oversight

High-Risk Series: An Update

Published by the Government Accountability Office on 2003-01-01.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

               United States General Accounting Office

GAO

January 2003
               High-Risk Series
               An Update




GAO-03-119
               a
This Series
This report entitled High-Risk Series: An Update is part of a special GAO series, first
issued in 1993 and periodically updated. In this 2003 report, GAO identifies areas
at high risk due to either their greater vulnerabilities to waste, fraud, abuse, and
mismanagement or major challenges associated with their economy, efficiency, or
effectiveness. This series also includes reports on three crosscutting high-risk
areas: strategic human capital management, protecting information systems
supporting the federal government and the nation’s critical infrastructures, and
federal real property. A companion series, Performance and Accountability Series:
Major Management Challenges and Program Risks, contains separate reports
covering each cabinet department, most major independent agencies, and the U.S.
Postal Service. It also includes a governmentwide perspective on transforming the
way the government does business in order to meet 21st century challenges and
address long-term fiscal needs. A list of all of the reports in this series is included
at the end of this report.
            Print This Page                         January 2003


                                                    HIGH-RISK SERIES
                                                    An Update
Highlights of GAO-03-119, a report to
Congress on GAO's High-Risk Series




GAO’s audits and evaluations                        In 2001, GAO identified 23 high-risk areas. Since then, demonstrable
identify federal programs and                       progress has been made in virtually all of them. Federal departments and
operations that are high risk, in                   agencies, and the Congress as well, have shown a growing commitment to
some cases, due to their greater                    addressing management challenges and have taken new steps to correct the
vulnerabilities to fraud, waste,                    root causes of the problems. In two areas, the Supplemental Security
abuse, and mismanagement.
Increasingly, we also are
                                                    Income program and the asset forfeiture programs managed by the
identifying high-risk areas to focus                Departments of Justice and the Treasury, GAO has determined that
on major economy, efficiency, or                    sufficient progress has been made to remove the high-risk designation.
effectiveness challenges.
                                                    GAO has increasingly used the high-risk designation to draw attention to the
Since 1990, GAO has periodically                    challenges faced by government programs and operations in need of broad-
reported on government operations                   based transformation. For example, in 2001, GAO designated as high risk
that it has designated as high risk.                strategic human capital management across government and the U.S. Postal
In this 2003 update for the new                     Service’s transformation and fiscal outlook. Since then, the President has
108th Congress, GAO presents the                    made human capital a top initiative of his Management Agenda, while the
status of high-risk areas included in               Congress enacted key governmentwide human capital reforms as it created
our last report made in January
2001 and identifies new high-risk
                                                    the Department of Homeland Security (DHS). In addition, a promising
areas warranting attention by the                   Postal Service transformation plan has been produced and the President
Congress and the administration.                    formed a commission to focus on Postal Service transformation.

Lasting solutions to high-risk                      With these positive results in mind, for 2003, GAO has designated three
problems offer the potential to save                additional areas as high risk based on challenges involving broad-based
billions of dollars, dramatically                   transformation and/or the need for legislative solutions. The first new high-
improve service to the American                     risk area is implementing and transforming DHS, which is high risk because
public, strengthen public                           of the sheer size of the undertaking, the fact that DHS’s proposed
confidence and trust in the                         components already face a wide array of existing challenges, and the
performance and accountability of                   prospect of serious consequences for the nation should DHS fail to
our national government, and
ensure the ability of government to
                                                    adequately address its management challenges and program risks. A related
deliver on its promises.                            homeland security challenge will be to protect information systems
                                                    supporting the federal government as well as the nation’s critical
                                                    infrastructures; information security has been a high-risk area since 1997 and
                                                    has been expanded this year to include both of these concerns. The second
This report contains GAO’s views                    new high-risk area involves federal disability programs, primarily those at
on what remains done for each                       the Social Security Administration and the Department of Veterans Affairs.
high-risk area to bring about lasting               Already growing, disability programs are poised to surge as baby-boomers
solutions. Perseverance by the                      age, yet the programs remain mired in outdated economic, workforce, and
administration in implementing                      medical concepts and are not well-positioned to provide meaningful and
GAO’s recommended solutions and                     timely support to disabled Americans. The third new high-risk area involves
continued oversight by the
                                                    federal real property, based on long-standing problems such as excess and
Congress both will be important.
                                                    underutilized property and deteriorating facilities, as well as increased
                                                    security challenges from the threat of terrorism.
www.gao.gov/cgi-bin/getrpt?GAO-03-119.
                                                    As appropriate, GAO also continues to identify more traditional high-risk
To view the full report, click on the link above.
For more information, contact George H.             areas. For example, this year’s fourth new high-risk area involves the
Stalcup at (202) 512-9490 or                        Medicaid program, in part because of growing concerns about inadequate
stalcupg@gao.gov.                                   fiscal oversight to prevent inappropriate program spending.
GAO’s 2003 High-Risk   GAO’s 2003 high-risk list is shown in the following table. Information on
                       each of these areas is presented in separate highlights pages included at the
List                   end of this report. These highlights pages show the names of GAO
                       executives to contact for more information on the high-risk areas and
                       Internet links to reports in the accompanying GAO series, Performance
                       and Accountability Series: Major Management Challenges and Program
                       Risks, where the high-risk areas are also discussed.




                                                                                                                         Year
                                                                                                                   designated
                       2003 high-risk areas                                                                          high-risk
                       Addressing Challenges In Broad-based Transformations
                       • Strategic Human Capital Managementa                                                               2001
                       • U.S. Postal Service Transformation Efforts and Long-Term Outlooka                                 2001
                       • Protecting Information Systems Supporting the Federal Government                                  1997
                         and the Nation’s Critical Infrastructures
                       • Implementing and Transforming the New Department of Homeland                                      2003
                         Security
                       • Modernizing Federal Disability Programsa                                                          2003
                       • Federal Real Propertya                                                                            2003
                       Ensuring Major Technology Investments Improve Services
                       • FAA Air Traffic Control Modernization                                                             1995
                       • IRS Business Systems Modernization                                                                1995
                       • DOD Systems Modernization                                                                         1995
                       Providing Basic Financial Accountability
                       • DOD Financial Management                                                                          1995
                       • Forest Service Financial Management                                                               1999
                       • FAA Financial Management                                                                          1999
                       • IRS Financial Management                                                                          1995
                       Reducing Inordinate Program Management Risks
                       • Medicare Programa                                                                                 1990
                       • Medicaid Programa                                                                                 2003
                       • Earned Income Credit Noncompliance                                                                1995
                       • Collection of Unpaid Taxes                                                                        1990
                       • DOD Support Infrastructure Management                                                             1997
                       • DOD Inventory Management                                                                          1990
                       • HUD Single-Family Mortgage Insurance and Rental Assistance                                        1994
                         Programs
                       • Student Financial Aid Programs                                                                    1990
                       Managing Large Procurement Operations More Efficiently
                       • DOD Weapon Systems Acquisition                                                                    1990
                       • DOD Contract Management                                                                           1992
                       • Department of Energy Contract Management                                                          1990
                       • NASA Contract Management                                                                          1990
                       Source: GAO.
                       a
                        Additional authorizing legislation is likely to be required as one element of addressing this high-risk
                       area.



                       Page 1                                                                    GAO-??-?? Document Name
Contents



Transmittal Letter                                                                                                   1


Historical Perspective                                                                                                3


Overview of Progress                                                                                                  6
                          High-Risk Designations Removed                                                              7
in Addressing             Progress Being Made in Remaining High-Risk Areas                                            8
High-Risk Areas           Progress in Addressing Transformation Challenges                                           11


New High-Risk Areas                                                                                                  18
                          Adding Three Broad-Based High-Risk Areas                                                   18
                          New High-Risk Area Identified Based on Fiscal Oversight
                            Vulnerabilities                                                                          25


Highlights of High-Risk                                                                                              28
Areas

Performance and
Accountability and
High-Risk Series




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                          Page i                                                       GAO-03-119 High-Risk Update
A
United States General Accounting Office
Washington, D.C. 20548
                                                                                          Comptroller General
                                                                                          of the United States




           January 2003                                                                                           T
                                                                                                                  ransmL
                                                                                                                       ta
                                                                                                                        ileter




           The President of the Senate
           The Speaker of the House of Representatives

           Since 1990, GAO has periodically reported on government operations that it identifies as “high risk.”
           This effort, which was supported by the Senate Committee on Governmental Affairs and the House
           Committee on Government Reform, has brought a much needed focus to problems that are impeding
           effective government and costing the government billions of dollars. To help, GAO has made
           hundreds of recommendations to improve these high-risk operations. Moreover, GAO’s focus on high-
           risk problems contributed to the Congress enacting a series of governmentwide reforms to address
           critical human capital challenges, strengthen financial management, improve information technology
           practices, and instill a more results-oriented government.

           GAO’s high-risk status reports are provided at the start of each new Congress. This update should
           help the Congress and the administration in carrying out their responsibilities while improving
           government for the benefit of the American people. It summarizes progress made in correcting high-
           risk problems, actions under way, and further actions that GAO believes are needed. In this update,
           GAO has determined that sufficient progress has been made to remove the high-risk designation from
           two areas, and has designated four new areas as high risk.

           GAO’s high-risk program has increasingly focused on those major programs and operations that need
           urgent attention and transformation in order to ensure that our national government functions in the
           most economical, efficient, and effective manner possible. Further, the administration has looked to
           GAO’s program in shaping governmentwide initiatives such as the President’s Management Agenda,
           which has at its base many of the areas GAO had previously designated as high risk. As in prior GAO
           high-risk update reports, federal programs and operations are also emphasized when they are at high
           risk because of their greater vulnerabilities to fraud, waste, abuse, and mismanagement. The high-
           risk program has served to bring “light” to these areas as well as “heat” to prompt needed “actions.”
           This has been clearly evidenced by the many actions that have occurred in connection with strategic
           human capital management and Postal Service transformation, the two most recent additions to
           GAO’s high-risk list prior to this update.




                                     Page 1                                             GAO-03-119 High-Risk Update
Copies of this series are being sent to the President, the congressional
leadership, other Members of the Congress, the Director of the Office of
Management and Budget, and the heads of major departments and
agencies.




David M. Walker
Comptroller General
of the United States




Page 2                                            GAO-03-119 High-Risk Update
Historical Perspective


               In 1990, we began a program to report on government operations that we
               identified as “high risk.” Since then, generally coinciding with the start of
               each new Congress, we have periodically reported on the status of progress
               to address high-risk areas and updated our high-risk list. Our previous
               high-risk update was in January 2001.1

               Overall, our high-risk program has served to identify and help resolve
               serious weaknesses in areas that involve substantial resources and provide
               critical services to the public. Since our program began, the government
               has taken high-risk problems seriously and has made long-needed progress
               toward correcting them. In some cases, progress has been sufficient for us
               to remove the high-risk designation. The overall changes to our high-risk
               list over the past 13 years are shown in table 1. Areas removed from the
               high-risk list over that same period are shown in table 2.



               Table 1: Overall Changes to GAO’s High-Risk List, 1990 to 2003

                                                                                          Number of
               Changes 1990–2003                                                             areas
               Original high-risk list in 1990                                                    14
               High-risk areas added since 1990                                                   24
               High-risk areas removed since 1990                                                 13
               High-risk list in 2003                                                             25
               Source: GAO.




               1
                U.S. General Accounting Office, High-Risk Series: An Update, GAO-01-263 (Washington,
               D.C.: Jan. 2001).




               Page 3                                                    GAO-03-119 High-Risk Update
Historical Perspective




Table 2: Areas Removed from GAO’s High-Risk List, 1990 to 2003

                                                              Year
                                                        designated         Year
Area                                                      high risk     removed
Pension Benefit Guaranty Corporation                             1990      1995
State Department Management of Overseas Real                     1990      1995
Property
Federal Transit Administration Grant Management                  1990      1995
Bank Insurance Fund                                              1991      1995
Resolution Trust Corporation                                     1990      1995
Customs Service Financial Management                             1991      1999
The Year 2000 Computing Challenge                                1997      2001
The 2000 Census                                                  1997      2001
Superfund Program                                                1990      2001
Farm Loan Programs                                               1990      2001
National Weather Service Modernization                           1995      2001
Supplemental Security Income                                     1997      2003
Asset Forfeiture Programs                                        1990      2003
Source: GAO.


Seven of the 13 areas removed from the list over the years were among the
14 programs and operations we determined to be high risk at the outset of
our efforts to monitor such programs. These results demonstrate that the
sustained attention and commitment by the Congress and agencies to
resolve serious, long-standing high-risk problems has paid off, as root
causes of the government’s exposure for half of our original high-risk list
have been successfully addressed.

Historically, high-risk areas have involved traditional vulnerabilities due to
their greater susceptibility to fraud, waste, abuse, and mismanagement. As
our high-risk program has evolved, we have increasingly designated areas
as high risk to draw attention to areas associated with the economy,
efficiency, effectiveness, and accountability of government programs and
operations. Perseverance by the administration is needed in implementing
our recommended solutions for addressing these high-risk areas.
Continued congressional oversight and, in some cases, additional
authorizing legislative action will also be key to achieving progress,
particularly in addressing challenges in broad-based transformations.




Page 4                                               GAO-03-119 High-Risk Update
Historical Perspective




To determine which federal government programs and functions should be
designated as high risk, we used our guidance document, Determining
Performance and Accountability Challenges and High Risks.2 In
determining whether a government program or operation is high risk, we
consider whether it involves national significance or a management
function that is key to performance and accountability. We also consider
whether the risk is

• inherent, which may arise when the nature of a program creates
  susceptibility to fraud, waste, and abuse; or

• a systemic problem, which may arise when the programmatic;
  management support; or financial systems, policies, and procedures
  established by an agency to carry out a program are ineffective, creating
  a material weakness.

Further, we consider qualitative factors, such as whether the risk

• involves public health or safety, service delivery, national security,
  national defense, economic growth, or privacy or citizens’ rights; or

• could result in significantly impaired service; program failure; public
  injury or loss of life; or significantly reduced economy, efficiency, or
  effectiveness.

Before making a high-risk designation, we also consider the corrective
measures an agency may have planned or under way to resolve a material
control weakness and the status and effectiveness of these actions.

When legislative and agency actions, including those in response to our
recommendations, result in significant progress toward resolving a high-
risk problem, we remove the high-risk designation. Key determinants here
include a demonstrated strong commitment to and top leadership support
for addressing problems, the capacity to do so, a corrective action plan,
and demonstrated progress in implementing corrective measures.

The next section discusses how we applied these criteria in determining
what areas to remove and to add since our last update in January 2001.


2
  U.S. General Accounting Office, Determining Performance and Accountability
Challenges and High Risks, GAO-01-159SP (Washington, D.C.: Nov. 2000).




Page 5                                                    GAO-03-119 High-Risk Update
Overview of Progress in Addressing High-Risk
Areas

               Since our January 2001 report, federal departments and agencies and the
               Congress have taken additional steps to address areas we designated as
               high risk. In two cases, progress has been sufficient for the high-risk
               designation to be removed. For virtually every other high-risk area,
               important steps have been taken to resolve risks and implement our
               recommendations, but more needs to be done before these areas can be
               removed from the high-risk list. Overall, we are impressed with the level of
               commitment shown by top officials and anticipate continued progress.

               Importantly, our high-risk program has helped the executive branch and the
               Congress to galvanize efforts to seek lasting solutions to high-risk
               problems. For example, our program helped shape the administration’s
               focus on governmentwide initiatives such as the President’s Management
               Agenda (PMA), which has at its base many of the areas we had previously
               designated as being high risk. Moreover, our program has helped draw
               attention to the need to effectively manage the risks associated with
               several important broad-based transformations under way in government
               today, such as those at the Department of Defense (DOD), Internal
               Revenue Service (IRS), Postal Service, Department of Education,
               Department of Housing and Urban Development (HUD), and Federal
               Aviation Administration (FAA), where success will be critical to the nation
               and its citizens.

               For 2003, we have designated four new high-risk areas. Three of these
               involve major challenges in addressing broad-based transformations, or are
               areas where legislative solutions may be called for. The fourth area,
               Medicaid, is being added to the high-risk list, in part because of growing
               concern about inadequate fiscal oversight efforts to prevent inappropriate
               program spending.



               Table 3: Changes to GAO’s High-Risk List, 2001 to 2003

                                                                                        Number of
               Changes 2001–2003                                                           areas
               High-risk list in 2001                                                           23
               High-risk areas added in 2003                                                     4
               High-risk areas removed in 2003                                                   2
               High-risk list in 2003                                                           25
               Source: GAO.




               Page 6                                                   GAO-03-119 High-Risk Update
                         Overview of Progress in Addressing
                         High-Risk Areas




High-Risk Designations   For this 2003 high-risk update, we determined that two high-risk areas
                         warranted removal from the list. They are the Social Security
Removed                  Administration’s (SSA) Supplemental Security Income (SSI) program and
                         the asset forfeiture programs managed by the Departments of Justice and
                         the Treasury. We will, however, continue to monitor these programs, as
                         appropriate, to ensure that the improvements we have noted are sustained.



Supplemental Security    We designated SSI a high-risk program in 1997, after several years of
Income                   reporting on specific instances of abuse and mismanagement, increasing
                         overpayments, and poor recovery of outstanding SSI overpayments. SSA’s
                         actions since then included developing a major SSI legislative proposal
                         with numerous overpayment deterrence and recovery provisions. The
                         ensuing enacted legislation directly addressed a number of our prior
                         recommendations and provides SSA with additional tools to obtain
                         applicant income and resource information from financial institutions;
                         imposes a period of ineligibility for applicants who transfer assets to
                         qualify for SSI benefits; and authorizes the use of credit bureaus, private
                         collection agencies, interest levies, and other means to recover
                         overpayments. SSA also obtained separate legislative authority to recover
                         overpayments from former SSI recipients who currently receive Social
                         Security benefits. In addition, SSA initiated a number of internal
                         administrative actions to further strengthen SSI program integrity,
                         including using tax refund offsets for collecting SSI overpayments and
                         more frequent automated matches to identify ineligible SSI recipients living
                         in nursing homes and other institutions. In addition, SSA increased the
                         number of SSI financial redeterminations that it conducted and the level of
                         resources and staff in the Office of Inspector General devoted to
                         investigating SSI fraud and abuse. Finally, SSA revised its field office work
                         credit and measurement system to better reward staff for time spent
                         developing fraud referrals. In fiscal year 2002, SSA increased its collection
                         of overpayments by $150 million over the prior fiscal year. (See our
                         Performance and Accountability report on the Social Security
                         Administration.3)




                         3
                           U.S. General Accounting Office, Major Management Challenges and Program Risks:
                         Social Security Administration, GAO-03-117 (Washington, D.C.: Jan. 2003).




                         Page 7                                                   GAO-03-119 High-Risk Update
                            Overview of Progress in Addressing
                            High-Risk Areas




Asset Forfeiture Programs   We first reported asset forfeiture programs operated by the Departments of
                            Justice and the Treasury as a high-risk area in 1990 because of
                            shortcomings in the management of and accountability for seized and
                            forfeited property and the potential for cost reduction through
                            administrative improvements and consolidation of the programs’
                            postseizure management and disposition of noncash seized property. We
                            have subsequently reported that actions taken by Treasury’s Customs
                            Service and Justice’s Marshals Service to address our recommendations
                            have improved the management of and accountability for seized and
                            forfeited property. We also reported that Justice’s Drug Enforcement
                            Administration and Federal Bureau of Investigation (FBI) have taken many
                            actions to address our recommendations to improve physical safeguards
                            over drugs and firearms evidence and strengthen accountability for such
                            evidence. In addition, the Treasury Forfeiture Fund and Justice's Asset
                            Forfeiture Fund and Seized Asset Deposit Fund have strengthened their
                            financial management and accountability over seized and forfeited
                            property, in part evidenced by the unqualified opinions on these entities’
                            financial statements over the past several years. With respect to
                            consolidating noncash asset management and disposition activities,
                            Treasury and Justice are moving toward sharing Web site locations for
                            Internet sales, sharing selected vehicle storage and warehouse facilities,
                            and exploring opportunities to jointly contract for specific services in high-
                            volume areas. The departments’ substantial progress in improving the
                            management of and accountability for seized and forfeited property, and
                            their demonstrated commitment to communicate and coordinate where
                            joint efforts could help reduce costs and eliminate duplicative activities,
                            are sufficient for us to remove the high-risk designation from asset
                            forfeiture programs. (See our Performance and Accountability reports on
                            the Departments of Justice and the Treasury.4)



Progress Being Made in      For virtually all other areas that remain on our 2003 high-risk list, there has
                            been important progress, although not yet enough progress to remove
Remaining High-Risk         these areas from the list. Top administration officials have expressed their
Areas                       commitment to maintaining momentum in seeing that high-risk areas


                            4
                              U.S. General Accounting Office, Major Management Challenges and Program Risks:
                            Department of Justice, GAO-03-105 (Washington, D.C.: Jan. 2003); and Major Management
                            Challenges and Program Risks: Department of the Treasury, GAO-03-109 (Washington,
                            D.C.: Jan. 2003).




                            Page 8                                                    GAO-03-119 High-Risk Update
Overview of Progress in Addressing
High-Risk Areas




receive adequate attention and oversight. A concerted effort by agencies
and ongoing attention by the Office of Management and Budget (OMB) is
critical, as our experience over the past 13 years has shown that
perseverance is required to fully resolve high-risk areas. The Congress,
too, will continue to play an important role through its oversight and,
where appropriate, through legislative action targeted at the problems and
designed to address high-risk areas. Examples of agencies’ progress
follow:

• DOD has undertaken a number of initiatives to transform its forces and
  improve its business operations. As part of its transformation process,
  the Secretary of Defense and senior civilian and military leaders have
  committed to adopt a capabilities-based approach to planning based on
  clear goals and to improve the linkage between strategy and
  investments. At the same time, DOD has embarked on a series of efforts
  to improve its business processes, including support infrastructure
  reforms to include base closures, information technology
  modernization, and logistics reengineering. Further, in acknowledging
  DOD’s numerous ongoing financial difficulties, the Secretary of Defense
  has laid out an 8-year plan to reform financial management and
  accountability and instituted new contract management policies and
  programs aimed at increasing the importance given to these processes.
  Although DOD recognizes the need for internal transformation and
  budget reform, its goals are challenging, and its strategic plan is
  currently not set up to allow DOD to implement and measure progress
  toward achieving its performance goals in an integrated fashion.
  Additionally, DOD has not kept pace with the changing capabilities and
  productivity of the modern business environment. Effecting
  departmental transformation also requires cultural transformation and
  business process reengineering, which take years to accomplish, and a
  commitment from both the executive and legislative branches of
  government. (See “Highlights of High-Risk Areas,” p. 28.)

• IRS continues to make important progress. For example, IRS (1) has
  developed and is using a modernization blueprint, commonly called an
  enterprise architecture, to guide and constrain its systems
  modernization projects and (2) is investing incrementally in them; both
  of which are leading practices of successful public- and private-sector
  organizations. In other actions, IRS has worked aggressively to address
  financial management issues not solely dependent on systems
  modernization for resolution and, in 2002, produced reliable annual
  financial statements (for the third consecutive year) only 6 weeks after



Page 9                                            GAO-03-119 High-Risk Update
Overview of Progress in Addressing
High-Risk Areas




   the end of the fiscal year. Also, IRS has made progress in revamping
   both its organizational performance and human capital management
   systems. It has implemented and used a new strategic planning,
   budgeting, and performance management process. It has also rolled out
   a new employee evaluation system designed to align performance
   expectations and incentives with agencywide strategic goals. Top
   management has further demonstrated its commitment by taking
   actions to address other problems. For example, IRS is in various stages
   of planning and implementing a strategy to improve productivity in
   collecting taxes, and the Commissioner of Internal Revenue and the
   Treasury Assistant Secretary for Tax Policy have convened a joint task
   force to develop recommendations to better administer the earned
   income credit. However, more needs to be done to address risks
   associated with the growing scope and complexity of modernization and
   the internal control weaknesses in IRS’s financial management. Further,
   concerns remain about trends in the collection of unpaid taxes and the
   level of earned income credit noncompliance. Finally, IRS needs to
   continue its efforts to strengthen its approaches to managing its human
   capital. (See “Highlights of High-Risk Areas,” p. 28.)

• The Department of Education has made important progress in, and
  demonstrated its commitment to, addressing long-standing issues that
  have made student financial aid programs vulnerable to fraud, waste,
  abuse, and mismanagement. Education established a team of senior
  managers to formulate strategies and direct initiatives to address key
  financial and management problems throughout the agency. Under one
  financial aid program initiative, names of defaulted borrowers were
  matched with the Department of Health and Human Services’ National
  Directory of New Hires database. This resulted in the collection of $269
  million in fiscal year 2002 alone. Education has also conducted sample
  matches of income reported on student aid applications with federal tax
  returns. Expanding this initiative is contingent upon legislation that
  would increase IRS’s ability to share information with other agencies.
  Progress has also been made in other areas. Education’s Office of
  Federal Student Aid can now better integrate and use its existing data
  on student loans and grants, and changes have been implemented aimed
  at strengthening financial management departmentwide. However,
  additional work is needed to both prevent and collect defaulted student
  loans and to better demonstrate systems integration progress.
  Furthermore, it is too soon to determine whether changes made to
  improve financial management and address internal control weaknesses
  will prove effective. (See “Highlights of High-Risk Areas,” p. 28.)



Page 10                                            GAO-03-119 High-Risk Update
                         Overview of Progress in Addressing
                         High-Risk Areas




                         • HUD continues to work at overcoming weaknesses in its Single-Family
                           Mortgage Insurance and Rental Housing Assistance program areas.
                           HUD’s progress in its single-family insurance programs includes, for
                           example, implementation of new processes to review lenders and
                           appraisers and new incentives to improve the performance of its
                           property disposition contractors. In its rental housing assistance
                           programs, HUD has, among other things, initiated efforts to ensure that
                           rental housing assistance is properly calculated and recipients are
                           eligible, and improved processes to ensure that housing providers
                           comply with the department’s housing quality standards. However,
                           many of HUD’s strategies for resolving its high-risk problems represent
                           new initiatives in the early stages of implementation, and significant
                           problems remain. For example, HUD has not yet fully implemented an
                           assessment system for calculating key financial indicators to determine
                           lenders’ soundness and risk exposure. Further, HUD now estimates that
                           rental assistance overpayments—some $2 billion out of $19 billion in
                           assistance in fiscal year 2000—are greater than previously estimated.
                           (See “Highlights of High-Risk Areas,” p. 28.)

                         FAA is moving to rectify serious, long-standing material weaknesses in its
                         financial management systems. Its new general, property, and cost
                         accounting systems—a departmentwide initiative—are expected to give
                         FAA the ability to produce reliable financial statements that accurately
                         assign costs to its programs and projects and account for the cost of its
                         property. Whether the new accounting system will fully remedy FAA's
                         financial management deficiencies will not be determined until it is fully
                         implemented and subsequently subjected to a financial statement audit.
                         FAA has also worked to address weaknesses in its Air Traffic Control
                         Modernization efforts. For example, the agency has implemented a
                         framework for improving its software processes, developed a systems
                         architecture, institutionalized cost estimating practices, and improved its
                         investment management practices. However, more needs to be done in
                         each of these areas to achieve needed improvements. (See “Highlights of
                         High-Risk Areas,” p. 28.)



Progress in Addressing   As part of our move toward focusing on broad-based management
                         challenges, we have designated as high risk key areas where
Transformation           transformation was needed or under way and where legislative action
Challenges               would be helpful. We have seen important progress in three of these areas
                         as well.




                         Page 11                                            GAO-03-119 High-Risk Update
                          Overview of Progress in Addressing
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Strategic Human Capital   Since we designated strategic human capital management as a
Management                governmentwide high-risk area in January 2001, the Congress and the
                          executive branch have taken a number of steps to address the challenges
                          identified. Among these steps were the following:

                          • In August 2001, the President placed the strategic management of
                            human capital at the top of the President’s Management Agenda (PMA).

                          • OMB began assessing agencies according to standards for success for
                            each part of the PMA, including the strategic management of human
                            capital. The first agency assessment was published in February 2002.
                            Subsequent assessments, published in June and September 2002,
                            reported on both the status and progress of agencies’ efforts in strategic
                            human capital management.

                          • In December 2001, the Office of Personnel Management (OPM) released
                            a human capital scorecard to assist agencies in responding to the human
                            capital standards for success contained in the PMA.

                          • In the fall of 2002, OPM began realigning its organizational structure and
                            appointed four new associate directors with proven human capital
                            expertise to lead federal efforts.

                          • In October 2002, OMB and OPM approved revised standards for success
                            in the human capital area of the PMA, reflecting language developed in
                            collaboration with us.

                          • In November 2002, the Congress passed the Homeland Security Act of
                            2002, which created the Department of Homeland Security and provided
                            the department with significant flexibility to design a modern human
                            capital management system. This legislation also included additional
                            significant provisions relating to governmentwide human capital
                            management, such as direct hire authority, the ability to use categorical
                            ranking in the hiring of applicants instead of the “rule of three,” the
                            creation of Chief Human Capital Officers (CHCO) positions and a CHCO
                            Council, expanded voluntary early retirement and buy-out authority, a
                            requirement to discuss human capital approaches in Government
                            Performance and Results Act reports and plans, a provision allowing
                            executives to receive their total performance bonus in the year in which
                            it is awarded, and other flexibilities.




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Although considerable momentum is building and progress has been made
over the past 2 years, it remains clear that today’s federal human capital
strategies are not yet appropriately constituted to meet current and
emerging challenges or to drive needed transformation across the federal
government. The basic problem, which continues today, has been the long-
standing lack of a consistent strategic approach to marshalling, managing,
and maintaining the human capital needed to maximize government
performance and assure its accountability. Specifically, agencies across
the federal government continue to face challenges in four key areas:

• Leadership: Top leadership in the agencies must provide the sustained,
  committed, and inspired attention needed to address human capital and
  related organization transformation issues.

• Strategic Human Capital Planning: Agencies’ human capital planning
  efforts need to be more fully and demonstrably integrated with mission
  and critical program goals.

• Acquiring, Developing, and Retaining Talent: Additional efforts are
  needed to improve recruiting, hiring, professional development, and
  retention strategies to ensure that agencies have needed talent.

• Results-Oriented Organizational Cultures: Agencies continue to lack
  organizational cultures that promote high performance and
  accountability, and that empower and include employees in setting and
  accomplishing programmatic goals.

Importantly, although strategic human capital management remains high
risk governmentwide, federal employees are not the problem. Rather, the
problem is a set of policies that are viewed by many as outdated, over-
regulated, and not strategic. Human capital weaknesses in the federal
government did not emerge overnight and will not be quickly or easily
addressed. Committed, sustained, and inspired leadership and persistent
attention on behalf of all interested parties will continue to be essential to
build on the progress that has been and is being made, if lasting reforms are
to be successfully implemented.

Reaching and maintaining a strategic approach to human capital
management will take considerable effort on the part of the Congress,
agency leadership, OPM, and OMB. Ultimately, the Congress may wish to
consider legislative reforms to existing civil service laws. Key questions
include the degree to which legislative changes are needed to design a



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                      modern human capital management system for the federal government.
                      Although momentum continues to build for comprehensive reform,
                      agencies need to use currently available flexibilities. (See “Highlights of
                      High-Risk Areas,” p. 28.)



U.S. Postal Service   In April 2001, we identified the U.S. Postal Service's transformation efforts
                      and long-term outlook as high risk due to growing financial, operational,
                      and human capital challenges. Since then, these challenges have
                      continued, and the Service has struggled to fulfill its primary mission of
                      providing universal postal service at reasonable rates while remaining self-
                      supporting from postal revenues. The events of September 11, 2001, and
                      subsequent use of the mail to transmit anthrax have introduced new issues
                      related to mail safety and security that also must be addressed. These
                      challenges, as well as the need to address the uncertainty about the
                      Service's future role, require urgent attention to ensure that the Service will
                      be able to fulfill its mission in the 21st century.

                      In response to our high-risk designation, the Service released its
                      Transformation Plan in April 2002. In this plan, the Service outlined actions
                      it deemed necessary to deal with transformation issues both (1) in the short
                      term, under its current authority and through moderate regulatory and
                      legislative reforms, and (2) in the longer term, through fundamental
                      structural transformation. To achieve its fundamental structural
                      transformation, the Service proposed moving to a Commercial Government
                      Enterprise business model.

                      We reported that the development of the Transformation Plan was a good
                      first step in raising key postal reform issues. Implementing the plan is a
                      new challenge for the Service—in part because consensus has yet to be
                      reached on legislative reforms—and therefore we have now added this
                      implementation to the list of the Service’s major challenges. The other
                      challenges include (1) controlling costs and improving productivity under
                      the Service’s existing authority, (2) addressing unresolved financial issues,
                      (3) developing strategies to address human capital issues, and (4) providing
                      complete and reliable financial and performance information in a timely
                      and transparent manner.

                      Opportunities exist for the Service to address these major management
                      challenges and make further progress in its transformation efforts. For
                      example, the results of a recent financial analysis by OPM may lead to a
                      reduction in the Service’s pension liability and related annual payments if



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                         the Congress takes legislative action in this area. This additional
                         “breathing room” could allow the Service to address other financial
                         challenges, such as its outstanding debt, substantial postretirement health
                         obligations, and its capital freeze. The Service also anticipates a large
                         number of upcoming retirements, which would provide an opportunity to
                         realign the Service’s workforce and infrastructure to meet its future
                         operational needs. Committed leadership and sustained attention to
                         addressing the Service’s management challenges will be critical to
                         achieving its transformation.

                         Addressing the Service’s various challenges through comprehensive
                         legislative reform will require consensus among various stakeholders—
                         something that has been very difficult to achieve, in part because the
                         Service’s numerous stakeholders have divergent needs and concerns.
                         Since 1996, the Congress has considered postal reform legislation many
                         times; however, none of the reform proposals has been passed. More
                         recently, in December 2002, the President established a nine-member
                         Commission on the United States Postal Service to propose a vision for the
                         future of the Postal Service and recommend the legislative and
                         administrative reforms needed to ensure the viability of postal services.
                         The Commission is expected to submit its report to the President by July
                         31, 2003. (See “Highlights of High-Risk Areas,” p. 28.)



Protecting Information   We have designated information security as a high-risk area across
Systems Supporting the   government since 1997 because of continuing evidence indicating
                         significant, pervasive weaknesses in the controls over computerized
Federal Government and
                         federal operations. Moreover, related risks continue to escalate, in part
the Nation’s Critical    due to the government’s increasing reliance on the Internet and on
Infrastructures          commercially available information technology. In addition, we continue
                         to report significant information security weaknesses in 24 major federal
                         agencies.5

                         Since our last high-risk report, efforts to correct information security
                         weaknesses and improve federal information security have accelerated
                         both at individual agencies and at the governmentwide level, including


                         5
                          U.S. General Accounting Office, Computer Security: Improvements Needed to Reduce Risk
                         to Critical Federal Operations and Assets, GAO-02-231T (Washington, D.C.: Nov. 9, 2001);
                         and Computer Security: Progress Made, but Critical Federal Operations and Assets
                         Remain at Risk, GAO-03-303T (Washington, D.C.: Nov. 19, 2002).




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implementing government information security reform legislation enacted
by the Congress in October 2000, implementing a related annual reporting
process, and developing guidance and tools for agencies to self-assess their
information security programs.

On December 17, 2002, the Federal Information Security Management Act
of 2002 was enacted, to permanently authorize and strengthen the
information security program, evaluation, and reporting requirements
established by government information security reform legislation. This
legislation is an essential step to sustaining agency efforts to identify and
correct significant weaknesses. Nonetheless, further information security
improvement efforts are needed at the agency level and governmentwide.
It is important that these efforts be guided by a comprehensive strategy and
that this strategy address certain key issues including:

• delineating the roles and responsibilities of the numerous entities
  involved in federal information security;

• providing more specific guidance to agencies on the controls that they
  need to implement;

• having agencies’ performance monitored by the agencies themselves, as
  well as by the Congress and the executive branch;

• providing adequate technical expertise and allocating sufficient
  resources; and

• expanding research in the area of information systems protection.

In our January 2001 high-risk update report, we also began to highlight the
increasing importance of the federal government’s efforts to protect our
nation’s critical public and private computer-dependent infrastructure
(such as national defense, power distribution, and water supply), as
outlined in Presidential Decision Directive 63. This year, we are broadening
this high-risk issue to highlight the increased importance of protecting the
information systems that support these critical infrastructures, referred to
as cyber critical infrastructure protection or cyber CIP. Since our 2001
report, terrorist attacks and threats have further underscored the need to
manage CIP activities that enhance the security of the cyber and physical
public and private infrastructures that are essential to national security,
national economic security, and/or national public health and safety. At the




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federal level, cyber CIP activities are perhaps the most critical component
of a department or agency’s overall information security program.

Since 2001, a number of significant actions have occurred to better position
the nation to protect its critical infrastructures, including the following:

• In October 2001, the President established the President’s Critical
  Infrastructure Protection Board to coordinate cyber-related federal
  efforts for protecting our nation’s critical infrastructures.

• In July 2002, the President and his Office of Homeland Security issued
  the National Strategy for Homeland Security, which identifies
  protecting critical infrastructures and intelligence and warning as
  critical components.

• In September 2002, the Protection Board released a comment draft of a
  National Strategy to Secure Cyberspace. The board issued this draft
  because the National Strategy for Homeland Security states that the
  administration will complete cyber and physical infrastructure
  protection plans to serve as the baseline for a future comprehensive
  national infrastructure protection plan.

• On November 25, 2002, the President signed the Homeland Security Act
  of 2002, which established the Department of Homeland Security and,
  within it, the Directorate of Information Analysis and Infrastructure
  Protection.

Although these actions taken are major steps to more effectively protect
our nation’s critical infrastructures, further actions are needed to fully
address our recommendations concerning CIP challenges, including

• completing a comprehensive and coordinated national CIP strategy,

• improving analysis and warning capabilities, and

• improving information sharing on threats and vulnerabilities.

(See “Highlights of High-Risk Areas,” p. 28.)




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Adding Three Broad-      The new use of the high-risk designation to draw attention to the
                         challenges faced by government programs and operations in need of broad-
Based High-Risk Areas    based transformation has led to important progress. With these positive
                         results in mind, for 2003, we have designated three additional such areas as
                         high risk: implementing and transforming the new Department of
                         Homeland Security (DHS), modernizing federal disability programs, and
                         federal real property.



Implementing and         We designated implementation and transformation of the new Department
Transforming the New     of Homeland Security as high risk based on three factors. First, the
                         implementation and transformation of DHS is an enormous undertaking
Department of Homeland
                         that will take time to achieve in an effective and efficient manner. Second,
Security                 components to be merged into DHS already face a wide array of existing
                         challenges. Finally, failure to effectively carry out its mission would
                         expose the nation to potentially very serious consequences.

                         In the aftermath of September 11, invigorating the nation’s homeland
                         security missions has become one of the federal government’s most
                         significant challenges. DHS, with an anticipated budget of almost $40
                         billion and an estimated 170,000 employees, will be the third largest
                         government agency; not since the creation of DOD more than 50 years ago
                         has the government sought an integration and transformation of this
                         magnitude. In DOD’s case, the effective transformation took many years to
                         achieve, and even today, the department continues to face enduring
                         management challenges and high-risk areas that are, in part, legacies of its
                         unfinished integration.

                         Effectively implementing and transforming DHS may be an even more
                         daunting challenge. DOD at least was formed almost entirely from
                         agencies whose principal mission was national defense. DHS will combine
                         22 agencies specializing in various disciplines: law enforcement, border
                         security, biological research, disaster mitigation, and computer security, for
                         instance. Further, DHS will oversee a number of non-homeland-security
                         activities, such as Coast Guard’s marine safety responsibilities and the
                         Federal Emergency Management Agency’s (FEMA) natural disaster
                         response functions. Yet only in the effective integration and collaboration
                         of these entities will the nation achieve the synergy that can help provide
                         better security against terrorism. The magnitude of the responsibilities,
                         combined with the challenge and complexity of the transformation,




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underscores the perseverance and dedication that will be required of all
DHS’s leaders, employees, and stakeholders to achieve success.

Further, it is well recognized that mergers of this magnitude in the public
and private sector carry significant risks, including lost productivity and
inefficiencies. Generally, successful transformations of large
organizations, even those undertaking less strenuous reorganizations and
with less pressure for immediate results, can take from 5 to 7 years to
achieve. Necessary management capacity and oversight mechanisms must
be established. Moreover, critical aspects of DHS’s success will depend on
well-functioning relationships with third parties that will take time to
establish and maintain, including those with state and local governments,
the private sector, and other federal agencies with homeland security
responsibilities, such as the Department of State, the FBI and the Central
Intelligence Agency, DOD, and the Department of Health and Human
Services (HHS). Creating and maintaining a structure that can leverage
partners and stakeholders will be necessary to effectively implement the
national homeland security strategy.

The new department is also being formed from components with a wide
array of existing major management challenges and program risks. For
instance, one DHS directorate’s responsibility includes the protection of
critical information systems that we already consider a high risk. In fact,
many of the major components merging into the new department, including
the Immigration and Naturalization Service (INS), the Transportation
Security Administration (TSA), Customs Service, FEMA, and the Coast
Guard, face at least one major problem, such as strategic human capital
risks, critical information technology challenges, or financial management
vulnerabilities; they also confront an array of challenges and risks to
program operations. For example, TSA has had considerable challenges in
meeting deadlines for screening baggage, and the agency has focused most
of its initial security efforts on aviation security, with less attention to other
modes of transportation. INS has had difficulty in tracking aliens due to
unreliable address information. Customs must meet challenges from the
potential threats of weapons of mass destruction smuggled in cargo
arriving at U.S. ports, and the Coast Guard faces the challenges inherent in
a massive fleet modernization.

DHS’s national security mission is of such importance that the failure to
address its management challenges and programs risks could have serious
consequences on our intergovernmental system, our citizens’ health and
safety, and our economy. Overall, our designation of the implementation



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                      and transformation of DHS as a high-risk area stems from the importance
                      of its mission and the nation’s reliance on the department’s effectiveness in
                      meeting its challenges for protecting the country against terrorism. (See
                      “Highlights of High-Risk Areas,” p. 28.)



Modernizing Federal   This new high-risk area encompasses a range of federal disability
Disability Programs   programs. Federal disability programs have experienced significant
                      growth over the past decade and are expected to grow even more steeply
                      as more baby boomers reach their disability-prone years. In particular, SSA
                      and the Department of Veterans Affairs (VA) oversee five major disability
                      programs providing cash assistance to individuals with physical or mental
                      conditions that reduced their earnings capacity, collectively paying more
                      than $100 billion in cash benefits to more than 13 million beneficiaries in
                      2001.6 In recent years, scientific advances and economic and social
                      changes, paradoxically, have redefined the relationship between
                      impairments and work. Advances in medicine and technology have
                      reduced the severity of some medical conditions and have allowed
                      individuals to live with greater independence and function in work settings.
                      Moreover, the nature of work has changed in recent decades as the national
                      economy has moved away from manufacturing-based jobs to service- and
                      knowledge-based employment. Yet federal disability programs remain
                      mired in concepts from the past and are poorly positioned to provide
                      meaningful and timely support for Americans with disabilities. Indeed, SSA
                      and VA are struggling to provide accurate, timely, and consistent disability
                      decisions to program applicants. We have added modernizing federal
                      disability programs to our 2003 high-risk list based on the following
                      concerns.

                      Federal disability programs are grounded in outmoded concepts. Despite
                      opportunities afforded by medical and technological advancements and the
                      growing expectations that people with disabilities can and want to work,
                      federal disability programs remain grounded in an approach that equates
                      medical conditions with the incapacity to work. The legislation for SSA’s
                      and VA’s disability programs requires that the assessment of eligibility be
                      based on the presence of medically determinable physical and mental
                      impairments. However, these assessments do not always reflect recent
                      medical and technological advances and their impact on medical

                      6
                       Total beneficiaries represents the sum of participants in each program and does not
                      account for potential participation in more than one program.




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conditions that affect the ability to work. Likewise, the criteria used to
assess disability have not incorporated changes in the labor market that
have affected the skills needed to perform work and the settings in which
work occurs. By using outdated information, the agencies risk
overcompensating some individuals while undercompensating or denying
compensation entirely to others.

While relying upon outmoded assumptions about impairment and work,
the agencies have experienced difficulty in managing disability programs.
In spite of years of efforts to improve the management of their disability
programs, both SSA and VA continue to face significant challenges. The
processes these agencies use to determine disability adversely affect each
agency’s ability to efficiently, equitably, and effectively serve their
beneficiaries.

Both SSA and VA have experienced increasing processing times for
disability claims over the past several years, with claimants waiting more
than 4 months for an initial decision and for more than 1 year for a decision
on appeal of a denied claim. Although SSA has recently implemented
several short-term initiatives not requiring statutory or regulatory changes
to reduce processing times, it is still evaluating strategies for longer-term
solutions. VA has demonstrated some recent progress based on newly
implemented initiatives, but the agency is far from achieving its own goals
for timeliness.

The inconsistencies in disability decisions across adjudicative levels and
locations in both agencies have raised questions about the fairness,
integrity, and cost of these programs. Although both agencies have taken
steps to provide training and enhance communication to improve the
consistency of decisions, variations in allowances rates continue and a
significant number of denied claims are still awarded on appeal. In
addition, both SSA and VA have experienced challenges with implementing
effective quality assurance systems. After failing in its attempts since 1994
to redesign a more comprehensive quality assurance system, SSA has
recently begun a new quality management initiative. VA has taken a
number of recent actions to correct problems with its quality assurance
system and its measure of decision accuracy in 2002 has shown
improvement. However, it is still well below the agency’s strategic goal for
accuracy.

Both SSA and VA lack comprehensive plans for addressing program
growth. For example, between 1991 and 2001, the number of beneficiaries



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and their family members receiving Disability Insurance (DI) benefits, the
largest of the five disability programs administered by SSA and VA,
increased from 4.5 million to 6.9 million, as total cash benefits increased
more than 70 percent (in 2001 dollars) during this time period to nearly $60
billion. By 2010, SSA expects that the number of DI beneficiaries and their
eligible family members will increase by more than one-third over 2001
levels. (See figure 1.) Similarly, VA expects the number and complexity of
its disability claims to increase due to veterans’ increased awareness of
service-connected disabilities and recent legislative changes. Likewise, the
disability rolls have been increasingly characterized by conditions that
result in extended entitlement periods. Mental impairments and
musculoskeletal conditions—conditions that people can survive with for
decades—are currently more common qualifying conditions for people
receiving benefits than in years past. However, SSA and VA have not
sufficiently prepared for this growth and need specific plans for addressing
future disability needs.



Figure 1: Growth in DI Beneficiaries
10 DI beneficiaries (in millions)

 9

 8

 7

 6

 5

 4

 3

 2

 1

 0
     1991     1993         1995        1997         1999        2001        2003        2005        2007        2009        2011
     Calendar year
Source: 2002 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and the Federal Disability
Insurance Trust Funds.

Note: Figures after 2001 are estimates based on the intermediate assumptions of the Trustees of the
Social Security trust funds.


SSA also faces the challenge of supporting disability beneficiaries’ return to
work. SSA has experienced limited success in doing so, in spite of changes



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                        in medicine, technology, society, and the nature of work, all of which have
                        increased the potential for some people with disabilities to return to the
                        labor force. Although SSA has taken a number of actions to improve its
                        return-to-work practices, the agency still needs to develop, as we have
                        recommended, a comprehensive return-to-work strategy that focuses at the
                        outset on an evaluation of what is needed for an individual to return to
                        work. Given the projected slowdown in the growth of the nation's labor
                        force, it is imperative that those who can work are supported in their
                        efforts to do so.

                        Developing comprehensive and sustainable solutions to the problems
                        facing federal disability programs in the 21st century will require agencies
                        to significantly broaden their current efforts. Indeed, no single agency has
                        the span of authority to fully address the issues involved. Although some
                        solutions can be developed and implemented within the regulatory
                        process, others will require legislative action. Fundamentally, agencies’
                        efforts need to be marked by consultation and cooperation with the
                        legislative branch and by cross-agency cooperation. Success in improving
                        operations and key outcomes—such as increased employment—will
                        involve partnerships with agencies such as the Department of Labor, the
                        Department of Education, HHS, and perhaps between SSA and VA
                        themselves. (See “Highlights of High-Risk Areas,” p. 28.)



Federal Real Property   Over 30 federal agencies control hundreds of thousands of real property
                        assets—including both facilities and land—in the United States and abroad.
                        These assets are worth about $328 billion, according to the fiscal year 2001
                        financial statements of the U.S. government.7 Unfortunately, much of this
                        vast and valuable asset portfolio presents significant management
                        challenges and reflects an infrastructure based on the business model and
                        technological environment of the 1950s. Many assets are no longer
                        effectively aligned with, or responsive to, agencies’ changing missions and
                        are therefore no longer needed. Furthermore, many assets are in an
                        alarming state of deterioration; restoration and repair needs are estimated
                        by agencies to be in the tens of billions of dollars. For example, the
                        Department of the Interior has a deferred maintenance backlog that its
                        Inspector General estimated in April 2002 to be as much as $8 billion to $11
                        billion, and General Services Administration (GSA) data has shown a $5.7

                        7
                         This value does not include stewardship assets—such as wilderness areas, scenic river
                        systems, and monuments.




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billion repair and maintenance backlog in its buildings. Compounding
these problems are the lack of reliable governmentwide data for strategic
asset management, a heavy reliance on costly leasing instead of ownership
to meet new space needs, and the cost and challenge of protecting these
assets against potential terrorism.

To address these challenges, the Congress and the administration have
undertaken several efforts, including Defense Base Realignment and
Closures Commissions and the President’s Commission to Study Capital
Budgeting. In addition, the Congress, OMB, and GSA have also recognized
the need for and developed legislative proposals in recent years that were
designed to address some of the problems. Although some of these efforts
and other work by individual real-property-holding agencies have had some
success, much remains to be done governmentwide. In most cases, the
effectiveness of current and planned initiatives has yet to be determined.
Despite these efforts and the sincerity with which the federal real property
community has embraced the need for reform, the problems have persisted
and have been exacerbated by competing stakeholder interests in real
property decisions, various legal and budget-related disincentives to
achieving businesslike outcomes, the need for better capital planning
among real-property-holding agencies, and the lack of a strategic
governmentwide focus on federal real property issues.

Given the persistence of these problems and the various obstacles that
have impeded progress in resolving them, we are designating federal real
property as a new high-risk area. Resolving these long-standing problems
will require high-level attention and effective leadership by the Congress
and the administration. Also, because of the breadth and complexity of the
issues involved, the long-standing nature of the problems, and the intense
debate about potential solutions that will likely ensue, current structures
and processes may not be adequate to address the problems. Given this,
there is a need for a comprehensive and integrated transformation strategy
for federal real property, and an independent commission or
governmentwide task force may be needed to develop this strategy. Such a
strategy could be based on input from agencies, the private sector, and
other interested groups. The strategy should also reflect the lessons
learned and leading practices of public and private organizations that have
attempted to reform their real property practices. These organizations
have recognized that real property, like capital, people, technology, and
information, is a valuable resource that, if managed well, can support the
accomplishment of their missions and the achievement of their business




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                      objectives. In addition, as these organizations are recognizing, the
                      workplace of the future will differ from today’s work environment.

                      For the federal government, technological advancements, electronic
                      government, flexible workplace arrangements, changing public needs,
                      opportunities for resource sharing, and security concerns will call for a
                      new way of thinking about the federal workplace and the government’s real
                      property needs. Realigning the government’s real property assets with
                      agency missions, taking into account the requirements of the future federal
                      role and workplace, will be critical to improving the government’s
                      performance and ensuring accountability within expected resource limits.
                      If actions resulting from the transformation strategy comprehensively
                      address the problems and are effectively implemented, agencies will be
                      better positioned to recover asset values, reduce operating costs, improve
                      facility conditions, enhance safety and security, and achieve mission
                      effectiveness. (See “Highlights of High-Risk Areas,” p. 28.)



New High-Risk Area    In addition to our expanded focus on challenges associated with the
                      economy, efficiency, and effectiveness of government programs and
Identified Based on   operations in need of broad-based transformation, we will continue to
Fiscal Oversight      identify high-risk areas based on the more traditional focus on fraud, waste,
                      abuse, and mismanagement. For such problems, our focus will continue to
Vulnerabilities       be on identifying the root causes behind the vulnerabilities, as well as
                      actions needed on the part of the agencies involved and, if appropriate, the
                      Congress. For this update, we have designated one such new high-risk
                      area.



Medicaid Program      Growing concern about the size, growth, and fiscal oversight of the
                      Medicaid program has led us to include the program on our 2003 high-risk
                      list. Medicaid pays for both acute health care and long-term care services
                      for over 44 million low-income Americans and is the third largest social
                      program in the federal budget (after Social Security and Medicare).
                      Financed jointly by the federal government and the states, Medicaid
                      consists of more than 50 distinct “state” programs that together cost $228
                      billion in fiscal year 2001, accounts for more than 20 percent of states’ total
                      expenditures, and is projected to double in spending in a decade. The
                      federal government pays from half to more than three-fourths of each
                      state’s Medicaid expenditures.




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The Centers for Medicare & Medicaid Services (CMS) faces major
challenges in managing this program of vast size, growth, and diversity.
Protecting the program’s fiscal integrity is critically important. It is
especially challenging because the federal government’s financial liability
for the Medicaid program is linked to reported state expenditures. Our
work in recent years finds that federal and state oversight efforts have
often been inadequate to prevent inappropriate spending, thereby
increasing federal spending unnecessarily.

Over the last decade, for example, some states have found ways to
inappropriately leverage federal funds. Although CMS and the Congress
have acted to curb certain financing schemes, states have found new
statutory and regulatory loopholes to create the illusion that they have
made large Medicaid payments to certain health care providers in order to
generate excessive federal matching payments. Some of the schemes have
cost the federal government several billions of dollars each year.

We are also concerned that states’ receipt of waivers—where the Secretary
of HHS waives certain statutory provisions and allows testing of new health
care delivery and coverage ideas—may continue to increase the federal
government’s financial liability beyond what it would have been without
the waivers.8 For example, two states’ waivers approved in 2002 are
estimated to cost the federal government an extra $330 million or more
than it would have paid in the absence of the waivers. HHS is currently
considering approval of similar waivers by additional states.

Another area of concern involves federal and state efforts to ensure that
payments are accurate and appropriate. Like other health care payers,
Medicaid is vulnerable to waste, fraud, and abuse by providers who submit
inappropriate claims. The hundreds of millions of dollars in improper
payments that a few states have identified in recent years suggests that
states have the potential for considerable savings through increased efforts
to safeguard program payments.

The exploitation of Medicaid not only penalizes taxpayers, but also
jeopardizes the viability of a program that over 44 million low-income
Americans depend on for essential health and long-term care services. To


8
  U.S. General Accounting Office, Medicaid and SCHIP: Recent HHS Approvals of
Demonstration Waiver Projects Raise Concerns, GAO-02-817 (Washington, D.C.: July 12,
2002).




Page 26                                                   GAO-03-119 High-Risk Update
New High-Risk Areas




better protect Medicaid dollars, CMS must take the steps needed to
strengthen federal and state fiscal oversight to ensure that the federal
government pays only its valid share of proper program expenditures. (See
“Highlights of High-Risk Areas,” p. 28.)




Page 27                                          GAO-03-119 High-Risk Update
Highlights of High-Risk Areas


               Overall, the government continues to take high-risk problems seriously and
               is making long-needed progress toward correcting them. The Congress has
               also acted to address several individual high-risk areas through hearings
               and legislation. Continued perseverance in addressing high-risk areas will
               ultimately yield significant benefits. Lasting solutions to high-risk
               problems offers the potential to save billions of dollars, dramatically
               improve service to the American public, strengthen public confidence and
               trust in the performance and accountability of our national government,
               and ensure the ability of government to deliver on its promises.

               We have prepared highlights of each of the 25 current high-risk areas
               showing (1) why the area is high risk, (2) the actions that have been taken
               and that are under way to address the problem since our last update report
               and the issues that are yet to be resolved, and (3) what remains to be done
               to address the risk. These highlights are presented on the following pages.

               Also, comprehensive discussions of 22 of the high-risk areas are included in
               the relevant department or agency report in the accompanying special GAO
               series entitled the Performance and Accountability Series: Major
               Management Challenges and Program Risks. The individual high-risk
               area highlights provide a link to the relevant reports in this series.
               Comprehensive discussions of the 3 crosscutting high-risk areas—strategic
               human capital management, protecting information systems supporting the
               federal government and the nation’s critical infrastructures, and federal
               real property—are presented in separate reports as part of this series.




               Page 28                                            GAO-03-119 High-Risk Update
                                                  January 2003


                                                  HIGH-RISK SERIES
                                                  Strategic Human Capital Management
Highlights of a high-risk area discussed in
the GAO report entitled High-Risk Series:
Strategic Human Capital Management
(GAO-03-120)




In its January 2001 High-Risk                     Leading public organizations here and abroad have found that strategic
Update (GAO-01-263), GAO                          human capital management must be the centerpiece of any serious change
designated strategic human capital                management initiative and efforts to transform the cultures of government
management as a governmentwide                    agencies. Unfortunately, the federal government’s strategic human capital
high-risk area. The basic problem,                approaches are not yet well positioned to enable the needed transformation.
which continues today, has been
the long-standing lack of a
consistent strategic approach to                  Since we designated strategic human capital management as a
marshaling, managing, and                         governmentwide high-risk area in January 2001, Congress has taken a
maintaining the human capital                     number of steps to address the challenges identified, including granting
needed to maximize government                     agencies significant new authorities for managing their human capital as part
performance and assure its                        of the Homeland Security Act of 2002. The strategic management of human
accountability.                                   capital was also placed at the top of the President’s Management Agenda.
                                                  Individual agencies have also taken action to address their specific
This report is part of a special                  challenges.
series of reports on
governmentwide and agency-                        Despite the considerable progress over the past 2 years, it remains clear that
specific challenges.
                                                  today’s federal human capital strategies are not appropriately constituted to
                                                  meet current and emerging challenges or to drive the needed transformation
                                                  across the federal government. Specifically, agencies continue to face
                                                  challenges in four key areas:
Reaching and maintaining an
approach to human capital                         •   Leadership: Top leadership in the agencies must provide the committed
management that is strategic will                     and inspired attention needed to address human capital and related
take considerable effort from the                     organization transformation issues.
Congress, agencies, the Office of                 •   Strategic Human Capital Planning: Agencies’ human capital planning
Personnel Management, and the                         efforts need to be more fully and demonstrably integrated with mission
Office of Management and Budget.                      and critical program goals.
Ultimately, Congress will need to
                                                  •   Acquiring, Developing, and Retaining Talent: Additional efforts are
consider additional legislative
reforms to existing civil service                     needed to improve recruiting, hiring, professional development, and
laws. While momentum continues                        retention strategies to ensure that agencies have the needed talent.
to build for comprehensive civil                  •   Results-Oriented Organizational Cultures: Agencies continue to lack
service reform, agencies need to                      organizational cultures that promote high performance and
use currently available flexibilities                 accountability and empower and include employees in setting and
to recruit, hire, develop, retain, and                accomplishing programmatic goals.
hold employees accountable for
mission accomplishment.                           Importantly, although strategic human capital management remains high –
                                                  risk governmentwide, federal employees are not the problem. Rather, the
                                                  problem is a set of policies and practices that are not strategic, and viewed
                                                  by many as outdated and over-regulated. In the final analysis, modern,
                                                  effective, and credible human capital strategies will be essential in order to
                                                  maximize the performance and assure the accountability of the government
www.gao.gov/cgi-bin/getrpt?GAO-03-120.            for the benefit of the American people.
For additional information about this high-risk
area, click on the link above or contact J.
Christopher Mihm at (202) 512-6806 or
mihmj@gao.gov.
                                                  January 2003


                                                  HIGH-RISK SERIES

                                                  U.S. Postal Service: Transformation
Highlights of a high-risk area discussed in       Efforts and Long-Term Outlook
GAO’s Performance and Accountability
Series report on the U.S. Postal Service
(GAO-03-118)




In April 2001, GAO designated the                 The Service’s current business model, which relies on increasing mail
U.S. Postal Service’s (the Service)               volumes to mitigate rate increases and cover costs, is at risk as competition
transformation and long-term                      and technological alternatives increase. In fiscal years 2001 and 2002, despite
outlook as high risk because of                   multiple rate increases and cost-cutting efforts, the Service incurred large
growing financial and operational                 deficits as total mail volume declined. The figure below shows that mail
difficulties, including the following:
•    The fiscal year 2001 outlook
                                                  volume growth for First-Class Mail and Standard Mail—mail classes that
     changed from a $480 million to               generate over three-fourths of the Service’s revenue—has been slowing.
     a $2 billion–$3 billion deficit.
•    Growth in expenses outpaced                  Growth in Key Mail Classes Is Slowing
     the growth in revenues.
•    Capital spending was deferred.
•    Weakened cash flow increased
     borrowing pressures, as debt
     levels approached the
     statutory borrowing limit.
Also, human capital issues, such as
the wave of impending retirements,
performance-based compensation,
and labor-management relations,
needed to be addressed.



GAO believes the Service should:
                                                  Other major challenges facing the Service include:
•    Work with Congress, the                      •  Long-standing difficulty in cutting costs, particularly related to its
     Presidential Commission, and                    workforce and infrastructure, and in sustaining productivity gains;
     stakeholders to implement its                •  Unknown safety and security needs;
     Plan, including legislation to               •  Cash flow from operations that is insufficient to fund capital
     address issues related to its                   expenditures and reduce borrowing pressure;
     mission and role for the 21st                •  Liabilities that continue to exceed assets, and postretirement health
     century; governance structure;                  obligations that are growing;
     accountability mechanisms;                   •  Succession planning for the large number of upcoming retirements.
     and human capital matters.
•    Develop strategies to align its              To address its high-risk designation, the Service issued its Transformation
     infrastructure and workforce
                                                  Plan (the Plan) in April 2002. The Plan outlined steps to guide it in carrying
     to support its business model;
•    Continue efforts to cut costs                out its future mission and proposed a new business model to achieve its
     and improve productivity; and                long-term transformation. The Plan was a good first step; however,
•    Address long-term financial                  concerns remain about its full implementation, as no consensus has been
     concerns, such as outstanding                reached on the Service’s future. Effective leadership and sustained attention
     debt and postretirement health               by the Service will be key to effectively carrying out its transformation.
     obligations.
                                                  Opportunities exist (for example, the upcoming retirements) for the Service
www.gao.gov/cgi-bin/getrpt?GAO-03-118
                                                  and its leadership to address these challenges. A recent analysis may lead to
For additional information about this high-risk   a significant reduction in its pension liability, which would improve the
area, click on the link above or contact          Service’s financial outlook and allow it to address other financial challenges
Bernard L. Ungar at (202) 512-2834 or
ungarb@gao.gov.
                                                  and align its workforce and infrastructure to meet future needs.
                                                  January 2003


                                                  HIGH-RISK SERIES

                                                  Protecting Information Systems
Highlights of a high-risk area discussed          Supporting the Federal Government and
later in this report (GAO-03-121)
                                                  the Nation’s Critical Infrastructures



Since GAO designated computer                     Since January 2001, efforts to improve federal information security have
security in the federal government                accelerated at individual agencies and at the governmentwide level. For
as high risk in 1997, evidence of                 example, implementation of Government Information Security Reform
pervasive weaknesses has been                     legislation (GISRA) enacted by the Congress in October 2000 was a
continuing. Also, related risks have              significant step in improving federal agencies’ information security programs
been escalating, in part because of
the dramatic increases in computer
                                                  and addressing their serious, pervasive information security weaknesses. In
interconnectivity and increasing                  implementing GISRA, agencies have noted benefits, including increased
dependence on computers to                        management attention to and accountability for information security.
support critical operations and                   Although improvements are under way, recent audits of 24 of the largest
infrastructures, such as power                    federal agencies continue to identify significant information security
distribution, water supply, national              weaknesses that put critical federal operations and assets in each of these
defense, and emergency services.                  agencies at risk (see figure below).
This year, GAO expanded this high
risk area to include protecting the               Over the years, various working groups have been formed, special reports
information systems that support                  written, federal policies issued, and organizations created to address the
our nation’s critical infrastructures,            nation’s critical infrastructure challenges. In 1998, the President issued
referred to as cyber critical
infrastructure protection or cyber
                                                  Presidential Decision Directive 63 (PDD 63), which described a strategy for
CIP. Among other reasons for                      cooperative efforts by government and the private sector to protect the
designating cyber CIP high risk is                physical and cyber-based systems essential to the minimum operations of
that terrorist groups and others                  the economy and the government. To accomplish its goals, PDD 63
have stated their intentions of                   designated and established organizations to provide central coordination
attacking our critical                            and support. This directive has since been supplemented by Executive Order
infrastructures, and failing to                   13231, which established the President’s Critical Infrastructure Protection
protect these infrastructures could               Board and the President’s National Strategy for Homeland Security. While
adversely affect our national                     the actions taken to date are major steps to more effectively protect our
security, economic security, and/or               nation’s critical infrastructures, GAO has made numerous recommendations
public health and safety.                         over the last several years concerning CIP challenges. In response to these
                                                  challenges, improvements have been made and efforts are in progress, but
                                                  more work is needed to address them.
Among other actions essential to                  Information Security Weaknesses at 24 Major Agencies
sustaining federal information
security improvements are the
agencies’ development of effective
risk management programs and the
development of a comprehensive
strategy to guide agencies’ efforts.
Further actions to improve CIP
include developing a national CIP
strategy and improving analysis and
warning capabilities and information
sharing on threats and vulnerabilities.

www.gao.gov/cgi-bin/getrpt?GAO-03-121.

For additional information about this high-risk
area, click on the link above or contact Robert
F. Dacey at (202) 512-3317 or
daceyr@gao.gov.
                                                  January 2003


                                                  HIGH-RISK SERIES

                                                  Implementing and Transforming the New
Highlights of a high-risk area discussed in       Department of Homeland Security
GAO’s Performance and Accountability
Series report on the Department of
Homeland Security (GAO-03-102)




GAO has designated implementing                   Effectively implementing and transforming the Department of Homeland
and transforming the new                          Security will be a daunting challenge. The Department will combine 22
Department of Homeland Security                   agencies with an estimated 170,000 employees specializing in various
(DHS) as a high risk area for three               disciplines: law enforcement, border security, biological research, disaster
reasons. First, the implementation                mitigation, and computer security, for instance. Further, DHS will oversee a
and transformation of DHS is an
enormous undertaking that will
                                                  number of non-homeland security activities, such as the Coast Guard’s
take time to achieve in an effective              marine safety responsibilities and the Federal Emergency Management
and efficient manner. Second,                     Agency’s (FEMA) natural disaster response functions. Yet, only in the
components being merged into                      effective integration and collaboration of these entities will the nation
DHS already face a wide array of                  achieve the synergy that can help provide better security. The magnitude of
existing challenges. Finally,                     the responsibilities, combined with the challenge and complexity of the
failure to effectively carry out its              transformation, underscore the perseverance and dedication that will be
mission exposes the nation to                     needed from DHS’s leaders, employees, and stakeholders to achieve success.
potentially very serious
consequences.                                     It is well recognized that mergers of this magnitude in the public and private
                                                  sector carry significant risks, including lost productivity and inefficiencies.
                                                  Generally, successful transformations of large organizations, even those
The long-term solution to this high               undertaking less strenuous reorganizations and with less pressure for
risk area necessitates that DHS                   immediate results, can take from 5 to 7 years to achieve. Necessary
effectively integrate the 22                      management capacity and oversight mechanisms must be established.
incoming agencies and nearly $40                  Moreover, critical aspects of DHS’s success will depend on well-functioning
billion budget in order to achieve                relationships with third parties that will take time to establish and maintain,
the synergy for providing better                  including those with states and local governments, the private sector, and
security against terrorism.                       other federal agencies with homeland security responsibilities, such as the
Necessary management capacity,                    State Department, the Federal Bureau of Investigation, the Central
priority setting, and oversight                   Intelligence Agency, the Defense Department, the Transportation
mechanisms must be established to                 Department, and the Department of Health and Human Services. Creating
cope with inherent risks associated
                                                  and maintaining a structure that can leverage partners and stakeholders will
with major mergers. In addition,
creating and maintaining a                        be needed to effectively implement the national homeland security strategy.
structure that can leverage partners
and stakeholders will be essential                The new department also is being formed from components with a wide
to effectively implementing the                   array of existing major management challenges and program risks. For
national homeland security                        instance, one DHS directorate’s responsibility includes the protection of
strategy. Finally, DHS must                       critical information systems that GAO already considers a high risk. In fact,
confront a wide array of existing                 many of the major components merging into the new department—
major management challenges and                   including the Immigration and Naturalization Service, the Transportation
program risks in its incoming                     Security Administration, Customs Service, FEMA, and the Coast Guard—
agencies to ensure success.                       face at least one major problem, such as strategic human capital risks,
                                                  information management technology challenges, or financial management
                                                  vulnerabilities; they also confront an array of program operations challenges
                                                  and risks.
www.gao.gov/cgi-bin/getrpt?GAO-03-102.
                                                  DHS’s national security mission is of such importance that the failure to
For additional information about this high-risk
area, click on the link above or contact          effectively address its management challenges and program risks could have
Randall Yim at (202) 512-3580 or                  serious consequences on our intergovernmental system, our citizens’ health
yimr@gao.gov, or Patricia Dalton at (202)         and safety, and our economy.
512-6806 or daltonp@gao.gov.
                                                     January 2003


                                                     HIGH-RISK SERIES
                                                     Modernizing Federal Disability Programs
   Highlights of a high-risk area discussed in
   GAO’s Performance and Accountability
   Series report on the Social Security
   Administration (GAO-03-117) and the
   Department of Veterans Affairs
   (GAO-03-110)




  Disability programs have been                      GAO’s work examining the challenges facing federal disability programs has
  growing and are poised to grow                     found that these programs are not well positioned to provide meaningful and
  even more rapidly as more baby                     timely support for Americans with disabilities. In particular, SSA’s and VA’s
  boomers reach their disability                     programs are based on concepts from the past. These outdated concepts
  prone years. This growth is taking                 persist despite scientific advances and economic and social changes that
  place despite greater opportunities
  for people with disabilities to work.
                                                     have redefined the relationship between impairments and the ability to
  Moreover, this growth is occurring                 work. Advances in medicine and technology have reduced the severity of
  at the same time that agencies such                some medical conditions and have allowed individuals to live with greater
  as the Social Security                             independence and function in work settings. Moreover, the nature of work
  Administration (SSA) and the                       has changed as the national economy has become increasingly knowledge-
  Department of Veterans Affairs                     based. At the same time, the projected slowdown in growth of the nation's
  (VA) are struggling to provide                     labor force makes it imperative that those who can work are supported in
  timely and consistent disability                   their efforts to do so. Beyond these outmoded design issues, the agencies
  decisions. While the agencies are                  also face longstanding challenges to improve the quality and timeliness of
  taking some actions to address                     disability decisions. As the result of this work, GAO has added modernizing
  these problems in the short term,                  federal disability programs to its 2003 high-risk list based on the following
  longer-term solutions are likely to
  require fundamental changes
                                                     concerns:
  including legislative action.
                                                     •   SSA and VA Programs Remain Grounded in Outmoded Concepts
                                                         of Disability. Disability criteria have not been updated to reflect the
                                                         current state of science, medicine, technology and labor market
  GAO believes that SSA and VA                           conditions. As a result, both agencies need to reexamine the medical and
  should take the lead in examining                      vocational criteria they use to determine whether individuals are eligible
  the fundamental causes of program                      for benefits. Using outdated information, the agencies risk
  problems such as outmoded                              overcompensating some individuals while undercompensating or
  disability criteria and seek both                      denying compensation entirely to others.
  management and legislative
  solutions as appropriate to bring                  •   Agencies Have Difficulties Managing Disability Programs. Both
  their programs in line with the                        SSA and VA have experienced (1) lengthy processing times for disability
  current state of science, medicine,                    claims, (2) inconsistencies in disability decisions across adjudicative
  technology and labor market                            levels and locations, and (3) challenges with implementing effective
  conditions.
                                                         quality assurance systems. The agencies have made some progress
  At the same time, these agencies                       addressing some of these challenges, but much more work needs to be
  should continue to develop and                         done.
  implement strategies for improving
  the accuracy, timeliness, and                      •   Agencies Need Adequate Plans for Addressing Program Growth.
  consistency of disability decision-                    Between 1991 and 2001, the SSA Disability Insurance rolls increased by
  making. Further, both agencies                         more than 50 percent and growth is expected to continue. Similarly, VA
  should pursue more effective                           expects the number of its disability claims to increase. However, SSA
  quality assurance systems.                             and VA have not sufficiently prepared for this growth and will need
                                                         specific plans for addressing future disability needs.
   www.gao.gov/cgi-bin/getrpt?GAO-03-117.
   www.gao.gov/cgi-bin/getrpt?GAO-03-110.            Developing effective and sustainable solutions to problems facing federal
For additional information about this high-risk
area, click on the link above or contact Robert E.   disability programs will require consultation and cooperation between the
Robertson (SSA programs) at (202) 512-7215 or        executive and legislative branches as well as cross-agency efforts, and will
robertsonr@gao.gov or Cynthia Bascetta (VA           likely require statutory as well as regulatory and management actions.
programs) at (202) 512-7101 or
bascettac@gao.gov.
                                                  January 2003


                                                  HIGH-RISK SERIES
                                                  Federal Real Property
Highlights of a high-risk area discussed in
the GAO report entitled High-Risk Series:
Federal Real Property (GAO-03-122)




•    Long-standing problems with                  Over 30 agencies control hundreds of thousands of real property assets
     excess and underutilized real                worldwide, including facilities and land, which are worth hundreds of
     property, deteriorating                      billions of dollars. Unfortunately, much of this vast, valuable portfolio
     facilities, unreliable real                  reflects an infrastructure based on the business model and technological
     property data, and costly space              environment of the 1950s. Many of the assets are no longer effectively
     challenges are shared by
     several agencies. These
                                                  aligned with, or responsive to, agencies’ changing missions and are therefore
     factors have multibillion-dollar             no longer needed. Further, many assets are in an alarming state of
     cost implications and can                    deterioration; agencies have estimated restoration and repair needs to be in
     seriously jeopardize mission                 the tens of billions of dollars. Compounding these problems are the lack of
     accomplishment.                              reliable governmentwide data for strategic asset management, a heavy
•    Federal agencies face many                   reliance on costly leasing instead of ownership to meet new needs, and the
     challenges securing real                     cost and challenge of protecting these assets against potential terrorism.
     property due to the threat of
     terrorism.                                   To address these challenges, Congress and the administration have
                                                  undertaken several efforts, including Defense Base Realignment and
                                                  Closures Commissions, the President’s Commission to Study Capital
                                                  Budgeting, and various legislative initiatives. While some of these efforts and
There is a need for a
                                                  other work by individual real property-holding agencies have had some
comprehensive and integrated real
property transformation strategy                  success, much remains to be done governmentwide. Furthermore, despite
that could identify how best to                   these efforts, the problems have persisted and have been exacerbated by
realign and rationalize federal real              competing stakeholder interests in real property decisions; various legal and
property and dispose of unneeded                  budget-related disincentives to businesslike outcomes; the need for better
assets; address significant real                  capital planning among agencies; and the lack of a strategic,
property repair and restoration                   governmentwide focus on real property issues.
needs; develop reliable, useful real
property data; resolve the problem                Given the persistence of the problems and related obstacles, we have added
of heavy reliance on costly leasing;              federal real property as a new high-risk area. Resolving these problems will
and minimize the impact of                        require high-level attention and effective leadership by both Congress and
terrorism on real property.                       the administration. Also, because of the breadth and complexity of the
                                                  issues, the long-standing nature of the problems, and the intense debate that
An independent commission or                      will likely ensue, current structures and processes may not be adequate to
governmentwide task force may be                  address the problems. Thus, there is a need for a comprehensive, integrated
needed to develop this strategy. If               transformation strategy for real property. Realigning the government’s real
resulting actions address the                     property, taking into account future workplace needs, will be critical to
problems and are effectively
                                                  improving the government’s performance and ensuring accountability within
implemented, agencies will be
                                                  expected resource limits.
better able to recover asset values,
reduce operating costs, improve
facility conditions, enhance safety
and security, and achieve mission
effectiveness.

www.gao.gov/cgi-bin/getrpt?GAO-03-122.

For additional information about this high-risk
area, click on the link above or contact John
H. Anderson, Jr. at (202) 512-2834 or
AndersonJ@gao.gov.
                                                   January 2003


                                                   HIGH-RISK SERIES

                                                   Federal Aviation Administration Air Traffic
Highlights of a high-risk area discussed in        Control Modernization
GAO’s Performance and Accountability
Series report on the Department of
Transportation (GAO-03-108)




After 2 decades and $35 billion,                   Faced with growing air traffic and aging equipment, in 1981 FAA initiated an
FAA’s air traffic control                          ambitious effort to modernize its air traffic control system. This effort
modernization program is far from                  involves acquiring a vast network of radar, navigation, communications, and
complete. While FAA has made                       information processing systems, as well as new air traffic control facilities—
important progress in addressing                   and is expected to cost over $50 billion through fiscal year 2007. However,
weaknesses that GAO identified,
more remains to be done. In the
                                                   over the past 2 decades, many of the projects that make up the
meantime, major FAA projects                       modernization program have experienced cost overruns, schedule delays,
continue to face challenges that                   and performance shortfalls of large proportions. GAO initially designated
could affect the agency’s ability to               FAA’s modernization program as high risk in 1995.
meet cost, schedule, and/or
performance expectations. Key                      GAO’s work over the years has identified root causes of the modernization
projects include the                               program’s problems, including
•   Standard Terminal Automation                   •  immature software acquisition capabilities,
    Replacement System,                            •  lack of a complete systems architecture,
•   Next-Generation Air/Ground                     •  inadequate cost estimating and accounting practices,
    Communications System, and                     •  ineffective investment management practices, and
•   Wide Area Augmentation
    System.
                                                   •  an organizational culture that impaired the acquisition process.

                                                   FAA has made important progress in addressing these weaknesses. For
                                                   example, the agency has implemented a framework for improving its
                                                   software processes, developed a systems architecture, institutionalized cost
                                                   estimating practices, and improved its investment management practices.
GAO has made over 30 specific                      However, more remains to be done in each of these areas.
recommendations to address the
root causes of FAA’s problems.
While the agency has made
progress on these
recommendations, more must be
done to institutionalize mature
software acquisition processes,
enforce the systems architecture,
and implement effective
investment management processes.
With FAA expecting to spend about
$16 billion through fiscal year 2007
on new air traffic control systems,
these actions are as critical as ever.




www.gao.gov/cgi-bin/getrpt?GAO-03-108.

For additional information about this high-risk
area, click on the link above or contact Joel C.
Willemssen at (202) 512-6408 or
willemssenj@gao.gov.
                                                  January 2003


                                                  HIGH-RISK SERIES

                                                  Internal Revenue Service Business
Highlights of a high-risk area discussed in       Systems Modernization
GAO’s Performance and Accountability
Series report on the Department of the
Treasury (GAO-03-109)




The Internal Revenue Service’s                    In 1995, after finding numerous and severe management and technical
(IRS) multibillion-dollar Business                program control weaknesses, GAO designated IRS’s systems modernization
Systems Modernization program is                  activities as high risk. At that time, GAO made a series of recommendations,
critical to the success of the                    including limiting modernization activities and spending until the
agency’s efforts to transform its                 weaknesses were corrected. IRS responded slowly. In light of IRS’s response
manual, paper-intensive business
operations and fulfill its obligations
                                                  and additional recommendations made by GAO as part of its ongoing
under the IRS Restructuring and                   support to Congress in overseeing systems modernization, GAO’s 2001 high-
Reform Act. While IRS has made                    risk report noted that despite improvements, key management controls were
important progress in establishing                still lacking. GAO also observed that until they were in place, the risks of
long overdue modernization                        project cost, schedule, and performance shortfalls would remain and would,
management capabilities, and in                   in fact, increase as IRS began to build and deploy systems. Since that time
acquiring the foundational system                 IRS has made significant progress. For example, IRS has developed and is
infrastructure and the system                     using a modernization blueprint, commonly called an enterprise
applications that will permit the                 architecture, to guide and constrain its modernization projects, and is
agency to operate more effectively                investing incrementally in its projects, both of which are leading practices of
and efficiently, significant                      successful public and private-sector organizations. Nevertheless, the
challenges and risks remain.
                                                  program remains at risk for two reasons:

                                                  •   Scope and complexity of modernization are growing. As IRS
IRS acknowledges its challenges                       proceeds, the number of projects underway and the complexity of the
and risks, and it is taking action to                 tasks associated with those projects that are moving beyond design and
address them. It is important for                     into development, continue to expand.
IRS to fully implement essential
modernization management                          •   Modernization management capacity is still maturing. IRS has yet
capabilities, including cost                          to fully implement a strategic approach to ensuring that it has sufficient
estimation, performance based                         human capital resources, and it has yet to fully implement process
contracting, and strategic                            controls in such areas as estimating costs and defining performance
management of human capital. This
                                                      based contracts.
is especially important now, as
IRS’s fiscal year 2003 spending plan
aims to fund the later, more
complex and demanding stages of
several key projects. It is therefore
essential that IRS move quickly to
fully implement our remaining
recommendations.




www.gao.gov/cgi-bin/getrpt?GAO-03-109.

For additional information about this high-risk
area, click on the link above or contact Robert
F. Dacey at (202) 512-3317 or
daceyr@gao.gov.
                                                  January 2003


                                                  HIGH-RISK SERIES

                                                  Department of Defense Systems
Highlights of a high-risk area discussed in       Modernization
GAO’s Performance and Accountability
Series report on the Department of
Defense (GAO-03-98)




To transform its business                         Since GAO first designated DOD’s systems modernization as a high risk in
operations, the Department of                     1995, DOD has had limited success in modernizing its information
Defense (DOD) is spending billions                technology environment because it has yet to fully implement GAO’s
of dollars to modernize its                       recommendations aimed at addressing its underlying modernization
information technology systems.                   management weaknesses. DOD acknowledges that it needs to correct these
However, pervasive modernization
management weaknesses increase
                                                  weaknesses and has agreed to implement most of GAO’s recommendations.
the risk that these efforts will not              However, progress in doing so since GAO’s 2001 high-risk report has been
be successful. Within some                        mixed. To its credit, DOD is taking steps to develop integrated
components of DOD,                                modernization blueprints, commonly called enterprise architectures, and it
modernization management                          has revised its investment management guidance. Also, it has engaged
improvements have occurred, but                   DOD’s executive leadership in the modernization through such bodies as the
the department as a whole remains                 Defense Practice Implementation Board. However, much remains to be
far from where it needs to be in                  accomplished before DOD will have effectively mitigated the risks it faces in
order to effectively and efficiently              modernizing its systems. At the same time, DOD continues to invest heavily
manage something the size and                     in information technology, with about $26 billion planned for fiscal year
significance of its DOD-wide                      2003.
systems modernization program.
                                                  Key modernization management improvements that DOD needs to make
                                                  include:
As GAO has reported, the key to
effecting meaningful change is                    •   Establish and use enterprise architectures. DOD lacks an
executive management leadership                       integrated set of enterprise architectures for its financial and related
and commitment to and use of a                        business functions, which is a recognized best practice, thus preventing
proven management framework.                          DOD and its component organizations from investing billions of dollars
Accordingly, DOD needs to (1)                         in a way that promotes system interoperability, limits duplication, and
treat these areas as management                       optimizes institutional performance.
priorities and (2) implement
frameworks for modernizing its                    •   Institute effective investment management practices. DOD
systems that are grounded in                          components are not consistently following best practices in managing its
legislative requirements, federal                     information technology investments as portfolios of competing
guidance, and the practices and
successes of leading public and
                                                      investment options. Also, DOD is committing to billion-dollar
private-sector institutions.                          information technology projects without adequate economic justification
                                                      and without reducing the investments’ inherent risk by breaking them
Although DOD agrees with these                        into a series of smaller projects.
recommendations, its progress in
implementing them has been                        •   Consistently implement effective acquisition processes. DOD
mixed. The backing of senior                          components’ implementation of acquisition management best practices
management, as shown by DOD’s                         is uneven, as are its proactive efforts to improve these processes, which
successful Year 2000 effort, will                     limits DOD’s ability to consistently deliver promised system capabilities
play a large role in what is                          on time and within budget.
accomplished.

www.gao.gov/cgi-bin/getrpt?GAO-03-98.

For additional information about this high-risk
area, click on the link above or contact
Randolph C. Hite at (202) 512-3439 or
hiter@gao.gov.
                                                  January 2003


                                                  HIGH-RISK SERIES

                                                  Department of Defense Financial
Highlights of a high-risk area discussed in       Management
GAO’s Performance and Accountability
Series report on the Department of
Defense (GAO-03-98)




Since 1995, the Department of                     GAO recently reported on fundamental flaws in DOD’s financial
Defense’s (DOD) financial                         management systems, processes, and overall internal control environment
management has been on GAO’s                      that resulted in
list of high-risk areas vulnerable to
waste, fraud, abuse, and                          •   government travel card delinquency rates for the Army and Navy that
mismanagement. Taken together,
DOD’s financial management
                                                      were nearly double those of federal civilian agencies;
deficiencies represent the single                 •   numerous instances of potential fraud and abuse, including purchases of
largest obstacle to achieving an                      a wide range of goods and services unrelated to official business;
unqualified opinion on the U. S.                  •   $146 million in illegal adjustments to amounts appropriated by the
government’s consolidated                             Congress;
financial statements. DOD                         •   an inability to ensure the Congress that the $1.1 billion in funds it
continues to face financial                           received for spare parts were used for that purpose;
management problems that are                      •   managing and reporting on the funding associated with the Air Force’s
pervasive, complex, long-standing,                    contracted depot maintenance that resulted in understating the dollar
and deeply rooted in virtually all its                value of year-end carryover work by tens of millions of dollars; and
business operations. DOD's                        •   excessing and selling critical inventory items such as unused sets of
financial management deficiencies
adversely affect the department's
                                                      chemical and biological protective garments for about $3 each, while at
ability to control costs, ensure                      the same time procuring hundreds of thousands of other such garments
basic accountability, anticipate                      for over $200 per set.
future costs and claims on the
budget, measure performance,                      Previous administrations over the past 12 years have attempted to address
maintain funds control, prevent                   these problems in various ways, but have largely been unsuccessful despite
fraud, and address pressing                       good intentions and significant effort. The results of DOD’s past stove-piped
management issues.                                approaches to financial management reform are perhaps most evident in its
                                                  business systems environment—recently estimated to include over 1,700
                                                  systems and system development projects—many of which evolved in
                                                  piecemeal fashion to accommodate different organizations, each with its
                                                  own policies and procedures.
Keys to effective reform are
•   an integrated approach,
•   sustained leadership,                         Overhauling DOD’s financial management operations represents a major
•   accountability for reform tied                management challenge that goes far beyond financial accounting to the very
    to the Secretary,                             fiber of the department’s range of business operations and management
•   results-oriented performance                  culture. To his credit, on September 10, 2001, the Secretary of Defense
    measures,                                     recognized the far-reaching nature of DOD’s existing financial management
•   appropriate incentives and                    problems and announced a broad initiative intended to “transform the way
    consequences,                                 the department works and what it works on.” DOD’s current initiative to
•   enterprisewide system                         overhaul its business systems is more far-reaching and comprehensive than
    architecture and investment                   in the past. DOD’s goals for reforming this high-risk area have long-term
    control, and
                                                  application and are not just patchwork fixes. However, the challenges
•   effective oversight and
    monitoring.                                   remaining are daunting. DOD’s well-intentioned transformation initiative
                                                  will succeed only with the right incentives, transparency, and accountability.
www.gao.gov/cgi-bin/getrpt?GAO-03-98.             Most importantly, it will require a number of years of sustained leadership,
                                                  spanning successive administrations, to be successful.
For additional information about this high-risk
area, click on the link above or contact
Gregory D. Kutz at (202) 512-9505 or
kutzg@gao.gov.
                                              January 2003


                                              HIGH-RISK SERIES
                                              Forest Service Financial Management
Highlights of a high-risk area discussed in
GAO’s Performance and Accountability
Series report on the Department of
Agriculture (GAO-03-96)




Although the Forest Service                   In 1999, we designated financial management of the U.S. Department of
received an unqualified opinion on            Agriculture’s (USDA) Forest Service as “high risk” on the basis of serious
its fiscal year 2002 financial                financial and accounting weaknesses. Again in our January 2001 report, we
statements, it took extraordinary             reiterated our concerns.
effort. The Forest Service has not
proven it can sustain this outcome
and continues to have serious
                                              In December 2002, the Forest Service received an unqualified opinion on its
material internal control                     fiscal year 2002 financial statements. While the Forest Service has reached
weaknesses.                                   an important milestone, it has not yet proved it can sustain this outcome,
                                              and it has not reached the end goal of routinely having timely, accurate, and
                                              useful financial information. As described in the following table, the Forest
                                              Service still has long-standing material control weaknesses in, among other
                                              things, its two major assets—fund balance with the Department of the
As recommended by its financial               Treasury (Treasury) and property, plant, and equipment.
statement auditor, the Forest
Service should

•    continue to improve its
     internal controls over                   Forest Service Material Internal Control Weaknesses
     reconciliations of its records           Financial management area              Condition reported by auditor
                                              Fund balance with the Treasury         The Forest Service had a large backlog of
     with the Treasury’s records,
                                                                                     unreconciled items that needed to be researched and
                                                                                     corrected. To bring the fund balance with the Treasury
•    improve internal controls over                                                  account into balance with Treasury records as of
     the general computer control                                                    September 30, 2002, the Forest Service made a $107
     environment and specific                                                        million adjustment.
     software applications,                   General and software application       Inadequate internal controls existed in the general
                                              controls                               computer control environment and in specific
                                                                                     software applications.
•    develop a new methodology                Accrued liabilities                    The proposed methodology for estimating certain
     for estimating certain liabilities                                              liabilities, such as grants, was inaccurate and would
     and maintain supporting                                                         have understated both accrued liabilities and related
     documentation,                                                                  expenses. Sampling methodologies were used to
                                                                                     project the year-end balance.
                                              Payroll process                        Users were allowed to submit their time sheets for
•    improve automated and                                                           approval to an employee who was not the designated
     manual controls over payroll                                                    supervisor. In addition, time sheets lacked adequate
     processes, and                                                                  evidence of supervisory review.
                                              Property, plant, and equipment         Property cost and related information (e.g., useful life)
•    continue to improve its                                                         were not accurately recorded.
     internal controls over initial           Source: GAO analysis.
     recording of its property, plant,
     and equipment.




www.gao.gov/cgi-bin/getrpt?GAO-03-96.

For additional information about this
high-risk area, click on the link above or
contact McCoy Williams at (202) 512-6906.
                                                  January 2003


                                                  HIGH-RISK SERIES

                                                  Federal Aviation Administration Financial
Highlights of a high-risk area discussed in       Management
GAO’s Performance and Accountability
Series report on the Department of
Transportation (GAO-03-108)




The Federal Aviation                              Since FAA financial management was designated high risk in 1999, FAA has
Administration (FAA) lacked                       made significant progress in addressing its financial accountability
accountability for billions of dollars            weaknesses. Three major systems initiatives in process are designed to
in assets and expenditures due to                 address specific identified needs. However, these systems must be fully
weaknesses in its financial                       installed and effectively integrated with one another and with other FAA
reporting, property, and cost
accounting systems. Substantial
                                                  systems and tested in actual use.
problems with the general
accounting system required 850                    By the end of 2003, FAA expects to implement a new DOT departmentwide
adjustments totaling $41 billion in               general accounting system called Delphi. This new system is designed to
2001. Weaknesses in property                      eliminate overall financial management deficiencies that limit FAA’s ability
accounting meant the agency could                 to report on and manage its assets and operations.
not accurately and routinely
account for property totaling $11.7               In addition, as a component of its Delphi system, FAA expects to implement
billion. Finally, FAA lacked the                  a new property accounting system module and complete the installation of a
cost information necessary to make                cost accounting system in 2003. The property system is needed to accurately
effective decisions about resource                and routinely account for FAA’s property, while the cost accounting system
needs and adequately account for
its activities and major projects,
                                                  is required to assign basic financial costs to its program activities and
such as the air traffic control                   projects.
modernization program.
                                                  Subsequent to implementation, FAA’s financial statement audit will provide
                                                  an assessment of the effectiveness of FAA’s new general accounting system,
                                                  the reliability of its property amounts and related internal controls, and its
FAA has made significant progress                 ability to account for costs of its program activities and major projects.
in improving the accuracy and                     Until these systems are fully tested and assessed in actual integrated
reliability of its financial                      operations, the reliability of FAA’s financial information will remain
information.                                      uncertain.
To continue this progress, it must                                                              a
implement and successfully                        Diagram Showing Way in Which FAA’s New Systems Must Exchange Data
integrate and test its new
accounting systems in actual
operational use, including

•    The new general accounting
     system module,
•    The new property accounting
     system module,
•    Its new cost accounting
     system.

These changes are expected to be
implemented by the end of 2003.
www.gao.gov/cgi-bin/getrpt?GAO-03-108.

For additional information about this high-risk   Note: GAO diagram based on FAA information.
                                                  a
area, click on the link above or contact Linda     Planned completion—2003.
Calbom at (202) 512-9508 or
calboml@gao.gov.
                                                  January 2003


                                                  HIGH-RISK SERIES

                                                  Internal Revenue Service Financial
Highlights of a high-risk area discussed in       Management
GAO’s Performance and Accountability
Series report on the Department of the
Treasury (GAO-03-109)




The Internal Revenue Service (IRS)                In fiscal year 2002, for the third consecutive year, IRS was able to produce
is responsible for collecting about               annual financial statements that were reliable, in GAO’s opinion, and was
$2 trillion annually, or about 95                 able to produce the fiscal year 2002 financial statements 6 weeks after the
percent of the government’s                       end of the fiscal year. To achieve this, IRS made fundamental changes in
revenue. However, IRS lacks the                   how it processed transactions, maintained its records, and reported its
information it needs to measure the
full cost of administering the
                                                  results. However, this also required IRS to continue to rely on costly,
Internal Revenue Code and to                      resource-intensive processes to compensate for serious internal control and
report meaningful, cost based                     systems deficiencies. IRS has continued to act on and has shown strong
performance information.                          commitment to resolving the financial management issues GAO has
Congress and IRS therefore lack                   identified, and has made notable progress on several. In particular, IRS has
the information to determine                      worked aggressively to address issues not solely dependent on systems
whether IRS has appropriate levels                modernization for their resolution, and has made important progress in
of funding and staff and is using its             addressing deficiencies in controls over budgetary activity, accountability
resources effectively. These issues               over property and equipment, taxpayer receipts and data, and computer
concerning IRS’s financial                        security. At the same time, IRS recognizes that resolving a number of its
management—a high-risk area                       financial management issues depends on the success of its systems
since 1995—adversely affect the
agency’s ability to effectively fulfill
                                                  modernization efforts. The challenge will be for IRS to continue the
its responsibilities as the nation’s              improvements made in recent years and, more importantly, to develop long-
tax collector.                                    term solutions to address the internal control and systems deficiencies GAO
                                                  has identified. IRS’s primary remaining internal control weaknesses are in
                                                  the following areas:

GAO has provided IRS with                         •   Accountability over property and equipment. IRS continues to lack
management and operational                            an integrated property management system that records property
recommendations that address (1)                      acquisitions and disposals as they occur and links costs on accounting
IRS’s systems modernization plans                     records to property records.
to resolve weaknesses in financial
management systems and (2)
                                                  •   Management of tax receipts and taxpayer data. IRS’s internal
needed improvements in controls
over how IRS records transactions,                    controls do not adequately protect against loss of tax receipts from theft
maintains records, and reports                        and inappropriate disclosure of taxpayer information.
financial results. We will continue
to make recommendations as                        •   Management of unpaid tax assessments. IRS continues to lack a
necessary. IRS’s management has                       subsidiary ledger for unpaid assessments that would allow it to produce
worked actively to address these                      timely and useful information. IRS employs a time-consuming, resource
issues. However, resolving many of                    intensive process to produce an annual balance of taxes receivable and
IRS’s most serious challenges will                    other unpaid assessments for its financial statements, but this balance is
require a sustained, long-term                        only reliable as of the last day of the fiscal year. Additionally, IRS
commitment of resources,                              continues to record erroneous and untimely information in taxpayer
continued involvement of senior
management, and sustained                             accounts, increasing the risk of unnecessary taxpayer burden.
progress in systems modernization.
                                                  •   Computer security. IRS continues to have serious weaknesses in its
www.gao.gov/cgi-bin/getrpt?GAO-03-109.                computer security controls designed to protect its computing resources
                                                      from unauthorized use, modification, loss, and disclosure. IRS has also
For additional information about this high-risk
area, click on the link above or contact              not taken sufficient steps to ensure that computer security deficiencies
Steven J. Sebastian at (202) 512-3406 or              identified at one facility are addressed at other facilities.
SebastianS@gao.gov.
                                                  January 2003


                                                  HIGH-RISK SERIES
                                                  Medicare Program
Highlights of a high-risk area discussed in
GAO’s Performance and Accountability
Series report on the Department of Health
and Human Services (GAO-03-101)




Since 1990, GAO has designated                    CMS has made improvements in assessing the level of improper payments,
Medicare a high-risk program,                     collecting overpayments and conducting other financial activities, and
vulnerable to waste, fraud, abuse,                building the foundation for modernizing its information technology.
and mismanagement, in part                        Nevertheless, much work remains to be done.
because of the program’s vast size
and complex administrative
structure. Medicare covered about
                                                  •   Reducing improper payments. Since 1996, annual audits by the
40 million elderly and disabled                       Department of Health and Human Services Office of the Inspector
Americans and cost about $241                         General have found that Medicare contractors have improperly paid
billion in fiscal year 2001; program                  claims worth billions of dollars. CMS has been working to better hold
spending as a share of the economy                    individual contractors accountable for claims payment performance and
is projected to double by 2035.                       help them target remedial actions, but it does not expect to fully
Medicare’s steward, the Centers for                   implement an initiative to measure performance before June 2003.
Medicare & Medicaid Services
(CMS), oversees claims                            •   Monitoring managed care plans. In 2001, auditors found that 59 of 80
administration contractors that                       health plans had misreported key financial data or had accounting
operate the program’s fee-for-
                                                      records too unreliable to support their data, but CMS did not have a plan
service component and health
plans that enroll beneficiaries in                    in place to resolve these issues.
the program’s managed care
component, Medicare+Choice.                       •   Improving financial management processes. Although CMS financial
While CMS has improved oversight                      statements are achieving unqualified, or “clean,” opinions, the agency’s
of contractors and health plans in                    financial systems and processes do not routinely generate information
recent years, considerable                            that is timely or reliable and do not ensure that the confidentiality of
management challenges remain.                         sensitive information is adequately protected from unauthorized access
                                                      or service disruption.

                                                  •   Modernizing the agency’s information technology (IT). CMS’s
Because Medicare will play such a                     processes for planning and managing systems development and
significant role in the nation’s fiscal
future, prudence calls for taking
                                                      implementation have certain shortcomings that put its IT modernization
steps to ensure that Medicare is                      efforts at risk. We reported in September 2001 that CMS’s blueprint for
professionally and efficiently                        modernization lacked sufficient detail and its process for managing IT
managed. Achieving this goal will                     investments was missing key review, approval, and evaluation steps.
require CMS to improve oversight                      The agency has made progress in its planning, review, and approval
of Medicare’s claims administration                   procedures and has strengthened IT security requirements, but much
contractors, management of the                        more remains to be done to reduce significant risks.
agency’s information technology
initiatives, and the implementation               •   Preparing for a new contracting environment. CMS’s claims
of financial management processes                     administration contracting authority and practices (1) do not generally
across multiple contractors and                       allow for full and open competition, (2) limit the contractor pool to
agency units.
                                                      health insurers, and (3) limit CMS’s ability to terminate contracts. If
                                                      proposed competitive contracting legislation were enacted, managing
                                                      the transition and adapting to new requirements would be a major
www.gao.gov/cgi-bin/getrpt?GAO-03-101.                challenge for CMS in the coming years.
For additional information about this high-risk
area, click on the link above or contact Leslie
G. Aronovitz at (312) 220-7600 or
aronovitzl@gao.gov.
                                                  January 2003


                                                  HIGH-RISK SERIES
                                                  Medicaid Program
Highlights of a high-risk area discussed in
GAO’s Performance and Accountability
Series report on the Department of Health
and Human Services (GAO-03-101)




Medicaid, which pays for both                     Inadequate fiscal oversight has led to increased and unnecessary federal
acute health care and long-term                   spending in the following ways:
care services for over 44 million
low-income Americans, has been                    Schemes that leverage federal funds inappropriately. Using statutory
subject to exploitation. Financed                 and regulatory loopholes over the last decade, some states have created the
jointly by the federal government
and the states, Medicaid consists of
                                                  illusion that they have made large Medicaid payments to certain providers,
more than 50 distinct “state”                     such as county health facilities, in order to generate excessive federal
programs that together cost                       matching payments. In reality, the states have only momentarily made
$228 billion in fiscal year 2001,                 payments to these providers—generally through electronic funds transfers—
accounts for more than                            and then required that the payments be returned. Some of these schemes
20 percent of states’ total                       have cost the federal government several billions of dollars each year.
expenditures, and is projected to                 Although the Congress and CMS have repeatedly acted to curtail abusive
double in spending in a decade.                   financing schemes when they have come to light, schemes continue to
The federal government pays from                  emerge and require ongoing oversight.
half to more than three-fourths of a
state’s total Medicaid expenditures.
                                                  Waiver programs that inappropriately increase the federal
Growing concern about the
program’s size, growth, and fiscal                government’s financial liability. The Secretary of HHS has authority to
oversight has led GAO to add                      waive certain statutory provisions and allow states to test new ideas for
Medicaid to its 2003 list of high-risk            delivering services and expanding coverage. Waiver programs must be
programs. The Centers for                         “budget neutral,” in that they do not increase federal financial liability
Medicare & Medicaid Services                      beyond what it would have been without these programs. Since the mid-
(CMS) in the Department of Health                 1990s, HHS has permitted states to use questionable methods to demonstrate
and Human Services (HHS) is                       budget neutrality for changes estimated to increase federal costs. For
responsible for administering the                 example, two states’ waivers approved in 2002 are estimated to cost the
program at the federal level, while               federal government an extra $330 million or more. HHS is currently
the states administer their                       considering approval of similar waivers by additional states.
respective programs’ day-to-day
operations.
                                                  Inappropriate billing by providers serving program beneficiaries.
                                                  Medicaid, like other health care payers, is vulnerable to waste, fraud, and
                                                  abuse by providers who submit inappropriate claims. While CMS has
CMS should (1) ensure that the                    initiated steps to improve financial reviews of Medicaid, its efforts are in the
federal government pays only its                  planning and early implementation stages and will require continued
correct share of valid program                    oversight. Efforts on the part of states to identify billing errors and abuses
expenditures, (2) develop better                  have been generally limited and only modestly funded. The hundreds of
methods to assess the costs of                    millions of dollars in improper payments that a few states have identified
state-proposed program                            suggests that these and other states have the potential to save hundreds of
alternatives, and (3) strengthen                  millions more through increased efforts to safeguard program payments.
federal and state fiscal oversight.




www.gao.gov/cgi-bin/getrpt?GAO-03-101.

For additional information about this high-risk
area, click on the link above or contact
Kathryn G. Allen at (202) 512-7118.
                                                  January 2003


                                                  HIGH-RISK SERIES
                                                  Earned Income Credit Noncompliance
Highlights of a high-risk area discussed in
GAO’s Performance and Accountability
Series report on the Department of the
Treasury (GAO-03-109)




The Internal Revenue Service (IRS)                IRS estimates that of the $31.3 billion in earned income credits claimed by
administers the earned income                     taxpayers in tax year 1999, about $8.5 to $9.9 billion should not have been
credit, a refundable federal income               paid. Furthermore, efforts to reduce earned income credit noncompliance
tax credit for low-income working                 over the past 5 years have produced little change.
individuals and families. The credit
reduces the amount of federal tax
owed and can result in a refund
                                                  Certain features of the credit represent a trade-off between compliance and
check. There are significant                      other desired goals. Unlike other income transfer programs, such as Food
compliance problems associated                    Stamps, the earned income credit was designed to be administered through
with the credit. IRS estimates that               the tax system. Accordingly, while other income transfer programs have
billions of dollars in credits                    staff that independently certify the eligibility of applicants, administration of
claimed by taxpayers should not                   the credit relies more directly on the self-reported qualifications of
have been paid. Because IRS has                   individuals. This approach generally should result in lower administrative
struggled to reduce overclaims and                costs and possibly higher participation rates but may also contribute to
because of the magnitude of the                   overclaims.
financial risk, earned income credit
noncompliance—a high-risk area
                                                  The IRS Commissioner and the Treasury Assistant Secretary for Tax
since 1995—continues to be high-
risk.                                             Policy have convened a high-level Treasury/IRS task force to develop
                                                  recommendations to better administer the credit and make it easier for
                                                  taxpayers to comply with the rules.


IRS needs to:
                                                  Earned Income Credit Claims and Estimated Potential Overclaims for Tax Year 1999
•    in conjunction with Treasury,
     ensure that the earned income
     credit task force completes
     work on recommendations to
     better administer the credit,
     and

•    implement task force
     recommendations to deal with
     noncompliance and resulting
     erroneous refunds.




www.gao.gov/cgi-bin/getrpt?GAO-03-109.

For additional information about this high-risk
area, click on the link above or contact Norm
Rabkin at (202) 512-9110 or
rabkinn@gao.gov.
                                                  January 2003


                                                  HIGH-RISK SERIES
                                                  Collection of Unpaid Taxes
Highlights of a high-risk area discussed in
GAO’s Performance and Accountability
Series report on the Department of the
Treasury (GAO-03-109)




Taxpayers’ willingness to                         In testimonies and reports, GAO has highlighted large and pervasive declines
voluntarily comply with the tax                   in IRS’s compliance and collections programs. These programs include
laws depends in part on their                     computerized checks for nonfiling and underreported income, audits, and
confidence that their friends,                    telephone and field collections. Between 1996 and 2001 the programs
neighbors, and business                           generally experienced growing workloads, decreased staffing, and decreases
competitors are paying their fair
share of taxes. Many view the
                                                  in the number of cases closed per employee. By the end of fiscal year 2001,
Internal Revenue Service’s (IRS)                  IRS was deferring collection action on about one out of every three tax
compliance and collection                         delinquencies assigned to the collections programs. By the end of fiscal year
programs as critical to providing                 2002, IRS had an inventory of unpaid taxes with a collection potential of
that confidence. For the last                     about $100 billion. In May 2002 congressional hearings, the IRS
several years, Congress and others                Commissioner said that IRS was not providing taxpayers with adequate
have been concerned that the                      assurance that their neighbors or competitors were complying with the tax
declines in IRS’s compliance and                  laws and paying what they owed.
collections programs are eroding
taxpayers’ confidence in the                      To reverse these trends, IRS is in various stages of planning and
fairness of our tax system. Because
                                                  implementing a management improvement strategy, including efforts to
of the potential revenue losses and
the threat to voluntary compliance,               improve the productivity of IRS’s existing compliance and collections staff
collection of unpaid taxes—a high-                and better target noncompliance. To improve productivity, IRS has begun
risk area since 1990—continues to                 work to reengineer its compliance and collections processes, modernize its
be high-risk.                                     technology, and develop better information on the costs and benefits of its
                                                  compliance activities using a centralized cost accounting system that is
                                                  planned for implementation in late 2003. Better targeting of noncompliance
                                                  requires better information. IRS’s new effort to review compliance, the
                                                  National Research Program, should, if implemented as planned, provide IRS
                                                  with the first up-to-date information on compliance rates and sources of
•    Reengineer compliance and                    noncompliance since it last measured the compliance rate using 1988 tax
     collections programs.                        returns.
•    Acquire and analyze data on
     noncompliance by continuing                  Audit Rates Have Declined
     to implement the National
     Research Program as planned.

•    Ensure that the planned
     centralized cost accounting
     system is effectively
     implemented and that its data
     is used to analyze the costs
     and benefits of compliance
     activities.



www.gao.gov/cgi-bin/getrpt?GAO-03-109.

For additional information about this high-risk
area, click on the link above or contact Norm
Rabkin at (202) 512-9110 or
rabkinn@gao.gov.
                                                  January 2003


                                                  HIGH-RISK SERIES

                                                  Department of Defense Support
Highlights of a high-risk area discussed in       Infrastructure Management
GAO’s Performance and Accountability
Series report on the Department of
Defense (GAO-03-98)




Since 1997, GAO has identified the                Infrastructure management, which GAO first identified as a high-risk area in
Department of Defense’s (DOD)                     1997, continues to present major challenges to DOD. The department
management of infrastructure as a                 defines infrastructure as those activities that provide support services to
high-risk area because DOD’s                      mission programs, such as combat units. DOD’s infrastructure categories
infrastructure costs continue to                  include installations, communications and information infrastructure,
consume a larger than necessary
portion of DOD’s budget. DOD has
                                                  science and technology programs, acquisition infrastructure, central
been concerned for a number of                    logistics, the Defense Health Program, central personnel administration and
years over the amount of funding                  benefits programs, central training, departmental management, and other
devoted to its support                            selected infrastructure programs such as support of DOD intelligence and air
infrastructure and the impact on its              traffic control activities. GAO’s past and current work in this area indicates
ability to devote more funding to                 that DOD
weapon system modernization and
other critical needs.                             •   continues to spend a larger portion of its budget than desired on
                                                      infrastructure—nearly 46 and 44 percent, respectively, in fiscal years
                                                      2001 and 2002;
                                                  •   lacks an overarching strategy to improve its business practices; and
Organizations throughout DOD
                                                  •   faces a challenge in adequately maintaining and revitalizing the facilities
need to continue reengineering
their business processes and                          it expects to retain for future use.
striving for greater operational
effectiveness and efficiency. DOD                 For example, GAO’s recent review of the physical condition of recruit
needs to develop a plan to better                 barracks confirmed DOD’s assertion that its facilities have been long
integrate, guide, and sustain the                 neglected and underfunded. Additionally, GAO’s analysis of DOD data
implementation of its diverse                     contained in its fiscal year 2002 annual report and fiscal year 2003 future
business transformation initiatives               years defense program showed that approximately $151 billion (44 percent)
in an integrated fashion. DOD also                of DOD’s $345 billion allocated to mission and support activities was spent
needs to develop a comprehensive                  on infrastructure in fiscal year 2002.
long-range plan for its facilities
infrastructure that addresses
                                                  DOD plans an additional base closure round in 2005; this could enable it to
facility requirements,
recapitalization, and maintenance                 devote its facility resources on fewer, more enduring facilities. With or
and repair needs.                                 without future base closures, DOD faces the challenge of adequately
                                                  maintaining and revitalizing the facilities it expects to retain for future use.
                                                  Available information indicates that DOD’s facilities continue to deteriorate
                                                  because of insufficient funding for their sustainment, restoration, and
                                                  modernization.

                                                  To its credit, DOD has highly emphasized the reform of its support
                                                  infrastructure to include an emphasis on the transformation of its associated
                                                  business processes in recent years. These reforms include acquisition and
                                                  financial management reform, logistics reengineering, public-private
                                                  competitions under the Office of Management and Budget’s Circular A-76
                                                  process, and elimination of unneeded facilities infrastructure. However,
www.gao.gov/cgi-bin/getrpt?GAO-03-98.             many key reforms that may have the greatest impact on managing the
                                                  support infrastructure and reducing costs are long term in nature and will
For additional information about this high-risk
area, click on the link above or contact Henry    require many years to be fully implemented.
L. Hinton, Jr. at (202) 512-4300 or
hintonh@gao.gov.
                                                  January 2003


                                                  HIGH-RISK SERIES

                                                  Department of Defense Inventory
Highlights of a high-risk area discussed in       Management
GAO’s Performance and Accountability
Series report on the Department of
Defense (GAO-03-98)




Since 1990, GAO has identified the                Inefficient inventory management practices represent one of the most
Department of Defense’s (DOD)                     serious weaknesses in DOD’s logistics operations. While DOD’s inventory
management of secondary                           value for the last 10 years has been declining, GAO’s past and current work
inventories (spare and repair parts,              in this area indicates that DOD
clothing, medical supplies, and
other items to support the
operating forces) as high risk
                                                  •   continues to store unnecessarily large amounts of material;
because inventory levels were too                 •   purchases material for which there is no valid requirement;
high and management systems and                   •   experiences equipment readiness problems because of a lack of key
procedures were ineffective and                       spare parts; and
wasteful. Many of these same                      •   maintains inadequate visibility over material being shipped to and from
weaknesses regarding excess                           military activities. About half of DOD’s $63 billion secondary inventory
inventories and the lack of                           exceeds war reserve or current operating requirements.
economy, efficiency, and
effectiveness in DOD’s inventory                  One of the more serious and long-standing inventory management
management practices still exist                  weaknesses that GAO has been reporting on for over a decade is the
today.                                            department’s inability to maintain adequate control over material being
                                                  shipped between contractor facilities and DOD activities or between DOD
                                                  activities. For example, in July 2002, GAO reported that the Air Force had
The long-term solution to this high-              not properly controlled or maintained effective accountability over material
risk area necessitates that the DOD               reportedly valued at about $567 million that had been shipped to contractors
reengineer its entire logistics                   for repair or use in the repair process.
operations to include the
development of a long-range                       While almost half of DOD’s inventory is excess to its current war reserve and
strategic vision and a                            operating requirements, GAO has consistently reported that the department
departmentwide, coordinated                       has experienced equipment readiness problems because of shortages of key
approach for logistics management.                spare parts. In an attempt to alleviate these shortages, the Congress
In the short term, however, GAO                   allocated $1.1 billion in supplemental appropriations to DOD in fiscal year
recommends that the department
                                                  1999. GAO reported, however, that DOD’s financial reporting systems do not
(1) reduce excess inventories, (2)
eliminate material purchases for                  provide reasonable assurance that these funds are being used to purchase
which no valid requirement exists,                spare parts. Each of the services has a planned number of initiatives to
(3) establish better controls and                 address these shortages. Additionally, DOD has initiatives planned or
visibility over material shipped to               underway to modernize its supply support management information systems
and from military activities, (4)                 and has submitted financial reports in response to prior recommendations.
take actions to address key spare
parts shortages, (5) better track                 Rates at Which Selected Aircraft Were Reported as Not Mission Capable due to Supply
how it spends its funds for spare                 Problems (in percent)
parts, (6) correct information                                             Reported Not Mission Capable Rates due to Supply Problems
systems weaknesses, and (7) adopt                 Fiscal year          Air Force C-5 aircraft      Navy F-14D aircraft              All Navy aircraft
specific industry-proven best
                                                  1996                                  15.6                       10.0                         12.5
practices for improving inventory
                                                  1997                                  15.2                       11.7                         12.4
management.
                                                  1998                                  16.8                       12.4                         12.9
www.gao.gov/cgi-bin/getrpt?GAO-03-98.             1999                                  17.3                       11.1                         12.1
                                                  2000                                  18.1                        7.6                         12.9
For additional information about this high-risk
area, click on the link above or contact Henry    Source: GAO.
L. Hinton, Jr. at (202) 512-4300 or
hintonhj@gao.gov.
                                                  Note: Analysis of Navy and Air Force data based on work completed in July 2001.
                                                  January 2003


                                                  HIGH-RISK SERIES

                                                  HUD Single-Family Mortgage Insurance
Highlights of a high-risk area discussed in       and Rental Housing Assistance Programs
GAO’s Performance and Accountability
Series report on the Department of
Housing and Urban Development (HUD)
(GAO-03-103)




HUD manages about $550 billion in                 GAO originally designated HUD’s programs as high risk in 1994 due to
insurance and $19 billion per year                serious, long-standing, departmentwide management problems. Following
in rental assistance. To do this,                 several years of effort by HUD to address these problems, in January 2001,
HUD relies on the performance and                 GAO redefined and reduced the number of HUD programs deemed to be
integrity of thousands of third                   high risk. HUD has continued to make progress in addressing identified
parties, including about 7,500
lenders that process mortgage
                                                  weaknesses in the high-risk program areas. HUD’s progress includes
insurance; about 4,500 public                     implementation of new processes to allow the review of lenders and
housing agencies that administer                  appraisers and new incentives to improve the performance of property
rental assistance programs; and                   disposition contractors in its single-family programs.
about 22,000 property owners who
provide rental housing. HUD’s                     However, many of HUD’s strategies for resolving problems in its high-risk
single-family mortgage insurance                  program areas represent new initiatives in the early stages of
and rental housing assistance                     implementation, and evidence shows that significant problems remain. In its
program areas are high risk                       rental housing assistance programs, implementation of a new assessment
because of weaknesses that include                system for public housing agencies has been delayed; correcting housing
HUD’s oversight and monitoring of                 quality violations remains problematic; and HUD estimates that rental
lenders, appraisers, and
contractors, and ensuring                         assistance overpayments—some $2 billion out of $19 billion in assistance in
compliance with HUD’s housing                     fiscal year 2000—are greater than previously estimated. Additionally, HUD’s
quality standards. Because of these               three major management challenges—human capital management,
weaknesses, evidence of fraud, and                acquisitions management, and programmatic and financial management
the variety of challenges HUD faces               information systems—cut across both program areas and contribute to the
in implementing corrective actions,               high-risk designations. HUD is in the early stages of developing measures to
the program areas remain at high                  resolve these deficiencies. For example, HUD has not yet developed a
risk.
                                                  comprehensive strategy to resolve serious, long-standing programmatic and
                                                  financial management information system deficiencies.

HUD needs to                                      Because significant challenges remain, GAO is maintaining the department’s
•  improve management and                         single-family mortgage insurance and rental housing assistance program
   oversight of its single-family                 areas as high risk at this time.
   mortgage insurance programs
   to reduce risk of losses from                  HUD’s High-Risk Program Areas and Management Challenges
   loan defaults or fraud; and
•  ensure that its rental housing
   assistance programs operate
   effectively and efficiently,
   specifically that assistance
   payments are accurate,
   recipients are eligible, assisted
   housing meets quality
   standards, and contractors
   perform as expected.

www.gao.gov/cgi-bin/getrpt?GAO-03-103.

For additional information about this high-risk
area, click on the link above or contact
Thomas J. McCool at (202) 512-8678 or
mccoolt@gao.gov.
.
                                                  January 2003


                                                  HIGH-RISK SERIES
                                                  Student Financial Aid Programs
Highlights of a high-risk area discussed in
GAO’s Performance and Accountability
Series report on the Department of
Education (GAO-03-99)




Federal grant and loan programs                   Since being designated high risk in 1990, Congress and Education have made
provide over $50 billion annually to              considerable changes to address ongoing management challenges.
students to finance their                         Congress established Education’s Office of Federal Student Aid (FSA) as a
postsecondary education. Millions                 performance-based organization and Education created a team of senior
of dollars in loans and grants have               managers to address key financial and management problems throughout
been disbursed to ineligible
students because of internal
                                                  the agency. Progress is occurring, but the following problems remain.
control weaknesses. Further, while
default rates have fallen, the                    •    Information to assess systems integration progress is not yet
amount of defaulted student loan                       readily available. FSA has selected a viable, industry-accepted means
dollars has remained high. Finally,                    for integrating its systems. FSA, however, will need to develop clear
with the exception of 1997,                            goals and measures in its performance plan and better demonstrate its
Education has not received an                          progress in achieving systems integration.
unqualified—or “clean”—opinion
on its financial statements since its             •    Weaknesses in financial management and internal controls
first agencywide audit in 1995.
                                                       remain. Education has made progress improving its financial
                                                       management; however it needs to implement corrective actions to
                                                       ensure that relevant, reliable, and timely, financial information is
                                                       available. Education also needs to address its internal control
GAO believes the Department                            weaknesses to prevent improper and erroneous payments.
should:
                                                  •    Plans and reports are unclear about how default management
•    continue with systems                             goals will be achieved. FSA has developed several goals to prevent
     integration and improve its                       and collect defaulted student loans, but its plans and reports provided
     plans and reports to better                       limited information about the actions it will take to achieve them.
     demonstrate its progress,
                                                  •    Continued focus on human capital management is needed.
•    make comprehensive
     improvements to address                           Education has developed a comprehensive human capital plan that
     financial management and                          incorporates FSA. This plan outlines specific steps and time frames for
     internal control weaknesses,                      improving its human capital management, but Education will need to
                                                       continuously focus on implementation of the plan to achieve results.
•    improve plans and reports to
     clearly explain strategies for               Amount of Student Loan Dollars in Default Remains High
     achieving default management
     goals, and

•    continue implementation of
     strategic human capital
     measures, including
     succession planning and staff
     development.


www.gao.gov/cgi-bin/getrpt?GAO-03-99.

For additional information about this high-risk
area, click on the link above or contact
Cynthia M. Fagnoni at (202) 512-7215 or
fagnonic@gao.gov.                                 Note: Balances include principal, interest, late fees, and administrative charges for defaulted loans
                                                  under both the Federal Family Education Loan and Federal Direct Loan Programs.
                                                  January 2003


                                                  HIGH-RISK SERIES

                                                  Department of Defense Weapon Systems
Highlights of a high-risk area discussed in       Acquisition
GAO’s Performance and Accountability
Series report on the Department of
Defense (GAO-03-98)




Acquiring high performance                        DOD continues to experience problems in developing and acquiring weapon
weapons is central to the                         systems. GAO has consistently found that acquisitions take a much longer
Department of Defense’s (DOD)                     time and cost much more than originally anticipated, causing disruptions to
ability to fight and win wars. Also,              DOD’s overall investment strategy and significantly reducing its buying
DOD’s investment in weapons is                    power. Programs are also at risk because they are moving forward with
growing rapidly—from $110 billion
in fiscal year 2002 to about $157
                                                  immature technologies and/or they are using late stage tests as a vehicle for
billion by fiscal year 2007—as DOD                discovering problems that should have been identified and addressed much
pushes to transform itself to meet a              earlier. Such problems were evident, for example, in GAO’s reviews of
new range of threats.                             DOD’s Joint Strike Fighter, V-22 aircraft, F-22, and other programs. In
Nevertheless, while DOD’s                         addition, DOD and the military services often do not consider options to
acquisition process has produced                  acquire systems jointly to avoid costly duplication and interoperability
the best weapons in the world, it                 problems. This was particularly apparent in efforts to acquire new sensor-
also routinely yields undesirable                 to-shooter systems, antiarmor munitions, and combat identification systems.
outcomes—cost increases,
schedule delays, and performance                  Many of the problems GAO has uncovered are rooted in DOD’s environment
shortfalls. Consequently, GAO has                 and its culture. The acquisition process tends to assert pressures on
designated this as a high-risk area
since 1990.
                                                  programs to promise more than they can deliver and to push programs
                                                  forward without sufficient knowledge about a weapon’s technology, design,
                                                  and production. The intense competition to get programs approved and
                                                  funded encourages setting requirements that will make the proposed
GAO has recommended that DOD                      weapon system stand out from others. In addition, DOD officials who
take additional steps to achieve                  establish requirements often aim for the most capability possible, since it
outcomes on par with leading                      may be many years before they get another opportunity to acquire a new
organizations. These include                      weapon system of the same type. This has led to overpromising capabilities
•    planning product development                 and underestimating costs.
     so that design and
     manufacturing decisions are                  DOD is changing its policies to achieve better outcomes. It has focused
     based on better data,
                                                  primarily on (1) ensuring technologies are demonstrated to a high level of
•    ensuring testing does not get
     deferred until late in the                   maturity before beginning a weapon system program, (2) taking an
     development cycle, and                       evolutionary, or phased, approach to developing a system, and (3) making
•    considering joint mission                    more realistic cost estimates in programs. These are positive steps that
     needs in establishing weapon                 should help curb incentives to overpromise the capabilities of new weapon
     requirements.                                systems and lead to more realistic cost estimates when pricing programs.
These steps should be taken in                    Implementation on individual programs will be the measure of the policies’
tandem with providing a better                    success, but early experience has been mixed, underscoring the challenge
environment for starting and                      DOD managers face in translating the policies into better program outcomes.
managing weapons programs—one
                                                  Various Weapon Systems
that more closely resembles the
knowledge-based process followed
by leading organizations.


www.gao.gov/cgi-bin/getrpt?GAO-03-98.

For additional information about this high-risk
area, click on the link above or contact Jack
L. Brock, Jr. at (202) 512-4841 or
brockj@gao.gov.
                                                  January 2003


                                                  HIGH-RISK SERIES

                                                  Department of Defense Contract
Highlights of a high-risk area discussed in       Management
GAO’s Performance and Accountability
Series report on the Department of
Defense (GAO-03-98)




The Department of Defense (DOD),                  Since being designated high risk in 1992, DOD has worked to improve and
the government’s largest purchaser,               streamline its acquisition practices as it adjusts to a changing acquisition
spent nearly $163 billion in fiscal               environment. DOD’s senior leadership is committed to improving its
year 2001 for goods and services to               acquisition of services; and DOD has achieved some positive results in
equip, maintain and support                       improving its payment processes for goods and services, is attempting to
military forces, but it is unable to
ensure that it is acquiring goods
                                                  address health care contracting problems, and has made progress in laying a
and services as efficiently as                    foundation for reshaping its acquisition workforce. The following problems
possible. Further, between fiscal                 remain.
years 1994 and 2001, DOD                          •   Improving DOD’s acquisition of services. Too often requirements are
contractors have refunded                             not clearly defined or alternatives fully considered. DOD does not have
$6.7 billion in overpayments. Also,                   a strategic plan that integrates or coordinates ongoing initiatives or that
DOD’s health care contracting,                        provides a road map for future efforts.
involving about $5 billion annually,              •   Assuring the appropriate use of contracting techniques and
is overly complicated and                             approaches. While efforts to streamline acquisition processes have
prescriptive and is unstable.                         been made, DOD missed out on opportunities to generate savings,
Contributing to DOD’s contract
                                                      reduce administrative burdens, and enhance outcomes for its
management problems, DOD’s
acquisition workforce has been cut                    acquisitions due to unclear guidance, poor internal controls, and
in half over the past 10 years.                       improperly trained personnel. As a result, DOD (1) had mixed results in
                                                      incorporating performance-based attributes into contracts, (2) is
                                                      vulnerable to fraud in its purchase and travel card programs, and (3)
                                                      negotiated prices for goods and services using approaches that did not
GAO’s reports on DOD’s contract                       always promote competition and ensure fair and reasonable prices.
management have recommended                       •   Overcoming long-standing contract payment issues. DOD
that DOD take the following steps.                    continues to be challenged in ensuring prompt, proper, and accurate
•    Use a strategic approach to                      payments for goods and services. Payment errors are attributable to
     improve its acquisition of                       problems such as not adjusting payments for changed contract
     services.                                        requirements and paying the same invoice twice.
•    Give priority management
     attention at all DOD levels to
                                                  •   Managing DOD’s contracts for health care. DOD’s contracting
     improve and use appropriate                      approach for TRICARE and numerous adjustments to the contracts had
     contracting techniques and                       created an unstable program. DOD also faces challenges in jointly
     approaches.                                      contracting with the Veterans Administration for medical and surgical
•    Develop fundamental controls                     supplies due to different approaches in standardization and the lack of
     over contractor debt and                         accurate and reliable procurement data.
     overpayments.                                •   Improving the acquisition workforce. DOD faces serious imbalances
•    Ensure a seamless transition                     in the skills and experience of its current workforce and the potential
     under new health care                            loss of highly specialized knowledge if many of its acquisition specialists
     contracts.                                       retire.
•    Take a strategic view of human
     capital and build on initial
     efforts to reshape DOD’s                     Strategic Approach Leading Companies Take in Acquiring Services
     acquisition workforce.                       •    Secure up-front commitment from top leaders
                                                  •    Create supporting structure processes and roles
www.gao.gov/cgi-bin/getrpt?GAO-03-98.             •    Obtain improved knowledge of service spending
For additional information about this high-risk   •    Enable success through leadership, communication and metrics
area, click on the link above or contact Jack     Source: GAO.
L. Brock, Jr. at (202) 512-4841 or
brockj@gao.gov.
                                                  January 2003


                                                  HIGH-RISK SERIES

                                                  Department of Energy Contract
Highlights of a high-risk area discussed in       Management
GAO’s Performance and Accountability
Series report on the Department of Energy
(GAO-03-100)




The Department of Energy, the                     DOE’s contract management, broadly defined to include contract
largest non-Defense contracting                   administration and project management, continues to be a significant
agency in the federal government,                 challenge for the department and remains at high risk for fraud, waste,
relies primarily on contractors to                abuse, and mismanagement. In a January 2001 report on DOE’s major
carry out its diverse missions and                management challenges, GAO reported ongoing problems with DOE’s
operate its laboratories and other
facilities. About 90 percent of
                                                  approach to selecting an appropriate contract type, using competition to
DOE’s annual budget is spent on                   award contracts, incorporating performance-based measures into contracts,
contracts. DOE’s history of both                  and minimizing cost and schedule overruns on major projects. DOE has
inadequate management and                         made progress in addressing these problems. However, contractor
oversight and failure to hold its                 performance problems continue to occur at DOE's laboratories and
contractors accountable has                       facilities. Objective performance information is scarce; DOE primarily
resulted in the high-risk                         measured progress in implementation of contract reform initiatives rather
designation for contract                          than measuring performance results.
management since 1990.
                                                  Nevertheless, there are indications that the performance of DOE’s
                                                  contractors may not have improved. For ongoing major DOE projects, GAO
                                                  found there was no significant improvement in cost or schedule
To better ensure the effectiveness
of its management improvement                     performance from 1996 to 2001. In both 1996 and 2001, more than half of the
initiatives, such as contract reform,             projects reviewed showed both cost increases and schedule delays.
GAO recommended that DOE                          Furthermore, as shown below, the proportion of projects experiencing cost
incorporate the management                        growth of more than double the initial cost estimates or schedule delays of 5
practices common in high-                         years or more has increased.
performing organizations. This
approach would include the key                    In an effort to improve cost and schedule performance on major projects,
elements of (1) clearly defined                   DOE issued new policy and guidance on managing and controlling projects
goals, (2) an implementation                      in 2000, and in 2001 established a project tracking system that required
strategy that sets milestones and                 monthly status reporting on all projects with total project costs over $5
establishes responsibility, (3)
                                                  million. DOE also has efforts under way to address skill gaps in its
results-oriented outcome
measures, and (4) a mechanism                     procurement and project management organizations and to develop the
that uses results-oriented data to                necessary technical and managerial expertise for adequate oversight of its
evaluate the effectiveness of the                 contractors through training and certification programs. Over the long term,
department’s initiatives and to take              DOE may resolve the challenges in its contract management. However, the
corrective action as needed.                      benefits of its improvement initiatives may take years to fully realize. Until
                                                  then, these ongoing challenges can increase the government’s costs and
                                                  expose the government to billions of dollars of financial risks.

                                                  Comparison of Significant Cost Overruns and Schedule Delays for Ongoing Projects in 2001
                                                  with Ongoing Projects in 1996
                                                                                                           Number of projects
                                                                                                          1996                2001
                                                  Number of projects reviewed                           25                 16
www.gao.gov/cgi-bin/getrpt?GAO-03-100.            Projects with a cost growth of more than
                                                  double the initial cost estimate                       7      (28%)         6    (38%)
For additional information about this high-risk   Projects with schedule delays of 5 years or
area, click on the link above or contact Robert   more
A. Robinson at (202) 512-3841 or
                                                                                                         8      (32%)         6    (38%)
robinsonr@gao.gov.                                Source: GAO analysis of DOE data.
                                                  January 2003


                                                  HIGH-RISK SERIES

                                                  National Aeronautics and Space
Highlights of a high-risk area discussed in       Administration Contract Management
GAO’s Performance and Accountability
Series report on the National Aeronautics
and Space Administration (GAO-03-114)




Much of NASA’s success depends                    Our reports and testimonies have demonstrated just how debilitating
on the work of its contractors—on                 weaknesses in contract management and oversight can be to important
which it spends over $12 billion a                space programs. Our July 2002 report on the International Space Station, for
year. Since 1990, we have                         example, found that the National Aeronautics and Space Administration
identified NASA's contract                        (NASA) did not effectively control costs or technical and scheduling risks,
management function as an area at
high risk, principally because it has
                                                  provide adequate oversight review, or effectively coordinate efforts with its
lacked accurate and reliable                      partners. As a result, NASA has had to make drastic cutbacks in the space
financial and management                          station’s capabilities.
information on contract spending,
and it has not placed enough                      In recent years, NASA has addressed many acquisition-related weaknesses.
emphasis on end results, product                  For example, it has developed systems to provide oversight and information
performance, and cost control.                    needed to improve contract management. It has made progress in evaluating
Since financial and contract                      procurement functions in its field centers. And it is reducing its use of
problems threaten the success of                  unnegotiated (i.e., uncosted) contract changes.
NASA's major programs, we
believe contract management                       Moreover, NASA is now beginning to tackle one of its most formidable
continues to be high risk.
                                                  barriers to sound contract management—the lack of a modern, integrated
                                                  financial management system. NASA’s financial management environment is
                                                  currently comprised of decentralized, nonintegrated systems with policies,
To further improve contract                       procedures, and practices that are unique to its field centers. Because its
management, NASA needs to                         systems cannot easily exchange data, it is difficult to ensure that contracts
successfully complete its design                  are being efficiently and effectively implemented and that budgets are
and implementation of a new                       executed as planned. According to NASA, the planned new system will be
financial management system.                      fully integrated, and it will provide complete cost information to agency
Moreover, it will need to transform               management for more fully informed decision-making.
its operations to better support its
core mission. This entails                        NASA faces considerable challenges in adequately implementing contract
•    ensuring that NASA has the
                                                  management improvements. It is only in the early stages of implementing its
     right data to oversee its
     programs and contracts—                      new financial management system, for example, and NASA reported it is
     specifically data that will allow            already facing challenges in terms of cost, security, and interoperability.
     comparisons of actual costs to               Moreover, NASA has not yet ensured that contractors uniformly provide cost
     estimates;                                   data at a level that will give managers the information they need to make
•    finding ways to shift                        trade-off decisions, although they have begun taking actions to improve the
     management attention away                    data available for some large programs. Furthermore, NASA has not yet
     from yearly budgets to total                 effectively shifted management attention away from yearly budgets to total
     costs; and                                   costs.
•    strengthening NASA’s financial
     organization to better support               Ultimately, to improve contract management and oversight, NASA will need
     the agency’s mission and goals.
                                                  to transform its financial management organization so that it better supports
                                                  its core mission. Right now, finance is not viewed as intrinsic to NASA’s
                                                  program management decision process, nor does it focus on what “could”
www.gao.gov/cgi-bin/getrpt?GAO-03-114.            and “should” take place from an analytical cost-planning standpoint. Making
                                                  this kind of transformation will be difficult because it will require NASA to
For additional information about this high-risk
area, click on the link above or contact Allen    change its culture and long-standing ways of doing business. But the need
Li at 202-512-4841 or lia@gao.gov.                for deeper reform is paramount since financial and contract management
                                                  problems threaten the success of virtually every major program.
Performance and Accountability and High-
Risk Series

              Major Management Challenges and Program Risks: A Governmentwide
              Perspective. GAO-03-95.

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

              Major Management Challenges and Program Risks: Department of
              Commerce. GAO-03-97.

              Major Management Challenges and Program Risks: Department of
              Defense. GAO-03-98.

              Major Management Challenges and Program Risks: Department of
              Education. GAO-03-99.

              Major Management Challenges and Program Risks: Department of
              Energy. GAO-03-100.

              Major Management Challenges and Program Risks: Department of
              Health and Human Services. GAO-03-101.

              Major Management Challenges and Program Risks: Department of
              Homeland Security. GAO-03-102.

              Major Management Challenges and Program Risks: Department of
              Housing and Urban Development. GAO-03-103.

              Major Management Challenges and Program Risks: Department of the
              Interior. GAO-03-104.

              Major Management Challenges and Program Risks: Department of
              Justice. GAO-03-105.

              Major Management Challenges and Program Risks: Department of
              Labor. GAO-03-106.

              Major Management Challenges and Program Risks: Department of State.
              GAO-03-107.

              Major Management Challenges and Program Risks: Department of
              Transportation. GAO-03-108.




              Page 54                                      GAO-03-119 High-Risk Update
Performance and Accountability and High-
Risk Series




Major Management Challenges and Program Risks: Department of the
Treasury. GAO-03-109.

Major Management Challenges and Program Risks: Department of
Veterans Affairs. GAO-03-110.

Major Management Challenges and Program Risks: U.S. Agency for
International Development. GAO-03-111.

Major Management Challenges and Program Risks: Environmental
Protection Agency. GAO-03-112.

Major Management Challenges and Program Risks: Federal Emergency
Management Agency. GAO-03-113.

Major Management Challenges and Program Risks: National
Aeronautics and Space Administration. GAO-03-114.

Major Management Challenges and Program Risks: Office of Personnel
Management. GAO-03-115.

Major Management Challenges and Program Risks: Small Business
Administration. GAO-03-116.

Major Management Challenges and Program Risks: Social Security
Administration. GAO-03-117.

Major Management Challenges and Program Risks: U.S. Postal Service.
GAO-03-118.

High-Risk Series: An Update. GAO-03-119.

High-Risk Series: Strategic Human Capital Management. GAO-03-120.

High-Risk Series: Protecting Information Systems Supporting the
Federal Government and the Nation’s Critical Infrastructures.
GAO-03-121.

High-Risk Series: Federal Real Property. GAO-03-122.




Page 55                                        GAO-03-119 High-Risk Update
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