oversight

Budget Issues: Budgetary Implications of Selected GAO Work for Fiscal Year 2000

Published by the Government Accountability Office on 1999-04-16.

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

                United States General Accounting Office

GAO             Report to Congressional Requesters




April 1999
                BUDGET ISSUES
                Budgetary Implications
                of Selected GAO Work
                for Fiscal Year 2000




GAO/OCG-99-26
      United States
GAO   General Accounting Office
      Washington, D.C. 20548

      Comptroller General
      of the United States

      B-281041

      April 16, 1999

      The Honorable Pete V. Domenici
      Chairman
      The Honorable Frank R. Lautenberg
      Ranking Minority Member
      Committee on the Budget
      United States Senate

      The Honorable John R. Kasich
      Chairman
      The Honorable John M. Spratt, Jr.
      Ranking Minority Member
      Committee on the Budget
      House of Representatives

      As you requested, this report identifies in a single document the budgetary
      implications of selected program reforms discussed in our work but not
      yet implemented or enacted. This report is part of a special biennial series
      designed to help each new Congress identify options that could be used to
      reduce federal spending or increase revenues. 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 report contains over 100 options. Twenty-three are new to this year’s
      report; the remainder are updated versions of options that appeared in our
      March 1997 report.1 All of these options are based on key findings and
      issues developed in our audits and evaluations. Each option represents
      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 cutting spending or raising
      revenue, and inclusion of a specific option in this report does not mean we
      endorse it, nor does it mean that the option presented is the only or most
      feasible approach to a particular issue. In addition, this report is not
      intended to provide a comprehensive framework for addressing the major




      1
       Addressing the Deficit: Budgetary Implications of Selected GAO Work for Fiscal Year 1998
      (GAO/OCG-97-2, Mar. 14, 1997).



      Page 1                                       GAO/OCG-99-26 Budget Implications of GAO Work
    B-281041




    fiscal challenges facing the nation arising from such critical programs as
    Social Security and Medicare.2

    This report is divided into four appendixes. Appendix I discusses the
    conventions used to estimate savings and revenue gains. Appendix II
    provides for congressional consideration an analytical framework in
    which to consider cost savings or revenue increases. 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—reconsider whether to terminate or revise services
    and programs provided;
•   redefine beneficiaries—reconsider who pays for or benefits from a
    particular program; and
•   improve efficiency—reconsider how a program or service is provided.

    Appendix III presents narrative descriptions of the options including
    available estimates of budgetary savings as determined by CBO or JCT. This
    appendix presents reduced spending options first—organized by budget
    function—and then additional receipt options. Each option also includes a
    listing of relevant GAO reports and testimonies and a GAO contact.

    Lastly, appendix IV lists options from the March 1997 report that were not
    updated for this year’s volume based on our review of congressional and
    agency actions taken over the past 2 years. Over 60 options from our last
    report are not included in this report because (1) the option was fully or
    substantially acted upon by the Congress or the cognizant agency, (2) the
    option was no longer appropriate due to environmental changes or the
    aging of our work, or (3) the Congress or the cognizant agency chose a
    different approach to address the issues discussed in the option. We will
    continue to monitor many of these options to assess whether underlying
    issues are ultimately resolved based on the actions taken. For example,
    our work repeatedly has identified chronic problems with the space
    station in terms of cost increases. The Congress has decided to begin
    deployment. We will continue to monitor this and report periodically.




    2
     For discussion of the fiscal and program issues facing Social Security and Medicare, see Social
    Security and Surpluses: GAO’s Perspective on the President’s Proposals (GAO/T-AIMD/HEHS-99-96,
    Feb. 23, 1999), Medicare and Budget Surpluses: GAO’s Perspective on the President’s Proposal and the
    Need for Reform (GAO/T-AIMD/HEHS-99-113, Mar. 10, 1999), and Social Security: Criteria for
    Evaluating Social Security Reform Proposals (GAO/T-HEHS-99-94, Mar. 25, 1999).



    Page 2                                       GAO/OCG-99-26 Budget Implications of GAO Work
B-281041




Although we derived the budget options in this report from our existing
body of work, there are similarities with other 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 Chairmen and Ranking
Minority Members of the Appropriations committees and relevant
subcommittees; the Chairmen and Ranking Minority Members of the
Senate Committee on Governmental Affairs and the Committee on
Finance; and to the Chairmen and Ranking Minority Members of the
House Committee on Government Reform and the Committee on Ways
and Means. Copies will be made available to others upon request.

This report was prepared under the direction of Paul L. Posner, Director,
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.




David M. Walker
Comptroller General
of the United States




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Contents



Letter                                                                                             1


Appendix I                                                                                        12
Explanation of
Conventions Used to
Estimate Savings and
Revenue Gains
Appendix II                                                                                       13
                        Reassess Objectives                                                       13
A Framework for         Redefine Beneficiaries                                                    14
Considering Savings     Improve Efficiency                                                        14
and Revenue Gains
Appendix III                                                                                      16
                        050 National Defense                                                      17
Options for Increased   Option:                                                                   18
Savings and Revenue       Guided Weapons
                        Option:                                                                   21
Gains                     Aircraft Carrier Propulsion Cost-Effectiveness
                        Option:                                                                   24
                          F-22 Fighter
                        Option:                                                                   27
                          Army’s Comanche Helicopter Program
                        Option:                                                                   29
                          C-130 and KC-135 Reserve Squadrons
                        Option:                                                                   31
                          Continental Air Defense
                        Option:                                                                   33
                          Carrier Battle Group Expansions and Upgrades
                        Option:                                                                   35
                          Air Force Bomber Force Requirements
                        Option:                                                                   38
                          Air Force Fighter Squadrons
                        Option:                                                                   40
                          Military Exchange Stores Consolidation
                        Option:                                                                   43
                          Army National Guard Divisions




                        Page 4                          GAO/OCG-99-26 Budget Implications of GAO Work
Contents




Option:                                                                   45
  Fiscal Year 2000 Military Personnel Budget Requirements
Option:                                                                   47
  DOD’s Fiscal Year 2000 Civilian Personnel Budget Requirements
Option: DOD Transportation Migration Systems                              49
Option:                                                                   51
  Navy Financial Management of Operating Materials and Supplies
Option:                                                                   53
  Defense Infrastructure Reform
Option:                                                                   56
  DOD’s Finance and Accounting Infrastructure
Option:                                                                   59
  Sizing the Military Health System
Option:                                                                   60
  Copayments for Care in Military Treatment Facilities
Option:                                                                   62
  Administering Defense Health Care
Option:                                                                   64
  Uniformed Services University of the Health Sciences
150 International Affairs                                                 67
Option:                                                                   68
  State Department Business Processes
Option:                                                                   70
  U.S. Overseas Presence
Option:                                                                   73
  International Broadcasting
Option:                                                                   75
  Export-Import Bank Programs
270 Energy                                                                77
Option:                                                                   78
  Corporatize or Divest Selected Power Marketing Administrations
Option:                                                                   81
  Power Marketing Administrations’ Cost Recovery
Option:                                                                   84
  Department of Energy’s National Laboratories
Option:                                                                   86
  Department of Energy’s Contractors’ Separation Benefits
  Package
Option:                                                                   88
  Federal Exemption to Certain State Taxes for Department of
  Energy’s Operating Contractors




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Option:                                                                    90
  Nuclear Waste Disposal Fees
Option:                                                                    91
  Federal Investment in Successfully Commercialized Technologies
300 Natural Resources and Environment                                      93
Option:                                                                    94
  Pursuing Cost-Effective Alternatives to NOAA’s Research/Survey
  Fleet
Option:                                                                    96
  Collaborative Federal Land Management Approach
Option:                                                                    98
  Fair Market Value for Natural Resources
Option:                                                                   100
  Hardrock Mining
Option:                                                                   102
  Natural Resources Revenue Sharing
Option:                                                                   104
  Federal Water Policies
Option:                                                                   108
  Water Transfers
Option:                                                                   110
  Pollution Fees and Taxes
Option:                                                                   112
  Hazardous Waste Cleanup Cost Recovery
Option:                                                                   114
  Non-Time-Critical Removals in Superfund Cleanups
Option:                                                                   116
  Excess Funds in Superfund Contracts
350 Agriculture                                                           118
Option:                                                                   119
  More Effective Operation of Rural Utilities Service’s Electricity
  and Telecommunications Loan Programs
Option:                                                                   121
  Consolidation of Common Administrative Functions at USDA
Option:                                                                   123
  Farm Service Agency County Office Restructuring
Option:                                                                   125
  Charging Beneficiaries for Food-Related Service Costs
Option:                                                                   127
  Agricultural Research Service Funding




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Contents




Option:                                                                   129
  USDA Telecommunications and Information Systems
370 Commerce and Housing Credit                                           131
Option:                                                                   132
  Self-Financing of Mission Oversight by Fannie Mae and Freddie
  Mac
Option:                                                                   134
  Rural Housing Loans Interest Recapture
Option:                                                                   136
  Reducing FHA’s Insurance Coverage
400 Transportation                                                        138
Option:                                                                   139
  Replacement of Airport Surveillance Radars
Option:                                                                   141
  Cargo Preference Laws
Option:                                                                   143
  Fees Paid by Foreign-Flagged Cruise Ships
Option:                                                                   145
  Department of Transportation’s Oversight of Its University
  Research
Option: Fees for Registering Aircraft                                     147
450 Community and Regional Development                                    149
Option:                                                                   150
  Eligibility for Federal Emergency Management Agency Public
  Assistance
500 Education, Training, Employment, and Social Services                  152
Option:                                                                   153
  Consolidation of Student Aid Programs
550 Health                                                                155
Option:                                                                   156
  Prescription Drug and Medicaid Fraud
Option:                                                                   159
  Medicaid: States Use Illusory Approaches to Shift Program Costs
  to the Federal Government
Option:                                                                   161
  Medicaid Formula: Fairness Could Be Improved
Option:                                                                   163
  Public Health Service Commissioned Corps
Option:                                                                   166
  Unified Risk-Based Food Safety System
570 Medicare                                                              168




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Option:                                                                  169
  Anticipated Savings at Risk With New Skilled Nursing Facility
  Payment Method
Option:                                                                  171
  Using More Precise Coding to Facilitate Adjusting Medicare Fee
  Schedule Allowances to Reflect Changing Technology, Costs, and
  Market Prices
Option:                                                                  174
  Medicare Program Safeguards
Option:                                                                  177
  Medicare Payments for High Technology Procedures
Option:                                                                  179
  Medicare Rate-Setting Methods for HMOs
Option:                                                                  182
  Medicare Incentive Payments in Health Care Shortage Areas
600 Income Security                                                      184
Option:                                                                  185
  Efficient Use of Debt Collection Tools to Recover Supplemental
  Security Income Overpayments
Option:                                                                  187
  Determining Supplemental Security Income Recipient Living
  Arrangements
Option:                                                                  189
  Resource Transfers to Qualify for Supplemental Security Income
Option:                                                                  192
  Improving Social Security Benefit Payment Controls
Option:                                                                  194
  Fees for Non-Temporary Assistance to Needy Families (TANF)
  Child Support Enforcement Services
Option:                                                                  196
  Benefit Payments Under the Federal Employees’ Compensation
  Act
Option:                                                                  202
  Return-To-Work Strategies for People With Disabilities
Option:                                                                  204
  Reporting of DOD Reserve Employee Payroll Data to State
  Unemployment Insurance Programs
Option:                                                                  207
  Automated Child Support Enforcement Systems
700 Veterans Benefits and Services                                       209




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Contents




Option:                                                                   210
  Veterans’ Disability Compensation for Nonservice Connected
  Diseases
Option:                                                                   211
  Cost Sharing for Veterans’ Long-Term Care
Option:                                                                   213
  Closing Underused Veterans Affairs Hospitals
Option:                                                                   215
  Limiting Enrollment in Veterans Affairs Health Care System
Option:                                                                   217
  Outpatient Pharmacy Costs
800 General Government, 900 Net Interest, and 999 Multiple                219
Option:                                                                   220
  Expand the Use of Alternative Dispute Resolution
Option:                                                                   222
  Eliminating Pay Increases After Separation in Calculating
  Lump-Sum Annual Leave Payments
Option:                                                                   224
  The 1-Dollar Coin
Option:                                                                   226
  Federal Reserve Operations
Option:                                                                   229
  Davis-Bacon Act Reform
Option:                                                                   232
  Formula-Based Grant Programs
Option:                                                                   236
  Federal Grant Matching
Option:                                                                   239
  Federal Travel Processing
Receipts                                                                  241
Option:                                                                   242
  Return Filing by U.S. Citizens Living Abroad
Option:                                                                   244
  Electronic Funds Transfer for Installment Tax Payments
Option:                                                                   246
  Electronic Filing of Tax Returns
Option:                                                                   248
  Tax Treatment of Health Insurance Premiums
Option:                                                                   250
  Tax Treatment of Interest Earned on Life Insurance Policies and
  Deferred Annuities




Page 9                           GAO/OCG-99-26 Budget Implications of GAO Work
                        Contents




                        Option:                                                                  252
                          Information Reporting on Forgiven Debts
                        Option:                                                                  254
                          Corporate Tax Document Matching
                        Option:                                                                  255
                          Independent Contractor Tax Compliance
                        Option:                                                                  257
                          Deductibility of Home Equity Loan Interest
                        Option:                                                                  258
                          Administration of the Tax Deduction for Real Estate Taxes
                        Option:                                                                  260
                          Collecting Gasoline Excise Taxes
                        Option:                                                                  262
                          Computing Excise Tax Bases
                        Option:                                                                  263
                          Highway User Fees on Heavy Trucks


Appendix IV                                                                                      265
Options Not Updated
for This Report
Appendix V                                                                                       270
Major Contributors to
This Report




                        Page 10                         GAO/OCG-99-26 Budget Implications of GAO Work
Page 11   GAO/OCG-99-26 Budget Implications of GAO Work
Appendix I

Explanation of Conventions Used to
Estimate Savings and Revenue Gains

                 CBO and JCT provided cost estimates for many of our options. As in our
                 March 1997 report, a brief explanation is included with the option if
                 specific estimates could not be provided. Where estimates are provided,
                 the following conventions were followed.1

             •   For revenue estimates, the increase in collections reflects what would
                 occur, over and above amounts 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 discretionary spending programs the estimates show savings
                 compared to the fiscal year 1999 appropriations in nominal terms (held
                 constant for the next 10 years).

                 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 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 the sale 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 a non-routine asset sale may be counted only if the sale entails no net
                 financial cost to the government. We have included those options that
                 constitute asset sales whether or not they meet that test.

                 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 reduced spending or
                 increased revenues but whose effects are too uncertain to be estimated. 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 10-year estimation period that CBO uses.




                 1
                 For a complete discussion of the uses and caveats of the CBO estimates, see CBO’s report,
                 Maintaining Budgetary Discipline (forthcoming).



                 Page 12                                      GAO/OCG-99-26 Budget Implications of GAO Work
Appendix II

A Framework for Considering Savings and
Revenue Gains

                          The recent 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 spending and revenue proposals. Also,
                          this kind of approach can be used regardless of any other budgetary
                          control mechanism (for example, discretionary spending limits or
                          sequestration proced ures) or any given level of desired deficit reduction.

                          Our framework consists of three broad themes: reassess objectives,
                          redefine beneficiaries, and improve efficiency. 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 framework focuses on the objectives of federal
Reassess Objectives       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 that 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 the 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 Comanche helicopter is intended to replace the
                          Vietnam-era scout and attack helicopters that the Army considers
                          incapable of meeting its existing or future requirements. However, real and
                          probable development cost increases, uncertain operating and support



                          Page 13                           GAO/OCG-99-26 Budget Implications of GAO Work
                             Appendix II
                             A Framework for Considering Savings and
                             Revenue Gains




                             cost savings, questions about the role of the Comanche compared to other
                             more affordable Army helicopters, deferral of the production decision, and
                             current defense budgets raise questions about the cost/benefits of this
                             program.


                             The second theme within our framework focuses on the intended
Redefine Beneficiaries       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 to individuals, groups, or industries that directly
                             benefit from federal programs. Also, existing charges can be increased so
                             that the direct beneficiaries share a greater portion of a program’s cost.
                         •   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 our option on formula grants.


                             The third theme within our framework addresses how the program or
Improve Efficiency           service is delivered. This strategy suggests that focusing on the approach
                             or delivery method can significantly reduce spending or increase
                             collections. Our body of work suggests five decision rules that illustrate
                             this strategy.




                             Page 14                                   GAO/OCG-99-26 Budget Implications of GAO Work
    Appendix II
    A Framework for Considering Savings and
    Revenue Gains




•   Reorganizing and consolidating 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, 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 management 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. Changing revenue sharing from a
    gross-receipt to a net-receipt basis would reduce net federal outlays and
    produce savings to the government.




    Page 15                                   GAO/OCG-99-26 Budget Implications of GAO Work
Appendix III

Options for Increased Savings and Revenue
Gains

               This appendix describes each of our options for increased savings and
               revenue gains 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, followed by an
               estimate (when available) of savings or revenue increases, relevant GAO
               reports, and a GAO contact.




               Page 16                          GAO/OCG-99-26 Budget Implications of GAO Work
               Appendix III
               Options for Increased Savings and Revenue
               Gains




               Guided Weapons
050 National   Aircraft Carrier Propulsion Cost-Effectiveness
Defense        F-22 Fighter
               Army’s Comanche Helicopter Program
               C-130 and KC-135 Reserve Squadrons
               Continental Air Defense
               Carrier Battle Group Expansions and Upgrades
               Air Force Bomber Force Requirements
               Air Force Fighter Squadrons
               Military Exchange Stores Consolidation
               Army National Guard Divisions
               Fiscal Year 2000 Military Personnel Budget Requirements
               DOD’s Fiscal Year 2000 Civilian Personnel Budget Requirements
               DOD’s Transportation Migration Systems
               Navy Financial Management of Operating Materials and Supplies
               Defense Infrastructure Reform
               DOD’s Finance and Accounting Infrastructure
               Sizing the Military Health System
               Copayment for Care in Military Treatment Facilities
               Administering Defense Health Care
               Uniformed Services University of the Health Sciences




               Page 17                                 GAO/OCG-99-26 Budget Implications of GAO Work
                 Appendix III
                 Options for Increased Savings and Revenue
                 Gains




Option:
Guided Weapons   Authorizing committees                      Armed Services (Senate and House)
                 Appropriations subcommittees                Defense (Senate and House)
                 Primary agency                              Department of Defense
                 Account                                     Missile Procurement, Air Force (57-3020)
                                                             Weapons Procurement, Navy (17-1507)
                                                             Missile Procurement, Army (21-2032)
                 Spending type                               Discretionary
                 Budget subfunction                          Department of Defense—Military
                 Framework theme                             Improve efficiency

                 Following the Persian Gulf War, DOD identified a need to improve its
                 arsenal of guided weapons. These improvements would increase target
                 destruction while decreasing the number of missions and weapons used,
                 unwanted collateral damage, and exposure of our aircraft to enemy
                 defenses. Thus, in the early 1990s, the services initiated a number of
                 programs to upgrade existing weapons and produce new guided weapons.
                 The acquisition programs now underway are expected to cost about
                 $16.6 billion (then year dollars) from fiscal years 1998 to 2007. These
                 programs would almost double the existing inventory of guided weapons
                 through the acquisition of about 158,000 new guided weapons. This does
                 not include the undetermined quantities and costs for a number of guided
                 weapons that are in early development. DOD already has enough guided
                 weapons in its inventory to meet current national security objectives for
                 deep attack missions.

                 To pay for all the new guided systems and upgrades, DOD will need to more
                 than double the average annual amount it has been spending on guided
                 weapons. According to DOD’s fiscal year 1999 Future Years Defense
                 Program, planned annual spending for guided weapons will need to
                 increase from about $775 million in fiscal year 1998 to more than $2 billion
                 in fiscal year 2003. Cost growth would result in further increases. These
                 increases are planned as other major procurement programs are also
                 forecasting large increases.

                 In a report issued in December 1998, we found (1) widespread overlap and
                 duplication of guided weapons types and capabilities and (2) questionable
                 quantities being procured for each target class. We concluded that DOD is
                 not providing effective management oversight and coordination over the
                 individual services’ development and procurement of guided weapons. It
                 also noted that DOD has no central oversight body to examine guided




                 Page 18                                 GAO/OCG-99-26 Budget Implications of GAO Work
                       Appendix III
                       Options for Increased Savings and Revenue
                       Gains




                       weapons programs in the aggregate and to assess the types and numbers
                       of weapons needed to meet national security objectives. GAO
                       recommended, among other things, that DOD reevaluate the planned guided
                       weapons acquisition programs in light of existing capabilities and the
                       current budgetary and security environment to determine whether the
                       procurement of all planned guided weapon types and quantities (1) is
                       necessary and cost-effective in the aggregate and (2) can clearly be carried
                       out as proposed within realistic, long-term projections of procurement
                       funding.

                       The large funding increases needed to support the services’ plans for
                       acquiring additional guided weapons capabilities may not be cost effective
                       considering widespread overlap and duplication of guided weapons types
                       and capabilities, questions regarding quantity requirements, existing
                       capabilities and inventory levels, and other high priority defense
                       requirements competing for funding. If the Congress directed DOD to
                       maintain annual guided weapons funding at the already increased fiscal
                       year 1999 level of $1.178 billion and adjust only for inflation, DOD could still
                       achieve substantial improvements in its guided weapons capabilities with
                       associated savings as shown below.

Five-Year Savings
                       Dollars in millions
                                                              FY00     FY01       FY02        FY03       FY04
                       Savings from the 1999 funding level
                       Budget authority                        318       590        495        792        903
                       Outlays                                  53       191        366        514        630
                       Source: Congressional Budget Office.




Related GAO Products   Weapons Acquisitions: Guided Weapon Plans Need to Be Reassessed
                       (GAO/NSIAD-99-32, Dec. 9, 1998).

                       Future Years Defense Program: DOD’s 1998 Plan Has Substantial Risks in
                       Execution (GAO/NSIAD-98-26, Oct. 23, 1997).

                       Aircraft Acquisition: Affordability of DOD’s Investment Strategy
                       (GAO/NSIAD-97-88, Sept. 8, 1997).

                       Weapons Acquisition: Better Use of Limited DOD Acquisition Funding
                       Would Reduce Costs (GAO/NSIAD-97-23, Feb. 13, 1997).



                       Page 19                                   GAO/OCG-99-26 Budget Implications of GAO Work
              Appendix III
              Options for Increased Savings and Revenue
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              Combat Air Power: Joint Mission Assessments Needed Before Making
              Program and Budget Decisions (GAO/NSIAD-96-177, Sept. 20, 1996).

              Weapons Acquisition: Precision Guided Munitions in Inventory,
              Production, and Development (GAO/NSIAD-95-95, June 23, 1995).


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




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Option:
Aircraft Carrier     Authorizing committees                      Armed Services (Senate and House)
Propulsion           Appropriations subcommittees                Defense (Senate and House)
                     Primary agency                              Department of Defense
Cost-Effectiveness   Accounts                                    Multiple
                     Spending type                               Discretionary
                     Budget subfunction                          Department of Defense—Military
                     Framework theme                             Improve efficiency

                     Throughout the 1960s and most of the 1970s, the Navy pursued a goal of
                     creating a fleet of nuclear carrier task forces. The centerpiece of these
                     task forces, the nuclear-powered aircraft carrier, would be escorted by
                     nuclear-powered surface combatants and nuclear-powered submarines. In
                     deciding to build nuclear-powered surface combatants, the Navy believed
                     that the greatest benefit would be achieved when all the combatant ships
                     in the task force were nuclear-powered. However, the Navy stopped
                     building nuclear-powered surface combatants after 1975 because of the
                     high cost. Recently, most of the remaining nuclear-powered surface
                     combatants have been decommissioned early because they were not
                     cost-effective to operate and maintain.

                     Our analysis shows that both conventional and nuclear aircraft carriers
                     have been effective in fulfilling U.S. forward presence, crisis response, and
                     war-fighting requirements and share many characteristics and capabilities.
                     Conventionally and nuclear-powered carriers both have the same standard
                     air wing and train to the same mission requirements. Each type of carrier
                     offers certain advantages. For example, conventionally powered carriers
                     spend less time in extended maintenance and, as a result, they can provide
                     more forward presence coverage. By the same token, nuclear carriers can
                     store larger quantities of aviation fuel and munitions and, as a result, are
                     less dependent upon at-sea replenishment. There was little difference in
                     the operational effectiveness of nuclear and conventional carriers in the
                     Persian Gulf War.

                     The U.S. maintains a continuous presence in the Pacific region by
                     homeporting a conventionally powered carrier in Japan. If the Navy
                     switches to an all nuclear carrier force, it would need to homeport a
                     nuclear-powered carrier there to maintain the current level of worldwide
                     overseas presence with a 12-carrier force. Homeporting a nuclear-powered
                     carrier in Japan could prove difficult and costly because of the need for
                     support facilities, infrastructure improvements, and additional personnel.



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                       The U.S. would need a larger carrier force if it wanted to maintain a
                       similar level of presence in the Pacific region with nuclear-powered
                       carriers homeported in the U.S.

                       The life-cycle costs—investment, operating and support, and inactivation
                       and disposal costs—are greater for nuclear-powered carriers than
                       conventionally powered carriers. GAO’s analysis, based on historical and
                       projected costs, shows that life-cycle costs for conventionally powered
                       and nuclear-powered carriers (for a notional 50-year service life) are
                       estimated at $14.1 billion and $22.2 billion (in fiscal year 1997 dollars),
                       respectively. Our analysis indicates that national security requirements
                       can be met at less cost with conventionally powered carriers rather than
                       nuclear-powered carriers. Because no production funds were appropriated
                       for the next generation aircraft carrier in fiscal year 1999, and no request
                       for funds through 2004 were included in the 1999 plan, implementing this
                       option would not yield any savings relative to the current level of funding.
                       Relative to the Administration’s fiscal year 2000 budget request, however,
                       CBO estimates that nearly $2 billion could be saved by implementing this
                       option. The savings estimate does not include funding for research and
                       development projects leading to infusion of new technologies into existing
                       and future aircraft carriers.


Related GAO Products   Navy Aircraft Carriers: Cost-Effectiveness of Conventionally and
                       Nuclear-Powered Carriers (GAO/NSIAD-98-1, Aug. 27, 1998).

                       Nuclear Waste: Impediments to Completing the Yucca Mountain
                       Repository Project (GAO/RCED-97-30, Jan. 17, 1997).

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

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




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

              Nuclear-Powered Ships: Accounting for Shipyard Costs and Nuclear Waste
              Disposal Plans (GAO/NSIAD-92-256, July 1, 1992).

GAO Contact   Donna M. Heivilin, (202) 512-6152




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Option:
F-22 Fighter   Authorizing committees                      Armed Services (Senate and House)
               Appropriations subcommittees                Defense (Senate and 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 fighter aircraft program was initiated in 1981 to
               replace F-15 fighters and to counter the threat then projected for the
               mid-1990s. Engineering and manufacturing development of the F-22 began
               in 1991 and flight testing began in September 1997. Two of nine planned
               test aircraft are active in flight testing. Concurrent with continuation of
               flight tests, the Air Force plans to procure two production representative
               test vehicles with funding provided in fiscal years 1998 and 1999. Low-rate
               initial production of F-22s is scheduled for fiscal year 2000 (6 aircraft), and
               funds were appropriated to initiate advance procurement for those aircraft
               in fiscal year 1999. Low-rate initial production is planned to continue in
               fiscal years 2001 (10 aircraft), 2002 (16 aircraft), and 2003 (24 aircraft).

               Our April 1995 report concluded that DOD should minimize commitments
               to F-22 production until completion of Initial Operational Test and
               Evaluation and recommended that the Secretary of Defense limit low-rate
               initial production quantities to about six to eight aircraft a year. DOD
               reduced the planned acceleration of production rates since that report, but
               progress of the flight test program and delivery of flight test aircraft are
               now expected to be slower than was intended when the production plans
               were last changed. In March 1998, we reported that F-22 flight test aircraft
               were expected to complete about 183 flight test hours, or about 4 percent
               of the total flight test program, rather than the 14 to 27 percent that had
               been planned. DOD’s Defense Science Board had previously noted that a
               RAND Corporation study indicated that major problems in a flight test
               program usually occurred within the first 10 to 20 percent of flight testing.
               Nevertheless, the Air Force did not delay the planned contract award
               when it became clear that the amount of flight testing would be decreased.

               In response to these concerns, the Strom Thurmond National Defense
               Authorization Act for Fiscal Year 1999 restricted obligations of fiscal year
               1999 advance procurement funds for 6 aircraft until (1) 433 flight test



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                    hours, about 10 percent of the flight test program, were completed, or
                    (2) 183 hours were completed and the Secretary of Defense determined
                    that fewer than 433 hours provided the Defense Acquisition Board with a
                    sufficient basis for deciding to proceed into F-22 production. In
                    December 1998, the Secretary determined that it was more financially
                    advantageous to proceed into production than to wait until 433 hours of
                    flight testing were completed, and he certified that in excess of 195 test
                    hours had been completed.

                    Buying production articles before they can be adequately tested can result
                    in buying systems that require significant, and sometimes costly,
                    modifications to achieve satisfactory performance; accepting less capable
                    systems than planned; and deploying substandard systems to combat
                    forces. Also, deferring a substantial increase in production rates until
                    completion of Initial Operational Test and Evaluation will reduce the
                    amount of needed production funding committed, which may be an
                    attractive option to maintain the aircraft procurement budget and overall
                    defense budget within congressional targets. Conversely, lower production
                    rates could increase average procurement cost over the life of the program
                    and, if the Air Force maintains its current plan to procure 339 production
                    aircraft, lead to difficulties in completing the production program within
                    congressional limitations on production costs.

                    We continue to believe that low-rate initial production should be limited to
                    about 6 to 8 aircraft a year until Initial Operational Test and Evaluation is
                    complete. If the Congress were to restrict funding to eight aircraft for
                    fiscal years 2000 through 2004, the following budget savings could be
                    achieved during the next 5 years.

Five-Year Savings
                    Dollars in millions
                                                           FY00        FY01        FY02         FY03        FY04
                    Savings from the 1999 funding level
                    Budget authority                         41         571        1,569        2,992            628
                    Outlays                                   4           68         346         962        1,558
                    Note: Estimated savings in FY2004 are based on a CBO assumption of an increased production
                    quantity of 18 aircraft.

                    Source: Congressional Budget Office.




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Related GAO Products   Defense Acquisition: Progress of the F-22 and F/A-18E/F Engineering and
                       Manufacturing Development Programs (GAO/T-NSIAD-99-113, Mar. 17, 1999).

                       F-22 Aircraft: Issues in Achieving Engineering and Manufacturing
                       Development Goals (GAO/NSIAD-99-55, Mar. 15, 1999).

                       1999 DOD Budget: DOD’s Procurement and RDT&E Programs
                       (GAO/NSIAD-98-216R, Aug. 14, 1998).

                       F-22 Aircraft: Progress of the Engineering and Manufacturing
                       Development Program (GAO/T-NSIAD-98-137, Mar. 25, 1998).

                       F-22 Aircraft: Progress in Achieving Engineering and Manufacturing
                       Development Goals (GAO/NSIAD-98-67, Mar. 10, 1998).

                       Aircraft Acquisition: Affordability of DOD’s Investment Strategy
                       (GAO/NSIAD-97-88, Sept. 8, 1997).

                       F-22 Restructuring (GAO/NSIAD-97-100R, Feb. 28, 1997).

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

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

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


GAO Contact            Louis J. Rodrigues, (202) 512-4811




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Option:
Army’s Comanche      Authorizing committees                      Armed Services (Senate and House)
Helicopter Program   Appropriations subcommittees                Defense (Senate and 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 $48 billion, with an estimated program unit cost of about
                     $37 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.

                     Given 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, deferral of the
                     production decision, and current defense budgets, the Congress may wish
                     to revisit the cost/benefits of this program. If the Congress elected to
                     terminate the program, the following savings would be achieved.




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Five-Year Savings
                       Dollars in millions
                                                              FY00     FY01       FY02        FY03       FY04
                       Savings from the 1999 funding level
                       Budget authority                        219       586        739        784        788
                       Outlays                                 127       412        634        734        765
                       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, Nov. 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:
C-130 and KC-135    Authorizing committees                              Armed Services (Senate and House)
Reserve Squadrons   Appropriations subcommittees                        Defense (Senate and House)
                    Primary agency                                      Department of Defense
                    Account                                             Multiple
                    Spending type                                       Discretionary
                    Budget subfunction                                  Department of Defense—Military
                    Framework theme                                     Improve efficiency

                    Over the past few years, the Department of Defense (DOD) has been
                    interested in modernizing its forces with new weapons and equipment. For
                    a variety of reasons, these efforts have been stymied, and funds that DOD
                    expected to have available to modernize the force have been needed
                    instead for current operational activities. One way to achieve savings is to
                    reorganize the Air Force’s reserve components—C-130 and KC-135—into
                    fewer and larger squadrons and wings.1

                    The majority of the Air Force’s C-130 and KC-135 aircraft are in the reserve
                    component. Reserve component wings generally have one squadron of 8
                    C-130 aircraft or 10 KC-135 aircraft. This is unlike active Air Force wings,
                    which generally have two to three squadrons of 14 C-130 aircraft or 12
                    KC-135 aircraft. Reserve component C-130 and KC-135 aircraft are
                    dispersed throughout the continental United States, Hawaii, and Alaska.

                    The Air Force could reduce costs and meet peacetime and wartime
                    commitments if it reorganized its C-130 and KC-135 aircraft into larger
                    squadrons and wings at fewer locations. These savings would primarily
                    result from fewer people being needed to operate these aircraft. For
                    example, redistributing 16 C-130 aircraft from two 8-aircraft wings to one
                    16-aircraft wing could save about $11 million dollars annually, primarily
                    from personnel savings.2 This reorganization could eliminate about 155
                    full-time positions and 245 part-time positions. The decrease in full-time
                    positions is especially significant, since the savings associated with these
                    positions represents about $8 million, or 75 percent of the total savings.
                    Fewer people would be needed in areas such as wing headquarters,
                    logistics, operations, and support group staffs as well as maintenance,
                    support, and military police squadrons.


                    1
                     The term “reserve component” refers to the Air Force Reserve and the Air National Guard collectively.
                    2
                    Savings were calculated using the Air Force’s Systemic Approach to Better Long-Range Estimating
                    model.



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                      We developed several alternatives that redistribute the existing reserve
                      component C-130 and KC-135 aircraft into larger squadrons and show a
                      gradual increase in savings in operating costs. We found that sufficient
                      personnel could be recruited and most locations’ facilities could be
                      inexpensively expanded to accommodate the unit sizes. The alternative
                      that requires the most reorganizing would increase the squadron size to 16
                      aircraft for the C-130 and 12 for the KC-135 by redistributing aircraft from
                      13 C-130 squadrons and 5 KC-135 squadrons to other squadrons. The table
                      below shows the potential savings from this option.

Five-Year Savings
                      Dollars in millions
                                                             FY00     FY01       FY02        FY03       FY04
                      Savings from the 1999 funding level
                      Budget authority                         93       170        267        349        376
                      Outlays                                  83       160        255        338        369
                      Source: Congressional Budget Office.




Related GAO Product   Air Force Aircraft: Reorganizing Mobility Aircraft Units Could Reduce
                      Costs (GAO/NSIAD-98-55, Jan. 21, 1998).


GAO Contact           Donna M. Heivilin, (202) 512-6152




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Option:
Continental Air   Authorizing committees                      Armed Services (Senate and House)
Defense           Appropriations subcommittees                Defense (Senate and House)
                  Primary agency                              Department of Defense
                  Accounts                                    Operation and Maintenance, Air National
                                                              Guard (57-3840)
                                                              Operation and Maintenance, Air Force
                                                              (57-3400)
                                                              National Guard Personnel, Air Force
                                                              (57-3850)
                                                              Military Personnel, Air Force (57-3500)
                                                              Procurement-funded Replenishment
                                                              Spares
                                                              Replacement Support Equipment and
                                                              Modifications
                  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. At the beginning of fiscal year 1998, 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). The Air Force budgeted about
                  $333 million in fiscal year 1998 to operate and support the continental air
                  defense force. The states of the former Soviet Union do not pose 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
                  because the United States no longer needed a large, dedicated air defense
                  force, this 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



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                      located at or near existing air defense bases, and (3) have pilots who
                      possess similar skills or who could acquire the necessary skills used by air
                      defense and air sovereignty pilots.

                      During fiscal year 1999, the Air Force expects to retask four dedicated
                      continental air defense F-16 units (15 aircraft per unit) to general purpose
                      units with secondary tasking for the continental air defense mission. This
                      action reduces the dedicated continental air defense force by 60 aircraft
                      from 150 to 90 aircraft. The Air Force has budgeted $267 million for its
                      continental air defense for fiscal year 1999. If the remaining six dedicated
                      air defense units were eliminated or retasked, the following savings could
                      be achieved.

Five-Year Savings
                      Dollars in millions
                                                             FY00     FY01       FY02        FY03       FY04
                      Savings from the 1999 funding level
                      Budget authority                        178       367        379        391        403
                      Outlays                                 147       327        365        381        395
                      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           Donna M. Heivilin, (202) 512-6152




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Option:
Carrier Battle Group   Authorizing committees                      Armed Services (Senate and House)
Expansions and         Appropriations subcommittees                Defense (Senate and House)
                       Primary agency                              Department of Defense
Upgrades               Accounts                                    Multiple
                       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 about $2 billion (in fiscal year 1998 dollars) and is
                       likely to increase as older components are replaced and modernized. The
                       Navy has several costly ongoing carrier-related programs: a
                       nuclear-powered Nimitz-class carrier, the Ronald Reagan (CVN-76), is
                       being built and the Navy is scheduled to begin to build the last carrier of
                       this class in fiscal year 2001; the formal design process for the next
                       generation of carriers, called the CVX class, began in 1996; the lead ship of
                       the 10-ship Nimitz-class began its 3-year refueling complex overhaul in
                       1998; AEGIS destroyers are being procured and the next generation of
                       surface combatants is being designed; and carrier-based aircraft are
                       expected to be replaced/upgraded by a new generation of strike fighters
                       and mission support aircraft throughout the next decade.

                       Our 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 crisis response. If the Congress
                       chose to retire one aircraft carrier and one active air wing in 1999, the
                       following savings could be achieved.




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Five-Year Savings
                       Dollars in millions
                                                              FY00     FY01       FY02        FY03       FY04
                       Savings from the 1999 funding level
                       Budget authority                        390       800        820        840        860
                       Outlays                                 310       690        780        820        850
                       Source: Congressional Budget Office.




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

                       Cruise Missiles: Proven Capability Should Affect Aircraft and Force
                       Structure Requirements (GAO/NSIAD-95-116, Apr. 20, 1995).

                       Navy Aircraft Carriers: Cost-Effectiveness of Conventionally and
                       Nuclear-Powered Carriers (GAO/NSIAD-98-1, Aug. 27, 1998).

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

                       Aircraft Acquisition: Affordability of DOD’s Investment Strategy
                       (GAO/NSIAD-97-88, Sept. 8, 1997).

                       Surface Combatants: Navy Faces Challenges Sustaining Its Current
                       Program (GAO/NSIAD-97-57, May 21, 1997).


GAO Contact            Donna M. Heivilin, (202) 512-6152




                       Page 34                                   GAO/OCG-99-26 Budget Implications of GAO Work
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Option:
Air Force Bomber              Authorizing committees                      Armed Services (Senate and House)
Force Requirements            Appropriations subcommittees                Defense (Senate and House)
                              Primary agency                              Department of Defense
                              Account                                     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.


Placing Additional B-1Bs in   The Air Force has 18 B-1Bs assigned to the Air National Guard—10 to the
the Reserve Component         Kansas Air National Guard and 8 to the Georgia Air National Guard. No
                              B-1Bs are currently assigned to Air Force Reserve units. Placing more
                              B-1Bs in the reserve component (either the Air Force Reserve or the Air
                              National Guard) could reduce the cost to operate the B-1B bomber force
                              without adversely affecting day-to-day peacetime training or critical
                              wartime missions or closing any bases. However, the availability of
                              recruitable personnel in some locations limits where reserve component
                              units can operate.

                              B-1B reserve component units have training, readiness, and deployment
                              requirements similar to active-duty B-1B units and are considered just as
                              capable of carrying out operational missions as their active duty
                              counterparts. Moreover, the cost to operate a reserve component unit is
                              generally lower than for an active duty unit for several reasons. First,
                              reserve component aircrews are more experienced than their active duty
                              counterparts and require fewer flying hours to meet mission training
                              requirements. Second, reserve component units employ fewer full-time
                              military personnel than active units. Additionally, because of the part-time



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                       manning of traditional reserve component units, there are fewer
                       requirements for permanent and costly base infrastructure—such as
                       family housing and base medical care facilities—necessary to support
                       full-time active duty personnel and their families.

                       Our analysis shows that the Air Force could select a variety of options if it
                       were to place more B-1Bs in the reserve component. The cost savings
                       would vary depending upon the option selected. If an 18 aircraft aircrew
                       training squadron and 6 aircraft operational squadron were transferred to
                       the reserve component, the following savings could be achieved.

Five-Year Savings
                       Dollars in millions
                                                              FY00     FY01       FY02        FY03       FY04
                       Savings from the 1999 funding level
                       Budget authority                          0         5         20         36         42
                       Outlays                                   0         2          9         22         34
                       Source: Congressional Budget Office.




Related GAO Products   Air Force Bombers: Moving More B-1s to the Reserves Could Save Millions
                       Without Reducing Mission Capability (GAO/NSIAD-98-64, Feb. 26, 1998).

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

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

                       B-1B Conventional Upgrades (GAO/NSIAD-96-52BR, Dec. 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, Jan. 10, 1994).

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




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              Options for Increased Savings and Revenue
              Gains




              Strategic Bombers: Adding Conventional Capabilities Will Be Complex,
              Time-Consuming, and Costly (GAO/NSIAD-93-45, Feb. 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, Mar. 6, 1991).


GAO Contact   Donna M. Heivilin, (202) 512-6152




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Option:
Air Force Fighter   Authorizing committees                      Armed Services (Senate and House)
Squadrons           Appropriations subcommittees                Defense (Senate and 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 its 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 they need more squadrons to have additional
                    flexibility to respond to numerous potential conflicts across the globe.
                    Although the Air Force considers smaller fighter squadrons beneficial, it
                    has 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 needed to execute missions—regardless of squadron size.

                    Keeping more squadrons than necessary increases operating costs and
                    may result in more base infrastructure than the Air Force needs. We
                    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. If the Air Force were to
                    consolidate fighter squadrons to 24 aircraft per squadron in the
                    continental U.S. only, annual savings would be $34 million. If the Air Force
                    were to consolidate fighter squadrons worldwide, annual savings would be
                    $134 million.




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                      If the Congress chose to consolidate the Air Force’s fighter force into
                      fewer squadrons by eliminating 7 of the 37, the following savings could be
                      achieved.

Five-Year Savings
                      Dollars in millions
                                                             FY00         FY01         FY02         FY03          FY04
                      Savings from the 1999 funding level
                      Budget authority                          18           37            38           39              40
                      Outlays                                   17           36            38           39              40
                      Note: Savings estimates do not include funds associated with 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           Donna M. Heivilin, (202) 512-6152




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

                       We reviewed the morale, welfare, and recreation (MWR) program—a
                       $12 billion enterprise that provides service members, their dependents,
                       and eligible civilians with an affordable source of goods and services like
                       those available to civilian communities—and found that revenue
                       generated by the MWR activities is likely to decrease in the 1990s because
                       of the downsizing of forces and increasing private sector competition.
                       Exchange stores are the largest producer of MWR revenue.

                       Since 1968, studies by GAO, the Department of Defense (DOD), and others
                       have recommended the consolidation of exchanges into a single entity.
                       Each study predicted that financial benefits could be achieved through
                       consolidation. In order to achieve such financial benefits, the Office of the
                       Secretary of Defense has recently proposed the integration of the Army/Air
                       Force Exchange System (AAFES) with the Navy and Marine Corps exchange
                       programs. A task force study commissioned to review this consolidation
                       plan in 1996 concluded that if the exchange systems were merged there
                       would be an annual recurring savings and the contribution to MWR funds
                       would increase by $3 billion annually.

                       In January 1997 DOD advised the congressional oversight committees of the
                       plan to continue with a systematic study on integrating exchange
                       functions, under the joint direction of the military departments. This plan
                       is based on the premise that a more rigorous analysis is needed before
                       judgments can be made as to optimal exchange structure. DOD contracted
                       with Price Waterhouse in April 1998 to further study this matter. A
                       decision on implementation of study recommendations is expected in the
                       April/May 1999 time frame. If major restructuring of the exchange system
                       is recommended and approved, it should take 3-5 years to implement. The
                       cost of the study is estimated at $3.1 million and has been split equally
                       among the services.




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                    Another consolidation effort currently underway that also predicts
                    financial benefits not yet quantified is called the Hybrid Initiative. This
                    initiative is aimed at consolidating exchanges and commissaries with
                    smaller versions of the larger commissary and exchange stores. These
                    stores are called BXMARTs, which are military retail stores that sell both
                    the hard goods normally found in a base exchange and the grocery type
                    goods associated with military commissaries.

                    The Commissary Operating Board, which is made up of members from
                    each of the services and the Defense Commissary Agency (DeCA), has been
                    discussing ways to improve and expand this initiative. BXMARTs have
                    traditionally been placed on bases that have been closed because of the
                    base realignment and closure (BRAC). They are managed by AAFES and
                    supported by DeCA. Presently, there are 11 BXMARTs in Europe, 2 on
                    military bases in the U.S., and 1 currently being negotiated in Orlando,
                    Florida. Further action on this initiative is awaiting DOD processing,
                    funding, and approval as well as congressional notification to begin
                    additional testing at other locations.

                    The Congress may wish to direct DOD to consolidate the Navy and Marine
                    Corps exchange systems with the existing Air Force/Army exchange
                    systems. CBO estimated that consolidating into a single exchange system
                    would yield the following 5-year savings.

Five-Year Savings
                    Dollars in millions
                                                           FY00     FY01       FY02        FY03       FY04
                    Savings from the 1999 funding level
                    Budget authority                         43        65         65         65         65
                    Outlays                                  43        65         65         65         65
                    Source: Congressional Budget Office.




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

                       Excess Equipment for Former Castle AFB (BXMART) (GAO/NSIAD-98-94R,
                       Feb. 27, 1998).


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




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Option:
Army National Guard   Authorizing committees                      Armed Services (Senate and House)
Divisions             Appropriations subcommittees                Defense (Senate and House)
                      Primary agency                              Department of Defense
                      Account                                     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, exceeded 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 its 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 mission. We recommended that the Secretary of
                      Defense direct that the Quadrennial Defense Review validate any
                      requirement for Guard combat structure. We further recommended that
                      once this validation is complete, the Secretary of Defense, in concert with




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                       the Secretary of the Army, eliminate any structure beyond validated
                       requirements.

                       The Quadrennial Defense Review, which was issued in May 1997, called
                       for reductions of 45,000 personnel from the Army reserve component.
                       Subsequently, the Army National Guard agreed to reduce its forces by
                       17,000 through fiscal year 2000. Although the Guard agreed to reduce its
                       total personnel, it did not agree to reduce its force structure. We believe
                       that savings could be achieved by eliminating excess force structure. If the
                       equivalent of one division were eliminated from the force structure, the
                       following savings could be achieved.

Five-Year Savings
                       Dollars in millions
                                                                 FY00          FY01         FY02          FY03            FY04
                       Savings from the 1999 funding level
                       Budget authority                            134          278           287           296            305
                       Outlays                                     120          260           281           291            300
                       Note: Because the Army identified a shortage in its support forces, this option would retain all
                       support personnel indirectly associated with the eliminated division.

                       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, Jan. 29, 1997).

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


GAO Contact            Donna M. Heivilin, (202) 512-6152




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Option:
Fiscal Year 2000      Authorizing committees                      Armed Services (Senate and House)
Military Personnel    Appropriations subcommittees                Defense (Senate and House)
                      Primary agency                              Department of Defense
Budget Requirements   Accounts                                    Military Personnel, Army (21-2020)
                                                                  Military Personnel, Navy (17-1453)
                                                                  Military Personnel, Marine Corps (17-1105)
                                                                  Military Personnel, Air Force (57-3500)
                      Spending type                               Discretionary
                      Budget subfunction                          Department of Defense—Military
                      Framework theme                             Improve efficiency

                      The Department of Defense (DOD) budget request for pay and allowances
                      for officers and enlisted personnel comprise the major portion of military
                      personnel costs. Military personnel strength and grade mix are major
                      factors in determining pay and allowances. Our analysis of DOD’s fiscal
                      year 1999 budget requests for military pay and allowances showed that the
                      budget for that year could have been reduced at least $255.8 million
                      because the services began fiscal year 1999 with (1) 15,031 fewer active
                      military personnel than requested and (2) a different grade mix than
                      planned. The net effect of these differences resulted in the following
                      overstatement of the services’ budget requests: $116.1 million for the
                      Army, $86.9 million for the Air Force, $52.3 million for the Navy, and
                      $0.5 million for the Marine Corps.

                      Of the $255.8 million we identified in potential reductions, the Congress
                      reduced DOD’s fiscal year 1999 budget requests for military pay and
                      allowances by $182.5 million. In view of DOD’s overstated fiscal year 1999
                      budget requirements for military pay and allowances, the Congress may
                      wish to consider whether similar reductions are needed in DOD’s fiscal year
                      2000 appropriations for active force pay and allowances. CBO agrees that
                      the differences in proposed versus actual reductions in personnel can
                      create windfall surpluses in personnel accounts during a single budget
                      year. More accurate reporting and subsequent tightening of budgets may
                      produce savings. CBO, however, is unable to estimate a five-year cost
                      savings for this option because of the variability in proposed versus actual
                      workyear execution.




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Related GAO Product   1998 DOD Budget: Military Personnel Programs (GAO/NSIAD-97-240R, Aug. 21,
                      1997).


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




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Option:
DOD’s Fiscal Year   Authorzing committees                       Armed Services (Senate and House)
2000 Civilian       Appropriations subcommittees                Defense (Senate and House)
                    Primary agency                              Department of Defense
Personnel Budget    Accounts                                    Operation and Maintenance,
Requirements                                                    Defense-Wide (97-0100)
                                                                Operation and Maintenance, Army
                                                                (21-2020)
                                                                Operation and Maintenance, Air Force
                                                                (57-3400)
                                                                Operation and Maintenance, Navy
                                                                (17-1804)
                                                                Operation and Maintenance, Marine Corps
                                                                (17-1106)
                    Spending type                               Discretionary
                    Budget subfunction                          Department of Defense—Military
                    Framework theme                             Improve efficiency

                    Every year since fiscal year 1996, the military services and defense
                    agencies generally have had fewer civilian personnel on board than
                    budgeted for, resulting in fewer actual executed workyears and overstated
                    budget requirements. Funds not used for civilian personnel compensation
                    can be used for other unfunded requirements. Our analysis of the services
                    and selected defense agencies’ fiscal year 1999 budget requests for civilian
                    personnel showed that the requests could have been reduced by
                    $487.3 million because (1) the civilian personnel levels at the beginning of
                    fiscal year 1999 were lower than those used to determine requests and
                    (2) the amount requested in the President’s budget differed from the
                    amount shown in the services’ budget justification documents. Based on
                    the number of Army, Navy, Air Force, and selected defense agency
                    personnel on board as of July 31, 1998, we estimated that the end strength
                    at the end of fiscal year 1998—the beginning figure for fiscal year
                    1999—was 8,737 personnel less than the figure used by the services and
                    defense agencies to determine their fiscal year 1999 budget requests.
                    Because the services and selected defense agencies overstated the number
                    of personnel expected to be employed at the beginning of fiscal year 1999,
                    the requested work years were overstated by 4,368 work years. Of the
                    $487.3 million we identified in potential reductions, the Congress reduced
                    DOD’s fiscal year 1999 budget request for civilian personnel by
                    $82.2 million. Based on overstatements in the services’ and selected
                    defense agencies’ fiscal year 1999 civilian personnel budget requirements,
                    the Congress may wish to consider whether similar reductions are needed
                    in DOD’s civilian personnel appropriations for fiscal year 2000.



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                       CBO agrees that the differences in proposed versus actual reductions in
                       personnel can create windfall surpluses in personnel accounts during a
                       single budget year. More accurate reporting and subsequent tightening of
                       budgets may produce savings. CBO, however, is unable to estimate a 5-year
                       cost savings for this option because of the variability in proposed versus
                       actual workyear execution.


Related GAO Products   1998 DOD Budget: Potential Reductions to Operation and Maintenance
                       Program (GAO/NSIAD-97-239R, Aug. 21, 1997).

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

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


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




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Option: DOD
Transportation      Authorizing committees                             Armed Services (Senate and House)
Migration Systems   Appropriations subcommittees                       Defense (Senate and House)
                    Primary agency                                     Department of Defense
                    Account                                            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.3 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 had 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 continuing 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
                    Air Loading Module and the Cargo Movement Operations Systems are not
                    deployed as migration systems, the following savings could be achieved.

                    3
                     A migration system is an automated information system which replaces several systems that perform
                    similar functions.



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Five-Year Savings
                       Dollars in millions
                                                              FY00     FY01       FY02        FY03       FY04
                       Savings from the 1999 funding level
                       Budget authority                          3         0          0          0          0
                       Outlays                                   2         1          0          0          0
                       Source: Congressional Budget Office.




Related GAO Products   Defense IRM: Poor Implementation of Management Controls Has Put
                       Migration Strategy at Risk (GAO/AIMD-98-5, Oct. 20, 1997).

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

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


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




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Option:
Navy Financial        Authorizing committees                      Armed Services (Senate and House)
Management of         Appropriations subcommittees                Defense (Senate and House)
                      Primary agency                              Department of Defense
Operating Materials   Account                                     Operations and Maintenance, Navy
and Supplies                                                      (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.

                      As a result, we found that 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.

                      We recommended that the Navy achieve savings by providing item
                      managers with full “visibility” over such materials and eliminating
                      redundant or unnecessary redistribution sites. Almost half of the excess
                      items were stored at 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.



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Five-Year Savings
                       Dollars in millions
                                                              FY00     FY01       FY02        FY03       FY04
                       Savings from the 1999 funding level
                       Budget authority                          3         3          3          3          3
                       Outlays                                   3         3          3          3          3
                       Source: Congressional Budget Office.




Related GAO Products   CFOAct Financial Audits: Programmatic and Budgetary Implications of
                       Navy Financial Data Deficiencies GAO/AIMD-98-56, Mar. 16, 1998).

                       High-Risk Series: Defense Financial Management (GAO/HR-97-3, Feb. 1997).

                       Navy Financial Management: Improved Management of Operating
                       Materials and Supplies Could Yield Significant Savings (GAO/AIMD-96-94,
                       Aug. 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:
Defense                 Authorizing committees                      Armed Services (Senate and House)
Infrastructure Reform   Appropriations subcommittees                Defense (Senate and House)
                        Primary agency                              Department of Defense
                        Accounts                                    Multiple
                        Spending type                               Discretionary
                        Budget subfunction                          Department of Defense—Military
                        Framework theme                             Improve efficiency

                        DOD  officials have repeatedly pointed to the importance of using resources
                        for the highest priority operational and investment needs rather than
                        maintaining unneeded property, facilities, and overhead. However, DOD has
                        found that infrastructure reductions are a difficult and painful process
                        because achieving significant cost savings requires up-front investments,
                        the closure of installations, and the elimination of military and civilian
                        jobs. DOD’s ability to reduce infrastructure has been affected by service
                        parochialism, a cultural resistance to change, and congressional and
                        public concern about the effects and impartiality of decisions. For fiscal
                        year 1998, DOD estimated that about $147 billion, or 58 percent of the
                        Defense budget, would still be needed for infrastructure requirements,
                        which included installation support, training, medical care, logistics, force
                        management, acquisition infrastructure, and personnel.

                        The Secretary of Defense’s November 1997 Defense Reform Initiative (DRI)
                        Report emphasized the need to reduce excess Cold War infrastructure to
                        free up resources that otherwise could be spent on modernization.
                        Specific initiatives cited in the report included privatizing military housing
                        and utility systems, emphasizing demolition of excess buildings,
                        consolidating and regionalizing many defense support agencies, and
                        requesting legislative authority to conduct two additional base realignment
                        and closure (BRAC) rounds. The Secretary noted that DOD continued to be
                        weighed down by facilities that are too extensive for its needs, more
                        expensive than it can afford, and detrimental to the efficiency and
                        effectiveness of the nation’s armed forces. Likewise, he noted that DOD
                        must do a better job of managing facility assets on its remaining bases. The
                        problem of continuing excess infrastructure was also emphasized in DOD’s
                        April 1998 report to the Congress concerning BRAC issues mandated by
                        Section 2824 of the Fiscal Year 1998 Defense Authorization legislation.
                        More recently, the problem of excess capacity was highlighted in our
                        November 1998 report on Army Industrial Facilities, which noted the




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                       continuing existence of significant excess capacity in the Army’s
                       maintenance depots and manufacturing arsenals.

                       While the DRI initiatives are steps in the right direction and have brought
                       high-level attention to the need for infrastructure reductions, they do not
                       collectively provide a comprehensive long-range plan for facilities
                       infrastructure. We have cited the need for such a plan but have noted that
                       plans that have existed were not focused on long-term comprehensive
                       strategies for facilities revitalization, replacement, and maintenance, and
                       they were not tied to measurable goals to be accomplished over specified
                       time frames or linked to funding.

                       The need for improved planning for facilities infrastructure is underscored
                       by the requirements of the Government Performance and Results Act,
                       which requires agencywide strategic plans and annual program
                       performance reports. Improved infrastructure planning can help agency
                       components and programs to develop outcome-oriented goals and
                       performance measures that are linked to and support agencywide goals.

                       While we have not completed an in-depth analysis of all the categories of
                       infrastructure, our work has identified numerous areas where
                       infrastructure activities can be eliminated, streamlined, or reengineered to
                       be made more efficient. Significant budget reductions could be achieved in
                       the areas of acquisition infrastructure, central logistics, installation
                       support, central training, force management, and medical facilities and
                       services. We present several other options that explore issues related to
                       DOD’s infrastructure. See the options “DOD’s Finance and Accounting
                       Infrastructure” and “Sizing the Military Health System.”

                       Savings for this option cannot be fully estimated until a comprehensive
                       consolidation and downsizing plan is specified.


Related GAO Products   Defense Reform Initiative: Progress, Opportunities, and Challenges
                       (GAO/T-NSIAD-99-95, Mar. 2, 1999).

                       Force Structure: A-76 Not Applicable to Air Force 38th Engineering
                       Installation Wing Plan (GAO/NSIAD-99-73, Feb. 26, 1999).

                       Army Industrial Facilities: Workforce Requirements and Related Issues
                       Affecting Depots and Arsenals (GAO/NSIAD-99-31, Nov. 30, 1998).




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              Military Bases: Review of DOD’s 1998 Report on Base Realignment and
              Closure (GAO/NSIAD-99-17, Nov. 13, 1998).

              Defense Infrastructure: Challenges Facing DOD in Implementing Reform
              Initiatives (GAO/T-NSIAD-98-115, Mar. 18, 1998).

              Best Practices: Elements Critical to Successfully Reducing Unneeded
              RDT&E Infrastructure (GAO/NSIAD/RCED-98-23, Jan. 8, 1998).

              Future Years Defense Program: DOD’s 1998 Plan Has Substantial Risk in
              Execution (GAO/NSIAD-98-26 Oct. 23, 1997).

              1997 Defense Reform Bill: Observations on H.R. 1778 (GAO/T-NSIAD-97-187,
              June 17, 1997).

              Defense Infrastructure: Demolition of Unneeded Buildings Can Help Avoid
              Operating Costs (GAO/NSIAD-97-125, May 13, 1997).

              DOD High-Risk Areas: Eliminating Underlying Causes Will Avoid Billions of
              Dollars in Waste (GAO/T-NSIAD/AIMD-97-143, May 1, 1997).

              Defense Acquisition Organizations: Linking Workforce Reductions With
              Better Program Outcomes (GAO/T-NSIAD-97-140, Apr. 8, 1997).

              Defense Budget: Observations on Infrastructure Activities
              (GAO/NSIAD-97-127BR, Apr. 4, 1997).

              Base Operations: Challenges Confronting DOD as It Renews Emphasis on
              Outsourcing (GAO/NSIAD-97-86, Mar. 11, 1997).

              Military Bases: Cost to Maintain Inactive Ammunition Plants and Closed
              Bases Could Be Reduced (GAO/NSIAD-97-56, Feb. 20, 1997).

              High-Risk Series: Defense Infrastructure (GAO/HR-97-7, Feb. 1997).


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




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Option:
DOD’s Finance and   Authorizing committees                      Armed Services (Senate and House)
Accounting          Appropriations subcommittees                Defense (Senate and House)
                    Primary agency                              Department of Defense
Infrastructure      Accounts                                    Multiple
                    Spending type                               Discretionary
                    Budget subfunction                          Department of Defense—Military
                    GAO 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. At that time
                    it planned to reduce the number of sites where finance and accounting
                    activities were conducted from over 300 to 26, that would have resulted in
                    a major reduction in staff years. The 26 sites were composed of 5 large
                    existing finance centers and 21 new sites that are called operating
                    locations. To date, 19 operating locations have been opened—18 in the
                    continental United States (CONUS) and 1 in Hawaii.

                    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 did not reflect leading-edge business practices and,
                    therefore, might require additional consolidations if business process
                    reengineering techniques were 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 opening 6, 10, or 15
                    operating locations. The Task Force concluded, however, that opening 6
                    new operating locations was the best alternative because it would save



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more money and allow an optimum consolidation of finance and
accounting functions. Based on this factor 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 were needed to support its finance and accounting operations.
Because of its interpretation of congressional intent, however, DOD
continued to support the opening of all 21 locations. As of November 1997,
DOD had opened 19 operating locations. Although DOD has supported the
opening of the remaining 2 locations, it generally conceded that there was
little need for these facilities.

In November 1997, Secretary Cohen released DOD’s Defense Reform
Initiative (DRI) report, that took a different position on the required size of
the DFAS infrastructure. This report announced that DFAS will continue its
consolidation efforts by eliminating 8 of its 26 existing or planned
facilities. The report also said that DOD would look at two DFAS
functions—civilian pay and military retirees and annuitant pay—for
possible competition under the Office of Management and Budget (OMB)
A-76 process. Since the report was issued, DFAS has again assessed its
future infrastructure needs. The latest assessment considered reform
initiatives and infrastructure reduction mandates included in both the
May 1997 Quadrennial Defense Review and the November 1977 Defense
Reform Initiative report. DFAS’ assessment showed that it had the capacity
to support about 24,900 personnel—this included space in its 5 centers as
well as its 18 CONUS operating locations. This is significantly more capacity
than DFAS projects that it will need. As of July 1998, DFAS was programmed
to support just over 22,000 workyears. By the end of fiscal year 2003, it is
programmed to support just over 17,000 workyears. Decreases in staffing
will occur in all DFAS functions. However, travel pay, civilian pay, and
disbursing—predominantly operating location functions—are projected to
experience the largest decreases. Given the current DFAS structure and
projected workyear decreases, it will have about 34 percent excess
capacity by the end of fiscal year 2003. The excess capacity equates to
infrastructure for about 8,400 personnel. Consistent with the DRI report,
only the 18 CONUS operating locations will be studied for closure, and the 5
centers will be excluded.

Recognizing the costs DOD has incurred to open 18 operating locations and
reducing the number of operating locations by 8 as called for in the DRI
report could still achieve savings. First, a reduction in the infrastructure



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                       would require fewer support and management personnel and related items
                       to operate the locations. Second, in anticipation of the efficiencies and
                       service improvements that would be achieved under DOD’s reengineering
                       and outsourcing efforts, annual funding could be reduced commensurate
                       with savings expected from personnel reductions. The next step, however,
                       is for DOD to take action on DFAS’ capacity analysis by identifying those
                       operating locations that need to be eliminated to meet the objectives in the
                       DRI report.



Related GAO Products   Defense Reform Initiative: Progress, Opportunities, and Challenges
                       (GAO/T-NSIAD-99-95, Mar. 2, 1999).

                       High-Risk Series: Defense Financial Management (GAO/HR-97-3, Feb. 1997).

                       DOD Infrastructure: DOD Is Opening Unneeded Finance and Accounting
                       Offices (GAO/NSIAD-96-113, Apr. 16, 1996).

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


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




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Option:
Sizing the Military    Authorizing committees                      Armed Services (Senate and House)
Health System          Appropriations subcommittees                Defense (Senate and House)
                       Primary agency                              Department of Defense
                       Account                                     Multiple
                       Spending type                               Discretionary
                       Budget subfunction                          Department of Defense—Military
                       Framework theme                             Improve efficiency

                       DOD  has not yet completed an update of what is known as the “733 study”
                       of April 1994. In this study, conducted pursuant to section 733 of the
                       National Defense Authorization Act for fiscal years 1992 and 1993, DOD’s
                       Office of Program Analysis and Evaluation challenged the Cold War
                       assumption that all military medical personnel employed during peacetime
                       are needed for wartime. The study concluded that DOD’s wartime medical
                       requirements are far lower—by as much as half—than the $15.9 billion
                       military health system budget for fiscal year 1999. Although DOD took no
                       action as a result of that study, the Deputy Secretary of Defense directed
                       that the study be updated and improved by March 1996.

                       We have reported that if the conclusions of the updated study are similar
                       to those of the 733 study and if DOD acted on those conclusions, the
                       potential reductions in military medical personnel could be significant.
                       However, the study is now almost 3 years overdue.

                       The Congress may wish to direct DOD to expeditiously complete a current
                       study of its wartime military medical requirements. Such a study could
                       suggest a significant reduction in military medical personnel and facilities.
                       No specific budget estimate can be developed until DOD’s study is
                       completed.


Related GAO Products   Defense Health Care: Operational Difficulties and System Uncertainties
                       Pose Continuing Challenges for TRICARE (GAO/T-HEHS-98-100, Feb. 26, 1998).

                       Wartime Medical Care: Personnel Requirements Still Not Resolved
                       (GAO/NSIAD-96-173, June 28, 1996).


GAO Contact            Stephen P. Backhus, (202) 512-7101




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Option:
Copayments for Care     Authorizing committees                        Armed Services (Senate and House)
in Military Treatment   Appropriations subcommittees                  Defense (Senate and House)
                        Primary agency                                Department of Defense
Facilities              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 system. In particular, we have
                        reported that 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 health 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 facilities 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.

Five-Year Savings
                        Dollars in millions
                                                               FY00     FY01          FY02     FY03       FY04
                        Savings from the 1999 funding level
                        Budget authority                        375       498          502      507        513
                        Outlays                                 316       468          493      504        510
                        Source: Congressional Budget Office.




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Related GAO Products   Defense Health Care: Operational Difficulties and System Uncertainties
                       Pose Continuing Challenges for TRICARE (GAO/T-HEHS-98-100, Feb. 26, 1998).

                       Military Retirees’ Health Care: Costs and Other Implications of Options to
                       Enhance Older Retirees’ Benefits (GAO/HEHS-97-134, June 20, 1997).

                       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, Aug. 3, 1995).

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

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


GAO Contact            Stephen P. Backhus, (202) 512-7101




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Option:
Administering          Authorizing committees                      Armed Services (Senate and House)
Defense Health Care    Appropriations subcommittees                Defense (Senate and 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 separate systems, which cost about $35 million
                       annually, perform many of the same administrative, management, and
                       operational functions.

                       Since 1949 numerous 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.


Related GAO Products   Defense Health Care: TRICARE Resource Sharing Program Failing to
                       Achieve Expected Savings (GAO/HEHS-97-130, Aug. 22, 1997).

                       Defense Health Care: Actions Under Way to Address Many TRICARE
                       Contract Change Order Problems (GAO/HEHS-97-141, July 14, 1997).

                       TRICAREAdministrative Prices in the Northwest Region May Be Too High
                       (GAO/HEHS-97-149R, June 24, 1997).

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




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

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

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


GAO Contact   Stephen P. Backhus, (202) 512-7101




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Option:
Uniformed Services   Authorizing committees                      Armed Services (Senate and House)
University of the    Appropriations subcommittees                Defense (Senate and House)
                     Primary agency                              Department of Defense
Health Sciences      Account                                     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 0-1 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 2-1/2 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. Our 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, our estimate shows that the annual costs of
                     USUHS graduates ($182,000) are comparable to scholarship graduates
                     ($181,000) when total federal costs are amortized over the expected years



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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. Our 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 we 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 2002 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. Using these assumptions, CBO
estimates the following savings.




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Five-Year Savings
                      Dollars in millions
                                                             FY00     FY01       FY02        FY03       FY04
                      Savings from the 1999 funding level
                      Budget authority                         25        36         52         93         90
                      Outlays                                  19        32         47         82         87
                      Source: Congressional Budget Office.




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


GAO Contact           Stephen P. Backhus, (202) 512-7101




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                    State Department Business Processes
150 International   U.S. Overseas Presence
Affairs             International Broadcasting
                    Export-Import Bank Programs




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Option:
State Department     Authorizing committees                      Foreign Relations (Senate) International
                                                                 Relations (House)
Business Processes   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)
                                                                 Security/maint. of U.S. Missions (19-0535)
                     Spending type                               Discretionary
                     Budget subfunction                          Conduct of Foreign Affairs
                     Framework theme                             Improve efficiency

                     The Department of State has a number of outmoded and inefficient
                     business processes. For example, one of the problems confronting State is
                     how to efficiently relocate its employees overseas, find suitable housing
                     abroad, and provide household furniture. Our work suggests that millions
                     of dollars could be saved while providing high-quality services if State
                     adopted relocation practices used in the private sector—including
                     outsourcing various parts of the transfer process.

                     State’s employee transfer process has remained virtually unchanged for
                     years. State employees are confronted with a myriad of steps and multiple
                     offices to navigate. State also separately contracts for each segment of
                     most moves. In addition to incurring annual direct costs of about
                     $36 million to ship household effects, State incurs as much as $1,600 in
                     overhead costs for each move. Moves are typically processed in State’s
                     Transportation Division in Washington, D.C.; one of its four regional
                     dispatch agencies; and its European Logistical Support Office. We found
                     that leading companies in the private sector use a number of “best
                     practices” to provide better service and reduce costs. Such practices
                     include having one point of contact for assistance to employees, known as
                     one-stop-shopping, and using commercial door-to-door shipments to lower
                     the cost of shipping employees’ household effects. Private sector firms
                     also generally use one contractor for all segments of the move, minimizing
                     in-house support requirements and reducing total costs.

                     Another important process is overseas housing. State and other U.S.
                     government agencies operating overseas spend over $200 million annually
                     to lease housing and purchase furniture for employees and their families.
                     This process appears to be more costly than necessary. Our comparison of



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                       State’s processes with those of key private sector firms operating overseas
                       indicates that if State adopted private sector practices at a number of
                       posts, it could potentially save the U.S. government substantial amounts of
                       money and still meet its employees’ overseas residential housing and
                       furniture needs. Specific practices that can reduce costs include (1) using
                       relocation companies and similar service providers to search for housing
                       and negotiate leases to reduce in-house support costs and shift some
                       property preparation expenses to landlords; (2) providing employees with
                       housing allowances to select their own homes rather than managing and
                       maintaining a housing pool of government leases and preassigning
                       residences; and (3) acquiring residential furniture overseas instead of
                       buying and shipping it from the United States.

                       Our cost analysis of the U.S. mission’s housing office in Brussels and the
                       housing support function at the U.S. embassy in London illustrate how
                       using a relocation company could potentially yield significant savings at
                       those posts. For example, based on cost data provided by the mission in
                       Brussels, the annual salary cost alone attributable to the short-term leasing
                       process totaled about $700,000 in fiscal year 1996. If property preparation
                       and other support costs are included, the embassy’s direct and indirect
                       costs for short-term residential leases exceed $1.5 million annually. In
                       contrast, a relocation company would charge between $207,000 and
                       $277,000 for home-finding services. For London, the support costs for
                       residential leasing totaled about $700,000 annually. Outsourcing
                       home-finding services would cost between $118,000 and $151,000.

                       While CBO agrees that improving State’s business processes could yield
                       savings, it cannot develop an estimate until specific proposals are
                       identified.


Related GAO Products   State Department: Using Best Practices to Relocate Employees Could
                       Reduce Costs and Improve Service (GAO/NSIAD-98-19, Oct. 17, 1997).

                       State Department: Options for Reducing Overseas Housing and Furniture
                       Costs (GAO/NSIAD-98-128, July 31, 1998).


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




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Option:
U.S. Overseas   Authorizing committees                      Foreign Relations (Senate) International
                                                            Relations (House)
Presence        Appropriation 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)
                                                            Security/maint. of buildings (19-0535)
                Spending type                               Discretionary
                Budget subfunction                          Conduct of Foreign Affairs
                Framework theme                             Reassess objectives

                The Department of State, in coordination with the numerous other
                agencies operating overseas, needs to systematically reevaluate its
                overseas staffing requirements and the alternatives to stationing large
                numbers of Americans overseas. Not only is this increasingly important for
                security concerns, the end of the cold war and the availability of new
                communication technologies raises related questions as to whether
                maintenance of a large overseas U.S. presence is necessary.

                State maintains a physical presence in the form of embassies in over 160
                countries, usually in the capital city, and consulates general, consulates,
                and other offices in the capital or other cities. About 19,000 U.S. direct-hire
                employees (over 7,000 from State and 12,000 from other agencies) work
                overseas at a total of more than 250 diplomatic posts. In addition, the U.S.
                direct-hire staffing levels have increased over the years, most notably in
                the nonforeign affairs agencies. U.S. embassies have become bases to at
                least 27 other U.S. government agencies involved in more than 300
                activities.

                Security requirements and the increasing costs of diplomacy are directly
                linked to size of the overseas workforce. Moreover, U.S. foreign policy
                needs, which have changed dramatically with the end of the cold war, call
                into question whether the current overseas post and staff structure is
                appropriate. By reducing the number of Americans at posts where U.S.
                interests are of lesser importance, consolidating functions, or using
                regional embassies in certain regions, State could reduce its security
                requirements and enhance the safety of Americans overseas. In addition to
                security concerns, the costs of maintaining Americans overseas are high. It
                costs over $200,000 annually to station an American overseas, which is



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                       about two times as much as for Washington-based staff. If the Congress
                       chose to reduce overseas staffing by 1 percent, CBO estimates that the
                       following savings could be achieved.

Five-Year Savings
                       Dollars in millions
                                                               FY00          FY01         FY02         FY03          FY04
                       Option: Relocate overseas staffing domestically by 1 percent
                       Savings from the 1999 funding level
                       Budget authority                             4            8           12            16              20
                       Outlays                                      3            7           11            15              19
                       Note: CBO assumes that these direct hire positions would be relocated gradually or through
                       attrition to minimize costs. This would occur at an even pace over five years and, based on
                       information from GAO, savings are estimated at $100,000 per position.

                       Source: Congressional Budget Office.



Five-Year Savings
                       Dollars in millions
                                                               FY00          FY01         FY02         FY03          FY04
                       Option: Eliminate overseas staffing by 1 percent
                       Savings from the 1999 funding level
                       Budget authority                             8           16           24            32              40
                       Outlays                                      6           14           22            30              37
                       Note: CBO assumes that these direct hire positions would be eliminated through attrition rather
                       than a reduction-in-force which would involve significant costs. Attrition would occur at an even
                       pace over five years and, based on information from GAO, savings are estimated at $200,000 per
                       position eliminated.

                       Source: Congressional Budget Office.




Related GAO Products   State Department: Major Management Challenges and Program Risks
                       (GAO/T-NSIAD/AIMD-99-99, Mar. 4, 1999).

                       Foreign Affairs Management: Major Challenges Facing the Department of
                       State (GAO/T-NSIAD-98-251, Sept. 17, 1998).

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




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


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                Commerce, Justice, State, the Judiciary,
                                                            and Related Agencies (Senate and House)
                Primary agency                              Broadcasting Board of Governors
                Account                                     International Broadcasting Operations
                                                            (95-0206)
                Spending type                               Discretionary
                Budget subfunction                          Foreign Information and Exchange
                                                            Activities
                Framework theme                             Reassess objectives

                The United States broadcasts over 1,650 hours of radio programming in 58
                languages and over 400 hours of television in several languages weekly to
                support U.S. foreign policy objectives. In fiscal year 1998, $391.5 million of
                the U.S. Information Agency’s budget supported the Voice of America
                (VOA) (53 languages), Radio Free Europe/Radio Liberty (RFE/RL)(25
                languages), Radio and TV Marti broadcasts to Cuba, Radio Free Asia (RFA)
                (8 languages), and Worldnet television broadcasts. 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 services have been terminated despite changing world
                conditions. The Broadcasting Board of Governors plans to review all
                language services and broadcast entities to determine their continued
                need and effectiveness. These reviews may identify less necessary services
                that could be eliminated.

                Although CBO agrees that eliminating less necessary services would
                produce savings, it cannot develop an estimate for this option until
                specific proposals are identified.




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

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

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




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Option:
Export-Import Bank   Authorizing committees                      Banking, Housing, and Urban Affairs
                                                                 (Senate) Banking and Financial Services
Programs                                                         (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 years 1994 to 1998, Eximbank used an average of
                     about $859 million of its credit subsidy appropriation to support an
                     average of about $12.2 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
                     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 1998
                       transaction levels, that about $243 million in program subsidy savings
                       could be achieved annually if Eximbank provided only short-term cover in
                       higher risk markets.

Five-Year Savings
                       Dollars in millions
                                                              FY00     FY01       FY02        FY03       FY04
                       Savings from the 1999 funding level
                       Budget authority                        243       243        243        243        243
                       Outlays                                  27        66        105        143        176
                       Source: Congressional Budget Office.




Related GAO Products   U.S. Export-Import Bank: Issues Raised by Recent Market Developments
                       and Foreign Competition (GAO/T-NSIAD-99-23, Oct. 7, 1998).

                       Export-Import Bank: Key Factors in Considering Eximbank Reauthorization
                       (GAO/T-NSIAD-97-215, July 17, 1997).

                       Export-Import Bank: Options for Achieving Possible Budget Reductions
                       (GAO/NSIAD-97-07, Dec. 20, 1996).

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

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

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


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




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             Corporatize or Divest Select Power Marketing Administrations
270 Energy   Power Marketing Administrations Cost Recovery
             Department of Energy’s National Laboratories
             Department of Energy’s Contractor Separation Benefits Package
             Federal Exemption to Certain State Taxes for Department of Energy’s
             Operating Contractors
             Nuclear Waste Disposal Fees
             Federal Investment in Successfully Commercialized Technologies




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

                        The federal government began to market electricity after the Congress
                        authorized the construction of dams and established major water projects,
                        primarily in the 1930s to the 1960s. The Department of Energy’s (DOE)
                        power marketing administrations (PMA)—Bonneville Power
                        Administration, Southeastern Power Administration, Southwestern Power
                        Administration, and Western Area Power Administration—market
                        primarily wholesale power in 33 states produced at large, multiple-purpose
                        water projects. Our March 1998 report identified options that the Congress
                        and other policymakers can pursue to address concerns about the role of
                        the three PMAs—Southeastern, Southwestern, and Western—in emerging
                        restructured markets or to manage them in a more business-like fashion.
                        Our work has demonstrated that, although federal laws and regulations
                        generally require that the PMAs recover the full costs of building, operating,
                        and maintaining the federal power plants and transmission assets, in some
                        cases federal statutes and DOE’s rules are ambiguous about or prohibit the
                        recovery of certain costs. For fiscal years 1992 through 1996, the federal
                        government incurred a net cost of $1.5 billion from its involvement in the
                        electricity-related activities of Southeastern, Southwestern, and Western.
                        In addition, our work has demonstrated that the availability of federal
                        power plants to generate electricity is below that of nonfederal plants
                        because the federal plants are aging and because the federal planning and
                        budgeting processes do not always ensure that funds are available to make
                        repairs when needed. Our March report outlines three general alternatives
                        to address the federal role in restructuring markets: (1) maintaining the
                        status quo of federal ownership and operation of the power generating
                        projects, (2) maintaining the federal ownership of these assets but
                        improving how they operated (an example of which is reorganizing the
                        PMAs to operate as federally owned corporations), and (3) divesting these
                        assets.

                        Under the third alternative, divesting the three PMAs and federal power
                        assets would eliminate the government’s presence in a commercial activity
                        and, depending on a divestiture’s terms and condition and the price
                        obtained, could produce both a net gain and a future stream of tax




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                       payments to the Treasury. Corporatization or divestitures of government
                       assets have been accomplished recently in the United States and also
                       overseas; our March 1997 report concluded that divesting the federal
                       hydropower assets would be complicated but not impossible. Such a
                       transaction would need to balance the multiple purposes of the water
                       project as well as other claims on the water.

                       CBO estimates that divesting the federal hydropower assets would result in
                       the savings shown below. The estimate assumes that the divestiture would
                       not occur for two years. Although the foregone receipts result in a loss of
                       revenue in 2003 and 2004, it is mitigated by the large receipt from
                       divestiture in 2003 and by the savings in discretionary spending.

Five-Year Savings
                       Dollars in millions
                                                              FY00     FY01       FY02        FY03       FY04
                       Discretionary spending
                       Savings from the 1999 funding level
                       Budget authority                          0         0          0        580        580
                       Outlays                                   0         0          0        290        464
                       Source: Congressional Budget Office.



Five-Year Savings
                       Dollars in millions
                                                              FY00     FY01       FY02        FY03       FY04
                       Direct spending
                       Savings from the 1999 funding level
                       Budget authority                          0         0      5,100       –643       –670
                       Outlays                                   0         0      5,100       –643       –670
                       Source: Congressional Budget Office.




Related GAO Products   Power Marketing Administrations: Repayment of Power Costs Needs
                       Closer Monitoring (GAO/AIMD-98-164, June 30, 1998).

                       Federal Power: Options for Selected Power Marketing Administrations’
                       Role in a Changing Electricity Industry (GAO/RCED-98-43, Mar. 6, 1998).

                       Federal Electricity Activities: The Federal Government’s Net Cost and
                       Potential for Future Losses (GAO/AIMD-97-110 and 110A, Sept. 19, 1997).



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              Federal Power: Issues Related to the Divestiture of Federal Hydropower
              Resources (GAO/RCED-97-48, Mar. 31, 1997).

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

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


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

                        Four of the Department of Energy’s (DOE) power marketing
                        administrations (PMA)—Bonneville Power Administration, Southeastern
                        Power Administration, Southwestern Power Administration, and Western
                        Area Power Administration—market primarily wholesale power in 33
                        states produced at large, multiple-purpose water projects. Except for
                        Bonneville, these PMAs receive annual appropriations to cover operating
                        and maintenance (O&M) expenses and, if applicable, the capital investment
                        in transmission assets.4 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.

                        Current monitoring activities do not ensure that the federal government
                        recovers the full cost of its power-related activities from the beneficiaries
                        of federal power. The full cost of the power-related activities—which are
                        to be recovered under current legislation and DOE policy—include all direct
                        and indirect costs incurred by the federal government in producing,
                        transmitting, and marketing federal power. Neither DOE nor the Federal
                        Energy Regulatory Commission, which reviews the PMAs’ rate proposals, is
                        effectively monitoring the rate-making process and the amounts due and
                        repayments made to ensure their accuracy, completeness, and timeliness.
                        Unrecovered power-related costs relate to (1) Civil Service Retirement
                        System (CSRS) pensions and postretirement health benefits, (2) life
                        insurance benefits, (3) certain workers’ compensation benefits, and
                        (4) interest on some of the federal appropriations used to construct
                        certain projects. The full magnitude of the under-recovery of
                        power-related costs is unknown. Until an effective monitoring system is
                        implemented, the federal government will continue to be exposed to
                        financial loss due to the under-recovery of power-related costs.

                        The federal government is also incurring other substantial net costs
                        annually—the amount by which the full costs of providing electric power

                        4
                         In 1974, the Congress stopped providing Bonneville with annual appropriations and instead provided
                        it with a revolving fund maintained by the Treasury; however, Bonneville remains responsible for
                        repaying its debt prior to 1974 and debt stemming from appropriations expended by the operating
                        agencies on power-related expenses.



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                       exceed the revenues from the sale of power—from the electricity-related
                       activities of the PMAs. Although the PMAs are generally required to recover
                       all costs, favorable financing terms and the lack of specific requirements
                       to recover certain costs have resulted in net costs to the federal
                       government because these PMAs’ electricity rates do not recover all costs
                       that are to be repaid through the sale of power. It is important to note that
                       the PMAs were generally following applicable laws and regulations applying
                       to the recovery of costs; however, in some cases, federal statutes and an
                       applicable DOE order are ambiguous about or prohibit the recovery of
                       certain costs.

                       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. We have recommended a
                       number of specific actions aimed at enhancing DOE’s oversight. For
                       example, changes could be implemented to recover the full costs to the
                       federal government of providing postretirement health benefits and
                       pensions for current employees and operating agency employees engaged
                       in producing and marketing the power sold by the PMAs. GAO and CBO agree
                       that several PMAs have begun to address some of these actions. CBO has not
                       prepared a savings estimate for this option because the extent of these
                       changes and their effects are not fully known at this time.


Related GAO Products   Power Marketing Administrations: Repayment of Power Costs Needs
                       Closer Monitoring (GAO/AIMD-98-164, June 30, 1998).

                       Federal Power: Options for Selected Power Marketing Administrations’
                       Role in a Changing Electricity Industry (GAO/RCED-98-43, Mar. 6, 1998).

                       Federal Electricity Activities: The Federal Government’s Net Cost and
                       Potential for Future Losses (GAO/AIMD-97-110 and 110A, Sept. 19, 1997).

                       Federal Power: Issues Related to the Divestiture of Federal Hydropower
                       Resources (GAO/RCED-97-48, Mar. 31, 1997).

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

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




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              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, Oct. 13, 1995).


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 (Senate
Laboratories                                                    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 23
                    labs, with a budget of over $10 billion and employing about 60,000 people.
                    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 that 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 we have 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 we
                    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
                    entities, transferring labs to universities, or assigning them to different
                    agencies whose missions better match lab strengths.




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                       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
                                                               FY00         FY01         FY02         FY03      FY04
                       Savings from the 1999 funding level
                       Budget authority                           43           96          155            226    285
                       Outlays                                    26           71          126            192    254
                       Note: This estimate assumes consolidation would take place over a 5-year period.

                       Source: Congressional Budget Office.




Related GAO Products   Department of Energy: Uncertain Progress in Implementing National
                       Laboratory Reforms (GAO/RCED-98-197, Sept. 10, 1998).

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

                       Department of Energy: National Laboratories Need Clearer Mission and
                       Better Management (GAO/RCED-95-10, Jan. 27, 1995).

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

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

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


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




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

                        Since 1993, the Department of Energy has spent about $1 billion to provide
                        benefits to contractor employees separated in workforce restructuring and
                        downsizing efforts at its facilities. About 85 percent of the costs were for
                        employee benefits including 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 act to bring separation
                        benefits in line with existing DOE contracts or with those benefits provided
                        to federal employees. CBO estimates such action would result in the
                        following savings.

Five-Year Savings
                        Dollars in millions
                                                               FY00     FY01          FY02     FY03       FY04
                        Savings from the 1999 funding level
                        Budget authority                         13        13           13        0          0
                        Outlays                                  13        13           13        0          0
                        Source: Congressional Budget Office.




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


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




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Option:
Federal Exemption to   Authorizing committees                        Armed Services (Senate and House)
                                                                     Energy and Natural Resources (Senate)
Certain State Taxes                                                  Commerce (House)
for Department of      Appropriations subcommittees                  Energy and Water Development (Senate
                                                                     and House)
Energy’s Operating                                                   Interior and Related Agencies (Senate and
                                                                     House)
Contractors            Primary agency                                Department of Energy
                       Account                                       Multiple
                       Spending type                                 Discretionary
                       Budget subfunction                            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 1998,
                       the contractors at DOE’s Oak Ridge and Sandia facilities were reimbursed
                       almost $60 million for gross receipts, sales, and/or use taxes. If the
                       Congress chose to designate DOE operating contractors as
                       “instrumentalities of the federal government,” the following savings could
                       be achieved. Such action would make the contractors immune from state
                       taxation and thereby eliminate this expense.

Five-Year Savings
                       Dollars in millions
                                                              FY00     FY01          FY02     FY03       FY04
                       Savings from the 1999 funding level
                       Budget authority                         77        78           80       82           84
                       Outlays                                  46        70           79       81           83
                       Source: Congressional Budget Office.




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Related GAO Product   Energy Management: DOE Controls Over Contractor Expenditures Need
                      Strengthening (GAO/RCED-87-166, Aug. 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
                                                              FY00     FY01       FY02        FY03       FY04
                       Added receipts                           12        25         37         50           63
                       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:
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
                        Account                                     Multiple
                        Spending type                               Discretionary
                        Budget subfunction                          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 funds 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 technologies



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                      (which DOE officials say is about average), then about $400 million could
                      be repaid to the federal government. However, repayment provisions
                      would only apply to future technology development projects not yet
                      negotiated with industry. CBO estimates that this option would have no
                      effect on receipts in the next 5 years because of the time lag between
                      research and commercialization.


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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                Pursuing Cost-Effective Alternatives to NOAA’s Research/Survey Fleet
300 Natural     Collaborative Federal Land Management Approach
Resources and   Fair Market Value for Natural Resources
Environment     Hardrock Mining
                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




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Option:
Pursuing                Authorizing committees                      Commerce, Science and Transportation
                                                                    (Senate) Commerce (House)
Cost-Effective          Appropriations subcommittees                Commerce, Justice, State, and the
Alternatives to                                                     Judiciary
                        Primary agency                              Department of Commerce
NOAA’s                  Account                                     Operations, Research, and Facilities
Research/Survey Fleet                                               (13-1450)
                        Spending type                               Discretionary
                        Budget subfunction                          Other Natural Resources
                        Framework theme                             Improve efficiency

                        The National Oceanic and Atmospheric Administration (NOAA) has an aging
                        in-house fleet of 15 ships that are used to support its programs in fisheries
                        research, oceanographic research, and hydrographic charting and
                        mapping. Most of NOAA’s ships are past their 30-year life expectancies, and
                        many of them are costly and inefficient to operate and maintain and lack
                        latest state-of-the-art technology. NOAA’s ships are managed and operated
                        by a NOAA Corps of about 240 uniformed service commissioned officers
                        who, like the Public Health Service Commissioned Corps, perform civilian
                        rather than military functions but are covered by a military-like pay and
                        benefits system.

                        For more than a decade, congressional committees, public and private
                        sector advisory groups, the National Performance Review (NPR), the
                        Commerce Office of Inspector General (OIG), and our office have urged
                        NOAA to aggressively pursue more cost-effective alternatives to its in-house
                        fleet of ships. Since 1990, NOAA has developed several fleet replacement
                        and modernization plans that call for investments of millions of dollars to
                        upgrade or replace these ships, and each has been criticized by the
                        Commerce OIG for not pursuing alternative approaches strongly enough. In
                        1996, the OIG recommended that NOAA terminate its fleet modernization
                        efforts; cease investing in its ships; immediately begin to decommission,
                        sell, or transfer them; and contract for the required ship services.

                        In response, NOAA has decommissioned almost one-third of its fleet since
                        1990 and now outsources for about 40 percent of its research and survey
                        needs. Although NOAA has increased its outsourcing for these services and
                        expects to further increase its use of outsourcing to about 50 percent over
                        the next 10 years, NOAA continues to rely heavily on its old, inefficient fleet
                        and still plans to replace or upgrade some of these ships. In this regard, the




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                       President’s budget for fiscal year 2000 proposes $52 million for
                       construction of a new fisheries research ship and indicates that NOAA plans
                       to spend a total of $185 million for four new replacement ships over the
                       5-year period ending in fiscal year 2004.

                       Because no funds were appropriated for modernizing and replacing the
                       NOAA  fleet in fiscal year 1999, implementing this option would not yield any
                       savings relative to the current level of funding for NOAA programs.
                       However, CBO agrees that implementing this option would result in savings
                       relative to the Administration’s fiscal year 2000 budget request.


Related GAO Products   Department of Commerce: National Weather Service Modernization and
                       NOAA Fleet Issues (GAO/T-AIMD/GGD-99-97, Feb. 24, 1999).


                       Major Management Challenges and Program Risks: Department of
                       Commerce (GAO/OCG-99-3, Jan. 1999).

                       Issues on the National Oceanic and Atmospheric Administration’s
                       Commissioned Corps (GAO/GGD-98-35R, Dec. 2, 1997).

                       National Oceanic and Atmospheric Administration: Issues on the
                       Civilianization of the Commissioned Corps (GAO/T-GGD-98-22, Oct. 29, 1997).

                       Federal Personnel: Issues on the Need for NOAA’s Commissioned Corps
                       (GAO/GGD-97-10, Oct. 31, 1996).

                       Research Fleet Modernization: NOAA Needs to Consider Alternatives to the
                       Acquisition of New Vessels (GAO/RCED-94-170, Aug. 3, 1994).


GAO Contact            L. Nye Stevens, (202) 512-8676




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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 among 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, Feb. 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, Feb. 1, 1994).


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 nonfee-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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                       We present several other options that illustrate how market-based
                       incentives could be implemented. See the options “Hardrock Mining,”
                       “Federal Water Policies,” and “Water Transfers.”

                       CBO agrees that implementing market-based incentives and management
                       practices could generate additional offsetting receipts. However, it cannot
                       develop an estimate until specific proposals are identified.


Related GAO Products   Forest Service: Lack of Financial and Performance Accountability Has
                       Resulted in Inefficiency and Waste (GAO/T-RCED/AIMD-98-135, Mar. 26, 1998).

                       Forest Service: Barriers to Generating Revenue or Reducing Costs
                       (GAO/RCED-98-58, Feb. 13, 1998).

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


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)
                                                              Agriculture (House)
                                                              Resources (House)
                  Primary agencies                            Department of the Interior
                                                              Department of Agriculture
                  Spending type                               Direct
                  Framework theme                             Improve efficiency

                  The Mining Law of 1872 allows holders of economically minable claims on
                  federal lands to obtain all rights and interests to both the land and the
                  hardrock minerals by patenting the claims for $2.50 or $5.00 an
                  acre—amounts that do not necessarily reflect the market value of such
                  lands today. Since 1872, the federal government has patented more than
                  3 million acres of mining claims (an area about the size of Connecticut),
                  and some patent holders have reaped huge profits by reselling their lands.
                  For example, we examined 12 applications for mining patents and
                  reported in 1989 that the government would receive only about $16,000 if
                  the claims were patented, whereas the value of these lands had been
                  appraised in 1988 at between $14.4 million and $47.1 million. Furthermore,
                  miners do not pay royalties to the government on hardrock minerals they
                  extract from federal lands. In 1990, hardrock minerals worth at least
                  $1.2 billion were extracted from federal lands, while known and
                  economically recoverable reserves of hardrock minerals remaining on
                  federal lands were estimated to be worth almost $64.9 billion.

                  Beginning in 1995, the Congress imposed a series of 1-year moratoriums
                  on patenting mining claims; during this time, it considered bills that would
                  prohibit the issuance of new patents, require the payment of fair market
                  value for a patent, or otherwise modify the requirements for patenting. The
                  Congress also considered bills that would impose royalties on hardrock
                  minerals extracted from federal lands, e.g., a royalty of 5 percent or
                  8 percent on net proceeds, net smelter returns, or gross income. Under the
                  terms of Interior’s 1999 appropriations bill (P.L. 105-277), any revisions to
                  the hardrock mining regulations are postponed for a year, pending a study
                  by the National Academy of Sciences.

                  Estimating the additional receipts that could be obtained if patenting
                  provisions were changed or if hardrock royalties were imposed would
                  depend on the specific proposals implemented. For example, receipts
                  from a 5 percent royalty on net smelter returns were estimated to average



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                       $35 million annually. Estimating additional receipts would be further
                       complicated by the large variation in land values and the lack of essential
                       data about the hardrock minerals on current mining claims. Assuming that
                       the Congress adopted a 5 percent royalty on net smelter returns, CBO
                       estimates that the following receipts would be gained.

Five-Year Savings
                       Dollars in millions
                                                              FY00     FY01       FY02        FY03       FY04
                       Savings from the 1999 funding level
                       Offsetting receipts                      10        42         29         29         29
                       Source: Congressional Budget Office.




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

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

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

                       Federal Land Management: The Mining Law of 1892 Needs Revision
                       (GAO/RCED-89-72, Mar. 10, 1989).


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                        Interior and Related Agencies (Senate and
                                                                        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
                    following savings.5

Five-Year Savings
                    Dollars in millions
                                                             FY00         FY01          FY02          FY03         FY04
                    Savings from the 1999 funding level
                    Budget authority                           185          190           190          195           175
                    Outlays                                    185          190           190          195           175
                    Source: Congressional Budget Office.




                    5
                     The projected savings do not include a potential federal cost increase under the Capital Payment in
                    Lieu of Taxes (PILT) program. Payments under the discretionary PILT program would increase
                    beginning in fiscal year 1999 if net program receipts were shared and the Congress appropriated such
                    an increase.



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Related GAO Products   Land Management Agencies: Revenue Sharing Payments to States and
                       Counties (GAO/RCED-98-261, Sept. 17, 1998).

                       Forest Service: Barriers to Generating Revenue or Reducing Costs
                       (GAO/RCED-98-58, Feb. 12, 1998).

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

                       Natural Resources Management Issues (GAO/OCG-93-17TR, Dec. 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, Apr. 25, 1991).

                       Mineral Revenues: Collection and Distribution of Revenues From Acquired
                       Lands (GAO/RCED-90-7, Aug. 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
                             Spending type                               Direct
                             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.


Increased Fees for           Under the Reclamation Reform Act of 1982, as amended, some farmers
Subsidized Federal Water     have reorganized large farming operations into multiple, smaller
to Large Farms               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.


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


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                             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 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.

                             CBO estimates that 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, eliminated double subsidies for crops and water,
                             required CVP irrigators to repay the costs of CVP by 2020 (roughly two-thirds
                             the time required under current law), recovered the investment in the




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                    Pick-Sloan Basin Program, and/or phased out the interest subsidy for
                    western irrigators.6

Five-Year Savings
                    Dollars in millions
                                                             FY00         FY01          FY02         FY03          FY04
                    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
                                                             FY00         FY01          FY02         FY03          FY04
                    Option: Phase out double subsidies
                    Added receipts                               3             6           10           10               10
                    Source: Congressional Budget Office.



Five-Year Savings
                    Dollars in millions
                                                             FY00         FY01          FY02         FY03          FY04
                    Option: Accelerate repayment of water project construction costs
                    Added receipts                               3             8           11           11               11
                    Source: Congressional Budget Office.



Five-Year Savings
                    Dollars in millions
                                                             FY00         FY01          FY02         FY03          FY04
                    Option: Recovery of federal investment in hydropower facilities
                    Added receipts                              18           18            18           18               18
                    Source: Congressional Budget Office.




                    6
                     Implementing some of these options would affect the potential savings from the remaining options.



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Five-Year Savings
                       Dollars in millions
                                                              FY00         FY01   FY02        FY03       FY04
                       Option: Phase out interest subsidy for irrigators
                       Added receipts                            4           11      14         14         14
                       Source: Congressional Budget Office.




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

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

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

                       Reclamation Law: Changes Needed Before Water Service Contracts Are
                       Renewed (GAO/RCED-91-175, Aug. 22, 1991).

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

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


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 reallocating scarce water to new users by allowing those
                    who place the highest economic value on the resource to purchase it.
                    Water transfers are a valuable tool for improving the efficiency of water
                    use and environmental quality and can be a promising way to increase
                    federal revenues for water development projects. Current reclamation law
                    provides the Secretary of the Interior with discretion in establishing
                    municipal and industrial charges to recover some of the costs of
                    constructing the projects. However, Interior’s principles governing water
                    transfers focus on facilitating transfers and placing the government in the
                    same or a better financial condition after a transfer is made, rather than
                    charging the highest amounts possible without discouraging transfers.
                    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. Moreover, many reclamation projects have
                    specified interest rates in authorizing legislation that limit interest charges
                    below current levels.

                    The Congress may wish to change reclamation law to allow the use of
                    current Treasury borrowing rates in establishing charges for transferred
                    water. If this change was implemented in 2000, CBO estimates the following
                    additional receipts. This estimate assumes that 3 percent of the
                    outstanding irrigation-related debt of about $2 billion is annually traded,
                    with the interest rate tied to the 30-year Treasury rate.

Five-Year Savings
                    Dollars in millions
                                                           FY00     FY01        FY02           FY03   FY04
                    Added receipts                            2            4        4             4       4
                    Source: Congressional Budget Office.




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                      Options for Increased Savings and Revenue
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Related GAO Product   Water Markets: Increasing Federal Revenues Through Water Transfers
                      (GAO/RCED-94-164, Sept. 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                                                                     Environment and Public Works (Senate)
                                                                          Transportation and Infrastructure (House)
                     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. Based on audit work,
                     we have 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 discharges, effective on discharges of water pollutants
                     made after December 31, 1999. 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 Savings
                     Dollars in billions
                                                               FY00          FY01       FY02       FY03        FY04
                     Revenue gain                                 0.1           0.2       0.2        0.2         0.2
                     Note: JCT provided its revenue estimates in billions of dollars.

                     Source: Joint Committee on Taxation.




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Related GAO Products   Environmental Protection: Implications of Using Pollution Taxes to
                       Supplement Regulation (GAO/RCED-93-13, Feb. 17, 1993).

                       Hazardous Waste: Much Work Remains to Accelerate Facility Cleanups
                       (GAO/RCED-93-15, Jan. 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.
                       Through fiscal year 1997, EPA had obtained legal agreements with
                       responsible parties to recover approximately $2.3 billion of the
                       $14.5 billion that it had spent. EPA has made these agreements, however,
                       under a policy that limits the indirect costs that it will seek to recover.
                       Since the early 1990s, EPA has been evaluating changes to its methodology
                       for calculating indirect costs. The agency is currently assessing one option
                       that could increase future recoveries by as much as an additional
                       $500 million. EPA should amend its definition of recoverable costs to
                       permit greater recoveries.

                       Savings could not be estimated due to EPA’s varying success in collecting
                       the full amount of current penalty and interest charges.


Related GAO Products   High-Risk Series: Superfund Program Management (GAO/HR-97-14,
                       Feb. 1997).

                       Superfund: EPA Has Opportunities to Increase Recoveries of Costs
                       (GAO/RCED-94-196, Sept. 28, 1994).




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              Superfund: More Settlement Authority and EPA Cost Controls Could
              Increase Cost Recovery (GAO/RCED-91-144, July 18, 1991).

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 18 years and $17 billion
                     on Superfund, construction of cleanup remedies (as of August 31,
                     1998) had been completed at only about 526 of the 1,193 sites 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 expanded 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, Apr. 15,
                       1996).

                       Superfund: Non-Time-Critical Removals as a Tool for Faster and Less
                       Costly Cleanups (GAO/T-RCED-96-137, Apr. 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, created
                      in 1980, was intended to clean up those sites considered to be the most
                      serious of the hazardous waste sites. 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 1997, Superfund contracts accounted for $5.4 billion, or 49
                      percent, of the $11.1 billion that EPA obligated for all contracts awarded
                      during that period. 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 April 1997, we
                      reported that substantial amounts remained obligated for completed
                      projects. Using EPA data systems, we identified $249 million in potential
                      recoveries, and we encouraged EPA to aggressively pursue these




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                       recoveries. In some cases, contracts had not been closed when work had
                       been completed many years ago.

                       In response to our recommendation, EPA committed itself to expediting
                       agency efforts to deobligate and reuse funds. In July 1998, we reported
                       that EPA recovered $210 million during fiscal year 1997 and was projecting
                       that it would recover $26 million during fiscal year 1998. However, we also
                       reported that EPA had an additional $125 million in potential recoveries for
                       fiscal year 1998. The Congress may want to reduce EPA’s fiscal year 2000
                       appropriation by $125 to encourage greater recovery of funds.

Five-Year Savings
                       Dollars in millions
                                                              FY00        FY01       FY02        FY03       FY04
                       Savings from the 1999 funding level
                       Budget authority                         125           0          0          0          0
                       Outlays
                       Note: CBO did not estimate outlay savings.

                       Source: Congressional Budget Office.




Related GAO Products   Environmental Protection: Funds Obligated for Completed Superfund
                       Projects (GAO/RCED-98-232, July 21, 1998).

                       Environmental Protection: Opportunities to Recover Funds Obligated for
                       Completed Superfund Projects (GAO/T-RCED-97-134, Apr. 15, 1997).


GAO Contact            Peter F. Guerrero, (202) 512-6111




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                  More Effective Operation of Rural Utilities Service’s Electricity and
350 Agriculture     Telecommunications Loan Programs
                  Consolidation of Common Administrative Functions at USDA
                  Farm Service Agency County Office Restructuring
                  Charging Beneficiaries for Food-Related Service Costs
                  Agricultural Research Service Funding
                  USDA Telecommunications and Information Systems




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Option:
More Effective        Authorizing committees                      Agriculture, Nutrition, and Forestry (Senate)
                                                                  Agriculture (House)
Operation of Rural    Appropriations subcommittees                Agriculture, Rural Development, Food and
Utilities Service’s                                               Drug Administration, and Related
                                                                  Agencies (Senate and House)
Electricity and       Primary agency                              Department of Agriculture
Telecommunications    Accounts                                    Multiple
Loan Programs         Spending type                               Discretionary
                      Framework theme                             Improve efficiency

                      The Rural Utilities Service (RUS), established by the Federal Crop
                      Insurance Reform and Department of Agriculture Reorganization Act of
                      1994 (P.L. 103-354, Oct. 13, 1994), administers the (1) electricity and
                      telecommunications loan programs that formerly were operated by the
                      Rural Electrification Administration (REA) and (2) water and waste
                      disposal loan program that was formerly operated by the Rural
                      Development Administration. In recent years, RUS has made or guaranteed
                      an average of about $1.4 billion per year in loans to help borrowers
                      develop, upgrade, or expand their electricity and telecommunications
                      systems. As of June 30, 1997, the outstanding principal on RUS’ electricity
                      and telecommunications loans totaled about $36 billion.

                      Our report on the efficiency and effectiveness of RUS’ operations identified
                      a number of program practices that increased the cost of the rural
                      electricity and telecommunications programs and reduced their
                      effectiveness. For example, even though the loan programs are intended to
                      assist in developing the nation’s rural areas, current lending practices
                      sometimes result in loans to borrowers serving areas that are heavily
                      populated. Also, the agency sometimes makes its subsidized direct loans
                      to borrowers capable of using their own resources or of obtaining loans
                      from the private sector to fund their utility projects. Finally, borrowers
                      have been able to obtain large-dollar loans and accumulate large amounts
                      of debt because RUS has few loan and indebtedness limits.

                      To reduce the costs and increase the effectiveness of the agency’s loan
                      programs, we identified the following options: (1) target loans to
                      borrowers that provide services to areas with low populations, (2) target
                      subsidized direct loans to borrowers that have a financial need for the
                      agency’s assistance, and (3) graduate the agency’s financially viable
                      borrowers from direct loans to commercial credit. Also, to decrease the




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                       agency’s vulnerability to losses, we identified the following options:
                       (1) establish loan and indebtedness limits, (2) set the repayment guarantee
                       at a level below 100 percent, and (3) prohibit loans to delinquent
                       borrowers or to borrowers who have caused the RUS to incur loan losses.

                       CBOcannot develop an estimate for this option until specific proposals to
                       improve efficiency are identified.


Related GAO Products   Rural Utilities Service: Opportunities to Operate Electricity and
                       Telecommunications Loan Programs More Effectively (GAO/RCED-98-42,
                       Jan. 21, 1998).

                       Rural Development: Financial Condition of the Rural Utilities Service’s
                       Loan Portfolio (GAO/RCED-97-82, Apr. 11, 1997).


GAO Contact            Lawrence J. Dyckman, (202) 512-5138




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Option:
Consolidation of    Authorizing committees                      Agriculture, Nutrition, and Forestry (Senate)
                                                                Agriculture (House)
Common              Appropriations subcommittees                Agriculture, Rural Development, Food and
Administrative                                                  Drug Administration, and Related
                                                                Agencies (Senate and House)
Functions at USDA   Primary agency                              Department of Agriculture
                    Accounts                                    Multiple
                    Spending type                               Discretionary/Direct
                    Framework theme                             Improve efficiency

                    In accordance with the Federal Crop Insurance Reform and Department of
                    Agriculture Reorganization Act of 1994, USDA recently reorganized and
                    streamlined its structure, consolidating 43 agencies and offices into 29 and
                    dividing most of the 29 agencies and offices into seven mission areas.
                    Under its streamlining plans, USDA also required mission areas with more
                    than one agency to consolidate administrative functions such as human
                    resource management and procurement. By mid-1997, USDA reported that
                    administrative consolidation had been completed in four of the five
                    mission areas with more than one agency.

                    However, we found that many of the mission areas still have multiple
                    offices performing functions such as legislative and legal affairs, public
                    information and community affairs, and financial and budget management
                    for each of the component agencies. In total, more than 3,500 staff fill
                    these positions. In addition, USDA has only recently developed a plan to
                    streamline administrative functions at the state office level. The
                    county-based service agencies—the Farm Service Agency, the Natural
                    Resources and Conservation Service, and the agencies in the Rural
                    Development mission—have each maintained their own state office in
                    almost every state. These state offices employ 4,782 USDA employees, some
                    of whom provide administrative services. Given that these agencies are
                    consolidating their county-based offices into one-stop service centers, it is
                    unclear why they need to maintain separate offices at the state level.

                    To further streamline its organization, increase efficiency, and reduce
                    overhead costs associated with running separate offices, USDA could do
                    more to combine agencies’ support functions, such as legislative and legal
                    affairs and public information, into a single office serving the needs of all
                    mission component agencies. In addition, even though USDA has developed
                    a plan to converge administrative functions at the state level for




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                       county-based agencies, a number of obstacles need to be overcome if the
                       plan is to be successfully implemented. Perhaps most importantly in the
                       near term is the selection of a strong leadership team to implement the
                       convergence plan once it is approved by the Secretary. CBO agrees that this
                       option could potentially yield savings. However, it did not develop a
                       savings estimate due to the uncertainty of the extent to which improved
                       efficiencies actually lead to budgetary savings.


Related GAO Products   U.S. Department of Agriculture: Administrative Streamlining Is Expected
                       to Continue Through 2002 (GAO/RCED-99-34, Dec. 11, 1998).

                       U.S. Department of Agriculture: Update on Reorganization and
                       Streamlining Efforts (GAO/RCED-97-186R, June 24, 1997).


GAO Contact            Lawrence J. Dyckman, (202) 512-5138




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Option:
Farm Service Agency   Authorizing committees                      Agriculture, Nutrition, and Forestry (Senate)
                                                                  Agriculture (House)
County Office         Appropriations subcommittees                Agriculture, Rural Development, Food and
Restructuring                                                     Drug Administration, and Related
                                                                  Agencies (Senate and House)
                      Primary agency                              Department of Agriculture
                      Accounts                                    Farm Service Agency
                      Spending type                               Discretionary
                      Framework theme                             Improve efficiency

                      USDA  maintains a field office structure that dates back to the 1930s when
                      transportation and communication systems limited the geographic
                      boundaries covered by a single field office and there were a greater
                      number of small, widely disbursed, family-owned farms. In 1933, the
                      United States had more than 6 million farmers; today the number of farms
                      in the United States is less than 2 million and a small fraction of these
                      produce more than 70 percent of the nation’s agricultural output. At
                      various times, the Congress has attempted to reduce the number of county
                      offices serving farmers and/or reduce county office staffing. Most recently,
                      the Federal Crop Insurance Reform and Department of Agriculture
                      Reorganization Act of 1994 (P.L. 103-354, Oct. 13, 1994) directed the
                      Secretary of Agriculture to streamline departmental operations by
                      consolidating county offices.

                      Our review of county office workload found that regardless of its size,
                      each of the Farm Service Agency’s (FSA) 2,440 county offices requires a
                      certain fixed amount of time and resources to carry out basic office
                      functions and train staff to administer FSA’s programs. USDA’s workload
                      data indicate that about 2 staff years of effort per office are needed to
                      carry out the basic administrative duties to keep the office open. These
                      duties include obtaining and managing office space, paying utilities, and
                      processing paperwork related to payroll. Additional time is needed to train
                      staff on the specific characteristics of program operations so that they can
                      effectively serve participating farmers. In total, these fixed administrative
                      activities may represent almost 40 percent of FSA county offices’ total
                      workload. However, in larger offices, a lower percentage of total staff time
                      is devoted to performing basic administrative functions, and a greater
                      proportion of time is available to provide service to farmers.




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                       To most effectively implement future staff reductions in FSA county
                       offices, the Congress may want to encourage USDA to focus attention on
                       closing offices that serve few farmers. Each office closed would save
                       about 2 staff years of workload previously devoted to keeping the office
                       open and functioning. Although CBO agrees that closing offices that serve
                       few farmers would produce savings, it cannot develop a savings estimate
                       until a specific proposal is identified.


Related GAO Products   U.S. Department of Agriculture: Status of Closing and Consolidating
                       County Offices (GAO/T-RCED-98-250, July 29, 1998).

                       Farm Programs: Service to Farmers Will Likely Change as Farm Service
                       Agency Continues to Reduce Staff and Close Offices (GAO/RCED-98-136,
                       May 1, 1998).

                       Farm Programs: Administrative Requirements Reduced and Further
                       Program Delivery Changes Possible (GAO/RCED-98-98, Apr. 20, 1998).

                       Farm Programs: Impact of the 1996 Farm Act on County Office Workload
                       (GAO/RCED-97-214, Aug. 19, 1997).

                       U.S. Department of Agriculture: Farm Agencies’ Field Structure Needs
                       Major Overhaul (GAO/RCED-91-9, Jan. 29, 1991).

                       U.S. Department of Agriculture: Interim Report on Ways to Enhance
                       Management (GAO/RCED-90-19, Oct. 26, 1989).


GAO Contact            Lawrence J. Dyckman, (202) 512-5138




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Option:
Charging               Authorizing committees                      Agriculture, Nutrition, and Forestry (Senate)
                                                                   Agriculture (House)
Beneficiaries for      Appropriations subcommittees                Agriculture, Rural Development, Food and
Food-Related Service                                               Drug Administration, and Related
                                                                   Agencies (Senate and House)
Costs                  Primary agency                              Department of Agriculture
                       Accounts                                    Multiple
                       Spending type                               Discretionary
                       Framework theme                             Redefine beneficiaries

                       User fees—charges individuals or firms pay for services they receive from
                       the federal government—are not new but have begun to play an
                       increasingly important role in financing federal programs, particularly
                       since the Balanced Budget Act of 1985. According to the Office of
                       Management and Budget Circular A-25, user fees should be charged to
                       cover the full cost of federal services when the service recipient receives
                       special benefits beyond those received by the general public. A special
                       benefit will be considered to accrue, and a user charge will be imposed,
                       when the government service (1) enables the beneficiary to obtain more
                       immediate or substantial gains than those that accrue to the general
                       public, (2) provides business stability or contributes to public confidence
                       in the business activity of the beneficiary, or (3) responds to the request of
                       or is provided for the convenience of the service recipient and is beyond
                       the service regularly received by other members of the same industry or by
                       the general public. In some cases, the government supplies a service that
                       provides a special benefit to an identifiable recipient and also provides a
                       benefit to the general public. When the public benefit in such cases is not
                       independent of, but merely incidental to, the special benefit provided the
                       service recipient, the government should seek to recover the full cost of
                       providing the service by charging the service recipient a user fee.

                       In March 1997, we reported that additional user fees could have been
                       charged to program beneficiaries in fiscal year 1995. For example, user
                       fees could have been charged for meat and poultry plant inspections, a
                       service currently provided without charge. CBO estimates that if meat and
                       poultry plant inspections were funded through user fees instead of
                       appropriations, the following savings might result.




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Five-Year Savings
                       Dollars in millions
                                                                FY00          FY01         FY02          FY03         FY04
                       Savings from the 1999 funding level
                       Budget authority                           273          545           545           545          545
                       Outlays                                    269          532           545           545          545
                       Note: This estimate assumes that user fees will cover direct and indirect costs of the meat and
                       poultry inspection program, including management and supervisory costs. Costs of physical
                       overhead, administration, and laboratory services incidental to the inspection program also will be
                       included. User fees will exclude grants and special assistance to states. This estimate also
                       assumes that only 50 percent of fees will be collected in the first year because of industry
                       opposition and administrative delays.

                       Source: Congressional Budget Office.




Related GAO Products   Food Safety: Opportunities to Redirect Federal Resources and Funds Can
                       Enhance Effectiveness (GAO/RCED-98-224, Aug. 6, 1998).

                       Food Safety: Federal Efforts to Ensure the Safety of Imported Foods Are
                       Inconsistent and Unreliable (GAO/RCED-98-103, Apr. 30, 1998)

                       Food-Related Services: Opportunities Exist to Recover Costs by Charging
                       Beneficiaries (GAO/RCED-97-57, Mar. 20, 1997).


GAO Contact            Lawrence J. Dyckman, (202) 512-5138




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Option:
Agricultural Research       Authorizing committees                      Agriculture, Nutrition, and Forestry (Senate)
                                                                        Agriculture (House)
Service Funding             Appropriations subcommittees                Agriculture, Rural Development, Food and
                                                                        Drug Administration, and Related
                                                                        Agencies (Senate and House)
                            Primary agency                              Department of Agriculture
                            Account                                     Agricultural Research Service, (12-1400),
                                                                        CSREES (12-1500)
                            Spending type                               Discretionary
                            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), whose program level was about $745 million for its fiscal
                            year 1998 research activities, conducts 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. The Cooperative State Research, Education, and
                            Extension Service (CSREES) administers funding for research at land grant
                            universities and other research institutions. It also provides funding for
                            state extension activities and several modest higher education programs in
                            agriculture-related areas. In fiscal year 1998, CSREES’ program level was
                            about $430 million for research and higher education.

                            USDA funds various types of agricultural research projects that the
                            Congress may consider to be of insufficiently high national public interest,
                            to have limited accountability, and/or should more appropriately be
                            funded by the private sector. In particular:

                        •   In June 1996, we reported that as of January 29, 1996, ARS used about 91
                            percent of its fiscal year 1996 appropriations to fund 1,198 projects at an
                            estimated cost of $648 million—495 of these projects (valued at
                            $257 million) involved mostly nonbasic research and 432 projects (valued
                            at $220 million) were outside the high-priority research areas designated in
                            ARS’ 6-year implementation plan. We identified 148 projects valued at
                            $78 million that fell into both of these categories.
                        •   In fiscal year 1996, USDA’s CSREES funded about $50 million in Special Grant
                            projects. Special grants are often congressionally earmarked to be
                            awarded to specific institutions for specific purposes and are not
                            automatically subject to peer review. Similarly, ARS funded about



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                       $32 million in projects that were to be conducted by an external
                       organization and that are not likely to be peer reviewed. While peer review
                       is not perfect, it is nonetheless an important part of quality control in
                       science. Without peer review, accountability is limited.

                       Should the Congress wish to reduce nonbasic federal agricultural
                       research, research that is not high-priority, and/or projects that are not
                       peer reviewed, we believe the ARS budget and the CSREES 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. CBO agrees that eliminating
                       projects could result in savings but could not develop an estimate of these
                       savings at this time.


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, Mar. 28, 1996).


GAO Contact            Lawrence J. Dyckman, (202) 512-5138




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Option:
USDA                 Authorizing committees                      Agriculture, Nutrition, and Forestry (Senate)
                                                                 Agriculture (House)
Telecommunications   Appropriations subcommittees                Agriculture, Rural Development, Food and
and Information                                                  Drug Administration, and Related
                                                                 Agencies (Senate and House)
Systems              Primary agency                              Department of Agriculture
                     Account                                     Multiple
                     Spending type                               Discretionary
                     Budget subfunction                          Multiple
                     Framework theme                             Improve efficiency

                     From telephone calls to video conference meetings to providing
                     nationwide customer access to information, USDA reports that it spends
                     over $200 million annually for a wide array of telecommunications
                     technology. In 1995 and 1996, we reported that USDA was not
                     cost-effectively managing and planning its substantial telecommunications
                     investments and was wasting millions of dollars each year as a result.
                     Specifically, we found that USDA (1) was paying for unnecessary or unused
                     telecommunications equipment and services because of breakdowns in
                     management controls; (2) was wasting as much as $5 million to $10 million
                     annually because the department had not acted on opportunities to
                     consolidate and optimize its FTS 2000 telecommunications services;
                     (3) was spending hundreds of millions of dollars developing redundant
                     networks that perpetuate long-standing information sharing problems and
                     (4) had hundreds of cases of telephone abuse because the department
                     lacked adequate controls over the millions of dollars it spends each year
                     on commercial telephone services.

                     In our 1998 followup review, we found that in response to our reports and
                     recommendations, USDA had taken positive steps to begin correcting its
                     telecommunications management weaknesses—improvements that the
                     department says could reduce its $200 million-plus reported annual
                     investment in telecommunications by as much as $70 million each year.
                     However, we also found that USDA had not achieved significant cost
                     savings or management improvements because many of the department’s
                     corrective actions were incomplete or inadequate. Further, it was unclear
                     how and when these needed corrective actions would be implemented
                     because the department had not established an effective action plan or
                     strategy for addressing our recommendations with time frames,
                     milestones, and resources for making improvements.




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                       Although the full extent of USDA’s telecommunications management
                       problem is unknown, USDA officials have indicated that millions could be
                       saved annually by eliminating redundant commercial telecommunication
                       services and by sharing 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: Strong Leadership Needed to Resolve
                       Management Weaknesses, Achieve Savings (GAO/AIMD-98-131, June 30, 1998).

                       Telecommunications Management: More Effort Needed by Interior and the
                       Forest Service to Achieve Savings (GAO/AIMD-97-67, May 8, 1997).

                       USDATelecommunications: More Effort Needed to Address Telephone
                       Abuse and Fraud (GAO/AIMD-96-59, Apr. 16, 1996).

                       USDATelecommunications: Better Management and Network Planning
                       Could Save Millions (GAO/AIMD-95-203, Sept. 22, 1995).

                       USDA   Telecommunications (GAO/AIMD-95-219R, Sept. 5, 1995).

                       USDA Telecommunications: Missed Opportunities to Save Millions
                       (GAO/AIMD-95-97, Apr. 24, 1995).


GAO Contact            Joel C. Willemssen, (202) 512-6408




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                   Self-Financing of Mission Oversight by Fannie Mae and Freddie Mac
370 Commerce and   Rural Housing Loans Interest Recapture
Housing Credit     Reducing FHA’s Insurance Coverage




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Option:
Self-Financing of      Authorizing committee                       Banking, Housing, and Urban Affairs
                                                                   (Senate)
Mission Oversight by                                               Banking and Financial Services (House)
Fannie Mae and         Appropriations subcommittee                 VA, HUD, and Independent Agencies
                                                                   (Senate and House)
Freddie Mac            Primary agency                              Department of Housing and Urban
                                                                   Development
                       Accounts                                    Office of Federal Housing Enterprise
                                                                   Oversight, Salaries and Expenses
                                                                   (86-5272)
                       Spending type                               Direct
                       Budget subfunction                          Mortgage Credit
                       Framework theme                             Improve efficiency

                       The Congress established and chartered the Federal National Mortgage
                       Association (Fannie Mae) and the Federal Home Loan Mortgage
                       Corporation (Freddie Mac) as government-sponsored enterprises. These
                       enterprises are privately-owned corporations chartered to enhance the
                       availability of mortgage credit across the nation. The Congress also
                       charged the Department of Housing and Urban Development (HUD) with
                       mission oversight responsibility for the enterprises, which includes
                       ensuring that housing goals established by HUD result in enhanced housing
                       opportunities for certain groups of borrowers.

                       Other federal organizations responsible for regulating
                       government-sponsored enterprises are financed by assessments on the
                       regulated entities. However, HUD’s mission oversight expenditures are
                       funded with taxpayer dollars from HUD’s appropriations. Accordingly,
                       HUD’s capability to strengthen its enterprise housing mission oversight may
                       be limited because resources that could be used for that purpose must
                       compete with other priorities. For example, HUD’s capacity to implement a
                       program to verify housing goal data, which would necessarily involve a
                       commitment of additional resources, may be limited.

                       Requiring Fannie Mae and Freddie Mac to reimburse HUD for mission
                       oversight expenditures would not only result in the savings shown below
                       but would also enable HUD to strengthen its oversight activities.




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Five-Year Savings
                       Dollars in millions
                                                              FY00     FY01       FY02        FY03       FY04
                       Savings from the 1999 funding level
                       Budget authority                         10        10         10         10         10
                       Outlays                                  10        10         10         10         10
                       Source: Congressional Budget Office.




Related GAO Products   Federal Housing Enterprises: HUD’s Mission Oversight Needs to Be
                       Strengthened (GAO/GGD-98-173, July 28, 1998).

                       Government-Sponsored Enterprises: Advantages and Disadvantages of
                       Creating a Single Housing GSE Regulator (GAO/GGD-97-139, July 9, 1997).

                       Government-Sponsored Enterprises: A Framework for Limiting the
                       Government’s Exposure to Risks (GAO/GGD-91-90, May 22, 1991).


GAO Contact            Thomas J. McCool, (202) 512-8678




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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, Food and
                                                                    Drug Administration, and Related
                                                                    Agencies (Senate and 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 USDA’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 1995 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.

Five-Year Savings
                      Dollars in millions
                                                             FY00     FY01       FY02           FY03    FY04
                      Savings from the 1999 funding level
                      Budget authority                         45            0        0            0         0
                      Outlays                                  45            0        0            0         0
                      Source: Congressional Budget Office.




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Related GAO Product   Rural Housing Programs: Opportunities Exist for Cost Savings and
                      Management Improvement (GAO/RCED-96-11, Nov. 16, 1995).


GAO Contact           Judy A. England-Joseph, (202) 512-7631




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Option:
Reducing FHA’s       Authorizing committees                      Banking, Housing, and Urban Affairs
                                                                 (Senate)
Insurance Coverage                                               Banking and Financial Services (House)
                     Appropriations subcommittees                VA, HUD, and Independent Agencies
                                                                 (Senate and House)
                     Primary agency                              Department of Housing and Urban
                                                                 Development
                     Account                                     FHA-Mutual Mortgage Insurance Fund
                                                                 (86-0183)
                     Spending type                               Discretionary/Direct
                     Budget subfunction                          Mortgage Credit
                     Framework theme                             Improve efficiency

                     Through its Federal Housing Administration (FHA), the Department of
                     Housing and Urban Development (HUD) insures private lenders against
                     nearly all losses resulting from foreclosures on single-family homes
                     insured under its Mutual Mortgage Insurance Fund (Fund). The
                     Department of Veterans Affairs (VA) also operates a single-family mortgage
                     guaranty program. However, unlike FHA, VA covers only 25 to 50 percent of
                     the original loan amount against losses incurred when borrowers default
                     on loans, leaving lenders responsible for any remaining losses.

                     In May 1997, we reported that reducing FHA’s insurance coverage to the
                     level permitted for VA home loans would likely reduce the Fund’s exposure
                     to financial losses, thereby improving its financial health. As a result, the
                     Fund’s ability to maintain financial self-sufficiency in an uncertain future
                     would be enhanced. For example, if insurance coverage on FHA’s 1995
                     loans were reduced to VA’s levels and a 14 percent volume reduction in
                     lending assumed, we estimated that the economic value of the loans would
                     increase by $52 million to $79 million. Economic value provides an
                     estimate of the profitability of FHA loans, which is important because
                     estimated increases in economic value due to legislative changes allow
                     additional mandatory spending authorizations to be made, other revenues
                     to be reduced, or projected savings in the federal budget to be realized.
                     Reducing FHA’s insurance coverage would likely improve the financial
                     health of the fund because the reduction in claim payments resulting from
                     lowered insurance coverage would more than offset the decrease in
                     premium income resulting from reduced lending volume.

                     Legislative changes could be made to reduce FHA’s insurance coverage.
                     Savings under this option would depend on future economic conditions,



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                      the volume of loans made, how higher risk and lower risk borrowers
                      would be identified for exclusion from the program, and whether some
                      losses may be shifted from FHA to the Government National Mortgage
                      Association. In addition, reducing FHA’s insurance coverage does pose
                      trade-offs affecting lenders, borrowers, and FHA’s role, such as diminishing
                      the federal role in stabilizing markets. Borrowers most likely affected
                      would be low-income, first-time, and minority home buyers and those
                      individuals purchasing older homes.

                      CBO did not provide a savings estimate for this option because the amount
                      of potential savings would depend on the reaction of lenders and the
                      resulting demand for FHA’s products.


Related GAO Product   Homeownership: Potential Effects of Reducing FHA’s Insurance Coverage
                      for Home Mortgages (GAO/RCED-97-93, May 1, 1997).


GAO Contact           Judy A. England-Joseph, (202) 512-7631




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                     Replacement of Airport Surveillance Radars
400 Transportation   Cargo Preference Laws
                     Fees Paid by Foreign-Flagged Cruise Ships
                     Department of Transportation’s Oversight of Its University Research
                     Fees for Registering Aircraft




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Option:
Replacement of         Authorizing committees                      Commerce, Science, and Transportation
                                                                   (Senate)
Airport Surveillance                                               Transportation and Infrastructure (House)
Radars                 Appropriations subcommittees                Transportation (Senate and House)
                       Primary agency                              Department of Transportation
                       Accounts                                    69-8107
                       Spending type                               Discretionary
                       Budget subfunction                          Air Transportation
                       Framework theme                             Improve efficiency

                       Before installing an airport surveillance radar (ASR), FAA conducts
                       benefit-cost studies to determine whether it will be cost effective. In
                       addition to the $5 million cost of the new radars, other costs may be
                       incurred for auxiliary equipment and infrastructure modifications.
                       Benefits of these improvements include travelers’ time saved through
                       potential reductions in aircraft delays and lives saved and injuries avoided
                       through reduced risk of midair and terrain collisions. Because there is a
                       direct correlation between projected air traffic operations and the
                       potential benefits associated with radar installation, airports with higher
                       air traffic projections would receive more benefit from a radar than those
                       with lower projections.

                       FAA plans to install technologically advanced ASR-11 radars to replace its
                       model ASR-7 and ASR-8 radars, currently located at 101 airports. However,
                       some of these airports may no longer qualify for a radar based on FAA’s
                       benefit-cost criteria. Seventy-five of these airports have less air traffic than
                       an airport whose radar request FAA recently denied using its benefit-cost
                       criteria. Furthermore, at some of these airports, the circumstances that
                       originally justified a radar no longer exist. Nevertheless, FAA officials plan
                       to proceed with the replacements because they believe that it would be
                       very difficult to discontinue radar operations at an airport that no longer
                       qualifies because the public’s perception would be that safety was being
                       reduced, even if safety is not compromised.

                       Safety and confidence in the national airspace system are very important
                       and must be considered when making decisions regarding the installation
                       and replacement of surveillance radars. However, FAA’s current plans to
                       install replacement radars without conducting benefit-cost studies and
                       revalidating operational needs may result in the agency spending millions
                       of dollars to replace radars that are no longer needed or where the costs




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                      outweigh the benefits. FAA’s perceived difficulties in discontinuing radar
                      operations at an airport only elevate the need for conducting benefit-cost
                      studies and assessing the operational needs. Therefore, we recommended
                      that FAA conduct benefit-cost studies to validate the cost effectiveness and
                      revalidate the need for the radars at airports scheduled to receive
                      replacement radars and to use the results of the studies in prioritizing the
                      replacement of the radars at qualifying airports. FAA has not yet responded
                      to our recommendation.

                      Any savings resulting from this proposal would depend on the findings of
                      an FAA benefit-cost study. Accordingly, CBO has not prepared a savings
                      estimate for this option.


Related GAO Product   Air Traffic Control: Surveillance Radar Request for the Cherry Capital
                      Airport (GAO/RCED-98-118, May 28, 1998).


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 times 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, Energy, and the Agency for International Development—were
                   responsible for more than 99 percent, by tonnage, of government cargo
                   subject to cargo preference laws. 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.

                   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 laws were eliminated, the following savings
                   could be achieved.




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Five-Year Savings
                       Dollars in millions
                                                              FY00         FY01         FY02         FY03            FY04
                       Savings from the 1999 funding level
                       Budget authority                         166          179         192          205             218
                       Outlays                                  123          170         185          199             212
                       Note: The termination of cargo preference requirements for all government-sponsored cargoes
                       would probably cause additional defaults on outstanding loans guaranteed by the Maritime
                       Administration.

                       Source: Congressional Budget Office.




Related GAO Products   Management Reform: Implementation of the National Performance
                       Review’s Recommendations (GAO/OCG-95-1, Dec. 5, 1994).

                       Maritime Industry: Cargo Preference Laws—Their Estimated Costs and
                       Effects (GAO/RCED-95-34, Nov. 30, 1994).

                       Cargo Preference: Effects of U.S. Export-Import Cargo Preference Laws
                       on Exporters (GAO/GGD-95-2BR, Oct. 31, 1994).

                       Cargo Preference Requirements: Objectives Not Significantly Advanced
                       When Used in U.S. Food Aid Programs (GAO/GGD-94-215, Sept. 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 shore-side 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.




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Five-Year Savings
                    Dollars in millions
                                                           FY00     FY01       FY02        FY03       FY04
                    Added receipts                           20        25         30         35         40
                    Source: Congressional Budget Office.




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 and House)
                      Primary agency                              Department of Transportation
University Research   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 we recommended, DOT has completed the development of a
                      departmentwide database to track the purpose and costs associated with
                      each university research award. We also recommended that DOT evaluate
                      the operating administrations’ processes to ensure that they have adequate
                      policies and procedures to carry out their responsibilities for monitoring
                      awards. However, the department has no plans to 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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                      Our 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. CBO does not disagree that improved
                      monitoring and oversight of DOT’s university research can reduce outlays.
                      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
Registering Aircraft   Authorizing committees                        Commerce, Science, and Transportation
                                                                     (Senate)
                                                                     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
                       December 1997, 349,528 aircraft were registered in the United States. In
                       fiscal year 1997, 59,353 certificate registrations were issued.

                       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. Although the DOT
                       Appropriations Act for fiscal year 1998 prohibited FAA from promulgating
                       new aviation user fees not specifically authorized by law, FAA plans on
                       rewriting the draft Notice of Proposed Rulemaking to increase registration
                       fees based on existing legislative authority.

                       If FAA recovered the full cost of processing aircraft registration
                       applications, the following additional revenue could be achieved.

Five-Year Savings
                       Dollars in millions
                                                              FY00     FY01       FY02        FY03        FY04
                       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 1998 dollars, FEMA obligated almost $12 billion in public
                          assistance for 412 disasters and emergencies declared during fiscal years
                          1991 through 1998, as compared with about $3 billion for 215 disasters and
                          emergencies declared during the preceding 8 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, we 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 (e.g., upgrade only disaster-damage
                          portions of structures, better define who has the authority to adopt and
                          approve codes and standards, and limit the time period for adopting new
                          codes). In 1998, FEMA reduced the number of appeals for program
                          decisions from three to two and issued regulations stating that building
                          codes and specifications or standards required for the construction of
                          facilities must be found to be reasonable and must be limited to the
                          standards that are in writing and in effect at the time of the disaster




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                       declaration. 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.

Five-Year Savings
                       Dollars in millions
                                                              FY00     FY01       FY02        FY03       FY04
                       Savings from the 1999 funding level
                       Budget authority                         48        48         48         48         48
                       Outlays                                  10        22         31         38         38
                       Source: Congressional Budget Office.




Related GAO Products   Disaster Assistance: Information on Federal Costs and Approaches for
                       Reducing Them (GAO/T-RCED-98-139, Mar. 26, 1998).

                       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, Apr. 30, 1996).


GAO Contact            Judy A. England-Joseph, (202) 512-7631




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                  Consolidation of Student Aid Programs
500 Education,
Training,
Employment, and
Social Services




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Option:
Consolidation of       Authorizing committees                      Labor and Human Resources (Senate)
                                                                   Education and the Workforce (House)
Student Aid Programs   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 Loan (FDL) programs compose
                       the largest source of federal student financial aid. FFEL and FDL 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 16
                       smaller programs are targeted to specific segments of the postsecondary
                       school population. 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 16 programs, which were funded at $1.1 billion total in fiscal year
                       1998, could be candidates for consolidation. For example, programs
                       directed at 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 several small grant programs.




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                       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 object of the enabling legislation,
                       the Higher Education Act of 1965, as amended.

Five-Year Savings
                       Dollars in millions
                                                              FY00     FY01       FY02        FY03       FY04
                       Savings from the 1999 funding level
                       Budget authority                        124       124        124        124        124
                       Outlays                                  15        99        121        124        124
                       Source: Congressional Budget Office.




Related GAO Products   Department of Education: Information on Consolidation Opportunities
                       and Student Aid (GAO/T-HEHS-95-130, Apr. 6, 1995).

                       Department of Education: Opportunities to Realize Savings
                       (GAO/T-HEHS-95-56, Jan.18, 1995).


GAO Contact            Cynthia M. Fagnoni, (202) 512-7215




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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
             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

                        While the Medicaid program is increasingly turning to managed care as a
                        solution for higher costs, about 60 percent of all 1996 recipients still
                        obtained medical items and services from vendors. 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 1997, Medicaid’s drug benefit cost about $10 billion.




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                       While precise dollar losses due to diversion—as with all fraud—are
                       impossible to identify, New York State officials estimate that in 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. Based on considerable previous work, we
                       believe 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
                       our findings and recommendation, but believes it is not feasible unless
                       new staff resources can be identified and allocated.

                       The Congress may wish to 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
                       of the savings 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, Mar. 22, 1995).

                       Prescription Drugs: Automated Prospective Review Systems Offer
                       Significant Potential Benefits for Medicaid (GAO/AIMD-94-130, Aug. 5, 1994).

                       Medicaid: A Program Highly Vulnerable to Fraud (GAO/T-HEHS-94-106, Feb. 25,
                       1994).

                       Medicaid Drug Fraud: Federal Leadership Needed to Reduce Program
                       Vulnerabilities (GAO/HRD-93-118, Aug. 2, 1993).




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              Medicaid Prescription Drug Diversion: A Major Problem, but State
              Approaches Offer Some Promise (GAO/T-HRD-92-48, July 29, 1992).

              Prescription Drug Monitoring: States Can Readily Identify Illegal Sales and
              Use of Controlled Substances (GAO/HRD-92-115, July 21, 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

                       We 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. Our 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 have been
                       restricted by (1) the Omnibus Budget Reconciliation Act of 1993
                       provisions that limit such payments to unreimbursed Medicaid and
                       uninsured costs and (2) the Balanced Budget Act of 1997 provisions that
                       further limit Medicaid payments to state psychiatric hospitals. 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.

                       We believe 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




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                       that provide the care. We believe the Congress should enact legislation to
                       minimize the likelihood that states can develop arrangements whereby
                       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   Medicaid: Managed Care and Individual Hospital Limits for
                       Disproportionate Share Hospital Payments (GAO/HEHS-98-73R, Jan. 28, 1998).

                       Medicaid: Disproportionate Share Payments to State Psychiatric Hospitals
                       (GAO/HEHS-98-52, Jan. 23, 1998).

                       Medicaid: Disproportionate Share Hospital Payments to Institutions for
                       Mental Disease (GAO/HEHS-97-181R, July 15, 1997)

                       State Medicaid Financing Practices (GAO/HEHS-96-76R, Jan. 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, Aug. 1, 1994).

                       Medicaid: The Texas Disproportionate Share Program Favors Public
                       Hospitals (GAO/HRD-93-86, Mar. 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 low-income, aged,
                    blind, or disabled individuals. The federal government and the states share
                    the financing of the program through an open-ended matching grant
                    whereby federal outlays rise with the cost and use of Medicaid services.
                    The federal share of the program costs varies inversely with state per
                    capita income. 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, we have issued numerous reports and testimonies that identify
                    ways in which the fairness of federal grant formulas could be improved.
                    With respect to Medicaid, we believe that the fairness of the matching
                    formula in the open-ended program could be improved by replacing the
                    per capita income factor with four factors—the number of people living
                    below the official poverty line, the total taxable resources of the state, cost
                    differences associated with the demographic composition of state
                    caseloads and, 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, lower
                    costs and greater 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
                                                              FY00      FY01       FY02        FY03       FY04
                       Savings from the 1999 funding level
                       Budget authority                       6,400     6,900      7,400      8,000      8,700
                       Outlays                                6,400     6,900      7,400      8,000      8,700
                       Source: Congressional Budget Office.




Related GAO Products   Medicaid Formula: Effects of Proposed Formula on Federal Shares of
                       State Spending (GAO/HEHS-99-29R, Feb. 19, 1999).

                       Medicaid Matching Formula: Effects of Need Indicators on New York’s
                       Funding (GAO/HEHS-97-152R, June 9, 1997).

                       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, Dec. 7,
                       1990).


GAO Contact            William J. Scanlon, (202) 512-7114




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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
                            Account                                     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.

                            We 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.

                           Our 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 changes are implemented, the accuracy of the data
                           PHS and DOD provided us, the applicability of 1994 costs to future years,
                           how closely our 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.

                           Although CBO estimates that converting officers with fewer than 15 years
                           of service to civilian status would result in a net cost to the federal
                           government during the initial 5-year estimation period, it agrees that
                           annual savings of millions of dollars would continue to grow as new
                           entrants continue to be hired at a lower cost than PHS Corps recruits.7


Related GAO Products       Federal Personnel: Public Health Service Commissioned Corps Officers’
                           Health Care for Native Americans (GAO/GGD-97-111BR, Aug. 27, 1997).



                           7
                            CBO’s estimate assumed that the conversion would be effective January 1, 2000. The estimate further
                           assumed that converted officers would not incur any reduction in pay but that new entrants would be
                           hired at a lower cost than previously incurred for PHS Corps recruits.



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              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 (House)
                     Primary agency                              Department of Agriculture
                     Accounts                                    Multiple
                     Spending type                               Discretionary
                     Framework theme                             Improve efficiency

                     We have issued numerous 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 is inefficient and outdated and does not
                     adequately protect the consumer against food-borne illness. We have
                     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, we have recommended the consolidation of federal food safety
                     agencies and activities. Specifically, we have 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) that 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, 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, these activities have not been consolidated into
                     a single food safety agency that would further reduce costs. In 1998, the
                     National Academy of Sciences issued a report endorsing action to
                     consolidate food safety activities.

                     A 5-year estimate of savings from consolidating food inspection
                     programs—which as separate activities currently cost over $1 billion




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                       dollars—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: Weak and Inconsistently Applied Controls Allow Unsafe
                       Imported Food to Enter U.S. Commerce (GAO/T-RCED-98-271, Sept. 10, 1998).

                       Food Safety: Opportunities to Redirect Federal Resources and Funds Can
                       Enhance Effectiveness (GAO/RCED-98-224, Aug. 6, 1998).

                       Food Safety: Federal Efforts to Ensure the Safety of Imported Foods Are
                       Inconsistent and Unreliable (GAO/RCED-98-103, Apr. 30, 1998).

                       Food Safety: Fundamental Changes Needed to Improve Food Safety
                       (GAO/RCED-97-249R, Sept.9, 1997).

                       Food Safety: Information on Foodborne Illnesses (GAO/RCED-96-96, May 8,
                       1996).

                       Food Safety: Changes Needed to Minimize Unsafe Chemicals in Food
                       (GAO/RCED-94-192, Sept. 26, 1994).

                       Food Safety: A Unified, Risk-Based Food Safety System Needed
                       (GAO/T-RCED-94-223, May 25, 1994).

                       Food Safety: Risk-Based Inspections and Microbial Monitoring Needed for
                       Meat and Poultry (GAO/RCED-94-110, May 19, 1994).

                       Food Safety and Quality: Uniform, Risk-based Inspection System Needed
                       to Ensure Safe Food Supply (GAO/RCED-92-152, June 26, 1992).

                       Food Safety and Quality: Who Does What in the Federal Government
                       (GAO/RCED-91-19A, Dec. 21, 1990).

                       Food Safety and Quality: Who Does What in the Federal Government
                       (GAO/RCED-91-19B, Dec. 21, 1990).


GAO Contact            Lawrence J. Dyckman (202) 512-5138



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               Anticipated Savings at Risk with New Skilled Nursing Facility Payment
570 Medicare     Method
               Using More Precise Coding to Facilitate Adjusting Medicare Fee Schedule
                 Allowances to Reflect
               Changing Technology, Costs, and Market Prices
               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:
Anticipated Savings at   Authorizing committees                      Finance (Senate)
                                                                     Ways and Means (House)
Risk With New Skilled                                                Commerce (House)
Nursing Facility         Primary agency                              Department of Health and Human Services
                         Account                                     Federal Hospital Insurance Trust Fund
Payment Method                                                       (20-8005)
                         Spending type                               Direct
                         Budget subfunction                          Health and Medicare
                         Framework theme                             Improve efficiency

                         The Balanced Budget Act mandated the implementation of a prospective
                         payment system (PPS) for skilled nursing facilities (SNF) to help address
                         concerns about dramatic growth in Medicare spending for these services.
                         A PPS provides incentives to deliver services efficiently by paying
                         providers—regardless of their costs—fixed, predetermined rates that vary
                         according to expected patient service needs. Health Care Financing
                         Administration (HCFA) began phasing in such a system for SNFs in
                         July 1998.

                         Problems with the design of the PPS, inadequate data used to establish
                         rates, and inadequate planned oversight of claims for payment, however,
                         could compromise Medicare’s ability to stem spending growth while
                         maintaining beneficiary access. We are concerned that the PPS preserves
                         the opportunity for providers to increase their compensation by supplying
                         potentially unnecessary services. Furthermore, the payment rates were
                         computed using data that overstate the reasonable cost of providing care
                         and may not appropriately reflect the differences in costs for patients with
                         different care needs. In addition, as a part of the system, Medicare appears
                         to have established new criteria for determining eligibility for the
                         Medicare SNF benefit, which could expand the number of beneficiaries
                         who will be covered and the length of covered stays. The planned
                         oversight of claims to determine if a beneficiary is entitled to Medicare
                         coverage and how much payment a SNF should receive is insufficient,
                         increasing the potential to compromise expected savings.

                         We believe that HCFA should modify the SNF PPS regulations to address
                         these concerns. Medicare needs to ensure that the payment rates reflect
                         only necessary services that the facilities actually provide. Medicare
                         should also increase its vigilance over claims review and provider




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                       oversight so that payments are appropriate and made only for eligible
                       beneficiaries.

                       CBO agrees that improved payment methods and oversight could reduce
                       spending. However, by convention, CBO only estimates the costs or savings
                       of proposals that change current law, not administrative changes.


Related GAO Products   Balanced Budget Act: Implementation of Key Medicare Mandates Must
                       Evolve to Fulfill Congressional Objectives (GAO/T-HEHS-98-214, July 16, 1998).

                       Long-Term Care: Baby Boom Generation Presents Financing Challenges
                       (GAO/T-HEHS-98-107, Mar. 9, 1998).

                       Medicare Post-Acute Care: Home Health and Skilled Nursing Facility Cost
                       Growth and Proposals for Prospective Payment (GAO/T-HEHS-97-90, Mar. 4,
                       1997).


GAO Contact            William J. Scanlon, (202) 512-7114




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Option:
Using More Precise      Authorizing committees                      Finance (Senate)
                                                                    Commerce (House)
Coding to Facilitate                                                Ways and Means (House)
Adjusting Medicare      Primary agency                              Department of Health and Human Services
                        Account                                     Federal Supplementary Medical Insurance
Fee Schedule                                                        Trust Fund (20-8004)
Allowances to Reflect   Spending type                               Direct
Changing Technology,    Budget subfunction                          Medicare
                        Framework theme                             Improve efficiency
Costs, and Market
Prices                  Medicare’s supplementary medical insurance program (Medicare Part B)
                        uses fee schedules to pay for most medical items such as durable medical
                        equipment, prosthetics, orthotics, and supplies—items that accounted for
                        $4.6 billion in allowed charges in 1996. Fee schedule allowances are
                        primarily based on historical charges, indexed forward, rather than
                        current costs or market prices. For example, the fee schedules for durable
                        medical equipment, prosthetic devices, orthotics, prosthetics, and related
                        supplies such as walkers, catheters, and glucose test strips are based on
                        supplier charges in 1986 and 1987.

                        Over time, providers’ costs for some procedures, equipment, and supplies
                        have declined as competition and efficiencies increased. In other cases,
                        medical innovations and advances have increased the cost of some
                        procedures and products. However, Medicare has not had a process to
                        routinely and systematically review these factors and make timely
                        adjustments to the Medicare allowances. In fact, through the years, the
                        Congress has legislatively adjusted Medicare allowances for some
                        products and services, such as home oxygen, clinical laboratory tests,
                        intraocular lenses, computed tomography scans and magnetic resonance
                        imaging scans.

                        The Balanced Budget Act of 1997 provided the Health Care Financing
                        Administration (HCFA) the authority to make more timely adjustments to
                        Medicare Part B allowances by up to 15 percent per year. (This authority
                        does not extend to adjustment of Medicare payments for physician
                        services.) However, HCFA must overcome some obstacles to effectively use
                        this new authority. One obstacle is that Medicare frequently does not
                        know specifically what it is paying for. HCFA does not require suppliers to
                        identify on Medicare claims the specific items billed. Instead, suppliers are
                        required to use HCFA billing codes, most of which cover a broad range of




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                       products of various types, qualities, and market prices. For example, one
                       Medicare billing code is used for more than 200 different urological
                       catheters, even though some of these catheters sell at a fraction of the
                       price of others billed under the same code. Unless Medicare claims
                       contain more product specific information, HCFA cannot track what items
                       are billed to ensure that each billing code is used for comparable products.
                       Although the health care industry is increasingly using more specific
                       universal product numbers and bar codes for inventory control, HCFA does
                       not require suppliers to use these identifiers on Medicare claims.

                       There are a number of options that could also help bring Medicare
                       allowances more into line with costs and market prices. For example, the
                       Congress has authorized HCFA to implement competitive bidding
                       demonstration projects for some Part B services and suppliers. Another
                       approach is basing Medicare payments on the lower of the fee schedule
                       allowance or the lowest amount a provider has agreed to accept from
                       other payers. Also, for some medical equipment and supplies, HCFA could
                       base Medicare allowances on the competitive contracts awarded by other
                       large payers, such as the Department of Defense or the Department of
                       Veterans’ Affairs.

                       CBOis currently collecting data on a Universal Product Code-based
                       payment system and is unable to provide saving estimates at this time.


Related GAO Products   Medicare: Progress to Date in Implementing Certain Major Balanced
                       Budget Act Reforms (GAO/T-HEHS-99-87, Mar. 17, 1999).

                       Medicare: Need to Overhaul Costly Payment System for Medical
                       Equipment and Supplies (GAO/HEHS-98-102, May 12, 1998).

                       Medicare: Home Oxygen Program Warrants Continued HCFA Attention
                       (GAO/HEHS-98-17, Nov. 7, 1997).

                       Medicare: Problems Affecting HCFA’s Ability to Set Appropriate
                       Reimbursement Rates for Medical Equipment and Supplies
                       (GAO/HEHS-97-157R, June 17, 1997).

                       Medicare: Comparison of Medicare and VA Payment Rates for Home
                       Oxygen (GAO/HEHS-97-120R, May 15, 1997).




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              Medicare Spending: Modern Management Strategies Needed to Curb
              Billions in Unnecessary Payments (GAO/HEHS-95-210, Sept. 19, 1995).

              Medicare High Spending Growth Calls for Aggressive Action
              (GAO/HEHS-T-95-75, Feb. 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 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 subfunction                          Health and Medicare
                   Framework theme                             Improve efficiency

                   Recently we reported that the funding Medicare contractors receive to
                   review benefit claims has declined by over 20 percent since 1989. In
                   response, contractors apply fewer or less stringent payment controls, and
                   claims are paid that otherwise would not be. Historically, payment
                   safeguards such as pre- and postpayment medical review of claims, or
                   fraud unit investigations, have returned $10 in savings for each dollar
                   expended on them. We believe 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
                   Investigation—to identify and pursue individuals or entities that defraud
                   federal health care programs. However, the recently enacted increase in
                   Medicare program safeguard funding alone—13.6 percent, or $60 million,
                   for fiscal year 1998—must be spread over a volume of claims rising in
                   recent years by 3 to 5 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 through 1996 average. Consequently, we
                   believe that the potential exists for further funding increases to yield net
                   savings.




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                       CBO did not prepare a savings estimate for this option because it does not
                       estimate changes in direct spending due to changes in discretionary
                       spending.


Related GAO Products   Medicare: Health Care Fraud and Abuse Control Program Financial Report
                       for Fiscal Year 1997 (GAO/AIMD-98-157, Jun. 1, 1998)

                       Medicare: Fraud and Abuse Control Pose a Continuing Challenge
                       (GAO/HEHS-98-215R, July 15, 1998).

                       Medicare: HCFA’s Use of Anti-Fraud-and-Abuse Funding and Authorities
                       (GAO/HEHS-98-160, June 1, 1998).

                       Medicare: Improper Activities by Mid-Delta Home Health (GAO/OSI-98-5,
                       Mar. 12, 1998).

                       Medicare: Recent Legislation to Minimize Fraud and Abuse Requires
                       Effective Implementation (GAO/T-HEHS-98-9, Oct. 9, 1997).

                       Medicare Fraud and Abuse: Summary and Analysis of Reform in the
                       Health Insurance Portability and Accountability Act of 1996 and the
                       Balanced Budget Act of 1997 (GAO/HEHS-98-18R, Oct. 9, 1997).

                       Medicare: Control Over Fraud and Abuse Remains Elusive
                       (GAO/T-HEHS-97-165, June 26, 1997).

                       Medicare: Inherent Program Risks and Management Challenges Require
                       Continued Federal Attention (GAO/T-HEHS-97-89, Mar. 4, 1997).

                       Nursing Homes: Too Early to Assess New Efforts to Control Fraud and
                       Abuse (GAO/T-HEHS-97-114, Apr. 16, 1997).

                       Medicare: Control Over Fraud and Abuse Remains Elusive
                       (GAO/T-HEHS-97-165, June 25, 1997).

                       Medicare Home Health: Success of Balanced Budget Act Cost Controls
                       Depends on Effective and Timely Implementation (GAO/T-HEHS-98-41, Oct. 29,
                       1997).

                       Medicare (GAO/HR-97-10, Feb. 1997).




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              Funding Anti-Fraud and Abuse Activities (GAO/HEHS-95-263R, Sept. 29, 1995).

              Medicare: High Spending Growth Calls for Aggressive Action
              (GAO/T-HEHS-95-75, Feb. 6, 1995).

              Medicare Claims (GAO/HR-95-8, Feb. 1995).

              Medicare: Adequate Funding and Better Oversight Needed to Protect
              Benefit Dollars (GAO/T-HRD-94-59, Nov. 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, Feb. 28, 1989).

              Medicare and Medicaid: Budget Issues (GAO/T-HRD-87-1, Jan. 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 less efficient rendering of a service due to
                      inexperience, large capital expenditures and low initial utilization rates.
                      When Medicare sets its payment rates for these new services, the rates
                      typically are based on the high initial unit costs. Over time, providers’ unit
                      costs decline as equipment improves, utilization increases, and experience
                      in performing the service 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 and magnetic
                      resonance imaging scans.

                      The Health Care Financing Administration (HCFA) has initiatives underway
                      which may help bring some Medicare payment rates more in line with
                      actual costs and market prices, including a HCFA demonstration project,
                      now mandated by the Balanced Budget Act of 1997, which will evaluate a
                      competitive bidding process to set Medicare payment levels for some
                      medical equipment and services. Laboratory services are among those
                      being considered for competitive bidding.

                      These projects may eventually bring some Medicare payment rates more in
                      line with actual costs and market rates, but none of these projects
                      specifically targets expensive, evolving technologies. We believe
                      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.




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                       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, Sept. 19, 1995).

                       Medicare: High Spending Growth Calls for Aggressive Action
                       (GAO/T-HEHS-95-75, Feb. 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                                       Directa
                        Budget subfunction                                  Medicare
                        Framework theme                                     Improve efficiency
                        a
                        A small portion of this account includes administrative expenses that are discretionary in nature.



                        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. Prior to
                        passage of the Balanced Budget Act of 1997, basic capitation rates for
                        Medicare risk HMOs in each county were set at 95 percent of the estimated
                        average cost of beneficiaries in that county’s Medicare fee-for-service
                        program. The county rates were then adjusted, up or down, depending on
                        HMO enrollees’ demographic traits. These adjustments, known as “risk
                        adjustments,” were designed to better match payment amounts with the
                        expected health care costs of HMO enrollees.

                        The risk contract program has not achieved its goal of reducing Medicare
                        costs for two reasons. First, the basic county capitation rates tend to be
                        too high in many areas. Medicare HMOs tend to attract relatively healthy
                        individuals while less healthy, more expensive, beneficiaries typically
                        remain in fee-for-service. Because county rates are determined by actual
                        fee-for-service spending, this “favorable selection” of relatively healthy
                        beneficiaries into HMOs tends to increase county rates and generate excess
                        payments to HMOs. Second, because the Health Care Financing
                        Administration’s (HCFA) risk adjustment methodology is inadequate,
                        Medicare has paid HMOs more than it would have paid to treat HMO
                        enrollees in the fee-for-service program. We have estimated that, for
                        counties containing 36 percent of risk contract HMO enrollment, Medicare
                        excess payments (payments above estimated fee-for-service costs) to HMOs
                        were about $1 billion in 1995.

                        The Balanced Budget Act requires major changes in how capitation rates
                        are determined, but the basic link to fee-for-service spending—and the




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                       payment inaccuracies that accompany that link—remain in the new rate
                       setting methodology. These inaccuracies will continue under the Balanced
                       Budget Act because (1) rates determined under the old system (increased
                       by 2 percent) are used as new minimum rates, (2) local fee-for-service
                       spending will continue to influence county rates, although not as strongly
                       as in the past, and (3) increases in fee-for-service spending will influence
                       annual updates in the capitation rates.

                       We have 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
                       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 Managed Care: Better Risk Adjustment Expected to Reduce
                       Excess Payments Overall While Making Them Fairer to Individual Plans
                       (GAO/T-HEHS-99-72, Feb. 25, 1999).

                       Medicare HMO Institutional Payments: Improved HCFA Oversight, More
                       Recent Cost Data Could Reduce Overpayments (GAO/HEHS-98-153, Sept. 9,
                       1998).

                       Medicare HMOs: Setting Payment Rates Through Competitive Bidding
                       (GAO/HEHS-97-154R, June 12, 1997).

                       Medicare HMOs: HCFA Can Promptly Eliminate Hundreds of Millions of
                       Excess Payments (GAO/HEHS-97-16, Apr. 25, 1997).

                       Medicare HMOs: HCFA Could Promptly Reduce Excess Payments by
                       Improving Accuracy of County Payment Rates (GAO/T-HEHS-97-78, Feb. 25,
                       1997).




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              Medicare Managed Care: Growing Enrollment Adds Urgency to Fixing HMO
              Payment Problem (GAO/HEHS-96-21, Nov. 8, 1995).

              Medicare: Changes to HMO Rate Setting Method Are Needed to Reduce
              Program Costs (GAO/HEHS-94-119, Sept. 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 Supplemental Insurance Trust
                                                                      Fund Account (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 1997, this program provided about
                          $92 million in bonuses to physicians in HPSAs, an amount 16 percent higher
                          than the previous year. While we are currently reviewing the effectiveness
                          of the program, our previous work has led us to raise questions about its
                          merits for the following reasons:

                      •   The MIP program is not an effective mechanism for improving Medicare
                          beneficiaries’ ability to obtain health care. Recent surveys of the Medicare
                          population show that neither provider shortages nor low Medicare
                          reimbursement rates were causing widespread access problems.
                      •   The MIP program is also not an effective mechanism for improving access
                          to care for people not covered by Medicare in underserved areas. The
                          basis on which MIP funds are targeted is inadequate to assure that they are
                          directed to improve access to care. 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 also
                          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 1996 was about $341—an
                          amount too low to have a significant effect on physicians’ practice location
                          decisions.




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                      The savings estimate that follows assumes that the Congress eliminates
                      the additional 10 percent payment for services delivered in urban and rural
                      HPSAs beginning in fiscal year 2000.



Five-Year Savings
                      Dollars in millions
                                                             FY00     FY01       FY02        FY03       FY04
                      Savings from the 1999 funding level
                      Budget authority                         70        70         70         75         75
                      Outlays                                  70        70         70         75         75
                      Source: Congressional Budget Office.




Related GAO Product   Physician Shortage Areas: Mecicare Incentive Payments Not an Effective
                      Approach to Improve Access (GAO/HEHS-99-36, Feb. 26, 1999).

                      Health Care Shortage Areas: Designations Not a Useful Tool for Directing
                      Resources to the Underserved (GAO/HEHS-95-200, Sept. 8, 1995).


GAO Contact           William J. Scanlon, (202) 512-7114




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             Efficient Use of Debt Collection Tools to Recover Supplemental Security
600 Income     Income Overpayments
Security     Determining SSI Recipient Living Arrangements
             Resource Transfers to Qualify for SSI
             Improving Social Security Benefit Payment Controls
             Fees for Non-Temporary Assistance to Needy Families (TANF) Child
               Support Enforcement Services
             Benefit Payments Under the Federal Employees’ Compensation Act
             Return-to-Work Strategies for People With Disabilities
             Reporting of DOD Reserve Payroll Data to State Unemployment Insurance
               Programs
             Automated Child Support Enforcement Systems




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Option:
Efficient Use of Debt   Authorizing committees                      Finance (Senate)
                                                                    Ways and Means (House)
Collection Tools to     Appropriations subcommittees                Labor, HHS, Education and Related
Recover Supplemental                                                Agencies (Senate and House)
                        Primary agency                              Social Security Administration
Security Income         Accounts                                    Supplemental Security Income Program
Overpayments                                                        (28-0406)
                        Spending type                               Direct/Discretionary
                        Budget subfunction                          Other Income Security
                        Framework theme                             Improve efficiency

                        The Supplemental Security Income (SSI) program is the nation’s largest
                        cash assistance program for the poor. In 1996, the SSI program paid about
                        6.6 million aged, blind and disabled recipients more than $25 billion in
                        benefits. Over the years, Social Security Administration (SSA) has been
                        significantly challenged in its efforts to serve the diverse needs of
                        recipients while still protecting the financial integrity of the program. In
                        prior reports, we have documented instances of program abuse,
                        mismanagement, and increasing SSI overpayments and outstanding debt
                        which totaled $2.6 billion in fiscal year 1997. We also noted SSA’s historical
                        reluctance to use both overpayment recovery tools already available to it
                        and aggressively pursue additional tools when warranted, including tax
                        refund offsets, credit bureau reporting, collection agencies, and interest
                        levies on outstanding debt owed. Following a number of GAO briefings with
                        SSA’s Acting Principal Deputy Commissioner and our recent testimony
                        denoting SSA’s reluctance to pursue more aggressive debt collection tools,
                        SSA is now seeking statutory authority to recover overpayments from other
                        retirement and disability benefits paid to former SSI recipients, as well as
                        use credit bureaus, collection agencies, interest levies and other
                        administrative offsets to strengthen its collection efforts. SSA has estimated
                        that its proposals, if enacted, will yield $40 million in additional annual
                        overpayment recoveries. In light of the potential for increased
                        overpayment recoveries and improved program integrity, the Congress
                        may wish to consider expanding SSA’s authority to use these more
                        aggressive debt collection tools. CBO estimates that doing so would
                        produce the savings shown in the following table.




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Five-Year Savings
                      Dollars in millions
                                                             FY00     FY01       FY02        FY03       FY04
                      Savings from the 1999 funding level
                      Offsetting receipts                       0         0          5         10         10
                      Source: Congressional Budget Office.




Related GAO Product   Supplemental Security Income: Action Needed on Long-Standing Problems
                      Affecting Program Integrity (GAO/HEHS-98-158, Sept. 14, 1998).


GAO Contact           Cynthia M. Fagnoni, (202) 512-7215




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Option:
Determining             Authorizing committees                      Finance (Senate) Ways and Means (House)
Supplemental Security   Appropriations subcommittees                Labor, HHS, Education and Related
                                                                    Agencies (Senate and House)
Income Recipient        Primary agency                              Social Security Administration
Living Arrangements     Accounts                                    Supplemental Security Income Program
                                                                    (28-0406)
                        Spending type                               Direct/Discretionary
                        Budget subfunction                          Other Income Security
                        Framework theme                             Improve efficiency

                        Social Security Administration (SSA) administers the Supplemental
                        Security Income (SSI) program, which is the nation’s largest cash
                        assistance program for the poor. Since its inception, the SSI program has
                        been difficult to administer because, similar to other means tested
                        programs, it relies on complicated criteria and policies to determine initial
                        and continuing eligibility and benefit levels. One of the factors considered
                        is the living arrangements of the beneficiary. When determining SSI
                        eligibility and benefit amounts, SSA staff apply a complex set of policies to
                        document an individual’s living arrangements and any additional support
                        they may be receiving from others. This process depends heavily on
                        self-reporting by recipients of whether they live alone or with others; the
                        relationships involved; the extent to which rents, food, utilities, and other
                        household expenditures are shared; and exactly what portion of those
                        expenses the individual pays. These numerous rules and policies have
                        made living arrangement determinations one of the most complex and
                        error prone aspects of the SSI program, and a major source of
                        overpayments.

                        We recently reported that SSA has not addressed longstanding SSI living
                        arrangement verification problems, despite numerous internal and
                        external studies and many years of quality reviews denoting this as an area
                        prone to error and abuse. Some of the studies we reviewed recommended
                        ways to simplify the process by eliminating many complex calculations
                        and thereby making it less susceptible to manipulation by recipients. Other
                        studies we reviewed suggested ways to make this aspect of the program
                        less costly to taxpayers. For example, in 1989, SSA’s Office of Inspector
                        General reported that a more simplified process that applied a shared
                        expenditures rationale to all SSI recipients living with another person
                        would result in fewer errors and reduce annual overpayments by almost
                        $80 million. In light of the potential cost savings associated with




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                      addressing this issue, we recommended in September 1998 that SSA
                      develop and advance legislative options for simplifying SSI living
                      arrangement policies and ultimately reduce program overpayments.

                      Although CBO agrees that some changes that would simplify living
                      arrangement policies have the potential to create savings, it cannot
                      develop a savings estimate until a specific legislative proposal is identified.


Related GAO Product   Supplemental Security Income: Action Needed on Long-Standing Problems
                      Affecting Program Integrity (GAO/HEHS-98-158, Sept. 14, 1998).


GAO Contact           Cynthia M. Fagnoni, (202) 512-7215




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Option:
Resource Transfers to   Authorizing committees                      Finance (Senate)
                                                                    Ways and Means (House)
Qualify for             Appropriations committees                   Labor, HHS, and Education (Senate and
Supplemental Security                                               House)
                        Primary agency                              Social Security Administration
Income                  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 1996, about 6.6 million SSI recipients received more than
                        $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
                        other individuals in order to qualify for SSI benefits. In a prior 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




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                    in the program’s integrity by ensuring that individuals use their own
                    resources for self-support before receiving SSI.

                    In response to our work, SSA has submitted a proposal to the Congress
                    aimed at preventing individuals from transferring assets in order to qualify
                    for SSI benefits.

                    In light of the potential for reduced program expenditures and increased
                    program integrity, the Congress may wish to consider this proposal. 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 estimates that
                    follow are based on this assumption. This option produces increases

                    in discretionary spending that are more than offset by savings in direct
                    spending.

Five-Year Savings
                    Dollars in millions
                                                           FY00     FY01       FY02        FY03       FY04
                    Discretionary spending
                    Savings from the 1999 funding level
                    Budget authority                         –1        –1         –1         –1         –1
                    Outlays                                  –1        –1         –1         –1         –1
                    Source: Congressional Budget Office.



Five-Year Savings
                    Dollars in millions
                                                           FY00     FY01       FY02        FY03       FY04
                    Direct spending
                    Savings from the 1999 funding level
                    Budget authority                          1         3          5          7          9
                    Outlays                                   1         3          5          7          9
                    Source: Congressional Budget Office.




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Related GAO Products   Supplemental Security Income: Action Needed on Long-Standing Problems
                       Affecting Program Integrity (GAO/HEHS-98-158, Sept. 14, 1998).

                       Supplemental Security Income: Some Recipients Transfer Valuable
                       Resources to Qualify for Benefits (GAO/HEHS-96-79, Apr. 30, 1996).


GAO Contact            Cynthia M. Fagnoni, (202) 512-7215




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Option:
Improving Social   Authorizing committees                      Finance (Senate) Ways and Means (House)
Security Benefit   Primary agency                              Social Security Administration
                   Accounts                                    Federal Old Age and Survivor’s Insurance
Payment Controls                                               Trust Fund (20-8006)
                   Spending type                               Direct
                   Budget subfunction                          Social Security
                   Framework theme                             Improve efficiency

                   Social Security Administration (SSA) is required by law to reduce social
                   security benefits to persons who also receive a pension from noncovered
                   employment (typically persons who work for the federal government or
                   state and local governmental agencies). The Government Pension Offset
                   provision requires SSA to reduce benefits to persons whose social security
                   entitlement is based on another person’s social security coverage (usually
                   their spouse’s). The Windfall Elimination Provision requires SSA to use a
                   modified formula to calculate a person’s earned social security benefit
                   whenever a person also earned a pension through a substantial career in
                   noncovered employment. The modified formula reduces the social
                   security benefit significantly.

                   We found that SSA payment controls for these offsets were incomplete. For
                   state and local retirees, SSA had no third party pension data to verify
                   whether persons were receiving a noncovered pension. An analysis of
                   available data indicated that this lapse in payment controls for state and
                   local government retirees cost the trust funds between $129 million to
                   $323 million from 1978 to about 1995.

                   We have recommended that SSA work with the Internal Revenue Service
                   (IRS) to revise the reporting of pension income on IRS tax form 1099R. IRS
                   has advised SSA that it needs a technical amendment to the Tax Code to
                   obtain the information SSA needs. We believe that millions of dollars in
                   reduced overpayments could be achieved each year with better payment
                   controls. However, it should be noted that these savings would be offset
                   somewhat by administrative costs associated with conducting additional
                   computer

                   matching at SSA. CBO estimates that improved payment controls could
                   result in the savings shown in the table below.




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Five-Year Savings
                       Dollars in millions
                                                              FY00     FY01       FY02        FY03       FY04
                       Savings from the 1999 funding level
                       Budget authority                          0        15         40         50         55
                       Outlays                                   0        15         40         50         55
                       Source: Congressional Budget Office.




Related GAO Product:   Social Security: Better Payment Controls for Benefit Reduction Provisions
                       Could Save Millions (GAO/HEHS-98-76, Apr. 30, 1998).


GAO Contact            Cynthia M. Fagnoni, (202) 512-7215




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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
                       Account                                     Family Support Payments to States
Assistance to Needy                                                (75-1501)
Families (TANF)        Spending type                               Direct
                       Budget subfunction                          Other Income Security
Child Support          Framework theme                             Redefine beneficiaries
Enforcement Services
                       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 1997, non-TANF caseloads and
                       costs rose about 420 percent and 920 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 1997, for example, state fee
                       practices returned about $41 million of the $1.6 billion spent to provide
                       non-TANF services.

                       Since 1992, we have reported on opportunities to defray some of the costs
                       of child support programs. Based on this work, we believe 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 15 percent on collections for non-TANF families. The following
                       savings assume states would be able to implement this option beginning
                       October 1, 1999.




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Five-Year Savings
                       Dollars in millions
                                                               FY00          FY01         FY02         FY03          FY04
                       Savings from the 1999 funding level
                       Budget authority                          780          850           930         1000         1080
                       Outlays                                   780          850           930         1000         1080
                       Note: Estimate assumes that all fees collected are split between the federal and state government
                       at the administrative cost match rate: 66 percent federal and 34 percent state.

                       Source: Congressional Budget Office.




Related GAO Products   Welfare Reform: Child Support an Uncertain Income Supplement for
                       Families Leaving Welfare (GAO/HEHS-98-168, Aug. 3, 1998).

                       Child Support Enforcement: Early Results on Comparability of Privatized
                       and Public Offices (GAO/HEHS-97-4, Dec. 16, 1996).

                       Child Support Enforcement: Reorienting Management Toward Achieving
                       Better Program Results (GAO/HEHS/GGD-97-14, Oct. 25, 1996).

                       Child Support Enforcement: States’ Experience with Private Agencies’
                       Collection of Support Payments (GAO/HEHS-97-11, Oct. 23, 1996).

                       Child Support Enforcement: States and Localities Move to Privatized
                       Services (GAO/HEHS-96-43FS, Nov. 20, 1995).

                       Child Support Enforcement: Opportunity to Reduce Federal and State
                       Costs (GAO/T-HEHS-95-181, June 13, 1995).


GAO Contact            Cynthia M. Fagnoni, (202) 512-7215




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Option:
Benefit Payments     Authorizing committees                      Labor and Human Resources (Senate)
                                                                 Education and the Workforce (House)
Under the Federal    Appropriations subcommittees                Labor, Health and Human Services, and
Employees’                                                       Education (Senate and House)
                     Primary agency                              Department of Labor
Compensation Act     Account                                     Multiple
                     Spending type                               Direct/Discretionary
                     Budget subfunction                          Other Income Security
                     Framework theme                             Reassess objectives

                     Federal workers who are disabled as a result of a work-related injury are
                     entitled to tax-free workers’ compensation benefits under the Federal
                     Employees’ Compensation Act (FECA). Several GAO reviews have identified
                     ways in which benefit payment policies can be revised to better address
                     eligibility and/or need or to bring FECA benefits more in line with other
                     federal and state workers’ compensation laws.


Basing FECA          For almost all totally disabled individuals, FECA benefits are 66-2/3 percent
Compensation on      of gross pay for beneficiaries without dependents and 75 percent of gross
Spendable Earnings   pay for beneficiaries with at least one dependent. We reported that nearly
                     30 percent of the more than 23,000 beneficiaries included in our analyses
                     received FECA compensation benefits that replaced more than 100 percent
                     of their estimated take-home pay. Another 40 percent of these
                     beneficiaries received FECA benefits that were between 90 and 99 percent
                     of their take-home pay. Benefit replacement rates tended to be higher for
                     beneficiaries who (1) received higher amounts of pay before they were
                     injured, (2) were injured before 1980, (3) received the FECA dependent
                     benefit, and (4) lived in states that had an income tax.

                     Workers’ compensation program analysts are reluctant to take a position
                     on what the “correct” level of workers’ compensation benefits should be,
                     leaving that matter to the judgment of legislators. According to a 1985
                     Workers Compensation Research Institute report, legislators in many
                     states must walk a fine line between benefits that are high enough to
                     provide adequate income, but not so high as to discourage an employee’s
                     return to work when he or she is no longer disabled. The 1972 Report of
                     the National Commission on State Workmen’s Compensation Laws
                     recommended that workers’ weekly benefits should replace at least
                     80 percent of their spendable weekly earnings, subject to a state’s




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                    maximum weekly benefit. Six states use a percentage of spendable weekly
                    earnings (ranging from 75 to 80 percent) rather than a percentage of gross
                    wages as the basis for computing compensation benefits. Spendable
                    earnings (take-home pay) are computed by taking an employee’s gross pay
                    at the time of injury and subtracting Social Security taxes and federal and
                    state income taxes. Taxes are based on published tax withholding tables,
                    given an employee’s actual exemptions and a standard deduction.

                    If the Congress judges that current FECA benefits are so high as to
                    discourage employee’s return to work, it could consider changing the
                    current FECA benefit structure from one that bases compensation on gross
                    pay to one that bases compensation on spendable earnings. The following
                    savings estimates assume that the new FECA benefit formula would equal
                    80 percent of spendable earnings. The CBO estimates below assume 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. Fewer savings would be achieved if a higher percentage of
                    spendable earnings were used as the basis for computing FECA benefits.

Five-Year Savings
                    Dollars in millions
                                                           FY00     FY01       FY02        FY03       FY04
                    Discretionary spending
                    Savings from the 1999 funding level
                    Budget authority                          3         8         21         35         49
                    Outlays                                   3         8         21         35         49
                    Source: Congressional Budget Office.



Five-Year Savings
                    Dollars in millions
                                                           FY00     FY01       FY02        FY03       FY04
                    Direct spending
                    Savings from the 1999 funding level
                    Budget authority                         10        19         20         20         21
                    Outlays                                  10        19         20         20         21
                    Source: Congressional Budget Office.




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Revising Benefits for   Retirement eligible federal workers who continue to be disabled as a
Retirement Eligible     result of a work-related injury could receive tax-free workers’
Beneficiaries           compensation benefits under FECA for the remainder of their lives that
                        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
                        would equal two-thirds of the previously provided FECA compensation
                        benefit, and that 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.




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Five-Year Savings
                       Dollars in millions
                                                              FY00     FY01       FY02        FY03       FY04
                       Discretionary spending
                       Savings from the 1999 funding level
                       Budget authority                          1         3          9         15         22
                       Outlays                                   1         3          8         14         21
                       Source: Congressional Budget Office.



Five-Year Savings
                       Dollars in millions
                                                              FY00     FY01       FY02        FY03       FY04
                       Direct spending
                       Savings from the 1999 funding level
                       Budget authority                          4         8          9          9          9
                       Outlays                                   4         8          9          9          9
                       Source: Congressional Budget Office.




FECA Cases Involving   FECA authorizes federal agencies to continue paying employees their
Third Parties          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



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                         amounts employees are required to reimburse the government when they
                         recover damages from third parties.

Five-Year Savings
                         Dollars in millions
                                                                FY00     FY01       FY02        FY03       FY04
                         Discretionary spending
                         Savings from the 1999 funding level
                         Budget authority                          0         0          1          1          1
                         Outlays                                   0         0          1          1          1
                         Source: Congressional Budget Office.



Five-Year Savings
                         Dollars in millions
                                                                FY00     FY01       FY02        FY03       FY04
                         Direct spending
                         Savings from the 1999 funding level
                         Budget authority                          1         1          0          0          0
                         Outlays                                   1         1          0          0          0
                         Source: Congressional Budget Office.




Comparability of FECA    We identified three major ways in which FECA differs from other federal
and Other Compensation   and state workers’ compensation laws, each of which results in relatively
Laws                     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



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                       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, eliminating augmented compensation benefits for
                       dependents and placing a 5-day waiting period immediately following the
                       injury, and before the continuation of pay period, would produce the
                       following savings, as estimated by CBO.

Five-Year Savings
                       Dollars in millions
                                                              FY00     FY01       FY02        FY03       FY04
                       Savings from the 1999 funding level
                       Budget authority                          7         7          7          7          7
                       Outlays                                   6         7          7          7          7
                       Source: Congressional Budget Office.




Related GAO Products   Federal Employees’ Compensation Act: Percentages of Take-Home Pay
                       Replaced by Compensation Benefits (GAO/GGD-98-174, Aug. 17, 1998).

                       Federal Employees’ Compensation Act: Issues Associated with Changing
                       Benefits for Older Beneficiaries (GAO/GGD-96-138BR, Aug. 14, 1996).

                       Workers’ Compensation: Selected Comparisons of Federal and State Laws
                       (GAO/GGD-96-76, Apr. 3, 1996).

                       Federal Employees’ Compensation Act: Redefining Continuation of Pay
                       Could Result in Additional Refunds to the Government (GAO/GGD-95-135,
                       June 8, 1995).


GAO Contact            L. Nye Stevens, (202) 512-8676




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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. For fiscal year 2000, DI outlays are estimated as over
                        $56 billion and SSI outlays as over $30 billion dollars. SSA data show that
                        between 1986 and 1998, the number of working-age people in these
                        disability programs increased 81 percent, from 4.2 million to 7.6 million.
                        Such growth has raised concerns that are compounded by the fact that
                        less than 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, we recommended
                        that the Commissioner of SSA develop a comprehensive return-to-work
                        strategy that integrates, as appropriate, earlier intervention, supports and
                        services needed for work, and cash and medical benefits that make work
                        more financially advantageous. SSA has recently taken steps to expand the
                        pool of vocational rehabilitation (VR) providers and proposed to



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                       demonstrate the effectiveness of giving providers greater incentives to
                       employ beneficiaries, among other return-to-work initiatives. However,
                       these efforts would have greater impact if cash and medical benefits were
                       structured to give beneficiaries greater impetus to use VR services and
                       attempt work, and if return-to-work assistance was provided earlier in the
                       decision-making process. We believe that substantial savings could be
                       achieved if SSA were to develop such a program. However, such savings
                       would be offset by program costs and any net savings would depend on
                       the program’s participation rate.


Related GAO Products   Social Security Disability: Multiple Factors Affect Return to Work
                       (GAO/T-HEHS-99-82, Mar. 11, 1999).

                       Social Security Disability Insurance: Multiple Factors Affect Beneficiaries’
                       Ability to Return to Work (GAO/HEHS-98-39, Jan. 12, 1998).

                       Social Security: Disability Programs Lag in Promoting Return to Work
                       (GAO/HEHS-97-46, Mar. 17, 1997).

                       People With Disabilities: Federal Programs Could Work Together More
                       Efficiently to Promote Employment (GAO/HEHS-96-126, Sept. 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, Apr. 24, 1996).


GAO Contact            Cynthia M. Fagnoni, (202) 512-7215




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Option:
Reporting of DOD        Authorizing committees                      Finance (Senate)
                                                                    Ways and Means (House)
Reserve Employee        Primary agency                              Department of Labor
Payroll Data to State   Account                                     State Unemployment Insurance and
                                                                    Employment Service Operations (16-0179)
Unemployment            Spending type                               Direct
Insurance Programs      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 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 Reserve
                        failed to report over $7 million 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.

                        The Defense Department and the Department of Transportation’s Coast
                        Guard have recently acted to ensure that reservists are reminded of their
                        responsibility to report income from reserve activity to state UI agencies.




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                    All reservists now receive an annual notice with their leave and earnings
                    statements reminding them of their duty to disclose their affiliation and
                    any Reserve related earnings when filing an UI claim. In addition, the Labor
                    Department has issued a directive to all state employment security
                    agencies to ensure that they inform prospective and continuing UI benefit
                    claimants of their responsibility to report Reserve related income.

                    These actions should improve general reservist compliance with state UI
                    program income reporting requirements. However, to detect unreported
                    Reserve income, the most frequently suggested alternative by federal and
                    state officials would be to require the 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. DOD has stated that it will develop an
                    action plan to provide such data to the state UI programs. However,
                    completion of this plan has been delayed because of other competing
                    agency priorities and a recognition that the task was more complex than
                    originally envisioned.

                    It is important to note 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.

                    If DOD was required to report Reserve payroll and personnel data to states
                    on a quarterly basis, CBO estimates that the following savings would result
                    from the reduction in overpayments.

Five-Year Savings
                    Dollars in millions
                                                             FY00          FY01          FY02          FY03         FY04
                    Savings from the 1999 funding level
                    Budget authority                             12            12           12            13               13
                    Outlays                                      12            12           12            13               13
                    Reduction in receipts                         0            –1           –3            –5               –7
                    Net effect on deficit                        12            11             9            8                6
                    Note: Unemployment Insurance trust fund receipts are dependent on prior year benefit outlays.
                    CBO estimates that, in addition to savings, this option would have the effect of reducing trust fund
                    receipts in the out years.

                    Source: Congressional Budget Office.




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Related GAO Product   Unemployment Insurance: Millions in Benefits Overpaid to Military
                      Reservists (GAO/HEHS-96-101, Aug. 5, 1996).


GAO Contact           Cynthia M. Fagnoni, (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 nonwelfare 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. From fiscal year 1981 through fiscal year 1997, the
                      states have spent about $3.2 billion to develop these systems, including
                      over $2.4 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. 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) provided additional funding for
                      the states to meet new systems requirements under this law. An 80 percent
                      federal funding participation rate, with a total national funding cap of
                      $400 million was authorized. The 66 percent federal funding participation
                      rate was continued for systems operation and administrative expenses.

                      The Congress could choose to reduce the federal funding participation
                      rate for modification and operation of these systems from 66 percent to
                      the 50 percent rate now common for such costs in other programs, such as




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                       Food Stamps and other welfare programs. CBO estimates that a reduced
                       participation rate would produce the following savings.

Five-Year Savings
                       Dollars in millions
                                                              FY00     FY01       FY02        FY03       FY04
                       Savings from the 1999 funding level
                       Budget authority                        105       115        125        140        150
                       Outlays                                 105       115        125        140        150
                       Source: Congressional Budget Office.




Related GAO Products   Child Support Enforcement: Leadership Essential to Implementing
                       Effective Automated Systems (GAO/T-AIMD-97-162, Sept. 10, 1997).

                       Child Support Enforcement: Strong Leadership Required to Maximize
                       Benefits of Automated Systems (GAO/AIMD-97-72, June 30, 1997).

                       Child Support Enforcement: Timely Action Needed to Correct System
                       Development Problems (GAO/IMTEC-92-46, Aug. 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) 512-6408




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               Veterans’ Disability Compensation for Nonservice Connected Diseases
700 Veterans   Cost Sharing for Veterans’ Long-Term Care
Benefits and   Closing Underused Veterans Affairs Hospitals
Services       Limiting Enrollment in Veterans Affairs Health Care System
               Outpatient Pharmacy Costs




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Option:
Veterans’ Disability   Authorizing committees                            Veterans Affairs (Senate and House)
Compensation for       Primary agency                                    Department of Veterans Affairs
                       Account                                           Compensation and Pensions (36-0153)
Nonservice             Spending type                                     Direct
Connected Diseases     Budget subfunction                                Income Security for Veterans
                       Framework theme                                   Redefine beneficiaries

                       In 1996, CBO reported that about 230,000 veterans were receiving about
                       $1.1 billion in disability compensation payments annually for diseases
                       neither caused nor aggravated by military service. Our 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, CBO estimates
                       that the following savings would apply.

Five-Year Savings
                       Dollars in millions
                                                              FY00         FY01          FY02       FY03       FY04
                       Savings from the 1999 funding level
                       Budget authority                            9           29           51        74         98
                       Outlays                                     9           28           49        72         96
                       Note: These estimates take into account an increase in DOD retirement pay.

                       Source: Congressional Budget Office.




Related GAO Products   VADisability Compensation: Disability Ratings May Not Reflect Veterans’
                       Economic Losses (GAO/HEHS-97-9, Jan. 7, 1997).

                       Disabled Veterans Programs: U.S. Eligibility and Benefit Types Compared
                       With Five Other Countries (GAO/HRD-94-6, Nov. 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) 512-7101




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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. Many
                      other states also conduct estate recoveries. In contrast, 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 veteran’s 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, as estimated by CBO.

Five-Year Savings
                      Dollars in millions
                                                             FY00     FY01          FY02     FY03         FY04
                      Saving from the 1999 funding level
                      Option: Recovery of 25 percent of costs
                      Budget authority                        559       559          559      559            559
                      Outlays                                 559       559          559      559            559
                      Source: Congressional Budget Office.




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Five-Year Savings
                       Dollars in millions
                                                              FY00      FY01       FY02        FY03       FY04
                       Savings from the 1999 funding level
                       Option: Recovery of 50 percent of costs
                       Budget authority                       1,120     1,120      1,120      1,120      1,120
                       Outlays                                1,120     1,120      1,120      1,120      1,120
                       Source: Congressional Budget Office.




Related GAO Products   VAAid and Attendance Benefits: Effects of Revised HCFA Policy on
                       Veterans’ Use of Benefits (GAO/HEHS-97-72R, Mar. 3, 1997).

                       VAHealth Care: Better Data Needed to Effectively Use Limited Nursing
                       Home Resources (GAO/HEHS-97-27, Dec. 20, 1996).

                       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, Aug. 12, 1992).


GAO Contact            Stephen P. Backhus, (202) 512-7101




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Option:
Closing Underused      Authorizing committees                      Veterans Affairs (House and Senate)
Veterans Affairs       Appropriations subcommittees                VA, HUD, and Independent Agencies
                                                                   (House and Senate)
Hospitals              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

                       The Department of Veterans Affairs (VA) took over 50,000 hospital beds
                       out of service between 1970 and 1995, based on declining utilization. With
                       the declining veteran population, new technologies, and VA’s plans to
                       emphasize highly specialized care on an outpatient basis, significant
                       further declines in demand for VA hospital care are likely. At some point,
                       closing a hospital and providing care either through another VA hospital or
                       through contracts with community hospitals may become preferable to
                       simply taking beds out of service because of the high fixed costs of
                       operating facilities.

                       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   VA Health Care: Capital Asset Planning and Budgeting Needs Improvement
                       (GAO/T-HEHS-99-83, Mar. 10, 1999).

                       Veterans’ Health Care: Challenges Facing VA’s Evolving Role in Serving
                       Veterans (GAO/T-HEHS-98-194, June 17, 1998).

                       VAHospitals: Issues and Challenges for the Future (GAO/HEHS-98-32, Apr. 30,
                       1998).

                       VAHealth Care: Closing a Chicago Hospital Would Save Millions and
                       Enhance Access to Services (GAO/HEHS-98-64, Apr. 16, 1998).




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              VAHealth Care: Opportunities to Enhance Montgomery and Tuskegee
              Service Integration (GAO/T-HEHS-97-191, July 28, 1997).

              VA Health Care: Lessons Learned From Medical Facility Integrations
              (GAO/T-HEHS-97-184, July 24, 1997).

              Department of Veterans Affairs: Programmatic and Management
              Challenges Facing the Department (GAO/T-HEHS-97-97, Mar. 18, 1997).

              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, Mar. 8, 1996).

              VA Health Care: Challenges and Options for the Future (GAO/T-HEHS-95-147,
              May 9, 1995).


GAO Contact   Stephen P. Backhus (202) 512-7101




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Option:
Limiting Enrollment   Authorizing committees                      Veterans Affairs (House and Senate)
in Veterans Affairs   Appropriations subcommittees                VA, HUD, and Independent Agencies
                                                                  (House and Senate)
Health Care System    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



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                       enrollment system. The Congress could consider funding the VA health
                       care system to cover only the expected enrollment of veterans in higher
                       priority 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 doing so would
                       produce the savings shown in the following table.

Five-Year Savings
                       Dollars in millions
                                                              FY00     FY01       FY02        FY03       FY04
                       Savings from the 1999 funding level
                       Budget authority                        463       463        463        463        463
                       Outlays                                 417       455        459        461        461
                       Source: Congressional Budget Office.




Related GAO Products   VA Health Care: Issues Affecting Eligibility Reform Efforts (GAO/HEHS-96-160,
                       Sept. 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, Mar. 20, 1996).

                       VAHealth Care: Opportunities to Increase Efficiency and Reduce Resource
                       Needs (GAO/T-HEHS-96-99, Mar. 8, 1996).

                       VA Health Care: Issues Affecting Eligibility Reform (GAO/T-HEHS-95-213,
                       July 19, 1995).


GAO Contact            Stephen P. Backhus, (202) 512-7101




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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 items 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 estimates that these steps would save
                      the following amounts.




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Five-Year Savings
                      Dollars in millions
                                                             FY00     FY01       FY02        FY03       FY04
                      Savings from the 1999 funding level
                      Budget authority                         82        86         90         94         98
                      Outlays                                  74        84         89         93         97
                      Source: Congressional Budget Office.




Related GAO Product   VAHealth Care: Opportunities to Significantly Reduce Outpatient
                      Pharmacy Costs (GAO/HEHS-97-15, Oct. 11, 1996).


GAO Contact           Stephen P. Backhus, (202) 512-7101




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                    Expand the Use of Alternative Dispute Resolution
800 General         Eliminating Pay Increases After Separation in Calculating Lump-Sum
Government, 900       Annual Leave Payments
Net Interest, and   The 1-Dollar Coin
                    Federal Reserve Operations
999 Multiple        Davis-Bacon Act Reform
                    Formula-Based Grant Programs
                    Federal Grant Matching
                    Federal Travel Processing




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Option:
Expand the Use of     Authorizing committees                      Multiple
Alternative Dispute   Appropriations subcommittees                Multiple
                      Primary agency                              Multiple
Resolution            Account                                     Multiple
                      Spending type                               Discretionary
                      Budget subfunction                          Multiple
                      Framework theme                             Improve efficiency

                      Federal employees have long had substantial workplace protections
                      through an administrative redress system that was designed to safeguard
                      them against arbitrary agency actions and prohibited personnel actions,
                      such as discrimination or retaliation for whistleblowing. But the redress
                      system—especially insofar as it affects workplace disputes involving
                      claims of discrimination—has been criticized by federal managers, as well
                      as employee representatives, as adversarial, inefficient, time-consuming,
                      and costly. A dramatic increase in the number of discrimination
                      complaints during the 1990s not only added to the costs and time of the
                      redress system but also to the number of unresolved cases.

                      In recent years, a number of federal agencies have looked for some means
                      of alternative dispute resolution (ADR) to help lessen the burdens
                      associated with the redress system. But as our review of the literature, our
                      interviews with experts and knowledgeable officials, and our case
                      illustrations showed, ADR availability or use was not pervasive—or even
                      necessarily widespread—within federal agencies that reported having
                      some ADR capability. Federal agencies tended to limit the application of
                      ADR to discrimination complaints. In addition, agencies tended to make use
                      of only one ADR technique—mediation.

                      No comprehensive data were available on ADR results. However, as our
                      broad examination of ADR use in the private and federal sectors and case
                      illustrations showed, officials at organizations using ADR and experts
                      generally considered it to be successful in resolving workplace disputes,
                      thereby avoiding more formal dispute resolution processes.
                      Comprehensive data were unavailable on the extent to which ADR has
                      saved organizations time and money, largely because most ADR programs
                      are relatively new, and because time and cost savings have not been
                      widely tracked or evaluated. Experts and officials at organizations using
                      ADR generally believed, however, that avoiding litigation or more formal
                      redress processes produced savings, and the administration has further



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                       endorsed the use of ADR through the creation in 1998 of the Attorney
                       General’s Interagency ADR Working Group. In order to reduce the time and
                       cost of dealing with employment disputes through formal redress
                       processes, the Congress may wish to take steps to encourage the
                       expanded use of ADR by federal agencies.


Related GAO Products   Alternative Dispute Resolution: Employers’ Experiences With ADR in the
                       Workplace (GAO/GGD-97-157, Aug. 12, 1997).

                       Federal Employee Redress: An Opportunity for Reform (GAO/T-GGD-96-42,
                       Nov. 29, 1995).

                       Employment Discrimination: Most Private-Sector Employers Use
                       Alternative Dispute Resolution (GAO/HEHS-95-150, July 5, 1995).


GAO Contact            L. Nye Stevens, (202) 512-8676




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Option:
Eliminating Pay   Authorizing committees                      Governmental Affairs (Senate)
                                                              Government Reform (House)
Increases After   Appropriations subcommittees                Multiple
Separation in     Primary agency                              Office of Personnel Management
Calculating       Account                                     Multiple
                  Spending type                               Discretionary
Lump-Sum Annual   Budget subfunction                          Multiple
Leave Payments    Framework theme                             Reassess objectives

                  Employee pay and benefits is one of many areas of the federal budget
                  receiving congressional attention because of scarce federal resources. One
                  such benefit is an employee’s entitlement under 5 U.S.C. 5551(a) to receive
                  a lump-sum payment for any accumulated, unused annual leave upon
                  separation from federal service. In calendar year 1996, the cost of
                  lump-sum leave payments to separating civilian employees was about
                  $562 million governmentwide. We were requested to identify any
                  personnel cost savings that could be achieved from limiting the lump-sum
                  leave payment to the employee’s pay rate at the time of separation, instead
                  of the current method of assuming the employee had remained in service
                  until the entire leave balance had expired.

                  Based in part on our information and analysis, CBO estimated that agencies
                  could realize personnel cost savings of $20 million over 5 years if
                  lump-sum annual leave payments were limited to the rate of pay at the
                  time of separation. If the Congress enacted such a limitation, no General
                  Schedule (GS) pay increases that go into effect following an employee’s
                  separation would be added to the payment calculation. To illustrate how
                  small the maximum reduction in payments would be to individual
                  separating employees, we calculated what the maximum reduction in
                  lump-sum leave payments would have been to separating employees in
                  January 1996 at various GS pay levels if the net 2.54 percent pay increase
                  had been eliminated from their lump-sum leave payments. For example,
                  we reported that the maximum reduction for an average GS-15 pay level
                  would be from $86 to $128, depending on the amount of accrued annual
                  leave.




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Five-Year Savings
                      Dollars in millions
                                                             FY00     FY01       FY02        FY03       FY04
                      Savings from the 1999 funding level
                      Budget authority                          4         4          4          4          4
                      Outlays                                   4         4          4          4          4
                      Source: Congressional Budget Office.




Related GAO Product   Federal Civilian Personnel: Cost of Lump-Sum Annual Leave Payments to
                      Employees Separating From Government (GAO/GGD-97-157, May 29, 1997).


GAO Contact           L. Nye Stevens, (202) 512-8676




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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/Governmental Receipts
                       Budget subfunction                                   Central Fiscal Operations
                       Framework theme                                      Improve efficiency

                       In 1993 and 1995, we reported on cost savings associated with the
                       replacement of the 1-dollar note 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 seignorage8 recognized reduces
                       the amount of borrowing needed to finance the deficit, substituting a
                       dollar coin for a dollar note would yield $456 million of savings to the
                       government per year, on average, over a 30-year period. Other countries
                       have demonstrated that public resistance to such a change can be
                       managed and overcome.

                       Even though the option would result in significant long-term savings, it
                       does not yield savings over the first 5 years, as scored by CBO. First,
                       seignorage, which lowers interest costs to the government by replacing the
                       need to borrow from the public, is not included in the estimate because it
                       is not considered part of the budget. Second, while the 5-year window
                       captures much of the additional costs for the U.S. Mint to produce and
                       stockpile a sufficient number of 1-dollar coins for circulation, it includes
                       only a fraction of the savings to the Federal Reserve System from lower
                       production and processing costs. (Significant savings would accrue,
                       however, beyond the 5-year horizon.) As a result, we have not included a
                       5-year savings table for this option.


Related GAO Products   A Dollar Coin Could Save Millions (GAO/T-GGD-95-203, July 13, 1995).




                       8
                        Seignorage 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.



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              1-Dollar Coin: Reintroduction Could Save Millions if Properly Managed
              (GAO/GGD-93-56, Mar. 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   Bernard L. Ungar, (202) 512-4232




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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.

                  The Federal Reserve could do more to increase its cost consciousness and
                  ensure that it is operating as efficiently as possible. We have 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—compared generously to those of federal financial regulatory




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                       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.

Five-Year Savings
                       Dollars in millions
                                                                FY00          FY01     FY02        FY03       FY04
                       Savings from the 1999 funding level
                       Added receipts                               82          86        90         94         98
                       Note: Estimates are presented net of the tax effect.

                       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, Sept. 30, 1996).




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              Federal Reserve Banks: Internal Control, Accounting, and Auditing Issues
              (GAO/AIMD-96-5, Feb. 9, 1996).


GAO Contact   Thomas J. McCool, (202) 512-8678




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Option:
Davis-Bacon Act   Authorizing committees                      Labor and Human Resources (Senate)
                                                              Education and the Workforce (House)
Reform            Appropriations subcommittees                Multiple
                  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 from the use of less productive labor 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,
                  though, on the accuracy of wage rates set.

                  Without making any assumptions about the accuracy of prevailing wage
                  rates, but considering other factors such as recordkeeping duties required
                  under the act, CBO concluded that Davis-Bacon inflates construction costs.



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                       On that basis, 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. If the Congress were to repeal the act, CBO estimates that the
                       following savings could be achieved.

Five-Year Savings
                       Dollars in millions
                                                                FY00          FY01          FY02          FY03          FY04
                       Discretionary spending
                       Savings from the 1999 funding level
                       Spending authority                       1,151         1,151         1,151        1,151         1,151
                       Outlays                                    247           659           900        1,020         1,098
                       Note: Spending authority includes budget authority, as well as obligation limitations from certain
                       trust funds.

                       Source: Congressional Budget Office.



Five-Year Savings
                       Dollars in millions
                                                                FY00          FY01          FY02          FY03          FY04
                       Direct spending
                       Savings from the 1999 funding level
                       Budget authority                             34            31           29            28             28
                       Outlays                                      12            26           30            30             29
                       Source: Congressional Budget Office.




Related GAO Products   Information Regarding the Davis-Bacon Act (GAO/HEHS-97-30R, Oct. 30, 1996).

                       Information Regarding Davis-Bacon Wage Determinations
                       (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 (GAO/HEHS-96-15R, June 3, 1996).




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              Davis-Bacon Act: Process Changes Could Raise Confidence That Wage
              Rates Are Based on Accurate Data (GAO/HEHS-96-130, May 31, 1996).

              Changes to the Davis-Bacon Act Regulations and Administration
              (GAO/HEHS-94-95R, Feb. 7, 1994).

              The Davis-Bacon Act Should Be Repealed (GAO/HRD-79-18, Apr. 27, 1979).


GAO Contact   Cynthia M. Fagnoni, (202) 512-7215




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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

                      We have 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, we
                      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 close-ended or capped
                      formula grant programs exceeding $1 billion.9 The dollar value for

                      9
                       In the transportation function, several very small, close-ended grants could not be easily isolated in
                      the baseline and these are included in the estimate.



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                       programs exceeding this threshold would include about 82 percent of the
                       dollars for such programs. The savings achieved through this option, as
                       estimated by CBO, 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
                                                              FY00      FY01       FY02        FY03       FY04
                       Discretionary spending
                       Savings from the 1999 funding level
                       Budget authority                       5,220     5,975      5,975      5,975      5,975
                       Outlays                                1,477     4,572      6,655      7,846      8,421
                       Source: Congressional Budget Office.



Five-Year Savings
                       Dollars in millions
                                                              FY00      FY01       FY02        FY03       FY04
                       Direct spending
                       Savings from the 1999 funding level
                       Budget authority                       5,283     5,222      5,115      5,127      5,134
                       Outlays                                 479        641        702        886      1,004
                       Source: Congressional Budget Office.




Related GAO Products   Formula Grants: Effects of Adjusted Population Counts on Federal
                       Funding to States (GAO/HEHS-99-69, Feb. 26, 1999).

                       Medicaid Formula: Effects of Proposed Formula on Federal Shares of
                       State Spending (GAO/HEHS-99-29R, Feb. 19, 1999).

                       Welfare Reform: Early Fiscal Effects of the TANF Block Grant
                       (GAO/AIMD-98-137, Aug. 22, 1998).

                       School Finance: State Efforts to Equalize Funding Between Wealthy and
                       Poor School Districts (GAO/HEHS-98-92, June 16, 1998).




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School Finance: State Efforts to Reduce Funding Gaps Between Poor and
Wealthy Districts (GAO/HEHS-97-31, Feb. 5, 1997).

Federal Grants: Design Improvements Could Help Federal Resources Go
Further (GAO/AIMD-97-7, Dec. 18, 1996).

Public Health: A Health Status Indicator for Targeting Federal Aid to
States (GAO/HEHS-97-13, Nov. 13, 1996).

Highway Funding: Alternatives for Distributing Federal Funds
(GAO/RCED-96-6, Nov. 28, 1995).

Ryan White Care Act of 1990: Opportunities to Enhance Funding Equity
(GAO/HEHS-96-26, Nov. 13, 1995).

Department of Labor: Senior Community Service Employment Program
Delivery Could Be Improved Through Legislative and Administrative
Action (GAO/HEHS-96-4, Nov. 2, 1995).

Rural Development: USDA’s Approach to Funding Water and Sewer
Projects (GAO/RCED-95-258, Sept. 22, 1995).

Medicaid: Matching Formula’s Performance and Potential Modifications
(GAO/T-HEHS-95-226, July 27, 1995).

Federal Aid: Revising Poverty Statistics Affects Fairness of Allocation
Formulas (GAO/HEHS-94-165, May 20, 1994).

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, Aug. 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, Apr. 2, 1992).

Remedial Education: Modifying Chapter 1 Formula Would Target More
Funds to Those Most in Need (GAO/HRD-92-16, Mar. 28, 1992).



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              Drug Treatment: Targeting Aid to States Using Urban Population as
              Indicator of Drug Use (GAO/HRD-91-17, Nov. 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, Mar. 31, 1986).

              Changing Medicaid Formula Can Improve Distribution of Funds to States
              (GAO/GGD-83-27, Mar. 9, 1983).


GAO Contact   Paul L. Posner, (202) 512-9573




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Option:
Federal Grant   Authorizing committees                      Multiple
Matching        Appropriations subcommittees                Multiple
                Primary agency                              Multiple
                Account                                     Multiple
                Spending type                               Discretionary/Direct
                Budget subfunction                          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 1998 with outlays of
                $250 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’ 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, for example 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 10 percent
                    reduction from the authorized grant levels, would result in the savings
                    shown below. 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
                                                           FY00      FY01       FY02        FY03       FY04
                    Discretionary spending
                    Savings from the 1999 funding level
                    Budget authority                       2,947     3,702      3,702      3,702      3,702
                    Outlays                                 659      2,336      3,221      3,519      3,624
                    Source: Congressional Budget Office.




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Five-Year Savings
                       Dollars in millions
                                                              FY00     FY01       FY02        FY03       FY04
                       Direct spending
                       Savings from the 1999 funding level
                       Budget authority                        238       170        170        170        170
                       Outlays                                 214       177        170        170        170
                       Source: Congressional Budget Office.




Related GAO Products   Welfare Reform: Early Fiscal Effects of the TANF Block Grant
                       (GAO/AIMD-98-137, Aug. 22, 1998).

                       Federal Grants: Design Improvements Could Help Federal Resources Go
                       Further (GAO/AIMD-97-7, Dec. 18, 1996).

                       Block Grants: Issues in Designing Accountability Provisions
                       (GAO/AIMD-95-226, Sept. 1, 1995).


GAO Contact            Paul L. Posner, (202) 512-9573




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Option:
Federal Travel   Authorizing committees                      Governmental Affairs (Senate)
                                                             Government Reform (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. GSA is currently in the process of identifying the indirect, or
                 administrative, costs of travel.

                 We 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 our recommendations, the
                 Appropriations Conference Committee reduced DOD’s operations and
                 maintenance 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 reduce



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                       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   Federal Travel Reform: Plans to Obtain Data to Assess Cost Savings
                       (GAO/AIMD-98-87R, Mar. 20, 1998).

                       Governmentwide Travel Management: Federal Agencies Have
                       Opportunities for Streamlining and Improving Their Travel Practices
                       (GAO/T-AIMD-96-60, Mar. 8, 1996).

                       Business Process Reengineering: DOD Has a Significant Opportunity to
                       Reduce Travel Costs by Using Industry Practices (GAO/T-AIMD-95-101, Mar. 28,
                       1995).


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




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           Return Filing by U.S. Citizens Living Abroad
Receipts   Electronic Funds Transfer for Installment Tax Payments
           Electronic Filing of Tax Returns
           Tax Treatment of Health Insurance Premiums
           Tax Treatment of Interest Earned on Life Insurance Policies and Deferred
             Annuities
           Information Reporting on Forgiven Debts
           Corporate Tax Document Matching
           Independent Contractor Tax Compliance
           Deductibility of Home Equity Loan Interest
           Administration of the Tax Deduction for Real Estate Taxes
           Collecting Gasoline Excise Taxes
           Computing Excise Tax Bases
           Highway User Fees on Heavy Trucks




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Option:
Return Filing by U.S.   Authorizing committees                      Finance (Senate)
                                                                    Ways and Means (House)
Citizens Living         Primary agency                              Internal Revenue Service
Abroad                  Spending type                               Direct
                        Framework theme                             Improve efficiency

                        U.S. citizens residing abroad are generally subject to the same filing
                        requirements as citizens residing in the United States. The State
                        Department estimated the total population of U.S. citizens living abroad at
                        about 3.1 million in 1995, excluding active military and current
                        government personnel. Some evidence suggests that the failure to file tax
                        returns may be relatively prevalent in some segments of the U.S.
                        population abroad, and the revenue impact, while unknown, could be
                        significant.

                        IRS’ ability to identify and collect taxes from nonfilers residing abroad is
                        restricted by the limited reach of U.S. laws in foreign countries,
                        particularly U.S. laws on tax withholding, information reporting, and
                        enforced collection through liens, levies, and seizures. Another factor that
                        could contribute to nonfiling abroad is the ambiguity in IRS’ filing
                        instructions for its Form 1040 and related guidance. For example, it may
                        not be clear that income qualifying for the foreign earned income or
                        housing

                        expense exclusions must be considered in determining whether one’s
                        gross income exceeds the filing threshold.

                        In pursuing nonfilers abroad, IRS has not fully explored the usefulness of
                        passport application data as a means of identifying potential nonfilers.
                        While passport applications contain no income information, they could be
                        used to collect applicants’ social security number, age, occupation, and
                        country of residence.

                        IRS may want to take additional steps to enforce the current information
                        requirement that all passport applicants provide their social security
                        numbers and to assess the additional cost of requiring country of
                        residence and occupation as a means of identifying potential nonfilers
                        abroad. IRS may also want to clarify its instructions for determining what
                        income must be considered in determining whether gross income exceeds




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                       the filing threshold. Initial projects to increase the number of returns filed
                       from

                       overseas suggests that the potential increase in tax revenues would justify
                       the costs to improve compliance.

                       JCTagrees that the option has the potential for increased revenue but has
                       not developed estimates of revenue gain.


Related GAO Products   Tax Administration: Nonfiling Among U.S. Citizens Abroad (GAO/GGD-98-106,
                       May 11, 1998).

                       IRSActivities to Increase Compliance on Overseas Taxpayers
                       (GAO/GGD-93-93, May 18, 1993).

                       United States Citizens Residing in Foreign Countries and Not Filing
                       Federal Income Tax Returns (Accession #126891, GAO/GGD, May 8, 1985
                       testimony).


GAO Contact            James R. White, (202) 512-9110




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Option:
Electronic Funds   Authorizing committees                      Finance (Senate)
                                                               Ways and Means (House)
Transfer for       Primary agency                              Internal Revenue Service
Installment Tax    Spending type                               Direct
Payments           Framework theme                             Improve efficiency

                   The Internal Revenue Code authorizes IRS to allow taxpayers to pay their
                   taxes in installments, with interest, if this arrangement would facilitate
                   collection of the liability. As of September 1997, IRS had about 2.9 million
                   installment agreements outstanding, worth about $13.2 billion. At the end
                   of fiscal year 1997, approximately 43 percent of these installment
                   agreements were in default.

                   A number of states use electronic funds transfer (EFT) to make their
                   installment agreement program more efficient and effective. One state,
                   Minnesota, requires taxpayers to pay by EFT, with some exceptions. As of
                   late 1997, approximately 90 percent of Minnesota’s installment agreements
                   were EFT agreements, and the default rate had dropped from about
                   50 percent to between 3 percent and 5 percent in the 2 years the EFT
                   requirement has been in effect. In California, within 6 months of
                   implementing its EFT procedures, its default rate for new installment
                   agreements dropped from around 40 percent to 5 percent.

                   EFT payments also produce administrative savings through lower
                   processing costs involved in recording and posting remittances, lower
                   postage and handling costs associated with sending monthly payment
                   reminders, and lower collection enforcement costs needed to pursue
                   fewer taxpayers in default. IRS’ initial comparison of the cost of EFT
                   payments with the cost of having taxpayers send installment payments to
                   lockboxes in commercial banks showed that EFT payment costs were
                   about 37 percent less than the lockbox costs.

                   The reported benefits for IRS of using EFT for installment agreement
                   payments include the potential to reduce the percentage of taxpayer
                   defaults, decrease administrative costs, and achieve faster collections.

                   JCTagrees that the option has the potential for increased revenue but has
                   not developed estimates of revenue gain.




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Related GAO Products   Tax Administration: Increasing EFT Usage for Installment Agreements
                       Could Benefit IRS (GAO/GGD-98-112, June 10, 1998).

                       Tax Administration: Administrative Improvements Possible in IRS’
                       Installment Agreement Program (GAO/GGD-95-137, May 2, 1995).


GAO Contact            James R. White, (202) 512-9110




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Option:
Electronic Filing of   Authorizing committeess                     Finance (Senate)
                                                                   Ways and Means (House)
Tax Returns            Primary agency                              Internal Revenue Service
                       Spending type                               Direct
                       Framework theme                             Improve efficiency

                       Electronic filing puts 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. 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. IRS does not have adequate data to determine
                       the relative costs of processing and handling electronic returns versus
                       paper returns, including the costs associated with processing, correcting
                       errors, communicating with taxpayers, and storage.

                       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 123 million
                       individual income tax returns filed in 1998, only 24.6 million (20 percent)
                       were filed electronically. Electronic filing of information returns would
                       enable IRS to match more of these documents to tax returns sooner. 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, we 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 o

                       electronic returns with invalid social security numbers. IRS cannot identify
                       invalid social security numbers on paper returns until after the returns are




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                       filed, and the number of problem cases it can work on is limited by the
                       number of available staff.

                       To reduce 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.

                       JCTagrees that the option has the potential for increased revenue but has
                       not developed estimates of revenue gain.


Related GAO Products   Tax Administration: Electronic Filing Falling Short of Expectations
                       (GAO/GGD-96-12, Oct. 31, 1995).

                       Tax Administration: IRS’ Partnership Compliance Activities Could be
                       Improved (GAO/GGD-95-151, June 16, 1995).


GAO Contact            James R. White, (202) 512-9110




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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—amounting to revenue
                   losses of about $70 billion in 1998—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. The same is true for a portion of the premiums paid by
                   self-employed individuals. 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—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 individuals a refundable
                   tax credit of 20 percent of premiums that they or their employers would
                   pay, with eligible premiums capped at $425 and $175 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.

                   JCT did not develop a revenue estimate for this option due to uncertainty in
                   determining the amount of health insurance that would be purchased
                   given a repeal of the employer exclusion.




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Related GAO Product   Tax Policy: Effects of Changing Tax Treatment of Fringe Benefits
                      (GAO/GGD-92-43, Apr. 7, 1992).


GAO Contact           James R. White, (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, such as 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 wish to consider taxing the interest earned on life
                        insurance policies and deferred annuities. The table below reflects JCT’s
                        estimated savings from this option, effective for life insurance policies and
                        annuities purchased after December 31, 1999. Investment income from
                        annuities purchased as part of a qualified individual retirement account
                        would be tax-deferred until benefits were paid.

Five-Year Revenues
                        Dollars in billions
                                                                  FY00          FY01       FY02         FY03   FY04
                        Revenue gain                               11.3          22.9      23.6         24.3   25.1
                        Note: JCT provided its revenue estimates in billions of dollars.

                        Source: Joint Committee on Taxation.




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Related GAO Product   Tax Policy: Tax Treatment of Life Insurance and Annuity Accrued Interest
                      (GAO/GGD-90-31, Jan. 29, 1990).


GAO Contact           James R. White, (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. We 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, 2000.

Five-Year Revenues
                        Dollars in billions
                                                                  FY00          FY01       FY02         FY03   FY04
                                                                        a             a           a        a       a
                        Revenue gain
                        Note: JCT provided its revenue estimates in billions of dollars.
                        a
                        Gains 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, Feb. 17, 1993).


GAO Contact           James R. White (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, we 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, we 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 increased
                      corporate noncompliance, and declining audit coverage, the Congress may
                      wish to require a corporate document matching program.

                      JCTagrees that the option has the potential for increased revenue but has
                      not developed estimates of revenue gain.


Related GAO Product   Tax Administration: Benefits of a Corporate Document Matching Program
                      Exceed the Costs (GAO/GGD-91-118, Sept. 27, 1991).


GAO Contact           James R. White, (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. Through fiscal year
                 1995, 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.

                 We believe that revenues from this option could possibly increase by
                 billions of dollars. JCT agrees that the option has the potential for increased
                 revenue but has not developed estimates of revenue gain.




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Related GAO Products   Tax Administration: Estimates of the Tax Gap for Service Providers
                       (GAO/GGD-95-59, Dec. 28, 1994).

                       Tax Administration: Approaches for Improving Independent Contractor
                       Compliance (GAO/GGD-92-108, July 23, 1992).


GAO Contact            James R. White, (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 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 up to
                        $300,000 of indebtedness for the taxpayer’s principal and second
                        residence. Assuming an effective date of January 1, 2000, JCT estimates
                        that this option would generate the following revenues.

Five-Year Revenues
                        Dollars in billions
                                                                  FY00          FY01       FY02       FY03      FY04
                        Revenue gain                                2 .2           3.1      3.2           3.4    3.7
                        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, Mar. 25, 1993).


GAO Contact             James R. White, (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

                        IRS audits show that individuals overstated their real estate tax deductions
                        by about $1.5 billion nationwide in 1988. We estimate 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
                        our review also found that IRS auditors detected only about 29 percent of
                        $127 million in overstated deductions in three locations we 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, 1999, and for amounts reported on tax bills after
                        December 31, 2000. JCT estimates that the proposals together, would
                        increase federal fiscal revenues as shown in the table below.

Five-Year Revenues
                        Dollars in billions
                                                                  FY00          FY01       FY02         FY03   FY04
                                                                                      a           a
                        Revenue gain                                   0                                 0.1     0.2
                        Note: JCT provided its revenue estimates in billions of dollars.
                        a
                        Gains 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, Jan. 19, 1993).


GAO Contact           James R. White, (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, we 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. JCT estimates that moving tax collection to the point at which the
                      gasoline leaves the refinery would result in the following revenue gains.

Five-Year Revenues
                      Dollars in billions
                                                                FY00          FY01       FY02         FY03   FY04
                                                                                    a           a        a       a
                      Revenue gain                                 0.7
                      Note: JCT provided its revenue estimates in billions of dollars.
                      a
                      Gains of less than $50 million.

                      Source: Joint Committee on Taxation.




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Related GAO Product   Tax Administration: Status of Efforts to Curb Motor Fuel Tax Evasion
                      (GAO/GGD-92-67, May 12, 1992).


GAO Contact           James R. White, (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. The Congress may wish to consider indexing excise tax
                       rates for alcohol and tobacco. The table reflects JCT’s estimated revenue
                       gains from this option with an effective date of January 1, 2000.

Five-Year Revenues
                       Dollars in billions
                                                                 FY00          FY01       FY02         FY03   FY04
                       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, Sept. 27, 1990).

                       Tax Policy: Revenue Potential of Restoring Excise Taxes to Past Levels
                       (GAO/GGD-89-52, May 9, 1989).


GAO Contact            James R. White, (202) 512-9110




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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 conducted a cost allocation study.
                       The study, released in August 1997, noted that the overall equity of
                       highway user fees could be incrementally improved by implementing
                       either a weight-distance tax or eliminating the existing $550 cap on the
                       Heavy Vehicle Use Tax. However, the study made no recommendations.
                       According to an FHWA official, FHWA plans to issue an addendum to the
                       report by April 1999 which will point out that the June 1998 Transportation
                       Equity Act for the 21st Century (TEA-21) reduced the equity of highway user
                       fees. TEA-21 requires that revenues from the federal fuel tax that had been
                       used to help reduce the federal budget deficit go instead to the Highway
                       Trust Fund so that they can be spent on highway and/or transit projects.
                       This means that users that pay this tax (owners of cars, light trucks, and




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                      vans) will move in the direction of paying more than their “fair” share of
                      highway maintenance costs. The administration still does not plan any
                      action and will continue to monitor highway user fees.

                        estimates that removing the $550 cap on the Heavy Vehicle Use Tax
                      JCT
                      would result in the revenue gains shown in the table below.

Five-Year Revenues
                      Dollars in billions
                                                                FY00          FY01       FY02     FY03       FY04
                      Revenue gain                                 0.1           0.1      0.1       0.1        0.1
                      Note: JCT provided its revenue estimates in billions of dollars.

                      Source: Joint Committee on Taxation.




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 IV

Options Not Updated for This Report


                                             The following table provides information on options presented in earlier
                                             versions of this series that are not included in this product. Over 60
                                             options from our last report are not included in this report because (1) the
                                             option was fully or substantially acted upon by the Congress or the
                                             cognizant agency, (2) the option was no longer valid due to environmental
                                             changes or the aging of our work, or (3) the Congress or the cognizant
                                             agency chose a different approach to address the issues discussed in the
                                             option. We will continue to monitor many of these options to assess
                                             whether underlying issues are ultimately resolved based on the actions
                                             taken. It is possible that some of the issues discussed below may appear in
                                             subsequent editions of this series.


Option (budget subfunction)                  Comments
F/A-18E/F Fighter (050)                      Our work concluded that expected operational improvements from the F/A-18E/F were
                                             marginal compared to current versions of the aircraft and that recurring flyaway costs
                                             were understated. In the fiscal year 1997 appropriations act, the Congress funded
                                             DOD’s request to procure 12 low-rate initial production aircraft under the first of three
                                             planned low-rate production lots. In the fiscal year 1998 and 1999 appropriations acts,
                                             the Congress funded DOD’s requests to procure 50 additional E/F aircraft under the
                                             second and third low-rate production lots.
C-17 Strategic Airlift (050)                 Our work indicated that a reduced procurement of 100 C-17s would meet airlift needs if
                                             other actions (e.g., increased prepositioning) were also taken. The Congress
                                             subsequently authorized DOD to procure 80 additional C-17s to bring the C-17 fleet to
                                             120 aircraft.
Nuclear Submarine Force Reductions (050)     Our work indicated that there were less costly alternatives to the Navy’s attack
                                             submarine shipbuilding plans, including building 6 fewer submarines than planned, to
                                             maintain a force structure of 45 to 55 submarines. The Navy had planned to meet this
                                             requirement by acquiring 30 new attack submarines, providing a force of about 55
                                             submarines through 2020. The Quadrennial Defense Review subsequently proposed a
                                             force of 50 attack submarines. To satisfy this smaller requirement, the Navy will continue
                                             with its plan to build 30 new submarines while increasing the number of planned
                                             submarine retirements.
Major Weapon System Warranty Law (050)       The National Defense Authorization Act for Fiscal Year 1998 repealed the requirement for
                                             contractor guarantees on major weapon systems, as suggested in the option. The
                                             Congress reduced DOD’s fiscal year 1998 appropriations by $75 million based on the
                                             repeal of the warranty law.
Base Alignment and Closure (BRAC)            DOD has reduced unobligated balances in BRAC accounts, as suggested in the option,
Accounts (050)                               and analysis of the fiscal year 2000 budget will assess the extent of change.
Defense Transportation Restructuring (050)   DOD is in the process of, among other things, consolidating cargo clearance and
                                             booking functions, outsourcing nontemporary storage functions, and converting vehicle
                                             processing centers to contractor-run operations. These changes and others are
                                             intended to save at least $20 million and reduce personnel by 258 positions, consistent
                                             with this option.
Depot Maintenance Program Excess             DOD adopted the recommended strategy and has completed three public-private
Capacity (050)                               competitions.
                                                                                                                            (continued)




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                                               Appendix IV
                                               Options Not Updated for This Report




Option (budget subfunction)                    Comments
DOD’s Acquisition Workforce (050)              DOD had been on pace to meet the targeted reductions required by the Defense
                                               Authorization Acts of 1996 and 1997, as discussed in this option. The 1998 Defense
                                               Authorization Act expanded the conditions under which the Secretary of Defense may
                                               elect not to make cuts in support of targeted reductions; the 1999 Act effectively ended
                                               further targeted reductions of the acquisition workforce by limiting DOD to percentage
                                               cuts that are not to exceed the rate of overall cuts in the civilian workforce.
DOD’s Materiel Management Migration            Based on our recommendation, the military services and the Defense Logistics Agency
Systems (050)                                  are now responsible for modernizing their inventory control point environments. The
                                               original plan for a standard suite of systems has been abandoned in favor of a
                                               combination of commercial, off-the-shelf systems, and modernized legacy systems.
DOD’s Bulk Fuel Budgeting (050)                Our option pertained to the 1998 DOD budget request and was considered during that
                                               year’s appropriations process.
Uniformed Services Treatment Facilities (050) In 1997, DOD completed new sole-source contract negotiations with each Uniformed
                                              Services Treatment Facility (USTF), which, among other things, reduced payments to
                                              USTFs, as discussed in this option. Program costs are now comparable to alternative
                                              programs such as military hospitals, TRICARE, and Medicare.
Department of Energy’s Procurement of          DOE is implementing recommended changes to procurement of commonly used
Laboratory Testing Services (050)              analyses of nonradioactive organic and inorganic chemicals.
Attrition of Enlisted Personnel From the       DOD implemented recommendations to move all drug testing of recruits to the
Military Services (050)                        pre-enlistment stage.
Defense Inventories Reform (050)               The Congress has required DOD to develop schedules to implement within the next 3 to
                                               5 years commercial practices for acquisition and distribution of inventory items, as
                                               suggested in the option.
Fiscal Year 1998 Defense Operation and         Our option pertained to the 1998 DOD budget request and was considered during that
Maintenance Budget (050)                       year’s appropriations process.
Convert Some Support Officer Positions to      Our option pertained to the 1998 DOD budget request and was considered during that
Civilian Status (050)                          year’s appropriations process.
DOD’s Training Infrastructure (050)            Our option pertained to the 1998 DOD budget request and was considered during that
                                               year’s appropriations process.
Excess Real Estate at Overseas Posts (150)     The State Department has established an independent advisory panel to review potential
                                               properties for sale and has significantly increased the sale of excess property, as
                                               suggested in this option.
USIA Exchanges Programs (150)                  The consolidation of foreign affairs agencies will result in the abolishment of USIA and
                                               the integration of its functions into the State Department, including the possible closure
                                               of exchange programs as discussed in this option.
USIA Overseas Posts, Activities, and Cultural The consolidation of foreign affairs agencies will result in the abolishment of USIA and
Centers (150)                                 the integration of its functions, including overseas structures and activities discussed in
                                              this option, into the State Department.
USAID’s Housing Guaranty Program (150)         The Congress has significantly reduced appropriations for housing guarantees in foreign
                                               aid programs, consistent with this option’s intent.
State Department Functions and Activities      The Congress has required the State Department to engage in a reinvention
(150)                                          effort—including changes in its overall operational priorities, organizational structure, and
                                               interagency relations, as discussed in this option—as part of the consolidation of foreign
                                               affairs agencies.
State Department Support Functions (150)       This option was consolidated with the State Department Business Processes option.
TV Marti (150)                                 This option was consolidated with the International Broadcasting option.
                                                                                                                               (continued)




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                                             Appendix IV
                                             Options Not Updated for This Report




Option (budget subfunction)                   Comments
Risk-Based Exposure Fees Export-Import        The United States and other members of the Organization for Economic Cooperation and
Bank (150)                                    Development have agreed to set rules on fees for export finance transactions and use
                                              similar rates in similar markets, as discussed in this option. Eximbank implemented the
                                              rules in 1998 by raising its fees in a number of markets.
Space Station (250)                           We have reported and testified that NASA has made some progress on the International
                                              Space Station (ISS), but stressed that the agency still had considerable challenges to
                                              overcome, including continued cost growth, lower financial reserves, and significant risk
                                              related to NASA’s and the Russian Space Agency’s ability to support the ISS launch and
                                              assembly schedule. Initial ISS launches began in late 1998, and we will continue to
                                              monitor program implementation.
NASA’s Earth Observing System Data and        Despite developmental problems with flight operations software, NASA is currently
Information System (250)                      restructuring the program to keep it on schedule and within budget, as suggested in this
                                              option.
Clean Coal Technology Funds (270)             Congressional rescissions, as suggested in this option, have significantly reduced the
                                              reserve fund balance for this account.
Use of Carryover Balances to Offset Future    Consistent with congressional direction and our recommendations, DOE has made
Budget Needs (270)                            substantial progress in reducing the level of carryover balances.
Department of Energy’s Overtime Costs (270) DOE’s Office of the Controller is closely monitoring overtime use and several
                                            initiatives—such as not allowing payment for compensatory time not used within a
                                            year—have been factors in reducing overtime, consistent with the intent of this option.
Department of Energy’s Cleanup Studies        Our work showed that removal actions were the least costly method to cleanup
(270)                                         contaminated sites. DOE has developed a 10-year plan (Accelerating Cleanup: Paths to
                                              Closure, June 1998) that, among other things, provides a site-by-site, project-by-project
                                              projection of the technical scope, cost, and schedule required to complete 353 cleanup
                                              projects at the 53 DOE sites.
Weather Service Modernization Project (300) The National Weather Service has begun to deploy the Advanced Weather Interactive
                                            Processing System. As discussed in this option, the deployment will involve only
                                            capabilities that have been validated.
Federal Land Policies (300)                   The portion of this option dealing with hardrock mining claims is captured under the
                                              Hardrock Mining option. Recent congressional initiatives addressed the portion of this
                                              option dealing with increasing concessionaires’ fees in parks, forests, and other
                                              recreation areas.
Federal Timber Sales (300)                    The Forest Service’s commercial timber sales program discussed in this option has been
                                              significantly reduced in recent years and the types of timber sales have changed.
                                              Currently, about half of the sales are related to forest stewardship (i.e., maintaining forest
                                              health) or personal use sales (i.e., products for individuals’ consumption), which are not
                                              selected for commercial value but for other particular management objectives.
Recreation Fees at Federal Sites (300)        Each of the major federal land management agencies is now participating in a recreation
                                              fee demonstration program that allows each agency to increase fees and charge new
                                              fees where appropriate, as discussed in the option. The additional fee revenue
                                              generated by this program will remain with the respective agencies without the need for
                                              annual appropriations.
Food Aid: Public Law 480 Title I Program      The Congress retained the Title I program under the Federal Agriculture Improvement
(350)                                         and Reform Act of 1996, but (1) cut funding significantly as discussed in this option, and
                                              (2) shifted emphasis under the Food for Peace Program from market expansion and
                                              economic development under Title I to emergency and humanitarian assistance under
                                              Title II.
                                                                                                                                (continued)




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                                                Appendix IV
                                                Options Not Updated for This Report




Option (budget subfunction)                     Comments
The Market Access Program (350)                 The Congress reduced authorized funding for this program, mandated that only small,
                                                new-to-market export companies could participate in the branded portion of the
                                                program, and incorporated a five-year graduation requirement for private, for-profit
                                                company participation, consistent with the intent of this option.
Export Credit Guarantee Programs (350)          USDA has significantly improved its credit risk assessment process and taken other
                                                steps to lessen the financial risk to the U.S. government, as discussed in the option. The
                                                number of countries of questionable creditworthiness that participate in the program has
                                                decreased and the risk of default on U.S. government-backed loans has decreased. The
                                                Congress committed to fund the Export Credit Guarantee Program at $5.5 billion a year
                                                under the Federal Agriculture Improvement and Reform Act of 1996.
Use of Sampling for the 2000 Decennial          The Supreme Court ruled on January 25, 1999, that the Census Act does not permit
Census (370)                                    sampling for purposes of congressional apportionment.
Military Airport Program Funds (400)            Responding to our recommendations, FAA agreed to tighten its criteria for entry into the
                                                Military Airport Program (MAP) and focus grants on conversion and capacity projects for
                                                MAP airports.
Fees for Certification of New Airlines (400)    The fiscal year 1998 appropriations act prohibited FAA from promulgating new aviation
                                                user fees not specifically authorized by law. Thus, the agency no longer plans to issue a
                                                Notice of Proposed Rulemaking, which could have updated fees to levels sufficient to
                                                recover the costs of certification.
State Share of State-Supported Intercity Rail   While Amtrak’s losses on state-supported routes—the focus of this option—have not
Passenger Service (400)                         decreased consistently in recent years, some states have begun to require that Amtrak
                                                use fixed-price contracts for these rail services. Fixed-price contracts provide an
                                                incentive for Amtrak to reduce costs on these routes.
Amtrak Subsidies (400)                          In the Amtrak Reform and Accountability Act of 1997, the Congress established an
                                                independent Amtrak Reform Council, as discussed in this option. If Amtrak does not
                                                meet the financial goals included in the act, the Council must recommend to the
                                                Congress a “restructured and rationalized national intercity rail passenger system.” The
                                                provision supersedes the option of a temporary commission to restructure Amtrak’s route
                                                network.
Consolidation of Employment and Training        The Congress passed the Workforce Investment Act of 1998, which consolidated and
Programs (500)                                  coordinated employment and training programs, as discussed in this option.
Automated Drug Utilization Reviews (550)        Most states have now implemented drug utilization review programs, as discussed in
                                                this option.
Payments to Rural Health Clinics (550)          The Congress enacted legislation that limited rural health clinics to areas with a current
                                                shortage area designation, consistent with our recommendations, and established
                                                payment limits for hospital-based clinics.
Teaching Hospitals’ Medicare Payments           The Balanced Budget Act of 1997 changed Medicare’s graduate medical education
(570)                                           payment methodology, as discussed in this option. Changes included reducing the
                                                percentages used to calculate the indirect teaching adjustment factor; capping the
                                                number of full-time equivalent residents and interns in certain medical fields used in
                                                calculating the adjustment factor, and providing incentive payments for voluntary
                                                residency reduction plans.
Funding for State Automated Welfare             Under recent welfare reform legislation, states have more responsibility for funding
Systems (600)                                   welfare programs as well as the automated systems needed to allow them to function.
The PASS Work Incentive Program (650)           In response to our recommendations, the Social Security Administration revised its
                                                application process. As a result, the number of participants in the plan for achieving
                                                self-support (PASS) program is much smaller and estimated program savings
                                                associated with restricting Disability Insurance beneficiaries would also likely be much
                                                smaller than previously estimated.
                                                                                                                                (continued)


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                                                Appendix IV
                                                Options Not Updated for This Report




Option (budget subfunction)                     Comments
Effective VA Hospital Preadmission              VA directed its facilities to establish utilization management programs to assess, monitor,
Certification (700)                             and evaluate the appropriateness of the level of health care provided by VA facilities.
                                                These programs, coupled with VA’s recently implemented capitation-based resource
                                                allocation system, are resulting in significant reductions in hospital admissions and
                                                lengths of stay, consistent with the intent of this option.
Construction of Veterans’ Medical Facilities    The President’s Budget proposed $48 million in fiscal year 1998 for VA major
(700)                                           construction funding, a 77 percent reduction from the prior year; $84 million and
                                                $47 million was requested for fiscal years 1999 and 2000, respectively.
VA’s Medical Care Account Growth Rate           In recent appropriations requests, VA indicated that it does not plan to request additional
(700)                                           appropriations, the focus of this option, but proposes supplementing its appropriations
                                                with increases in third-party reimbursements.
Sunset Date on VA’s Income Verification         In response to our recommendations, the Congress extended the provision authorizing
Program (700)                                   IRS and SSA assistance to VA in verifying income to September 30, 2002.
Approving Education and Training Programs Our work indicated that VA was contracting with state approving agencies to conduct
for Veterans (700)                        assessments that overlapped with those performed by other federal agencies. The
                                          Congress subsequently directed VA to continue to contract with states to determine
                                          whether postsecondary educational and training programs and institutions meet federal
                                          requirements.
Border Patrol Resources (750)                   The Immigration and Naturalization Service has partially redeployed agents to better
                                                address the threat of illegal entry, as discussed in this option.
General Services Administration Supply          GSA has reported that it is increasing use of direct delivery and has formed a task force
Depot System (800, 900, 999)                    to reassess the role of depots in its supply operations, as discussed in this option.
Judiciary’s Long-Range Space Planning           The Administrative Office of the Courts has updated its space plans as recommended
System (800, 900, 999)                          and is using statistical tools to ensure consistent treatment across districts, as discussed
                                                in this option.
Premium Payments to Employees While on          Consistent with our recommendation, the Congress enacted in 1998 a permanent
Leave (800, 900, 999)                           governmentwide restriction on the payment of Sunday premium pay for all employees
                                                who are paid from appropriated funds and who do not actually perform work on Sunday.
Commemorative Coins (800, 900, 999)             The Congress has authorized a 10-year circulating commemorative coin program—the
                                                quarter dollar—beginning in 1999, as discussed in this option.
Internal Revenue Staff Utilization (Receipts)   Although allocation of collection staff may still be an issue, IRS has reassigned a
                                                significant number of collections personnel since the revenue estimates were made, as
                                                discussed in this option.
Taxation of Additives to Diesel Fuel            The Taxpayer Relief Act of 1997 requires that kerosene, which may be blended with
(Receipts)                                      diesel fuel, be subject to the same requirements as those applied to diesel fuel, as
                                                discussed in this option.
Industrial Development Bonds Targeting          Our work indicated that targeted reductions in the amount of bonds a state may issue (a
(Receipts)                                      “volume cap”) based on the extent of fiscal distress among its communities could
                                                reduce tax losses while not significantly lessening the public benefits arising from this
                                                type of bond. The Congress expanded this program in 1998 by increasing the state
                                                volume cap.
Federal Agency Reporting to the Internal        The Taxpayer Relief Act of 1997 requires federal agencies to report payments of $600 or
Revenue Service (Receipts)                      more to corporations for services, as discussed in this option. However, IRS has not yet
                                                begun to match corporation tax returns against the reported information to identify
                                                underreporting.




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Appendix V

Major Contributors to This Report


               Literally hundreds of GAO staff were responsible for the scores of reports
               and testimonies that form the basis for the options included in this
               product. At the end of each option, a key contact name is provided to
               address questions pertaining to the specific option.

               Michael J. Curro, Assistant Director, Carol M. Henn, Senior Evaluator, and
               Adriel M. Harvey, Evaluator, prepared this volume in the GAO series.
               Questions may be directed to these staff in the Accounting and
               Information Management Division, Budget Issues Group, at (202) 512-9573.




(935286)       Page 270                          GAO/OCG-99-26 Budget Implications of GAO Work
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