project-based properties and
recommended that the Secretary of HUD (1) promptly identify all
properties with severe physical problems and offer affected tenants
temporary assistance to relocate to safe and decent housing, (2)
systematically notify owners of the problems, and (3) take
appropriate enforcement actions against owners not bringing their
properties into compliance with housing quality standards.  HUD's
2020 Management Reform Plan contains a strategy to address the very
poor physical conditions at properties supported by HUD's
project-based assistance.  Under its reform plan, HUD would create a
Department-wide Real Estate Assessment Center, which would review
projects' physical inspection results and financial performance data
to identify problem properties early.  A Multifamily Center would
also be created to provide improved asset management.  If HUD's
strategy is successfully implemented, it would meet the intent of our
recommendations.  (GAO/T-RCED-94-273)

In a February 1989 report, we recommended that the Congress establish
one low-income rental assistance subsidy program that would provide a
unified approach to delivering housing assistance, equalize the
benefits to program recipients, and quiet the debate over which
program is preferable.  Both the House and Senate have pending
legislation to merge current programs.  (GAO/RCED-89-20)


         LEAD-BASED PAINT HAZARDS
------------------------------------------------------ Chapter 2:4.3.2

The risk of poisoning from lead-based paint continues to threaten the
lives of young children living in low-income housing that was
constructed before the sale of such paint was banned in 1978. 
Exposure to lead, even at low levels may cause serious health,
learning, and behavioral problems in children--especially those under
the age of 7.  In 1993, we issued a report that found (1) public
housing authorities were not complying with emergency abatement or
relocation regulations for children with elevated blood lead levels
and (2) HUD was not complying with 1988 legislative requirements
aimed at abating lead-based paint hazards from public housing nor
ensuring that public housing administrations were complying with its
testing, abatement, and notification requirements.  In the June 7,
1996, Federal Register, HUD published a proposed rule covering
notification, evaluation, and reduction of lead-based paint in
federally-owned and assisted housing.  However, HUD has not yet
published a final rule.  (GAO/RCED-93-138)



   TRANSPORTATION AND
   TELECOMMUNICATIONS ISSUE AREA
   (BUDGET FUNCTION 400)
---------------------------------------------------------- Chapter 2:5

GAO Contact:  John H.  Anderson, Jr., 202/512-2834


      IMPACT OF GAO'S WORK
-------------------------------------------------------- Chapter 2:5.1

Transportation issues significantly affect many aspects of our daily
lives.  The transportation sector is crucial to maintaining a healthy
economy, as well as ensuring our competitiveness in the world markets
and serving the expanding demands of our businesses and industries,
as well as the American public.  Despite the vast federal, state, and
local resources that go to maintain this infrastructure, with the
forecasted dramatic increase in air travel in the next decade and no
slowdown expected in the demand for surface and water transportation,
there is concern about the adequacy of the present infrastructure to
continue to meet the needs of the traveling public safely. 

As detailed below, our work has focused on budget, program
management, and safety related issues.  It has influenced the
Congress, the Department of Transportation (DOT) and its agencies to
take many actions that should improve transportation safety and the
efficiency and the effectiveness of transportation policies and
programs. 

In the wake of major airline these crashes in 1996, we provided
numerous reports and testimonies which highlighted the need forthe
Federal Aviation Administration (FAA) to undertake actions more
quickly to protect the flying public from the threat of explosives. 
During 1997, in response to our recommendations, FAA

  -- convened consortia at major airports to develop vulnerability
     assessments and action plans for addressing identified
     vulnerabilities; and

  -- assessed commercially available explosive detection equipment
     for screening checked baggage and purchased 54 such systems for
     deployment at airports. 

During 1997, FAA also took action on two of our key open
recommendations concerning a long-term national strategy to improve
aviation security and monitoring progress in implementing a series of
safety improvements.  FAA

  -- has established short- and long-range target dates to address
     the recommendations of the White House Commission Report on
     Aviation Safety and Security, which provides a comprehensive
     framework for improving aviation security;

  -- is deploying a computerized training and testing system to
     improve screener performance; and

  -- created an implementation plan that outlines the objectives for
     its safety improvements, provides points of contact for each,
     and links those recommendations to ones made by other FAA safety
     studies. 

Our work also influenced the Congress to enact legislation which
impacted aviation funding.  For instance, the Congress passed
legislation which reinstated the taxes which financed the Airport and
Airway Trust Fund, averting a major funding shortfall and providing
$2.7 billion in tax revenue for fiscal year 1997.  Also, based on our
recommendations, the Congress

  -- eliminated the set-aside funding for reliever airports,
     resulting in cost reductions of $123 million for fiscal years
     1997 and 1998; and

  -- reduced FAA's fiscal year 1997 appropriations by $34.5 million. 

Finally, in response to findings that FAA's culture was contributing
to persistent problems in its air traffic control system
modernization efforts, FAA issued a report entitled "Strategy for
Acquisition Culture Change." This report will serve as an important
building block toward long-term efforts to change FAA's culture. 

In 1997, DOT, its agencies, and the Congress took action on several
recommendations dealing with surface transportation and the Coast
Guard.  For example,

  -- DOT provided the Congress with the estimated cost and funding
     sources for each of the 55 action items that it identified to
     improve highway-rail crossing safety;

  -- The Federal Highway Administration (FHWA) increased its role in
     state environmental planning by assisting the Council on
     Economic Quality in (1) publishing a handbook that explains how
     to assess a project's cumulative impact on the environment, and
     (2) planning a series of workshops for environmental assessment
     practitioners on how to use the handbook;

  -- FHWA corrected errors in programming transportation enhancement
     funds and took steps to ensure that future funds were programmed
     only for eligible projects;

  -- the Congress eliminated a total of $122.6 million in federal
     funding from two very large transportation projects--San
     Francisco's rapid transit extension to its airport and the Los
     Angeles Red Line Subway; and

  -- the Congress decided not to fund the Coast Guard's $6 million
     request for procurement of additional systems and reduced the
     agency's 1997 budget request by $15.9 million. 

Finally, in 1997, the Coast Guard took action on our key
recommendation to explore less costly alternatives to its plans to
expand installation of Vessel Traffic Service systems. 


      KEY OPEN RECOMMENDATIONS
-------------------------------------------------------- Chapter 2:5.2

Although many actions and initiatives have been taken by the
Congress, DOT, and its agencies in response to our recommendations,
some important recommendations remain open and warrant priority
attention. 


         AVIATION SECURITY AND
         SAFETY
------------------------------------------------------ Chapter 2:5.2.1

During their first 5 years of operations, new airlines, on average,
had nearly twice the accident and incident rates of established
airlines and received more than twice the number of enforcement
actions that established airlines received.  However, our analysis
showed that FAA is not targeting inspections on those airlines with
the most serious safety problems.  For example, Valujet--a new
airline that experienced an accident in which 110 passengers and crew
died--had an incident rate that was 40 percent higher than average,
but was inspected one-third as frequently as all new large airlines
through calendar year 1994.  We recommended that the FAA closely
monitor the performance of new airlines, particularly during the
early years of operations and conduct increased and/or comprehensive
inspections of those new airlines that experience elevated rates of
safety-related problems.  FAA is in the process of developing a
national certification team to assist in reviews of newly certified
air carriers and is developing handbooks for use in evaluation and
surveillance of these carriers.  However, the certification team is
not yet fully staffed.  (GAO/RCED-97-2)


         GLOBAL POSITIONING SYSTEM
------------------------------------------------------ Chapter 2:5.2.2

When augmented, the Global Positioning System could provide
substantial safety and efficiency benefits for airlines and other
users of the National Airspace System.  One of the main benefits of
the Global Positioning System will be prevention of accidents and the
associated casualties.  For example, the use of the Global
Positioning System might have prevented the American Airlines crash
in Columbia when the ground-based navigational aids were out of
service and the pilot got lost in mountainous terrain.  Additionally,
airlines will save hundreds of millions through more efficient and
direct routings and approaches.  Finally, production of the Global
Positioning System-related equipment for aircraft and other
transportation modes is expected to be an $8 billion per year
industry.  In May 1995, we recommended that FAA prepare a
comprehensive plan for augmenting the Global Positioning System,
transitioning to the augmented system, and updating the plan
regularly.  The plan should include, among other things, schedule and
cost estimates for developing and implementing the wide and local
area augmentation systems as well as information on the probability
that FAA will meet these estimates.  FAA completed the public version
of the Global Positioning System Transition Plan in July 1996, and is
initiating work on the Global Positioning System Transition Plan
Library which is intended to address other users' needs.  The
Library's completion is expected late in 1997.  However, FAA has not
yet developed plans for developing, acquiring, fielding, or
implementing a local area augmentation system--needed to support
precision approaches--as we had recommended.  (GAO/RCED-95-26)


         FEES FOR REGISTERING AND
         CERTIFYING AIRCRAFT
------------------------------------------------------ Chapter 2:5.2.3

A potential option for dealing with limited FAA resources, is to
establish new user fees or increase existing ones for the services it
provides, taking into consideration the government's costs, the value
of the services to the user, and the public policy or interest
served.  In 1993, we reported that FAA is 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.  In accordance
with our recommendations, DOT is processing a Notice of Proposed
Rulemaking to increase aircraft registration fees and expects to
issue it in March, 1998.  (GAO/RCED-93-135}

In 1996, we recommended that DOT reevaluate the appropriateness of
the Office of the Secretary increasing its fees and FAA establishing
fees for services to certify new airlines.  In November, 1996, FAA
formed a working group to focus on this issue.  FAA anticipates
issuance of a Notice of Proposed Rulemaking to establish such fees in
late 1997.  (GAO/RCED-96-8)

See also Information Resources Management--Federal Aviation
Administration in this chapter. 


         BOSTON CENTRAL
         ARTERY/TUNNEL
------------------------------------------------------ Chapter 2:5.2.4

Since 1995, we have been monitoring the cost and financing plans for
the Central Artery/Tunnel project--one of the largest, most complex,
and most expensive highway construction projects ever undertaken.  As
of March 1997, Massachusetts estimated the project's total cost at
$10.8 billion.  The state's cost estimate depends on meeting the
aggressive cost containment goals established for the project.  If
current trends continue, further cost increases seem likely and the
project's cost could increase by between $100 million and $500
million.  Additionally, the State's December 1996 feasibility study
identified a funding gap of $1.8 billion to $2.3.  billion between
fiscal years 1998 and 2002.  Massachusetts has implemented a plan to
finance its share of the project's cost, including a strategy to
finance funding shortfalls.  However this plan may not be sufficient
to meet the project's funding needs because, among other things, it
does not recognize cost increases that occurred through March 1997. 
We recommended that the project's next finance plan include (1) a
revised estimate of the project's costs and funding needs that more
closely reflects the state's actual experience with its cost
containment program, and (2) a contingency plan for financing the
project if costs increase further or if the sources of financing are
not sufficient.  (RCED-97-170)


         TRACK SAFETY INSPECTIONS
------------------------------------------------------ Chapter 2:5.2.5

In reporting on the Federal Railroad Administration's (FRA) Track
Safety Inspection Program, we recommended that the FRA provide
guidance to track inspectors on options available when excepted track
deficiencies constitute an imminent threat of derailment or another
safety hazard.  Such action would strengthen the current regulations
governing the excepted track provision and improve safety on excepted
track.  DOT agreed to issue revised guidance to its inspectors once
the FRA finalizes the new Track Safety Standards.  DOT issued a
Notice of Proposed Rulemaking in July, 1997, and expects to issue
revised guidance to its inspectors by December 1997. 
(GAO/RCED-94-56)


   INFORMATION RESOURCES
   MANAGEMENT--FEDERAL AVIATION
   ADMINISTRATION (BUDGET FUNCTION
   990)
---------------------------------------------------------- Chapter 2:6

GAO Contact:  Rona B.  Stillman, 202/512-6412


      IMPACT OF GAO'S WORK
-------------------------------------------------------- Chapter 2:6.1

Our work has been aimed at strengthening FAA's ability to meet its
mission of providing safe and efficient air travel.  To this end, we
have designated FAA's air traffic control modernization, a $34
billion dollar effort to develop and implement over 200 projects
ranging from facility upgrades to software-intensive information
system projects, as a high risk area and focused our attention on
identifying the root causes of past modernization project failures,
and making recommendations to correct these problems.  We have also
continued to follow-up on past recommendations concerning other
aviation safety functions that FAA performs. 

During this fiscal year, we issued several reports on FAA's air
traffic control system modernization.  These reports addressed
systemic weaknesses in the modernization's management structure and
processes, including the organizational placement of the Chief
Information Officer, the definition and enforcement of a complete
systems architecture, the maturity of software acquisition processes,
and the adequacy of cost estimating and cost accounting practices. 
FAA has acted to address many of the recommendations made in the
reports. 

During this year, FAA implemented our recommendations to improve a
key modernization project, which contributed to the project being
completed ahead of schedule, as well as our recommendations to
improve the quality of the data used by FAA's safety analysis system,
which will strengthen FAA's ability to target limited inspection
resources.  Each of these accomplishments is discussed below. 


         DISPLAY CHANNEL COMPLEX
         REHOST
------------------------------------------------------ Chapter 2:6.1.1

We reported that acquisition of software-intensive systems, like the
Display Channel Complex Rehost, is inherently risky.  Best practices
used in government and private sector acquisition and development
activities include the use of formal risk management to proactively
and continually identify, assess, track, control, and report risks. 
While FAA had formal strategies and efforts underway to address
certain key risks, two risks--associated with FAA's plan to
concurrently conduct factory acceptance testing, site acceptance
testing, and operations testing--were not being formally managed. 
These two risks were (1) contention for human test resources and (2)
control of the test baseline configuration.  Therefore, FAA could not
assure that either risk would be carefully and effectively mitigated. 
The Department of Transportation and FAA officials agreed with our
recommendation and began formal management of both risks.  FAA
subsequently completed this acquisition ahead of schedule. 


         SAFETY PERFORMANCE
         ANALYSIS SYSTEM
------------------------------------------------------ Chapter 2:6.1.2

In 1995, we reported that the Safety Performance Analysis System--a
decision support system to better target limited inspection
resources--would not be effective if its data quality were not
improved.  We recommended that FAA develop and implement a
comprehensive and coordinated strategy specifying how the quality of
all data residing on source data systems would be brought to the
minimum level needed for the Safety Performance Analysis System to
meet operational requirements.  We specified that the strategy must
include, among other things, (1) clear statements of organizational
responsibility and authority for improving the source systems' data
quality, (2) both interim and long-term milestones for attaining
stated quality objectives that tie closely to the development
schedules, and (3) estimates of resource requirements to meet stated
objectives and agency commitments to providing these resources.  FAA
officials agreed and, in response, are implementing a "Comprehensive
Data Quality Plan" for the Flight Standards Service that satisfies
these specifications. 


      HIGH-RISK AREA
-------------------------------------------------------- Chapter 2:6.2

We have designated the FAA's Air Traffic Control Modernization
program as a high risk area. 


         AIR TRAFFIC CONTROL
         MODERNIZATION
------------------------------------------------------ Chapter 2:6.2.1

Faced with rapidly growing air traffic volumes and aging air traffic
control equipment, the FAA in 1981 initiated an ambitious Air Traffic
Control modernization program.  This effort--expected to cost $34
billion through fiscal year 2003--mostly involves investments in a
multitude of software-intensive computer systems. 

Over the past 15 years, the modernization program has experienced
cost overruns, schedule delays, and performance shortfalls of large
proportions--particularly in the $7.6 billion former centerpiece of
the modernization known as the Advanced Automation System, which FAA
restructured in 1994.  The acquisition of that system failed because
FAA did not recognize the technical complexity of the effort, did not
realistically estimate the resources required, did not adequately
oversee its contractors' activities, and did not effectively control
system requirements.  With $11 billion planned to be spent on the Air
Traffic Control program from fiscal years 1998 through 2003, and
billions more to follow, it is critical that FAA overcome the
weaknesses that threaten the effort. 

FAA continues to face formidable challenges.  For example, the many
systems comprising the modernization effort have long proceeded
without a complete systems architecture, or overall blueprint, to
guide development and evolution.  The result has been unnecessarily
high spending to buy, integrate, and maintain hardware and software. 
Also exacerbating the modernization's problems is unreliable cost
information--both future estimates of costs and accumulations of
actual costs.  The lack of adequate cost estimating processes and
cost accounting practices needed to measure actual cost performance
against cost estimates leaves FAA at risk of making ill-informed
decisions on critical multimillion, even billion, dollar Air Traffic
Control systems.  Additionally, FAA's Air Traffic Control
modernization software acquisition processes are ad hoc and sometimes
chaotic, and are not repeatable even on a project-by-project basis. 


      KEY OPEN RECOMMENDATIONS
-------------------------------------------------------- Chapter 2:6.3

Our work on FAA's Air Traffic Control modernization showed pervasive
and fundamental problems in FAA's approach to managing the
modernization.  To address these problems, we have made a series of
detailed recommendations aimed at correcting key modernization
management problems. 

  -- Our report on FAA's system architecture recommended that FAA
     ensure a complete architecture is defined and enforced before
     FAA decides on the architectural characteristics for replacing
     the Host Computer System.  We also recommended that FAA
     establish an effective management structure for developing,
     maintaining, and enforcing the complete Air Traffic Control
     systems architecture, including adopting a Chief Information
     Officer (CIO) structure similar to that required under the
     Clinger-Cohen Act.  The agency has actions underway to expand on
     past architectural efforts.  (GAO/AIMD-97-30)

  -- Our report on FAA's cost estimating processes and cost
     accounting practices found numerous weaknesses.  We recommended
     that FAA institutionalize defined processes for estimating Air
     Traffic Control projects' costs that include (1) a corporate
     memory, (2) structure approaches for estimating software size
     and complexity, (3) cost models calibrated to past experiences,
     (4) audit trails that record cost model inputs, (5) approaches
     for dealing with cost and schedule constraints, and (6) data
     collection and feedback processes.  We also recommended that FAA
     should disclose the inherent uncertainty in all Air Traffic
     Control projects' official cost estimates presented to the
     Congress and executive oversight agencies, should acquire or
     develop and implement a managerial cost accounting capability,
     and should report its lack of a cost accounting capability as a
     material internal control weakness in the Department's FMFIA
     reports.  FAA agreed to implement all but the final
     recommendation.  It has since formed a life cycle cost
     estimating working group to develop cost estimating processes in
     line with GAO's recommendations; it has committed to disclosing
     the inherent uncertainty in projects' cost estimates; and it
     plans to implement an initial cost accounting capability by
     October 1, 1997, and a full cost accounting system by October 1,
     1998.  FAA did not implement the final recommendation because it
     believes that its current lack of a cost accounting capability
     is not a material weakness.  We disagree and until FAA has a
     full cost accounting capability system, it will continue to lack
     adequate cost information needed to effectively manage Air
     Traffic Control system acquisitions.  Disclosure of such a
     management control weakness is one of the objectives of the
     FMFIA, and therefore should be reported as a material weakness. 
     (GAO/AIMD-97-20)

  -- Our report on FAA's software acquisition process maturity
     reiterated our earlier recommendation for FAA to implement a CIO
     structure similar to that specified in the Clinger-Cohen Act and
     recommended that FAA improve its software acquisition processes
     by (1) assigning responsibility for software acquisition process
     improvement to FAA's CIO, (2) providing FAA's CIO with the
     authority to implement and enforce Air Traffic Control
     modernization software acquisition process improvements, (3)
     requiring the CIO to develop and implement a formal plan for Air
     Traffic Control software acquisition process improvement based
     on GAO's software acquisition capability maturity model (SA-CMM)
     evaluation results, (4) allocating adequate resources to ensure
     that planned initiatives are implemented and enforced, and (5)
     requiring that, before being approved, every Air Traffic Control
     modernization acquisition project have software acquisition
     processes that satisfy at least SA-CMM level 2 requirements. 
     FAA has efforts underway to address some of the recommendations. 
     (GAO/AIMD-97-47)

See also Transportation and Telecommunication Issue Area of this
chapter. 


IMPROVING HUMAN RESOURCE PROGRAMS
============================================================ Chapter 3


   EDUCATION AND EMPLOYMENT ISSUE
   AREA (BUDGET FUNCTION 500)
---------------------------------------------------------- Chapter 3:1

GAO Contact:  Carlotta C.  Joyner, 202/512-7014


      IMPACT OF GAO'S WORK
-------------------------------------------------------- Chapter 3:1.1

The Education and Employment issue area focuses on the nation's
educational efforts--from preschool through higher education
programs--and its efforts to develop skilled workers, link potential
workers with employment, and ensure basic workplace protections.  The
quality of life in this country and our ability to compete in the
international marketplace are heavily influenced by the nation's
investment in educational and employment programs.  The Departments
of Education and Labor are the federal agencies with primary
responsibility for overseeing this investment.  Working with state
and local governments, the federal government invests over $60
billion annually to promote access to quality education and to
advance opportunities for productive employment under safe and
equitable conditions. 

Our education work continues to alert the Congress and executive
branch agencies to important issues.  In this regard, the next
section discusses the multibillion dollar federal student financial
aid programs--one of the high-risk areas that GAO has identified as
being vulnerable to waste, fraud, abuse, and mismanagement.  Our
latest high-risk series report summarizes and updates both our
continuing concerns about the Department of Education's
vulnerabilities in managing and overseeing the student aid programs
as well as progress in strengthening the programs' fiscal and
management control systems.  Our work on proprietary schools revealed
that students are obtaining federal student financial aid for
training in occupations with a surplus of trained workers.  In May
1997, we reported the potential inability of the District of Columbia
Public Schools to manage the magnitude of work involved in doing
repairs before the 1997-98 school year.  As a result, a request for
supplemental federal funds for this purpose was withdrawn, creating a
$37 million savings for taxpayers.  We have also provided the
Congress information on numerous other education topics, including
the existence of multiple federal youth programs, comparative per
pupil funding in poor and wealthy school districts, the relationship
between school performance and reliance on federal student financial
aid in the proprietary school sector, comparative levels of activity
in the direct and guaranteed student loan programs, and the role of
state commissions in implementing the AmeriCorps national service
program. 

The focus of our workforce skills and jobs work has been on
identifying ways in which federal programs can better assist workers
to acquire the skills they need to become economically
self-sufficient and help employers recruit and hire qualified
employees.  Our work on various aspects of Job Corps has been a major
part of this effort.  For example, we reported on the extent to which
Job Corps participants are served in centers located within their
state of residence and the Job Corps program capacity within each
state relative to the number of participants from that state.  With
respect to the Employment Service, which is administered jointly by
the Department of Labor and the states, we recommended that the
Secretary of Labor work with the states to identify and solve
problems affecting Employment Service quality and performance.  As a
result, the Labor Department now recognizes states as partners in
program management.  Several Employment Service revitalization
projects involve state and local partners as standard operating
practice in efforts to improve program performance. 

With respect to worker protection, our work has focused on the
maintenance of workplace protections for employees while minimizing
the regulatory compliance burden on employers.  Our work played a
major role in the development of recent initiatives that the
Department of Labor's Occupational Safety and Health Administration
(OSHA) took to improve its policies and procedures.  We recommended
that OSHA promulgate a regulation requiring employers to submit
evidence of the corrective actions taken to abate safety and health
hazards.  On March 31, 1997, OSHA issued an abatement verification
regulation requiring employers to document the corrective actions
that have been taken to abate hazards.  We also recommended that OSHA
implement procedures for ensuring that employers accurately record
occupational injuries and illnesses.  In response, OSHA has initiated
a records audit program under which it will conduct 250 record audits
each year.  In addition, we recommended the National Labor Relations
Board identify labor law violators who receive federal contracts. 
Procedures have been established for the Board to obtain tax
identification numbers, which will allow the Board to use Treasury
Department records to determine if a labor law violator is also a
federal contractor.  These procedures will enable the National Labor
Relations Board to use federal administrative and income tax refund
offsets to enforce compliance with orders to restore wages. 

Further, in other work involving unemployment insurance, we made
recommendations that would prevent military reservists from being
overpaid in unemployment insurance benefits.  We recommended that the
components of the military notify all reservists of their
income-reporting responsibilities with respect to state unemployment
insurance benefits in a message included on their leave and earnings
statement.  Such messages are now included annually in reservists'
leave and earnings statements.  We also recommended that the
Department of Labor provide assistance to state unemployment
insurance programs in reviewing the administrative forms or
procedures used to gather information about a prospective or
continuing claimant's wages and making revisions to clearly identify
to claimants the types of reserve income they must report for the
offset of benefits.  The Department has provided assistance through
correspondence. 

Finally, we reviewed several of the draft strategic plans that
federal agencies were required to prepare under the Government
Performance and Results Act of 1993 (the Results Act).  The agencies
used many of our observations and suggestions to produce
substantially improved final plans.  For example, we highlighted
numerous ways Labor's draft plan could be improved so that Labor
could most benefit from this strategic planning process and be in
compliance with the Results Act.  In a letter to the House Committee
on Education and the Workforce transmitting a revised version of its
plan, Labor noted that our findings provided the impetus and guidance
to advance its plan.  The final plan addressed many concerns we had
raised.  As a result of the improvements made in Labor's plan and in
others, the agencies will now be able to take greater advantage of
the strategic planning process envisioned by the act and be in a
better position to manage their organizations. 


      HIGH-RISK AREA
-------------------------------------------------------- Chapter 3:1.2

We have designated student financial aid as a high-risk area.


         STUDENT FINANCIAL AID
------------------------------------------------------ Chapter 3:1.2.1

Although the Department of Education has shown a commitment to
improving its management of the student financial aid programs, the
financial risk to U.S.  taxpayers remains substantial.  The major
student aid programs--the Federal Family Education Loan Program,
Federal Direct Loan Program, and Pell Grant Programs--employ complex
and cumbersome processes with many participants, as they provide over
$35 billion of aid for postsecondary education students.  The
addition of the Federal Direct Loan Program made the management of
the student aid programs an even greater challenge for the
Department.  Also, to maximize access to aid funds, the Higher
Education Act placed nearly all the financial risk of loan defaults
(which totals over $2.5 billion in 1996) on the federal government. 

Management shortcomings are another major problem.  Reviews by us,
congressional committees, and the Department's Inspector General have
shown that the Department (1) did not adequately oversee schools that
participate in the programs; (2) relied too heavily on managing each
title IV program through separate administrative structures, with
poor or little communication among programs; (3) used inadequate
management information systems that contained unreliable data; and
(4) did not have sufficient and reliable student loan data to
determine the liability associated with outstanding loan guarantees. 

The Department has generally been responsive to addressing problems
in its student aid programs, and many of those actions appear to be
achieving some results.  For example, annual collections on defaulted
loans have increased over the last 5 years from $1 billion to $2.4
billion.  The Department has also begun a major reengineering effort
that it expects will resolve problems with data reliability and
communication among programs in the next several years.  It is
envisioned as a student-based, integrated data system through which
all management and control functions will be conducted. 


      KEY OPEN RECOMMENDATIONS
-------------------------------------------------------- Chapter 3:1.3


         DEPARTMENT OF EDUCATION
         MANAGEMENT
------------------------------------------------------ Chapter 3:1.3.1

In our 1992 transition series report, we recommended that the
Department of Education have information and financial management
systems that provide needed data and protect the federal government's
financial interests from waste, fraud, and mismanagement.  We
recognized that corrective actions would require new systems and
revised regulations, or legislation, or both.  The Department is
continuing the redesign of its core financial management systems. 
However, in September 1997, the Department suspended all computer
purchases to focus its management information systems resources on
solving the problem of how to handle information pertaining to
January 1, 2000, and beyond.  Although the Department has made
progress in implementing our recommendation, even without the need to
refocus resources on the year 2000 problem, its initiatives are long
term efforts that will require more time to complete. 
(GAO/OCG-93-18TR)

See also chapter 5, Financial and Information Management Programs,
Information Resources Management Issue Area. 


         HEAD START
------------------------------------------------------ Chapter 3:1.3.2

In our April 1997 report on research studies of the impact of the
current Head Start program, we reported that although research has
been conducted, it does not provide information on whether today's
Head Start is making a positive difference in the lives of
participants.  While we acknowledged the difficulties of conducting
impact studies of programs such as Head Start, we concluded that
research could be done that would allow the Congress and the
Department of Health and Human Services (HHS) to know with more
certainty whether the $4 billion investment in Head Start is making a
difference.  We recommended that the HHS Secretary include in HHS'
research plan an assessment of the impact of Head Start programs.  In
commenting on a draft of our report, the Department indicated that it
plans to evaluate the feasibility of conducting impact studies such
as we recommended; however, the Department has not yet initiated
action on our recommendation.  (GAO/HEHS-97-59)

See also chapter 5, Financial and Information Management Programs,
Information Resources Management Issue Area. 


         DAVIS-BACON ACT WAGE
         DETERMINATIONS
------------------------------------------------------ Chapter 3:1.3.3

During our 1996 study of the Department of Labor's prevailing wage
determination process under the Davis-Bacon Act, we found that
Labor's wage determination process is based on voluntary
participation by employers and third parties in surveys that report
wage and fringe benefits data on construction projects.  We also
found that this process contains weaknesses that could permit the use
of fraudulent or inaccurate data in the setting of prevailing wage
rates.  We recommended that the Department request a sample of
participating employers to submit appropriate documentation to
support their data submissions or to conduct a limited number of
on-site inspection reviews of employer wage data.  In response, in
July 1996, Labor officials advised regional offices to start
collecting documentation of wages paid from a selected group of
employers included in its current and ongoing wage survey process. 
Three of five regional offices have begun selective verification, and
Department officials will review the results.  Department officials
are also changing survey training materials to emphasize verification
of reported wage data.  Further, in its report accompanying the bill
to provide fiscal year 1998 funds for the Department, the House
Committee on Appropriations directed the Department to ensure that an
appropriate portion of the funds appropriated for the Davis-Bacon
wage survey program be expended to randomly sample all data
submissions to verify their accuracy, and that a sample of all data
submissions be selected for on-site data verification against actual
payroll records.  The Congress also directed GAO to review the
Department's activities to determine whether they will improve the
timeliness, accuracy, and reliability of Davis-Bacon wage
determinations.  (GAO/HEHS-96-130)


         U.S.  COMMISSION ON CIVIL
         RIGHTS
------------------------------------------------------ Chapter 3:1.3.4

We recommended that the U.S.  Commission on Civil Rights develop and
document policies and procedures that (1) assign responsibility for
management functions to the staff director and other Commission
officials; and (2) provide mechanisms for holding them accountable
for properly managing the Commission's day-to-day operations.  We
specified that this effort should include establishing a management
information system for commissioners and staff to use to plan
projects and track progress using the best information available
about projects' expected and actual costs, time frames, staffing
levels and completion dates.  The Commission is in the process of
implementing our recommendation.  For example, a management
information system that will track the status of projects and the
resources committed to them is nearing completion.  (GAO/HEHS-97-125)



   VETERANS' AFFAIRS AND MILITARY
   HEALTH CARE ISSUE AREA (BUDGET
   FUNCTIONS 050, 550, 700 & 753)
---------------------------------------------------------- Chapter 3:2

GAO Contact:  Stephen P.  Backhus, 202/512-7101


      IMPACT OF GAO'S WORK
-------------------------------------------------------- Chapter 3:2.1

The Veterans' Affairs and Military Health Care issue area is
responsible for GAO's evaluations of health care directly provided by
the federal government as well as nonhealth benefits provided by the
Department of Veterans Affairs (VA).  Our work on health care
delivery focuses primarily on the services provided to over 34
million veterans and military beneficiaries by VA and DOD through
their $32 billion systems of hospitals, clinics, and managed care
contracts.  We also evaluate health care provided by the Indian
Health Service and Bureau of Prisons.  For VA nonhealth benefits, our
evaluations address disability compensation, pensions, vocational
rehabilitation, and life insurance.  These programs serve over 3
million veterans and cost about $18 billion a year. 

Rising health care costs and substantial budget deficits have
prompted major congressional concerns about whether these agencies
are delivering quality health care to their beneficiaries as
efficiently and cost-effectively as possible.  The downsizing of the
military forces and the declining but aging veteran population has
also prompted a concern about the structure of DOD and VA health
delivery and VA's benefits systems. 

Our objectives are to (1) identify opportunities to improve existing
VA and DOD health care systems' and VA benefit programs' management
and accountability; (2) assess efforts to structurally reform VA and
DOD health care and VA benefits systems to better accomplish their
missions; (3) evaluate the implementation of, and lessons learned
from, managed health care strategies in VA and DOD; and (4) determine
whether federal agencies are effectively serving the unique health
care needs of special populations. 


         DOD PROGRAMS
------------------------------------------------------ Chapter 3:2.1.1

In fiscal year 1997, we continued to focus on issues related to the
reform and restructuring of the military health care system,
particularly TRICARE, the managed care program DOD began to implement
in 1995 and is continuing to phase in across the country.  On the
basis of previous GAO recommendations, DOD is making substantive
changes to its TRICARE contracting process.  For example, DOD has (1)
made improvements in how it monitors contractor performance; (2)
initiated procedures for reviewing, approving, and budgeting for
proposed contract modifications; (3) begun redesigning its health
care contract specifications to reflect best industry practices; and
(4) initiated actions to recover millions of dollars in overpayments
to contractors. 

Our study on options to enhance older military retirees' health
benefits was influential in Congress' decision to authorize a 3-year
test of the Medicare subvention option, rather than moving ahead
systemwide.  Moreover, our previous work on DOD health issues has
resulted in significant financial benefits.  DOD has now
substantially implemented our recommendation that its CHAMPUS
reimbursement rate structure be in line with Medicare rates, for
example.  DOD savings are estimated to be nearly $1.5 billion in
fiscal year 1997 and future years.  Actions the Congress has taken,
upon our recommendation, to prevent double billing for Uniformed
Services Treatment Facilities care provided to Medicare-eligible DOD
beneficiaries and to reduce the Uniformed Services Treatment
Facilities fiscal year 1997 appropriation level, will save millions. 


         VA HEALTH CARE PROGRAMS
------------------------------------------------------ Chapter 3:2.1.2

During the past year, our work has examined VA's efforts to increase
the efficiency of its health care system, adopt managed care
strategies, and serve special populations, including Persian Gulf War
veterans. 

We testified that VA's 5-year plan to reduce its per patient cost by
30 percent, increase patients served by 20 percent, and finance 10
percent of its expenditures using nonappropriated revenues by the
year 2002 could limit VA's contributions to deficit reduction and
potentially put low-income, uninsured veterans at risk.  We
determined that VA could operate as a health care safety net for
several years at its current $17 billion appropriation or less,
without increasing users or expanding revenues.  However, VA's plans
to attract new users focus primarily on attracting insured and
higher-income veterans with other health care options rather than on
addressing the unmet needs of veterans with service-connected
conditions and low-income veterans.  Moreover, we concluded that VA
will have difficulty increasing recoveries from private health
insurance--a key component of its planned efforts to increase
nonappropriated revenues. 

We continue to examine ways in which VA could more cost-effectively
operate its hospital system.  We identified lessons learned from VA's
medical facility integrations that could help enhance VA's process
for planning and implementing integrations, including adopting a more
comprehensive planning approach and completing planning before
implementing changes.  Our previous work on VA's proposed $278
million hospital construction project at Travis Air Force Base
identified several more efficient alternatives that are available to
VA which could effectively meet veterans' demand for VA health care. 
On the basis of our conclusion that the hospital project was not
justified, VA has abandoned its plans to construct a new hospital and
instead plans to open new outpatient clinics to improve veterans'
access to care. 

We reported that VA's new resource allocation method, the Veterans
Equitable Resource Allocation system, shows promise for correcting
long-standing regional funding imbalances that have impeded veterans'
equitable access to services.  On the basis of our recommendations,
VA has linked the Veterans Equitable Resource Allocation system to
its strategic planning process so that allocations are more closely
associated with VA's long-range goals, performance standards, and
workload priorities.  However, VA monitoring and oversight efforts
are inadequate to ensure that Veterans Equitable Resource Allocation
system's potential for creating equitable access to services will be
realized. 

Regarding special populations, we testified that Persian Gulf War
veterans appeared to be confused by, and frustrated with, VA and the
care they received for their illnesses.  We are continuing to examine
VA's diagnosis, treatment, and monitoring of Persian Gulf War
veterans and the health problems they report. 

Moreover, our past work on VA's pharmacies' dispensing practices has
resulted in significant benefits.  VA has now substantially
implemented our recommendation that pharmacies dispense maintenance
drugs in 90-day supplies (rather than in the 30 or 60 day supplies
previously dispensed) when VA physicians prescribe veterans' use of
such drugs for periods of 90 days or longer.  VA pharmacies reported
that 90-day supplies had allowed pharmacies to dispense drugs almost
16 million fewer times in 1997, reducing costs about $29 million in
that year alone. 


         VA NONHEALTH
------------------------------------------------------ Chapter 3:2.1.3

Our work in this area has addressed VA's services to Benefits
Programs veterans, including vocational rehabilitation, disability
compensation, and burial benefits.  We have emphasized the need for
VA to focus on program results as well as cost-effective service
delivery, as envisioned by the Government Performance and Results Act
of 1993.  In testimony and a report, for example, we noted that the
most significant deficiency in the draft strategic plan VA has
developed is the lack of results-oriented goals for major VA
programs, particularly for benefit programs. 

Our past work has demonstrated that, despite legislation requiring VA
to focus its vocational rehabilitation program on finding disabled
veterans suitable employment, VA continues to place few veterans in
jobs.  On the basis of our recommendations, VA has established a
multiagency task force to strengthen working relationships between
VA, the Department of Labor, and state rehabilitation agencies, and
conducted an attrition study to examine reasons why veterans drop out
before successfully completing their vocational rehabilitation
programs. 

We also reported that VA's disability rating schedule, which has
served as a basis for distributing compensation among disabled
veterans since 1945, does not reflect the many changes that medical
and socioeconomic conditions may have had on veterans' earning
capacity over the last 51 years.  Thus, the ratings may not
accurately reflect the levels of economic loss that veterans
currently experience as a result of their disabilities. 

VA, through its Readjustment Counseling Service, operates over 200
community-based facilities, known as Vet Centers, which help certain
veterans make a successful transition from military to civilian life. 
On the basis of our recommendations, VA has directed the Service to
develop a systematic approach for evaluating, on a continuing basis,
the effectiveness of Vet Centers in meeting veterans' psychological
needs. 

On the basis of our concerns about Persian Gulf War veterans'
undiagnosed illness claims, VA agreed to provide veterans with better
information regarding acceptable claims evidence.  We are continuing
to monitor VA's efforts to improve its processing of these claims. 
We are also examining VA's efforts to improve its disability claims
processing and adjudication, a subject of continuing concern to the
Congress. 


      KEY OPEN RECOMMENDATIONS
-------------------------------------------------------- Chapter 3:2.2


         DOD
------------------------------------------------------ Chapter 3:2.2.1

We reported that DOD resource-sharing arrangements with TRICARE
support contractors were resulting in about 5 percent of the
estimated $700 million in new savings, potentially causing financial
losses for both DOD and the contractors and higher TRICARE costs.  We
recommended that DOD pursue promising resource sharing arrangements
while also seeking alternatives to resource sharing in its existing
and future contracts.  We also recommended that DOD continue to focus
on implementing needed contract change order process improvements,
and to link TRICARE contractors' administrative payments to actual
health care costs.  DOD is in the process of improving its TRICARE
contracting procedures.  (GAO/HEHS-97-130 and GAO/HEHS-97-141)

Also of key importance are our recommendations that DOD begin
gathering certain data on who is using DOD health care under the
TRICARE program, as well as DOD's success in providing timely access
to its beneficiaries.  This data will be critical in the eventual
evaluation of TRICARE's overall success.  (GAO/HEHS-96-128)


         VA
------------------------------------------------------ Chapter 3:2.2.2

VA has struggled for years to develop a method for equitably
allocating resources among its facilities nationwide.  To enhance the
potential for success of VA's new allocation system--the Veterans
Equitable Resource Allocation system, we recommended that VA (1)
develop more timely and detailed indicators of changes in key system
workload measures and medical care practices, and (2) improve
oversight of Veterans Integrated Services Networks' allocation of
resources to their facilities to help ensure that veterans receive
equitable access to appropriate care.  (GAO/HEHS-97-178;
GAO/HEHS-96-48)

VA hospitals too often serve patients whose care could be more
efficiently provided in alternative settings, such as outpatient
clinics or nursing homes.  In July 1996 we testified and reported
that VA facilities could save billions by reducing nonacute
admissions and days of care in VA hospitals.  Toward this end, we
recommended that VA establish an independent, external preadmission
certification program for hospitals.  On the basis of our
recommendation, VA has directed its Veterans Integrated Services
Networks to establish preadmission certification programs.  However,
the program VA established did not involve contracts with independent
external reviewers or establish any financial risk/incentives for VA
physicians to adhere to the review findings.  (GAO/HEHS-96-121)

As the number of veterans aged 65 and older increases, nursing home
care is becoming an increasingly important health care service.  As
part of VA's ongoing efforts to improve nursing home resource
management decisions, we recommended that VA more accurately
accumulate and report nursing home costs, assess the availability of
community nursing home resources, and identify locations where
current reimbursement rates are not competitive.  (GAO/HEHS-97-27)

In an effort to enhance veterans' access to health care and place
more emphasis on primary care, VA has begun to establish
free-standing outpatient clinics.  In doing so, VA has identified
what could be a cost-effective way to enhance the availability of
health care, especially for veterans residing in underserved areas. 
However, VA has not developed a plan to ensure that outpatient
clinics are established in an affordable manner.  We recommended that
VA provide the Congress with a report that presents the overall VA
plan and time schedule for the systemwide establishment of outpatient
clinics to assist Congress in determining the affordability of the VA
plan.  VA has stated its intent to establish a work group to develop
a plan for the systemwide establishment of outpatient clinics. 
(GAO/HEHS-97-7)

Three VA-administered life insurance programs have and for the
foreseeable future will continue to have sufficient excess funds to
pay their own administrative costs.  This would save an estimated $27
million annually in appropriated monies.  In order to pay for this,
veterans' annual dividends (which currently range from $274 to $373)
would be reduced by about $10.  Insured veterans have no statutory or
contractual right to excess funds.  However, because the law now
requires the government to pay the administrative costs, a
legislative change would be required to allow these programs to pay
their own administrative costs.  Thus, in March 1992 we recommended
that the Congress amend 38 U.S.C.  1982 to require that the three VA
insurance programs pay administrative costs from excess interest
income.  (GAO/HRD-92-42)

In response to our recommendations focusing on preventing
overpayments in compensation and benefits claims, VA is determining
the causes of overpayments and developing strategies for targeting
preventive efforts.  (GAO/HEHS-95-88)



   HEALTH FINANCING AND SYSTEMS
   ISSUE AREA (BUDGET FUNCTION
   550)
---------------------------------------------------------- Chapter 3:3

GAO Contact:  William J.  Scanlon, 202/512-7114


      IMPACT OF GAO'S WORK
-------------------------------------------------------- Chapter 3:3.1

Our work on the nation's public and private health insurance programs
encompasses some of the most important and expensive issues facing
the country.  Medicare and Medicaid are the primary insurers for more
than 70 million people and the federal government will spend an
estimated $315 billion on these programs in fiscal year 1997 with the
states contributing an additional $72 billion to Medicaid.  Although
enactment of the Balanced Budget Act of 1997 shored up the Medicare
Hospital Insurance trust fund, extending its expected depletion data
from 2001 to 2010, the program still faces longer term problems with
the aging of the baby boom generation who will begin turning 65 in
2010.  As the main insurer of long-term care, Medicaid also will be
facing increased costs as the population ages, and especially as the
number of those over 85 increases. 

We continued to assess the ongoing transition in the Medicare and
Medicaid programs from fee-for-service to various forms of managed
care, including the effects of this evolution on the insured as well
as on providers of care.  At the same time, we examined new
developments in the private insurance sector, helping congressional
decision making on issues such as (1) the new children's health
insurance program, authorized by Balanced Budget Act of 1997, that is
envisioned to cover uninsured children with expenditures of $20
billion over 5 years; (2) federal efforts to help citizens gain
access to insurance through implementation of new provisions enacted
in the Health Insurance Portability and Accountability Act of 1996;
and (3) other trends in coverage under employer-sponsored health
plans, such as decreasing coverage for retirees. 

One unifying theme to much of our work this year was a focus on
improving the design of public health insurance programs.  During the
Congress' consideration of the Balanced Budget Act of 1997, we
provided, through reports and testimonies, many suggestions for how
Medicare and Medicaid reform proposals could be made more effective,
the kinds of issues that needed to be addressed, and information on
the likely effects of actions.  We also raised a number of issues
surrounding the design of prospective payment systems for Medicare
home health and skilled nursing facility services including selection
of the unit of service for payment purposes, the adequacy of current
data for rate-setting purposes, the importance of utilization and
quality monitoring systems under prospective payment, and the
potential effect of payment systems design decisions on these
monitoring systems.  We addressed problems with how Medicare sets
payment rates for health maintenance organizations and the need for
enhanced monitoring of, and furnishing beneficiaries more information
about, these organizations.  Many of these matters were addressed in
the final legislation. 

GAO also provided key information on a public health insurance design
issue that preceded the landmark Balanced Budget Act of 1997
provisions.  Under 1993 legislation, HHS had been required to
establish a data bank containing information on about 160 million
employees and their dependents covered by employer group plans.  Its
purpose was to identify those Medicare and Medicaid beneficiaries
with other insurance that they should have used to pay medical bills
before drawing on their Medicare or Medicaid coverage.  In 1994 and
1995, we reported and testified that the proposed data bank would
create an avalanche of unnecessary paperwork for both HCFA and
employers and would likely achieve little or no savings while costing
millions.  In fiscal year 1997, Congress repealed the Medicare and
Medicaid Coverage Data Bank, resulting in identifiable budgetary
savings of $55 million. 

In another area, the debate over the creation and design of a
children's health insurance program last year, a critical issue was
how to allocate federal monies to the states, particularly because
the new program--unlike Medicaid--has a limit on funding.  We
provided information to the Congress and assisted in devising a
method of allocating federal funds to the states.  We also provided
assistance in the revision of an Older Americans Act formula for
allocating federal monies among the states to assist the elderly with
independent living.  In addition, we assisted the Substance Abuse,
Mental Health Services Administration in implementing an improved
cost of services indicator to be used as a criterion for allocating
federal funds among the states. 

We also provided important information to Congress showing the share
of federal dollars-- in the form of state Medicaid disproportionate
share payments--that were going to institutions for mental diseases. 
Limits on such payments, which became part of the budget agreement,
will result in substantial savings in future years. 


      HIGH-RISK AREA
-------------------------------------------------------- Chapter 3:3.2

We designated Medicare as a high-risk area.


         MEDICARE
------------------------------------------------------ Chapter 3:3.2.1

Numerous GAO reports have highlighted problems the nation's insurers
in general and Medicare in particular face in controlling waste,
fraud, abuse, and mismanagement.  Our high risk series report on
Medicare summarized our work in the area and where the program stood
in addressing waste, fraud, abuse, and mismanagement issues.  We
pointed out that many of Medicare's vulnerabilities are inherent to
its size and mission which make it an attractive target for
exploitation requiring constant vigilance for the foreseeable future
to protect the program.  In July 1997, the Department of Health and
Human Services' (HHS) Office of Inspector General (OIG) reported that
the estimated amount of Medicare fee-for-service payments
attributable to fraud, abuse, or error ranged from $17.8 billion to
$28.6 billion, or about 11 percent to 17 percent of payments. 

The Health Care Financing Administration (HCFA), which administers
Medicare, has invested substantially in developing a new claims
processing system, the Medicare Transaction System, to provide, among
other things, better protection from fraud and abuse.  In the past,
GAO has reported on risks associated with this project, including a
plan to implement the system in a single stage, rather than
incrementally; difficulty in defining requirements; and significant
schedule problems.  Although HCFA had responded to these concerns in
various ways, including changing its single-stage implementation
approach, the Medicare Transaction System project all but collapsed
in August 1997 when HCFA terminated the contract.  This is a
significant setback for HCFA's anti-fraud- and-abuse efforts,
bringing into question the ability of HCFA and its contractors to
perform the data-intensive analyses needed to detect abusive billing
schemes.  We will continue to monitor and evaluate HCFA's efforts to
modernize this important information system as a key
anti-fraud-and-abuse mechanism. 

Two recent laws--the Health Insurance Portability and Accountability
Act of 1996 and the Balanced Budget Act of 1997--incorporated many of
our recommendations designed to help control waste, fraud, and abuse. 
For example, the former addressed our longstanding call to provide
stable funding for program safeguard activities by appropriating an
annually increasing amount over the fiscal year 1997-2002 period. 
The Balanced Budget Act of 1997, among other things, mandated that
prospective payment systems replace cost-based reimbursement methods
in paying for certain Medicare services.  Adoption of these
prospective payment provisions responded in part to concerns that we
and the HHS OIG have raised about the overutilization and billing
abuse problems reflected in Medicare's expenditures for home health
and skilled nursing facility services.  Other provisions gave HCFA
and the OIG many new tools to fight waste, fraud, abuse, and
mismanagement. 


      KEY OPEN RECOMMENDATIONS
-------------------------------------------------------- Chapter 3:3.3


         EXCESSIVE MEDICARE
         PAYMENTS FOR COSTLY
         TECHNOLOGIES
------------------------------------------------------ Chapter 3:3.3.1

Provider costs and Medicare reimbursements for medical procedures
involving new technologies, such as magnetic resonance imaging (MRI),
are often high in order to offset initial expenditures for equipment
and low rates of usage.  We reported, however, that HCFA does not
make timely adjustments to the Medicare reimbursement rates as new
medical technologies mature and unit costs decline.  Therefore, we
recommended that HCFA (1) survey facility costs and revise the
Medicare fee schedule to more accurately reflect the costs that are
incurred and (2) periodically review and adjust the Medicare
reimbursements for procedures using high-cost, revolving
technologies. 

To help bring Medicare payment rates more into line with actual
costs, the Congress has enacted several mandates to reduce rates for
specific procedures and services--including payments for MRI scans. 
In addition, HCFA has three rate-reduction projects planned or under
way: 

  -- a revision of the Medicare Fee Schedule to reflect the actual
     cost of staff, equipment, and supplies associated with medical
     procedures;

  -- a review to identify and correct any excessive Medicare payments
     for 100 items of medical equipment and supplies; and

  -- a demonstration project to evaluate a competitive bidding
     process to set Medicare payment levels for some medical
     equipment and supplies. 

However, none of these projects targets new and expensive
technologies.  We continue to believe that significant program
savings would result from an ongoing, systematic process for
evaluating the reasonableness of Medicare payment rates for maturing
technologies.  (GAO/HRD-92-59)


         RAPID SPENDING GROWTH IN
         HOME HEALTH CARE
------------------------------------------------------ Chapter 3:3.3.2

Since 1990, Medicare outlays on home health care services--provided
to beneficiaries who are home-bound and need skilled care--have grown
at an average rate of over 30 percent a year.  We reported that the
increase in home health outlays is largely due to increased usage
that has accompanied deterioration in program controls.  Funding for
review of claims has declined by over a third.  In addition, a court
struck down HCFA's interpretation of benefit coverage requirements;
this court ruling in effect widened Medicare coverage of home health. 
Consequently, we suggested that the Congress may wish to consider
providing extra resources to strengthen controls against abuse of the
home health benefit and clarifying the scope of the benefit.  At
issue is whether this benefit should continue to be more of a
long-term care benefit or whether it should be limited primarily to
post-acute care.  (GAO/HEHS-96-16)


         MEDICARE REIMBURSEMENT
         FOR THERAPY IN NURSING
         HOMES
------------------------------------------------------ Chapter 3:3.3.3

Nursing home residents receive therapy services (e.g., physical
therapy) from various providers.  We reported that Medicare is
vulnerable to overcharges by unscrupulous providers, due in part to
its flawed reimbursement methods, in part to its inadequate screening
of providers.  Consequently, we recommended that HCFA set explicit
limits to ensure that Medicare pays no more for therapy services than
would any prudent purchaser.  HCFA has proposed salary guidelines for
various therapy services.  In addition, the Balanced Budget Act of
1997 required that, beginning July 1998, skilled nursing facilities
begin consolidated billing for the many services provided to Medicare
beneficiaries.  Furthermore, we recommended that Medicare
certification requirements be strengthened so that those entities
billing Medicare would be more accountable for the services they
provide to beneficiaries.  (GAO/HEHS-95-23)


         EXCESSIVE PAYMENTS FOR
         MEDICAL SUPPLIES
------------------------------------------------------ Chapter 3:3.3.4

Medicare reimburses providers of certain medical items and supplies
according to fee schedules that do not reflect substantially lower
market prices.  For example, Medicare pays $2.32 for a pad of gauze
that is available at the wholesale level for 19 cents.  Excessive
fees invite submission of abusive claims by unscrupulous providers. 
Coupled with inadequate review of such claims, these above-market
fees and payment rates lead to Medicare and the taxpayer losing
hundreds of millions of dollars. 

Because current law imposes cumbersome administrative requirements
that HCFA must follow when adjusting payment rates, for HCFA to make
such an adjustment can take 3 years or more.  In addition, for some
items HCFA lacks authority to adjust payment rates.  We recommended
that the Congress give HHS the flexibility to adjust fee schedules
promptly when overpriced services and supplies are identified.  The
Balanced Budget Act of 1997 provided HHS some flexibility to adjust
fees through a somewhat less onerous process; however, this
flexibility is applicable only when the fee adjustment is 15 percent
or less.  (GAO/HEHS-95-171)


         MEDICARE HMO OVERSIGHT
------------------------------------------------------ Chapter 3:3.3.5

Beneficiaries' confidence in Medicare managed care depends
significantly on the effectiveness of HCFA oversight.  Although HCFA
has instituted several promising improvements, its monitoring and
enforcement of performance standards for Medicare HMOs still falls
short; quality assurance reviews are not comprehensive, enforcement
actions are too often weak, and the appeal process for beneficiaries
is slow.  We recommended that HHS develop more consumer-oriented
oversight of the Medicare HMO program, including (a) routinely
publishing comparative data on HMO's performance and on known
deficiencies and (b) assigning sufficient, trained staff to monitor
and verify the effectiveness of HMOs' quality assurance practices. 
The Balanced Budget Act of 1997 mandated that Medicare beneficiaries
be provided comparative information on HMOs, including disenrollment
rates, enrollee satisfaction, health outcomes, and managed care
plans' compliance record with Medicare requirements.  HCFA has
efforts in process that will begin to respond to these
recommendations and the new Balanced Budget Act mandates. 
(GAO/HEHS-95-155)


         MEDICAID EXCLUDED
         PROVIDERS
------------------------------------------------------ Chapter 3:3.3.6

Providers are removed from state Medicaid programs for health care
fraud, abuse, or quality-of-care problems.  Such excluded providers
should also be removed from participation in other federal programs
including Medicare and Medicaid programs in other states.  We found
that weaknesses in the HHS Office of the Inspector General's excluded
provider process had allowed providers excluded from one state's
Medicaid program to continue to provide services in another state or
in other federal health programs and sometimes inappropriately
receive thousands of dollars in program payments.  In response to our
concerns, the OIG implemented a tracking system to provide improved
accountability over case referrals for exclusion actions.  In
addition, at our urging, HCFA began transmitting exclusion data to
states over the Internet. 

In addition to these changes, we recommended that the OIG: 

  -- clarify to states that settlements and provider withdrawals to
     avoid formal sanctions should be reported to the OIG, in
     accordance with its regulations;

  -- provide ongoing, clear, and consistent guidance to the state on
     the documentation needed for timely processing of exclusion
     actions; and

  -- establish consistent standards--including performance goals or
     benchmarks--for the timely processing of state referrals. 
     (GAO/HEHS-97-63)


         OVERSIGHT OF CARE IN
         INTERMEDIATE CARE
         FACILITIES FOR THE
         MENTALLY RETARDED
------------------------------------------------------ Chapter 3:3.3.7

Medicaid funds provide support to more than 400 large intermediate
care facilities for the mentally retarded that are owned and operated
primarily by state governments.  In 1996, we reported that serious
quality-of-care deficiencies continued to occur in some of these
institutions despite federal standards, oversight by state agencies
and HCFA, and on going Justice Department investigations.  While
state agencies have primary responsibility for ensuring that their
institutions meet federal standards, they do not identify all
deficient care practices nor take sufficient enforcement actions to
prevent their recurrence.  Although HCFA has recently taken steps to
improve the inspection process and more efficiently target limited
federal and state resources, several oversight weaknesses remain. 

We identified several means to address these weaknesses and
strengthen accountability for quality of care.  Specifically, we
recommended that HCFA assess the effectiveness of its new inspection
process, address the potential conflict of interest that occurs when
states are both the operators and primary inspectors of such
intermediate care facilities, and determine whether a wider range of
enforcement mechanisms would lead to more effective correction of
deficient care.  In response, HCFA has increased federal oversight of
these institutions and will maintain increased oversight if
warranted.  Also, through the Balanced Budget Act, HCFA acquired
legislative authority to apply alternative enforcement sanctions to
non-compliant facilities.  Pending the results of an evaluation of
alternative sanctions in nursing homes expected in 1998, HCFA plans
to assess whether a similar approach for intermediate care facilities
for the mentally retarded will be appropriate.  (GAO/HEHS-96-131)

See also chapter 5, Financial and Information Management Programs,
Information Resources Management Issue Area. 



   HEALTH SERVICES QUALITY &
   PUBLIC HEALTH ISSUE AREA
   (BUDGET FUNCTIONS 550 AND 570)
---------------------------------------------------------- Chapter 3:4

GAO Contact:  Bernice Steinhardt, 202/512-7119


      IMPACT OF GAO'S WORK
-------------------------------------------------------- Chapter 3:4.1

The Health Services Quality and Public Health issue area focuses on
evaluating access to high-quality health care and on measuring the
outcomes and effectiveness of federally funded health and medical
programs, research, and regulatory activities. 

GAO's work on health services quality and public health issues
concentrates on: 

  -- evaluating whether the programs administered by public health
     service agencies are ensuring the public's health efficiently
     and effectively,

  -- assessing opportunities for ensuring the quality of health care
     under fee-for-service and managed care payment arrangements,

  -- assessing opportunities for improving the nation's access to
     health care and improving accountability, and

  -- appraising the implications of emerging biomedical research,
     health care technologies, and information systems. 

In the course of our work, we have examined the ongoing
transformation of U.S.  health care, its effects on local markets and
public health institutions, information about health care quality,
and the performance of public health agencies.  The federal public
health agencies, including the Food and Drug Administration (FDA),
the National Institutes of Health, the Centers for Disease Control
and Prevention, the Health Resources and Services Administration, the
Substance Abuse and Mental Health Services Administration, the Indian
Health Service, the Agency for Health Care Policy and Research, and
the Office of Public Health and Science (formerly the Office of the
Assistant Secretary for Health), spend $24 billion annually.  More
efficient and effective use of these resources could improve agency
performance in promoting the public's health. 


         ACCESS TO HEALTH CARE
------------------------------------------------------ Chapter 3:4.1.1

Many communities contain populations that may have difficulty
obtaining health care services for reasons such as geographic
isolation or, more often, inability to pay for care.  Our work has
identified many instances in which federal programs have provided aid
to communities without ensuring that this aid has been used to
improve access to primary care.  The rural health clinic program,
established two decades ago, allows higher Medicare and Medicaid
reimbursements to support health care professionals in underserved
areas that are too sparsely populated to sustain a physician's
practice.  We found that many of the recently established clinics are
in fairly well-populated areas that already have extensive health
care delivery systems in place.  To bring about improvements needed
to direct assistance toward those rural areas that the program was
originally intended to serve, we recommended that both the Congress
and the Secretary of Health and Human Services establish additional
eligibility criteria and controls over the cost-reimbursement benefit
of the program.  Congress incorporated these recommendations into the
Balanced Budget Act of 1997. 

To address physician shortages in underserved areas in the country, a
growing number of locations are turning to non-U.S.  citizens who
have just completed their graduate medical education in the United
States.  These physicians generally enter the United States under a
visa which requires them to leave the country when their medical
training is done, but this requirement can be waived at the request
of a federal agency or a state.  We reported that four federal
agencies and 23 states requested waivers for foreign physicians to
practice in underserved areas in 1995, but found that these efforts
are not coordinated among the federal agencies or with the states and
that monitoring efforts and accountability are limited.  Based
largely on our review, the Department of Housing and Urban
Development continued a moratorium on its visa waiver activities and
stopped processing requests for waivers for physicians to practice in
underserved areas.  In addition, to address our concerns, the
Appalachian Regional Commission changed its policies and instituted
additional measures to improve monitoring and to ensure that the
waivered physicians will be providing substantial services to those
segments of the population that are underserved. 


         QUALITY OF CARE
------------------------------------------------------ Chapter 3:4.1.2

The best method known to reduce breast cancer mortality is early
detection, and mammography is the single most effective tool for
detecting breast cancer at its earliest stages.  To address concerns
about the quality of mammography services offered by more than 10,000
facilities throughout the United States, Congress passed legislation
in 1992 requiring the accreditation and annual inspection of
mammography facilities.  Our review of FDA actions during the first
18 months of the inspection program revealed two problem areas. 
First, FDA's inspection procedures for an important test of
mammography equipment were inadequate.  Second, FDA lacked procedures
to guarantee that all violations of standards were both promptly and
adequately corrected.  Our report contained several recommendations
to the Commissioner of FDA to establish procedures, guidance, and
training to help ensure timely compliance with mammography quality
standards by facilities.  FDA has implemented all of our
recommendations. 

Preventive services for early detection and treatment of a condition
can save lives and dollars.  Diabetes is a chronic condition that
affects at least 10 percent of Medicare beneficiaries.  Although
experts agree that close medical and patient monitoring is important
to slow or prevent costly complications of the disease, we reported
that diabetic Medicare beneficiaries are not receiving recommended
levels of physicals, eye exams, blood tests, and other screening
services.  We testified about our findings, and Congress included
Medicare preventive services provisions for diabetes self-management
training and blood testing strips in the Balanced Budget Act of 1997. 

Quality of care issues and quality of life issues are closely
intertwined.  In 1990, Congress passed the Patient Self-Determination
Act, requiring health care providers to increase public awareness
about the use of "advance directives"ï¿½a living will or health care
power of attorney that spells out how life-support decisions should
be carried out should the patient become terminally ill and unable to
communicate his or her wishes.  In 1995, we reported the act's
implementation and the effectiveness of advance directives in
ensuring patient self-determination.  Our report was used in
reopening the Congressional debate on end-of-life care issues and to
make changes in the act.  As a result, the Balanced Budget Act of
1997 requires that an individual's advance directive be placed in a
prominent part of that individual's current medical record. 


      KEY OPEN RECOMMENDATIONS
-------------------------------------------------------- Chapter 3:4.2


         MEDICAL DEVICE MONITORING
------------------------------------------------------ Chapter 3:4.2.1

FDA is responsible for protecting the American public from unsafe and
ineffective medical devices, which range from simple household items,
such as thermometers, to implanted heart valves.  FDA uses an adverse
event reporting system that records problems associated with medical
devices after they have been approved for public use.  The Safe
Medical Devices Act of 1990 expanded the reporting requirements to
include user facilities, such as hospitals and nursing homes, and
medical device distributors.  We found that although FDA collects
reports from users, hospitals, nursing homes, manufacturers, and
others about problems with medical devices, FDA does not act
systematically to ensure that reported problems are resolved
promptly, thus defeating the system's usefulness as an early warning
about defective medical devices.  We made recommendations to the
Commissioner of the Food and Drug Administration to improve FDA's
adverse event reporting system's ability to serve as an early warning
system about medical device problems.  FDA has several actions
underway to address our recommendations.  For example, FDA's
reengineering task force is using our report to identify the actions
needed to address problems with post marketing surveillance of
medical devices.  (GAO/HEHS-97-21)


         SAFETY OF BLOOD SUPPLY
------------------------------------------------------ Chapter 3:4.2.2

We assessed the current risks of transfusion, examined the content
and quality of data collected to assess these risks, and evaluated
the FDA's safeguards and their ability to ensure the safety of the
nation's blood supply.  Our analysis showed that the U.S.  blood
supply is safer today than at any time in recent history, with risks
from blood transfusions quite small compared with the benefits of
transfusion in saving lives.  We reported, however, that FDA can
strengthen the safety of the blood supply in some areas.  For
example, the lack of mandatory notification to donors whose blood
donations must be deferred allows some donors who have tested
positive for viruses to unwittingly attempt to donate again; untested
units donated for self-use may be mistakenly used for unintended
recipients; and unlicensed facilities--those that do not sell or
exchange blood products across state lines--are not required to
report errors and accidents.  FDA inspections of both licensed and
unlicensed blood facilities appear to be inconsistent in focus,
scope, and documentation.  Moreover, FDA does not maintain a central
repository for inspection reports and, therefore, does not examine
national trends.  We made recommendations by which the Secretary of
Health and Human Services (HHS) could improve the safety of the
nation's blood supply.  Six of the recommendations concern gaps in
the layers of safety, one has to do with error and accident
reporting, and two relate to HHS's regulations and FDA inspection
processes.  Thus far, in response to our recommendations, FDA has
established a group of specialized investigators with the goals of
improving consistency, timeliness, and quality in inspections of
blood facilities.  (GAO/PEMD-97-1 and GAO/PEMD-97-2)


         HEALTH PROFESSIONS
         EDUCATION
------------------------------------------------------ Chapter 3:4.2.3

During the past decade, the supply of nearly all health professionals
has increased faster than has the population.  For most health
professions, however, data are unavailable to show whether this
increased supply has translated into more access to care in rural and
underserved areas.  Our findings are similar for minority
recruitment.  Although the number of minority health professionals is
increasing, data are inconclusive about whether further increases
will improve access to health care for underserved populations. 
Although nearly $2 billion has been provided to 30 programs under
title VII and VIII of the Public Health Service Act during the last
10 years, HHS has not gathered the information necessary to evaluate
whether these programs have had a significant effect on changes in
the national supply, distribution, and minority representation of
health professionals or their impact on access to care.  The
effectiveness of these programs will remain difficult to measure as
long as they are authorized to support a broad range of health care
objectives without common goals, outcome measures, and reporting
requirements.  We recommended that the Congress establish or direct
the Secretary of Health and Human Services to establish more specific
goals, outcome measures, and funding criteria.  Our work was used as
the basis for program reauthorization hearings and proposed
legislation to reauthorize the programs.  (GAO/HEHS-94-164)


         HOSPITAL CONSTRUCTION
------------------------------------------------------ Chapter 3:4.2.4

The Federal Housing Administration's (FHA) Hospital Mortgage
Insurance Program insures loans to finance hospital renovation and
construction.  FHA mortgage insurance protects lenders against losses
they might incur if hospitals fail to make their mortgage payments. 
The concentration of insured projects and the largest loans amounts
in New York exposes the program and threatens its stability. 
Further, trends in health care and changes in state and federal
health care policies that reduce hospitals' revenues will affect
hospitals participating in the program.  The implications of these
health care trends for program hospitals were not factored into FHA's
methodology for estimating potential loan losses.  In addition, FHA's
approach to determining default and loss rate assumptions was
unreliable.  FHA did not consider the full loss exposure in
estimating reserves for hospitals that it had identified as having
high default probabilities.  As a result of these flaws, the
reliability of FHA's loan loss reserve estimate is limited.  We made
recommendations to the Secretary of Housing and Urban Development
(HUD) to improve the reliability of FHA's loan loss reserve estimate,
ensure future compliance with federal performance measurement
requirements, and minimize potential financial losses from future
projects.  HUD officials have said that they are monitoring each
individual loan and, to date, have not had a claim.  FHA has hired a
management consultant to develop timeliness measures and expects to
implement them in fiscal year 1998.  FHA is drafting regulations for
risk sharing, and HUD has established a reserve to cover uncertainty
stemming from changes in health care payment policies. 
(GAO/HEHS-96-29)


         METHADONE MAINTENANCE
------------------------------------------------------ Chapter 3:4.2.5

We reviewed the activities of a number of methadone maintenance
treatment programs.  Methadone maintenance is the most commonly used
treatment for heroin addiction.  Many of the methadone programs are
established by private not-for-profit organizations while others are
private for-profit or public programs.  We found wide variation among
program policies with respect to urine testing, dismissing patients,
counselor staffing levels, and methadone dosage levels.  For example,
in the 24 programs we visited, average methadone dosage levels ranged
from 21 to 67 milligrams.  Nearly one-half the programs that we
visited were not effective in achieving the benefits of methadone
maintenance.  We recommended that the Secretary of Health and Human
Services direct FDA or the National Institute on Drug Abuse to
monitor and assess methadone maintenance treatment programs.  The
National Institute on Drug Abuse is developing and testing a
performance evaluation system for methadone treatment programs and
anticipates issuing a report about its feasibility and utility in the
summer of 1998.  (GAO/HRD-90-104)



   INCOME SECURITY ISSUE AREA
   (BUDGET FUNCTIONS 600, 650)
---------------------------------------------------------- Chapter 3:5

GAO Contact:  Jane L.  Ross, 202/512-7215


      IMPACT OF GAO'S WORK
-------------------------------------------------------- Chapter 3:5.1

Income security programs operating through the Social Security
Administration (SSA), the Department of Health and Human Services
(HHS), and the Department of Labor (DOL) account for nearly 40
percent of all federal spending.  Millions of Americans rely upon
programs like Social Security, Disability Insurance (DI),
Supplemental Security Income (SSI), and various means-tested programs
for financial support and services.  In addition, Americans are
dependent on DOL to provide oversight of private pension plans, an
important source of income for millions of retired workers. 

Our work provided information and recommendations directed at (1)
ensuring that public assistance program funds are spent efficiently
and protected from fraud and abuse, (2) improving SSA's service to
the public at reduced cost, (3) evaluating the adequacy of Social
Security and public and private pension systems for future retirees,
(4) redesigning the nation's disability programs to provide disabled
people with greater opportunities to work, (5) monitoring
implementation of the 1996 welfare reform legislation, and (6)
assessing government efforts to protect children's welfare. 

The work has contributed significantly to legislative and executive
actions that will result in financial savings and improvements in
program efficiency and cost effectiveness.  For example, relying on
our analysis of weaknesses in administering the Individualized
Functional Assessment, as a part of last year's welfare reform law,
Congress eliminated the Individualized Functional Assessment as a
basis for awarding benefits to disabled SSI children.  Specifically,
SSI eligibility criteria for disabled children have been tightened,
and less severely impaired children are no longer eligible for SSI. 
As a result, SSA anticipates removing 135,000 children from the
disability rolls and awarding benefits to fewer children, at an
estimated savings of nearly $5.4 billion over the next 6 years. 

Based on the results of our work, the Personal Responsibility and
Work Opportunity Reconciliation Act of 1996 contained a provision
that allows states to use recoupment to collect any Food Stamp
overpayments, including those caused by agency error.  This provision
will result in a yearly $40 million savings from 1997 through 1999
and a yearly $45 million savings from 2000 through 2002. 

Our work has resulted in several actions taken to improve SSA's
disability claims process.  For example, in response to our
recommendations, SSA revised its implementation strategy for
redesigning its disability claims process to address major program
delays and management obstacles.  It reduced the number of
initiatives and selected those critical in producing significant
measurable reductions in claims-processing time and administrative
costs to ensure that dramatic results could be achieved.  Further, we
had reported that the management of the Administrative Law Judges
underlies many of the problems affecting SSA's disability programs
and that SSA had not consistently defined what actions it could
legally employ to better manage Administrative Law Judges'
activities.  Citing our work, the Commissioner of SSA requested a
review of any conflict between Administrative Law Judges' decisional
independence and SSA's management authority over them.  As a result
of the review, SSA's authority in setting program policy and ensuring
those policies are carried out was clarified.  This authority also
included the ability to establish production targets and similar
goals critical to addressing the appeals backlog.  Finally, we
reported that SSA's Short Term Disability Plan had enhanced the
Office of Hearings and Appeals' ability to dispose of appealed cases,
helped decrease the number of cases awaiting a written decision, and
reduced processing time for some cases.  Based on our recommendation,
SSA extended the Short Term Disability Plan's key initiatives, which
will result in SSA's disposing of approximately 39,000 additional
cases between January 1, 1997, and September 30, 1997. 


      HIGH-RISK AREA
-------------------------------------------------------- Chapter 3:5.2

We have designated the Supplemental Security Income program as a
high-risk area.


         SUPPLEMENTAL SECURITY
         INCOME PROGRAM
------------------------------------------------------ Chapter 3:5.2.1

SSA administers the SSI program, which pays cash benefits to the
low-income aged, blind, and disabled.  About 6.6 million SSI
beneficiaries now receive roughly $22 billion in federal benefits. 
To date, our work has shown that several longstanding problems have
affected SSA's ability to manage the program and protect taxpayer
dollars from being overspent.  These problems involve SSA's failure
to adequately (1) verify recipients' initial and continuing financial
eligibility, (2) minimize and collect overpayments, (3) address
program fraud and abuse, (4) determine whether SSI recipients remain
disabled, and (5) help SSI recipients enter the workforce and
ultimately leave the program.  The above deficiencies have affected
program size and integrity and contributed to significant annual
increases in SSI overpayments.  During 1996, more than $2.3 billion
in overpaid benefits was owed to the agency, including $895 million
in newly detected overpayments for the year. 

While attempts have been made by SSA in the past to make the SSI
program more efficient, significant problem areas remain unaddressed. 
As a result, our concerns continue about underlying SSI program
vulnerabilities and the level of SSA attention devoted to these
vulnerabilities.  To more precisely identify "root" causes of
longstanding SSI problems and the actions necessary to address them,
we are presently conducting a broad-based review of the program. 
This work is designed to explore program design issues, operational
policy, management philosophy and agency culture, and programmatic
and legislative options for achieving substantive change.  We
anticipate issuing our report in early 1998. 


      KEY OPEN RECOMMENDATIONS
-------------------------------------------------------- Chapter 3:5.3


         SOCIAL SECURITY
------------------------------------------------------ Chapter 3:5.3.1

In October 1993, we reported that while SSA had made progress in
solving its management problems, opportunities still existed for SSA
to continue to improve.  We made several recommendations, among them
that SSA complete the implementation of a strategic management
process to guide planning, implementation, and evaluation of
long-term strategic initiatives.  SSA completed its strategic plan on
September 30, 1997, and has in place a tracking and monitoring system
to monitor the progress of key agency initiatives and the attainment
of performance targets and plans to establish a new methodology to
ensure appropriate attention to key agency initiatives. 
(GAO/HRD-94-22)


         DISABILITY PROGRAMS
------------------------------------------------------ Chapter 3:5.3.2

SSA's plan for achieving self-support (PASS) program was established
in 1972 as an SSI work incentive program to help SSI and DI
recipients achieve self-support, thus reducing or eliminating future
benefit costs.  However, very few recipients have left the federal
disability rolls by returning to work.  In February 1996, we reported
that SSA has done a poor job implementing and managing the PASS
program.  We found that, among other things, the impact of PASS on
employment is unknown because SSA lacks basic data on PASS
participation and outcomes and recommended that SSA gather additional
management data on PASS program participation and impact and use
these data to evaluate the impact of PASS program participation on
employment.  SSA has experienced many technical problems establishing
such a database, and SSA does not consider the data to be reliable. 
SSA officials, however, are continuing efforts to develop a data base
that would provide needed data for managing the PASS program.  In
addition, we recommended that the Congress consider legislation to
eliminate DI beneficiary eligibility for SSI benefits through the use
of PASS.  While SSA has proposed such legislation, the Administration
has not submitted it.  (GAO/HEHS-96-51)

In April 1996, we reported that weaknesses in the design and
implementation of DI and SSI program components have limited SSA's
capacity to identify and assist in expanding beneficiaries'
productive capacities.  We noted that eligibility requirements and
the application process encourage people to focus on their
inabilities, not their abilities; work incentives offered by the
programs do not overcome the risk of returning to work for many
beneficiaries, and the complexities of work incentives can make them
difficult to understand and challenging to implement; and
beneficiaries receive little encouragement to use rehabilitation
services, which are relatively inaccessible to beneficiaries seeking
them.  We recommended that SSA take immediate action to place greater
priority on return to work, including (1) designing more effective
means to more accurately identify and expand beneficiaries' work
capacities and (2) better implementing existing return-to-work
mechanisms.  Similarly, in July 1996, we reported return-to-work
strategies and practices employed by the private sector in the U.S
and by social insurance programs in Germany and Sweden may hold the
potential for improving federal disability programs by helping people
with disabilities return to productive activity in the workplace and
at the same time reduce program costs.  We recommended that, in line
with placing greater emphasis on return to work, SSA should develop a
comprehensive return-to-work strategy that integrates, as
appropriate, earlier intervention, earlier identification and
provision of necessary return-to-work assistance for applicants and
beneficiaries, and changes in the structure of cash and medical
benefits.  In both reports, we also recommended that SSA identify
legislation needed to implement the recommended program changes.  SSA
noted that it is currently placing a high priority on return to work,
citing its expansion of the pool of vocational rehabilitation
providers and its proposed "tickets to independence" (vouchers for
vocational rehabilitation) as a new demonstration to attempt to
improve return-to-work outcomes.  In addition, SSA has affirmed its
interest in determining whether return-to-work practices of other
systems could help improve the return-to-work rate in its disability
programs.  While such steps are in the right direction, they do not
constitute the fundamental redirection of goals and practices needed
to move the disability programs to much greater emphasis on return to
work.  Finally, SSA emphasized that efforts to improve the
return-to-work rate in its disability programs can be fruitful only
if all parties affecting federal disability policy are involved. 
While we agree that all relevant parties must be involved, we believe
that, as the primary manager of the disability programs and the
entity with fiduciary responsibility for the trust funds, SSA must
take the lead in forging the partnerships and cooperation needed to
redesign federal disability programs.  (GAO/HEHS-96-62 and
GAO/HEHS-96-133)

In August 1996, we reported that for many years, SSA has lacked an
effective program to detect SSI recipients in county and local jails. 
It has relied primarily on (1) recipients or their representative
payees to voluntarily report incarceration and (2) redetermination. 
Neither of these mechanisms has been completely effective; as a
result, SSA has erroneously paid millions to thousands of prisoners
in county and local jails.  While SSA initiated action to obtain
better information on SSI recipients currently in jail, they had not
attempted to develop information on SSI recipients who may have been
incarcerated and received payments in prior years.  We recommended
that SSA obtain information on former prisoners from county and local
facilities and identify and attempt to recover any erroneous
payments.  SSA has initiated a pilot project to determine the
feasibility and cost benefit of implementing our recommendations. 
(GAO/HEHS-96-152)

We also reported in August 1996 that the SSI program could be
administered more efficiently and, more importantly, millions in
overpayments could be prevented or more quickly detected if
information needed for claims processing were available immediately
on-line during initial and subsequent assessments of eligibility.  We
estimated that direct on-line access to state computerized income
information could have prevented or more quickly detected about
$131.3 million in overpayments caused by unreported or underreported
income nationwide in one 12-month period.  However, in SSA field
offices where such direct access to computerized state information
has been implemented, its staff did not use it for overpayment
detection.  They did use it, however, to process claims more
efficiently, and SSA's preliminary results have shown that its use
has reduced the administrative costs of the program.  We recommended
that SSA require claims representatives to use online access to
routinely check for unreported sources of income when initial and
subsequent assessments of eligibility are done, provided it is
cost-effective to do so and that the data available online pertain to
the time periods covered by SSI payments.  Further, we recommended
that SSA develop automatic interfaces with state databases that
comply with laws and standards governing computer matching, privacy,
and security that can (1) more fully automate the earnings and
Unemployment Insurance computer matches and (2) identify additional
income sources that do not currently have computer matches.  SSA has
requested a study of the cost-effectiveness of these recommendations. 
(GAO/HEHS-96-163)

SSA is required by law to conduct periodic examinations, called
continuing disability reviews, to determine whether a beneficiary has
medically improved to the extent that the person is no longer
considered disabled.  In October 1996, we recommended that, to ensure
that as many disabled individuals as possible become self-sufficient,
SSA should test the use of continuing disability reviews' contact
with beneficiaries to determine individuals' rehabilitation service
needs and help them obtain the services and employment assistance
they need to reenter the workforce.  SSA is currently in the process
of testing various strategies to better identify applicants and
beneficiaries with rehabilitation potential to better encourage their
return to work.  The agency has developed an agenda to conduct
demonstrations that would assist in encouraging return to work and
intends to test using continuing disability reviews' contact to
assess recipients' potential for and to promote vocational
rehabilitation services.  (GAO/HEHS-97-1 and GAO/HEHS-97-2)

In June 1997, we reported that although benefits paid to persons
receiving SSI must be reduced when they enter nursing homes covered
by Medicaid, SSA is not always notified of the change and full
benefits continue to be paid.  These overpayments may exceed
approximately $100 million annually.  To prevent the overpayments or
detect them sooner, we recommended that HHS direct the Health Care
Financing Administration to require states, as part of their Medicaid
Management Information Systems requirements, to make nursing home
admissions data available to SSA electronically.  In its comments on
our report, HHS noted HCFA's willingness to provide the data it
receives from states to SSA on a quarterly rather than annual basis. 
However, we believe that having HCFA involved in the pass-through of
information causes unnecessary expenditures for HCFA and delays for
SSA.  SSA needs to obtain nursing home admissions data as quickly as
possible after the actual admissions to minimize the overpayments it
makes.  We further recommended that SSA (1) electronically obtain
nursing home admissions data directly from states, (2) obtain
computer tapes or paper listings of nursing home admissions to
identify overpayment situations, while states adapt their systems to
provide the information electronically, and (3) determine the
reliability of state data for implementing an automated computer
interface to automatically adjust the benefits of SSI recipients
admitted to nursing homes.  SSA is considering a study in the fall of
1997 to determine the best mechanism for obtaining nursing home
admissions data in a timely manner and will assess the reliability of
state Medicaid data to cause automatic benefit reductions. 
(GAO/HEHS-97-62)


         CHILD SUPPORT ENFORCEMENT
------------------------------------------------------ Chapter 3:5.3.3

In June 1992, GAO reported on the opportunity to defray the
burgeoning federal and state non-AFDC costs in the child support
program by charging a minimum percentage fee on collections. 
Non-AFDC administrative costs increased from $644 million in 1990 to
$1.4 billion in 1995, while recovered costs remained stagnant at
about $33 million in 1995.  As part of an overall effort to revise
the child support financing structure, the Congress currently is
developing legislation to revise the child support incentive formula
used to reward the states.  As program costs continue to increase,
measures to increase cost recovery, such as charging fees, may
eventually be considered.  (GAO/HRD-92-91 and GAO/T-HEHS-95-181)


IMPROVING JUSTICE AND GENERAL
GOVERNMENT PROGRAMS
============================================================ Chapter 4


   ADMINISTRATION OF JUSTICE ISSUE
   AREA (BUDGET FUNCTION 750)
---------------------------------------------------------- Chapter 4:1

GAO Contact:  Norman J.  Rabkin, 202/512-8777


      IMPACT OF GAO'S WORK
-------------------------------------------------------- Chapter 4:1.1

Americans continue to rank crime and fear of crime as top national
concerns.  The Administration of Justice issue area focuses on the
federal role in protecting the public.  We provide analysis and
information on, and recommendations for improvements to, federal
criminal justice programs.  Within our purview are issues related to
(1) law enforcement; (2) grant programs supporting criminal justice
research and evaluation and assisting states and localities in
meeting their public safety needs; (3) immigration; and (4)
litigative and judicial activities.  Criminal justice program
responsibilities cross the jurisdictions of several federal
departments and agencies, and they involve close interaction with
state and local law enforcement officials, as well as private
academicians and researchers.  As a result, a broad theme of our work
is to seek coordination among policymakers across jurisdictions to
avoid duplication and put available resources to the most effective
use. 


         LAW ENFORCEMENT
------------------------------------------------------ Chapter 4:1.1.1

Over the years, we have issued numerous reports on the nation's drug
control efforts.  These reports show a consistent theme:  the effort
to control illegal drugs is complex, fragmented among more than 50
agencies, and hindered by the absence of meaningful performance
measures to gauge programs and to guide decisionmaking.  As a result
of these findings, we have concluded that there is a continuing need
for a central planning agency to coordinate the national drug control
strategy.  We advised a House Government Reform and Oversight
Subcommittee to reauthorize the Office of National Drug Control
Policy--an executive office created in 1988--with this mission. 

The Attorney General identified health care fraud as a top national
law enforcement priority.  We reported on the advantages and
disadvantages of establishing a centralized health care fraud
database to better coordinate enforcement efforts among the law
enforcement agencies that investigate health care fraud.  Reference
to our work, citing the extent of health care fraud and the need for
enforcement coordination, was contained in the legislative history of
the Health Insurance Portability and Accountability Act of 1996.  The
law established a national health care fraud and abuse program, which
included a requirement to report certain final adverse actions
against health care providers, suppliers, and practitioners. 

Since the Waco siege and other incidents, the Treasury Department's
Bureau of Alcohol, Tobacco, and Firearms (ATF) has come under public
criticism and congressional scrutiny concerning allegations of using
excessive force in carrying out its enforcement responsibilities. 
Our report on ATF's use-of-force policies provided objective,
independent information on this highly sensitive issue. 
Subsequently, the House Appropriations Committee report and the
Conference report on the fiscal year 1997 Treasury appropriation
included recommendations calling for the creation of an Office of
Professional Responsibility within Treasury's Office of the
Undersecretary for Enforcement.  The new office would oversee, among
other things, use-of-force allegations involving ATF and other
Treasury law enforcement agencies.  The Committee report also called
for outside representation on ATF's Shooting Incident Review Board
and Professional Review Board.  In response, Treasury is in the
process of creating an Office of Professional Responsibility within
its Office of Enforcement.  In March 1997, ATF added two outside
representatives--one each from the Customs Service and the Internal
Revenue Service--to its review boards. 

We also reported on ATF's compliance with legal restrictions on
maintaining firearms licensee data.  We determined that ATF was
narrowly interpreting an annual appropriations rider prohibiting the
consolidation or centralization of data from firearms licensee
records and, as a result, had not systematically reviewed its data
systems and its information practices.  In response, ATF (1) adopted
our broader interpretation of the appropriations rider; (2) reviewed
the applicable data bases and found them to be in compliance with the
revised interpretation; and (3) reported the results of its review to
a House Appropriations Subcommittee. 

With regard to federal fugitive apprehension activities, we reported
that different federal agencies used different time criteria for
entering fugitives' data into the National Crime Information Center's
Wanted Person File.  Many fugitives, even those classified as
dangerous, were entered into the File long after their arrests were
authorized.  Justice and Treasury generally implemented our
recommendations to improve agencies' policies and practices relating
to the timing of entering fugitives' data into the Wanted Person
File. 


         GRANT PROGRAMS
------------------------------------------------------ Chapter 4:1.1.2

The Violent Crime Control and Law Enforcement Act of 1994 (Crime
Control Act) established what officials describe as the largest grant
program ever administered by the Department of Justice.  It
authorized $8.8 billion in grants for fiscal years 1995 to 2000, with
the goals of promoting community policing and adding 100,000 officer
positions to the streets of communities nationwide.  In view of its
large size and scope, we reviewed the community policing grant
program's design, operation, and management.  We found that Justice
did limited monitoring of how state and local law enforcement
agencies spent the community policing grants they were awarded during
the first two and a half years of the program.  This was due, in
part, to an early program focus on processing applications to get
officers on the street.  During the course of our review, Justice was
taking steps to increase its level of monitoring and improve its
oversight of this multibillion dollar program. 

Also funded under the 1994 Crime Control Act was a program providing
grants for state and local drug courts.  The purpose of the drug
court programs is to use the authority of the court to reduce crime
by changing defendants' drug-using behavior.  Under this concept, in
exchange for the possibility of dismissed charges or reduced
sentences, defendants are diverted to drug court programs in various
ways and at various stages of the judicial process depending on the
circumstances.  Components common to most drug court programs include
provisions for treatment of offenders, prescribed sanctions and
rewards, and frequent court status hearings.  Based on data from
federal funding sources and drug court program officials, over $125
million had been made available for drug court programs since 1989. 
Over $80 million was from federal sources--primarily from the
Departments of Justice and Health and Human Services.  In response to
a legislative mandate, we provided information on drug court programs
and made recommendations for improving evaluations of them.  In
addition to assisting Congressional decisionmakers, the report will
assist state and local jurisdictions in their efforts to implement or
enhance drug court programs, and help evaluators and researchers to
improve upon their efforts to study the impact and effectiveness of
the drug court programs. 


         IMMIGRATION
------------------------------------------------------ Chapter 4:1.1.3

The Department of Justice's Immigration and Naturalization Service
(INS) has received considerable public attention in recent years as
immigration, especially illegal immigration, has become a focus of
national attention.  From fiscal year 1993 to fiscal year 1997, INS'
budget more than doubled, and its personnel resources increased by
about 45 percent to more than 26,000 positions.  At the same time, we
have reported that INS experienced severe management problems in a
variety of areas. 

In July 1997, we issued a follow-on report on selected management
problems that we had discussed in our 1991 general management review
of INS.  We reported that INS had made progress toward addressing
some management problems that we had identified in 1991, but that
much remained to be done, and the attention of top management was
required to make improvements.  More specifically, we found that
internal communications continued to be problematic, guidance on
policies and procedures were not current, workload information was
not consistently factored into resource allocation decisions, and
budgetary decisionmaking was hampered by inaccurate financial data
and an antiquated financial management system. 

We testified on the need for INS to improve processes under its
Institutional Hearing Program for identifying imprisoned aliens and
deporting them when they are released from prison.  We found that INS
had not fully complied with statutory requirements that it initiate
deportation proceedings against certain types of felons while they
are in prison and take them into custody upon their release.  Among
the reasons for problems in the Institutional Hearing Program were
staff attrition, delays in hiring, and the use of lower level INS
agents to replace rather than supplement higher level agents.  Had
INS completed proceedings for all aliens released from state and
federal prisons before they were released, it could have avoided
nearly $63 million in detention costs during fiscal year 1995. 

In a December 1994 report, we found that procedures in effect at the
time of our review for verifying completion of criminal record and
fingerprint checks needed to be improved.  We pointed out that INS'
assumption that an applicant for naturalization had no criminal
history because there was no record of a criminal history in his or
her file could prove to be incorrect.  Results of criminal history
reports might have been delayed or not filed in a timely manner.  We
also reported that INS examiners could not determine whether FBI
fingerprint checks had been completed because, at INS' request, the
FBI returned a report only if a criminal history record was found. 


         LITIGATIVE AND JUDICIAL
         ACTIVITIES
------------------------------------------------------ Chapter 4:1.1.4

In our 1995 report on defender services, we found that costs were
rising for court-appointed attorneys for eligible federal criminal
defendants and that data explaining the reasons for the increases
were either not available or unreliable.  In 1997, we critiqued a
report from the Administrative Office of the Courts on the causes of
the rapid rise in the cost of defending capital cases.  We have
continued to provide Congressional appropriations subcommittees with
analyses of defender services budget requests.  Based on our support,
a House subcommittee directed the Administrative Office of the Courts
to do a new study on increased defender services costs and consult
with us on the methodology to be used. 


      HIGH-RISK AREA
-------------------------------------------------------- Chapter 4:1.2

We designated the federal government's management of its asset
forfeiture programs as a high-risk area. 


         ASSET FORFEITURE
         MANAGEMENT
------------------------------------------------------ Chapter 4:1.2.1

Property seized from criminals and forfeited to the federal
government in asset forfeiture programs includes businesses, cash,
bank accounts, automobiles, jewelry, and real estate, as well as
thousands of tons of illegal drugs and counterfeit items. 
Inventories were valued at about $2 billion in 1995. 

The federal asset forfeiture programs, administered by the
Departments of the Treasury (Customs Service) and Justice (Marshals
Service), were part of our original high-risk list in 1990 because
the programs did not adequately focus on managing the items seized. 
Since then, we have continued to make recommendations to improve the
management of the programs and to monitor the progress being made. 
Although Treasury and Justice have made many improvements to their
asset forfeiture programs over the years, we continue to include
asset forfeiture as a high-risk area.  We found that significant
enhancements to internal controls and property management were still
needed in order to effectively reduce the vulnerability of the
programs to theft and misappropriation of seized property. 

Legislation enacted in 1988 required Customs and Justice to develop a
plan to consolidate postseizure administration of certain properties. 
In June 1991, we recommended that Customs and Justice consolidate the
postseizure management and disposition of all noncash seized
properties.  A 1995 House Appropriations Committee report stated that
"the consolidation of asset management and disposition functions of
Justice and Treasury could address duplication and provide cost
savings to the management and disposal process." In our February 1995
and 1997 high-risk reports, we pointed out that the issue of the
consolidation of postseizure management and disposition of seized
properties still needed to be addressed. 


      KEY OPEN RECOMMENDATIONS
-------------------------------------------------------- Chapter 4:1.3


         LAW ENFORCEMENT
------------------------------------------------------ Chapter 4:1.3.1

In our testimony on the misuse of criminal justice information in the
National Crime Information Center, we identified numerous examples of
misuse and recommended that Congress enact legislation with strong
criminal sanctions for such misuse.  The FBI, the Information
Center's Advisory Policy Board, and state and local law enforcement
agencies that use the National Crime Information Center generally
support such legislation as a deterrent to further misuse.  Various
bills relating to our recommendation have been introduced since our
testimony in 1993.  (GAO/T-GGD-93-41)


         GRANT PROGRAMS
------------------------------------------------------ Chapter 4:1.3.2

In our study on drug court programs, we identified significant
limitations in available evaluation studies that prevented us from
drawing firm conclusions on the impact of drug court programs.  We
noted that outcomes of future evaluations of drug court programs may
be hindered by the lack of follow-up data on program participants,
which drug court programs do not currently collect.  We pointed out
that if issues raised by Congress and others about the efficacy of
drug court programs are to be addressed, following up on program
participants and similarly situated nonparticipants for some period
after they leave their respective program(s) would be important. 
Accordingly, we recommended that the Attorney General and the
Secretary of Health and Human Services require drug court programs
funded by various federal grants to collect and maintain follow-up
data on program participants' criminal recidivism to the extent
permitted by law.  We also recommended that they collect data, to the
extent feasible, on participants' drug use relapse.  We also
recommended that the Attorney General, the Secretary of Health and
Human Services, and the executive director of the State Justice
Institute require that future impact evaluations of drug court
programs funded by their respective agencies include an assessment of
program participants' postprogram criminal recidivism and drug use
relapse.  We noted that whenever feasible, they should compare drug
court program participants with similar nonparticipants.  The
recommendations were generally agreed to by the federal agencies
involved and are currently under consideration.  (GAO/GGD-96-106)


         IMMIGRATION
------------------------------------------------------ Chapter 4:1.3.3

In our report on INS management problems, we recommended that INS
clarify roles and responsibilities under its four executive associate
commissioners and establish milestones for issuing manuals of current
policies and procedures.  INS agreed with our findings concerning
improvements needed in internal communications and written guidance
and indicated that its staff was working to implement these
recommendations.  (GAO/GGD-97-132)

We made several recommendations to improve the operations of and
outcomes from INS' Institutional Hearing Program, under which INS is
to initiate deportation procedures against deportable aliens while
they are still in prison so that they can be quickly removed from the
country upon their release.  We recommended that the INS Commissioner
give priority under the program to aliens serving time for aggravated
felonies by establishing controls to ensure that these aliens are
identified from among the universe of foreign-born inmates provided
by the Bureau of Prisons and the states, are placed into deportation
proceedings while in prison, and are taken into custody upon their
release.  Other recommendations included (1) establishing and using a
nationwide data system to track the status of each foreign-born
inmate reported to INS by federal and state corrections systems; (2)
identifying the causes of immigration agent attrition and taking
steps to ensure that staffing is adequate to achieve the goals of the
Institutional Hearing Program; (3) establishing and effectively
communicating a clear policy on the role of special agents in the
program; and (4) setting program goals for district directors,
through the use of a workload analysis model.  INS is currently
focusing on trying to reduce the attrition of agents in the
Institutional Hearing Program.  The agency is considering ways to
revamp the jobs to make them more attractive and reduce turnover. 
(GAO/GGD-97-154)

We also recommended, as a result of work on INS' procedures for
determining the criminal history of aliens applying for benefits such
as permanent residency and naturalization, that INS obtain the
results from the FBI of all of its record and fingerprint checks,
including those for aliens who did not have criminal history records. 
INS agreed to implement the recommendation, but it had not done so as
of September 1996.  Subsequently, INS found that of the 1 million
aliens who were naturalized between September 1995 and September
1996, almost 180,000 of them may not have been checked by the FBI for
their criminal history.  Had INS implemented our recommendations, it
would not have naturalized these 180,000 aliens without first
obtaining the results of the FBI's criminal history check. 
(GAO/GGD-97-154)

See also chapter 5, Financial and Information Management Programs,
Information Resources Management Issue Area. 



   FEDERAL MANAGEMENT AND
   WORKFORCE ISSUE AREA (BUDGET
   FUNCTION 800)
---------------------------------------------------------- Chapter 4:2

GAO Contact:  L.  Nye Stevens, 202/512-8676


      IMPACT OF GAO'S WORK
-------------------------------------------------------- Chapter 4:2.1

The Federal Management and Workforce issue area focuses on
cross-cutting management, workforce, and statistical issues.  These
include government performance goals and measurement, restructuring
and downsizing, regulatory reform, privatization, oversight of the
civil service, human resource management, and the quality,
reliability, and dissemination of census and other social and
economic statistical data.  Agencies within the purview of the issue
area are the Executive Office of the President, the Office of
Management and Budget, Office of Personnel Management, Merit Systems
Protection Board, Office of Special Counsel, Federal Labor Relations
Authority, Office of Government Ethics, Department of Commerce,
Government Printing Office, Bureau of Labor Statistics, Library of
Congress, and the National Archives. 

However, managerial, personnel, and statistical/information issues
involve all other agencies as well. 

In 1997, GAO continued to contribute to congressional oversight of
the implementation of the landmark Government Performance and Results
Act (known as GPRA or the Results Act) and the use of the Act to
improve decisionmaking.  The issue area's support for Congress was
centered on three key efforts:  (1) assisting Congress as it reviewed
agencies' draft strategic plans, highlighting the key strategic
planning issues most in need of sustained attention, (2) providing
Congress with information and perspectives on how the Results Act can
be used to improve congressional decisionmaking, and (3) assessing
agencies' progress in implementing the Act.  Most prominently, our
June 1997 report on the prospects for effective implementation of the
Results Act showed the progress that had been made during the Act's
pilot phase, but also pinpointed the key challenges that remain. 

In addition to work on the Results Act, we analyzed other major
management initiatives as well.  For example, the issue area's often
cited work on states' experiences with public sector privatization
initiatives has been used within Congress to consider how best to
structure federal efforts.  We also testified on initiatives to bring
a more market-like orientation to federal management and the proposed
creation of performance based organizations. 

In response to recommendations in GAO's report on 185 "reinvention
labs" established under the National Performance Review (NPR), an NPR
task force announced that the National Academy of Public
Administration would serve as a needed clearinghouse for propagation
of validated operational improvements. 

We have also contributed to oversight of the federal regulatory
system.  For example, the Unified Agenda of Federal Regulatory and
Deregulatory Actions is used to satisfy the requirements of section
610 of title 5, which requires agencies to identify the rules it will
review pursuant to the Regulatory Flexibility Act during the next 12
months to determine whether they should be amended, rescinded, or
continued.  However, we concluded that the size of the Unified Agenda
makes it difficult for the public to locate those items that are
being reviewed.  Therefore, we recommended that the Unified Agenda
contain an index or special section for rules that agencies plan to
review.  In June 1997, the Administrator of OMB's Office of
Information and Regulatory Affairs notified all regulatory policy
officers that the October 1997 edition of the Unified Agenda would
have a separate index for section 610 entries. 

During 1997, Congress and the executive branch continued to press for
a more streamlined, effective, and efficient civil service system. 
Trimming the federal workforce continued, but we found that six
agencies' fiscal year 1997 buyouts were better planned and
implemented than was generally the case among non-defense agencies in
1994 and 1995.  These agencies generally linked their buyouts to
achieving specific organizational objectives and implemented their
buyout programs in ways that tended to increase savings.  Indeed,
based on our analysis of five agencies where demographic data was
readily available, we estimated that by using buyouts to separate 887
employees, three agencies generated over $3.75 million more in fiscal
year 1997 savings than if they had used reduction-in-force.  The two
remaining agencies we examined will start accruing savings in fiscal
year 1998.  The improvements in agencies' buyouts came on the heels
of our earlier work which found that buyouts typically offer greater
savings than reductions-in-force.  It also followed our work
demonstrating that agencies needed better workforce and strategic
planning to guide their downsizing decisions.  Congress incorporated
requirements for such planning in recent buyout legislation. 

Although downsizing has reduced the federal workforce to levels not
seen since the 1960s, the federal government remains a major employer
with attendant personnel management concerns.  We published several
reports that contributed to deliberations on possible changes to
federal compensation and benefits.  For example, our report comparing
federal physicians compensation under title 5 and compensation of
physicians in private practice and under other federal pay plans
contributed to Congress' decision to reauthorize physicians'
comparability allowances.  Our seven reports on federal retirement
program issues, including our comparison of federal and private
sector retirement program benefits and our analyses of options for
potential budgetary savings, added a factual foundation and valuable
perspectives for decisions affecting this core element of the federal
employee compensation system. 

As agencies move toward the Results Act mandate of managing for
results and being held accountable for achieving those results,
agencies are increasingly interested in gaining greater flexibility
in the management of their human resources.  DOD and the Internal
Revenue Service (IRS) are but two of the largest agencies seeking
revamped personnel systems more tailored to their circumstances.  Our
report on the excepted service profiled the agencies already having
statutory flexibilities differing from those available under title 5
and identified the complexities of determining whether those
flexibilities have paid off in improved performance. 

In the information and statistics area, we issued reports detailing
the governmentwide costs of subscriptions and news clippings, as well
as the costs and distribution of government-maintained web sites on
the Internet.  We also contributed to the growing congressional
debate on the best way to conduct the 2000 Census, concluding that
incomplete information on the effects of the Census Bureau's plan to
incorporate sampling into its design was contributing to its
inability to reach agreement with Congress over the design and
funding. 


      HIGH-RISK AREA
-------------------------------------------------------- Chapter 4:2.2

We designated the 2000 Decennial Census as a high-risk area..


         2000 DECENNIAL CENSUS
------------------------------------------------------ Chapter 4:2.2.1

The decennial census, the nation's most comprehensive statistical
data-gathering program, is required by the Constitution.  The results
are critical for apportioning seats in the House of Representatives
and are also used to (1) draw district boundaries within states,
cities, and counties, (2) allocate billions in federal funding for
numerous programs, (3) provide a baseline for comparative data
collection and analysis for the ensuing decade, and (4) guide the
plans and decisions of government, business, education, and health
institutions in the multibillion dollar investments they make. 
Agreement is needed between the administration and Congress on an
approach that will both minimize risk of an inaccurate census and
keep the cost within reasonable bounds.  Over the years, the
methodology used by the Census Bureau to conduct the decennial census
has produced results that were less accurate and more expensive.  On
several occasions since 1992, we have testified on the need for
careful advance planning to avoid the risk of a very expensive and
seriously flawed census in 2000. 

The Congress has the authority to approve the manner in which the
census will be taken, but the Census Bureau has not demonstrated
convincingly to the Congress what effects sampling and estimation
would have at different levels of geographical detail. 

The longer the delay in securing agreement over design and funding,
the more difficult it will be to execute an effective census, and the
more likely it will be that we will have spent billions and still
have demonstrably inaccurate results.  Given the dependence of many
decisions affecting governments, businesses, and citizens on the
results of the census, the country can ill afford an unsatisfactory
census at the turn of the century, especially if it comes at a
substantially higher cost than previous censuses. 


      KEY OPEN RECOMMENDATIONS
-------------------------------------------------------- Chapter 4:2.3

We reported in 1994 that one reason for agencies' lack of compliance
with the Regulatory Flexibility Act is that the act does not
expressly authorize the Small Business Administration (SBA) to
develop criteria for agencies to follow in reviewing their rules. 
Although the act says SBA should monitor agencies' compliance, SBA
has not issued guidance defining key terms in the act.  Therefore, we
recommended that, if Congress wishes to strengthen the implementation
of the act, it should consider amending the act to provide SBA with
clearer authority and responsibility to interpret the act's
provisions.  Although the Small Business Regulatory Enforcement
Fairness Act of 1996 made several changes to the Regulatory
Flexibility Act, it did not clarify SBA's authority or responsibility
to interpret the act's provisions.  (GAO/GGD-94-105)

In reviewing the fiscal year 1997 buyout programs of six agencies, we
found that they had been better managed than was generally the case
governmentwide during the 1994 and 1995 non-defense buyout window. 
However, we also concluded that opportunities for still further
savings may have been identified if OMB had required agencies to not
only estimate the savings generated by buyouts, but to compare them
to estimated savings produced by alternative separation strategies,
such as reductions-in-force.  To achieve the full potential savings
consistent with other organizational objectives, we recommended that
the Director of OMB require all agencies to include in any future
requests for buyouts information comparing the costs and savings of
buyouts versus other separation strategies for the separation year
and a reasonable number of subsequent years for which accurate
assumptions and estimates could be made.  (GAO/GGD-97-124)

In the area of equal employment opportunity, our recommendations
addressed the guidance that the Equal Employment Opportunity
Commission provides to federal agencies for affirmative employment
planning.  According to the Commission, it has made substantial
revisions to its proposed management directive and continues to
discuss these changes with the Department of Justice.  Once these
discussions are complete and the proposed directive is approved
within the Commission, the directive will be sent to external
agencies for comment.  (GAO/GGD-91-86, GAO/T-GGD-92-2, GAO/GGD-94-71)

We reported in 1992 that the basic design of the decennial census had
exhausted its potential for counting the population accurately and
cost-effectively.  We reported also that the key to a successful
reform effort would be vigorous congressional oversight.  We
therefore recommended that Congress schedule oversight hearings
throughout the decade to ensure that consistent progress is being
made in designing and planning the 2000 census.  In a 1997 report we
concluded that the Bureau of the Census needed to provide Congress
with detailed data, updated as necessary to meet the objective of
full and open disclosure, on the expected effects of the Bureau's
census design proposals.  (GAO/GGD-97-142)

We reported that the current practice of updating the expenditure
weights used in the Consumer Price Index only every 10 years was a
source of inaccuracy in this key economic indicator.  We recommended
that the Commissioner of the Bureau of Labor Statistics update the
weights on a more frequent schedule.  (GAO/GGD-98-2)



   FINANCIAL INSTITUTIONS AND
   MARKETS ISSUE AREA (BUDGET
   FUNCTION 800)
---------------------------------------------------------- Chapter 4:3

GAO Contact:  Thomas J.  McCool, 202/512-8678


      IMPACT OF GAO'S WORK
-------------------------------------------------------- Chapter 4:3.1

Financial institutions and markets continue to change at a rapid
rate.  Banks and thrifts, which used to be clearly distinct
institutions, perform increasingly similar functions.  In an attempt
to increase profits and maintain a customer base, banks are
increasingly taking on new lines of business--such as mutual funds
and securities underwriting--which make them look more like
securities firms.  The products offered by banks, securities firms,
and insurance companies look more and more similar.  As markets
become more global, foreign and domestic institutions perform similar
functions and interact with savers and investors in similar ways. 
Our work explores the implications of these changes for the industry,
its customers, and its regulators.  We examine these issues to
provide information, analyses, and recommendations to Congress and
regulators on changes in and oversight of the financial services
industry.  We analyze:  (1) various emerging issues in the financial
services industry; (2) regulatory practices to see if they work as
intended; and (3) the continued appropriateness of federal policies
governing financial institutions and markets. 

Our work has improved the operation of the financial system as a
whole and individual components of it.  Our primary mission--work on
safety and soundness issues--helps protect the taxpayer from the need
to rescue one or more financial institutions or sectors.  Our work
also has an investor/customer focus to help ensure that financial
services industry customers get what they pay for.  Our work on
agency operations has led to improvements in their effectiveness. 

Our recent review of the operations of the Federal Reserve suggests
that the System is facing a number of major challenges that could
affect the nature, size, and distribution of its activities and
resources.  We found that the System needs to become more cost
conscious and that it should undertake a thorough re-examination of
its mission, structure, and work processes to assure that it is
operating as efficiently and effectively as possible. 

Our work on over-the-counter derivatives market has provided the
framework for debating the complex issue.  Our report suggested that
linkages among major U.S.  dealers, especially bank dealers,
represented a potential threat to the financial system if one or more
major dealers were to fail or withdraw from the market.  The report
also identified major gaps in the regulatory structure. 

Our work on the Federal Home Loan Bank System identified the need for
major reform.  We expressed concerns about the System's capital
structure and the mixture of voluntary and mandatory members.  We
also expressed substantial concern about whether the Federal Housing
Finance Board could act as an arm's-length regulator, and recommended
a single regulator for all three housing-related government sponsored
enterprises.  This report helped to spur an ongoing debate in this
Congress on how to reform the System. 


      KEY OPEN RECOMMENDATIONS
-------------------------------------------------------- Chapter 4:3.2


         FINANCIAL INSTITUTION
         REFORMS
------------------------------------------------------ Chapter 4:3.2.1

In our reports on credit unions, we recommended regulatory and
legislative actions to ensure the future soundness of the industry,
including changes to (1) maintain safe and sound insurance
operations, (2) upgrade the regulation and supervision of credit
unions, and (3) clarify the "common bond" characteristic
distinguishing credit unions from banks and thrifts.  The National
Credit Union Administration is addressing our concerns. 
(GAO/GGD-91-85 and GAO/GGD-95-107)

Our report on the Federal Home Loan Bank System recommended reforming
its capital structure, its mixture of voluntary and mandatory
members, and potential cost saving reforms.  The report also
recommended a single regulator for all three housing-related
government-sponsored enterprises.  The Administration and the
Congress have been working on a legislative plan to address our
recommendations.  (GAO/GGD-94-38)

Our reviews of the Community Reinvestment Act, the Equal Credit
Opportunity Act and the Fair Housing Act concluded that the lending
and regulatory communities still face challenges in effectively
implementing these laws.  We recommended that the regulators: 
develop uniform fair lending examination procedures; adequately train
examiners to review and test for lending discrimination; and use
their full range of resources, including enforcement actions to
ensure accurate, timely Home Mortgage Disclosure Act data.  We
further recommended that the agencies determine what resources and
examination techniques were needed to meet the requirements of the
recently revised Community Reinvestment Act regulations.  We also
recommended that the Attorney General provide updated guidance to the
bank regulators on the characteristics of referable "pattern or
practice" cases under the Equal Credit Opportunity Act and the Fair
Housing Act.  In addition, we suggested that Congress may wish to
consider alleviating the legal risks of self-testing for
discrimination done by the lenders.  These recommendations are under
consideration by the regulators.  (GAO/GGD-96-23 and GAO/GGD-96-145)

Our report on Federal Reserve operations noted a number of areas in
which the Federal Reserve could be more efficient.  We recommended
that the Federal Reserve undertake a thorough review of its mission,
structure, and work processes to identify ways to become more
efficient and effective in the future.  We suggested that the Federal
Reserve carefully examine the need for its 12 regional Banks and its
25 branches.  We also recommended that the Federal Reserve develop
criteria for maintaining its surplus rather than the rule of thumb it
has been using.  (GAO/GGD-96-128)

Our testimony and report on modernizing the U.  S.  bank structure
made suggestions that incorporate the many of the advantages we found
in foreign bank regulatory systems.  We noted that consolidation of
agencies responsible for bank oversight was one logical step in
modernization.  We recommended that the Federal Reserve System and
Treasury be part of the oversight structure in any financial
modernization effort.  Congress is considering these proposals as
part of proposed financial services modernization legislation. 
(GAO/GGD-97-23 and GAO/T-GGD-96-117)


         SECURITIES
------------------------------------------------------ Chapter 4:3.2.2

Our over-the-counter derivatives market report identified the actions
needed to ensure that this rapidly growing segment of the financial
market does not become a source of systemic risk.  We made several
recommendations calling for congressional action to address the
weaknesses and gaps we identified that are impeding the regulatory
process.  Additionally, we made several recommendations to the
regulators involved with regulating the over-the-counter derivatives
market that address the weaknesses and gaps within their control. 
Regulators are in the process of implementing many of our
recommendations.  (GAO/GGD-94-133 and GAO/GGD/AIMD-97-8)

Our work on the National Association of Stock Dealers Hotline
suggested that many investors did not know about the hotline, but
that investors would find additional information about broker-dealers
useful in making investment decisions.  We recommended that the
National Association of Stock Dealers Regulation explore ways of
publicizing the hotline to a wider audience and provide hotline
callers with all the relevant disciplinary-related information
available.  (GAO/GGD-96-171)

See also chapter 5, Financial and Information Management Programs,
Budget Issue Area, Corporate Audits and Standards Issue Area, and
Information Resources Management Issue Area. 



   GOVERNMENT BUSINESS OPERATIONS
   ISSUE AREA (BUDGET FUNCTION
   800)
---------------------------------------------------------- Chapter 4:4

GAO Contact:  Bernard L.  Ungar, 202/512-4232


      IMPACT OF GAO'S WORK
-------------------------------------------------------- Chapter 4:4.1

Our work focuses primarily on two of the government's largest
business entities:  the General Services Administration (GSA), which
controls or oversees over $60 billion in annual government spending,
and the United States Postal Service (USPS), which has annual
revenues of more than $55 billion.  Their activities have
far-reaching implications for federal agencies and the general
public.  Through them, the federal government owns and controls
assets worth hundreds of billions of dollars and provides goods and
services to federal agencies that directly affect mission
accomplishment. 

Also, this past year, our work has involved the activities of other
entities, including the Treasury, Federal Communications Commission,
National Oceanic and Atmospheric Administration, Smithsonian
Institution, Kennedy Center for the Performing Arts, Library of
Congress, Government Printing Office, Architect of the Capitol,
Federal Prison Industries, Administrative Office of the U.S.  Courts,
and governmentwide assignments dealing with construction project
labor agreements, user fees, and employee relocation costs. 

The reforms that GSA has made in recent years appear responsive to
many of the concerns we and NPR have continued to express.  GSA is
deeply involved in government downsizing and reinvention issues,
contracting out some of this effort while adjusting to new
leadership.  It has reorganized its Public Buildings Service to
separate its policy/oversight and service-provider responsibilities
and help facilitate the delivery of real estate services to federal
agencies.  We continue to emphasize several key obstacles--such as
Federal Buildings Fund shortfalls, budget scorekeeping rules, and the
lack of strategic focus and planning--that impede GSA's and the
Congress' ability to pursue the most cost-effective housing and asset
management options for meeting federal space needs and managing
existing federal buildings.  Key areas of work this past year have
involved the design, construction, and use of federal courthouses;
construction of and the housing plan for the Ronald Reagan Federal
Building and International Trade Center; proposed disposal of the
Toledo Federal Building; federal building security upgrades; and GSA
actions to deal with the $846 million Federal Buildings Fund
shortfall in fiscal year 1997. 

Our efforts at USPS have continued to focus on persistent problems as
well as the prospect that major reform legislation may place USPS in
a more competitive arena with its private-sector counterparts.  The
problems include poor labor-management relations, an inability to
properly control the receipt of mail and ensure proper revenue
collection, as well as the need to control costs in order to reap
projected benefits from major automation investments.  In both
reports and testimonies, we have highlighted the major issues facing
USPS:  (1) how competition will affect both the Service's revenues,
costs, and rates (domestically and internationally) and the federal
government's role in mail delivery; (2) how poor controls have
resulted in revenue losses and mismanagement in some major purchases;
and (3) how efforts to improve labor-management relations have been
fragmented and difficult to sustain.  Our postal work made major
contributions to the postal reform legislation reintroduced in 1997. 

We also handled a wide range of congressional requests covering
diverse agencies and issues.  For example, we reported that, contrary
to reports in the press, the Library of Congress did not violate the
Buy America Act in its contracts to convert printed materials into
electronic formats, portions of which were done in Jamaica and the
Philippines.  In the currency area, we testified that pending
proposals to change the denominational mix of the coins and currency
could significantly affect capital investment plans of the Mint and
the Bureau of Engraving and Printing; Treasury studies on merging the
two agencies were inconclusive; Treasury has not pursued further
outsourcing of money production; and strategic plans of the Mint and
the Bureau do not consider total government production and
distribution costs or alternative mixes of coins and currency.  In
another area, we reported on the potential for duplication of audit
efforts resulting from a mandated GAO audit of the Kennedy Center's
use of appropriated funds.  Further, we reported on the Center's
development of a facility management structure and the related
systems required to manage and operate the facility since Congress
gave the Center's Board responsibility for operation and maintenance
and capital improvement in 1994. 

Examples of our contributions this past year include the following: 

  -- GSA ended its virtual monopoly in providing leased office space
     to federal agencies by delegating authority to lease general
     purpose space, regardless of geographic location, to the heads
     of all federal agencies. 

  -- Congress approved a measure, which the President signed, barring
     the payment of surcharges to sponsors of commemorative coins
     until all of the Mint's costs associated with that coin are
     recovered. 

  -- The Postal Service implemented actions to reduce Express Mail
     Corporate Account Losses, which amounted to about $800,000 in
     revenue during fiscal year 1995. 

  -- The Smithsonian Institute and the Library of Congress
     collaborated in the acquisition of artifacts, thereby ensuring
     that the government's cost of acquiring material for its
     collections were not driven up by competitive bidding by the
     agencies. 

  -- The National Archives implemented a new systemic approach to
     identify customers' needs, compare those needs with services
     provided, and examine how to meet shortfalls. 

  -- GSA increased direct delivery of supplies by adding supply
     system features such as (1) ordering direct-delivery products
     over the Internet, (2) lowering the direct-delivery threshold
     for items that have limited shelflives, and (3) adding a
     supplies contract that promotes the use of a contractor to
     supply agencies directly. 


      KEY OPEN RECOMMENDATIONS
-------------------------------------------------------- Chapter 4:4.2


         GENERAL SERVICES
         ADMINISTRATION
------------------------------------------------------ Chapter 4:4.2.1

The Congress, the Judiciary, and GSA have embarked on a $10 billion
courthouse construction initiative.  In response to various
criticisms about inadequate management and oversight, GSA established
a courthouse management group to develop a more disciplined approach
that would reduce costs and provide for better decisionmaking.  This
group is working closely with the Administrative Office of the U.S. 
Courts--the administrative arm of the Judiciary--to improve
communication and respond to specific recommendations that we made
during our testimony for improvement in the overall management and
oversight of courthouse construction.  The group is also establishing
a mechanism to monitor and assess the use of flexible design guidance
with a view toward striking a better balance in the choices made
about courthouse designs.  (GAO/T-GGD-96-19)


         U.S.  POSTAL SERVICE
------------------------------------------------------ Chapter 4:4.2.2

USPS, unions, and management associations should develop a long-term
framework on an agreement to change the workplace climate in mail
processing and delivery functions.  The agreement should provide for
the following principles and values:  (1) a work structure to give
employees greater responsibility and accountability for results; (2)
incentives to encourage all employees to share in the tasks necessary
for success and to allow for recognition and reward for corporate and
unit performance; (3) training employees and holding them
accountable, with a focus on customer service; (4) selection and
training of supervisors to be facilitators/counselors who will have
the skills, experience, and interest to treat employees with respect,
motivate them, recognize and reward them, promote teamwork, and deal
with poor performers; and (5) counseling, training, and if necessary,
removal of supervisors and employees who show a lack of commitment to
work-unit goals, values, and principles.  The Postmaster General and
the leaders of the unions and management associations have taken some
initial steps toward arranging a summit at which they can discuss
approaches to try to address persistent labor-management relations
problems.  (GAO/GGD-94-201A)

If the Congress wants USPS to keep or gain business customers in
parcel post and Express Mail, it should consider reexamining the
provisions of section 403(c) of the Postal Reorganization Act.  The
Congress should determine if volume discounting by USPS, in which all
customers would be given the same volume discounts, would result in
undue or unreasonable discrimination among mailers and undue or
unreasonable preference being given to mailers since private carriers
commonly use this pricing strategy.  (GAO/GGD-92-49)

The Congress should reexamine the act's ratemaking criteria and
consider amending it to state that (1) in allocating institutional
costs, demand factors are to be weighted to take into account the
need to maintain the long-term viability of USPS as a nation-wide,
full-service provider of postal services, and (2) such use of demand
factors will not be inconsistent with the rate criterion requiring
the establishment of an equitable rate schedule as long as each mail
class recovers the direct and indirect costs attributable to that
service and contributes to institutional costs.  (GAO/GGD-92-49)


         TREASURY ISSUES
------------------------------------------------------ Chapter 4:4.2.3

Our 1993 report on the dollar coin recommended that Congress
eliminate the paper dollar and replace it with a well-designed dollar
coin.  Hearings were held in 1995, but no legislation was passed. 
(GAO/GGD-93-56)



   TAX POLICY AND ADMINISTRATION
   ISSUE AREA (BUDGET FUNCTION
   800)
---------------------------------------------------------- Chapter 4:5

GAO Contact:  Lynda D.  Willis, 202/512-9110


      IMPACT OF GAO'S WORK
-------------------------------------------------------- Chapter 4:5.1

The Tax Policy and Administration issue area's mission is to provide
Congress, the executive branch, and the public with timely, accurate,
and objective analyses and information to improve our nation's tax
system and its administration.  Accordingly, this issue area's
responsibility encompasses the revenue side of the budget--the $1.4
trillion in tax receipts that finance federal government operations
and the $400 billion in tax expenditures used to promote numerous
social and economic objectives--and the federal agency responsible
for tax administration--the Internal Revenue Service (IRS). 

The federal treasury will realize over $1.8 billion in increased tax
revenues and cost reductions over 2 years as a result of statutory
and administrative changes we recommended during the last few years. 
Of that total, (1) about $1.1 billion comes from a phaseout of the
Section 936 tax credit in U.S.  possessions; (2) about $514 million
from a reduction in the fiscal year 1997 Tax System Modernization
appropriation; (3) about $90 million from the cancellation of IRS'
corporate accounts processing system; (4) about $82 million comes
from additional tax collections by sending semiannual reminder
notices to delinquent taxpayers; and (5) about $27 million comes from
the termination of a pilot program for private debt collection
assistance. 

The increased tax revenues represent only one aspect of our work's
impact.  For example, in response to our recommendations, (1) federal
agency Chief Financial Officers must certify that procedures for
issuing information returns on payments to corporations providing
services are in place; (2) IRS developed a definition of taxpayer
complaints; (3) IRS created the Office of the Taxpayer Advocate; (4)
IRS changed the requirement that Treasury's General Counsel review
all offers-in-compromise greater than $500; (5) IRS reduced the
volume of its undeliverable mail; (6) IRS has limited the prior audit
protection rule in Section 530; (7) IRS made changes to improve the
processing of undeliverable mail; (8) IRS initiated a program to use
private companies in collecting delinquent debt; (9) IRS established
a government program management office; and (10) congressional
spending limits for IRS' fiscal year 1997 information systems
appropriation were approved. 


      HIGH-RISK AREAS
-------------------------------------------------------- Chapter 4:5.2

At IRS, we designated the problems in the management and collection
of billions in taxes and the significant levels of tax filing fraud
as two high-risk areas. 


         TAX ACCOUNTS RECEIVABLE
------------------------------------------------------ Chapter 4:5.2.1

IRS is the government's primary tax collection agency and collects
over a trillion dollars annually.  However, since many taxpayers are
either unable or unwilling to pay their taxes when due, IRS has
accumulated accounts receivable estimated to be in the tens of
billions of dollars.  Unfortunately, IRS' long-term efforts to
efficiently and effectively collect these delinquent taxes have been
seriously hampered, primarily by outdated equipment and processes,
old accounts that are difficult to collect, incomplete information
needed to better target collection efforts, and the absence of a
comprehensive strategy and detailed plan that address the systemic
nature of the underlying problems. 

IRS has undertaken many initiatives to deal with some of its accounts
receivable problems.  These include correcting errors in the
accounting records of tax receivables, developing more information on
the makeup of the inventory of tax debts, developing research systems
to identify characteristics of delinquent taxpayers and appropriate
collection techniques, attempting earlier telephone contact with
delinquent taxpayers, revising the format of bills sent to taxpayers,
and automating many of the processes performed by collection
employees in field offices. 

While some of these initiatives appear to have had some positive
impact, correcting the problems and improving collections will
require long-term and continuous efforts.  To ensure that these
efforts are on the right track, IRS needs a comprehensive strategy
that involves all aspects of IRS' operations.  As part of this
strategy, IRS must set priorities; modernize outdated equipment and
processes; and establish goals, timetables, and a system to measure
progress. 


         FILING FRAUD
------------------------------------------------------ Chapter 4:5.2.2

We first identified filing fraud as a high-risk area in February 1995
after the amount of fraudulent refunds identified by IRS had risen
from $42.9 million in 1991 to $160.5 million in 1994.  A great
majority of those fraudulent refunds involved Earned Income Credit
claims.  More recently, as noted in our 1997 high-risk series, the
amount of detected fraud had declined, but there was insufficient
information available to determine whether the decline was due to
staff reductions in IRS' primary fraud detection program, changes in
the program's operating or reporting procedures, or a general decline
in the incidence of fraud. 

Since our high-risk series was issued, IRS released a report on the
results of its study of Earned Income Credit claims on tax year 1994
individual income tax returns.  That study, which provides the most
recent data on a major source of filing fraud, showed that of the
$17.2 billion in Earned Income Credit claims on tax year 1994
returns, 25.8 percent was erroneously claimed.  It was unclear from
IRS' study, however, how many of those erroneous claims were due to
fraud.  IRS expected some of this noncompliance to be mitigated by a
provision in the Welfare Reform Act of 1996 that allowed IRS,
beginning in 1997, to treat missing or incorrect Social Security
Numbers as math errors and to automatically reduce the taxpayer's
refund. 

Other provisions enacted as part of the Taxpayer Relief Act of 1997
are intended to further reduce Earned Income Credit noncompliance. 
Those provisions include certain restrictions on future Earned Income
Credit claims by persons who are found to have fraudulently claimed
an Earned Income Credit and certain penalties against tax return
preparers who are found to have failed to exercise due diligence
against improper Earned Income Credit claims in preparing tax
returns.  In testimony before the House Committee on Ways and Means
before those provisions were enacted, we stated that various
questions about the provisions needed to be answered, the most
significant being whether they get at the real causes of EIC
noncompliance.  (GAO/T-GGD-97-105)


      KEY OPEN RECOMMENDATIONS
-------------------------------------------------------- Chapter 4:5.3


         TAXPAYER COMPLIANCE
------------------------------------------------------ Chapter 4:5.3.1

The Low-Income Housing Tax Credit is the largest federal program to
fund the development and rehabilitation of rental housing for
low-income households.  Under the program, states allocate federal
tax credits as an incentive to the private sector to develop these
projects.  The annual cost of the credits could be as much as $3
billion.  IRS is responsible for ensuring that taxpayers take no more
credits than allowed and that the states allocate no more credit than
they are authorized to allocate.  We recommended that IRS (1)
establish clear requirements to ensure independent verification on
sources and uses of funds submitted to states by developers that form
the basis of decisions about the value of tax credits granted for
low-income housing projects; (2) require that states report
sufficient information about monitoring inspections or reviews,
including the number and types of inspections made so that IRS can
determine whether states have complied with their monitoring plans;
(3) require that states' monitoring plans include specific steps that
will provide information to permit IRS to more effectively ensure
that the Internal Revenue Code's habitability requirements are met;
and (4) explore alternative ways to obtain better information to
verify that states' allocations do not exceed tax credit
authorizations and to evaluate taxpayers' and housing projects'
compliance with the requirements of the Code.  IRS is taking steps to
address these recommendations.  (GAO/GGD/RCED-97-55)

Sole proprietors, who account for about 13 percent of individual
taxpayers, are responsible for about 40 percent of the taxable income
earned by individuals but not reported for tax purposes.  Much of
this noncompliance is attributable to sole proprietors who operate as
independent contractors, e.g., self-employed individuals who provide
services to others.  Given the persistently high levels of
noncompliance over the years, we have recommended that IRS adopt a
more comprehensive and coordinated compliance program.  We also
recommended that Congress consider compliance-enhancing legislation,
for example, extending withholding and information reporting
requirements to cover independent contractors.  Since January 1995,
at least four legislative proposals for clarifying the rules have
been submitted.  We had testified annually from 1992 to 1996. 
(GAO/GGD-92-108)

Annually, about two-thirds of all additional tax assessments
recommended as a result of IRS audits are attributable to the
nation's 1,700 largest corporations.  Although audits of these large
corporations consume about 20 percent of IRS' examination resources,
IRS collects only about $1 of every $5 of recommended tax
assessments.  We recommended that IRS take a number of steps to help
ensure that it meets its mission of collecting the proper amount of
tax at the least cost.  They are that IRS (1) provide more authority
over budget and staffing allocations in the field to the National
Office executive who manages this audit program, (2) improve controls
to ensure that the auditors receive the information that the
corporations submitted to IRS' appeals function, and (3) analyze
recurring tax disputes and propose legislative changes for minimizing
such recurrence.  IRS is taking steps to address these
recommendations.  (GAO/GGD-94-70)

IRS also has an audit program dealing with tax returns filed by about
45,000 other large corporations.  Between 1988 and 1994, IRS had been
investing additional time in doing these audits but recommending
fewer additional taxes per hour invested.  IRS had been collecting
about $1 of every $4 in additional taxes recommended during the
audit.  These results raised issues about the productivity of such
audits.  Our recommendations strove to improve that productivity. 
For example, we recommended that IRS (1) develop more specific
criteria to guide the selection of tax returns and tax issues on
those returns with high audit potential, (2) encourage the management
of the field auditors and lawyers to work together on finding
cost-effective ways for auditors to get the necessary legal
assistance, and (3) provide feedback to auditors on how IRS' appeals
function settled tax disputes with the large corporations so that the
auditors could prepare better support for tax issues that could be
sustained if appealed.  (GAO/GGD-97-62)

Through negative withholding, low-paid wage earners may receive a
proration of the earned income tax credit during the tax year.  Such
an advance payment of the tax credit presents a potential compliance
problem because the credit is paid before IRS can ensure that the
wage earners are eligible.  Ensuring compliance becomes more
problematic if the affected wage earners do not report the advance
payment on their tax returns or do not file tax returns.  We
recommended that IRS (1) send to individuals who do not file tax
returns a notice explaining their requirement to file; and (2)
explore ways to identify those individuals who claim the credit in
advance but do not report it, so as to prevent them from receiving
the credit a second time.  While IRS subsequently took steps directed
at taxpayer reporting, we believe that IRS needs to do more to
identify and deal with those who do not file correct returns. 
(GAO/GGD-92-26)

At the beginning of fiscal year 1993, IRS had an inventory of about
10 million individual and business nonfilers.  IRS estimated that
unpaid taxes on nonfiled individual income tax returns for 1992 alone
totaled more than $10 billion.  Concerned about this noncompliance,
IRS began a strategy in fiscal year 1993 to bring nonfilers into the
system and keep them there.  IRS' strategy was generally successful
in (1) reducing the size of the nonfiler inventory, (2) eliminating
unproductive cases, and (3) increasing the number of returns secured
from individual nonfilers.  However, it is unclear whether voluntary
taxpayer compliance actually improved and whether IRS' enforcement
resources were effectively managed.  We identified several areas
where opportunities existed to improve IRS' nonfiler strategy and
recommended that IRS (1) become more timely in making telephone
contact with nonfilers; (2) use lower graded staff,
paraprofessionals, and administrative staff for more of the nonfiler
work; and (3) consider revising procedures for dealing with nonfilers
who are brought into compliance and then become nonfilers again. 
(GAO/GGD-96-72)

Concerns about continued noncompliance levels led IRS to change its
tax compliance philosophy.  In addition to the use of enforcement
methods, it is researching ways to improve compliance for entire
market segments--specific groups of taxpayers that share certain
characteristics or behaviors.  IRS' goal is to increase total
compliance with the tax laws from an estimated 87 percent to 90
percent by 2001, and IRS believes its new compliance research
approach will uncover ways to help meet this goal.  We recommended
that IRS (1) develop support from its employees for the new approach
and monitor the success of its developmental effort; (2) ensure that
reliable compliance data will be available when needed; (3) set a
schedule for completion and monitor it; and (4) establish milestones
and monitoring mechanisms for the research effort and for evaluating
the effort.  (GAO/GGD-96-109)


         TAX SYSTEMS MODERNIZATION
------------------------------------------------------ Chapter 4:5.3.2

Available compliance data indicate that overstated deductions by
small businesses are a significant noncompliance area--about $40
billion annually.  Our review work showed that it was technically
feasible for IRS to use computer-matching techniques and available
information returns to identify a portion of this noncompliance.  We
recommended that IRS implement such matching techniques where tests
showed that it would be cost-effective.  We also recommended that IRS
consider actions that could be taken to expand computer matching as
part of its Tax Systems Modernization effort.  (GAO/GGD-93-133)

We reviewed IRS' plans to maximize electronic filing, which is the
cornerstone of IRS' plan to move from the traditional paper-based
return filing.  We found that (1) if electronic filing continued at
the current pace, IRS would fall far short of its goal of 80 million
electronic returns by 2001; (2) IRS was having little success in
broadening the appeal of electronic filing to those taxpayers who
file more complex returns; and (3) unless IRS can increase electronic
filing, its customer service and paper-processing workloads may
overwhelm its planned staffing and alter various aspects of its
modernization efforts.  We recommended that the Commissioner (1)
identify those groups of taxpayers who offer the greatest opportunity
to reduce IRS' paper-processing workload and operating costs if they
were to file electronically and develop strategies that focus IRS
resources on eliminating or alleviating impediments that inhibit
those groups from participating in the program, including the
impediment posed by the program's cost; (2) adopt goals for
electronic filing that focus on reducing IRS paper-processing
workload and operating costs; and (3) prepare contingency plans for
the possibility that the electronic filing program will fall short of
expectations.  (GAO/GGD-96-12)


         ACCOUNTS RECEIVABLE
         COLLECTION
------------------------------------------------------ Chapter 4:5.3.3

IRS is losing the potential to collect hundreds of millions in
overdue taxes because of shortcomings in its processes for
determining which accounts are currently collectible and which are
not.  We recommended that IRS develop information on the
characteristics of the accounts written off to determine whether
additional cost-effective collection measures can be developed and
applied.  (GAO/GGD-91-89)

We reviewed IRS' Offer-in-Compromise Program, which affords taxpayers
the opportunity to settle tax debts for less than the amount owed. 
While IRS was pleased with the results of the program, it had not
demonstrated that the program's objectives of increased collections
and improved compliance would be met.  We recommended that IRS
develop the indicators necessary to evaluate the Offer-in-Compromise
Program as a collection and compliance tool.  (GAO/GGD-94-47)

We studied private sector and state collection techniques to
determine whether IRS could improve its collection of delinquent
taxes.  We recommended, among other things, that IRS restructure its
collection program to use collection staff in earlier, more
productive phases of the collection cycle, develop detailed
information on delinquent taxpayers for customized collection
procedures, and identify ways to increase cooperation with state
governments.  (GAO/GGD-93-67)


         TAX SIMPLIFICATION
------------------------------------------------------ Chapter 4:5.3.4

Our work showed that the rules for claiming dependent exemptions were
too complex and too burdensome for many taxpayers.  We recommended
that Congress simplify the rules by substituting a residency test
similar to that used in the earned income tax credit. 
(GAO/GGD-93-60)

To determine their tax liabilities (e.g., employer portion of Social
Security taxes) and take the appropriate steps to meet the
requirements of other laws, businesses need to be able to readily
distinguish between workers who are "employees" and those who are
"independent contractors." But the IRS rules for classifying workers
are unclear and subject to conflicting interpretations.  This
situation puts employers at risk of large penalties and retroactive
tax assessments.  We recommended congressional intervention to help
clarify the rules.  (GAO/T-GGD-96-130 and GAO/GGD-92-108)

Tax simplification also involves efforts to make IRS correspondence
easier for taxpayers to understand.  In this regard, we recommended
that IRS modify its correspondence practices to (1) make certain
system improvements and (2) monitor taxpayer satisfaction with IRS
correspondence.  (GAO/GGD-94-118)


         IRS MANAGEMENT
------------------------------------------------------ Chapter 4:5.3.5

Knowing how much it costs to carry out programs and activities is
indispensable for planning and decision-making.  For example, IRS
management needs information to compare what it costs to run IRS at
various times and at locations doing similar work.  To strengthen
IRS' financial management, we recommended that IRS develop a
comprehensive cost accounting system, one that accounts for all IRS
costs and identifies the organizational components and functions to
which they relate.  (GAO/GGD-89-1)

IRS is undergoing a major effort to modernize its information systems
and restructure its organization.  This effort involves several
components, one of which IRS calls its "customer service vision,"
which seeks to improve IRS' interactions with taxpayers and fold
parts of IRS' field structure into 23 customer service centers. 
These centers would work primarily by telephone to provide taxpayer
service, take orders for tax forms, collect unpaid taxes, and adjust
taxpayer accounts.  They would absorb current IRS telephone
operations and try to convert much of IRS' written correspondence
work to the telephone.  However, a lack of clarity in management
responsibilities has, to some extent, hampered IRS in implementing
its customer service plans.  First, because the work units and
related resources that are to make up the new customer
service-organization belong to two separate IRS organizations, we
recommended that IRS clarify criteria for assigning process owners. 
Second, at lower management levels, we found instances in which
"products" were being developed for use in the customer service sites
that had no clearly designated process owners; thus, we recommended
that IRS define process owners' roles and responsibilities.  Third,
we identified two instances in which IRS officials had assumed
ownership roles for interactive telephone systems but had not carried
out their duties to establish the quality measures critical to
evaluating the systems' performance.  Thus, we recommended that IRS
emphasize the need for timely input for quality measures. 
(GAO/GGD-96-03)


         TAXPAYER SERVICE
------------------------------------------------------ Chapter 4:5.3.6

Successful implementation of IRS' one-stop service initiative is
crucial to IRS' plans for improving customer service, that is , to
reduce taxpayer burden in terms of additional time and frustration
associated with making numerous contacts with IRS to resolve a single
problem.  In August 1994, we concluded that a flawed measurement
process had led IRS to overstate its progress in providing one-stop
service and recommended that a different measurement system be
adopted.  This followed an earlier recommendation aimed at improving
taxpayer access to IRS.  We recommended that IRS develop a reliable
measure of toll-free telephone accessibility so that it can make
appropriate decisions on making services available.  (GAO/GGD-94-131
and GAO/GGD-92-132)

Three prototype interactive telephone systems--designed to reduce
correspondence between IRS and taxpayers and to make IRS more
accessible--suffer from too many menu options and other problems. 
Resolving these shortcomings is essential if IRS is to achieve its
goal of handling 45 percent of taxpayer calls by using interactive
phone systems.  IRS' telephone-routing system requires taxpayers to
remember up to eight menu options, even though the contractor
guidelines called for no more than four, and does not allow taxpayers
to return to the main menu when they make a mistake or want to
resolve other issues.  IRS has not done a cost-benefit analysis of
the use of multiple toll-free numbers, which we recommended as a
solution to the problem of too many menu options.  IRS complied with
government security requirements when developing its first three
interactive telephone systems.  However, future interactive systems
will allow taxpayers greater access to tax information, and more
secure features, such as a personal identification number, may be
needed to protect taxpayer data.  Currently there are 7 interactive
applications located in 10 customer service centers.  According to
IRS, fiscal year 1997 will provide the best overview of the role
interactive telephone systems will play and fiscal year 1998 will
provide the best data for determining how well the interactive
systems are working and what problems may still exist. 
(GAO/GGD-96-74)

See also chapter 4, Improving Justice and General Government
Programs, Information Resources Management--Internal Revenue Service
Issues and chapter 5, Financial and Information Management Programs,
Civil Audits Issue Area, and Information Resources Management Issue
Area. 



   INFORMATION RESOURCES
   MANAGEMENT--INTERNAL REVENUE
   SERVICE ISSUES (BUDGET FUNCTION
   990)
---------------------------------------------------------- Chapter 4:6

GAO Contact:  Rona B.  Stillman, 202/512-6412


      IMPACT OF GAO'S WORK
-------------------------------------------------------- Chapter 4:6.1

Over the last decade, IRS has been trying to modernize its tax
processing systems, which are used to annually collect and account
for over $1 trillion in revenue.  IRS' efforts to modernize these
systems have been largely unsuccessful.  Our work has concentrated on
identifying the causes of the agency's past modernization failures
and recommending solutions to these problems.  Our work has also
focused on strengthening security over IRS' computer resources and
facilities and its taxpayer data. 

In July 1995, we identified serious management and technical
weaknesses in the modernization program that jeopardize its
successful completion, recommended many actions to fix the problems,
and designated IRS' modernization as a high-risk area.  During this
year, we closely monitored IRS' progress in implementing these
recommendations, particularly its efforts to develop and enforce a
systems architecture, develop and enforce disciplined investment
management processes, and implement mature software development and
acquisition processes.  Through report recommendations, testimonies,
and congressional briefings, we worked to restrict IRS spending until
it fully implements these recommendations, thereby putting in place
the internal capability to effectively invest in systems. 
Additionally, this year we identified and recommended corrective
action for many weaknesses in IRS' computer security program that
place tax processing operations at risk of being disrupted and
taxpayer data being improperly used, modified, or destroyed. 

IRS has started implementing virtually all of our recommendations to
improve its modernization management and technical capability and to
strengthen computer security.  This has resulted in hundreds of
millions in cost reductions through the cancellation of poorly
managed modernization projects--initial steps in improving
modernization management and technical capabilities, greater
attention to computer security, and elimination of some computer
security weaknesses.  Each of these accomplishments is discussed
below. 


         TAX SYSTEMS MODERNIZATION
------------------------------------------------------ Chapter 4:6.1.1

Responding to our recommendations and congressional direction, the
Department of Treasury increased its management oversight of IRS'
modernization efforts.  For example, it (1) established a
Modernization Management Board as the primary review and
decision-making body for modernization and for policy and strategic
direction; (2) scaled back the overall size of the modernization by
approximately $2 billion; (3) reduced IRS' fiscal year 1997 budget
request for modernization from $850 million to $664; and (4) has
guided IRS to obtain additional contractor staff to accomplish
modernization efforts. 

During the past year, the Congress has continued to oversee the
modernization and, more specifically, Treasury's and IRS' efforts to
correct management and technical weaknesses.  In the fiscal year 1997
Omnibus Consolidated Appropriations Act, Congress directed IRS to (1)
submit by December 1, 1996, a schedule for transferring a majority of
its modernization development and deployment to contractors by July
31, 1997, and (2) establish a schedule for implementing our
recommendations by October 1, 1997.  In its conference report on the
act, Congress directed the Secretary of the Treasury to (1) provide
quarterly reports on the status of IRS' corrective actions and
modernization spending and (2) submit by May 15, 1997, a technical
architecture for the modernization that has been approved by
Treasury's Modernization Management Board.  Additionally, the Board
was directed to prepare a request for proposal by July 31, 1997, to
acquire a prime contractor to manage modernization deployment and
implementation.  Congress also reduced IRS' budget request for
modernization from $664 million to $336 million. 

Treasury and IRS have responded by continuing to take steps to
implement our recommendations and respond to congressional direction. 
For example, IRS hired a new Chief Information Officer.  It also
created an investment review board to select, control, and evaluate
its information technology investments.  Thus far, the board has
reevaluated and terminated selected major modernization development
projects, such as the Document Processing System, avoiding the costs
of over a billion dollars.  Additionally, IRS provided a report to
Congress that set forth IRS' strategic plan and schedule for shifting
modernization development and deployment to contractors. 

Further, IRS prepared a schedule for implementing our recommendations
and provided it to Congress.  In May 1997, IRS issued levels one and
two of its four-level "Modernization Blueprint."

IRS initiated or continued to work on other actions we recommended to
strengthen tax systems modernization management.  For example, it is
finalizing a comprehensive strategy to maximize electronic filing
that is scheduled for completion in late 1997.  It is also updating
its system development life cycle methodology and is working across
various IRS organizations to define disciplined processes for
software requirements management, quality assurance, configuration
management, and project planning and tracking. 

In our testimonies before the Congress during this year, we reported
that although we recognize that IRS has initiated a number of actions
and is making some progress in correcting its management and
technical weaknesses, IRS has not yet fully implemented any of our
recommendations, and we remain concerned because a great deal remains
to be done to fully implement essential improvements. 

Furthermore, despite persisting weaknesses in both software
development and acquisition capabilities, IRS continues to request
hundreds of millions of dollars for systems modernization efforts. 
Specifically, in its fiscal year 1998 budget request, IRS is seeking
$131 million for system development initiatives.  However, the
request does not include a credible, verifiable justification and
states that IRS does not know how it plans to spend these funds
because its modernization architecture and deployment plan have not
yet been completed.  In addition, the Administration is proposing to
establish an Information Technology Investments Account to fund
future modernization investments at IRS.  It is seeking $500 million
in each of the next two fiscal years ($1 billion in total) for
ï¿½yet-to-be-specifiedï¿½ modernization efforts.  This request is also
not based on analytical data or derived using formal cost estimating
techniques.  Accordingly, we recommended that the Congress consider
not funding either the $131 million request for system development or
the $1 billion capital account until the management and technical
weaknesses in IRS' modernization program are resolved and
justifications completed. 


         COMPUTER SECURITY
------------------------------------------------------ Chapter 4:6.1.2

IRS has also taken steps to address many serious computer security
weaknesses, including the continued browsing of electronic taxpayer
records by IRS employees.  For example, in response to our
recommendations, IRS (1) appointed a single official to be
responsible for computer security agencywide, (2) developed an action
plan to correct all weaknesses and corrected some weaknesses at some
facilities, and (3) reported to the Congress on an evaluation of the
adequacy of IRS' current management approach to computer security. 


      HIGH-RISK AREA
-------------------------------------------------------- Chapter 4:6.2

We have designated IRS Tax System Modernization as a high-risk area.


         TAX SYSTEMS MODERNIZATION
------------------------------------------------------ Chapter 4:6.2.1

In 1995, we added IRS' modernization to our high-risk list.  Since
then, IRS and Treasury have together taken steps, some of which are
described above, to implement our recommendations.  However, none of
our recommendations have been fully implemented and much remains to
be done to fully implement essential improvements.  Increasing the
use of contractors, for example, will not automatically increase the
likelihood of successful modernization because IRS does not have the
technical capability needed to manage all of its current contractors. 
As a case in point, IRS' Cyberfile--a system development effort led
by contractors to enable taxpayers to personally prepare and file
their tax returns electronically--exhibited many undisciplined
software acquisition practices as well as inadequate financial and
management controls.  Eventually, IRS canceled the Cyberfile project
after spending over $17 million and without fielding any of the
system's promised capabilities.  Therefore, if IRS is to use
additional contractors effectively, it will have to first strengthen
and improve its ability to manage those contractors.  Likewise, until
disciplined systems life cycle processes are defined and implemented
throughout IRS, and all systems life cycle products (including the
architecture) are completed and validated, IRS will not be ready to
begin developing or acquiring information systems. 

IRS needs to continue to make concerted, sustained efforts to fully
implement our recommendations and respond to congressional direction. 
It will take both management commitment and technical discipline for
IRS to do this effectively.  Accordingly, we plan to continue
assessing IRS' progress in its critical endeavor to modernize. 


      KEY OPEN RECOMMENDATIONS
-------------------------------------------------------- Chapter 4:6.3

Our work on Tax Systems Modernization identified pervasive management
and technical weaknesses with IRS' approach to managing its
modernization.  It also highlighted that IRS does not have
disciplined software acquisition practices and requisite financial
and management controls to effectively manage all of its contractors. 

Our work on computer security found many serious weaknesses remain
uncorrected, leading us to conclude that IRS' current approach to
computer security is ineffective.  To address these problems, we made
a series of specific recommendations aimed at correcting key
modernization management and technical weaknesses and strengthening
the effectiveness of IRS' management of computer security. 

  -- Our report on IRS' modernization weaknesses recommended that IRS
     (1) formulate a comprehensive business strategy for maximizing
     electronic filings; (2) improve IRS' strategic information
     management by implementing a process for selecting,
     prioritizing, controlling, and evaluating the progress and
     performance of all major information systems investments, (3)
     implement disciplined, consistent procedures for software
     requirements management, quality assurance, configuration
     management, and project planning and tracking, and (4) complete
     and enforce an integrated systems architecture, including
     security and data subarchitectures.  In June and September 1996,
     we reported that although IRS had initiated actions to implement
     our recommendations, none had been fully implemented.  Over the
     past year, we have reported to the Congress that although IRS
     continues make some progress in correcting its management and
     technical weaknesses, a great deal remains to be done to fully
     implement essential improvements specified in our
     recommendations.  (GAO/AIMD-95-156 and GAO/AIMD-96-106)

  -- In our report on IRS' acquisition of its Cyberfile electronic
     filing system, we recommended, among other things, that the
     Commissioner report to congressional appropriations,
     authorization, and oversight committees on (1) the weaknesses in
     IRS' acquisition and financial management processes and controls
     that permitted Cyberfile mismanagement to occur, (2) actions to
     correct the weaknesses, and (3) IRS' plans for completing the
     project.  While IRS subsequently canceled the project, it has
     yet to report to the congressional committees as recommended. 
     An IRS official told us that IRS had prepared a report and
     submitted it to the Department of the Treasury for approval. 
     Until we can assess the report's contents, we will not know what
     steps IRS has taken to (1) correct these serious problems and
     (2) ensure that it has the disciplined processes and controls in
     place to effectively acquire and manage all of its contractors. 
     (GAO/AIMD-96-140)

  -- Our report on IRS' computer security weaknesses recommended that
     the Commissioner (1) prepare a plan for correcting all the
     weaknesses identified at the five data processing facilities
     that we visited as well as identifying and correcting security
     weaknesses at the other IRS facilities, (2) provide the plan to
     congressional appropriations, authorization, and oversight
     committees, (3) report on IRS' progress against the plan in its
     fiscal year 1999 budget submission, and (4) identify the
     computer security weaknesses we found as being material in IRS'
     Federal Managers' Financial Integrity Act report to Treasury. 
     In addition, because longstanding computer security problems
     continue to plague IRS operations, the report reiterated our
     prior recommendation that the Commissioner, through the Deputy
     Commissioner, strengthen computer security management, including
     reevaluating IRS' current approach to computer security,
     preparing plans for improvement, and reporting the results to
     the congressional committees cited above.  The report also
     recommended that the Commissioner (1) ensure that IRS completely
     and consistently monitors, records, and reports the full extent
     of electronic browsing for all systems that can be used to
     access taxpayer data and (2) report disciplinary action taken
     against employees caught browsing and include these statistics
     and an assessment of progress in eliminating browsing in IRS'
     annual budget submission.  (GAO/AIMD-97-49)

IRS is working to correct the computer security weaknesses and
implement our recommendations.  For example, IRS assigned sole
responsibility for computer security, including employee browsing, to
a single office within the Office of the Chief Information Officer. 
In addition, IRS provided to congressional committees an action plan
for correcting the weaknesses and a report containing the results of
its computer security management reevaluation.  IRS also has taken
the necessary steps to correct some of the identified weaknesses. 
Taken together, these steps represent a good start for the IRS, but a
sustained, disciplined effort will be needed to ensure that all the
remaining weaknesses are corrected in a timely fashion.  Until then,
IRS runs the risk of its tax processing operations being disrupted
and taxpayer data being improperly used, modified, or destroyed. 
(GAO/AIMD-97-49)

See also chapter 4, Improving Justice and General Government
Programs, Tax Policy and Administration Issue Area and chapter 5,
Financial and Information Management Programs, Budget Issue Area. 


FINANCIAL AND INFORMATION
MANAGEMENT PROGRAMS
============================================================ Chapter 5


   BUDGET ISSUE AREA (BUDGET
   FUNCTION 990)
---------------------------------------------------------- Chapter 5:1

GAO Contact:  Paul L.  Posner, 202/512-9573
Susan J.  Irving, 202/512-9142


      IMPACT OF GAO'S WORK
-------------------------------------------------------- Chapter 5:1.1

During fiscal year 1997, we focused on deficit reduction and
opportunities to improve the budgetary information available to
policymakers and the public.  We are the primary issue area in GAO
examining the budget and budget process of the U.S.  government.  An
important part of our mission is to make GAO's work more accessible
to and usable by those involved in the congressional budget debate. 
The following paragraphs discuss our work in various areas. 


         DEFICIT REDUCTION
------------------------------------------------------ Chapter 5:1.1.1

In the area of deficit reduction, we produced the fourth annual
report on the budgetary implications of selected GAO work.  The
report, a collaborative effort with the Congressional Budget Office
(CBO) and the Joint Committee on Taxation, provided the Congress with
147 deficit reduction options--most with associated savings
estimates--based on GAO's work. 

Also, we identified the long-term economic impact of current fiscal
policy by updating our simulations of the long-term economic impact
of the deficit and provided basic information on the composition and
size of the federal debt.  Lastly, our report on the design of
federal grants has been used by both GAO staff and outside experts
when considering the devolution of responsibilities to the states and
how grant design improvements can help scarce federal resources go
further. 


         IMPROVING BUDGETARY
         CHOICES
------------------------------------------------------ Chapter 5:1.1.2

Our work in the area of structuring, presenting, and analyzing the
budget to assist the Congress in making resource allocation decisions
was extensive.  It included studies and analysis on proposed changes
to the current budget process, budgeting for federal insurance
programs, linking accounting and budgeting to improve financial
management and budget decision-making, and ways that performance
measures might be integrated into the budget process.  We provided
information to the Chairman of the Senate Appropriations Committee on
the difficulty in tracking whether agencies were deferring needed
maintenance on plant and equipment, and we analyzed the ways agencies
successfully budget for federal capital.  We provided a compendium of
budget accounts developed to give users a convenient way to sort out
the budgetary structure of the federal government and to determine
the level of resources used for individual departments, bureaus, and
accounts.  We issued reports on federal fiscal trends over the past
24 years and on federal investment outlays.  We worked with audit
groups on the consolidated financial statement audit and on
translating financial audit findings into terms and concepts familiar
to the House and Senate budget committees. 

This past year we saw some of our previous work on budget structure
and process bear fruit in legislative proposals and changes in law. 
GAO's work assisting in the early stages of the implementation of the
Government Performance and Results Act (GPRA) has included our widely
used report comparing GPRA to earlier initiatives, as well as our
work on account structures, on the relationship of GPRA to the
appropriations process, and on program overlap and fragmentation. 

We worked closely with the Federal Management and Workforce Issues
group on several joint products dealing with management in the
federal government and on GPRA implementation.  Our previous work on
divestiture and privatization practices in other nations led to the
President's proposal in the fiscal year 1998 budget request to create
an office of privatization within the Department of the Treasury. 

In addition, we continue to work on the linkage of budgeting and
accounting concepts.  We have worked to draw road maps from financial
statement information to the budget process.  Our forthcoming report
on budgeting for insurance explores an area in which federal
commitments are under-recognized in the budget.  Several staff serve
on the Federal Accounting Standards Advisory Board (FASAB) and CFO
task forces and subgroups.  In addition, we are active participants
in discussions about the audit of the consolidated financial
statement and how to make that information most useful in debates
about fiscal and budget policy.  We also worked with the
Environmental Protection Issues group on a joint product that
assessed the process for budgeting and setting operating priorities
at the National Park Service and with the Government Business
Operations Issues group on a report on GSA's cost estimates for
obtaining office space. 

We have also worked with OMB on a range of products.  We were
involved extensively from the outset in shaping OMB's guide to
agencies on capital programming.  Our best practices examples from
our ongoing work will be folded into OMB's capital guide.  We
participated in an OMB-led task force on cost accounting and the
budget culminating in a CFO Council guide to agencies. 


      KEY OPEN RECOMMENDATIONS
-------------------------------------------------------- Chapter 5:1.2


         FEDERAL CREDIT REFORM
------------------------------------------------------ Chapter 5:1.2.1

We have issued a series of reports examining several highly technical
issues related to the implementation of the Federal Credit Reform Act
of 1990.  In our July 1994 report on coverage and compliance issues,
we stated that Government National Mortgage Association (GNMA)
guarantees were covered by the Credit Reform Act, but that GNMA had
not fully complied with the act's requirements.  We recommended that
the OMB Director require GNMA to budget for guarantees using the
issuance dates of the guarantees to determine whether their costs
should be included in the financing account or the liquidating
account.  Although the fiscal year 1998 Budget included some changes
in budgetary treatment for GNMA, it did not include a requirement
that GNMA budget for guarantees using the issuance dates.  It is
possible, however, that recent changes to the Credit Reform Act may
prompt GNMA acceptance of our recommendations.  (GAO/AIMD-94-57)

See also chapter 4, Improving Justice and General Government
Programs, Financial Institutions and Markets Issue Area. 


         TAX EXPENDITURES
------------------------------------------------------ Chapter 5:1.2.2

In a joint effort with the Tax Policy and Administration Issue Area,
we responded to a congressional request to examine the growth of tax
expenditures and alternatives for limiting their growth.  Our June
1994 report contained a recommendation to the Congress, matters for
congressional consideration, and recommendations to the OMB Director. 
We recommended that the congressional tax-writing committees explore,
within the existing framework, opportunities to exercise more
scrutiny over indirect "spending" through tax expenditures.  Although
these committees have considered revisions to various existing tax
expenditures over the years to either eliminate such expenditures or
more narrowly restrict eligibility, no specific action has been taken
on our recommendation.  (GAO/AIMD/GGD-94-122)

In this report, we also stated that should the Congress wish to
address tax expenditure efforts in the broader context of the
allocation of federal resources, it could consider further
integrating those efforts into the current budget process.  One
option would be for the Congress to consider whether it wanted to
seek a specified level of tax expenditure savings during its annual
deliberations on the congressional budget resolution.  Several
proposals for better controlling tax expenditures have been offered,
but no specific action has been taken on our recommendation. 
(GAO/AIMD/GGD-94-122)

In the same report, we made several recommendations to the OMB
Director. 

First, we recommended that the Director, in consultation with the
Secretary of the Treasury, revise the budgetary presentation of tax
expenditure information to highlight the fiscal and other
consequences associated with tax expenditures.  OMB revised its
fiscal year 1995 budget to highlight information about tax
expenditures in two respects:  (1) the budget presents estimated tax
expenditures over the 5-year budget window, as well as estimated
expenditures for the current fiscal year and actual expenditures for
the prior fiscal year, and (2) present-value estimates are reported
for tax expenditures involving deferrals and similar long-term
revenue effects.  Although OMB agreed in principle that the combined
presentation of outlays and tax expenditures within functional areas
would be helpful and is exploring the feasibility of presenting this
information on a selective basis, OMB made no significant additions
for the fiscal year 1997 budget.  The Department of the Treasury is
deferring to OMB on this recommendation.  (GAO/AIMD/GGD-94-122)

Second, we recommended that to the extent practical, OMB incorporate
tax expenditures into the annual budget review process.  OMB has
announced its intentions to begin such a process and has initiated
preliminary actions to implement joint reviews of tax expenditures
and related outlay programs as part of its annual budget review. 
(GAO/AIMD/GGD-94-122)

Third, we recommended that OMB, working with the Treasury, design and
test a basic structure for tax expenditure performance reviews before
developing the governmentwide framework GPRA requires by May 1997. 
OMB has not yet developed this framework.  We also recommended that
once the initial determinations were made, OMB, along with the
Treasury, conduct case studies of the proposed performance review
process.  This would enable OMB and the Treasury to gauge how well
the proposed framework might function.  In addition, we recommended
that once tax expenditure performance data were developed, OMB
consult with the Treasury to consider how to present tax expenditure
performance information in the budget.  OMB is scheduled to begin
action on the above recommendations according to the time frames
established in GPRA.  The Department of the Treasury is deferring to
OMB on this recommendation.  (GAO/GGD/AIMD-94-122)

See also chapter 4, Improving Justice and General Government
Programs, Tax Policy and Administration Issue Area, and Information
Resources Management--Internal Revenue Service Issues. 



   CIVIL AUDITS ISSUE AREA (BUDGET
   FUNCTION 990)
---------------------------------------------------------- Chapter 5:2

GAO Contacts:  Gary T.  Engel, 202/512-8815
Gregory D.  Kutz, 202/512-9505
Linda M.  Calbom, 202/512-8341
Robert F.  Dacey, 202/512-3317


      IMPACT OF GAO'S WORK
-------------------------------------------------------- Chapter 5:2.1

Our civil agency audit work continues to demonstrate the importance
of reliable financial information and effective systems in
strengthening accountability and improving control over the federal
government's financial resources and program activities.  The
preparation and audit of accurate and useful financial statements
depends upon the quality, usefulness, and availability of the
financial information on which they are based and, ultimately, the
adequacy of the underlying systems and related internal controls. 
Overall, progress is being made.  But much remains to be accomplished
to successfully implement the Chief Financial Officers (CFO)
Act--especially as it relates to improving systems and the quality
and accuracy of the information maintained and produced by them for
decision makers. 


         CHIEF FINANCIAL OFFICERS
         ACT OF 1990
------------------------------------------------------ Chapter 5:2.1.1

The CFO Act establishes a solid foundation for greatly needed,
comprehensive reform of federal financial management.  Since its
enactment in 1990 and the enactment of the Government Management
Reform Act of 1994, financial statement preparation and audit
coverage have significantly increased.  The Government Management
Reform Act expanded the CFO Act's requirements by requiring that,
beginning with fiscal year 1996, financial statements be prepared on
an organization-wide basis, i.e., cover all of an agency's programs
and activities.  However, most of the agencies did not receive
unqualified audit opinions on their fiscal year 1996 financial
statements. 

Our experience has shown that preparation and audit of annual
financial statements incrementally improves the reliability of
financial information.  Also such recurring audits are providing a
more complete view of agencies' financial conditions, highlighting
control weaknesses and high-risk areas that need to be resolved, and
identifying actual and potential savings.  In fiscal year 1997, we
continued our work with OMB and with agency CFOs and IGs in
connection with the audits of the agencywide financial statements and
our first audit of the Federal Government's consolidated financial
statements. 


         OTHER FINANCIAL
         MANAGEMENT IMPROVEMENTS
------------------------------------------------------ Chapter 5:2.1.2

Our audits at civil agencies over the past several years continue to
result in significant financial management improvements.  We assessed
the effectiveness of agency efforts to implement CFO Act
requirements.  Through this effort, we were able to work
collaboratively with agency management and Inspectors General in
identifying problems and potential solutions as agencies continue to
work to meet the audit and reporting requirements of the CFO Act and
the Government Management Reform Act. 

Agencies have long had problems in managing credit programs and
collecting tax and nontax debt.  As of September 30, 1996,
governmentwide delinquent debt reached $51 billion.  In our June 1997
report on debt collection, we noted that better data and key analyses
are crucial aspects of federal efforts to measure success in
accomplishing the charter for a more business-like credit management
environment as set out by the Debt Collection Improvement Act of
1996.  Such data is central to effective day-to-day management in
terms of selecting collection strategies and deploying available
staff and contract resources.  We have recommended that Treasury, in
conjunction with major credit agencies and OMB, revise the framework
and data requirements for agency reporting on debt collection to
ensure that reports to the Congress offer an evaluation of agency use
of individual collection tools and highlight any significant backlogs
in collection activity meriting administrative or legislative
consideration. 

For the first time IRS received a qualified opinion on its fiscal
year 1996 Statement of Administrative Financial Position.  In our
report on IRS' 1996 Administrative financial statements, we noted
that progress has been made and actions are underway by IRS to try to
resolve the material weaknesses in internal controls and financial
management problems reported in our prior year audits.  For example,
IRS' inadequate procedures for reconciling its Fund Balance with
Treasury accounts resulted in years of accumulated unreconciled
amounts that were not regularly researched and were difficult to
resolve when the amounts were required to be audited.  Over the past
3 years, IRS has implemented procedures for reconciling and reducing
these significant unreconciled amounts.  At the completion of our
fiscal year 1996 audit, IRS had reconciled its September 30, 1996,
Fund Balance with Treasury accounts. 

Federal agencies use the OMB credit subsidy model to calculate the
subsidy cost of direct loan and loan guarantee programs for budget
and financial reporting purposes.  With outstanding direct loan and
guaranteed loan balances for federal credit programs approaching a
reported $1 trillion, accountants, auditors, and budget analysts need
to have assurance that the OMB model calculates a reliable subsidy
cost and is maintained and operated under a system of adequate
controls.  As a result of our work with the OMB credit subsidy model,
certain issues surfaced relating to the use of the OMB model that
need to be addressed as part of the financial statement audits of
user agencies.  With assistance from the Federal Audit Executive
Council, credit agencies' inspectors general, representatives of the
Governmentwide Credit Reform Subgroup, and OMB, we prepared a list of
supplemental audit procedures to help provide assurance that federal
credit agencies are using the model properly.  These audit procedures
were sent to all credit agencies' inspectors general. 

The monthly process used by federal departments and agencies, and
Treasury in reconciling the Fund Balances with Treasury accounts is a
primary control over federal receipts and disbursements.  With
disbursements and receipts each amounting to over $1 trillion
annually, accountants and auditors need to have assurance that this
reconciliation process is operating effectively.  Based on our work
on the overall reconciliation process and with the assistance of the
Federal Audit Executive Council, we issued correspondence to the
Inspectors General and Chief Financial Officers of the 24 agencies
covered under the Chief Financial Officers Act.  This correspondence
(1) provided information on key Treasury and agency processes and
procedures for reconciliations of Fund Balance with Treasury accounts
and alerted the IGs to concerns and certain issues related to these
reconciliations that emerged during our work, and (2) provided
guidance and suggested audit procedures for Fund Balances with
Treasury accounts to assist the IGs in developing audit plans for
their audits of fiscal year 1997 financial statements. 


      HIGH-RISK AREAS
-------------------------------------------------------- Chapter 5:2.2

During the past year, we focused on two high risk areas--Customs
financial management and IRS financial management.  Congress has
shown significant interest in both areas in 1997. 


         CUSTOMS FINANCIAL
         MANAGEMENT
------------------------------------------------------ Chapter 5:2.2.1

Customs continues to address significant weaknesses in its financial
management and internal control systems.  These actions include, for
example, statistically sampling compliance of commercial importations
through ports of entry to better focus enforcement efforts and to
project and report lost duties, taxes, and fees due to noncompliance. 
Customs also developed a methodology to estimate and disclose the
liability for future claims for drawback payments and other refunds. 
In addition, meaningful steps toward correcting its computer access
problems were taken.  Further, Customs reorganized its Office of
Finance and established financial advisor positions in key
organizational units to more effectively meet financial management
responsibilities. 

Although these actions have resulted in substantial progress, Customs
still has not fully corrected problems in these areas, which continue
to be identified during audits of Customs' financial statements under
the CFO Act.  These problems continue to hinder Customs' ability to
reasonably ensure that duties, taxes, and fees on imports are
properly assessed and collected and refunds of such amounts are
valid; sensitive data maintained in its automated systems, such as
critical information used to monitor Customs' law enforcement
operations, are adequately protected from unauthorized access and
modification; and core financial systems capture all activities that
occurred during the year and provide reliable information for
management to use in controlling operations. 

We have made several recommendations to Customs in an effort to
promote better financial management and strengthen its controls. 
Although actions have been initiated on all key open recommendations
and improvements continue, recommendations deemed critical to
improving the assessment and collection of revenue, strengthening
automated systems security, and integrating core financial systems
remain open.  We realize that most of these problems require
long-term efforts to effectively plan and implement solutions to
address the long-standing root causes.  (GAO/AIMD-94-119 and
GAO/HR-97-30)


         IRS FINANCIAL MANAGEMENT
------------------------------------------------------ Chapter 5:2.2.2

IRS has made progress in addressing its financial management problems
and has developed an action plan, with specific timetables and
deliverables, to address the issues our financial statement audits
have identified.  For example, as noted above, IRS has identified
substantially all of the reconciling items for its Fund Balance with
Treasury accounts.  Additionally, it has begun designing both a
short-term and a long-term strategy to fix the problems that
contribute to its nonpayroll expenses being unsupported or reported
in the wrong period.  Further, in the revenue accounting area, IRS
has designed an interim approach to capture the detailed support for
revenue and accounts receivable until longer-term solutions can be
identified and implemented.  The issues with IRS' revenue accounting
operations are complex, and the remedies needed are multifaceted and
encompass organizational, managerial, technological, and procedural
improvements.  IRS' revenue accounting problems are complicated by
automated data processing systems that were implemented many years
ago and thus not designed to support the financial reporting
requirements ushered in by the CFO Act.  IRS is working on a
long-term systems improvement plan that would ultimately result in
software, hardware, and procedural changes needed to create reliable
subsidiary accounts receivable and revenue records that are fully
integrated with the general ledger. 

Over the past 4 years, we have made 59 recommendations to improve
IRS' financial management systems and reporting.  IRS has completed
action on several of these recommendations and has efforts under way
to address almost all of the remaining areas.  (GAO/T-AIMD-97-34 and
GAO/HR-97-2)


      KEY OPEN RECOMMENDATIONS
-------------------------------------------------------- Chapter 5:2.3


         AGENCY-SPECIFIC
         RECOMMENDATIONS
------------------------------------------------------ Chapter 5:2.3.1

We continue to make agency-specific recommendations to correct
problems involving fundamental accounting procedures, including
serious internal control and accounting system weaknesses.  The
following recommendations deserve priority attention.  Major
improvements are needed to restore integrity to the federal
government's financial management operations.  Key elements of
successful federal financial management reform are high-quality
leadership; an effective CFO organizational structure; effective
long-range planning; and preparation of meaningful and auditable
component level, agencywide, and governmentwide financial statements. 
Though agencies have made some progress in these areas, substantive
and lasting improvement will depend on prompt action needed to
implement our recommendations and to meet the requirements of the CFO
Act. 


         BUREAU OF INDIAN AFFAIRS
------------------------------------------------------ Chapter 5:2.3.2

Our work at the Department of the Interior's Office of the Special
Trustee for American Indians and its Bureau of Indian Affairs showed
continuing trust fund management problems, and the need for the
Secretary to (1) adequately report to the Senate Committee on Indian
Affairs and the House Committee on Resources on the tribes that
accept or dispute their reconciled account balances, and the
Secretary's plan for resolving disputes, (2) implement trust fund
management subsidiary systems, and (3) provide additional information
to support proposals in the Special Trustee's strategic plan for
Indian trust funds management improvements.  (GAO/T-AIMD-95-94 and
GAO/T-AIMD-97-138)


         OMB SUBSIDY CREDIT MODEL
------------------------------------------------------ Chapter 5:2.3.3

Our review of OMB's credit subsidy model resulted in the following
recommendations for improving the model's reliability and controls: 
(1) revise the model's discounting equations to follow standard
finance theory; (2) implement a structured software development
methodology to ensure the production of quality, reliable, software;
(3) improve documentation; (4) enhance the model's printed output to
provide an audit trail showing which data the model used to calculate
the subsidy cost; and (5) provide credit agencies with guidance to
establish logical access controls surrounding use of the model.  OMB
has indicated that it plans to take actions consistent with our
recommendations when it develops a new model that is tentatively
expected to be completed in mid-1998.  (GAO/AIMD-97-145)


         FEDERAL FAMILY EDUCATION
         LOAN PROGRAM
------------------------------------------------------ Chapter 5:2.3.4

Financial audits continue to identify significant issues related to
determining the Federal Family Education Loan Program's costs,
effectively monitoring payments to guaranty agencies and lenders, and
ensuring accurate financial reporting.  Because the Department of
Education has begun corrective actions in these areas and has
demonstrated a commitment to resolving financial management problems,
we believe the Department is making progress.  However, because
guaranty agencies and lenders have a crucial role in the
implementation and ultimate cost of this education loan program, the
Department should complete steps underway for improving oversight of
guaranty agencies and lenders.  The Department of Education has
issued revised audit guidance for its lenders, lender servicers and
guaranty agencies which requires their independent auditors to
perform procedures to report on the integrity of billings.  However,
to use this guidance as an effective monitoring tool for the guaranty
agencies, the Department needs to monitor the receipt of audit
reports and follow-up on audit findings in a timely manner. 
Furthermore, the Department needs to continue its plans for (1)
revising the role of guaranty agencies and the manner in which they
are compensated, (2) establishing and maintaining subsidiary ledgers
for the Federal Family Education Loan Program, and (3) finalizing
reasonability edits and analyzing variances between the Department of
Education's Federal Family Education Loan Program subsystems and
lenders' billing data.  (GAO/AIMD-96-22). 


         DISTRICT OF COLUMBIA
------------------------------------------------------ Chapter 5:2.3.5

Our work at the District of Columbia has shown that little progress
has been made to improve its financial condition, its health care, or
its prison system.  We identified structural issues relating to the
District's limitation on significantly increasing its revenue at the
District and federal level.  Congress recently addressed these issues
in the Balanced Budget Act of 1997 which provided financial relief to
the District.  The legislation (1) transferred the responsibility for
the $4.8 billion unfunded pension liability to the federal government
(2) reduced the District's non-federal share of medicaid expenditures
from 100 percent to 30 percent resulting in a $273 million savings
based on the 1997 budget submission, and (3) transferred certain
responsibilities for the prison system to the federal government. 
Our work also shows continuing financial and management problems and
the need to (1) clean up existing data in financial systems and place
special emphasis on ensuring that basic accounting policies and
procedures are followed, and (2) establish a process of
accountability for implementation of management initiatives. 
(GAO/T-AIMD-96-126 and GAO/T-AIMD-95-176)



   CORPORATE AUDITS AND STANDARDS
   ISSUE AREA (BUDGET FUNCTION
   990)
---------------------------------------------------------- Chapter 5:3

GAO Contact:  Robert W.  Gramling, 202/512-9406


      IMPACT OF GAO'S WORK
-------------------------------------------------------- Chapter 5:3.1

The issue area includes accounting and auditing standard setting in
both the public and private sectors.  The issue area also includes
audit work at largely independent government agencies referred to as
government corporations and mandated assistance related to
legislative entities. 


         ACCOUNTING AND AUDITING
         STANDARDS
------------------------------------------------------ Chapter 5:3.1.1

In cooperation with OMB and the Department of the Treasury, GAO sets
accounting standards for the federal government based on standards
recommended by the Federal Accounting Standards Advisory Board
(FASAB).  GAO also establishes audit standards for audits of
government organizations, programs, activities, functions, and
assistance. 

We have continued to focus on evaluating whether generally accepted
accounting principles and auditing standards provide an adequate
basis for fairly and consistently reporting financial condition and
operating performance.  As a member of FASAB, we provided leadership
in developing the recently completed accounting standards to
facilitate consistent and reliable agency financial reporting as
envisioned by the Chief Financial Officers Act of 1990 (CFO Act). 
These standards have provided a unique financial reporting model and
"core" standards to guide federal agencies in accounting and
financial reporting on many of the major categories of items under
their cognizance.  They are designed to provide information on the
federal government's financial condition, as well as on the cost of
its programs and related exposures to high risk.  Moreover, the new
standards that have resulted from FASAB's work are central to
effectively meeting the CFO Act's financial management goals.  We
were also instrumental in developing an improved reporting model that
focuses users on an entity's costs of programs and the relationship
of those costs to its budgetary obligations.  We have continually
provided technical assistance on the application of FASAB accounting
standards.  GAO also works with the Financial Accounting Standards
Board (FASB), the Government Accounting Standards Board (GASB) for
state and local governmental entities, the American Institute of
Certified Public Accountants (AICPA), the International Federation of
Accountants (IFA), and others to provide input to accounting and
auditing standards established for the private sector and state and
local governments. 

Over the past year we have also conducted a variety of activities to
increase the understanding of Government Auditing Standards, to help
ensure the consistent application of these standards, and to broaden
the acceptance of the standards by the auditing community.  For
example, GAO staff have provided technical assistance in response to
frequent telephone inquiries, made numerous speeches at major
conferences, provided technical training throughout the government
auditing community, and explained the standards in several
videotapes, which have been viewed by thousands of auditors. 

We have also reinstituted the Advisory Council on Government Auditing
Standards to advise the Comptroller General on revisions to
Government Auditing Standards.  The Council met twice during fiscal
year 1997.  Results of the meetings include (1) a revised approach to
issuing auditing standards which should result in issuing standards
more timely, (2) agreement to issue other product lines in addition
to the standards, such as interpretive guidance and a question and
answer forum on the INTERNET to provide answers to frequently asked
questions concerning government auditing standards and Single Audit
Act audit requirements, and (3) the identification of several audit
issues that may necessitate revisions to the auditing standards. 

We also worked with OMB over the past year to develop audit
requirements for the annual financial statement audits required by
the CFO Act for the government's 24 major agencies, the Federal
Financial Managers Improvement Act of 1996 (FFMIA), and the Single
Audit Act Amendments of 1996. 

Regarding the CFO Act, we issued the CFO Act Checklist in 1995 to
assist agencies and auditors in complying with the requirements of
accounting standards when preparing financial reports mandated by the
Act.  We are revising the checklist to incorporate the requirements
of several standards issued after 1995, and will release the revised
checklist for comment in December 1997.  Regarding the FFMIA, we have
prepared a detailed checklist (similar to the CFO Act Checklist) to
assist agencies and auditors in complying with the systems
requirements of the Act.  The checklist is out for comment. 
Regarding the Single Audit Act amendments, we have worked closely
with OMB to make the necessary revisions to OMB Circular A-133 and
the related Compliance Supplement, and are currently working with the
AICPA and OMB to issue guidance for auditing federal awards. 

GAO's Policy and Procedures Manual For Guidance of Federal Agencies
provides accounting and internal control standards and guidelines for
executive agencies to follow.  GAO provides interpretations and
explanations of the standards and guidelines to assist agencies in
operating effective systems and reporting reliable information.  As a
result of (1) the National Performance Review's effort to create
better government at less cost, (2) the downsizing taking place, and
(3) the ability of technology (computer systems) to automate
traditional manual controls, a number of agencies have sought GAO's
approval to implement compensating controls involving interpretations
of GAO's fiscal and internal control standards.  We have worked
effectively with the agencies to streamline operations in their
payments processing, document retention, and travel voucher
processing resulting in estimated cost reductions of over $7 million. 
We have also revised the portion of the manual covering reporting
standards to reflect the issuance of Volume I of the codification of
the new federal accounting standards.  This revision should assist
the CFO, IG, and accounting/auditing community by providing one
document containing all federal accounting standards.  GAO is also
revising the internal control standards (Appendix II of Title 2)
which will be released for comment. 

In response to our 1996 report on the accounting profession that
discussed concerns over auditor independence, the Securities and
Exchange Commission and the AICPA jointly created the Independence
Standards Board.  The Board, which is responsible for setting
improved independence standards for auditors of public companies, is
expected to provide solutions to challenges facing auditing firms
that pursue new service areas and form new, complex business and
professional relations. 


         GOVERNMENT CORPORATIONS
------------------------------------------------------ Chapter 5:3.1.2

Government corporations conduct a variety of missions that are an
integral part of the nation's economy, such as deposit insurance;
buying and selling mortgages, loans, and other forms of credit for
housing and other national purposes; transportation; and utilities. 
Regarding the nation's financial industries, trillions of dollars of
support are provided in the form of guarantees and insurance. 

We have focused our efforts on the government corporations with
significant exposure presented by the government's deposit insurance
guarantee.  For the past several years, financial institutions have
been reporting record profits.  This financial performance
contributed to the health of the two insurance funds administered by
the Federal Deposit Insurance Corporation (FDIC), as relatively few
institution failures occurred over the past several years.  However,
billions of dollars in assets from past failed institutions still
remain that need to be managed and disposed of. 

In March 1995, we reported to the Congress that FDIC, and ultimately
the taxpayers, were facing significant exposure from problems
remaining from the thrift industry crisis.  In September 1996, in
response to issues raised in our report which contained a range of
policy options to address this exposure, the Congress passed the
Deposit Insurance Funds Act of 1996 which authorized FDIC to charge a
special assessment on assessable deposits of the Savings Association
Insurance Fund.  The special assessment resulted in a net inflow of
$4.5 billion and fully capitalized the insurance fund. 

In response to issues identified through our audits, FDIC has made
several significant improvements in key processes and systems
affecting its accounting and financial reporting for the deposit
insurance program and the continued liquidation activities for failed
thrifts.  FDIC has improved its process for estimating the recoveries
from assets from failed institutions, thus improving the information
used to record key estimates in the financial statements.  FDIC has
also improved its time and attendance reporting process, resulting in
improved accounting for expenses.  FDIC also took actions to improve
weaknesses we identified in its electronic data processing controls. 

Our financial audit of FDIC for fiscal year 1996 resulted in an
unqualified (clean) opinion on each of FDIC's three funds'--the Bank
Insurance Fund, the Savings Association Insurance Fund, and the
Federal Savings and Loan Insurance Corporation Resolution
Fund--financial statements.  However, our audits identified needed
improvements in internal controls over (1) the integrity of
information used to calculate the allowance for losses on receivables
from resolution activities and investment in corporate-owned assets,
and (2) FDIC's oversight of asset servicers contracted to manage and
dispose of failed financial institution assets.  We are currently
working closely with FDIC in its development of action plans to
address the above weaknesses. 

To address our recommendations to the Federal Reserve Board
concerning the quality of bank examinations and inspections of bank
holding companies, the Board developed internal control review
procedures and inspection procedures that are based on a risk
assessment of controls and bank activities.  The Board also developed
documentation and supervisory review procedures. 

We audited the Panama Canal Commission's financial statements to
assist the Congress in monitoring the Commission's financial progress
in being able to meet its obligations by the year 2000 when the Canal
is turned over to the Panamanian government.  In addition to the
general purpose financial statements, we reported on the Commission's
financial viability to meet its financial liabilities on December 31,
1999, and that the Commission's liability for severance pay could
greatly increase from $10 million to as much as $68 million if a
proposed rule to amend the severance pay regulations is not issued by
the Office of Personnel Management.  During the past year, the
Commission acted on our recommendations to improve its methodology
for estimating post retirement medical care costs.  The Commission's
previous methodology had underestimated the cost by about $1 million. 
Also, the Commission corrected an error we identified in its process
for calculating interest payments to the U.  S.  Treasury on the
government's investment.  This resulted in the U.  S.  Treasury
receiving about $213,000 additional interest from the Commission. 


         LEGISLATIVE BRANCH
         ENTITIES
------------------------------------------------------ Chapter 5:3.1.3

We continued to work with the Congress and legislative entities to
provide timely and effective audit and other assistance and to
encourage consideration of annual financial audits for legislative
entities similar to those being conducted for the executive branch
under the CFO Act.  Specifically, our audit and assistance efforts
have included financial audits of the Congressional Award Foundation,
Capitol Preservation Fund, and the Senate Restaurants; review and
related procedures related to the House Interparliamentary Groups and
Committee on House Oversight financial reports; and advice and/or
other assistance to the Secretary of the Senate and Senate Sergeant
at Arms.  We provided the Congress and the management for the
legislative entities with valuable assurance on the reliability and
accuracy of their financial information and reports and made
recommendations designed to strengthen financial operations and
controls and to improve the usefulness of financial information and
reports. 

We are monitoring the Library of Congress' efforts to address
internal control and system-related weaknesses identified previously
in the audit of the Library's fiscal year 1995 financial statements. 
Although the Library has made considerable progress, several of the
problem areas, such as conducting risk assessments of its
collections, require long-term efforts. 


      KEY OPEN RECOMMENDATIONS
-------------------------------------------------------- Chapter 5:3.2


         FDIC'S INTERNAL CONTROLS
------------------------------------------------------ Chapter 5:3.2.1

In our 1996 financial audits of FDIC's three funds, we found that the
corporation continued to make progress in addressing internal control
weaknesses identified during our previous financial audits.  However,
while much progress has been made, FDIC continues to face internal
control weaknesses relating to the integrity of information used to
calculate the allowance for losses on receivables from resolution
activities and the oversight of asset servicers contracted to manage
and dispose of failed financial institution assets.  FDIC is
addressing these internal control issues.  We agree with the
Corporation's planned corrective actions and will monitor its
progress.  (GAO/AIMD-95-102 and GAO/AIMD-97-111)


         BANK EXAMINATIONS
------------------------------------------------------ Chapter 5:3.2.2

Our 1993 report on the quality of bank examinations performed by the
Office of the Comptroller of the Currency contains a recommendation
concerning sampling methodologies.  In response to our
recommendation, the Office of the Comptroller of the Currency is
revising the statistical section of its examiner handbook, and plans
to issue the revision by the end of 1997.  We will monitor the Office
of the Comptroller of the Currency's progress in addressing our
recommendation.  (GAO/AFMD-93-13)

See also chapter 4, Improving Justice and General Government
Programs, Financial Institutions and Markets Issue Area. 


         LIBRARY OF CONGRESS'
         INTERNAL CONTROLS AND
         COLLECTIONS SECURITY
------------------------------------------------------ Chapter 5:3.2.3

The audit of the Library's fiscal year 1996 financial statements,
conducted by a CPA firm under the direction of the Library's IG,
confirmed the Library's progress in improving financial management
and in implementing recommendations made as part of the audit of the
Library's fiscal year 1995 financial statements.  However, the 1996
audit noted that more needs to be done to strengthen accounting and
security controls, including conducting a comprehensive risk
assessment for the Library's collections and developing a security
plan to safeguard its collections.  We will monitor the Library's
efforts to respond to the recommendations made as part of the fiscal
year 1995 audit.  (GAO/T-GGD/AIMD-96-115)



   DEFENSE FINANCIAL AUDIT ISSUE
   AREA (BUDGET FUNCTION 990)
---------------------------------------------------------- Chapter 5:4

GAO Contact:  Lisa G.  Jacobson, 202/512-9542


      IMPACT OF GAO'S WORK
-------------------------------------------------------- Chapter 5:4.1

Long-standing, serious weaknesses in DOD's financial operations
continue not only to severely limit the reliability of its financial
information, but also have resulted in wasted resources, and
undermined the Department's ability to carry out its stewardship
responsibilities.  While DOD prepared its first set of DOD-wide
financial statements for fiscal year 1996, they were unauditable. 
Nonetheless, the effort to produce and attempt to audit these
statements has generated increased pressure on DOD to fix its serious
financial problems.  As envisioned by the Chief Financial Officers
Act of 1990, and expanded by the Government Management Reform Act of
1994, audited financial statement will provide an annual public
scorecard to measure DOD's other agencies' progress in resolving
financial management deficiencies. 

Effectively addressing DOD's widespread and severe financial
management problems is critical to effectively managing the
Department's vast resources. 

DOD is responsible for over $1 trillion in assets, 3 million military
and civilian personnel, and a budget of an estimated $250 billion for
fiscal year 1997.  We now have a multi-faceted audit approach that
focuses on identifying (1) opportunities to improve DOD's ability to
comply with current and upcoming financial statement preparation and
audit requirements and (2) actions needed to address the fundamental
problems contributing to the Department's inability to produce
reliable financial information.  We are also continuing to work with
the Inspectors General at the Department of State, AID, and NASA to
ensure that financial audit work at these agencies is sufficient,
reliable, and conducted in accordance with applicable standards. 

This audit approach focuses on promoting more efficient and
cost-effective program operations, as well as on strengthening
accountability.  Our efforts this past year have gone a long way in
contributing to this objective.  Many of our key recommendations, as
outlined in the following section, are intended to help the Congress,
as well as top DOD and other cognizant agencies' officials, to better
understand the full extent and nature of the financial management
challenges confronting them. 

Examples of our contributions this past year include: 

  -- developing an approach for conducting the first world-wide
     verification of DOD's estimated multi-billion dollar investment
     in mission assets;

  -- improved controls over the DOD system used to process payments
     to hundreds of thousands of DOD civilian employees;

  -- correction of errors and related improvements in the overall
     reliability of the system used to track the Air Force's billions
     of dollars invested in aircraft and missiles; and

  -- improvements in NASA's ability to effectively carry out its cost
     accounting and property accountability responsibilities. 


      HIGH-RISK AREA
-------------------------------------------------------- Chapter 5:4.2

In February 1995, we designated DOD's financial management operations
as a high-risk area. 


         DOD'S FINANCIAL
         MANAGEMENT
------------------------------------------------------ Chapter 5:4.2.1

We characterized DOD's financial operations as "one of the worst in
government and the product of many years of neglect".  Since 1990, we
and DOD auditors have made over 400 recommendations to correct DOD's
most pressing financial management weaknesses. 

In our February 1997 high-risk series, we reported that the past few
years have been marked by DOD leadership's recognition of the
importance of tackling the broad range of problems in this area. 
However, we added that DOD had a long way to go to meet the
challenges of managing its vast and complex operations with the
business-like efficiency demanded by the Congress and the American
public.  DOD has a number of reform initiatives underway that are
intended to address its financial management deficiencies.  If its
envisioned financial management reforms are to realize meaningful
financial management improvements, they must address challenging
problems in six critical areas--systems, cost accounting,
disbursements, personnel, internal controls, and business processes. 
It will take a focused, sustained effort for DOD to fully resolve
these fundamental deficiencies. 


      KEY OPEN RECOMMENDATIONS
-------------------------------------------------------- Chapter 5:4.3

The following are among our most important recommendations that have
yet to be fully implemented.


         DOD-WIDE PROGRAMS
------------------------------------------------------ Chapter 5:4.3.1

In January 1997, we reported that DOD does not have a complete
inventory of the systems it uses to record, accumulate, classify, and
report financial information.  An accurate inventory is a critical
first step if DOD is to develop reliable financial management systems
and resolve its long-standing financial management problems. 
(GAO/AIMD-97-29)

According to DOD, its disbursement transactions paid at one location,
but accounted for at another location--commonly referred to as
Transactions-by-Others--have been the costliest, most time-consuming,
complicated, and error-prone segment of its disbursement accounting
operations.  In March 1997, we reported on key issues that limited
DOD's ability to effectively and promptly achieve its goal of
improving processing for Transactions-by-Others.  We recommended that
DOD develop more comprehensive information on the causes of problems
and ensure that resources dedicated to addressing those problems are
properly prioritized.  (GAO/AIMD-97-45)

In September 1997, we reported that the system DOD selected to
account for its multi-billion dollar investment in real and personal
property, as designed, did not provide the information needed to meet
new federal accounting requirements.  We recommended a number of
actions to improve DOD's ability to achieve its desired goal of
financial control and accountability over its general property,
plant, and equipment by the year 2000.  Specifically, we recommended
that DOD take a number of actions, including:  (1) develop a concept
of operations for the property function, (2) develop a detailed
implementation plan, and (3) expand the system functionality to
ensure that it can meet both current and pending federal accounting
requirements.  (GAO/AIMD-97-150)

In September 1997, we identified significant control deficiencies
concerning the actuarial process and in the general controls over the
electronic data processing support operations for the DOD Military
Retirement Trust Fund.  This Fund is used to finance an estimated
$548 billion DOD liability for military retirement and survivor
benefits.  We recommended a number of actions to address weaknesses
in the Fund's actuarial process and electronic data processing
general controls.  (GAO/AIMD-97-128)

In November 1995, we testified that given the serious and pervasive
nature of DOD's financial management problems, and the need for more
immediate progress, DOD needed to consider additional steps to fix
its longstanding weaknesses.  Specifically, we reported that to turn
the Secretary's "Blueprint" for reforming the department's financial
management into substantive improvements, DOD should (1) assess the
number and skill levels of its financial management workforce, and
(2) establish an outside board of experts to provide counsel,
oversight, and perspective to its reform efforts.  (GAO/T-AIMD-96-1)


         ARMY PROGRAMS
------------------------------------------------------ Chapter 5:4.3.2

In December 1993, we reported that the Army's budget execution system
had fundamental weaknesses that limited the Army's ability to ensure
its compliance with the Antideficiency Act.  The report also pointed
out that inaccurate reporting could cause the Army to underestimate
its future required outlays.  In addition, we reported that the lack
of sustained DOD leadership had impaired Army's ability to strengthen
financial accountability.  We recommended that the DOD Chief
Financial Officer (1) evaluate and resolve budget execution and
disbursement problems, (2) implement existing security access
policies and automated data processing contingency plans, and (3)
develop and implement a comprehensive plan, with specific milestones,
for identifying and monitoring improvements in DOD and Army financial
management, including personnel qualifications, organizational
structures, and systems used to carry out Army financial management. 
(GAO/AIMD-94-12). 


         NAVY PROGRAMS
------------------------------------------------------ Chapter 5:4.3.3

A critical factor in achieving the financial management improvement
objectives envisioned by the Chief Financial Officers Act and other
recent reform legislation is ensuring that agencies have well trained
and experienced financial personnel in key positions.  In the Navy,
comptrollers serve in positions of critical importance for ensuring
that the Department effectively manages its operations and meets the
requirements of recent reform legislation.  However, we reported in
May 1997 that Navy personnel practices did not provide a career path
for Navy officers to develop and maintain the core competencies
needed by a comptroller.  We recommended a number of actions to
address this situation, including establishing a financial management
career path that will ensure that military officers are prepared,
both in terms of education and work experience, for comptrollership
responsibilities.  (GAO/AIMD-97-58)

In September 1996, we reported that our reviews of general controls
at locations processing Navy and Marine Corps data revealed serious
weaknesses that would allow both computer hackers and hundreds of
thousands of legitimate users with valid access privileges to
improperly modify, steal, inappropriately disclose, and destroy
sensitive DOD data.  We found deficiencies across the board,
undermining DOD's ability to protect sensitive personnel, payroll,
disbursement, and inventory information maintained in DOD computer
systems.  To resolve these deficiencies, we recommended that DOD's
chief information officer take a leadership role in implementing a
series of actions directed at establishing, implementing, and
monitoring a comprehensive DOD-wide computer security management
program.  (GAO/AIMD-96-144)

In September 1996, we reported on improvements needed in the Standard
Accounting and Reporting System (STARS), which had been selected to
serve as Navy's system for general fund accounting.  We found that
the planned STARS implementation was expected to produce some net
cost savings.  However, its implementation plans were hampered by the
lack of a target systems architecture--or blueprint--that would
define the systems' expected functions, features, and attributes,
including interfaces and data flows.  To increase the likelihood that
the STARS enhancement project will result in an efficient, effective,
and integrated Navy general fund accounting system, we recommended
that DOD and the Navy expeditiously develop a target STARS
architecture and that action plans reflect specific steps needed to
achieve this architecture, identifying responsible parties, and
establishing realistic milestones.  (GAO/AIMD-96-99)

In August 1996, we reported that Navy's item managers did not have
adequate visibility over $5.7 billion in operating materials and
supplies.  This lack of visibility increased the risk that millions
could be spent unnecessarily to purchase items that could be obtained
from excess stock at operating unit-level locations.  For example, we
determined that, for the first half of fiscal year 1995, the Navy
will incur unnecessary expenses of approximately $27 million.  We
recommended that the Navy take a number of actions directed at
eliminating operating material and supply redistribution centers and
ensuring that asset visibility efforts facilitate complete, reliable
financial reporting of Navy operating materials and supplies. 
(GAO/AIMD-96-94)

In July 1996, we reported that the Navy's Plant Property accounting
and reporting was unreliable.  Specifically, we reported that there
was no assurance that all plant property was reported.  We identified
over $24 billion of real property that was reported twice.  We
recommended several actions directed at updating requirements,
monitoring compliance, and ensuring that appropriate training is
provided to correct the observed deficiencies.  (GAO/AIMD-96-65)

In March 1996, we issued a report to complete our initial reviews of
each of the military services' financial management operations.  We
expressed our concern that the Navy had not taken advantage of the 5
years since the passage of the CFO Act or the experiences of its
counterparts in the Army and the Air Force to address the pervasive
and long-standing financial management problems hampering the Navy's
financial operations.  We concluded that the Navy and Defense Finance
and Accounting Service must now play "catch up" by giving the area a
higher priority and sense of urgency if it is to meet the objectives
of the CFO Act.  We recommended that the DOD Comptroller and the
Navy's Assistant Secretary for Financial Management take a number of
actions to improve the credibility of the Navy's financial reports. 
Our recommendations focused on placing high priority on implementing
basic required financial controls over Navy accounts and reports, and
developing a plan for producing reliable financial statements that
will address (1) staffing issues, (2) short-term measures to improve
data quality in existing financial systems, (3) strategies for
promptly meeting U.S.  general ledger requirements, and (4) offices
or positions that will be held accountable for identified actions. 
(GAO/AIMD-96-7)

See also chapter 1, Improving National Security and International
Affairs Programs. 



   AUDIT OVERSIGHT AND LIAISON
   ISSUE AREA (BUDGET FUNCTION
   990)
---------------------------------------------------------- Chapter 5:5

GAO Contact:  David L.  Clark, 202/512-9489


      IMPACT OF GAO'S WORK
-------------------------------------------------------- Chapter 5:5.1

This issue area focuses on four objectives:  (1) improving the
quality and use of single audits, (2) strengthening the inspector
general concept, (3) improving the financial accountability of
several federal activities, and (4) making the intergovernmental
auditing process more useful. 

We have worked with OMB, federal program and IG offices, and state
organizations to improve the quality and use of single audits.  The
Single Audit Act requires annual audits of federal financial
assistance--over $200 billion annually received by state and local
governments and nonprofit organizations.  We have worked closely with
OMB to revise and reissue Circular A-133, Audits of States, Local
Governments, and Non-Profit Organizations, dated June 1997, and the
related Compliance Supplement that assists non-Federal entities and
auditors in meeting their responsibilities under the Single Audit
Act.  We have met with representatives of IG organizations to
determine their intended use of single audit results, and to stress
the critical role that single audits often play in the agencywide
financial statement audits required by the Chief Financial Officers
Act.  We also frequently interact with representatives of program and
IG offices and state and local organizations to respond to questions
on the Single Audit Act in such areas as the use of the recently
developed risk-based audit approach and the interpretation of various
provisions of Circular A-133 and the related Compliance Supplement. 

Federal IGs have devoted considerable effort since passage of the IG
Act in 1978 to establishing controls to ensure compliance with
professional standards and to measuring savings and other
accomplishments from their work.  At the request of a congressional
committee, we recently began a comprehensive review of the current IG
concept, including key areas such as strategic planning, performance
measures, quality assurance, reporting, expertise, and independence
in order to identify and assess opportunities to strengthen IGs'
effectiveness. 

We perform financial audits of several federal activities, such as
independent counsels, commemorative coin recipients, and White House
operations.  These audits, typically mandated by law, have resulted
in numerous recommendations and suggestions that the audited
organizations have implemented, including improvements in internal
controls over financial operations.  We also review the results of
mandated financial audits of federally chartered corporations to
ensure that those audits are conducted in accordance with generally
accepted government auditing standards, as required by law. 

The issue area provides guidance and support to the National
Intergovernmental Audit Forum and 10 regional intergovernmental audit
forums.  The forums include federal, state, and local auditors as
well as members of the public accounting profession.  The forums have
provided the foundation for the development and recognition of
professional auditing standards for audits of governmental entities
and the means to ensure that those audits help ensure accountability
over public funds.  In that regard, the forums have been an excellent
resource in developing and implementing recommendations to make the
single audit process more useful for program oversight and in
preparing and auditing federal agency financial statements. 


      KEY OPEN RECOMMENDATIONS
-------------------------------------------------------- Chapter 5:5.2

Audits of employee benefit plans are a key safeguard for protecting
assets held by plans.  As of 1988, the most recent year for which we
have data, an estimated 5.2 million plans covered by the Employee
Retirement Income Security Act of 1974 had assets of about $1.75
trillion.  The Act currently allows plan administrators to exclude
from the scope of those audits investments held by certain regulated
institutions, such as banks and insurance companies.  The Congress
has not enacted legislation we recommended to eliminate this limited
scope provision in the Act.  (GAO/AFMD-92-14)



   INFORMATION RESOURCES
   MANAGEMENT ISSUE AREAS (BUDGET
   FUNCTION 990)
---------------------------------------------------------- Chapter 5:6

GAO Contacts:  Jack L.  Brock, Jr., 202/512-6240
Joel C.  Willemssen, 202/512-6408


      IMPACT OF GAO'S WORK
-------------------------------------------------------- Chapter 5:6.1

The federal government's dependence on computer systems, networks,
and electronic records to carry out its work continues to accelerate. 
Information systems are now integral to virtually every aspect of
over $1.5 trillion in annual government operations and spending--from
national defense and air traffic control to revenue collection and
benefit payments.  Yet despite an annual investment of approximately
$26 billion for information technology (IT) products and services,
agencies continue to face chronic problems in reducing operating
costs, improving performance, supporting sound financial management,
and providing quality service to the American public. 

Our work focuses on the most complex and difficult technology
challenges facing the federal government today, including

  -- multi-billion dollar, high-risk efforts to modernize government
     information systems,

  -- initiatives to improve mission performance by adopting the best
     public and private sector practices for strategic information
     management,

  -- the Year 2000 problem which, for many agencies, will be the
     largest project ever managed and implemented by their
     information resource management organizations,

  -- the increasing need for agencies to provide adequate security
     over the integrity, privacy, and availability of the data they
     rely on, and

  -- the government's ability to use its telecommunications resources
     to improve service to the public and reduce the cost of
     operations. 

Examples of some of our accomplishments include the following. 

  -- The Bureau of Land Management has saved millions on its
     Automated Land and Mineral Record System, identified system
     performance problems, and strengthened testing and evaluation. 

  -- The Department of Education is developing a departmentwide
     systems architecture to guide the development of its student
     financial aid systems. 

  -- We published a Guide for Evaluating Federal Agencies' IT
     Investment Decision-making which provides agencies with detailed
     guidance on the best practices for selecting, controlling, and
     evaluating their information technology projects.  This approach
     was embodied in the Clinger-Cohen Act of 1996 and in subsequent
     OMB guidance on capital investments in technology. 

  -- The Department of Housing and Urban Development consolidated
     several grant management systems to save millions. 

  -- The National Oceanic and Atmospheric Administration revised its
     procurement plans for satellites in the Geostationary
     Operational Environmental Satellite program.  Specifically, the
     procurement of follow-on satellites will use open competition. 

  -- DOD is reengineering temporary duty travel processing, a
     traditionally wasteful and burdensome operation.  Pilot results
     reported nearly a 100 percent increase in customer satisfaction,
     a 48 percent decrease in both average cycle time and travel
     process steps, a 63 percent decrease in average voucher
     processing time, and a 56 percent decrease in average processing
     costs.  The Congress reduced DOD's request for operations and
     maintenance funds for fiscal year 1996 by $128.5 million. 

  -- The U.S.  Department of Agriculture has initiated a moratorium
     on IT purchases and restructured its overall IT program.  USDA
     has deferred spending millions on major IT investments for its
     field service centers until business processes are fully
     reengineered. 

  -- NASA has revised its telecommuncations network consolidation
     strategy with the expectation of achieving cost reductions.  For
     example, officials at the Goddard Space Flight Center estimated
     that the agency can save an additional $94.5 million, beyond the
     savings originally estimated for the consolidation effort. 


      HIGH-RISK AREAS
-------------------------------------------------------- Chapter 5:6.2

The management of information as well as information technology
continues to be a high-risk area for the government.  Of particular
concern across the government is the Year 2000 conversion and
information security.  Two other multibillion dollar technology
programs--DOD's Corporate Information Management Initiative and the
National Weather Service's modernization--are also designated as
high-risk. 


         YEAR 2000 CONVERSION
------------------------------------------------------ Chapter 5:6.2.1

The Year 2000 conversion is one of the rapidly emerging problems in
information technology.  This problem stems from the common practice
of abbreviating years by their last two digits.  Computer systems
could interpret "00" as the year 1900 instead of the year 2000, "01"
as 1901, and so on.  The resulting miscalculations involving dates
and the computation of elapsed time could cascade through all kinds
of activities, such as loans, mortgages, pensions, tax records, and
benefit payments.  Moreover, the impact of Year 2000 failure could be
widespread, costly, and debilitating to important warfighting and
military missions.  Our Year 2000 audit effort has focused on
assessing whether agencies are sufficiently prepared to handle the
massive and complex management task of correcting their information
systems and to assist governmentwide efforts to improve the
effectiveness of Year 2000 programs. 

Our series of reviews of Defense Year 2000 computer problems revealed
critical flaws in DOD's processes for addressing Year 2000 problems,
particularly with respect to (1) project planning, (2) risk
assessments, (3) contingency plans, (4) identifying and correcting
interfaces, and (5) availability of testing resources. 

In response, DOD has agreed to address specific weaknesses we
identified.  The Defense Finance and Accounting Service and the
Defense Logistics Agency, for the most part, have agreed to implement
our recommendations.  These actions should greatly improve the DOD's
ability to address the problem successfully . 

As a result of our 1997 efforts involving the Veterans Benefit
Administration's year 2000 problem, the Veterans Benefit
Administration is taking steps to avert serious future disruptions in
its ability to disseminate benefits to millions of people. 


         INFORMATION SECURITY
------------------------------------------------------ Chapter 5:6.2.2

Electronic information and increasingly interconnected automated
systems are essential to virtually all major federal operations. 
These factors, combined with serious weaknesses in agency security
controls, are placing billions of dollars in federal assets at risk
of loss, critical operations at risk of disruption, and enormous
amounts of sensitive data at risk of inappropriate disclosure.  Over
the past year our efforts in this area have concentrated on
identifying for the Congress ways in which to manage the risks and
develop solutions to this complex problem. 

Our recent reports have highlighted these risks and raised the
visibility of this issue among congressional oversight committees and
groups with central management responsibilities, such as the CIO and
CFO Councils.  As a result, information security is beginning to be
recognized as a high priority issue in strategic plans, and
congressional interest in balancing the benefits of new technology
with security and privacy concerns is growing.  In particular, our
work at individual agencies has assisted the Congress in monitoring
progress on long-standing problems, such as security weaknesses at
IRS, and in understanding the security implications of new issues,
such as the Social Security Administration's move to allow access to
individuals' earnings data through the Internet. 

Our review of DOD's computer security disclosed that unknown and
unauthorized individuals are increasingly attacking and gaining
access to highly sensitive, but unclassified information on DOD's
computer systems.  In response, DOD initiated action to implement
several of the recommendations.  Most notably, it has updated its
computer security policies and procedures, included computer security
as one of four cornerstones of its strategic information technology
plan, begun to recruit and train additional information systems
security professionals, and begun to use more intrusion detection
software in its computer networks. 

Our May 1997 testimony highlighted general privacy and security
considerations that federal agencies must address to safeguard
sensitive information made available as a public service via the
Internet. 


         DOD'S CORPORATE
         INFORMATION MANAGEMENT
------------------------------------------------------ Chapter 5:6.2.3

In a series of reports on DOD's Corporate Information Management
initiative related to depot maintenance, materiel management, and the
transportation business areas, we found that DOD's on-going migration
system strategies were not likely to produce the dramatic gains in
efficiency and effectiveness that were anticipated.  Partially as a
result of our work, DOD has revised these business area
implementation strategies resulting in savings of over $330 million,
primarily from elimination of unnecessary systems development work. 


         NATIONAL WEATHER
         SERVICE'S MODERNIZATION
------------------------------------------------------ Chapter 5:6.2.4

We continued to identify major risks associated with the development
of the National Weather Service's $550 million Advanced Weather
Interactive Processing System.  The Weather Service is currently
pursuing our recommendations on the need for a systems architecture
and more rigorous software testing and contract oversight. 


      KEY OPEN RECOMMENDATIONS
-------------------------------------------------------- Chapter 5:6.3

The following paragraphs discuss some of the key open recommendations
in the areas of information technology, information security, and
telecommunications management as well as agency-specific
recommendations. 


         INFORMATION TECHNOLOGY
------------------------------------------------------ Chapter 5:6.3.1


         OFFICE OF MANAGEMENT AND
         BUDGET
------------------------------------------------------ Chapter 5:6.3.2

Under the Clinger-Cohen Act, the Director of OMB is given significant
governmentwide IT leadership and oversight responsibilities.  In
September 1996, we made extensive recommendations to OMB based upon
our review of several agencies' IT investment decision-making
processes.  Specifically, we recommended that OMB develop guidance
requiring agencies to (1) implement IT investment decision-making
processes, (2) periodically analyze their entire portfolio of IT
investments, (3) design control and evaluation processes that include
cost, schedule, and quantitative performance measures, and (4) set
minimum data quality standards for data used to assess cost, benefit,
and risk decisions.  In addition, we recommended that OMB develop its
recommendations for the President's budget based on agency actual
track records in delivering mission performance for IT funds
expended.  OMB agreed with these recommendations and has issued
implementation guidance to assist agencies in designing their IT
investment processes.  (GAO/AIMD-96-64)


         DEPARTMENT OF DEFENSE
------------------------------------------------------ Chapter 5:6.3.3

Our past work on DOD's logistics system improvement actions resulted
in a number of recommendations aimed at improving the management of
these major investments.  Specifically, we recommended that DOD
develop a strategic information resources management plan that
anchors its use of information technology resources to priority
business objectives.  We also recommended that DOD limit or halt
deployment of segments of its failed migration strategies in these
logistics areas until they can be linked with evolving
outsourcing/privatization plans and show a favorable return on
investment.  While some actions were taken in response to these
recommendations--notably a strategic plan was developed, and the
depot maintenance and material management strategies were
significantly modified--none of these actions were justified within
the guidelines of the Clinger-Cohen Act's investment criteria. 
Further, oversight and review of the modified strategies that would
verify an acceptable return on investment prior to continued
implementation of the strategies has not occurred.  (GAO/AIMD-96-81,
GAO/AIMD-96-109, GAO/AIMD-97-6 and GAO/AIMD-95-110)

See also chapter 1, Improving National Security and International
Affairs Programs, Defense Management Issue Area. 


         U.  S.  DEPARTMENT OF
         AGRICULTURE
------------------------------------------------------ Chapter 5:6.3.4

While USDA has taken some actions to reengineer its business
processes for the Department's farm service and rural development
agencies, these actions have not been fully responsive to our
recommendations.  Therefore, it is unclear how successful USDA will
be in improving the way it does business as it implements the revised
process.  We are monitoring USDA's efforts to modernize information
technology for the field service and are working with agency
officials, OMB, and congressional committees to ensure that sound
business process reengineering principles and practices are followed. 
(GAO/AIMD-94-156)

To correct its financial management systems problems, USDA has taken
steps to provide more authority to the CFO but has yet to fully
address all our other recommendations.  We are continuing to work
with USDA on actions underway to integrate and improve financial
management systems.  (GAO/AIMD-95-222)

See also chapter 2, Improving Resources, Community, and Economic
Development Programs, Food and Agriculture Issue Area. 


         YEAR 2000 CONVERSION
------------------------------------------------------ Chapter 5:6.3.5

We have issued four reports identifying weaknesses and recommending
corrective actions for the Year 2000 programs of specific DOD
components.  We recommended that Defense quickly modernize its
departmentwide systems inventory with state-of-the-art access
capabilities and additional data fields that will allow Defense
agency personnel to enter system status information and use this data
to track progress of correction efforts.  At the Defense Finance and
Accounting Service and the Defense Logistics Agency our
recommendations included the need for improved project planning,
formal system risk assessments, contingency plans, interface
agreements, and testing resource assessments.  Defense has concurred
with all of our recommendations and plans to take corrective actions. 
(GAO/AIMD-97-106, GAO/AIMD-97-112, GAO/AIMD-97-117 and
GAO/AIMD-97-120R)

See also chapter 1, Improving National Security and International
Affairs Programs,Defense Management Issue Area.


         INFORMATION SECURITY
------------------------------------------------------ Chapter 5:6.3.6


         OFFICE OF MANAGEMENT AND
         BUDGET
------------------------------------------------------ Chapter 5:6.3.7

In September 1996, we recommended that the Director of OMB promote
the CIO Council's (1) adoption of information security as one of its
top priorities and (2) development of a strategic plan for increasing
awareness of the importance of information security, especially among
senior agency executives, and improving information security program
management governmentwide.  As of August 1997, the CIO Council's
draft strategic plan included "Privacy and Security" as one of nine
strategic goals.  The goals will be finalized later in 1997. 
Although performance goals have been specified in the draft plan, a
more detailed approach has not yet been developed.  (GAO/AIMD-96-110)


         DEPARTMENT OF DEFENSE
------------------------------------------------------ Chapter 5:6.3.8

Our report issued last year on computer attacks at the DOD
highlighted risks to our national security and the damage that has
already been caused.  DOD agreed with our report and acknowledges,
however, that it has much more to do to improve its information
security posture.  More attention needs to be given to increasing the
awareness and accountability among computer users as to their
security responsibilities.  Many installations still do not have
full-time dedicated information systems security officers and are not
fully aware of the security risks of computer systems connected to
the Internet.  And, securing DOD systems will require an ongoing
concerted process whereby risks are identified and controls are
implemented as appropriate.  (GAO/AIMD-96-84)

See also chapter 1, Improving National Security and International
Affairs Programs, Defense Management Issue Area. 


         NATIONAL WEATHER SERVICE
         MODERNIZATION
------------------------------------------------------ Chapter 5:6.3.9

In our report on the National Weather Service's modernization
program, we recommended that more rigorous software testing and
contract oversight to reduce major risks associated with the
development of its $550 million Advanced Weather Interactive
Processing System.  In addition, we identified planning risks
associated with the National Oceanic and Atmospheric Administration's
multi-billion dollar weather satellite

program and we are monitoring the Administation's actions to address
these risks.  (GAO/AIMD-94-28, GAO/AIMD-95-24 and GAO/AIMD-97-37)


         TELECOMMUNICATIONS
         MANAGEMENT
----------------------------------------------------- Chapter 5:6.3.10


         DEPARTMENT OF DEFENSE
----------------------------------------------------- Chapter 5:6.3.11

In our November 1996 report on the Defense Information Systems
Network acquisition, we recommended that DOD develop performance
measures needed to gauge the success of the program.  At a minimum,
these measures should address the concerns of customers and should
correspond to the five factors--requirements, technology enhancement,
schedule, management, and cost--that the Defense Systems Information
Agency used to select its acquisition strategy.  While DOD concurred,
it has yet to finalize any Defense Information Systems Network
performance measures.  (GAO/AIMD-97-9)

In August 1997, we reported the Defense Finance and Accounting
Service (DFAS) had not thoroughly reviewed or revalidated its
requirements for telecommunication equipment and services as
prescribed by DOD.  Our study of utilization data for DFAS' data
communication lines indicated that many of the lines may have excess
capacity.  DOD's Deputy Chief Financial Officer agreed with our
recommendation that DFAS reassess its telecommunication requirements
stating that such a reassessment would be performed in September and
October 1997.  (GAO/AIMD-97-100)

See also chapter 1, Improving National Security and International
Affairs Programs, Defense Management Issue Area. 


         U.S.  DEPARTMENT OF
         AGRICULTURE
----------------------------------------------------- Chapter 5:6.3.12

We reported on the need for telecommunications management
improvements at Interior and U.S.  Department of Agriculture (USDA)
and identified missed opportunities to save hundreds of millions of
dollars because the Departments were not sharing telecommunications
resources.  For instance, Interior and USDA's Forest Service often
use parallel radio systems.  However, they were planning to
collectively spend up to several hundred million dollars acquiring
their own separate radio systems over the next 8 years and had failed
to jointly determine the extent to which they could reduce these
costs by sharing radio equipment and services.  In response to our
recommendations, both agreed to implement a systematic process for
identifying opportunities to share telecommunications resources and
to stop further radio purchases until radio sharing opportunities are
fully analyzed.  (GAO/AIMD-97-67)

Similarly, at USDA, after acknowledging the potential for saving tens
of millions of dollars each year, the Department also acted on our
recommendations to improve telecommunications management, consolidate
telecommunications resources, and eliminate unnecessary services. 
Initial efforts have already yielded millions in savings. 
(GAO/AIMD-95-97, GAO/AIMD-95-203, and GAO/AIMD-96-59)

See also chapter 2, Improving Resources, Community, and Economic
Development Programs, Food and Agriculture Issue Area. 


         AGENCY-SPECIFIC
         RECOMMENDATIONS
----------------------------------------------------- Chapter 5:6.3.13


         VETERANS BENEFIT
         ADMINISTRATION
----------------------------------------------------- Chapter 5:6.3.14

In our continuing review of the Veteran Benefits Administration
modernization project, we have noted that it has taken steps toward
fulfilling our recommendations.  However, as discussed in our 1996
testimony, it still needs to take aggressive action to effectively
address serious management and technical weaknesses if its
modernization effort is to succeed.  (GAO/T-AIMD-96-103)

In response to our review which found its software development
capability to be ad hoc and chaotic, the Veterans Benefit
Administration has made progress.  However, its actions have not yet
fully addressed needed software development improvements.  These
include a need for a defined strategy to reach the repeatable level,
a baseline to measure improvements, and a process to ensure that its
software development contractors have a repeatable maturity level. 
The Veterans Benefit Administration generally agrees that these
issues need to be addressed.  (GAO/AIMD-96-90)

See also chapter 3, Improving Human Resource Programs, Veterans'
Affairs and Military Health Care Issue Area. 


         NATIONAL STUDENT LOAN
         DATA SYSTEM
----------------------------------------------------- Chapter 5:6.3.15

In our review of the Department of Education's efforts to integrate
the National Student Loan Data System with other student financial
aid databases that support title IV programs, we recommended that
Education (1) develop and enforce a departmentwide systems
architecture and (2) ensure that the architecture addresses the title
IV systems integration.  We also recommended that the Secretary
direct that, as of July 1, 1998, the Department's information
technology investments conform to the developed architecture and
funding for all projects be predicated on such conformance, unless
careful, thorough, and documented analysis supports an exception. 
Education agreed with our recommendations.  (GAO/AIMD-97-122)

See also chapter 3, Improving Human Resource Programs, Education and
Employment Issue Area. 


         CHILD SUPPORT
----------------------------------------------------- Chapter 5:6.3.16

At HHS, our review of efforts by the states to develop automated
child support enforcement systems found that HHS' Office of Child
Support Enforcement (OCSE) had not provided adequate leadership and
oversight of these efforts.  Consequently, states have not always
made efficient and effective use of the government's $2 billion
investment for these systems and many state systems may not be
certified on time.  We recommended a number of actions to strengthen
OCSE leadership and increase the likelihood of developing more
effective state automated child support enforcement systems.  HHS is
acting on our recommendations.  (GAO/AIMD-97-72)

See also chapter 3, Improving Human Resource Programs. 


         MEDICARE TRANSACTION
         SYSTEM
----------------------------------------------------- Chapter 5:6.3.17

Since 1994, we have reported and testified on the need for the Health
Care Financing Administration (HCFA) to reduce risks associated with
its acquisition of the Medicare Transaction System.  While HCFA has
made some improvements, we reported in 1997 that serious management
and technical weaknesses persist.  To address these weaknesses, we
recommended a number of actions to (1) improve management of the
interim Medicare processing environment and the changes necessary for
operating beyond the year 2000, (2) ensure that the Medicare
Transaction System is managed as investment, and (3) ensure that
sound system-development practices are followed.  HCFA has begun to
implement our recommendations.  (GAO/AIMD-97-78)

See also chapter 3, Improving Human Resource Programs, Health
Services Quality and Public Health Issue Area. 


         DEPARTMENT OF COMMERCE,
         U.S.  CUSTOMS SERVICE
----------------------------------------------------- Chapter 5:6.3.18

In reporting on Customs' efforts to modernize its automated systems,
we recommended in 1996 that Customs (1) identify and analyze its
business requirements before selecting an enterprisewide architecture
and (2) manage information systems as investments.  Based on our
recommendations, the House and Senate Committees on Appropriations
withheld almost $3.5 million of the $15 million appropriated for
fiscal year 1997 for development of the Automated Commercial
Environment system.  In 1997, we reported on Customs' progress in
addressing these recommendations, which included (1) hiring a
contractor to conduct the appropriate analyses and recommend an
architecture and (2) designating an investment review board.  Customs
has not finalized the investment review board's policies and
procedures or implemented an investment review process. 
(GAO/AIMD-96-57, GAO/AIMD-97-43R and GAO/T-AIMD-97-96)

See also chapter 4, Improving Justice and General Government
Programs, Administration of Justice Issue Area. 


         ENVIRONMENTAL PROTECTION
         AGENCY
----------------------------------------------------- Chapter 5:6.3.19

At the Environmental Protection Agency (EPA), we recommended that EPA
determine what information is needed to oversee states'
implementation of Resource Conservation and Recovery Act and develop
a cost-effective solution for meeting these needs.  EPA has completed
an information strategy plan which is the first step in the
information engineering process.  Also, in response to our report on
improving EPA's ability to recover costs associated with cleaning up
hazardous waste sites, EPA is implementing procedures to help ensure
the accuracy and completeness of Superfund cost recovery data. 
However, further action is needed to fully implement all our
recommendations.  (GAO/AIMD-95-167 and GAO/AIMD-95-177)

See also chapter 2, Improving Resources, Community, and Economic
Development Programs, Environmental Protection Issue Area. 


         GEOSTATIONARY OPERATIONAL
         ENVIRONMENTAL SATELLITE
----------------------------------------------------- Chapter 5:6.3.20

Our report on planning for the future of the Geostationary
Operational Environmental Satellite program highlighted the need for
a "next generation" system to be developed in order to reduce costs
and improve mission results.  We recommended that the National
Oceanic and Atmospheric Administration prepare a formal analysis of
the costs and benefits of several alternatives for the timing,
funding, and scope of its follow-on program.  Agency officials have
said that they will examine a number of options for the follow-on
program.  (GAO/AIMD-97-37)


         IMMIGRATION AND
         NATURALIZATION SERVICE
----------------------------------------------------- Chapter 5:6.3.21

Our review of the Immigration and Naturalization Service's (INS)
initiative, the Law Enforcement Support Center, to devise and
implement a system that would assist INS and law enforcement agencies
in determining whether arrested individuals are aliens, and our
evaluation of the reliability of the related criminal alien
information disclosed several weaknesses.  As a result, we made
recommendations to improve the effectiveness of the Law Enforcement
Support Center and data reliability.  INS has taken some steps to
ensure that the Support Center can be used to effectively assist in
the positive identification of criminal aliens and to improve its
systems data; however, much additional effort is needed. 
(GAO/AIMD-95-147)

See also chapter 4, Improving Justice and General Government
Programs, Administration of Justice Issue Area. 


         DEFENSE WORKING CAPITAL
         FUND
----------------------------------------------------- Chapter 5:6.3.22

The Defense Working Capital Fund is expected to operate on a
break-even basis over time--that is, not to make a profit nor incur a
loss but simply to recover all costs.  However, the Navy ordnance
business area incurred losses totaling $212 million from fiscal year
1994 through 1996.  To ensure that the Navy ordnance business area
operates on a break-even basis, we recommended that Navy develop a
plan to streamline the Navy ordnance operations and reduce its
infrastructure costs, especially overhead costs.  This plan should
(1) concentrate on eliminating unnecessary infrastructure, including
overhead, (2) identify specific actions that need to be accomplished,
(3) include realistic assumptions about the savings that can be
achieved, (4) establish milestones, and (5) clearly delineate
responsibilities for performing the tasks in the plan. 
(GAO/AIMD/NSIAD-97-74)

Our report on DOD's use of a stabilized rate to price items sold to
foreign countries under the foreign military sales program disclosed
that DOD's Working Capital Funds were not including all costs in its
stabilized rate to ensure full recovery of pension and postretirement
health benefit costs.  We reported that the exclusion of these costs
had resulted in over $40.5 million of losses to the U.  S. 
Government between fiscal years 1992 and 1996.  Accordingly, we
recommended that DOD implement policies and procedures as soon as
possible to require DOD's Working Capital Funds to include pension
and postretirement health benefit costs in the prices it charges
foreign military sales customers.  We also recommended that DOD make
every reasonable attempt to bill for and collect the over $40.5
million of undercharges we identified during our review.  DOD agreed
with our recommendations and immediately changed its policies and
procedures to require these costs be included in future prices.  DOD
also agreed to bill foreign customers for the past undercharges in
those cases where it proved to be cost-effective to do so. 
(GAO/AIMD-97-134)

See also chapter 1, Improving National Security and International
Affairs Programs, Defense Management Issue Area. 



STATUS OF OPEN RECOMMENDATIONS:  A
USERS QUICK REFERENCE FOR THE
ELECTRONIC EDITION
============================================================ Chapter I


   INTRODUCTION
---------------------------------------------------------- Chapter I:1

This electronic edition contains the details for GAO's open
recommendations using "askSam for Windows" software.  The software is
compatible with Microsoft Windows 3.1 or Microsoft Windows 95 and
provides several search and retrieval options to find either
summaries of key open recommendations or detailed information on
products containing open recommendations.  Three high-density 3.5
inch installation disks are provided containing all of the software
and data for this electronic edition of the Status of Open
Recommendations report. 


   HOW TO INSTALL
---------------------------------------------------------- Chapter I:2

The installation program installs the files necessary to run this
software on your hard drive and creates a Windows icon that will
allow you to run the program.  At least 8MB of RAM and 8.3MB of hard
disk space are required.  To load the software on your hard drive: 

1.  Insert the installation disk labelled "Disk 1" into your floppy
drive. 

2.  Select the File option from the Windows menu bar, then select the
Run option from the drop-down menu. 

3.  In the Command Line window, type the drive designation of your
floppy drive, a colon, a backslash, and the word "install." For
example type "a:\install."

4.  Click once on the OK button, then follow the instructions that
appear on the screen. 


   HOW TO START
---------------------------------------------------------- Chapter I:3

In Windows, double-click on the Open Recommendations icon to start
the program and display the main menu as shown in figure 1.  The menu
contains three options:  Report Details, Issue Area Summary, and
Background Information. 

   Figure 1

   (See figure in printed
   edition.)


   HOW TO SEARCH--REPORT DETAILS
---------------------------------------------------------- Chapter I:4

This option accesses the database containing descriptive information
about each GAO product with open recommendations including the title,
recommendations, an abstract, the GAO contact person, addresses,
requestors, and the product number. 

1.  Select the Report Details option on the main menu.  The Report
Details menu, shown in figure 2, will be displayed. 

2.  To quickly select a commonly used word, code, or phrase:  select
and click on one of five look-up table options listed: 

Committees of Interest
Interested Members of Congress
Recommendation Addressees
GAO Issue Area Units
Subject Terms

Follow the instructions to browse the table you selected, and to
select and copy the name, term, or code for your search.  Return to
the Report Details menu.  (NOTE:  You may skip step 2 if you wish to
search on a keyword.)

3.  Select and click on one of the three output formats for
displaying or printing the results: 

Brief list
Descriptive information
Full information

4.  When prompted, depress Shift-Insert to paste the search term
(that you selected and copied in step 2), enclosing the term in "[],"
OR type in a keyword.  Press OK. 

   Figure 2

   (See figure in printed
   edition.)


   HOW TO SEARCH--ISSUE AREA
   SUMMARY
---------------------------------------------------------- Chapter I:5

This option presents the information contained in the printed copy of
the Status of Open Recommendations--the impact of GAO's work and key
open recommendations, organized by GAO's programming units. 

1.  Select the Issue Area Summary on the main menu. 

2.  Select and click on one of the options: 

Table of Contents
Search Issue Area by Keyword


   HOW TO PRINT YOUR SEARCH
   RESULTS
---------------------------------------------------------- Chapter I:6

There are two options for printing the results of a search: 

  -- Select File from the menu bar.  Select Print from the drop-down
     menu, or

  -- Depress Control/P. 


   EXITING THE PROGRAM
---------------------------------------------------------- Chapter I:7

To exit the program, choose File from the Menu Bar, then choose the
Exit option from the drop-down menu. 


   HOW TO GET HELP
---------------------------------------------------------- Chapter I:8

Detailed information on searching the Report Details and Issue Area
Summary Databases may be obtained from the Main Menu's link to
"Background Information" and the Report Detail Menu's option:  "For
more information about using this program, click here." Information
on formulating searches using the askSam query language is available
by clicking on the Help option appearing in the Windows menu bar. 

Suggestions or comments about this electronic publication should be
directed to: 

George E.  Breen, Jr.
Assistant Director
GAO, Office of Policy

Voice (202) 512-6100
Fax(202) 512-4844
[email protected]

*** End of document. ***