oversight

Addressing the Deficit: Budgetary Implications of Selected GAO Work for Fiscal Year 1998

Published by the Government Accountability Office on 1997-03-14.

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

               United States General Accounting Office

GAO            Report to the Congress




March 1997
               ADDRESSING THE
               DEFICIT
               Budgetary Implications
               of Selected GAO Work
               for Fiscal Year 1998




GAO/OCG-97-2
      United States
GAO   General Accounting Office
      Washington, D.C. 20548

      Comptroller General
      of the United States

      B-274810

      March 14, 1997

      To the President of the Senate and
      the Speaker of the House of Representatives

      This report is part of our continuing effort to help the Congress identify
      options that could be used to reduce the deficit.1 It updates our previous
      work in this area with new information and systematically identifies in a
      single document the budgetary implications of selected program reforms
      discussed in our work but not yet implemented or enacted. Where
      available, budgetary savings estimates provided by the Congressional
      Budget Office (CBO) or the Joint Committee on Taxation (JCT) are
      presented for each of the options.

      This year’s report contains 147 options. Nearly half of these
      options—71—are new to this year’s report; the remainder are updated
      versions of options that appeared in last year’s report. To update last
      year’s options, we reviewed and analyzed congressional and agency
      actions taken over the past year that affected the substantive content of
      the option and/or its likely savings. In fact, some options from last year’s
      report were not included in this year’s report (see appendix IV) because
      the Congress has already addressed the relevant issues. The remaining
      options from last year’s report have been updated and modified to reflect
      recent congressional or agency actions.

      All of the options are based on key findings and issues developed in our
      audits and evaluations. Some of the options reflect our recommendations.
      Others do not, but rather represent one way to address, in a budgetary
      context, some of the significant problems identified in our reviews of
      federal programs and activities. The Congress has many available options
      for dealing with the deficit. Inclusion of a specific option in this report
      does not mean that we endorse it as the only or most feasible approach, or




      1
       See Addressing The Deficit: Updating the Budgetary Implications of Selected GAO Work
      (GAO/OCG-96-5, June 28, 1996); Deficit Reduction: Opportunities to Address Long-Standing
      Government Performance Issues (GAO/T-OCG-95-6, September 13, 1995); Addressing The Deficit:
      Budgetary Implications of Selected GAO Work for Fiscal Year 1996 (GAO/OCG-95-2, March 15, 1995);
      and Addressing The Deficit: Budgetary Implications of Selected GAO Work (GAO/OCG-94-3, March 11,
      1994).



      Page 1                                                   GAO/OCG-97-2 Addressing the Deficit
    B-274810




    that other options are not also appropriate for consideration by the
    Congress.2

    This report is divided into four appendixes. Appendix I discusses the
    conventions used to provide estimates of cost savings or additional
    revenues. As in our previous report, appendix II provides for
    congressional consideration an analytical framework of individual options.
    This framework provides one set of criteria that may be used to assess
    goals, scope, and approaches for delivering federal programs. It is
    organized around the following three broad themes:

•   reassess objectives, that is, reconsider whether to terminate or revise
    services and programs provided;
•   redefine beneficiaries, that is, reconsider who pays for or benefits from a
    particular program; and
•   improve efficiency, that is, reconsider how a program or service is
    provided.

    Appendix III presents narrative descriptions of the options, organized by
    budget function and receipts. As mentioned above, appendix IV lists
    options from last year’s report that were not updated for this year’s
    volume.

    Although we derived the options from our existing body of work, there are
    similarities with other deficit reduction proposals. For example, some
    options contained in this report have also been included in past editions of
    CBO’s annual publication, Reducing the Deficit: Spending and Revenue
    Options, House and Senate Budget Resolution proposals, and the
    President’s annual budget submission.

    We are sending copies of this report to the appropriate congressional
    committees and every Member of the Congress. Copies will be made
    available to others upon request.




    2
     Under the Budget Enforcement Act (BEA), as amended, the spending and revenue options included in
    this report could be used either to reduce the deficit or to free up funds for other programs. Under the
    pay-as-you-go (PAYGO) rules of BEA, savings from direct spending programs (entitlement and
    mandatory programs) or revenue options would reduce the deficit unless these savings were used to
    offset either direct spending program expansions or tax cuts. For discretionary spending programs,
    savings from changes would contribute to additional deficit reduction if BEA caps on discretionary
    spending were lowered; otherwise, the savings would be available for use in other discretionary
    programs.



    Page 2                                                        GAO/OCG-97-2 Addressing the Deficit
B-274810




This report was prepared under the direction of Paul L. Posner, Director
for Budget Issues, who may be reached at (202) 512-9573. Specific
questions about individual options may be directed to the GAO contact
listed with each option. Major contributors to this report are listed in
appendix V.




James F. Hinchman
Acting Comptroller General
of the United States




Page 3                                      GAO/OCG-97-2 Addressing the Deficit
Contents



Letter                                                                                            1


Appendix I                                                                                       12

Explanation of
Conventions Used to
Estimate Savings and
Revenue Gains
Appendix II                                                                                      14
                       Reassess Objectives                                                       14
A Framework for        Redefine Beneficiaries                                                    15
Deficit Reduction      Improve Efficiency                                                        15

Appendix III                                                                                     17
                       050 National Defense                                                      18
Options for Deficit    Defense Infrastructure Reform                                             19
Reduction              Fiscal Year 1998 Defense Operation and Maintenance Budget                 21
                       Continental Air Defense                                                   23
                       Carrier Battle Group Expansions and Upgrades                              25
                       Army’s Comanche Helicopter Program                                        27
                       F/A-18E/F Fighter                                                         29
                       F-22 Fighter                                                              31
                       Air Force Bomber Force Requirements                                       33
                       Air Force Fighter Squadrons                                               38
                       C-17 Strategic Airlift                                                    40
                       Nuclear Submarine Force Reductions                                        42
                       Major Weapon System Warranty Law                                          44
                       Base Alignment and Closure Accounts                                       46
                       Defense Inventories Reform                                                48
                       Defense Transportation Restructuring                                      53
                       Depot Maintenance Program Excess Capacity                                 55
                       Military Exchange Stores Consolidation                                    59
                       Budgeted Civilian Personnel Requirements                                  61
                       Convert Some Support Officer Positions to Civilian Status                 63
                       Attrition of Enlisted Personnel From the Military Services                65
                       Army National Guard Divisions                                             68
                       Junior Reserve Officers’ Training Corps                                   70
                       DOD’s Acquistion Workforce                                                72




                       Page 4                                    GAO/OCG-97-2 Addressing the Deficit
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DOD’s Finance and Accounting Infrastructure                               74
DOD’s Training Infrastructure                                             77
DOD’s Transportation Migration Systems                                    79
DOD’s Materiel Management Migration Systems                               81
DOD’s Bulk Fuel Budgeting                                                 83
Navy Financial Management of Operating Materials and Supplies             85
Copayments for Care in Military Treatment Facilities                      87
Administering Defense Health Care                                         89
Uniformed Services University of the Health Sciences                      91
Uniformed Services Treatment Facilities                                   94
Department of Energy’s Procurement of Laboratory Testing                  97
   Services
150 International Affairs                                                 99
USAID’s Housing Guaranty Program                                         100
Excess Real Estate at Overseas Diplomatic Posts                          102
Overseas Diplomatic Posts                                                105
State Department Functions and Activities                                108
State Department Support Functions                                       110
TV Marti                                                                 112
USIA Exchange Programs                                                   114
USIA Overseas Posts, Activities, and Cultural Centers                    116
International Broadcasting                                               120
Risk-Based Exposure Fees for Export-Import Bank                          122
Export-Import Bank Programs                                              124
250 General Science, Space, and Technology                               126
Space Station                                                            127
NASA’s Earth Observing System Data and Information System                130
270 Energy                                                               132
Clean Coal Technology Funds                                              133
Department of Energy’s National Laboratories                             135
Use of Carryover Balances to Offset Future Budget Needs                  138
Department of Energy’s Overtime Costs                                    140
Department of Energy’s Cleanup Studies                                   142
Department of Energy’s Contractors’ Separation Benefits                  144
   Package
Federal Exemption to Certain State Taxes for Department of               146
   Energy’s Operating Contractors
Nuclear Waste Disposal Fees                                              148
Power Marketing Administrations Cost Recovery                            149
Federal Investment in Successfully Commercialized Technologies           151
300 Natural Resources and Environment                                    153




Page 5                                    GAO/OCG-97-2 Addressing the Deficit
Contents




Federal Land Policies                                                     154
Collaborative Federal Land Management Approach                            157
Federal Timber Sales                                                      159
Fair Market Value for Natural Resources                                   161
Recreation Fees at Federal Sites                                          163
Hardrock Mining Royalities                                                165
Natural Resources Revenue Sharing                                         167
Federal Water Policies                                                    169
Water Transfers                                                           173
Pollution Fees and Taxes                                                  174
Hazardous Waste Cleanup Cost Recovery                                     176
Non-Time-Critical Removals in Superfund Cleanups                          178
Excess Funds in Superfund Contracts                                       180
Weather Service Modernization Project                                     182
350 Agriculture                                                           185
Food Aid: Public Law 480 Title I Program                                  186
The Market Access Program                                                 189
Export Credit Guarantee Programs                                          191
Agricultural Research Service Funding                                     194
USDA Telecommunications and Information Systems                           196
370 Commerce and Housing Credit                                           198
Rural Housing Loans Interest Recapture                                    199
Use of Sampling for the 2000 Decennial Census                             201
400 Transportation                                                        204
State Share of State-Supported Intercity Rail Passenger Service           205
Amtrak Subsidies                                                          207
Military Airport Program Funds                                            210
Cargo Preference Laws                                                     212
Fees Paid by Foreign-Flagged Cruise Ships                                 215
Department of Transportation’s Oversight of Its University                217
   Research
Fees for Certification of New Airlines                                    219
Fees for Registering Aircraft                                             221
450 Community and Regional Development                                    223
Eligibility for Federal Emergency Management Agency Public                224
   Assistance
500 Education, Training, Employment, and Social Services                  226
Consolidation of Student Aid Programs                                     227
Consolidation of Employment and Training Programs                         229
550 Health                                                                233
Prescription Drug and Medicaid Fraud                                      234




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Medicaid: States Use Illusory Approaches to Shift Program Costs           236
  to the Federal Government
Medicaid Formula: Fairness Could Be Improved                              238
Automated Drug Utilization Reviews                                        240
Payments to Rural Health Clinics                                          243
Public Health Service Commissioned Corps                                  245
Unified Risk-Based Food Safety System                                     248
570 Medicare                                                              251
Teaching Hospitals’ Medicare Payments                                     252
Medicare Program Safeguards                                               254
Medicare Payments for High Technology Procedures                          256
Medicare Rate-Setting Methods for HMOs                                    258
Medicare Incentive Payments in Health Care Shortage Areas                 260
600 Income Security                                                       262
Fees for Non-Temporary Assistance to Needy Families (TANF)                263
  Child Support Enforcement Services
Automated Child Support Enforcement Systems                               265
Funding for State Automated Welfare Systems                               267
Benefits for Retirement Eligible FECA Beneficiaries                       269
Workers’ Compensation Cases Involving Third Parties                       271
Workers’ Compensation Payments                                            273
Resource Transfers to Qualify for SSI                                     275
Return-to-Work Strategies for People With Disabilities                    277
Reporting of Federal Employee Payroll Data to State                       279
  Unemployment Insurance Programs
650 Social Security                                                       281
The PASS Work Incentive Program                                           282
700 Veterans Benefits and Services                                        284
Veterans’ Disability Compensation for Nonservice Connected                285
  Diseases
Approving Education and Training Programs for Veterans                    286
Cost Sharing for Veterans’ Long-Term Care                                 288
Effective VA Hospital Preadmission Certification                          290
Construction of Veterans’ Medical Facilities                              292
Underused VA Hospitals                                                    295
VA’s Medical Care Account Growth Rate                                     297
Enrollment in VA Health Care System                                       300
Outpatient Pharmacy Costs                                                 302
Sunset Date on VA’s Income Verification Program                           304
750 Administration of Justice                                             306
Border Patrol Resources                                                   307




Page 7                                     GAO/OCG-97-2 Addressing the Deficit
                        Contents




                        800 General Government,                                                   310
                           900 Net Interest, and 999 Multiple
                        General Services Administration Supply Depot System                       311
                        Judiciary’s Long-Range Space Planning System                              313
                        The 1-Dollar Coin                                                         315
                        Commemorative Coins                                                       317
                        Federal Reserve Operations                                                318
                        Premium Payments to Employees While on Leave                              321
                        Davis-Bacon Act Reform                                                    322
                        Formula-Based Grant Programs                                              325
                        Federal Grants                                                            328
                        Federal Travel Processing                                                 331
                        Receipts                                                                  333
                        Tax Treatment of Health Insurance Premiums                                334
                        Information Reporting on Forgiven Debts                                   336
                        Administration of the Tax Deduction for Real Estate Taxes                 338
                        Corporate Tax Document Matching                                           340
                        Tax Treatment of Interest Earned on Life Insurance Policies and           341
                           Deferred Annuities
                        Federal Agency Reporting to the Internal Revenue Service                  343
                        Independent Contractor Tax Compliance                                     344
                        Deductibility of Home Equity Loan Interest                                346
                        Internal Revenue Service Staff Utilization                                348
                        Collecting Gasoline Excise Taxes                                          350
                        Computing Excise Tax Bases                                                351
                        Industrial Development Bonds Targeting                                    352
                        Highway User Fees on Heavy Trucks                                         354
                        Taxation of Additives to Diesel Fuel                                      356
                        Electronic Filing of Tax Returns                                          358

Appendix IV                                                                                       360

Options Not Updated
for This Report
Appendix V                                                                                        363

Major Contributors to
This Report
                        Abbreviations

                        AFDC             Aid to Families With Dependent Children
                        AIP              Airport Improvement Program


                        Page 8                                     GAO/OCG-97-2 Addressing the Deficit
Contents




AOC        Administrative Office of the U.S. Courts
ARS        Agricultural Research Service
AWIPS      Advanced Weather Interactive Processing System
BBS        broad-based, sustainable
BEA        Budget Enforcement Act
BLM        Bureau of Land Management
BRAC       Base Realignment and Closure
BUR        bottom-up review
CBO        Congressional Budget Office
CERCLA     Comprehensive Environmental Response,
                 Compensation, and Liability Act
CDR        continuing disability review
CFO        Chief Financial Officer
CHAMPUS    Civilian Health and Medical Program of the Uniformed
                 Services
COP        continuation-of-pay
CVP        Central Valley Project
DBOF       Defense Business Operations Fund
DFAS       Defense Finance and Accounting Service
DFSC       Defense Fuel Supply Center
DI         Disability Insurance
DLA        Defense Logistics Agency
DOD        Department of Defense
DOE        Department of Energy
DOT        Department of Transportation
DUR        drug utilization review
EDWAA      Economic Dislocation and Worker Adjustment
                 Assistance
EM         Environmental Management
EOS        Earth Observing System
EOSDIS     Earth Observing System Data and Information System
EPA        Environmental Protection Agency
FAIR       Federal Agriculture Improvement and Reform Act of
                 1996
FAA        Federal Aviation Administration
FAS        Foreign Agricultural Service
FDIC       Federal Deposit Insurance Corporation
FDSL       Federal Direct Student Loan
FECA       Federal Employees’ Compensation Act
FEMA       Federal Emergency Management Agency
FFEL       Federal Family Education Loan


Page 9                              GAO/OCG-97-2 Addressing the Deficit
Contents




FHWA       Federal Highway Administration
FSN        foreign service national
FY         fiscal year
GAO        General Accounting Office
GPS        global positioning systems
GSA        General Services Administration
HACCP      Hazard Analysis and Critical Control Point
HCFA       Health Care Financing Administration
HHS        Department of Health and Human Services
HMO        health maintenance organization
HPSA       Health Professional Shortage Area
HUD        Department of Housing and Urban Development
IDB        industrial development bond
IFAD       International Fund for Agricultural Development
INS        Immigration and Naturalization Service
IRS        Internal Revenue Service
JCS        Joint Chief of Staff
JCT        Joint Committee on Taxation
JFMIP      Joint Financial Management Improvement Program
JROTC      Junior Reserve Officers’ Training Corps
JTPA       Job Training Partnership Act
LRIP       low-rate initial production
MAP        Military Airport Program
MIP        Medicare Incentive Payment
MRI        magnetic resonance imaging
MTMC       Military Traffic Management Command
MWR        morale, welfare, and recreation
NASA       National Aeronautics and Space Administration
NOAA       National Oceanic and Atmospheric Administration
NORAD      North American Aerospace Defense Command
NTC        non-time-critical
NWS        National Weather Service
OCSE       Office of Child Support Enforcement
OMB        Office of Management and Budget
O&M        operation and maintenance
OST        Office of the Secretary
OTC        over the counter
PASS       plan for achieving self-support
PAYGO      pay-as-you-go
PHS        Public Health Service
PILT       Payment in Lieu of Taxes


Page 10                            GAO/OCG-97-2 Addressing the Deficit
Contents




PMA          Power Marketing Administration
RHC          Rural Health Clinic
RCRA         Resource Conservation and Recovery Act
RFA          Radio Free Asia
RFE/RL       Radio Free Europe/Radio Liberty
RHS          Rural Housing Service
RTC          Resolution Trust Corporation
SAA          state approving agency
SBU          strategic business unit
SSA          Social Security Administration
SSI          Supplemental Security Income
SSN          nuclear-powered attack submarine
TANF         Temporary Assistance for Needy Families
TDY          temporary duty
TRICARE      DOD’s managed health care system
UI           unemployment insurance
USAID        U.S. Agency for International Development
USDA         U.S. Department of Agriculture
USIA         United States Information Agency
USTF         Uniformed Services Treatment Facility
USTRANSCOM   U.S. Transportation Command
USUHS        Uniformed Services University of the Health Sciences
VA           Department of Veterans Affairs
VOA          Voice of America




Page 11                               GAO/OCG-97-2 Addressing the Deficit
Appendix I

Explanation of Conventions Used to
Estimate Savings and Revenue Gains

                 Cost estimates for many of our options were provided by CBO and JCT. As
                 in last year’s report, if specific estimates could not be provided, a brief
                 explanation is included with the option. Where estimates are provided, the
                 following conventions were followed:3

             •   For revenue estimates, the increase in collections reflects that which
                 would occur, over and above that due under current law, if the option
                 were enacted.
             •   For direct spending programs, estimated savings show the difference
                 between what the program would cost under the CBO baseline, which
                 assumes continuation of current law, and what it would cost after the
                 suggested modification.
             •   For nondefense discretionary spending programs, two estimates are
                 provided. One estimate is of savings compared to the actual fiscal year
                 1997 appropriations increased for projected inflation. A second estimate is
                 of savings compared to the fiscal year 1997 appropriations in nominal
                 terms (held constant for the next 4 years).
             •   For defense discretionary spending programs, estimates are of savings
                 compared to the 1997 Defense Plan that CBO uses for its defense
                 discretionary estimates. CBO uses this plan because it provides the
                 programmatic detail necessary to estimate the effects of changes in force
                 structures and weapons systems.

                 Specific assumptions made in estimating individual options are noted in
                 the option narratives in appendix III.

                 Subsequent savings and revenue estimates provided by CBO and JCT may
                 not match exactly those contained in this report. Differences in the details
                 of specific proposals, changes in assumptions which underlie the analyses,
                 and updated baselines can all lead to significant differences in estimates.
                 Also, a few of our options—involving sales of real estate and other
                 government-owned property—constitute asset sales. Under the Balanced
                 Budget and Emergency Deficit Control Act of 1985, as amended, proceeds
                 from asset sales are not counted in determining compliance with the
                 discretionary spending limits or PAYGO requirements. In order to provide
                 policymakers the fullest possible picture of the budgetary implications of
                 our work, we have included those options which constitute asset sales.
                 They are clearly identified as such.




                 3
                  For a complete discussion of the uses and caveats of the CBO estimates, see CBO’s August 1996
                 report, Reducing the Deficit: Spending and Revenue Options.



                 Page 12                                                    GAO/OCG-97-2 Addressing the Deficit
Appendix I
Explanation of Conventions Used to
Estimate Savings and Revenue Gains




Finally, some of the options could not be scored by CBO or JCT under
current scorekeeping conventions. Several of these involve management
improvements that we believe can contribute to solving the deficit
problem but whose effects are too indirect for estimation purposes. A few
options are not estimated because they concern future choices about
spending that is not currently in the baseline used to calculate annual
spending and revenue. In other cases, savings are likely to come in years
beyond the 5-year estimation period that CBO uses.




Page 13                                     GAO/OCG-97-2 Addressing the Deficit
Appendix II

A Framework for Deficit Reduction


                          The history of deficit reduction efforts suggests that basing decisions on
                          explicit policy rationales, rather than considering separate
                          program-by-program assessments, may improve chances for success. A
                          consistent and systematic framework can be an effective means to
                          formulate and package broad-based deficit reduction proposals. Also, this
                          kind of approach can be used regardless of any other budgetary control
                          mechanism (for example, discretionary spending limits or sequestration
                          procedures) or any given level of desired deficit reduction.

                          GAO’s deficit reduction framework consists of three broad themes: reassess
                          objectives, redefine beneficiaries, and improve efficiency and accuracy.
                          These three fundamental strategies are based on an implicit set of decision
                          rules that encourage decisionmakers to think systematically, within an
                          ever-changing environment, about

                      •   what services the government provides or should continue to provide,
                      •   for whom these services are or should be provided, and
                      •   how services are or should be provided.

                          By using a policy-oriented framework such as this, choices can be made
                          more clearly and the results become more defensible.


                          The first theme within our deficit reduction framework focuses on the
Reassess Objectives       objectives for federal programs or services. Our premise is that
                          periodically reconsidering a program’s original purpose, the conditions
                          under which it continues to operate, and its cost-effectiveness, is
                          appropriate. Our work suggests three decision rules which illustrate this
                          strategy.

                      •   Programs can be considered for termination if they have succeeded in
                          accomplishing their intended objectives or if it is determined that the
                          programs have persistently failed to accomplish their objectives.
                      •   Programs can be considered for termination or revision when underlying
                          conditions change so that original objectives may no longer be valid.
                      •   Programs can be reexamined when cost estimates increase significantly
                          above those associated with original objectives, when benefits fall
                          substantially below original expectations, or both.

                          For example, the Public Law 480 Title I Food Aid Program allows U.S.
                          agricultural commodities to be sold to developing countries on long-term
                          credit at below-market interest rates. The current goal of the program is to



                          Page 14                                      GAO/OCG-97-2 Addressing the Deficit
                             Appendix II
                             A Framework for Deficit Reduction




                             promote U.S. foreign policy by enhancing the food security of developing
                             countries. The program is also designed to expand markets for U.S.
                             agricultural commodities. However, multiple and sometimes competing
                             objectives, as well as contradictory program requirements, have hampered
                             the program, and its contribution to long-term, foreign market
                             development for U.S. agricultural commodities has not been
                             demonstrated.


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

                         •   Formulas for a variety of grant programs to state and local governments
                             can be revised to better reflect the fiscal capacity of the recipient
                             jurisdiction. This strategy could reduce overall funding demands while
                             simultaneously redistributing available grant funds so that the most needy
                             receive the same or increased levels of support.
                         •   Eligibility rules can be revised, without altering the objectives of the
                             program or service.
                         •   Fees can be targeted at individuals, groups, or industries that directly
                             benefit from federal programs. Also, existing charges can be increased so
                             that a greater portion of a program’s cost is shared by the direct
                             beneficiaries.
                         •   Tax preferences can be narrowed or eliminated by revising eligibility
                             criteria or limiting the maximum amount of preference allowable.

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


                             The third theme within our deficit reduction framework addresses how
Improve Efficiency           the program or service is delivered. This strategy suggests that focusing on



                             Page 15                                      GAO/OCG-97-2 Addressing the Deficit
    Appendix II
    A Framework for Deficit Reduction




    the approach or delivery method can significantly reduce spending or
    increase collections. Our body of work suggests five decision rules which
    illustrate this strategy.

•   Reorganizing programs or activities with similar objectives and audiences
    can eliminate duplication and improve operational efficiency.
•   Using reengineering, benchmarking, streamlining and other process
    change techniques can reduce the cost of delivering services and
    programs.
•   Using performance measurement and generally improving the accuracy of
    available program information can promote accountability and
    effectiveness and reduce errors.
•   Improving collection methods and ensuring that all revenues and debts
    owed are collected can increase federal revenues.
•   Establishing market-based prices can help the government recover the
    cost of providing services while encouraging the best use of the
    government’s resources.

    As an illustration of this theme, GAO has identified over 150 federal
    programs and funding streams providing employment and training
    assistance. These programs are spread across 15 departments and
    independent agencies with a total budget of about $20 billion. Many of
    these programs have similar goals and provide the same services to similar
    populations using separate, parallel delivery structures. Consolidating
    these programs where it is appropriate can reduce administrative costs as
    well as increase efficiencies in service delivery. GAO’s option illustrates
    how opportunities to improve efficiency and flexibility in employment and
    training programs can provide a basis for reducing program funding.




    Page 16                                     GAO/OCG-97-2 Addressing the Deficit
Appendix III

Options for Deficit Reduction


               This appendix describes each of GAO’s options for deficit reduction,
               organized by budget function and receipts. For each option, we provide,
               when relevant, information about the authorizing committee,
               appropriations subcommittee, primary agency, budget account, spending
               type, budget subfunction, and framework theme. We then provide a
               summary and description of budgetary implications, which is followed by
               an estimate (when available) of savings or revenue increase, relevant GAO
               reports, and a GAO contact.




               Page 17                                     GAO/OCG-97-2 Addressing the Deficit
                   Appendix III
                   Options for Deficit Reduction




               •   Defense Infrastructure Reform
050 National   •   Fiscal Year 1998 Defense Operation and Maintenance Budget
Defense        •   Continental Air Defense
               •   Carrier Battle Group Expansions and Upgrades
               •   Army’s Comanche Helicopter Program
               •   F/A-18E/F Fighter
               •   F-22 Fighter
               •   Air Force Bomber Force Requirements
               •   Air Force Fighter Squadrons
               •   C-17 Strategic Airlift
               •   Nuclear Submarine Force Reductions
               •   Major Weapon System Warranty Law
               •   Base Alignment and Closure Accounts
               •   Defense Inventories Reform
               •   Defense Transportation Restructuring
               •   Depot Maintenance Program Excess Capacity
               •   Military Exchange Stores Consolidation
               •   Budgeted Civilian Personnel Requirements
               •   Convert Some Support Officer Positions to Civilian Status
               •   Attrition of Enlisted Personnel from the Military Services
               •   Army National Guard Divisions
               •   Junior Reserve Officers’ Training Corps
               •   DOD’s Acquisition Workforce
               •   DOD’s Finance and Accounting Infrastructure
               •   DOD’s Training Infrastructure
               •   DOD’s Transportation Migration Systems
               •   DOD’s Materiel Management Migration Systems
               •   DOD’s Bulk Fuel Budgeting
               •   Navy Financial Management of Operating Materials and Supplies
               •   Copayments for Care in Military Treatment Facilities
               •   Administering Defense Health Care
               •   Uniformed Services University of the Health Sciences
               •   Uniformed Services Treatment Facilities
               •   Department of Energy’s Procurement of Laboratory Testing Services




                   Page 18                                   GAO/OCG-97-2 Addressing the Deficit
                        Appendix III
                        Options for Deficit Reduction




Option:
Defense                 Authorizing committees                  Armed Services (Senate)
                                                                National Security (House)
Infrastructure Reform   Appropriations subcommittees            Defense (Senate)
                                                                National Security (House)
                        Primary agency                          Department of Defense
                        Accounts                                Multiple
                        Spending type                           Discretionary
                        Budget subfunction                      Department of Defense—Military
                        Framework theme                         Improve efficiency

                        Although the Department of Defense (DOD) has in recent years undergone
                        substantial downsizing in funding, personnel, and force structure,
                        commensurate infrastructure support reductions have not been achieved.
                        For fiscal 1997, DOD estimates that about $152 billion, or 60 percent of the
                        Defense budget will still be needed for infrastructure requirements which
                        include installation support, training, medical care, logistics, force
                        management, acquisition infrastructure, and personnel. Despite progress
                        in reducing excess infrastructure through the Base Realignment and
                        Closure (BRAC) rounds, it is generally recognized that much excess
                        capacity will remain.

                        Significant budget reductions could be achieved by streamlining the
                        command structure of the remaining forces; sharing medical facilities and
                        services; consolidating depots and shipyards; reforming acquisition
                        processes; consolidating and eliminating research, development, and
                        training facilities; using simulators for training and exercises; and reducing
                        dependence on government-owned housing.

                        Savings for this option cannot be fully estimated until a comprehensive
                        consolidation and downsizing plan is specified. However, in an April 1996
                        report, GAO identified some specific options for reducing defense
                        infrastructure spending.


Related GAO Products    Defense Infrastructure (GAO/HR-97-7, February 1997).

                        Defense Acquisition Infrastructure: Changes in RDT&E Laboratories and
                        Centers (GAO/NSIAD-96-221BR, September 13, 1996).




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              Military Bases: Update on the Status of Bases Closed in 1988, 1991, and
              1993 (GAO/NSIAD-96-149, August 6, 1996).

              Defense Infrastructure: Costs Projected to Increase Between 1997 and
              2001 (GAO/NSIAD-96-174, May 31, 1996).

              Military Bases: Opportunities for Savings in Installation Support Costs Are
              Being Missed (GAO/NSIAD-96-108, April 23, 1996).

              Military Bases: Closure and Realignment Savings are Significant, but Not
              Easily Quantified (GAO/NSIAD-96-67, April 8, 1996).

              Defense Infrastructure: Budget Estimates for 1996-2001 Offer Little
              Savings for Modernization (GAO/NSIAD-96-131, April 4, 1996).

              DOD Training: Opportunities To Reduce the Training Infrastructure
              (GAO/NSIAD-96-96, March 29, 1996).

              Military Bases: Analysis of DOD’s 1995 Process and Recommendations for
              Closure and Realignment (GAO/NSIAD-95-133, April 14, 1995).

              Defense Infrastructure: Enhancing Performance Through Better Business
              Practices (GAO/T-NSIAD/AIMD-95-126, March 23, 1995).


GAO Contact   David R. Warren, (202) 512-8412




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                    Options for Deficit Reduction




Option:
Fiscal Year 1998    Authorizing committees                               Armed Services (Senate)
                                                                         National Security (House)
Defense Operation   Appropriations subcommittees                         Defense (Senate)
and Maintenance                                                          National Security (House)
                    Primary agency                                       Department of Defense
Budget              Accounts                                             Multiple
                    Spending type                                        Discretionary
                    Budget subfunction                                   Department of Defense—Military
                    Framework theme                                      Improve efficiency

                    The military services’ operation and maintenance (O&M) accounts are used
                    to fund a wide range of military and support activities including training,
                    purchasing spare and repair parts, and paying civilian personnel.

                    GAO analysis of selected O&M requests for fiscal year 1997 showed that the
                    budget for that year could have been reduced by $3.4 billion without
                    damaging defense operations and capabilities. The largest potential
                    reductions, each for over $180 million, were associated with improved
                    inventory management, excess bulk fuel requirements, excess unobligated
                    funds, storage of unneeded aircraft, O&M pass-throughs to the Defense
                    Business Operations Fund (DBOF), overstated civilian personnel
                    requirements, and funds requested for ground operation tempo that are
                    not needed for training purposes.4

                    Based on GAO’s analysis regarding potential savings in the fiscal year 1997
                    O&M budget, the Congress may wish to consider reductions of a similar
                    magnitude, $3.4 billion, when formulating fiscal year 1998 appropriations
                    for O&M accounts. It is important for the Congress to be aware that savings
                    for this option include savings for other options involving the individual
                    services’ O&M accounts since the problems GAO identified persist. CBO
                    estimated the following 5-year savings.




                    4
                     Specific options related to bulk fuel (see “DOD’s Bulk Fuel Budgeting”), civilian personnel reductions
                    (see “Budgeted Civilian Personnel Requirements”), and Army spare parts (see “Defense Inventories
                    Reform”) are contained in this report. Therefore, the projected savings from these specific options
                    should not be added to the $3.4 billion in potential savings shown here.



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Five-Year Savings
                       Dollars in millions
                                                              FY98    FY99     FY00        FY01       FY02
                       Savings from the 1997 Defense Plan
                       Budget authority                       3,400      0         0           0          0
                       Outlays                                2,530    677       112          37         17
                       Source: Congressional Budget Office.




Related GAO Products   1997 DOD Budget: Potential Reductions to Operation and Maintenance
                       Programs (GAO/NSIAD-96-220, September 18, 1996).

                       1996 DOD Budget: Potential Reductions to Operation and Maintenance
                       Programs (GAO/NSIAD-95-200BR, September 26, 1995).

                       1995 Budget: Potential Reductions to the Operation and Maintenance
                       Programs (GAO/NSIAD-94-246BR, September 6, 1994).


GAO Contact            Mark E. Gebicke, (202) 512-5140




                       Page 22                                           GAO/OCG-97-2 Addressing the Deficit
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Option:
Continental Air   Authorizing committees                              Armed Services (Senate)
                                                                      National Security (House)
Defense           Appropriations subcommittees                        Defense (Senate)
                                                                      National Security (House)
                  Primary agency                                      Department of Defense
                  Accounts                                            Multiple
                  Spending type                                       Discretionary
                  Budget subfunction                                  Department of Defense—Military
                  Framework theme                                     Improve efficiency

                  The continental air defense mission evolved during the Cold War to detect
                  and intercept Soviet bombers attacking North America via the North Pole.
                  The force that carries out that mission is within the North American
                  Aerospace Defense Command (NORAD), which is a joint U.S. and Canadian
                  command. As of the beginning of fiscal year 1997, the force consisted of
                  150 primary aircraft (Air National Guard F-15 and F-16 aircraft in 10
                  dedicated units which stand alert for NORAD).5 The Air Force budgeted
                  about $345 million in fiscal year 1997, to operate and support the
                  continental air defense force.

                  The former Soviet Union no longer poses a significant threat of a bomber
                  attack on the continental United States. Further, internal problems within
                  Russia and other former Soviet Union countries have extended the time it
                  would take them to return to previous levels of military readiness and
                  capabilities. Reflecting these changing realities, the Chairman of the Joint
                  Chiefs of Staff determined in 1993 that the United States no longer needed
                  a large, dedicated air defense force and that the dedicated force could be
                  significantly reduced or eliminated.

                  Since the threat of a Soviet-style air attack against the United States has
                  largely disappeared, the air defense force now focuses its activities on air
                  sovereignty missions. These missions provide surveillance and control of
                  territorial airspace, including activities such as assisting aircraft in distress
                  or intercepting aircraft as part of antidrug smuggling efforts. However,
                  active and reserve general-purpose and training forces could perform this
                  mission because they (1) have comparable or better aircraft, (2) are
                  located at or near existing air defense bases, and (3) have pilots who



                  5
                   DOD’s 1997 plan reduced the number of dedicated continental air defense Air National Guard aircraft
                  from 150 to 90.



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                      possess similar skills or who could acquire the necessary skills used by air
                      defense and air sovereignty pilots.

                      Based on our audit work, GAO has concluded that significant savings could
                      be achieved by dual-tasking the active, reserve, and training forces. If the
                      dedicated continental air defense force were eliminated, the following
                      savings could be achieved.

Five-Year Savings
                      Dollars in millions
                                                             FY98   FY99     FY00        FY01       FY02
                      Savings from the 1997 Defense Plan
                      Budget authority                        153    314       322        331         341
                      Outlays                                 126    278       309        322         333
                      Source: Congressional Budget Office.




Related GAO Product   Continental Air Defense: A Dedicated Force Is No Longer Needed
                      (GAO/NSIAD-94-76, May 3, 1994).


GAO Contact           Richard Davis, (202) 512-3504




                      Page 24                                          GAO/OCG-97-2 Addressing the Deficit
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Option:
Carrier Battle Group   Authorizing committees                              Armed Services (Senate)
                                                                           National Security (House)
Expansions and         Appropriations subcommittees                        Defense (Senate)
Upgrades                                                                   National Security (House)
                       Primary agency                                      Department of Defense
                       Accounts                                            Operation and Maintenance, Navy
                                                                           (17-1804)
                                                                           Military Personnel, Navy (17-1453)
                                                                           Procurement-funded Replenishment
                                                                           Spares (17-1506)
                       Spending type                                       Discretionary
                       Budget subfunction                                  Department of Defense—Military
                       Framework theme                                     Improve efficiency

                       Aircraft carrier battle groups are the centerpiece of the Navy’s surface
                       force and significantly influence the size, composition, and cost of the
                       fleet. The annualized cost to acquire, operate, and support a single Navy
                       carrier battle group is from $1.7 billion to $2 billion (in fiscal year 1996
                       dollars) and will continue to increase. The Navy is embarking on several
                       costly carrier-related programs—procuring another carrier, refueling
                       existing carriers, and replacing/upgrading combat aircraft.

                       GAO’s  analysis indicates that there are opportunities to use less costly
                       options to satisfy many of the carrier battle groups’ traditional roles
                       without unreasonably increasing the risk that U.S. national security would
                       be threatened. For example, one less costly option would be to rely more
                       on increasingly capable surface combatants, such as cruisers, destroyers,
                       or frigates, for overseas presence and crises response. If the Congress
                       chose to retire one aircraft carrier and one active air wing in 1998, the
                       following savings could be achieved.

Five-Year Savings
                       Dollars in millions
                                                                FY98         FY99          FY00         FY01      FY02
                       Savings from the 1997 Defense Plan
                       Budget authority                           350          710         1,170            900   6,580
                       Outlays                                    260          580           690            840   1,190
                       Note: Estimate includes savings from not buying a new carrier in fiscal year 2002.

                       Source: Congressional Budget Office.




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Related GAO Products   Navy’s Aircraft Carrier Program: Investment Strategy Options
                       (GAO/NSIAD-95-17, January 1, 1995).

                       Navy Carrier Battle Groups: The Structure and Affordability of the Future
                       Force (GAO/NSIAD-93-74, February 25, 1993).


GAO Contact            Richard Davis, (202) 512-3504




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Option:
Army’s Comanche      Authorizing committees                 Armed Services (Senate)
                                                            National Security (House)
Helicopter Program   Appropriations subcommittees           Defense (Senate)
                                                            National Security (House)
                     Primary agency                         Department of Defense
                     Account                                Research, Development, Test and
                                                            Evaluation, Army (21-2040)
                     Spending type                          Discretionary
                     Budget subfunction                     Department of Defense—Military
                     Framework theme                        Reassess objectives

                     The Comanche helicopter is to replace the Vietnam-era scout and attack
                     helicopters that the Army considers incapable of meeting existing or
                     future requirements. The Comanche’s overall program cost has grown to
                     approximately $50 billion, with an estimated program unit cost of about
                     $39 million. Anticipated cost increases and other unresolved technical
                     risks indicate that future cost growth is likely. In December 1994, the
                     Secretary of Defense decided to restructure the Comanche program,
                     reducing program cost by about $2 billion for fiscal years 1996 through
                     2001. This action extended the development phase until 2006 and deferred
                     the production decision until then.

                     Although light attack missions are part of the Army’s plan for the
                     Comanche, its lethality is now expected to rival or surpass that of the
                     Apache—the Army’s premiere attack helicopter. In addition, as the Army
                     reduces its total helicopter fleet, it plans to modify many that will remain
                     to increase combat capabilities. For example, the Army is arming its scout
                     helicopter, the Kiowa, and modifying 227 basic model Apaches with the
                     Longbow system, which includes a fire control radar with a radar detector
                     and a Hellfire missile with a radio-frequency seeker. These actions,
                     collectively, tend to blur the distinction in roles among the Army’s
                     helicopter fleet.

                     GAO’s work has pointed to real and probable development cost increases,
                     uncertain operating and support cost savings, questions about the role of
                     the Comanche compared to other more affordable Army helicopters, and
                     deferral of the production decision. If the Congress would elect to
                     terminate the program, the following savings would be achieved.




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Five-Year Savings
                       Dollars in millions
                                                              FY98   FY99     FY00        FY01       FY02
                       Savings from the 1997 Defense Plan
                       Budget authority                        144    384       454        602         650
                       Outlays                                  82    268       397        520         607
                       Source: Congressional Budget Office.




Related GAO Products   Comanche Helicopter: Testing Needs To Be Completed Prior to
                       Production Decisions (GAO/NSIAD-95-112, May 18, 1995).

                       Army Aviation: Modernization Strategy Needs To Be Reassessed
                       (GAO/NSIAD-95-9, November 21, 1994).

                       Comanche Helicopter: Program Needs Reassessment Due To Increased
                       Unit Cost and Other Factors (GAO/NSIAD-92-204, May 27, 1992).


GAO Contact            Louis J. Rodrigues, (202) 512-4841




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Option:
F/A-18E/F Fighter   Authorizing committees                              Armed Services (Senate)
                                                                        National Security (House)
                    Appropriations subcommittees                        Defense (Senate)
                                                                        National Security (House)
                    Primary agency                                      Department of Defense
                    Account                                             Aircraft Procurement, Navy (17-1506)
                    Spending type                                       Discretionary
                    Budget subfunction                                  Department of Defense—Military
                    Framework theme                                     Reassess objectives

                    In 1992, the Navy justified the F/A-18E/F Fighter to correct operational
                    deficiencies that were projected to occur in its F/A-18C/D aircraft. As of
                    December 1995, the total program cost was projected to be almost
                    $81 billion in then year dollars. In its fiscal year 1996/1997 Biennial Budget,
                    the Navy requested $236.882 million and $306.344 million to cover long
                    lead requirements for the procurement of 12 F/A-18E/F aircraft in fiscal
                    year 1997 and 24 aircraft in fiscal year 1998. An F/A-18E/F low rate initial
                    production (LRIP) milestone decision is scheduled for the first quarter of
                    calendar year 1997.

                    In a report issued in June 1996, GAO concluded that the need for the
                    F/A-18E/F is questionable. Operational deficiencies that in 1992 the Navy
                    stated existed in the current F/A-18C/D either have not materialized as
                    projected or can be corrected with nonstructural changes to the
                    F/A-18C/D. Furthermore, operational improvements that the E/F will have
                    over the C/D would be marginal.

                    GAO also reported that DOD’s $43.6 million (in fiscal year 1996 dollars) unit
                    recurring flyaway cost6 for the F/A-18E/F is understated because E/F
                    procurement cost estimates are based on annual (72 aircraft) and total
                    procurement (1,000 aircraft) levels that are overstated. The Congress has
                    indicated that an annual production rate of 72 aircraft is not possible in the
                    current budget environment. Also, total production of 1,000 aircraft is
                    overstated by 340 aircraft—the number of Marine Corps E/Fs that are
                    included in the total buy but which the Corps has decided it will not
                    procure. GAO estimated that lowering the E/F annual production rate to a
                    more realistic level of 36 aircraft and procuring a total of 660 aircraft
                    would increase F/A-18E/F unit costs by about $10 million to $53 million in

                    6
                     Recurring flyaway costs include costs related to the production of the basic aircraft and do not
                    include all procurement costs. DOD consistently maintains that these costs are the most appropriate to
                    compare the costs of different aircraft.



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                       fiscal year 1996 dollars. This compares to about $29.6 million for the
                       current F/A-18C/D.

                       GAO  further reported that procuring 660 C/Ds rather than the E/F would
                       save almost $17 billion (fiscal year 1996 dollars). Savings would be greater
                       if fewer than 660 C/Ds are needed to maintain Navy tactical aircraft
                       inventories. Near term savings associated with procuring the C/D rather
                       than the E/F would be significant. Through fiscal year 2002 the unit
                       recurring flyaway cost of the E/F averages about $99.6 million (then-year
                       dollars), or more than three times the $29.6 million unit recurring flyaway
                       cost of the F/A-18C/D over this same period.

                       Because continued procurement of the less expensive F/A-18C/D would
                       provide the Navy a capable tactical aircraft, the Congress may wish to
                       reconsider the need to procure the F/A-18E/F. CBO estimates that canceling
                       the program would achieve the following budget savings during the next 5
                       years.

Five-Year Savings
                       Dollars in millions
                                                              FY98    FY99      FY00        FY01       FY02
                       Savings from the 1997 Defense Plan
                       Budget authority                       1,812   2,116     2,233       1,654      2,410
                       Outlays                                 252     932      1,630       1,886      1,943
                       Source: Congressional Budget Office.




Related GAO Products   Navy Aviation: F/A-18E/F Will Provide Marginal Operational Improvement
                       at High Cost (GAO/NSIAD-96-98, June 18, 1996).

                       Naval Aviation: F/A-18 E/F Acquisition Strategy (NSIAD-94-194, August 18,
                       1994).

                       Naval Aviation: Consider All Alternatives Before Proceeding With the
                       F/A-E/F (NSIAD-93-144, August 27, 1993).


GAO Contact            Louis J. Rodrigues, (202) 512-4841




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Option:
F-22 Fighter   Authorizing committees                              Armed Services (Senate)
                                                                   National Security (House)
               Appropriations subcommittees                        Defense (Senate)
                                                                   National Security (House)
               Primary agency                                      Department of Defense
               Account                                             Aircraft Procurement, Air Force (57-3010)
               Spending type                                       Discretionary
               Budget subfunction                                  Department of Defense—Military
               Framework theme                                     Reassess objectives

               The Air Force’s F-22 program was initiated in 1981 to replace F-15s and to
               meet the evolving threat projected for the mid-1990s. Although the
               Department of Defense (DOD) procurement plans support achievement of
               initial operational capability in 2004, our reports issued in 1993 and 1994
               indicated the need to replace F-15s with F-22s was not urgent. Our reports
               indicated that potential adversary air forces are expected to include few
               fighters that have the capability to challenge the F-15—a U.S. frontline
               fighter.

               DOD is currently planning to procure a significant number of F-22s before
               completing operational tests and evaluations, thereby increasing the cost,
               schedule, and performance risks within the system.7 Initial operational
               tests and evaluations, which provide a valid estimate of expected system
               operational effectiveness and operational suitability, are not scheduled to
               be completed until after the Air Force will have committed to procure 76
               aircraft involving an investment of nearly $11 billion. Air Force plans call
               for procurement of 4 aircraft a year, increasing to 12, 24, and 36 a year
               before initial operational tests and their evaluation are completed. Many
               aircraft systems entering production before starting operational testing
               have required major modification later, which is often costly.

               Using DOD guidelines, F-22 program concurrency is high because the F-22
               program is scheduled to proceed into low rate initial production well
               before any operational testing starts. Furthermore, the F-22 program
               contemplates a higher commitment as a percentage of total production
               prior to completion of initial operational testing than most modern fighter
               programs.


               7
                In December 1996, the Air Force announced the results of a review of the program by a joint cost
               estimating team. Significant changes to the program, including changes to the procurement plan, are
               being considered as a result of that team’s report.



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                       Since the need for the F-22 is not urgent, the Congress could choose to
                       restrict production of F-22s to six aircraft in 2000, eight aircraft in 2001,
                       and eight aircraft in 2002 until initial operational tests and evaluations are
                       completed in April 2002. Further, maintaining production quantities at
                       eight or less aircraft per year could defer the purchase of $282 million of
                       production tooling—$109 million in fiscal year 2000 to increase production
                       to 12 aircraft per year, $116 million in fiscal year 2001 to increase
                       production from 12 to 24 aircraft per year, and $57 million in fiscal year
                       2002 to increase production from 24 to 36 per year.

                       If the Congress were to restrict funding in this way and restrict
                       procurement of tooling to limit production to eight aircraft a year, the
                       following budget savings could be achieved during the next 5 years.

Five-Year Savings
                       Dollars in millions
                                                              FY98   FY99     FY00        FY01       FY02
                       Savings from the 1997 Defense Plan
                       Budget authority                          0    127     1,340       2,608      3,810
                       Outlays                                   0      8       114        527       1,332
                       Source: Congressional Budget Office.




Related GAO Products   Combat Air Power: Joint Mission Assessments Needed Before Making
                       Program and Budget Decisions (GAO/NSIAD-96-177, September 20, 1996).

                       Tactical Aircraft: Concurrency in Development and Production of F-22
                       Aircraft Should Be Reduced (GAO/NSIAD-95-59, April 19, 1995).

                       Weapons Acquisition: Low-Rate Initial Production Used to Buy Weapon
                       Systems Prematurely (GAO/NSIAD-95-18, November 21, 1994).

                       Tactical Aircraft: F-15 Replacement Is Premature as Currently Planned
                       (GAO/NSIAD-94-118, March 25, 1994).


GAO Contact            Louis J. Rodrigues, (202) 512-4841




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Option:
Air Force Bomber     Authorizing committees                 Armed Services (Senate)
                                                            National Security (House)
Force Requirements   Appropriations subcommittees           Defense (Senate)
                                                            National Security (House)
                     Primary agency                         Department of Defense
                     Accounts                               Multiple
                     Spending type                          Discretionary
                     Budget subfunction                     Department of Defense—Military
                     Framework theme                        Improve efficiency

                     Bombers currently in the force, B-2s, B-1Bs, and B-52Hs, were initially
                     designed and procured by the Department of Defense (DOD) primarily to
                     meet nuclear war-fighting requirements. Since the end of the Cold War,
                     DOD has placed increased emphasis on the role of bombers in future
                     conventional conflicts while reducing the number of bombers significantly
                     from a total of about 360 in 1989 to a planned retention of 187 bombers
                     through the early part of the next century.

                     Senior DOD officials have said that DOD cannot afford all of the services’
                     stated requirements and difficult decisions must be made on which
                     investment programs to cancel so that DOD can develop and implement a
                     long-term, sustainable recapitalization plan. While DOD believes it needs a
                     level of redundancy to provide commanders in chief with a safety margin
                     and flexibility, it may not need to upgrade its capabilities to the extent
                     currently planned. GAO’s analysis shows that DOD has not made a
                     compelling case to retain and upgrade 187 bombers to support future
                     war-fighting requirements. While there are a number of ways to reduce
                     capabilities to strike ground targets, a smaller bomber force may be one
                     option to reduce overlap that would result in an acceptable loss to DOD’s
                     overall war-fighting capabilities.

                     Because DOD’s plans to modernize combat airpower may be prohibitively
                     expensive, DOD is seeking ways to reduce costs. With this in mind, GAO has
                     identified three options to reduce or restructure the bomber force that
                     would achieve cost savings yet enable DOD to retain extensive aggregate
                     airpower capabilities. The first two options—retiring all or a portion of the
                     B-1B fleet—would result in a smaller bomber force than DOD currently
                     plans. Retiring or reducing the B-1B force may result in an acceptable
                     decrease in DOD’s existing capabilities. The third option—increasing the
                     number of B-1Bs in the Air National Guard—would not result in a smaller




                     Page 33                                       GAO/OCG-97-2 Addressing the Deficit
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                           Options for Deficit Reduction




                           force but would achieve some cost savings because reserve units are less
                           expensive to operate than active units. Options two and three are not
                           mutually exclusive. The three options and their projected cost savings are
                           detailed below.


Retire Entire B-1B Force   Retiring the entire B-1B force of 95 aircraft would reduce DOD’s aggregate
                           conventional airpower capabilities somewhat but would yield significant
                           cost savings. Eliminating the B-1B force would decrease DOD’s inventory of
                           long-range airpower assets. However, B-2s and B-52Hs would still be
                           available for missions requiring long-range and large payload capabilities.
                           Retiring the B-1B force also would have no adverse effect on DOD’s nuclear
                           mission. The B-1B will no longer have a nuclear mission once B-2s enter
                           the force.

                           If the Congress directed DOD to retire the B-1B force, CBO estimates it
                           would save about $6 billion in budget authority and about $5.2 billion in
                           budget outlays for fiscal years 1998-2002 as shown in the following table.

Five-Year Savings
                           Dollars in millions
                                                                    FY98          FY99          FY00         FY01             FY02
                           Savings from the 1997 Defense Plan
                           Budget authority                           750         1,190        1,220         1,300            1,490
                           Outlays                                    430           950        1,130         1,290            1,440
                           Note: In estimating the cost savings of this option, CBO assumed that the B-1B force would be
                           retired over a 1-year period beginning immediately, resulting in smaller savings for fiscal year
                           1998.

                           Source: Congressional Budget Office.




Retire 27 B-1Bs in         The Air Force currently has 27 B-1B aircraft in reconstitution reserve that
Reconstitution Reserve     lack aircrews and funding for operations. In fiscal year 1997, the Air Force
                           will begin reducing the number of unfunded reconstitution reserve
                           aircraft, will establish two new operational B-1B squadrons using the
                           aircraft that are currently in reconstitution reserve, and will fund
                           additional aircrews and flying hours. The Air Force has included the cost
                           of upgrading reconstitution reserve aircraft in the B-1B Conventional
                           Munitions Upgrade Program estimated to cost $2.4 billion from fiscal years
                           1996 through 2008.




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                            If DOD perceives that the risks to retire the entire B-1B fleet outweigh the
                            savings that could be realized, it could retire 27 reconstitution reserve
                            B-1Bs and keep 68 B-1Bs in the force, 60 of which would be funded for
                            combat operations or training. This option would not result in as much
                            loss in capability as retiring the entire B-1B fleet. If 27 B-1Bs were retired,
                            DOD would still have numerous other combinations of platforms and
                            weapons to attack the types of targets that the B-1B is planned to destroy.
                            Compared to retiring all 95 B-1Bs, this option would provide commanders
                            in chief with more flexibility in planning air campaigns and basing aircraft
                            in theater, since B-1Bs would be based farther away from the theater of
                            operations and would not require refueling during a typical wartime
                            mission, unless operating from the United States.

                            Retiring the 27 B-1Bs in reconstitution reserve would save about
                            $750 million in budget authority for fiscal years 1998-2002. Reconstitution
                            reserve aircraft place an increased maintenance workload on the squadron
                            and require the Air Force to authorize and fund four additional
                            maintenance personnel per reconstitution reserve aircraft. Savings in the
                            near-term would reflect the immediate termination of these positions.
                            Savings would increase significantly in fiscal year 2000 because DOD would
                            not establish two additional operation squadrons and could eliminate the
                            personnel and flying-hour costs associated with these aircraft. Retiring 27
                            B-1Bs also would save procurement funds since DOD would upgrade only
                            68 B-1Bs for the conventional mission instead of 95 B-1Bs.8 If the Congress
                            directed DOD to retire the 27 B-1Bs in reconstitution reserve, CBO estimates
                            the following savings could be achieved.

Five-Year Savings
                            Dollars in millions
                                                              FY98           FY99            FY00           FY01          FY02
                            Savings from the 1997 Defense Plan
                            Budget authority                       2              4             80            270          390
                            Outlays                                2              4             64            230          350
                            Source: Congressional Budget Office.




Place 24 Additional B-1Bs   Placing more B-1Bs in the Air National Guard is an option that could
in the Air National Guard   reduce the cost to operate DOD’s bomber force while preserving the
                            war-fighting capability of DOD’s planned bomber force. By fiscal year 1998,
                            the Air Force will have 18 B-1Bs assigned to the National Guard and fully

                            8
                             According to CBO, savings from forgoing these upgrades would occur after fiscal year 2002.



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                    trained in the conventional role. B-1Bs will no longer have a nuclear role in
                    the near future, thus making the transfer of B-1Bs to the Air National
                    Guard somewhat easier than transferring B-52s to the Air Force Reserve.

                    Placing 24 more B-1Bs in the Air National Guard would save about
                    $110 million in budget authority for fiscal years 1998 to 2002. We examined
                    placing 24 more B-1Bs in the Air National Guard because this would
                    achieve a 50/50 active/reserve ratio when attrition and backup aircraft are
                    excluded and the Air Force has placed 50 percent or more of some
                    refueling and air mobility assets in the reserve component. Transferring
                    additional B-1Bs to the Air National Guard is not likely to degrade combat
                    effectiveness or result in loss of war-fighting capability. Air Reserve
                    combat units generally have readiness similar to active-duty units and are
                    required to be ready to deploy within the same time as active units based
                    in the continental United States. A major benefit of transferring bombers
                    to the reserve component is that reserve units traditionally are less
                    expensive to operate than active duty counterparts. Air National Guard
                    B-1B squadrons will require fewer flying hours than active squadrons
                    because Air National Guard units are able to recruit more experienced
                    pilots who require less frequent training to maintain their proficiency.
                    Also, in contrast to active duty units that rely primarily on active military
                    personnel, Air National Guard units rely heavily on less costly civilians and
                    part-time Guard personnel.

                    If the Congress directed DOD to place an additional 24 B-1Bs in the Air
                    National Guard, CBO estimates cost savings of about $110 million in budget
                    authority for fiscal years 1998 through 2002 could be achieved as shown in
                    the table below.

Five-Year Savings
                    Dollars in millions
                                                             FY98         FY99          FY00         FY01           FY02
                    Savings from the 1997 Defense Plan
                    Budget authority                             0             0           10            40           60
                    Outlays                                      0             0            9            37           59
                    Note: One additional Guard unit would be started in fiscal year 2000 and two additional units
                    would be started in fiscal year 2001.

                    Source: Congressional Budget Office.




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Related GAO Products   Air Force Bombers: Options to Retire or Restructure the Force Would
                       Reduce Planned Spending (GAO/NSIAD-96-192, September 30, 1996).

                       Embedded Computers: B-1B Computers Must Be Upgraded to Support
                       Conventional Requirements (GAO/AIMD-96-28, February 27, 1996).

                       B-1B Conventional Upgrades (GAO/NSIAD-96-52BR, December 4, 1995).

                       B-1B Bomber: Evaluation of Air Force Report on B-1B Operational
                       Readiness Assessment (GAO/NSIAD-95-151, July 18, 1995).

                       Air Force: Assessment of DOD’s Report on Plan and Capabilities for
                       Evaluating Heavy Bombers (GAO/NSIAD-94-99, January 10, 1994).

                       Strategic Bombers: Issues Relating to the B-1B’s Availability and Ability to
                       Perform Conventional Missions (GAO/NSIAD-94-81, January 10, 1994).

                       Strategic Bombers: Adding Conventional Capabilities Will Be Complex,
                       Time-Consuming, and Costly (GAO/NSIAD-93-45, February 5, 1993).

                       Strategic Bombers: Need to Redefine Requirements for B-1B Defensive
                       Avionics System (GAO/NSIAD-92-272, July 17, 1992).

                       Strategic Bombers: Updated Status of the B-1B Recovery Program
                       (GAO/NSIAD-91-189, May 9, 1991).

                       Strategic Bombers: Issues Related to the B-1B Aircraft Program
                       (GAO/T-NSIAD-91-11, March 6, 1991).


GAO Contact            Richard Davis, (202) 512-3504




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Option:
Air Force Fighter   Authorizing committees                 Armed Services (Senate)
                                                           National Security (House)
Squadrons           Appropriations subcommittees           Defense (Senate)
                                                           National Security (House)
                    Primary agency                         Department of Defense
                    Account                                Operation and Maintenance, Air Force
                                                           (57-3400)
                    Spending type                          Discretionary
                    Budget subfunction                     Department of Defense—Military
                    Framework theme                        Improve efficiency

                    The Air Force accounts for its fighter force structure in wing equivalents
                    that represent 72 aircraft. At the end of the Air Force’s planned drawdown,
                    the Air Force’s active component F-15 and F-16 communities will make up
                    about 10 fighter wing equivalents. The Air Force plans to organize these
                    aircraft in 37 squadrons at 17 bases in the United States and overseas.
                    Until recently, Air Force fighter wings were predominantly organized in 3
                    squadrons of 24 aircraft. However, the Air Force has decided to reduce its
                    squadron size to 18, which consequently reduced its wing size to 54. This
                    change in unit size increased the number of wings and squadrons to more
                    than would have been needed had the squadron size stayed at 24.

                    The Air Force has not demonstrated that it needs additional squadrons. Air
                    Force officials believe that more squadrons are needed to provide the Air
                    Force with additional flexibility to respond to numerous potential conflicts
                    across the globe. Although the Air Force considers smaller fighter
                    squadrons beneficial, it had not performed any analysis to justify its
                    decision. Further, according to Air Force officials, Commanders in Chief,
                    who are responsible for conducting these operations, developed plans
                    based on the number of aircraft that are needed to execute
                    missions—regardless of squadron size.

                    Keeping more squadrons than are needed increases operating costs and
                    may result in more base infrastructure than the Air Force needs. GAO
                    developed several notional basing plans that the Air Force could use in
                    considering how to consolidate its fighter force into fewer squadrons.
                    Implementing these plans could eliminate not only between two and seven
                    squadrons, but also a wing and/or fighter base. CBO identified operating
                    and support cost savings ranging between $38 million and $149 million




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                      annually (in 1997 dollars).9 Recurring savings resulting from a base closure
                      are estimated at an additional $40 million annually (in 1997 dollars).
                      However, these savings would not begin to accrue until 3 to 4 years after
                      the base closure decision. If the Congress chose to consolidate the Air
                      Force’s fighter force into fewer squadrons by eliminating seven of them,
                      the following operating savings could be achieved.

Five-Year Savings
                      Dollars in millions
                                                               FY98         FY99          FY00         FY01         FY02
                      Savings from the 1997 Defense Plan
                      Budget authority                            75          153          157           161            165
                      Outlays                                     71          149          156           160            165
                      Note: Savings estimates do not include funds associated with the base closure. The savings
                      could be significant depending on the base selected for closure.

                      Source: Congressional Budget Office.




Related GAO Product   Air Force Aircraft: Consolidating Fighter Squadrons Could Reduce Costs
                      (GAO/NSIAD-96-82, May 6, 1996).


GAO Contact           Richard Davis, (202) 512-3504




                      9
                       The CBO savings estimate is based on GAO’s personnel reduction estimates. Based on these
                      reductions, GAO’s work shows that operating costs savings could range between $25 million and
                      $115 million annually. Differences between CBO and GAO estimates are attributable to the larger
                      infrastructure cost savings estimated by CBO and not included in GAO’s estimates.



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Option:
C-17 Strategic Airlift   Authorizing committees                  Armed Services (Senate)
                                                                 National Security (House)
                         Appropriations subcommittees            Defense (Senate)
                                                                 National Security (House)
                         Primary agency                          Department of Defense
                         Account                                 Aircraft Procurement, Air Force (57-3010)
                         Spending type                           Discretionary
                         Budget subfunction                      Department of Defense—Military
                         Framework theme                         Reassess objectives

                         The C-17 jet transport is being manufactured for the Air Force by
                         McDonnell Douglas Corporation. The Air Force originally planned to
                         acquire 210 C-17s; however, as a result of the Major Aircraft Review, that
                         number was reduced to 120. In 1993, because of ongoing problems with
                         the C-17 program, the Department of Defense (DOD) explored the
                         possibility of acquiring a mixed fleet of C-17s and nondevelopmental
                         commercial transport aircraft, such as Boeing 747-400s. In November 1995,
                         as a result of an Air Force study which considered a number of possible
                         mixes of C-17s and non-developmental airlift aircraft and a Defense
                         Acquisition Board decision, DOD decided that the advantages of a transport
                         fleet with only C-17s outweighed the cost savings of acquiring a mixed
                         fleet. Thus, DOD is planning to acquire 120 C-17s to replace the C-141s that
                         are being retired.

                         An option not considered by the Defense Acquisition Board, which may
                         also satisfy airlift requirements, would be to acquire 100 C-17s and no
                         nondevelopmental airlift aircraft. This option could save over $7 billion in
                         life cycle costs. Airlift needs could be met with this reduced number of
                         C-17s if DOD implemented other individual measures, such as increasing,
                         by a small amount, prepositioning; using training aircraft that were
                         assumed to be unavailable in the analyses presented to the Defense
                         Acquisition Board; increasing the use of the Civil Reserve Air Fleet
                         aircraft, extending slightly the time frame for delivery, or a combination of
                         these measures.

                         Because of the potential for cost savings, the Congress may wish to
                         consider funding only 100 C-17s rather than the 120 that are currently
                         planned for acquisition. If the Congress chose to fund only 100 C-17s, CBO
                         estimates that the following budget savings could be achieved.




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Five-Year Savings
                      Dollars in millions
                                                             FY98   FY99     FY00        FY01       FY02
                      Savings from the 1997 Defense Plan
                      Budget authority                          0      0         0        240       2,974
                      Outlays                                   0      0         0          15        242
                      Source: Congressional Budget Office.




Related GAO Product   Military Airlift: DOD Could Meet Mobility Needs With Fewer C-17s and Save
                      Billions (GAO/NSIAD-97-38, December 30, 1996).


GAO Contact           Louis J. Rodrigues, (202) 512-4841




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Option:
Nuclear Submarine   Authorizing committees                 Armed Services (Senate)
                                                           National Security (House)
Force Reductions    Appropriations subcommittees           Defense (Senate)
                                                           National Security (House)
                    Primary agency                         Department of Defense
                    Account                                Shipbuilding and Conversion, Navy
                                                           (17-1611)
                    Spending type                          Discretionary
                    Budget subfunction                     Department of Defense—Military
                    Framework theme                        Reassess objectives

                    Nuclear-powered attack submarines (SSN) are the Navy’s prime
                    antisubmarine warfare asset. Today, faced with a changed world threat
                    and a new defense posture, the Navy is reducing the size of its SSN fleet.
                    The Department of Defense’s (DOD’s) Bottom-Up Review (BUR) determined
                    that the Navy needed to maintain a force of 45 to 55 SSNs after fiscal year
                    1999 to meet the requirements of the defense strategy, including both
                    regional conflicts and peacetime presence operations. There are less
                    costly alternatives than the approach the Navy has chosen to maintain the
                    required SSN force structure. As we have reported, these alternative
                    approaches would save billions of dollars and meet the Navy’s force
                    structure and threat requirements.

                    In October 1994, we reported that there were less costly alternatives than
                    the Navy shipbuilding plan for maintaining DOD’s approved attack
                    submarine force structure of 45 to 55 submarines. Under two of the three
                    alternatives, the Navy could maintain a sustained low-rate production, and
                    under the third, the Navy could defer SSN construction until early in the
                    next century. The Navy and the Congress subsequently decided not to
                    defer SSN construction.

                    This alternative, would build only 25 SSNs through 2014, 6 fewer than the
                    Navy currently plans. This alternative allows a force structure of close to
                    55 submarines through 2014, before declining to 45 SSNs in 2020. The
                    alternative would buy one submarine in each year from 1998 through 2002
                    and, eventually buy 3 submarines every other year until 25 submarines are
                    purchased. If the Navy accepted this alternative and bought 6 fewer
                    submarines than currently planned, the following savings would be
                    achieved through 2002.




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Five-Year Savings
                      Dollars in millions
                                                              FY98         FY99         FY00         FY01    FY02
                      Savings from the 1997 Defense Plan
                      Budget authority                            0          160          240          170   1,730
                      Outlays                                     0           10           50          110     220
                      Note: Estimate includes savings from not buying a new submarine in fiscal year 2002.

                      Source: Congressional Budget Office.




Related GAO Product   Attack Submarines: Alternatives for a More Affordable SSN Force Structure
                      (GAO/NSIAD-95-16, October 13, 1994).


GAO Contact           Richard Davis, (202) 512-3504




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Option:
Major Weapon System   Authorizing committees                 Armed Services (Senate)
                                                             National Security (House)
Warranty Law          Appropriations subcommittees           Defense (Senate)
                                                             National Security (House)
                      Primary agency                         Department of Defense
                      Account                                Aircraft Procurement, Air Force (57-3010)
                      Spending type                          Discretionary
                      Budget subfunction                     Department of Defense—Military
                      Framework theme                        Improve efficiency

                      During the 1970s and the 1980s, the Congress was faced with an
                      acquisition process that delivered weapon systems that often failed to
                      meet their military missions, were operationally unreliable, and had
                      defective and poor workmanship and material. As a result, in 1984 the
                      Congress passed legislation requiring the Department of Defense (DOD) to
                      obtain warranties on major weapon systems. The warranties were
                      expected to improve weapon system reliability by providing a mechanism
                      to hold contractors liable for poor performance. Prior to the warranty law,
                      DOD was permitted but not required to obtain a warranty.


                      GAO estimated that the military services spend approximately $271 million
                      annually obtaining weapon system warranties. GAO found that none of the
                      warranties reviewed, where claim and price data were available, were
                      cost-effective. For example, for the warranties reviewed, the government
                      only collected $5 million after paying $94 million for these weapon system
                      warranties.

                      Despite DOD’s efforts to address administrative weaknesses, such as failing
                      to file all warranty claims or making use of adequate cost-benefit analyses,
                      DOD continues to have fundamental problems managing the warranty
                      program. The administrative problems appear to be unintended
                      consequences of the warranty law. Attempts to administratively correct
                      the warranty law have not been successful. Because of the potential for
                      cost savings, the Congress should repeal the warranty law (10 U.S.C.
                      2403). Savings under this option would depend on the extent the military
                      departments still obtain warranties for some programs after the law is
                      repealed, therefore, CBO is unable to provide a savings estimate at this
                      time.




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Related GAO Product   Weapons Acquisition: Warranty Law Should Be Repealed (GAO/NSIAD-96-88,
                      June 28, 1996).


GAO Contact           Louis J. Rodrigues, (202) 512-4841




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Option:
Base Alignment and   Authorizing committees                        Armed Services (Senate)
                                                                   National Security (House)
Closure Accounts     Appropriations subcommittees                  Military Construction (Senate)
                                                                   Military Construction (House)
                     Primary agency                                Department of Defense
                     Account                                       Base Realignment and Closure (97-0103)
                     Spending type                                 Discretionary
                     Budget subfunction                            Department of Defense—Military
                     Framework theme                               Improve efficiency

                     Changing national security needs and the Department of Defense’s (DOD)
                     recognition that its base structure was larger than required led to a
                     decision to close numerous bases around the country. Consequently, the
                     Congress enacted legislation that instituted closures of facilities identified
                     by the Base Realignment and Closure (BRAC) Commission as part of the
                     base closure process.

                     The Congress appropriates BRAC funds on a no year and lump sum basis.
                     Funds can be used for a variety of purposes including construction, family
                     housing, and environmental restoration costs associated with base
                     closures and realignment. Therefore, DOD is provided a tremendous
                     amount of flexibility to finance BRAC expenditures from the BRAC account.
                     While DOD budget guidance directs services to request only funds needed
                     in the appropriation year, large unobligated balances indicate the services
                     have been requesting more than necessary. Because requirements lack the
                     specificity of regular DOD requirements, large unobligated balances
                     represent funds the Congress may wish to rescind. The following savings
                     represent a rescission of the $148 million.

Five-Year Savings
                     Dollars in millions
                                                            FY98     FY99          FY00        FY01     FY02
                     Savings from the 1997 Defense Plan
                     Budget authority                        148         0            0             0       0
                     Outlays                                  46        53           28          15         2
                     Source: Congressional Budget Office.




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Related GAO Products   Military Bases: Potential Reductions to the Fiscal Year 1997 Base Closure
                       Budget (GAO/NSIAD-96-158, July 15, 1996).

                       Military Bases: Update on the Status of Bases Closed in 1988, 1991, and
                       1993 (GAO/NSIAD-96-149, August 6, 1996).


GAO Contact            David R. Warren, (202) 512-8412




                       Page 47                                     GAO/OCG-97-2 Addressing the Deficit
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Option:
Defense Inventories   Authorizing committees                 Armed Services (Senate)
                                                             National Security (House)
Reform                Appropriations subcommittees           Defense (Senate)
                                                             National Security (House)
                      Primary agency                         Department of Defense
                      Accounts                               Multiple
                      Spending type                          Discretionary
                      Budget subfunction                     Department of Defense—Military
                      Framework theme                        Improve efficiency

                      Over 100 GAO reports have pointed out Department of Defense (DOD)
                      inventory management problems and have shown that DOD has
                      accumulated inventory that greatly exceeds its operational and war
                      reserve needs. Systemic problems in determining requirements and
                      inadequate financial accountability and control have contributed to poor
                      inventory management practices. Traditionally, DOD’s culture has
                      emphasized overbuying and placed little value on economy and efficiency,
                      causing unneeded items to pile up in warehouses.

                      DOD could be more aggressive in implementing private sector practices
                      that could reduce inventory costs. DOD has implemented, in a limited
                      manner, certain commercial practices such as direct vendor delivery for
                      medical and food items. However, these initiatives represent only about
                      3 percent of the items for which this concept could be used.

                      Systemic reforms—such as improving the way inventory requirements are
                      determined, using commercial inventory management practices, and
                      changing financial management policies and practices—continue to be
                      needed to achieve further reductions in DOD’s budget requirements. GAO
                      estimates that, as of September 1995, only about half of DOD’s $69.6 billion
                      in inventory had to be on hand to support current operations and war
                      reserves. GAO’s work has shown that several private business have been
                      able to reduce their on hand inventories by more than 50 percent by
                      implementing best practices.

                      Unless DOD takes more aggressive actions, its inventory management
                      problems will continue into the next century. We have identified four
                      specific inventory related options the Congress may wish to consider for
                      DOD budget reduction purposes.




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Use Prime Vendors to         DOD spends over a billion dollars for clothing and textile items sold to
Supply High-Volume           military service customers, primarily the services’ 14 recruit induction
Clothing and Textile Items   centers and over 300 military exchange stores. GAO has reported that while
                             private sector companies are cutting costs by minimizing inventories, DOD
                             continues to store redundant levels of clothing and textile inventories
                             throughout its wholesale and retail system. Much of this inventory is aged;
                             for about 26 percent of the items, DOD had 10 years of supply on hand. To
                             maintain these stocks, DOD employs a large operations infrastructure and
                             thus incurs unnecessary inventory storage and handling costs.

                             Many private sector firms and some federal agencies with uniformed
                             employees are relying on prime vendors to manage their clothing
                             inventories. Prime vendors provide timely and direct delivery between
                             customers and suppliers, and order additional stock from manufacturers
                             on short notice, with quick turnaround, to minimize inventory holding
                             costs and improve customer service. GAO believes that substantial
                             opportunities exist to reduce DOD annual expenditures on clothing and
                             textile items by adopting best commercial practices on a wide-scale basis.
                             For example, the Congress may wish to direct DOD to adopt a primary
                             vendor program for supplying clothing and textile items to it’s 14 recruit
                             induction centers. Although CBO believes that initiating such actions would
                             save money, it was unable to calculate a savings estimate at this time.


Use Innovative               The Defense Logistics Agency (DLA) manages over 1 million electronics
Commercial Practices to      items such as resistors, fuses, and switches. It stores this inventory, valued
Supply Electronics Items     at over $2 billion, at 28 distribution depots and other storage locations.
                             This large level of inventory reflects DLA’s practice of buying and storing
to Maintenance and Repair    electronics supplies to ensure they are available to customers—sometimes
Facilities                   several years in advance of when the supplies are actually needed. The
                             turnover of DLA’s electronics inventory is slow. In fiscal year 1993, the
                             wholesale inventory of such items would turn over once every 4 years. In
                             comparison, private sector suppliers often turn their stock over four times
                             a year.

                             Many private sector companies have adopted modern inventory
                             management practices, including long-term relationships with suppliers,
                             direct delivery programs, and direct communication channels between
                             suppliers and end users. With these practices, companies do not store
                             supplies at intermediate handling and storage locations, as DOD does.
                             Instead, they arrange for suppliers to deliver inventory items directly to
                             the end user’s facility at about the time when the items are needed. The



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                          Options for Deficit Reduction




                          result is a reduction in inventories and related holding costs as well as
                          improved customer service.

                          DLA has initiated several programs to adopt commercial practices for
                          electronics items, but overall progress is slow and projected results are
                          limited. Substantial opportunities exist and significant savings would
                          result if electronics items were managed by adopting best commercial
                          practices on a wide-scale basis. The Congress may wish to direct DLA to
                          adopt modern inventory management practices that would result in a
                          similar 50 percent decrease in electronics items inventory. Although CBO
                          believes that initiating such actions would save money, it was unable to
                          calculate a savings estimate at this time.


DOD Spare and Repair      The Army, Navy, and Air Force store the majority of their general issue
Parts Storage Locations   spare and repair parts inventories at a few locations with the remaining
                          inventory being stored at hundreds of other locations. To illustrate, over
                          95 percent of the Army’s general issue inventory is stored at 7 major
                          locations and the remaining 5 percent is stored at 110 other locations. The
                          Navy stores 81 percent of its inventory at 6 locations and the other
                          19 percent at 52 locations. The Air Force’s storage pattern is similar to that
                          of the Army and Navy. It stores 96 percent of its inventory at 6 major
                          locations and the other 4 percent at 105 locations.

                          Most of the items stored at other than major locations had small quantities
                          of onhand inventory. In fact, over 53 percent of the items had onhand
                          quantities of three or less, while only 25 percent of the items had quantities
                          of 11 or more. Our analysis also showed that many of the Army items10 had
                          infrequent issues over the 2-year period ending August, 1996. Over
                          53 percent of the inventory items at other than major storage locations had
                          no issues and, an additional 33 percent of the items had less than five
                          issues during the same 2-year period. The need for many of the items
                          stored at other than major locations is questionable.

                          Maintaining inventory that is not needed is expensive and does not
                          contribute to an effective, efficient, and responsive supply system. Our
                          analysis showed that $2.7 billion of the inventory was not needed to meet
                          the services’ current operating and war reserve requirements. CBO agrees
                          that DOD could save millions of dollars annually in inventory holding costs
                          by eliminating at other than major locations inventory that is not needed

                          10
                            Information was not readily available from the Air Force and Navy to determine the number of
                          inventory issues on an item-by-item basis at each storage location.



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                        Options for Deficit Reduction




                        to meet current operating and war reserve requirements. However, CBO
                        could not provide a savings estimate at this time.


Army Spare and Repair   The Army budget stratification reports which are used to determine spare
Parts Budget            and repair parts budget requests are based on inaccurate data. When an
                        item’s available inventory is not sufficient to meet the requirements, the
                        item is considered to be in a shortage position, and the aggregate value of
                        shortage items is the basis for determining the budget request.

                        Our review of 258 items with a reported shortage value of $519 million
                        showed that the shortage position for $211 million of the items was
                        incorrect. If accurate requirements and inventory data had been used, the
                        inventory shortage for these items would have been $23 million rather
                        than the $211 million reported. As a result, the fiscal year 1996 budget
                        request included $188 million ($211 million minus $23 million) for items
                        that were not in a shortage position.

                        Because corrective actions were not taken in time to affect the fiscal year
                        1997 budget request, we believe the fiscal year 1997 request is also
                        overstated. Therefore, the Congress may want to reduce the Army’s fiscal
                        year 1998 spare and repair parts budget request by the $188 million it was
                        overstated in fiscal year 1996.

Five-Year Savings
                        Dollars in millions
                                                               FY98   FY99     FY00        FY01       FY02
                        Savings from the 1997 Defense Plan
                        Budget authority                        188      0         0           0          0
                        Outlays                                 143     35         6           2          1
                        Source: Congressional Budget Office.




Related GAO Products    Defense Inventory Management (GAO/HR-97-5, February 1997).

                        Defense Inventory: Spare and Repair Parts Inventory Costs Can Be
                        Reduced (GAO/NSIAD-97-47, January 17, 1997).

                        1997 DOD Budget: Potential Reductions to Operation and Maintenance
                        Program (GAO/NSIAD-96-220, September 18, 1996).




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               Navy Financial Management: Improved Management of Operating
               Materials and Supplies Could Yield Significant Savings (GAO/AIMD-96-94,
               August 16, 1996).

               Inventory Management: Adopting Best Practices Could Enhance Navy
               Efforts to Achieve Efficiencies and Savings (GAO/NSIAD-96-156, July 12, 1996).

               Defense Logistics: Requirement Determinations for Aviation Spare Parts
               Need to Be Improved (GAO/NSIAD-96-70, March 19, 1996).

               Best Management Practices: Reengineering the Air Force’s Logistics
               System Can Yield Substantial Savings (GAO/NSIAD-96-5, February 21, 1996).

               Army Inventory: Budget Requests for Spare and Repair Parts Are Not
               Reliable (GAO/NSIAD-96-3, December 29, 1995).

               Inventory Management: DOD Can Build on Progress in Using Best Practices
               to Achieve Substantial Savings (GAO/NSIAD-95-142, August 4, 1995).

               Best Practices Methodology: A New Approach for Improving Government
               Operations (GAO/NSIAD-95-154, May 25, 1995).

               Commercial Practices: DOD Could Reduce Electronics Inventories by Using
               Private Sector Techniques (GAO/NSIAD-94-110, June 29, 1994).

               Commercial Practices: Leading-Edge Practices Can Help DOD Better
               Manage Clothing and Textile Stocks (GAO/NSIAD-94-64, April 13, 1994).


GAO Contacts   David R. Warren, (202) 512-8412

               Mark E. Gebicke, (202) 512-5140




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Option:
Defense          Authorizing committees                Armed Services (Senate)
                                                       National Security (House)
Transportation   Appropriations subcommittees          Defense (Senate)
Restructuring                                          National Security (House)
                 Primary agency                        Department of Defense
                 Accounts                              Multiple
                 Spending type                         Discretionary
                 Budget subfunction                    Department of Defense—Military
                 Framework theme                       Improve efficiency

                 In 1993 and again in 1996, we reported that the Department of Defense’s
                 (DOD) current transportation processes are fragmented, inefficient, and
                 costly. Beginning in 1949, various studies, commissions, and task forces
                 have recommended changes in the defense transportation system
                 organizational structure. In 1987, after the Goldwater-Nichols Act of 1986
                 urged that actions be taken to unify transportation management, the
                 Secretary of Defense established the U.S. Transportation Command
                 (USTRANSCOM). USTRANSCOM’s own study shows that little has changed since
                 it was created and charged with responsibility for unifying DOD’s
                 transportation infrastructure.

                 Our work shows that opportunities exist to reduce defense transportation
                 infrastructure and improve efficiency of cargo traffic management
                 operations. For example, combining common-user traffic management
                 functions and positions under the direct command and control of a single
                 manager, USTRANSCOM, would reduce overhead and eliminate duplicative
                 functions. Moreover, nearly all defense surface cargo moves by
                 commercial carriers during peacetime and noncontingency operations.
                 More outsourcing of the traffic management functions related to
                 shipments by commercial carriers is possible and would further reduce
                 transportation costs.

                 Overall, fixing the organizational structure is a mandatory first step to
                 substantially reduce transportation costs. One logical way, though not the
                 only one, as related to surface traffic management functions, would be to
                 (1) place the Defense Business Operations Fund-Transportation staff of
                 the Navy’s Military Sealift Command staff worldwide together with the
                 staff of the Army’s Military Traffic Management Command (MTMC), thereby
                 eliminating duplicative staff and overlapping layers of management,
                 (2) consolidate or eliminate the resulting continental United States area




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                       command offices thereby eliminating duplicate staff functions,
                       (3) consolidate or eliminate the resulting overseas area offices, and
                       (4) consolidate or eliminate the resulting port command and area offices.

                       Although MTMC, because of the recommendations of the 1995 Defense Base
                       Closure and Realignment Commission to close the Military Ocean
                       Terminal at Bayonne, New Jersey, and California’s Oakland Army Base,
                       has announced plans to consolidate the continental United States area
                       command staff in a new location, opportunities still exist to reduce
                       infrastructure and improve efficiency of traffic management operations. If
                       the Congress chose to restructure the organization as noted, the following
                       civilian personnel savings could be achieved.

Five-Year Savings
                       Dollars in millions
                                                              FY98   FY99     FY00        FY01       FY02
                       Savings from the 1997 Defense Plan
                       Budget authority                         16     33        51          70         73
                       Outlays                                  16     32        50          69         73
                       Source: Congressional Budget Office.




Related GAO Products   Defense Transportation: Reengineering the DOD Personal Property
                       Program (GAO/NSIAD-97-49, November 27, 1996).

                       Defense Infrastructure: Budget Estimates for 1996-2001 Offer Little
                       Savings for Modernization (GAO/NSIAD-96-131, April 4, 1996).

                       Defense Transportation: Streamlining of the U.S. Transportation
                       Command Organization Is Needed (GAO/NSIAD-96-60, February 22, 1996).

                       Defense Transportation: Commercial Practices Offer Improvement
                       Opportunities (GAO/NSIAD-94-26, November 26, 1993).


GAO Contact            David R. Warren, (202) 512-8412




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Option:
Depot Maintenance   Authorizing committees                Armed Services (Senate)
                                                          National Security (House)
Program Excess      Appropriations subcommittees          Defense (Senate)
Capacity                                                  National Security (House)
                    Primary agency                        Department of Defense
                    Accounts                              Multiple
                    Spending type                         Discretionary
                    Budget subfunction                    Department of Defense—Military
                    Framework theme                       Improve efficiency

                    The Department of Defense’s (DOD) annual $15 billion depot maintenance
                    program provides for the repair and overhaul of military parts, weapon
                    systems, and equipment. This work is accomplished by commercial
                    contractors as well as by DOD employees in large industrial depots
                    maintained by the military departments.

                    Factors such as threat changes, new war-fighting plans, force structure
                    reductions, and increased reliability and maintainability of many military
                    systems have significantly reduced depot maintenance requirements over
                    the past few years. Faced with substantial excess depot capacity and high
                    infrastructure costs, DOD has been struggling to implement initiatives to
                    more cost effectively (1) utilize existing maintenance resources at depots
                    and operational units, (2) reduce excess depot maintenance infrastructure,
                    largely by closing depots as a part of the base closure and realignment
                    process, and (3) reallocate workload from closing depots. At the same
                    time, DOD has embarked on the implementation of a depot maintenance
                    strategy that will privatize much of the depot maintenance workload
                    without determining whether privatizing specific depot workloads will
                    result in savings.

                    In previous reports and as a part of our ongoing review of DOD depot
                    maintenance operations and management, GAO has identified the following
                    shortcomings in these initiatives and has highlighted other actions that
                    could be taken to improve the cost-effectiveness of the DOD depot
                    maintenance program.

                    First, DOD has not been successful in achieving an optimal balance
                    between maintenance work performed at operational units and at depots.
                    Cost-benefit evaluations of competing alternatives that consider




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infrastructure, personnel, material, transportation, and equipment
tradeoffs could result in significant savings.

Second, the services continue to rely largely on their own service depots
rather than maximizing interservicing opportunities by consolidating
similar maintenance operations at a single location. On many occasions,
we have pointed out that this approach leads to unnecessary duplication
of resources. A greater use of cross-servicing could eliminate costly
redundancies and excess capacity.

Third, DOD plans to privatize-in-place depot maintenance activities without
evaluating other alternatives such as public-private competitions or
interservicing. Such privatization-in-place initiatives will do little to resolve
the extensive excess capacity problem that currently exists in both public
and private sector industrial facilities and may not be the most
cost-effective solution. An option that could result in substantial savings
would be to reallocate core workload to remaining military depots when
determined to be more cost-effective and use competitive procedures to
include public and private entities to determine the source-of-repair for
noncore workload.

Fourth, DOD is reluctant to use competitions between the public and
private sector to ensure that the privatization of maintenance workloads
will result in savings. While there are opportunities to achieve cost savings
by privatizing depot maintenance workloads which have commercial
counterparts and where there is a substantial private sector competitive
market, it is less likely the private sector will be more cost-effective in an
uncompetitive environment. A greater reliance on public-private
competitions as a means of depot maintenance workload reallocations
could produce significant savings.

Fifth, while the four previous base realignment and closure (BRAC) rounds
have resulted in the identification of four naval shipyards, three naval
aviation depots and two warfare centers, three Air Force depots, and five
Army depots for closure or realignment, significant excess capacity will
remain in the public depot system, particularly if DOD proceeds with its
privatization-in-place plans. Additional closures and/or realignments could
reduce costly excess capacity and produce significant savings.

Sixth, we have reported that reengineering the processes and procedures
for organic workloads that have been subjected to competition resulted in
significant efficiency gains and productivity improvements. Similar



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                       reengineering initiatives for other organic workloads should also result in
                       significant savings.

                       One option the Congress may wish to consider is to direct DOD, prior to
                       privatizing any depot workloads at depots identified by the BRAC for
                       closure or realignment, to complete cost analyses that consider the
                       savings potential of consolidating those BRAC-identified depot maintenance
                       workloads at other DOD depots. Such analyses should include determining
                       savings that can be achieved for existing workloads by reducing overhead
                       rates through more efficient capacity utilization of fixed overhead at
                       underused military depots. The magnitude of savings would depend on the
                       resulting structure and size of the depot maintenance system and
                       workload split between the private and public sectors. CBO agrees that
                       savings would occur but were unable to provide a savings estimate at this
                       time.


Related GAO Products   Defense Infrastructure (GAO/HR-97-7, February 1997).

                       Air Force Depot Maintenance: Privatization-in-Place Plans Are Costly
                       While Excess Capacity Exists (GAO/NSIAD-97-13, December 31, 1996).

                       Depot Maintenance: Opportunities to Privatize Repair of Military Engines
                       (GAO/NSIAD-96-33, March 5, 1996).

                       Closing Maintenance Depots: Savings, Workload and Redistribution Issues
                       (GAO/NSIAD-96-29, March 4, 1996).

                       Navy Maintenance: Assessment of the Public-Private Competition Program
                       for Aviation Maintenance (GAO/NSIAD-96-30, January 22, 1996).

                       Depot Maintenance: The Navy’s Decision To Stop F/A-18 Repairs at Ogden
                       Air Logistics Center (GAO/NSIAD-96-31, December 15, 1995).

                       Military Bases: Analysis of DOD’s 1995 Process and Recommendations for
                       Closure and Realignment (GAO/NSIAD-95-133, April 14, 1995).

                       Aerospace Guidance and Metrology Center: Cost Growth and Other
                       Factors Affect Closure and Privatization (GAO/NSIAD-95-60, December 9,
                       1994).




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              Correspondence to the Chairman, Subcommittee on Readiness, Senate
              Committee on Armed Services, follow-up to April 12, 1994, Depot
              Maintenance Testimony (GAO/NSIAD-94-242R, July 28, 1994).

              Navy Maintenance: Assessment of the Public and Private Shipyard
              Competition Program (GAO/NSIAD-94-184, May 25, 1994).

              Depot Maintenance: Issues in Allocating Workload Between the Public and
              Private Sectors (GAO/T-NSIAD-94-161, April 12, 1994).

              Depot Maintenance: Issues in Management and Restructuring To Support a
              Downsized Military (GAO/T-NSIAD-93-13, May 6, 1993).


GAO Contact   David R. Warren, (202) 512-8412




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Option:
Military Exchange      Authorizing committees                        Armed Services (Senate)
                                                                     National Security (House)
Stores Consolidation   Appropriations subcommittees                  Defense (Senate)
                                                                     National Security (House)
                       Primary agency                                Department of Defense
                       Accounts                                      Multiple
                       Spending type                                 Discretionary
                       Budget subfunction                            Department of Defense—Military
                       Framework theme                               Improve efficiency

                       GAO  reviewed the morale, welfare, and recreation (MWR) program—a
                       $12 billion dollar enterprise that provides service members, their
                       dependents, and eligible civilians with an affordable source of goods and
                       services like those available to civilians—and found that revenue
                       generated by the MWR activities is likely to decrease in the 1990’s because
                       of the downsizing of forces and increasing private sector competition.
                       Appropriated funds—which now constitute 10 percent of MWR
                       funding—are also expected to decline as overall budgets decline.

                       Exchange stores are the largest producer of MWR revenue. The Department
                       of Defense’s (DOD) decentralized approach to managing the MWR program
                       will not work well in this environment. Since 1968, studies by GAO, DOD,
                       and others have recommended the consolidation of exchanges into a
                       single entity. Each study predicted financial benefits could be achieved
                       through consolidation. While the Army and Air Force exchanges have been
                       consolidated, the Navy and Marine Corps retain independent exchanges.
                       Further consolidations could achieve additional savings. For example,
                       consolidating the Navy and Marine Corps exchange systems with the Air
                       Force/Army exchange system would eliminate entire headquarters
                       operations and the corresponding overhead costs. The Congress may wish
                       to direct DOD to consolidate the Navy and Marine Corps exchange systems
                       with the existing Air Force/Army exchange system. CBO estimated that the
                       following 5-year savings might be achieved.

Five-Year Savings
                       Dollars in millions
                                                              FY98     FY99          FY00        FY01    FY02
                       Savings from the 1997 Defense Plan
                       Budget authority                         40        60           60          60       60
                       Outlays                                  30        50           60          60       60
                       Source: Congressional Budget Office.



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Related GAO Product   Morale, Welfare, and Recreation: Declining Funds Require DOD to Take
                      Action (GAO/NSIAD-94-120, February 28, 1994).


GAO Contact           David R. Warren, (202) 512-8412




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Option:
Budgeted Civilian   Authorizing committees                              Armed Services (Senate)
                                                                        National Security (House)
Personnel           Appropriations subcommittees                        Defense (Senate)
Requirements                                                            National Security (House)
                    Primary agency                                      Department of Defense
                    Accounts                                            Multiple
                    Spending type                                       Discretionary
                    Budget subfunction                                  Department of Defense—Military
                    Framework theme                                     Improve efficiency

                    The services determined their civilian personnel requirements for fiscal
                    year 1997 based on the estimated end-strength for fiscal year 1996 adjusted
                    for program changes that are expected to occur during fiscal year 1997.
                    Once the beginning and ending strength for the budget year are
                    determined, the services compute the estimated work years and multiply
                    the result by the average civilian personnel salary cost.11 If fiscal year 1996
                    actual end strength was less than budgeted, the beginning point for
                    determining the fiscal year 1997 requirement was overstated.

                    Based on the actual number of civilian personnel on board as of April 1996
                    for the Navy and other DOD agencies and as of May 1996 for the Army and
                    Air Force, we estimated that the actual end strength at the end of fiscal
                    year 1996—the beginning figure for fiscal year 1997—would be 7,33112 less
                    than the figure used by the services for determining their fiscal year 1997
                    budget request. Because the services used a larger beginning figure, the
                    number of work years used in the budget request is also overstated by
                    3,665 work years ($185.5 million). In addition, our comparison of the
                    civilian personnel requirements shown in the President’s Budget to the
                    justification documents prepared in support of the budget request showed
                    that the budget request was overstated $60 million. Thus, the total
                    overstated personnel requirements equate to about $245.5 million.

                    In view of the overstated personnel requirements, the Congress may want
                    to reduce the services’ fiscal year 1998 budget requests for civilian
                    personnel by the amounts of the overstatements; the Army’s by
                    $33.3 million, the Navy’s by $108.3 million, the Air Force’s by $70 million,
                    and other DOD agencies by $33.9 million.

                    11
                      The average salary cost includes an estimate of funds needed for severance pay and separation
                    incentives purposes as well as for compensation.
                    12
                      This equates to 3,665 work years.



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                      CBO  agrees that the differences in proposed versus actual reductions in
                      personnel creates windfall surpluses in personnel accounts during a single
                      budget year. More accurate reporting and subsequent tightening of the O&M
                      budget may produce savings; however, CBO is unable to estimate a
                      five-year cost savings for this option.


Related GAO Product   1997 DOD Budget: Potential Reductions to Operation and Maintenance
                      Program (GAO/NSIAD-96-220, September 18, 1996).


GAO Contact           Mark E. Gebicke, (202) 512-5140




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Option:
Convert Some            Authorizing committees                 Armed Services (Senate)
                                                               National Security (House)
Support Officer         Appropriations subcommittees           Defense (Senate)
Positions to Civilian                                          National Security (House)
                        Primary agency                         Department of Defense
Status                  Accounts                               Multiple
                        Spending type                          Discretionary
                        Budget subfunction                     Department of Defense—Military
                        Framework theme                        Improve efficiency

                        Commissioned military officers are required to provide leadership and
                        command military organizations. The services use officers in such
                        warfighting positions as infantry commander and fighter pilot and such
                        support positions as civil engineer, personnel officer, and veterinarian.

                        Thousands of officers are staffing positions that could be converted to
                        civilian status without reducing operational forces. GAO evaluated about
                        32,000 officer positions in the Army, Air Force, and Navy (about 30 percent
                        of all officers in support positions), and found that about 9,500 are
                        performing work that could be performed by civilians at lower cost.
                        Independently, the Army identified about 6,100 officer and enlisted
                        positions that it believes could be converted to civilian status and the Air
                        Force found between about 15,200 and about 25,400 officer positions that
                        it believes could be converted.

                        Savings can only be obtained if the military position is deleted from end
                        strength. Also, the savings are partially offset by the need to staff
                        converted positions with civilian personnel, but GAO found that civilians of
                        roughly equal grade are less expensive than corresponding military
                        personnel. GAO did not evaluate the potential to use contractors rather
                        than federal civilians in converted positions although using contractors
                        might produce greater savings.

                        DOD is in the midst of an extensive drawdown of civilian personnel.
                        Military to civilian conversions, however, do not necessarily conflict with
                        plans to reduce the size of government. For example, DOD currently plans
                        to reduce civilian endstrength by 26 percent between fiscal year 1993 and
                        2001. If DOD reduced civilian endstrength by about 25 percent (rather than
                        26 percent), it would have enough civilian authorizations to replace the
                        9,500 officer positions.




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                      If the Congress directed the Department of Defense to civilianize, at a
                      minimum, the 9,500 officer support positions identified by GAO and then
                      maintain the grade structure that existed prior to conversion, the following
                      budget savings could be achieved. These savings assume that the
                      commissioned military officer positions are deleted from DOD’s force.

Five-Year Savings
                      Dollars in millions
                                                      FY98    FY99      FY00         FY01         FY02
                      Savings from the 1997 Defense Plan
                      Budget authority                   97    100        103          106          110
                      Outlays                            95    100        103          106          110
                      Source: Congressional Budget Office.




Related GAO Product   DOD  Force Mix Issues: Converting Some Support Officer Positions to
                      Civilian Status Could Save Money (GAO/NSIAD-97-15, October 23, 1996).


GAO Contact           Mark E. Gebicke, (202) 512-5140




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Option:
Attrition of Enlisted       Authorizing committees                  Armed Services (Senate)
                                                                    National Security (House)
Personnel From the          Appropriations subcommittees            Defense (Senate)
Military Services                                                   National Security (House)
                            Primary agency                          Department of Defense
                            Accounts                                Multiple
                            Spending type                           Discretionary
                            Budget subfunction                      Department of Defense—Military
                            Framework theme                         Improve efficiency

                            For at least the last decade, about one-third of enlistees in the military
                            services have failed to complete their first tours of duty. A large
                            percentage of this attrition occurs in the first 6 months of enlistees’ first
                            terms, before they have reported to their first duty stations. For example,
                            more than 25,000 of the 176,000 recruits who were enlisted in fiscal year
                            1994 were separated before they had completed 6 months of service. In
                            fiscal year 1994, the services’ enlisted attrition rates at the 6-month point
                            were as follows: 15.7 percent for the Army, 15.7 for the Navy, 12.5 for the
                            Marine Corps, and 11.6 for the Air Force.

                            Thousands of recruits are separated in their first 6 months of service
                            because the services do not adequately screen applicants for disqualifying
                            medical conditions or for preservice drug use. One reason that this
                            screening is inadequate is that recruiters do not have sufficient incentives
                            to ensure that their recruits are qualified. Thousands of recruits also are
                            separated who fail to meet minimum performance criteria. Recruits have
                            problems meeting performance standards because they are not physically
                            prepared for basic training and because they lack motivation. At present,
                            DOD lacks consistent and complete information on the percentage of
                            attrition that is unnecessary. DOD’s primary database for managing attrition
                            does not allow it to adequately determine the reasons that enlisted recruits
                            separate and set appropriate targets for reducing attrition.

                            In our recently issued report, to reduce the attrition of enlisted personnel
                            during the first 6 months of their terms of enlistment and ensure that only
                            qualified personnel are enlisted, we recommended that the Secretary of
                            Defense direct the services to

                        •   strengthen their recruiter incentive programs to encourage recruiters to
                            thoroughly prescreen potential recruits with medical histories;




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•   link recruiting quotas to recruits’ successful completion of basic training;
•   require potential recruits to provide the names of their medical insurers
    and providers and allow the services access to past medical information;
•   revise their forms for collecting information from recruits; and
•   use a newly proposed DOD database of medical diagnostic codes to
    determine whether medical screening tests should be added to
    preenlistment examinations.

    The recommendations, if implemented would help the services meet their
    goals to reduce attrition in the first 6 months.

    All the services agree that reducing early attrition is desirable. To this end,
    three services have attrition-reducing targets ranging from 4 to 10 percent.
    If the services reach their goals, they would realize immediate short-term
    annual savings because they would be transporting, feeding, clothing, and
    paying fewer recruits. We estimated short-term annual savings would
    range from around $5 million to $12 million. Even greater dollar savings
    could be realized over time as the services began to reduce the
    infrastructure associated with recruiting and training enlistees. We
    estimated the services possible long-term infrastructure savings could
    range from $15 million to $39 million. However, these long-term savings
    probably would not be proportional to the decrease in attrition.13

    CBO could not provide a 5-year cost savings that might occur if DOD
    reduced enlisted attrition by at least 4 percent because of limitations with
    DOD’s and the services’ attrition data. However, CBO was able to calculate
    an estimated cost savings that might result if DOD and the services reduced
    those attritions that result from inadequate medical screenings designed to
    identify pre-existing conditions. Those estimated cost savings are shown in
    the table below.




    13
      GAO’s short-term cost savings are based on cost data provided by the Navy and includes the cost to
    transport a recruit to basic training; pay, feed, and house the recruit while at basic training; provide the
    recruit’s medical examination while at basic training; and transport the recruit home after separation.
    Long-term cost savings are based on cost data provided by the Office of the Secretary of Defense and
    includes the cost of recruiting and training each new recruit up to the 6-month point in their first
    terms.



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Five-Year Savings
                      Dollars in millions
                                                             FY98   FY99     FY00        FY01       FY02
                      Savings from the 1997 Defense Plan
                      Budget authority                          5      5         5           6          6
                      Outlays                                   5      5         5           6          6
                      Source: Congressional Budget Office.




Related GAO Product   Military Attrition: DOD Could Save Millions by Better Screening Enlisted
                      Personnel (GAO/NSIAD-97-39, January 6, 1997).


GAO Contact           Mark E. Gebicke, (202) 512-5140




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Option:
Army National Guard   Authorizing committees                  Armed Services (Senate)
                                                              National Security (House)
Divisions             Appropriations subcommittees            Defense (Senate)
                                                              National Security (House)
                      Primary agency                          Department of Defense
                      Accounts                                Multiple
                      Spending type                           Discretionary
                      Budget subfunction                      Department of Defense—Military
                      Framework theme                         Improve efficiency

                      In March 1996, we reported that the Army National Guard’s combat
                      structure, with 42 combat brigades, exceeds projected requirements for
                      two major regional conflicts, according to war planners and Department of
                      Defense (DOD) and Army studies. Although the National Guard has state
                      missions in addition to its federal role, RAND studied the use of Guard
                      forces for state missions and concluded that even in a peak year, such
                      missions would not require a large portion of the Guard and therefore
                      should not be used as a basis for sizing the Guard’s force.

                      In our report, we noted that the Army has a shortage of support troops for
                      a two regional conflict strategy and was studying alternatives to redesign
                      the Guard’s combat structure to meet critical shortages that the Army
                      identified in its support capabilities. We recommended that the Secretary
                      of Defense validate the size and structure of all the Guard’s combat forces
                      and that the Secretary of the Army prepare and execute a plan to bring the
                      size and structure in line with validated requirements. We further
                      recommended that the Secretary of Defense consider eliminating Guard
                      forces that exceed validated requirements. DOD’s Commission on Roles
                      and Missions had similar recommendations in their report.

                      In January 1997, we reported on the study to redesign the Guard’s combat
                      structure. We stated that the study developed an option that provides for
                      the conversion of some Guard combat and supporting forces to fill
                      needed, but unresourced, support requirements. However, neither this
                      study nor other studies deal with the critical issues of validating the need
                      for the remaining Guard combat structure or eliminating any excess
                      forces. As a result, substantial Guard combat structure is left in place that
                      has no valid war fighting missions. We recommended that the Secretary of
                      Defense, as he guides the Quadrennial Defense Review, direct that the
                      Review process validate any requirement for Guard combat structure. We




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                       further recommended that once this validation is complete, the Secretary
                       of Defense, in concert with the Secretary of the Army, eliminate any
                       structure beyond validated requirements.

                       If the validation process determines that there is structure beyond
                       validated needs, savings could be achieved by eliminating those excess
                       forces. For example, the following savings could be achieved, if the
                       equivalent of one division were eliminated from the force structure.

Five-Year Savings
                       Dollars in millions
                                                                  FY98          FY99          FY00          FY01          FY02
                       Savings from the 1997 Defense Plan
                       Budget authority                             117           240           245           252           259
                       Outlays                                      105           225           242           248           255
                       Note: For estimating purposes, CBO used the cost of an armored division. Since the Army has
                       identified a shortage in its support forces, this option would retain all support personnel indirectly
                       associated with the eliminated division. The elimination of each additional division would yield
                       more or less savings, depending on the type of division eliminated.

                       Source: Congressional Budget Office.




Related GAO Products   Army National Guard: Planned Conversions Are A Positive Step, but
                       Unvalidated Combat Forces Remain (GAO/NSIAD-97-55BR, January 29, 1997).

                       Army National Guard: Validate Requirements for Combat Forces and Size
                       Those Forces Accordingly (GAO/NSIAD-96-63, March 14, 1996).


GAO Contact            Richard Davis, (202) 512-4032




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Option:
Junior Reserve       Authorizing committees                Armed Services (Senate)
                                                           National Security (House)
Officers’ Training   Appropriations subcommittees          Defense (Senate)
Corps                                                      National Security (House)
                     Primary agency                        Department of Defense
                     Accounts                              Operation and Maintenance—Army, Navy,
                                                           Marine Corps, and Air Force
                     Spending type                         Discretionary
                     Budget subfunction                    Department of Defense—Military
                     Framework theme                       Reassess objectives

                     The National Defense Act of 1916 established the Junior Reserve Officers’
                     Training Corps (JROTC) program for high schools and private secondary
                     schools. The program’s primary purpose was to disseminate military
                     knowledge among the secondary school population of the United States.
                     The ROTC Vitalization Act of 1964 expanded the program and required the
                     Secretary of each military department to establish and maintain JROTC
                     units. In the wake of the August 1992 Los Angeles riots, the President and
                     the Chairman of the Joint Chiefs of Staff made plans to double the size of
                     the program within 5 years.

                     The Army, Navy, Marine Corps, and Air Force Operation and Maintenance
                     (O&M) budget requests for fiscal year 1997 included $135.3 million for the
                     JROTC program. This program was in place in over 2,300 high schools in
                     economically disadvantaged areas, affluent areas, private schools, and
                     Department of Defense (DOD) dependent schools at the time of our review
                     in 1996. The program objectives are to teach military and citizenship
                     subjects. The JROTC program is essentially a “stay in school” program. In
                     addition, the Army runs a summer camp and O&M funds are used to help
                     pay instructors’ salaries. Service officials emphasized that JROTC is not
                     viewed as a recruiting tool.

                     In our September 1995 report we stated that while the program may
                     provide worthwhile benefits to the community and the public in general,
                     the question is whether DOD should be involved in funding this type
                     program or if the program should be funded by a non-DOD appropriation
                     account. Congress may wish to discontinue or phase out the program. If
                     the program was eliminated, the following savings could be achieved.




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Five-Year Savings
                      Dollars in millions
                                                             FY98   FY99     FY00        FY01       FY02
                      Savings from the 1997 Defense Plan
                      Budget authority                        170    170       180        180         190
                      Outlays                                 130    160       170        180         180
                      Source: Congressional Budget Office.




Related GAO Product   1996 DOD Budget: Potential Reduction to Operation and Maintenance
                      Program (GAO/NSIAD-95-200BR, September 26, 1995).


GAO Contact           Mark E. Gebicke, (202) 512-5140




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Option:
DOD’s Acquisition   Authorizing committees                 Armed Services (Senate)
                                                           National Security (House)
Workforce           Appropriations subcommittees           Defense (Senate)
                                                           National Security (House)
                    Primary agency                         Department of Defense
                    Accounts                               Multiple
                    Spending type                          Discretionary
                    Budget subfunction                     Department of Defense—Military
                    Framework theme                        Improve efficiency

                    In November 1995, GAO reported that the Department of Defense (DOD) had
                    a combined acquisition workforce of about 464,000—398,000 civilians and
                    66,000 military personnel in fiscal year 1994. The DOD acquisition
                    infrastructure consumes enormous resources that could otherwise be
                    utilized to meet modernization needs. In 1994, DOD’s civilian acquisition
                    workforce was 12 percent lower than in 1980; however, these personnel
                    reductions have not resulted in a commensurate decline in civilian payroll
                    costs. This is due in part to the significant decline in blue-collar workers
                    and an increase in white-collar workers. In addition, DOD officials stated
                    that civilian payroll costs increased because of other factors, such as the
                    advent of locality pay and changes in grade structure.

                    Despite declines in both the defense procurement budget and the civilian
                    workforce since 1990, the number of acquisition organizations remains
                    relatively constant. Each acquisition organization maintains similar
                    occupational fields in common areas, such as personnel, budgeting,
                    computer specialists, and contracting, and many of the duties performed
                    in these occupations are not unique to an acquisition organization’s
                    mission. As a result, there are significant opportunities to improve
                    efficiencies in these areas, such as consolidating, cross-servicing, and
                    streamlining certain functions.

                    The National Defense Authorization Act for Fiscal Year 1996 contains a
                    provision (Title IX, section 906) that required DOD to provide a plan to
                    reduce the number of personnel (both military and civilian) assigned to
                    defense organizations by 25 percent, or 90,000 personnel over a 4-year
                    period. The provision also required an actual reduction of 15,000
                    personnel during fiscal year 1996. In addition, the Defense Authorization
                    Act for 1997 reemphasized congressional commitment to realizing
                    significant reductions and increased efficiencies from the defense




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                       acquisition infrastructure. Although the 1997 Act requires a specific
                       reduction of 15,000 in the number of personnel assigned to defense
                       acquisition organizations during fiscal year 1997, it also directs DOD to
                       assess the impact of the reductions prior to consideration of further cuts.
                       Stopping at the 30,000 person reduction level would amount to only
                       one-third of the total 25-percent reduction required by Title-IX, section
                       906.

                       The savings from a 90,000 person reduction in civilian personnel salaries
                       alone are estimated in the following table.

Five-Year Savings
                       Dollars in millions
                                                       FY98    FY99       FY00         FY01         FY02
                       Savings from the 1997 Defense Plan
                       Budget authority                  805   1,657      2,556        3,513        3,636
                       Outlays                           781   1,631      2,529        3,485        3,633
                       Source: Congressional Budget Office.




Related GAO Products   Defense Acquisition Organizations: Changes in Cost and Size of Civilian
                       Workforce (GAO/NSIAD-96-46, November 13, 1995).

                       Defense Infrastructure: Budget Estimates for 1996-2001 Offer Little
                       Savings for Modernization (GAO/NSIAD-96-131, April 4, 1996).


GAO Contact            Louis J. Rodrigues, (202) 512-4841




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Option:
DOD’s Finance and   Authorizing committees                 Armed Services (Senate)
                                                           National Security (House)
Accounting          Appropriations subcommittees           Defense (Senate)
Infrastructure                                             National Security (House)
                    Primary agency                         Department of Defense
                    Accounts                               Multiple
                    Spending type                          Discretionary
                    Budget subfunction                     Department of Defense—Military
                    Framework theme                        Improve efficiency

                    After several false starts, in May 1994 the Department of Defense (DOD)
                    announced it would begin consolidating and reducing the size of its
                    finance and accounting infrastructure during fiscal year 1995. It plans to
                    reduce the number of sites where finance and accounting activities are
                    conducted from over 300 to 26, which will result in a major reduction in
                    staff years. The 26 sites are composed of 5 large existing finance centers
                    and 21 new sites that are called operating locations. To date, 16 operating
                    locations have been opened.

                    Despite these consolidation efforts, additional opportunities exist to
                    reduce the infrastructure and improve the efficiency of finance and
                    accounting operations. In September 1995, we reported that the process
                    DOD used to identify the appropriate size and location of its consolidated
                    operations was flawed. Not only would the planned infrastructure be
                    larger than necessary, but it would also perpetuate the continued use of
                    older, inefficient, and duplicative systems. With fewer people available to
                    support the same operations and systems at fewer locations, the
                    consolidation could degrade, rather than improve, customer service.
                    Moreover, DOD’s plan does not reflect leading-edge business practices and,
                    therefore, may require additional consolidations if business process
                    reengineering techniques are used to identify more productive business
                    practices for DOD finance and accounting operations.

                    Because DOD’s decision to open 21 new operating locations was not based
                    on current or future operating requirements, customer needs, or
                    leading-edge business practices, other consolidation alternatives could
                    produce substantial infrastructure savings. The Defense Finance and
                    Accounting Service (DFAS) Consolidation Task Force showed that savings
                    could occur by retaining the 5 large centers plus 6, 10, or 15 operating
                    locations. The Task Force concluded, however, that 6 new operating




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locations was the best alternative because it would save more money and
allow an optimum consolidation of finance and accounting functions.
Based on this and other factors, we recommended that DOD reassess the
number of operating locations needed to efficiently perform finance and
accounting operations.

DOD’s subsequent reassessment concluded that 16 rather than 21 operating
locations are needed to support its finance and accounting operations.
Because of its interpretation of congressional intent, however, DOD
continues to support the opening of all 21 locations. In presenting this
option, we relied on the analysis performed by the DFAS Consolidation
Task Force which identified 6 as the optimum number of operating
locations.

Recognizing the costs DOD has incurred to open 16 centers, reducing the
number of operating locations from 16 to 6 could achieve savings in
several different ways. First, a reduction in the infrastructure would
require fewer support and management personnel and related items to
operate the locations. Second, military construction funding for sites that
would require extensive renovations would not be necessary. Third, in
anticipation of the efficiencies and service improvements that would be
achieved under DOD’s reengineering and privatization efforts, annual
funding could be reduced 10 to 15 percent. If the Congress was to direct
the Secretary of Defense to reduce the existing 16 locations to 6, as
recommended by the DFAS Consolidation Task Force, the following savings
could be achieved in civilian personnel and military construction. This
represents the optimum consolidation of locations according to the DFAS
Consolidation Task Force. The savings estimate assumes that by reducing
the number of sites to six, 6,500 civilian personnel positions would be
eliminated. This magnitude of personnel reductions can only be attained if
DOD achieves the productivity gains it expects from reengineering and
privatization/outsourcing initiatives. However, the Congress and DOD will
need to reach an agreement on the exact number of operating locations
and reductions in personnel. Moreover, DOD may need to make
investments in this area to improve its financial management systems.




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Five-Year Savings
                      Dollars in millions
                                                             FY98   FY99     FY00        FY01       FY02
                      Savings from 1997 Defense Plan
                      Budget authority                        174    299       369        382         395
                      Outlays                                 171    295       367        381         395
                      Source: Congressional Budget Office.




Related GAO Product   Defense Financial Management (GAO/HR-97-3, February 1997).

                      DOD Infrastructure: DOD’s Planned Finance and Accounting Structure Is Not
                      Well Justified (GAO/NSIAD-95-127, September 18, 1995).


GAO Contact           David R. Warren, (202) 512-8412




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Option:
DOD’s Training   Authorizing committees                 Armed Services (Senate)
                                                        National Security (House)
Infrastructure   Appropriations subcommittees           Defense (Senate)
                                                        National Security (House)
                 Primary agency                         Department of Defense
                 Accounts                               Multiple
                 Spending type                          Discretionary
                 Budget subfunction                     Department of Defense—Military
                 Framework theme                        Improve efficiency

                 Analysis of the Department of Defense’s (DOD) end strengths, training
                 workloads, and overall training budgets between fiscal years 1987 and
                 1995 showed that end strengths and training workloads have decreased at
                 much greater rates than the training budget. Between fiscal years 1987 and
                 1995, the number of Army, Navy, Marine Corps, and Air Force active duty
                 personnel decreased from about 2.2 million to about 1.5 million—a
                 reduction of about 30 percent. During the same period, the training
                 workloads for formal training and education programs decreased from
                 about 248,000 to about 178,000—a reduction of about 28 percent.
                 However, military personnel funding, which is used to pay military
                 students, instructors, and training support and management personnel,
                 decreased by only about 15 percent, and operation and maintenance (O&M)
                 funding, which is used to pay DOD civilian and contractor instructors and
                 to operate, maintain, and support training facilities and equipment,
                 increased about 30 percent.

                 The cost of providing formal military training and education to individuals
                 increased significantly between fiscal years 1987 and 1995. During this
                 period, the training cost per student increased from about $53,194 to
                 $72,546. (After considering the effects of inflation, the cost per student
                 increased about $4,200 a year.) This cost differential when multiplied by
                 the fiscal year 1995 training workload shows that it cost about $745 million
                 more to train students in fiscal year 1995 than it would have taken to train
                 the same number of students in 1987, even after accounting for inflation.
                 Officials told us that the primary reason that training had become more
                 expensive was the increased use of government civilian and private-sector
                 instructors and facilities rather than military instructors.

                 DOD  and the services have completed several actions to reduce the training
                 infrastructure, and even more actions will be implemented over the next




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                      several years. The actions are intended to (1) reduce the number of
                      locations where a particular course is taught, (2) increase interservice
                      training, and (3) increase the use of private sector instructors and
                      facilities. Also, actions by the Base Realignment and Closure (BRAC)
                      Commission to close and realign bases where training is conducted are
                      also expected to reduce the training infrastructure. However, an overall
                      plan to guide and measure the progress of reducing the training
                      infrastructure is lacking.

                      The lack of a management information system with reliable cost data
                      within the various training categories makes it difficult for DOD to evaluate
                      the overall effectiveness of alternate methods of providing training and
                      assess whether actions taken to reduce costs are achieving the expected
                      results. The need for reliable data and a system for evaluating it has
                      become even more critical because excess training infrastructure
                      identified in the future will be difficult to eliminate in the absence of a
                      BRAC-like process.


                      In view of the disparity between training workload and training costs,
                      Congress may want to cap the funding level for O&M-related formal
                      education and training at the fiscal year 1997 level until DOD develops a
                      management plan to guide and measure progress in reducing the training
                      infrastructure.

Five-Year Savings
                      Dollars in millions
                                                             FY98         FY99         FY00        FY01            FY02
                      Savings from the 1997 Defense Plan
                      Budget authority                         144         300          461          635            818
                      Outlays                                  130         281          441          615            797
                      Note: The savings shown in the above table represent the amounts estimated for O&M-related
                      formal education and training above the fiscal year 1997 funding level.

                      Source: Congressional Budget Office.




Related GAO Product   DOD Training: Opportunities Exist to Reduce the Training Infrastructure
                      (GAO/NSIAD-96-93, March 29, 1996).


GAO Contact           Mark E. Gebicke, (202) 512-5140




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Option:
DOD’s Transportation   Authorizing committees                             Armed Services (Senate)
                                                                          National Security (House)
Migration Systems      Appropriations subcommittees                       Defense (Senate)
                                                                          National Security (House)
                       Primary agency                                     Department of Defense
                       Accounts                                           Multiple
                       Spending type                                      Discretionary
                       Budget subfunction                                 Department of Defense—Military
                       Framework theme                                    Reassess objectives

                       In April 1994, DOD developed a structured approach to identify, select, and
                       implement transportation migration systems.14 However, in its haste to
                       meet a March 1997 deadline, DOD selected these systems without fully
                       analyzing alternatives, such as acquiring new systems or contracting for
                       services. Further, in making a quarter of its transportation migration
                       system selections, DOD relied on incomplete and unverified cost data.
                       Finally, DOD did not assess how making significant changes to
                       transportation operations—through reengineering and outsourcing—will
                       affect its migration systems. By relying on such inadequate analyses in
                       making its system selections, DOD essentially gambled that systems
                       migration would achieve anticipated savings and resolve problems with
                       transportation business processes. As a result, its selections may turn out
                       to be poor investments and preclude the use of better commercial
                       alternatives.

                       DOD has little assurance that its selection of 28 transportation migration
                       systems is cost effective. At a minimum, had DOD followed its own
                       regulations and calculated investment returns, it would have
                       found—based on data available when the migration systems were
                       selected—that two of the selected systems would produce a negative
                       return if implemented as migration systems. The Air Loading Module
                       would lose 67 cents out of every dollar invested and the Cargo Movement
                       Operations Systems would lose 4 cents out of every dollar invested.

                       Before proceeding with its systems migration effort, DOD should
                       immediately establish current cost, benefit, investment return, and
                       schedule baselines and terminate the migration of transportation systems
                       for which migration is shown to be a poor investment. For example, if the


                       14
                         A migration system is an automated information system which replaces several systems that perform
                       similar functions.



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                       Air Loading Module and the Cargo Movement Operations Systems were
                       not deployed as migration systems, the following savings could be
                       achieved.

Five-Year Savings
                       Dollars in millions
                                                              FY98   FY99     FY00        FY01       FY02
                       Savings from the 1997 Defense Plan
                       Budget authority                          3      0         0           0          0
                       Outlays                                   2      1         0           0          0
                       Source: Congressional Budget Office.




Related GAO Products   Defense IRM: Strategy Needed for Logistics Information Technology
                       Improvement Efforts (GAO/AIMD-97-6, November 14, 1996).

                       Defense Transportation: Migration Systems Selected Without Adequate
                       Analysis (GAO/AIMD-96-81, August 29, 1996).


GAO Contact            Jack L. Brock, Jr., (202) 512-6240




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Option:
DOD’s Materiel      Authorizing committees                  Armed Services (Senate)
                                                            National Security (House)
Management          Appropriations subcommittees            Defense (Senate)
Migration Systems                                           National Security (House)
                    Primary agency                          Department of Defense
                    Account                                 Defense Business Operations Fund
                                                            (97-4930)
                    Spending type                           Discretionary
                    Budget subfunction                      Department of Defense—Military
                    Framework theme                         Reassess objectives

                    In December 1995, the Department of Defense (DOD) determined that its
                    goal of developing a standard suite of nine integrated systems to improve
                    various aspects of materiel management operations—including asset
                    management, requirements determination, and inventory
                    management—would cost much more than the $5.3 billion originally
                    estimated. DOD abandoned its plan to deploy all nine systems as an
                    integrated suite across all inventory control points and now plans to
                    deploy the systems individually as they are developed at selected sites. It
                    has also embarked on an accelerated deployment schedule to provide
                    these systems from fiscal year 1996 through 1999.

                    As a result, DOD is embarking on a new strategy before taking a number of
                    steps to ensure that the hundreds of millions of dollars to be spent on
                    materiel management systems, as well as the monies already invested,
                    bring positive results. Specifically, DOD did not first conduct economic and
                    risk assessments that would ensure its strategy would be cost-effective.
                    DOD also did not incorporate efforts to improve, consolidate, and privatize
                    logistics operations into its strategy. Such changes will impact the
                    processes the systems are being developed to support. Further, this
                    strategy was not justified within DOD’s own oversight process, nor were
                    documents critical to defining the program’s objectives, costs, goals, and
                    risk mitigation strategies prepared. As a result, DOD decisionmakers were
                    not afforded an opportunity to thoroughly review the new program before
                    deploying new systems.

                    Moreover, DOD is proceeding with deployments under the new strategy
                    without accommodating the time required for testing the new systems.
                    This greatly increases the risk that DOD will experience problems
                    associated with shifting testing to system users and curtailing the levels of




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                       testing normally done. As a result, DOD is likely to incur substantial
                       additional costs to operate and maintain its current systems and to correct
                       deficiencies with the new systems.

                       To provide more timely service, DOD made a major change in its materiel
                       migration system15 policy. In doing so, it is clearly on a course to
                       accelerate system deployments before critical steps are taken that would
                       help ensure that good business decisions are made and that risks are
                       minimized. As a result, DOD is likely to deploy systems that will not be
                       significantly better than the hundreds of systems already in place and
                       could waste millions of dollars resolving problems that result from the
                       lack of developing and implementing a clear and cohesive strategy. Before
                       proceeding with any new strategy, it is imperative that DOD takes the
                       necessary steps to fully define its approach, plan for risks, ensure
                       adequate oversight, and complete testing of the new systems. DOD must
                       also immediately establish current cost, benefit, investment return, and
                       schedule baselines and terminate materiel management migration systems
                       for which migration is shown to be a poor investment.

                       Savings for this option cannot be estimated at this time. The amount of
                       savings would depend on the outcome of DOD’s review of its systems.


Related GAO Products   Defense IRM: Strategy Needed for Logistics Information Technology
                       Improvement Efforts (GAO/AIMD-97-6, November 14, 1996).

                       Defense IRM: Critical Risks Facing New Materiel Management Strategy
                       (GAO/AIMD-96-109, September 6, 1996).


GAO Contact            Jack L. Brock, Jr., (202) 512-6240




                       15
                         A migration system is an automated information system which replaces several systems that perform
                       similar functions.



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Option:
DOD’s Bulk Fuel   Authorizing committees                  Armed Services (Senate)
                                                          National Security (House)
Budgeting         Appropriations subcommittees            Defense (Senate)
                                                          National Security (House)
                  Primary agency                          Department of Defense
                  Accounts                                Multiple
                  Spending type                           Discretionary
                  Budget subfunction                      Department of Defense—Military
                  Framework theme                         Improve efficiency

                  The Defense Fuel Supply Center (DFSC) has the primary responsibility for
                  providing the services with the fuel they need. DFSC purchases the fuel
                  from commercial sources and sells it to the services. Although DFSC is the
                  primary source, the services also buy a small amount of fuel direct from
                  commercial sources. For fiscal year 1996, the Army, Navy, and Air Force
                  budget requests for bulk fuel totaled $4.12 billion. Of this total, the three
                  services planned to buy $107 million, or 2.6 percent, from commercial
                  sources. Therefore, the amount of funds requested to buy fuel from DFSC
                  was about $4.01 billion.

                  At the time that the Department of Defense (DOD) submitted its fiscal year
                  1996 budget request, DFSC estimated that the services would purchase
                  about $3.68 billion of fuel in fiscal year 1996, or about $330 million less
                  than the amount requested. During the authorization and appropriation
                  process, the Congress reduced the budget request $100 million. Based on
                  historical usage data adjusted for factors expected to occur in fiscal year
                  1996, DFSC estimated, in February 1996, that the services’ fuel purchases in
                  fiscal year 1996 would be about $3.57 billion, or about $440 million less
                  than the amount the services requested in their budgets.

                  For fiscal year 1997, the services have again requested more funds for fuel
                  than they will need. The services budgeted for 117.8 million barrels of fuel
                  at a cost of $3.796 billion. However, DFSC estimates that the services will
                  buy 113.2 million barrels at a cost of about $3.613 billion, or $183 million
                  less than the services estimate.

                  Because the over budgeting for bulk fuel seems to be a recurring practice,
                  the Congress may want to reduce the services’ fiscal year 1998 budget
                  requests by the $183 million overbudgeted for fiscal year 1997.




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Five-Year Savings
                       Dollars in millions
                                                              FY98   FY99     FY00        FY01       FY02
                       Savings from the 1997 Defense Plan
                       Budget authority                        183      0         0           0          0
                       Outlays                                 136     36         6           2          1
                       Source: Congressional Budget Office.




Related GAO Products   1997 DOD Budget: Potential Reductions to Operation and Maintenance
                       Program (GAO/NSIAD-96-220, September 18, 1996).

                       DODBulk Fuel: Budgeting for Bulk Fuel and Other Operation and
                       Maintenance Activities (GAO/T-NSIAD-96-208, July 30, 1996).

                       DODBulk Fuel: Services’ Fuel Requirements Could Be Reduced and Funds
                       Used for Other Purposes (GAO/NSIAD-96-96, March 28, 1996).


GAO Contact            Mark E. Gebicke, (202) 512-5140




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Option:
Navy Financial        Authorizing committees                  Armed Services (Senate)
                                                              National Security (House)
Management of         Appropriations subcommittees            Defense (Senate)
Operating Materials                                           National Security (House)
                      Primary agency                          Department of Defense
and Supplies          Account                                 Operations and Maintenance, Navy
                                                              (17-1804)
                      Spending type                           Discretionary
                      Budget subfunction                      Department of Defense—Military
                      Framework theme                         Improve efficiency

                      The Chief Financial Officers Act of 1990, as amended, requires that each
                      agency Chief Financial Officer (CFO) develop an integrated agency
                      accounting and financial management system that complies with
                      applicable principles and standards and provides for complete, reliable,
                      consistent, and timely information that is responsive to the agency’s
                      financial information needs. The act also specifies that each agency CFO
                      should direct, manage, and provide policy guidance and oversight of asset
                      management systems, including inventory management and control.

                      Our broad-based review of various aspects of the Department of the
                      Navy’s financial management operations and its ability to meet the
                      management and reporting requirements of the CFO Act identified
                      numerous deficiencies. These deficiencies can have significant budgetary
                      implications. For example, we found that, because of inadequate systems,
                      Navy item managers did not have sufficient visibility over $5.7 billion in
                      operating materials and supplies on ships and at 17 Navy redistribution
                      sites. About $883 million, 15 percent of the $5.7 billion, was excess to
                      current operating allowances or needs.

                      Lacking adequate visibility, item managers incurred unnecessary costs of
                      approximately $27 million in the first half of fiscal year 1995 as a result of
                      ordering or purchasing items that were already on-hand at operating
                      locations and classified as excess. Also, our analysis of planned purchases
                      through the end of fiscal year 1997 showed that the Navy could incur an
                      estimated additional $38 million in unnecessary costs by procuring items
                      which are already in operating level stock as excess.

                      We recommended that the Navy could achieve savings by providing item
                      managers with full visibility over such materials and eliminating redundant




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                       or unnecessary redistribution sites. Almost half of the excess items were
                       stored at the Navy’s 17 redistribution sites. These sites are often located in
                       the same general area as other DOD suppliers. Eliminating the 17 sites
                       would reduce associated operating costs by $3 million annually and could
                       reduce redundant supply operations and streamline visibility efforts.

Five-Year Savings
                       Dollars in millions
                                                              FY98   FY99     FY00        FY01       FY02
                       Savings from the 1997 Defense Plan
                       Budget authority                          3      3         3           3          3
                       Outlays                                   2      3         3           3          3
                       Source: Congressional Budget Office.




Related GAO Products   Defense Financial Management (GAO/HR-97-3, February 1997).

                       Navy Financial Management: Improved Management of Operating
                       Materials and Supplies Could Yield Significant Savings (GAO/AIMD-96-94,
                       August 16, 1996).

                       CFOAct Financial Audits: Navy Plant Property Accounting and Reporting Is
                       Unreliable (GAO/AIMD-96-65, July 8, 1996).

                       Financial Management: Control Weaknesses Increase Risk of Improper
                       Navy Civilian Payroll Payments (GAO/AIMD-95-73, May 8, 1995).


GAO Contact            Lisa G. Jacobson, (202) 512-9542




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Option:
Copayments for Care     Authorizing committees                 Armed Services (Senate)
                                                               National Security (House)
in Military Treatment   Appropriations subcommittees           Defense (Senate)
Facilities                                                     National Security (House)
                        Primary agency                         Department of Defense
                        Account                                Defense Health Program (97-0130)
                        Spending type                          Discretionary
                        Budget subfunction                     Department of Defense—Military
                        Framework theme                        Redefine beneficiaries

                        Numerous GAO reports and testimonies have documented the problems of
                        controlling costs in the military health service system. In particular, we
                        have reported that currently care received by military beneficiaries in
                        military hospitals and clinics is free. However, when care must be
                        obtained through civilian providers, military beneficiaries share in the
                        costs of the care they receive. This uneven system has led to confusion,
                        uncertainty, and inequity among beneficiaries as to what their health care
                        benefits are. Further, research has shown that free care leads to greater
                        (and unnecessary) use and, therefore, greater costs.

                        The Department of Defense (DOD) managed care system—TRICARE—is
                        intended to make health care benefits uniform regardless of venue, but
                        some cost sharing is still based on where patients receive their care. Under
                        TRICARE, beneficiaries pay the same enrollment fees whether they are
                        enrolled with a military or civilian primary care manager. However,
                        subsequent cost-sharing—in the form of copays for visits—is still not
                        required for care provided in military clinics but is required for care from
                        civilian providers.

                        The Congress may wish to establish beneficiary cost-sharing requirements
                        in military facilities that are similar to the cost sharing for care that
                        beneficiaries receive from civilian providers. CBO estimates that such a
                        change would result in the following savings.




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Five-Year Savings
                       Dollars in millions
                                                              FY98      FY99        FY00       FY01       FY02
                       Savings from the 1997 funding level
                       Budget authority                        305        300        302        305         307
                       Outlays                                 258        292        298        303         305
                       Savings from the 1997 funding level adjusted for inflation
                       Budget authority                        305        300        302        305         307
                       Outlays                                 258        292        298        303         305
                       Source: Congressional Budget Office.




Related GAO Products   Defense Health Care: New Managed Care Plan Progressing, but Cost and
                       Performance Issues Remain (GAO/HEHS-96-128, June 14, 1996).

                       Defense Health Care: Despite TRICARE Procurement Improvements,
                       Problems Remain (GAO/HEHS-95-142, August 3, 1995).

                       Defense Health Care: DOD’s Managed Care Program Continues to Face
                       Challenges (GAO/T-HEHS-95-117, March 28, 1995).

                       Defense Health Care: Issues and Challenges Confronting Military Medicine
                       (GAO/HEHS-95-104, March 22, 1995).

                       Defense Health Care: Lessons Learned From DOD’s Managed Health Care
                       Initiatives (GAO/T-HRD-93-21, May 10, 1993).

                       Defense Health Care: Obstacles in Implementing Coordinated Care
                       (GAO/T-HRD-92-24, April 7, 1992).

                       Defense Health Care: Implementing Coordinated Care—A Status Report
                       (GAO/HRD-92-10, October 3, 1991).

                       The Military Health Services System—Prospects for the Future
                       (GAO/T-HRD-91-11, March 14, 1991).


GAO Contact            Stephen P. Backhus, (202) 512-7111




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Option:
Administering         Authorizing committees                  Armed Services (Senate)
                                                              National Security (House)
Defense Health Care   Appropriations subcommittees            Defense (Senate)
                                                              National Security (House)
                      Primary agency                          Department of Defense
                      Account                                 Defense Health Program (97-0130)
                      Spending type                           Discretionary
                      Budget subfunction                      Department of Defense—Military
                      Framework theme                         Improve efficiency

                      Each of the three military departments (Army, Navy, and Air Force)
                      operates its own health care system, providing medical care to active duty
                      personnel, their dependents, retirees, and survivors of military personnel.
                      To a large extent, these systems perform many of the same administrative,
                      management, and operational functions.

                      Since 1949 over 22 studies have reviewed whether a central entity should
                      be created within the Department of Defense (DOD) for the centralized
                      management and administration of the three systems. Most of these
                      studies encouraged some form of organizational consolidation. A Defense
                      health agency would consolidate the three military medical systems into
                      one centrally managed system, eliminating duplicate administrative,
                      management, and operational functions. No specific budget estimate can
                      be developed until numerous variables, such as the extent of consolidation
                      and the impact on command and support structures, are determined.

                      DOD’s  implementation of a systemwide managed care program—
                      TRICARE—adds to the advantages to be gained by eliminating the separate
                      medical systems within the department. DOD has divided the country into
                      12 regions, each with its own administrative staff headed by a Lead Agent.
                      These Lead Agents have the responsibility for administering TRICARE in
                      their regions. However, because all of the operational control over medical
                      facilities is still with the separate services, the Lead Agents do not have the
                      command and control authority to manage the medical care delivered
                      directly by DOD, which is most of the care received by military health care
                      beneficiaries. Presumably, a single Defense health agency would
                      incorporate this new regional structure and give Lead Agents genuine
                      control over all DOD care in their regions.




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Related GAO Products   Defense Health Care: New Managed Care Plan Progressing, but Cost and
                       Performance Issues Remain (GAO/HEHS-96-128, June 14, 1996).

                       Defense Health Care: Medicare Costs and Other Issues May Affect
                       Uniformed Services Treatment Facilities’ Future (GAO/HEHS-96-124, May 17,
                       1996).

                       Defense Health Care: Effects of Mandated Cost Sharing on Uniformed
                       Services Treatment Facilities Likely to Be Minor (GAO/HEHS-96-141, May 13,
                       1996).

                       Defense Health Care: Despite TRICARE Procurement Improvements,
                       Problems Remain (GAO/HEHS-95-142, August 3, 1995).

                       Defense Health Care: DOD’s Managed Care Program Continues to Face
                       Challenges (GAO/T-HEHS-95-117, March 28, 1995).

                       Defense Health Care: Issues and Challenges Confronting Military Medicine
                       (GAO/HEHS-95-104, March 22, 1995).

                       Defense Health Care: Lessons Learned From DOD’s Managed Health Care
                       Initiatives (GAO/T-HRD-93-21, May 10, 1993).

                       Defense Health Care: Obstacles in Implementing Coordinated Care
                       (GAO/T-HRD-92-24, April 7, 1992).

                       Defense Health Care: Implementing Coordinated Care—A Status Report
                       (GAO/HRD-92-10, October 3, 1991).

                       The Military Health Services System—Prospects for the Future
                       (GAO/T-HRD-91-11, March 14, 1991).


GAO Contact            Stephen P. Backhus, (202) 512-7111




                       Page 90                                      GAO/OCG-97-2 Addressing the Deficit
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Option:
Uniformed Services   Authorizing committees                  Armed Services (Senate)
                                                             National Security (House)
University of the    Appropriations subcommittees            Defense (Senate)
Health Sciences                                              National Security (House)
                     Primary agency                          Department of Defense
                     Accounts                                Multiple
                     Spending type                           Discretionary
                     Budget subfunction                      Department of Defense—Military
                     Framework theme                         Improve efficiency

                     With the end of the draft in 1972, the military services needed new ways to
                     obtain active duty physicians. To address this need, Public Law 92-426
                     established two complementary programs: the Health Profession
                     Scholarship Program and the Uniformed Services University of the Health
                     Sciences (USUHS), a medical school operated by DOD.

                     Under the scholarship program, DOD pays tuition and fees, plus a monthly
                     stipend for students enrolled in civilian medical schools. In return, the
                     students incur an obligation to serve a year of active duty for each year of
                     benefits received, with a 2-year minimum obligation. Upon graduation,
                     most scholarship program participants go on active duty and begin
                     graduate medical education (GME) in military hospitals. In 1994, 987
                     scholarship program participants graduated from medical school.

                     Students at USUHS enter active military service as medical students, receive
                     the pay and benefits of officers at the O-1 level, and incur 7-year service
                     obligations. In 1994, 155 medical students graduated from the University.
                     Overall, USUHS graduates represent about 14 percent of military physicians
                     on active duty.

                     In the 2 decades since its legislative establishment, proposals have been
                     made to close USUHS. Those who propose closing the University assert that
                     DOD’s need for physicians can be met at a lower cost using physicians
                     educated at civilian medical schools under the DOD scholarship program.
                     GAO’s analysis shows that USUHS is a more costly source of military
                     physicians on a per graduate basis when DOD’s and total federal costs are
                     considered. With DOD education and retention costs of about $3.3 million
                     over the course of a physician’s career, the cost of a University graduate is
                     more than 2 times greater than the $1.5 million cost for a scholarship
                     program graduate. However, GAO estimates show that the annual costs of




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USUHS graduates ($182,000) are comparable to scholarship graduates
($181,000) when total federal costs are amortized over the expected years
of military service because USUHS graduates are expected to have longer
military careers and the University receives less non-DOD federal support
than civilian medical schools. USUHS graduates are expected to serve for
about 18.5 years, on average, while scholarship program physicians serve
for 9.8 years, on average.

Those who propose retaining the University assert that it is needed to
provide a stable cadre of physicians trained to meet the unique demands
of military medicine. GAO’s analysis shows that USUHS provides a medical
education that compares well with that of other U.S. medical schools.
However, while USUHS graduates begin their military medical careers with
more readiness training than their peers, the significance of the additional
training is unclear.

In addition, to help meet standards required for accreditation as an
academic institution, USUHS provides education and training for other
health care and related professions and engages in research, consultation,
and archival activities. While these activities do not directly contribute to
the education of military physicians, they do involve USUHS faculty and
staff, and University officials believe that DOD would continue to conduct
these activities even if USUHS is closed. USUHS officials estimated the value
of these activities to be about $18.6 million—a figure that GAO did not
validate.

Given the changes in operational scenarios and DOD’s approach for
delivering peacetime health care, new assessments of the military’s
physician needs and the means to acquire and retain physicians are in
order. If DOD continues to need a cadre of experienced career physicians,
alternative strategies, such as an additional scholarship option with a
longer service obligation, could be considered as a potentially less
expensive way to increase the length of selected military physicians’
careers.

This option assumes that (1) the University would close at the end of fiscal
year 2000 after the current freshman class graduates, (2) the scholarship
program would be expanded to offset the loss of physicians trained at
USUHS, and (3) scholarship program participants incur a 2-year service
obligation for each year of benefits received.




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Five-Year Savings
                      Dollars in millions
                                                             FY98      FY99       FY00        FY01       FY02
                      Savings from 1997 funding level
                      Budget authority                         17         32         45          83         81
                      Outlays                                  14         28         42          76         79
                      Savings from 1997 funding levels adjusted for inflation
                      Budget authority                         19         37         53          94         94
                      Outlays                                  16         33         49          86         92
                      Source: Congressional Budget Office.




Related GAO Product   Military Physicians: DOD’s Medical School and Scholarship Program
                      (GAO/HEHS-95-244, September 29, 1995).


GAO Contact           Stephen P. Backhus, (202) 512-7111




                      Page 93                                               GAO/OCG-97-2 Addressing the Deficit
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Option:
Uniformed Services     Authorizing committees                               Armed Services (Senate)
                                                                            National Security (House)
Treatment Facilities   Appropriations subcommittees                         Defense (Senate)
                                                                            National Security (House)
                       Primary agency                                       Department of Defense
                       Account                                              Defense Health Program (97-0130)
                       Spending type                                        Discretionary
                       Budget subfunction                                   Department of Defense—Military
                       Framework theme                                      Redefine beneficiaries

                       In 1982, the Congress enacted legislation that designates nine former
                       Public Health Service hospitals now under civilian ownership as
                       Uniformed Services Treatment Facilities (USTF) and makes them part of
                       the Department of Defense’s (DOD) health care system. Between 1994 and
                       1997, DOD has spent over $1.3 billion on noncompetitive, set-aside
                       contracts with the USTFs to deliver health care to what now totals about
                       124,000 beneficiaries. This arrangement with DOD has guaranteed the USTFs,
                       in addition to their private health care business, a stable revenue source by
                       enabling them to provide care to uniformed services beneficiaries. The
                       USTFs offer their members the full Civilian Health and Medical Program of
                       the Uniformed Services (CHAMPUS)16 benefit package plus additional
                       preventive services not covered by CHAMPUS. But unlike CHAMPUS, USTF
                       members do not lose their eligibility when they reach age 65 and become
                       Medicare-eligible. At the beginning of fiscal year 1996, 22 percent (about
                       27,000) of the USTF members were Medicare-eligible.

                       GAO  and others have reported that the USTFs are not as cost-effective as
                       alternative federal sources of health care. The Institute for Defense
                       Analyses estimated that the USTFs cost the government $110 million more
                       per year than what costs would be if the beneficiaries had to rely on the
                       current military health services system and Medicare for their care. Also,
                       the Institute reported that high numbers of USTF beneficiaries have private
                       insurance coverage, and GAO found that many are receiving Medicare
                       services outside the USTF, even though DOD has already paid the USTFs in
                       advance for all USTF members’ care. In response to GAO’s

                       16
                         CHAMPUS is a fee-for-service health insurance program that pays for a substantial part of the health
                       care that civilian hospitals, physicians, and others provide to nonactive duty DOD beneficiaries. DOD
                       is in the process of changing its military health services system from the separate systems of direct
                       care in military facilities and CHAMPUS to TRICARE, a nationwide managed care program. TRICARE
                       involves managing beneficiary care using all available military hospitals and clinics, supplemented by
                       contracted civilian services. TRICARE offers CHAMPUS-eligible beneficiaries choice between three
                       benefit plans—fee for service, preferred provider, and health maintenance organization.



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                       recommendations, DOD and the Health Care Financing Administration have
                       recently estimated about $33 million in unnecessary costs to the
                       government from USTF members’ use of Medicare between October 1993
                       and December 1995.

                       The Congress included reforms in the fiscal year 1997 DOD authorization
                       act to reduce the relative costliness of the USTFs compared with alternative
                       programs, such as military hospitals, TRICARE, and Medicare. However,
                       before any savings can be realized, DOD must complete new sole-source
                       contract negotiations with each USTF. An immediate, cost-effective, and
                       equitable option would be to terminate the USTF program by repealing the
                       hospitals’ status as designated, sole-source providers of DOD health care.
                       Instead, former USTF beneficiaries would be treated the same way all other
                       DOD beneficiaries are treated under DOD’s managed care support contracts
                       and direct care system. Such beneficiaries would retain their eligibility for
                       Medicare-financed care, as well as DOD’s direct care system. And, as noted
                       above, a high number of such beneficiaries already have private insurance.
                       Ending the USTFs’ current sole-source, noncompetitive contractual
                       relationship with DOD would remove their decided business advantage over
                       other, competitive TRICARE providers.

Five-Year Savings
                       Dollars in millions
                                                              FY98      FY99        FY00       FY01       FY02
                       Savings from the 1997 funding level
                       Budget authority                        118        107         95          81         71
                       Outlays                                 118        107         95          81         71
                       Savings from the 1997 funding level adjusted for inflation
                       Budget authority                        121        122        123        128         128
                       Outlays                                 121        122        123        128         128
                       Source: Congressional Budget Office.




Related GAO Products   Defense Health Care: Medicare Costs and Other Issues May Affect
                       Uniformed Services Treatment Facilities’ Future (GAO/HEHS-96-124, May 17,
                       1996).

                       Defense Health Care: Effects of Mandated Cost Sharing on Uniformed
                       Services Treatment Facilities Likely to Be Minor (GAO/HEHS-96-141, May 13,
                       1996).




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              Defense Health Care: Uniformed Services Treatment Facility Health Care
              Program (GAO/HEHS-94-174, June 2, 1994).


GAO Contact   Stephen P. Backhus, (202) 512-7111




              Page 96                                   GAO/OCG-97-2 Addressing the Deficit
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Option:
Department of           Authorizing committees                Energy and Natural Resources (Senate)
                                                              Resources (House)
Energy’s Procurement                                          Commerce (House)
of Laboratory Testing   Appropriations subcommittees          Energy and Water Development
                                                              (Senate and House)
Services                Primary agency                        Department of Energy
                        Account                               Defense Environmental Restoration and
                                                              Waste Management (89-0242)
                        Spending type                         Discretionary
                        Budget subfunction                    Atomic Energy Defense Activities
                        Framework theme                       Improve efficiency

                        Both the Department of Energy (DOE) and the Environmental Protection
                        Agency (EPA) are responsible for large environmental cleanup efforts. A
                        major component of DOE’s cleanup program involves analyses of toxic and
                        radioactive contaminants. DOE has estimated that these analyses may cost
                        the federal government more than $15 billion over the next 30 years. While
                        both agencies analyze nonradioactive organic and inorganic chemicals
                        using some of the same testing methods, the agencies procure these
                        commonly-used analyses in a different manner. EPA centrally contracts for
                        them while DOE employs a decentralized procurement approach that relies
                        heavily on its operating contractors to subcontract for them through
                        commercial laboratories.

                        Under its procurement approach, DOE pays higher prices to its commercial
                        laboratories than EPA does for the same analyses and methods, partly
                        because decentralized purchasing practices do not produce price
                        competition, volume discounts, and compliance with one standard
                        contract format. Also, DOE’s decentralized approach to procuring
                        commonly-used analyses results in duplication of contractor efforts in the
                        award and management of commercial laboratory subcontracts, which
                        adds inefficiencies and increases administrative costs. GAO’s analysis
                        indicates that if DOE contracted for these services through one central
                        procurement function, similar to EPA’s approach, it would receive
                        substantially lower prices from commercial laboratories by consolidating
                        its overall buying power and greatly reduce the inherent duplication in
                        contract award and oversight activities. DOE is currently attempting to
                        contract for these services on a regional basis.




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                      DOE  estimated that laboratory analyses costs are at least 15 percent of its
                      cleanup costs, and in fiscal year 1997, DOE was appropriated about
                      $6 billion for Defense Environmental Restoration and Waste Management.
                      While we believe savings could be achieved through centralization, a
                      5-year savings amount is difficult to estimate for several reasons, including
                      the lack of current and complete data and the extent to which DOE’s prices
                      would be affected by the potential for radioactivity in DOE’s samples.


Related GAO Product   Nuclear Facility Cleanup: Centralized Contracting of Laboratory Analysis
                      Would Produce Budgetary Savings (GAO/RCED-95-118, May 8, 1995).


GAO Contact           Victor S. Rezendes, (202) 512-3841




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                    •   USAID’sHousing Guaranty Program
150 International   •   Excess Real Estate at Overseas Diplomatic Posts
Affairs             •   Overseas Diplomatic Posts
                    •   State Department Functions and Activities
                    •   State Department Support Functions
                    •   TV Marti
                    •   USIA Exchange Programs
                    •   USIA Overseas Posts, Activities, and Cultural Centers
                    •   International Broadcasting
                    •   Risk-Based Exposure Fees for Export-Import Bank
                    •   Export-Import Bank Programs




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Option:
USAID’s Housing    Authorizing committees                  Foreign Relations (Senate)
                                                           International Relations (House)
Guaranty Program   Appropriations subcommittees            Foreign Operations (Senate and House)
                   Primary agency                          Agency for International Development
                   Account                                 Housing Guaranty Program Account
                                                           (72-0401)
                   Spending type                           Discretionary
                   Budget subfunction                      International Development and
                                                           Humanitarian Assistance
                   Framework theme                         Reassess objectives

                   The Foreign Assistance Act of 1961, as amended, authorizes the U.S.
                   Agency for International Development (USAID) to guaranty loans made by
                   U.S. investors to borrowers in developing countries for shelter-related
                   projects. With this authority, USAID operates the Housing Guaranty
                   Program. A long-run goal of this program is to increase shelter for
                   low-income families in developing countries by stimulating local credit
                   institutions to provide the necessary investment capital and other
                   resources. Since 1961, USAID has guarantied over $2.7 billion in loans to 44
                   countries for home construction, mortgages, home improvements, urban
                   infrastructure, and other shelter-related projects.

                   In June 1995, GAO reported that USAID had not achieved the key objectives
                   of the Housing Guaranty Program despite over 30 years of trying. GAO’s
                   analysis showed that U.S.-sponsored housing construction projects had
                   not actually stimulated private investment. Nonetheless, USAID continued
                   to guaranty loans for housing projects under this program. Furthermore,
                   GAO found that USAID does not always know whether the program is
                   benefiting the poor target population. On the contrary, we found
                   numerous instances where the program was benefiting higher-income
                   families. We also reported that many borrowers have defaulted on
                   previous loan payments forcing USAID, as guarantor, to make these
                   payments for them. The fees that USAID charges borrowers do not generate
                   sufficient income to cover these costs.

                   GAO  recommended that the Congress terminate the program. Although
                   defaults on outstanding loan balances could cost USAID in excess of $1
                   billion, CBO estimates that terminating the Housing Guaranty Program
                   would produce $24 million in savings over 5 years.




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Five-Year Savings
                      Dollars in millions
                                                             FY98      FY99        FY00       FY01       FY02
                      Savings from the 1997 funding level
                      Budget authority                          4          4          4           5          5
                      Outlays                                   0          1          2           3          3
                      Savings from the 1997 funding level adjusted for inflation
                      Budget authority                          4          5          5           5          5
                      Outlays                                   0          1          2           3          4
                      Source: Congressional Budget Office.




Related GAO Product   Foreign Housing Guaranty Program: Financial Condition Is Poor and
                      Goals Are Not Achieved (GAO/NSIAD-95-108, June 2, 1995).


GAO Contact           Benjamin F. Nelson, (202) 512-4128




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Option:
Excess Real Estate at   Authorizing committees                  Foreign Relations (Senate)
                                                                International Relations (House)
Overseas Diplomatic     Appropriations subcommittees            Commerce, Justice, State, the Judiciary,
Posts                                                           and Related Agencies (Senate and House)
                        Primary agency                          Department of State
                        Account                                 Security and Maintenance of U.S. Missions
                                                                (19-0535)
                        Spending type                           Discretionary
                        Budget subfunction                      Conduct of Foreign Affairs
                        Framework theme                         Reassess objectives

                        The Department of State has millions of dollars invested in overseas
                        properties that may be unneeded or too expensive to maintain. Proper
                        management of the sale of these assets could generate considerable
                        revenue. State’s process for selling unneeded real estate requires weighing
                        multiple factors presented by different groups with competing interests.
                        Resistance from the host government can add further to delays in selling
                        these properties. Resolving these differences often stalls potential sales for
                        years. Furthermore, State has the authority to retain and use the proceeds
                        from real estate sales for other facilities’ needs without specific approval
                        from the Office of Management and Budget (OMB) or the Congress. The
                        Congress did not appropriate funds for any new facilities in fiscal year
                        1997; therefore, State will likely use sales receipts for that purpose. To
                        reduce the deficit, the Congress would have to restrict the proceeds from
                        the asset sales from reverting to the State Department.

                        As of October 1995, State had a list of over 100 properties for potential sale
                        valued at $467 million, including high-value properties in Manila, Paris,
                        Singapore, and Bangkok. In addition, our review of State’s records
                        identified other properties not on the list that potentially could be sold,
                        including properties at closed posts in Zanzibar, Tanzania, and Alexandria,
                        Egypt; and properties that are vacant or unsuitable for the purposes for
                        which they were acquired including high-value properties in Hamilton,
                        Bermuda, and Buenos Aires, Argentina.

                        The 104th Congress endorsed our recommendation that the Department of
                        State establish an independent panel to review and recommend the sale of
                        real estate. The panel could review the list identified by State as well as
                        properties identified in our report or by other sources. If State establishes
                        a panel to review and sell only those properties it has identified, and if the




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                    Congress specifically restricted the proceeds from reverting back to the
                    State Department, CBO estimates that $150 million in assets could be
                    generated and earmarked for deficit reduction over the next five years. We
                    believe that substantial additional revenues could be generated through
                    the sale of other assets, such as the property in Hamilton, Bermuda, and
                    Buenos Aires, Argentina.

                    In addition, in 1995 we reported that certain high-value properties in
                    Tokyo are unneeded. Our analysis demonstrated the feasibility of—and
                    identified options for—selling portions of this property. For example,
                    selling the Deputy Chief of Mission residence and constructing a less
                    costly replacement residence on the government-owned housing
                    compound could generate proceeds that could be used for deficit
                    reduction. The State Department has rejected this option because the
                    embassy desired to retain the facility for representational purposes.

                    The current sales value of the Tokyo property is uncertain. There has been
                    no recent appraisal of the Deputy Chief of Mission residence, but in 1990,
                    it was valued at $92 million. Embassy information, based on Japanese
                    government reports in September 1994, shows that residential property
                    values have declined about 30 percent since 1990. GAO assumes that the
                    Deputy Chief of Mission residence is valued at $40 million—less than 50
                    percent of its value in 1990. In preparing the following estimate, CBO
                    assumes that the construction of the new Deputy Chief of Mission
                    residence on the Mitsui compound would cost $4 million and that the sale
                    of the old residence would take place after the construction of the
                    replacement residence is completed. The sale of the old residence for
                    $40 million would count towards deficit reduction only if the Congress
                    specifically restricted the proceeds from reverting back to the State
                    Department.

Five-Year Savings
                    Dollars in millions
                                                           FY98     FY99       FY00       FY01       FY02
                    Option: Sell unnecessary real estate at overseas diplomatic posts
                    Asset sale
                    Budget authority                         30       30          30         30         30
                    Outlays                                   9       17          24         29         30
                    Source: Congressional Budget Office.




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Five-Year Savings
                       Dollars in millions
                                                              FY98   FY99     FY00        FY01       FY02
                       Option: Sell high value property in Tokyo
                       Asset sale
                       Budget authority                         –4      0         0           0         40
                       Outlays                                  –1     –1        –1          –1         40
                       Source: Congressional Budget Office.




Related GAO Products   State Department: Options for Addressing Possible Budget Reductions
                       (GAO/NSIAD-96-124, August 29, 1996).

                       Overseas Real Estate: Millions of Dollars Could Be Generated By Selling
                       Unneeded Real Estate (GAO/NSIAD-96-36, April 23, 1996).

                       Overseas Real Estate: Inaction on Proposals to Sell High-Value Property in
                       Tokyo (GAO/NSIAD-95-73, April 7, 1995).


GAO Contact            Benjamin F. Nelson, (202) 512-4128




                       Page 104                                         GAO/OCG-97-2 Addressing the Deficit
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Option:
Overseas Diplomatic   Authorizing committees                 Foreign Relations (Senate)
                                                             International Relations (House)
Posts                 Appropriations subcommittees           Commerce, Justice, State, the Judiciary,
                                                             and Related Agencies (Senate and House)
                      Primary agency                         Department of State
                      Account                                Diplomatic and Consular Programs
                                                             (19-0113)
                                                             Salaries and Expenses (19-0107)
                      Spending type                          Discretionary
                      Budget subfunction                     Conduct of Foreign Affairs
                      Framework theme                        Reassess objectives

                      In fiscal year 1995, State spent about $1.9 billion, or almost 70 percent of
                      its budget, operating overseas posts. State maintains a diplomatic
                      presence in 252 overseas locations, including countries where the United
                      States has limited interests. Because overseas posts consume such a large
                      portion of State’s operating budget, closing posts or reducing their size
                      offers the greatest potential for achieving substantial budget reductions.
                      Balanced, thoughtful decisions on closing and/or reducing the size of posts
                      must be made to ensure that U.S. interests are well served overseas and
                      Americans are protected within available funding.

                      In response to funding constraints in recent years, State has closed and
                      reduced the size of a number of posts and has proposed the closure of
                      additional posts. However, it has made little headway because of internal
                      and external resistance to these changes. In GAO’s August 1996 report, we
                      suggested that one strategy to reduce the controversy surrounding post
                      closings would be to establish an independent post closure panel like the
                      Defense Base Closure and Realignment Commission. Such an approach
                      would allow for decision-making based on the need to support both State
                      and non-State activities, consistent with overall U.S. policy interests and
                      priorities as well as available resources. It would also have the advantage
                      of mitigating at least some of the pressures and parochial interests that
                      have historically operated to maintain a U.S. overseas presence in some
                      locations.

                      Reducing the number of overseas posts might be accomplished in any
                      number of ways. For example, one option would be to use multiple
                      country accreditation in some regions, where an ambassador operating
                      from a regional post would “circuit ride” to several small, neighboring




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countries, eliminating the need for permanent embassy structures in each
country. Regional posts would allow consolidation of staff and other
resources, although cost reductions would be offset to some degree by
travel and other related expenses. The British government employs this
approach in some African countries, and the U.S. Embassy in Bridgetown,
Barbados, executes diplomatic responsibilities for a number of countries
in the eastern Caribbean. State could expand this approach to include
other regions, such as the Baltic States, Africa, and countries in South
America. The State Department’s financial management systems could not
readily provide post-specific operating costs and closing costs to estimate
the savings for this option. However, we calculate that if State closed 20
small embassies and employed the “circuit rider” approach to cover its
diplomatic responsibilities in these countries, State could reduce its costs
by up to $40 million annually, after closing costs have been dealt with and
if the U.S. direct-hire positions were eliminated.

A second option would be to reevaluate the need for State’s 77 consulates
and consulates general. Although many consulates are small or moderately
sized, some are bigger and more expensive to operate than major
embassies. Some believe that the end of the Cold War, expanded media
coverage, and improved information and telecommunications technology
make it possible for State to close consulates and consolidate staff at
embassies or other consulates located in the same countries. Our analysis
has shown that if State closed one of its largest consulate generals it could
reduce its annual operating costs by nearly $20 million, after closing costs
have been dealt with and if the U.S. direct-hire positions were eliminated.

Another way to reduce costs would be to reduce overseas staffing—an
item that accounts for a large portion of overseas costs. Large and
comprehensive posts understandably absorb a disproportionate share of
the total costs of U.S. overseas posts and, therefore, represent a significant
opportunity in this regard. In fiscal year 1995, the cost of operating the
posts in Germany alone totaled over $90 million. The cost of operating the
posts in Japan totaled over $54 million during the same period. Although
the cost reductions from eliminating U.S. direct-hire positions overseas
vary by region and post, using average costs, CBO estimates that $45 million
could be saved by eliminating 100 such positions through attrition over 5
years.




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Five-Year Savings
                       Dollars in millions
                                                              FY98      FY99        FY00       FY01       FY02
                       Option: Eliminating 100 overseas positions
                       Savings from 1997 funding level
                       Budget authority                          3          6          9          12         15
                       Outlays                                   3          5          8          11         14
                       Savings from the 1997 funding level adjusted for inflation
                       Budget authority                          3          6          9          12         15
                       Outlays                                   3          5          8          11         14
                       Source: Congressional Budget Office.




Related GAO Products   State Department: Options for Addressing Possible Budget Reductions
                       (GAO/NSIAD-96-124, August 29, 1996).

                       Overseas Presence: Staffing at U.S. Diplomatic Posts (GAO/NSIAD-95-50FS,
                       December 28, 1994).

                       State Department: Overseas Staffing Process Not Linked to Policy
                       Priorities (GAO/NSIAD-94-228, September 20, 1994).


GAO Contact            Benjamin F. Nelson (202) 512-4128




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Option:
State Department   Authorizing committees                 Foreign Relations (Senate)
                                                          International Relations (House)
Functions and      Appropriations subcommittees           Commerce, Justice, State, the Judiciary,
Activities                                                and Related Agencies (Senate and House)
                   Primary agency                         Department of State
                   Account                                Diplomatic and Consular Programs
                                                          (19-0113)
                                                          Salaries and Expenses (19-0107)
                   Spending type                          Discretionary
                   Budget subfunction                     Conduct of Foreign Affairs
                   Framework theme                        Improve efficiency

                   The Department of State’s functional bureaus share responsibility with
                   several other U.S. agencies on various overlapping policy issues. The
                   involvement of many agencies in similar or related functions does not
                   mean the agencies unnecessarily duplicate activities, but it does suggest
                   the potential for consolidation or transfer of some of State’s duties. For
                   example, we identified nearly 30 agencies and offices involved in trade
                   policy and export promotion, about 35 engaged in global programs, and
                   over 20 involved in international security functions. For many of these
                   functions, several offices and bureaus within State headquarters and
                   overseas posts are involved.

                   State’s costs could be reduced by lessening the degree of its involvement
                   in functions that overlap with other agencies or by lessening overlap
                   within State’s offices. For example, CBO estimates that if the 45 overseas
                   labor attaché and 6 corresponding headquarters positions were eliminated
                   through attrition over five years it would produce savings of $30 million.
                   According to several officials at overseas posts, labor issues could be
                   adequately covered by political and/or economic officers. In addition,
                   several State bureaus monitor labor issues. State has proposed abolishing
                   or lowering the rank of some labor attaché positions in the past but has
                   encountered resistance from the Department of Labor and others.

                   In addition, State could cut costs if some of its legislatively mandated
                   workload requirements were reduced. In fiscal year 1996, State was
                   required to produce over 130 congressionally mandated reports. While
                   some reports could be eliminated or curtailed, it is not clear which are the
                   best candidates because their cost and relative value to the users are not
                   known. For example, country reports on economic policy and trade




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                       practices, required by the Omnibus Trade and Competitiveness Act of
                       1988, consume the equivalent of 5 staff years at headquarters and 100
                       posts at an annual cost of at least $500,000 and State Department officials
                       indicated that the information in the reports is available through other
                       sources. Since the personnel and expenses involved in preparing these
                       reports would likely be reallocated rather than eliminated, CBO does not
                       anticipate any budgetary savings from this option.

Five-Year Savings
                       Dollars in millions
                                                              FY98      FY99        FY00       FY01       FY02
                       Option: Eliminating Labor Attaché and corresponding headquarters positions
                       Savings from the 1997 funding level
                       Budget authority                          2          4          6           8         10
                       Outlays                                   2          4          6           8          9
                       Savings from the 1997 funding level adjusted for inflation
                       Budget authority                          2          4          6           8         10
                       Outlays                                   2          4          6           8          9
                       Source: Congressional Budget Office.




Related GAO Products   Foreign Affairs: Perspectives on Foreign Affairs Programs and Structures
                       (GAO/NSIAD-97-6, November 8, 1996).

                       State Department: Options for Addressing Possible Budget Reductions
                       (GAO/NSIAD-96-124, August 29, 1996).


GAO Contact            Benjamin F. Nelson, (202) 512-4128




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Option:
State Department    Authorizing committees                 Foreign Relations (Senate)
                                                           International Relations (House)
Support Functions   Appropriations subcommittees           Commerce, Justice, State, the Judiciary,
                                                           and Related Agencies (Senate and House)
                    Primary agency                         Department of State
                    Accounts                               Diplomatic and Consular Programs
                                                           (19-0113)
                                                           Salaries and Expenses (19-0107)
                    Spending type                          Discretionary
                    Budget subfunction                     Conduct of Foreign Affairs
                    Framework theme                        Improve efficiency

                    In fiscal year 1995, State allotted $1.8 billion, or about 65 percent of its
                    budget, to domestic and overseas support operations. These funds
                    provided support for both Department staff and employees from other
                    federal agencies. Centrally funded operations account for approximately
                    $1.1 billion of the support budget and cover central administration costs
                    and the costs of running several regional centers that provide financial and
                    information management services to overseas posts. The geographic
                    bureaus control the remaining portion of State’s support budget, which is
                    largely used to fund the salaries of those employees in support positions.

                    Cost-cutting measures being considered by State include hiring more U.S.
                    family members to fill overseas staffing positions, increasing employees’
                    payments for medical services, and increasing the length of overseas tours.
                    Over the long term, State hopes to further reduce its operating expenses
                    through business process reengineering and the outsourcing of certain
                    support functions. In both areas, however, only limited progress has been
                    made.

                    GAO identified several additional options State could implement to adjust
                    to potential budget cuts as well as some of the potential adverse
                    consequences of these options. These options include (1) expanding the
                    use of foreign service nationals (FSN) in support positions at overseas
                    posts, (2) reviewing employees’ benefits and allowances, and (3) reviewing
                    support staff levels in headquarters.

                    While cost-savings estimates for the last two options are not available until
                    reforms are specified, CBO estimates that expanding the use of foreign
                    nationals in selected posts could result in $165 million in savings over 5




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                       years. Specifically, State could increase its use of FSNs to replace Foreign
                       Service specialists working in non-sensitive positions. Employment of FSNs
                       is far less costly than the employment of Foreign Service specialists
                       because FSNs do not receive the benefits and allowances payable to
                       Foreign Service employees. We estimate that State currently has 500
                       Foreign Service specialists in six job categories it considers nonsensitive.

Five-Year Savings
                       Dollars in millions
                                                              FY98      FY99        FY00       FY01       FY02
                       Savings from the 1997 funding level
                       Budget authority                         11         22         33          44         55
                       Outlays                                   9         20         30          41         52
                       Savings from the 1997 funding level adjusted for inflation
                       Budget authority                         11         22         33          44         55
                       Outlays                                   9         20         30          41         52
                       Source: Congressional Budget Office.




Related GAO Products   Foreign Affairs: Perspectives on Foreign Affairs Programs and Structures
                       (GAO/NSIAD-97-6, November 8, 1996).

                       State Department: Options for Addressing Possible Budget Reductions
                       (GAO/NSIAD-96-124, August 29, 1996).

                       State Department: Actions Needed to Improve Embassy Management
                       (GAO/NSIAD-96-1, March 12, 1996).

                       State Department: Widespread Management Weaknesses at Overseas
                       Embassies (GAO/T-NSIAD-93-17, July 13, 1993).

                       State Department: Survey of Administrative Issues Affecting Embassies
                       (GAO/NSIAD-93-218, July 12, 1993).


GAO Contact            Benjamin F. Nelson, (202) 512-4128




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Option:
TV Marti   Authorizing committees                Foreign Relations (Senate)
                                                 International Relations (House)
           Appropriations subcommittees          Commerce, Justice, State, and the
                                                 Judiciary, and Related Agencies (Senate
                                                 and House)
           Primary agency                        U.S. Information Agency
           Account                               Broadcasting to Cuba (67-0208)
           Spending type                         Discretionary
           Budget subfunction                    Foreign Information and Exchange
                                                 Activities
           Framework theme                       Reassess objectives

           The U.S. Information Agency (USIA) recognizes that although it provides
           television broadcasts to Cuba through TV Marti, the broadcasts are
           constantly and effectively jammed. USIA’s research data shows that, mainly
           as a result of the jamming, the number of Cubans who are able to watch
           the broadcasts is small. Other factors that decrease effectiveness of TV
           Marti include broadcast hours that are not convenient to viewers and a
           broadcast signal that does not reach much beyond the greater Havana
           area. The U.S. Advisory Commission on Public Diplomacy has reported
           that TV Marti is not cost-effective and has repeatedly recommended that it
           be terminated. In March 1994, the Advisory Panel on Radio Marti and TV
           Marti concluded that TV Marti cannot be considered cost-effective and
           would not be cost-effective unless the viewing audience in Cuba could be
           substantially expanded. TV Marti broadcasts daily from 3:30 am to 8 am,
           but Cuba jams the broadcasts. In an attempt to overcome jamming, TV
           Marti is converting from VHF to UHF transmission even though Cuba
           could acquire equipment to jam the new signal at relatively little cost.
           Further, GAO has criticized controls over program quality and objectivity,
           and according to the Advisory Panel, identified problems do not appear to
           have been fully resolved.

           The Congress may wish to eliminate TV Marti given its persistent problems
           and its limited ability to achieve its goals. The savings that could be
           achieved if TV Marti were eliminated are shown in the following table.




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Five-Year Savings
                       Dollars in millions
                                                              FY98      FY99        FY00       FY01       FY02
                       Savings from the 1997 funding level
                       Budget authority                          6         11         11          11         11
                       Outlays                                   5         10         11          11         11
                       Savings from the 1997 funding level adjusted for inflation
                       Budget authority                          6         12         12          13         13
                       Outlays                                   5         11         12          13         13
                       Source: Congressional Budget Office.




Related GAO Products   TV Marti: Costs and Compliance With Broadcast Standards and
                       International Agreements (GAO/NSIAD-92-199, May 6, 1992).

                       Broadcasts to Cuba: TV Marti Surveys Are Flawed (GAO/NSIAD-90-252,
                       August 9, 1990).


GAO Contact            Benjamin F. Nelson, (202) 512-4128




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Option:
USIA Exchange   Authorizing committees                  Foreign Relations (Senate)
                                                        International Relations (House)
Programs        Appropriations subcommittees            Commerce, Justice, State, the Judiciary,
                                                        and Related Agencies (Senate and House)
                Primary agency                          U.S. Information Agency
                Account                                 Educational and Cultural Exchange
                                                        Programs (67-0209)
                Spending type                           Discretionary
                Budget subfunction                      Foreign Information and Exchange
                                                        Activities
                Framework theme                         Reassess objectives

                The U.S. Information Agency (USIA) manages a variety of exchange
                programs to foster mutual understanding between the people of the
                United States and other countries. In 1994, USIA academic exchanges
                accounted for less than 24 percent of all U.S. government-funded
                international exchange and training activities. In fiscal year 1996, these
                exchanges cost about $210 million plus approximately $29 million to
                manage them.

                In recent years, funding levels have not permitted USIA to maintain the
                same number of exchanges it supported in the past. Should funding be
                further reduced, options to cut costs include eliminating certain
                exchanges entirely, reducing the amount of funds USIA allocates to each
                program, or obtaining more financial support from the private sector or
                foreign governments. The advisability of implementing any or all of these
                options would need to be evaluated along with the impact such actions
                might have on U.S. bilateral relationships and on the promotion of ties
                between private citizens and organizations in the United States and
                abroad. Whether the federal government still needs to fund each
                exchange, whether the exchange is targeted at the most appropriate
                countries, whether it is unique and unavailable from the private sector,
                and whether it is effective are questions requiring review if the budget for
                exchanges is significantly cut.

                Savings resulting from reduced funding for certain programs would
                depend on the specific programs and the level of cuts. Likewise, savings
                that result from obtaining more financial support from the private sector
                would depend on specific negotiations with companies and new bilateral
                agreements with other countries. However, critics of one program, USIA’s




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                       high school exchange, argue that it is more expensive and has less
                       immediate impact than other programs. For example, in fiscal year 1995
                       USIA spent more than $56 million on the Congress-Bundestag Program with
                       Germany and the Freedom Support Act/Newly Independent States and
                       Support for East European Democracy Act Programs that specialized in
                       exchanges of secondary school students and educators. CBO estimates that
                       $222 million in savings over 5 years could be generated if these programs
                       were eliminated.

Five-Year Savings
                       Dollars in millions
                                                              FY98      FY99        FY00       FY01       FY02
                       Savings from the 1997 funding level
                       Budget authority                         41         41         41          41         41
                       Outlays                                  21         36         39          41         41
                       Savings from the 1997 funding level adjusted for inflation
                       Budget authority                         42         43         44          46         47
                       Outlays                                  21         37         42          44         46
                       Source: Congressional Budget Office.




Related GAO Products   U.S. Information Agency: Options for Addressing Possible Budget
                       Reductions (GAO/NSIAD-96-179, September 23, 1996).

                       Exchange Programs: Inventory of International Educational, Cultural, and
                       Training Programs (GAO/NSIAD-93-157BR, June 23, 1993).

                       Exchange Programs: Observations on International Educational, Cultural,
                       and Training Programs (GAO/T-NSIAD-93-7, March 23, 1993).


GAO Contact            Benjamin F. Nelson, (202) 512-4128




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Option:
USIA Overseas Posts,   Authorizing committees                  Foreign Relations (Senate)
                                                               International Relations (House)
Activities, and        Appropriations subcommittees            Commerce, Justice, State, the Judiciary,
Cultural Centers                                               and Related Agencies (Senate and House)
                       Primary agency                          U.S. Information Agency
                       Accounts                                Salaries and Expenses (67-0201)
                                                               Educational and Cultural Exchange
                                                               Programs (67-0209)
                       Spending type                           Discretionary
                       Budget subfunction                      Foreign Information and Exchange
                                                               Activities
                       Framework theme                         Reassess objectives

                       The mission of the U.S. Information Agency (USIA) is to explain and
                       advocate U.S. policy to foreign publics, provide information about the
                       United States, build lasting relationships and mutual understanding, and
                       advise U.S. decisionmakers on foreign public opinion and its implications
                       for the United States. In fiscal year 1996, USIA spent $310 million, or about
                       28 percent of its $1.1 billion budget, on personnel, infrastructure,
                       programs and headquarters activities to support its 199 overseas posts in
                       143 countries.

                       Although U.S. foreign policy objectives may have changed in light of
                       post-cold war needs, USIA has not determined if its organizational structure
                       and public diplomacy programs have outlived their usefulness. Agency
                       officials believe it is difficult to link a program to a desired result, and
                       existing evidence of impact is largely anecdotal. However, such
                       assessments are critical to USIA’s ability to remain viable while managing
                       budgetary reductions.

                       This option is divided into three parts: eliminating some USIA overseas
                       posts, activities, and cultural centers.


Posts                  GAO reported in 1996 that USIA maintains overseas missions in countries
                       that are relatively less important to the U.S. foreign policy and retains
                       overseas infrastructure and programs which may no longer be relevant.
                       For example, in fiscal year 1997 at a cost of about $29 million, USIA
                       operated posts in more than 50 countries where it believed the United
                       States had limited public diplomacy goals.




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                   Reducing or eliminating these posts or activities are options to lower costs
                   but actual savings will depend on the current costs of the posts closed or
                   reduced. Based on fiscal year 1997 costs, CBO estimates that closing these
                   posts in countries where the United States has limited public diplomacy
                   goals would produce $148 million in savings over 5 years.


Activities         One activity we believe merits review is USIA’s student advising operation.
                   USIA spends about $2.6 million annually to subsidize more than 400
                   educational advisory centers worldwide that provide information about
                   the U.S. system of education. Some of these centers are housed in USIA
                   offices and are fully funded by the U.S. government. Others are operated
                   by host country universities or U.S. nonprofit organizations and are
                   partially funded by USIA. An additional $1.4 million is spent annually for
                   training, materials, and other activities.

                   Proponents of the student advising operation believe that it is in the best
                   interests of the United States to support student advising because
                   international students spend nearly $7 billion a year in the United States,
                   contributing substantially to the U.S. economy, and American students are
                   introduced to different cultures, enhancing diversity. Critics have
                   concluded, however, that new worldwide trends to internationalize higher
                   education, advancements in communication technology, and the increased
                   sophistication of non-U.S.-government-sponsored educational advising
                   institutions indicate that a guidance and oversight role for USIA is more
                   appropriate than an operational one. They argue that the increase in
                   private sector counseling services, coupled with dwindling USIA resources,
                   suggest it is an appropriate time for USIA to turn over its educational
                   advising role to the private sector. CBO estimates that eliminating student
                   advising operations would result in savings of $15 million over 5 years.


Cultural Centers   USIA maintains more than 70 cultural centers, libraries, and branch offices
                   overseas. Because they may not be colocated with an embassy and require
                   staff to deal directly with the public, they are often expensive to operate.
                   In Germany, for example, the fiscal year 1995 cost to operate six cultural
                   centers (called America Houses) was nearly $9 million, which was for 77
                   staff and for activities such as reference centers with online databases,
                   student counseling activities, and cultural events.

                   USIA could cut costs by finding alternatives for its cultural centers. For
                   example, critics of the cultural centers believe that binational centers are a



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                    cost-effective alternative to cultural centers. Binational centers are private,
                    autonomous institutions established to promote mutual understanding
                    between the United States and host countries. USIA may have only minimal
                    or no funds invested in the centers and may or may not assign staff. USIA
                    successfully encouraged the formation of a binational center when funding
                    limitations forced it to close an America House in Germany. The agency
                    collaborated with private industry and the local German government to
                    establish a German-American Institute to further relations through cultural
                    and educational events. CBO estimates that if USIA closed its cultural
                    centers it could achieve $141 million in savings over 5 years.

Five-Year Savings
                    Dollars in millions
                                                           FY98      FY99          FY00        FY01       FY02
                    Option: Eliminate USIA posts
                    Savings from the 1997 funding level
                    Budget authority                         16         29            29          29         29
                    Outlays                                  13         27            29          29         29
                    Savings from the 1997 funding level adjusted for inflation
                    Budget authority                         17         31            32          33         35
                    Outlays                                  14         29            32          33         35
                    Source: Congressional Budget Office.



Five-Year Savings
                    Dollars in millions
                                                           FY98      FY99          FY00        FY01       FY02
                    Option: Eliminate student advising operations
                    Savings from the 1997 funding level
                    Budget authority                          2          3             3           3          3
                    Outlays                                   2          3             3           3          3
                    Savings from 1997 funding level adjusted for inflation
                    Budget authority                          2          3             3           3          4
                    Outlays                                   2          3             3           3          4
                    Source: Congressional Budget Office.




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Five-Year Savings
                      Dollars in millions
                                                             FY98      FY99          FY00        FY01       FY02
                      Option: Eliminate USIA cultural centers
                      Savings from the 1997 funding level
                      Budget authority                          14        28            28          28         28
                      Outlays                                   12        26            28          28         28
                      Savings from 1997 funding level adjusted for inflation
                      Budget authority                          15        30            31          32         33
                      Outlays                                   13        27            31          32         33
                      Source: Congressional Budget Office.




Related GAO Product   U.S. Information Agency: Options for Addressing Possible Budget
                      Reductions (GAO/NSIAD-96-179, September 23, 1996).


GAO Contact           Benjamin F. Nelson, (202) 512-4128




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Option:
International   Authorizing committees                  Foreign Relations (Senate)
                                                        International Relations (House)
Broadcasting    Appropriations subcommittees            Foreign Operations (Senate and House)
                Primary agency                          U.S. Information Agency
                Account                                 International Broadcasting Operations
                                                        (67-0206)
                Spending type                           Discretionary
                Budget subfunction                      Foreign Information and Exchange
                                                        Activities
                Framework theme                         Reassess objectives

                The United States broadcasts over 1,600 hours of radio programming in 53
                languages and over 400 hours of television in several languages weekly to
                support U.S. foreign policy objectives. In fiscal year 1996, $405 million, or
                38 percent of the U.S. Information Agency’s budget supported the Voice of
                America (VOA) (47 languages), Radio Free Europe/Radio Liberty
                (RFE/RL)(21 languages), Radio and TV Marti broadcasts to Cuba, and
                Worldnet television broadcasts. Also, Radio Free Asia (RFA) began
                broadcasting to China in September 1996 and to Tibet in December 1996.
                VOA, RFE/RL, and RFA have different purposes and therefore broadcast in
                some of the same languages. VOA’s mission is to provide accurate and
                objective world news and present a balanced portrayal of U.S. institutions
                and policies. In contrast, RFE/RL’s and RFA’s mission is to present accurate
                news about political, social, and economic developments within the
                countries themselves in the absence of fully functional or free media.

                Funding for international broadcasting has dropped considerably since
                fiscal year 1994 as VOA and RFE/RL consolidated functions such as
                engineering, eliminated overlapping broadcast hours to the same target
                audience, and cut 1,500 positions. Further savings would require changes
                in the number of language services and/or broadcast hours. Over the years,
                very few language services have been terminated despite changing world
                conditions. The Broadcasting Board of Governors is developing a plan to
                review all language services and broadcast entities to determine their
                continued need and effectiveness. This review may identify less necessary
                language services that could be eliminated. Estimated annual savings that
                would result from reducing the number of broadcast languages would
                range from $230,000 for VOA’s Slovene language broadcast to $12.7 million
                for both VOA and RFE/RL’s Russian language broadcasts.




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Related GAO Products   U.S. Information Agency: Options for Addressing Possible Budget
                       Reductions (GAO/NSIAD-96-179, September 23, 1996).

                       International Broadcasting: Downsizing and Relocating Radio Free
                       Europe/Radio Liberty (GAO/NSIAD-95-53, April 5, 1995).

                       Voice of America: Station Modernization Projects Need to Be Justified
                       (GAO/NSIAD-94-69, January 24, 1994).

                       Voice of America: Management Actions Needed to Adjust to a Changing
                       Environment (GAO/NSIAD-92-150, July 24, 1992).


GAO Contact            Benjamin F. Nelson, (202) 512-4128




                       Page 121                                   GAO/OCG-97-2 Addressing the Deficit
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Option:
Risk-Based Exposure   Authorizing committees                   Banking, Housing, and Urban Affairs
                                                               (Senate)
Fees for                                                       Banking and Financial Services (House)
Export-Import Bank    Appropriations subcommittees             Foreign Operations (Senate)
                                                               Foreign Operations, Export Financing, and
                                                               Related Programs (House)
                      Primary agency                           U.S. Export-Import Bank
                      Account                                  Export-Import Bank Program Account
                                                               (83-0100)
                      Spending type                            Discretionary
                      Budget subfunction                       International Financial Programs
                      Framework theme                          Redefine beneficiaries

                      The U.S. Export-Import Bank’s (Eximbank) fees are currently lower than
                      those charged by most foreign export credit agencies because Eximbank
                      has interpreted its broad congressional mandate to be “fully competitive”
                      by setting its sovereign fees as low or lower than about 75 percent of those
                      offered by other major export credit agencies.

                      Decision makers will need to address several trade and foreign policy
                      issues before making changes in Eximbank’s programs. Eximbank officials
                      said that any proposed fee increases need to be considered within the
                      broader context of current international efforts to gradually reduce
                      government export finance subsidies. They also stated that these options
                      could make Eximbank programs less competitive relative to foreign
                      export credit agencies but acknowledged that it would be difficult to
                      determine the precise trade effects of such actions.

                      Using 1995 Eximbank transaction data, we estimated that the bank could
                      have saved about $84 million in fiscal year 1995 if it had raised its fees to a
                      level in the mid-range of fees charged by other major export credit
                      agencies of other nations. Any fee increases are likely to reduce demand
                      for Eximbank financing and the savings associated with such an increase
                      would depend on its magnitude and on other variables, such as the
                      sensitivity of demand to the price increase as well as the risk levels, terms,
                      and conditions of future transactions. CBO estimates that changing the fee
                      structure accordingly could save more than $450 million over 5 years.




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Five-Year Savings
                       Dollars in millions
                                                              FY98      FY99        FY00       FY01       FY02
                       Savings from the 1997 funding level
                       Budget authority                         90         90         90          90         90
                       Outlays                                  10         24         36          46         56
                       Savings from the 1997 funding level adjusted for inflation
                       Budget authority                         92         95         97        100         103
                       Outlays                                  10         25         37          49         60
                       Source: Congressional Budget Office.




Related GAO Products   Export-Import Bank: Options for Achieving Possible Budget Reductions
                       (GAO/NSIAD-97-7, December 20, 1996).

                       Foreign Affairs: Perspectives on Foreign Affairs Programs and Structures
                       (GAO/NSIAD-97-6, November 8, 1996).

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

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


GAO Contact            Benjamin F. Nelson, (202) 512-4128




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Option:
Export-Import Bank   Authorizing committees                Banking, Housing, and Urban Affairs
                                                           (Senate)
Programs                                                   Banking and Financial Services (House)
                     Appropriations subcommittees          Foreign Operations (Senate)
                                                           Foreign Operations, Export Financing, and
                                                           Related Programs (House)
                     Primary agency                        U.S. Export-Import Bank
                     Account                               Export-Import Bank Loans Program
                                                           Account (83-0100)
                     Spending type                         Discretionary
                     Budget subfunction                    International Financing Programs
                     Framework theme                       Reassess objectives

                     The U.S. Export-Import Bank (Eximbank) was created to facilitate exports
                     of U.S. goods and services by offering a wide range of financing at terms
                     competitive with those of other governments’ export financing agencies.
                     Eximbank is to absorb risks that the private sector is unwilling or unable
                     to assume. Higher risk markets, such as the Newly Independent States of
                     the Former Soviet Union, constitute a relatively small share of the
                     Eximbank’s total financing commitments yet absorb a relatively large
                     share of its subsidy costs. From fiscal year 1992 to 1996, Eximbank has
                     used an average of $750 million of its credit subsidy appropriation to
                     support an average of $13.3 billion in export financing commitments
                     (loans, loan guarantees, and insurance). Eximbank’s congressional
                     mandate is to supplement, not compete with, private capital. Thus it
                     provides financing in a wide variety of markets, including more markets in
                     higher-risk categories than those of any of its major competitors.

                     The level and scope of the risks of the Eximbank’s programs could be
                     reduced by several means, such as placing a ceiling on the maximum
                     subsidy rate allowed in Eximbank programs, reducing or eliminating
                     program availability offered in high-risk markets, and offering less than
                     100-percent risk protection. These changes would have only a slight effect
                     (less than 5 percent) on the overall level of U.S. exports supported with
                     Eximbank financing. However, these options raise several trade and
                     foreign policy issues that decisionmakers would need to address before
                     making any changes in Eximbank’s programs. Eximbank officials noted
                     that these options could undermine U.S. government efforts to provide
                     support in some higher-risk markets, such as the Newly Independent
                     States of the Former Soviet Union, that exhibit promising long-term
                     potential.



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                       The specific level of savings resulting from these program changes would
                       be dependent on several factors, including the willingness of exporters
                       and participating banks to absorb increased costs and risks, and the
                       reaction of foreign export credit agencies. We estimated, based on 1995
                       transaction levels, that $157 million in program subsidy savings could be
                       achieved annually if Eximbank provided only short-term cover in high-risk
                       markets. The following CBO estimates are based on an increase in
                       Eximbank transaction levels in these markets.

Five-Year Savings
                       Dollars in millions
                                                              FY98      FY99        FY00       FY01       FY02
                       Savings from the 1997 funding level
                       Budget authority                        244        244        244        244         244
                       Outlays                                  27         66         97        125         150
                       Savings from the 1997 funding level adjusted for inflation
                       Budget authority                        248        255        262        269         276
                       Outlays                                  28         68        101        133         162
                       Source: Congressional Budget Office.




Related GAO Products   Export-Import Bank: Options for Achieving Possible Budget Reductions
                       (GAO/NSIAD-97-7, December 20, 1996).

                       Foreign Affairs: Perspectives on Foreign Affairs Programs and Structures
                       (GAO/NSIAD-97-6, November 8, 1996).

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

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


GAO Contact            Benjamin F. Nelson, (202) 512-4128




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                      •   Space Station
250 General           •   NASA’s Earth Observing System Data and Information System
Science, Space, and
Technology




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Option:
Space Station   Authorizing committees                 Commerce, Science and Transportation
                                                       (Senate)
                                                       Science (House)
                Appropriations subcommittees           VA, HUD, and Independent Agencies
                                                       (Senate and House)
                Primary agency                         National Aeronautics and Space
                                                       Administration
                Account                                Human Space Flight (80-0111)
                Spending type                          Discretionary
                Budget subfunctions                    Space Flight, Research, and Supporting
                                                       Activities
                Framework theme                        Reassess objectives

                In 13 reports and testimonies issued since 1991, GAO has expressed
                concerns about various aspects of the space station, including rising cost
                estimates that have prompted several redesigns since the project was first
                funded in fiscal year 1985. In 1993, the station was redesigned again and
                Russia was brought in as a partner. The National Aeronautics and Space
                Administration (NASA) believed that Russian participation would improve
                the station’s capabilities and reduce the estimated cost to complete its
                assembly. Subsequently, annual funding through completion of assembly
                was capped at about $2.1 billion and the total project cost was capped at
                $17.4 billion.

                Since 1993, GAO has reported that NASA has made some progress on the
                space station, but it still has considerable challenges to overcome,
                including lower financial reserves and significant risk related to the space
                shuttle’s ability to support the space station’s launch and assembly
                schedule. Most recently, in July 1996, GAO reported that the cost and
                schedule threats have continued. The cost threat is particularly severe
                over the next few years, due to the limited reserves for additional cost
                risks such as possible reduced Russian participation.

                The Congress may wish to closely monitor NASA’s efforts to manage station
                development to enable it to act quickly should estimated costs to complete
                the project increase substantially. Such actions could include acceptance
                of the cost increases, further reduction in the project’s scope, or
                terminating the project. If the project were terminated, the following
                savings would result.




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Five-Year Savings
                       Dollars in millions
                                                               FY98          FY99       FY00        FY01       FY02
                       Savings from the 1997 Defense Plan
                       Budget authority                        1,449         2,149      2,149       2,149      2,149
                       Outlays                                   947         1,884      2,136       2,148      2,149
                       Savings from the 1997 Defense Plan adjusted for inflation
                       Budget authority                        1,503         2,263      2,323       2,385      2,450
                       Outlays                                   982         1,976      2,289       2,362      2,426
                       Note: This estimate assumes termination costs of $700 million.

                       Source: Congressional Budget Office.




Related GAO Products   Space Station: Cost Control Difficulties Continue (GAO/T-NSIAD-96-210,
                       July 24, 1996).

                       Space Station: Cost Control Difficulties Continue (GAO/NSIAD-96-135, July 17,
                       1996).

                       Space Station: Declining Budgets and Tight Schedules Could Jeopardize
                       Space Station Support (GAO/NSIAD-95-171, July 28, 1995).

                       Space Station: Estimated Total U.S. Funding Requirements
                       (GAO/NSIAD-95-163, June 12, 1995).

                       Space Station: Plans to Expand Research Community Do Not Match
                       Available Resources (GAO/NSIAD-94-33, November 22, 1994).

                       Space Station: Update on the Impact of the Expanded Russian Role
                       (GAO/NSIAD-94-248, July 29, 1994).

                       Space Station: Impact of the Expanded Russian Role on Funding and
                       Research (GAO/NSIAD-94-220, June 21, 1994).

                       Space Station: Information on National Security Applications and Cost
                       (GAO/NSIAD-93-208, May 18, 1993).

                       Space Station: Program Instability and Cost Growth Continue Pending
                       Redesign (GAO/NSIAD-93-187, May 18, 1993).




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              NASA:
                  Large Programs May Consume Increasing Share of Limited Future
              Budgets (GAO/NSIAD-92-278, September 4, 1992).

              Space Station: Status of Financial Reserves (GAO/NSIAD-92-279, July 20, 1992).

              NASA Budget: Potential Shortfalls in Funding NASA’s 5-Year Plan
              (GAO/T-NSIAD-92-18, March 17, 1992).

              Questions Remain on the Costs, Uses, and Risks of the Redesigned Space
              Station (GAO/T-NSIAD-91-26, May 1, 1991).


GAO Contact   Louis J. Rodrigues, (202) 512-4841




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Option:
NASA’s Earth           Authorizing committees                 Commerce, Science and Transportation
                                                              (Senate)
Observing System                                              Science (House)
Data and Information   Appropriations subcommittees           VA, HUD, and Independent Agencies
                                                              (Senate and House)
System                 Primary agency                         National Aeronautics and Space
                                                              Administration (NASA)
                       Account                                Space, Aeronautics, and Technology
                                                              (80-0110)
                       Spending type                          Discretionary
                       Budget subfunctions                    Multiple
                       Framework theme                        Reassess objectives

                       NASA’s Earth Observing System (EOS) is a comprehensive program to study
                       global change by gathering and analyzing data about how the earth
                       functions as a single, integrated system. About a third of the cost for EOS
                       will go to the Earth Observing System Data and Information System
                       (EOSDIS), which will operate EOS satellites and instruments and provide
                       ground acquisition, processing, storage, management, and distribution of
                       the EOS data. In addition to the EOS data, EOSDIS will incorporate and make
                       available data from previous NASA missions, non-NASA systems, and
                       atmosphere-, ocean-, and land-based sensors. Developing EOSDIS is a
                       massive undertaking; its intended scope far exceeds that of any previous
                       civilian data management system. Over its lifetime, EOSDIS could
                       accumulate information comparable to more than 1,000 times the amount
                       of text stored in the Library of Congress. A major objective of EOSDIS is to
                       make this enormous quantity of data easily accessible and usable to many
                       earth scientists.

                       The bulk of EOSDIS development is being carried out under a single,
                       comprehensive contract, known as the EOSDIS Core System contract. The
                       Core System contract was awarded to Hughes Applied Information
                       Systems in early 1993 and will cost NASA an estimated $930 million through
                       2003. Hughes is responsible for building and integrating the major
                       elements of EOSDIS, including hardware and software to be installed at
                       eight data centers around the country.

                       In March 1995, GAO observed that NASA’s emphasis on large-scale
                       development in the near term may be unwise and recommended deferring
                       full-scale development until technology and standards have further
                       advanced and user needs are better known. Also, in 1995, the National



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                       Research Council expressed its concerns about the EOSDIS development
                       effort and recommended a new approach to EOSDIS, which would
                       streamline some EOSDIS functions and transfer other functions to a
                       competitively selected federation of partners in government, academia,
                       and the private sector. Since that time, NASA has been changing its plans
                       for EOSDIS to try to accommodate the vision of a federation of partners
                       recommended by the National Research Council. Given that these changes
                       should lead to a less intensive near-term systems development effort, it is
                       reasonable to consider reducing planned funding for EOSDIS. However, GAO
                       has not made a determination of the exact size of the most appropriate
                       reduction.


Related GAO Products   Earth Observing System: Funding Requirements for NASA’s EOSDIS
                       (GAO/AIMD-95-153FS, June 8, 1995).

                       Earth Observing System: Concentration on Near-term EOSDIS Development
                       May Jeopardize Long-term Success (GAO/T-AIMD-95-103, March 16, 1995).


GAO Contact            Jack L. Brock, Jr., (202) 512-6240




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             •   Clean Coal Technology Funds
270 Energy   •   Department of Energy’s National Laboratories
             •   Use of Carryover Balances to Offset Future Budget Needs
             •   Department of Energy’s Overtime Costs
             •   Department of Energy’s Cleanup Studies
             •   Department of Energy’s Contractors’ Separation Benefits Package
             •   Federal Exemption to Certain State Taxes for Department of Energy’s
                 Operating Contractors
             •   Nuclear Waste Disposal Fees
             •   Power Marketing Administrations Cost Recovery
             •   Federal Investment in Successfully Commercialized Technologies




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Option:
Clean Coal         Authorizing committees                 Energy and Natural Resources (Senate)
                                                          Science (House)
Technology Funds   Appropriations subcommittees           Interior and Related Agencies (Senate and
                                                          House)
                   Primary agency                         Department of Energy
                   Account                                Clean Coal Technology (89-0235)
                   Spending type                          Discretionary
                   Budget subfunction                     Energy Supply
                   Framework theme                        Reassess objectives

                   A number of clean coal technology demonstration projects are
                   experiencing problems and difficulties in meeting cost, schedule, and
                   performance goals. DOE has extended deadlines several times on some
                   projects to allow their sponsors to restructure the projects, find suitable
                   alterative project sites, and firm up financing commitments to make the
                   projects economically viable. In April 1995, the Congress rescinded
                   $200 million of this program’s budget authority which DOE achieved by
                   using unobligated funds associated with projects that were subsequently
                   terminated. DOE’s fiscal year 1997 budget request proposed an additional
                   $325 million rescission, but the Congress only rescinded $123 million. As
                   of October 1996, DOE had achieved this rescission and also accumulated
                   about $159 million of unobligated funds in the clean coal reserve as a
                   result of terminated projects. DOE expects additional savings ranging from
                   about $50 million to $100 million or more from combining or terminating
                   certain other ongoing projects. DOE plans to use the reserve funds to pay
                   for program direction beginning in fiscal year 1998 through the end of the
                   program (which DOE estimates could total about $50 million) and to help
                   pay for cost growth for selective ongoing projects. To the extent that the
                   reserve funds are not used for cost growth, about $160 million to about
                   $210 million in unobligated funds may be available for rescission. If the
                   Congress chose to rescind $160 million in budget authority, the following
                   savings could occur.




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Five-Year Savings
                       Dollars in millions
                                                              FY98      FY99        FY00       FY01       FY02
                       Savings from the 1997 funding level
                       Budget authority                        160          0          0           0          0
                       Outlays                                   0          0         25          25         50
                       Savings from the 1997 funding level adjusted for inflation
                       Budget authority                        160          0          0           0          0
                       Outlays                                   0          0         25          25         50
                       Source: Congressional Budget Office.




Related GAO Products   Fossil Fuels: Lessons Learned in DOE’s Clean Coal Technology Program
                       (GAO/RCED-94-174, May 26, 1994).

                       Fossil Fuels: Improvements Needed in DOE’s Clean Coal Technology
                       Program (GAO/RCED-92-17, October 30, 1991).


GAO Contact            Victor S. Rezendes, (202) 512-3841




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Option:
Department of       Authorizing committees                  Energy and Natural Resources (Senate)
                                                            Commerce (House)
Energy’s National   Appropriations subcommittees            Energy and Water Development
Laboratories                                                (Senate and House)
                    Primary agency                          Department of Energy
                    Account                                 Energy Supply, R&D Activities
                                                            (89-0224)
                    Spending type                           Discretionary
                    Budget subfunction                      Atomic Energy Defense Activities
                    Framework theme                         Reassess objectives

                    The Department of Energy’s (DOE) laboratory network is comprised of
                    approximately 30 labs, with a budget of about $8 billion and employing
                    over 25,000 scientists and engineers. Recent shifts in national
                    priorities—principally, the dramatic reduction in the arms race and
                    proposed cutbacks in energy and nuclear research funding—raise
                    questions about the need for all these labs. In particular, DOE’s three large
                    defense labs, costing about $1 billion annually, were created to design and
                    test nuclear weapons, a role which has greatly diminished over time.
                    Currently, these labs allocate less than half their budgets to nuclear
                    weapons design, development, and testing—the principal reasons they
                    were created. Yet, as GAO has reported, DOE still maintains a redundant
                    structure with respect to nuclear weapons work, an arrangement that may
                    no longer be the most efficient alternative for meeting defense
                    requirements.

                    The 1995 Galvin Task Force, commissioned by DOE, also argued for more
                    focused missions for the national laboratories. In addition, the task force
                    said that the national laboratory system is oversized for its current mission
                    assignments. Several congressional bills have been introduced in recent
                    years calling for the creation of a separate structure for determining the
                    best way to streamline national laboratories.

                    Aside from deciding on the ideal number of labs, most experts GAO
                    consulted agree that the missions of the laboratories now need to be
                    clarified if their resources are to be used most effectively. Some are
                    suggesting the current laboratory structure may not be the most rational if
                    the labs are to move into newer mission areas. Suggestions for
                    restructuring range from converting some labs into private or quasi-public




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                       entities, transferring labs to universities, or assigning them to different
                       agencies whose missions better match lab strengths.

                       In addition to supporting DOE’s efforts to streamline individual labs, the
                       Congress should reconsider the role and mission of the laboratories as a
                       group, which could be restructured in various ways. For example, the
                       Galvin Task Force examined a transfer of most of the nuclear weapons
                       functions of Lawrence Livermore to the Los Alamos laboratory. Los
                       Alamos officials estimated that having both facilities design weapons but
                       only one engineer and test them would eventually save about $200 million
                       in annual operating costs. The table below reflects savings from phasing in
                       such a consolidation over a 5-year period.

Five-Year Savings
                       Dollars in millions
                                                              FY98      FY99        FY00       FY01       FY02
                       Savings from the 1997 funding level
                       Budget authority                         32         66        102        140         179
                       Outlays                                  24         58         93        131         169
                       Savings from the 1997 funding level adjusted for inflation
                       Budget authority                         33         70        110        156         205
                       Outlays                                  25         60        100        144         192
                       Source: Congressional Budget Office.




Related GAO Products   Federal R&D Laboratories (GAO/RCED/NSIAD-96-78R, February 29, 1996).

                       National Laboratories Need Clearer Mission and Better Management
                       (GAO/RCED-95-10, January 27, 1995).

                       DOE’sNational Laboratories: Adopting New Missions and Managing
                       Effectively Pose Significant Challenges (GAO/T-RCED-94-113, February 3,
                       1994).

                       Department of Energy: Management Problems Require a Long-term
                       Commitment to Change (GAO/RCED-93-72, August 31, 1993).




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              Nuclear Weapons Complex: Issues Surrounding Consolidating Los Alamos
              and Lawrence Livermore National Laboratories (GAO/RCED-92-98,
              September 24, 1992).

GAO Contact   Victor S. Rezendes, (202) 512-3841




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Option:
Use of Carryover      Authorizing committees                Armed Services (Senate)
                                                            Energy and Natural Resources (Senate)
Balances to Offset                                          National Security (House)
                                                            Commerce (House)
Future Budget Needs   Appropriations subcommittees          Energy and Water Development
                                                            (Senate and House)
                                                            Interior and Related Agencies (Senate and
                                                            House)
                      Primary agency                        Department of Energy
                      Accounts                              Multiple
                      Spending type                         Discretionary
                      Budget subfunctions                   Multiple
                      Framework theme                       Improve efficiency

                      Carryover balances represent funding from prior years’ budgets and
                      consist of both unobligated balances and uncosted obligations. Each fiscal
                      year, the Department of Energy (DOE) requests obligational authority from
                      the Congress to meet the costs of running its programs. Once DOE receives
                      this authority, it obligates funds by placing orders or awarding contracts
                      for goods and services that will require payment during the same fiscal
                      year or in the future. Unobligated balances represent the portion of its
                      authority that the Department has not obligated. Uncosted obligations
                      represent the portion of the Department’s authority that it has obligated
                      for goods and services but for which it has not yet incurred costs.
                      Uncosted obligations may occur because goods and services have not yet
                      been provided or they may reflect amounts no longer needed because of
                      cost underruns, reductions in the projects’ scope, or cancellation of
                      projects. DOE’s carryover balances are distributed among operating
                      activities, capital equipment procurement, and construction projects. At
                      the beginning of fiscal year 1996, DOE’s carryover balances totaled
                      $9.6 billion.

                      Over the past several years, GAO has audited DOE’s carryover balances and
                      found amounts that were no longer needed for their original purposes, and
                      thus, could be used to offset future funding requirements. For example, a
                      1994 GAO review of two DOE program areas—Environmental Management
                      and Defense Programs—identified over $500 million in unneeded funds. In
                      its most recent review, GAO found that while DOE programs need some
                      carryover balances to pay for commitments made in prior years that have
                      not been completed, the Department may have had as much as $2.1 billion
                      in operating activity and capital procurement carryover balances that were



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                       potentially available to offset the Department’s fiscal year 1997 budget
                       request. Of this total, $1.6 billion was contained in the Energy Research,
                       Energy Efficiency, and Fossil Energy programs. GAO also found that the
                       Department had $73.5 million in funding for construction projects that was
                       available. Future appropriations could be reduced to reflect these
                       carryover balances.

                       While GAO recognizes that the $2.1 billion in potentially available balances
                       represents a starting point from which to identify the amount of balances
                       that could actually be used to offset DOE’s budget, the Congress may wish
                       to consider reducing fiscal year 1998 appropriations to reflect some
                       portion of these available funds. Based on GAO’s prior work, reducing
                       appropriations by $500 million in fiscal year 1998 could achieve the
                       following savings.

Five-Year Savings
                       Dollars in millions
                                                                FY98         FY99         FY00          FY01         FY02
                       Savings from the 1997 Defense Plan
                       Budget authority                          500              0            0            0              0
                       Note: The budget authority reduction for this option is based on GAO’s estimate. CBO does not
                       estimate any corresponding reduction in outlays for the five-year period as the carryover balance
                       is reduced.

                       Source: Congressional Budget Office.




Related GAO Products   DOE’sCarryover Balances and Fiscal Year 1997 Budget (GAO/RCED-96-239R,
                       September 6, 1996).

                       DOE Management: DOE Needs to Improve Its Analysis of Carryover
                       Balances (GAO/RCED-96-57, April 12, 1996).


GAO Contact            Victor S. Rezendes, (202) 512-3841




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Option:
Department of       Authorizing committees                  Armed Services (Senate)
                                                            Energy and Natural Resources (Senate)
Energy’s Overtime                                           National Security (House)
                                                            Commerce (House)
Costs               Appropriations subcommittees            Energy and Water Development (Senate
                                                            and House)
                                                            Interior and Related Agencies (Senate and
                                                            House)
                    Primary agency                          Department of Energy
                    Accounts                                Multiple
                    Spending type                           Discretionary
                    Budget subfunctions                     Multiple
                    Framework theme                         Improve efficiency

                    The Department of Energy’s (DOE) direct overtime costs for its federal
                    employees increased from $15.5 million in 1989 to $26.5 million in 1993. In
                    1995, overtime costs dropped to about $21.9 million.

                    In the past, DOE’s efforts to manage and minimize such costs have been
                    limited. DOE has (1) incurred costs for questionable overtime work, such as
                    driving DOE officials to the airport from their homes on weekends, (2) not
                    fully utilized compensatory time as a less costly alternative to paid
                    overtime, and (3) not consistently planned annual leave to minimize the
                    use of overtime. In order to better manage overtime and minimize costs,
                    DOE should (1) ensure that the types of work driving overtime costs are
                    essential, (2) increase the use of compensatory time as an alternative to
                    paid overtime, and (3) ensure that annual leave is planned to minimize the
                    use of overtime. The Congress may wish to reduce DOE appropriations in
                    anticipation of changes in DOE’s direct overtime costs practices. The
                    following table illustrates the savings that could be realized over 5 years if
                    DOE reduced its overtime expenditures annually by 6 percent.




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Five-Year Savings
                      Dollars in millions
                                                             FY98      FY99        FY00       FY01       FY02
                      Savings from the 1997 funding level
                      Budget authority                          1          3          4           5          7
                      Outlays                                   1          2          4           5          6
                      Savings from the 1997 funding level adjusted for inflation
                      Budget authority                          1          3          4           6          7
                      Outlays                                   1          2          4           5          7
                      Source: Congressional Budget Office.




Related GAO Product   Energy Management: Department of Energy’s Efforts to Manage Overtime
                      Costs Have Been Limited (GAO/RCED-94-282, September 27, 1994).


GAO Contact           Victor S. Rezendes, (202) 512-3841




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Option:
Department of      Authorizing committees                 Armed Services (Senate)
                                                          Energy and Natural Resources (Senate)
Energy’s Cleanup                                          National Security (House)
                                                          Commerce (House)
Studies            Appropriations subcommittees           Energy and Water Development (Senate
                                                          and House)
                                                          Interior and Related Agencies (House)
                   Primary agency                         Department of Energy
                   Accounts                               Multiple
                   Spending type                          Discretionary
                   Budget subfunctions                    Multiple
                   Framework theme                        Improve efficiency

                   The Department of Energy’s (DOE) Environmental Management (EM)
                   program oversees and directs all aspects of the agency’s nuclear weapons
                   complex cleanup. DOE has been criticized for the high cost of the program
                   and for spending too much money studying sites, rather than cleaning
                   them up.

                   Remediation activities at DOE’s facilities are governed by the
                   Comprehensive Environmental Response, Compensation, and Liability Act
                   (CERCLA) of 1980, as amended, and the Resource Conservation and
                   Recovery Act (RCRA) of 1976, as amended. These laws lay out requirements
                   for identifying waste sites, studying the extent of their contamination and
                   identifying possible remedies, and involving the public in making decisions
                   about the sites. CERCLA offers three methods for determining how a waste
                   site will be remediated: the full CERCLA process, interim remedial measures,
                   and removal actions. Removal actions are the most abbreviated of the
                   three processes.

                   Removal actions save time and money and can provide other benefits,
                   such as quickly reducing continued risks to the environment. For example,
                   GAO found that removal actions cost from 80 to 90 percent less than the
                   other approaches. While DOE has a policy that encourages the greater use
                   of removal actions, DOE has made limited use of removal actions for a
                   variety of reasons, including requirements in interagency agreements and
                   contracts with DOE’s cleanup contractors that do not encourage the use of
                   removal actions. GAO also found that while complete, reliable data on the
                   number of sites where removal actions could be used is not available,
                   many of DOE’s cleanup sites share the same characteristics as the sites
                   where removal actions have been used. For example, at DOE’s Hanford



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                      facility about 33 percent of all clean-up sites are similar to those where
                      removal actions were used.

                      In fiscal year 1995, DOE spent about $845 million on studying cleanup sites
                      under CERCLA and/or RCRA. Assuming that 25 percent of these studies could
                      be performed as removal actions and that cost reductions of 85 percent
                      could be achieved for these sites, the Congress could require DOE’s EM
                      program to increase the use of removal actions and reduce DOE’s budget by
                      about $190 million.

Five-Year Savings
                      Dollars in millions
                                                             FY98      FY99        FY00       FY01       FY02
                      Savings from the 1997 funding level
                      Budget authority                        190        190        190        190         190
                      Outlays                                 143        190        190        190         190
                      Savings from the 1997 funding level adjusted for inflation
                      Budget authority                        195        200        206        211         217
                      Outlays                                 146        199        204        210         216
                      Source: Congressional Budget Office.




Related GAO Product   Nuclear Waste: Greater Use of Removal Actions Could Cut Time and Cost
                      for Cleanups (GAO/RCED-96-124, May 23, 1996).


GAO Contact           Victor S. Rezendes, (202) 512-3841




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Option:
Department of           Authorizing committees                Armed Services (Senate)
                                                              National Security (House)
Energy’s Contractors’   Appropriations subcommittees          Energy and Water Development (Senate
Separation Benefits                                           and House)
                        Primary agency                        Department of Energy
Package                 Accounts                              Multiple
                        Spending type                         Discretionary
                        Budget subfunctions                   Multiple
                        Framework theme                       Redefine beneficiaries

                        Since 1993, the Department of Energy (DOE) has spent nearly $600 million
                        to provide benefits to contractor employees separated in workforce
                        restructuring and downsizing efforts at its facilities. About 88 percent of
                        the costs were for enhanced retirement incentives or severance pay.
                        Enhanced retirement programs typically added 3 years to age and service
                        for the purpose of calculating pension benefits. Some enhanced retirement
                        programs included an additional incentive payment. Other benefits
                        included extended medical insurance and help with retraining, relocating,
                        and finding new jobs for affected employees. More than half of the
                        workforce restructuring plans provided more generous severance pay than
                        would have normally been provided by the contractors under existing
                        contracts, and all facilities provided other benefits not normally provided
                        by contractors. Moreover, benefits provided under the workforce
                        restructuring plans exceeded those that would be provided to federal
                        employees in a reduction in force.

                        As DOE continues to align its contractor workforce because of its reduced
                        defense mission and as it completes environmental cleanup efforts, it will
                        undergo further downsizing. The Congress could take action to bring
                        separation benefits in line with existing DOE contracts or with those
                        benefits provided federal employees. CBO estimates such action would
                        result in the following savings.




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Five-Year Savings
                      Dollars in millions
                                                             FY98      FY99        FY00       FY01       FY02
                      Savings from the 1997 funding level
                      Budget authority                         26          4         10          15         10
                      Outlays                                  26          4         10          15         10
                      Savings from the 1997 funding level adjusted for inflation
                      Budget authority                         27          4         11          17         12
                      Outlays                                  27          4         11          17         12
                      Source: Congressional Budget Office.




Related GAO Product   Department of Energy: Value of Benefits Paid to Separated Contractor
                      Workforce Varied Widely (GAO/RCED-97-33, January 23, 1997).


GAO Contact           Victor S. Rezendes, (202) 512-3841




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Option:
Federal Exemption to   Authorizing committees                         Armed Services (Senate)
                                                                      Energy and Natural Resources (Senate)
Certain State Taxes                                                   National Security (House)
                                                                      Commerce (House)
for Department of      Appropriations subcommittees                   Energy and Water Development (Senate
Energy’s Operating                                                    and House)
                                                                      Interior and Related Agencies (Senate and
Contractors                                                           House)
                       Primary agency                                 Department of Energy
                       Accounts                                       Multiple
                       Spending type                                  Discretionary
                       Budget subfunctions                            Multiple
                       Framework theme                                Redefine beneficiaries

                       The federal government is exempt from paying certain state taxes, such as
                       gross receipts and use taxes. However, the Department of Energy’s (DOE)
                       contractor-operated laboratories and production plants, although wholly
                       government-owned and dedicated exclusively to government programs,
                       are subject to such taxes. Because DOE has fully reimbursable contracts
                       with its operating contractors, DOE is, in effect, paying these taxes. The
                       amounts reimbursed can be significant. For example, in fiscal year 1995,
                       the contractors at DOE’s Oak Ridge and Sandia facilities were reimbursed
                       almost $69 million for gross receipts, sales, and/or use taxes. The Congress
                       could take action to designate DOE operating contractors as
                       “instrumentalities of the federal government.” Such action would make the
                       contractors immune from state taxation and thereby eliminate this
                       expense.

Five-Year Savings
                       Dollars in millions
                                                              FY98      FY99          FY00     FY01       FY02
                       Savings from the 1997 funding level
                       Budget authority                         90         90           90        90          90
                       Outlays                                  90         90           90        90          90
                       Savings from the 1997 funding level adjusted for inflation
                       Budget authority                         90         90           90        90          90
                       Outlays                                  90         90           90        90          90
                       Source: Congressional Budget Office.




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Related GAO Product   Energy Management: DOE Controls Over Contractor Expenditures Need
                      Strengthening (GAO/RCED-87-166, August 28, 1987).


GAO Contact           Victor S. Rezendes, (202) 512-3841




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Option:
Nuclear Waste          Authorizing committees                        Energy and Natural Resources (Senate)
                                                                     Commerce (House)
Disposal Fees                                                        Resources (House)
                       Primary agency                                Department of Energy
                       Spending type                                 Direct
                       Framework theme                               Improve efficiency

                       Utilities pay a fee to the Nuclear Waste Fund to finance the development
                       of storage and permanent disposal facilities for high-level radioactive
                       wastes. The amount of this fee has not changed since 1983, making the
                       fund susceptible to future budget shortfalls. To help ensure that sufficient
                       revenues are collected to cover increases in cost estimates caused by price
                       inflation, the Congress should amend the Nuclear Waste Policy Act of 1982
                       to direct the Secretary of Energy to automatically adjust for inflation the
                       nuclear waste disposal fee that utilities pay into the Nuclear Waste Fund.
                       If the fee were indexed to inflation, the following additional receipts could
                       be expected.

Five-Year Savings
                       Dollars in millions
                                                              FY98     FY99         FY00        FY01       FY02
                       Added receipts                           16       33            51          69         88
                       Source: Congressional Budget Office.




Related GAO Products   Status of Actions to Improve DOE User-Fee Assessments (GAO/RCED-92-165,
                       June 10, 1992).

                       Changes Needed in DOE User-Fee Assessments (GAO/T-RCED-91-52, May 8,
                       1991).

                       Changes Needed in DOE User-Fee Assessments to Avoid Funding Shortfall
                       (GAO/RCED-90-65, June 7, 1990).


GAO Contact            Victor S. Rezendes, (202) 512-3841




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Option:
Power Marketing        Authorizing committees                Energy and Natural Resources (Senate)
                                                             Resources (House)
Administrations Cost   Primary agency                        Department of Energy
Recovery               Spending type                         Direct
                       Framework theme                       Redefine beneficiaries

                       Three of the Department of Energy’s (DOE) power marketing
                       administrations (PMAs)—the Southeastern Power Administration, the
                       Southwestern Power Administration, and the Western Area Power
                       Administration—market primarily wholesale power in 30 states produced
                       at large, multiple-purpose water projects. The three PMAs receive annual
                       appropriations to cover operating and maintenance (O&M) expenses and, if
                       applicable, the capital investment in transmission assets. Federal law
                       requires the PMAs to repay these appropriations as well as the
                       power-related O&M and the capital appropriations expended by the
                       operating agencies generating the power.

                       GAO  identified five major power-related costs that have not been fully
                       recovered by one or more of the three PMAs through rates: (1) pensions
                       and postretirement health benefits for current employees; (2) construction
                       costs for some power-generating and transmission projects;
                       (3) construction and O&M costs that have been allocated to irrigation
                       facilities at the Pick-Sloan Program that are incomplete and infeasible;
                       (4) costs of mitigating the environmental impact of certain water projects;
                       and (5) certain O&M costs and interest expense payments due from the
                       Western Area Power Administration. In some cases, the PMAs are not
                       required to recover these costs because of legislation or DOE policy. GAO
                       estimated that these unrecovered costs amounted to about $83 million for
                       fiscal year 1995 and cumulatively as much as $1.8 billion as of
                       September 30, 1995. GAO has also determined that financing of
                       power-related capital projects is subsidized by the federal government and
                       estimates that the financing subsidies were about $200 million in fiscal
                       year 1995. GAO estimates that the cumulative financing subsidy over the
                       last 30 years has been several billion dollars.

                       The Congress and/or the Secretary of Energy may wish to consider
                       directing the PMAs to more fully recover power-related costs or revising
                       DOE’s policy on high-interest debt repayment. For example, changes could
                       be implemented to recover the full costs to the federal government of
                       providing postretirement health benefits and pensions for current




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                       employees and operating agency employees engaged in producing and
                       marketing the power sold by the PMAs. CBO estimates that such action
                       would result in the following savings.

Five-Year Savings
                       Dollars in millions
                                                       FY98    FY99      FY00         FY01         FY02
                       Added receipts                     16     16         17           17           18
                       Source: Congressional Budget Office.




Related GAO Products   Power Marketing Administrations: Cost Recovery, Financing, and
                       Comparison to Nonfederal Utilities (GAO/AIMD-96-145, September 19, 1996).

                       Federal Power: Outages Reduce the Reliability of Hydroelectric Power
                       Plants in the Southeast (GAO/T-RCED-96-180, July 25, 1996).

                       Federal Power: Recovery of Federal Investment in Hydropower Facilities
                       in the Pick-Sloan Program (GAO/T-RCED-96-142, May 2, 1996).

                       Federal Electric Power: Operating and Financial Status of DOE’s Power
                       Marketing Administrations (GAO/RCED/AIMD-96-9FS, October 13, 1995).


GAO Contact            Victor S. Rezendes, (202) 512-3841




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Option:
Federal Investment in   Authorizing committees                 Energy and Natural Resources (Senate)
                                                               Science (House)
Successfully                                                   Commerce (House)
Commercialized          Appropriations subcommittees           Energy and Water Development (Senate
                                                               and House)
Technologies                                                   Interior and Related Agencies (Senate and
                                                               House)
                        Primary agency                         Department of Energy
                        Accounts                               Multiple
                        Spending type                          Discretionary
                        Budget subfunctions                    Multiple
                        Framework theme                        Redefine beneficiaries

                        The Department of Energy (DOE) and the private sector are involved in
                        hundreds of cost-shared projects aimed at developing a broad spectrum of
                        cost-effective, energy-efficiency technologies that protect the
                        environment, support the nation’s economic competitiveness, and
                        promote the increased use of oil, gas, coal, nuclear, and renewable energy
                        resources. In June 1996, GAO reported that DOE generally does not require
                        repayment of its investment in technologies that are successfully
                        commercialized. GAO’s review identified only four DOE programs that
                        require industry repayment if the technologies are ultimately
                        commercialized. The offices in which GAO focused most of its work
                        planned to devote about $8 billion in federal funds to cost-shared projects
                        over their lifetime, of which about $2.5 billion is subject to repayment.

                        GAO’s report discussed the advantages and disadvantages of having a
                        repayment policy and pointed out that many of the disadvantages can be
                        mitigated by structuring a flexible repayment requirement with the
                        disadvantages in mind. It also discussed the types of programs and
                        projects that would be the most appropriate or suitable for repayment of
                        the federal investment.

                        Because opportunities exist for substantial repayment in some of DOE’s
                        programs, requiring repayment under a flexible policy would allow the
                        government to share in the benefits of successfully commercialized
                        technologies that could amount to hundreds of millions of dollars. The
                        potential for repayment can be illustrated by assuming that if only 50
                        percent of the $5.5 billion planned for projects that are currently not
                        subject to repayment lend themselves to repayment and if about 15
                        percent of research and development funds result in commercialized



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                      technologies (which DOE officials say is about average), then about
                      $400 million could be repaid to the federal government. However, a 5-year
                      savings estimate cannot be developed at this time because new repayment
                      provisions would only apply to future technology development projects
                      not yet negotiated with industry.


Related GAO Product   Energy Research: Opportunities Exist to Recover Federal Investment in
                      Technology Development Projects (GAO/RCED-96-141, June 26, 1996).


GAO Contact           Victor S. Rezendes, (202) 512-3841




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                •   Federal Land Policies
300 Natural     •   Collaborative Federal Land Management Approach
Resources and   •   Federal Timber Sales
Environment     •   Fair Market Value for Natural Resources
                •   Recreation Fees at Federal Sites
                •   Hardrock Mining Royalties
                •   Natural Resources Revenue Sharing
                •   Federal Water Policies
                •   Water Transfers
                •   Pollution Fees and Taxes
                •   Hazardous Waste Cleanup Cost Recovery
                •   Non-Time-Critical Removals in Superfund Cleanups
                •   Excess Funds in Superfund Contracts
                •   Weather Service Modernization Project




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Option:
Federal Land Policies       Authorizing committees                 Agriculture, Nutrition and Forestry (Senate)
                                                                   Energy and Natural Resources (Senate)
                                                                   Agriculture (House)
                                                                   Resources (House)
                                                                   Transportation and Infrastructure (House)
                            Primary agencies                       Department of the Interior
                                                                   Department of Agriculture
                            Spending type                          Direct
                            Framework theme                        Improve efficiency

                            The federal government owns and manages about 650 million
                            acres—nearly one-third of the U.S. landmass. For many years, these lands
                            have been sold or otherwise made available for a variety of purposes to
                            private citizens, corporations, and state and local governments. In many
                            cases, the rate of return received by the government for the sale or use of
                            these valuable natural resources has fallen far below reasonable
                            market-based levels.

                            This option has two components: increased fees for patenting hardrock
                            mining claims and higher fees for concessionaires operating on federal
                            lands. Descriptions of each component follow.


Increased Fees for          The Mining Law of 1872 allows holders of economically minable claims to
Patenting Hardrock Mining   obtain all rights and interests to both the land and the minerals by
Claims                      patenting them for $2.50 or $5.00 an acre—an amount that approximated
                            the fair market value for western grazing land and farmland in 1872. Over
                            the last 124 years, the federal government has sold about 3.2 million acres
                            of public lands, or an area about the size of Connecticut, under this patent
                            provision. As a result, some patent holders have reaped huge profits at the
                            government’s expense. At the time of GAO’s 1989 study, 265 patent
                            applications were pending for more than 80,000 acres of public land. At
                            just 12 of these sites, if all the land applied for was patented, the
                            government would have received about $16,000 for land appraised in 1988
                            at between $14.4 million and $47.1 million.

                            The 104th Congress considered several bills that address patenting of
                            hardrock mining claims. Two companion bills (H.R. 1580 and S.
                            506) would have repealed the current congressional moratorium against
                            new mining patents. Four other bills (H.R. 357 and its companion S. 504, as
                            well as H.R. 721 and H.R. 3102) would have eliminated patenting of mining



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                            claims. Under a seventh bill (S. 639), patenting would have granted the
                            claimholder title to the mineral only.

                            Revising the patent fees for hardrock mining claims could take many
                            forms (assuming the current moratorium on patenting is lifted). For
                            example, fees could be set to recover the agency’s administrative costs to
                            process the patents, or the fees could be set to capture the fair market
                            value of selling the land and/or the mineral resources. The amount of
                            additional receipts from increased fees would depend on the specific
                            proposal implemented. In any case, estimating savings is difficult because
                            of the large variation in surface land values, the lack of essential data
                            about the mineral resources on current claims, and the lack of multiple
                            bidders on any claim to allow a competitive process. CBO cannot develop a
                            5-year estimate of additional receipts due to increased fees for patenting
                            hardrock mining claims at this time.


Higher Fees for             The federal government enters into agreements with concessionaires to
Concessionaires Operating   provide key services in parks, forests, and other recreation areas. In 1991,
                            GAO reported that concessionaires generated about $1.4 billion in gross
on Federal Lands
                            revenues and paid the government about $35 million in concession
                            fees—an average return to the government of about 2 percent. The
                            Department of the Interior’s follow-on report to the Vice President’s
                            National Performance Review concluded that receipts from concession
                            franchise fees must be actively pursued by the National Park Service,
                            estimating that substantial revenue could be generated by promoting
                            competition, expediting contract renegotiations, and boosting the
                            government’s return.

                            The 104th Congress considered several bills that would reform concession
                            policies. All of these bills were intended to increase the return to the
                            government by limiting preferential rights of renewal, thus increasing
                            competition. H.R. 773 and S. 309 focused only on the National Park Service
                            and would have allowed the agency to keep increased fee revenue. H.R.
                            2028, which was included in the fiscal year 1996 omnibus budget
                            reconciliation bill (H.R. 2491), would have increased fees for several land
                            management agencies. Under H.R. 2028, fees up to a minimum amount
                            would have been credited to the U. S. Treasury and fees above that level
                            would have stayed within the agencies.

                            CBO cannot provide a savings estimate for higher fees at this time. The
                            Park Service has recently renegotiatied many of its existing agreements



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                               with concessionaires. Therefore, some of the savings from this option may
                               occur beyond the year 2002.


Related GAO Products
Land Ownership                 Land Ownership: Information on the Acreage, Management, and Use of
                               Federal and Other Lands (GAO/RCED-96-40, March 13, 1996).

Hardrock Mining Patents        Natural Resources Management Issues (GAO/OCG-93-17TR, December 1992).

                               Federal Land Management: The Mining Law of 1872 Needs Revision
                               (GAO/RCED-89-72, March 10, 1989).

Concessionaires Operating on   Federal Lands: Concession Reform Is Needed (GAO/T-RCED/GGD-96-223,
Federal Lands                  July 18, 1996).

                               NPS Projected Returns From Concessionaires (GAO/RCED-96-48R,
                               November 28, 1995).

                               National Parks: Difficult Choices Need to Be Made About the Future of the
                               Parks (GAO/RCED-95-238, August 30, 1995).

                               Federal Lands: Views on Reform of Recreation Concessionaires
                               (GAO/T-RCED-95-250, July 25, 1995).

                               National Parks: Difficult Choices Need to Be Made About the Future of the
                               Parks (GAO/T-RCED-95-124, March 7, 1995).

                               Federal Lands: Little Progress Made in Improving Oversight of
                               Concessionaires (GAO/T-RCED-93-42, May 27, 1993).

                               Forest Service: Little Assurance That Fair Market Value Fees Are
                               Collected From Ski Areas (GAO/RCED-93-107, April 16, 1993).

                               Federal Lands: Improvements Needed in Managing Concessionaires
                               (GAO/RCED-91-163, June 11, 1991).


GAO Contact                    Victor S. Rezendes, (202) 512-3841




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Option:
Collaborative Federal   Authorizing committees              Agriculture, Nutrition, and Forestry (Senate)
                                                            Energy and Natural Resources (Senate)
Land Management                                             Agriculture (House)
                                                            Resources (House)
Approach                Appropriations subcommittees        Interior and Related Agencies (Senate and
                                                            House)
                        Primary agencies                    Department of the Interior
                                                            Department of Agriculture
                        Accounts                            Multiple
                        Spending type                       Discretionary
                        Budget subfunction                  Conservation and Land Management
                        Framework theme                     Improve efficiency

                        The responsibilities of the four major federal land management
                        agencies—the National Park Service, Bureau of Land Management (BLM),
                        Fish and Wildlife Service within the Department of Interior, and the Forest
                        Service within the Department of Agriculture—have grown more similar
                        over time. Most notably, the Forest Service and BLM now provide more
                        noncommodity uses, including recreation and protection for fish and
                        wildlife, on their lands. In addition, managing federal lands has become
                        more complex. Managers have to reconcile differences among a growing
                        number of laws and regulations, and the authority for these laws is
                        dispersed among several federal agencies and state and local agencies.
                        These changes have coincided with two other developments—the federal
                        government’s increased emphasis on downsizing and budgetary constraint
                        and scientists’ increased understanding of the importance and functioning
                        of natural systems whose boundaries may not be consistent with existing
                        jurisdictional and administrative boundaries. Together, these changes and
                        developments suggest a basis for reexamining the processes and
                        structures under which the federal land management agencies currently
                        operate.

                        Over the last 26 years, two basic strategies have been proposed to improve
                        federal land management: (1) streamlining the existing structure by
                        coordinating and integrating functions, systems, activities, programs, and
                        field locations and (2) reorganizing the structure by combining agencies.
                        The two strategies are not mutually exclusive and some prior proposals
                        have encompassed both.

                        Over the last several years, the Forest Service and BLM have collocated
                        some offices or shared space with other federal agencies. They have also



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                       pursued other means of streamlining, sharing resources, and saving rental
                       costs. However, no significant legislation has been enacted to streamline
                       or reorganize federal land management agencies and the four major
                       federal land management agencies have not, to date, developed a strategy
                       to coordinate and integrate their functions, systems, activities, and
                       programs.

                       Without a specific restructuring proposal that would eliminate certain
                       programs or revise how the land is managed, CBO does not estimate
                       savings due to sharing resources between the four major land management
                       agencies. Savings would depend on the extent of a workforce
                       restructuring and implementation proposal.


Related GAO Products   Federal Land Management: Streamlining and Reorganization Issues
                       (GAO/T-RCED-96-209, June 27, 1996).

                       National Park Service: Better Management and Broader Restructuring
                       Efforts Are Needed (GAO/T-RCED-95-101, February 9, 1995).

                       Forestry Functions: Unresolved Issues Affect Forest Service and BLM
                       Organizations in Western Oregon (GAO/RCED-94-124, May 17, 1994).

                       Forest Service Management: Issues to Be Considered in Developing a New
                       Stewardship Strategy (GAO/T-RCED-94-116, February 1, 1994).


GAO Contact            Victor S. Rezendes, (202) 512-3841




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Option:
Federal Timber Sales   Authorizing committees                 Agriculture, Nutrition and Forestry (Senate)
                                                              Agriculture (House)
                       Appropriation subcommittees            Interior and Related Agencies (Senate and
                                                              House)
                       Primary agency                         Department of Agriculture
                       Accounts                               National Forest System (12-1106)
                                                              National Forest Service Receipts (12-9990)
                       Spending type                          Discretionary/Direct
                       Budget subfunction                     Conservation and Land Management
                       Framework theme                        Improve efficiency

                       The Department of Agriculture’s Forest Service does not always recover
                       all of its timber-related costs from the sale of timber. Currently, the
                       Service receives most of its timber funding from timber sales and from
                       appropriated funds linked primarily to timber management and harvest.

                       GAO estimated that in fiscal year 1990, under the most conservative
                       definition of costs, $35.6 million in Forest Service preparation and
                       administration expenses went unrecovered. GAO’s estimates ranged as high
                       as $112.2 million when all operating costs and payments to states were
                       considered. According to the Forest Service’s fiscal year 1995 Timber Sale
                       Program Annual Report, timber sale program costs exceeded revenues by
                       about $195 million when payments to states are considered as costs of the
                       program.

                       The escalating costs of the Forest Service’s timber sale program has long
                       been a concern of the Congress. In response to this concern, the Forest
                       Service has taken efforts to achieve cost efficiencies and is reviewing its
                       policy regarding below-cost timber sales. The primary objective of some
                       timber sales is to achieve forest stewardship objectives such as forest
                       health—generating revenues is secondary. However, notwithstanding
                       these types of timber sales, at some forests, the costs to prepare and
                       administer timber sales still exceed total receipts.

                       The Congress may wish to cease all below-cost federal timber sales. For
                       example, all future timber sales could be eliminated in three of the Forest
                       Service’s nine regions where, on average over the last decade, cash
                       expenditures have exceeded cash receipts. This also would reduce Forest
                       Service outlays for timber management, reforestation, construction of




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                       logging roads, and other program costs. CBO estimates that the following
                       net 5-year savings in federal outlays could be achieved.

Five-Year Savings
                       Dollars in millions
                                                              FY98      FY99        FY00       FY01       FY02
                       Savings from the 1997 funding level
                       Budget authority                         25         35         40          50         60
                       Outlays                                  20         30         35          45         55
                       Savings from the 1997 funding level adjusted for inflation
                       Budget authority                         25         35         40          50         60
                       Outlays                                  20         30         35          45         55
                       Source: Congressional Budget Office.




Related GAO Products   Forest Service: Observations on the Emergency Salvage Sale Program
                       (GAO/T-RCED-96-38, November 29, 1995).

                       Forest Service: Distribution of Timber Sales Receipts Fiscal Years 1992-94
                       (GAO/RCED-95-237FS, September 8, 1995).

                       Forest Service: Status of Efforts to Achieve Cost Efficiency
                       (GAO/RCED-94-185FS, April 26, 1994).

                       Forest Service Management: Issues to Be Considered in Developing a New
                       Stewardship Strategy (GAO/T-RCED-94-116, February 1, 1994).

                       Natural Resources Management Issues (GAO/OCG-93-17TR, December 1992).

                       Comments on Below-Cost Timber Bills (GAO/RCED-92-160R, April 1, 1992).

                       Forest Service Needs to Improve Efforts to Reduce Below-Cost Timber
                       Sales (GAO/T-RCED-91-43, April 25, 1991).

                       Forest Service Needs to Improve Efforts to Protect the Government’s
                       Financial Interest and Reduce Below-Cost Timber Sales (GAO/T-RCED-91-42,
                       April 24, 1991).


GAO Contact            Victor S. Rezendes, (202) 512-3841




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Option:
Fair Market Value for   Authorizing committees                 Agriculture, Nutrition and Forestry (Senate)
                                                               Energy and Natural Resources (Senate)
Natural Resources                                              Agriculture (House)
                                                               Resources (House)
                        Primary agencies                       Department of Agriculture
                                                               Department of the Interior
                        Spending type                          Direct
                        Framework theme                        Improve efficiency

                        Implementing market-based incentives and management practices may
                        encourage more economically and environmentally sound use of federal
                        lands and resources. The existing arrangement for use of the public
                        domain provides subsidies to users—such as grazers, miners, and
                        communication site lessees—that may encourage poor use of scarce
                        resources and/or deprive the government of revenues to which it is
                        entitled. In addition, certain non fee-related provisions of the governing
                        laws may also encourage less than optimal use of those lands and
                        resources. For example, currently livestock operators on Forest Service
                        lands are required to graze livestock on their allotments or lose their
                        permits. Removing this “use-it-or-lose-it” requirement would not only
                        promote economically efficient use of the resources, but also improve
                        ecological conditions on Forest Service lands since environmental groups
                        may often outbid ranchers for the permits in order to rest the land.

                        Many proposals have been advanced to alter the existing arrangements to
                        stress better use of the lands and/or increased revenue to the federal
                        government including: implementing new user fees for a variety of uses;
                        charging fair market value for goods and recovering costs for services;
                        opening certain uses to competitive bidding and removing restrictions on
                        how the land must be used; funding land management units out of net
                        receipts; and entering into partnership arrangements with other
                        governmental and non-governmental entities. Some of these ideas would
                        require specific new statutory authority, while others could be
                        implemented under current authority.

                        According to the Thoreau Institute, charging fair market value for all uses,
                        including timber, grazing, recreation, and minerals and subsequently
                        funding forests, parks, and public lands out of the net income would save
                        taxpayers more than $21 billion over 5 years. No more funds would be
                        appropriated for these uses.




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                      In this report, GAO presents several specific options that illustrate how
                      market-based incentives could be implemented. See the options “Federal
                      Land Policies,” “Federal Timber Sales,” “Recreation Fees at Federal Sites,”
                      “Hardrock Mining Royalties,” “Federal Water Policies,” and “Water
                      Transfers.”


Related GAO Product   Forest Service Management: Issues to Be Considered in Developing a New
                      Stewardship Strategy (GAO/T-RCED-94-116, February 1, 1994).


GAO Contact           Victor S. Rezendes, (202) 512-3841




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Option:
Recreation Fees at   Authorizing committees                        Agriculture, Nutrition, and Forestry (Senate)
                                                                   Energy and Natural Resources (Senate)
Federal Sites                                                      Agriculture (House)
                                                                   Resources (House)
                                                                   Transportation and Infrastructure (House)
                     Primary agencies                              Department of the Interior
                                                                   Department of Agriculture
                     Spending type                                 Direct
                     Framework theme                               Improve efficiency

                     Improved pricing of user fees at recreational sites could help defray direct
                     costs to the government, shift the cost burden from the taxpayers to the
                     beneficiaries of the services, and alleviate overcrowding at many sites.
                     Entrance and user fees are charged at some sites, but the fees generally
                     cover only a small portion of the costs for services provided to visitors.
                     For example, in 1993, the Department of the Interior’s National Park
                     Service spent an estimated $230 million on services for visitors but
                     recovered only an estimated $90 million in fees.

                     Interior’s follow-on report to the Vice President’s National Performance
                     Review concluded that reform in the nature, level, and collection of fees in
                     national parks could generate substantial revenues.

                     Fiscal year 1996 and 1997 appropriations legislation for the Park Service,
                     as well as some other land management agencies, included language that
                     permits these agencies to experiment with increased entrance fees at a
                     number of locations. In addition, legislation was introduced in the 104th
                     Congress to permanently authorize higher fees throughout the Park
                     Service and several other land management agencies.

                     Requiring the Park Service to charge fees to cover direct as well as
                     associated costs and disallowing their use for increased park spending
                     would yield net new receipts over the fiscal year 1998 through 2002 period
                     as shown in the following table. Any spending increases resulting from
                     increased fees would be subject to future appropriations action.

Five-Year Savings
                     Dollars in millions
                                                            FY98        FY99        FY00         FY01        FY02
                     Added receipts                          200            207         215       222          231
                     Source: Congressional Budget Office.




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Related GAO Products   Comments on H.R. 2107 (GAO/RCED-96-189R, June 11, 1996).

                       National Parks: Difficult Choices Need to Be Made About the Future of the
                       Parks (GAO/RCED-95-238, August 30, 1995).

                       National Parks: Difficult Choices Need to Be Made About the Future of the
                       Parks (GAO/T-RCED-95-124, March 7, 1995).

                       Natural Resources Management Issues (GAO/OCG-93-17TR, December 1992).

                       Forest Service: Difficult Choices Face the Future of the Recreation
                       Program (GAO/RCED-91-115, April 15, 1991).


GAO Contact            Victor S. Rezendes, (202) 512-3841




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Option:
Hardrock Mining        Authorizing committees                        Agriculture, Nutrition and Forestry (Senate)
                                                                     Energy and Natural Resources (Senate)
Royalties                                                            Agriculture (House)
                                                                     Resources (House)
                       Primary agencies                              Department of the Interior
                                                                     Department of Agriculture
                       Spending type                                 Direct
                       Framework theme                               Improve efficiency

                       The government receives no financial compensation for hardrock minerals
                       extracted from federal lands. In 1990, hardrock minerals worth at least
                       $1.2 billion were extracted from federal lands, while known, economically
                       recoverable reserves of hardrock minerals remaining on federal lands
                       were valued at $64.9 billion.

                       The 104th Congress considered several bills that would have imposed
                       royalties on hardrock minerals extracted from federal lands. H.R. 1580 and
                       S. 506 would have imposed a royalty of 3 percent of the net proceeds for
                       mines grossing at least $500,000 annually. Two other bills (H.R. 721 and S.
                       504) would have imposed a royalty fee of 8 percent of the gross income.
                       H.R. 357 and H.R. 3102 would have imposed a royalty of 8 percent of the
                       net smelter return. Another bill, S. 639, would have assessed royalties for
                       gold at 3 percent of the gross value, and for minerals other than gold at
                       2 percent of the gross value.

                       Assuming that the Congress adopted an 8-percent royalty on gross profits,
                       CBO estimates that the following receipts would be gained. CBO’s estimate
                       reflects a reduction since 1990 in the expected amount of hardrock
                       minerals produced on federal lands as a result of patenting.

Five-Year Savings
                       Dollars in millions
                                                              FY98     FY99         FY00          FY01     FY02
                       Added receipts                           12        55           39           39        39
                       Source: Congressional Budget Office.




Related GAO Products   Mineral Royalties: Royalties in the Western States and in Major
                       Mineral-Producing Countries (GAO/RCED-93-109, March 29, 1993).




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              Natural Resources Management Issues (GAO/OCG-93-17TR, December 1992).

              Mineral Resources: Value of Hardrock Minerals Extracted From and
              Remaining on Federal Lands (GAO/RCED-92-192, August 24, 1992).


GAO Contact   Victor S. Rezendes, (202) 512-3841




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Option:
Natural Resources   Authorizing committees                               Agriculture, Nutrition and Forestry (Senate)
                                                                         Energy and Natural Resources (Senate)
Revenue Sharing                                                          Agriculture (House)
                                                                         Resources (House)
                    Appropriations subcommittees                         Agriculture, Rural Development, and
                                                                         Related Agencies (Senate)
                                                                         Interior and Related Agencies (Senate and
                                                                         House)
                                                                         Agriculture, Rural Development, Food and
                                                                         Drug Administration, and Related
                                                                         Agencies (House)
                    Primary agencies                                     Department of the Interior
                                                                         Department of Agriculture
                    Accounts                                             Multiple
                    Spending type                                        Direct
                    Budget subfunction                                   Conservation and Land Management
                    Framework theme                                      Improve efficiency

                    The federal government collects fees from private interests for the sale or
                    use of natural resources on federal lands. A percentage of these fees is,
                    under certain conditions, allocated to states and counties as an offset for
                    tax revenues not received from the federal lands.

                    Federal land-managing agencies typically do not deduct the full costs of
                    their programs from the gross receipts that the programs generate before
                    sharing the receipts with states and counties. Sharing federal receipts on a
                    gross, rather than a net, basis often reduces the federal government’s
                    share of the revenues.

                    According to CBO, changing revenue sharing from a gross-receipt to a
                    net-receipt basis would reduce net federal outlays and produce the savings
                    shown as follows.17




                    17
                     The projected savings do not include a potential federal cost increase under the Payment in Lieu of
                    Taxes (PILT) program. Payments under the discretionary PILT program would increase by about
                    $30 million per year beginning in fiscal year 1999 if net program receipts were shared and the Congress
                    appropriated such an increase.



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Five-Year Savings
                       Dollars in millions
                                                              FY98      FY99        FY00       FY01       FY02
                       Savings from the 1997 funding level
                       Budget authority                        180        190        195        200         205
                       Outlays                                 180        190        195        200         205
                       Savings from the 1997 funding level adjusted for inflation
                       Budget authority                        180        190        195        200         205
                       Outlays                                 180        190        195        200         205
                       Source: Congressional Budget Office.




Related GAO Products   Forest Service: Distribution of Timber Sales Receipts Fiscal Years 1992-94
                       (GAO/RCED-95-237FS, September 8, 1995).

                       Natural Resources Management Issues (GAO/OCG-93-17TR, December 1992).

                       Rangeland Management: Current Formula Keeps Grazing Fees Low
                       (GAO/RCED-91-185BR, June 11, 1991).

                       Forest Service Needs to Improve Efforts to Reduce Below-Cost Timber
                       Sales (GAO/T-RCED-91-43, April 25, 1991).

                       Mineral Revenues: Collection and Distribution of Revenues From Acquired
                       Lands (GAO/RCED-90-7, August 2, 1990).


GAO Contact            Victor S. Rezendes, (202) 512-3841




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Option:
Federal Water Policies     Authorizing committees                 Energy and Natural Resources (Senate)
                                                                  Resources (House)
                           Primary agency                         Department of the Interior
                           Accounts                               Multiple
                           Spending type                          Direct
                           Budget subfunction                     Water Resources
                           Framework theme                        Improve efficiency

                           This broad option has five components: increased fees for subsidized
                           federal water to large farms, subsidized water to produce subsidized
                           crops, repayment of water project construction costs, recovery of federal
                           investment in hydropower facilities, and federal water subsidies.
                           Descriptions of each of the components follow.


Subsidized Federal Water   Under the Reclamation Reform Act of 1982, as amended, some farmers
to Large Farms             have reorganized large farming operations into multiple, smaller
                           landholdings to be eligible to receive additional federally subsidized
                           irrigation water. The act limits to 960 the maximum number of owned or
                           leased acres that individuals or legal entities (such as partnerships or
                           corporations) can irrigate with federal water at rates that exclude interest
                           on the government’s investment in the irrigation component of its water
                           resource projects. However, due to the vague definition of the term “farm,”
                           the flow of federally subsidized water to land holdings above the 960
                           acre-limit has not been stopped, and the federal government is not
                           collecting revenues to which it is entitled under the act.


Subsidized Water to        The use of federally subsidized water to produce federally subsidized
Produce Subsidized Crops   crops results in the government paying double subsidies. According to the
                           Department of the Interior, between 1976 and 1985, an average of 38
                           percent of the acreage served by the Bureau of Reclamation nationwide
                           was used to produce crops that are also eligible for subsidies through the
                           Department of Agriculture’s commodity programs. Estimates of the cost of
                           federal water subsidies vary but are substantial. The Department of the
                           Interior estimated that irrigation subsidies used to produce subsidized
                           crops throughout the 17 western states totaled $203 million in 1986; the
                           Bureau of Reclamation placed the figure at $830 million.




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Time Frame for Repaying      By the end of fiscal year 1990, after receiving water from the Central Valley
Water Project Construction   Project (CVP) in California’s Central Valley Basin for over 40 years,
Costs                        irrigators had repaid only $10 million, 1 percent, of the over $1 billion in
                             construction costs that they owe the federal government. In 1986, the
                             Congress required irrigators and other users to pay their share of the
                             federal investment in the CVP by 2030. While construction costs ultimately
                             may be recovered by 2030, the dollars that eventually flow to the Treasury
                             could be worth much less than if they had been repaid sooner. The
                             Congress may wish to accelerate the repayment schedule.


Recovery of Federal          Under the current repayment criteria, approximately $454 million of the
Investment in Hydropower     federal investment in the Pick-Sloan Basin Program (a comprehensive plan
Facilities                   to manage the water and hydropower resources of the Missouri River
                             basin) is unrecoverable. A portion of Pick-Sloan’s completed facilities
                             were intended for use with irrigation facilities that have not been
                             completed and are no longer considered feasible. In addition, as the
                             overall federal investment in the other aspects of the completed
                             hydropower facilities increases because of changes such as renovations
                             and replacements, the amount of the federal investment that is
                             unrecoverable will increase. Changing the terms of repayment to recover
                             any of the $454 million investment would require congressional action.
                             Consistent with previous congressional action concerning the program,
                             the Congress could direct the Western Area Power Administration to
                             recover the investment through power revenues and to take action to
                             minimize any impact on power rates.


Federal Interest Subsidies   Estimates of the current cost of federal water subsidies are substantial.
for Irrigators               For example, the Department of the Interior reported that irrigation
                             subsidies throughout the 17 western states totaled $534 million in 1986,
                             while the Bureau of Reclamation placed the cost at $2.2 billion. Estimates
                             differ because of different definitions of an irrigation subsidy, different
                             interest rates used to calculate the subsidies, and different methods for
                             compounding unpaid interest. Much has changed in the West since the
                             subsidies were established in 1902, and it is not known whether the
                             subsidies are still warranted or whether irrigators could pay more of the
                             cost of the water delivered.

                             The added receipts shown in the tables below would be achieved if the
                             Congress collected the full cost of federally subsidized water to large
                             farms, required CVP irrigators to repay the costs of the CVP by 2020 (roughly



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                              two-thirds the time required under current law), recovered the investment
                              in the Pick-Sloan Basin Program, and/or phased out the interest subsidy
                              for western irrigators.18

Five-Year Savings
                              Dollars in millions
                                                                       FY98          FY99         FY00         FY01          FY02
                              Option: Increased fees for subsidized water to large farms
                              Added receipts                                4            8             8            8               8
                              Source: Congressional Budget Office.



Five-Year Savings
                              Dollars in millions
                                                                       FY98          FY99         FY00         FY01          FY02
                              Option: Time frame for repaying water project construction costs
                              Added receipts                                0            3             8           11           11
                              Source: Congressional Budget Office.



Five-Year Savings
                              Dollars in millions
                                                                       FY98          FY99         FY00         FY01          FY02
                              Option: Recovery of federal investment in hydropower facilities
                              Added receipts                                0           18           18            18           18
                              Source: Congressional Budget Office.



Five-Year Savings
                              Dollars in millions
                                                                       FY98          FY99         FY00         FY01          FY02
                              Option: Federal interest subsidies for irrigators
                              Added receipts                                0            4           11            14           14
                              Source: Congressional Budget Office.




Related GAO Products
Subsidized Federal Water to   Water Subsidies: The Westhaven Trust Reinforces the Need to Change
Large Farms                   Reclamation Law (GAO/RCED-90-198, June 5, 1990).


                              18
                                Implementing some of these options would affect the potential savings from the remaining options.



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                                 Water Subsidies: Basic Changes Needed to Avoid Abuse of the 960-Acre
                                 Limit (GAO/RCED-90-6, October 12, 1989).

Subsidized Water to Produce      Natural Resources Management Issues (GAO/OCG-93-17TR, December 1992).
Subsidized Crops
                                 Reclamation Law: Changes Needed Before Water Service Contracts Are
                                 Renewed (GAO/RCED-91-175, August 22, 1991).

Time Frame for Repaying          Water Subsidies: Impact of Higher Irrigation Rates on Central Valley
Water Project Construction       Project Farmers (GAO/RCED-94-8, April 19, 1994).
Costs
                                 Reclamation Law: Changes Needed Before Water Service Contracts Are
                                 Renewed (GAO/RCED-91-175, August 22, 1991).

Recovery of Federal Investment   Federal Power: Recovery of Federal Investment in Hydropower Facilities
in Hydropower Facilities         in the Pick-Sloan Program (GAO/T-RCED-96-142, May 2, 1996).

Federal Interest Subsidies for   Water Subsidies: Impact of Higher Irrigation Rates on Central Valley
Irrigators                       Project Farmers (GAO/RCED-94-8, April 19, 1994).

                                 Natural Resources Management Issues (GAO/OCG-93-17TR, December 1992).


GAO Contact                      Victor S. Rezendes, (202) 512-3841




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Option:
Water Transfers       Authorizing committees                  Energy and Natural Resources (Senate)
                                                              Resources (House)
                      Primary agency                          Department of the Interior
                      Spending type                           Direct
                      Framework theme                         Improve efficiency

                      Water transfers, in which rights to use water are bought and sold, are a
                      mechanism for relocating scarce water to new users by allowing those
                      who place the highest economic value on it to purchase it. Water transfers
                      from irrigation to municipal and industrial uses can increase federal
                      revenues because municipal and industrial users pay rates based on their
                      full share of the project’s construction cost plus interest. In contrast, many
                      irrigators pay only a portion of their share of the construction costs and
                      are exempt from paying interest. However, increasing federal revenues
                      will reduce the net benefits to the buyers and sellers, thereby discouraging
                      some transfers. Deciding how much the Bureau of Reclamation should
                      charge for transferred water involves balancing the increase in federal
                      revenues with retaining incentives for water transfers to occur.

                      A 5-year estimate of additional receipts cannot be developed at this time.
                      The difficulties of estimating the highest economic value of water and
                      which users are willing to pay that value inhibit estimation.


Related GAO Product   Water Markets: Increasing Federal Revenues Through Water Transfers
                      (GAO/RCED-94-164, September 21, 1994).


GAO Contact           Victor S. Rezendes, (202) 512-3841




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Option:
Pollution Fees and     Authorizing committees                               Finance (Senate)
                                                                            Ways and Means (House)
Taxes                  Primary agency                                       Environmental Protection Agency
                       Spending type                                        Direct
                       Framework theme                                      Improve efficiency

                       User fees, cost reimbursement mechanisms, and pollution taxes could be
                       designed as a way to control pollutants and harmful substances by
                       preventing their further generation, thus supplementing regulatory efforts
                       to meet the objectives of existing environmental laws. These mechanisms
                       also produce significant revenues which could help defray the costs of
                       administering environmental protection programs or ultimately reduce the
                       budget deficit. Based on audit work, GAO has identified several specific
                       areas where fees and taxes might be effective, including, but not limited to
                       (1) requiring states to collect permit fees on industrial and municipal
                       dischargers to surface waters and (2) establishing a pollution tax on
                       dischargers, based on volume, toxicity, or both.

                       Based on our work, an example of a pollution fee which the Congress may
                       wish to consider is an excise tax on toxic water pollutants. Savings below
                       illustrate a tax on water pollution discharges whose rate increases with
                       the toxicity of the discharge, effective on discharges of water pollutants
                       made after December 31, 1997. Rates range from $0.65 per pound for the
                       least toxic pollutant to $63.40 per pound for the most toxic pollutant. Over
                       time, revenue from a pollution fee tax should decline since the intent of
                       such a tax is to provide an incentive to reduce the amount of pollutants
                       generated.

Five-Year Revenues
                       Dollars in billions
                                                                 FY98          FY99        FY00        FY01       FY02
                       Revenue gain                                 0.2           0.2        0.2         0.2        0.2
                       Note: JCT provided its revenue estimates in billions of dollars.

                       Source: Joint Committee on Taxation (JCT).




Related GAO Products   Environmental Protection: Implications of Using Pollution Taxes to
                       Supplement Regulation (GAO/RCED-93-13, February 17, 1993).




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              Hazardous Waste: Much Work Remains to Accelerate Facility Cleanups
              (GAO/RCED-93-15, January 19, 1993).

              Drinking Water: Widening Gap Between Needs and Available Resources
              Threatens Vital EPA Program (GAO/RCED-92-184, July 6, 1992).

              Water Pollution: Stronger Efforts Needed by EPA to Control Toxic Water
              Pollution (GAO/RCED-91-154, July 19, 1991).

              Environmental Protection: Meeting Public Expectations With Limited
              Resources (GAO/RCED-91-97, June 18, 1991).


GAO Contact   Peter F. Guerrero, (202) 512-6111




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Option:
Hazardous Waste   Authorizing committees                 Environment and Public Works (Senate)
                                                         Commerce (House)
Cleanup Cost                                             Transportation and Infrastructure (House)
Recovery          Appropriations subcommittees           VA, HUD, and Independent Agencies
                                                         (Senate and House)
                  Primary agency                         Environmental Protection Agency
                  Account                                Hazardous Substance Superfund
                                                         (20-8145)
                  Spending type                          Discretionary
                  Budget subfunction                     Pollution Control and Abatement
                  Framework theme                        Improve efficiency

                  The Comprehensive Environmental Response, Compensation and Liability
                  Act (CERCLA), which created the Superfund program, requires that the
                  parties responsible for contaminating Superfund sites clean them up or
                  reimburse the Environmental Protection Agency (EPA) for doing so.
                  However, through 1995, EPA had reached agreements with responsible
                  parties to recover only 14 percent of its costs. Recoveries have been low
                  because EPA has narrowly defined which costs it will seek to
                  recover—excluding, for example, research and development costs. As a
                  result, the agency has foregone any opportunity to recover over $3.8
                  billion in indirect costs. Moreover, CERCLA prevents EPA from charging
                  polluters hundreds of millions of dollars in additional interest on the cost
                  EPA incurs to clean up Superfund sites by setting an interest rate
                  significantly lower than commercial rates and preventing the accrual of
                  interest on costs until demand for payment is made. If EPA had been
                  allowed to accrue interest at a commercial rate from the date funds were
                  expended, GAO estimates that $105 million in interest could have been
                  accrued in 1990 on the funds EPA expended in fiscal year 1989 alone.

                  EPA should amend its definition of recoverable costs to permit greater
                  recoveries. The Congress should amend CERCLA to allow EPA to recover
                  from responsible parties more interest on the cost it incurs to clean up
                  Superfund sites.

                  Savings could not be estimated due to EPA’s varying success in collecting
                  the full amount of current penalty and interest charges.




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Related GAO Products   Superfund: EPA Has Opportunities to Increase Recoveries of Costs
                       (GAO/RCED-94-196, September 28, 1994).

                       Superfund: More Settlement Authority and EPA Cost Controls Could
                       Increase Cost Recovery (GAO/RCED-91-144, July 18, 1991).

                       Superfund: A More Vigorous and Better Managed Enforcement Program Is
                       Needed (GAO/RCED-90-22, December 14, 1989).


GAO Contact            Peter F. Guerrero, (202) 512-6111




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Option:
Non-Time-Critical    Authorizing committees                 Environment and Public Works (Senate)
                                                            Commerce (House)
Removals in                                                 Transportation and Infrastructure (House)
Superfund Cleanups   Appropriations subcommittees           VA, HUD, and Independent Agencies
                                                            (Senate and House)
                     Primary agency                         Environmental Protection Agency
                     Account                                Hazardous Substance Superfund (20-8145)
                     Spending type                          Discretionary
                     Budget subfunction                     Pollution Abatement and Control
                     Framework theme                        Improve efficiency

                     Superfund is the Environmental Protection Agency’s (EPA) program for
                     cleaning up the nation’s highly contaminated hazardous waste sites, either
                     through undertaking a cleanup action itself or compelling responsible
                     private parties to do so. After spending more than 16 years and $15 billion
                     on Superfund, cleanups have been completed at only about 400 of the
                     1,300 sites currently on EPA’s priority cleanup list.

                     EPA has two processes for conducting Superfund cleanups: (1) the removal
                     process which is typically used to respond to urgent situations, and (2) the
                     remedial process which has traditionally been used for conducting more
                     comprehensive cleanup actions. To accelerate the cleanup of Superfund
                     sites, EPA has begun expanding the use of its removal process to conduct
                     substantial nonemergency cleanup actions. These Non-Time-Critical (NTC)
                     removals result in equally protective but quicker cleanups than under the
                     remedial process because they streamline cleanup planning. NTC removals
                     can be used to clean up at least a portion of almost any Superfund site,
                     particularly the highest risk portions.

                     In April 1996, we reported on the 81 cleanup actions that EPA had
                     conducted under the NTC removal process. We found that compared to the
                     remedial process, the NTC removal process accelerated cleanup actions by
                     an average of 2 years per action and, consequently, reduced human health
                     risks sooner and prevented the further spread of contamination. Using NTC
                     removals also reduced the cost of the cleanup actions, from $4.1 million to
                     $3.6 million, on average, for a savings of $500,000 per action.

                     If NTC removals were consistently used, the backlog of contaminated sites
                     in the Superfund program could be more quickly addressed. This would




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                       reduce total costs over the life of the Superfund program but, given the
                       current backlog, could not be expected to yield short-term savings.


Related GAO Products   A Superfund Tool for More Efficient Cleanups (GAO/RCED-96-134R, April 15,
                       1996).

                       Superfund: Non-Time-Critical Removals as a Tool for Faster and Less
                       Costly Cleanups (GAO/T-RCED-96-137, April 17, 1996).

                       Time and Cost Limits on Superfund Removals (GAO/RCED-96-195R, June 10,
                       1996).


GAO Contact            Peter F. Guerrero, (202) 512-6111




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Option:
Excess Funds in       Authorizing committees                 Environment and Public Works (Senate)
                                                             Commerce (House)
Superfund Contracts   Appropriations subcommittees           VA, HUD, and Independent Agencies
                                                             (Senate and House)
                      Primary agency                         Environmental Protection Agency
                      Account                                Hazardous Substances Superfund
                                                             (20-8145)
                      Spending type                          Discretionary
                      Budget subfunction                     Pollution Control and Abatement
                      Framework theme                        Improve efficiency

                      The Environmental Protection Agency’s (EPA) Superfund program, which
                      the Congress created in 1980, was intended to clean up those sites
                      considered to be the most serious of the hazardous waste sites identified
                      in the United States. EPA is authorized to compel parties responsible for
                      causing the hazardous waste pollution to clean up the sites. If these parties
                      cannot be found, or if a settlement with them cannot be reached, EPA can
                      hire contractors to conduct the clean up. EPA has reported spending over
                      $10 billion for cleaning up nonfederal Superfund sites.

                      If EPA took more aggressive action in identifying and closing completed
                      contracts under the Superfund program, excess amounts could be
                      recovered and used for new Superfund work, obviating the need for
                      additional appropriations to perform such work. During fiscal years 1990
                      through 1996, EPA obligated about $4.4 billion dollars for Superfund
                      contracts. As the work is performed under these contracts, the contractors
                      are paid and EPA’s obligations are liquidated. For various reasons, the
                      amount of funds obligated for a particular contract often exceeds the
                      amount eventually paid to the contractor. In these circumstances, the
                      unspent funds should be deobligated and used for other Superfund
                      activities, once the original contracts are closed.

                      In 1994, EPA’s Office of Inspector General reported that contracts awarded
                      under the Superfund program had balances of over $100 million in unspent
                      obligated funds that were no longer needed for their original purposes. In
                      the same year, an EPA task force was established to develop guidance on
                      and pursue the recovery of excess funds. However, in May 1996 we
                      reported that substantial amounts remained obligated for completed
                      projects. Using EPA data systems, we identified $164 million in potential
                      recoveries, and we encouraged EPA to aggressively pursue these




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                      recoveries. EPA’s failure to take aggressive actions in identifying and
                      closing completed contracts in the past has contributed greatly to its
                      failure to recover unneeded funds. For example, in some cases, contracts
                      had not been closed when work had been completed many years ago.

                      Our current work, which will be completed by May 1997, indicates that
                      similar excess funds could be available during fiscal year 1998.
                      Accordingly, in considering EPA’s fiscal year 1998 budget request, the
                      Congress may wish to consider reducing EPA’s budget to encourage the
                      agency to aggressively seek recovery of such funds. For example, the
                      Congress may want to reduce EPA’s fiscal year 1998 appropriation by
                      $164 million to encourage greater recovery of funds.

Five-Year Savings
                      Dollars in millions
                                                             FY98      FY99        FY00       FY01       FY02
                      Savings from the 1997 funding level
                      Budget authority                        164          0          0           0          0
                      Outlays                                  41         57         33          16          8
                      Savings from the 1997 funding level adjusted for inflation
                      Budget authority                        164          0          0           0          0
                      Outlays                                  41         57         33          16          8
                      Source: Congressional Budget Office.




Related GAO Product   Environmental Protection: Selected Issues Related to EPA’s Fiscal Year
                      1997 Appropriation (GAO/T-RCED-96-164, May 1, 1996).


GAO Contact           Peter F. Guerrero, (202) 512-6111




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Option:
Weather Service         Authorizing committees                 Commerce, Science, and Transportation
                                                               (Senate)
Modernization Project                                          Science (House)
                        Appropriations subcommittees           Commerce, Justice, State, and the
                                                               Judiciary (Senate)
                                                               Commerce, Justice, State, the Judiciary,
                                                               and Related Agencies (House)
                        Primary agency                         Department of Commerce
                        Account                                Operations, Research and Facilities
                                                               (13-1450)
                        Spending type                          Discretionary
                        Budget subfunction                     Other Natural Resources
                        Framework theme                        Reassess objectives

                        The National Weather Service (NWS) uses a variety of systems and manual
                        processes to collect, process, and disseminate weather data to and among
                        its network of field offices and regional and national centers. Many of
                        these systems and processes are outdated, and during the 1980s, NWS
                        began modernizing its systems. NWS’ current modernization project
                        includes four new major system development programs including the
                        Advanced Weather Interactive Processing System (AWIPS). AWIPS is
                        designed to integrate for the first time satellite, radar, and other data to
                        support weather forecaster decision-making and communications. NWS
                        estimates that the AWIPS workstations and network will cost $525 million
                        and be fully deployed in 1999.

                        GAO reports and testimony note that NWS has not demonstrated that all
                        AWIPS capabilities will result in the promised mission improvements, such
                        as better forecasts, fewer field offices, and reduced staffing levels.
                        Therefore, GAO recommended that NWS (1) expand ongoing AWIPS
                        requirements review activities to include validation that proposed
                        capabilities are justified on the basis of mission impact and (2) implement
                        only those capabilities that are validated. NWS disagreed with this
                        recommendation stating that completed and ongoing requirements
                        reviews and risk reduction activities as well as operational test and
                        evaluation of each AWIPS software release are sufficient to ensure that
                        unneeded AWIPS capabilities are revised or not implemented. However, GAO
                        believes that none of the NWS-cited activities were or are intended to
                        demonstrate the mission impact of AWIPS capabilities.




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                       Recently, the Congress, in conference report language accompanying the
                       National Oceanic and Atmospheric Administration’s 1997 appropriations
                       bill, placed a cap of $525 million on AWIPS and recommended that the
                       Commerce Department delay a decision to deploy AWIPS nationwide until it
                       conducts more operational testing. Unless NWS validates AWIPS capabilities
                       to measurable mission improvements, it runs the risk of wasting
                       taxpayers’ money. Savings could potentially be achieved depending on the
                       outcome of the capabilities validation.


Related GAO Products   Weather Forecasting: Recommendations to Address New Weather
                       Processing System Development Risks (GAO/AIMD-96-74, May 13, 1996).

                       Weather Forecasting: NWS Has Not Demonstrated That New Processing
                       System Will Improve Mission Effectiveness (GAO/AIMD-96-29, February 29,
                       1996).

                       Weather Forecasting: New Processing System Faces Uncertainties and
                       Risks (GAO/T-AIMD-96-47, February 29, 1996).

                       Weather Forecasting: Radars Far Superior to Predecessors, but Location
                       and Availability Questions Remain (GAO/T-AIMD-96-2, October 17, 1995).

                       Weather Service Modernization Staffing (GAO/AIMD-95-239R, September 26,
                       1995).

                       Weather Forecasting: Radar Availability Requirements Not Being Met
                       (GAO/AIMD-95-132, May 31, 1995).

                       Weather Forecasting: Unmet Needs and Unknown Costs Warrant
                       Reassessment of Observing System Plans (GAO/AIMD-95-81, April 21, 1995).

                       Weather Service Modernization Questions (GAO/AIMD-95-106R, March 10,
                       1995).

                       Weather Service Modernization: Despite Progress, Significant Problems
                       and Risks Remain (GAO/T-AIMD-95-87, February 21, 1995).

                       Weather Forecasting: Improvements Needed in Laboratory Software
                       Development Processes (GAO/AIMD-95-24, December 14, 1994).




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              Weather Forecasting: Systems Architecture Needed for National Weather
              Service Modernization (GAO/AIMD-94-28, March 11, 1994).

              Weather Forecasting: Important Issues on Automated Weather Processing
              System Need Resolution (GAO/IMTEC-93-12BR, January 6, 1993).


GAO Contact   Joel C. Willemssen, (202) 512-6253




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                  •   Food Aid: Public Law 480 Title I Program
350 Agriculture   •   The Market Access Program
                  •   Export Credit Guarantee Programs
                  •   Agricultural Research Service Funding
                  •   USDA Telecommunications and Information Systems




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Option:
Food Aid: Public   Authorizing committees                  Agriculture, Nutrition and Forestry (Senate)
                                                           Commerce, Science and Transportation
Law 480 Title I                                            (Senate)
                                                           Agriculture (House)
Program            Appropriations subcommittees            Agriculture, Rural Development, and
                                                           Related Agencies (Senate)
                                                           Agriculture, Rural Development, Food and
                                                           Drug Administration, and Related
                                                           Agencies (House)
                   Primary agency                          Department of Agriculture
                   Accounts                                P.L. 480 Grants (12-2278)
                                                           P.L. 480 Program (12-2277)
                   Spending type                           Discretionary/Direct
                   Budget subfunction                      Farm Income Stabilization
                   Framework theme                         Reassess objectives

                   Through the Public Law 480 Title I Food Aid Program, U.S. agricultural
                   commodities are sold to developing countries on long-term credit at
                   below-market interest rates. The current goal of the program is to promote
                   the foreign policy of the United States by enhancing the food security of
                   developing countries. The Public Law 480 legislation specifies ways that
                   agricultural commodities provided under the program can support this
                   goal, including their use to promote broad-based, sustainable (BBS)
                   development, and develop and expand markets for U.S. agricultural
                   commodities.

                   Title I’s contribution to BBS development and long-term market
                   development for U.S. agricultural goods is limited for many reasons. The
                   value of foreign exchange a country might save through purchasing Title I
                   commodities on concessional terms—the vehicle through which BBS
                   development could occur—is small relative to the country’s development
                   needs. Also, the program provides the Department of Agriculture (USDA)
                   little leverage to influence development activities or initiate policy reforms
                   in the recipient country. Further, other competing objectives dilute
                   whatever leverage might be associated with the program.

                   Title I’s contribution to long-term, foreign market development for U.S.
                   agricultural commodities has not been demonstrated. Title I commodities
                   tend to be price sensitive; therefore, it is difficult to transform the
                   concessional market share established through the Title I program into




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commercial market share, unless the United States can offer competitive
prices and financing.

In addition, legislatively mandated program requirements (particularly
cargo preference rules and reexport restrictions) impose constraints on
recipients that undermine market development efforts.

Title II of the Federal Agriculture Improvement and Reform (FAIR) Act of
1996 amended the Title I program to provide greater program flexibility,
make improvements in operations and administration, and extend
authority to enter into new agreements through 2002. Notably, the FAIR Act
(1) authorized agreements with private entities in addition to foreign
governments, (2) eliminated the minimum repayment period of 10 years
for Title I concessional credits and reduced the maximum grace period
from 7 to 5 years, (3) permitted an agricultural trade organization to carry
out a project or program in a developing country using funds derived from
Title I sales if the organization has a market development plan approved
by the Secretary of Agriculture, and (4) simplified the process by which
the Secretary determines the commodities eligible for the program.

Despite these reforms, and the management streamlining required in 1990
amendments to the Title I program, multiple and sometimes competing
objectives, as well as contradictory program requirements, continue to
encumber the Title I program, making it difficult to create and implement
an effective program strategy. Furthermore, the reforms did not address
primary concerns regarding the program’s level of effectiveness in
developing long-term foreign markets and achieving economic
development. Thus, from this perspective, the Congress may wish to
consider reducing or eliminating funding for the Title I program. The
savings presented below assume that the program authority would not be
extended beyond fiscal year 1998.19 The delay would permit USDA to lower
production through an increased acreage set-aside in 1998 which would
not build surpluses or otherwise affect the budget.




19
 The savings include $14 million for ocean freight differential costs for the shipment of agricultural
commodities.



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Five-Year Savings
                       Dollars in millions
                                                              FY98      FY99        FY00       FY01       FY02
                       Savings from the 1997 funding level
                       Budget authority                          0        200        200        200         200
                       Outlays                                   0        110        190        200         200
                       Savings from the 1997 funding level adjusted for inflation
                       Budget authority                          0        210        216        221         227
                       Outlays                                   0        116        203        219         224
                       Source: Congressional Budget Office.




Related GAO Products   Farm Bill Export Options (GAO/GGD-96-39R, December 15, 1995).

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

                       Cargo Preference Requirements: Objectives Not Significantly Advanced
                       When Used in U.S. Food Aid Programs (GAO/GGD-94-215, September 29,
                       1994).

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


GAO Contact            Benjamin F. Nelson, (202) 512-4128




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Option:
The Market Access   Authorizing committees                 Agriculture, Nutrition and Forestry (Senate)
                                                           Agriculture (House)
Program             Primary agency                         Department of Agriculture
                    Accounts                               Commodity Credit Corporation Fund
                                                           (12-4336)
                    Spending type                          Direct
                    Budget subfunction                     Farm Income Stabilization
                    Framework theme                        Redefine beneficiaries

                    Under the Agriculture Trade Title (Title II) of the Federal Agriculture
                    Improvement and Reform (FAIR) Act of 1996, the Congress changed the
                    name of the Market Promotion Program to the Market Access Program.
                    The Market Access Program is an export promotion program that
                    subsidizes overseas promotional activities for U.S. agricultural products.
                    The program uses government funds to help U.S. producers, exporters,
                    and trade associations finance cost-share promotional activities for U.S.
                    agricultural products abroad. The Foreign Agricultural Service (FAS)
                    operates the Market Access Program through 65 not-for-profit associations
                    that either run the programs themselves or pass funds through to other
                    entities.

                    Adequate assurance does not exist to demonstrate that Market Access
                    Program funds are supporting additional promotional activities rather than
                    simply replacing company/industry funds. Moreover, FAS has not provided
                    adequate guidance or oversight in targeting Market Access Program funds
                    to smaller and new-to-export industries which are less likely to supplant
                    them.

                    Under Title II of the FAIR Act, the Congress cut annual program funding
                    from $110 million to $90 million for fiscal years 1996 through 2002. The
                    legislation also prohibits program funding for direct assistance of branded
                    promotions from being provided to foreign companies for promotion of
                    foreign produced products or to companies that are not recognized as
                    small business concerns under the Small Business Act, with the exception
                    of cooperatives and nonprofit trade associations.

                    Based on the examinations of the program since its inception, members of
                    Congress have asked GAO to continue monitoring this program to ensure
                    that executive and legislative branch reforms are effectively and efficiently
                    implemented, particularly those pertaining to funding additionality,




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                       graduation of private companies out of the program, and greater small
                       company participation. Because questions have been raised as to whether
                       continued substantial funding of large cooperatives is consistent with the
                       intent of the program, further program funding reductions might be
                       considered. In addition, based on graduation criteria effective in fiscal
                       year 1999, some companies may no longer be eligible for subsidies. This
                       could facilitate the reduction of program funding levels. For example, if
                       the Congress were to reduce the annual program funding to $50 million for
                       fiscal years 1998 through 2002, the following savings could be achieved.

Five-Year Savings
                       Dollars in millions
                                                              FY98      FY99        FY00       FY01       FY02
                       Savings from the 1997 funding level adjusted for inflation
                       Budget authority                         40         40         40          40         40
                       Outlays                                   3         31         40          40         40
                       Source: Congressional Budget Office.




Related GAO Products   Agricultural Trade: Competitor Countries Foreign Market Development
                       Programs (GAO/T-GGD-95-184, June 14, 1995).

                       Farm Bill Export Options (GAO/GGD-96-39R, December 15, 1995).

                       International Trade: Changes Needed to Improve Effectiveness of the
                       Market Promotion Program (GAO/GGD-93-125, July 7, 1993).

                       U.S. Department of Agriculture: Improvements Needed in Market
                       Promotion Program (GAO/T-GGD-93-17, March 25, 1993).


GAO Contact            Benjamin F. Nelson, (202) 512-4128




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Option:
Export Credit        Authorizing committees                 Agriculture, Nutrition and Forestry (Senate)
                                                            Agriculture (House)
Guarantee Programs   Primary agency                         Department of Agriculture
                     Accounts                               Commodity Credit Corporation Loans
                                                            Program Account (12-1336)
                                                            Commodity Credit Corporation Fund
                                                            (12-4336)
                     Spending type                          Direct
                     Budget subfunction                     Farm Income Stabilization
                     Framework theme                        Reassess objectives

                     Under the U.S. Department of Agriculture (USDA), the Export Credit and
                     Intermediate Export Credit Guarantee Programs are major agricultural
                     export promotion programs. The main objective of these programs is to
                     increase U.S. agricultural exports. Based on legislative requirements, USDA
                     is required to make a total of $5.5 billion in government loan guarantees
                     available each year to foreign country buyers of U.S. agricultural
                     commodities.

                     Since the programs began in the 1980s, and as of January 1997, the
                     government had paid out approximately $7.8 billion in claims because of
                     loan repayment defaults and reschedulings by foreign country buyers. Past
                     operations of the programs have incurred high costs because USDA had
                     provided a large amount of guarantees to high-risk countries, such as Iraq
                     and the former Soviet Union. Guarantees had been extended to such
                     high-risk countries for market development reasons and foreign policy
                     considerations. Extending guarantees and increasing exposure to new and
                     existing high-risk participants will result in higher program costs.

                     The Agriculture Trade Provisions (Title II) of the Federal Agriculture
                     Improvement and Reform Act of 1996 reformed the operations of the
                     Export Credit Guarantee Programs. Notably, the Act: (1) authorized
                     short-term supplier credit guarantees; (2) listed criteria to be used by the
                     Secretary of Agriculture in deciding whether a country is creditworthy for
                     intermediate-term credit guarantees; (3) mandated annual program levels
                     at $5.5 billion through 2002 but allowed for flexibility in how much is
                     provided for each program; (4) clarified that the 1 percent maximum
                     origination fee is to be applied to the amount of short-term credit to be
                     guaranteed and removed the cap on the origination fee charged for
                     Commodity Credit Corporation Facilities Financing Guarantees; and
                     (5) permitted the use of credit guarantees for high-value products with at



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                       least 90 percent U.S. content by weight. Minimum amounts of credit
                       guarantees will be required to be available for processed and high-value
                       products: 25 percent in 1996 and 1997; 30 percent in 1998 and 1999; and
                       35 percent thereafter. Minimum requirements are not applicable if they
                       cause a reduction in total commodity sales under the program.

                       It is unclear that the export credit guarantee programs have resulted in
                       increased agricultural exports. Also, there is a history of poor management
                       control of these programs, principally because USDA officials viewed the
                       export credit guarantee programs as “commercial” programs that are
                       subject to the normal controls that exist for commercial sales
                       transactions. USDA is taking steps to improve program management.

                       The Congress may wish to reduce the programs’ budgets. For example,
                       reducing guarantees for sales to high-risk countries would permit
                       reductions in annual loan guarantees to about $3 billion, about
                       $800 million less than current levels assumed in CBO’s baseline. The
                       Congress may also wish to consider whether such beneficiary countries
                       might be more appropriately assisted with food aid programs. However,
                       this would offset some or all of the savings cited in the following table.

Five-Year Savings
                       Dollars in millions
                                                              FY98      FY99        FY00       FY01       FY02
                       Savings from the 1997 funding level adjusted for inflation
                       Budget authority                        108        143        147        154         159
                       Outlays                                 108        143        147        154         159
                       Source: Congressional Budget Office.




Related GAO Products   Farm Bill Export Options (GAO/GGD-96-39R, December 15, 1995).

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

                       GSM Export Credit Guarantees (GAO/GGD-94-211R, September 29, 1994).

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




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              Loan Guarantees: Export Credit Guarantee Programs’ Costs Are High
              (GAO/GGD-93-45, December 22, 1992).


GAO Contact   Benjamin F. Nelson, (202) 512-4128




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Option:
Agricultural Research   Authorizing committees                              Agriculture, Nutrition, and Forestry
                                                                            (Senate) Agriculture (House)
Service Funding         Appropriations subcommittees                        Agriculture, Rural Development, and
                                                                            Related Agencies (Senate)
                                                                            Agriculture, Rural Development, Food and
                                                                            Drug Administration, and Related
                                                                            Agencies (House)
                        Primary agency                                      Department of Agriculture
                        Account                                             Agricultural Research Service (12-1400)
                        Spending type                                       Discretionary
                        Budget subfunction                                  Agricultural Research and Services
                        Framework theme                                     Reassess objectives

                        The U.S. agricultural research system is decentralized and diverse,
                        spanning federal, state, and private institutions. The Agricultural Research
                        Service (ARS), which was appropriated about $717 million for its fiscal year
                        1997 research activities, conducts most federal in-house agricultural
                        research in laboratories located nationwide and in several foreign
                        countries. ARS’ role is to develop the knowledge essential to solving
                        technical agricultural problems that are broad in scope and have high
                        national priority.

                        In June 1996, GAO provided information on ARS’ fiscal year 1996 research
                        projects that the Congress could use if it chose to reduce ARS funding. As
                        of January 29, 1996, ARS had used about 91 percent of its fiscal year 1996
                        research appropriations to fund 1,198 projects at an estimated cost of
                        $648 million. Of the projects, 495 (valued at $257 million) involved mostly
                        nonbasic research.20 Similarly, 432 projects (valued at $220 million) were
                        outside the high-priority research areas designated in ARS’ 6-year
                        implementation plan. GAO identified 148 projects valued at $78 million
                        which fell into both of these categories.

                        Should the Congress wish to reduce nonbasic federal agricultural research
                        and/or research that is not high-priority, we believe the ARS budget could
                        sustain a commensurate reduction. For example, the Congress could
                        eliminate the 148 projects which involved mostly nonbasic research and
                        were outside high-priority research areas.



                        20
                          Nonbasic research is applied and developmental research, which produces knowledge relevant to a
                        technology or service and is generally completed in a few years. In contrast, basic research creates
                        new knowledge and may take years to complete.



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Five-Year Savings
                       Dollars in millions
                                                              FY98      FY99        FY00       FY01       FY02
                       Savings from the 1997 funding level
                       Budget authority                         78         78         78          78         78
                       Outlays                                  61         73         78          78         78
                       Savings from the 1997 funding level adjusted for inflation
                       Budget authority                         81         83         86          89         92
                       Outlays                                  63         78         85          88         91
                       Source: Congressional Budget Office.




Related GAO Products   ARS’   Research Activities (GAO/RCED-96-153R, June 14, 1996).

                       Agricultural Research: Information on Research System and USDA’s Priority
                       Setting (GAO/RCED-96-92, March 28, 1996).


GAO Contact            Robert A. Robinson, (202) 512-5138




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Option:
USDA                 Authorizing committees                Agriculture, Nutrition, and Forestry
                                                           (Senate)
Telecommunications                                         Agriculture (House)
and Information      Appropriations subcommittees          Agriculture, Rural Development, and
                                                           Related Agencies (Senate)
Systems                                                    Agriculture, Rural Development, Food and
                                                           Drug Administration, and Related
                                                           Agencies (House)
                     Primary agency                        Department of Agriculture
                     Accounts                              Multiple
                     Spending type                         Discretionary
                     Budget subfunction                    Multiple
                     Framework theme                       Improve efficiency

                     The U.S. Department of Agriculture (USDA) and its 29 component agencies
                     spend over $100 million on telecommunications annually, including more
                     than $50 million for commercial telecommunications services obtained
                     from over 1,500 telephone companies.

                     We have reported that USDA does not cost-effectively manage and plan its
                     telecommunications resources. USDA agencies are spending hundreds of
                     millions of dollars continuing to develop their own telecommunications
                     networks that overlap and perpetuate long-standing information sharing
                     problems. We also found that USDA agencies waste millions of dollars each
                     year paying for (1) unnecessary telecommunications services, (2) leased
                     equipment that is not used and services billed for but never provided, and
                     (3) commercial carrier services that cost more than 3 times what they
                     would under the Federal Telecommunications System 2000 program. In
                     addition, USDA pays tens of thousands of dollars each month for collect and
                     long-distance calls without knowing whether such calls are appropriate.
                     We found that about 50 percent of all collect calls accepted by USDA
                     officials in the Washington, D.C., metropolitan area over a 4-month period
                     were from callers at correctional institutions. We also found that USDA
                     wasted tens of thousands of dollars because it had not established
                     adequate procedures for reviewing bills to verify the appropriateness of
                     telephone charges made by private vendors.

                     Although the full extent of USDA’s telephone fraud, waste, and abuse
                     problem is unknown, USDA officials have indicated that as much as
                     $15 million to $30 million could be saved annually by eliminating
                     redundant commercial telecommunications services and by sharing



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                       resources. If our recommendations to the Secretary to take aggressive
                       action to improve USDA’s management of telecommunications and
                       information systems were fully implemented, we believe substantial
                       savings could be achieved. However, the amount of such savings cannot
                       be known with certainty until USDA takes action to fully identify and
                       eliminate spending on fraudulent and wasteful telecommunications
                       services.


Related GAO Products   USDATelecommunications: More Effort Needed to Address Telephone
                       Abuse and Fraud (GAO/AIMD-96-59, April 16, 1996).

                       USDATelecommunications: Better Management and Network Planning
                       Could Save Millions (GAO/AIMD-95-203, September 22, 1995).

                       USDA   Telecommunications (GAO/AIMD-95-219R, September 5, 1995).

                       USDA Telecommunications: Missed Opportunities to Save Millions
                       (GAO/AIMD-95-97, April 24, 1995).


GAO Contact            Joel C. Willemssen, (202) 512-6253




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                   •   Rural Housing Loans Interest Recapture
370 Commerce and   •   Use of Sampling for the 2000 Decennial Census
Housing Credit




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Option:
Rural Housing Loans   Authorizing committees                 Banking, Housing, and Urban Affairs
                                                             (Senate)
Interest Recapture                                           Banking and Financial Services (House)
                      Appropriations subcommittees           Agriculture, Rural Development, and
                                                             Related Agencies (Senate)
                                                             Agriculture, Rural Development, Food and
                                                             Drug Administration, and Related
                                                             Agencies (House)
                      Primary agency                         Department of Agriculture
                      Account                                Rural Housing Insurance Fund (12-2081)
                      Spending type                          Direct
                      Budget subfunction                     Mortgage Credit
                      Framework theme                        Redefine beneficiaries

                      The Housing Act of 1949, as amended, requires the U.S. Department of
                      Agriculture’s Rural Housing Service (RHS) to recapture a portion of the
                      subsidy provided over the life of direct housing loans it makes when the
                      borrower sells or vacates a property. The rationale being that because
                      taxpayers paid a portion of the mortgage, they are entitled to a portion of
                      the property’s appreciation.

                      In a recent report, we pointed out that because recapture is not mandated
                      when homes are refinanced, RHS’ policy allows borrowers who pay off
                      direct RHS loans but continue to occupy the properties to defer the
                      payments for recapturing the subsidies. As of June 30, 1995, RHS’ records
                      showed that about $119 million was owed by borrowers who had
                      refinanced their mortgages but continue to occupy the properties. RHS
                      does not charge interest on the amounts owed by these borrowers.

                      Legislative changes could be made to allow RHS to charge market rate
                      interest on recapture amounts owed by borrowers to help recoup the
                      government’s administrative and borrowing costs. CBO’s estimate of the
                      savings for this option is presented on a net present value basis as required
                      by the Federal Credit Reform Act of 1990. Actual savings could differ
                      depending on how this proposal would affect the rate at which homes are
                      sold.




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Five-Year Savings
                      Dollars in millions
                                                             FY98   FY99     FY00        FY01       FY02
                      Budget authority                         50      0         0           0          0
                      Outlays                                  50      0         0           0          0
                      Source: Congressional Budget Office.




Related GAO Product   Rural Housing Programs: Opportunities Exist for Cost Savings and
                      Management Improvement (GAO/RCED-96-11, November 16, 1995).


GAO Contact           Judy A. England-Joseph, (202) 512-7631




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Option:
Use of Sampling for       Authorizing committees                 Governmental Affairs (Senate)
                                                                 Government Reform and Oversight (House)
the 2000 Decennial        Appropriations subcommittees           Commerce, Justice, State, and the
Census                                                           Judiciary and Related Agencies (Senate
                                                                 and House)
                          Primary agency                         Department of Commerce
                          Account                                Periodic Censuses and Programs
                                                                 (13-0450)
                          Spending type                          Discretionary
                          Budget subfunction                     Other Advancement of Commerce
                          Framework theme                        Improve efficiency

                          Since 1992, GAO reports and testimonies have identified opportunities to
                          reduce the cost of the 2000 Decennial Census without decreasing
                          accuracy. The Census Bureau estimated that using the 1990 census-taking
                          approach without modification could cost about $4.8 billion in current
                          dollars for the 2000 Decennial Census.

                          GAO believes the Census Bureau should pursue several cost-saving options
                          currently being evaluated by the Bureau. Census Bureau estimates suggest
                          that the use of these options could result in savings for the 2000 Decennial
                          Census. These options are as follows:

                      •   Promoting a higher mail response rate by simplifying and streamlining the
                          census questionnaire and using a strategy of multiple mail contacts. A
                          simplified, more user-friendly questionnaire could promote better
                          response rates by reducing the time and effort needed for respondents to
                          understand and complete the form. Additionally, tests have shown that the
                          use of multiple contacts, such as targeted reminder cards and second
                          mailings, improves response rates.
                      •   Using the Postal Service to identify vacant and invalid addresses during
                          the mailing of questionnaires to avoid costly and unnecessary follow-up
                          efforts. In order to maximize savings, the Census Bureau must ascertain
                          the earliest point at which vacant and invalid housing units are accurately
                          classified to eliminate futile follow-up on them.
                      •   Gathering data on only a sample of those households not responding by
                          mail, rather than attempting to contact them all in person. Savings
                          estimates would vary according to the initial percentage of households
                          responding by mail and the sampling rate and method selected.




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                       The Census Bureau estimates that it could have saved between
                       $700 million and $800 million of the $2.6 billion that it spent on the 1990
                       Decennial Census if it had incorporated the procedures listed above.
                       Almost all of these savings would have occurred in fiscal year 1990. With
                       inflation and workload adjustments, this figure should be somewhat
                       higher for fiscal year 2000.

                       In addition, by eliminating or reducing costly labor-intensive address list
                       operations through greater reliance on the Postal Service and local
                       communities, the Census Bureau estimates that it could save as much as
                       $188 million for the 2000 Census. This cooperative effort will be
                       permissible under 1994 legislation (P.L. 103-430). To realize these savings,
                       the Census Bureau estimated in 1995 that it would incur costs of about
                       $5.1 million in fiscal years 1995, 1996, and 1997. However, thereafter, the
                       Bureau will generate net savings of $13.5 million in fiscal year 1998,
                       between $129.4 million and $179.4 million in fiscal year 1999, and another
                       $10.8 million in fiscal year 2000.

                       The dollar amounts above are Census Bureau estimates. The Census
                       Bureau will have to spend several million each year to prepare for the
                       change. However, the Census Bureau should require less in budget
                       authority to accomplish the 2000 Decennial Census than it would without
                       implementing this proposal. Because of the unique nature of the census, a
                       cyclical program with the majority of spending occurring once every 10
                       years, estimates against an interim year baseline would be inappropriate.

                       To illustrate the potential savings, CBO estimates that using sampling for
                       nonresponse follow-up for the 2000 Decennial Census could result in the
                       following savings.


Five-Year Savings
                       Dollars in millions
                                                              FY98   FY99     FY00        FY01       FY02
                       Budget authority                          0      0       500           0          0
                       Outlays                                   0      0       395        105           0
                       Source: Congressional Budget Office.




Related GAO Products   Decennial Census: Fundamental Design Decisions Merit Congressional
                       Attention (GAO/T-GGD-96-37, October 25, 1995).




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              Decennial Census: 1995 Test Census Presents Opportunities to Evaluate
              New Census-Taking Methods (GAO/T-GGD-94-136, September 27, 1994).

              Decennial Census: Promising Proposals, Some Progress, but Challenges
              Remain (GAO/T-GGD-94-80, January 26, 1994).

              Decennial Census: Test Design Proposals Are Promising, but Fundamental
              Reform Is Still at Risk (GAO/T-GGD-94-12, October 7, 1993).

              Decennial Census: Focused Action Needed Soon to Achieve Fundamental
              Breakthroughs (GAO/T-GGD-93-32, May 27, 1993).

              Decennial Census: Fundamental Reform Jeopardized by Lack of Progress
              (GAO/T-GGD-93-6, March 2, 1993).

              Transition Series: Commerce Issues (GAO/OCG-93-12TR, December 1992).

              Decennial Census: 1990 Results Show Need for Fundamental Reform
              (GAO/GGD-92-94, June 9, 1992).


GAO Contact   L. Nye Stevens, (202) 512-7824




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                     •   State Share of State-Supported Intercity Rail Passenger Service
400 Transportation   •   Amtrak Subsidies
                     •   Military Airport Program Funds
                     •   Cargo Preference Laws
                     •   Fees Paid by Foreign-Flagged Cruise Ships
                     •   Department of Transportation’s Oversight of Its University Research
                     •   Fees for Certification of New Airlines
                     •   Fees for Registering Aircraft




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Option:
State Share of      Authorizing committees                              Commerce, Science, and Transportation
                                                                        (Senate)
State-Supported                                                         Transportation and Infrastructure (House)
Intercity Rail      Appropriations subcommittees                        Transportation (Senate)
                                                                        Transportation and Related Agencies
Passenger Service                                                       (House)
                    Primary agency                                      Department of Transportation
                    Account                                             Grants to National Railroad Passenger
                                                                        Corporation
                                                                        (69-0704)
                    Spending type                                       Discretionary
                    Budget subfunction                                  Ground Transportation
                    Framework theme                                     Redefine beneficiaries

                    Section 403(b) of the Rail Passenger Service Act authorizes Amtrak to
                    initiate and/or operate intercity rail services, in addition to its basic
                    system, when such services are financially supported by the states. As of
                    January 1996, Amtrak had contracts with 11 states to operate such service
                    over 15 routes.21 These operations account for about 15 percent of
                    Amtrak’s ridership. Under the provisions of the Rail Passenger Service Act,
                    the states contribute at least 45 percent of section 403(b) service operating
                    losses in the first year of operation and 65 percent of these losses in
                    subsequent years. For service that began prior to 1989, states reimburse
                    Amtrak for short-term avoidable losses, while for service that began after
                    1989, states reimburse Amtrak for long-term avoidable losses. Although
                    long-term avoidable losses are a larger amount than short-term avoidable
                    losses, they are only about 55 percent of losses that are based on fully
                    allocated costs—including capital costs. The states do pay 50 percent of
                    the capital equipment costs (primarily depreciation and interest)
                    associated with section 403(b) service.

                    In fiscal year 1994, Amtrak sustained about $82.2 million in losses on
                    section 403(b) services and this increased to $88.2 million in fiscal year
                    1995. The states receiving section 403(b) services contributed $32.6 million
                    in 1994 and $35.7 million in 1995. These amounts are consistent with
                    Amtrak’s experience in recent years. However, Amtrak is planning to
                    substantially increase the share of section 403(b) service losses that the
                    individual states will bear. In fiscal year 1996, Amtrak planned to collect
                    $72.6 million in state contributions to cover section 403(b) losses.


                    21
                     These states were Alabama, California, Illinois, Michigan, Missouri, New York, North Carolina,
                    Wisconsin, Oregon, Washington, and Vermont.



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                       However, it actually collected $64.2 million. Amtrak plans to eventually
                       recover the fully allocated losses from section 403(b) services, but has not
                       yet secured the states’ agreement.

                       The Congress could require that the states reimburse Amtrak for the fully
                       allocated costs of providing section 403(b) services. While this is Amtrak’s
                       goal, supporting legislation would pave the way for fully allocated loss
                       reimbursement. Currently, Amtrak must negotiate reimbursement with
                       each state and the state contributions vary widely. On the basis of
                       Amtrak’s experience in recent years (as opposed to its plan for the current
                       year), the following savings would apply if federal subsidies were reduced
                       by the estimated 403(b) losses that Amtrak now must absorb.

Five-Year Savings
                       Dollars in millions
                                                              FY98      FY99        FY00       FY01       FY02
                       Savings from the 1997 funding level
                       Budget authority                         46         46         46          46         46
                       Outlays                                  46         46         46          46         46
                       Savings from the 1997 funding level adjusted for inflation
                       Budget authority                         47         48         50          51         52
                       Outlays                                  47         48         50          51         52
                       Source: Congressional Budget Office.




Related GAO Products   Amtrak’s Strategic Business Plan: Progress to Date (GAO/RCED-96-187,
                       July 24, 1996).

                       Northeast Rail Corridor: Information on Users, Funding Sources, and
                       Expenditures (GAO/RCED-96-144, June 27, 1996).

                       Intercity Passenger Rail: Amtrak’s Financial and Operating Conditions
                       Threaten Its Longterm Viability (GAO/RCED-95-71, February 6, 1995).


GAO Contact            John H. Anderson, Jr., (202) 512-2837




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Option:
Amtrak Subsidies   Authorizing committees                  Commerce, Science, and Transportation
                                                           (Senate)
                                                           Transportation and Infrastructure (House)
                   Appropriations subcommittees            Transportation (Senate)
                                                           Transportation and Related Agencies
                                                           (House)
                   Primary agency                          Department of Transportation
                   Account                                 Grants to National Railroad Passenger
                                                           Corporation
                                                           (69-0704)
                   Spending type                           Discretionary
                   Budget subfunction                      Ground Transportation
                   Framework theme                         Reassess objectives

                   Amtrak’s financial condition has deteriorated rapidly in the first half of the
                   decade, seriously threatening Amtrak’s ability to provide high-quality
                   passenger rail service nationwide. The time has come for Amtrak and the
                   federal government to make key long-term decisions concerning the
                   quality and extent of passenger rail service and the government’s
                   commitment to subsidize such operations. Recognizing Amtrak’s need for
                   financial support, the Congress has provided significant funding since
                   Amtrak began operating in 1971. Since 1990, however, Amtrak’s federal
                   subsidy has not covered the gap between operating expenses and
                   revenues. Total operating deficits had exceeded federal operating
                   subsidies by $175 million. This imbalance occurred because passenger
                   revenues have been lower than projected while expenses have been higher
                   than expected. Furthermore, between 1990 and 1994, Amtrak steadily
                   reduced its working capital by $254 million. Although Amtrak’s working
                   capital position improved in fiscal year 1995, current liabilities still
                   exceeded current assets by $149 million.

                   Over the next few years, Amtrak will face difficult and costly challenges
                   that could impede its financial recovery. At the same time, Amtrak faces
                   few opportunities to substantially increase revenues. The challenges
                   include (1) maintaining its aging passenger cars, (2) modernizing the
                   Beech Grove, Indiana, repair facility, which services all equipment used
                   outside the Northeast Corridor, (3) modernizing its locomotive and
                   passenger car fleet, acquiring high-speed trains, and continuing rail
                   improvements in the Northeast Corridor, (4) negotiating new operating
                   agreements with the freight railroads, which own about 97 percent of the
                   track over which Amtrak operates, (5) negotiating labor issues and work



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rules with Amtrak’s union employees, and (6) incurring higher costs for
employee health benefits and environmental clean-up.

To address its financial and operating problems, Amtrak has developed a
strategic and business plan that is designed to eliminate the need for
federal operating subsidies by the year 2002. To facilitate the proposed
changes, Amtrak has been reorganized into strategic business units (SBU)
which are responsible for different “product lines.” The West Coast SBU is
responsible for operations in California, Washington, and Oregon; the
Northeast Corridor SBU is responsible for the Metroliners and other
operations between Washington and Boston; and the Intercity SBU has
responsibility for the remaining rail passenger operations. The parent SBU
in Washington, D.C., handles the corporate operations, such as legal affairs
and national advertising, that transcend the geographic areas covered by
the SBUs. Amtrak believes that decentralization of authority and
responsibility, combined with route, service, and fare changes, will allow it
to achieve operating self-sufficiency. However, Amtrak’s plan is predicated
on continued availability of federal funds for capital improvements,
greater state support for 403(b) services, and significant productivity
savings. While Amtrak continues to work toward eliminating federal
operating subsidies by the year 2002, it remains to be seen whether it can
achieve self-sufficiency if its assumptions are not wholly fulfilled.

If substantially increasing the level of federal funding for Amtrak,
especially for capital investments, is not possible in today’s budgetary
environment, now may be the time for the Congress to consider refocusing
Amtrak’s efforts and reducing its current route system, retaining service in
locations where Amtrak can carry the largest number of passengers in the
most cost-effective manner. The Congress could consider establishing a
temporary commission similar to the military base closure commission to
restructure Amtrak’s operations and reduce the route network so that
efficient and quality service can be provided within the available funding
from all sources—federal, state and local, and private.

Savings estimates cannot be made until specific proposals are developed
regarding changes in Amtrak operations and routes. These estimates
cannot be made because restructuring proposals would affect the amount
of the reduction in federal funding for Amtrak’s capital, operating, and
Northeast Corridor activities.




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Related GAO Products   Amtrak’s Strategic Business Plan: Progress to Date (GAO/RCED-96-187,
                       July 24, 1996).

                       Northeast Rail Corridor: Information on Users, Funding Sources, and
                       Expenditures (GAO/RCED-96-144, June 27, 1996).

                       Intercity Passenger Rail: Amtrak’s Financial and Operating Conditions
                       Threaten Its Longterm Viability (GAO/RCED-95-71, February 6, 1995).

                       Amtrak: Key Decisions Need to be Made in the Face of Deteriorating
                       Financial Condition (GAO/T-RCED-94-186, April 13, 1994).

                       Amtrak: Deteriorated Financial Condition and Costly Future Challenges
                       (GAO/T-RCED-94-145, March 23, 1994).

                       Amtrak: Financial Condition has Deteriorated and Future Costs Make
                       Recovery Difficult (GAO/T-RCED-94-155, March 17, 1994).


GAO Contact            John H. Anderson, Jr., (202) 512-2834




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Option:
Military Airport   Authorizing committees                  Commerce, Science, and Transportation
                                                           (Senate)
Program Funds                                              Transportation and Infrastructure (House)
                   Primary agency                          Department of Transportation
                   Account                                 Grants-in-Aid for Airports (Airport and
                                                           Airway Trust Fund)
                                                           (69-8106)
                   Spending type                           Discretionary/Direct
                   Budget subfunction                      Air Transportation
                   Framework theme                         Improve efficiency

                   The Airport Improvement Program (AIP), the nation’s multibillion dollar
                   program for planning and improving its airport infrastructure, includes
                   legislatively established funding categories for specific uses. One such
                   category—the Military Airport Program (MAP)—was established in 1990 to
                   assist current and former military airports located in congested
                   metropolitan areas in converting to viable civilian airports.

                   However, 9 of the 12 airports selected by the Federal Aviation
                   Administration (FAA) to participate in MAP do not meet key legislatively
                   established program goals. Five of the airports are not located in
                   congested air traffic areas and are unlikely to increase capacity, either in
                   major metropolitan areas or systemwide. Nine airports selected had
                   already been operating as joint or civilian airports for 10 or more years,
                   and many of these already had the types of facilities in place that the
                   program was designed to develop.

                   The Congress could suspend participation in MAP or further limit
                   participation. In extending authorization for the AIP in 1996, the Congress
                   reduced from 15 to 12 the number of airports that could participate in MAP
                   during a fiscal year. The Congress retained the criteria that to participate
                   in MAP an airport would reduce congestion at airports experiencing 20,000
                   hours of annual delays in their commercial passenger traffic. Also, the
                   Congress revised the criteria to allow MAP designation for recently closed
                   and realigned military airfields under the Defense Base Closure and
                   Realignment Acts that could be classified as civil commercial or reliever
                   airports. The Congress also could limit participation to those airports
                   where first civilian use occurred after the 1988 and later base closure and
                   realignment processes. If the Congress did not wish airports participating
                   in MAP to receive AIP funding in lieu of MAP funding, it would need to specify
                   this. However, because any or all of these actions could result in a



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                      redirection rather than a reduction in AIP spending, the Congress also
                      would need to reduce the contract authority and obligation limitation for
                      the AIP to achieve savings. Given past problems in selecting airports that
                      meet legislatively-established criteria, one option the Congress could
                      consider is eliminating MAP as shown in the table below.

Five-Year Savings
                      Dollars in millions
                                                             FY98      FY99        FY00       FY01       FY02
                      Savings from the 1997 funding level
                      Budget authority                         19         19         19          19         19
                      Outlays                                   3         11         15          17         18
                      Savings from the 1997 funding level adjusted for inflation
                      Budget authority                         19         19         20          21         21
                      Outlays                                   3         11         16          18         20
                      Source: Congressional Budget Office.




Related GAO Product   Airport Improvement Program: The Military Airport Program Has Not
                      Achieved Intended Impact (GAO/RCED-94-209, June 30, 1994).


GAO Contact           John H. Anderson, Jr., (202) 512-2834




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Option:
Cargo Preference   Authorizing committees                             Commerce, Science, and Transportation
                                                                      (Senate)
Laws                                                                  Transportation and Infrastructure (House)
                   Appropriations subcommittees                       Multiple
                   Primary agency                                     Multiple
                   Accounts                                           Multiple
                   Spending type                                      Discretionary
                   Budget subfunction                                 Water transportation
                   Framework theme                                    Reassess objectives

                   Cargo preference laws require that certain government-owned or financed
                   cargo shipped internationally be carried on U.S.-flagged vessels. This
                   guarantees a minimum amount of business for the U.S. merchant fleet.
                   This promotes other sectors of the maritime industry because U.S.-flagged
                   vessels are required by law to be crewed by U.S. mariners, are generally
                   required to be built in U.S. shipyards, and are encouraged to be maintained
                   and repaired in U.S. shipyards. In addition, U.S.-flag carriers commit to
                   providing capacity in time of national emergencies.

                   However, because U.S.-flagged vessels often charge higher rates to
                   transport cargo than foreign-flagged vessels, cargo preference laws
                   increase the government’s transportation costs. For fiscal years 1989
                   through 1993, four federal agencies—the Departments of Defense,
                   Agriculture, and Energy and the Agency for International
                   Development—were responsible for more than 99 percent, by tonnage, of
                   government cargo subject to cargo preference laws.22 Cargo preference
                   laws increased these federal agencies’ transportation costs by an
                   estimated $578 million per year in fiscal years 1989 through 1993 because
                   U.S.-flagged vessels generally charge more to carry cargo than their
                   foreign-flagged counterparts. The average was about $710 million per year
                   when the costs associated with the Persian Gulf War were included. In an
                   October 1996 letter to GAO, the Maritime Administrator claimed that CBO’s
                   estimate23 of savings from the elimination of cargo preference laws was
                   too high but agreed that savings would occur.



                   22
                    Currently, the Departments of Defense and Agriculture, the Agency for International Development,
                   and the Export-Import Bank are responsible for most of the payments made to shippers under cargo
                   preference laws.
                   23
                    See Addressing the Deficit: Updating the Budgetary Implications of Selected GAO Work
                   (GAO/OCG-96-5, June 28, 1996) for CBO’s previous estimate of savings for this option.



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                       The effect of cargo preference laws on the U.S. merchant marine industry
                       is mixed. On one hand, the share of international oceanborne cargo
                       carried by U.S. vessels has declined despite cargo preference laws because
                       most oceanborne international cargo is not subject to cargo preference
                       laws. On the other hand, these laws appear to have a substantial impact on
                       the U.S. merchant marine industry by providing incentive for vessels to
                       remain in the U.S. fleet.

                       If the Congress eliminated cargo preference laws, federal agencies would
                       save hundreds of millions of dollars yearly, but the U.S. fleet would be
                       significantly smaller and shipboard jobs would be lost. If the laws were
                       eliminated, the following savings could be achieved.24

Five-Year Savings
                       Dollars in millions
                                                                FY98         FY99         FY00          FY01         FY02
                       Savings from the 1997 funding level
                       Budget authority                          216           266          317           367          418
                       Outlays                                   154           238          295           346          397
                       Savings from the 1997 funding level adjusted for inflation
                       Budget authority                          221           279          341           406          477
                       Outlays                                   157           250          315           381          450
                       Source: Congressional Budget Office.




Related GAO Products   Management Reform: Implementation of the National Performance
                       Review’s Recommendations (GAO/OCG-95-1, December 5, 1994).

                       Maritime Industry: Cargo Preference Laws—Their Estimated Costs and
                       Effects (GAO/RCED-95-34, November 30, 1994).

                       Cargo Preference: Effects of U.S. Export-Import Cargo Preference Laws
                       on Exporters (GAO/GGD-95-2BR, October 31, 1994).




                       24
                        The termination of cargo preference requirements for all government-sponsored cargoes would
                       probably cause additional defaults on outstanding loans guaranteed by the Maritime Administration.
                       CBO estimates that such defaults would increase mandatory spending by between $2 million and
                       $20 million over the next several years.



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              Cargo Preference Requirements: Objectives Not Significantly Advanced
              When Used in U.S. Food Aid Programs (GAO/GGD-94-215, September 29,
              1994).

GAO Contact   John H. Anderson, Jr., (202) 512-2834




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Option:
Fees Paid by        Authorizing committees                        Judiciary (Senate and House)

Foreign-Flagged     Primary agency                                Department of Justice
                    Spending type                                 Direct
Cruise Ships        Framework theme                               Redefine beneficiaries

                    The multibillion dollar passenger cruise market in the United States is
                    almost exclusively served by foreign-flagged cruise vessels. With the
                    exception of two, there are no oceangoing U.S.-flagged cruise vessels of
                    any substantial size. Access to the U.S. market is, therefore, a very
                    lucrative privilege, which is made even more so because the vessels and
                    their crews pay virtually no corporate or personal U.S. income tax.

                    To ensure adequate shoreside facilities, the safety of U.S. passengers and
                    property, and enforcement of immigration laws, the federal government
                    has enacted laws and dispersed responsibility for their administration and
                    enforcement throughout several departments and agencies of the federal
                    government. This raises the question of whether the foreign-flagged cruise
                    vessels, which are enjoying substantial profits as a result of their
                    monopoly, are paying their fair share of the cost to the federal government
                    of ensuring that this extremely valuable U.S. market operates safely and in
                    accordance with our laws and regulations.

                    Seven agencies provide services to foreign-flagged cruise vessels. For
                    fiscal year 1993, we found that all but two agencies—the Coast Guard and
                    the Immigration and Naturalization Service (INS)—charged fees for these
                    services that were about equal to or exceeded their costs to provide the
                    services. In 1996, the Congress authorized the Coast Guard to begin
                    collecting fees for its inspection services. However, INS is still not
                    collecting fees that recover the cost of passenger inspections because
                    passengers are exempt from its fee when arriving at a port of entry in the
                    United States on a cruise originating in Canada, Mexico, a territory or
                    possession of the United States, or any adjacent island. If the Congress
                    lifted this exemption, the following savings would occur.

Five-Year Savings
                    Dollars in millions
                                                           FY98     FY99         FY00        FY01       FY02
                    Added receipts                           37       37            37          37         37
                    Source: Congressional Budget Office.




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Related GAO Product   None

GAO Contact           John H. Anderson, Jr., (202) 512-2834




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Option:
Department of         Authorizing committees                 Commerce, Science and Transportation
                                                             (Senate)
Transportation’s                                             Transportation and Infrastructure (House)
Oversight of Its      Appropriations subcommittees           Transportation (Senate)
                                                             Transportation and Related Agencies
University Research                                          (House)
                      Primary agency                         Department of Transportation
                      Accounts                               Multiple
                      Spending type                          Discretionary
                      Budget subfunction                     Ground, Air, Water, and Other
                                                             Transportation
                      Framework theme                        Improve efficiency

                      The Department of Transportation (DOT) conducts a variety of research to
                      enhance safety, mobility, environmental quality, efficiency, and economic
                      growth in the nation’s transportation system. The results of DOT’s research
                      programs include prototypes of systems, new operating procedures, data
                      used to focus policy decisions, and regulations. Within DOT several offices
                      are responsible for the oversight of research and development activities. In
                      addition, each of DOT’s operating administrations is responsible for
                      reviewing and monitoring its own research to ensure that the university
                      awards’ objectives are met and the costs are appropriate.

                      While DOT’s spending on research at universities has grown significantly
                      between fiscal years 1988 and 1993, DOT does not have an integrated plan
                      to ensure that sponsored research is needed to meet departmental goals.
                      In addition, a lack of oversight on some university awards led to
                      overcharges of almost $450,000 and unpaid cost-sharing totaling $3 million
                      in a sample of awards reviewed in detail. More effective planning and
                      management of the research program could reduce costs by limiting
                      duplicate research and ensuring that recipients follow award guidelines on
                      allowable costs and cost sharing.

                      As GAO recommended, DOT has completed the development of a
                      departmentwide database to track the purpose and costs associated with
                      each university research award. GAO continues to recommend that DOT
                      evaluate the operating administrations’ processes to ensure that they have
                      adequate policies and procedures to carry out their responsibilities for
                      monitoring awards.




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                      CBO does not disagree that improved monitoring and oversight of DOT’s
                      university research can reduce outlays. GAO findings of overcharges and
                      unpaid cost sharing for a sample of grants suggest that the Congress could
                      slow DOT’s university research spending by reducing appropriations until
                      improvements in necessary planning and management processes are
                      made. However, savings from this option would depend on which among
                      many small accounts are reduced and the amounts of these reductions.


Related GAO Product   Department of Transportation: University Research Activities Need
                      Greater Oversight (GAO/RCED-94-175, May 13, 1994).


GAO Contact           John H. Anderson, Jr., (202) 512-2834




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Option:
Fees for Certification   Authorizing committees                  Commerce, Science, and Transportation
                                                                 (Senate)
of New Airlines                                                  Transportation and Infrastructure (House)
                         Primary agency                          Department of Transportation
                         Spending type                           Direct
                         Framework theme                         Redefine beneficiaries

                         To obtain the necessary certification to begin operations, applicants
                         currently pay nominal fees to the Department of Transportation’s (DOT)
                         Office of the Secretary (OST) but nothing to the Federal Aviation
                         Administration (FAA). The fees that applicants currently pay represent only
                         a small fraction of what it costs the government to conduct certification
                         activities. For example, applicants that completed OST’s and FAA’s
                         certification processes paid an average fee of $760 for certification, less
                         than 1 percent of the government’s average estimated cost of $154,000 to
                         certify each applicant.

                         Department of Transportation officials said that a portion of the
                         certification costs is recouped from ticket and fuel taxes paid by the
                         operating airlines. These taxes are deposited into the Airport and Airway
                         Trust Fund. Even so, applicants do not pay into the fund until they begin
                         operations; therefore, applicants that never begin operations never
                         contribute to the fund. For example, 80 of the 180 applicants that filed
                         applications with OST between January 1990 and July 1995 never began
                         operations and thus had never contributed to the fund.

                         OST and FAA officials recognize that the existing fees are insufficient to
                         cover certification costs but have not yet determined the appropriateness
                         of the current fee structures. OST has recently undertaken a review of all
                         fees it charges for aviation licensing activities, which were last updated 10
                         years ago, and plans to issue a notice of proposed rulemaking to update
                         the fees. According to the Deputy Director of the Flight Standards Service,
                         FAA plans to examine all services, such as new airlines, pilot training, and
                         aircraft inspection requiring certificates and to review the existing fee
                         structures to determine the extent to which the government’s costs have
                         been or should be recouped. Legislation introduced in the 104th Congress
                         would have allowed FAA to charge fees for various aviation services,
                         including new airline certification fees.




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                      If the Congress were to direct OST and FAA to fully recover the costs of
                      airline certification from applicants, the following revenue could be
                      achieved.

Five-Year Savings
                      Dollars in millions
                                                             FY98   FY99     FY00        FY01       FY02
                      Added receipts                            3      3         3           3          3
                      Source: Congressional Budget Office.




Related GAO Product   Certification of New Airlines: Department of Transportation Has Taken
                      Action to Improve Its Certification Process (GAO/RCED-96-8, January 11,
                      1996).


GAO Contact           John H. Anderson, Jr. (202) 512-2834




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Option:
Fees for Registering   Authorizing committees                        Commerce, Science, and Transportation
                                                                     (Senate)
Aircraft                                                             Transportation and Infrastructure (House)
                       Primary agency                                Department of Transportation
                       Spending type                                 Direct
                       Framework theme                               Redefine beneficiaries

                       In 1977, the Congress amended the Federal Aviation Act and identified
                       three categories of aircraft owners—U.S. citizens, resident aliens, and
                       U.S.-based foreign companies—that may register aircraft in the United
                       States. To register an aircraft, an eligible owner submits a $5 fee. As of the
                       end of fiscal year 1996, 307,503 aircraft were registered in the United
                       States. From fiscal year 1993 to 1996, the number of registrations
                       processed annually has ranged from about 45,000 to 49,000.

                       In 1993, we reported that the Federal Aviation Administration (FAA) was
                       not fully recovering the cost of processing aircraft registration
                       applications and estimated that, by not increasing fees since 1968 to
                       recover costs, FAA had foregone about $6.5 million in additional revenue.
                       In 1993, we recommended that FAA accelerate implementation of rules it
                       proposed in 1990 for increasing aircraft registration fees. FAA now expects
                       that a Notice of Proposed Rulemaking will be issued in November 1997,
                       with an effective date of January 1998. The Congress may want to
                       encourage FAA to meet these milestones in order to avoid any further
                       losses in revenues.

                       If FAA recovered the full cost of processing aircraft registration
                       applications, the following additional revenue could be achieved.

Five-Year Savings
                       Dollars in millions
                                                              FY98     FY99         FY00        FY01       FY02
                       Added receipts                            1            1         1           1            1
                       Source: Congressional Budget Office.




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Related GAO Product   Aviation Safety: Unresolved Issues Involving U.S.-Registered Aircraft
                      (GAO/RCED-93-135, June 18, 1993).


GAO Contact           John H. Anderson, Jr. (202) 512-2834




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                    •   Eligibility for Federal Emergency Management Agency Public Assistance
450 Community and
Regional
Development




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Option:
Eligibility for Federal   Authorizing committees                  Environment and Public Works (Senate)
                                                                  Transportation and Infrastructure (House)
Emergency                 Appropriations subcommittees            VA, HUD and Independent Agencies
Management Agency                                                 (Senate and House)
                          Primary agency                          Federal Emergency Management Agency
Public Assistance         Account                                 Disaster Relief Fund (58-0104)
                          Spending type                           Discretionary
                          Budget subfunction                      Disaster relief and insurance
                          Framework theme                         Redefine beneficiaries

                          The Federal Emergency Management Agency’s (FEMA) Public Assistance
                          Program helps pay state and local governments’ costs of repairing and
                          replacing eligible public facilities and equipment damaged by natural
                          disasters. It also pays other disaster-related costs, such as debris removal,
                          emergency protective measures, and the administrative costs of managing
                          the recovery effort. Many private nonprofit organizations, such as schools,
                          hospitals, and utilities are also eligible for assistance. The cost of the
                          Public Assistance Program has increased dramatically in recent years—in
                          constant 1995 dollars, FEMA obligated over $6.5 billion in public assistance
                          for 246 disasters and emergencies declared during fiscal years 1989
                          through 1994, as compared with about $1 billion for 151 disasters and
                          emergencies declared during the preceding 6 fiscal years. Although much
                          of this is due to increased disaster activity, changes in the amount and
                          types of assistance provided and eligible recipients of assistance have also
                          been a factor.

                          In a May 1996 report, GAO presented a number of options identified by
                          public assistance program officials in FEMA’s 10 regional offices that, if
                          implemented, could reduce the cost of the program. Among the options
                          recommended most strongly were: placing limits on the appeals process;
                          eliminating eligibility for some facilities that generate revenue, lack
                          required insurance, or are not delivering government services; and limiting
                          the impact of codes and standards. Savings for all of these options could
                          not be estimated because it is difficult to isolate the effects of fluctuating
                          disaster activity versus changes in eligibility and because FEMA’s data base
                          does not enable the separation of costs related to some of these options.
                          However, CBO estimates that eliminating eligibility for all private nonprofit
                          organizations—many of which are revenue-generating facilities such as
                          utilities, hospitals, and universities—would yield the following savings.




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Five-Year Savings
                       Dollars in millions
                                                              FY98      FY99        FY00       FY01       FY02
                       Savings from the 1997 funding level
                       Budget authority                         52         52         52          52         52
                       Outlays                                  10         23         34          42         47
                       Savings from the 1997 funding level adjusted for inflation
                       Budget authority                         53         55         56          58         59
                       Outlays                                  11         24         36          45         51
                       Source: Congressional Budget Office.




Related GAO Products   Disaster Assistance: Improvements Needed in Determining Eligibility for
                       Public Assistance (GAO/RCED-96-113, May 23, 1996).

                       Disaster Assistance: Improvements Needed in Determining Eligibility for
                       Public Assistance (GAO/T-RCED-96-166, April 30, 1996).


GAO Contact            Judy A. England-Joseph, (202) 512-7631




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                  •   Consolidation of Student Aid Programs
500 Education,    •   Consolidation of Employment and Training Programs
Training,
Employment, and
Social Services




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Option:
Consolidation of       Authorizing committees                  Labor and Human Resources Committee
                                                               (Senate)
Student Aid Programs                                           Economic and Educational Opportunities
                                                               Committee (House)
                       Appropriations subcommittees            Labor, Health and Human Services,
                                                               Education, and Related Agencies (Senate
                                                               and House)
                       Primary agency                          Department of Education
                       Account                                 Student Financial Assistance (91-0200)
                       Spending type                           Discretionary/Direct
                       Budget subfunction                      Higher Education
                       Framework theme                         Improve efficiency

                       The Department of Education provides loans and grants to students to
                       help finance their higher education. The federal government’s role in
                       supporting higher education is contributing about 50 percent of its
                       education budget to postsecondary education programs and activities,
                       most of which are for student financial aid. The largest programs provide
                       federally insured loans and Pell grants for students. The Federal Family
                       Education Loan (FFEL) and Federal Direct Student Loan (FDSL) programs
                       compose the largest source of federal student financial aid. FFEL and FDSL
                       programs are entitlements, but Pell grants, the largest federal grant-in-aid
                       program, are awarded to the most needy eligible students, dependent on
                       the availability of appropriated funds.

                       Although the student loan and Pell grant programs provide the majority of
                       federal financial aid to students for postsecondary education, another 22
                       smaller programs are targeted to specific segments of the postsecondary
                       school population. These programs were collectively funded at $1.1 billion
                       for fiscal year 1995. The programs fund remedial and support services for
                       prospective students from disadvantaged families, programs to enhance
                       the labor pool in designated specialties, grants to students for volunteer
                       activities, and grants to women and minorities who are underrepresented
                       in graduate education.

                       These smaller grant programs may be considered candidates for
                       consolidation. They could be consolidated with other larger programs or
                       among themselves. For example, programs directed to attracting minority
                       and disadvantaged students could be consolidated into one program. Or a
                       certain amount of funds could be provided to states through a single grant,
                       in lieu of several smaller grants, to cover some or all of the purposes of



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                       several small grant programs. In 1995, we identified 22 programs that
                       could be candidates for consolidation. In anticipation of the administrative
                       savings that could be achieved through consolidation, funding for these
                       programs could be reduced 10 percent each year as part of the
                       consolidation. Since all savings achieved through consolidation would be
                       administrative in nature, we assume that there would be no adverse
                       impact on students’ access to postsecondary education—a principal
                       objective of the enabling legislation, the Higher Education Act of 1965, as
                       amended.

Five-Year Savings
                       Dollars in millions
                                                              FY 98    FY 99          FY00        FY01       FY02
                       Savings from 1997 funding level
                       Budget authority                        101       101            101        101         101
                       Outlays                                  12         81            99        100         101
                       Savings from 1997 funding level adjusted for inflation
                       Budget authority                        104       107            110        113         116
                       Outlays                                  12         84           105        108         112
                       Source: Congressional Budget Office.




Related GAO Products   Department of Education: Information on Consolidation Opportunities
                       and Student Aid (GAO/T-HEHS-95-130, April 6, 1995).

                       Department of Education: Opportunities to Realize Savings
                       (GAO/T-HEHS-95-56, January 18, 1995).


GAO Contact            Carlotta C. Joyner, (202) 512-7002




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Option:
Consolidation of    Authorizing committees                  Multiple

Employment and      Appropriations subcommittees            Labor, Health and Human Services, and
                                                            Education (Senate and House)
Training Programs   Primary agencies                        Multiple
                    Accounts                                Multiple
                    Spending type                           Discretionary/Direct
                    Budget subfunction                      Training and Employment
                    Framework theme                         Improve efficiency

                    The challenges posed by increased global competition and a changing
                    economy call for a renewed commitment to invest in the American
                    workforce. The federal government’s effort to meet this commitment has
                    been to increase investment in a wide array of programs that target people
                    experiencing barriers to employment and to add other new programs that
                    target particular groups. Since 1992 GAO has issued numerous reports and
                    testimonies commenting on federal employment and training programs.
                    Most recently, GAO identified more than 150 federal programs and funding
                    streams providing employment and training assistance. These programs
                    are spread across 15 departments and independent agencies with a total
                    budget of about $20 billion.

                    GAO’s  analysis of programs that target the economically disadvantaged
                    showed that those programs had similar goals, often served the same
                    categories of people, and provided many of the same services using
                    separate, yet parallel, delivery structures. This overlap can add
                    unnecessary administrative costs at each level of government—federal,
                    state, and local.

                    In the 104th Congress, the House and the Senate passed bills that would
                    consolidate many of the federally funded employment training programs.
                    The House bill would have created three block grants by consolidating 74
                    employment training programs and eliminating 52 higher education
                    programs. The Senate bill would have consolidated 83 programs into a
                    single block grant. Although final passage was not accomplished before
                    the Congress adjourned, it is likely that this issue will reemerge in the
                    105th Congress.

                    The amount of any savings from consolidating programs will depend on
                    how many programs are included, the degree and kind of reductions, and
                    the level of federal involvement. To illustrate the potential for savings from



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                    consolidating employment and training programs, one option would be to
                    consolidate the following programs for the economically disadvantaged:
                    Job Training Partnership Act (JTPA) IIA Training Services for the
                    Disadvantaged Adult, JTPA IIA State Education Programs, JTPA IIA
                    Incentive Grants, Food Stamp Employment and Training, Family
                    Self-Sufficiency Program, Vocational Education—Basic State Programs,
                    Educational Opportunity Centers, and Student Literacy and Mentoring
                    Corps. A second option could consolidate the following programs for
                    dislocated workers: JTPA Economic Dislocation and Worker Adjustment
                    Assistance (EDWAA) (substate allotment), JTPA EDWAA (governor’s
                    discretionary), JTPA EDWAA (Secretary’s discretionary), JTPA Defense
                    Conversion Adjustment Program, JTPA Clean Air Employment Transition
                    Assistance, JTPA Defense Diversification, Trade Adjustment
                    Assistance—Workers, Vocational Education—Demonstration Centers for
                    the Training of Dislocated Workers, and the Transition Assistance
                    Program.

                    Consolidating similar employment and training programs would result in
                    administrative efficiencies to the states as well as improved opportunities
                    to reduce fragmentation and increase effectiveness in service delivery. In
                    consolidating programs, the Congress would also want to consider the
                    implications for federal agency workloads and responsibilities. In
                    anticipation of the benefits states will receive, funding for the programs
                    included could be reduced 10 percent each year as part of the
                    consolidation. Savings from the consolidations are shown in the two sets
                    of tables that follow, which separately identify direct and discretionary
                    spending.

Five-Year Savings
                    Dollars in millions
                                                             FY98          FY99         FY00          FY01         FY02
                    Option: Disadvantaged adults
                    Discretionary spending
                    Savings from the 1997 funding level
                    Budget authority                           195          195           195           195            195
                    Outlays                                     14          168           193           196            196
                    Savings from the 1997 funding level adjusted for inflation
                    Budget authority                           199          205           211           216            222
                    Outlays                                     15          173           203           211            217
                    Note: The Family Self Sufficiency Program did not receive an appropriation for fiscal year 1997.

                    Source: Congressional Budget Office.




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Five-Year Savings
                       Dollars in millions
                                                              FY98         FY99         FY00         FY01            FY02
                       Option: Dislocated workers
                       Direct spending
                       Budget authority                           9            8            8            8              8
                       Outlays                                    3            7            8            8              8
                       Source: Congressional Budget Office.



Five-Year Savings
                       Dollars in millions
                                                              FY98         FY99         FY00         FY01            FY02
                       Option: Dislocated workers
                       Discretionary spending
                       Savings from the 1997 funding level
                       Budget authority                         133          133         133          133             133
                       Outlays                                    9           94         127          133             133
                       Savings from the 1997 funding level adjusted for inflation
                       Budget authority                         136          140         144          148             152
                       Outlays                                    9           97         132          143             147
                       Note: JTPA Defense Conversion, JTPA Clean Air, JTPA Defense Diversification, and Vocational
                       Education Demonstration Centers did not receive appropriations in fiscal year 1997.

                       Source: Congressional Budget Office.




Related GAO Products   Employment Training: Successful Projects Share Common Strategy
                       (GAO/HEHS-96-108, May 7, 1996).

                       Block Grants: Characteristics, Experience, and Lessons Learned
                       (GAO/HEHS-95-74, February 9, 1995).

                       Multiple Employment Training Programs: Major Overhaul Is Needed to
                       Create a More Efficient, Customer-Driven System (GAO/T-HEHS-95-70,
                       February 6, 1995).

                       Multiple Employment Training Programs: Major Overhaul Is Needed to
                       Reduce Costs, Streamline the Bureaucracy, and Improve Results
                       (GAO/T-HEHS-95-53, January 10, 1995).




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              Multiple Employment Training Programs: Basic Program Data Often
              Missing (GAO/T-HEHS-94-239, September 28, 1994).

              Multiple Employment Training Programs: Overlap in Programs Raises
              Questions About Efficiency (GAO/HEHS-94-193, July 11, 1994).

              Department of Labor: Rethinking the Federal Role in Worker Protection
              and Workforce Development (GAO/T-HEHS-95-125, April 4, 1994).

              Multiple Employment Training Programs: Major Overhaul Is Needed
              (GAO/T-HEHS-94-109, March 3, 1994).

              Multiple Employment Training Programs: Most Federal Agencies Do Not
              Know if Their Programs Are Working Effectively (GAO/HEHS-94-88, March 2,
              1994).

              Multiple Employment Training Programs: Overlapping Programs Can Add
              Unnecessary Administrative Costs (GAO/HEHS-94-80, January 28, 1994).

              Multiple Employment Training Programs: Conflicting Requirements
              Hamper Delivery of Services (GAO/HEHS-94-78, January 28, 1994).

              Multiple Employment Programs: National Employment Training Strategy
              Needed (GAO/T-HRD-93-27, June 18, 1993).

              Multiple Employment Programs (GAO/HRD-93-26R, June 15, 1993).

              Multiple Employment Programs (GAO/HRD-92-39R, July 24, 1992).


GAO Contact   Carlotta C. Joyner, (202) 512-7002




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             •   Prescription Drug and Medicaid Fraud
550 Health   •   Medicaid: States Use Illusory Approaches to Shift Program Costs to the
                 Federal Government
             •   Medicaid Formula: Fairness Could Be Improved
             •   Automated Drug Utilization Reviews
             •   Payments to Rural Health Clinics
             •   Public Health Service Commissioned Corps
             •   Unified Risk-Based Food Safety System




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Option:
Prescription Drug and   Authorizing committees                Finance (Senate)
                                                              Ways and Means (House)
Medicaid Fraud          Primary agency                        Department of Health and Human Services
                        Account                               Grants to States for Medicaid
                                                              (75-0512)
                        Spending type                         Direct
                        Budget subfunction                    Health care services
                        Framework theme                       Improve efficiency

                        The Medicaid program typically includes prescription drugs in its covered
                        services, and diversion of these medications has been a problem for at
                        least a decade. Such diversion can involve pharmacists routinely adding
                        drugs to legitimate prescriptions and keeping the overage for themselves
                        or for sale to others; clinics providing inappropriate prescriptions to
                        Medicaid recipients who trade them for cash or merchandise or have them
                        filled and then sell the drugs themselves; and individuals who provide
                        recipients with abusable drugs in exchange for subsequent illicit use of
                        their Medicaid recipient numbers. Participants in drug diversion schemes
                        therefore frequently face added charges of fraud, false claims, or other
                        related violations of state or federal law.

                        The financial incentives for diverting drugs are substantial and apply to
                        both controlled and noncontrolled substances. Legal controlled
                        drugs—those with significant potential for physical or psychological
                        harm—are appealing because they are relatively cheap and chemically
                        pure compared to illicit drugs. Profits from street sales can amount to
                        several thousand percent of initial investment. One drug costing the
                        pharmacy less than 50 cents per pill sold on the street for $85 per pill.
                        Noncontrolled drugs, also, have recently become popular targets for
                        diversion because they are comparatively easier to obtain and are
                        particularly desirable if obtained under an insurance program—such as
                        Medicaid—requiring little or no copayment. With no or minimal outlay on
                        the part of the recipient, the street price—while typically lower than the
                        pharmacy price and thus attractive to buyers—is entirely profit.

                        Medicaid accounts for 80 percent of all federal spending on prescription
                        drugs. In fiscal year 1995, Medicaid’s drug benefit cost more than
                        $10 billion. While precise dollar losses due to diversion—as with all
                        fraud—are impossible to identify, New York State officials estimate that in




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                       1990, these losses represented about 10 percent of the state’s total
                       Medicaid spending for prescription drugs.

                       States have various initiatives under way to curb Medicaid prescription
                       drug diversion but are hampered by insufficient resources, lengthy and
                       frequently unproductive investigations, and the prevalence of repeat
                       offenders and resilient schemes. GAO believes that the Health Care
                       Financing Administration should assume an active leadership role in
                       orchestrating and encouraging states’ efforts and fostering the
                       development and implementation of preventive measures. The Department
                       of Health and Human Services (HHS) generally agrees with the GAO findings
                       and recommendation, but believes it is not feasible unless new staff
                       resources can be identified and allocated.

                       The Congress should encourage HHS to take a stronger role. If states
                       curbed these losses by even a small percentage, future Medicaid costs
                       would be reduced substantially. However, CBO cannot develop an estimate
                       for this option until specific strategies are identified. Moreover, savings
                       would be net of the additional resources required to curb fraudulent
                       activities.


Related GAO Products   Prescription Drugs and Medicaid: Automated Review Systems Can Help
                       Promote Safety, Save Money (GAO/AIMD-96-72, June 11, 1996).

                       Medicare and Medicaid: Opportunities to Save Program Dollars by
                       Reducing Fraud and Abuse (GAO/T-HEHS-95-110, March 22, 1995).

                       Prescription Drugs: Automated Prospective Review Systems Offer
                       Significant Potential Benefits for Medicaid (GAO/AIMD-94-130, August 5, 1994).

                       Medicaid: A Program Highly Vulnerable to Fraud (GAO/T-HEHS-94-106,
                       February 25, 1994).

                       Medicaid Drug Fraud: Federal Leadership Needed to Reduce Program
                       Vulnerabilities (GAO/HRD-93-118, August 2, 1993).

                       Medicaid Prescription Drug Diversion: A Major Problem, but State
                       Approaches Offer Some Promise (GAO/T-HRD-92-48, July 29, 1992).


GAO Contact            William J. Scanlon, (202) 512-7114



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Option:
Medicaid: States Use   Authorizing committees                 Finance (Senate)
                                                              Commerce (House)
Illusory Approaches    Primary agency                         Department of Health and Human Services
to Shift Program       Account                                Grant to States for Medicaid
                                                              (75-0512)
Costs to the Federal   Spending type                          Direct
Government             Budget subfunction                     Health care services
                       Framework theme                        Reassess objectives

                       GAO  raised a concern that in fiscal year 1993, Michigan, Texas, and
                       Tennessee used illusory financing approaches to obtain about $800 million
                       in federal Medicaid funds without effectively committing their share of
                       matching funds. Under these approaches, facilities that received increased
                       Medicaid payments from the states, in turn, paid the states almost as much
                       as they received. Consequently, the states realized increased revenue that
                       was used to reduce their state Medicaid contributions, fund other health
                       care needs, and supplement general revenue funding. For the period from
                       fiscal year 1991 to fiscal year 1995, Michigan alone reduced its share of
                       Medicaid costs by almost $1.8 billion through financing partnerships with
                       medical providers and local units of government. GAO’s analysis of
                       Michigan’s transactions showed that even though legislation curtailed
                       certain creative financing practices, the state was able to reduce its share
                       of Medicaid costs at the expense of the federal government by $428 million
                       through other mechanisms.

                       The practices that involve payments to state-owned facilities are restricted
                       by Omnibus Budget Reconciliation Act of 1993 provisions that limit such
                       payments to unreimbursed Medicaid and uninsured costs. However, states
                       can continue to make payments to local government-owned facilities,
                       including payments that exceed costs, and have the facilities return the
                       payments to the states. States are not required to justify the need for
                       increased reimbursements, nor is the Health Care Financing
                       Administration required to verify that moneys are used for the purpose for
                       which they were obtained.

                       GAO believes that the Medicaid program should not allow states to benefit
                       from illusory arrangements and that Medicaid funds should only be used
                       to help cover the costs of medical care incurred by those medical facilities
                       that provide the care. GAO believes the Congress should enact legislation to
                       minimize the likelihood that states can develop arrangements whereby




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                       providers return Medicaid payments to the states, thus effectively reducing
                       the state’s share of Medicaid funding. This legislation should prohibit
                       Medicaid payments that exceed costs to any government-owned facility.

                       Savings are difficult to estimate for this option because national data on
                       these practices are not readily available. In addition, Medicaid spending is
                       influenced by the use of waivers from federal requirements, which allows
                       states to alter Medicaid financing formulas. Future requests and use of
                       waivers by states are uncertain.


Related GAO Products   State Medicaid Financing Practices (GAO/HEHS-96-76R, January 23, 1996).

                       Michigan Financing Arrangements (GAO/HEHS-95-146R, May 5, 1995).

                       Medicaid: States Use Illusory Approaches to Shift Program Costs to the
                       Federal Government (GAO/HEHS-94-133, August 1, 1994).

                       Medicaid: The Texas Disproportionate Share Program Favors Public
                       Hospitals (GAO/HRD-93-86, March 30, 1993).


GAO Contact            William J. Scanlon, (202) 512-7114




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Option:
Medicaid Formula:   Authorizing committees                  Finance (Senate)
                                                            Commerce (House)
Fairness Could Be   Primary agency                          Department of Health and Human Services
Improved            Account                                 Grant to States for Medicaid
                                                            (75-0512)
                    Spending type                           Direct
                    Budget subfunction                      Health care services
                    Framework theme                         Reassess objectives

                    The Medicaid program provides medical assistance to current
                    beneficiaries of the Temporary Assistance for Needy Families (TANF)
                    program who qualified under their states’ pre-reform AFDC plans,
                    low-income people who receive Supplemental Security Income, and
                    certain other low-income individuals. The federal government and the
                    states share the financing of the program. Under current law, the federal
                    commitment is open-ended: federal outlays rise with the costs and use of
                    Medicaid services. The federal share of the program costs varies with the
                    per capita income of the state. Consequently, high-income states pay a
                    larger share of the benefits than low-income states. By law, the federal
                    share can be no less than 50 percent and no more than 83 percent.

                    Since 1986, GAO has issued numerous reports and testimonies that identify
                    ways in which the fairness of federal grant formulas could be improved.
                    With respect to Medicaid, GAO believes that the fairness of the matching
                    formula in the open-ended program could be improved by replacing the
                    per capita income factor with three factors—the number of people living
                    below the official poverty line, the total taxable resources of the state, and
                    the differences in health care costs across states—and by reducing the
                    minimum federal share to 40 percent. These changes could reduce federal
                    reimbursements by reducing the federal share in states with the most
                    generous benefits, the fewest low-income people in need, and the greatest
                    ability to fund benefits from state resources. These changes could redirect
                    federal funding to states with the highest concentration of people in
                    poverty and the least capability of funding these needs from state
                    resources.

                    To illustrate the savings that could be achieved from changes in the
                    Medicaid formula, CBO estimates that if the minimum federal share were
                    reduced to 40 percent, the following savings could be achieved.




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Five-Year Savings
                       Dollars in millions
                                                              FY98      FY99        FY00       FY01       FY02
                       Savings from the 1997 funding level adjusted for inflation
                       Budget authority                       7,040     7,590       8,210      8,880      9,630
                       Outlays                                7,040     7,590       8,210      8,880      9,630
                       Source: Congressional Budget Office.




Related GAO Products   Medicaid: Matching Formula’s Performance and Potential Modifications
                       (GAO/T-HEHS-95-226, July 27, 1995).

                       Medicaid Formula: Fairness Could Be Improved (GAO/T-HRD-91-5,
                       December 7, 1990).


GAO Contact            William J. Scanlon, (202) 512-7114




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Option:
Automated Drug        Authorizing committees                  Finance (Senate)
                                                              Commerce (House)
Utilization Reviews   Primary agency                          Department of Health and Human Services
                      Account                                 Grants to States for Medicaid
                                                              (75-0512)
                      Spending type                           Direct
                      Budget subfunction                      Health Care Services
                      Framework theme                         Improve efficiency

                      Amendments to Title XIX of the Social Security Act required that states
                      implement drug utilization review (DUR) programs in their Medicaid
                      programs by January 1, 1993. Under DUR, states must review Medicaid
                      prescriptions to (1) determine whether they are appropriate, medically
                      necessary, and not likely to result in adverse medical reactions and
                      (2) identify fraud, waste, and abuse. Reviews must be performed
                      prospectively (before prescriptions are filled) and retrospectively (on a
                      quarterly basis after prescriptions are filled).

                      The amendments encourage, but do not require, states to use statewide
                      automated systems to conduct prospective reviews. However, use of these
                      systems by some states shows significant potential to both improve patient
                      safety and reduce Medicaid program costs. Automated prospective DUR
                      systems operated by five geographically diverse states—Maryland,
                      Missouri, New Mexico, Oregon, and Pennsylvania—together cancel
                      hundreds of thousands of Medicaid prescriptions annually that represent
                      potential inappropriate drug therapy or instances of waste, fraud, and/or
                      abuse. Moreover, additional cancellations result from companion on-line
                      screening capabilities that ensure recipients are eligible for Medicaid
                      benefits at the time a prescription is presented. During 12-month periods
                      for these five states, automated prospective DUR systems cancelled
                      prescriptions totaling over $30 million due to drug overutilization and
                      Medicaid ineligibility. In contrast, the total one-time costs to install these
                      systems was only $1.9 million. Although these results are impressive, the
                      greatest potential savings for the Medicaid program would result from
                      avoiding hospitalizations due to inappropriate drug therapy (estimates of
                      which range from 3 percent for the general population to 28 percent for
                      the elderly). With Medicaid’s fiscal year 1995 inpatient hospitalizations
                      totaling about $42 billion, even a limited implementation of automated
                      prospective DUR systems could have a significant impact.




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                    Most states have currently implemented or plan to implement automated
                    prospective DUR systems, however, states implement these systems
                    differently. The absence in some states of some types of drug therapy
                    reviews, such as those for pregnancy conflict (use of prescribed drug is
                    not recommended during pregnancy) and underutilization (an indication
                    of noncompliance with a prescribed drug regimen), could have dramatic
                    effects on patient safety. Also, whether or not states automatically deny
                    early refill claims (request for prescription refill before a predetermined
                    amount of a drug—such as 75 percent—has been consumed) can
                    substantially affect the relative amount of the savings and the prevention
                    of potential waste, fraud, and abuse.

                    Responsible for overseeing the states’ implementation of DUR programs,
                    the Health Care Financing Administration (HCFA) has encouraged the use
                    of statewide automated prospective DUR systems through such
                    statutorily-required efforts as conducting a demonstration project and
                    issuing guidance to the states on prospective DUR cost and benefit
                    reporting. However, given both the substantial safety benefits that can
                    accrue to Medicaid recipients and savings to the Medicaid program
                    through the effective use of automated prospective DUR systems, HCFA
                    could more actively facilitate states’ coordination and sharing of
                    experiences and best practices for the effective implementation and use of
                    these systems.

                    GAO work shows that the use of automated prospective DUR systems in five
                    states saved millions of dollars by cancelling prescriptions which could
                    have been inappropriate or fraudulent or where the recipient was not
                    eligible for Medicaid benefits. The following table shows potential annual
                    savings that would result from operating automated prospective DUR
                    systems in all states for fiscal years 1998 through 2002.

Five-Year Savings
                    Dollars in millions
                                                           FY98      FY99        FY00       FY01       FY02
                    Savings from the 1997 funding level adjusted for inflation
                    Budget authority                         10         40         80        110         120
                    Outlays                                  10         40         80        110         120
                    Source: Congressional Budget Office.




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Related GAO Products   Prescription Drugs and Medicaid: Automated Review Systems Can Help
                       Promote Safety, Save Money (GAO/AIMD-96-72, June 11, 1996).

                       Prescription Drugs and the Elderly: Many Still Receive Potentially Harmful
                       Drugs Despite Recent Improvements (GAO/HEHS-95-152, July 24, 1995).

                       Prescription Drugs: Automated Prospective Review Systems Offer
                       Potential Benefits for Medicaid (GAO/AIMD-94-130, August 5, 1994).


GAO Contact            Joel C. Willemssen, (202) 512-6253




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Option:
Payments to Rural   Authorizing committees                 Finance (Senate)
                                                           Ways and Means (House)
Health Clinics      Primary agency                         Department of Health and Human Services
                    Accounts                               Federal Supplemental Insurance Trust
                                                           Fund Account (20-8004)
                                                           Grants to States for Medicaid (75-0512)
                    Spending type                          Direct
                    Budget subfunction                     Health Care Services and Medicare
                    Framework theme                        Redefine beneficiaries

                    In 1977, the Rural Health Clinics (RHC) program was established to provide
                    Medicare and Medicaid reimbursement to health clinics in underserved
                    rural communities. Today, Medicare and Medicaid continue to reimburse
                    RHC providers on the basis of their actual costs of providing care, while
                    most other providers receive lower Medicare and Medicaid payments
                    limited by set fee schedules. RHCs continue to receive cost-based
                    reimbursement out of recognition that a fee schedule approach does not
                    help ensure financial viability of low volume rural health care providers.
                    Since 1989, the number of RHCs has grown by over 30 percent a year to
                    nearly 3,000, with total Medicare and Medicaid payments to them expected
                    to be over $1 billion annually by the year 2000.

                    We found that contrary to its purpose, the RHC program is generally not
                    focused on serving populations that have difficulty obtaining primary care
                    in isolated rural areas. Rather, our work suggests that the additional
                    Medicare and Medicaid funding provided to RHCs each year (estimated at
                    $295 million in 1996) increasingly benefits well-staffed, financially viable
                    clinics in populated areas that already have extensive health care delivery
                    systems in place. For example, almost half of the RHCs are located in areas
                    with a nearby population of over 25,000. The program’s broad eligibility
                    criteria entitles RHCs to be reimbursed at cost, even if they are already
                    financially viable using standard Medicare/Medicaid payment methods.
                    Further, once designated as an RHC, the clinic remains eligible for cost
                    reimbursement indefinitely, even if the area no longer qualifies as rural or
                    underserved.

                    We recommended that the Congress eliminate cost-based reimbursement
                    to RHCs unless they are located in areas with no other Medicare and
                    Medicaid providers or can demonstrate that existing providers will not
                    accept new Medicare and Medicaid patients and that the funding would be




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                      used to expand access to them. Assuming such improvements in the
                      targeting of payments, the following savings could be achieved.

Five-Year Savings
                      Dollars in millions
                                                             FY98      FY99        FY00       FY01       FY02
                      Savings from the 1997 funding level adjusted for inflation
                      Medicaid (Outlays)                       20         30         30          30         30
                      Medicare (Outlays)                       30         40         40          40         50
                      Total                                    50         70         70          70         80
                      Source: Congressional Budget Office.




Related GAO Product   Rural Health Clinics: Rising Program Expenditures Not Focused on
                      Improving Care in Isolated Areas (GAO/HEHS-97-24, November 22, 1996).


GAO Contact           Bernice Steinhardt, (202) 512-7119




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Option:
Public Health Service       Authorizing committees                  Labor and Human Resources (Senate)
                                                                    Commerce (House)
Commissioned Corps          Appropriations subcommittees            Labor, Health and Human Services,
                                                                    Education, and Related Agencies (Senate
                                                                    and House)
                            Primary agency                          Department of Health and Human Services
                            Accounts                                Multiple
                            Spending type                           Discretionary/Direct
                            Budget subfunction                      Health Care Services
                            Framework theme                         Improve efficiency

                            The Commissioned Corps of the Public Health Service (PHS) was
                            established in the late 1800s to provide medical care to sick and injured
                            merchant seamen. Over the ensuing years, the Corps’ responsibilities have
                            grown, and Corps officers today are involved in a wide range of PHS
                            programs, such as providing medical care to Native Americans at tribal
                            and Indian Health Service facilities, psychiatric, medical, and other
                            services in federal prisons, and health sciences research. As the result of
                            their temporary service with the armed forces during World Wars I and II,
                            members of the Corps were authorized to assume military ranks and
                            receive military-like compensation, including retirement eligibility (at any
                            age) after 20 years of service. Corps officers continue to receive virtually
                            the same pay and benefits as military officers, including retirement.

                            GAO found that the functions of the Corps are essentially civilian in nature,
                            and, in fact, some civilian PHS employees carry out the same functions as
                            Corps members. Further,

                        •   the Corps has not been incorporated into the armed forces since 1952, and
                            the Department of Defense (DOD) has no specific plans for how the Corps
                            might be used in future emergency mobilizations;
                        •   generally, the Corps does not meet the criteria and principles cited in a
                            DOD report as justification for the military compensation system; and
                        •   other than Corps officers who are detailed to the Coast Guard and DOD,
                            Corps members are not subject to the Uniform Code of Military Justice,
                            which underlies how military personnel are managed.

                            Corps officials maintained that uniformed Corps members are needed as
                            mobile cadres of professionals who can be assigned with little notice to
                            any location and function, often in hazardous or harsh conditions.




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    However, other agencies, such as the Environmental Protection Agency,
    the National Transportation Safety Board, and the Federal Emergency
    Management Agency, use civilian employees to respond quickly to
    disasters and other emergency situations that could involve both
    hazardous or harsh conditions.

    GAO’s analysis showed that, based on 1994 costs, when all of the
    components of personnel costs—basic pay and salaries; special pay,
    allowances, and bonuses; retirement; health care; life insurance; and
    Corps members’ tax advantages—are considered, PHS personnel costs
    could be reduced by converting the PHS Corps to civilian status. The
    amount of any cost reductions would depend on various factors, including
    the method by which any changes are implemented, the accuracy of the
    data PHS and DOD provided GAO, the applicability of 1994 costs to future
    years, how closely GAO’s underlying assumptions match actual
    relationships between Corps and civilian personnel costs, and the manner
    in which any transition to civilian employment would be carried out.

    Any decision to convert the Corps could be implemented in a number of
    ways, including

•   requiring all officers to immediately convert to civilian employment;
•   allowing all current officers to remain in place until retirement or other
    separation and requiring all new entrants to be civilian employees;
•   allowing all officers with a specific number of years in the Corps to
    continue in the Corps until retirement or other separation; or
•   retaining a permanent smaller Corps to provide medical services in areas
    that are difficult to staff with civilian employees.

    The Congress may wish to refer to this information when considering the
    merits of converting the PHS Commissioned Corps to civilian status. If the
    Congress does in fact choose to convert the Corps, the following savings
    could result, depending upon the factors mentioned above.

    To illustrate the savings that could be achieved through conversion to
    civilian status, CBO estimated that if officers with less than 15 years of
    service were converted to civilian status effective January 1, 1998, the
    following savings would apply.




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Five-Year Savings
                      Dollars in millions
                                                             FY98      FY99        FY00       FY01       FY02
                      Discretionary spending
                      Savings from the 1997 funding level adjusted for inflation
                      Budget authority                         15         23         26          28         31
                      Outlays                                   9         18         24          26         29

Five-Year Savings
                      Dollars in millions
                                                             FY98      FY99        FY00       FY01       FY02
                      Direct spending (Retirement Fund)
                      Agency contributions
                      (Outlays)                                18         27         30          34         37

Five-Year Revenues
                      Dollars in millions
                                                             FY98      FY99        FY00       FY01       FY02
                      Change in revenues (Retirement Fund)
                      Employee contributions                   –1         –2         –2          –2         –3
                      Source: Congressional Budget Office.




Related GAO Product   Federal Personnel: Issues on the Need for the Public Health Service’s
                      Commissioned Corps (GAO/GGD-96-55, May 7, 1996).


GAO Contact           L. Nye Stevens, (202) 512-8676




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Option:
Unified Risk-Based   Authorizing committees                 Agriculture, Nutrition, and Forestry
                                                            (Senate) Agriculture (House)
Food Safety System   Appropriations subcommittees           Agriculture, Rural Development, and
                                                            Related Agencies (Senate)
                                                            Agriculture, Rural Development, Food and
                                                            Drug Administration, and Related
                                                            Agencies (House)
                     Primary agency                         Department of Agriculture
                     Accounts                               Multiple
                     Spending type                          Discretionary
                     Budget subfunctions                    Consumer and Occupational Health and
                                                            Safety
                     Framework theme                        Improve efficiency

                     GAO has issued 14 reports and testimonies on food safety issues. This work
                     leads us to conclude that the federal system to ensure the safety and
                     quality of the nation’s food—at an annual cost of over $1 billion a year—is
                     inefficient and outdated and does not adequately protect the consumer
                     against food-borne illness. GAO has reported that as many as 12 different
                     agencies administering over 35 different laws oversee food safety. As a
                     result, the current food safety system suffers from overlapping and
                     duplicative inspections, poor coordination, and inefficient allocation of
                     resources.

                     To improve the effectiveness and efficiency of the federal food safety
                     system, GAO has recommended the consolidation of federal food safety
                     agencies and activities. Specifically, GAO has recommended
                     (1) consolidating food safety activities under a single, risk-based food
                     safety agency with a uniform set of food safety laws, (2) establishing a
                     Hazard Analysis and Critical Control Point system (HACCP) which
                     emphasizes building safety into food production, and (3) placing
                     responsibility for the system’s implementation on the industry, with the
                     government retaining an oversight role. Since December 1995, federal
                     rules and regulations have been revised to move the seafood and meat and
                     poultry industries under a HACCP-based system. The seafood industry is
                     required to adopt and implement HACCP systems by the end of
                     December 1997, and all meat and poultry plants are required to implement
                     HACCP systems by 2000. While HACCP may eliminate the need for some food
                     safety inspectors, resulting in government cost savings, no move has been
                     made to consolidate these activities in a single food safety agency which
                     would further reduce costs.



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                       A 5-year estimate of savings from consolidating food inspection programs
                       cannot be developed at this time. The amount of any savings will depend
                       on how many programs are included, the degree and kind of reductions,
                       and the level of federal involvement. In addition, the amount of savings
                       will depend on the extent to which administrative cost savings are used to
                       offset overall program costs.


Related GAO Products   Food Safety: Reducing the Threat of Foodborne Illnesses (GAO/T-RCED-96-185,
                       May 23, 1996).

                       Food Safety: Information on Foodborne Illnesses (GAO/RCED-96-96, May 8,
                       1996).

                       Food Safety: New Initiatives Would Fundamentally Alter the Existing
                       System (GAO/RCED-96-81, March 27, 1996).

                       Food Safety: Fundamental Changes Needed to Improve Monitoring of
                       Unsafe Chemicals in Food (GAO/T-RCED-94-311, September 28, 1994).

                       Food Safety: Changes Needed to Minimize Unsafe Chemicals in Food
                       (GAO/RCED-94-192, September 26, 1994).

                       Food Safety: A Unified, Risk-Based Food Safety System Needed
                       (GAO/T-RCED-94-223, May 25, 1994).

                       Meat Safety: Inspectors’ Ability to Detect Harmful Bacteria is Limited
                       (GAO/T-RCED-94-228, May 24, 1994).

                       Food Safety: Risk-Based Inspections and Microbial Monitoring Needed for
                       Meat and Poultry (GAO/RCED-94-110, May 19, 1994).

                       Food Safety: Risk-Based Inspections and Microbial Monitoring Needed for
                       Meat and Poultry (GAO/T-RCED-94-189, April 19, 1994).

                       Meat Safety: Inspection System’s Ability to Detect Harmful Bacteria
                       Remain Limited (GAO/T-RCED-94-123, February 10, 1994).

                       Food Safety: A Unified Risk-Based System Needed to Enhance Food
                       Safety (GAO/T-RCED-94-71, November 4, 1993).




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              Food Safety: Building a Scientific, Risk-Based Meat and Poultry Inspection
              System (GAO/T-RCED-93-22, March 16, 1993).

              Food Safety: Inspection of Domestic and Imported Meat Should Be
              Risk-Based (GAO/RCED-93-10, February 18, 1993).

              Food Safety and Quality: Uniform, Risk-Based Inspection System Needed
              to Ensure Safe Food Supply (GAO/RCED-92-152, June 26, 1992).


GAO Contact   Robert A. Robinson, (202) 512-5138




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               •   Teaching Hospitals’ Medicare Payments
570 Medicare   •   Medicare Program Safeguards
               •   Medicare Payments for High Technology Procedures
               •   Medicare Rate-Setting Methods for HMOs
               •   Medicare Incentive Payments in Health Care Shortage Areas




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Option:
Teaching Hospitals’   Authorizing committees                 Finance (Senate)
                                                             Commerce (House)
Medicare Payments                                            Ways and Means (House)
                      Appropriations subcommittees           Labor, Health and Human Services, and
                                                             Education (Senate and House)
                      Primary agency                         Department of Health and Human Services
                      Account                                Federal Hospital Insurance Trust Fund
                                                             Account (20-8005)
                      Spending type                          Direct
                      Budget subfunction                     Medicare
                      Framework theme                        Improve efficiency

                      Medicare’s Prospective Payment System pays hospitals with graduate
                      medical education programs at rates higher than those other hospitals
                      receive for treating the same conditions. The higher payments are to
                      compensate for the higher costs teaching hospitals incur, which are
                      thought to be due to such factors as increased diagnostic testing,
                      increased number of procedures performed, and higher staffing ratios. The
                      teaching adjustment is based on the ratio of interns and residents per bed
                      and currently is set at a 7.65-percent increase in payments for each 0.1
                      increment in the ratio.

                      In 1989, GAO found that the present adjustment factor was too high
                      because it did not explicitly consider all relevant teaching hospital costs
                      and did not accurately measure all cost factors. Based on its analysis, GAO
                      found that the adjustment should be no higher than 6.26 percent and could
                      be as low as 3.73 percent. The 6.26-percent rate would better measure
                      factors explicitly recognized by the current formula. The 3.73-percent rate
                      expands on the current formula to reflect additional factors that affect
                      teaching hospital costs.

                      CBO’s analysis of Medicare’s indirect medical education payments
                      discusses rates of 6 percent and 3 percent. Savings for those rates are
                      reflected in the following table.




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Five-Year Savings
                      Dollars in millions
                                                             FY98     FY99      FY00        FY01       FY02
                      Option: Reduce to 6-percent adjustment factor
                      Outlays                                 910      970      1,040       1,120      1,120
                      Option: Reduce to 3-percent adjustment factor
                      Outlays                                2,560    2,740     2,920       3,150      3,400
                      Source: Congressional Budget Office.




Related GAO Product   Medicare: Indirect Medical Education Payments Are Too High
                      (GAO/HRD-89-33, January 5, 1989).


GAO Contact           William J. Scanlon, (202) 512-7114




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Option:
Medicare Program   Authorizing committees                              Finance (Senate)
                                                                       Commerce (House)
Safeguards                                                             Ways and Means (House)
                   Appropriations subcommittees                        Labor, Health and Human Services, and
                                                                       Education (Senate and House)
                   Primary agency                                      Department of Health and Human Services
                   Accounts                                            Federal Hospital Insurance Trust Fund
                                                                       (20-8005)
                                                                       Federal Supplementary Medical Insurance
                                                                       Trust Fund (20-8004)
                                                                       Program Management (75-0511)
                   Spending type                                       Discretionary/Direct
                   Budget subfunctions                                 Health and Medicare
                   Framework theme                                     Improve efficiency

                   Medicare receives over 800 million claims for reimbursement each year.
                   When Medicare pays contractors to process claims, one of the contractors’
                   responsibilities is to ensure that Medicare only pays claims for covered
                   services that are medically necessary and appropriate and for which
                   Medicare is the primary payer. Such activities are referred to as program
                   safeguards.

                   Recently GAO reported that the funding contractors receive to review each
                   claim has declined since 1989 by over 20 percent. In response, contractors
                   apply fewer or less stringent payment controls, and claims are paid that
                   otherwise would not be. Historically, payment safeguards have returned
                   $10 in savings for each dollar expended on them. GAO believes additional
                   program safeguard funding is necessary to better protect the program
                   against erroneous payments.

                   The Health Insurance Portability and Accountability Act of 1996 increased
                   funding to Medicare for program safeguards—a substantial reversal of the
                   prolonged decline in funding per claim for those activities. CBO estimated a
                   net savings of over $3 billion from increased resources—for Medicare as
                   well as for the HHS Office of Inspector General and Federal Bureau of
                   Investigations—to identify and pursue individuals or entities that defraud
                   federal health care programs.25 However, the recently enacted increase in


                   25
                     In prior years, CBO did not score increases in such funding because the proposals violated rules
                   (established in the conference report on the Omnibus Budget Reconciliation Act of 1993) that preclude
                   attributing changes in mandatory spending to changes in discretionary funding for program
                   administration. That prohibition did not apply to this legislation, however, because it establishes
                   long-term mandatory appropriations to cover all of the enforcement activities proposed.



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                       Medicare program safeguard funding alone—8.5 percent, or $34 million,
                       for fiscal year 1997—must be spread over a volume of claims rising in
                       recent years 5 to 8 percent annually. Coupled with inflation, this growth in
                       the number of claims will erode part of the effect of the funding increase
                       enacted for future years. While the Congress has provided safeguard
                       funding substantially above 1996 levels, fiscal year 2002 funding, adjusted
                       for projected inflation and claims growth, is projected to be about
                       10 percent below the 1991-96 average. Consequently, GAO believes that the
                       potential exists for further funding increases to yield net savings.


Related GAO Products   Medicare (GAO/HR-97-10, February 1997).

                       Funding Anti-Fraud and Abuse Activities (GAO/HEHS-95-263R, September 29,
                       1995).

                       Medicare: High Spending Growth Calls for Aggressive Action
                       (GAO/T-HEHS-95-75, February 6, 1995).

                       Medicare Claims (GAO/HR-95-8, February 1995).

                       Medicare: Adequate Funding and Better Oversight Needed to Protect
                       Benefit Dollars (GAO/T-HRD-94-59, November 12, 1993).

                       Medicare: Further Changes Needed to Reduce Program and Beneficiary
                       Costs (GAO/HRD-91-67, May 15, 1991).

                       Medicare: Cutting Payment Safeguards Will Increase Program Costs
                       (GAO/T-HRD-89-06, February 28, 1989).

                       Medicare and Medicaid: Budget Issues (GAO/T-HRD-87-1, January 29, 1987).


GAO Contact            William J. Scanlon, (202) 512-7114




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Option:
Medicare Payments     Authorizing committees                 Finance (Senate)
                                                             Commerce (House)
for High Technology                                          Ways and Means (House)
Procedures            Primary agency                         Department of Health and Human Services
                      Account                                Federal Supplementary Medical Insurance
                                                             Trust Fund (20-8004)
                      Spending type                          Direct
                      Budget subfunction                     Medicare
                      Framework theme                        Improve efficiency

                      When new medical technologies first come into use, providers’ unit costs
                      often are high because of large capital expenditures and low initial
                      utilization rates. When Medicare sets its payment rates for these new
                      technologies, the rates typically are based on the high initial unit costs.
                      Over time, providers’ unit costs decline as equipment improves, utilization
                      increases, and experience with the technology results in efficiencies.
                      However, Medicare does not have a process for routinely and
                      systematically assessing these factors and adjusting its fee schedule
                      payment rates to reflect the declining unit costs.

                      The Congress has reacted to the identification of specific overpaid
                      procedures and services by legislatively reducing rates. For example,
                      payments have been reduced for overpriced surgeries, selected items of
                      durable medical equipment, magnetic resonance imaging (MRI) scans, and
                      intraocular lenses.

                      The Health Care Financing Administration (HCFA) has three projects
                      underway which may help bring some Medicare payment rates more in
                      line with actual costs and market prices. First, by January 1, 1998, HCFA
                      expects to implement revisions to the Medicare Fee Schedule that will
                      take into account the actual cost of staff, equipment, and supplies
                      associated with medical procedures, rather than past charges submitted
                      for those procedures.

                      Second, in October 1995, HCFA initiated a project to review 100 items of
                      medical equipment and supplies to identify and address any excessive
                      Medicare payments. Under current law, this review requires the use of a
                      lengthy “inherent reasonableness” process, and the project is expected to
                      take at least 2 years.




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                       Third, a HCFA demonstration project will evaluate a competitive bidding
                       process to set Medicare payment levels for some medical equipment and
                       supplies. Delays have postponed project implementation at the first of
                       three proposed sites until August 1997.

                       These projects may eventually bring some Medicare payment rates more in
                       line with actual costs and market rates, but none of the three projects
                       specifically targets expensive, evolving technologies. GAO believes
                       significant program savings would result from an ongoing, systematic
                       process for evaluating the reasonableness of Medicare payment rates for
                       new medical technologies as those technologies mature.

                       Savings have not been estimated because revising the Medicare Fee
                       Schedule potentially encompasses all procedures, and any savings would
                       depend on the particular technologies for which Medicare payment rates
                       are reduced.


Related GAO Products   Medicare Spending: Modern Management Strategies Needed to Curb
                       Billions in Unnecessary Payments (GAO/HEHS-95-210, September 19, 1995).

                       Medicare: High Spending Growth Calls for Aggressive Action
                       (GAO/T-HEHS-95-75, February 6, 1995).

                       Medicare: Excessive Payments Support the Proliferation of Costly
                       Technology (GAO/HRD-92-59, May 27, 1992).

                       Medicare: Further Changes Needed to Reduce Program and Beneficiary
                       Costs (GAO/HRD-91-67, May 15, 1991).


GAO Contact            William J. Scanlon, (202) 512-7114




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Option:
Medicare Rate-Setting   Authorizing committees                 Finance (Senate)
                                                               Ways and Means (House)
Methods for HMOs        Primary agency                         Department of Health and Human Services
                        Account                                Federal Supplementary Medical Insurance
                                                               Trust Fund (20-8004)
                        Spending type                          Discretionary/Direct
                        Budget subfunction                     Medicare
                        Framework theme                        Improve efficiency

                        Hoping to take advantage of the potential cost savings associated with
                        health maintenance organizations (HMO), the Congress created the
                        Medicare risk contract program. Under this program, Medicare pays HMOs
                        a fixed amount (or capitation rate) for each beneficiary enrolled.
                        Capitation rates are set at 95 percent of the estimated average cost of
                        beneficiaries in Medicare’s fee-for-service program. These rates are
                        adjusted based on enrollees’ demographic traits: age, sex, Medicaid
                        eligibility, working status, and whether the enrollee is in a nursing home or
                        other institution. These adjustments, known as “risk adjustments,” are
                        designed to reduce HMOs’ ability to benefit from “favorable selection”—the
                        tendency of HMO enrollees to be healthier and less costly to care for than
                        fee-for-service beneficiaries.

                        The risk contract program has not achieved its goal of reducing Medicare
                        costs for two reasons. First, the Health Care Financing Administration’s
                        (HCFA) risk adjustment methodology has proved insufficient to prevent
                        HMOs from benefiting from favorable selection. Consequently, Medicare
                        has paid HMOs more than it would have if HMO enrollees had received
                        fee-for-service care because the HMO enrollees are healthier and less costly
                        to treat—by more than 5 percent—than comparable fee-for-service
                        beneficiaries. GAO has estimated that, for counties containing 36 percent of
                        risk contract HMO enrollment, Medicare excess payments to HMOs in 1995
                        were about $1 billion. Excess payments are likely to increase as
                        enrollment rates in the risk contract program continue to rise. Second, in
                        many areas, Medicare’s 5-percent “discount” from fee-for-service costs is
                        too modest. By failing to reflect local market conditions and greater HMO
                        efficiencies, the capitation rate causes Medicare to overpay HMOs.

                        GAO has suggested that Medicare address the problem of excess payments
                        to HMOs by pursuing a number of strategies, including fostering price
                        competition among HMOs through competitive bidding, introducing more




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                       accurate risk adjusters, and modifying the current formula for HMO rates to
                       reflect market competition and HMOs’ local health care costs. These
                       strategies should be pursued concurrently since barriers exist to the
                       development and implementation of each strategy, and any one strategy
                       may not emerge as feasible or best for all areas.

                       A 5-year estimate of savings from these strategies cannot be made at this
                       time. Available data are insufficient to permit determining the effect of
                       many proposed alternate payment strategies on Medicare spending and on
                       HMO participation in the risk contract program.



Related GAO Products   Medicare HMOs: HCFA Could Promptly Reduce Excess Payments by
                       Improving Accuracy of County Payment Rates (GAO/T-HEHS-97-78,
                       February 25, 1997).

                       Medicare Managed Care: Growing Enrollment Adds Urgency to Fixing HMO
                       Payment Problem (GAO/HEHS-96-21, November 8, 1995).

                       Medicare: Changes to HMO Rate Setting Method Are Needed to Reduce
                       Program Costs (GAO/HEHS-94-119, September 2, 1994).


GAO Contact            William J. Scanlon, (202) 512-7114




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Option:
Medicare Incentive        Authorizing committees                  Finance (Senate)
                                                                  Ways and Means (House)
Payments in Health        Primary agency                          Department of Health and Human Services
Care Shortage Areas       Account                                 Federal Supplementary Insurance Trust
                                                                  Fund (20-8004)
                          Spending type                           Direct
                          Budget subfunction                      Medicare
                          Framework theme                         Reassess objectives

                          The Medicare Incentive Payment (MIP) program was established in 1987
                          amid concerns that low Medicare reimbursement rates for primary care
                          services caused access problems for Medicare beneficiaries in
                          underserved areas. To encourage physicians to locate and serve Medicare
                          beneficiaries in such areas, physicians receive an additional 10-percent
                          payment from Medicare for the services they deliver in urban and rural
                          Health Professional Shortage Areas (HPSA) designated by the Department
                          of Health and Human Services (HHS). In 1995, a HCFA representative stated
                          this program provided about $107 million in bonuses to physicians in
                          HPSAs, an amount 16 percent higher than the previous year. Our work leads
                          us to question the appropriateness of the program for the following
                          reasons.

                      •   The premise on which the program was created may no longer be valid
                          because the basis for Medicare reimbursement has changed since 1987. In
                          fact, recent surveys of Medicare population show that neither provider
                          shortages nor low Medicare reimbursement rates were causing wide
                          spread access problems.
                      •   The basis on which MIP funds are targeted is inadequate to assure that they
                          are directed to improve access to care. While nearly two-thirds of the U.S.
                          counties have HPSAs, we found that at least one-third of these designations
                          are outdated or erroneous. Furthermore, the HPSA designation system itself
                          is not an appropriate vehicle to target MIP funds as it does not lend itself to
                          directing program resources to those providing primary care services to
                          the medically underserved. HHS said they do not have an alternative system
                          that would effectively allocate funding under this program.
                      •   Evidence suggests that the MIP program did not play a significant role in
                          physician decisions to practice in underserved areas. For example, the
                          median payment to urban and rural physicians in 1992 was about $1,239
                          and $869, respectively—an amount too low, according to an HHS Inspector




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                      General’s report, to have a significant effect on physicians’ practice
                      location decisions.

                      The savings estimate that follows assumes the Congress eliminates
                      funding for the Medicare Incentive Payment program beginning in fiscal
                      year 1998.

Five-Year Savings
                      Dollars in millions
                                                             FY98      FY99        FY00       FY01       FY02
                      Savings from the 1997 funding level adjusted for inflation
                      Budget authority                         40         70         80          90        100
                      Outlays                                  40         70         80          90        100
                      Source: Congressional Budget Office.




Related GAO Product   Health Care Shortage Areas: Designations Not a Useful Tool for Directing
                      Resources to the Underserved (GAO/HEHS-95-200, September 8, 1995).


GAO Contact           Bernice Steinhardt, (202) 512-7119




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             •   Fees for Non-Temporary Assistance to Needy Families (TANF) Child
600 Income       Support Enforcement Services
Security     •   Automated Child Support Enforcement Systems
             •   Funding for State Automated Welfare Systems
             •   Benefits for Retirement Eligible FECA Beneficiaries
             •   Workers’ Compensation Cases Involving Third Parties
             •   Workers’ Compensation Payments
             •   Resource Transfers to Qualify for SSI
             •   Return-to-Work Strategies for People with Disabilities
             •   Reporting of Federal Employee Payroll Data to State Unemployment
                 Insurance Programs




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Option:
Fees for               Authorizing committees                  Finance (Senate)
                                                               Ways and Means (House)
Non-Temporary          Primary agency                          Department of Health and Human Services
Assistance to Needy    Account                                 Family Support Payments to States
                                                               (75-1501)
Families (TANF)        Spending type                           Direct
Child Support          Budget subfunction                      Other Income Security
Enforcement Services   Framework theme                         Redefine beneficiaries

                       The purpose of the Child Support Enforcement Program is to strengthen
                       state and local efforts to obtain child support for both families eligible for
                       Temporary Assistance to Needy Families (TANF) and non-TANF families.
                       The services provided to clients include locating noncustodial parents,
                       establishing paternity, and collecting ongoing and delinquent child support
                       payments. From fiscal year 1984 through 1995, non-TANF caseloads and
                       costs have risen about 390 percent and 810 percent, respectively. States
                       have exercised their discretion to charge only minimal application and
                       service fees and, thus, are doing little to recover the federal government’s
                       66-percent share of program costs. In fiscal year 1995, for example, state
                       fee practices returned $33 million of the $1.4 billion spent to provide
                       non-TANF services.

                       Since 1992, GAO has reported on opportunities to defray some of the costs
                       of child support programs. Based on this work, GAO believes that
                       mandatory application fees should be dropped and that states should
                       charge a minimum percentage service fee on successful collections for
                       non-TANF families. Application fees are administratively burdensome, and a
                       service fee would ensure that families are charged only when the service
                       has been successfully performed.

                       If the Congress wishes to recover all of the administrative costs of the
                       program, states could charge a service fee of about 18 percent on
                       collections for non-TANF families. The following savings assume states
                       would be able to implement this option beginning October 1, 1997.




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Five-Year Savings
                       Dollars in millions
                                                              FY98      FY99        FY00       FY01       FY02
                       Savings from the 1997 funding level adjusted for inflation
                       Budget authority                        755        835        915       1,000      1,080
                       Outlays                                 755        835        915       1,000      1,080
                       Source: Congressional Budget Office.




Related GAO Products   Child Support Enforcement: Early Results on Comparability of Privatized
                       and Public Offices (GAO/HEHS-97-4, December 16, 1996).

                       Child Support Enforcement: Reorienting Management Toward Achieving
                       Better Program Results (GAO/HEHS/GGD-97-14, October 25, 1996).

                       Child Support Enforcement: States’ Experience with Private Agencies’
                       Collection of Support Payments (GAO/HEHS-97-11, October 23, 1996).

                       Child Support Enforcement: States and Localities Move to Privatized
                       Services (GAO/HEHS-96-43FS, November 20, 1995).

                       Child Support Enforcement: Opportunity to Reduce Federal and State
                       Costs (GAO/T-HEHS-95-181, June 13, 1995).


GAO Contact            Jane L. Ross, (202) 512-7215




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Option:
Automated Child       Authorizing committees                 Finance (Senate)
                                                             Ways and Means (House)
Support Enforcement   Primary agency                         Department of Health and Human Services
Systems               Account                                Family Support Payments to States
                                                             (75-1501)
                      Spending type                          Direct
                      Budget subfunction                     Other Income Security
                      Framework theme                        Improve efficiency

                      The Department of Health and Human Services’ (HHS) Office of Child
                      Support Enforcement (OCSE) oversees states’ efforts to develop automated
                      systems for the Child Support Enforcement Program. Established for both
                      welfare and non-welfare clients with children, this program is directed at
                      locating parents not supporting their children, establishing paternity,
                      obtaining court orders for the amounts of money to be provided, and
                      collecting these amounts from noncustodial parents. Achievement of Child
                      Support Enforcement Program goals depends in part on the effective
                      planning, design, and operation of automated systems. The federal
                      government is providing enhanced funding to develop these automated
                      child support enforcement systems by paying up to 90 percent of states’
                      development costs. The states have spent about $2.7 billion to develop
                      these systems, including over $2 billion from the federal government.

                      The 90-percent funding participation rate was initially discontinued at the
                      end of fiscal year 1995, the congressionally mandated date for the systems
                      to be certified and operational. However, the Congress subsequently
                      extended the deadline for these systems to the end of fiscal year 1997.
                      Therefore, the 90-percent funding participation rate was continued for
                      states that had an approved funding plan for systems development at the
                      end of fiscal year 1995. In addition, the federal government will continue
                      to reimburse states’ costs to operate these systems at the 66-percent rate
                      established for administrative expenses. Finally, The Personal
                      Responsibility and Work Opportunity Reconciliation Act of 1996 (P.L.
                      104-193) authorized $400 million (with an 80-percent federal funding
                      participation rate) for the states to meet new systems requirements under
                      this law. The 66-percent federal funding participation rate was continued
                      for systems operation and administrative expenses.

                      HHSestimates that the operation of these state automated systems will cost
                      about $213 million in fiscal year 1997, including about $140 million in




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                       federal funds. The Congress could choose to reduce the federal funding
                       participation rate for operation of the automated child support
                       enforcement systems from 66 percent to the 50-percent rate now common
                       for such costs in welfare programs. CBO estimates that doing so would
                       produce the savings shown in the following table.

Five-Year Savings
                       Dollars in millions
                                                              FY98      FY99        FY00       FY01       FY02
                       Savings from the 1997 funding level adjusted for inflation
                       Budget authority                         65         70         80          85         95
                       Outlays                                  65         70         80          85         95
                       Source: Congressional Budget Office.




Related GAO Products   Child Support Enforcement: Timely Action Needed to Correct System
                       Development Problems (GAO/IMTEC-92-46, August 13, 1992).

                       Child Support Enforcement: Opportunity to Defray Burgeoning Federal
                       and State Non-AFDC Costs (GAO/HRD-92-91, June 5, 1992).


GAO Contact            Joel C. Willemssen, (202) 512-6253




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Option:
Funding for State   Authorizing committees                Agriculture (Senate and House)
                                                          Finance (Senate)
Automated Welfare                                         Ways and Means (House)
Systems             Appropriations subcommittees          Labor, Health and Human Services,
                                                          Education and Related Agencies (Senate)
                                                          Agriculture (House)
                    Primary agencies                      Department of Agriculture
                                                          Department of Health and Human Services
                    Account                               Multiple
                    Spending type                         Discretionary/Direct
                    Budget subfunction                    Food and Nutrition; Other Income Security
                    Framework theme                       Improve efficiency

                    We reported that, from 1984 to 1992, federal agencies contributed over
                    $6.8 billion, and $1.8 billion prior to 1984, to help fund development and
                    operation of automated information systems for welfare and
                    welfare-related programs. These programs included: Aid to Families with
                    Dependent Children, Medicaid, Food Stamps, Child Support Enforcement,
                    Job Opportunities and Basic Skills Training, Child Care, and Child Welfare
                    Services and Foster Care/Adoption Assistance. The Department of Health
                    and Human Services (HHS) administers all of these programs except Food
                    Stamps, which the Department of Agriculture (USDA) administers. As part
                    of their program administration responsibilities, these departments are to
                    monitor the development of automated information systems to ensure that
                    the systems meet federal requirements.

                    We reported that ineffective oversight of state-developed systems had led
                    to millions of dollars being spent on systems that did not work and/or did
                    not meet federal requirements. For example, one state spent $51 million
                    on a system that could not be implemented as planned because important
                    user requirements were not incorporated into its original design.
                    Moreover, even though millions of dollars have been spent on
                    state-developed systems, the benefits of these systems in reducing
                    administrative costs and mistakes have not been determined.

                    Many states operate separate systems for separate programs even though
                    the welfare clients the programs serve are often the same. The Personal
                    Responsibility and Work Opportunity Reconciliation Act of 1996, (P.L.
                    104-193) changed the nation’s welfare system into one that requires work
                    in exchange for time-limited assistance. This law affects many existing
                    programs that have traditionally operated individually, but now must



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                       function together to achieve the legislative mandate. The federal
                       government continues to provide support for the operation of these
                       automated systems. However, states now have more responsibility for
                       funding these welfare programs as well as the automated systems needed
                       to allow them to function. In addition, many states are now in the process
                       of upgrading or replacing existing systems or developing or planning to
                       develop new systems, which they estimate could cost at least $2.2 billion
                       from 1993 to 1999.

                       Savings could be achieved and the usefulness of state automated systems
                       improved if problems were identified and corrected early in the system
                       development process. In addition, more of these systems could be
                       integrated, with the federal government providing model systems to
                       further reduce development costs. If it chooses, the Congress could slow
                       HHS’ and USDA’s development funding to reflect the anticipated savings
                       resulting from early detection of problems in the system development
                       process, greater system integration, and greater use of models to guide
                       state development efforts. However, a savings estimate for this option
                       cannot be developed at this time because yearly data on states’ future
                       spending for automated systems development in the affected welfare and
                       welfare-related programs are not available.


Related GAO Products   Automated Welfare Systems: Historical Costs and Projections
                       (GAO/AIMD-94-52FS, February 25, 1994).

                       Welfare Programs: Ineffective Federal Oversight Permits Costly
                       Automated System Problems (GAO/IMTEC-92-29, May 27, 1992).


GAO Contact            Joel C. Willemssen, (202) 512-6253




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Option:
Benefits for          Authorizing committees                 Labor and Human Resources (Senate)
                                                             Economic and Educational Opportunity
Retirement Eligible                                          (House)
FECA Beneficiaries    Appropriations subcommittees           Labor, Health and Human Services, and
                                                             Education (Senate and House)
                      Primary agency                         Department of Labor
                      Account                                Multiple
                      Spending type                          Direct/Discretionary
                      Budget subfunction                     Other Income Security
                      Framework theme                        Reassess objectives

                      Federal workers who continue to be disabled as a result of a work-related
                      injury receive tax-free workers’ compensation benefits under the Federal
                      Employees’ Compensation Act (FECA). These benefits could continue for
                      life and would generally be greater than amounts these workers would
                      receive as retirement benefits. FECA benefits are 75 percent of salary for a
                      disabled employee with a dependent; Civil Service Retirement System
                      benefits for a 55-year old employee with 30 years of service are 56 percent
                      of salary. We reported that 60 percent of the approximately 44,000
                      long-term FECA beneficiaries were at least age 55, the age at which some
                      federal employees are eligible for optional retirement with unreduced
                      retirement benefits. Proponents for changing FECA benefits for older
                      beneficiaries argue that an inequity is created between federal workers
                      who retire normally and those who, in effect, “retire” on FECA benefits.
                      Opponents of such a change argue that reducing benefits would break the
                      implicit promise that injured workers have exchanged their right to tort
                      claims for a given level of future benefits.

                      We identified two prior proposals for reducing FECA benefits to those who
                      become eligible for retirement. One would convert compensation benefits
                      received by retirement-eligible disabled workers to retirement benefits.
                      However, this approach raises complex issues related to the tax-free
                      nature of workers’ compensation benefits and to the individual’s
                      entitlement to retirement benefits. The second proposal would convert
                      FECA benefits to a newly established FECA annuity, thus avoiding the
                      complexity of shifting from one benefit program to another.

                      To reduce benefits for retirement-eligible FECA beneficiaries, the Congress
                      could consider converting from the current FECA benefit structure to a FECA
                      annuity. The following savings estimate assumes that such an annuity




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                      would equal two-thirds of the previously provided FECA compensation
                      benefit and the annuity would begin following the disabled individual’s
                      eligibility for retirement benefits. The CBO estimate assumes that changes
                      in benefits would be made prospectively. Additional savings could be
                      achieved if changes were made to affect individuals who were already
                      receiving FECA benefits.

Five-Year Savings
                      Dollars in millions
                                                             FY98      FY99        FY00       FY01       FY02
                      Direct spending
                      Savings from the 1997 funding level adjusted for inflation
                      Budget authority                          4          8          9           9          9
                      Outlays                                   4          8          9           9          9

Five-Year Savings
                      Dollars in millions
                                                             FY98      FY99        FY00       FY01       FY02
                      Discretionary spending
                      Savings from the 1997 funding level
                      Budget authority                          1          3          9          15         22
                      Outlays                                   1          3          9          15         22
                      Source: Congressional Budget Office.




Related GAO Product   Federal Employees’ Compensation Act: Issues Associated With Changing
                      Benefits for Older Beneficiaries (GAO/GGD-96-138BR, August 14, 1996).


GAO Contact           L. Nye Stevens, (202) 512-8676




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Option:
Workers’             Authorizing committees                 Labor and Human Resources (Senate)
                                                            Economic and Educational Opportunity
Compensation Cases                                          (House)
Involving Third      Appropriations subcommittees           Labor, Health and Human Services, and
                                                            Education (Senate and House)
Parties              Primary agency                         Department of Labor
                     Account                                Multiple
                     Spending type                          Discretionary
                     Budget subfunction                     Other Income Security
                     Framework theme                        Improve efficiency

                     The Federal Employees’ Compensation Act (FECA) authorizes federal
                     agencies to continue paying employees their regular salaries for up to 45
                     days when they are absent from work due to work-related traumatic
                     injuries. In cases in which third parties are responsible for employees’
                     on-the-job injuries (e.g., dog bites or automobile-related injuries), the
                     Department of Labor may require that employees pursue collection
                     actions against these parties. However, based on current interpretations of
                     FECA by the Employees’ Compensation Appeals Board and a federal
                     appeals court, the federal government has no legal basis to obtain refunds
                     from third parties for the first 45 days of absence from work (called the
                     continuation-of-pay (COP) period). Recoveries from third parties continue
                     to be allowed for payments of compensation benefits following the COP
                     period and for medical benefits.

                     Based on the current interpretation of FECA, employees can receive regular
                     salary payments from their employing agencies and reimbursements from
                     third parties—in effect, a double recovery of income for their first 45 days
                     of absence from work due to an injury for which a third party was
                     responsible. We recommended that the Congress amend FECA to expressly
                     provide for refunds of amounts paid as COP when employees receive third
                     party recoveries. CBO estimates that the following savings could be
                     achieved if the Congress redefined COP so that it could be included in
                     amounts employees are required to reimburse the government when they
                     recover damages from third parties.




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Five-Year Savings
                       Dollars in millions
                                                              FY98      FY99        FY00       FY01       FY02
                       Savings from the 1997 funding level
                       Budget authority                          1          1          1           1          1
                       Outlays                                   1          1          1           1          1
                       Savings from the 1997 funding level adjusted for inflation
                       Budget authority                          1          1          1           1          1
                       Outlays                                   1          1          1           1          1
                       Source: Congressional Budget Office.




Related GAO Products   Federal Employees’ Compensation Act: Redefining Continuation of Pay
                       Could Result in Additional Refunds to the Government (GAO/GGD-95-135,
                       June 8, 1995).

                       Workers’ Compensation: Selected Comparisons of Federal and State Laws
                       (GAO/GGD-96-76, April 3, 1996).


GAO Contact            L. Nye Stevens, (202) 512-8676




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Option:
Workers’       Authorizing committees                 Labor and Human Resources (Senate)
                                                      Economic and Educational Opportunity
Compensation                                          (House)
Payments       Appropriations subcommittees           Labor, Health and Human Services, and
                                                      Education (Senate and House)
               Primary agency                         Department of Labor
               Account                                Multiple
               Spending type                          Discretionary/Direct
               Budget subfunction                     Other Income Security
               Framework theme                        Reassess objectives

               Federal workers who experience job-related injuries are entitled to
               workers’ compensation benefits authorized under the Federal Employees’
               Compensation Act (FECA). Our review identified three major ways in which
               FECA differed from other federal and state workers’ compensation laws
               and which resulted in relatively greater benefits under FECA.

               First, FECA authorizes maximum weekly benefit amounts that are greater
               than those authorized by other federal and state workers’ compensation
               laws. As of January 1, 1995, maximum authorized weekly FECA benefits
               were equal to $1,274, 75 percent of the base salary of a GS-15, step 10. The
               maximum weekly benefit authorized under the other workers’
               compensation laws was $817 in Iowa. FECA also authorizes additional
               benefits for one or more dependents equal to 8.33 percent of salary. Only
               seven states authorize additional benefits for dependents, ranging from $5
               to $10 per week per dependent, with total benefits not exceeding
               maximum authorized benefit amounts. Finally, FECA provides eligible
               workers who suffer traumatic injuries with their regular salary for a period
               not to exceed 45 days. Compensation benefits for wage loss begin on the
               48th day, after a 3-day waiting period. All other federal and state workers’
               compensation laws provide for a 3- to 7-day waiting period following the
               injury before paying compensation benefits. In either case, if employees
               continue to be out of work for extended periods of time ranging from 5 to
               42 days, depending on the jurisdiction, retroactive benefits to cover the
               waiting period would be paid.

               Reducing FECA’s authorized maximum weekly benefit to make it
               comparable to other compensation laws would have little effect on
               compensation costs because very few federal workers receive maximum
               benefits. However, CBO estimates (1) eliminating augmented compensation




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                      benefits for dependents and (2) placing a 5-day waiting period immediately
                      following the injury, and before the continuation of pay period, would
                      produce savings, as shown in the table below.

Five-Year Savings
                      Dollars in millions
                                                             FY98      FY99        FY00       FY01       FY02
                      Discretionary spending
                      Savings from the 1997 funding level
                      Option: Eliminate augmented dependent compensation benefits
                      Budget authority                          2          2          7           8          8
                      Outlays                                   2          2          7           8          8
                      Option: 5-day waiting period
                      Budget authority                         11         11         12          12         12
                      Outlays                                  11         11         12          12         12
                      Source: Congressional Budget Office.



Five-Year Savings
                      Dollars in millions
                                                             FY98      FY99        FY00       FY01       FY02
                      Direct spending
                      Savings from the 1997 funding level adjusted for inflation
                      Option: Eliminate augmented dependent compensation benefits
                      Budget authority                          5          5              *          *          *
                      Outlays                                   5          5              *          *          *
                      *Savings of less than $500,000

                      Source: Congressional Budget Office.




Related GAO Product   Workers’ Compensation: Selected Comparisons of Federal and State Laws
                      (GAO/GGD-96-76, April 3, 1996).


GAO Contact           L. Nye Stevens, (202) 512-8676




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Option:
Resource Transfers to   Authorizing committees                 Finance (Senate)
                                                               Ways and Means (House)
Qualify for SSI         Primary agency                         Social Security Administration
                        Account                                Supplemental Security Income Program
                                                               (28-0406)
                        Spending type                          Direct/Discretionary
                        Budget subfunction                     Other Income Security
                        Framework theme                        Redefine beneficiaries

                        The Supplemental Security Income (SSI) program is the country’s largest
                        cash assistance program for the poor and one of the fastest growing
                        entitlement programs. Program costs grew 20 percent annually from 1991
                        through 1994. In 1995, more than 6 million SSI recipients received nearly
                        $25 billion in federal and state benefits. Recent growth in the SSI program
                        has increased congressional interest in ensuring that the SSI program
                        focuses on individuals who have no resources with which to meet their
                        needs and that to the extent possible, individuals rely on their own
                        resources before turning to the SSI program for support.

                        Currently, the law does not prohibit people from transferring resources to
                        qualify for SSI benefits. In a recent review, we found that the 3,505 SSI
                        recipients who transferred resources between 1990 and 1994 transferred
                        cash, houses, land, and other items valued at an estimated $74 million.
                        However, we noted that the total amount of resources transferred was
                        likely to be larger than our estimate because the Social Security
                        Administration (SSA) is not required to verify the accuracy of resource
                        transfer information, which is self-reported by individuals.

                        Without a transfer-of-resource restriction, the 3,505 SSI recipients who
                        transferred resources to qualify for benefits would receive about
                        $7.9 million in SSI benefits in the 24 months after they transferred
                        resources. Although administrative costs may be associated with SSA’s
                        implementing a transfer-of-resource restriction, in our analysis we
                        estimated that from 1990 through December 1995, $14.6 million in program
                        expenditures could have been saved with an SSI transfer-of-resource
                        restriction similar to Medicaid’s long-term care provision. In addition, an
                        SSI transfer-of-resource restriction could increase the public’s confidence
                        in the program’s integrity by ensuring that individuals use their own
                        resources for self-support before receiving SSI.




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                      In light of the potential for reduced program expenditures and increased
                      program integrity, the Congress may wish to consider an SSI
                      transfer-of-resource restriction. The restriction could be calculated in a
                      way that takes into account the value of the resource transferred so that
                      individuals transferring more valuable resources would be ineligible for SSI
                      benefits for longer periods of time than those who transfer less valuable
                      resources. The CBO estimate that follows is based on this assumption.

Five-Year Savings
                      Dollars in millions
                                                             FY98      FY99        FY00       FY01       FY02
                      Savings from the 1997 funding level adjusted for inflation
                                                                a
                      Budget authority                                     2          4           6          8
                                                                a
                      Outlays                                              2          4           6          8
                      Administrative costs
                      (discretionary)                          –1         –1         –1          –1         –1
                      a
                      Less than $1 million

                      Source: Congressional Budget Office.




Related GAO Product   Supplemental Security Income: Some Recipients Transfer Valuable
                      Resources to Qualify for Benefits (GAO/HEHS-96-79, April 30, 1996).


GAO Contact           Jane L. Ross, (202) 512-7215




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Option:
Return-to-Work          Authorizing committees                  Finance (Senate)
                                                                Ways and Means (House)
Strategies for People   Primary agency                          Social Security Administration
With Disabilities       Account                                 Federal Disability Insurance Trust Fund
                                                                (20-8007)
                                                                Supplemental Security Income Program
                                                                (20-0406)
                        Spending type                           Direct
                        Budget subfunction                      Multiple
                        Framework theme                         Reassess objectives

                        The Social Security Administration (SSA) operates the Disability Insurance
                        (DI) and Supplemental Security Income (SSI) programs—the nation’s two
                        largest federal programs providing cash benefits to people with
                        disabilities. SSA data show that between 1985 and 1994, the number of
                        working-age people in these disability programs increased 59 percent from
                        4 million to 6.3 million. Such growth has raised concerns that are
                        compounded by the fact that less than half of 1 percent of DI beneficiaries
                        ever leave the disability rolls by returning to work.

                        We found that return-to-work strategies and practices may hold potential
                        for improving federal disability programs by helping people with
                        disabilities return to productive activity in the workplace and, at the same
                        time, reducing benefit payments. Our analysis of practices advocated and
                        implemented by the private sector in the United States and by social
                        insurance programs in Germany and Sweden revealed three common
                        strategies in the design of their return-to-work programs: intervene as
                        soon as possible after an actual or potentially disabling event to promote
                        and facilitate return to work, identify and provide necessary
                        return-to-work assistance and manage cases to achieve return-to-work
                        goals, and structure cash and medical benefits to encourage people with
                        disabilities to return to work.

                        In line with placing greater emphasis on return to work, the Congress
                        could direct the Commissioner of SSA to develop a comprehensive
                        return-to-work strategy that integrates, as appropriate, earlier intervention,
                        earlier identification and provision of necessary return-to-work assistance
                        for applicants and beneficiaries, and changes the structure of cash and
                        medical benefits. The Commissioner should also identify legislative
                        changes needed to implement such a change. We believe that substantial
                        savings could be achieved if SSA were to develop such a program.



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                       However, such savings would be offset by program costs and any net
                       savings would depend on the program’s participation rate.


Related GAO Products   People With Disabilities: Federal Programs Could Work Together More
                       Efficiently to Promote Employment (GAO/HEHS-96-126, September 3, 1996).

                       SSADisability: Return-to-Work Strategies From Other Systems May
                       Improve Federal Programs (GAO/HEHS-96-133, July 11, 1996).

                       SSADisability: Program Redesign Necessary to Encourage Return to Work
                       (GAO/HEHS-96-62, April 24, 1996).


GAO Contact            Jane L. Ross, (202) 512-7215




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Option:
Reporting of Federal   Authorizing committees                  Finance (Senate)
                                                               Ways and Means (House)
Employee Payroll       Primary agency                          Department of Labor
Data to State          Account                                 State Unemployment Insurance and
                                                               Employment Service Operations (16-0179)
Unemployment           Spending type                           Direct
Insurance Programs     Budget subfunction                      Multiple
                       Framework theme                         Redefine beneficiaries

                       The Congress established the national unemployment insurance (UI)
                       system in the 1930s to provide partial income assistance to many
                       temporarily unemployed workers with substantial work histories. Today,
                       UI is the major federal program providing assistance to the unemployed.
                       Many workers covered by the UI system are also among the 1.1 million
                       personnel currently participating in the National Reserve forces (Army
                       National Guard, Army Reserve, Naval Reserve, Marine Corps Reserve, Air
                       National Guard, Air Force Reserve, and the Coast Guard Reserve).

                       Most UI claimants are required to report the income they receive while in
                       the Reserves so that state UI programs can reduce their benefits
                       accordingly. Our analysis of benefit and Reserve data from seven states
                       shows that some Reserve personnel are receiving improper benefit
                       payments from state UI programs. In the seven states in our analysis, we
                       estimate that UI claimants who were active participants in the Reserves
                       failed to report over $7 milllion in Reserve income in fiscal year 1994. This
                       led to UI benefit overpayments of approximately $3.6 million, of which
                       federal trust fund losses were about $1.2 million. We expect that the
                       federal and state trust fund losses from all UI programs are much greater
                       because the seven states we reviewed account for only 27 percent of all
                       reservists.

                       State officials cited various reasons why claimants may not be reporting
                       their Reserve income while receiving UI benefits. According to state
                       officials, the claimants may not understand their reporting responsibilities,
                       are often not specifically informed of these responsibilities, and may have
                       incentives not to report all Reserve income—incentives that are amplified
                       by the states’ limited ability to detect nonreporting.

                       To detect unreported Reserve income, the most frequently suggested
                       alternative by federal and state officials would be to require the




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                      Department of Defense (DOD) to report Reserve payroll and personnel data
                      to states on a quarterly basis, as private-sector employers are required to
                      do, to permit verification of claimant income on a regular basis. The
                      following CBO estimate assumes that such reporting would result in a
                      reduction of overpayments of $44 million over 5 years. It is noted that the
                      nonreporting of claimant income appears to be a broader problem
                      involving all UI claimants who were former federal civilian and military
                      employees, rather than just those participating in the Reserves. Officials
                      from many of the state programs we analyzed reported general difficulties
                      in monitoring reported income from claimants who were former federal
                      employees.

Five-Year Savings
                      Dollars in millions
                                                                FY98          FY99          FY00          FY01          FY02
                      Savings from 1997 funding level adjusted for inflation
                      Budget authority                              11            12            12            12              12
                      Outlays                                       11            12            12            12              12
                      Reduction in receipts                          0            –1            –3            –5              –7
                      Net effect on deficit                         11            11             9             7               5
                      Note: UI trust fund receipts are dependent on prior year benefit outlays. CBO estimates that, in
                      addition to the savings, this option would have the effect of reducing trust fund receipts in the out
                      years.

                      Source: Congressional Budget Office.




Related GAO Product   Unemployment Insurance: Millions in Benefits Overpaid to Military
                      Reservists (GAO/HEHS-96-101, August 5, 1996).


GAO Contact           Carlotta C. Joyner, (202) 512-7014




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                      •   The PASS Work Incentive Program
650 Social Security




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Option:
The PASS Work       Authorizing committees                  Finance (Senate)
                                                            Ways and Means (House)
Incentive Program   Primary agency                          Social Security Administration
                    Account                                 Federal Disability Insurance Trust Fund
                                                            (20-8007)
                    Spending type                           Direct
                    Budget subfunction                      Social Security
                    Framework theme                         Redefine beneficiaries

                    The Social Security Administration’s (SSA) plan for achieving self-support
                    (PASS) work incentive program was established in 1972 as part of the
                    Supplemental Security Income (SSI) program to help disability benefit
                    recipients return to gainful employment. PASS program applicants submit
                    plans outlining their employment goals, which are reviewed by staff in 1 of
                    the more than 1,300 SSA field offices that administer SSI. An approved PASS
                    plan allows disabled individuals to exclude any non-SSI income or
                    resources they have, including Disability Insurance (DI) benefits, from the
                    determination of the amount of their SSI benefits.

                    While the PASS program is currently small—only about 10,300 individuals
                    participated in December 1994—the number of PASSes has increased more
                    than fivefold between 1990 and 1994 as awareness of the provision has
                    grown. Millions more DI and SSI beneficiaries are eligible to participate.
                    About 40 percent of PASS program participants, largely DI beneficiaries,
                    would not be eligible for federal SSI payments if some of their income was
                    not disregarded under PASS. Additionally, nearly all DI beneficiaries who
                    had participated in the PASS program received their full benefits in May
                    1995. We estimate the cost of additional SSI payments to all program
                    participants to be $2.6 million for January 1995, or about $30 million
                    annually.

                    We found that SSA has not translated the Congress’ broad goals for the PASS
                    work incentive into a coherent program design, provided adequate criteria
                    or guidance to field offices charged with administering the program, or
                    adequately addressed internal control weaknesses that have left the
                    program vulnerable to abuse. The Congress may wish to consider whether
                    individuals otherwise financially ineligible for SSI because their DI benefits
                    or other income exceed the eligibility threshold should continue to gain
                    eligibility for SSI through the PASS program. Also, SSA needs to make major
                    improvements in the management of the program, including clarifying the




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                      program’s goals, deciding whether fees paid to third parties should
                      continue to be disregarded when calculating benefit payment amounts and
                      whether the amount of disregarded fees should be capped, and
                      strengthening internal controls.

                      The following savings estimate is based on the assumption that the
                      Congress takes legislative action to restrict individuals from gaining
                      access to SSI through the PASS program when their DI benefits or other
                      income exceed the eligibility threshold.

Five-Year Savings
                      Dollars in millions
                                                             FY98      FY99        FY00       FY01       FY02
                      Savings from the 1997 funding level adjusted for inflation
                      Budget authority                          5         10         15          15         15
                      Outlays                                   5         10         15          15         15
                      Source: Congressional Budget Office.




Related GAO Product      Program: SSA Work Incentive for Disabled Beneficiaries Poorly
                      PASS
                      Managed (GAO/HEHS-96-51, February 28, 1996).


GAO Contact           Jane L. Ross, (202) 512-7215




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               •   Veterans’ Disability Compensation for Nonservice Connected Diseases
700 Veterans   •   Approving Education and Training Programs for Veterans
Benefits and   •   Cost Sharing for Veterans’ Long-Term Care
Services       •   Effective VA Hospital Preadmission Certification
               •   Construction of Veterans’ Medical Facilities
               •   Underused VA Hospitals
               •   VA’s Medical Care Account Growth Rate
               •   Enrollment in VA Health Care System
               •   Outpatient Pharmacy Costs
               •   Sunset Date of VA’s Income Verification Program




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Option:
Veterans’ Disability   Authorizing committees                         Veterans’ Affairs (Senate and House)

Compensation for       Primary agency                                 Department of Veterans Affairs
                       Account                                        Compensation (36-0153)
Nonservice             Spending type                                  Direct
Connected Diseases     Budget subfunction                             Income Security for Veterans
                       Framework theme                                Redefine beneficiaries

                       During 1986, the Department of Veterans Affairs (VA) paid approximately
                       $1.7 billion in disability compensation payments to veterans with diseases
                       neither caused nor aggravated by military service. In 1996, CBO reported
                       that about 230,000 veterans were receiving about $1.1 billion annually in VA
                       compensation for these diseases. GAO’s study of five countries shows that
                       those countries do not compensate veterans under such circumstances.
                       The Congress may wish to reconsider whether such diseases should be
                       compensated as service-connected disabilities. If disability compensation
                       payments to veterans with nonservice connected, disease-related
                       disabilities were eliminated in future cases, the following savings would
                       apply.

Five-Year Savings
                       Dollars in millions
                                                              FY98      FY99         FY00        FY01        FY02
                       Savings from the 1997 funding level adjusted for inflation
                       Budget authority                         15         48           82        118         156
                       Outlays                                  14         44           87        105         151
                       Source: Congressional Budget Office.




Related GAO Products   Disabled Veterans Programs: U.S. Eligibility and Benefit Types Compared
                       With Five Other Countries (GAO/HRD-94-6, November 24, 1993).

                       VABenefits: Law Allows Compensation for Disabilities Unrelated to
                       Military Service (GAO/HRD-89-60, July 31, 1989).


GAO Contact            Stephen P. Backhus, (202) 512-7111




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Option:
Approving Education     Authorizing committees                 Veterans Affairs (Senate and House)

and Training            Appropriation subcommittees            VA, HUD, and Independent Agencies
                                                               (Senate and House)
Programs for Veterans   Primary agency                         Department of Veterans Affairs
                        Account                                Readjustment Benefits (36-0137)
                        Spending type                          Discretionary
                        Budget subfunction                     Veterans Education, Training and
                                                               Rehabilitation
                        Framework theme                        Improve efficiency

                        The Department of Veterans Affairs (VA) contracts with state approving
                        agencies (SAA) to assess whether schools and training programs offer
                        education of sufficient quality for veterans to receive VA education
                        assistance benefits when attending them. SAAs perform this “gatekeeping”
                        or approval function by evaluating course quality, school financial
                        stability, and student progress. In fiscal year 1994, VA paid more than
                        $1 billion in education assistance benefits to more than 450,000
                        beneficiaries and spent about $12 million for SAA gatekeeping services.

                        Other federal agencies—particularly the Department of Education and the
                        Department of Labor—also perform gatekeeping by determining whether
                        postsecondary educational and training programs and institutions meet
                        federal requirements for student loans and grants, apprenticeship
                        assistance, and other forms of federal support.

                        An estimated $10.5 million of the $12 million paid to SAAs in 1994 was spent
                        to conduct assessments that overlapped those of the Department of
                        Education. These assessments involved reviews of academic and
                        vocational schools that were already accredited by Education-approved
                        agencies. SAA efforts costing another $400,000 in 1994 may have
                        overlapped assessments of apprenticeship programs done by Labor,
                        though the data were not available to determine if overlap was indeed
                        occurring. The remaining SAA assessment activity—costing about
                        $1.1 million—did not overlap activities of other agencies because it
                        involved on-the-job training programs and unaccredited schools, neither of
                        which Education or Labor assessed.

                        The substantial amount of overlap that occurred between SAA and other
                        gatekeepers’ efforts raises questions about whether SAA efforts should
                        continue at their current level. An estimated 87 percent of the approval




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                      effort expended by SAAs related to schools and programs also subject to
                      accreditation by Education-approved entities. Also, in a review of six
                      jurisdictions, 93 percent of the accredited schools were also certified by
                      Education to participate in Title IV student aid programs. School
                      certification involves applying standards that are similar to those used by
                      SAAs. On its face, an SAA review of courses of study at an
                      Education-certified school would appear to add only marginal value. An
                      opportunity exists for reducing federal expenditures by over $10 million
                      annually through elimination of overlapping SAA gatekeeping efforts.

                      The following CBO savings estimate is based on the assumption that the
                      Congress directs VA to discontinue contracting with SAAs to review and
                      approve educational programs at schools that have already been reviewed
                      and certified by Education.

Five-Year Savings
                      Dollars in millions
                                                             FY98      FY99          FY00        FY01       FY02
                      Savings from 1997 funding level
                      Budget authority                         10         10            10          10         10
                      Outlays                                  10         10            10          10         10
                      Savings from 1997 funding level adjusted for inflation
                      Budget authority                         10         11            11          11         12
                      Outlays                                  10         11            11          11         12
                      Source: Congressional Budget Office.




Related GAO Product   VAStudent Financial Aid: Opportunity to Reduce Overlap in Approving
                      Education and Training Programs (GAO/HEHS-96-22, October 30, 1995).


GAO Contact           Carlotta C. Joyner, (202) 512-7002




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Option:
Cost Sharing for      Authorizing committees                 Veterans’ Affairs (Senate and House)

Veterans’ Long-Term   Appropriations subcommittees           VA, HUD, and Independent Agencies
                                                             (Senate and House)
Care                  Primary agency                         Department of Veterans Affairs
                      Account                                Medical Care (36-0160)
                      Spending type                          Discretionary
                      Budget subfunction                     Hospital and Medical Care for Veterans
                      Framework theme                        Redefine beneficiaries

                      State veterans’ homes recover as much as 50 percent of the costs of
                      operating their facilities through charges to veterans receiving services.
                      Similarly, Oregon recovers about 14 percent of the costs of nursing home
                      care provided under its Medicaid program through estate recoveries. In
                      fiscal year 1990, the Department of Veterans Affairs (VA) offset less than
                      one-tenth of 1 percent of its costs through beneficiary copayments.

                      Potential recoveries appear to be greater within the VA system than under
                      Medicaid. Home ownership is significantly higher among VA hospital users
                      than among Medicaid nursing home recipients, and veterans living in VA
                      nursing homes generally contribute less toward the cost of their care than
                      do Medicaid recipients, allowing veterans to build larger estates.

                      The Congress may wish to consider increasing cost sharing for VA nursing
                      home care by (1) adopting cost-sharing requirements similar to those
                      imposed by most state veterans’ homes and (2) implementing an estate
                      recovery program similar to those operated by many states under their
                      Medicaid programs. If VA recovered either 25 percent or 50 percent of its
                      costs of providing nursing home and domiciliary care through a
                      combination of cost sharing and estate recoveries, the savings shown in
                      the following table would apply.




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Five-Year Savings
                       Dollars in millions
                                                              FY98      FY99        FY00       FY01       FY02
                       Savings from the 1997 funding level
                       Option: Recovery of 25 percent of costs
                       Budget authority                        678        678        678        678         678
                       Outlays                                 678        678        678        678         678
                       Option: Recovery of 50 percent of costs
                       Budget authority                       1,359     1,359       1,359      1,359      1,359
                       Outlays                                1,359     1,359       1,359      1,359      1,359
                       Source: Congressional Budget Office.



Five-Year Savings
                       Dollars in millions
                                                              FY98      FY99        FY00       FY01       FY02
                       Savings from the 1997 funding level adjusted for inflation
                       Option: Recovery of 25 percent of costs
                       Budget authority                        703        727        752        778         805
                       Outlays                                 703        727        752        778         805
                       Option: Recovery of 50 percent of costs
                       Budget authority                       1,408     1,456       1,507      1,559      1,614
                       Outlays                                1,408     1,456       1,507      1,559      1,614
                       Source: Congressional Budget Office.




Related GAO Products   VAHealth Care: Potential for Offsetting Long-Term Care Costs Through
                       Estate Recovery (GAO/HRD-93-68, July 27, 1993).

                       VAHealth Care: Offsetting Long-Term Care Cost By Adopting State
                       Copayment Practices (GAO/HRD-92-96, August 12, 1992).


GAO Contact            Stephen P. Backhus, (202) 512-7111




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Option:
Effective VA Hospital   Authorizing committees                 Veterans’ Affairs (House and Senate)

Preadmission            Appropriations subcommittees           VA, HUD, and Independent Agencies
                                                               (House and Senate)
Certification           Primary agency                         Department of Veterans Affairs
                        Account                                Medical Care (36-0160)
                        Spending type                          Discretionary
                        Budget subfunction                     Hospital and Medical Care for Veterans
                        Framework theme                        Improve efficiency

                        Department of Veterans Affairs (VA) hospitals too often serve patients
                        whose care could be more efficiently provided in alternative settings, such
                        as outpatient clinics or nursing homes. In 1985, we reported that about
                        43 percent of the days of care that VA medical and surgical patients spent
                        in the VA hospitals reviewed could have been avoided. Since then, several
                        studies by VA researchers and the VA Office of Inspector General have
                        found that over 40 percent of VA hospitals admissions and days of care
                        were not medically necessary.

                        Private health insurers typically require their policyholders (or their
                        physicians) to obtain authorization from the insurer or its agent prior to
                        admission to a hospital. Failure to obtain such preadmission certification
                        can result in denial of insurance coverage or a reduction in payment. For
                        example, all fee-for-service health plans participating in the Federal
                        Employees Health Benefits Program are required to operate a
                        preadmission certification program to help limit nonacute admissions and
                        days of care.

                        We have recommended that VA establish an independent preadmission
                        certification program. Although VA agreed to establish such a program, it
                        has provided no time frame for completing development and
                        implementation of the program. In addition, it has not indicated how
                        compliance with the findings of external reviews will be enforced.
                        Because VA facilities currently incur no financial risk from providing
                        inappropriate care, external preadmission certification requirements may
                        not be effective unless coupled with a financial penalty for noncompliance
                        with review findings.

                        CBO estimates that if VA were to establish precertification procedures
                        similar to those used by private health insurers which result in a




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                       40-percent reduction in admissions and days of care, VA’s Medical Care
                       spending could be reduced by $8.4 billion over 5 years.

Five-Year Savings
                       Dollars in millions
                                                              FY98      FY99        FY00       FY01       FY02
                       Savings from the 1997 funding level adjusted for inflation
                       Budget authority                       1,655     1,670       1,682      1,693      1,703
                       Outlays                                1,490     1,652       1,681      1,692      1,702
                       Source: Congressional Budget Office.




Related GAO Products   VAHealth Care: Issues Affecting Eligibility Reform Efforts (GAO/HEHS-96-160,
                       September 11, 1996).

                       VAHealth Care: Opportunities for Service Delivery Efficiencies Within
                       Existing Resources (GAO/HEHS-96-121, July 25, 1996).

                       VAHealth Care: Opportunities to Increase Efficiency and Reduce Resource
                       Needs (GAO/T-HEHS-96-99, March 8, 1996).

                       VAHealth Care: Challenges and Options for the Future (GAO/T-HEHS-95-147,
                       May 9, 1995).

                       Better Patient Management Practices Could Reduce Length of Stay in VA
                       Hospitals (GAO/HRD-85-52, August 8, 1985).


GAO Contact            Stephen P. Backhus, (202) 512-7111




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Option:
Construction of     Authorizing committees                                   Veterans Affairs (Senate and House)

Veterans’ Medical   Appropriations subcommittees                             VA, HUD, and Independent Agencies
                                                                             (Senate and House)
Facilities          Primary agency                                           Department of Veterans Affairs
                    Account                                                  Construction (36-0110)
                    Spending type                                            Discretionary
                    Budget subfunction                                       Hospital and Medical Care for Veterans
                    Framework theme                                          Redefine beneficiaries

                    The Department of Veterans Affairs’ (VA) health care system comprises
                    one of the nation’s largest networks of direct delivery health care
                    providers, including 173 hospitals, 376 outpatient clinics, 133 nursing
                    homes, and 39 domicilaries. These facilities provided care to about
                    2.2 million veterans at a cost of about $16 billion in fiscal year 1995. For
                    fiscal year 1996, VA medical centers proposed to headquarters more than
                    $3 billion in funding requests for major construction projects.26 In the
                    fiscal year 1996 budget request, the President asked the Congress to
                    appropriate $514 million for nine projects. The projects range in size from
                    $9 million to renovate nursing units in one hospital to $211.1 million to
                    build a new medical center at Travis Air Force Base in California.

                    Long-term commitments for any major construction or renovation of
                    predominantly inpatient facilities in today’s rapidly changing health care
                    environment are accompanied by high levels of financial risk. VA’s recent
                    commitment to a major realignment of its health care system magnifies
                    such risk by creating additional uncertainty. In addition, we believe that
                    analyzing such alternatives in connection with the other major
                    construction projects in VA’s budget proposal is entirely consistent with
                    VA’s suggested realignment criteria. Delaying funding for these projects
                    until the alternatives can be fully analyzed may result in more prudent and
                    economical use of already scarce federal resources.

                    The potential savings of delaying funding for VA hospital construction are
                    uncertain in the absence of an assessment of VA’s needs based on its own
                    realignment criteria. However, we have recently reported that VA officials
                    did not rigorously consider available alternatives to construction of two
                    major new hospital facilities: Brevard Hospital in Brevard County, Florida,
                    and Travis Hospital at Travis Air Force Base in northern California. The
                    Congress directed VA to forgo construction of Brevard Hospital for savings

                    26
                      Major projects are those costing $3 million or more.



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                       totaling $155 million and develop lower cost alternatives to meet veterans’
                       needs.

                       Additionally, we found that construction of additional hospital beds and an
                       outpatient clinic as large as VA proposes at Travis Air Force Base is
                       unnecessary. Although significant changes have occurred in the health
                       care marketplace and in the way VA delivers health care in the 4 years
                       since the project was planned, VA plans have not been revised accordingly.
                       These changes alone have resulted in over 3,300 unused hospital beds in
                       northern California hospitals, including beds in VA, Air Force, and
                       community hospitals. In addition, the veteran population in the service
                       area is expected to drop by about 25 percent between 1995 and 2010. We
                       also found that VA has not considered the likely negative effects the
                       additional beds could have on other hospitals in northern California,
                       particularly those community hospitals in the Solano County area
                       surrounding Travis Air Force Base that have occupancy rates of around
                       40 percent.

                       CBO estimates that if the Congress did not approve funding of any major
                       construction projects until after VA has completed its realignment, savings
                       totaling more than $1.2 billion could be achieved over 5 years.

Five-Year Savings
                       Dollars in millions
                                                              FY98      FY99       FY00        FY01       FY02
                       Savings from 1997 funding level
                       Budget authority                        219       219         219        219         219
                       Outlays                                  21         36        104        168         207
                       Savings from 1997 funding levels adjusted for inflation
                       Budget authority                        224       231         237        243         250
                       Outlays                                   1         37        108        175         220
                       Source: Congressional Budget Office.




Related GAO Products   VA Health Care: Travis Hospital Construction Project Is Not Justified
                       (GAO/HEHS-96-198, September 3, 1996).

                       VAHealth Care: Effects of Facility Realignment on Construction Needs Are
                       Unknown (GAO/HEHS-96-19, November 17, 1995).




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              VAHealth Care: Need for Brevard Hospital Not Justified (GAO/HEHS-95-192,
              August 29, 1995).


GAO Contact   Stephen P. Backhus, (202) 512-7111




              Page 294                                    GAO/OCG-97-2 Addressing the Deficit
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Option:
Underused VA           Authorizing committees                 Veterans’ Affairs (House and Senate)

Hospitals              Appropriations subcommittees           VA, HUD, and Independent Agencies
                                                              (House and Senate)
                       Primary agency                         Department of Veterans Affairs
                       Account                                Medical Care (36-0160)
                       Spending type                          Discretionary
                       Budget subfunction                     Hospital and Medical Care for Veterans
                       Framework theme                        Improve efficiency

                       Although the Department of Veterans Affairs (VA) took over 50,000 hospital
                       beds out of service between 1970 and 1995, it did not close any hospitals
                       based on declining utilization. With the declining veteran population, new
                       technologies, and VA’s plans to emphasize outpatient care, significant
                       further declines in demand for VA hospital care are likely. While closing
                       wards clearly saves some money by reducing staffing costs, the cost per
                       patient treated rises because the fixed costs of facility operation are
                       disbursed over fewer patients. At some point, closing a hospital and
                       providing care either through another VA hospital or through contracts
                       with community hospitals may become less costly than simply taking beds
                       out of service.

                       Potential savings from hospital closures are difficult to estimate because
                       of uncertainties about which facilities would be closed, the increased
                       costs that would be incurred in providing care through other VA hospitals
                       or contracts with community hospitals, and the disposition of the closed
                       facilities. VA is currently developing strategic plans to assess veterans’
                       future health care needs that could provide a basis for decisions regarding
                       which hospitals to close.


Related GAO Products   VAHealth Care: Opportunities for Service Delivery Efficiencies Within
                       Existing Resources (GAO/HEHS-96-121, July 25, 1996).

                       VAHealth Care: Opportunities to Increase Efficiency and Reduce Resource
                       Needs (GAO/T-HEHS-96-99, March 8, 1996).

                       VAHealth Care: Challenges and Options for the Future (GAO/T-HEHS-95-147,
                       May 9, 1995).




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GAO Contact   Stephen P. Backhus, (202) 512-7111




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Option:
VA’s Medical Care     Authorizing committees                 Veterans’ Affairs (House and Senate)

Account Growth Rate   Appropriations subcommittees           VA, HUD, and Independent Agencies
                                                             (House and Senate)
                      Primary agency                         Department of Veterans Affairs
                      Account                                Medical Care (36-0160)
                      Spending type                          Discretionary
                      Budget subfunction                     Hospital and Medical Care for Veterans
                      Framework theme                        Reassess objectives

                      The Department of Veterans Affairs’ (VA) health care system was
                      established in 1930, primarily to provide for the rehabilitation and
                      continuing care of veterans injured during wartime service. VA developed
                      its health care system as a direct delivery system in which the government
                      owned and operated its own health care facilities. It grew into the nation’s
                      largest direct delivery system. Veterans’ health care benefits include
                      medically necessary hospital and nursing home care and some outpatient
                      care.

                      We found that VA’s health care system should be able to significantly
                      contribute to deficit reduction in the next 5 years. First, the system may
                      not need to expend the level of resources that VA had previously estimated
                      to meet the health care needs of veterans. These resources are overstated
                      because (1) VA did not adequately reflect the declining demand for VA
                      hospital care in estimating its resource needs and (2) eligibility for VA
                      resources has been reformed, which, according to VA, will allow VA to
                      divert 20 percent of its hospital admissions to less costly outpatient
                      settings. Second, VA could reduce operating costs over the next 5 years by
                      billions of dollars by completing actions on a wide range of efficiency
                      initiatives. Actions are planned or underway on many of the
                      improvements.

                      The success of these efforts, however, depends on the extent to which VA
                      and its health care facilities are held accountable for how they spend
                      appropriated funds. We recently recommended that VA provide the
                      Congress improved information supporting its budget request. Specifically,
                      we recommended that VA provide the Congress information on the savings
                      achieved through improved efficiency. Providing the Congress with
                      information on factors, such as inflation and creation of new programs,
                      that increase resource needs without providing information on changes
                      that could reduce or offset those needs leaves the Congress with little



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                       basis for determining appropriate funding levels. VA, however, has been
                       unwilling to provide the Congress such information.

                       In 1995, the Congress adopted a budget resolution providing VA medical
                       care budget authority of $16.2 billion annually for 7 years, essentially
                       limiting VA spending at the fiscal year 1995 level. VA estimated that such a
                       limitation would result in a cumulative shortfall of almost $24 billion in the
                       funds it would need to maintain current services to the veteran population
                       through 2002. However, we reported that VA overestimated the potential
                       budget shortfall because it assumed that (1) the VA facility workload would
                       increase in fiscal year 1996 and that it would be sustained during the entire
                       7-year period, (2) limited savings would be achieved through
                       improvements in the efficiency with which services are provided by VA
                       facilities, and (3) costs, workload, and staffing would steadily increase due
                       to opening or expanding facilities.

                       Because VA facilities are essentially allowed to keep any funds they
                       generate through efficiency improvements and seek additional funds to
                       compensate for the effects of inflation, the true rate of increase in VA’s
                       medical care appropriation is understated. One way for the Congress to
                       respond to VA’s unwillingness to provide information on savings from
                       improved efficiency and the overestimation of needs would be to limit the
                       VA medical care appropriation at the fiscal year 1997 level for the next 5
                       years. CBO estimates that this would result in almost $9 billion in savings.

Five-Year Savings
                       Dollars in millions
                                                              FY98      FY99          FY00        FY01       FY02
                       Savings from the 1997 funding level
                       Budget authority                          0          0             0           0          0
                       Outlays                                   0          0             0           0          0
                       Savings from 1997 funding level adjusted for inflation
                       Budget authority                        584      1,165         1,767       2,395      3,050
                       Outlays                                 525      1,101         1,701       2,326      2,978
                       Source: Congressional Budget Office.




Related GAO Products   VAHealth Care: Opportunities for Service Delivery Efficiencies Within
                       Existing Resources (GAO/HEHS-96-121, July 25, 1996).




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              VAHealth Care: Opportunities to Increase Efficiency and Reduce Resource
              Needs (GAO/T-HEHS-96-99, March 8, 1996).

              Medical Care Budget Alternatives (GAO/HEHS-95-247R, September 12, 1995).


GAO Contact   Stephen P. Backhus, (202) 512-7111




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Option:
Enrollment in VA     Authorizing committees                 Veterans’ Affairs (House and Senate)

Health Care System   Appropriations subcommittees           VA, HUD, and Independent Agencies
                                                            (House and Senate)
                     Primary agency                         Department of Veterans Affairs
                     Account                                Medical Care (36-0160)
                     Spending type                          Discretionary
                     Budget subfunction                     Hospital and Medical Care for Veterans
                     Framework theme                        Redefine beneficiaries

                     The Department of Veterans Affairs’ (VA) health care system was initially
                     established to meet the special care needs of veterans injured during
                     wartime and those wartime veterans permanently incapacitated and
                     incapable of earning a living. Although all veterans were eligible for
                     hospital care, most veterans were eligible for only limited outpatient
                     services.

                     Recently enacted legislation expands eligibility for health benefits to make
                     all veterans eligible for comprehensive inpatient and outpatient services,
                     subject to the availability of resources. The legislation also requires VA to
                     establish a system of enrollment for VA health care benefits and establishes
                     enrollment priorities to be applied within appropriated resources. The
                     lowest priority for enrollment are veterans with no service-connected
                     disabilities and incomes that place them in the discretionary care category.

                     However, VA does not currently provide the Congress the type of
                     information on VA’s workload that would enable it to make informed
                     judgments about which portion of VA’s workload to fund. For example, it
                     provides the Congress little data on the extent to which its resources are
                     used to provide services to service-connected veterans, to veterans with
                     low incomes, and to veterans with higher incomes. Without information on
                     the extent to which VA resources are used to provide services to veterans
                     in the priority categories established under the new law, the Congress
                     lacks the basic information needed to guide decisions about what portion
                     of VA’s workload to fund.

                     We found that about 15 percent of veterans with no service-connected
                     disabilities who use VA medical centers have sufficiently high incomes that
                     would place them in the lowest priority category under the new patient
                     enrollment system. If the Congress funded the VA health care system to
                     cover only the expected enrollment of veterans in higher priority



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                       enrollment categories, such as veterans with service-connected disabilities
                       and veterans without the means to obtain public or private insurance to
                       meet their basic health care needs, CBO estimates that $1.7 billion in budget
                       authority adjusted for inflation could be saved over 5 years.

Five-Year Savings
                       Dollars in millions
                                                              FY98      FY99          FY00        FY01       FY02
                       Savings from 1997 funding level
                       Budget authority                        280       280            280        280         280
                       Outlays                                 252       277            280        280         280
                       Savings from 1997 funding level adjusted for inflation
                       Budget authority                        323       335            346        358         371
                       Outlays                                 291       331            346        358         371
                       Source: Congressional Budget Office.




Related GAO Products   VAHealth Care: Issues Affecting Eligibility Reform Efforts (GAO/HEHS-96-160,
                       September 11, 1996).

                       VAHealth Care: Opportunities for Service Delivery Efficiencies Within
                       Existing Resources (GAO/HEHS-96-121, July 25, 1996).

                       VAHealth Care: Approaches for Developing Budget-Neutral Eligibility
                       Reform (GAO/T-HEHS-96-107, March 20, 1996).

                       VAHealth Care: Opportunities to Increase Efficiency and Reduce Resource
                       Needs (GAO/T-HEHS-96-99, March 8, 1996).

                       VA Health Care: Issues Affecting Eligibility Reform (GAO/T-HEHS-95-213,
                       July 19, 1995).


GAO Contact            Stephen P. Backhus, (202) 512-7111




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Option:
Outpatient Pharmacy   Authorizing committees                    Veterans’ Affairs (Senate and House)

Costs                 Appropriations subcommittees              VA, HUD, and Independent Agencies
                                                                (Senate and House)
                      Primary agency                            Department of Veterans Affairs
                      Account                                   Medical Care (36-0160)
                      Spending type                             Discretionary
                      Budget subfunction                        Hospital and Medical Care for Veterans
                      Framework theme                           Redefine beneficiaries

                      The Department of Veterans Affairs’ (VA) pharmacies dispense over 2,000
                      types of medications and medical supplies to veterans that are available
                      over the counter (OTC) through local retail outlets. Such products were
                      dispensed more than 15 million times in 1995 at an estimated cost of
                      $165 million. The most frequently dispensed include aspirin, dietary
                      supplements, and alcohol prep pads. VA physicians and others are
                      concerned that veterans who need such products may lack the resources
                      to purchase them and, as a result, not use them. However, only a few VA
                      pharmacies restrict which veterans may receive OTC products or how many
                      are provided. While many veterans shared a modest portion of the costs of
                      the OTC products, in most cases, the veterans paid no copayments and VA
                      absorbed the total costs of these OTC products.

                      Unlike VA, other public and private health care plans cover few, if any, OTC
                      products for their beneficiaries. These plans’ coverage of OTC products is
                      more restrictive than all but a few of VA’s facilities. In addition, VA facilities
                      provide other features, such as free prescription mail service, that are
                      commonly not available from other plans. As a result, VA facilities devote
                      significant resources to the provision of OTC products that other plans have
                      elected not to cover.

                      Our assessment of VA’s operating practices suggests several ways that
                      budget savings could be achieved. First, VA could more narrowly define
                      when to provide OTC products, reducing the number of OTC products
                      available to veterans on an outpatient basis. Second, VA could collect
                      copayments for all OTC products. CBO has estimated that these steps would
                      save the following amounts.




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Five-Year Savings
                      Dollars in millions
                                                             FY98      FY99        FY00       FY01       FY02
                      Option: Restrict availability of OTC products at VA pharmacies
                      Savings from the 1997 funding level
                      Budget authority                         60         60           61        61         62
                      Outlays                                  54         59           61        61         62
                      Savings from the 1997 funding level adjusted for inflation
                      Budget authority                         62         64           67        70         74
                      Outlays                                  55         64           67        70         73

Five-Year Savings
                      Dollars in millions
                                                             FY98      FY99        FY00       FY01       FY02
                      Option: Charge copayments on OTC products at VA pharmacies
                      Savings from the 1997 funding level
                      Budget authority                          5          9           14        14         14
                      Outlays                                   5          9           14        14         14
                      Savings from the 1997 funding level adjusted for inflation
                      Budget authority                          5          9           14        14         14
                      Outlays                                   5          9           14        14         14
                      Source: Congressional Budget Office.




Related GAO Product   VAHealth Care: Opportunities to Significantly Reduce Outpatient
                      Pharmacy Costs (GAO/HEHS-97-15, October 11, 1996).


GAO Contact           Stephen P. Backhus, (202) 512-7111




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Option:
Sunset Date on VA’s   Authorizing committees                        Veterans’ Affairs (Senate and House)

Income Verification   Appropriations subcommittees                  VA, HUD, and Independent Agencies
                                                                    (Senate and House)
Program               Primary agency                                Department of Veterans Affairs
                      Accounts                                      Compensation (36-0153)
                                                                    Medical Care (36-0160)
                      Spending type                                 Direct
                      Budget subfunctions                           Multiple
                      Framework theme                               Improve efficiency

                      The Department of Veterans Affairs (VA) administers over $35 billion
                      annually in benefits and health care programs for veterans and their
                      dependents. Eligibility for benefits and the level of benefits paid are often
                      income dependent. VA uses self-reported income in establishing eligibility
                      for certain benefits. In general, the lower the reported income, the higher
                      the benefits.

                      In 1988 we recommended that the Congress amend the Internal Revenue
                      Code to give VA access to tax data to verify income reported by VA pension
                      recipients. We estimated that VA made potential overpayments of over
                      $157 million in 1984 because it lacked access to tax data. Legislation was
                      enacted in 1990 that gave VA access to Internal Revenue Service (IRS) tax
                      data and Social Security Administration (SSA) earnings records to help VA
                      verify incomes reported by beneficiaries. Since 1990, millions of dollars in
                      savings have been achieved as a result of VA’s income verification program.

                      However, the provision authorizing IRS and SSA assistance to VA in verifying
                      income will expire on September 30, 1998—its “sunset” date. If the
                      provision is not extended, VA’s outlays will be unnecessarily higher.

Five-Year Savings
                      Dollars in millions
                                                             FY98     FY99         FY00        FY01        FY02
                      Budget authority                          0        22           27          31         36
                      Outlays                                   0        22           27          31         36
                      Source: Congressional Budget Office.




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Related GAO Products   VAHealth Care: Verifying Veterans’ Reported Income Could Generate
                       Millions in Copayment Revenues (GAO/HRD-92-159, September 15, 1992).

                       Veterans’ Benefits: Millions in Savings Possible From VA’s Matching
                       Program With IRS and SSA (GAO/HRD-92-37, December 23, 1991).

                       Veterans’ Pensions: Verifying Income With Tax Data Can Identify
                       Significant Payment Problems (GAO/HRD-88-24, March 16, 1988).


GAO Contact            Stephen P. Backhus, (202) 512-7111




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                     •   Border Patrol Resources
750 Administration
of Justice




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Option:
Border Patrol   Authorizing committees                 Judiciary (Senate and House)

Resources       Appropriations subcommittees           Commerce, Justice, State, and the
                                                       Judiciary (Senate and House)
                Primary agency                         Department of Justice
                Accounts                               Immigration and Naturalization Service
                                                       Salaries and Expenses (15-1217)
                                                       Violent Crime Reduction Fund Programs
                                                       (15-8598)
                Spending type                          Discretionary
                Budget subfunction                     Federal Law Enforcement Activities
                Framework theme                        Improve efficiency

                Drug smuggling and illegal immigration are serious threats along the
                Southwest border. Experts estimate that most of the cocaine and most
                illegal aliens entering the United States enter from Mexico across the
                Southwest border. Unless border control efforts become more effective,
                illegal immigration is expected to increase over the next decade.

                The Department of Justice’s Immigration and Naturalization Service (INS)
                is responsible for enforcing the nation’s immigration laws. The INS has 3
                regional offices, 33 district offices, 21 Border Patrol sectors with 145
                Border Patrol offices, and 265 staffed ports of entry. The three principal
                divisions with enforcement responsibilities include the Border Patrol,
                Investigations, and Inspections.

                The Violent Crime Control and Law Enforcement Act of 1994 increased
                funding for the Border Patrol to help stem the flow of illegal aliens
                crossing the Southwest border. The legislation authorized an increase of
                4,000 Border Patrol agents and support staff over four years to carry out
                the INS’ new border enforcement strategy of “prevention through
                deterrence.” Under this strategy, Border Patrol agents are to be deployed
                on the border to discourage aliens from entering illegally. Previously,
                agents were deployed in border areas, but their strategy was to apprehend
                aliens after they had entered the United States.

                Nationwide, in fiscal year 1994, the Border Patrol reportedly spent
                63 percent of its enforcement time preventing illegal alien entry. The
                remaining 37 percent was spent apprehending aliens who illegally entered
                or violated the conditions upon which they entered. The activities of
                Border Patrol agents generally vary according to their distance from the




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border. Agents at most stations within 25 miles of the border were
principally engaged in patrolling the border to prevent illegal entry of
aliens. In contrast, agents at stations over 25 miles from the border were
principally engaged in apprehending illegal aliens after their entry.

INSdistrict offices and Border Patrol sectors geographically overlap
throughout the country. In addition, some Border Patrol enforcement
activities parallel the enforcement activities of other INS enforcement
divisions. Border Patrol and Investigations are both responsible for
identifying criminal and illegal aliens after they enter the country and
reviewing employers’ records to determine whether only authorized
workers are employed. The work in these parallel areas is usually a lower
priority for the Border Patrol.

INS data indicates that it costs half as much to redirect existing Border
Patrol agents to the border than to hire and train new agents. Also,
redirecting the time spent by agents at the 32 southwest border stations
from apprehending aliens after entry to patrolling the border would
decrease the number of new agents needed. Furthermore, relocating
interior Border Patrol agents to the borders could result in INS closing
some Border Patrol stations and reducing some of its lease costs. In a
recent example of how this type of redirection and redeployment might be
implemented, the Congress directed the Border Patrol to redeploy 200
agent positions from interior stations to the Southwest border. Following
this directive, INS set aside only 100 investigator positions to perform the
activities that had previously been performed by the 200 redeployed
agents.

The Congress could direct the INS to fully implement its new enforcement
strategy by redeploying additional Border Patrol agents and closing Border
Patrol stations that are not carrying out operations designed to prevent the
entry of illegal aliens. Given the emphasis that the President and the
Congress have placed on controlling the nation’s borders, one possible
approach would be to redeploy resources to those border areas where
there is an immediate threat of illegal entry. Although CBO could not
provide an estimate of savings at this time, under this approach Border
Patrol stations where agents spend less than, for example, 50 percent of
their time patrolling the border or less than 75 percent of their time
conducting traffic checks, might be closed and have its agents redeployed.
Also, stations in close proximity to the Southwest or Canadian borders
where agents do not spend a minimum of, for example, 50 percent of their
time patrolling the border or 75 percent of their time conducting traffic



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                       checks, might have the activities of its agents redirected to prevent entry
                       of illegal aliens. Further, the redirection of agents’ activities should reduce
                       the number of new agents the Border Patrol would need to hire to increase
                       the amount of time spent patrolling the border.


Related GAO Products   Border Patrol: Staffing and Enforcement Activities (GAO/GGD-96-65,
                       March 11, 1996).

                       Border Control: Revised Strategy is Showing Some Positive Results
                       (GAO/T-GGD-95-92, March 10, 1995).


GAO Contact            Norman J. Rabkin, (202) 512-8777




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                    •   General Services Administration Supply Depot System
800 General         •   Judiciary’s Long-Range Space Planning System
Government,         •   The 1-Dollar Coin
900 Net Interest,   •   Commemorative Coins
                    •   Federal Reserve Operations
and 999 Multiple    •   Premium Payments to Employees While on Leave
                    •   Davis-Bacon Act Reform
                    •   Formula-Based Grant Programs
                    •   Federal Grants
                    •   Federal Travel Processing




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Option:
General Services        Authorizing committees                 Governmental Affairs (Senate)
                                                               Government Reform and Oversight (House)
Administration Supply   Primary agency                         General Services Administration
Depot System            Account                                General Supply Fund (47-4530)
                        Spending type                          Direct
                        Budget subfunction                     General Property and Records
                                                               Management
                        Framework theme                        Improve efficiency

                        The General Services Administration (GSA) has a multimillion dollar supply
                        system to help support federal agencies’ mission needs. As part of this
                        system, GSA buys and warehouses about 16,000 common-use supply
                        products and resells and ships them to federal agencies through five
                        depots. An alternative method GSA uses is to have supplies delivered
                        directly from suppliers to federal agencies. Agencies pay less when
                        supplies are delivered directly. At the time of GAO’s most recent work, GSA
                        marked up directly delivered products, on average, 10 percent of product
                        cost, while products stored and shipped from GSA depots were marked up
                        an average of 29 percent. For fiscal year 1996, GSA’s markups had
                        increased to 22 percent and 35 percent, respectively. Although the cost
                        difference between the two delivery options has lessened in the
                        intervening years for a variety of reasons, including a changed
                        methodology for calculating mark-ups developed in fiscal year 1995, the
                        difference is still significant and reflects the higher costs associated with
                        maintaining and operating a large depot distribution system.

                        In fiscal year 1992, GAO’s review showed that GSA directly delivered only an
                        estimated $68 million of the estimated $800 million in sales that had
                        potential for direct delivery during the 12-month period ending on
                        February 14, 1991. This means that over 80 percent of depot sales had
                        potential to be supplied in this way. The remaining depot sales were
                        mostly low-value, small-quantity orders which may have been
                        uneconomical for GSA to handle—more specifically, it cost them more to
                        provide the materials than the customer paid. Most of these orders could
                        have been purchased locally without going through GSA. If GSA increased
                        direct delivery and encouraged agencies to purchase low-value,
                        small-quantity orders locally, it could significantly reduce needed depot
                        operations.




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                       Maintaining a large and costly depot distribution system may no longer be
                       a viable or necessary activity for the federal government. Consistent with
                       this position, the Vice President’s National Performance Review
                       recommended that supply inventories be reduced and agencies be allowed
                       to choose sources of supply. In response, GSA is studying its own and
                       private-sector depot distribution costs to identify where greater efficiency
                       could be achieved. In addition, GSA (1) permits agencies to use supply
                       sources other than depots for purchases under $5,000, which GSA
                       estimated includes 99 percent of all potential purchases, (2) has actions to
                       identify logistic models that may provide other sources of supply capable
                       of providing items at reasonable costs, and (3) has increased the use of
                       commercial rather than government-specific item descriptions, which
                       should provide a clearer link between the items agencies need and those
                       available commercially. To the extent that GSA’s efforts result in more
                       economical and efficient ways for agencies to obtain needed supplies
                       outside the depot system, GAO believes that there will be increased
                       opportunities to reduce or possibly even eliminate GSA’s depot system.

                       The Congress could consider requiring increased use of direct delivery for
                       high-dollar value supplies and only stocking items that are profitable. After
                       these changes are implemented, GSA or the Congress could phase out GSA
                       depots that are no longer economically justifiable or needed. If all the
                       depots were phased out, the following savings would result.

Five-Year Savings
                       Dollars in millions
                                                              FY98      FY99        FY00       FY01       FY02
                       Savings from the 1997 funding level adjusted for inflation
                       Budget authority                         16         34         52          54         56
                       Outlays                                  12         30         48          54         55
                       Source: Congressional Budget Office.




Related GAO Products   General Services Administration: Increased Direct Delivery of Supplies
                       Could Save Millions (GAO/GGD-93-32, December 28, 1992).

                       Transition Series: General Services Issues (GAO/OCG-93-28TR,
                       December 1992).


GAO Contact            J. William Gadsby, (202) 512-8387



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Option:
Judiciary’s            Authorizing committees                   Environment and Public Works (Senate)
                                                                Transportation and Infrastructure (House)
Long-Range Space       Primary agency                           Administrative Office of the United States
Planning System                                                 Courts
                       Account                                  Federal Buildings Fund (47-4542)
                       Spending type                            Direct
                       Budget subfunction                       General Property and Records
                                                                Management
                       Framework theme                          Improve efficiency

                       In 1988, the Administrative Office of the U.S. Courts (AOC) developed a
                       long-range plan for space needs. Based on 1992 space projections by the
                       AOC, GAO estimated that the total space requirements for courts and related
                       agencies would increase to about 36.9 million square feet over a 10-year
                       period—a 97-percent increase. GAO found that AOC’s planning process
                       resulted in higher estimates for court space than is warranted. Using the
                       judiciary’s $31 per square foot average cost for all court space, GAO showed
                       that the judiciary could save approximately $112 million annually, or
                       $1.1 billion in constant dollars over a 10-year period, if the errors in its
                       planning process were corrected.

                       The Congress should direct the judiciary to revise its planning process for
                       identifying long-range space needs. Specifically, the process should
                       (1) treat all judicial districts consistently in terms of assumptions between
                       caseloads, staff, and space, (2) establish a baseline of space needs for each
                       district that reflects current caseloads, and (3) increase the reliability of its
                       estimates by using an appropriate statistical methodology to project
                       caseloads and by reducing the level of subjectivity in the process. Because
                       of uncertainty about the nature and extent of changes that might be made
                       to the planning process, a 5-year estimate of savings cannot be developed
                       for this option.


Related GAO Products   Federal Courthouse Construction: More Disciplined Approach Would
                       Reduce Costs and Provide for Better Decisionmaking (GAO/T-GGD-96-19,
                       November 8, 1995).

                       Federal Judiciary Space: Progress Is Being Made To Improve The
                       Long-Range Planning Process (GAO/T-GGD-94-146, May 4, 1994).




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              Federal Judicial Space Follow-up (GAO/GGD-94-135R, April 22, 1994).

              Federal Judiciary Space: Long-Range Planning Process Needs Revision
              (GAO/T-GGD-94-1B, October 7, 1993).

              Federal Judiciary Space: Long-Range Planning Process Needs Revision
              (GAO/GGD-93-132, September 28, 1993).


GAO Contact   J. William Gadsby, (202) 512-8387




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Option:
The 1-Dollar Coin   Authorizing committees                                Banking, Housing, and Urban Affairs
                                                                          (Senate)
                                                                          Banking and Financial Services (House)
                    Appropriations subcommittees                          Treasury, Postal Service, and General
                                                                          Government (Senate and House)
                    Primary agency                                        Department of the Treasury
                    Account                                               United States Mint Public Enterprise Fund
                                                                          (20-4159)
                    Spending Type                                         Direct
                    Budget subfunction                                    Central Fiscal Operations
                    Framework theme                                       Improve efficiency

                    In 1993 and 1995, GAO reported on cost savings associated with the 1-dollar
                    coin. We said that because a dollar coin would have a longer life and be
                    more easily processed than a note, and because the seigniorage27
                    recognized reduces the amount of borrowing needed to finance the deficit,
                    substituting a dollar coin for a dollar note would yield significant savings
                    to the government. Other countries have demonstrated that public
                    resistance to such a change can be managed and overcome.

                    The direct budgetary savings from this option, as scored by CBO, are
                    relatively small during the 5-year estimating period. Additional revenues,
                    shown in the first table that follows, result from increases in payments of
                    earnings by the Federal Reserve Bank into miscellaneous receipts of the
                    Treasury due to the lower costs of purchasing and processing these coins
                    relative to dollar bills. Although not reflected in the table, there are other
                    substantial longer term savings due to the effects of seigniorage.
                    Seigniorage is not considered part of the budget, but it does substitute for
                    borrowing from the public and, thus, lowers interest costs to the
                    government. The second table shows that, initially, the U.S. Mint’s costs
                    would increase to cover the costs of research and development, metals
                    acquisition, storage for coins stockpiled before their introduction into
                    circulation,28 and a public education campaign. CBO’s estimate assumes
                    that the Mint would pay for these costs by borrowing from seignorage
                    generated by coins already in circulation. These costs would be repaid
                    when new dollar coins are deposited at the Federal Reserve and begin

                    27
                      Seigniorage is the difference between the face value of the coin and its cost of production, which
                    includes the value of the metals contained in the coin and the U.S. Mint’s manufacturing and
                    distribution costs.
                    28
                     CBO’s estimate assumes 30 months of lead time for the U.S. Mint to produce and stockpile new dollar
                    coins before their introduction into circulation.



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                                    generating their own seigniorage. Over time, the net effect on direct
                                    spending would be zero.

Five-Year Revenues
                                    Dollars in millions
                                                                           FY98   FY99     FY00        FY01       FY02
                                    Revenue gains                             0      0         0          80        110
                                    Source: Congressional Budget Office.



Five-Year Direct Spending Savings
                                    Dollars in millions
                                                                           FY98   FY99     FY00        FY01       FY02
                                    Budget authority                        –88   –278       212        142           2
                                    Outlays                                 –88   –278       212        142           2
                                    Source: Congressional Budget Office.




Related GAO Products                A Dollar Coin Could Save Millions (GAO/T-GGD-95-203, July 13, 1995).

                                    1-Dollar Coin: Reintroduction Could Save Millions If It Replaced the
                                    1-Dollar Note (GAO/T-GGD-95-146, May 3, 1995).

                                    1-Dollar Coin: Reintroduction Could Save Millions if Properly Managed
                                    (GAO/GGD-93-56, March 11, 1993).

                                    National Coinage Proposals: Limited Public Demand for New Dollar Coin
                                    or Elimination of Pennies (GAO/GGD-90-88, May 23, 1990).


GAO Contact                         J. William Gadsby, (202) 512-8387




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Option:
Commemorative         Authorizing committees                Banking, Housing and Urban Affairs
                                                            (Senate)
Coins                                                       Banking and Financial Services (House)
                      Primary agency                        Department of the Treasury
                      Spending type                         Direct
                      Budget subfunction                    Net Interest
                      Framework theme                       Improve efficiency

                      In 1996, GAO reported that if the Congress authorized the United States
                      Mint to produce circulating commemorative coins, which are coins with
                      distinctive designs that are issued at face value, the government could
                      generate about $225 million in additional seigniorage annually. Seigniorage
                      is the difference between the face value of the coin and its cost of
                      production and distribution. Seigniorage is not considered part of the
                      budget, but it does substitute for borrowing from the public and, thus,
                      lowers interest costs to the government. Generating $225 million in
                      additional seigniorage annually would result in about $16 million in
                      interest savings on the national debt each year.

                      GAO  concluded that because the quarter is the highest denomination and
                      the largest in size of the widely circulating coins, it would be likely to
                      generate the most seigniorage. GAO reported that in 1976, when the Mint
                      produced a circulating quarter commemorating the Bicentennial, the Mint
                      produced 83 percent more quarters commemorating the Bicentennial than
                      its average annual production from 1971 to 1981. GAO based its 1996
                      estimate on the assumption that the demand for quarters would increase
                      50 percent over the 1995 production levels for the quarter. CBO did not
                      provide an estimate of the savings from producing a circulating
                      commemorative quarter since it involves interest savings only.


Related GAO Product   U.S. Mint: Commemorative Coins Could Be More Profitable (GAO/GGD-96-113,
                      August 7, 1996).


GAO Contact           J. William Gadsby, (202) 512-8387




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Option:
Federal Reserve   Authorizing committees                 Banking, Housing and Urban Affairs
                                                         (Senate)
Operations                                               Banking and Financial Services (House)
                  Primary agency                         Federal Reserve Board
                  Spending type                          Direct
                  Framework theme                        Improve efficiency

                  The Federal Reserve is responsible for conducting monetary policy,
                  maintaining the stability of financial markets, providing services to
                  financial institutions and government agencies, and supervising and
                  regulating banks and bank-holding companies. The Federal Reserve is
                  unique among governmental entities in its mission, structure, and finances.
                  Unlike federal agencies funded through congressional appropriations, the
                  Federal Reserve is a self-financing entity that deducts its expenses from its
                  revenue and transfers the remaining amount to the U.S. Department of the
                  Treasury. Although the Federal Reserve’s primary mission is to support a
                  stable economy, rather than to maximize the amount transferred to
                  Treasury, its revenues contribute to total U.S. revenues and, thus, can help
                  reduce the federal deficit.

                  From 1988 to 1994, the Federal Reserve’s annual revenue averaged
                  $22 billion and greatly exceeded its average annual expenses and other
                  deductions of $2.5 billion. Consequently, the annual amount returned to
                  the Treasury during this period ranged from about $16 billion to
                  $24 billion. The cost of Federal Reserve operations over this period
                  increased steadily and substantially. Specifically, operating expenses for
                  the Board and Reserve banks increased by about 50 percent, with the
                  greatest increases occurring in the areas of bank supervision, personnel
                  costs, and data-processing modernization. The costs of providing services
                  for which banks are charged have been rising faster than the
                  corresponding revenues received.

                  With the current budgetary climate, the Federal Reserve could do more to
                  increase its cost consciousness and ensure that it is operating as
                  efficiently as possible. GAO has identified several inefficiencies in the
                  Federal Reserve’s policies and practices that have increased the cost of
                  providing its current services, including its costs for travel, personnel
                  benefits, building acquisition, and contracting and procurement. For
                  example, personnel benefit packages varied among Reserve banks and
                  certain benefits—such as leave policies and savings plans—were generous




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                       compared to those of federal financial regulatory agencies with similar
                       personnel requirements. We have also identified opportunities for the
                       Federal Reserve to strengthen internal controls over financial reporting
                       and safeguarding of assets.

                       The Federal Reserve could better control costs and increase efficiencies
                       through management with a more systemwide focus. Such management
                       would include reducing or eliminating benefits that are not necessary to
                       attract and retain a quality workforce and managing other benefits on a
                       systemwide basis, using the combined bargaining power of the 12 Reserve
                       banks. The internal controls of all Reserve banks should be independently
                       assessed annually to ensure reliable financial reporting, safeguarding of
                       assets, and compliance with laws and regulations.

                       In addition, the Federal Reserve’s revenue, and hence its return to
                       taxpayers, would be enhanced by charging fees for bank examinations.
                       The Federal Reserve Act authorizes the Federal Reserve to charge fees for
                       bank examinations, but the Federal Reserve has not done so, either for the
                       state-member banks it examines or the bank-holding company
                       examinations it conducts. Thus, taxpayers in effect bear the cost of these
                       examinations, which totaled $368 million in 1994. If fees were assessed
                       similar to those charged national banks with a credit allowed for fees paid
                       to state regulators, the following savings could be achieved.29

Five-Year Savings
                       Dollars in millions
                                                                FY98         FY99          FY00         FY01          FY02
                       Added receipts                              72           75            78           82            86
                       Source: Congressional Budget Office.




Related GAO Products   Federal Reserve System: Current and Future Challenges Require
                       Systemwide Attention (GAO/T-GGD-96-159, July 26, 1996).

                       Federal Reserve System: Current and Future Challenges Require
                       Systemwide Attention (GAO/GGD-96-128, June 17, 1996).

                       Federal Reserve Banks: Inaccurate Reporting of Currency at the Los
                       Angeles Branch (GAO/AIMD-96-146, September 30, 1996).


                       29
                        CBO also assumes that the Federal Deposit Insurance Corporation (FDIC) begins to charge for bank
                       examinations at the same rate; however, the effect on FDIC’s budget is not included in its estimate.



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              Federal Reserve Banks: Internal Control, Accounting, and Auditing Issues
              (GAO/AIMD-96-5, February 9, 1996).


GAO Contact   Thomas M. McCool, (202) 512-8678




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Option:
Premium Payments to   Authorizing committees               Multiple

Employees While on    Appropriations subcommittees         Multiple
                      Primary agency                       Multiple
Leave                 Accounts                             Multiple
                      Spending type                        Discretionary
                      Budget subfunctions                  Multiple
                      Framework theme                      Improve efficiency

                      The Office of Personnel Management has directed all federal agencies to
                      pay employees who are scheduled to work on Sundays at the Sunday
                      premium pay rate even if the employees take leave on Sunday. The
                      directive became effective on May 27, 1993, and was based on a U.S.
                      Claims Court interpretation of federal leave statutes that prohibit an
                      employee’s pay from being diminished due to taking leave. Prior to this
                      time, employees who took leave on Sunday were paid at their basic pay
                      rate for the leave rather than the Sunday premium rate of the base rate
                      plus 25 percent. GAO reviewed five agencies—the Federal Aviation
                      Administration, the Customs Service, and the Departments of Defense,
                      Justice, and Veterans Affairs—which are among the most frequent payers
                      of Sunday premium pay in the federal government. Using leave
                      information provided by these five agencies for fiscal year 1994, we
                      estimated that $17.9 million of the $146.1 million in Sunday premium pay
                      was paid to employees on leave.

                      The Departments of Commerce, Justice, State, the Judiciary, and Related
                      Agencies Appropriations Act of 1997 included a provision that precluded
                      all the relevant agencies from paying premium pay for Sundays not
                      actually worked. GAO addressed this issue governmentwide in a 1995
                      report. We suggested that to preclude federal employees from receiving
                      Sunday premium pay while on leave and to reduce governmentwide
                      employment costs, the Congress may wish to consider requiring that all
                      agencies’ employees actually must work on Sunday to receive Sunday
                      premium pay.


Related GAO Product   Sunday Premium Pay: Millions of Dollars in Sunday Premium Pay Are Paid
                      to Employees on Leave (GAO/GGD-95-144, May 19, 1995).


GAO Contact           L. Nye Stevens, (202) 512-8676



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Option:
Davis-Bacon Act   Authorizing committees                  Labor and Human Resources (Senate)
                                                          Economic and Educational Opportunities
Reform                                                    (House)
                  Appropriations subcommittees            Labor, Health and Human Services, and
                                                          Education (Senate and House)
                  Primary agency                          Department of Labor
                  Accounts                                Multiple
                  Spending type                           Discretionary/Direct
                  Budget subfunctions                     Multiple
                  Framework theme                         Reassess objectives

                  The Davis-Bacon Act requires that workers on federally funded or
                  federally assisted construction projects be paid wages at or above levels
                  determined by the Department of Labor to be prevailing in an area. The
                  current dollar threshold for projects covered by Davis-Bacon is $2,000, an
                  amount that has not changed since 1935. Critics of the act believe that it
                  inflates federal construction costs because the wage rates set are actually
                  higher than those prevailing in an area. Supporters say it sets a basic
                  responsibility for federal construction contractors to pay wages typical in
                  an area, not lower wage rates in order to receive a contract. They also
                  argue that savings from lower wage rates would be offset by the higher
                  total project costs and also from government revenue losses as a result of
                  reduced tax collections.

                  In 1979, GAO expressed major concern about the accuracy of the wage
                  determinations and the impact of the inaccurately high wage rates on
                  federal construction costs. Since that time, Labor has made changes that
                  have improved the administration of the Davis-Bacon Act and made it less
                  likely that the wage rates would be artificially high. For example, Labor
                  has revised its criteria to require that 50 percent, rather than 30 percent, of
                  the workers included on survey projects must receive the same wage for
                  that rate to be considered the prevailing wage. This made it less likely that
                  the collectively bargained wage rate in an area would be used to set the
                  prevailing wage and, as of 1995, less than 30 percent of all of Labor’s wage
                  determinations were set in that way. In 1996, Labor also implemented
                  recommendations to reduce the potential for its wage determinations to be
                  based on erroneous wage data. There is still an absence of current data,
                  however, on the accuracy of wage rates set.




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                       In the past, CBO has noted that repealing the Davis-Bacon Act or raising the
                       threshold for projects it covers would allow appropriators to reduce funds
                       spent on federal construction. In addition, either action would increase the
                       opportunities for employment of less skilled workers. However, such
                       changes would lower the earnings of some construction workers. In 1997,
                       CBO estimates that repeal of Davis-Bacon would allow appropriators to
                       reduce funds for construction with a resulting discretionary outlay savings
                       of about $2.8 billion between fiscal years 1998 and 2002. CBO assumes that
                       the currently suspended helper regulations will be reinstated beginning
                       after the first quarter of fiscal year 1998.

Five-Year Savings
                       Dollars in millions
                                                                FY98          FY99          FY00          FY01         FY02
                       Direct spending
                       Savings from the 1997 funding level adjusted for inflation
                       Budget authority                             32           26            24            24             23
                       Outlays                                      28           27            25            24             24
                       Note: CBO has identified some direct spending savings from the repeal of the Davis-Bacon Act,
                       including a reclassification of about $1.6 billion in federal aid to highways in fiscal year 1996.

                       Source: Congressional Budget Office.



Five-Year Savings
                       Dollars in millions
                                                                FY98          FY99          FY00          FY01         FY02
                       Discretionary spending
                       Savings from the 1997 funding level
                       Budget authority                           799           777           777           777             777
                       Outlays                                    196           458           602           683             734
                       Savings from the 1997 funding level adjusted for inflation
                       Budget authority                           826           854           877           901             926
                       Outlays                                    196           463           625           739             816
                       Source: Congressional Budget Office.




Related GAO Products   Information Regarding the Davis-Bacon Act, Correspondence to
                       Representative Pete Hoekstra, (GAO/HEHS-97-30R, October 30, 1996).




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              Information Regarding Davis-Bacon Wage Determinations,
              Correspondence to Representative Pete Hoekstra (GAO/HEHS-96-177R, July 17,
              1996).

              Davis-Bacon Act: Process Changes Could Address Vulnerability to Use
              Inaccurate Data in Setting of Prevailing Wage Rates (GAO/T-HEHS-96-166,
              June 20, 1996).

              Davis-Bacon Act Job Targeting Programs, Correspondence to
              Representative William M. Thomas (GAO/HEHS-96-15R, June 3, 1996).

              Davis-Bacon Act: Process Changes Could Raise Confidence That Wage
              Rates Are Based on Accurate Data (GAO/HEHS-96-130, May 31, 1996).

              Davis-Bacon Act, Correspondence to Senator Larry Craig and
              Representatives Charles Stenholm, William Goodling, Tim Valentine, and
              Thomas Petri (GAO/HEHS-94-95, April 27, 1996).

              Changes to the Davis-Bacon Act Regulations and Administration
              (GAO/HEHS-94-95R, February 7, 1994).

              The Davis-Bacon Act Should Be Repealed (GAO/HRD-79-18, April 27, 1979).


GAO Contact   Carlotta C. Joyner, (202) 512-7002




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Option:
Formula-Based Grant   Authorizing committees                               Multiple

Programs              Appropriations subcommittees                         Multiple
                      Primary agencies                                     Multiple
                      Accounts                                             Multiple
                      Spending type                                        Discretionary/Direct
                      Budget subfunctions                                  Multiple
                      Framework theme                                      Redefine beneficiaries

                      GAO  has issued many reports over the past decade showing that the
                      distribution of federal grants to state and local governments is not
                      well-targeted to those jurisdictions with greatest programmatic needs or
                      lowest fiscal capacity to meet those needs. As a result, program recipients
                      in areas with relatively lower needs and greater wealth may enjoy a higher
                      level of services than is available in harder pressed areas, or the wealthier
                      areas can provide the same level of services at lower tax rates than harder
                      pressed areas.

                      At a time when federal domestic discretionary resources are constrained,
                      better targeting of grant formulas offers a strategy to bring down federal
                      outlays by concentrating reductions on wealthier localities with
                      comparatively fewer needs and greater capacity to absorb the cuts. At the
                      same time, redesigned formulas could hold harmless the hardest pressed
                      areas, which are most vulnerable.

                      Cuts in federal grants to states could be targeted by disproportionately
                      reducing federal funds to states with stronger tax bases and fewer needs.
                      Cuts in federal grants to local governments could be targeted by either
                      concentrating cuts on areas with the strongest tax bases or by changing
                      program eligibility to restrict grant funding only to those places with lower
                      fiscal capacity or greatest programmatic needs. As an example, during the
                      debate in 1986 over the termination of General Revenue Sharing, GAO
                      reported that a better targeted formula and restricted eligibility could
                      achieve a 50-percent cut in total outlays, while maintaining or increasing
                      federal funds to harder pressed jurisdictions. An example that illustrates
                      the potential savings from this option is a 10-percent reduction in the
                      aggregate total of all closed-ended or capped formula grant programs
                      exceeding $1 billion.30 The dollar value for programs exceeding this
                      threshold would include over 60 percent of the dollars for such programs.

                      30
                        In the transportation budget function, several very small closed-ended grants could not be easily
                      isolated in the baseline and these are included in the estimate.



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                       The savings achieved through this option could serve as a benchmark for
                       overall savings from this approach but should not be interpreted as a
                       suggestion for across-the-board cuts. Rather, the Congress may wish to
                       determine specific reductions on a program-by-program basis, after
                       examining the relative priority and performance of each grant program.

Five-Year Savings
                       Dollars in millions
                                                              FY98      FY99        FY00       FY01       FY02
                       Discretionary spending
                       Savings from the 1997 funding level
                       Budget authority                       2,903     2,903       2,903      2,903      2,903
                       Outlays                                1,055     3,256       4,110      4,483      4,659
                       Savings from the 1997 funding level adjusted for inflation
                       Budget authority                       3,079     3,281       3,486      3,705      3,937
                       Outlays                                1,086     3,413       4,446      5,085      5,532

Five-Year Savings
                                                              FY98      FY99        FY00       FY01       FY02
                       Direct Spending
                       Savings from the 1997 funding level adjusted for inflation
                       Budget authority                       4,228     4,238       4,308      4,369      4,433
                       Outlays                                1,612     1,811       1,809      1,816      1,825
                       Source: Congressional Budget Office.




Related GAO Products   Federal Grants: Design Improvements Could Help Federal Funds Go
                       Further (GAO/AIMD-97-7, December 18, 1996).

                       Public Health: A Health Status Indicator for Targeting Federal Aid to
                       States (GAO/HEHS-97-13, November 13, 1996).

                       Highway Funding: Alternatives for Distributing Federal Funds
                       (GAO/RCED-96-6, November 28, 1995).

                       Ryan White Care Act of 1990: Opportunities to Enhance Funding Equity
                       (GAO/HEHS-96-26, November 13, 1995).




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              Department of Labor: Senior Community Service Employment Program
              Delivery Could Be Improved Through Legislative and Administrative
              Action (GAO/HEHS-96-4, November 2, 1995).

              Rural Development: USDA’s Approach to Funding Water and Sewer
              Projects (GAO/RCED-95-258, September 22, 1995).

              Medicaid: Matching Formula’s Performance and Potential Modifications
              (GAO/T-HEHS-95-226, July 27, 1995).

              Older Americans Act: Funding Formula Could Better Reflect State Needs
              (GAO/HEHS-94-41, May 12, 1994).

              Medicaid: Alternatives for Improving the Distribution of Funds to States
              (GAO/HRD-93-112FS, August 20, 1993).

              Mental Health Grants: Funding Not Distributed According to State Needs
              (GAO/T-HRD-91-32, May 16, 1992).

              Maternal And Child Health: Block Grants Funds Should Be Distributed
              More Equitably (GAO/HRD-92-5, April 2, 1992).

              Remedial Education: Modifying Chapter 1 Formula Would Target More
              Funds to Those Most in Need (GAO/HRD-92-16, March 28, 1992).

              Drug Treatment: Targeting Aid to States Using Urban Population as
              Indicator of Drug Use (GAO/HRD-91-17, November 27, 1990).

              Block Grants: Proposed Formulas for Substance Abuse, Mental Health
              Provide More Equity (GAO/HRD-87-109BR, July 16, 1987).

              Local Governments: Targeting General Fiscal Assistance Reduces Fiscal
              Disparities (GAO/HRD-86-113, July 24, 1986).

              Highway Funding: Federal Distribution Formulas Should Be Changed
              (GAO/RCED-86-114, March 31, 1986).

              Changing Medicaid Formula Can Improve Distribution of Funds to States
              (GAO/GGD-83-27, March 9, 1983).


GAO Contact   Paul L. Posner, (202) 512-9573



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Option:
Federal Grants   Authorizing committees                 Multiple
                 Appropriations subcommittees           Multiple
                 Primary agency                         Multiple
                 Accounts                               Multiple
                 Spending type                          Discretionary
                 Budget subfunctions                    Multiple
                 Framework theme                        Improve efficiency

                 Intergovernmental grants are a significant part of both federal and state
                 budgets. From the first annual cash grant under the Hatch Act of 1887, the
                 number of grant programs rose to more than 600 in 1995 with outlays of
                 $225 billion, about 15 percent of total federal spending. Grants serve many
                 purposes beyond returning resources to taxpayers in the form of state
                 services. For example, grants can serve as a tool to supplement state
                 spending for nationally important activities. However, if states use federal
                 grant dollars to reduce (i.e., substitute for) their own spending for the
                 aided program either initially or over time, the fiscal impact of federal
                 grant dollars is reduced.

                 Public finance experts suggest that grants are unlikely to supplement
                 completely a state’s own spending, and thus some substitution is to be
                 expected in any grant. Our review of economists’ most recent estimates of
                 substitution suggests that every additional federal grant dollar results in
                 less than a dollar of total additional spending on the aided activity. The
                 estimates of substitution showed that about 60 cents of every federal grant
                 dollar substitutes for state funds that states otherwise would have spent.

                 Our analysis linked substitution to the way in which most grants are
                 designed. For example, many of the 87 largest grant programs did not
                 include features, such as state matching and maintenance-of-effort
                 requirements, that can encourage states to use federal funds as a
                 supplement rather than a replacement for their own spending. While not
                 every grant is intended to supplement state spending, proponents of grant
                 redesign argue that if some grants incorporated more rigorous
                 maintenance-of-effort requirements and lower federal matching rates, then
                 fewer federal funds could still encourage states to contribute to
                 approximately the same level of overall spending on nationally important
                 programs. Critics of this approach argue that such redesign would put a
                 higher burden on states because they would have to finance a greater
                 share of federally aided programs.



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                       The savings that could be achieved from redesigning grants to increase
                       their fiscal impact would depend on the nature of the design changes and
                       state responses to those changes. For example, faced with more rigorous
                       financing requirements, states might reduce or eliminate their own
                       financial support for the aided activity. The outcome will be influenced by
                       the tradeoff decisions that the Congress makes to balance the importance
                       of achieving each program’s goals and objectives against the goal of
                       encouraging greater state spending and lowering the federal deficit.

                       We were unable to precisely measure the budgetary impact of
                       inflation-adjusted maintenance-of-effort requirements because current
                       state spending levels are not reported consistently. However, it was
                       possible to estimate the impact of changes in the matching rates on many
                       close-ended federal grants. For example, many such grants do not require
                       any state or local matching funds. The federal share of these programs
                       could be reduced modestly, from 100 percent to 90 percent—a reduction
                       unlikely to discourage states from participating in the program. CBO
                       estimates that the introduction of a 10 percent matching requirement on
                       some of the largest federal discretionary grant programs that are currently
                       100 percent federally funded and a corresponding ten percent reduction
                       from the authorized grant levels, would reduce outlays by $20 billion over
                       5 years. If such a change in match rates were combined with
                       inflation-adjusted maintenance-of-effort requirements, states that choose
                       to participate in the program would have to maintain the same or increase
                       levels of program spending in order to receive federal funding.

Five-Year Savings
                       Dollars in millions
                                                              FY98      FY99        FY00       FY01       FY02
                       Savings from the 1997 funding level
                       Budget authority                       3,740     3,740       3,740      3,740      3,740
                       Outlays                                1,120     2,810       3,550      3,670      3,740
                       Savings from the 1997 funding level adjusted for inflation
                       Budget authority                       3,830     3,940       4,040      4,150      4,260
                       Outlays                                1,150     2,910       3,750      3,970      4,150
                       Source: Congressional Budget Office.




Related GAO Products   Federal Grants: Design Improvements Could Help Federal Funds Go
                       Further (GAO/AIMD-97-7, December 18, 1996).




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              Block Grants: Issues in Designing Accountability Provisions
              (GAO/AIMD-95-226, September 1, 1995).


GAO Contact   Paul L. Posner, (202) 512-9573




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Option:
Federal Travel   Authorizing committees                 Governmental Affairs (Senate)
                                                        Government Reform and Oversight (House)
Processing       Appropriations subcommittees           Multiple
                 Primary agency                         Multiple
                 Account                                Multiple
                 Spending type                          Discretionary
                 Budget subfunction                     Multiple
                 Framework theme                        Improve efficiency

                 In fiscal year 1994, the federal government reported travel obligations for
                 individuals of about $7.6 billion—about $5 billion for the Department of
                 Defense (DOD) and about $2.6 billion for the civilian agencies. This amount
                 was for direct costs (i.e., costs directly related to travel, such as
                 transportation, lodging, and rental cars) related primarily to two types of
                 travel—temporary duty (TDY) and permanent relocation. The General
                 Services Administration (GSA) currently negotiates some of these direct
                 rates with travel vendors, at significant savings to federal agencies. The
                 indirect costs for arranging and processing travel can be significant as
                 well.

                 GAO recently reviewed a number of private-sector companies that have set
                 themselves apart from other organizations, both public and private, by
                 streamlining and automating their travel processes and adopting a
                 common set of best practices. These organizations achieved
                 improvements by consolidating travel management and processing
                 centers, eliminating unnecessary review layers, simplifying the travel
                 process, streamlining and automating the expense reporting process, and
                 integrating travel processing with their financial management systems. In
                 doing so, these organizations have saved millions of dollars in
                 administrative costs.

                 DOD has recognized the need to improve travel management and has
                 efforts underway to adopt industry best practices and reengineer its travel
                 processing to reduce costs. In anticipation of savings related to DOD’s
                 travel reengineering efforts and based on GAO recommendations, the
                 Appropriations Conference Committee reduced DOD’s operations and
                 maintenance (O&M) funds for fiscal year 1996 by $128.5 million.

                 A handful of federal agencies, such as the Departments of State, Energy,
                 and Transportation, have also begun to implement best practices and



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                       reduce costs. In addition, the Joint Financial Management Improvement
                       Program (JFMIP) travel improvement task force, made up of
                       representatives from several agencies across government, has assessed
                       both TDY and permanent relocation travel and estimated that hundreds of
                       millions of dollars could be saved by implementing a number of key
                       recommendations. JFMIP’s recommendations mirror many of the best
                       practices we found at leading organizations, including requiring the use of
                       a corporate charge card and consolidating and automating travel data.

                       CBO  does not disagree that savings could be achieved if agencies were able
                       to streamline their travel processing operations. However, the amount of
                       savings would depend on each agency’s current costs and future
                       streamlining actions.


Related GAO Products   Governmentwide Travel Management: Federal Agencies Have
                       Opportunities for Streamlining and Improving Their Travel Practices
                       (GAO/T-AIMD-96-60, March 8, 1996).

                       Business Process Reengineering: DOD Has a Significant Opportunity to
                       Reduce Travel Costs by Using Industry Practices (GAO/T-AIMD-95-101,
                       March 28, 1995).


GAO Contact            Jack L. Brock, Jr., (202) 512-6240




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           •   Tax Treatment of Health Insurance Premiums
Receipts   •   Information Reporting on Forgiven Debts
           •   Administration of the Tax Deduction for Real Estate Taxes
           •   Corporate Tax Document Matching
           •   Tax Treatment of Interest Earned on Life Insurance Policies and Deferred
               Annuities
           •   Federal Agency Reporting to the Internal Revenue Service
           •   Independent Contractor Tax Compliance
           •   Deductibility of Home Equity Loan Interest
           •   Internal Revenue Staff Utilization
           •   Collecting Gasoline Excise Taxes
           •   Computing Excise Tax Bases
           •   Industrial Development Bonds Targeting
           •   Highway User Fees on Heavy Trucks
           •   Taxation of Additives to Diesel Fuel
           •   Electronic Filing of Tax Returns




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Option:
Tax Treatment of     Authorizing committees                               Finance (Senate)
                                                                          Ways and Means (House)
Health Insurance     Primary agency                                       Internal Revenue Service
Premiums             Spending type                                        Direct
                     Framework theme                                      Redefine beneficiaries

                     The current tax treatment of health insurance gives few incentives to
                     workers to economize on purchasing health insurance. Employer
                     contributions for employee health protection are considered deductible,
                     ordinary, business expenses, and employer contributions are not included
                     in an employee’s taxable income. Some analysts believe that the
                     tax-preferred status of these benefits has contributed to the overuse of
                     health care services and large increases in our nation’s health care costs.
                     In addition, the primary tax benefits accrue to those in high tax brackets
                     who also have above average incomes.

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

                     One specific option the Congress may wish to consider would be to tax all
                     employer-paid health insurance, while providing a refundable tax credit of
                     20 percent of all premiums, with eligible premiums capped at $350 and
                     $170 per month for family coverage and individuals, respectively. This
                     option recognizes the gain from changing the treatment of insurance only
                     for the individual income tax, not the payroll tax. The option is effective
                     for payments of health insurance premiums paid after December 31, 1997.

Five-Year Revenues
                     Dollars in billions
                                                               FY98          FY99        FY00        FY01       FY02
                     Revenue gain                               10.2          15.7        17.6        19.7       22.0
                     Note: JCT provided its revenue estimates in billions of dollars.

                     Source: Joint Committee on Taxation.




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Related GAO Product   Tax Policy: Effects of Changing Tax Treatment of Fringe Benefits
                      (GAO/GGD-92-43, April 7, 1992).


GAO Contact           Lynda D. Willis, (202) 512-9110




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Option:
Information Reporting   Authorizing committees                               Finance (Senate)
                                                                             Ways and Means (House)
on Forgiven Debts       Primary agency                                       Internal Revenue Service
                        Spending type                                        Direct
                        Framework theme                                      Improve efficiency

                        The Internal Revenue Code requires taxpayers to report forgiven debts as
                        income except under certain circumstances. GAO reviewed taxpayer
                        compliance in reporting the Federal Deposit Insurance Corporation’s
                        (FDIC) and Resolution Trust Corporation’s (RTC) forgiven debt with and
                        without information reporting by these corporations to IRS.

                        Information reporting increased taxpayer compliance. For example,
                        without information reporting, 1 percent of taxpayers voluntarily reported
                        FDIC forgiven debts. With reporting, 48 percent voluntarily reported their
                        forgiven debts. With the information reports, IRS was able to detect that
                        another 20 percent had failed to report their forgiven debts, yielding
                        68 percent of taxpayers eventually complying.

                        In 1993, the Congress required information reporting on forgiven debts by
                        FDIC, RTC, the National Credit Union Administration, credit unions, certain
                        banks, and federal agencies. In 1996, IRS began receiving these required
                        information returns for tax year 1995 and has been matching them to tax
                        returns. The Congress could consider extending the requirement to other
                        lending institutions. Revenues for this option are difficult to estimate due
                        to uncertainties about its effect on lending institution reporting practices.
                        However, to illustrate potential savings from this option, if the requirement
                        were extended to finance companies, JCT estimates revenue gains of under
                        $50 million, assuming an effective date of January 1, 1998.

Five-Year Revenues
                        Dollars in billions
                                                                  FY98          FY99        FY00        FY01       FY02
                                                                       a              a           a         a           a
                        Revenue gain
                        Note: JCT provided its revenue estimates in billions of dollars.
                        a
                        A gain of less than $50 million.

                        Source: Joint Committee on Taxation.




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Related GAO Product   Tax Administration: Information Returns Can Improve Reporting of
                      Forgiven Debts (GAO/GGD-93-42, February 17, 1993).


GAO Contact           Lynda D. Willis, (202) 512-9110




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Option:
Administration of the   Authorizing committees                               Finance (Senate)
                                                                             Ways and Means (House)
Tax Deduction for       Primary agency                                       Internal Revenue Service
Real Estate Taxes       Spending type                                        Direct
                        Framework theme                                      Improve efficiency

                        IRSaudits show that individuals overstated their real estate tax deductions
                        by about $1.5 billion nationwide in 1988. GAO estimates that this resulted in
                        a nearly $300 million federal tax loss, which would increase to about
                        $400 million for 1992. However, this may understate lost revenues because
                        GAO’s review also found that IRS auditors detected only about 29 percent of
                        $127 million in overstated deductions in three locations GAO reviewed.
                        Revenues could be lost not only for the federal government, but also for
                        the 31 states which in 1991 tied their itemized deductions to those used for
                        federal tax purposes.

                        Two changes to the reporting of real estate cash rebates and real estate
                        taxes could reduce noncompliance and increase federal tax collections.
                        First, the Congress could require that states report to IRS, and to taxpayers
                        on Form 1099s, cash rebates of real estate taxes. Second, the Congress
                        could require that state and local governments conform real estate tax
                        statements to specifications issued by IRS that would separate real estate
                        taxes from nondeductible fees, which are often combined on these
                        statements. For estimation purposes, the proposals would be effective for
                        rebates issued after December 31, 1998, and for amounts reported on tax
                        bills after December 31, 1999. Together, the proposals would increase
                        federal fiscal year revenues as shown in the table below.

Five-Year Revenues
                        Dollars in billions
                                                                  FY98          FY99        FY00        FY01       FY02
                                                                                      a
                        Revenue gain                                   0                      0.1         0.2        0.2
                        Note: JCT provided its revenue estimates in billions of dollars.
                        a
                        A gain of less than $50 million.

                        Source: Joint Committee on Taxation.




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Related GAO Product   Tax Administration: Overstated Real Estate Tax Deductions Need To Be
                      Reduced (GAO/GGD-93-43, January 19, 1993).


GAO Contact           Lynda D. Willis, (202) 512-9110




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Option:
Corporate Tax         Authorizing committees                 Finance (Senate)
                                                             Ways and Means (House)
Document Matching     Primary agency                         Internal Revenue Service
                      Spending type                          Direct
                      Framework theme                        Improve efficiency

                      Internal Revenue Service (IRS) data show that corporate compliance with
                      tax laws has declined to an alarming degree. IRS’ document matching
                      program for payments to individuals has proven to be a highly
                      cost-effective way of bringing in billions of dollars in tax revenues to the
                      Treasury while at the same time boosting voluntary compliance. However,
                      unlike payments to individuals, the law does not require that information
                      returns be submitted on most payments to corporations.

                      Generally using IRS’ assumptions, GAO estimated the benefits and costs for
                      a corporate document matching program that would cover interest,
                      dividends, rents, royalties, and capital gains. Assuming that a corporate
                      document matching program began in 1993, GAO estimated that for years
                      1995 through 1999, IRS’ annual costs would be about $70 million and annual
                      increased revenues about $1 billion. This estimate did not factor in
                      compliance costs and changes in taxpayer behavior. Given continuing
                      deficits, increased corporate noncompliance, and declining audit
                      coverage, the Congress may wish to require a corporate document
                      matching program.

                      JCT has not developed an estimate of revenue gains from this proposal. JCT
                      agrees that this option will result in increased revenues, but those
                      revenues will depend heavily on the scope of coverage under an expanded
                      information reporting system.


Related GAO Product   Tax Administration: Benefits of a Corporate Document Matching Program
                      Exceed the Costs (GAO/GGD-91-118, September 27, 1991).


GAO Contact           Lynda D. Willis, (202) 512-9110




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Option:
Tax Treatment of        Authorizing committees                               Finance (Senate)
                                                                             Ways and Means (House)
Interest Earned on      Primary agency                                       Internal Revenue Service
Life Insurance          Spending type                                        Direct
Policies and Deferred   Framework theme                                      Reassess objectives

Annuities               Interest earned on life insurance policies and deferred annuities, known as
                        “inside buildup,” is not taxed as long as it accumulates within the contract.
                        Although the deferred taxation of inside buildup is similar to the tax
                        treatment of income from some other investments, such as capital gains, it
                        differs from the policy of taxing interest as it accrues on certain other
                        investments like certificates of deposit and original issue discount bonds.

                        Not taxing inside buildup may have merit if it increases the amount of
                        insurance coverage purchased and the amount of income available to
                        retirees and beneficiaries. However, the tax preference given life
                        insurance and annuities mainly benefits middle- and upper-income people.
                        Coverage for low-income people is largely provided through the Social
                        Security System, which provides both insurance and annuity protection.

                        The Congress may want to reconsider granting preferential tax treatment
                        to inside buildup, weighing the social benefits against the foregone
                        revenue. The Congress may wish to consider taxing the interest earned on
                        life insurance policies and deferred annuities. The table below reflects the
                        estimated savings from this option, effective for life insurance policies and
                        annuities purchased after December 31, 1997.

Five-Year Revenues
                        Dollars in billions
                                                                  FY98          FY99        FY00        FY01       FY02
                        Revenue gain                                 7.8         19.1        21.5        23.7       25.9
                        Note: JCT provided its revenue estimates in billions of dollars.

                        Source: Joint Committee on Taxation.




Related GAO Product     Tax Policy: Tax Treatment of Life Insurance and Annuity Accrued Interest
                        (GAO/GGD-90-31, January 29, 1990).




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GAO Contact   Lynda D. Willis, (202) 512-9110




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Option:
Federal Agency        Authorizing committees                  Governmental Affairs (Senate)
                                                              Finance (Senate)
Reporting to the                                              Government Reform and Oversight
                                                              (House)
Internal Revenue                                              Ways and Means (House)
Service               Primary agency                          Internal Revenue Service
                      Spending type                           Direct
                      Framework theme                         Improve efficiency

                      According to Internal Revenue Service (IRS) data, corporate tax
                      compliance decreased by 20 percentage points between 1980 and 1987.
                      Information returns—reports provided to IRS by payers of interest,
                      dividends, or other tax-related information—have proven to be highly
                      cost-effective in generating billions of tax dollars from individual
                      taxpayers. However, no such program exists for payments to corporations.
                      IRS matches information return data to individuals’ tax returns, which
                      induces individuals to voluntarily report income and helps to identify
                      those who do not. Similar results might be obtained from corporations.

                      Federal agencies could help increase corporate tax compliance by
                      reporting their payments made to corporations for services. Federal
                      agencies paid corporations about $61 billion for service contracts of more
                      than $25,000 in 1990.

                      JCT   has not developed an estimate of the revenue gains for this proposal.
                      JCT   does not disagree that improved reporting could increase compliance.


Related GAO Product   Tax Administration: Federal Agencies Should Report Service Payments
                      Made to Corporations (GAO/GGD-92-130, September 22, 1992).


GAO Contact           Lynda D. Willis, (202) 512-9110




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Option:
Independent      Authorizing committees                 Finance (Senate)
                                                        Ways and Means (House)
Contractor Tax   Primary agency                         Internal Revenue Service
Compliance       Spending type                          Direct
                 Framework theme                        Improve efficiency

                 Common law rules for classifying workers as employees or independent
                 contractors are unclear and subject to conflicting interpretations. While
                 recognizing this ambiguity, the Internal Revenue Service (IRS) enforces tax
                 laws and rules through employment tax examinations. Since 1989,
                 90 percent of these examinations had found misclassified workers. From
                 October 1987 through December 1991, the average IRS tax assessment
                 relating to misclassified workers was $68,000.

                 Establishing clear rules is difficult. Nevertheless, taxpayers need—and
                 government is obligated to provide—clear rules for classifying workers if
                 businesses are to voluntarily comply. In addition, improved tax
                 compliance could be gained by requiring businesses to (1) withhold taxes
                 from payments to independent contractors and/or (2) file information
                 returns with IRS on payments made to independent contractors constituted
                 as corporations. Both approaches have proven to be effective in promoting
                 individual tax compliance.

                 During 1993, the Congress considered but rejected extending current
                 information reporting requirements for unincorporated independent
                 contractors to incorporated ones. Thus, independent contractors
                 organized as either sole proprietors or corporations would have been on
                 equal footing, and IRS would have had a less intrusive means of ensuring
                 their tax compliance.

                 In recent years, various proposals on clarifying the definition of
                 independent contractors and improving related information reporting
                 emerged. Congressional hearings dealt with some of these bills. As of
                 January 1997, the Congress had not acted on any of them.

                 JCT did not provide an estimate for this option. Estimating the revenue
                 gains from this option is difficult. A previous estimate by the JCT showed
                 that the proposal increased revenues by about $400 million over 5 years. In
                 contrast, the Department of Treasury’s Office of Tax Analysis estimated a
                 5-year gain of about $5 billion. Estimates can vary widely depending on the




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                      definition of independent contractor, the scope of coverage under an
                      expanded information reporting or withholding system, and assumptions
                      about how much more unreported income could be captured.


Related GAO Product   Tax Administration: Approaches for Improving Independent Contractor
                      Compliance (GAO/GGD-92-108, July 23, 1992).


GAO Contact           Lynda D. Willis, (202) 512-9110




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Option:
Deductibility of Home   Authorizing committees                               Finance (Senate)
                                                                             Ways and Means (House)
Equity Loan Interest    Primary agency                                       Department of the Treasury
                        Spending type                                        Direct
                        Framework theme                                      Reassess objectives

                        The term home equity borrowing or financing is usually applied to
                        mortgages other than the original loan used to acquire a home or to any
                        subsequent refinancing of that loan. Interest is deductible on up to
                        $100,000 of home equity indebtedness and $1 million of indebtedness used
                        to acquire a home. Home equity financing grew at an average annual rate
                        of about 20 percent between 1981 and 1991. Home equity financing is not
                        limited to home-related uses and can be used to finance additional
                        consumption by borrowers.

                        Use of mortgage-related debt to finance nonhousing assets and
                        consumption purchases through home equity loans could expose
                        borrowers to increased risk of losing their homes should they default.
                        Equity concerns may exist because middle- and upper-income taxpayers
                        who itemize primarily take advantage of this tax preference, and such an
                        option is not available to people who rent their housing.

                        One way to address the issues concerning the amounts or uses of home
                        equity financing would be to limit mortgage interest deductibility to the
                        first $300,000 of indebtedness for the taxpayer’s principal and second
                        residence. Assuming an effective date of January 1, 1999, this option would
                        generate the following revenues.

Five-Year Revenues
                        Dollars in billions
                                                                  FY98          FY99        FY00        FY01       FY02
                        Revenue gain                                   0           1.9        2.7         2.9        3.1
                        Note: JCT provided its revenue estimates in billions of dollars.

                        Source: Joint Committee on Taxation.




Related GAO Product     Tax Policy: Many Factors Contributed to the Growth in Home Equity
                        Financing in the 1980s (GAO/GGD-93-63, March 25, 1993).




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GAO Contact   Lynda D. Willis, (202) 512-9110




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Option:
Internal Revenue   Authorizing committees                   Appropriations (Senate and House)
                                                            Finance (Senate)
Service Staff                                               Ways and Means (House)
Utilization        Primary agency                           Internal Revenue Service
                   Spending type                            Direct
                   Framework theme                          Improve efficiency

                   The allocation of IRS’ collection staff has not been based on the relative
                   productivity of its collection programs. Some of the more productive
                   programs, such as IRS automatic call sites, have not reached their full
                   potential because staff are assigned to less productive field collection
                   activities. The productivity of collection staff also varies greatly among
                   collection locations.

                   More emphasis on contacting delinquent taxpayers early using telephone
                   collection techniques and allocating staff based on productivity should
                   increase collections. A rough GAO estimate indicated that the reassignment
                   of about 1,000 staff from field collections—the least productive use of
                   staff—to telephone collections could increase collections by about
                   $1.2 billion per year.

                   IRS’fiscal year 1997 budget included a decrease of 1,341 full-time
                   equivalent positions in tax enforcement job categories, such as field
                   revenue officers and revenue agents, that engage in face-to-face audit and
                   collection activities. IRS’ budget stated that although “these positions still
                   comprise the lion’s share of IRS enforcement efforts, they also represent,
                   on the margin, the least efficient use of IRS resources.”

                   On the other hand, because of other budget decisions, IRS targeted its
                   telephone collection activity for a significant staff reduction in fiscal year
                   1997. IRS officials subsequently decided that the impact of this staff
                   reduction would be too severe. As a result, they negotiated with the
                   National Treasury Employees Union to allow for the temporary transfer of
                   about 300 revenue officers and other compliance staff to telephone
                   collections for at least 1 year.

                   Although CBO does not disagree that better utilization of IRS staff can
                   increase revenues, it does not make budget estimates of such increases.
                   This is because it is difficult to establish a clear connection between
                   changes in staff allocations and revenue gains. In addition, even if such a




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                       connection can be established, the magnitude of such gains attributable to
                       reallocation is not certain enough for budget scorekeeping purposes.


Related GAO Products   Tax Administration: New Delinquent Tax Collection Methods of IRS
                       (GAO/GGD-93-67, May 11, 1993).

                       Tax Administration: Improved Staffing of IRS’ Collection Function Would
                       Increase Productivity (GAO/GGD-93-97, May 5, 1993).

                       Internal Revenue Service Receivables (GAO/HR-93-13, December 1992).

                       Tax Administration: IRS’ System Used in Prioritizing Taxpayer
                       Delinquencies Can Be Improved (GAO/GGD-92-6, March 26, 1992).

                       Tax Administration: Efforts To Prevent, Identify, and Collect Employment
                       Tax Delinquencies (GAO/GGD-91-94, August 28, 1991).


GAO Contact            Lynda D. Willis, (202) 512-9110




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Option:
Collecting Gasoline   Authorizing committees                 Finance (Senate)
                                                             Ways and Means (House)
Excise Taxes          Primary agency                         Internal Revenue Service
                      Spending type                          Direct
                      Framework theme                        Improve efficiency

                      Although reliable statistical data do not exist to estimate gasoline excise
                      tax evasion, the Department of Transportation estimated in a report to the
                      Congress that such evasion amounted to about $500 million annually.
                      From a tax administration perspective, moving the collection point for
                      gasoline excise taxes from the terminal to the refinery level may reduce
                      tax evasion because (1) gasoline would change hands fewer times before
                      taxation, (2) refiners are presumed to be more financially sound and have
                      better records than other parties in the distribution system, and (3) fewer
                      taxpayers would be involved. However, industry representatives raise
                      competitiveness and cost-efficiency questions associated with moving the
                      collection point.

                      In a May 1992 report, GAO suggested that the Congress explore the level of
                      gasoline excise tax evasion and, if it was found to be sufficiently high,
                      move tax collection to the point at which gasoline leaves the refinery. The
                      amount of revenue that would be generated from moving the collection
                      point for gasoline excise taxes would depend on the accuracy of the
                      $500 million estimate of evasion and how well the move curbed such
                      evasion.

                      JCTagrees that this option has the potential for increased revenue but has
                      not developed estimates of revenue gains.


Related GAO Product   Tax Administration: Status of Efforts to Curb Motor Fuel Tax Evasion
                      (GAO/GGD-92-67, May 12, 1992).


GAO Contact           Lynda D. Willis, (202) 512-9110




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Option:
Computing Excise       Authorizing committees                               Finance (Senate)
                                                                            Ways and Means (House)
Tax Bases              Primary agency                                       Internal Revenue Service
                       Spending type                                        Direct
                       Framework theme                                      Improve efficiency

                       Federal excise taxes are sometimes set at a fixed dollar amount per unit of
                       taxed good. For example, alcoholic beverages are taxed at a set rate per
                       gallon or barrel, with the rate varying for different types of beverages and
                       differing concentrations of alcohol. When set in this manner, the real
                       dollar value of the tax falls with inflation.

                       The real dollar value of these taxes can be maintained over time if the tax
                       is indexed for inflation or set as a percentage of the price of the taxed
                       product or service. Tax policy issues would need to be considered, and
                       administrative difficulties may be encountered, but they are not
                       insurmountable. Of the five excise taxes GAO studied in 1989, alcohol and
                       tobacco taxes yielded over 99 percent of the increased revenue that
                       indexing would have generated. The Congress may wish to consider
                       indexing excise tax rates for alcohol and tobacco. The table below reflects
                       the estimated savings from this option with an effective date of January 1,
                       1998.

Five-Year Revenues
                       Dollars in billions
                                                                 FY98          FY99        FY00        FY01       FY02
                       Revenue gain                                 0.2           0.5        0.7         1.1        1.3
                       Note: JCT provided its revenue estimates in billions of dollars.

                       Source: Joint Committee on Taxation.




Related GAO Products   Alcohol Excise Taxes: Simplifying Rates Can Enhance Economic and
                       Administrative Efficiency (GAO/GGD-90-123, September 27, 1990).

                       Tax Policy: Revenue Potential of Restoring Excise Taxes to Past Levels
                       (GAO/GGD-89-52, May 9, 1989).


GAO Contact            Lynda D. Willis, (202) 512-9110



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Option:
Industrial          Authorizing committees                  Finance (Senate)
                                                            Ways and Means (House)
Development Bonds   Primary agency                          Department of the Treasury
Targeting           Spending type                           Direct
                    Framework theme                         Reassess objectives

                    The interest earned on certain bonds used by private entities is tax-exempt
                    because the activities financed are considered to produce public benefits.
                    The “private activity bonds” are issued by state and local governmental
                    authorities who provide the proceeds to private entities to finance, among
                    other things, the creation or expansion of manufacturing facilities. Such
                    private activity bonds are commonly referred to as Industrial Development
                    Bonds (IDBs).

                    Critics of IDBs argue that the benefits from private activity caps are
                    ill-defined. While IDBs clearly provide benefits to the private companies
                    and to investors, there is no clear consensus on whether the bonds achieve
                    public benefits. Proponents of the bonds argue that IDBs can indeed
                    achieve public benefits, such as creating jobs, assisting economically
                    distressed areas, fostering start-up companies, and keeping manufacturing
                    firms in the country. However, IDBs do not appear to be targeted to states
                    with large concentrations of communities in fiscal distress and possibly
                    greatest need for bond market intervention. The Tax Reform Act of 1986
                    imposed a limit (volume cap) that restricts the amount of bonds a state
                    may issue to the greater of $50 per state resident or $150 million.

                    This option illustrates three ways in which the Congress could choose to
                    reduce the tax losses associated with IDBs. If reductions in the cap were
                    targeted, states with highest concentrations of fiscal stress could be
                    spared the cuts while the deepest cuts were applied to states with the
                    lowest concentration of communities in fiscal stress. For example, this
                    approach would cut 25 percent from the cap in a state with a majority of
                    communities in fiscal stress and 75 percent from the cap in states with low
                    concentrations of communities in fiscal stress. This approach would
                    reduce the caps by 23 percent for net revenue gains of $800 million over 5
                    years.

                    Another approach would simply be to reduce the cap proportionally
                    across all states. The 1995 cap was allocated to all states in such a way as
                    to ensure a minimum of $150 million. Many states received more than




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                      $150 million, however no states received less than this amount. If the
                      minimum allocation were reduced by $50 million and proportionally
                      reduced in all states that received more than $150 million, the total cap
                      would be reduced by 48 percent.

                      Still another approach would be to both reduce the cap proportionally
                      across all states and to target additional cuts to states with low
                      concentrations of communities in fiscal stress. Such an approach would
                      yield a 56 percent reduction in the caps.

                      JCT estimates that the first option, targeting reductions in the cap for bonds
                      issued after December 31, 1997, would result in the following revenue
                      gain.

Five-Year Revenues
                                                                FY98          FY99        FY00        FY01       FY02
                                                                     a
                      Revenue gain                                               0.1        0.2         0.2        0.3
                      Note: JCT provided its revenue estimates in billions of dollars.
                      a
                      A gain of less than $50 million.

                      Source: Joint Committee on Taxation.




Related GAO Product   Industrial Development Bonds: Achievement of Public Benefits Is Unclear
                      (GAO/RCED-93-106, April 22, 1993).


GAO Contacts          Paul L. Posner, (202) 512-9573
                      Judy A. England-Joseph, (202) 512-7631




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Option:
Highway User Fees on   Authorizing committees                 Commerce, Science, and Transportation
                                                              (Senate)
Heavy Trucks                                                  Transportation and Infrastructure (House)
                       Primary agency                         Department of Transportation
                       Spending type                          Direct
                       Framework theme                        Redefine beneficiaries

                       To develop and maintain highways, the Federal Highway Administration
                       (FHWA) collects user fees. In fiscal year 1993, FHWA collected over
                       $18.5 billion from four user fees: fuel taxes, a heavy vehicle use tax, a new
                       vehicle excise tax, and an excise tax on heavy tires. In 1982, FHWA reported
                       that heavy trucks underpaid by about 50 percent their fair share relative to
                       the pavement damage that they caused. FHWA also reported that lighter
                       trucks were overpaying by between 30 and 70 percent (depending on
                       weight), and automobiles were overpaying by 10 percent.

                       To increase highway revenues and to respond to the FHWA study, the
                       Congress in 1982 passed the first major increase in federal highway use
                       taxes since 1956. To increase revenues, the Congress raised gasoline and
                       diesel taxes from 4 cents to 9 cents per gallon. To improve equity, the
                       Congress mandated that the ceiling for the heavy vehicle use tax be
                       increased from $240 a year to $1,900 a year by 1989. In response to the
                       concerns of the trucking industry about the new tax structure, the
                       Congress again revised the system in the Deficit Reduction Act of 1984.
                       Under the act, the ceiling for the heavy vehicle use tax was lowered from
                       $1,900 to $550 a year. To ensure that this action was revenue neutral, the
                       Congress raised the tax on diesel fuel from 9 cents to 15 cents per gallon.

                       As we recommended in June 1994, FHWA is conducting a formal cost
                       allocation study to determine whether all highway users are paying their
                       fair share of federal highway costs. FHWA plans to complete this study by
                       early 1997. If this study finds that heavy trucks underpay their share, one
                       solution could be to base the truck’s fees on vehicle weight and distance
                       traveled—a method currently employed by six states. The precise revenue
                       gain from this action would depend on the type and amount of user fee
                       increases. Increasing fuel taxes, the heavy vehicle use tax, the new vehicle
                       excise tax, and the excise tax on heavy tires would generate additional
                       revenues. For example, in fiscal year 1994, heavy truck operators paid
                       about $620 million in heavy vehicle use taxes. Raising the ceiling on this




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                      Appendix III
                      Options for Deficit Reduction




                      fee from $550 to $1,900 per user could raise between $800 million and
                      $1 billion.

                      JCT does not disagree that this option could yield revenue. However, an
                      estimate of revenue gains is not available at this time.


Related GAO Product   Highway User Fees: Updated Data Needed To Determine Whether All
                      Users Pay Their Fair Share (GAO/RCED-94-181, June 7, 1994).


GAO Contact           John H. Anderson, Jr., (202) 512-2834




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                        Appendix III
                        Options for Deficit Reduction




Option:
Taxation of Additives   Authorizing committees                  Finance (Senate)
                                                                Ways and Means (House)
to Diesel Fuel          Primary agency                          Internal Revenue Service
                        Spending type                           Direct
                        Framework theme                         Improve efficiency

                        The federal government generally imposes an excise tax of 24.4 cents per
                        gallon on diesel fuel that is used on highways. Diesel fuel for off-highway
                        use, such as home heating, is not taxed. In addition, certain entities, such
                        as state and local governments, are exempt from paying tax on diesel fuel
                        they use on highways. This excise tax is collected at the fuel terminal and
                        any diesel fuel removed from a terminal for tax-free use must be dyed.

                        Diesel fuel additives, primarily kerosene, may be added to tax-paid diesel
                        fuel after it leaves the terminal where taxes are collected. Fuel excise
                        taxes are intended to be collected on each gallon of fuel used on the
                        highway, including any additives, so that the tax revenues can be used to
                        maintain and improve the highway system. Under current federal excise
                        tax regulations, kerosene is not treated as a diesel fuel and is generally
                        neither taxed nor dyed when removed from the terminal. However,
                        undyed tax-free kerosene can be used in blending schemes that could
                        result in excise tax evasion. For example, a dishonest retailer could take
                        two gallons of tax-paid diesel fuel and mix it with one gallon of undyed
                        kerosene on which no tax has been paid. The retailer now has three
                        gallons of “cocktailed” diesel fuel, but has only paid tax on two gallons of
                        the product.

                        In January 1996, GAO reported that under current IRS regulations, kerosene
                        is not treated as a diesel fuel and is generally neither taxed nor dyed when
                        removed from the terminal, although it may ultimately be used as a
                        highway fuel. Other uses of kerosene, such as for home heating,
                        complicate its taxation. Nevertheless, in July 1995, the Treasury
                        Department expressed support for subjecting kerosene to the same dyeing
                        requirements as those applied to diesel fuel. The Congress may wish to
                        consider dyeing nontaxed kerosene in order to improve and increase
                        collection of fuel excise taxes. The table below reflects the estimated
                        revenues from this option with an effective date of July 1, 1998.




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                       Options for Deficit Reduction




Five-Year Revenues
                       Dollars in billions
                                                                 FY98          FY99        FY00        FY01       FY02
                                                                      a             a           a          a           a
                       Revenue gain
                       Note: JCT provided its revenue estimates in billions of dollars.
                       a
                       A gain of less than $50 million.

                       Source: Joint Committee on Taxation.




Related GAO Products   Tax Administration: Diesel Fuel Excise Tax Change (GAO/GGD-96-53,
                       January 16, 1996).

                       Tax Administration: Status of Efforts to Curb Motor Fuel Tax Evasion
                       (GAO/GGD-92-67, May 12, 1992).


GAO Contact            Lynda D. Willis, (202) 512-9110




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                       Options for Deficit Reduction




Option:
Electronic Filing of   Authorizing committees                  Finance (Senate)
                                                               Ways and Means (House)
Tax Returns            Primary agency                          Internal Revenue Service
                       Spending type                           Direct
                       Framework theme                         Improve efficiency

                       Electronic filing sends data directly on-line to Internal Revenue Service
                       (IRS) computers, thereby eliminating manual handling of paper, disks,
                       computer tapes, and cartridges, which significantly reduces processing
                       time and cost. For example, electronically filed information returns can be
                       fully processed and entered into IRS’ computers within 2 days compared
                       with an average of 58 days for magnetic media shipments. Math errors on
                       electronic returns are identified by the system and corrected by the
                       taxpayer before IRS accepts the return. Electronic returns also avoid the
                       error-prone manual data entry system IRS uses to process paper returns.
                       Fewer errors mean fewer notices to taxpayers and less time spent with the
                       resulting telephone calls and correspondence.

                       Electronic filing can enhance IRS’ compliance efforts. However, of the
                       777 million nonwage information returns IRS processed in 1994, only
                       12.6 million (1.6 percent) were filed electronically. Of the 118 million
                       individual income tax returns filed in 1996, only 15 million (12.7 percent)
                       were filed electronically. Electronic filing of information returns would
                       enable IRS to match more of these documents sooner to tax returns. For
                       example, matching information returns on partnership income (Schedule
                       K-1) to individual tax returns has been a cost-effective means of detecting
                       and assessing taxes on unreported partnership income. But few Schedule
                       K-1s have been matched. For tax year 1991, GAO estimated that had IRS
                       been able to match all Schedule K-1s, it could have assessed about
                       $220 million in additional taxes. Similarly, with electronic returns, IRS can
                       more effectively and efficiently validate social security numbers—a key
                       control against refund fraud—because up-front filters prevent the
                       submission of electronic returns with invalid social security numbers. IRS
                       cannot identify invalid social security numbers on paper returns until after
                       the returns are filed, and the number of problem cases it can work is
                       limited by the amount of available staff.

                       Not only is the number of electronic returns relatively low, but the returns
                       being filed electronically are generally those that contribute least to
                       paper-processing workload and operating costs. For example, on the basis




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                       Options for Deficit Reduction




                       of IRS’ 1993 service center processing cost estimates, it cost IRS $4.53 to
                       process a paper Form 1040, $3.95 to process a paper Form 1040A, and
                       $3.36 to process a paper Form 1040EZ. The most costly of the three (Form
                       1040) accounted for about 59 percent of all individual returns (paper and
                       electronic) processed in 1994, yet Form 1040 accounted for only about
                       20 percent of the individual returns filed electronically.

                       To reduce processing costs and increase compliance revenues, IRS needs
                       to develop and implement a strategy for significantly increasing the
                       number of returns filed electronically. We have recommended that IRS
                       identify those groups of taxpayers who offer the greatest opportunity to
                       reduce IRS’ paper-processing workload and operating costs if they were to
                       file electronically and develop strategies that focus IRS’ resources on
                       eliminating or alleviating impediments that inhibit those groups from
                       participating in the program, including the impediment posed by the
                       program’s cost. No cost savings or revenue enhancement estimates can be
                       made until IRS develops these strategies.


Related GAO Products   Tax Administration: Electronic Filing Falling Short of Expectations
                       (GAO/GGD-96-12, October 31, 1995).

                       Tax Administration: IRS’ Partnership Compliance Activities Could Be
                       Improved (GAO/GGD-95-151, June 16, 1995).


GAO Contact            Lynda D. Willis, (202) 512-9110




                       Page 359                                     GAO/OCG-97-2 Addressing the Deficit
Appendix IV

Options Not Updated for This Report


                                                The following table provides information on options from last year’s
                                                report31 that were not updated due to congressional or agency action or
                                                other factors.


Option                                                                   Comments
Improved Material Management Can Reduce Shipyard Costs                   See new option on Navy financial management of operating
                                                                         materials and supplies.
Reduce Army’s Unfilled War Reserve Requirements by Using Other See new option on defense inventories reform.
Inventory Items
MK-48 Advanced Capability Torpedo Propulsion System                      Since the time this option was included in last year’s report, the
                                                                         Navy has purchased the MK-48 propulsion improvements.
Reassess Defense Conversion Spending                                     The Congress terminated funding for the centerpiece of the
                                                                         defense conversion initiative—the Technology Reinvestment
                                                                         Project.
Improve Controls Over Payments to Defense Contractors                    In our 1997 high-risk series,a we pointed out that DOD has
                                                                         recognized problem disbursements as a major area of concern
                                                                         and is working hard to reduce them. However, we also noted that
                                                                         our preliminary work on DOD’s reporting on problem
                                                                         disbursement data indicates that reported amounts are
                                                                         substantially understated and raises concerns over whether DOD
                                                                         has sufficient, reliable information to determine the extent to which
                                                                         disbursement problems have been reduced. We have several
                                                                         ongoing reviews directed at identifying opportunities for additional
                                                                         corrective actions.
Negotiate More Realistic Environmental Agreements                        The Department of Energy’s Environmental Management Program
                                                                         is in the process of developing a new 10-year plan that will
                                                                         represent a more national approach to the cleanup and should
                                                                         result in more realistic cleanup agreements.
U.S. Contribution to the International Fund for Agricultural             The United States has committed to pay $30 million to the Fund in
Development                                                              six installments, beginning in 1997, and may make additional
                                                                         contributions on a voluntary basis. However, the United States has
                                                                         decided that it will not participate in any future Fund
                                                                         replenishments.
Shortwave Radio Modernization Program                                    The Voice of America (part of the U.S. Information Agency) has
                                                                         either completed or scaled back all projects in the modernization
                                                                         plan. The only new construction currently planned is for a facility
                                                                         on Tinian Island to support Radio Free Asia.
Privatize Uranium Enrichment Program                                     As a result of recent amendments to the Energy Policy Act of
                                                                         1992, CBO assumes that the United States Enrichment
                                                                         Corporation will be privatized in fiscal year 1998. We continue to
                                                                         recommend that the Secretary of the Treasury consider ways to
                                                                         ensure that the government is protected from an undervalued sale
                                                                         when the Corporation is sold.
                                                                                                                                       (continued)



                                                31
                                                 Addressing the Deficit: Budgetary Implications of Selected GAO Work for Fiscal Year 1996
                                                (GAO/OCG-96-5, June 28, 1996).



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                                               Appendix IV
                                               Options Not Updated for This Report




Option                                                               Comments
Privatize the Naval Petroleum Reserve-1                              The Defense Authorization Act (Public Law 104-106) established a
                                                                     schedule for selling the reserve by February 1998, unless DOE
                                                                     and OMB determine that selling the reserve is not in the interest of
                                                                     the United States or the proceeds are unlikely to reflect the
                                                                     reserve’s fair market value. CBO’s baseline assumes the reserve
                                                                     will be sold in fiscal year 1998.
Consolidate Strategic Petroleum Reserve                              In fiscal year 1996, the Congress required DOE to sell enough oil
                                                                     from the strategic petroleum reserve to pay for the cost of
                                                                     operating the reserve. CBO assumes that this funding mechanism
                                                                     will continue to be used. As a result, mothballing a storage site
                                                                     would reduce the reserve’s operating costs but would also
                                                                     alleviate the need to sell a requisite amount of oil. Therefore,
                                                                     mothballing would conserve the reserve’s oil but would not
                                                                     contribute to deficit reduction.
National Oceanic and Atmospheric Research Fleet Modernization        Based on a series of reports on the National Oceanic and
                                                                     Atmospheric Administration’s (NOAA) fleet modernization,
                                                                     including prior GAO reports, the Inspector General of the
                                                                     Commerce Department issued a March 1996 report
                                                                     recommending that the entire NOAA fleet be eliminated.
Consolidation of U.S. Department of Agriculture Food Assistance      The Personal Responsibility and Work Opportunity Reconciliation
Programs                                                             Act of 1996 consolidates two food assistance programs—the
                                                                     Emergency Food Assistance Program and Soup Kitchens/Food
                                                                     Banks. Consolidating these programs should give states greater
                                                                     flexibility to more effectively target resources to alleviate hunger
                                                                     and help streamline federal, state, and local administration of
                                                                     USDA’s distribution of these commodities.
Social Security Continuing Disability Reviews (CDRs)                 The Contract with America Advancement Act of 1996 increased
                                                                     authorized funding for CDRs to almost $3 billion by 2002. With this
                                                                     and other funding earmarked from its administrative budget, SSA
                                                                     plans to eliminate the backlog of CDRs for disabled workers
                                                                     under age 59. While we believe that the program could be
                                                                     administered more cost effectively and that SSA’s plan excludes
                                                                     some beneficiaries in the backlog, this option was not included
                                                                     because the potential for additional budget deficit reduction is not
                                                                     significant.
Justice’s Use of Private Counsel to Collect Civil Debt               The Omnibus Consolidated Rescissions and Appropriations Act of
                                                                     1996 gives the Attorney General permanent authority to hire
                                                                     private debt contractors to collect a nontax debt or claim owed to
                                                                     the United States. The Department of Justice currently has
                                                                     contracts in 13 judicial districts.
Global Positioning System (GPS) Technology                           In our report on global positioning systems (GPS), we
                                                                     recommended that the Office of Management and Budget
                                                                     develop a stronger coordination mechanism for managing future
                                                                     federal GPS activities. Consistent with our recommendation, in
                                                                     March 1996, a Presidential Decision Directive established DOT as
                                                                     the lead agency for all federal civil GPS matters.
                                                                                                                              (continued)




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                                           Appendix IV
                                           Options Not Updated for This Report




Option                                                            Comments
Federal Agency Credit Management Programs                         The Debt Collection Improvement Act of 1996 provided agencies
                                                                  with several new debt collection tools. Treasury is developing
                                                                  plans for, and beginning to implement, the requirements of the act.
Improving Compliance of Sole Proprietors                          The Internal Revenue Service has created a tracking system to
                                                                  manage its sole proprietor compliance projects and has been
                                                                  using its Taxpayer Compliance Management Program data to
                                                                  help identify projects that would address the most noncompliant
                                                                  sole proprietors. The agency has also reached an agreement with
                                                                  the trucking industry that should improve the industry’s tax
                                                                  recordkeeping.

                                           a
                                            See the high-risk series reports Defense Financial Management (GAO/HR-97-3,
                                           February 1997) and Defense Contract Management (GAO/HR-97-4, February 1997).




                                           Page 362                                              GAO/OCG-97-2 Addressing the Deficit
Appendix V

Major Contributors to This Report


                       Thomas M. James, Assistant Director
Accounting and         Claudia J. Dickey, Senior Evaluator
Information            Laura E. Hamilton, Senior Evaluator
Management Division,   Bill J. Keller, Senior Evaluator

Washington, D.C.




(935213)               Page 363                              GAO/OCG-97-2 Addressing the Deficit
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