oversight

Civil Penalties: Agencies Unable to Fully Adjust Penalties for Inflation Under Current Law

Published by the Government Accountability Office on 2003-03-14.

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

             United States General Accounting Office

GAO          Report to the Committee on
             Governmental Affairs, U.S. Senate, and
             the Committee on Government Reform,
             House of Representatives

March 2003
             CIVIL PENALTIES
             Agencies Unable to
             Fully Adjust Penalties
             for Inflation Under
             Current Law




GAO-03-409
             a
                                               March 2003


                                               CIVIL PENALTIES

                                               Agencies Unable to Fully Adjust Penalties
Highlights of GAO-03-409, a report to the      for Inflation Under Current Law
Senate Committee on Governmental
Affairs and the House Committee on
Government Reform




Civil penalties are an important               As of June 2002, 16 of 80 federal agencies with civil penalties covered by the
element of regulatory enforcement,             Inflation Adjustment Act had not made the required initial adjustments to
allowing agencies to punish                    their penalties. Nineteen other agencies had not made required subsequent
violators appropriately and to serve           adjustments, and several other agencies had made incorrect adjustments.
as a deterrent to future violations.           The act does not give any agency the authority to monitor compliance or to
In 1996, Congress enacted the
Inflation Adjustment Act to require
                                               provide guidance to agencies. More important, several provisions of the act
agencies to adjust certain penalties           have prevented some agencies from fully adjusting their penalties for
for inflation. GAO assessed federal            inflation. One provision limited the agencies’ first adjustments to 10 percent
agencies’ compliance with the act              of the penalty amounts, even if the penalties were decades old and hundreds
and whether provisions in the act              of percent behind inflation. The resultant “inflation gap” can never be
have prevented agencies from                   corrected under the statute and grows with each subsequent adjustment.
keeping their penalties in pace with           (The figure below illustrates the effect of the cap on one agency’s $1,000
inflation.                                     penalty set in 1958.) Also, the act’s calculation and rounding procedures
                                               require agencies to lose a year of inflation each time they adjust their
                                               penalties, and can prevent some agencies from making adjustments until
                                               inflation increases by 45 percent or more (i.e., 15 years or more at recent
Congress may wish to consider
                                               rates of inflation). Finally, the act exempts penalties under certain statutes
amending the act to (1) require or
permit agencies to adjust their                from its requirements entirely. Consequently, more than 100 exempted
penalties for lost inflation; (2)              penalties have declined in value by 50 percent or more since Congress last
make the calculation and rounding              set them.
procedures more consistent with
changes in inflation; (3) permit               Ten Percent Cap on Initial Penalty Adjustments Resulted in Large Inflation Gaps
agencies with exempt penalties to
adjust them for inflation; and (4)
give some agency the responsibility
to monitor compliance and provide
guidance.

The Department of Justice, the
Department of the Treasury, and
the Office of Management and
Budget did not comment on the
first three matters for
congressional consideration. The
agencies suggested changes to the
fourth matter, but we did not make
those changes.




www.gao.gov/cgi-bin/getrpt?GAO-03-409.

To view the full report, including the scope
and methodology, click on the link above.
For more information, contact Victor
Rezendes (202) 512-6806 or
rezendesv@gao.gov.
Contents



Letter                                                                                                  1
                            Results in Brief                                                            2
                            Background                                                                  4
                            Objectives, Scope, and Methodology                                          9
                            Many Agencies Did Not Make Required Penalty Adjustments                    11
                            The Inflation Adjustment Act Has Prevented Agencies from Keeping
                              Certain Penalties in Pace with Inflation                                 16
                            Conclusions                                                                36
                            Matters for Congressional Consideration                                    38
                            Agency Comments and Our Evaluation                                         39


Appendixes
             Appendix I:    Final Rules That Adjust Civil Penalties for Inflation as of
                            June 30, 2002                                                              42
             Appendix II:   Amount of Inflation and Estimated Length of Time Needed to
                            Trigger Penalty Adjustments in Selected Agencies                           47


Tables                      Table 1: The 10 Percent Cap on Initial Adjustments Resulted in
                                     Large “Inflation Gaps” for Some Penalties                         17
                            Table 2: Rounding Rules in the Inflation Adjustment Act Prevented
                                     PWBA from Increasing Its Penalties in 2001                        28
                            Table 3: When PWBA Penalties Are Eligible for Adjustment, the
                                     Increases Will Be about Twice That Needed to Keep Pace
                                     with Inflation                                                    29
                            Table 4: Inflation Adjustment Act Exempted at Least 238 Civil
                                     Penalties from Coverage                                           34
                            Table 5: A Substantial Amount of Inflation Has Elapsed with Regard
                                     to Some Exempted Penalties                                        35
                            Table 6: Final Rules That Adjust Cabinet Departments’ Civil
                                     Penalties for Inflation (as of June 30, 2002)                     43
                            Table 7: Final Rules That Adjust Independent Agencies’ Civil
                                     Penalties for Inflation (as of June 30, 2002)                     45
                            Table 8: Amount of Inflation and Estimated Length of Time Needed
                                     to Trigger Next Penalty Adjustments in Six Selected
                                     Agencies                                                          47


Figures                     Figure 1: The 10 Percent Cap on Initial Adjustments Prevented FAA
                                      from Keeping Its $1,000 Penalty in Pace With Inflation           19




                            Page i                                              GAO-03-409 Civil Penalties
Contents




Figure 2: The Size of the Inflation Gap Resulting from the 10
          Percent Cap Grows with Each Subsequent Adjustment                                21
Figure 3: CPI Lag in the Inflation Adjustment Act Reduces the
          Amount of Inflation That Can Be Considered                                       24
Figure 4: Inflation Lost Due to CPI Lag Cannot Be Recovered                                25
Figure 5: Less Inflation Can Be Considered When Penalty
          Adjustments Are More Frequent                                                    26
Figure 6: Rounding Rules Can Prevent Penalty Adjustments for
          Decades                                                                          30
Figure 7: Rounding Based on the Size of the Increase More Closely
          Tracks Inflation than Rounding Based on the Size of the
          Penalty                                                                          32
Figure 8: Rounding Based on the Size of the Increase without the
          CPI Lag More Closely Tracks Inflation                                            33


Abbreviations

CMS                   Centers for Medicare and Medicaid Services
CPI                   Consumer Price Index
EPA                   Environmental Protection Agency
ERISA                 Employee Retirement Income Security Act
FAA                   Federal Aviation Administration
FMS                   Financial Management Service
IRS                   Internal Revenue Service
MSHA                  Mine Safety and Health Administration
NHTSA                 National Highway Traffic Safety Administration
NPR                   National Performance Review
OFFM                  Office of Federal Financial Management
OMB                   Office of Management and Budget
OPS                   Office of Pipeline Safety
OSHA                  Occupational Safety and Health Administration
PWBA                  Pension and Welfare Benefits Administration
SSA                   Social Security Administration
USCG                  United States Coast Guard



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Page ii                                                         GAO-03-409 Civil Penalties
A
United States General Accounting Office
Washington, D.C. 20548



                                    March 14, 2003                                                                  Leter




                                    The Honorable Susan M. Collins
                                    Chairman
                                    The Honorable Joseph I. Lieberman
                                    Ranking Minority Member
                                    Committee on Governmental Affairs
                                    United States Senate

                                    The Honorable Tom Davis
                                    Chairman
                                    The Honorable Henry A. Waxman
                                    Ranking Minority Member
                                    Committee on Government Reform
                                    House of Representatives

                                    Civil monetary penalties are one method by which agencies enforce federal
                                    laws and regulations, with penalty assessments and collections totaling
                                    hundreds of millions of dollars per year. Dozens of federal agencies are
                                    currently authorized to levy such penalties for violations involving such
                                    issues as public health and safety, environmental protection, securities
                                    transactions, and international trade. For example, within the past few
                                    years,

                                    • a major automobile manufacturer agreed to pay $425,000 in civil
                                      penalties to settle charges that it failed to promptly recall vehicles with
                                      ignition-switch problems and withheld information in investigations into
                                      fires in its vehicles,

                                    • a furniture manufacturer agreed to pay a $900,000 civil penalty to settle
                                      allegations that it knowingly failed to report a substantial hazard in
                                      cedar chests involved in the suffocation deaths of five children, and

                                    • a company agreed to pay civil penalties totaling $30,000 to settle
                                      allegations that it violated export control and antiboycott laws by
                                      shipping chemicals to Iran through the United Arab Emirates.




                                    Page 1                                                GAO-03-409 Civil Penalties
                   Congress generally establishes civil penalty maximums in the underlying
                   statutes, and those maximum penalties are generally reserved for the worst
                   offenses. In 1996, Congress amended the Federal Civil Penalties Inflation
                   Adjustment Act of 1990 to require agencies to issue regulations adjusting
                   their covered penalties for inflation.1 The statute as amended (hereinafter
                   referred to as the “Inflation Adjustment Act”) required agencies with
                   covered penalties to publish initial penalty adjustments in the Federal
                   Register by October 23, 1996, and to examine their penalties for additional
                   inflation adjustments at least once every 4 years thereafter.2 The act
                   limited the first such adjustment to 10 percent of the penalty amount and
                   required specific calculation and rounding procedures to be followed, but
                   excluded penalties under certain statutes from coverage (e.g., the
                   Occupational Safety and Health Act of 1970 and the Internal Revenue Code
                   of 1986).

                   This report examines the implementation of the Inflation Adjustment Act.
                   Specifically, our objectives were to determine (1) whether, as of June 30,
                   2002, agencies with penalties covered by the act had made the required
                   penalty adjustments and (2) whether provisions in the act have prevented
                   agencies from keeping their penalties in pace with inflation. A complete
                   discussion of our scope and methodology is included later in this report. In
                   brief, we focused part of our work on six agencies that the most recent data
                   available indicated had large penalty assessments. We also focused on the
                   five agencies that levy penalties under the excluded statutes. We conducted
                   this review under our basic legislative authority to undertake work
                   supporting Congress, and are reporting the results to you as the current
                   Chairmen and Ranking Minority Members of the two Committees that
                   sponsored the Federal Civil Penalties Inflation Adjustment Act of 1990.



Results in Brief   As of June 2002, 16 of 80 federal agencies with civil penalties covered by
                   the Inflation Adjustment Act had not adjusted any of their penalties for
                   inflation. Only 9 of the 64 agencies that made initial penalty adjustments


                   1
                    The 1990 act was amended in 1996 by the Debt Collection Improvement Act, which added
                   the requirement for agencies to adjust their civil penalties by regulation (Pub. L. 104-134,
                   Sec. 31001(s)(1),110 Stat. 1321-373). See 28 U.S.C. 2461 note.
                   2
                    The Inflation Adjustment Act does not clearly indicate whether second-round adjustments
                   should be made within 4 years of the initial deadline (i.e., by October 23, 2000) or within 4
                   years after the initial adjustment—whenever it occurred. In this report we considered the
                   statute to require second-round adjustments within 4 years of the first adjustment.




                   Page 2                                                            GAO-03-409 Civil Penalties
did so by the statutory deadline of October 23, 1996, and some of the
adjustments were not made until years after the deadline. Also, 19 of the 64
agencies that made initial adjustments had not made required subsequent
adjustments for eligible penalties, and several other agencies made the
adjustments incorrectly. The act does not give any agency the authority or
responsibility to monitor agencies’ compliance or provide guidance on its
implementation. Lack of monitoring and guidance may have contributed to
the widespread lack of compliance with the act’s requirements and the
numerous questions raised to us regarding its provisions.

Several provisions in the Inflation Adjustment Act have prevented agencies
from keeping their civil penalties in pace with inflation.

• The 10 percent cap on initial adjustments prevented some agencies from
  accounting for hundreds of percent of inflation that had occurred since
  certain penalties were last set or adjusted by Congress. The “inflation
  gap” that results from this 10 percent cap can never be corrected under
  this statutory authority and grows with each subsequent adjustment.
  Several agencies with penalties covered by the act indicated that,
  because of the 10 percent cap, their penalties had lost effectiveness and
  their enforcement options had been limited. However, officials in those
  agencies were generally noncommittal with regard to elimination of the
  cap, neither supporting nor opposing such action.

• The act’s requirements on how the penalty adjustments should be
  calculated and rounded prevent agencies from capturing all of the
  inflation that occurs between adjustments and prevent agencies from
  increasing certain penalties until inflation has increased by 45 percent
  or more. Therefore, at recent rates of inflation, agencies may not be
  able to adjust some of their penalties for 15 years or more. Agency
  officials frequently told us that these provisions in the act were unclear
  and produced undesirable effects. Each agency in our review with
  covered penalties supported changes to the act to allow more timely and
  accurate penalty adjustments.

• The act exempted 238 penalties from its requirements. Many of these
  exempted penalties have not been adjusted for decades, and more than
  half would be at least 50 percent higher if fully adjusted for inflation.
  Nevertheless, officials in four of the five agencies with exempted
  penalties indicated that their penalties did not currently need to be
  increased.




Page 3                                                GAO-03-409 Civil Penalties
             This report contains several matters for consideration by Congress that can
             help ensure that agencies will keep their civil penalties in pace with
             inflation. First, if Congress wants federal civil penalties to retain their
             original deterrent values, it should consider amending the Inflation
             Adjustment Act to require or permit agencies to make catch-up
             adjustments accounting for all of the inflation that occurred since Congress
             last set or adjusted those penalties. Second, if Congress wants agencies to
             make timely and accurate adjustments of their civil penalties, Congress
             should consider amending the calculation and rounding procedures in the
             act to be more consistent with changes in inflation. Third, if Congress
             believes that exempted penalties are currently in need of adjustment, it
             could amend the statute to permit agencies to do so. Finally, to improve
             compliance with the statute, Congress could give one or more entities in
             the executive branch the authority and responsibility to monitor the act’s
             implementation and provide guidance to agencies.



Background   Prior to 1996, agencies generally did not have the authority to adjust civil
             penalty maximums that were established in statute. Congress would
             occasionally adjust individual penalties or specific groups of penalties, but
             not all civil penalties. As a result, by 1990, many penalties had not been
             changed for decades. When the Federal Civil Penalties Inflation
             Adjustment Act of 1990 was enacted, Congress noted in the “Findings”
             section of the legislation that inflation had weakened the deterrent effect of
             many civil penalties. The stated purpose of the 1990 act was “to establish a
             mechanism that shall (1) allow for regular adjustment for inflation of civil
             monetary penalties; (2) maintain the deterrent effect of civil monetary
             penalties and promote compliance with the law; and (3) improve the
             collection by the Federal Government of civil monetary penalties.”
             However, the act did not give agencies the authority to adjust their civil
             penalties for inflation. Instead, the 1990 act required the President to
             report to Congress every 5 years on how much each covered civil penalty
             had to be increased to keep pace with inflation. In addition, the act
             required the President to report annually on penalty assessments and
             collections.




             Page 4                                                 GAO-03-409 Civil Penalties
                        In July 1991, the Office of Management Budget (OMB) submitted the first
                        (and ultimately the only) report to Congress under the Federal Civil
                        Penalties Inflation Adjustment Act describing the penalty increases needed
                        to keep pace with inflation.3 Based on submissions from dozens of
                        agencies, the report identified almost 1,000 civil monetary penalties that
                        were covered by the act, and listed, by agency, the statutory modifications
                        that were required to fully adjust the penalties for inflation. Also, in
                        satisfaction of the annual reporting requirement, the report also provided
                        information on civil penalty assessments and collections during fiscal year
                        1990. At the request of OMB’s Office of Federal Financial Management, the
                        Department of the Treasury’s Financial Management Service (FMS)
                        published those reports until 1998 (providing information on assessments
                        and collections through fiscal year 1997). Congress abolished this annual
                        reporting requirement as part of the Federal Reports Elimination Act of
                        1998.4

                        Congress amended the 1990 act in 1996, replacing the 5-year reporting
                        obligation with a requirement that agencies publish regulations in the
                        Federal Register adjusting each of their covered civil penalties for inflation.
                        The act as amended required each agency’s first inflation adjustment
                        regulation to be published by October 23, 1996, and requires the agencies to
                        examine their covered penalties at least once every 4 years thereafter and,
                        where possible, make penalty adjustments. However, the act limited the
                        agencies’ initial penalty adjustments to 10 percent of the penalty amounts.
                        The Inflation Adjustment Act also exempted penalties under the Internal
                        Revenue Code of 1986, the Tariff Act of 1930, the Occupational Safety and
                        Health Act of 1970, and the Social Security Act.



Adjustment Procedures   The Inflation Adjustment Act requires agencies to follow specific
                        procedures when making penalty adjustments. For example, section 5 of
                        the act defines a “cost-of-living adjustment” as the following:




                        3
                         Office of Management and Budget, Civil Monetary Penalty Assessments and Collections:
                        1990 Report to Congress and Civil Monetary Penalty Inflation Adjustment Report
                        (Washington, D.C.: July 1991).
                        4
                        Pub. L. 105-362, Nov. 10, 1998.




                        Page 5                                                       GAO-03-409 Civil Penalties
    …the percentage (if any) for each civil monetary penalty by which -
    (1) the Consumer Price Index5 for the month of June of the calendar
    year preceding the adjustment, exceeds (2) the Consumer Price Index
    for the month of June of the calendar year in which the amount of such
    civil monetary penalty was last set or adjusted pursuant to law.

Therefore, if an agency made its first round of adjustments in October 1996
and the penalty was last set or adjusted in October 1990, the agency was
required to calculate the unrounded cost-of-living adjustment by comparing
the June 1995 Consumer Price Index (CPI) with the CPI for June 1990.

The Inflation Adjustment Act also provides specific criteria for how
agencies should round any penalty increase. Section 5 of the act says the
following:

    Any increase determined under this subsection shall be rounded to the
    nearest (1) multiple of $10 in the case of penalties less than or equal to
    $100; (2) multiple of $100 in the case of penalties greater than $100 but
    less than or equal to $1,000; (3) multiple of $1,000 in the case of
    penalties greater than $1,000 but less than or equal to $10,000;
    (4) multiple of $5,000 in the case of penalties greater than $10,000 but
    less than or equal to $100,000; (5) multiple of $10,000 in the case of
    penalties greater than $100,000 but less than or equal to $200,000; and
    (6) multiple of $25,000 in the case of penalties greater than $200,000.

For example, if a maximum civil penalty of $5,000 was last set in 1990, and
there had been 17 percent inflation from June 1990 through June 1995 (the
relevant time frame for an adjustment in 1996), the unrounded increase
would be $850 ($5,000 times 0.17). Because the $5,000 penalty was greater
than $1,000 but less than or equal to $10,000, the statute indicates that the
$850 increase should be rounded to the nearest multiple of $1,000, which is
$1,000. Therefore, the adjusted penalty after rounding would be $6,000.

However, section 6 of the Inflation Adjustment Act states that the first
penalty adjustment under these procedures “may not exceed 10 percent of
such penalty.” Therefore, in the above example the $1,000 rounded
increase would be limited to 10 percent of the $5,000 penalty amount, or
$500. As a result, the adjusted penalty after the 10 percent cap would be


5
 The Consumer Price Index is published monthly by the Bureau of Labor Statistics and is the
most widely used measure of inflation.




Page 6                                                          GAO-03-409 Civil Penalties
                          $5,500. The legislative history of the Inflation Adjustment Act does not
                          explain why Congress established the 10 percent cap, the penalty
                          exemptions, or the particular adjustment procedures.



Prior GAO Work on Civil   Our previous work has indicated that the establishment and adjustment of
Penalties                 civil penalty maximums is only one part of the penalty process. Civil
                          penalty maximums are generally reserved for the most egregious cases
                          (e.g., those involving willful intent to violate the law and/or fatalities).
                          Agencies investigate potential violations and determine the amount of
                          penalty to be sought based on a variety of factors, including the severity of
                          the incident, whether the individual or organization involved has a previous
                          history of violations, and the individual or organization’s ability to pay the
                          fine. In February 2001, we reported on the implementation of a statutory
                          provision that required federal agencies to provide small entities (e.g.,
                          small businesses and small governments) with civil penalty relief.6 We
                          concluded that the requirement was being implemented by the agencies
                          differently, and that small entities may not be receiving any more relief than
                          larger entities.

                          We have reported several other times on the assessment of civil penalties
                          and the collection of civil penalty debt. For example, see the following.

                          • In August 1994, we reported on the enforcement of the Employee
                            Retirement Income Security Act of 1974 (ERISA), noting that the
                            Pension and Welfare Benefits Administration’s (PWBA) enforcement
                            program could be strengthened by increasing the use of penalties
                            authorized by the statute to deter plans from violating the law.7




                          6
                           U.S. General Accounting Office, Regulatory Reform: Implementation of Selected Agencies’
                          Civil Penalty Relief Policies for Small Entities, GAO-01-280 (Washington, D.C.: Feb. 20,
                          2001).
                          7
                           U.S. General Accounting Office, Pension Plans: Stronger Labor ERISA Enforcement
                          Should Better Protect Plan Participants, GAO/HEHS-94-157 (Washington, D.C.: Aug. 8,
                          1994). Effective February 3, 2003, the name of the Pension and Welfare Benefits
                          Administration was changed to the Employee Benefits Security Administration. In this
                          report, we refer to the agency as PWBA because that was its name during the time frame
                          covered by this review.




                          Page 7                                                         GAO-03-409 Civil Penalties
• In March 1996 we said “penalties play a key role in environmental
  enforcement by deterring violators and by ensuring that regulated
  entities are treated fairly and consistently so that no one gains a
  competitive advantage by violating environmental regulations.”8

• In March 1999, we reported that the potential usefulness of civil
  monetary penalties in relation to noncompliant nursing homes was
  being hampered because of delays in the application of the sanctions by
  the Health Care Financing Administration.9

• In May 2000, we reported that the Office of Pipeline Safety (OPS) had
  decreased the number and amount of fines while increasing the use of
  less severe corrective actions.10 We questioned this approach, and
  recommended that the agency determine the impact of the reduced use
  of fines on compliance with safety requirements. We subsequently
  reported that OPS had increased its use of fines.11

• In December 2001, we reported on the growth in civil monetary penalty
  receivables at the Centers for Medicare and Medicaid Services (CMS).12
  In that report, OMB stated that it has broad oversight responsibility in
  monitoring and evaluating governmentwide debt collection activities.
  However, OMB said it is the agencies’ responsibility to monitor, manage,
  and collect the debt, and the agency’s Office of the Inspector General’s
  responsibility to audit debt collection activities.




8
 U.S. General Accounting Office, Water Pollution: Many Violations Have Not Received
Appropriate Enforcement Attention, GAO/RCED-96-23 (Washington, D.C.: Mar. 20, 1996).
9
 U.S. General Accounting Office, Nursing Homes: Additional Steps Needed to Strengthen
Enforcement of Federal Quality Standards, GAO/HEHS-99-46 (Washington, D.C.: Mar. 18,
1999).
10
 U.S. General Accounting Office, Pipeline Safety: The Office of Pipeline Safety Is
Changing How It Oversees the Pipeline Industry, GAO/RCED-00-128 (Washington, D.C.:
May 15, 2000).
11
 U.S. General Accounting Office, Pipeline Safety: Status of Improving Oversight of the
Pipeline Industry, GAO-02-517T (Washington, D.C.: Mar. 19, 2002).
12
 U.S. General Accounting Office, Civil Fines and Penalties Debt: Review of CMS’
Management and Collection Processes, GAO-02-116 (Washington, D.C.: Dec. 31, 2001).




Page 8                                                         GAO-03-409 Civil Penalties
                         We have also specifically commented on the adjustment of civil penalties
                         for inflation. In September 1993, the National Performance Review (NPR)
                         recommended that federal civil monetary penalties be adjusted for
                         inflation.13 Specifically, NPR recommended that a “catch-up” penalty
                         adjustment be made to bring penalties up to date, and that the need for
                         additional inflation adjustments be automatically reassessed every 4 years.
                         NPR estimated that implementation of the recommendation would
                         increase federal receipts by nearly $200 million during the fiscal year 1994
                         through fiscal year 1999 period. In our December 1994 report on NPR, we
                         generally agreed with the recommendation, noting that civil penalties
                         should be periodically adjusted so that they do not lose relevancy.14



Objectives, Scope, and   The objectives of this report are to determine (1) whether, as of June 30,
                         2002, agencies with penalties covered by the Inflation Adjustment Act had
Methodology              made the required penalty adjustments and (2) whether provisions in the
                         act have prevented agencies from keeping their penalties in pace with
                         inflation. To address the first objective, we electronically searched the
                         Federal Register and determined whether the required penalty adjustment
                         regulations had been published by all federal agencies that the 1991 OMB
                         report and the 1997 Department of the Treasury report indicated had civil
                         penalty authorities that were covered by the Inflation Adjustment Act. We
                         defined an “agency” to be each organizational unit that was separately
                         listed in those reports or that separately published penalty adjustment
                         regulations in the Federal Register.

                         We also examined the adjusted penalties and determined whether any of
                         them were eligible for a second round of adjustments. We focused part of
                         our analysis on six agencies with large penalty assessments in 1997 (the
                         most recent data available)—the Environmental Protection Agency (EPA);
                         the Mine Safety and Health Administration (MSHA) and PWBA within the
                         Department of Labor; and the Federal Aviation Administration (FAA), the
                         National Highway Traffic and Safety Administration (NHTSA), and the
                         United States Coast Guard (USCG) within the Department of
                         Transportation.


                         13
                          National Performance Review, From Red Tape to Results: Creating a Government That
                         Works Better and Costs Less (Washington, D.C.: Sept. 7, 1993).
                         14
                            U.S. General Accounting Office, Management Reform: Implementation of the National
                         Performance Review’s Recommendations, GAO/OCG-95-1 (Washington, D.C.: Dec. 5, 1994).




                         Page 9                                                     GAO-03-409 Civil Penalties
We also focused on those six agencies in the second objective, comparing
the amount of penalty adjustments made under the 10 percent cap with the
amount of inflation that had occurred since the agencies’ penalties were
last set or adjusted. As called for by the act, we used the CPI for urban
workers during the month of June in the relevant years as our measure of
the historical rates of inflation. We then calculated the amount of inflation
that had not been accounted for by the agencies’ initial adjustments—what
we refer to in this report as the “inflation gap.” We interviewed officials in
each agency to determine their views regarding the effect of the 10 percent
cap on their agencies’ civil penalties and enforcement efforts.

We also focused on those six agencies to examine the effects of the
adjustment calculation requirements and rounding rules in the statute.
Specifically, we used certain commonly occurring penalty amounts to
demonstrate how the statute requires the penalties to be adjusted and
rounded, and developed projections of how closely the resultant penalties
tracked a possible rate of inflation. Our projections assume an annual rate
of inflation of 2.5 percent—about the average rate since the Inflation
Adjustment Act was enacted in 1996.

We focused another part of our review on the five agencies responsible for
penalties that are exempted from the act’s requirements—CMS within the
Department of Health and Human Services, the Occupational Safety and
Health Administration (OSHA) within the Department of Labor, the U.S.
Customs Service (Customs) and the Internal Revenue Service (IRS) within
the Department of the Treasury, and the Social Security Administration
(SSA). We interviewed officials in each of the five agencies, asking if they
knew why their agencies’ penalties had been excluded, the effect of the
exclusions on their ability to keep their penalties in pace with inflation, and
whether they believed their penalties should now be adjusted for inflation.
We also contacted officials from OMB, the Department of Justice, and FMS
within the Department of the Treasury to obtain their views regarding the
need for central management oversight of the act.




Page 10                                                 GAO-03-409 Civil Penalties
                        We focused part of our review on the extent to which the Inflation
                        Adjustment Act permits agencies to keep their civil penalties in pace with
                        inflation. However, we made no attempt to ascertain whether any
                        individual penalty was set at a sufficient level to deter violations of federal
                        law or regulation. We also did not attempt to determine the extent to which
                        the agencies’ maximum civil penalties are administered. Also, because
                        there is no current comprehensive database that identifies each agency
                        with civil penalty authority subject to the provisions of the Inflation
                        Adjustment Act, we cannot be sure that we have identified all of the
                        agencies or penalties covered by the act. We did not attempt to verify
                        whether a penalty adjusted for inflation by an agency appropriately met the
                        definition of a covered penalty in the Inflation Adjustment Act.15 We
                        conducted our work from March 1, 2002, through September 1, 2002, at the
                        headquarters offices of the above-mentioned agencies in accordance with
                        generally accepted government auditing standards.

                        We provided a draft of this report to OMB, the Department of Justice, and
                        the Department of the Treasury for their review and comment. The
                        comments that we received are reflected in the “Agency Comments and
                        Our Evaluation” section of this report.



Many Agencies Did Not   Our review indicated that lack of compliance with the Inflation Adjustment
                        Act has been widespread. As of June 2002, 16 of 80 federal agencies with
Make Required Penalty   civil penalties covered by the act had not adjusted any of their penalties for
Adjustments             inflation. Only 9 of the 64 agencies that made initial penalty adjustments
                        did so by the statutory deadline of October 23, 1996, and some of the
                        adjustments were not made until years after the deadline. Also, 19 of the 64
                        agencies that made initial adjustments had not made required subsequent
                        adjustments for eligible penalties, and several other agencies made the
                        adjustments incorrectly. The act does not give any agency the authority or
                        responsibility to monitor agencies’ compliance or provide guidance on its
                        implementation. Representatives from the six agencies with covered
                        penalties that we contacted all supported giving some federal entity that
                        authority and responsibility.




                        15
                         For example, some agencies adjusted broadly applicable civil penalty statutes (e.g., the
                        False Claims Act or the Program Fraud Civil Remedies Act of 1986), whereas other agencies
                        administering penalties under those statutes did not.




                        Page 11                                                        GAO-03-409 Civil Penalties
Sixteen Agencies with       As noted previously, the Inflation Adjustment Act required each federal
Covered Penalties Did Not   agency with covered civil penalties to publish a regulation in the Federal
                            Register by October 23, 1996, making initial inflation adjustments to its civil
Make Initial Penalty        penalties (to a maximum of 10 percent). We reviewed OMB’s 1991 report to
Adjustments                 Congress and other sources and determined that 80 federal agencies had at
                            least one civil penalty that was covered by the act’s requirements. 16 Our
                            review of the Federal Register indicated that, as of June 30, 2002, 16 of the
                            80 agencies had not published the required penalty adjustment regulations.
                            (See app. I for a list of the 80 agencies and which ones did and did not
                            publish regulations.)

                            We contacted 4 of the 16 agencies that had not published regulations, those
                            that appeared to have multiple civil penalties and/or active civil penalty
                            programs—the Department of Education, the Federal Energy Regulatory
                            Commission, the Food and Drug Administration within the Department of
                            Health and Human Services, and Customs.17 In separate reports published
                            during this review, we recommended that each of the four agencies publish
                            the required initial penalty adjustment regulations.18 Each of the agencies
                            agreed to do so, and some have since published the required adjustments.19


                            16
                             We also determined that the Consumer Product Safety Commission has its own agency-
                            specific civil penalty inflation adjustment authority that supersedes the Inflation Adjustment
                            Act as the governing criteria for its penalties. See the Consumer Product Safety
                            Improvement Act of 1990, Pub. L. 101-608,104 Stat. 3110 (Nov. 16, 1990).
                            17
                             The 12 other agencies that had not published initial inflation adjustment regulations
                            generally had only a few civil penalties identified in previous OMB and Treasury reports as
                            covered under the Inflation Adjustment Act. Those 12 agencies are the Bureau of Land
                            Management, the Fish and Wildlife Service, and the Minerals Management Service within
                            the Department of the Interior; the Department of State; the Enforcement Office within the
                            Department of the Treasury; the Federal Emergency Management Agency; the International
                            Trade Commission; the Office of Personnel Management; the National Aeronautics and
                            Space Administration; the National Transportation Safety Board; the Small Business
                            Administration; and the Surface Transportation Board.
                            18
                             U.S. General Accounting Office, Federal Energy Regulatory Commission’s Compliance
                            with Requirement to Adjust Civil Monetary Penalties for Inflation, GAO-02-888R
                            (Washington, D.C.: July 15, 2002); The Department of Education’s Compliance with the
                            Inflation Adjustment Act, GAO-02-1030R (Washington, D.C.: Aug. 26, 2002); Food and Drug
                            Administration’s Compliance with the Inflation Adjustment Act, GAO-02-933R
                            (Washington, D.C.: Aug. 1, 2002); and U.S. Customs Service: Compliance with the Inflation
                            Adjustment Act, GAO-02-1045R (Washington, D.C.: Sept. 9, 2002).
                            19
                             For example, the Federal Energy Regulatory Commission published its regulation at 67
                            Fed. Reg. 52410 (Aug. 12, 2002). The Department of Education published its regulation at 67
                            Fed. Reg. 69654 (Nov. 18, 2002).




                            Page 12                                                           GAO-03-409 Civil Penalties
                            Officials in these agencies said they did not know why their agencies had
                            not adjusted their penalties earlier.

                            Some of the penalty adjustment regulations that were published covered all
                            of the department or agency’s civil penalties, but others covered only a
                            particular subunit within the department or agency. For example, the
                            Department of Agriculture’s initial inflation adjustment regulation covered
                            eight different agencies within the department (e.g., the Agricultural
                            Marketing Service, the Animal and Plant Health Inspection Service, and the
                            Food Safety and Inspection Service). In contrast, nine agencies within the
                            Department of Transportation (e.g., FAA, USCG, and NHTSA) each
                            published separate penalty adjustment regulations.

                            Only 9 of the 64 agencies making penalty adjustments published their
                            regulations by the statutory deadline of October 23, 1996. Most of the other
                            55 agencies published their regulations by the end of 1997, but 7 agencies
                            did not do so until 1998 or later. For example, the Office of the Attorney
                            General within the Department of Justice did not publish its initial Inflation
                            Adjustment Act regulation until August 30, 1999. The Wage and Hour
                            Division within the Department of Labor’s Employment Standards
                            Administration did not publish its initial regulation until December 7,
                            2001—more than 5 years after the statutory deadline.

                            All six of the agencies that we focused on in this part of our review had
                            published a first round of penalty adjustment regulations by June 2002.
                            However, none of the agencies published their regulations by the October
                            23, 1996, statutory deadline. For example, MSHA did not publish its initial
                            penalty adjustments until April 22, 1998—nearly 18 months after the
                            deadline.



Nineteen Agencies Did Not   The Inflation Adjustment Act required agencies with covered civil penalties
Make Required Second-       to examine those penalties and, where possible under the act’s procedures,
                            make at least one more round of penalty adjustments within 4 years after
Round Adjustments
                            the initial adjustments. Therefore, if an agency published its initial penalty
                            adjustments on October 23, 1996, it should have examined those penalties
                            and, where possible, published a second round of adjustments by October
                            23, 2000. However, as we viewed the act, if the agency did not publish the
                            initial adjustments until 2 years after the deadline (i.e., October 23, 1998),
                            the agency was not required to publish a second round of adjustments for
                            eligible penalties until October 23, 2002.




                            Page 13                                                GAO-03-409 Civil Penalties
As appendix I shows, 29 of the 64 agencies that published initial penalty
adjustment regulations under the Inflation Adjustment Act had not
published a second round of adjustments by June 30, 2002. However, in
some cases, 4 years had not elapsed since the agencies’ initial penalty
adjustments. In other cases, the agencies’ penalties were not eligible for a
second round of adjustments under the procedures prescribed in the
Inflation Adjustment Act. In total, 19 agencies had at least one penalty that
was eligible for a second adjustment as of June 30, 2002, but the agencies
had not adjusted those penalties.

Among the six agencies that we focused on in this part of our review, two
agencies—FAA and NHTSA—had published a second round of adjustments
for all of their eligible penalties by June 30, 2002.20 One agency—PWBA—
had no penalties that were eligible for adjustment under the Inflation
Adjustment Act’s procedures. The three remaining agencies—EPA, USCG,
and MSHA—had penalties that were eligible for a second round of
adjustments as of June 30, 2002, but had not adjusted those penalties in a
manner consistent with the act’s requirements.

• EPA published a second round of adjustments on June 18, 2002 (nearly
  5 ½ years after its first adjustments), but later withdrew the rule after we
  advised EPA that the adjustments were inconsistent with the Inflation
  Adjustment Act’s requirements.21 EPA officials told us that the agency
  would publish another adjustment regulation in 2003.

• USCG could have adjusted 56 of its 122 previously adjusted penalties by
  June 2002.

• MSHA could have adjusted at least 2 of its 5 previously adjusted
  penalties by June 2002.




20
  FAA adjusted 1 of its 8 civil penalties in 2002, and NHTSA adjusted 7 of its 16 civil penalties
in two separate regulations in 1999 and 2001.
21
 U.S. General Accounting Office, Federal Civil Penalties Inflation Adjustment Act, B-
290021 (Washington, D.C.: July 15, 2002).




Page 14                                                             GAO-03-409 Civil Penalties
                            In separate reports published during this review, we recommended that
                            USCG and MSHA publish a second round of penalty adjustments, and each
                            agency subsequently agreed to do so.22



No Agency Is Responsible    Several provisions in the Inflation Adjustment Act are unclear, and
for Monitoring Compliance   agencies raised a number of questions during our review regarding some of
                            the act’s requirements.
or Providing Guidance
                            • The act does not clearly indicate whether second-round adjustments
                              should be made within 4 years of the October 23, 1996, deadline, or
                              within 4 years of the initial adjustment—whenever it occurred.

                            • Although it is clear that the Inflation Adjustment Act covers penalty
                              maximums and minimums set in statute, it is not clear whether penalties
                              set administratively by the agencies are covered by the act’s
                              requirements.

                            • It is not clear whether the term “last set or adjusted” refers to the date
                              an adjustment was published in the Federal Register or the date the
                              adjustment took effect.

                            • Officials in several agencies raised questions during our review
                              regarding how the rounding rules in the statute should be interpreted. In
                              January 2002, the Federal Election Commission’s General Counsel
                              developed a memo examining various interpretations of those
                              provisions and indicating that agencies were interpreting the
                              requirements differently.

                            • Officials in one agency said it was unclear whether future inflation
                              adjustments should be based on the penalty prior to or after rounding.

                            When the Inflation Adjustment Act was enacted in 1996, Congress did not
                            give any federal agency the authority or responsibility to monitor agencies’
                            compliance with the act or to provide guidance to agencies on how the act
                            should be implemented. In November 1996, at the request of OMB’s Office


                            22
                             U.S. General Accounting Office, United States Coast Guard: Implementation of the
                            Inflation Adjustment Act, GAO-03-221R (Washington, D.C.: Nov. 1, 2002) and Mine Safety
                            and Health Administration: Implementation of the Inflation Adjustment Act, GAO-03-
                            288R (Washington, D.C.: Nov. 27, 2002).




                            Page 15                                                       GAO-03-409 Civil Penalties
                         of Federal Financial Management (OFFM), FMS developed written
                         guidance on the Inflation Adjustment Act and held a workshop on how the
                         act should be implemented. As noted previously, FMS also reported on
                         agencies’ civil penalty assessments and collections until 1998 at the request
                         of OFFM. However, FMS has not provided any guidance to agencies on the
                         Inflation Adjustment Act since 1996 and has never monitored agencies’
                         compliance with the act.

                         In contrast, other crosscutting regulatory reform statutes make a particular
                         executive branch agency responsible for monitoring compliance and
                         providing guidance to other agencies. For example, the Paperwork
                         Reduction Act gives OMB the authority and responsibility to approve
                         agencies’ proposed information collections and to provide guidance to the
                         agencies on how the act should be implemented.23 Also, the Regulatory
                         Flexibility Act requires the Small Business Administration’s Chief Counsel
                         for Advocacy to monitor and report at least annually on agencies’
                         compliance with the act.24

                         Representatives from all six of the agencies with covered penalties that we
                         contacted supported giving some federal entity the authority and
                         responsibility to monitor agencies’ compliance with the Inflation
                         Adjustment Act and to provide guidance to the agencies on the act’s
                         implementation. One representative said that FMS had been very helpful
                         during the act’s early implementation, but since then there had been no
                         entity that the agencies could turn to for advice and guidance.



The Inflation            Several provisions in the Inflation Adjustment Act have limited agencies’
                         ability to keep their penalties in pace with inflation. The 10 percent cap on
Adjustment Act Has       initial adjustments prevented some agencies from fully adjusting for
Prevented Agencies       hundreds of percent of inflation that had occurred since certain penalties
                         were last set or adjusted by Congress. The resultant “inflation gap” cannot
from Keeping Certain     be corrected under this statutory authority through subsequent
Penalties in Pace with   adjustments and, in fact, grows with each adjustment. Also, the act’s
Inflation                requirements on how the penalty adjustments should be calculated and
                         rounded prevents agencies from capturing all of the inflation that occurs
                         between adjustments, and can prevent agencies from increasing certain


                         23
                              See 44 U.S.C. 3504.
                         24
                              See 5 U.S.C. 612.




                         Page 16                                               GAO-03-409 Civil Penalties
                                                                       penalties until inflation increases by 45 percent or more. In addition, the
                                                                       act exempted hundreds of penalties from inflation adjustment, some of
                                                                       which have not been adjusted for decades.



Ten Percent Cap Results in                                             The Inflation Adjustment Act limited covered agencies’ first adjustments
Penalty “Inflation Gaps”                                               under the statute to 10 percent of the penalty amount. In the six agencies
                                                                       that we focused on in this portion of our review, all 232 initial penalty
                                                                       adjustments were capped at 10 percent.25 As table 1 shows, none of these
                                                                       10 percent adjustments were sufficient to fully account for the amount of
                                                                       inflation that had occurred since the underlying penalties were last set or
                                                                       adjusted. The size of the inflation gap varied by agency and by penalty
                                                                       within agencies. In some cases, the cap did not severely limit the agencies’
                                                                       ability to account for inflation. For example, the 10 percent adjustment
                                                                       that MSHA made to its five penalties in 1998 (using the June 1997 CPI)
                                                                       accounted for all but 4 percent of the inflation that occurred since those
                                                                       penalties were last adjusted in 1992.



Table 1: The 10 Percent Cap on Initial Adjustments Resulted in Large “Inflation Gaps” for Some Penalties

                                                                                      Year penalties were         Inflation gap after            Inflation gap after
                                                                                      last set or adjusted       adjustment (percent)           adjustment (dollars)
                         CPI year used                Number of penalties
                              for initial            adjusted and capped                                Most
Agency                    adjust-ment                       at 10 percent                Oldest        recent            High          Low               High          Low
EPA                                     1995                                     74        1972          1992             266              2       $ 282,400           $ 74
PWBA                                    1996                                      7        1974          1990             281            11               281            11
MSHA                                    1997                                      5        1992          1992                4             4            2,150              2
FAA                                     1995                                      8        1958          1990             418              7          20,120            488
NHTSA                                   1996                                     16        1966          1992             374              2       2,126,400             13
USCG                                    1996                                   122         1968          1992             343            11           41,100             10
Total                                                                          232
Source: GAO analysis of agency initial inflation adjustment regulations.

                                                                       Note: The inflation gap estimates represent the difference between the increase needed to fully
                                                                       account for inflation and the 10 percent adjustment. The 74 penalties that EPA adjusted and capped at
                                                                       10 percent includes 2 penalties that the agency adjusted in June 1997 that were not included in the
                                                                       agency’s December 1996 publication.



                                                                       25
                                                                         Although all of the penalties in the six agencies that were adjusted were capped at 10
                                                                       percent, some of the agencies’ penalties were not adjusted. For example, EPA did not
                                                                       increase certain penalties that were enacted into law in 1996.



                                                                       Page 17                                                                 GAO-03-409 Civil Penalties
However, in other cases the 10 percent cap on agencies’ initial adjustments
resulted in sizable inflation gaps. For example, one of the civil penalties
that FAA adjusted in 1996 was a maximum $1,000 penalty for, among other
things, possession of a firearm discovered at a baggage security
checkpoint. The penalty was set in 1958 and, until 1996, had not been
changed.26 As figure 1 illustrates, if adjusted for inflation in 1996 (using the
June 1995 CPI), this penalty would have increased by more than 400
percent to $5,277. However, because the Inflation Adjustment Act limited
agencies’ first adjustments to 10 percent, FAA was only able to increase
this penalty by $100 to $1,100—$4,177 less than it would have been if fully
adjusted for the amount of inflation that occurred from 1958 through 1995.




26
 In November 2002, this penalty was increased to $10,000 as part of the establishment of the
Department of Homeland Security. (Pub. L. 107-296, Section 1602, Nov. 25, 2002).




Page 18                                                          GAO-03-409 Civil Penalties
Figure 1: The 10 Percent Cap on Initial Adjustments Prevented FAA from Keeping Its
$1,000 Penalty in Pace With Inflation
$6,000

                                                        $5,277

$5,000



$4,000
                                                     Inflation gap
                                                        ($4,177)
                                                      created by
$3,000                                                10 percent
                                                          cap


$2,000


                   $1,000               $1,100
$1,000



       0
             Penalty as set             Penalty         Penalty
                in 1958               adjustment      adjustment
                                        in 1996     in 1996 if fully
                                      (capped at     adjusted for
                                      10 percent)      inflation

                      Inflation gap
Source: GAO analysis of FAA data.



The 10 percent cap on initial adjustments also resulted in sizable inflation
gaps for several other penalties in the six selected agencies. For example,
see the following.

• If fully adjusted for inflation in 1996, a NHTSA penalty last set in 1972 at
  $800,000 for a series of violations involving the failure to meet bumper
  standard testing criteria would have increased by 275 percent to more
  than $3 million. However, the 10 percent cap limited the increase to
  $80,000, leaving an inflation gap of more than $2.1 million.

• An EPA penalty last set at $25,000 in 1976 for violation of the Toxic
  Substances Control Act would have increased by nearly 170 percent to
  more than $67,000 if fully adjusted for inflation in 1995. However, the 10




Page 19                                                                GAO-03-409 Civil Penalties
                                       percent cap meant that the penalty could only increase by $2,500,
                                       leaving an inflation gap of nearly $40,000.

                                  • A PWBA penalty was last set at $100 per day in 1974 for refusal to
                                    provide information in a timely manner needed to determine
                                    compliance with certain requirements in ERISA. If fully adjusted for
                                    inflation in 1996, the penalty would have increased to more than $300
                                    per day. However, with the 10 percent cap, the penalty could only
                                    increase by $10, leaving an inflation gap of more than $200.

Size of Inflation Gap Resulting   Because of other provisions in the Inflation Adjustment Act, the inflation
from the 10 Percent Cap Grows     gap resulting from the 10 percent cap on initial adjustments cannot be
with Subsequent Adjustments       corrected under this statutory authority—and, in fact, grows with each
                                  penalty adjustment. The act defines the term “cost of living adjustment” as
                                  the percentage by which the CPI for the year preceding the adjustment
                                  exceeds the CPI for the year in which the penalty was last set or adjusted.
                                  Therefore, agencies’ second adjustments under the statute could only take
                                  into consideration the amount of inflation since the first adjustment.27 As a
                                  result, any inflation gap remaining as a result of the 10 percent cap
                                  becomes permanent. Furthermore, because the capped penalties are
                                  smaller than they would have been without the 10 percent restriction, the
                                  size of subsequent adjustments using that smaller base are also smaller,
                                  resulting in a widening of the inflation gaps.

                                  For example, in the previously mentioned FAA penalty, the 10 percent cap
                                  on the agency’s December 1996 adjustment resulted in an adjusted penalty
                                  of $1,100 and an inflation gap of $4,177. Under the Inflation Adjustment
                                  Act, FAA was required to examine this penalty by December 2000 and to
                                  calculate the cost of living adjustment needed to account for inflation from
                                  June 1996 through June 1999. Inflation increased by about 6 percent during
                                  this period, so the unrounded increase in this penalty would have been $66
                                  ($1,100 times .06), resulting in an unrounded adjusted penalty of $1,166.
                                  However, FAA could not go back and recapture any of the $4,177 inflation
                                  gap that resulted from the 10 percent cap on the 1996 adjustment.



                                  27
                                    During our review, we determined that the National Science Foundation had adjusted its
                                  covered penalties in a manner that erroneously accounted for all of the changes in the CPI
                                  since the penalties were set in 1978. The agency agreed with our recommendation to
                                  correct this error. See U.S. General Accounting Office, National Science Foundation’s
                                  Compliance With the Inflation Adjustment Act, GAO-02-932R (Washington, D.C.: July 26,
                                  2002). See the corrected adjustment in 67 Fed. Reg. 55728 (Aug. 30, 2002).




                                  Page 20                                                         GAO-03-409 Civil Penalties
                                                           As figure 2 shows, by June 1999, the $1,000 penalty set in 1958 would have
                                                           been $5,750 if fully adjusted for inflation. Therefore, the inflation gap
                                                           resulting from the 10 percent cap would have increased from $4,177 to
                                                           $4,584 ($5,750 minus $1,166).



Figure 2: The Size of the Inflation Gap Resulting from the 10 Percent Cap Grows with Each Subsequent Adjustment
  6,000 Dollars
                                                                                   5,750
                                                                5,277
  5,000



  4,000                                                                         Inflation gap
                                                             Inflation gap         (4,584)
                                                                (4,177)          created by
                                                              created by         10 percent
  3,000
                                                              10 percent             cap
                                                                  cap

  2,000


                     1,000                  1,100                                                           1,166                  1,100
  1,000



      $0
               Penalty as set              Penalty              Penalty            Penalty                 Penalty          Penalty as set
                  in 1958                adjustment           adjustment         adjustment              adjustment            in 1996
                                           in 1996          in 1996 if fully   in 2000 if fully            in 2000
                                         (capped at          adjusted for       adjusted for             (capped at
                                         10 percent)           inflation          inflation              10 percent)


                                1996 adjustment (actual)                                          2000 adjustment using 1999 CPI
                                                                                                         (before rounding)


                       Inflation gap

Source: GAO analysis of FAA data.




                                                           Page 21                                                                 GAO-03-409 Civil Penalties
Agencies Generally              The limited legislative history that exists regarding the 1996 amendment to
Noncommittal Regarding          the Inflation Adjustment Act does not explain why the 10 percent cap was
Elimination of 10 Percent Cap   established. Until the 1996 amendment, no earlier executive branch or
                                congressional initiative had called for any cap on the amount of inflation
                                adjustments. In fact, legislation passed by the House of Representatives in
                                1993 included a provision for an immediate one-time catch-up adjustment.28
                                Officials in the six selected agencies said that they did not know why
                                Congress established the 10 percent cap on initial penalty adjustments.

                                In its second inflation adjustment regulation, NHTSA expressed concern
                                that even with two inflation adjustments, some of the agency’s penalty
                                amounts may be inadequate because of the 10 percent cap.29 Specifically,
                                NHTSA said the following:

                                        Upon review, we concluded that application of the formulae permit
                                        some of our penalties to be increased at this time. We are doing so
                                        before the passage of four years in order to enhance the deterrent
                                        effect of these penalties because of their importance to our
                                        enforcement programs. Even with these increases, these penalties
                                        appear less than adequate as a full deterrent to violations of the statutes
                                        that we enforce. For example, the maximum penalty for a related series
                                        of violations under the National Traffic and Motor Vehicle Safety Act of
                                        1966 as amended in 1974 was $800,000. It would have increased more
                                        than threefold, to $2.45 million, in June 1996 if (fully) adjusted for
                                        inflation. However, the adjustment was capped at $880,000. Further,
                                        under this aggregate penalty ceiling, on a per vehicle basis the
                                        maximum penalty amounts to less than one dollar per vehicle where a
                                        substantial fleet was in violation of the Safety Act.

                                We asked representatives from each of the six agencies that we focused on
                                in this part of our review whether their agencies believed the 10 percent
                                cap should be lifted and agencies either required or allowed to make catch-
                                up adjustments. Although the agency representatives generally agreed that
                                the 10 percent cap was a significant limitation on the maximum amount of
                                the civil penalty that could be assessed on the “worst offenders,” they were
                                generally noncommittal with regard to this issue, neither supporting nor


                                28
                                 See H.R. 3400. This provision was deleted from the bill that was subsequently enacted as
                                Pub. L. 103-356.
                                29
                                     64 Fed. Reg. 37876 (July 14, 1999).




                                Page 22                                                        GAO-03-409 Civil Penalties
                            opposing the elimination of the cap. One representative said he was not
                            aware of any instance in which his agency had imposed its largest penalty
                            (an $1,100 penalty for each day a violation occurred), so he did not believe
                            a catch-up adjustment to account for lost inflation would have any effect on
                            the agency’s enforcement actions. However, he indicated that the same
                            situation might not be true for the agency’s other civil penalties. The
                            Department of Labor representative said his department would not support
                            changing the statute to require agencies to make catch-up adjustments, but
                            said it would have no problem changing the statute to allow agencies to do
                            so.



CPI Lag Reduces Amount of   When determining whether adjustments to their penalties are permitted,
Inflation That Can Be       the Inflation Adjustment Act requires agencies to compare the CPI from
                            June of the year preceding the adjustment with the CPI in June of the year
Considered
                            in which the penalty was “last set or adjusted pursuant to law.”30 Therefore,
                            if an agency made its first round of penalty adjustments in October 1996
                            and examined those penalties in October 2000 to determine if further
                            adjustments were warranted, the agency would have to compare the CPI
                            for June 1996 with the CPI for June 1999—not the most current CPI data
                            available or even the most recent June CPI data. As figure 3 shows, this
                            “CPI lag” feature in the statutory adjustment procedures reduces the
                            amount of inflation that can be accounted for from 10 percent (the amount
                            of inflation from June 1996 through June 2000) to 6.1 percent (the amount
                            of inflation from June 1996 through June 1999).




                            30
                              During our review, EPA officials raised questions to us regarding the interpretation of this
                            requirement. Specifically, they asked whether the term “last set or adjusted pursuant to
                            law” referred to the date an adjustment was published in the Federal Register or the date
                            the adjustment took effect. This issue has relevance for EPA because the agency published
                            its first round of adjustments in December 1996 but the adjustments took effect in January
                            1997. Other agencies’ adjustments also took effect in different years than their publication.




                            Page 23                                                           GAO-03-409 Civil Penalties
Figure 3: CPI Lag in the Inflation Adjustment Act Reduces the Amount of Inflation
That Can Be Considered
 Percent
10
                10


     8



     6
                                   6.1


     4



     2



     0
           Inflation from      Inflation from
         June 1996 through   June 1996 through
             June 2000           June 1999
            (no CPI lag)

Source: GAO.



The inflation lost as a result of the CPI lag in the statute cannot be
recovered later because the statute requires each subsequent adjustment to
be calculated from the CPI for the year in which the penalty was last set or
adjusted (i.e., June 2000 in the above example)—not from the CPI used to
make the last adjustment (June 1999).31 Therefore, as figure 4 shows, each
time an agency makes an adjustment the agency loses a year of inflation
that can never be recovered.




31
 NHTSA calculated its August 2001 adjustment without losing a year of inflation by
comparing the CPI index of June 2000 with the index that it last used to make the
adjustment (June 1996), not the index for June in the year the adjustment was last made
(June 1997). (See 66 Fed. Reg. 41149, Aug. 7, 2001.) Although we understand why NHTSA
would want to use the earlier index, we believe that this approach is inconsistent with the
act’s requirements.




Page 24                                                          GAO-03-409 Civil Penalties
Figure 4: Inflation Lost Due to CPI Lag Cannot Be Recovered
                   2000 adjustment                                  2004 adjustment                                2008 adjustment
               (Comparing June 1999 CPI                       (Comparing June 2003 CPI                         (Comparing June 2007 CPI
                   to June 1996 CPI)                              to June 2000 CPI)                                to June 2004 CPI)

                                                                                                                                            Lag


                                                                                                  Lag


                                            Lag




    1996       1997      1998        1999         2000        2001          2002         2003           2004   2005      2006        2007         2008

                                                             Years when inflation is considered

Source: GAO.



                                                   Also, the amount of inflation lost as a result of the CPI lag in the Inflation
                                                   Adjustment Act increases in proportion to the frequency with which the
                                                   agency makes penalty adjustments. Each time that an agency adjusts its
                                                   penalties, the agency loses a year of inflation. As figure 5 illustrates, if the
                                                   agency in the above example had examined and been able to adjust its
                                                   penalties twice during the period from 1996 to 2000, once in 1998, and again
                                                   in 2000, the agency would have only been able to consider the amount of
                                                   inflation that occurred from June 1996 through June 1997 (2.3 percent) and
                                                   from June 1998 through June 1999 (2.0 percent)—a total of 4.3 percent—
                                                   not the full amount of inflation that occurred from June 1996 through June
                                                   2000 (10 percent) or even the amount that occurred from June 1996
                                                   through June 1999 (6.1 percent).




                                                   Page 25                                                                  GAO-03-409 Civil Penalties
                                  Figure 5: Less Inflation Can Be Considered When Penalty Adjustments Are More
                                  Frequent
                                  Percent
                                  10
                                                 10

                                   8


                                   6
                                                               6.1

                                   4
                                                                                   4.3


                                   2


                                   0
                                        Inflation from    Inflation from       Inflation from
                                          June 1996         June 1996       June 1996 through
                                           through           through       June 1997, and from
                                          June 2000         June 1999       June 1998 through
                                         (no CPI lag)      (CPI lag with         June 1999
                                                         one adjustment)        (CPI lag with
                                                                             two adjustments)

                                  Source: GAO.



Agencies Believe CPI Lag Should   Representatives from the six agencies with covered penalties that we
Be Changed                        focused on in this part of our review generally said the CPI lag in the
                                  Inflation Adjustment Act should be corrected. One official from
                                  Department of Labor said that it “doesn’t make much sense” to have a
                                  system in which agencies lose a year of inflation each time they make an
                                  adjustment, and supported changing the act in this area.



Rounding Rules Can                The rounding rules in the Inflation Adjustment Act can also significantly
Prevent Adjustments for           affect the size and the timing of agencies’ penalty adjustments. As noted
                                  previously, the act requires agencies to round penalty increases to certain
Long Periods
                                  dollar amounts, depending on the size of the penalty (not the size of the
                                  penalty increase). Specifically, the act provides that any increase should
                                  be rounded to the nearest

                                  • multiple of $10 in the case of penalties less than or equal to $100,

                                  • multiple of $100 in the case of penalties greater than $100 but less than
                                    or equal to $1,000,




                                  Page 26                                                        GAO-03-409 Civil Penalties
• multiple of $1,000 in the case of penalties greater than $1,000 but less
  than or equal to $10,000,

• multiple of $5,000 in the case of penalties greater than $10,000 but less
  than or equal to $100,000,

• multiple of $10,000 in the case of penalties greater than $100,000 but less
  than or equal to $200,000, and

• multiple of $25,000 in the case of penalties greater than $200,000.

For example, if the CPI increased by 10 percent during the relevant period
since a $7,500 penalty was last set or adjusted, the resultant penalty
increase ($750) would be rounded to the nearest multiple of $1,000—which
is $1,000. Therefore, the new rounded penalty would be $8,500 ($7,500 plus
$1,000).

Our analysis indicated that these requirements can prevent agencies from
adjusting certain penalties until inflation increases substantially—
sometimes 45 percent or more. At recent rates of inflation that can mean
that agencies cannot make penalty adjustments for 15 years or more. For
example, after a first round of adjustments in July 1997, one of PWBA’s
seven civil penalty maximums at the time was $11, five were $110, and one
was $1,100.32 Under the statute, any effort by the agency to increase its
penalties during calendar year 2001 (4 years after the agency’s last
adjustment) could include any increase in inflation that occurred from June
1997 through June 2000. During that period, the CPI increased by about 7.5
percent. However, as table 2 shows, multiplying each of the 1997 penalty
amounts by 7.5 percent and applying the rounding rules in the act does not
result in a penalty adjustment for any of the agency’s penalties.




32
 Subsequently, Congress established three other PWBA civil penalty maximums—two at
$1,000 and one at $100. On January 22, 2003, PWBA published a final rule adjusting each of
these penalties by 10 percent effective March 24, 2003. See 68 Fed. Reg. 2875 (Jan. 22, 2003).




Page 27                                                           GAO-03-409 Civil Penalties
Table 2: Rounding Rules in the Inflation Adjustment Act Prevented PWBA from
Increasing Its Penalties in 2001

                                                  Unrounded
                                 Unrounded           penalty   Statute requires
Penalty                    penalty increase      (unrounded         increase to
amount after                  (1997 penalty    increase plus     be rounded to      Rounded
1997 increase                   times 0.075)   1997 penalty) nearest multiple of    increase
$11                                   $0.83          $11.83                  $10              0
110                                    8.25          118.25                  100              0
1,100                                 82.50         1,182.50               1,000              0
Source: GAO analysis of PWBA data.


In fact, PWBA’s penalties are not eligible for an increase under the rounding
rules in the Inflation Adjustment Act until the CPI increases by 45.5
percent. Assuming a 2.5 percent annual rate of inflation in the future
(about the average rate since the Inflation Adjustment Act was passed in
1996), PWBA would not be able to increase any of its civil penalties for 17
years.33

Appendix II shows the maximum civil penalty amounts in each of the six
selected agencies after the first round of adjustments, the number of
penalties at each maximum penalty amount, the inflation trigger points for
each penalty amount, and the number of years that would have had to
elapse before those penalties could be adjusted again (assuming a 2.5
percent rate of inflation). Of the 232 penalties in the six agencies, 208
(about 90 percent) could not be adjusted under the statute within the 4-year
period contemplated in the statute. Ninety-eight of the penalties (about 42
percent) could not be adjusted for at least 10 years, and 44 (about 19
percent) could not be adjusted for 17 years or more. For example, after the
first round of adjustments (assuming a 2.5 percent inflation rate), see the
following:

• Six NHTSA penalties at the $1,100 level could not be adjusted under the
  statute for 17 years. These penalties include statutory violations
  involving failure to comply with requirements to reduce traffic deaths
  and injuries, the tracing and recovery of stolen vehicles and component


33
  For example, at 2.5 percent inflation per year, compounded annually, a 45.5 percent
increase in the CPI would take 16 years. With the 1-year CPI lag, the total is 17 years. At
double that rate of inflation (5 percent per year), these penalties would be eligible for
adjustment under the rounding rules in 9 years.



Page 28                                                            GAO-03-409 Civil Penalties
                                     parts, and the providing of information needed to determine the
                                     crashworthiness of motor vehicles. One NHTSA penalty at the $5.50
                                     level (for each 0.1 mile per gallon exceeding the fuel standard for
                                     automobiles under the standard times the number of those automobiles)
                                     could not be adjusted for 28 years.

                                 • Two EPA penalties at the $1,100 level could not be adjusted under the
                                   statute for 17 years. These include penalties for certain violations of the
                                   Clean Water Act and the Federal Insecticide, Fungicide, and Rodenticide
                                   Act.

                                 • Twenty-seven USCG penalties at the $1,100 and $110 levels could not be
                                   adjusted under the statute for 17 years. The penalties involve violations
                                   related to the reporting of marine casualties, hazardous substance
                                   discharges, bridge maintenance and operation, and other statutory
                                   violations.

                                 In general, penalties that are just over the lower end of the rounding
                                 categories (e.g., $110 or $1,100) take longer to adjust than penalties at the
                                 upper end of those categories (e.g., $1,000 or $10,000).

Rounding Can Result in Penalty   When the agencies are finally able to adjust their penalties for inflation, the
Adjustments That Outpace         size of the adjustments permitted under the rounding rules in the statute
Inflation                        can be significantly larger than the amount of inflation that has occurred.
                                 For example, as illustrated in table 3 for the PWBA penalties discussed
                                 above, although the CPI must increase 45.5 percent before the agency can
                                 make an adjustment, the adjustment that is ultimately provided will be
                                 twice that amount—90.9 percent.



                                 Table 3: When PWBA Penalties Are Eligible for Adjustment, the Increases Will Be
                                 about Twice That Needed to Keep Pace with Inflation

                                                          Percentage
                                 Penalty                  increase in                                              Percentage
                                 amount after             CPI needed                                               increase in
                                 first round of             to adjust        Unrounded    Rounded         New          penalty
                                 adjustments                  penalty          increase   increase      penalty       amount
                                 $11                                  45.5          $5        $10           $21           90.9
                                 110                                  45.5          50        100           210           90.9
                                 1,100                                45.5         500       1,000        2,100           90.9
                                 Source: GAO analysis of PWBA data.




                                 Page 29                                                             GAO-03-409 Civil Penalties
                                                            Figure 6 illustrates the 17-year period that may be required for an
                                                            adjustment of the $1,100 penalty and the overcompensation that can occur
                                                            because of the rounding rules. Assuming a 2.5 percent annual rate of
                                                            inflation and applying the adjustment formula in the statute, in 2014 (17
                                                            years after the agency’s first adjustment) PWBA’s $1,100 penalty could be
                                                            increased by $1,000 to $2,100. However, if the penalty had just kept pace
                                                            with inflation (i.e., increased 2.5 percent each year for 17 years) the penalty
                                                            would have only increased by about $574 to $1,674—about $426 less than
                                                            the rounded adjustment pursuant to the Inflation Adjustment Act.



Figure 6: Rounding Rules Can Prevent Penalty Adjustments for Decades
Dollars
 6,000

                                                                                                                            5,100
 5,000

                                                                                                               4,100

  4,000

                                                                                          3,100
  3,000
                                                                                                                                            3,027
                                                         2,100
                                                                                                                          2,611
  2,000
                                                                                                   2,143
               1,100                                                   1,674
  1,000
                                 17 years                                      10 years                  8 years          6 years

      0
          1997     2000              2005              2010           2015            2020        2025             2030       2035           2040

                   Rounding based on size of penalty
                   Projected rate of inflation at 2.5 percent/year
Source: GAO.



                                                            The figure also shows that in subsequent penalty adjustments under the
                                                            statute (again assuming a 2.5 percent annual rate of inflation), the size of
                                                            the rounded penalty is almost always above the penalty amount if it had
                                                            just kept pace with inflation. For example, applying the rounding rules, the
                                                            $2,100 rounded penalty would be eligible for another $1,000 increase to
                                                            $3,100 in the year 2024—10 years after the previous adjustment. However,
                                                            if the original $1,100 penalty had just kept pace with inflation from 1997
                                                            through 2024 it would be $2,143—$957 less than the rounded penalty. By
                                                            the fifth adjustment in 2038, the rounded civil penalty ($5,100) is projected




                                                            Page 30                                                               GAO-03-409 Civil Penalties
                                 to be more than $2,000 larger than the penalty if it had simply kept pace
                                 with inflation ($3,027).

Rounding Based on the Size of    During our review, we determined that several agencies were rounding
the Increase Yields More         their penalty adjustments incorrectly. Specifically, the agencies were
Frequent, Accurate Adjustments   rounding the increases based on the size of the unrounded penalty increase
                                 rather than the size of the penalty.34 Although this method is inconsistent
                                 with the requirements of the Inflation Adjustment Act, as figure 7 shows
                                 (again using the $1,100 penalty for illustration and assuming a 2.5 percent
                                 annual rate of inflation), rounding based on the size of the increase yields
                                 more frequent results than the statutory approach (rounding based on the
                                 size of the penalty), and the results more closely track the actual changes in
                                 inflation over time. The agency could make adjustments every 2 years (as
                                 illustrated in the figure), but must do so at least once every 4 years.




                                 34
                                  See, for example, U.S. General Accounting Office, Farm Credit Administration:
                                 Compliance with the Inflation Adjustment Act, GAO-02-1084R (Washington, D.C.: Sept. 24,
                                 2002) and Department of Commerce: Compliance with the Inflation Adjustment Act, GAO-
                                 02-1085R (Washington, D.C.: Sept. 30, 2002).




                                 Page 31                                                      GAO-03-409 Civil Penalties
Figure 7: Rounding Based on the Size of the Increase More Closely Tracks Inflation
than Rounding Based on the Size of the Penalty
Dollars
4,000

                                                                                          3,100



3,000

                                                              2,100



2,000
                            1,190          1,250
                 1,130
        1,100                                                                     1,990
                                                                                           510
                                                                                           difference
                                                                                  1,480
1,000
                                                                  1,370   1,440
                                                     1,310



   0
          1997      2000            2005           2010           2015       2020            2025
                    Rounding based on size of penalty
                    Rounding based on size of increase (with CPI lag)
                    Projected rate of inflation at 2.5 percent/year
 Source: GAO.



Although rounding based on the size of the increase produces improved
results, the resulting penalty adjustments are less than they would be if the
actual rates of inflation were used. For example, as figure 7 shows, by the
year 2021, the penalty amount derived by rounding based on the size of the
increase would be $1,480—$510 less than if the penalty had just kept pace
with the projected rate of inflation ($1,990). However, virtually all of the
difference between these two figures is caused by the CPI lag feature
discussed earlier (in which only a portion of the amount of inflation
occurring during an adjustment period is counted). As figure 8 shows,
rounding penalty adjustments based on the size of the increase without the
CPI lag allows the agency to make adjustments each year, and the result is
a much closer fit to the projected rate of inflation. By the year 2021, the
rounded penalty is only $10 more ($2,000 versus $1,990) than if it had
directly kept pace with inflation.




Page 32                                                                           GAO-03-409 Civil Penalties
                            Figure 8: Rounding Based on the Size of the Increase without the CPI Lag More
                            Closely Tracks Inflation
                            Dollars
                            4,000

                                                                                                                                        3,100



                            3,000                                                                  1,640
                                                                                                                   1,800
                                                                                                      2,100

                                                                                                                                          2,000
                                                                                   1,480                                                          10
                            2,000                                  1,340                                                                          difference
                                                   1,220
                                                                                                                                          1,990


                                                                                                                           1,900
                            1,000                                                                          1,720
                                                                           1,400           1,560
                                                           1,280
                                           1,160


                                 0
                                      1997     2000                 2005               2010                 2015               2020        2025
                                               Rounding based on size of penalty
                                               Rounding based on size of increase (with CPI lag)
                                               Projected rate of inflation at 2.5 percent/year
                            Source: GAO.



Agencies Believe Rounding   Representatives from all six of the agencies that we focused on in this part
Rules Should Be Changed     of our review strongly supported changing the rounding rules in the
                            Inflation Adjustment Act. All of them said the rules were problematic
                            because of their complexity and/or their effects on the agencies’ ability to
                            make timely and accurate adjustments. Alternatives that they suggested to
                            the current approach included rounding based on the size of the penalty
                            increase (rather than the size of the penalty itself) and elimination of
                            rounding altogether.



Some Exempted Penalties     The Inflation Adjustment Act requires each agency to adjust its civil
Have Not Been Adjusted in   penalties for inflation, but explicitly exempts penalties established under
                            certain statutes: (1) the Social Security Act, (2) the Occupational Safety
Decades                     and Health Act of 1970, (3) the Internal Revenue Code of 1986, and (4) the
                            Tariff Act of 1930. As table 4 shows, the exemptions in the act account for
                            at least 238 penalties enforced by five federal agencies: CMS within the
                            Department of Health and Human Services, OSHA within the Department
                            of Labor, Customs and IRS within the Department of the Treasury, and SSA.




                            Page 33                                                                                                GAO-03-409 Civil Penalties
The legislative history of the act does not indicate why these statutes were
exempted from the inflation adjustment requirements.



Table 4: Inflation Adjustment Act Exempted at Least 238 Civil Penalties from
Coverage

                                                                                                      Number of civil
Exempted statute                              Department/agency                                    penalties excluded
Social Security Act                           Department of Health and Human                                                70
                                              Services/CMS
                                              SSA                                                                                5

Occupational Safety and                       Department of Labor/ OSHA                                                          6
Health Act of 1970
Internal Revenue Code of 1986 Department of the Treasury/IRS                                                              128
Tariff Act of 1930                            Department of the                                                             29
                                              Treasury/Customs
Total                                                                                                                     238
Source: GAO analysis of 1991 OMB report on civil penalties supplemented with recent data from Health and Human Services, OSHA,
IRS, Customs, and SSA.


All of OSHA’s six exempted civil penalties were last adjusted by Congress in
1990. Therefore, as of June 2002, all of them were 38 percent less than if
they had fully kept pace with inflation since 1990. However, as table 5
illustrates, the dates that the other agencies’ exempted penalties were last
set or adjusted vary substantially. As a result, the amount of inflation that
has elapsed since the agencies’ last adjustments also varies. For example,
eight IRS penalties have not been changed since 1954, but three other IRS
penalties were set in 1998. As a result, by June 2002 the amount of inflation
that had occurred since the agency’s penalties were last set or adjusted
ranged from 10 percent (for the 1998 penalties) to 569 percent (for the 1954
penalties). One Customs penalty had not been adjusted since 1879—
resulting in an inflation gap of more than 1,700 percent. Overall, 142
(nearly 60 percent) of the 238 exempted penalties would need to be
increased by 50 percent or more to be fully adjusted for inflation as of June
2002. Twenty-six of the penalties (about 11 percent) would need to be
adjusted by at least 100 percent.




Page 34                                                                                   GAO-03-409 Civil Penalties
Table 5: A Substantial Amount of Inflation Has Elapsed with Regard to Some
Exempted Penalties

                                 Years in which exempted                      Amount of inflation since last
                                 penalties were last set or                    adjustment (percent) as of
                                         adjusted                                     June 2002
Agency                                   Oldest        Most recent                            High                       Low
CMS                                         1986                  1999                            64                             8
IRS                                         1954                  1998                          569                         10
OSHA                                        1990                  1990                            38                        38
Customs                                     1879                  1993                       1,736                          22
SSA                                         1988                  1994                            53                        22
Source: GAO analysis of 1991 OMB report on civil penalties supplemented with recent data from Health and Human Services, OSHA,
IRS, Customs, and SSA.

Note: CPI information is only available since 1913, so the amount of inflation elapsed for the oldest
customs penalty (1879) is calculated since 1913.


These inflation gaps notwithstanding, officials in four of the five agencies
with exempted penalties—CMS, IRS, Customs, and OSHA—said that their
penalties did not need to be adjusted for inflation.

• CMS officials said that, despite their age, some of the maximum
  penalties in the Social Security Act are still fairly high, thereby giving the
  agency the flexibility it needs when deciding on the size of the penalty
  imposed. They also said that some of the penalties could be
  compounded monthly, weekly, or daily, resulting in even higher penalty
  maximums if needed. As a result, they said that CMS has the leverage it
  needs to counteract the effects of inflation on penalty amounts that
  were set by Congress, in some cases, decades earlier.

• IRS officials said that the agency’s penalties for fixed dollar amounts can
  be compounded daily. As a result, they said, the maximum penalty
  assessed could be substantial even without adjusting for inflation. In
  addition, they said that IRS penalties sometimes contain formulas (e.g.,
  a percentage of the amount invested or of the amount of tax due) that
  implicitly account for inflation.35


35
  For example, one penalty states that if a person either fails to register a tax shelter by a
certain prescribed date or files false or incomplete information regarding the registration,
IRS can either impose a penalty of up to $500 or 1 percent of the aggregate amount invested
in the tax shelter—whichever is greater. See 26 U.S.C. 6707(a).




Page 35                                                                                   GAO-03-409 Civil Penalties
              • Customs officials said that they are satisfied with the adequacy of the
                fixed amount penalties provided for within the Tariff Act and the
                deterrent effect that they provide. For example, the most commonly
                assessed fixed amount penalty—a $5,000 penalty for violation of 19
                U.S.C. 1436 assessed against a master of a vessel, operator of a vehicle,
                or pilot of an aircraft for failing to comply with statutory requirements
                concerning report of arrival of conveyances and presentation of
                accurate cargo and passenger manifest information—has proven to be
                an effective deterrent.

              • OSHA officials said that Congress increased the agency’s penalties
                seven-fold in 1990—far in excess of the amount of inflation that had
                occurred since those penalties were previously set in 1970. As a result,
                they said, the 1990 penalty amounts were still sufficient to keep their
                penalties in pace with the amount of inflation that has occurred since
                1970. In addition, they said the agency’s policy allows penalties to be
                assessed on a violation-by-violation basis that allows the agency to
                create a multiplier effect. They indicated that this multiplier effect
                could raise the penalty to an amount that would exceed the inflation-
                adjusted levels.

              In contrast, SSA officials said that inflation adjustments are currently
              needed for at least some of their penalties because they have become
              eroded by inflation over time and become less effective.



Conclusions   Civil monetary penalties are an important element of regulatory
              enforcement. Suitably severe maximum penalties allow agencies to punish
              willful and egregious violators appropriately and serve as a deterrent to
              future violations. However, civil penalties can lose their ability to punish
              and deter if unadjusted for inflation. Therefore, as we have said previously,
              we believe that civil penalties should be periodically adjusted for the
              effects of inflation so that they do not lose their relevancy. Doing so can
              also increase federal receipts from those penalties, perhaps by tens of
              millions of dollars per year.

              Our review indicated that the Inflation Adjustment Act limits agencies’
              ability to keep their civil penalties in pace with inflation.

              • Because of the 10 percent cap on initial penalty adjustments, some civil
                penalties are hundreds of percent less than they would be if fully
                adjusted for the amount of inflation since Congress last set or adjusted



              Page 36                                                GAO-03-409 Civil Penalties
   them. Viewed another way, those penalties currently represent only a
   fraction of their original value. The inflation gap resulting from the 10
   percent cap can never be recovered under the statutory authority and
   grows each year.

• Because of the rounding rules in the statute, agencies can be prevented
  from making a second round of penalty adjustments until inflation
  increases 45 percent or more. Therefore, at recent rates of inflation,
  agencies may not be able to readjust their penalties for 15 years or more
  after their initial adjustments.

• Because of the way that the statute requires the agencies to use CPI data
  to calculate the raw adjustment, agencies will lose a year of inflation
  each time they make an adjustment. That lost inflation that can never be
  recaptured in subsequent adjustments. Also, the statute requires
  agencies to use CPI data that are at least 7 months old, and perhaps as
  much as 18 months old.

• Because the statute exempted certain penalties from the act’s
  requirements, the agencies administering those penalties are unable to
  make even the modest adjustments permitted as a result of the 10
  percent cap, rounding rules, and CPI lag features discussed above. More
  than 100 of these exempted penalties have declined in value by 50
  percent or more since Congress last set them.

Our review also indicated widespread lack of compliance with and
confusion about the Inflation Adjustment Act’s requirements. Agencies’
failure to comply with those requirements may have cost the government
millions of dollars in lost penalties from individuals and organizations that
are the worst offenders of health, safety, environmental, and other statutes.
We believe that an agency charged with monitoring agencies’ compliance
with the Inflation Adjustment Act could have identified the compliance
problems earlier in the act’s implementation, and may have been able to
prevent them from occurring. For example, an oversight agency could
have developed a database that would determine when penalties were due
for an adjustment and notified the agencies of their responsibilities under
the act. The agency could also suggest ways to make implementation of
the act’s requirements better or easier. For example, the agency could
provide a standard format by which agencies could explain how their
penalties were adjusted and list the new penalty amounts, and/or could
have provided agencies with computer programs to facilitate the
computation of penalty adjustments and revised penalty amounts. In



Page 37                                                GAO-03-409 Civil Penalties
                addition, detailed guidance to the agencies regarding the Inflation
                Adjustment Act’s requirements might have prevented some of the questions
                and problems that have arisen during its implementation. Finally, an
                oversight agency could collect information regarding civil penalty
                assessments and collections that has been unavailable for the past 5 years.
                That information could help Congress understand which agencies have
                civil penalty authority, the extent to which certain penalties are being used,
                and the extent to which agencies are developing alternatives to the
                exemptions from the Inflation Adjustment Act and the limitations imposed
                by the act on their penalty adjustments.



Matters for     If Congress wants federal civil penalties to regain their full impact and
                deterrent effects, it should consider amending the Inflation Adjustment Act
Congressional   to require agencies to adjust their penalties for the full amount of inflation
Consideration   that has occurred since they were last set or adjusted by Congress. This
                catch-up adjustment could occur all at once or in a series of adjustments.
                Alternatively, Congress could amend the act to permit (but not require)
                agencies to make catch-up adjustments.

                If Congress wants federal civil penalties to be adjusted on a more timely
                and accurate basis, it should consider amending the Inflation Adjustment
                Act to

                • allow agencies to use more current CPI data to calculate the size of
                  penalty increases, and require that changes in the CPI be calculated
                  without losing a year of inflation and

                • either eliminate the rounding provisions altogether (e.g., adjust
                  penalties for the actual amount of inflation that occurred) or change the
                  way in which penalty increases are rounded (e.g., round based on the
                  size of the increase rather than the size of the penalty itself).

                If Congress wants penalties currently exempted from the act to be covered,
                it should consider amending the Inflation Adjustment Act and permitting
                agencies to adjust those penalties for inflation.

                Finally, Congress should consider giving one or more executive branch
                agencies the authority and responsibility to monitor the act’s
                implementation and provide guidance to the agencies. A single agency
                could be made responsible for both providing guidance to agencies on the
                implementation of the Inflation Adjustment Act and monitoring compliance



                Page 38                                                GAO-03-409 Civil Penalties
                      with the act. Alternatively, those functions could be given to separate
                      agencies. The agency or agencies could also collect basic information on
                      which agencies have civil penalty authority, the amount of penalty
                      assessments and collections, and the agencies’ use of alternative
                      mechanisms to increase assessments and collections.



Agency Comments and   On February 11, 2003, we provided a draft of this report to OMB, the
                      Department of Justice, and the Department of the Treasury for their review
Our Evaluation        and comment. We also provided a draft for technical review to the six
                      selected agencies with covered penalties and the five agencies with
                      penalties not covered by the Inflation Adjustment Act. Two of the agencies
                      with covered penalties—NHTSA and PWBA—provided us with technical
                      comments, which we incorporated as appropriate. For example, in
                      response to a comment from NHTSA, we clarified that both FAA and
                      NHTSA had published a second round of penalty adjustments by June 30,
                      2002, for all of the agencies’ eligible penalties.

                      On February 26, 2003, we received written comments on the draft report
                      from the Director of the Audit Liaison Office within the Department of
                      Justice. On behalf of the department, she suggested that we change our
                      matter for congressional consideration to state that Congress should
                      provide not only the authority and responsibility to monitor the act’s
                      implementation, but also the “necessary resources.” We did not make this
                      change because we do not believe that these roles will require significant,
                      dedicated resources. The Director did not comment on the other proposed
                      changes to the act’s requirements (e.g., elimination of the inflation gap
                      created by the 10 percent cap or changes to the rounding rules).

                      On February 27, 2003, we received written comments on the draft report
                      from the Commissioner of FMS within the Department of the Treasury. The
                      Commissioner said that FMS is “not the appropriate organization” for
                      monitoring compliance with the Inflation Adjustment Act given the act’s
                      “unique and complex features” and because such monitoring is not directly
                      related to the agency’s responsibility for overseeing the collection of
                      delinquent debt. He said it is FMS’s view that each federal agency is
                      responsible for managing and collecting civil monetary penalty debt. He
                      also said that each federal agency’s inspector general has a responsibility
                      for overseeing agency compliance with the Inflation Adjustment Act. We
                      agree that inspectors general can help oversee the act’s implementation
                      within particular agencies. However, we also believe that some type of
                      central oversight and guidance function is also needed to ensure



                      Page 39                                              GAO-03-409 Civil Penalties
consistency in how the act is interpreted and applied, and to gather
information about civil penalty assessments and collections throughout the
government. In addition, several of the departments and agencies with
inspectors general did not make the required penalty adjustments—an
indication that reliance on inspectors general alone may not result in
improved compliance with the act. Also, at least two agencies with
penalties covered by the act do not have inspectors general, so it is unclear
what entities would oversee implementation in these agencies. Therefore,
we did not change our matter for congressional consideration.

The Commissioner of FMS also provided comments on specific sections of
the draft report, which we incorporated as appropriate. For example, he
suggested that we clarify that FMS developed written guidance on the
Inflation Adjustment Act and held a workshop on how the act should be
implemented at the request of OFFM, not at the agency’s initiative. The
Commissioner did not comment on the other proposed changes to the act’s
requirements.

On March 7, 2003, we received written comments on the draft report from
OMB staff in OFFM and the Office of the General Counsel. The OMB staff
agreed with the report’s conclusions on the Inflation Adjustment Act’s
requirements, namely that Congress directly assigned to each federal
agency the responsibility to comply with the act’s requirements and did not
assign to any agency the responsibility to provide centralized
governmentwide guidance and oversight. As such, the staff said that it is
the responsibility of each agency to comply with the act’s requirements,
and that oversight of each agency’s compliance with the act resides first
with that agency’s inspector general office. The OMB staff also said they
did not agree that a centralized role of providing guidance and oversight of
governmentwide compliance with the act was necessarily needed.
However, they said that if it were concluded that a federal agency should
take on this added responsibility, an agency other than OMB would likely
be more appropriate for serving this role. As we indicated in our response
to a similar comment from the Commissioner of FMS, we agree that agency
inspectors general can help oversee the act’s implementation within
particular agencies. However, we also believe some type of central
oversight and guidance function is also needed to ensure consistency in
how the act is interpreted and applied. Therefore, we did not change our
matter for congressional consideration.




Page 40                                               GAO-03-409 Civil Penalties
We are sending copies of this report to the Secretary of the Treasury, the
Attorney General, and the Director of OMB. We are also sending copies to
each of the six agencies with covered penalties that we focused on in this
review, and to each of the five agencies with penalties that are not covered
by the act. It will also be available at no charge on GAO’s homepage at
http://www.gao.gov. If you have any questions concerning this report,
please call Curtis Copeland or me at (202) 512-6806. Major contributors to
this report include Andrea Levine, Joe Santiago, John Tavares, and Michael
Volpe.




Victor S. Rezendes
Managing Director
Strategic Issues




Page 41                                               GAO-03-409 Civil Penalties
Appendix I

Final Rules That Adjust Civil Penalties for                                                    Appendx
                                                                                                     ies




Inflation as of June 30, 2002                                                                   Append
                                                                                                     x
                                                                                                     Ii




                Tables 6 and 7 identify the departments and agencies that the Office of
                Management and Budget’s (OMB) 1991 report or other sources indicated
                have civil penalty authority and that are covered by the requirements of the
                Federal Civil Penalties Inflation Adjustment Act, as amended (Inflation
                Adjustment Act). The tables also identify the initial and subsequent penalty
                adjustment final rules that had been published as of June 30, 2002. Because
                there is no current comprehensive database that identifies each agency
                with civil penalty authority subject to the provisions of the Inflation
                Adjustment Act, we cannot be sure that we have identified all of the
                covered agencies or penalties. Also, the adjustment regulations listed
                reflect the results of our search of the Federal Register from 1996 through
                June 30, 2002. Other penalty adjustment regulations may have been
                published that we did not discover.

                In some cases, cabinet departments published a single rule that adjusted
                penalties for all subagencies/offices within the department (e.g., the
                Department of Agriculture’s July 31, 1997, initial adjustment). In other
                cases, agencies within the departments each made their own adjustments
                (e.g., the Department of Transportation). The phrase “not made” in a cell
                indicates that a required initial or subsequent adjustment had not been
                made as of June 30, 2002, for at least one eligible penalty. The phrase “not
                required” in a cell in the “subsequent adjustment” column indicates that no
                adjustment was required as of June 30, 2002, either because 4 years had not
                elapsed since the initial adjustment or because not enough inflation had
                occurred to permit an adjustment under the rounding rules in the statute.




                Page 42                                               GAO-03-409 Civil Penalties
                                               Appendix I
                                               Final Rules That Adjust Civil Penalties for
                                               Inflation as of June 30, 2002




Table 6: Final Rules That Adjust Cabinet Departments’ Civil Penalties for Inflation (as of June 30, 2002)

                                                                           Initial adjustments        Subsequent adjustments
                                                                     Date of     Federal Register   Date of        Federal Register
Department           Subagency/office                                publication citation           publication    citation
Agriculture          Agricultural Marketing Service                  07/31/1997     62 FR 40924     not made
                     Animal and Plant Health Inspection Service
                     Food and Consumer Service
                     Food Safety and Inspection Service
                     Forest Service
                     Grain Inspection, Packers and Stockyards
                     Administration
                     Federal Crop Insurance Corporation
                     Office of the Secretary
Commerce             Bureau of Export Administration                 10/24/1996     61 FR 55092     11/01/2000     65 FR 65260
                     Economic Development Administration
                     Economics and Statistics Administration
                     Bureau of Economic Analysis
                     Import Administration
                     National Oceanic and Atmospheric
                     Administration
                     Office of the Secretary
Defense              Army Corps of Engineers                         12/26/1996     61 FR 67944     not made
                     Office of the Secretary
Education                                                            not made
Energy               Office of General Counsel                       09/02/1997     62 FR 46181     not made
Health and Human     Food and Drug Administration                    not made
Services             Office of Inspector General                     10/07/1996     61 FR 52299     not made
Housing and Urban    Office of Federal Housing Enterprise            12/31/1997     62 FR 68152     01/04/2001     66 FR 709
Development          Oversight
                     Office of the Secretary                         09/24/1996     61 FR 50207     not made
                                                                     10/04/1996     61 FR 52215
Interior             Bureau of Land Management                       not made
                     Fish and Wildlife Service                       not made
                     Minerals Management Service                     not made
                     Office of Surface Mining Reclamation and        11/28/1997     62 FR 63274     11/21/2001     66 FR 58644
                     Enforcement
Justice              Executive Office for Immigration Review         02/12/1999     64 FR 7066      not required
                     Office of the Attorney General                  08/30/1999     64 FR 47099     not required




                                               Page 43                                                      GAO-03-409 Civil Penalties
                                                                  Appendix I
                                                                  Final Rules That Adjust Civil Penalties for
                                                                  Inflation as of June 30, 2002




(Continued From Previous Page)
                                                                                                   Initial adjustments               Subsequent adjustments
                                                                                              Date of     Federal Register        Date of         Federal Register
Department                      Subagency/office                                              publication citation                publication     citation
Labor                           Mine Safety and Health Administration                         04/22/1998   63 FR 20031            not made
                                Pension and Welfare Benefits                                  07/29/1997   62 FR 40695            not required
                                Administration
                                Wage and Hour Division                                        12/07/2001   66 FR 63501            not required
                                Office of Worker’s Compensation Program                       10/17/1997   62 FR 53955            not made
State                                                                                         not made
Transportation                  Federal Aviation Administration                               12/20/1996   61 FR 67443            02/11/2002      67 FR 6364
                                Federal Highway Administration                                03/13/1998   63 FR 12413            not made
                                Federal Railroad Administration                               03/10/1998   63 FR 11618            not required
                                Maritime Administration                                       11/05/1996   61 FR 56900            not made
                                National Highway Traffic Safety                               02/04/1997   62 FR 5167             07/14/1999      64 FR 37876
                                Administration                                                                                    08/07/2001      66 FR 41149
                                Office of the Secretary                                       02/13/1997   62 FR 6719             not made
                                Research and Special Projects                                 01/21/1997   62 FR 2970             not made
                                Administration
                                Saint Lawrence Seaway Development                             10/22/1996   61 FR 54733            not made
                                Corporation
                                United States Coast Guard                                     04/08/1997   62 FR 16695            not made
Treasury                        Bureau of Alcohol, Tobacco, and Firearms                      10/23/1996   61 FR 54935            not required
                                Office of Enforcement                                         not made
                                Office of Foreign Assets Controls                             10/23/1996   61 FR 54936            not made
                                Office of the Comptroller of the Currency                     01/22/1997   62 FR 3199             12/11/2000      65 FR 77250
                                Office of Thrift Supervision                                  10/31/1996   61 FR 56118            10/17/2000      65 FR 61260
                                U. S. Customs Service                                         not made
Veterans Affairs                                                                              11/01/1996   61 FR 56449            not made
Source: GAO analysis of OMB’s 1991 report and individual agency Federal Register documents.

                                                                  Note: Some final rules making initial and subsequent adjustments were revised after the initial
                                                                  publication dates to reflect technical corrections.




                                                                  Page 44                                                                 GAO-03-409 Civil Penalties
                                                      Appendix I
                                                      Final Rules That Adjust Civil Penalties for
                                                      Inflation as of June 30, 2002




Table 7: Final Rules That Adjust Independent Agencies’ Civil Penalties for Inflation (as of June 30, 2002)

                                                                                 Initial adjustments                    Subsequent adjustments
                                                                        Original date Federal Register             Original date Federal Register
Agency                                                                  of publication citation                    of publication citation
Commodity Futures Trading Commission                                    10/28/1996          61 FR 55564            07/25/2000         65 FR 45709
Environmental Protection Agency                                         12/31/1996          61 FR 69359            06/18/2002a        67 FR 41343
Equal Employment Opportunity Commission                                 05/16/1997          62 FR 26933            not required
Farm Credit Administration                                              10/22/1996          61 FR 54728            07/27/2000         65 FR 46087
Farm Credit System Insurance Corporation                                10/24/1996          61 FR 55079            08/22/2001         66 FR 44027
Federal Communications Commission                                       02/03/1997          62 FR 4917             10/13/2000         65 FR 60868
Federal Deposit Insurance Corporation                                   11/12/1996          61 FR 57987            10/31/2000         65 FR 64884
Federal Election Commission                                             03/12/1997          62 FR 11316            not made
Federal Emergency Management Agency                                     not made
Federal Energy Regulatory Commission                                    not made
Federal Maritime Commission                                             10/08/1996          61 FR 52704            08/15/2000         65 FR 49741
Federal Reserve System                                                  11/01/1996          61 FR 56407            10/12/2000         65 FR 60583
Federal Trade Commission                                                10/21/1996          61 FR 54548            10/13/2000         65 FR 60857
General Services Administration                                         12/20/1996          61 FR 67234            not made
International Trade Commission                                          not made
Merit Systems Protection Board                                          09/18/1996          61 FR 49049            not required
National Credit Union Administration                                    11/06/1996          61 FR 57290            09/22/2000         65 FR 57277
National Aeronautics and Space Administration                           not made
National Transportation Safety Board                                    not made
National Science Foundation                                             11/20/1996          61 FR 59027            06/16/1998         63 FR 32761
Nuclear Regulatory Commission                                           10/11/1996          61 FR 53553            10/04/2000         65 FR 59270
Office of Government Ethics                                             08/30/1999          64 FR 47095            not required
Office of Personnel Management                                          not made
Pension Benefit Guaranty Corporation                                    07/10/1997          62 FR 36993            not required
Railroad Retirement Board                                               01/27/1997          62 FR 3790             not made
Securities and Exchange Commission                                      11/08/1996          61 FR 57773            02/02/2001         66 FR 8761
Small Business Administration                                           not made
Surface Transportation Boardb                                           not made
Tennessee Valley Authority                                              10/24/1996          61 FR 55097            03/05/2002         67 FR 9924
United States Postal Service                                            10/29/1996          61 FR 55750            not made
                                                                        11/01/1996          61 FR 56450
Source: GAO analysis of Federal Register documents.

                                                      Note: Some final rules making initial and subsequent adjustments were revised after the initial
                                                      publication dates to reflect technical corrections.




                                                      Page 45                                                                 GAO-03-409 Civil Penalties
Appendix I
Final Rules That Adjust Civil Penalties for
Inflation as of June 30, 2002




a
 As discussed in the report, EPA’s second round of adjustments was withdrawn after we advised EPA
that the adjustments were inconsistent with the Inflation Adjustment Act’s requirements.
b
 The Interstate Commerce Commission Termination Act of 1995 (Pub. L. 104-88, 109 Stat. 803)
abolished the Interstate Commerce Commission and transferred certain regulatory functions to the
newly created Surface Transportation Board (Board). The act took effect on January 1, 1996.
Therefore, the Board was not required to make an initial round of adjustments for eligible civil penalties
until January 1, 2000. As of June 30, 2002, the Board had not made those adjustments.




Page 46                                                                    GAO-03-409 Civil Penalties
Appendix II

Amount of Inflation and Estimated Length of
Time Needed to Trigger Penalty Adjustments
in Selected Agencies                                                                                                                  Appendx
                                                                                                                                            Ii




                                            Table 8 illustrates, for six selected agencies, the (1) size of the agencies’
                                            penalty amounts after the first round of adjustments, (2) the number of
                                            covered penalties at each amount, (3) the relevant rounding category in the
                                            Federal Civil Penalties Inflation Adjustment Act, as amended (Inflation
                                            Adjustment Act), for each penalty amount, (4) the amount of inflation
                                            needed to trigger a second round of penalty adjustments at that penalty
                                            amount, (5) the rounded penalty amount after adjustment, (6) the
                                            percentage increase that rounded penalty represents (when compared to
                                            the earlier amount), and (6) the number of years it will take (at 2.5 percent
                                            inflation per year) to trigger this adjustment. The amount of inflation
                                            needed to trigger an adjustment is calculated by taking half of the rounding
                                            multiple and dividing that by the size of the penalty. For example, for the
                                            $11 Pension and Welfare Benefits Administration penalty, half of the $10
                                            rounding multiple is $5, which when divided by $11 equals 45.4 percent. As
                                            the table shows, some of the agencies’ penalties cannot be adjusted for
                                            more than 15 years under the rounding rules, and the rounded increases are
                                            twice the amount of actual inflation to trigger an adjustment.



Table 8: Amount of Inflation and Estimated Length of Time Needed to Trigger Next Penalty Adjustments in Six Selected
Agencies

                                                              Statute    Percentage            Number of
                               Penalty                       requires         inflation     years to next
                             amounts         Number of    increase to        increase         adjustment
                            after first-       covered    be rounded       needed to      assuming a 2.5       Rounded       Rounded
                                round      penalties at    to nearest    trigger next     percent annual        penalty    percentage
Agency                    adjustments      this amount     multiple of   adjustment         inflation rate      amount       increase
Pension and Welfare                $ 11               1          $ 10             45.5                 17           $ 21          90.9
Benefits Administration
                                    110               5           100             45.5                 17            210          90.9
                                  1,100               1         1,000             45.5                 17          2,100          90.9
                                     55               1            10              9.1                  5             65          18.2
Mine Safety and Health               66               1            10              7.6                  4             76          15.2
Administration
                                    275               1           100             18.2                  8            375          36.4
                                  5,500               1         1,000              9.1                  5          6,500          18.2
                                55,000                1         5,000              4.6                  3         60,000           9.1
Federal Aviation                  1,100               1         1,000             45.5                 17          2,100          90.9
Administration                    2,200               1         1,000             22.8                 10          3,200          45.5
                                11,000                5         5,000             22.8                 10         16,000          45.5
                                27,500                1         5,000              9.1                  5         32,500          18.2




                                            Page 47                                                          GAO-03-409 Civil Penalties
                                             Appendix II
                                             Amount of Inflation and Estimated Length of
                                             Time Needed to Trigger Penalty Adjustments
                                             in Selected Agencies




(Continued From Previous Page)
                                                                Statute    Percentage            Number of
                                Penalty                        requires         inflation     years to next
                              amounts         Number of     increase to        increase         adjustment
                             after first-       covered     be rounded       needed to      assuming a 2.5       Rounded       Rounded
                                 round      penalties at     to nearest    trigger next     percent annual        penalty    percentage
Agency                     adjustments      this amount      multiple of   adjustment         inflation rate      amount       increase
National Highway Traffic             5.5               1             10             91.0                 28           15.5         181.8
Safety Administration              1,100               6          1,000             45.5                 17          2,100          90.9
                                   1,650               1          1,000             30.4                 12          2,650          60.6
                                   2,200               1          1,000             22.8                 10          3,200          45.5
                                  11,000               1          5,000             22.8                 10         16,000          45.5
                                 110,000               2         10,000              4.6                  3       120,000            9.1
                                 275,000               1         25,000              4.6                  3       300,000            9.1
                                 440,000               1         25,000              2.9                  3       465,000            5.7
                                 880,000               2         25,000              1.5                  2       905,000            2.8
United States Coast                   22               1             10             22.8                 10             32          45.5
Guard                                 55               2             10              9.1                  5             65          18.2
                                     110               9            100             45.5                 17            210          90.9
                                     185               1            100             27.1                 11            285          54.1
                                     220               7            100             22.8                 11            320          45.5
                                     550               15           100              9.1                  5            650          18.2
                                   1,100               18         1,000             45.5                 17          2,100          90.9
                                   2,200               2          1,000             22.8                 11          3,200          45.5
                                   3,300               1          1,000             15.2                  7          4,300          30.3
                                   5,500               22         1,000              9.1                  5          6,500          18.2
                                  11,000               23         5,000             22.8                 10         16,000          45.5
                                  22,000               4          5,000             11.4                  6         27,000          22.7
                                  27,500               13         5,000              9.1                  5         32,500          18.2
                                  55,000               1          5,000              4.6                  3         60,000           9.1
                                 110,000               1         10,000              4.6                  3       120,000            9.1
                                 137,500               2         10,000              3.7                  3       147,500            7.3




                                             Page 48                                                           GAO-03-409 Civil Penalties
                                            Appendix II
                                            Amount of Inflation and Estimated Length of
                                            Time Needed to Trigger Penalty Adjustments
                                            in Selected Agencies




(Continued From Previous Page)
                                                                Statute       Percentage             Number of
                               Penalty                         requires            inflation      years to next
                             amounts         Number of      increase to           increase          adjustment
                            after first-       covered      be rounded          needed to       assuming a 2.5         Rounded       Rounded
                                round      penalties at      to nearest       trigger next      percent annual          penalty    percentage
Agency                    adjustments      this amount       multiple of      adjustment          inflation rate        amount       increase
Environmental                       550                1              100                9.1                     5           650            18.2
Protection Agency                   660                1              100                7.6                     4           760            15.2
                                   1,100               2            1,000              45.5                     17         2,100            90.9
                                   2,750               2            1,000              18.2                      8         3,750            36.4
                                   3,300               1            1,000              15.2                      7         4,300            30.3
                                   5,000               1            1,000              10.0                      5         6,000            20.0
                                   5,500              10            1,000                9.1                     5         6,500            18.2
                                  11,000              11            5,000              22.8                     10        16,000            45.5
                                  22,000               1            5,000              11.4                      6        27,000            22.7
                                  27,500              31            5,000                9.1                     5        32,500            18.2
                                  55,000               3            5,000                4.6                     3        60,000             9.1
                                  82,500               3            5,000                3.1                     3        87,500             6.1
                                 110,000               1          10,000                 4.6                     3      120,000              9.1
                                 137,500               5          10,000                 3.7                     3      147,500              7.3
                                 220,000               1          25,000                 5.7                     3      245,000             11.4
Source: GAO.

                                            Note: The projection of the number of years to next adjustment was based on a 2.5 percent inflation
                                            rate compounded annually and the addition of 1 year to reflect the Consumer Price Index lag
                                            requirement in the Inflation Adjustment Act.




(450105)                                    Page 49                                                                  GAO-03-409 Civil Penalties
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