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The first question to be decided the seaman's personal injury suit for damages on the grounds of unseaworthiness and negligence under the Jones Act1 is whether the jury should have been allowed to determine, in the absence of supporting testimony by an expert in naval architecture, a claim that the shipowner failed to equip his ship with necessary and feasible safety devices to prevent the mishap which befell the seaman. The trial judge submitted for the jury's determination various bases of respondent's alleged liability, including the claim resting on the failure to provide certain safety devices. Because the jury returned a general verdict for the seaman, it cannot be said what basis of liability the jury found to exist. The Court of Appeals for the Second Circuit, Judge Smith dissenting, reversed and remanded for a new trial, holding that in the absence of expert evidence, it was error to have allowed the jury to consider the failure to provide safety devices. 2 Cir., 293 F.2d 121, 123—124. Since the question whether supporting expert testimony is needed is important in litigation of this type, we granted certiorari. 368 U.S. 811, 82 S.Ct. 62, 7 L.Ed.2d 21. We hold that the Court of Appeals erred. Petitioner was a lookout on the S.S. United States. He was injured as he moved from a ladder to a platform leading to his post in the crow's-nest. The crow's-nest was housed in a 'bubble' half way up a hollow aluminum radar tower which rose 65 feet from the bridge deck. The ladder extended the full height of the tower along the inside of its after side. At various levels inside the tower were horizontal platforms, at the after ends of which were access openings slightly larger than manholes, through which the ladder passed straight up. The tower was more than six feet from fore to aft at the crow's-nest level, and tapered from four to three feet in width. There was only a narrow ledge around three-quarters of the opening in the platform at that level; the platform proper was toward the bow, and led to the door in the crow's-nest. As a seaman climbed the ladder to the crow's-nest, he faced astern until his feet were approximately level with the platform. To get from the ladder to the platform proper, he had to pivot, putting one foot on the starboard or port ledge, follow it with the other foot, complete his pivot and step forward along the ledge to the platform proper. Although the respondent describes the crow's-nest and its approach as 'purposely constructed so as to provide maximum protection and safety for members of the crew having to use it,' there were no devices intended to facilitate safe maneuvering from ladder to platform; for support during this maneuver, the seaman could grasp one of the thin vertical beams located at intervals along the port and starboard sides, or a vertical, bulky rectangular pipe enclosing a radar cable and near the starboard side, or a horizontal stiffener or ledging that ran at shoulder-height around the tower. Respondent argues that the seaman also could simply spread his arms to brace himself against the sides of the tower. On the night of February 15—16, 1958, as the United States went at high speed and rolled in rough seas, the tower was plunged into darkness, just as the petitioner was executing the movement to the crow's-nest platform from the ladder. Illumination within the tower was provided by five electric lights at various levels, but these burned out frequently. Two had been out for a long period and two others had gone out a few hours before the accident, leaving as the only light that which was at the crow's-nest platform. At some point after petitioner had begun the maneuver from ladder to platform, but before he reached a place on the platform proper and away from the access opening, that last light went out. An instant later petitioner fell backwards across the opening and struck his head against the ladder and his lower back against the fore edge of the opening, leaving his body suspended in the opening. He grasped the ladder rungs and called for help from the lookout on duty in the crow's-nest. With the lookout's aid he was able to seat himself on the starboard ledge with his legs hanging down through the opening and his right arm around the cable pipe. The lookout returned to the crow's-nest to phone the bridge for help. In his absence the petitioner became dizzy and fell through the opening to a place eight feet below the platform. The only issue before us on this phase of the case is whether the trial judge erred in instructing the jury that they might find the respondent liable for unseaworthiness or negligence for having failed to provide 'railings or other safety devices' at the crow's-nest platform. The Court of Appeals held that it was error to submit that question to the jury because 'There was no expert testimony that proper marine architecture required the additional provision of railings or other safety devices on such a ladder or platform enclosed within a tower leading to a crow's nest. Should the jury, under these conditions, have been permitted to decide whether proper marine architecture required railings or other safety devices? In two recent cases, this court has held that a jury should not be permitted to speculate on such matters in the absence of expert evidence.'2 293 F.2d at 123. There was evidence in the form of testimony and photographs, from which the jury might clearly see the construction at the crow's-nest level which we have described. If the holding of the Court of Appeals is only that in this case there are peculiar fact circumstances which made it impossible for a jury to decide intelligently, we are not told what those circumstances are, and our examination of the record discloses none.3 If the holding is that claims which might be said to touch upon naval architecture can never succeed without expert evidence, neither the Court of Appeals nor the respondent refers us to authority or reason for any such broad proposition. This is not one of the rare causes of action in which the law predicates recovery upon expert testimony. See Wigmore, Evidence (od ed. 1940), §§ 2090, 2090a. Rather, the general rule is as stated by Mr. Justice Van Devanter, when circuit judge, that expert testimony not only is unnecessary but indeed may properly be excluded in the discretion of the trial judge 'if all the primary facts can be accurately and intelligibly described to the jury, and if they, as men of common understanding, are as capable of comprehending the primary facts and of drawing correct conclusions from them as are witnesses possessed of special or peculiar training, experience, or observation in respect of the subject under investigation * * *.' United States Smelting Co. v. Parry, 10 Cir., 166 F. 407, 411, 415. Furthermore, the trial judge has broad discretion in the matter of the admission or exclusion of expert evidence, and his action is to be sustained unless manifestly erroneous. Spring Co. v. Edgar, 99 U.S. 645, 658, 25 L.Ed. 487. This Court has held, in a factual context similar to this, that there was no error, let alone manifest error, in having a jury decide without the aid of experts. Spokane & Inland Empire R. Co. v. United States, 241 U.S. 344, 36 S.Ct. 668, 60 L.Ed. 1037, was an action by the United States to recover penalties for violation of the Safety Appliance Act provision requiring handholds or grab-irons to be placed on the ends of railroad cars used in interstate commerce.4 The defendant railroad offered expert testimony to establish that the substitutes provided on its cars would accomplish the statute's purposes. The jury had inspected the cars, and the expert evidence was excluded when the United States objected that this 'was a matter of common knowledge.' We held that 'the court was clearly right in holding that the question was not one for experts, and that the jury, after hearing the testimony and inspecting the (cars) were competent to determine the issue * * *.' 241 U.S. at 351, 36 S.Ct. at 671.5 In sum, we agree with Judge Smith in dissent below: 'There was before the jury sufficient evidence, both from oral testimony and from photographs, for it to visualize the platform on and from which plaintiff fell and to determine whether some railing or hand hold in addition to the structures present was reasonably necessary for the protection of a seaman passing from the ladder to the platform in the swaying mast. '* * * (There is no) blanket proposition that any and all theories of negligence and/or unseaworthiness which might touch on the broad field of 'naval architecture' may be properly submitted to a jury only if supported by expert testimony. Here the potential danger was fairly obvious and a jury should be perfectly competent to decide whether the handholds furnished were sufficient to discharge the owner's duty to provide his seamen with a safe place to work. Such a determination hardly requires expert knowledge of naval architecture * * *.' 293 F.2d at 126. Indeed, 'if there was a reason hidden from the ordinary mind why this condition of things must have existed, those facts called upon the defendant to make that reason known.' Missouri, K. & T.R. Co. v. Williams, 103 Tex. 228, 231, 125 S.W. 881, 882; and see Poignant v. United States, 2 Cir., 225 F.2d 595, 602 (concurring opinion).6 There is another question to be decided. The petitioner also sought maintenance and cure. The trial judge awarded past maintenance, which the respondent has not disputed, and also future maintenance for three years. The Court of Appeals set aside the award of future maintenance, saying: 'There does not appear to be any sufficient basis, by opinion evidence or otherwise, for the finding that three years is the period reasonably to be expected for Salem to reach maximum improvement.' 293 F.2d, at 125. The trial judgment made no findings. We have therefore examined the evidence on the question in the light of what was said in Calmar S. S. Corp. v. Taylor, 303 U.S. 525, 531—532, 58 S.Ct. 651, 655, 82 L.Ed. 993: '* * * (A)mounts (for future maintenance should be such) as may be needful in the immediate future for the maintenance and cure of a kind and for a period which can be definitely ascertained.' We agree that the evidence provides no support under that test for the award of three years' future maintenance. We affirm as respects maintenance but otherwise reverse the judgment of the Court of Appeals. Since other grounds of reversal urged by the respondent were not reached by that court, the case is remanded to it for further proceedings in conformity with this opinion. It is so ordered. Affirmed in part, reversed in part and case remanded with directions. Mr. Justice FRANKFURTER took no part in the decision of this case. Mr. Justice WHITE took no part in the consideration or decision of this case.
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1. In this suit under the Jones Act based on unseaworthiness and negligence, seeking damages for personal injuries sustained by a seaman who fell as he went to his post in the crow's nest, held: It was error for the Court of Appeals to order a new trial on the ground that a jury could not determine, in the absence of supporting testimony by an expert in naval architecture, a claim that the shipowner had failed to equip the ship with necessary and feasible safety devices to prevent such a mishap. Pp. 31-37. 2. The evidence in this record provides no support for the trial court's award to the seaman of future maintenance for three years. Pp. 37-38. 293 F. 2d 121, affirmed in part and reversed in part.
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Background Following the terrorist attacks of September 11, 2001, the United States began military operations to combat terrorism both in the United States and overseas. Operations to defend the United States from terrorist attacks are known as Operation Noble Eagle. Overseas operations to combat terrorism are known as Operation Enduring Freedom, which takes place principally in Afghanistan, and Operation Iraqi Freedom, which takes place in and around Iraq. Figure 1 shows the primary locations where U.S. forces conducted operations to support GWOT in fiscal year 2004. Since September 11, 2001, DOD reports that it obligated $191 billion through May 2005 to conduct GWOT. Factors that affect the cost of the war include the number of deployed personnel, the special pays and allowances that deployed personnel receive, the additional pay that mobilized reservists receive when on active duty, the pace of operations, the extent to which facilities have to be built to house and protect the deployed forces, and the distance to the theater. Congress has enacted a series of supplemental appropriation acts, beginning in September 2001, to fund the war. These supplemental appropriation acts have included funding authority for operations in Afghanistan and Iraq, homeland security, and other global counterterrorism military and intelligence operations. The costs of contingency operations are referred to as “incremental costs” and are directly attributable costs that would not have been incurred, were it not for the operation. Specifically, the costs are above and beyond baseline training, operations, and personnel costs. Incremental costs include the pay of mobilized reservists as well as the special pays and allowances of deployed personnel, such as imminent danger pay and foreign duty pay for those personnel serving in Operation Iraqi Freedom and Operation Enduring Freedom, the cost of transporting personnel and materiel to the theater of operation and supporting them upon arrival, and the operating cost of equipment, such as vehicles and aircraft, among many other costs. Costs that are incurred regardless of whether there is a contingency operation, such as the base pay of active duty military personnel, are not considered incremental. DOD tracks the obligations incurred to support GWOT and produces a monthly cost report, which is distributed throughout the department and used by senior DOD leadership in discussing the cost of the war. It is also used in formulating future budget requests to fund GWOT. The monthly report, which, as noted earlier, was titled the Terrorist Response Cost Report until January 2005, when it was renamed the Supplemental and Cost of War Execution Report, identifies the monthly and cumulative incremental GWOT obligations. DOD reports the costs by service, defense agency, contingency operation, and appropriation. On October 1, 1998, DOD implemented a standard contingency cost breakdown structure to improve contingency cost reporting consistency between multiple services and DOD agencies. Furthermore, this cost breakdown structure was also to facilitate future efforts to understand and interpret differences between estimated and actual costs. DOD Financial Management Regulation 7000.14-R, volume 12, chapter 23, generally establishes financial policy and procedures related to DOD contingency operations. The regulation incorporates the common cost categories and multiple subcategories, which were established in 1998 and updated in January 2005, that are used to report DOD’s monthly GWOT costs. We previously reported our concerns about the reliability of reported contingency operations cost data. Specifically, our 1996 report on the reliability of reported contingency operations costs found inaccuracies representing about 7 percent of the $4.1 billion in costs reported in fiscal years 1994 and 1995, which we believe was indicative of a material weakness in the accounting systems. These included the following: $104 million in overstated costs, primarily due to the failure of the Air Force ($67 million) and the Navy ($3 million) to adjust reported flying hour costs to reflect the value of free fuel being received at that time. The services’ failure to adjust reported costs to reflect normal operating and training costs. For example, one Army command reported operating costs of $11 million that were not incurred because of deployments. The services’ failure to report or fully report $171 million in understated costs, including some military personnel costs such as imminent danger pay and family separation pay, munitions the Navy used, and Air Force mobility equipment and munitions. We further reported that it was not feasible to examine all reported costs and supporting data and that our results were not statistically projectable. Consequently, we were unable to conclude, on the whole, if reported costs were overstated or understated. At that time, we recommended that DOD clarify existing guidance for reporting costs, which DOD agreed to do. Over the years DOD and the services have adopted a number of our recommendations to improve their guidance for spending on contingency operations. Reliability of DOD’s Reported Costs Is Unknown We found numerous problems in DOD’s processes for recording and reporting costs for the Global War on Terrorism, raising significant concerns about the overall reliability of DOD’s reported cost data. As a result, neither DOD nor Congress (1) can reliably know how much the war is costing and details on how appropriated funds are being spent or (2) have historical data useful in considering future funding needs. On the basis of our work, DOD is taking steps to improve its cost reporting. However, as was the case in our 1996 report, because it was not feasible to examine all reported costs and significant data reliability problems existed, we were not able to determine the extent that total costs were misstated. DOD policy requires that controls, accounting systems, and procedures provide, in financial records, the proper identification and recording of costs incurred in supporting contingency operations. However, our examination of DOD’s reported costs in support of GWOT found a number of problems affecting the accuracy of reported costs. These problems included long-standing deficiencies in DOD’s financial management systems and business processes, reported military personnel obligations that do not match payroll records, incorrectly categorizing operation and maintenance obligations, the use of estimates instead of actual information, and a lack of supporting documentation. Problems contributing to DOD’s challenges in reporting reliable GWOT cost data include the previously cited long-standing deficiencies in DOD’s financial management systems, the lack of a systematic process to ensure that data are correct, the failure to use actual data when available, and a large number of cost categories and little training on how to apply them. DOD’s Financial Management Regulation Addresses the Importance of Accurately Reporting Obligations DOD’s Financial Management Regulation (FMR) emphasizes the importance of accurate cost reporting. Volume 6A, chapter 2 (sec. 020201) of DOD’s FMR establishes the general financial responsibilities for DOD components. Components are responsible for the following: ensuring the accuracy, completeness, timeliness, and documentary support for all data generated by the customer and input into finance and accounting systems; or submitted to the Defense Finance and Accounting Service for input and/or recording in the finance and accounting systems and inclusion in financial reports; establishing appropriate internal controls to ensure the accuracy of data provided to the DFAS; and reviewing all reports provided by the DFAS to assess the accuracy of the financial information being reported. In addition to volume 6A, chapter 2, volume 3, chapter 8 of the FMR has several provisions that require funds holders to take steps to ensure that transactions have been entered accurately. Section 080401 requires that funds holders conduct a triannual review of commitments and obligations. During these reviews, officials are to review commitment and obligation transactions for timeliness, accuracy, and completeness. The requirement applies to all appropriations and funds of all DOD components. Section 080403 establishes the responsibility of conducting reviews of outstanding commitments and unliquidated obligations to funds holders. According to the FMR, this is true regardless of whether the funds holders or the accounting office actually records the commitments or obligations in the official accounting records. This responsibility is placed on the funds holders because the funds holder initiates those actions that result in commitments and obligations and, therefore, is in the best position to determine the accuracy and the status of such transactions. Finally, volume 12, chapter 23 of the FMR establishes policies and procedures for budgeting and cost reporting for contingency operations and states that DOD policy requires that controls, accounting systems, and procedures provide, in financial records, proper identification and recording of costs incurred in supporting contingency operations. Concerns Regarding the Reliability of Reported GWOT Costs Stem from a Variety of Factors Our work has identified a number of concerns regarding the reliability of reported GWOT costs. These include deficiencies in DOD’s financial management systems, discrepancies between some reported military personnel obligations and DOD payroll information, incorrectly categorized operation and maintenance costs, the use of estimates instead of actual information, and a lack of supporting documentation. DOD Uses Its Existing Financial Management Systems and Business Processes to Record GWOT Costs, but These Systems Have Long-standing Deficiencies Because DOD’s accounting systems cannot directly capture GWOT costs, the department’s overall GWOT cost reporting is based on the military services’ reports of obligations. Volume 12, chapter 23 of the FMR requires that the DOD components collect and report applicable costs related to contingency operations. Chapter 23 also requires that the services capture their obligations in their existing accounting systems and at the lowest possible level of organization. However, DOD has long-standing deficiencies in its existing financial management systems and business processes. As recently as September 2004, DOD acknowledged that agencywide financial statements were not completely reliable as a result of inadequately designed systems. The department reported that systemic deficiencies in its financial management systems and business processes result in its inability to collect and report financial and performance information that is accurate, reliable, and timely. In March 2004, the Under Secretary of Defense (Comptroller) stated in a memo that DOD’s fiscal year 2004 agencywide financial statements would not substantially conform to generally accepted accounting principles. The department acknowledged that although it has made progress in its efforts to resolve financial management shortfalls, its financial management systems currently do not fully comply with the applicable requirements. For years we have reported on DOD’s financial management deficiencies. In 1995 we first designated DOD financial management as an area of high risk. We concluded that DOD’s financial management deficiencies adversely affect the department’s ability to control costs, ensure basic accountability, anticipate future costs and claims on the budget, measure performance, maintain funds control, prevent fraud, and address pressing management issues. From 1995 through 2005, we continued to report on deficiencies in DOD’s financial management processes. In November 2004, we testified that recent audits and investigations by our and DOD’s auditors continue to confirm the existence of pervasive weaknesses in DOD’s financial and related business processes and systems. We found that adverse conditions included discrepancies in military pay, logistical support such as duplicate supply requisitions, and data reliability needed by Congress and DOD to make sound sourcing decisions. Most recently, in June 2005 we testified that long-standing weaknesses in DOD’s financial management and related business processes and systems have (1) resulted in a lack of reliable information needed to make sound decisions and report on the status of DOD activities, including the accountability of assets, through financial and other reports to Congress and DOD decision makers; (2) hindered its operational efficiency; (3) adversely affected mission performance; and (4) left the department vulnerable to fraud, waste, and abuse. Some Reported Military Personnel Obligations Are Not Consistent with Related Payroll Information The Army did not have a reasonable and reliable process to identify and report almost $12 billion of GWOT military personnel obligations in fiscal year 2004. Instead of using related DOD payroll information, the Army based the GWOT military personnel obligations used in the GWOT cost report primarily on its fiscal year 2004 obligation plan and, in the end, forced, or “plugged,” obligations to match available supplemental budget authority. Effectively, the Army was reporting back to Congress exactly what it had appropriated. Army officials were unable to readily explain the process for identifying and reporting GWOT military personnel obligations. Specifically, the Army Budget Office lacked formal procedures to guide the monthly reporting of GWOT military personnel obligations to DOD and a process to ensure management’s review of the reported amounts. Army Budget Office officials stated that these problems were exacerbated by staff losses in the September 11 terrorist attack on the Pentagon, personnel turnover, and hiring difficulties. Our analysis showed that obligations associated with Army military personnel in the monthly GWOT cost report were not consistent with related DOD payroll information, and the use of planned obligations instead of actual payroll information might have resulted in reported Army military personnel GWOT obligations being materially overstated. For fiscal year 2004, our analysis of the more than $7.1 billion in incremental military personnel obligations listed in the GWOT cost report category for mobilized Army reserve-component soldiers identified as much as $2.1 billion of reported obligations in excess of related DOD payroll information. Initially, the Army could not support this difference or its reported GWOT military personnel obligations. Over the next several months, the Army and the Office of the Under Secretary of Defense (Comptroller) provided us with several possible, though sometimes inaccurate, explanations for this difference. Some explanations appeared valid while others did not and, taken together, they failed to fully account for the difference. For example, the Army Budget Office stated that a portion of the difference was attributable to retirement pay and retirement health care accruals. We found that the retirement health care accrual did not result in incremental costs and, therefore, was not a valid explanation for the difference. However, mobilized reserve-component personnel receive an increase in retirement pay benefits over nonmobilized reservists and, therefore, DOD incurs incremental costs related to this benefit. According to the Army, the retirement pay accrual represents part of the difference, and it reported this amount at $824 million. This information was provided too late in our audit to assess its accuracy and completeness. Further details on our review of GWOT obligations for Army military personnel are included in appendix II. In addition to examining the obligations for mobilized Army reservists, we also examined reported imminent danger pay and found wide monthly swings and little correlation with the numbers of deployed personnel. Imminent danger pay relates directly to the number of military personnel deployed to eligible areas. Beginning on October 1, 2002, all military personnel—both Active and Reserve Component—in areas designated as eligible for imminent danger pay receive $225 per month for each month for which they qualify for such pay. Eligible areas include, but are not limited to, the countries of Iraq, Afghanistan, Kuwait, Qatar, Bahrain, and Saudi Arabia. The monthly amount is payable in full without being prorated or reduced, for each month, during any part of which a service member qualifies and regardless of the actual period of time served on active or inactive duty during that month. Month-to-month changes in reported imminent danger pay obligations for GWOT should be consistent with the number of deployed forces in eligible areas. However, as shown in table 1, which depicts the amounts reported for DOD as a whole and the implied number of people who should be receiving the pay on the basis of dividing the amount per month—$225— into the reported obligations, there are wide monthly swings in the number of deployed personnel, based on the amount of reported imminent danger pay, that do not seem to correlate to the actual numbers of deployed personnel. For example, the reported imminent danger pay suggests that 173,000 personnel were deployed to support GWOT in July 2004 and that the number of personnel rose to more than 1 million in August 2004 and then declined to 264,000 in September 2004 and 61,000 in October 2004. According to DOD, about 221,300 personnel from all the military services were deployed throughout the region in December 2004 to support Operation Enduring Freedom and Operation Iraqi Freedom, including deployed personnel in Iraq, Afghanistan, and Kuwait. In continuing discussions of our analysis, Army Budget Office officials provided additional detail on the Army’s reported imminent danger pay obligations, which comprise the bulk of DOD-wide reported imminent danger pay obligations. With respect to the August 2004 reported imminent danger pay, which was by far the largest reported amount from April 2004 through April 2005, Army Budget Office officials said that their reported portion—$217 million—of the DOD-wide $231 million was in error owing to a misplaced decimal and that the Army’s August 2004 imminent danger pay should have been reported as $21 million. These officials attributed the month-to-month fluctuations in reported imminent danger pay to the lack of timeliness and consistency in adjusting costs between those baseline and GWOT amounts. Beginning in June 2005, the Army said that it adopted a new process that uses accounting data, with the actual count of deployed forces as a validation checkpoint. Operation and Maintenance Obligations Are Not Always Properly Categorized Obligations are the foundation of all GWOT cost reporting. Operation and maintenance obligations in support of GWOT represent tens of thousands, if not hundreds of thousands, of individual transactions ranging in value from 1 penny to millions of dollars. When obligations are incurred, the services enter them into their accounting systems using accounting codes. For example, an Army budget activity, such as an installation or unit, initially obligates funds for acquired goods and services by using the Standard Army Accounting Classification Code. An obligation entry includes information on the funding source; the operational mission, such as Operation Iraqi Freedom; and the category of cost. The cost categories are established by the services. In the Army, the cost category is called the element of resource (EOR). Because DOD’s Financial Management Regulation volume 12, chapter 23 requires that the services capture costs within their existing accounting systems and report them in a common cost format known as the cost- breakdown structure, the services must translate—or “cross-walk”— their obligations into 1 of 55 cost categories in the cost breakdown structure established by the Office of the Under Secretary of Defense (Comptroller) and used in the monthly GWOT cost reports. For the Army, this involves translating obligations recorded by EOR into the chapter 23 GWOT cost categories. To meet DOD’s reporting requirements, each month Army resource management officials must cross-walk costs in the EOR categories into the GWOT cost categories, sometimes manually. For example, in fiscal year 2004, ARCENT resource management officials manually cross-walked 266 EORs into 14 GWOT cost categories. If obligations are not identified in the correct cost category in the services’ accounting system, they can affect the overall reliability of DOD’s GWOT cost reporting. In the Army, ARCENT resource management officials told us that on the basis of their reviews of GWOT obligations, they had confidence in the accuracy of the total dollar obligations as identified in the GWOT cost report but felt that obligations were being incorrectly categorized. At two Army divisions, we observed obligations being assigned to the wrong EOR. In our limited testing of transactions at one of the divisions, which deployed to Iraq as part of Operation Iraqi Freedom, we found errors in assigning costs to the correct EOR, which resulted in overstated costs in some categories and understated costs in others. We reviewed 31 transactions valued at $15 million and found coding errors in 11, or 35 percent of the transactions, valued at $770,134, or 5 percent of the amount we reviewed. One example of an error we found involved $383,147 in obligations for communications services, which was entered into the division’s financial management systems under an EOR that corresponded with DOD’s GWOT cost report’s category of Other Services and Miscellaneous Contracts. A senior division resource management official stated that it would have been better to use an EOR that corresponded with the Facilities/Base Support category. As a result, the Other Services and Miscellaneous Contracts category was overstated by $383,147 while the Facilities/Base Support cost category was understated by the same amount. At the other Army division, which deployed to Afghanistan as part of Operation Enduring Freedom, we also found errors in assigning costs to the correct EOR that resulted in overstated costs in some categories and understated costs in others. We reviewed 146 of 237 transactions valued at more than $14 million and found coding errors in 32 transactions, or 22 percent of the transactions, valued at more than $4 million, or 30 percent of the amount we reviewed. For example, the division obligated $6,995 for a printer, which it originally coded with the EOR for automated data- processing equipment. However, once the purchase request reached the contracting office, it was recoded as general supplies and not as automated data-processing equipment. After reviewing this example and others, a senior resource management official at the division concurred with our assessment of these coding errors. In related reporting, we have raised concerns about reported equipment reconstitution costs. Reconstitution is one of the cost categories in DOD’s GWOT cost report. We reported that DOD has not accurately tracked and reported its reconstitution costs because the services are unable to segregate equipment reconstitution from other maintenance requirements, as required. In the case of the Air Force, we reported that it does not break out its equipment reconstitution obligations from other GWOT obligations in the cost report and was reporting no reconstitution costs. In further discussions Air Force officials told us that their reconstitution costs were being captured in their flying hour (operating tempo) costs. Regarding the Army and the Navy, we reported that equipment reconstitution obligations reported by those two services are likely overstated because (1) the Army includes costs other than those required for reconstitution and (2) the Navy is unable to segregate regular maintenance from reconstitution maintenance for ship overhauls. We recommended and DOD agreed to direct the services to develop comprehensive and consistent methods for tracking and reporting equipment reconstitution obligations. In agreeing with our recommendation, the Office of the Under Secretary of Defense (Comptroller) said that the office had already revised its financial management regulation to improve the reporting of equipment reconstitution, but we observed that until additional actions are taken, such as improving the services’ financial management systems’ ability to track obligations, our recommendation will not be fully implemented. Beginning in October 2004, DOD revised its reconstitution cost category to include four subcategories, and the Air Force is reporting reconstitution obligations in two of those categories. In addition to the concerns with properly categorizing costs that we identified, officials from the Army Budget Office believe that the Army’s operating support obligation data are reliable at the broad category levels (personnel support, operating support, and transportation), but distribution within categories is likely to contain errors. These officials said that the Army is taking two immediate actions. First, it has refined its EOR to cost breakdown structure code cross-walk. The Army has specifically identified approximately 135 EORs that directly associate with the cost breakdown structure. Additionally, Army officials said that they have added an additional data element (the Functional Cost Account code, which describes the programmatic function), which will provide one more reference point to validate entries. This revision was effective with the June 2005 reporting cycle. Second, Army officials said that the Army is developing a standard operating procedure with a follow-on “train the trainers” program for Army-wide distribution. It will prescribe the methodology for capturing GWOT execution data from the accounting systems and source documents. This is a longer-term solution that the Army believes should contribute materially to improved data entry at the originating organizational levels. The Air Force Audit Agency, in a June 2005 report on Air Force GWOT spending, also identified errors in properly categorizing GWOT costs. Specifically, the audit agency found that in fiscal year 2003, 159 of 923 transactions it reviewed, or about 17 percent of GWOT transactions valued at more than $163 million, were inaccurately recorded in the Air Force’s accounting system. The report stated that this condition occurred because resource management officials were uncertain of which costs were GWOT related and because reported costs were not compared with documentation as required by DOD’s financial management regulation. The audit agency concluded that inaccurate cost reporting may lead to questionable cost-of-war information, distorted command resource allocation and spending plans, and unreliable summary DOD financial reports. The audit agency made several recommendations, including one that cognizant Air Force officials review transaction data and notify accounting liaison office personnel of inaccurate entries monthly, and one that the liaison office personnel request data correction from appropriate accounting offices. The Air Force agreed with the recommendations and stated that it would make the recommended changes. In advance of the report’s issuance, in a March 2, 2005, memo, the Assistant Secretary of the Air Force, Financial Management and Comptroller, addressed and agreed to revise guidance to emphasize increased management oversight over transaction approval, accuracy, and documentation completeness. Some GWOT Cost Data Are Based on Estimates Because ships at sea incur the same types of costs whether in normal forward-deployed operations or in support of GWOT, the Navy allocates the costs between normal and GWOT operating costs. The Navy’s major commands use a variety of approaches for allocating these costs. For example, we found that the Atlantic and Pacific surface commands, which are responsible for managing the Navy’s surface ships, use two different approaches in order to allocate a portion of each ship’s normal operating costs to GWOT for those ships that have been used to support GWOT missions. The Atlantic Fleet uses an approach whereby the portion of a ship’s normal operating costs becomes GWOT costs when (1) the ship has been engaged in a GWOT mission during that month and (2) the ship exceeds its monthly baseline budget. Once the baseline budget has been exceeded, the additional cost above that baseline is considered incremental and is recorded as a GWOT cost. The Pacific Fleet uses a different approach, which utilizes a model that has evolved over many years. This model takes a number of factors into consideration in order to calculate how much of a ship’s costs should be allocated to GWOT. These factors include a running 3-year average of the costs of operating each individual ship, the cost of maintaining that general class of ships, and whether the ship has performed GWOT missions. This model calculates an amount for each ship that should be recorded as a GWOT cost. Documentation Is Not Always Available Documentation related to goods and services purchased in support of the Global War on Terrorism is not always available. Without documentation, one cannot attest to the reliability and applicability of reported costs to GWOT. At one of the Marine Expeditionary Forces, we were able to link reported costs to the supporting documentation for contractual purchases. However, when we compared a limited number of documents from the ARCENT document register with documentation controlled by DFAS- Rome, New York, we found instances where (1) document register descriptions did not match invoices maintained by DFAS and (2) invoices did not match dollar amounts associated with the ARCENT documentation number. For example, one item we identified was listed in the document register as a purchase of unit coins for $200,000. However, we found no evidence indicating that the $200,000 was actually obligated for the purchase of unit coins. The EOR listed in the document register indicated that the item was for furniture. When we reviewed the invoices, we found that the documentation supported the purchase of furniture for $18,959 but nothing for unit coins or for $200,000. In another example, a purchase was listed in the document register for $21,900 toward an operational fund. When we reviewed the invoice, we found that the documentation supported the purchase of translator services for $3,950. Several audit agencies also had mixed success with linking reported GWOT costs to supporting documentation. In many cases, documentation was not available or the available documentation was not sufficient enough to determine the applicability of costs, as shown in the following examples: The Air Force Audit Agency, in its previously cited June 2005 report on Air Force GWOT funds management, reported that financial managers could not provide documentation to support approximately 14 percent of 1,037 fiscal year 2003 transactions reviewed. The transactions had an absolute value of more than $16 million. The audit agency reported that the inability to provide documentation occurred for three primary reasons: (1) Air Force financial managers did not require funds holders and resource advisors to maintain supporting documents for a minimum of 24 months, (2) comptrollers did not provide funds holders and resource managers with documentation requirements training, and (3) Air Force organizations did not always comply with records management guidance. The agency concluded that maintaining documentation provides an audit trail and assurance that Air Force personnel properly expended these funds. The agency made several recommendations to strengthen controls over documentation, which the Air Force agreed to implement. In the previously cited March 2, 2005, memo issued in advance of the issuance of the Air Force Audit Agency’s report, the Assistant Secretary of the Air Force, Financial Management and Comptroller also addressed this finding and agreed to revise Air Force guidance to require funds holders and resource advisors to maintain supporting documentation for a minimum of 24 months for all financial transactions, modify the Web-based Resource Advisor Tutorial to highlight the need for funds holders and resource advisors to maintain documentation for financial transactions, and to require comptroller personnel to include documentation requirements in all funds holders’ training and resource advisor training. The Naval Audit Service reported that it could not find supporting documentation for 11 percent of the reported fiscal year 2002 Operation Enduring Freedom costs for the 14 units it reviewed. The Naval Audit Service found that more than half of these unsupported costs resulted from one unit’s not retaining documentation over a 2-month period. This same unit’s costs for other months reviewed were well documented; so, overall, the audit service was not overly concerned with the 2-month gap. For the other units reviewed, documentation was available, but the units could not always identify the portion of those items reported as being incremental costs of Operation Enduring Freedom. The Naval Audit Service concluded that internal controls were adequate and that an expanded review was not warranted at that time. It made no recommendations. The U.S. Army Audit Agency found that 58, or about 2 percent, of the 2,751 transactions it reviewed for fiscal year 2003 valued at $37.4 million lacked supporting documentation. As a consequence, the agency was unable to determine if the transactions were valid. The Army Audit Agency also discovered documentation problems involving government purchase cards. These problems included a lack of documentation authorizing purchases and inadequate justification of purchases to ensure that they were related to contingency operations. The agency concluded that without adequate justifications and support to ensure that the transactions are related to contingency operations, these types of obligations appear questionable. The agency recommended that Army financial management leadership emphasize the consistent application of guidance for justifying and documenting contingency operations requirements, and the Army financial management leadership said that it would emphasize the need to fully justify and document expenditures as related contingency operations and that it had already completed or will complete action through the distribution of additional guidance by December 2005. Several Factors Contribute to Data Reliability Concerns Data reliability is affected by the previously discussed long-standing deficiencies in DOD’s financial management systems, which affect the ability to capture costs in a completely systematic manner. This is compounded by the lack of a systematic process for ensuring that the data in the GWOT cost reports are accurate, less-than-adequate management oversight on the preparation and accuracy of the reports, the failure to use actual data when available, and a large number of cost categories and little training on how to apply them. There Is No Systematic Process to Ensure That GWOT Data Are Accurately Recorded and Ensure Adequate Management Oversight For the most part, DOD does not have a systematic process to review reported GWOT costs to ensure that they are accurate. To ensure the accuracy of DOD’s GWOT cost reports, the military services and the Office of the Under Secretary of Defense (Comptroller) compare each new month’s cost report with previous months’ reports to ascertain if there are large variances from previous reports and, if so, determine what caused them and make revisions as appropriate. For GWOT cost reporting, individual obligation data that are coded as being in support of GWOT are aggregated at successively higher command levels and sent through the services’ chain of command. At each command level, financial management officials review costs for large anomalies. The services take different approaches to ensure that GWOT obligation data are correctly recorded. For example, the Army gains assurance that reported obligations are accurate by reviewing the monthly obligation data provided by units. However, the Army does not follow specific guidelines to determine the extent to which obligations are accurately reported. For example, U.S. Army Forces Command and ARCENT financial management officials ensure that reported obligations are correct by using historical knowledge of cost trends to review obligation reports for large anomalies. If a large anomaly is identified, it is further investigated to determine the cause and resolve any differences. However, the two commands do not have specific criteria to determine how large an anomaly has to be before it is investigated. As a result, financial management officials at the commands use their judgment to determine which anomalies to investigate. The Navy also reviews GWOT cost data for anomalies but lacks a systematic method for gaining assurance that the data are reliable. According to the Financial Management and Budget official who manages the process, there is no systematic approach for reviewing the submissions received from each of the claimants. The Marine Corps has adopted additional measures to gain further assurance that its GWOT obligations are accurately reported. For example, resource management officials at one Marine Expeditionary Force told us that they periodically visit subordinate units to reaffirm that these units are following Marine Corps standard operating procedures for entering and recording obligation data. During these visits, officials use a checklist that highlights areas that the visiting officials should emphasize. These areas include assessing the unit’s knowledge of Marine Corps policies and procedures, reviewing purchases made by the unit, and checking to ensure that the unit correctly entered obligations into the Marine Corps’ accounting system. Marine Expeditionary Force resource management officials told us that this process plays an important role in ensuring that GWOT obligation data are reliable. Once the services complete their review of GWOT obligations they submit their obligation reports to DFAS, which aggregates the individual submissions into the monthly GWOT cost report. The Office of the Under Secretary of Defense (Comptroller) gains assurance that the services’ reported obligations are reliable by reviewing the monthly DFAS cost reports for anomalies. If a discrepancy is identified, the Comptroller’s office contacts the responsible DOD component, attempts to determine reasons for the discrepancy, and directs that necessary corrections be made before distributing the cost report within DOD. Despite the efforts to review reported costs, there is less-than-adequate management oversight on the preparation and accuracy of the reports. We found instances where the services did not identify wide swings in monthly costs, such as the swings discussed earlier in imminent danger pay in the GWOT cost reports for DOD as a whole, as well as errors in the overall GWOT cost reports that amounted to hundreds of millions of dollars monthly. Specifically, in reviewing the Navy’s and Marine Corps’ fiscal year 2005 operation and maintenance and investment GWOT obligations as part of a separate effort, we found that the obligations reported in DOD’s summary GWOT cost report were inadvertently being overstated by hundreds of millions of dollars monthly between the November 2004 and the April 2005 cost reports. In total, we found that the two services overstated their obligations during that period by almost $1.8 billion—$1.5 billion in the case of the Marine Corps and $300 million in the case of the Navy. Each month DOD prepares a separate report for each of the appropriations acts that are used to provide funding authority to support GWOT and an overall summary cost report. In discussions with Marine Corps and Navy budget officials, it was determined that operation and maintenance and investment obligations associated with funding authority provided through title IX of the fiscal year 2005 Defense Appropriations Act were inadvertently being double counted in the GWOT cost report: once in the title IX report and once again in the report on funding authority provided in other fiscal year 2005 appropriations acts, resulting in inflated figures in the summary report. These reporting problems were present in all of the GWOT cost reports from November 2004 through April 2005. Once this matter came to light, Navy and Marine Corps officials took action to reflect the accurate obligations for the title IX and other fiscal year 2005 appropriations reports. The May 2005 report reflects the corrected cumulative obligations through May 2005. Volume 3, chapter 8 of DOD’s Financial Management Regulation requires that steps be taken to verify that transactions are correctly entered into the services’ accounting systems by comparing financial transactions with supporting documents. However, as discussed earlier, in a detailed review of fiscal year 2003 GWOT obligations, the Air Force Audit Agency found that in addition to not properly categorizing costs, officials at 16 of 29 locations visited failed to verify that 159 of 923 transactions, or 17 percent of the transactions the agency reviewed, were accurately entered into the Air Force’s financial accounting system. The audit agency said that this condition occurred because funds holders were uncertain of which costs should be coded as GWOT expenditures and did not compare financial transactions with supporting documents as required by DOD’s financial management regulation. The audit agency concluded that as a result, financial managers may inadvertently provide questionable “cost of war” information when data are inaccurately processed in the system. Furthermore, command resource allocation and spending plans may be distorted by faulty data. Finally, summary DOD financial reports may be unreliable. The audit agency made recommendations to the Air Force to review transaction data; correct inaccurate data; and develop, publish, and implement guidelines on the appropriate use of GWOT cost codes, which the Air Force agreed to do. Estimated Obligations Are Used Instead of Actual Payroll Information As previously discussed, in reviewing the Army’s military personnel GWOT obligations for fiscal year 2004, we found that the reported amounts for mobilized Army reservists were inconsistent with related DOD payroll information. We found that the Army’s military personnel GWOT obligations reported in the GWOT cost report were based primarily on monthly estimates in the Army obligation plan rather than actual payroll information. The practice of using estimates in reporting military personnel costs related to contingency operations rather than payroll data has been ongoing for almost a decade. In our previously cited 1996 report on the reliability of contingency operations costs, we reported that the services used estimates rather than actual data to derive incremental personnel costs for reservists called to active duty in contingency operations. We also reported that the services used estimates in reporting the special pays and allowances, such as imminent danger pay, which all military personnel become eligible for during deployments, and that they did not reconcile those costs to actual payroll data. At that time, we reported that DOD had plans under way to link its payroll and personnel systems, which would allow the extraction of actual cost data. Until the two systems were linked, we reported that it would not be possible to test the accuracy of estimated costs. As of June 2005, more than 9 years after our earlier report, at least one service, the Army, was still not using actual payroll information to report its GWOT military personnel obligations. Army officials advised us in July 2005 that, on the basis of our findings on reported military personnel obligations, they will now use related DOD payroll information where applicable. Assigning Correct EORs Are Complicated by a Number of Factors As also discussed earlier, if obligations are not categorized in the correct cost categories in the services’ accounting system, it can affect the overall reliability of DOD’s GWOT cost reporting. The large number of EORs used by Army units to assign costs to categories, literally in the thousands, complicates properly categorizing GWOT obligations. We found that the large number of EORs encourages Army units to adopt shortcuts to simplify categorization, which can result in incorrectly categorizing obligations. For example, a resource management official in one Army division indicated that the division used one particular EOR as a catch-all category. This EOR corresponded with DOD’s GWOT cost-reporting category of “Other Services and Miscellaneous Contracts.” Placing costs in this category inflates this cost category. At another Army division, resource management officials reviewed the EOR list in order to streamline the number of EORs that the division used. After reviewing about 3,700 EORs, resource management officials concluded that about 15 were most appropriate for the purpose of categorizing its GWOT obligations. The use of a single standardized EOR to categorize obligations for varying types of goods and services also affects proper cost categorization. For example, there is one EOR for all purchases made with a Government Purchase Card (GPC), regardless of the item or service purchased. In another example, resource management officials at one Army division told us that while deployed to Afghanistan, cash purchases made by its field ordering officers were always coded to the EOR for general supplies, no matter what item or service was obtained. Finally, ARCENT resource management officials told us that the command identified contracts that should have been allocated to several EORs but were consolidated under one EOR. These contracts inflated the costs for that EOR category. When coding errors are made, they are not always corrected. Resource management officials at one Army division told us that it was too time- consuming to fix miscoded EORs, as it involves having to coordinate with customers and make changes in the Army’s financial accounting system. As a result, inaccurate information remains in the accounting system. This division’s Comptroller acknowledged that better attention should be paid to coding purchase requests at the comptroller level and that oversight should be a higher concern. People responsible for categorizing purchases by the EOR are not always properly trained, which further complicates correct categorization. Resource management officials at an Army command we visited told us that there were training concerns with staff in the Comptroller’s office, particularly given the frequent rotation in and out of the office that is typical of military staff. These officials told us that, often, the person responsible for entering EORs into the system has not been trained to do so. Obligations are often entered by lower-ranked enlisted soldiers who have been assigned to the position because they have downtime and are computer literate. These soldiers may not have any experience with entering obligation data and might have received little or no training on how to do so. According to the officials, inexperience is not a major issue with more straightforward obligation categories such as transportation; however, when applied to more complicated categories, such as supplies, many errors can occur. Like the Army, the Marine Corps also captures GWOT obligations using cost categories, known in the Marine Corps as cost account codes. However, because the Marine Corps uses fewer categories, converting data into the contingency cost categories is simpler than for the other services. For example, Marine Corps Forces Pacific resource management officials established 31 cost account codes that translate into 25 of the 55 GWOT cost report categories. Resource management officials at one Marine Expeditionary Force told us that utilizing a simple system helps to improve the accuracy of their obligation data. Processes for Recording GWOT Costs Can Lead to Errors Processes used to enter and monitor operation and maintenance obligations may also contribute to unreliable cost data. For example, in the Army, resource management officials from two divisions that had deployed to Iraq and one division that had deployed to Afghanistan reported that, when deployed, the divisions were junior users of the Army’s database Commitment Accounting System and did not have access to the Army’s principal accounting system, the Standard Army Financial System. As a result, the three divisions had to submit their document registers to ARCENT to record obligations and commit funds. Resource management officials at two of the three divisions stated that the amounts recorded in ARCENT’s ledger could not be relied upon because of manipulations and adjustments made to the data by ARCENT. One official stated that obligations or commitments would sometimes be doubled or eliminated entirely from the ledger. For example, one division had to reenter $40 million in obligations that ARCENT dropped from the ledger during the fiscal year 2003 closeout. This official also told us that the system that the Army uses to track commitments was antiquated and did not support the data needed to accurately track and analyze costs. The Use of Existing GWOT Cost Data Affects Multiple DOD Financial Processes Notwithstanding concerns about data reliability, according to the Office of the Under Secretary of Defense (Comptroller), which develops GWOT budget requests in concert with the military services and other DOD components, a metric is needed and the GWOT cost reports are the only available data. In discussing the implications of improperly categorizing GWOT obligations, the Comptroller’s office told us that it adversely affects decision making and the ability to use the data for analysis. In discussing how the detailed cost data are used, a Comptroller representative told us that he uses the detailed information presented in the cost breakdown structure categories in the report for several purposes, as follows: to make billion-dollar decisions in developing supplemental funding to cross-check the cost data as presented in the cost breakdown structure with the estimates developed by the Contingency Operations Support Tool (COST) model; and as a management tool to adjust the cost factors in the COST model and revise the model, prepare supplemental funding budget requests, and inform DOD leadership of detailed costs incurred for GWOT. DOD Is Using Regulations to Guide GWOT Budgeting, Reporting, and Spending That Were Not Designed for Wartime Operations Office of the Under Secretary of Defense (Comptroller) and military service officials are using DOD’s existing financial management regulation that addresses contingency operation funding for guiding budget submissions, cost reporting, and spending for GWOT. However, DOD’s Financial Management Regulation, which contains these policies and procedures, was designed for small-scale contingency operations and has language expressly stating that it is not intended to address wartime activities such as those that DOD is confronted with in the current war. Furthermore, specific provisions in this regulation conflict with the GWOT funding procedures and, in some cases, the needs of the war. Without an updated policy on GWOT budgeting, cost reporting, and spending, the military services and other DOD agencies cannot make informed judgments on the appropriate use of GWOT funding authorities. In response to our work, the Office of the Under Secretary of Defense (Comptroller) has updated its regulation to address GWOT spending. Current Spending Policy Was Developed for Smaller- Scale Operations DOD’s current regulation was designed for small-scale contingency operations and is not intended to address wartime activities. In February 1995, DOD added a chapter to its financial management regulation to establish policies and procedures for estimating the budget and reporting the costs of contingency operations (vol. 12, ch. 23—Contingency Operations). In 1998 the Office of the Under Secretary of Defense (Comptroller) implemented a standard cost breakdown structure for standard contingency operations to improve the budgeting and reporting of these costs. This structure was incorporated in the 2001 version of chapter 23 and has been expanded in the latest January 2005 version. The Office of the Under Secretary of Defense (Comptroller) has also supplemented its regulation through messages regarding cost reporting and formulating specific fiscal year budget requests. Since its publication in 1995, Comptroller officials have used chapter 23 and later the cost breakdown structure in particular, to budget, capture the costs, and fund or seek supplemental funding for contingency operations. Comptroller officials have also directed the services to prepare budget estimates and report the costs of contingency operations (to include the various missions that support the Global War on Terrorism), according to chapter 23’s provisions. During our visits to the military commands and installations that have been involved in supporting GWOT contingency operations, service financial managers indicated that they use chapter 23 as a primary source to guide all war-related spending. Although Office of the Under Secretary of Defense (Comptroller) and service financial management officials are continuing to use the provisions in chapter 23 to guide their GWOT budget submissions, cost reporting, and spending, it is not clear to what extent these provisions should apply, especially given that, on its face, chapter 23 states that its policies and procedures do not address wartime activities or circumstances that require U.S. military forces to be placed on a wartime footing. Moreover, numerous specific provisions in chapter 23 conflict with the GWOT funding procedures and, in some cases, the needs of the war. In addition to the express language that states that chapter 23 does not apply to wartime activities, the overall structure of chapter 23 and many of its specific provisions are not intended to address the types of costs incurred or funding authorities provided to support GWOT. For example, although the fiscal year 2004 GWOT budget estimates and cost reporting contained significant amounts of investment costs, chapter 23, given that it was designed to address small-scale contingency operations, which usually would not involve such costs, did not include policies and procedures to guide the budgeting or reporting of these costs. Moreover, another specific provision in chapter 23 states that these costs should not be considered as incremental costs of a contingency operation. Recognizing that large-scale contingency operations lasting as long as GWOT and affecting a large portion of U.S. military units may necessarily incur investment costs, these provisions illustrate an inconsistency between the needs to support the war and the current DOD policies and procedures used to guide the preparation of GWOT budgets, cost reporting, and spending. This lack of clarity could lead to uncertainty at all levels within DOD over what policies actually are intended to guide the funding for the war. Use of GWOT Funds for Home Station Operations Is Most Affected by the Lack of Updated Policy There is confusion over DOD’s policies and procedures for guiding the preparation of GWOT budgets, cost reporting, and the spending of billions of dollars in GWOT funding for base operation activities at the home stations of the military units that are preparing to deploy or have deployed on GWOT missions. Chapter 23 expressly states that costs associated with facilities/base support activities may be budgeted and reported only if the activities occur away from a unit’s home station. Despite this administrative limitation, many installations have been budgeting and recognizing as GWOT-related costs base support costs for home station activities. For example, in fiscal year 2003 the Navy spent $42.5 million for wharf repairs at Pearl Harbor, Hawaii. In fiscal years 2003 and 2004, the Air Force spent a total of more than $117 million at Anderson Air Force base in Guam for a variety of installation-related costs (e.g., support facilities for bomber aircraft and storm damage repair). The Army’s Installation and Management Agency, which manages all Army installations, obligated $1.52 billion in fiscal year 2004 and has budgeted about $2.07 billion in fiscal year 2005 expressly for GWOT-related “home station” base support activities. All of these costs conflict with the home station spending limitation in chapter 23. Notwithstanding chapter 23’s administrative limitation on budgeting and reporting costs for home station facilities/base support activities, some of these reported costs appear to meet the definition of “incremental costs,” which guides all GWOT spending. DOD policy states that costs associated with contingency operations are limited to the incremental costs of the operations, that is, costs that are above and beyond baseline training, operations, and personnel costs or costs that would not have been incurred had the contingency operation not been supported (i.e., costs that are directly attributable to the operation). During our review, we noted a number of instances in which GWOT costs were recorded relating to home station base operation activities that appear to be directly attributable to the war. At one Army installation—an installation that helped prepare reserve military personnel for deployments in support of GWOT—we found reported GWOT costs for the renovation of barracks, dining facilities, and latrines to accommodate increased numbers of reserve personnel using those facilities. However, we also found some home station costs that did not appear to support the war or only to tangentially support it. For example, at this same installation we found that it also reported GWOT costs for renovating unneeded vehicles for redistribution within the Army even though they were not used in any contingency operation and had been declared excess to the unit before it deployed. At another Army installation, we found GWOT costs to improve the readiness condition of equipment not deployed for contingency operations. In addition, we found that one Navy Command reported GWOT costs for improving the condition of floating docks that were not properly stored while the unit responsible for their upkeep was deployed on a GWOT mission. The docks were seriously corroded as a result of not being stored properly and left in salt water for more than a year. Navy officials said that nearly $6 million in GWOT funding had been used in fiscal year 2003 to pay for these repairs. Navy officials disagreed with our view that these costs were at best tangential to the support of the war and noted that the justification for the repairs was that these docks were a requirement and would likely be needed in the future to support GWOT. However, we believe that GWOT costs are limited by the provisions of chapter 23 to those costs that are in direct support of the war. In response to our concerns about the inconsistencies contained in chapter 23, in August 2005, the Office of the Under Secretary of Defense (Comptroller) officials approved a revision to chapter 23 to clarify the policy on both base operations and investment costs for contingency operations. This clarification should assist the military services and other DOD agencies in making informed judgments on the appropriate use of GWOT funding authorities. Cost Controls Can Be Strengthened As Operations Mature DOD and Office of Management and Budget policies emphasize the need to spend funds prudently. Individual commands and commanders have implemented a variety of cost controls for GWOT spending. Current cost controls include acquisition review boards, command review of purchases, limits on some categories of spending, and a cost reduction goal in Iraq. However, DOD’s policies and guidance do not go beyond advising DOD officials of their financial management responsibilities with regard to the prudent use of contingency funding authorities and provide no guidelines on steps that should be taken to control costs, particularly as operations mature, while ensuring mission accomplishment. Resource managers from a number of Army divisions that have deployed to Iraq or Afghanistan have told us that cost controls can be strengthened as operations mature. Policy Emphasizes the Need for Prudent Spending OMB circular A-123 requires all mangers of federal funds to ensure that cost-effective controls be implemented for the expenditure of appropriated funds. Section 230108 of DOD’s financial management regulation for contingency operations, which was added in January 2005, advises DOD officials of their financial management responsibilities to ensure the prudent use of contingency funding authorities. The section emphasizes that it is vital for civilian and military personnel authorized to obligate and expend funds in support of contingency operations to employ a fiduciary approach to ensure that funds are used in a prudent manner. GWOT spending has risen steadily since the attacks of September 11, 2001, as operations have expanded. As shown in figure 2, from fiscal year 2002 through fiscal year 2004, reported costs rose from $11 billion to $71 billion annually and, from our projection of reported fiscal year 2005 obligations through May 2005, could reach about $71.5 billion again in fiscal year 2005. The large amount of spending and its growth underscore the need for cost controls. Individual Commands Have Developed a Variety of Cost Controls for GWOT Spending, but There Is No Systematic DOD Effort to Ensure That All Commands Pursue Cost Controls Some commands have taken steps to seek economy and efficiency in performing tasks by reviewing existing requirements and seeking more efficient methods to perform required tasks. Over the years, we have reported that when the government seeks opportunities to control costs, savings are usually realized. For example, in July 2004 we reported that savings are generally realized when the customer reviews logistics support contractors’ work for economy and efficiency but that these reviews have not been routinely conducted at all work locations. We reported that U.S. Army Europe saved $200 million dollars, or 10 percent of the contract ceiling price, on its Balkans Support Contract; Third Army would save $31 million annually in Kuwait, or 43 percent by changing food service contractors; and the Marine Corps saved $8.6 million, or 18 percent, from an estimated $48 million in work in Djibouti, which is one of the Operation Enduring Freedom locations. Military commands and individual commanders involved in GWOT as well as in earlier operations have put in place a variety of controls on their own initiative designed to control costs. Some examples are as follows: Acquisition review boards are being used in Iraq, Afghanistan, and Kuwait to assess if requirements are valid and, if so, decide how best to satisfy them. In addition, in an August 2004 order, the commander of Multinational Forces-Iraq established a stewardship council intended to reinforce fiscal discipline in order to ensure that limited financial resources are effectively and efficiently employed to accomplish the command’s strategic objectives. Individual Army divisions have taken steps to control costs. One Army division we visited has restricted the use of its Government Purchase Cards for GWOT reconstitution obligations until the card holders complete a training class detailing the appropriate use of the cards. The division Comptroller stated that this action was taken to limit spending and ensure that purchases made in support of GWOT were appropriate. Another Army division implemented a Program Budget Advisory Committee to review its GWOT predeployment requirements. One example of economies directed by the committee was to consolidate requirements for medical supplies, batteries, and ballistic blankets into a single division purchase. The committee was reestablished upon the division’s return from Afghanistan for the review and approval of GWOT reconstitution requirements. Third Army, which obligated almost $17 billion in fiscal year 2004 to support GWOT, has taken a number of steps to control costs. Among other things, it reviews requisitions of items obtained through the stock fund that are not reviewed by the review boards in Iraq, Afghanistan, and Kuwait—specifically, items that have a high dollar value, involve large quantities, are pilferable, or are personal items. In a March 2005 message to the Vice Chief of Staff of the Army, the Third Army commander also described cost control measures implemented by organizations funded by Third Army. These included management controls placed on requests to expand the use of LOGCAP, reducing the cost of transporting cargo into the theater, and reducing demurrage charges associated with commercial containers by identifying and returning excess containers. The Army has also set limits on certain kinds of spending. For example, the Army set a $6.5 billion limit on LOGCAP spending in fiscal year 2004 on the basis of the estimated cost of required work and a $6.6 billion limit for fiscal year 2005. On a much smaller scale, in July 2004, Third Army issued a policy memorandum setting forth procedures for purchasing and awarding unit coins to limit coins purchased with contingency operations funds. The policy recommends a funding ceiling for coin purchases from operating funds of $1,000 per battalion and $3,000 per brigade. One command has also set spending reduction targets to constrain spending. The commander of coalition forces in Iraq has set a 10 percent cost reduction target in Iraq. According to the Deputy Chief of Staff for Resource Management for Multinational Forces-Iraq, the cost-reduction goal was intended as a direction to take the command rather than as a hard target. While realizing that many factors driving costs were outside his control, the commanding general wanted the command to manage those areas that the command could affect. The cost-reduction plan was broken down into three lines of operation—stock fund, LOGCAP, and nonstock fund. As a result the command reports the following: Efforts to control stock fund costs have met with mixed results. The command has encountered difficulties in controlling stock fund costs in part because units can order items directly from the supplying command, bypassing the command in Iraq. However, some control procedures have been established, which reduced direct orders from approximately $50 million per month to $5 million in April 2005. The command reports that it has been working to control LOGCAP costs, but additional requirements were subsequently identified that were expected to drive up LOGCAP costs beyond the initial $4.3 billion goal. The commanding general has asked the Army Audit Agency to help evaluate the use of the LOGCAP program in Iraq and provide recommendations for cost savings and improved processes. The command reports that it is well on its way to achieving its goal of $2.25 billion for nonstock fund spending. As of April 30, 2005, the command reported that it had obligated only about $1 billion in nonstock funds and was well on its way to come in under the initial savings goal. ARCENT, the Army command responsible for funding the command in Iraq, was aware of the initiative but not its details and was not aware of whether there were similar efforts in other countries, specifically in Afghanistan and Kuwait. While DOD policy emphasizes commanders’ fiduciary responsibility to spend funds prudently, it has not directed any systematic effort for the services and combatant commands to seek opportunities to reduce costs or provided guidelines for doing so. In discussions with resource management personnel in Army units that were deployed to Iraq and/or Afghanistan, there was a consensus that cost controls can be strengthened as an operation matures. For example, resource managers at one Army division that deployed to Iraq told us that the division’s experience is that spending can be managed at all stages of a contingency operation, even under high-operating-tempo combat operations. Another Army division resource manager who deployed to Iraq told us that he could have operated under a budget after his third month of deployment to Iraq. He preferred to operate under a budget where he knew the amount of funding that was available and could tell commanders that they had to prioritize their requirements. A third Army division resource manager, who deployed to Afghanistan, told us that as an operation matures, cost controls can be strengthened. In discussing efforts to control costs with the Office of the Under Secretary of Defense (Comptroller), the view was expressed that on the basis of the varying combat situations, steps to control costs were best left to the individual commands. As described above, individual commands have done much to control costs, but efforts vary by command, and there is limited knowledge of such efforts outside each command. The Comptroller’s office has no direct knowledge of the commands’ cost control efforts and has not asked to be kept informed of cost control steps. We believe that more can be done and that absent DOD-wide guidelines on cost control efforts, there is no assurance that successive commanders will emphasize cost control and that each command’s efforts will be equally comprehensive. Conclusions We found numerous problems with DOD’s processes for recording and reporting costs for the Global War on Terrorism, raising significant concerns about the overall reliability of DOD’s reported cost data. Because of these problems, neither DOD nor Congress can reliably know how much the war is costing and details on how appropriated funds are being spent, or have historical data useful in considering future funding needs. In response to our work, DOD has identified a number of steps it said it is taking to improve the accuracy and reliability of its cost reporting. Until DOD fully implements those steps, gives improving its GWOT cost reporting high priority, and undertakes an exhaustive effort to ensure that the data in its GWOT cost reports are reliable, there can be no assurance that the cost of the war is accurate and whether funding is adequate. DOD is generally using its existing contingency operations financial management regulation to guide GWOT budgeting, cost reporting, and spending, although this regulation was developed and structured to manage the costs of small-scale contingency operations. Specific provisions of the regulation conflict with the needs of GWOT. One such conflict concerns administrative limitations on the use of supplemental funds for base support activities at home stations. In addition, the regulation includes conflicting policies and procedures to guide the budgeting or reporting of investment costs of the war. Without an updated policy, the military services and other DOD agencies cannot make informed judgments on the appropriate use of GWOT funding authorities. In response to our work, DOD revised its Financial Management Regulation. While certain individual commands have taken steps to control costs and DOD policy generally advises its officials of their financial management responsibilities with regard to the prudent use of contingency funding, the Office of the Under Secretary of Defense (Comptroller) has not systematically called for all commands involved in GWOT to take steps to control costs and to keep the office informed of those steps and their success. With the growth in GWOT costs, there is a need to ensure that all commands seek to control costs. Until the department establishes guidelines on cost controls and is routinely informed about the types of controls and their impact on costs, it cannot be sure that all that can be done to control costs is being done. Recommendations for Executive Action To ensure that Congress and the Department of Defense can reliably know how much the war is costing, we recommend that the Secretary of Defense take the following three steps: 1. Direct the Secretaries of the military services to undertake a series of steps to ensure that reported GWOT costs are accurate and reliable, to include: developing a systematic process to review reported obligations; developing and monitoring procedures to ensure that obligations are using actual data whenever possible and, when not possible, to take steps to allow the development of actual data; and ensuring that actions previously agreed to in response to audits have been implemented effectively. 2. Direct the Office of the Under Secretary of Defense (Comptroller) to oversee the above service efforts as well as to develop a systematic process to review and test the reliability of the overall GWOT cost reports. 3. Direct the Secretary of the Army to take the following steps: develop and implement formal procedures to guide the monthly reporting of GWOT military personnel costs; formalize the Army’s management review of military personnel cost information submitted for the GWOT cost report; use information from the DOD payroll system, where applicable, to identify and report GWOT military personnel cost information; and review and simplify the numbers of elements of resource currently used to identify, categorize, and record contingency costs. To ensure that the military services and other DOD agencies make informed judgments on the appropriate use of GWOT funding authorities that are consistent with DOD guidance and meet the needs of GWOT, we recommend that the Secretary of Defense expand DOD’s financial management regulation for contingency operations to include contingencies as large as the current GWOT. At a minimum, the updated policy should address the budgeting, cost reporting, and spending associated with investment and base operation and support costs at the home stations of units that support GWOT. To ensure that GWOT mission needs are being met while applying appropriate cost controls we recommend that the Secretary of Defense direct the Office of the Under Secretary of Defense (Comptroller) to take the following two steps: 1. establish guidelines on cost controls, including identifying what types of cost controls are available to the services, and 2. require that the services routinely keep the Comptroller’s office informed about the types of controls and their impact on costs, and share information on cost control efforts. Agency Comments and Our Evaluation DOD provided written comments on a draft of this report. Its comments are discussed below and are reprinted in appendix III. DOD agreed with all but one of our recommendations, stating that it generally agreed with the intent of the recommendations and has carefully reviewed its guidance and procedures for reporting cost data. DOD further commented that on the basis of its review and consistent with our recommendations it has taken several immediate actions to improve procedures and strengthen the cost reports. These include issuing additional direction and guidance to strengthen, clarify, standardize, and simplify procedures for collecting, reporting, and auditing cost of war information and issuing supplemental guidance to its Financial Management Regulation to address large-scale contingency operations. Regarding our recommendations on improving the accuracy and reliability of reported costs of the Global War on Terrorism and to have the Office of the Under Secretary of Defense (Comptroller) play a role in overseeing the efforts as well as to develop a systematic process to review and test the reliability of the overall GWOT cost reports, DOD stated that it has completed implementation of this recommendation through the execution of new guidance and procedures for collecting and reporting cost of war information and is actively overseeing the preparation of GWOT cost reports. DOD further stated that the Army has changed its data collection and reporting process and among other things is now using a Standard Operating Procedure which prescribes a clear methodology for capturing contingency operations cost data from the accounting systems and a formal management review process to prepare military cost information associated with GWOT. “Additionally, because of the scale of operations, including intense combat or long term stability or anti-insurgency operations, expenses beyond only direct incremental costs may be appropriate on a case by case basis in written coordination with the Office of the Under Secretary of Defense (Comptroller).” Although the revised guidance states that such costs require coordination with the Office of the Under Secretary of Defense (Comptroller), we believe that this expanded definition of incremental costs suggests that the costs of large-scale contingency operations can be beyond those defined elsewhere in DOD’s guidance as incremental costs--i.e., those additional costs to the DOD Component appropriations that would not have been incurred had the contingency operations not been supported. We further believe that costs incurred beyond what was reasonably necessary to support a contingency operation cannot be deemed incremental expenses, since such costs are not directly attributable to support of the operation. In addition, we believe that expanding allowable costs of contingency operations beyond those directly attributable to support of the operation is problematic because it provides no guidance on what costs beyond those that are attributable to the operation are now allowed to be reported. We therefore do not believe that this provision meets the intent of our recommendation. The Under Secretary of Defense (Comptroller) should reconsider this provision in light of our evaluation of its potential consequences. DOD did not agree with our recommendation to have the Office of the Under Secretary of Defense (Comptroller) establish guidelines on cost controls. In commenting on our recommendation, DOD stated that field commanders are the correct echelon to adopt and emphasize cost controls during a contingency; that it relies on the judgment of the combatant commander in the theater of operations to manage resources at their disposal to effectively safeguard personnel and perform the mission; and that implementing administrative funding controls could have a detrimental effect on the commanders’ ability to make critical decisions in the theater. DOD further stated that the Office of the Under Secretary of Defense (Comptroller) has included a section in the Financial Management Regulation that emphasizes that the DOD components are responsible to employ a fiduciary approach to ensure that the funds are used in a prudent manner and that as operations mature, steps should be taken to evaluate and establish spending constraints. We recognize that certain individual commands have done much to control costs and describe some of those efforts, but we further note in our discussion of cost controls that efforts vary by command and that there is limited knowledge of such efforts outside each command. We do not believe, as DOD suggests, that our recommendation would have a detrimental effect on the commanders’ ability to make critical decisions in the theater. We are simply recommending that DOD provide guidance that increases awareness of the need for reasonable cost controls and requires that the Office of the Under Secretary of Defense (Comptroller) be kept informed of the types of controls and their impact on costs and share information within DOD on cost control efforts. We continue to believe that more can be done and that absent DOD-wide guidelines on cost control efforts, there is no assurance that successive commanders will emphasize cost control and that each command’s efforts will be equally comprehensive. Therefore, we have retained the recommendation. In commenting on the report’s content, DOD disagreed with GAO’s position on the overstatement of the reported costs for mobilized Army reservists in fiscal year 2004. DOD commented that our report was incomplete because we did not consider military retirement pay and other costs, which DOD stated accounted for almost $1.3 billion of the $2.1 billion difference cited in our report. We disagree. As discussed in our draft report, initially, the Army could not support its reported costs for mobilized Army reservists or explain the $2.1 billion difference that we noted between its payroll system and its reported cost for mobilized Army reservists. During our audit, the Army and the Office of the Under Secretary of Defense (Comptroller) provided us with several possible, although sometimes inaccurate, explanations for the $2.1 billion difference. After several months, DOD provided information showing that it could account for about $1.6 billion of the $2.1 billion difference. While making it clear that the information was received too late for us to assess its accuracy and completeness as part of our audit, we did include the information in our draft report. We stated that some of the explanations appeared valid, while others did not and, taken together, they failed to fully account for the difference. The fact that DOD’s comment letter reduces the $1.6 billion to $1.3 billion further confirms the concerns we have expressed throughout this report over the accuracy of DOD’s past reported costs. Finally, we believe that DOD’s reference in its comment letter to the $2.1 billion difference as an anomaly is a mischaracterization--particularly when viewed in the context of its explanation that “the Department’s use of estimates led to a difference.” As clearly stated in this report, we found that the reported cost data are not reliable, in part because of long-standing deficiencies in DOD’s financial and accounting systems, a lack of systematic processes to ensure that data are properly entered into those accounting systems, and the use of estimates rather than actual information. We understand that DOD is planning corrective action to address issues related to cost reporting for military personnel supporting GWOT operations. We are sending copies of this report to other interested congressional committees; the Secretary of Defense; the Under Secretary of Defense (Comptroller); the Secretaries of the military services; and the Director, Office of Management and Budget. Copies of this report will also be made available to others upon request. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff has any questions regarding this report, please contact Sharon Pickup at 202-512-9619 or by e-mail at [email protected] or Greg Kutz at 202-512-9095 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff that made major contributions to this report are included in appendix IV. Scope and Methodology To accomplish this review, we obtained and analyzed copies of all 12 months of the Department of Defense’s (DOD) fiscal year 2004 monthly Consolidated DOD Terrorist Response Cost Report from the Office of the Under Secretary of Defense (Comptroller), which was renamed the Supplemental and Cost of War Execution Report in January 2005, to identify reported obligations by operation and by appropriation account for the military services. We did not review the obligations reported by the intelligence community or the other defense agencies, but we do mention the amount appropriated and obligated because the amount appropriated was part of the total DOD appropriation. We focused our analysis primarily, but not exclusively, on reported costs for fiscal year 2004—the latest full year of data available at the time of our review—and specifically the military personnel and operation and maintenance accounts as they represent the largest amount of spending. We also did not conduct site visits to Air Force units because their audit agency was conducting a similar review. To determine the reliability of DOD’s data, we reviewed previous GAO reports and reports from other audit agencies that identified long-standing material weaknesses in DOD’s accounting systems. We conducted limited testing on operation and maintenance obligations using Global War on Terrorism (GWOT) funding because DOD’s financial management systems and business processes have been reported to contain significant deficiencies. At the Army- and Marine Corps-unit levels, we judgmentally selected obligation data entries and traced them back to a computerized database or paper documents to determine whether the data were properly entered into the accounting system. At the Army’s Central Command Headquarters, we judgmentally selected document numbers and item descriptions for obligations made in Iraq and Afghanistan. We traced the document register numbers against paper documentation controlled by the Defense Finance and Accounting Service (DFAS), Rome, New York. We also provided a written data reliability assessment checklist for Navy officials to report how they ensured that their data were accurate and reliable. Finally, we discussed the processes used to ensure that GWOT obligation data provided were accurate and reliable with service financial managers. We found that the reported cost data were not reliable because of long-standing deficiencies in DOD’s financial and accounting systems, the lack of a systematic process to ensure that data were properly entered into those accounting systems, the use of estimates rather than actual data for some of DOD’s reported costs, and the incorrect categorization of some reported costs due to the large number of cost categories and limited training on how to apply them. However, because it was not feasible to examine all reported costs and significant data reliability problems existed, we were not able to determine the extent that total costs were misstated. To identify unusual fluctuations in the reported Army military personnel GWOT obligations, we analyzed the fiscal year 2004 GWOT cost reports and discussed our work with the Army Budget Office and DFAS. We also obtained and reviewed cost-reporting for military personnel information, budget estimates, supplemental appropriation information, budget reprogramming documents, and other supporting documentation from the Army Budget Office. To determine if reported obligations were based primarily on estimates, we compared reported GWOT amounts for Army military personnel with Army obligation plans. We obtained monthly extracts of fiscal year 2004 military pay records for Army Reserve and National Guard soldiers supporting GWOT operations from the DOD payroll system at DFAS, Indianapolis. To identify GWOT obligations for Army military personnel based on actual DOD payroll information, we summarized payroll record extracts by pay component and aligned these amounts with the cost category structure of the GWOT cost report. For cost category “Reserve Components Called to Active Duty,” we compared actual DOD payroll information with the estimated Army military personnel amounts in the GWOT cost report, calculated the difference, and discussed our work with the Army Budget Office. In July 2005, we obtained information from the Army and DOD on this difference. To assess the extent to which DOD’s existing financial management policy is applicable to war spending, we focused our efforts on analyzing guidance provided by the fiscal year 2004 Defense Appropriation Act and DOD’s and the military services’ specific policy and procedures. We reviewed previous GAO reports regarding guidance and oversight of contingency operations costs. We also reviewed DOD Financial Management Regulation volume 12 chapter 23, which establishes DOD policy and procedures for developing contingency budget estimates and cost reporting. We analyzed DOD’s emergency supplemental budget requests for fiscal year 2003 and fiscal year 2004, and service contingency operation financial management policies and procedures. Lastly, we spoke with Office of the Under Secretary of Defense (Comptroller) and service financial management officials about GWOT budget estimations, cost reporting activities, and whether the current policy is sufficient or needs to be modified to reflect GWOT conditions. To determine controls over costs, we reviewed reports on GWOT spending and contract management from other audit agencies as well as command guidance and held discussions with resource management officials from major commands and units that had returned from Iraq and Afghanistan regarding their experiences. We also discussed what steps DOD has directed or implemented to strengthen cost controls and what actions it has implemented. Furthermore, we discussed cost controls implemented by Army divisions while deployed or upon the units’ return to their home station. We visited the following locations during our review: Office of the Under Secretary of Defense (Comptroller), Washington, D.C. Headquarters, Defense Finance and Accounting Service, Arlington, Virginia. Headquarters, Department of the Army, Washington, D.C. U.S. Army Installation Management Agency, Washington, D.C. U.S. Army Installation Management Agency, Southeast Region, Fort McPherson, Georgia. Headquarters, U.S. Army Forces Command and Headquarters, Third Army (Army Central Command), Fort McPherson, Georgia. Headquarters, U.S. Army Pacific, Fort Shafter, Hawaii. Headquarters, 25th Infantry Division, Schofield Barracks, Hawaii. Headquarters, U.S. Army Europe, Heidelberg, Germany. Headquarters, 1st Armored Division, Wiesbaden, Germany. Headquarters, III Corps and 1st Cavalry Division, Fort Hood, Texas. Headquarters, 3rd Armored Cavalry Regiment, Fort Carson, Colorado. Headquarters, U.S. Marine Corps Forces Pacific, Camp H.M. Smith, Hawaii. Headquarters, 1st Marine Expeditionary Force, Camp Pendleton, California. Defense Finance and Accounting Service Center, Denver, Colorado. Defense Finance and Accounting Service Center, Indianapolis, Indiana. Defense Finance and Accounting Service-Rome, Rome, New York. Assistant Secretary of the Navy, Financial Management and Comptroller, Washington, D.C. Commander, Naval Installations Command, Washington, D.C. U.S. Fleet Forces Command, U.S. Atlantic Fleet, Norfolk, Virginia. Commander, U.S. Pacific Fleet, Pearl Harbor, Hawaii. Commander, Naval Air Force, San Diego, California. Commander, Naval Surface Force, San Diego, California. Commander, Submarine Force, Pearl Harbor, Hawaii. U.S. Air Force Audit Agency, March Air Reserve Base, California. U.S. Air Forces Pacific, Hickam Air Force Base, Hawaii. We performed our work from August 2004 through August 2005 in accordance with generally accepted government auditing standards. Ineffective Reporting of Fiscal Year 2004 Army Military Personnel Global War on Terrorism Obligations As part of our work on cost reporting for the Global War on Terrorism (GWOT), we undertook a detailed review of obligations for Army military personnel supporting GWOT operations. The results of that review follow. Background In fiscal year 2004, the Department of Defense (DOD) asked for funds in a supplemental budget request to provide pay, allowances, subsistence, and other personnel costs for active- and reserve-component military personnel activated for duty in support of GWOT. This request included certain special pays that active-duty military personnel received for deployment, as well as the base pay, special pays, and allowances for reserve personnel mobilized to participate in or directly support GWOT operations. In addition, the estimate also included the costs to pay active-component personnel affected by military stop-loss programs and additional military personnel maintained on active duty above the normal end-strength levels to sustain the readiness of deploying units. As shown in figure 3, Congress provided about $17.8 billion in funding for DOD military personnel in the fiscal year 2004 supplemental appropriation, including almost $12.9 billion provided for the Army. This was an increase from the about $13.4 billion in funding for DOD military personnel, including about $7.8 billion for Army military personnel in the fiscal year 2003 supplemental appropriation. In the September 2004 GWOT cost report, DOD military personnel obligations totaled over $17 billion of the reported $71.2 billion in total GWOT obligations for fiscal year 2004. Of this $17 billion, Army military personnel obligations reported by DOD totaled almost $12 billion, or about 71 percent, of military personnel obligations for GWOT operations. As shown in table 2, Army military personnel obligations for GWOT operations increased from fiscal year 2003 through fiscal year 2004, while obligations reported by other DOD organizations decreased. The Army Budget Office controls the Military Personnel, Army, appropriation account and is also responsible for identifying and reporting the incremental costs of Army military personnel in support of GWOT operations. Incremental military personnel costs are to include pay, special pay, and entitlements above normal monthly payroll costs for active- and reserve-component personnel. In fiscal year 2004, the monthly GWOT cost report included the following six primary cost categories for military personnel as designated in the DOD Financial Management Regulation: “Reserve Components Called to Active Duty” includes basic military pay for Reserve and National Guard personnel either as part of the operation or as backfill. “Imminent Danger or Hostile Fire Pay,” when authorized, provides a monthly special pay for active- and reserve-component personnel. “Family Separation Allowance” is a monthly special allowance paid to active- and reserve-component personnel who are separated from their families for 30 days or more. “Foreign Duty Pay” is a monthly special pay for active- and reserve- component personnel who are at a designated location outside of the continental United States. “Subsistence” includes the costs of food, water, ice, and other subsistence items that are purchased expressly to support personnel engaged in or supporting the operation. “Other Military Personnel” includes other allowances or special pay for active- and reserve-component personnel that are not included in another cost category. In fiscal year 2004, this category included the costs to pay active-component soldiers affected by military stop-loss programs and additional soldiers maintained on active duty above the normal end-strength levels. Table 3 shows the Army military personnel obligations for GWOT operations reported in fiscal years 2003 and 2004. Army Lacked a Reasonable and Reliable Process to Report GWOT Military Personnel Obligations The Army did not have a reasonable and reliable process to identify and report almost $12 billion of GWOT military personnel obligations in fiscal year 2004. Instead of using actual information, the Army based the GWOT military personnel obligations used in the GWOT cost report primarily on estimates in its fiscal year 2004 obligation plan and, in the end, forced, or “plugged,” obligations to match available supplemental budget authority. Army officials were unable to readily explain the process for identifying and reporting GWOT military personnel obligations owing to the lack of both formalized reporting procedures and management review of reported obligations, problems which were exacerbated by staff losses in the September 11 terrorist attack on the Pentagon, personnel turnover, and hiring difficulties. Our analysis showed that obligations associated with Army military personnel in the monthly GWOT cost report were not consistent with related DOD payroll information, and the use of planned obligations instead of related DOD payroll information might have resulted in reported GWOT military personnel obligations being materially overstated. For fiscal year 2004, our analysis of the more than $7.1 billion in incremental military personnel costs listed in the cost category “Reserve Components Called to Active Duty” identified as much as $2.1 billion of reported obligations in excess of related DOD payroll information. Army Budget Office officials were unable to explain the entire difference. Army GWOT Reporting Process Used Estimated Obligations In 2003, the Army developed a monthly obligation plan for estimated GWOT military personnel obligations in fiscal year 2004 on the basis of anticipated funding of $12.5 billion from the fiscal year 2004 DOD supplemental appropriation request. In October 2003, the Army began incurring military personnel obligations for fiscal year 2004 GWOT operations before passage of a supplemental appropriation. However, instead of using actual information, the Army based the military personnel obligations used in the monthly GWOT cost report primarily on estimates in its fiscal year 2004 obligation plan, and “plugged” to available supplemental budget authority. Effectively, the Army was reporting back to Congress exactly what it had appropriated. Through much of fiscal year 2004, the Army Budget Office based military personnel obligations for GWOT operations primarily on its monthly obligation plan. As illustrated in table 4, this resulted in the cumulative GWOT military personnel obligations tracking closely to and, in two cases equaling, the estimated amounts from the fiscal year 2004 obligation plan. One example of military personnel obligations reported directly from the Army obligation plan is evident with the cost category for “Subsistence” described earlier. The Army obligation plan for “Subsistence” showed an estimated obligation amount of about $130 million monthly in most of fiscal year 2004 and, except for a large increase in September 2004, was largely identical to the monthly GWOT cost report amounts as shown in table 5. Subsistence costs at the end of fiscal year 2004 were a major factor in the need to “plug” reported military personnel obligations in the GWOT report’s cost category “Reserve Components Called to Active Duty” as discussed later. Budget authority for Army military personnel supporting GWOT operations provided in the fiscal year 2004 emergency supplemental appropriation was reduced late in the fiscal year. As detailed in table 6, reprogrammings and additional reductions lowered the supplemental budget authority available from the supplemental appropriation to about $12 billion for Army GWOT military personnel in fiscal year 2004. The Army Budget Office reported negative obligations of more than $439 million in the cost category “Reserve Components Called to Active Duty” for September 2004 so that GWOT military personnel obligations would equal available supplemental budget authority of about $12 billion. This was necessary (1) because the fiscal year 2004 Army obligation plan was originally developed for about $12.5 billion in GWOT military personnel spending and the available supplemental budget authority was reduced late in the fiscal year and (2) because of the unexpected need to obligate a large amount for the “Subsistence” cost category in September 2004. As shown in figure 4, the reporting of a negative amount effectively resulted in the Army’s use of “plugging,” or reporting back to Congress exactly the amount of available budget authority, as adjusted, remaining from the fiscal year 2004 emergency supplemental appropriation. Army’s Reporting Process Hampered by Lack of Formal Procedures and Management Review The process used in fiscal year 2004 to determine the Army’s military personnel obligations for the monthly GWOT cost report was not clearly understood by Army Budget Office management, and we found that Army management was not familiar with the process used to force, or “plug,” the reported fiscal year 2004 GWOT military personnel obligations to match available supplemental budget authority. According to Army Budget Office officials, they did not have formal procedures for developing and reporting GWOT military personnel obligations. These officials explained that, in the absence of written procedures, the process used to develop the monthly obligation information reported to the Defense Finance and Accounting Service (DFAS) was entirely dependent on the staff person assigned to this task. A DOD Financial Management Regulation includes general guidance on developing and reporting incremental costs related to contingency operations. For example, the guidance requires that controls, accounting systems, and procedures provide, in financial records, a proper identification and recording of the costs incurred for DOD contingency operations. However, this general guidance is not a substitute for detailed, written implementing procedures at the service level. Furthermore, the Army Budget Office did not establish a formal management review process for the GWOT military personnel obligations reported monthly to DFAS. The Army could not provide documentation to show that management-level officials reviewed its GWOT military personnel obligations in fiscal year 2004 that were sent to DFAS for inclusion in the monthly GWOT report. Army Budget Office officials also told us that these problems were exacerbated by staff lost in the September 11 terrorist attack on the Pentagon, personnel turnover, and hiring difficulties. Specifically, the Army Budget Office-Military Personnel Division is authorized 10 civilian positions and had not been fully staffed in over 2 years. The position of Chief for the Military Personnel Division was held by three different individuals in the last 2 years. We were told that only one staff member had been with the division longer than 2 years. As of May 2005, Army Budget Office officials told us that 2 of the 10 positions were staffed by interns and 3 positions were not filled. High staff turnover and new staff training make it increasingly important that detailed, documented procedures be developed for identifying and reporting incremental GWOT military personnel obligations. Formal procedures would help ensure that the monthly amounts are reported consistently and accurately, using the best available information. Lacking such procedures, Army Budget Office management provided two different explanations for the process for identifying and reporting GWOT military personnel obligations. When asked, Army management initially explained that reported GWOT military personnel obligations for fiscal year 2004 were based largely on payroll expenditures. However, our analysis of reported obligations revealed a significant, unexpected monthly fluctuation in two GWOT military personnel cost categories, raising doubts about the reasonableness of management’s explanation and the reliability of the Army’s estimation process. For example, as previously noted, a large negative obligation amount was reported in the “Reserve Components Called to Active Duty” cost category in September 2004 even though the associated Army National Guard and Reserve soldier strength remained relatively constant during the period. In December 2004, Army Budget Office management provided a different explanation and stated that GWOT military personnel obligations were estimates based principally on a calculation that considered the number of soldiers (e.g., mobilized, deployed) and a monthly composite pay rate or special pay/allowance amount. The Army Budget Office provided a schedule in January 2005 supporting this description of the estimating process for its GWOT military personnel obligations in fiscal year 2004. Using this description, our analysis of these obligations, however, indicated that the Army’s estimation process was not reliable. For example, our analysis showed that the estimated obligations reported were not reasonable owing to both inconsistencies with the number of soldiers and the high composite pay rate (i.e., officer-grade equivalent). After further discussion with us about the reasonableness of their earlier explanations, an Army Budget Office official agreed with our determination in February 2005 that the reported amounts were based on planned obligations and later agreed that the year-end amount was matched, or “plugged,” to available supplemental budget authority. Army and DOD officials stated that efforts were being undertaken to improve GWOT cost reporting by using, where applicable, DOD payroll information instead of estimated amounts. Reported GWOT Obligations for Mobilized Army Soldiers Were Significantly Higher Than Related DOD Payroll Information GWOT military personnel obligations reported in fiscal year 2004 were not consistent with the DOD payroll information we reviewed. Army management expressed a belief that pay and allowance information could not be obtained from the DOD payroll system and used for the monthly GWOT cost report. However, we obtained fiscal year 2004 payroll information from DFAS for reserve-component soldiers mobilized for GWOT operations and demonstrated that actual DOD payroll information, where applicable, could be used to identify incremental military personnel obligations for mobilized Army National Guard and Reserve soldiers. Although we previously reported that several system issues were significant factors impeding accurate and timely payroll payments to mobilized reserve-component soldiers, we believe that payroll information represents the best information available and should be used, where applicable, to prepare the GWOT cost report. For fiscal year 2004, we evaluated the Army obligation plan estimates and military personnel cost category titled “Reserve Components Called to Active Duty.” Army officials explained that this estimate included a soldier’s basic pay, Federal Insurance Contribution Act contributions (i.e., Social Security and Medicare), allowances for housing and subsistence, and accrual amounts for retirement pay and retirement health care. From the DOD payroll system, we identified the payroll information for Army soldiers mobilized to support GWOT operations in fiscal year 2004 and analyzed payroll information for the related pay components used to estimate Army military personnel GWOT obligations. As shown in table 7, military personnel costs identified from the DOD payroll system were as much as $2.1 billion less than the estimated Army obligations reported in the monthly GWOT cost report. Initially, the Army could not support this difference or its reported GWOT military personnel obligations. Over the next several months, the Army and the Office of the Under Secretary of Defense (Comptroller) provided us with several possible, though sometimes inaccurate, explanations for this difference. Some explanations appeared valid while others did not and, taken together, they failed to fully account for the difference. For example, when asked to explain the difference in military personnel obligations between the GWOT cost report and related DOD payroll information, Army Budget Office officials stated in March 2005 that a portion of the difference was attributable to retirement pay and retirement health care accruals. We found that the retirement health care accrual did not result in incremental costs and, therefore, was not a valid explanation for the difference. In July 2005, DOD agreed that mobilized reservists do not receive an increase in retirement health care benefits over benefits for nonmobilized reservists and, therefore, DOD does not incur incremental costs related to this benefit. However, mobilized reservists receive an increase in retirement pay benefits over benefits for nonmobilized reservists and, therefore, DOD incurs incremental costs related to this benefit. In July 2005, Army and Office of the Under Secretary of Defense (Comptroller) officials reported to us that $824 million of the difference was attributable to the inclusion of the retirement pay accruals and provided other potential reconciling cost information totaling $732 million as additional explanations for the difference. This information was provided too late in our audit to assess its accuracy and completeness. Comments from the Department of Defense GAO Contacts and Staff Acknowledgments GAO Contacts Acknowledgments In addition to the contacts named above, Steve Sternlieb, Mark Connelly, Leo Sullivan, Vince Balloon, Kurt Burgeson, Laura Czohara, Dave Mayfield, Francine Delvecchio, Abe Dymond, K. Eric Essig, Jason Kelly, John Ledford, and Wayne Turowski made key contributions to this report.
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Since the attacks of September 11, 2001, the Department of Defense (DOD) has reported spending $191 billion through May 2005 to conduct the Global War on Terrorism (GWOT). On an ongoing basis, DOD compiles and reports information on the incremental costs of the war, and uses these data in preparing future funding requests. To assist Congress in its oversight of war spending, GAO assessed (1) whether DOD's reported war costs are based on reliable data, (2) the extent to which DOD's existing financial management policy is applicable to war spending, and (3) whether DOD has implemented cost controls as operations mature. GAO focused primarily, but not exclusively, on fiscal year 2004 reported costs--the latest full year of data available at the time of GAO's review. GAO found numerous problems in DOD's processes for recording and reporting costs for GWOT, raising significant concerns about the overall reliability of DOD's reported cost data. As a result, neither DOD nor Congress can reliably know how much the war is costing and details on how appropriated funds are being spent, or have historical data useful in considering future funding needs. On the basis of GAO's work, DOD is taking steps to improve its cost reporting. Factors affecting the reliability of DOD's reported costs include long-standing deficiencies in DOD's financial systems, the lack of a systematic process to ensure that data are correctly entered into those systems, inaccurately reported costs, and difficulties in properly categorizing costs. In at least one case, reported costs may be materially overstated. Specifically, DOD's reported obligations for mobilized Army reservists in fiscal year 2004 were based primarily on estimates rather than actual information and differed from related payroll information by as much as $2.1 billion, or 30 percent of the amount DOD reported in its cost report. In addition, GAO found inadvertent double counting in the Navy's and Marine Corps' portion of DOD's reported costs amounting to almost $1.8 billion from November 2004 through April 2005. Because it was not feasible to examine all reported costs and significant data reliability problems existed, GAO was not able to determine the extent that total costs were misstated. Further complicating the data reliability issue is the fact that DOD has not updated its policy to address GWOT spending. Instead, DOD is using its existing financial management regulation for funding contingency operations, although it was developed and structured to manage the costs of small-scale contingency operations. GAO has noted that specific provisions of the existing policy conflict with the needs of GWOT. One conflict concerns the use of supplemental funds for base support activities at home stations. DOD's financial management regulation administratively precludes such use, but military service officials have spent billions of dollars in supplemental funds on these activities. Some of this spending appears to directly support the war, but some does not. DOD is currently updating its regulation on the basis of GAO's work. While individual commands have taken steps to control costs and DOD policy generally advises its officials of their financial management responsibilities to ensure the prudent use of contingency funding, DOD has not established guidelines that would require all commands involved in GWOT to take steps to control costs and to keep DOD informed of those steps and their success. For example, the commander of coalition forces in Iraq has unilaterally set a 10 percent cost reduction target for fiscal year 2005 but the details are not widely known outside the command. With the growth in GWOT costs, there is a need to ensure that all commands seek to control costs, including the need to review and rationalize related requirements. Until the department establishes guidelines on cost controls and is routinely informed about the types of controls and their impact on costs, it cannot be sure that all that can be done to control costs is being done.
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Introduction Almost every conversation about surface transportation finance begins with a two-part question: What are the "needs" of the national transportation system, and how does the nation pay for them? This report is aimed almost entirely at discussing the "how to pay for them" question. Since 1956, federal surface transportation programs have been funded largely by taxes on motor fuels that flow into the Highway Trust Fund (HTF). A steady increase in the revenues flowing into the HTF due to increased motor vehicle use and occasional increases in fuel tax rates accommodated growth in surface transportation spending over several decades. In 2001, though, trust fund revenues stopped growing faster than spending. In 2008 Congress began providing Treasury general fund transfers to keep the HTF solvent. Every year since 2008, there has been a gap between the dedicated tax revenues flowing into the HTF and the cost of the surface transportation spending Congress has authorized. Congress has filled these shortfalls with a series of further transfers, largely from the Treasury's general fund. These transfers have shifted a total of $143.6 billion to the HTF. The last $70 billion of these transfers were authorized in the Fixing America's Surface Transportation Act (FAST Act; P.L. 114-94 ), which was signed by President Barack Obama on December 4, 2015. The FAST Act funds federal surface transportation programs from FY2016 through FY2020. When the act expires the de facto policy of relying on general fund transfers to sustain the HTF will be 12 years old. Congressional Budget Office (CBO) projections indicate that the imbalance between motor fuel tax receipts and HTF expenditures will reemerge and the HTF balance will approach zero in FY2021. In consequence, funding and financing surface transportation is expected to continue to be a major issue for Congress. The Highway Trust Fund Financing Dilemma The HTF has two separate accounts—highways and mass transit. The primary revenue sources for these accounts are an 18.3-cent-per-gallon federal tax on gasoline and a 24.3-cent-per-gallon federal tax on diesel fuel. Although the HTF has other sources of revenue, such as truck registration fees and a truck tire tax, and is also credited with interest paid on the fund balances held by the U.S. Treasury, fuel taxes in most years provides roughly 85%-90% of the amounts paid into the fund by highway users. The transit account receives 2.86 cents per gallon of fuel taxes, with the remainder of the tax revenue flowing into the highway account. An additional 0.1-cent-per-gallon fuel tax is reserved for the Leaking Underground Storage Tank (LUST) Fund, which is not part of the transportation program. Since the trust fund was created in 1956, motor fuel taxes have increased four times: in 1959, 1982, 1990, and 1993. Since the 1993 increase, additional changes to the taxation structure have modestly boosted trust fund revenues. The American Jobs Creation Act of 2004 ( P.L. 108-357 ), for example, provided the trust fund with increased future income by changing elements of federal "gasohol" taxation. In 2005, the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users ( P.L. 109-59 ; SAFETEA) included a number of changes designed to bolster the trust fund, mainly by addressing tax fraud. SAFETEA also provided for the transfer of some general fund revenue associated with transportation-related activities to the trust fund. It was believed at the time of SAFETEA's passage that the tax changes, a $12.5 billion unexpended balance in the trust fund, and higher fuel tax revenue due to expected economic growth would be sufficient to finance the surface transportation program through FY2009. This prediction proved to be incorrect. The shortfalls resulting from the overly optimistic forecasts associated with SAFETEA were rectified by Treasury general fund contributions. In September 2008, Congress enacted a bill that transferred $8 billion of Treasury general funds to shore up the HTF. Other transfers followed (see Table 1 ). The era of automatic trust fund growth may be over. Annual vehicle miles traveled (VMT) are no longer increasing at the 2% average rate experienced from the 1960s until 2008; although vehicle use is growing again after slumping between 2008 and 2012 due to the sluggish economy, total mileage is projected to grow at an average of roughly 1% per year over the next 20 years. Meanwhile, other policy changes are weakening the link between driving activity and motor fuel tax revenues. Under new rules issued in 2012, combined new passenger car and light truck Corporate Average Fuel Economy standards are expected to reach 41.0 miles per gallon in model year 2021 and 49.7 miles per gallon in model year 2025. This will eventually reduce the number of gallons of fuel used, although the impact in the near term will be modest. The expanding fleets of hybrid and electric vehicles, respectively, pay less or nothing by way of fuel taxes, raising equity issues that are likely to become more prominent as the electric vehicle fleet expands. An increase in the existing fuel tax rates would provide immediate relief to the trust fund. As a rule of thumb, adding a penny to federal motor fuel taxes provides the trust fund with roughly $1.5 billion to $1.7 billion per year. The prospect of reduced motor fuel consumption, however, casts doubt on the ability of the motor fuel taxes to support increased surface transportation spending beyond the next decade, even with modest increases in tax rates. What Congress Faces Since FY2008, the balance of federal highway user tax revenues in the HTF has been inadequate to fund the surface transportation program authorized by Congress. The 2015 surface transportation act addressed the HTF shortfall through FY2020 by authorizing the use of Treasury general funds for transportation purposes. CBO projects that from FY2021 to FY2026 the gap between dedicated surface transportation revenues and spending will average $20.1 billion annually ( Table 2 ). In 2020, as Congress considers surface transportation reauthorization, it could again face a choice between finding new sources of income for the surface transportation program and settling for a smaller program, which might look very different from the one currently in place. Figure 1 shows the impact of the general fund transfers within the context of the underlying imbalance between HTF revenues and projected spending for FY2016-FY2026. The Underlying Problem: Spending Exceeds Revenues Table 2 provides projections of the gap between HTF receipts and outlays following the expiration of the FAST Act at the end of FY2020. In recent decades, Congress has typically sought to reauthorize surface transportation programs for periods of five or six years. As the table indicates, a five-year reauthorization beginning in FY2021 faces a projected gap between revenues and outlays of nearly $101 billion. A six-year reauthorization would face a gap of almost $125 billion. These projections assume that spending on federal highway and public transportation programs would remain as it is today, adjusted for anticipated inflation. The Resulting Funding Shortfalls When the FAST Act expires at the end of FY2020, the balance in the HTF resulting from previous years' income is expected to be $12.1 billion—an amount equal to approximately two and a half months of outlays. CBO projects that this balance, plus incoming revenue, will allow the Federal Highway Administration (FHWA) and the Federal Transit Administration (FTA) to pay their obligations to states and transit agencies until sometime in FY2021. However, without a reduction in the size of the surface transportation programs, an increase in revenues, or further general fund transfers, the balance in the HTF is projected to be close to zero near the end of FY2021 (see Table 3 ). At that point, both FHWA and FTA would likely have to delay payments for completed work. Based strictly on projected income and expenses, the HTF would move from a positive balance of $12.1 billion at the start of FY2021 to a negative balance of $88.5 billion at the end of FY2025. However, current law does not allow the HTF to incur negative balances. Unless this is changed, $88.5 billion represents the minimum amount the House Ways and Means Committee and the Senate Committee on Finance would need to find over the FY2021-FY2025 period in some combination of additional revenue and budget offsets for general fund transfers, should Congress choose to continue funding surface transportation at the current, or "baseline," level, adjusted for inflation. Because the HTF currently provides all but about $2 billion of annual spending authorized for the highway and transit programs (the main exception being the FTA Capital Investment Grants Program), these numbers have implications for the size of the program Congress may approve to follow the FAST Act. Highway and transit spending based solely on the revenue projected to flow into the HTF under current law would be limited to roughly $41 billion in FY2021, significantly less than the "baseline" FY2021 outlays of roughly $58 billion. The projected year-to-year decline in HTF revenue implies that FHWA and FTA would have less contract authority each year to spend on projects through FY2026. Reducing expenditures might not provide immediate relief from the demands on the HTF. Because transportation projects can take years to complete, both the highway and public transportation programs must make payments in future years pursuant to commitments that have already been incurred. As of FY2018, obligated but unspent contract authority for highway projects in progress is projected to be roughly $64 billion. This does not count another $24 billion in available but unobligated contract authority. For public transportation programs the equivalent figures for FY2018 are projected to be almost $16 billion in unpaid obligations and another $10 billion in unobligated contract authority. The obligated amounts represent legal obligations of the U.S. government and must be paid out of future years' HTF receipts. Existing Highway Fuel Taxes16 The first federal tax on gasoline (1 cent per gallon) was imposed in 1932, during the Hoover Administration, as a deficit-reduction measure following the depression-induced fall in general revenues. The rate was raised to help pay for World War II (to 1.5 cents per gallon) and raised again during the Korean War (to 2 cents per gallon). The Highway Revenue Act of 1956 (P.L. 84-627) established the HTF and raised the rate to 3 cents per gallon to pay for the construction of the Interstate Highway System. The Federal-Aid Highway Act of 1959 (P.L. 86-342) raised the rate to 4 cents per gallon. The gasoline tax remained at 4 cents from October 1, 1959, until March 31, 1983. During this period, revenues grew automatically from year to year as fuel consumption grew along with increases in vehicle miles traveled. Since 1983 lawmakers have passed legislation raising the tax rates on highway fuel use three times. Although infrequent, these rate increases were quite large in a proportional sense. The gasoline tax was raised on April 1, 1983, from 4 to 9 cents per gallon, a 125% increase; on September 1, 1990, from 9 to 14 cents (not counting the additional 0.1 cent for LUST), or 55%; and on October 1, 1993, from 14 to 18.3 cents, or 31%. How the Rates Have Been Raised Since 1983 Increasing the rate of the fuel taxes has never been popular. The last three increases were accomplished with difficulty and were influenced by the broader budgetary environment and the politics of the time. The "Great Compromise" and the Highway "User Fee" The increase in the fuel tax rate under the Surface Transportation Assistance Act of 1982 (STAA; P.L. 97-424 , Title V) occurred in the lame-duck session of the 97 th Congress. In the "Great Compromise," supporters of increased highway spending had come to an agreement with transit supporters (mostly from the Northeast) that a penny of a proposed 5-cents-per-gallon increase would be dedicated to a new mass transit account within the HTF. This meant that support for the bill during the lame-duck session was widespread and bipartisan. During the congressional elections of 1982 the Democrats had picked up 26 seats in the House of Representatives. The economy was experiencing a major recession, and some argued that increased highway spending would stimulate the economy. President Reagan's opposition to an increase in the "gas tax" softened during the lame-duck session. On November 23, 1982, he announced that he would support passage of STAA, even though it would "mean an increase in the highway user fee, or gas tax, of 5 cents a gallon.... Our country's outstanding highway system was built on the user fee principle—that those who benefit from a use should share in its cost." Nonetheless, the bill faced a series of filibusters in the Senate, which were eventually overcome by four cloture votes. The conference report was again filibustered, and President Reagan helped secure the votes needed for cloture. President Reagan signed STAA into law on January 6, 1983, more than doubling the highway fuel tax to 9 cents per gallon. 50/50 Share: Deficit Reduction/Highway Trust Fund The Omnibus Budget Reconciliation Act of 1990 (OBRA90; P.L. 101-508 ), enacted November 5, 1990, was passed under the pressure of impending final FY1991 sequestration orders issued by President George H. W. Bush under Title II of P.L. 99-177 , the Balanced Budget and Emergency Deficit Control Act of 1985, known as the Gramm-Rudman-Hollings Act (GRH). OBRA90 included budget cuts, tax changes, and the Budget Enforcement Act ( P.L. 101-508 ), which rescinded the FY1991 sequestration orders. OBRA90 also raised the tax on gasoline by 5 cents per gallon, to 14 cents. Half the increase went to the HTF (2 cents to the highway account and 0.5 cents to the mass transit account), with the other 2.5 cents per gallon to be deposited in the general fund for deficit reduction. This was the first time since 1957 the motor fuel tax had been used as a source of general revenue. Section 9001 expressed the sense of Congress that all motor fuel taxes should be directed to the HTF as soon as possible. More for Deficit Reduction The Omnibus Budget Reconciliation Act of 1993 (OBRA93; P.L. 103-66 ) Section 13241(a) made further changes in regard to fuel taxes: The 2.5-cents-per-gallon fuel tax dedicated to deficit reduction in OBRA90 was redirected to the HTF beginning October 1, 1995, and its authorization was extended to September 30, 1999. The highway account received 2 cents per gallon and the mass transit account 0.5 cents per gallon of the rededicated amount. An additional permanent 4.3-cents-per-gallon fuel tax took effect in October 1993 and was dedicated to deficit reduction. This brought the gasoline tax to 18.3 cents per gallon, although for two years (October 1, 1993, to October 1, 1995) 6.8 cents per gallon of this was deposited in the general fund, dedicated to deficit reduction. On October 1, 1995, the amount going to the general fund dropped to 4.3 cents per gallon, and the amount dedicated to the HTF increased to 14 cents per gallon. Subsequently, under the Taxpayer Relief Act of 1997 ( P.L. 105-34 ), all motor fuel tax revenue was redirected to the HTF (3.45 cents per gallon to the highway account and 0.85 cents to the mass transit account), effective October 1, 1997. (The LUST fund continues to receive the revenue from an additional 0.1 cents-per-gallon tax.) Since 2001, revenue flowing into the HTF has not met expectations in most years, and has generally lagged inflation since FY2007. In some years, HTF revenue has declined even in nominal terms (unadjusted for inflation) due to reduced vehicle travel. Because of the fixed nature of the cents-per-gallon gasoline and diesel taxes, the only way the taxes can generate additional revenue for the HTF is if motor-fuel consumption rises. In recent years, as gasoline prices have fallen, the vehicle miles traveled have increased, and gasoline sales have exceeded 2007 levels. An improving U.S. job market and wage growth may have contributed to record high VMT. The renewed popularity of vehicles with relatively low fuel economy suggests demand for motor fuel may remain stronger than anticipated a few years ago. However, to date CBO continues to forecast declines in gasoline tax revenues through FY2027. Alternatives for HTF Finance The political difficulty of increasing motor fuel taxes has led to interest in alternative approaches for supporting the HTF. These involve tying motor fuel tax rates to the price of fuel, changing the structure of the current fuel taxes, and charging drivers for the distance they drive rather than the fuel they consume, as well as freight-related charges and a variety of options unrelated to transportation. "Fixing" the Gas Tax A differently designed gas tax might be indexed to both inflation (either inflation generally or highway construction cost inflation) and fuel-efficiency improvements. This new design would be imposed after raising the current gas tax rate to compensate for the loss in purchasing power since the last rate increase in 1993. If the motor fuels taxes for gasoline and diesel had been adjusted in 2016 to keep pace with the change in the Bureau of Labor Statistics' consumer price index since 1993, the 18.3-cents-per-gallon gasoline tax would now be 31 cents per gallon, and the 24.3-cents-per-gallon diesel tax would be 41.1 cents per gallon. Consequently, the first step in implementing this method of "fixing" the gas tax would be to raise the base tax rate for gasoline by roughly 13 cents per gallon and to raise the rate for diesel by roughly 17 cents per gallon. Future adjustments would depend on the inflation rate in future years. Tax-rate adjustments to make up for revenue lost due to greater fuel efficiency could be determined by dividing miles driven by vehicle category by the total amount of fuel consumed by that category and comparing the quotient to the previous year. Although fuel-economy standards for new vehicles are to rise sharply over the next few years, the average efficiency of the entire vehicle fleet will rise slowly because of the large number of older vehicles on the road. Consequently, an annual efficiency adjustment to the fuel tax rates would likely be small. Providing a Tax Rebate to Offset a Fuels Tax Increase One approach to reducing the political obstacles to higher fuel taxes is to couple a fuels-tax increase with income-tax rebates approximating the average cost of the fuels tax increase to the typical driver. The cost of the rebates would be less than the additional taxes collected because truckers, other commercial users, and individuals who do not file income-tax returns would not receive the rebates. The rebates could be phased out after several years while the higher tax rates would continue. This solution raises a number of issues. The proposal could be seen, in effect, as a general fund transfer. Depending on the language of the House and Senate budget resolutions, the rebates might have to be offset by spending reductions elsewhere in the federal budget. Also, unless the higher tax rates were indexed for inflation, revenues would again be on a downward slope after the tax increase occurs. Switching to Sales Taxes Under the sales tax concept, the federal motor fuel tax would be assessed as a percentage of the retail price of fuel rather than as a fixed amount per gallon. Some states already levy taxes on motor fuels in this way, either alongside or in place of fixed cents-per-gallon taxes on motor fuel purchases. If fuel prices rise in the future, sales tax revenues could rise from year to year even if consumption does not increase. Conversely, however, a decline in motor fuel prices could lead to a drop in sales tax revenue. Many states that tied fuel taxes to prices after the price shocks of the 1970s encountered revenue shortfalls in the 1980s, when fuel prices fell dramatically. Over a 20-year period, most of these variable state fuel taxes disappeared. Recently, however, Virginia eliminated its cents-per-gallon fuel taxes in favor of a sales tax on fuel and a general sales tax increase that was dedicated to transportation purposes. The Virginia law mandates that the tax be imposed on the average wholesale price (calculated twice each year) but sets price floors; if prices of motor fuels fall beneath those floors, the amount of fuel tax charged per gallon is not reduced further. A federal sales tax on motor fuel would likely be at best an interim solution to the long-term problem of financing transportation infrastructure because, as with the current motor fuel tax, it relies on fuel consumption to fund transportation programs. To the extent that improved vehicle efficiency or adoption of hybrid or electric vehicles leads to long-term declines in fuel usage, a sales tax on fuel may not lead to increases in trust fund revenues. In addition, a sales tax calibrated to produce a desired amount of revenue in an environment of high motor fuel prices could significantly underperform if fuel prices were to be lower than anticipated. Mileage-Based Road User Charges Economists have long favored mileage-based user charges as an alternative source of highway funding. Under the user charge concept, motorists would pay fees based on distance driven and, perhaps, on other costs of road use, such as wear and tear on roads, traffic congestion, and air pollution. The funds collected would be spent for surface transportation purposes. The concept is not new: federal motor fuel taxes are a form of indirect road user charge insofar as road use is loosely related to fuel consumption. Some states have charged trucks by the mile for many years, and toll roads charge drivers based on miles traveled and the number of axles on a vehicle, which is used as a proxy for weight. Recent technological developments, as well as the evident shortcomings of motor fuel taxes, have led to renewed interest in the user charge concept, including establishment of a pilot program in legislation enacted in 2015. Mileage-based road user charges (often referred to as vehicle miles traveled charges, or VMTs) could range from a flat cent-per-mile charge based on a simple odometer reading to a variable charge based on vehicle movements tracked by the Global Positioning System (GPS). Other proposals envision mileage-based road user charges that would mimic the way Americans now pay their fuel taxes by collecting the charge at the pump. Most road user charge proposals would require electric vehicle users to pay for their use of the roads. Implementation of a mileage-based road user charge would have to overcome a number of potential disadvantages relative to the motor fuels tax, including public concern about personal privacy; the higher costs to establish, collect, and enforce this charge (estimates range from 5% to 13% of collections); the administrative challenge of the billing process given the size of the vehicle fleet (estimated at roughly 263 million vehicles); and the setting and adjusting of the road user charge rates, which would likely be as controversial as increasing the motor fuels taxes. Another barrier to implementation is how to fairly charge the "unbanked," those who have no bank accounts or credit/debit cards. A nationwide mileage-based road user charge would be analogous to a national toll. This raises the prospect that vehicles using toll roads might be charged twice, although this effectively happens now in that toll road users also pay tax on the motor fuel they consume while using the toll road. Technically, it would be possible for a road user charge to replace an existing toll, but this could cause complications with respect to the servicing of bonds funded by toll-road revenue. Mileage-Based Road User Charges and Non-highway Programs Since 1982, the HTF has financed most federal public transportation programs as well as highway programs. If a mileage-based road user charge were to be used strictly for highway purposes, it might reasonably be characterized as a user fee even if the amount paid by each individual driver does not correspond precisely to the social cost (such as pollution and traffic congestion costs) of that user's driving. A road user charge that funded both highways and public transportation might arguably be seen more as a tax than a user fee. This distinction raises a number of legal issues. Any legislation establishing a road user charge would have to clearly identify what the charge would be spent on. If the existing HTF were to be retained, legislation would have to specify what share of the revenue would be credited to the separate highway and mass transit accounts within the fund. Other Options to Preserve the Highway Trust Fund In addition to options discussed above, a wide range of additional proposals has been suggested to generate revenue for the HTF. These proposals largely originated from the work of the two SAFETEA congressional commissions and of groups such as the American Association of State Highway and Transportation Officials (AASHTO) and Transportation Research Board (TRB). For example, AASHTO's Matrix of Illustrative Surface Transportation Revenue Options lists 33 potential HTF revenue options with yield estimates in tabular form. Many of these options involve taxes on freight movements or energy. It should be emphasized that the revenue estimates from these exercises are merely suggestive; the revenue obtained from any given measure would depend on changes in the price of motor fuels, growth in the number of annual auto registrations, and other factors. The Future of the Trust Fund If Congress chooses not to impose new taxes and fees dedicated to the HTF, it could still maintain or expand the surface transportation program with general fund monies. Any of the financing options discussed above could be used to sustain the existing federal financing mechanism, the HTF, but could also be used to support the general fund if Congress considers alternatives to the trust fund financing model. This would weaken the historical link between the taxes and fees paid by highway users and spending on the nation's highways and bridges. The Highway Trust Fund was set up as a temporary device that was supposed to disappear when the Interstate System was finished. It has endured, and its breadth of financing has expanded well beyond the Interstates, most significantly with the 1982 creation of the mass transit account within the fund to support public transportation spending. But the HTF is certainly not essential to a federal role in transportation funding. Congress routinely funds large infrastructure projects, such as those constructed by the Army Corps of Engineers, from general fund appropriations. Before 1956, it funded highway projects using annual appropriations. As recently as the 1990s, significant highway programs such as the Appalachian Development Highway System were funded from the general fund. One alternative would be to eliminate the trust fund structure, thereby doing away with its complicated budget framework of contract authority, obligations, and apportionments. Eliminating the trust fund would force surface transportation to compete with other federal programs for funding each year, possibly leading to less spending on transportation. There could be advantages to moving away from trust fund financing of surface transportation. Until recently, one of the most intractable arguments in reauthorization debates concerned which states were "donors" to transportation programs and which were "donees." Donor states were states whose highway users were estimated to pay more to the highway account of the HTF than they received. Donee states received more than they paid. The donor-donee dispute was unique to the federal highway program, and occurred largely because of the ability to track federal fuel tax revenues by state. This issue has faded as injections of general fund revenues into the HTF have made all states donees, and would likely disappear if transportation-related taxes were deposited into the general fund instead of the trust fund. Treating fuel taxes as just another source of federal revenue would also dampen the long-standing link between road user charges and program spending. This would provide Congress with greater flexibility to allocate funding among various transportation modes and between transportation and nontransportation uses. Most trust-fund outlays take the form of formula grants over which states have a great deal of spending discretion. While there are numerous federal requirements attached to trust fund expenditures, there have been until recently relatively few performance-oriented goals that the states are required to meet in selecting projects to be undertaken with federal monies. Performance measures might be easier to implement without formula programs that automatically apportion funding to the states. Eliminating the trust fund might also allow for creativity in thinking about the provision of transportation infrastructure across the modal boundaries that now define much of federal transportation spending. Historically, important parts of U.S. transportation infrastructure, such as the transcontinental railroads and the Panama Canal, were authorized by specific congressional enactments rather than grant programs. Reconsidering the trust fund structure might reopen discussion of this approach. Another alternative would be to again devote all trust fund revenues exclusively to highway spending. This would leave transit and other surface transportation programs to be funded exclusively by annual appropriations of general funds. Such a change would have political implications. Since the early 1990s, public transportation and cycling advocates, environmentalists, and a wide range of other groups have become full-fledged supporters of the surface transportation program, as it has benefited their interests. The expanded coalition supporting the surface transportation program played an important role in the hard-fought political battles since the early 1990s to pass multiyear surface transportation bills. As was made clear by passage of the FAST Act, Congress has chosen to support the current HTF funding model by transferring funds, mostly from the Treasury general fund. Whether such general fund support should continue is likely to become a major point of contention when Congress debates reauthorizing surface transportation programs beyond FY2020. Making a General Fund Share Permanent By FY2020, the last year of the FAST Act, federal highway programs will have been funded for 12 years under a de facto policy of providing a Treasury general fund share. Congress could address the inadequacy of motor fuel taxes to meet surface transportation needs by making the general fund share permanent. The public transportation titles of surface transportation bills already fund the New Starts program with general fund appropriated funds. The Federal Aviation Administration (FAA) budget is also supported by a combination of trust funds and general funds; the general fund amount is supposed to approximate the value of the airways system to military and other government users and to "societal" nonusers (people who do not fly but, for example, benefit from the delivery of freight via aircraft). A similar argument could be made regarding the public good benefits of a well-functioning highway system to justify an annual general fund appropriation to support spending on roads. Should Congress agree on a future policy of providing an annual general fund share for federal highway funding, the financing structure of the federal-aid highways program could change. Congress would have the choice of appropriating the general fund share to the HTF and maintaining the programmatic status quo, or it could fund some programs from the trust fund and fund others via appropriations. Congress could also consider a two-pronged approach to authorization. It could authorize the trust funded programs separately from the appropriated programs. This would give Congress the option of trust funding a very long (perhaps as much as 10-year) authorization bill for programs that fund projects that typically take many years to plan and complete. The long-term authorization could be paired with a series of short-term bills funded with appropriated general funds for programs whose projects are more likely to be completed quickly. Toll Financing of Federal-Aid System Highways Toll roads have a long history in the United States, going back to the early days of the republic. During the 18 th century, most were local roads or bridges that could not be built or improved with local government tax revenue alone. However, beginning with the Federal Aid Road Act of 1916 (39 Stat. 355), federal law has included a prohibition on the tolling of roads that benefited from federal funds. During the late 1940s and early 1950s, the prospect of toll revenues allowed states to build thousands of miles of limited-access highways without federal aid and much sooner than would have been the case with traditional funding. Despite this, the tolling prohibition was reiterated in the Federal-Aid Highway Act and Highway Revenue Act of 1956 (70 Stat. 374), which authorized funds for the Interstate System, created the HTF, and raised the fuel taxes to pay for their construction. Over the last three decades the prohibition has been moderated so that exceptions to the general ban on tolling now cover the vast majority of federal-aid roads and bridges. There remains a ban on the tolling of existing Interstate System highway surface lane capacity. While new toll facilities have opened in several states, some of those projects have struggled financially. Generally, there are three levels of restrictions on tolling of federal-aid highways. Non-Interstate System highways and bridges may be converted to toll roads but only after reconstruction or replacement. Existing Interstate System surface lane capacity may not be converted to toll roads except under the auspices of two small pilot programs. However, Interstate System bridges and tunnels may be converted if they are reconstructed or replaced. New capacity on the federal-aid highway system generally may be tolled. There are no federal restrictions on tolling of roads off of the federal-aid system. Options for Expanded Use of Tolling Highway toll revenue nationwide came to $14.025 billion in FY2015, according to FHWA. While the amount of toll revenue has grown significantly in recent years, toll revenue as a share of total spending on highways has been relatively steady for more than half a century, in the range of roughly 5% to 6%. On average, facility owners collected $2.38 million per mile of toll road or bridge in FY2015, but revenue per mile varies greatly among toll facilities. All revenue from tolls flows to the state or local agencies or private entities that operate tolled facilities; the federal government does not collect any revenue from tolls. However, a major expansion of tolling might reduce the need for federal expenditures on roads. There are three possible means of increasing revenue from tolling: Increase the E xtent of T oll R oads. FHWA statistics identify 5,882 tolled miles of roads, bridges, and tunnels as of January 1, 2016, a net increase of 1,161 miles, or 25%, over 1990. Toll-road mileage comprises only 0.6% of the 1,016,964 miles of public roads eligible for federal highway aid. While there may be many existing roads on which tolling would be financially feasible, the vast majority of mileage on the federal-aid system probably has too little traffic to make toll collection economically viable. Increase T oll- R oad U sage. The financing of many of the toll roads constructed in the 20 th century was based on the assumption that the new roads would lead to increased vehicle usage. Although vehicles miles traveled declined in the wake of the recession that began in 2007, vehicle use has been rising again since 2014. If this trend continues it bodes well for toll revenues, which would rise with increasing traffic. On the other hand, if demographic trends and social changes, such as the increased popularity of center-city living, eventually lead to slower growth in personal motor vehicle use, then toll revenues may be constrained in the longer term. If that proves to be the case, higher traffic volume may contribute little to increased toll revenues. Increase the A verage T oll per M ile. Raising tolls can be politically challenging, especially when revenue is used for purposes other than building and maintaining the toll facility. Trucking interests frequently raise opposition to rate changes that increase truck tolls relative to automobile tolls. Where roads are operated by private concessionaires, the operators' contracts with state governments typically specify the maximum rate at which tolls can rise. Additionally, large increases can encourage motorists to use competing nontolled routes. These factors suggest that imposing tolls on individual transportation facilities is likely to be of only limited use in supporting the overall level of highway capital spending. Furthermore, some states, particularly those with low population densities, may have few or no facilities suitable for tolling. Toll collection itself can be costly; collection costs on many existing toll roads exceed 10% of revenues. For these reasons, while tolls may be an effective way of financing specific facilities—especially major roads, bridges, or tunnels that are likely to be used heavily and are located such that the tolls are difficult to evade—they would likely be less effective in providing broad financial support for surface transportation programs. Value Capture Value capture represents an attempt to cover part or all of the cost of transportation improvements from landowners or developers who benefit from the resulting increase in the value of real property. Value capture revenue mechanisms include tax increment financing, special assessments, development impact fees, negotiated exactions, and joint development. The federal role in value capture strategies may be limited, as the Government Accountability Office (GAO) has noted, but it is worth describing these strategies to provide a fuller picture of the ways in which they might supplement or supplant more commonly used funding and financing mechanisms. Value capture is not a new idea. Land developers built and operated streetcar systems in the late 19 th century as a way to sell houses on the urban fringe, for example. Much of the recent experience with value capture has been associated with public transit. GAO found that the most widely used mechanism is joint development, in which a real estate project at or near a transit station is pursued cooperatively between the public and private sectors. An example might involve a transit agency leasing the unused space over a station, its "air rights," to a developer in exchange for a regular payment. GAO found that joint development has generated relatively small amounts of money for transit agencies. For example, the Washington Metropolitan Area Transit Authority received about $10 million from joint development in FY2016, about 1% of its operating revenue. However, less widely used strategies, such as special assessment districts, are estimated to generate significant amounts of funding for specific projects. In a special assessment district, properties within a defined area are assessed a special tax for a specific purpose. A special assessment district in Seattle produced $25 million of the $53 million (47%) needed to fund the South Lake Union streetcar project. There has been less use of value capture in highway projects, but this appears to be changing. Texas, for example, has authorized the use of tax increment financing through the creation of transportation reinvestment zones to help fund highway projects. Special assessment districts also have been set up in several states, including Florida and Virginia, to fund highway projects. In Virginia a special assessment district was used to help fund the expansion of Route 28 near Washington Dulles International Airport beginning in the late 1980s. Public-Private Partnerships Growing demands on the transportation system and constraints on public resources have led to calls for more private-sector involvement in the provision of highway and transit infrastructure through public-private partnerships (P3s), which can be designed to lessen demands on public-sector funding. Private involvement can take a variety of forms, including design-build and design-build-finance-operate agreements. Typically, the "public" in public-private partnerships refers to a state government, local government, or transit agency. The federal government, nevertheless, exerts influence over the prevalence and structure of P3s through its transportation programs, funding, and regulatory oversight. To be viable, P3s involving private financing typically require an anticipated project-related revenue stream from a source such as vehicle tolls, freight container fees, or, in the case of transit station development, building rents. Private-sector resources may come from an initial payment to lease an existing asset in exchange for future revenue, as with the Indiana Toll Road and Chicago Skyway, or they may arise from a newly developed asset that creates a new revenue stream. Either way, a facility user fee, such as a toll, is often the key to unlocking private-sector participation and resources. In some cases, private-sector financing is backed by "availability payments," regular payments made by government to the private entity based on negotiated quality and performance standards of the facility. Aversion in the private sector to the risk that too few users will be willing to pay for use of a new facility has made availability payment P3s more common over the past few years. As a result, state and local governments are retaining this risk, known as demand risk, more often. It is widely believed that hundreds of billions of dollars of private monies are available globally for infrastructure investment, such as surface transportation. To date, however, the number of transportation P3s in the United States is relatively small, as is the amount of long-term private financing provided. According to one source, from 1993 through September 2017 there were 30 surface transportation P3s involving long-term financing, with total project costs totaling $39 billion. This includes the 99-year lease of the Chicago Skyway; the I-595 managed lanes project in Florida; and the Purple Line light rail transit project in Maryland. P3s and private investment in surface transportation are relatively larger in many other countries, including Portugal, Spain, and Australia. It is quite possible that private investment will grow in the future, but many impediments remain. Some of the major ones include the relative attractiveness of the tax-exempt financing available to state and local government, political opposition to tolling and privatization, and difficulties associated with project development. Private-sector financing generated through P3s might best be seen as a supplement to traditional public-sector funding rather than as a substitute. In addition to attracting private capital, P3s may generate new resources for highway and transit infrastructure in at least two ways. First, P3s may improve efficiency through better management and innovation in construction, maintenance, and operation—in effect providing more infrastructure for the same price. Private companies may be more able to examine the full life-cycle cost of investments, whereas public agency decisions are often tied to short-term budget cycles. Such cost reductions may not materialize, however, if the public sector has to spend a substantial amount of time on procurement, oversight, dispute resolution, and litigation. GAO argues that most state governments lack the capacity to manage P3 contracts. Second, P3s may reduce government agencies' costs by transferring the financial risks of building, maintaining, and operating infrastructure to private investors. These risks include construction delays, unexpectedly high maintenance costs, and the possibility that demand will be less than forecast. There is a danger, however, that this transfer of risk may prove illusory if major miscalculations force the public agency to renegotiate contracts or provide financial guarantees. Moreover, as GAO points out, not all the risks can or should be shifted to the private sector. For instance, private investors are unlikely to accept the risk of higher construction costs due to delays in the environmental review process. Municipal Bonds Municipal bonds, debt instruments used by states and all types of local government, are a major source of financing for transportation infrastructure. The interest on municipal bonds is generally exempt from federal income tax; consequently, an investor will usually accept a lower interest rate than on a non-tax-exempt bond, and the borrower can finance a project at a lower cost. The forgone tax revenue is the federal government's contribution to a project financed with municipal bonds. Private activity bonds (PABs) are a type of municipal bond in which a state or local government acts as a financial intermediary for a business or individual. PABs are not eligible for federal tax exemption unless Congress grants an exception for a certain purpose and other requirements are met. Congress has approved limited use of tax-exempt private activity bonds for airports, docks and wharves, mass commuting facilities, high-speed intercity rail facilities, and qualified highway or surface freight transfer facilities (26 U.S.C. §142). In the case of qualified highway or surface freight transfer facilities, the Secretary of Transportation must approve the issuance of PABs, and the aggregate amount allocated must not exceed $15 billion (26 U.S.C. §142(m)(2)). As of January 2017, $6.6 billion of the $15 billion had been issued to finance 17 projects, and another $4.3 billion had been allocated to eight other projects. There have been proposals to increase the bond issuance cap so that PABs, which are seen as an important support for P3 deals, can continue to be issued in the future. While municipal bonds are a popular financing method, there are a number of potential disadvantages to their use. Because they are issued by state and local government, the federal government has less control over the types of projects supported and the amount of the federal contribution than it does with grant and loan programs. Tax-exempt bonds, moreover, can be an inefficient way to subsidize state and local debt because borrowing costs are reduced by less than the forgone revenue. As the Congressional Budget Office notes, "the remainder of that tax expenditure accrues to bond buyers in the highest income tax brackets." Also, tax-exempt bonds are unattractive to investors that do not have a federal tax liability, such as pension funds and foreign individuals and organizations, shrinking the potential funds available to state and local governments. Tax credit bonds, an alternative type of tax-preferred municipal bond, might help to overcome some of these limitations. Tax credit bonds typically do not pay interest. Instead, the investor receives a tax credit, an amount that is the same for investors in different tax brackets. Tax credit bonds, therefore, are more efficient than tax-exempt bonds because the revenue forgone by the federal government equals the reduction in borrowing costs that state and local governments receive. Unused tax credits may be carried forward to another year or sold to another entity with tax liability. With some types of tax credit bonds known as issuer credit or direct pay bonds, the credit is paid to the issuer and the investor gets interest similar to taxable securities. Consequently, tax credit bonds can be attractive to investors with no federal tax liability. Federal authority exists for state and local governments to issue some types of tax credit bonds, but none can be used to finance transportation projects. Tax credit bonds authorized by the American Recovery and Reinvestment Act of 2009 ( P.L. 111-5 ), known as Build America Bonds, were used to finance a wide range of projects including transportation. The authorization to issue these bonds expired December 31, 2010. Transportation Infrastructure Finance and Innovation Act (TIFIA) Financing An existing federal mechanism for providing credit assistance to relatively large transportation infrastructure projects is financing under the Transportation Infrastructure Finance and Innovation Act (TIFIA) program, enacted in 1998. TIFIA provides federal credit assistance in the form of secured loans, loan guarantees, and lines of credit. Federal credit assistance reduces borrowers' costs and lowers project risk, thereby helping to secure other financing at rates lower than would otherwise be possible. Another purpose of TIFIA funding is to leverage nonfederal funding, including investment from the private sector. Loans must be repaid with a dedicated revenue stream, typically a project-related user fee, such as a toll, but sometimes dedicated tax revenue. As of January 2018, according to DOT, TIFIA had provided assistance of nearly $30 billion to more than 70 projects. The overall cost of the projects supported is estimated to be $107 billion. The FAST Act reduced funding for the TIFIA program after it had been greatly increased under the previous authorization, the Moving Ahead for Progress in the 21 st Century Act (MAP-21; P.L. 112-141 ), enacted in July 2012. Prior to MAP-21, the TIFIA authorization was $122 million annually. This was increased to $750 million in FY2013 and $1 billion in FY2014 and FY2015. Under the FAST Act, the direct authorization for TIFIA was $275 million in both FY2016 and FY2017, $285 million in FY2018, and $300 million in both FY2019 and FY2020. Because the government expects its loans to be repaid, an appropriation need cover only administrative costs and the subsidy cost of credit assistance. According to the Federal Credit Reform Act of 1990, the subsidy cost is "the estimated long-term cost to the government of a direct loan or a loan guarantee, calculated on a net present value basis, excluding administrative costs." According to DOT, $1 in TIFIA funding historically has provided about $10 in credit assistance, a 10% subsidy cost, although in recent years each dollar has provided closer to $14. Seen in isolation, the cut in the TIFIA authorization reduced DOT's capacity to issue loans by approximately $7.25 billion in FY2016, assuming a 10% subsidy cost. However, the FAST Act also allowed states to use funds they receive from two other highway programs to pay for the subsidy and administrative costs of credit assistance. These two programs are the Nationally Significant Freight and Highway Projects Program (NSFHPP), authorized at $800 million in FY2016, and the National Highway Performance Program (NHPP), authorized at $22.3 billion in FY2016. If states decide to use their formula funding in this way, the potential amount of loans and other credit assistance may be much greater than would be possible using the $275 million direct authorization alone. The Transportation Investment Generating Economic Recovery (TIGER) Grant Program, funded by general fund appropriations, also can be used by grant recipients to pay the subsidy and administrative costs of a TIFIA loan. Several changes to the TIFIA program in the FAST Act were aimed at making it easier to finance smaller projects, particularly those in rural areas. These provisions included providing authority for a TIFIA loan to a state infrastructure bank (SIB) to capitalize a "rural project fund"; adding transit-oriented development (TOD) infrastructure as an eligible project (TOD infrastructure is a "project to improve or construct public infrastructure that is located within walking distance of, and accessible to, a fixed guideway transit facility, passenger rail station, intercity bus station, or intermodal facility"); allowing up to $2 million of TIFIA budget authority each fiscal year to pay the application fees for projects costing $75 million or less instead of requiring payment by the project sponsor; modifying or setting the minimum project cost thresholds for credit assistance at $10 million for TOD projects, the capitalization of a rural project fund, and local government infrastructure projects; and providing for a streamlined application process for loans of $100 million or less. In addition, the FAST Act authorized the creation of a new National Surface Transportation and Innovative Finance Bureau within DOT to administer federal transportation financing programs, specifically the TIFIA program, the SIB program, the Railroad Rehabilitation and Improvement Financing (RRIF) Program, and the allocation of authority to issue private activity bonds for qualified highway or surface freight transfer facilities. To fulfill this mandate, DOT established the Build America Bureau in July 2016. The bureau also will be responsible for establishing and promoting best practices for innovative financing and P3s, and for providing advice and technical expertise in these areas. The bureau will administer the new discretionary Nationally Significant Freight and Highway Projects grant program, known as INFRA grants, and will have responsibilities related to procurement and project environmental review and permitting. National Infrastructure Bank Congress has considered several proposals to create a national infrastructure bank to help finance infrastructure projects. One purported advantage of a national infrastructure bank over other loan programs, such as TIFIA, is that it would have more independence in its operation, such as in project selection, and have greater expertise at its disposal. Additionally, a national infrastructure bank would likely be set up to help a much wider range of infrastructure projects, including water, energy, and telecommunications infrastructure. Proponents claim that the best projects, or at least those that are the most financially viable, would be selected from across these sectors. In many formulations, capitalization of a national infrastructure bank comes from an appropriation, but in others the bank is authorized to raise its own capital through bond issuance. By issuing securities that are not tax exempt, it could tap pools of private capital that do not invest in tax-exempt bonds, such as pension funds and foreign citizens, the traditional source of much project finance. Tax-exempt municipal securities are unattractive to some investors, either because individual issues are too small to interest them or because the investors do not benefit from the tax preference. Taxable bonds with long maturities might be attractive to some of these investors. An infrastructure bank also might reduce the federal government's share of project costs, putting greater reliance on nonfederal capital and user fees. Most infrastructure bank proposals assume the bank would improve the allocation of public resources by funding projects with the highest economic returns regardless of infrastructure system or type. Selection of the projects with the highest returns, however, might conflict with the traditional desire of Congress to assure funding for various purposes. In the extreme case, major transportation projects might not be funded if the bank were to exhaust its lending authority on water or energy projects offering higher returns. Limitations of a national infrastructure bank include its duplication of existing programs like TIFIA and the Wastewater and Drinking Water State Revolving Funds. An infrastructure bank may not be the lowest-cost means of increasing infrastructure spending. CBO has pointed out that a special entity that issues its own debt would not be able to match the lower interest and issuance costs of the U.S. Treasury. In some formulations, a national infrastructure bank exposes the federal government to the risk of default. State Infrastructure Banks SIBs already exist in many states. In 32 states and Puerto Rico, SIBs were created pursuant to a federal program originally established in surface transportation law in 1995 ( P.L. 104-59 ). Several other states, among them California, Florida, Georgia, Kansas, Ohio, and Virginia, have state investment banks that are unconnected to the federal program. Local governments have also begun to embrace the idea. The City of Chicago has established a nonprofit organization, the Chicago Infrastructure Trust, as a way to attract private investment for public works projects, and Dauphin County, PA, has established an infrastructure bank funded from a state tax on liquid fuels to make loans to the 40 municipalities and private project sponsors within its borders. One of the biggest stumbling blocks to federally authorized SIBs has been capitalization. States can capitalize the banks using some of their apportioned and allocated highway and transit funds, and any amount of rail program funds. Under the FAST Act, capitalization of a rural project fund may now be made by a loan from the TIFIA program. Federal funds have to be matched with state funds, generally on an 80% federal, 20% state basis. Authority to use federal transportation funds for this purpose lapsed between the beginning of FY2010 and enactment of the FAST Act in December 2015, and few states took advantage of this authority prior to FY2010 because they preferred to use their federal grant funds for other purposes.
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For many years, federal surface transportation programs were funded almost entirely from taxes on motor fuels deposited in the Highway Trust Fund (HTF). Although there has been some modification to the tax system, the tax rates, which are fixed in terms of cents per gallon, have not been increased at the federal level since 1993. Prior to the recession that began in 2007, annual increases in driving, with a concomitant increase in fuel use, were sufficient in most years to keep revenue rising steadily. This is no longer the case. Although vehicle miles traveled have recently surpassed prerecession levels, future increases in fuel economy standards are expected to reduce motor fuel consumption and therefore fuel tax revenue in the years ahead. Congress has yet to address the surface transportation program's fundamental revenue issues, and has given limited legislative consideration to raising fuel taxes in recent years. Instead, since 2008 Congress has financed the federal surface transportation program by supplementing fuel tax revenues with transfers from the U.S. Treasury general fund. The most recent reauthorization act, the Fixing America's Surface Transportation Act (FAST Act; P.L. 114-94), was enacted on December 4, 2015, and authorized spending on federal highway and public transportation programs through September 30, 2020. The act provided $70 billion in general fund transfers to the HTF to support the programs over the five-year life of the act. This use of general fund transfers to supplement the HTF will have been the de facto funding policy for 12 years when the FAST Act expires. The FAST Act did not address funding of surface transportation programs over the longer term. Congressional Budget Office (CBO) projections indicate that the HTF revenue shortfalls relative to spending will reemerge following expiration of the FAST Act. The trust fund financing system (which supports both federal highway and public transportation programs) faces a number of challenges. As Congress examines possible options for financing surface transportation infrastructure, it may consider several key points: Raising motor fuel taxes could provide the HTF with sufficient revenue to fully fund the program in the near term, but may not be a viable long-term solution due to expected declines in fuel consumption. It would also not address the equity issue arising from the increasing number of personal and commercial vehicles that are powered electrically and therefore do not pay motor fuel taxes. Replacing the fuels tax with a mileage-based road user charge or vehicle miles traveled (VMT) charge would need to overcome a variety of financial, administrative, and privacy barriers, but could be a solution in the longer term. Treasury general fund transfers could continue to be used to make up for the HTF's projected shortfalls but could require budget offsets of an equal amount. The political difficulty of adequately funding the HTF could lead Congress to consider altering the trust fund system or eliminating it altogether. This might involve a reallocation of responsibilities and obligations among federal, state, and local governments. Private investment and federal loans can meet some surface transportation needs, but many projects are not well suited to alternative financing. Tolling may be an effective way to finance specific roads, bridges, or tunnels that are likely to have heavy use and are located such that the tolls are difficult to evade, but tolls are unlikely to provide broad financial support for surface transportation programs.
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Duthie brought suit for the recovery of damages for personal injuries in the circuit court of the United States for the western district of Texas against the Mexican Central Railway Company, Limited, and in his original complaint averred that he 'resides in El Paso, in El Paso county, state of Texas, in the western district of said state,' and that defendant was a citizen of the state of Massachusetts. The cause was tried before a jury, and resulted in a verdict and judgment thereon April 10, 1902. The record shows 'that no further proceedings were had in said cause after the entry of said judgment until, to wit, the 17th day of April, 1902, on which day plaintiff filed his motion asking leave to amend his petition,' to the effect 'that leave be granted him to now amend his said original and first amended petition by inserting therein the following: 'And is a citizen of said state and of the United States of America,' after the allegation made in said pleading 'that plaintiff resides in El Paso, in El Paso county, state of Texas." In support of the motion plaintiff stated under oath 'that he is now and was at the date of the filing of his original petition herein, and was on the 22d day of July, 1901, the date of his injuries, a bona fide citizen of the United States of America and of the state of Texas.' The court granted leave to so amend, and defendant excepted. Thereupon defendant applied to the court to certify to this court the question of jurisdiction to amend, and to retain the judgment after such amendment, and a certificate was accordingly granted. If the complaint or petition had remained as it was originally framed, and the case had then been carried to the circuit court of appeals, that court would have been constrained to reverse the judgment and remand the cause for a new trial, with leave to amend. Metcalf v. Watertown, 128 U. S. 586, 32 L. ed. 543, 9 Sup. Ct. Rep. 173; Horne v. George H. Hammond Co. 155 U. S. 393, 39 L. ed. 197, 15 Sup. Ct. Rep. 167. But plaintiff, discovering the defect in the averment before the case had passed from the jurisdiction of the circuit court, applied and obtained leave to amend, and made the amendment. So that the only question is whether the circuit court has power to allow the amendment. By § 954 of the Revised Statutes (U. S. Comp. Stat. 1901, p. 697) it was provided that the trial court might 'at any time permit either of the parties to amend any defect in the process or pleadings, upon such conditions as it shall, in its discretion and by its rules, prescribe;' and since the trial court in the present case still had control of the record, it had jurisdiction to act, and we may add that we do not perceive that there was any abuse of discretion in permitting the amendment in the circumstances disclosed. Mexican C. R. Co. v. Pinkney, 149 U. S. 201, 37 L. ed. 702, 13 Sup. Ct. Rep. 859; The Tremolo Patent, 23 Wall. 518, sub nom. Tremaine v. Hitchcock, 23 L. ed. 97. If the statutes of Texas forbade such an amendment, the law of the United States must govern. Phelps v. Oaks, 117 U. S. 236, 29 L. ed. 888, 6 Sup. Ct. Rep. 714; Southern P. Co. v. Denton, 146 U. S. 202, 36 L. ed. 943, 13 Sup. Ct. Rep. 44. The suggestion that defendant was cut off from trying the fact as to plaintiff's citizenship is without merit. The record does not disclose that defendant sought to contest plaintiff's affidavit, and for aught that appears the fact may have been conceded. Judgment affirmed.
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Under section 954, Rev. Stat., the Circuit Court has power in its discretion to allow plaintiff to amend his petition after judgment has been entered in his favor, but while the court still has control of the record, and it is not an abuse of such discretion to permit an amendment setting up plaintiff's citizenship, the fact being established and residence only having been pleaded, and where it appears that had the amendment not been made as it was the Circuit Court of Appeals would have been constrained to reverse and remand with leave to make the amendment.
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Background Since the early 1990s, GSA and the federal judiciary have been carrying out a multibillion-dollar courthouse construction initiative to address the judiciary’s growing needs. In 1993, the judiciary identified 160 court facilities that required either the construction of a new building or a major annex to an existing building. From fiscal year 1993 through fiscal year 2005, Congress appropriated approximately $4.5 billion for 78 courthouse construction projects. Since fiscal year 1996, the judiciary has used a 5 year plan to prioritize new courthouse construction projects, taking into account a court’s need for space, security concerns, growth in judicial appointments, and any existing operational inefficiencies. The judiciary’s most recent 5-year plan (covering fiscal years 2005 through 2009) identifies 57 needed projects that are expected to cost $3.8 billion. GSA and the judiciary are responsible for managing the multibillion-dollar federal courthouse construction program, which is designed to address the judiciary’s long-term facility needs. The Administrative Office of the United States Courts (AOUSC), the judiciary’s administrative agency, works with the nation’s 94 judicial districts to identify and prioritize needs for new and expanded courthouses. The U.S. Courts Design Guide (Design Guide) specifies the judiciary’s criteria for designing new court facilities and sets the space and design standards that GSA uses for courthouse construction. First published in 1991, the Design Guide has been revised several times to address budgetary considerations, technological advancements, and other issues, and the guide is currently undergoing another revision. GSA provides a range of real property services including maintenance, repairs, alterations, and leasing to numerous federal agencies and the federal judiciary. The Public Buildings Amendments of 1972 made several important revisions to the Federal Property and Administrative Services Act. First, the 1972 law created a new revolving fund, later named FBF. Next, it required agencies that occupy GSA-controlled buildings to pay rent to GSA, which is to be deposited in the revolving fund to be used for GSA real property services. GSA charges rent based on appraisals for facilities it owns and the actual lease amount for facilities it leases on the tenants’ behalf. The legislation also authorized any executive agency other than GSA that provides space and services to charge for the space and services. The rent requirement is intended to reduce costs and encourage more efficient space utilization by making agencies accountable for the space they use. GSA proposes spending from FBF for courthouses as part of the President’s annual budget request to Congress. GSA has been using the judiciary’s 5-year plan for new courthouse projects since fiscal year 1996 to develop requests for both new courthouses and expanded court facilities. GSA also prepares feasibility studies to assess various courthouse construction alternatives and serves as the central point of contact with the judiciary and other stakeholders throughout the construction process. For courthouses that are to be selected for construction, GSA prepares detailed project descriptions called prospectuses that include the justification, location, size, and estimated cost of the new or annexed facility. GSA typically submits two prospectuses to Congress. The first prospectus generally requests authorization and funding to purchase the site and design the building, and the second prospectus generally requests authorization and funding for construction, as well as any additional funding needed for site and design work. Once Congress authorizes and appropriates funds for a project, GSA refines the project budget and selects private-sector firms for the design and construction work. Figure 1 illustrates the process for planning, approving, and constructing a courthouse project. Courthouse projects continue to be costly, and increasing rents and budgetary constraints have given the judiciary further incentive to control its costs. The judiciary pays rent to GSA for the use of the courthouses, which GSA owns, and the proportion of the judiciary’s budget that goes to rent has increased as the judiciary’s space requirements have grown. According to the judiciary, rent currently accounts for just over 20 percent of its operating budget and is expected to increase to over 25 percent of its operating budget in fiscal year 2009, when the rental costs of new court buildings are included. Additionally, in fiscal year 2004, the judiciary faced a budgetary shortfall and, according to the judiciary, reduced its staff by 6 percent. In September 2004, the judiciary announced a 2-year moratorium on new courthouse construction projects as part of an effort to address its increasing operating costs and budgetary constraints. During this moratorium, AOUSC officials said that they plan to reevaluate the courthouse construction program, including reassessing the size and scope of projects in the current 5-year plan, reviewing the Design Guide’s standards, and reviewing the criteria and methodology used to prioritize projects. Judiciary officials also said that they plan to reevaluate their space standards in light of technological advancements and opportunities to share space and administrative services. GAO’s Courthouse Construction Work Has Focused on Costs, Planning, and Courtroom Sharing Our work in the 1990s showed that decision makers within GSA and the judiciary had wide latitude in making choices that significantly affected costs. The judiciary’s 5-year plan did not reflect all of the judiciary’s most urgently needed projects. However, the judiciary has since made some of our recommended changes. We also found that the judiciary did not compile data that would allow it to determine how many and what types of courtrooms it needs. The judiciary concluded that additional data and analysis were not necessary. Courthouse Construction Costs In 1995, we testified that a primary reason for differences in the construction costs of courthouses was that GSA and the judiciary had wide latitude in making choices about the location, design, construction, and finishes of courthouse projects. These choices were made under circumstances in which budgets or designs were often committed to before requirements were established. In addition, design guidance was flexible, and systematic oversight was limited. As a result, some courthouses had more expensive features than others. While recognizing that some flexibility was needed and that some costly features may be justifiable, we found that the flexibility in the process should have been better managed. We recommended that GSA and AOUSC clearly define the scope of construction projects and refine construction cost estimates before requesting project approval and final funding levels; establish and implement a systematic and ongoing project oversight and evaluation process to compare courthouse projects, identify opportunities for reducing costs, and apply lessons learned to future projects; and establish a mechanism to monitor and assess the use of flexibility within design guidance to better balance choices made about courthouse design, features, and finishes. GSA and the judiciary said that since 1996, they have also taken several actions to improve the courthouse construction program, including developing priority lists of locations needing additional space (the 5-year plan), revising the Design Guide, and placing greater emphasis on cost consciousness in its courthouse construction guidance for GSA. In a 2004 congressional briefing, we reported that GSA had attributed some cost growth in courthouse construction projects to a number of factors, including changes in the scope of the projects. In Buffalo, New York, for example, GSA had to change the scope of the courthouse project and acquire an entirely new site in order to achieve the necessary security based setbacks from the street. The judiciary said that funding delays have slowed the progress of the program by creating a backlog of projects, and increased costs by 3 to 4 percent per year because of inflation. The judiciary also indicated that limiting the size of courthouses to stay within budget has resulted in space shortages sooner than expected at some courthouses. In a 2004 report related specifically to a new federal courthouse proposed for Los Angeles, we found that the government will likely incur additional construction and operational costs beyond the $400 million estimated as needed for the new courthouse. Some of these additional costs are attributable to operational inefficiencies. Specifically, the court is split between a new building and an existing courthouse in Los Angeles, both of which will, according to the judiciary, require additional courtrooms to meet the district court’s projected space requirements in 2031. Judiciary Long- and Short- Term Space Planning In 1993, we reviewed the long-term planning process used by the judiciary to estimate its space requirements. We found that AOUSC’s process for projecting long-term space requirements did not produce results that were sufficiently reliable to form the basis for congressional authorization and funding approval of new construction and renovation projects for court space. Specifically, three key problems impaired the accuracy and reliability of the judiciary’s projections. First, AOUSC did not treat all districts consistently. For example, the procedure used to convert caseload estimates to staffing requirements did not reflect differences among districts that affect space requirements. Second, according to AOUSC’s assumptions about the relationship between caseloads and staff needs, many district baseline estimates did not reflect the districts’ current space requirements. For example, when a district occupied more space than the caseload warranted, future estimates of needs were overstated. Third, AOUSC’s process did not provide reliable estimates of future space requirements because the methodology used to project caseloads did not use standard acceptable statistical methods. We recommended that AOUSC revise the long-term planning process to increase consistency across regions, establish accurate caseload baselines for each district, and increase the reliability of the projected caseloads by applying an accepted statistical methodology and reducing subjectivity in the process. In May 1994, we testified that the judiciary had implemented some of these recommendations. For example, on the basis of our recommendation, whenever a decision was made to proceed on a particular building project, AOUSC provided GSA with detailed 10-year space requirements for prospectus development and an overall summary of its projected 30-year space requirements for purposes of site planning. In 2001, we reported that since 1994, AOUSC had continued its efforts to improve its long-term planning process in implementing our previous recommendations. Specifically, the judiciary began (1) using an automated computer program that applied Design Guide standards to estimate space requirements, (2) employing a standard statistical forecasting technique to improve caseload projections, and (3) providing GSA with data on its 10-year projected space requirements to support the judiciary’s request for congressional approval of funds to build new facilities. In 1996 we reported that the judiciary had developed a methodology for assessing project urgency and a short-term (5-year) construction plan to communicate its urgent courthouse construction needs. Our analysis suggested that its 5-year plan did not reflect all of the judiciary’s most urgent construction needs. We found that the judiciary, in preparing the 5 year plan, developed urgency scores for 45 projects, but did not develop urgency scores for other locations that, according to AOUSC, also needed new courthouses. Our analysis of available data on conditions at the 80 other locations showed that 30 of them likely would have had an urgency score higher than some projects in the plan. We recommended that the Director of AOUSC work with the Judicial Conference Committee on Security, Space, and Facilities to make improvements to the 5-year plan, including fully disclosing the relative urgency of all competing projects and articulating the rationale or justification for project priorities, including information on the conditions that are driving urgency—such as specific security concerns or operational inefficiencies. In commenting on the report, AOUSC generally agreed with our recommendations and indicated that many of the improvements we recommended were already under consideration. It also recognized that some courthouse projects, which were currently underway, may have had lower priority scores because the funding had already been provided by the time the priority scores were developed. Courtroom Sharing In 1997, we reported that the judiciary maintains a general practice of, whenever possible, assigning a trial courtroom to each district judge.However, we also noted that the judiciary did not compile data on how often and for what purposes courtrooms are actually used and it did not have analytically based criteria for determining how many and what types of courtrooms are needed. We concluded that the judiciary did not have sufficient data to support its practice of providing a trial courtroom for every district judge. We recommended that the judiciary establish criteria for determining effective courtroom utilization and a mechanism for collecting and analyzing data at a representative number of locations so that trends can be identified over time and better insights obtained on court activity and courtroom usage; design and implement a methodology for capturing and analyzing data on usage, courtroom scheduling, and other factors that may substantially affect the relationship between the availability of courtrooms and judges’ ability to effectively administer justice; use the data and criteria to explore whether the one-judge, one-courtroom practice is needed to promote efficient courtroom management or whether other courtroom assignment alternatives exist; and establish an action plan with time frames for implementing and overseeing these efforts. In 1999, AOUSC contracted for a study of the judiciary’s facilities program to address, among other things, the courtroom-sharing issue and identify ways to improve its space and facility efforts. As part of this study, the contractor analyzed how courtrooms are used, assigned, and shared by judges. We reviewed the courtroom use and sharing portion of this study and concluded, along with others, that the study was not sufficient to resolve the courtroom sharing issue. We recommended that the Director, AOUSC, in conjunction with the Judicial Conference’s Committee on Court Administration and Case Management and Committee on Security and Facilities, design and implement cost-effective research more in line with the recommendations in our 1997 report. We also recommended that AOUSC establish an advisory group made up of interested stakeholders and experts to assist in identifying study objectives, potential methodologies, and reasonable approaches for doing this work. In responding to the report, AOUSC disagreed with our recommendations because it believed the contractor study was sufficient and additional statistical studies would not be productive. In a 2002 report, we found that the judiciary’s policies recognized that senior district judges with reduced caseloads were the most likely candidates to share courtrooms and some active and senior judges were sharing courtrooms in some locations primarily when there were not enough courtrooms for all judges to have their own courtroom. However, because of the judiciary’s belief in the strong relationship between ensured courtroom availability and the administration of justice and the wide discretion given to circuits and districts in determining how and when courtroom sharing may be implemented, we concluded that there would not be a significant amount of courtroom sharing in the foreseeable future, even among senior judges. Issues Related to FBF We have reported over the years that GSA has struggled to address its repair and alteration needs identified in its inventory of owned buildings. In 1989, we found that FBF’s inability to generate sufficient revenue in the past was due, in large part, to restrictions imposed on the amount of rent GSA could charge federal agencies, and we recommended in 1989 that Congress remove all rent restrictions and not mandate any further restrictions. It is also important to note that not all federal property is subject to FBF rent payments because GSA does not control all federal properties. We are currently conducting a review for this committee regarding the issues associated with the judiciary’s request of a $483 million permanent, annual exemption from rent payments to GSA. Rent Restrictions Have Historically Contributed to Large Repair Backlogs As part of our series on high-risk issues facing the federal government, we have reported that GSA has struggled over the years to meet the requirements for repairs and alterations identified in its inventory of owned buildings. By 2002, its estimated backlog of repairs had reached $5.7 billion. We have reported that adverse consequences of the backlog included poor health and safety conditions, higher operating costs associated with inefficient building heating and cooling systems, restricted capacity to modernize information technology, and continued structural deterioration resulting from such things as water leaks. We reported that FBF has not historically generated sufficient revenue to address the backlog. On the basis of the work we did in the late 1980s and early 1990s, we concluded that federal agencies’ rent payments provided a relatively stable, predictable source of revenue for FBF, but that this revenue has not been sufficient to finance both growing capital investment needs and the cost of leased space. We found that FBF’s inability to generate sufficient revenue during that time was compounded by restrictions imposed on the amount of rent GSA could charge federal agencies. Congress and OMB had instituted across-the-board rent restrictions that reduced FBF by billions of dollars over several years, and later continued to restrict what GSA could charge some agencies, such as the Departments of Agriculture and Transportation. Because these rent restrictions were a principal reason why FBF has accumulated insufficient money for capital investment, we recommended that Congress remove all rent restrictions and not mandate any further restrictions. According to GSA, most of the restrictions initiated by Congress and OMB have been lifted. However, the GSA Administrator has the authority to grant rent exemptions to agencies. GSA data show that several rent exemptions are currently in place. In general, these exemptions are narrowly focused on a single building or even part of a single building or are granted for a limited duration. Table 2 summarizes the current rent exemptions that exist in GSA buildings, according to data GSA provided. Direct Appropriations to FBF Generally Benefit the Fund In fiscal year 2006, according to data from GSA, $7.7 billion in expected FBF revenue is projected to come from rent paid by over 60 different federal tenant agencies, such as the Departments of Justice and Homeland Security. Congress sets annual limits on how much FBF revenue can be spent for various activities through the appropriations process. In addition, Congress may appropriate additional amounts for FBF and between fiscal year 1990 and fiscal year 2005, Congress made direct appropriations into FBF for all but 3 fiscal years. This additional funding was not tied directly to any specific projects or types of projects. The statutory language relating to the direct appropriations states that additional amounts are being deposited into FBF for the purposes of the fund. It is also important to note that not all federal property is subject to FBF rent payments. While GSA owns and leases property and provides real estate services for numerous federal agencies, we reported in 2003 that GSA owns only about 6 percent of federal facility space in terms of building floor area. Other agencies, including the Department of Defense (DOD), the U.S. Postal Service, and the Department of Energy have significant amounts of space that they own and control without GSA involvement. In all, over 30 agencies control real property assets. Property owning agencies do not pay rent into FBF or receive services from GSA for the space they occupy in the buildings that they own. For example, the Pentagon and military bases are owned by DOD, and national parks facilities are owned by Interior. As a result, these facilities are maintained by DOD and Interior, respectively. Our Ongoing Work on the Judiciary’s Request for an Exemption from Rent Payments to FBF In December 2004, the judiciary requested that the GSA Administrator grant a $483 million permanent, annual exemption from rent payments— an amount equal to about 3 times the amount of all other rent exclusions combined. This exemption would equal about half of the judiciary’s $900 million annual rent payment to GSA for occupying space in federal courthouses. The judiciary has expressed concern that the growing proportion of its budget allocated to GSA rent payments is having a negative effect on court operations. According to GSA data, the judiciary increased the owned space it occupies by 15 percent from 2000 to 2004. In February 2005, the GSA Administrator declined the request because GSA considered it unlikely that the agency could replace the lost income with direct appropriations to FBF. In April 2005, this subcommittee requested that we look into issues associated with the judiciary’s request for a permanent, annual exemption from rent payments to GSA. Our objectives for this work are to determine the following: 1. How are rent payments calculated by GSA and planned and accounted for by the judiciary? 2. What changes, if any, has the judiciary experienced in rent payments in recent years? 3. What impact would a permanent rent exemption have on FBF? Our work is still underway, but our past work on related issues shows that rent exemptions have been a principal reason why FBF has accumulated insufficient money for capital investment. Scope and Methodology We conducted our work for this testimony in June 2005 in accordance with generally accepted government auditing standards. During our work, we reviewed past GAO work on federal real property and courthouse construction issues, analyzed AOUSC and GSA documents, and interviewed AOUSC and GSA officials. Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to any questions that you or the other Members of the Subcommittee may have. GAO Contacts and Staff Acknowledgments For further information about this testimony, please contact me at (202) 512-2834 or [email protected]. Keith Cunningham, Randy De Leon, Maria Edelstein, Bess Eisenstadt, Joe Fradella, Susan Michal-Smith, David Sausville, and Gary Stofko also made key contributions to this statement. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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Over the last 20 years, GAO has compiled a large body of work on courthouse construction and federal real property. The General Services Administration (GSA) owns federal courthouses and funds related expenses from its Federal Buildings Fund (FBF)--a revolving fund used to finance GSA real property services, including the construction and maintenance of federal facilities under GSA control. The judiciary pays rent to GSA for the use of these courthouses, and the proportion of the judiciary's budget that goes to rent has increased as its space requirements have grown. In December 2004, the judiciary requested a $483 million permanent, annual exemption from rent payments to GSA to address budget shortfalls. In this testimony, GAO (1) summarizes its previous work on courthouse construction and (2) provides information on FBF and GAO's ongoing work on the federal judiciary's request for a permanent, annual rent exemption of $483 million from rent to GSA. GAO's courthouse construction work to date has focused primarily on courthouse costs, planning, and courtroom sharing. In the 1990s, GAO reported that wide latitude among judiciary and GSA decision makers in choices about location, design, construction, and finishes often resulted in expensive features in some courthouse projects. The judiciary has since placed greater emphasis on cost consciousness in the guidelines for courthouse construction that it provides to GSA. Related to planning, GAO also found in the 1990s that long-range space projections by the judiciary were not sufficiently reliable, and that the judiciary's 5-year plan did not reflect all of the its most urgently needed projects. The judiciary has made changes to improve its planning and data reliability. During previous work, GAO also found that the judiciary did not track sufficient courtroom use data to gauge the feasibility of courtroom sharing. GSA has been unable to generate sufficient revenue through FBF over the years and thus has struggled to meet the requirements for repairs and alterations identified in its inventory of owned buildings. By 2002, the estimated backlog of repairs had reached $5.7 billion, and consequences included poor health and safety conditions, higher operating costs, restricted capacity for modern information technology, and continued structural deterioration. GSA's inability to generate sufficient revenue in the past has been compounded by restrictions imposed on the rent GSA could charge federal agencies. Consequently, GAO recommended in 1989 that Congress remove all rent restrictions and not mandate any further restrictions, and the most restrictions have been lifted. Some narrowly focused rent exemptions, many of limited duration, still exist today, but together they represent roughly a third of the $483 million permanent exemption the judiciary is currently requesting from GSA. The judiciary has requested the exemption, equaling about half of its annual rent payment, because of budget problems it believes that its growing rent payments have caused. GSA data show that GSA-owned space, occupied by the judiciary, has increased significantly. GAO is currently studying the potential impact of such an exemption on FBF, but past GAO work shows rent exemptions have been a principal reason why FBF has accumulated insufficient money for capital investment.
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The petitioner, indicted with others in the Northern district of California, was convicted of conspiracy to violate section 215 of the Criminal Code. 35 Stat. 1088, 1130 (Comp. St. § 10385). The judgment was affirmed. 7 F.(2d) 961. And see Lupipparu v. United States (C. C. A.) 5 F.(2d) 504. The question for decision is whether the use of the mails for the purpose of obtaining money by means of threats of murder or bodily harm is a scheme to defraud within the meaning of that section. Petitioner contends that sending threatening letters for that purpose involves coercion and not fraud. The government insists that in a broad sense threats constitute fraud, and that the section covers the obtaining of money or property of another by dishonest means. The words of the statute relied on follow: 'Whoever, having devised * * * any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises, * * * shall, for the purpose of executing such scheme * * * place, or cause to be placed, any letter, * * * in any post office, * * * to be sent or delivered * * *' shall be punished. Questions somewhat similar have been considered in the lower courts, but the issue here presented has never been decided by this court. In Weeber v. United States (C. C.) 62 F. 740, the defendant was convicted under the provision here in question, then a part of section 5480, Revised Statutes. The scheme to defraud alleged was this: One Kearney pretending to have a claim against Stephens placed it in defendant's hands for collection. An action was then pending in the federal court brought by the United States against Stephens. Defendant caused to be mailed a letter purporting to be from the United States attorney to himself in reference to furnishing testimony tending to show Stephens liable to the government, and then caused the letter to be seen by Stephens intending that he would be frightened into paying the false claim in order to prevent disclosures to the United States attorney. The court held the indictment good and affirmed the conviction. But in that case there were involved trickery and deceit as well as threat. The contention that threats to injure do not constitute a scheme to defraud does not appear to have been made; at any rate, it was not discussed in the opinion. In Horman v. United States, 116 F. 350, 53 C. C. A. 570, the Circuit Court of Appeals of the Sixth Circuit affirmed a conviction under section 5480. The defendant and others, pretending to have knowledge of crimes committed by Douglass and others, threatened to make them public unless given $7,000. The purpose of the conspiracy was to obtain money by means akin to, if not technically, blackmail and extortion. The court construed the section and said the words 'to defraud' were not descriptive of the character of the artifice of scheme but rather of the wrongful purpose involved in devising it. And it held that (page 352 (53 C. C. A. 572)): 'If the scheme or artifice in its necessary consequence is one which is calculated to injure another, to deprive him of his property wrongfully, then it is to defraud within the meaning of the statute.' On the basis of these cases the government argues that the statute embraces all dishonest methods of deprivation the gist of which is the use of the mails. But in Hammerschmidt v. United States, 265 U. S. 182, 44 S. Ct. 511, 68 L. Ed. 968, we held that section 37 of the Criminal Code (Comp. St. § 10201), denouncing conspiracy 'to defraud the United States in any manner or for any purpose,' did not condemn a conspiracy to defeat the selective draft by inducing persons to refuse to register. It is there said that the decision in Horman v. United States went to the verge, that since that decision section 5480 had been amended to make its scope clearer, and that its construction in that case could not be used as authority to include within the legal definition of a conspiracy to defraud the United States a mere open defiance of the governmental purpose to enforce a law. And in the discussion of the words 'to defraud' it is said that they primarily mean to cheat, that they usually signify the deprivation of something of value by trick, deceit, chicane, or overreaching, and that they do not extend to theft by violence, or to robbery or burglary. The reference in the opinion to 'means that are dishonest' and 'dishonest methods or schemes' does not support the government's construction of the phrase. The contrasts there emphasized and the context indicate the contrary. And in Naponiello v. United States, 291 F. 1008, the Circuit Court of Appeals of the Seventh Circuit-a few days after the decision of the Hammerschmidt Case, but without out reference to it-held that the use of the mails to send a letter to extort money by threats is not to promote a scheme to defraud within section 215; and said the words there used to show unmistakably that the victim's money must be taken from him by deceit. Undoubtedly the obtaining of money by threats to injury or kill is more reprehensible than cheat, trick or false pretenses; but that is not enough to require the court to hold that a scheme based on such threats is one to defraud within section 215. While, for the ascertainment of the true meaning and intention of the words relied on regard is to be had to the evils that called forth the enactment and to the rule that a strict construction of penal statutes does not require the words to be so narrowed as to exclude cases that fairly may be said to be covered by them, it is not permissible for the court to search for an intention that the words themselves do not suggest. United States v. Wiltberger, 5 Wheat. 76, 95, 5 L. Ed. 37. If threats to kill or injure unless money is forthcoming do not constitute a scheme to defraud within the statute, there is none in this case. The only means employed by petitioner and his co-conspirators to obtain the money demanded was the coercion of fear. A comprehensive definition of 'scheme or artifice to defraud' need not be undertaken. the phrase is a broad one and extends to a great variety of transactions. But broad as are the words 'to defraud,' they do not include threat and coercion through fear or force. The rule laid down in the Horman Case includes every scheme that in its necessary consequences is calculated to injure another or to deprive him of his property wrongfully. That statement goes beyond the meaning that justly may be attributed to the language used. The purpose of the conspirators was to compel action in accordance with their demand. The attempt was by intimidation and not by anything in the nature of deceit or fraud as known to the law or as generally understood. The words of the act suggest no intention to include the obtaining of money by threats. There are no constructive offenses; and, before one can be punished, it must be shown that his case is plainly within the statute. United States v. Lacher, 134 U. S. 624, 628, 10 S. Ct. 625, 33 L. Ed. 1080. In United States v. Chase, 135 U. S. 255, 10 S. Ct. 756, 34 L. Ed. 117, the indictment was under section 1 of the Act of July 12, 1876, c. 186, 19 Stat. 90, declaring 'every * * * book, pamphlet, picture, paper, writing, print or other publication of an indecent character' to be unmailable, and making their deposit in the mails an offense. The question was whether to send an obscene letter by mail violated that section. The court held that the letter was not a writing within the meaning of the Statute. It said (page 261 (10 S. Ct. 758)): 'We recognize the value of the rule of construing statutes with reference to the evil they were designed to suppress as an important aid in ascertaining the meaning of language in them which is ambiguous and equally susceptible of conflicting constructions. But this court has repeatedly held that this rule does not apply to instances which are not embraced in the language employed in the statute, or implied from a fair interpretation of its context, even though they may involve the same mischief which the statute was designed to suppress.' The threats in question cannot fairly be held to constitute a scheme to defraud. Judgment reversed.
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A scheme for obtaining money, by means of intimidation through threats of murder and bodily harm, is not a "scheme to defraud," within the meaning of Crim. Code § 215, (Rev. Stats. § 54S0,) punishing the use of the mails for the purpose of executing any "scheme or artifice to defraud," etc. P. 625. 7 F. (2d) 961, reversed. CERTIORARI (269 U. S. 551) to a judgment of the Circuit
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This cause is here upon a certificate from the Circuit Court of appeals requesting the instruction of this Court in respect of the following questions: '1. Is a high-caste Hindu, of full Indian blood, born at Amritsar, Punjab, India, a white person within the meaning of section 2169, Revised Statutes? 3), disqualify from naturalization as citizens those Hindus now barred by that act, who had lawfully entered the United States prior to the passage of said act?' The appellee was granted a certificate of citizenship by the District Court of the United States for the District of Oregon, over the objection of the Naturalization Examiner for the United States. A bill in equity was then filed by the United States, seeking a cancellation of the certificate on the ground that the appellee was not a white person and therefore not lawfully entitled to naturalization. The District Court, on motion, dismissed the bill (In re Bhagat Singh Thind, 268 Fed. 683), and an appeal was taken to the Circuit Court of Appeals. No question is made in respect of the individual qualifications of the appellee. The sole question is whether he falls within the class designated by Congress as eligible. Section 2169, Revised Statutes (Comp. St. § 4358), provides that the provisions of the Naturalization Act 'shall apply to aliens being free white persons and to aliens of af ican nativity and to persons of African descent.' If the applicant is a white person, within the meaning of this section, he is entitled to naturalization; otherwise not. In Ozawa v. United States, 260 U. S. 178, 43 Sup. Ct. 65, 67 L. Ed. , decided November 13, 1922, we had occasion to consider the application of these words to the case of a cultivated Japanese and were constrained to hold that he was not within their meaning. As there pointed out, the provision is not that any particular class of persons shall be excluded, but it is, in effect, that only white persons shall be included within the privilege of the statute. 'The intention was to confer the privilege of citizenship upon that class of persons whom the fathers knew as white, and to deny it to all who could not be so classified. It is not enough to say that the framers did not have in mind the brown or yellow races of Asia. It is necessary to go farther and be able to say that had these particular races been suggested the language of the act would have been so varied as to include them within its privileges'—citing Dartmouth College v. Woodward, 4 Wheat. 518, 644, 4 L. Ed. 629. Following a long line of decisions of the lower Federal courts, we held that the words imported a racial and not an individual test and were meant to indicate only persons of what is popularly known as the Caucasian race. But, as there pointed out, the conclusion that the phrase 'white persons' and the word 'Caucasian' are synonymous does not end the matter. It enabled us to dispose of the problem as it was there presented, since the applicant for citizenship clearly fell outside the zone of debatable ground on the negative side; but the decision still left the question to be dealt with, in doubtful and different cases, by the 'process of judicial inclusion and exclusion.' Mere ability on the part of an applicant for naturalization to establish a line of descent from a Caucasian ancestor will not ipso facto to and necessarily conclude the inquiry. 'Caucasian' is a conventional word of much flexibility, as a study of the literature dealing with racial questions will disclose, and while it and the words 'white persons' are treated as synonymous for the purposes of that case, they are not of identical meaning—idem per idem. In the endeavor to ascertain the meaning of the statute we must not fail to keep in mind that it does not employ the word 'Caucasian,' but the words 'white persons,' and these are words of common speech and not of scientific origin. The word 'Caucasian,' not .means clear, and the use of it in its scientific probably wholly unfamiliar to the original framers of the statute in 1790. When we employ it, we do so as an aid to the ascertainment of the legislative intent and not as an invariable substitute for the statutory words. Indeed, as used in the science of ethnology, the connotation of the word is by no means clear, and the use of it in its scientific sense as an equivalent for the words of the statute, other considerations aside, would simply mean the substitution of one perplexity for another. But in this country, during the last half century especially, the word by common usage has acquired a popular meaning, not clearly defined to be sure, but sufficiently so to enable us to say that its popular as distinguished from its scientific application is of appreciably narrower scope. It is in the popular sense of the word, therefore, that we employ is as an aid to the construction of the statute, for it would be obviously illogical to convert words of common speech used in a statute into words of scientific terminology when neither the latter nor the science for whose purposes they were coined was within the contemplation of the framers of the statute or of the people for whom it was framed. The words of the statute are to be interpreted in accordance with the understanding of the common man from whose vocabulary they were taken. See Maillard v. Lawrence, 16 How. 251, 261, 14 L. Ed. 925. They imply, as we have said, a racial test; but the term 'race' is one which, for the practical purposes of the statute, must be applied to a group of living persons now possessing in common the requisite characteristics, not to groups of persons who are supposed to be or really are descended from some remote, common ancestor, but who, whether they both resemble him to a greater or less extent, have, at any rate, ceased altogether to resemble one another. It may be true that the blond Scandinavian and the brown Hindu have a common ancestor in the dim reaches of antiquity, but the average man knows perfectly well that there are unmistakable and profound differences between them to-day; and it is not impossible, if that common ancestor could be materialized in the flesh, we should discover that he was himself sufficiently differentiated from both of his descendants to preclude his racial classification with either. The question for determination is not, therefore, whether by the speculative processes of ethnological reasoning we may present a probability to the scientific mind that they have the same origin, but whether we can satisfy the common understanding that they are now the same or sufficiently the same to justify the interpreters of a statute written in the words of common speech, for common understanding, by unscientific men—in classifying them together in the statutory category as white persons. In 1790 the Adamite theory of creation which gave a common ancestor to all mankind—was generally accepted, and it is not at all probable that it was intended by the legislators of that day to submit the question of the application of the words 'white persons' to the mere test of an indefinitely remote common ancestry, without regard to the extent of the subsequent divergence of the various branches from such common ancestry or from one another. The eligibility of this applicant for citizenship is based on the sole fact that he is of high-caste Hindu stock, born in Punjab, one of the extreme northwestern districts of India, and classified by certain scientific authorities as of the Caucasian or Aryan race The Aryan theory as a racial basis seems to be discredited by most, if not all, modern writers on the subject of ethnology. A review of their contentions would serve no useful purpose. It is enough to refer to the works of Deniker (Races of Man, 317), Keane (Man, Past and Present, 445, 446), and Huxley (Man's Place in Nature, 278) and to the Dictionary of Races, Senate Document 662, 61st Congress, 3d Sess. 1910-1911, p. 17. The term 'Aryan' has to do with linguistic, and not at all with physical, characteristics, and it would seem reasonably clear that mere resemblance in language, indicating a common linguistic root buried in remotely ancient soil, is altogether inadequate to prove common racial origin. There is, and can be, no assurance that the so-called Aryan language was not spoken by a variety of races living in proximity to one another. Our own history has witnessed the adoption of the English tongue by millons of negroes, whose descendants can never be classified racially with the descendants of white persons, notwithstanding both may speak a common root language. The word 'Caucasian' is in scarcely better repute.1 It is at best a conventional term, with an altogether fortuitous origin,2 which under scientific manipulation, has come to include far more than the unscientific mind suspects. According to Keane, for example (The World's Peoples, 24, 28, 307, et seq.), it includes not only the Hindu, but some of the Polynesians3 (that is, the Maori, Tahitians, Samoans, Hawaiians, and others), the Hamites of Africa, upon the ground of the Caucasic cast of their features, though in color they range from brown to black. We venture to think that the average wellinformed white American would learn with some degree of astonishment that the race to which he belongs is made up of such heterogeneous elements.4 The various authorities are in irreconcilable disagreement as to what constitutes a proper racial division. For instance, Blumenbach has 5 races; Keane following Linnaeus, 4; Deniker, 29.5 The explanation probably is that 'the inumerable varieties of mankind run into one another by insensible degrees,'6 and to arrange them in sharply bounded divisions is an undertaking of such uncertainty that common agreement is practically impossible. It may be, therefore, that a given group cannot be properly assigned to any of the enumerated grand racial divisions. The type may have been so changed by intermixture of blood as to justify an intermediate classification. Something very like this has actually taken place in India. Thus, in Hindustan and Berar there was such an intermixture of the 'Aryan' invader with the darkskinned Dravidian.7 In the Punjab and Rajputana, while the invaders seem to have met with more success in the effort to preserve their racial purity,8 intermarriages did occur producing an intermingling of the two and destroying to a greater or less degree the purity of the 'Aryan' blood. The rules of caste, while calculated to prevent this intermixture, seem not to have been entirely successful.9 It does not seem necessary to pursue the matter of scientific classification further. We are unable to agree with the District Court, or with other lower federal courts, in the conclusion that a native Hindu is eligible for naturalization under section 2169. The words of familiar speech, which were used by the original framers of the law, were intended to include only the type of man whom they knew as white. The immigration of that day was almost exclusively from the British Isles and Northwestern Europe, whence they and their forebears had come. When they extended the privilege of American citizenship to 'any alien being a free white person' it was these immigrants—bone of their bone and flesh of their flesh—and their kind whom they must have had affirmatively in mind. The succeeding years brought immigrants from Eastern, Southern and Middle Europe, among them the Slavs and the dark-eyed, swarthy people of Alpine and Mediterranean stock, and these were received as unquestionably akin to those already here and readily amalgamated with them. It was the descendants of these, and other immigrants of like origin, who constituted the white population of the country when section 2169, re-enacting the naturalization test of 1790, was adopted, and, there is no reason to doubt, with like intent and meaning. What, if any, people of Primarily Asiatic stock come within the words of the section we do not deem it necessary now to decide. There is much in the origin and historic development of the statute to suggest that no Asiatic whatever was included. The debates in Congress, during the consideration of the subject in 1870 and 1875, are persuasively of this character. In 1873, for example, the words 'free white persons' were unintentionally omitted from the compilation of the Revised Statutes. This omission was supplied in 1875 by the act to correct errors and supply omissions. 18 Stat. c. 80, p. 318. When this act was under consideration by Congress efforts were made to strike out the words quoted, and it was insisted upon the one hand and conceded upon the other, that the effect of their retention was to exclude Asiatics generally from citizenship. While what was said upon that occasion, to be sure, furnishes no basis for judicial construction of the statute, it is, nevertheless, an important historic incident, which may not be altogether ignored in the search for the true meaning of words which are themselves historic. That question, however, may well be left for final determination until the details have been more completely disclosed by the consideration of particular cases, as they from time to time arise. The words of the statute, it must be conceded, do not readily yield to exact interpretation, and it is probably better to leave them as they are than to risk undue extension or undue limitation of their meaning by any general paraphrase at this time. What we now hold is that the words 'free white persons' are words of common speech, to be interpreted in accordance with the understanding of the common man, synonymous with the word 'Caucasian' only as that word is popularly understood. As so understood and used, whatever may be the speculations of the ethnologist, it does not include the body of people to whom the appellee belongs. It is a matter of familiar observation and knowledge that the physical group characteristics of the Hindus render them readily distinguishable from the various groups of persons in this country commonly recognized as white. The children of English, French, German, Italian, Scandinavian, and other European parentage, quickly merge into the mass of our population and lose the distincitive hallmarks of their European origin. On the other hand, it cannot be doubted that the children born in this country of Hindu parents would retain indefinitely the clear evidence of their ancestry. It is very far from our thought to suggest the slightest question of racial superiority or inferiority. What we suggest is merely racial difference, and it is of such character and extent that the great body of our people instinctively recognize it and reject the thought of assimilation. It is not without significance in this connection that Congress, by the Act of February 5, 1917, 39 Stat. 874, c. 29, § 3 (Comp. St. 1918, Comp. St. Ann. Supp. 1919, § 4289 1/4b), has now excluded from admission into this country all natives of Asia within designated limits of latitude and longitude, including the whole of India. This not only constitutes conclusive evidence of the congressional attitude of opposition to Asiatic immigration generally, but is persuasive of a similar attitude toward Asiatic naturalization as well, since it is not likely that Congress would be willing to accept as citizens a class of persons whom it rejects as immigrants. It follows that a negative answer must be given to the first question, which disposes of the case and renders an answer to the second question unnecessary, and it will be so certified. Answer to question No. 1, No.
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1. A high caste Hindu, of full Indian blood, born at Amrit Sar, Punjab, India, is not a "white person ", within the meaning of Rev. Stats., § 2169, relating to the naturalization of aliens. -P. 207. 2. "Free white persons," as used in that section, are words of common speech, to be interpreted in accordance .with the understanding of the common man, synonymous with the word "Caucasian" only as that word is popularly understood. P. 214. Ozawa v. United States, 260 U. S. 178. 3. The action of Congress in excluding from admission to this country all natives of Asia within designated limits including all of India, is evidence of a like attitude toward naturalization of Asians within those limits. P. 215.
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Introduction The Constitution's Speedy Trial Clause protects the criminally accused against unreasonable delays between his indictment and trial. Before indictment, the statutes of limitation, and in extreme circumstances, the Due Process Clauses protect the accused from unreasonable delays. This is an overview of federal law relating to the statutes of limitation in criminal cases, including those changes produced by the act. The phrase "statute of limitations" refers to the time period within which formal criminal charges must be brought after a crime has been committed. "The purpose of a statute of limitations is to limit exposure to criminal prosecution to a certain fixed period of time following the occurrence of those acts the legislature has decided to punish by criminal sanctions. Such a limitation is designed to protect individuals from having to defend themselves against charges when the basic facts may have become obscured by the passage of time and to minimize the danger of official punishment because of acts in the far-distant past. Such a time limit may also have the salutary effect of encouraging law enforcement officials promptly to investigate suspected criminal activity." Therefore, in most instances, prosecutions are barred if the defendant can show that there was no indictment or other formal charge filed within the time period dictated by the statute of limitations. Statutes of limitation are creatures of statute. The common law recognized no period of limitation. An indictment could be brought at any time. Limitations are recognized today only to the extent that a statute or due process dictates their recognition. Congress and most state legislatures have enacted statutes of limitation, but declare that prosecution for some crimes may be brought at any time. Federal statutes of limitation are as old as federal crimes. When the Founders assembled in the First Congress, they passed not only the first federal criminal laws but made prosecution under those laws subject to specific statutes of limitation. Similar provisions continue to this day. Federal capital offenses may be prosecuted at any time, but unless some more specific arrangement has been made a general five-year statute of limitations covers all other federal crimes. Some of the exceptions to the general rule identify longer periods for particular crimes. Others suspend or extend the applicable period under certain circumstances such as the flight of the accused, or during time of war. Prosecution at Any Time Aside from capital offenses, crimes which Congress associated with terrorism may be prosecuted at any time if they result in a death or serious injury or create a foreseeable risk of death or serious injury. Although the crimes were selected because they are often implicated in acts of terrorism, a terrorist defendant is not a prerequisite to an unlimited period for prosecution. A third category of crimes that may be prosecuted at any time consists of various designated federal child abduction and sex offenses. Limits by Crime Although the majority of federal crimes are governed by the general five-year statute of limitations, Congress has chosen longer periods for specific types of crimes—20 years for the theft of art work; 10 years for arson, for certain crimes against financial institutions, and for immigration offenses; and 8 years for the nonviolent terrorist offenses that may be prosecuted at any time if committed under violent circumstances. Investigative difficulties or the seriousness of the crime seem to have provided the rationale for enlargement of the time limit for prosecuting these offenses beyond the five-year standard. Suspension and Extension The five-year rule may yield to circumstances other than the type of crime to be prosecuted. For example, an otherwise applicable limitation period may be suspended or extended in cases involving child abuse, the concealment of the assets of an estate in bankruptcy, wartime fraud against the government, dismissal of original charges, fugitives, foreign evidence, or DNA evidence. Child Protection The child protection section, 18 U.S.C. § 3283, permits an indictment or information charging kidnaping, or sexual abuse, or physical abuse, of a child under the age of 18 to be filed within the longer of 10 years or the life of the victim. Section 3283 extends the statute of limitations in sexual abuse cases generally and is not confined to the offenses found in sexual abuse chapter of the federal criminal code. In contrast, 18 U.S.C. § 3299 eliminates the statute of limitations in child sexual abuse cases arising under the specific statutory provisions it cites. DNA There are two DNA provisions. One, 18 U.S.C. § 3297, suspends any applicable statute of limitations for the time required to identify an individual when DNA evidence implicates his involvement in a felony offense. The other, 18 U.S.C. § 3282(b), suspends the statute of limitations for federal sexual abuse violations by means of an indictment using a DNA profile alone to identify the person charged. Neither provision comes into play when the offense involves sexual abuse of a child or child abduction. As noted earlier, prosecution for such crimes may be brought at any time under 18 U.S.C. § 3299. Section 3282(b) is the narrower of the two DNA provisions. It only applies to offenses proscribed in 18 U.S.C. ch. 109A. Chapter 109A outlaws abusive sexual contact, sexual abuse, and aggravated sexual abuse when any of these offenses is committed in a federal prison, or within the special maritime or territorial jurisdiction of the United States. Section 3282(b) also suspends the provisions of the Speedy Trial Act that would otherwise come to life with the filing of an indictment in such cases. Section 3282(b), however, reaches only those cases in which the statute of limitations has not already expired. Section 3297 applies to any federal felony. Rather than suspend the statute of limitations, it marks the beginning of the period of limitation, not from the commission of the crime, but from the time when DNA testing implicates an individual. Concealing Bankruptcy Assets The statute of limitations on offenses which involve concealing bankruptcy assets does not begin to run until a final decision discharging or refusing to discharge the debtor: "The concealment of assets of a debtor in a case under Title 11 shall be deemed to be a continuing offense until the debtor shall have been finally discharged or a discharge denied, and the period of limitations shall not begin to run until such final discharge or denial of discharge." When a discharge determination is impossible, the statute of limitations runs from the date of the event when discharge becomes impossible for whatever reason. Wartime Statute of Limitations Section 3287 establishes a suspension of the statute of limitations covering wartime frauds committed against the United States that allows for prosecution at any time up to five years after the end of the war. At one time, it could be said with some conviction that Section 3287 "appears to have only been used in cases that involved conduct during or shortly after World War II" and none since. That is no longer the case. In 2008, Congress amended the section to make it clear that the provision covers misconduct during both declared wars and periods of armed conflict for which Congress has explicitly authorized use of the Armed Forces. The same amendment extended the period of suspension from three to five years. The provision applies to crimes related to conduct of the conflict as well as those that are not. The offense, however, must "involve the defrauding of the United States in [some] pecuniary manner or in a manner concerning property." The provision's five-year clock begins to run with the end of the war or conflict, but there is some difference of opinion over whether a formal termination must come first. Indictment or Information The statute of limitations runs until an indictment or information is found and returned to the court. There is, however, some question about the impact of sealing the indictment upon its return. The Federal Rules of Criminal Procedure allow the magistrate to whom the indictment is returned to seal it until the defendant is apprehended or released on bail. Some courts seem troubled when they believe that the seal has been applied for purposes of tactical advantage rather than to prevent the escape of the accused. The statute of limitations remains tolled if the original indictment is replaced by a superseding indictment, as long as the superseding indictment does not substantially alter the original charge. If the indictment or information is subsequently dismissed, federal law extends the statute of limitations an additional six months (30 days if the indictment or information is dismissed on appeal and there is a grand jury with jurisdiction in place). Beyond the extension here, when a timely indictment is dismissed pursuant to a plea agreement under which the defendant pleads to other charges, the statute of limitations ordinarily begins again for the dismissed charges unless the defendant has waived as part of the plea agreement. Foreign Evidence Section 3292 was enacted to compensate for the delays the Justice Department experienced when it sought to secure bank records and other evidence located overseas. It provides the following: (a)(1) Upon application of the United States, filed before return of an indictment, indicating that evidence of an offense is in a foreign country, the district court before which a grand jury is impaneled to investigate the offense shall suspend the running of the statute of limitations for the offense if the court finds by a preponderance of the evidence that an official request has been made for such evidence and that it reasonably appears, or reasonably appeared at the time the request was made, that such evidence is, or was, in such foreign country. (2) The court shall rule upon such application not later than thirty days after the filing of the application. (b) Except as provided in subsection (c) of this section, a period of suspension under this section shall begin on the date on which the official request is made and end on the date on which the foreign court or authority takes final action on the request. (c) The total of all periods of suspension under this section with respect to an offense – (1) shall not exceed three years; and (2) shall not extend a period within which a criminal case must be initiated for more than six months if all foreign authorities take final action before such period would expire without regard to this section. (d) As used in this section, the term "official request" means a letter rogatory, a request under a treaty or convention, or any other request for evidence made by a court of the United States or an authority of the United States having criminal law enforcement responsibility, to a court or other authority of a foreign country. Construction of Section 3292 has been something less than uniform, thus far. The courts are divided over whether the target of the grand jury or the subject of the foreign evidence sought may contest the government's application when it is filed or whether the application may be filed ex parte with an opportunity for the accused to contest suspension following indictment. By the same token, it is less certain whether the phrase indicating that the application must be filed with "the district court before which a grand jury is impaneled to investigate the offense," means that the application must relate to a specific grand jury investigation or may be filed in anticipation of such an investigation. On the related issue of when an application may be filed, one court has ruled that the government may seek the suspension either to allow it to obtain foreign evidence or to compensate it for time expended to acquire the evidence prior to the application. Another has held that the extension cannot be had when the evidence sought by the government is in its possession at the time of the application. Still others cannot agree on whether the request may revive an expired statute of limitations. The statute demands that the government bear the burden of establishing to the court its right to a suspension by a preponderance of the evidence. The Second Circuit has pointed out, however, that the statute sets out two slightly different preponderance standards, a simple preponderance standard for the fact a request has been made, and slightly less demanding one (preponderance that it "reasonably appears") for the fact that the evidence sought exists overseas. The government must do more than present unsworn, conclusory statements to meet its burden, but "something of evidentiary value" on point will ordinarily do. As for the nature of the overseas evidence, it is no bar to suspension that the evidence might be obtained in this country or that without it the grand jury has enough evidence to indict. On the other hand, the court may not suspend, if the government has already received the foreign evidence at the time when it submits its application for suspension. The suspension begins when the government submits its official request to a foreign source. It ends when the foreign entity takes "final action" on the request. When that occurs may be a matter of some dispute. Some courts suggest that final action occurs with a dispositive response, i.e ., when the United States is satisfied its request has been answered; yet at least one believes that final action occurs when the foreign government believes it has provided a final response. Fugitives A provision exempting fugitives accompanied passage of the first federal statute of limitations. The language has changed little since, but its meaning remains a topic of debate. Most circuits, taking their lead from Streep v. United States , hold that the government must establish that the accused acted with an intent to avoid prosecution. Yet two have held that mere absence from the jurisdiction is sufficient. Even in the more demanding circuits, however, flight is thought to have occurred when the accused conceals himself within the jurisdiction; remains outside the jurisdiction after becoming aware of the possibility of prosecution; flees before an investigation begins; departs after an investigation has begun but before charges are filed; absconds to avoid prosecution on another matter; or flees to avoid civil or administrative justice rather than criminal justice. Conspiracies and Continuing Offenses Statutes of limitation "normally begin to run when the crime is complete," which occurs when the last element of the crime has been satisfied. The rule for conspiracy is a bit different. The general conspiracy statute consists of two elements: (1) an agreement to commit a federal crime or to defraud the United States and (2) an overt act committed in furtherance of the agreement. Conspirators left uninterrupted will frequently continue on through several overt acts to the ultimate commission of the underlying substantive offenses which are the objectives of their plots. Thus, the statute of limitations for such conspiracies begins to run not with the first overt act committed in furtherance of the conspiracy but with the last. The statute of limitations under conspiracy statutes that have no overt act requirement begins to run with the accomplishment of the conspiracy's objectives, with its abandonment, or with the defendant's effective withdrawal from the conspiracy. Concealment of the criminal plot after its completion is considered a natural component of all conspiracies. Consequently, overt acts of concealment after the objectives of the conspiracy have been accomplished may not be used to delay the running of the statute of limitations. Overt acts of concealment which are among the original objectives of the conspiracy as charged in the indictment, however, may serve as the point at which the statute of limitations begins to run. Distinguishing between the two is sometimes difficult. There are other crimes, which, like conspiracy, continue on long after all the elements necessary for their prosecution fall into place. The applicable statute of limitations for these continuing crimes is delayed if either "the explicit language of the substantive criminal statute compels such a conclusion, or the nature of the crime involved is such that Congress must assuredly have intended that it be treated as a continuing one." Continuing federal offenses for purposes of the statutes of limitation include the following: escape from federal custody; flight to avoid prosecution; failure to report for sentencing; possession of the skin and skull of an endangered species; possession of counterfeit currency; kidnaping; failure to register under the Foreign Agents Registration Act; failure to register under the Selective Service Act; being found in the United States having reentered this country after deportation; embezzlement under some circumstances; possession of unregistered pipe bombs; failure to pay child support; possession of an immigration document obtained fraudulently; bank fraud; and health care fraud. Constitutional Considerations Ex post Facto Historically, constitutional challenges to the application of various statutes of limitation have arisen most often under the ex post facto or due process clauses. The Constitution prohibits both Congress and the states from enacting ex post facto laws. More precisely, the words of the Supreme Court in Calder v. Bull , it prohibits the following: 1 st . Every law that makes an action done before the passing of the law, and which was innocent when done, criminal; and punishes such action. 2d. Every law that aggravates a crime, or makes it greater than it was, when committed. 3d. Every law that changes the punishment, and inflicts a greater punishment, than the law annexed to the crime, when committed. 4 th . Every law that alters the legal rules of evidence, and receives less, or different, testimony, than the law required at the time of the commission of the offense, in order to convict the offender. The lower federal appellate courts had long felt that a statute that extended a period of limitation before its expiration did not offend the ex post facto clauses, but that the clauses do ban laws that attempt to revive and extend an expired statute of limitations. Until the United States Supreme Court confirmed that view in Stogner v. California , however, there were well regarded contrary opinions. The California Supreme Court in Frazer , for example, at one point concluded that the ex post facto clauses in fact pose no impediment to the revival of an expired statute of limitations. In so holding, the California court relied heavily on the United States Supreme Court's Collins v. Youngblood decision where the Court seemed to repudiate at least the evidentiary component of the traditional Calder understanding. As the California court read Collins , the Supreme Court had not only indicated that evidentiary changes were beyond the realm of ex post facto protection but that ex post facto protection reached no further than retroactive changes in a crime's elements or punishment. The Supreme Court subsequently warned that Collins should not be read as a repudiation of Calder's four prohibited classes, but instead that " Collins held that it was a mistake to stray beyond Calder's four categories." In another case, the Court seemed to further signal its reluctance to reach beyond the limits of Calder when it declined to extend the ex post facto proscription to cover a retroactive application of a judicial (rather than a legislative) change in the law. These developments did not necessarily undermine the California decision in Frazer , however, because its revival of a statute of limitations that had run did not appear to fit easily within any of the Calder categories. The Frazer analysis was in error nonetheless. The United States Supreme Court in Stogner characterized the California legislative revival of an expired period of limitation as not only "manifestly unjust and oppressive," but among those laws that run afoul of Calder's second standard, i.e., "[e]very law that aggravates a crime, or makes it greater than it was, when committed." As properly understood and alternatively characterized in Calder , this second category embraces statutes like the California statute that "inflicted punishments, where the party was not by law, liable to any punishment," at the time. Due Process Retroactivity aside, the due process clauses may be implicated when a crime has no statute of limitations or when the period of limitation has not run. Although statutes of limitation alone generally govern the extent of permissible pre-indictment delay, extraordinary circumstances may trigger due process implications. The Supreme Court in Marion observed that even "the Government concedes that the Due Process Clause of the Fifth Amendment would require dismissal of [an] indictment if it were shown at trial that the pre-indictment delay ... caused substantial prejudice to [a defendant's] rights to a fair trial and that the delay was an intentional device to gain tactical advantage over the accused." The Court declined to dismiss the indictment there, however, because the defendants failed to show they had suffered any actual prejudice from the delay or to show "that the Government intentionally delayed to gain some tactical advantage over [them] or to harass them." The Court later made clear that due process contemplates more than a claimant's showing of adverse impact caused by pre-indictment delay: "Thus Marion makes clear that proof of prejudice is generally a necessary but not sufficient element of a due process claim, and that the due process inquiry must consider the reasons for the delay as well as the prejudice to the accused." Perhaps because so few defendants have been able to show sufficient prejudice to necessitate further close inquiry, the lower federal appellate courts seem at odds over exactly what else due process demands before it will require dismissal. Most have held that the defendant bears the burden of establishing both prejudice and government deficiency; others, that once the defendant establishes prejudice the burden shifts to the government to negate the second prong; and still others, that once the defendant shows prejudice the court must balance the harm against the justifications for delay. Attachment 1. Periods of Limitation for Specific Federal Crimes (Citations) No Limitation Death Penalty Offenses 8 U.S.C. § 1324(a)(1) (bringing in or harboring aliens where death results) 15 U.S.C. § 1825(a)(2)(C) (killing those enforcing the Horse Protection Act) 18 U.S.C. §§ 32, 33, 34 (destruction of aircraft, commercial motor vehicles or their facilities where death results) 18 U.S.C. § 36 (drive-by shooting resulting in 1 st degree murder) 18 U.S.C. § 37 (violence at international airports where death results) 18 U.S.C. §§ 43, 3559(f) (animal enterprise terrorism constituting murder of a child) 18 U.S.C. § 115 (kidnaping with death resulting of the member of the family of a federal official or employee to obstruct or retaliate) 18 U.S.C. § 115 (murder of the member of the family of a federal official or employee to obstruct or retaliate) 18 U.S.C. § 175 (development or possession of biological weapons) 18 U.S.C. §§ 175c, 3559(f) (variola virus offense constituting murder of a child) 18 U.S.C. §§ 229, 229A (use of chemical weapons where death results) 18 U.S.C. § 241 (conspiracy against civil rights where death results) 18 U.S.C. § 242 (deprivation civil rights under color of law where death results) 18 U.S.C. § 245 (discriminatory obstruction of enjoyment of federal protected activities where death results) 18 U.S.C. § 247 (obstruction of the exercise of religious beliefs where death results) 18 U.S.C. § 249 (hate crime resulting in death) 18 U.S.C. § 351 (murder of a Member of Congress) 18 U.S.C. § 351 (conspiracy to kill or kidnap a Member of Congress if death results) 18 U.S.C. § 351 (kidnaping a Member of Congress if death results) 18 U.S.C. § 794 (espionage) 18 U.S.C. §§ 831, 3559(f) (nuclear material offense constituting murder of a child) 18 U.S.C. § 844(d) (use of fire or explosives unlawfully where death results) 18 U.S.C. § 844(f)(burning or bombing federal property where death results) 18 U.S.C. § 844(i)(burning or bombing property affecting interstate commerce where death results) 18 U.S.C. § 924(j)(1) (murder while in possession of a firearm during the commission of a crime of violence or drug trafficking) 18 U.S.C. § 930(c) (murder while in possession of a firearm in a federal building) 18 U.S.C. § 1091 (genocide) 18 U.S.C. § 1111 (murder within the special maritime or territorial jurisdiction of the U.S.) 18 U.S.C. § 1121(b) (killing a state law enforcement officer by a federal prisoner or while transferring a prisoner interstate) 18 U.S.C. § 1114 (murder of a federal officer or employee) 18 U.S.C. § 1116 (murder of a foreign dignitary) 18 U.S.C. § 1118 (murder by a federal prisoner) 18 U.S.C. § 1119 (murder of an American by an American overseas) 18 U.S.C. § 1120 (murder by an escaped federal prisoner) 18 U.S.C. § 1121 (murder of one assisting in a federal criminal investigation) 18 U.S.C. § 1201 (kidnaping where death results) 18 U.S.C. § 1203 (hostage taking where death results) 18 U.S.C. §§ 1365, 3559(f) (tampering with consumer products constituting murder of a child) 18 U.S.C. § 1503 (murder committed to obstruction of federal judicial proceedings) 18 U.S.C. § 1512 (tampering with a federal witness or informant involving murder) 18 U.S.C. § 1513 (retaliating against a federal witness or informant involving murder) 18 U.S.C. §§ 1591, 2245 (murder committed during the course of sex trafficking by force, fraud or of a child) 18 U.S.C. §§ 1651, 1652, 3559(f) (piracy involving murder of a child) 18 U.S.C. § 1716 (mailing injurious articles with intent to injure or damage property where death results) 18 U.S.C. § 1751 (kidnaping the President where death results) 18 U.S.C. § 1751 (conspiracy to kill or kidnap the President where death results) 18 U.S.C. § 1751 (murder of the President) 18 U.S.C. §§ 1952, 3559(f) (travel in aid of racketeering involve the murder of child) 18 U.S.C. § 1958 (use of interstate facilities in furtherance of a murder-for-hire where death results) 18 U.S.C. § 1959 (murder in aid of racketeering activity) 18 U.S.C. § 1992 (terrorist attacks on trains and mass transit) 18 U.S.C. § 2113(e) (robbing a federally insured bank if death results) 18 U.S.C. §§ 2118, 3559(f) (robbery or burglary involving controlled substances constituting murder of a child) 18 U.S.C. § 2119 (carjacking where death results) 18 U.S.C. §§ 2199, 3559(f) (murder of a child by a stowaway) 18 U.S.C. §§ 2241, 2245 (aggravated sexual assault of a child under 12 years of age in the special maritime or territorial jurisdiction of the U.S. where death results) 18 U.S.C. §§ 2242, 2245 (coercing or enticing interstate travel for sexual purposes where death results) 18 U.S.C. §§ 2243, 2245 (transporting minors for sexual purposes resulting in the death of a child under 14 years of age) 18 U.S.C. §§ 2244, 2245 (abusive sexual contact where death results) 18 U.S.C. § 2251 (sexual exploitation of children where death results) 18 U.S.C. §§ 2251A, 2245 (selling or buying children where death results) 18 U.S.C. §§ 2260, 2245 (production of material depicting sexually explicit activities of a child where death results) 18 U.S.C. §§ 2261, 2261A, 2262, 3559(f) (murder of a child involved in interstate domestic violence, stalking, or interstate violation of a protective order) 18 U.S.C. § 2280 (violence against maritime navigation where death results) 18 U.S.C. § 2281 (violence against maritime fixed platform where death results) 18 U.S.C. § 2282A (interference with maritime commerce where death results) 18 U.S.C. § 2283 (transportation of explosive, nuclear, chemical, biological or radioactive material resulting in death) 18 U.S.C. § 2291 (destruction of a vessel or maritime facility) 18 U.S.C. § 2332 (terrorist murder of an American outside the U.S.) 18 U.S.C. § 2332a (use of weapons of mass destruction where death results) 18 U.S.C. § 2332b (acts of terrorism transcending national boundaries where death results) 18 U.S.C. § 2332f (bombing public places) 18 U.S.C. §§ 2332g, 3559(f) (anti-aircraft missile offense constituting murder of a child) 18 U.S.C. §§ 2332h, 3559(f) (radiological dispersal device offense constituting murder of a child) 18 U.S.C. § 2340A (torture where death results) 18 U.S.C. § 2381 (treason) 18 U.S.C. § 2441 (war crimes where death results) 18 U.S.C. §§ 2421, 2245 (transportation of illicit sexual purposes where death results) 18 U.S.C. §§ 2422, 2245 (coercion or inducement to travel for illicit sexual purposes where death results) 18 U.S.C. §§ 2423, 2245 (transportation of minors for illicit sexual purposes where death results) 18 U.S.C. §§ 2425, 2245 (interstate transportation of information concerning a minor where death results) 21 U.S.C. § 461 (killing a poultry inspector) 21 U.S.C. § 675 (killing a meat inspector) 21 U.S.C. §§ 848(c), 3591(b) (major drug kingpin violations) 21 U.S.C. § 848(e)(1) (killing in furtherance of a serious drug trafficking violation or killing a law enforcement official in furtherance of a controlled substance violation) 21 U.S.C. § 1041(c) (murder of an egg inspector) 42 U.S.C. § 2000e-13 (murder of EEOC personnel) 42 U.S.C. § 2283 (murder of federal nuclear inspectors) 49 U.S.C. § 46502 (air piracy where death results) 49 U.S.C. § 46506 (murder in the special aircraft jurisdiction of the United States) Terrorism-Related Offenses Resulting in or Involving the Risk of Death or Serious Injury 18 U.S.C. § 32 (destruction of aircraft or aircraft facilities) 18 U.S.C. § 37 (violence at international airports) 18 U.S.C. § 81 (arson within special maritime and territorial jurisdiction) 18 U.S.C. §§ 175, 175b (biological weapons offenses) 18 U.S.C. § 175c (variola virus) 18 U.S.C. § 229 (chemical weapons offenses) 18 U.S.C. § 351(a),(b),(c), or (d) (congressional, cabinet, and Supreme Court assassination and kidnaping) 18 U.S.C. § 831 (nuclear materials offenses) 18 U.S.C. § 832 (participation in a foreign atomic weapons program) 18 U.S.C. § 842(m) or (n) (plastic explosives offenses) 18 U.S.C. § 844(f)(2) or (3)(arson and bombing of federal property risking or causing death) 18 U.S.C. § 844(i) (burning or bombing of property used in, or used in activities affecting, commerce) 18 U.S.C. § 930(c) (killing or attempted killing during an attack on a federal facility with a dangerous weapon) 18 U.S.C. § 956(a)(1) (conspiracy to murder, kidnap, or maim persons abroad) 18 U.S.C. § 1030(a)(1) (protection of computer systems containing classified information) 18 U.S.C. § 1030(a)(5)(A)(i) (resulting in damage defined in 1030(a)(5)(B)(ii) through (v) (protection of computers) 18 U.S.C. § 1114 (protection of officers and employees of the United States), 18 U.S.C. § 1116 (murder or manslaughter of foreign officials, official guests, or internationally protected persons) 18 U.S.C. § 1203 (hostage taking) 18 U.S.C. § 1361 (destruction of federal property) 18 U.S.C. § 1362 (destruction of communication lines, stations, or systems) 18 U.S.C. § 1363 (injury to buildings or property within special maritime and territorial jurisdiction of the United States) 18 U.S.C. § 1366(a) (destruction of energy facilities) 18 U.S.C. § 1751(a),(b),(c), or (d) (Presidential and Presidential staff assassination and kidnaping) 18 U.S.C. § 1992 (terrorist attacks on trains and mass transit) 18 U.S.C. § 2155 (destruction of national defense materials, premises, or utilities), 18 U.S.C. § 2156 (production of defective national defense material) 18 U.S.C. § 2280 (violence against maritime navigation) 18 U.S.C. § 2280a (violence against maritime navigation involving weapons of mass destruction) 18 U.S.C. § 2281 (violence against maritime fixed platforms) 18 U.S.C. § 2281a (addition offenses involving violence against maritime fixed platforms) 18 U.S.C. § 2332 (certain homicides and other violence against United States nationals occurring outside of the United States) 18 U.S.C. § 2332a (use of weapons of mass destruction) 18 U.S.C. § 2332b (acts of terrorism transcending national boundaries) 18 U.S.C. § 2332f (bombing public places) 18 U.S.C. § 2332g (anti-aircraft missiles) 18 U.S.C. § 2332h (radiological dispersal devices) 18 U.S.C. § 2332i (acts of nuclear terrorism) 18 U.S.C. § 2339 (harboring terrorists) 18 U.S.C. § 2339A (providing material support to terrorists) 18 U.S.C. § 2339B (providing material support to terrorist organizations) 18 U.S.C. § 2339C (financing terrorism) 18 U.S.C. § 2339D (receipt of military training from a foreign terrorist organization) 18 U.S.C. § 2340A (torture committed under color of law) 21 U.S.C. § 960A (narcoterrorism) 42 U.S.C. § 2122 (atomic weapons) 42 U.S.C. § 2284 (sabotage of nuclear facilities or fuel) 49 U.S.C. § 46502 (aircraft piracy) 49 U.S.C. § 46504 (second sentence)(assault on a flight crew with a dangerous weapon) 49 U.S.C. § 46505(b)(3) or (c) (explosive or incendiary devices, or endangerment of human life by means of weapons, or aircraft) 49 U.S.C. § 46506 (if homicide or attempted homicide involved, application of certain criminal laws to acts on aircraft) 49 U.S.C. § 60123(b) (destruction of interstate gas or hazardous liquid pipeline facility) Child Abduction and Sex Offenses 18 U.S.C. § 1201 (kidnaping a child) 18 U.S.C. § 1591 (sex trafficking by force, fraud or of a child) 18 U.S.C. ch.109A 18 U.S.C. § 2241 (aggravated sexual abuse) 18 U.S.C. § 2242 (sexual abuse) 18 U.S.C. § 2243 (sexual abuse of a ward or child) 18 U.S.C. § 2244 (abusive sexual contact) 18 U.S.C. § 2245 (sexual abuse resulting in death) 18 U.S.C. § 2250 (failure to register as a sex offender) 18 U.S.C. ch. 110 18 U.S.C. § 2251 (sexual exploitation of children) 18 U.S.C. § 2251A (selling or buying children) 18 U.S.C. § 2252 (transporting, distributing or selling child sexually exploitive material) 18 U.S.C. § 2252A (transporting or distributing child pornography) 18 U.S.C. § 2252B (misleading names on the Internet) 18 U.S.C. § 2260 (making child sexually exploitative material overseas for export to the U.S.) 18 U.S.C. ch. 117 18 U.S.C. § 2421 (transportation of illicit sexual purposes) 18 U.S.C. § 2422 (coercing or enticing travel for illicit sexual purposes) 18 U.S.C. § 2423 (travel involving illicit sexual activity with a child) 18 U.S.C. § 2424 (filing false immigration statement) 18 U.S.C. § 2425 (interstate transmission of information about a child relating to illicit sexual activity) 20 years 18 U.S.C. 668 (major art theft) 10 years 18 U.S.C. § 81 (arson in the special maritime or territorial jurisdiction of the United States not involving a risk of death or serious injury)* 18 U.S.C. § 215 (receipt by financial institution officials of commissions or gifts for procuring loans)** 18 U.S.C. § 656 (theft, embezzlement, or misapplication by bank officer or employee)** 18 U.S.C. § 657 (embezzlement by lending, credit and insurance institution officers or employees)** 18 U.S.C. § 844(f) (burning or bombing federal property not involving a risk of death or serious injury)* 18 U.S.C. § 844(h) (carrying explosives during the commission of a federal offense or using fire or explosives to commit a federal offense)* 18 U.S.C. § 844 (i) (burning or bombing property used in or used in activities affecting commerce not involving a risk of death or serious injury)* 18 U.S.C. § 1005 (fraud concerning bank entries, reports and transactions)** 18 U.S.C. § 1006 (fraud concerning federal credit institution entries, reports and transactions)** 18 U.S.C. § 1007 (fraud concerning Federal Deposit Insurance Corporation transactions)** 18 U.S.C. § 1014 (fraud concerning loan and credit applications generally; renewals and discounts; crop insurance)** 18 U.S.C. § 1033 (crimes by or affecting persons engaged in the business of insurance)** 18 U.S.C. § 1344 (bank fraud)** 18 U.S.C. § 1341 (mail fraud affecting a financial institution)** 18 U.S.C. § 1343 (wire fraud affecting a financial institution)** 18 U.S.C. § 1423 (misuse of evidence of citizenship or naturalization) (or conspiracy to commit)+ 18 U.S.C. § 1424 (personation or misuse of papers in naturalization proceedings) (or conspiracy to commit)+ 18 U.S.C. § 1425 (procurement of citizenship or naturalization unlawfully) (or conspiracy to commit)+ 18 U.S.C. § 1426 (reproduction of naturalization or citizenship papers) (or conspiracy to commit)+ 18 U.S.C. § 1427 (sale of naturalization or citizenship papers) (or conspiracy to commit)+ 18 U.S.C. § 1428 (surrender of canceled naturalization certificate) (or conspiracy to commit)+ 18 U.S.C. § 1541 (passport or visa issuance without authority) (or conspiracy to commit)+ 18 U.S.C. § 1542 (false statement in application and use of passport) (or conspiracy to commit)+ 18 U.S.C. § 1543 (forgery or false use of passport) (or conspiracy to commit)+ 18 U.S.C. § 1544 (misuse of passport) (or conspiracy to commit)+ 18 U.S.C. § 1581 (peonage; obstruction of justice)++ 18 U.S.C. § 1583 (enticement into slavery)++ 18 U.S.C. § 1584 (sale into involuntary servitude)++ 18 U.S.C. § 1589 (forced labor)++ 18 U.S.C. § 1590 (slave trafficking)++ 18 U.S.C. § 1592 (document offenses involving slave trafficking)++ 18 U.S.C. § 1963 (RICO violation involving bank fraud)** 18 U.S.C. § 2442 (recruiting or using child soldiers) 42 U.S.C. § 2274 (communication of restricted data)† 42 U.S.C. § 2275 (receipt of restricted data)† 42 U.S.C. § 2276 (tampering with restricted data)† 50 U.S.C. § 783 (disclosure of classified information (with suspension until the end of any federal employment of the accused)) 8 years Generally 18 U.S.C. § 112 (assaults upon diplomats) 18 U.S.C. § 351(e) (assaulting a Member of Congress) 18 U.S.C. § 1751(e) (assaulting the President or presidential staff) 49 U.S.C. § 46506 (certain criminal laws to acts on aircraft) Federal Crimes of Terrorism That Do Not Result in or Involve the Risk of Death or Serious Injury 18 U.S.C. § 32 (destruction of aircraft or aircraft facilities) 18 U.S.C. § 37 (violence at international airports) 18 U.S.C. § 81 (arson within special maritime and territorial jurisdiction) 18 U.S.C. § 175, 175b (biological weapons offenses) 18 U.S.C. § 175c (variola virus) 18 U.S.C. § 229 (chemical weapons offenses) 18 U.S.C. § 351(a),(b),(c), or (d) (congressional, cabinet, and Supreme Court assassination and kidnaping) 18 U.S.C. § 831 (nuclear materials offenses) 18 U.S.C. § 832 (participation in a foreign atomic weapons program) 18 U.S.C. § 842(m) or (n) (plastic explosives offenses) 18 U.S.C. § 844(f)(2) or (3) (arson and bombing of federal property) 18 U.S.C. § 844(i) (burning or bombing of property used in, or used in activities affecting, commerce) 18 U.S.C. § 956(a)(1) (conspiracy to murder, kidnap, or maim persons abroad) 18 U.S.C. § 1203 (hostage taking) 18 U.S.C. § 1361 (destruction of federal property) 18 U.S.C. § 1362 (destruction of communication lines, stations, or systems) 18 U.S.C. § 1363 (injury to buildings or property within special maritime and territorial jurisdiction of the United States) 18 U.S.C. § 1366(a) (destruction of energy facilities) 18 U.S.C. § 1751(a),(b),(c), or (d) (Presidential and Presidential staff assassination and kidnaping) 18 U.S.C. § 1992 (terrorist attacks on trains and mass transit) 18 U.S.C. § 2155 (destruction of national defense materials, premises, or utilities), 18 U.S.C. § 2156 (production of defective national defense material) 18 U.S.C. § 2280 (violence against maritime navigation) 18 U.S.C. § 2280a (violence against maritime navigation involving weapons of mass destruction) 18 U.S.C. § 2281 (violence against maritime fixed platforms) 18 U.S.C. § 2281a (addition offenses involving violence against maritime fixed platforms) 18 U.S.C. § 2332 (certain homicides and other violence against United States nationals occurring outside of the United States) 18 U.S.C. § 2332a (use of weapons of mass destruction) 18 U.S.C. § 2332b (acts of terrorism transcending national boundaries) 18 U.S.C. § 2332f (bombing public places) 18 U.S.C. § 2332g (anti-aircraft missiles) 18 U.S.C. § 2332h (radiological dispersal devices) 18 U.S.C. § 2232i (acts of nuclear terrorism) 18 U.S.C. § 2339 (harboring terrorists) 18 U.S.C. § 2339A (providing material support to terrorists) 18 U.S.C. § 2339B (providing material support to terrorist organizations) 18 U.S.C. § 2339C (financing terrorism) 18 U.S.C. § 2339D (receipt of military training from a foreign terrorist organization) 18 U.S.C. § 2340A (torture committed under color of law) 21 U.S.C. § 960A (narcoterrorism) 42 U.S.C. § 2122 (atomic weapons) 42 U.S.C. § 2284 (sabotage of nuclear facilities or fuel) 49 U.S.C. § 46502 (aircraft piracy) 49 U.S.C. § 46504 (second sentence) (assault on a flight crew with a dangerous weapon) 49 U.S.C. § 46505(b)(3) or (c) (explosive or incendiary devices, or endangerment of human life by means of weapons, or aircraft) 49 U.S.C. § 46506 (if homicide or attempted homicide involved, application of certain criminal laws to acts on aircraft) 49 U.S.C. § 60123(b) (destruction of interstate gas or hazardous liquid pipeline facility) 7 years 18 U.S.C. § 247 (damage to religious property) 18 U.S.C. § 249 (hate crime not resulting in death) 18 U.S.C. § 1031 (major fraud against the United States) 6 years 15 U.S.C. § 77x (Securities Act violations)¤ 15 U.S.C. § 77yyy (Trust Indenture Act violations)¤ 15 U.S.C. § 78ff(a) (Securities Exchange Act violations)¤ 15 U.S.C. § 80a-48 (Investment Company Act violations¤ 15 U.S.C. § 80b-17 (Investment Advisers Act violations)¤ 18 U.S.C. § 1348 (securities and commodities fraud)¤ 26 U.S.C. § 6531 (tax crimes) 5 years All crimes not otherwise provided for 3 years 31 U.S.C. § 333 (misuse of Treasury Department names, symbols, etc.) 1 year 18 U.S.C. § 402 (contempt of court) Attachment 2. Selected State Felony Statutes of Limitation
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A statute of limitations dictates the time period within which a legal proceeding must begin. The purpose of a statute of limitations in a criminal case is to ensure the prompt prosecution of criminal charges and thereby spare the accused of the burden of having to defend against stale charges after memories may have faded or evidence is lost. There is no statute of limitations for federal crimes punishable by death, nor for certain federal crimes of terrorism, nor for certain federal sex offenses. Prosecution for most other federal crimes must begin within five years of the commitment of the offense. There are exceptions. Some types of crimes are subject to a longer period of limitation; some circumstances suspend or extend the otherwise applicable period of limitation. Arson, art theft, certain crimes against financial institutions, and various immigration offenses all carry statutes of limitation longer than the five-year standard. Regardless of the applicable statute of limitations, the period may be extended or the running of the period suspended or tolled under a number of circumstances, such as when the accused is a fugitive or when the case involves charges of child abuse, bankruptcy, wartime fraud against the government, or DNA evidence. Ordinarily, the statute of limitations begins to run as soon as the crime has been completed. Although the federal crime of conspiracy is complete when one of the plotters commits an affirmative act in its name, the period for conspiracies begins with the last affirmative act committed in furtherance of the scheme. Other so-called continuing offenses include various possession crimes and some that impose continuing obligations to register or report. Limitation-related constitutional challenges arise most often under the Constitution's ex post facto and due process clauses. The federal courts have long held that a statute of limitations may be enlarged retroactively as long as the previously applicable period of limitation has not expired. The Supreme Court recently confirmed that view; the ex post facto proscription precludes legislative revival of an expired period of limitation. Due process condemns pre-indictment delays even when permitted by the statute of limitations if the prosecution wrongfully caused the delay and the accused's defense suffered actual, substantial harm as a consequence. A list of federal statutes of limitation in criminal cases and a rough chart of comparable state provisions are attached. This report is available in an abbreviated form as CRS Report RS21121, Statute of Limitation in Federal Criminal Cases: A Sketch, without the attachments, footnotes, or attributions to authority found here.
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SECTION 1. SHORT TITLE.
This Act may be cited as the ``Drug-Free Schools Reform Act of
1996''.
SEC. 2. DRUG AND VIOLENCE PREVENTION PROGRAMS.
Subpart 1 of part A of title IV of the Elementary and Secondary
Education Act of 1965 (20 U.S.C. 7111 et seq.) is amended to read as
follows:
``Subpart 1--State Grants for Drug and Violence Prevention Programs
``SEC. 4111. RESERVATIONS AND ALLOTMENTS.
``(a) Reservations.--From the amount made available under section
4004(a) to carry out this subpart for each fiscal year, the Secretary--
``(1) shall reserve 1 percent of such amount for grants
under this subpart to Guam, American Samoa, the Virgin Islands,
and the Commonwealth of the Northern Mariana Islands, to be
allotted in accordance with the Secretary's determination of
their respective needs;
``(2) shall reserve 1 percent of such amount for the
Secretary of the Interior to carry out programs under this part
for Indian youth;
``(3) may reserve not more than $1,000,000 for the national
impact evaluation required by section 4114(a); and
``(4) shall reserve 0.2 percent of such amount for programs
for Native Hawaiians under section 4115.
``(b) State Allotments.--
``(1) In general.--Except as provided in paragraph (2), the
Secretary shall, for each fiscal year, allocate among the
States--
``(A) one-half of the remainder not reserved under
subsection (a) according to the ratio between the
school-aged population of each State and the school-
aged population of all the States; and
``(B) one-half of such remainder according to the
ratio between the amount each State received under part
A of title I for the preceding year and the sum of such
amounts received by all the States.
``(2) Minimum.--For any fiscal year, no State shall be
allotted under this subsection an amount that is less than one-
half of 1 percent of the total amount allotted to all the
States under this subsection.
``(3) Reallotment.--The Secretary may reallot any amount of
any allotment to a State if the Secretary determines that the
State will be unable to use such amount within two years of
such allotment. Such reallotments shall be made on the same
basis as allotments are made under paragraph (1).
``(4) Definitions.--For the purpose of this subsection--
``(A) the term `State' means each of the 50 States,
the District of Columbia, and the Commonwealth of
Puerto Rico; and
``(B) the term `local educational agency' includes
educational service agencies and consortia of such
agencies.
``SEC. 4112. STATE APPLICATIONS.
``(a) In General.--In order to receive an allotment under section
4111 for any fiscal year, the chief executive officer of the State
shall submit to the Secretary, at such time as the Secretary may
require, an application that--
``(1) describes how funds under this subpart will be
coordinated with programs under this Act, the Goals 2000:
Educate America Act, and other Acts, as appropriate, in
accordance with the provisions of section 14306;
``(2) contains the results of the State's needs assessment
for drug and violence prevention programs, which shall be based
on the results of on-going State evaluation activities,
including data on the prevalence of drug use and violence by
youth in schools and communities;
``(3) contains an assurance that the State will cooperate
with, and assist, the Secretary in conducting a national impact
evaluation of programs required by section 4114(a); and
``(4) includes any other information the Secretary may
require.
``(b) Peer Review.--The Secretary shall use a peer review process
in reviewing State applications under this section.
``SEC. 4113. STATE PROGRAMS.
``(a) Use of Funds.--
``(1) In general.--The chief executive officer of a State
shall use funds allocated pursuant to section 4111(a)(1) for
drug and violence prevention programs and activities in
accordance with this section.
``(2) Administrative costs.--A chief executive officer may
use not more than 5 percent of the total amount received under
this part for the administrative costs incurred in carrying out
the duties of such officer under this section.
``(b) Programs Authorized.--
``(1) In general.--The exclusive and immutable purpose of
these grants to or contracts with the foregoing is to finance
or sponsor prevention or education programs dedicated to
teaching directly the dangers, risks, health costs, legal
penalties, short- and long-term negative personal impacts of
illegal drug use and underage drinking with funds expended for
no other purpose than a `no use,' `right-wrong' antidrug
message. If any amount or percentage of these funds is spent
for purposes other than a strict no-drug-use curriculum, such
as general health or hygiene education, social events, annual
sports budgets, or any other non-anti-drug program, such
expenditures shall be considered a violation.
``(2) Penalties.--Complete forfeiture, reimbursement, and
each applicable Federal penalty provision shall apply to each
person responsible for any such misapplication or misspending
of the funds.
``(3) Peer review.--Grants or contracts awarded under this
subsection shall be subject to a peer review process.
``(4) Special rule.--The chief executive officer of a State
may carry out activities under this subsection directly, or
through grants or contracts.
``(c) Law Enforcement Education Partnerships.--A chief executive
officer shall use funds under subsection (a)(1) to award grants to
State, county or local law enforcement agencies (including district
attorneys) in consortium with local educational agencies or community-
based agencies for the purposes of carrying out drug abuse and violence
prevention activities, such as--
``(1) Project Drug Abuse Resistance Education and other
programs which provide classroom instruction by uniformed law
enforcement officials that is designed to teach students to
recognize and resist pressures to experiment that influence
such children to use controlled substances or alcohol;
``(2) Project Legal Lives and other programs in which
district attorneys provide classroom instruction in the law and
legal system which emphasizes interactive learning techniques,
such as mock trial competitions;
``(3) partnerships between law enforcement and child
guidance professionals; and
``(4) before- and after-school activities.
``SEC. 4114. EVALUATION AND REPORTING.
``(a) National Impact Evaluation.--
``(1) Biennial evaluation.--The Secretary, in consultation
with the Secretary of Health and Human Services, the Director
of the Office of National Drug Control Policy, and the Attorney
General, shall conduct an independent biennial evaluation of
the national impact of programs assisted under this subpart and
of other recent and new initiatives to combat violence in
schools and submit a report of the findings of such evaluation
to the President and the Congress.
``(2) Data collection.--(A) The National Center for
Education Statistics shall collect data to determine the
frequency, seriousness, and incidence of violence in elementary
and secondary schools in the States. The Secretary shall
collect the data using, wherever appropriate, data submitted by
the States pursuant to subsection (b)(2)(B).
``(B) Not later than January 1, 2000, the Secretary shall
submit to Congress a report on the data collected under this
subsection, together with such recommendations as the Secretary
determines appropriate, including estimated costs for
implementing any recommendation.
``(b) State Report.--
``(1) In general.--By October 1, 1999, and every third year
thereafter, the chief executive officer of the State shall
submit to the Secretary a report on the implementation and
outcomes of State programs under section 4113, as well as an
assessment of their effectiveness.
``(2) Special rule.--The report required by this subsection
shall be--
``(A) in the form specified by the Secretary;
``(B) based on the State's ongoing evaluation
activities, and shall include data on the prevalence of
drug use and violence by youth in schools and
communities; and
``(C) made readily available to the public.
``SEC. 4114. PROGRAMS FOR NATIVE HAWAIIANS.
``(a) General Authority.--From the funds made available pursuant to
section 4111(a)(4) to carry out this section, the Secretary shall make
grants to or enter into cooperative agreements or contracts with
organizations primarily serving and representing Native Hawaiians which
are recognized by the Governor of the State of Hawaii to plan, conduct,
and administer programs, or portions thereof, which are authorized by
and consistent with the provisions of this title for the benefit of
Native Hawaiians.
``(b) Definition of Native Hawaiian.--For the purposes of this
section, the term `Native Hawaiian' means any individual any of whose
ancestors were natives, prior to 1778, of the area which now comprises
the State of Hawaii.''.
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Drug-Free Schools Reform Act of 1996 - Amends the Elementary and Secondary Education Act of 1965 to revise requirements for State Grants for Drug and Violence Prevention Programs.
Revises requirements relating to State applications for such grants. Eliminates requirements relating to distribution of State funds among local educational agencies and their applications for such assistance.
Revises program requirements. Requires use of program funds for awarding grants to State, county, or local law enforcement agencies (including district attorneys) in consortium with local educational agencies or community-based agencies to carry out drug abuse and violence prevention activities.
Revises evaluating and reporting requirements for such programs.
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SECTION 1. SHORT TITLE.
This Act may be cited as the ``Infant Plan of Safe Care Improvement
Act''.
SEC. 2. BEST PRACTICES FOR DEVELOPMENT OF PLANS OF SAFE CARE.
Section 103(b) of the Child Abuse Prevention and Treatment Act (42
U.S.C. 5104(b)) is amended--
(1) by redesignating paragraphs (5) through (8) as
paragraphs (6) through (9), respectively; and
(2) by inserting after paragraph (4), the following:
``(5) maintain and disseminate information about the
requirements of section 106(b)(2)(B)(iii) and best practices
relating to the development of plans of safe care as described
in such section for infants born and identified as being
affected by illegal substance abuse or withdrawal symptoms, or
a Fetal Alcohol Spectrum Disorder;''.
SEC. 3. STATE PLANS.
Section 106(b)(2)(B)(iii) of the Child Abuse Prevention and
Treatment Act (42 U.S.C. 5106a(b)(2)(B)(iii)) is amended by inserting
before the semicolon at the end the following: ``to ensure the safety
and well-being of such infant following release from the care of
healthcare providers, including through--''
``(I) addressing the health and
substance use disorder treatment needs
of the infant and affected family or
caregiver; and
``(II) the development and
implementation by the State of
monitoring systems regarding the
implementation of such plans to
determine whether and in what manner
local entities are providing, in
accordance with State requirements,
referrals to and delivery of
appropriate services for the infant and
affected family or caregiver''.
SEC. 4. DATA REPORTS.
(a) In General.--Section 106(d) of the Child Abuse Prevention and
Treatment Act (42 U.S.C. 5106a(d)) is amended by adding at the end of
the following:
``(17)(A) The number of infants identified under subsection
(b)(2)(B)(ii).
``(B) The number of infants for whom a plan of safe care
was developed under subsection (b)(2)(B)(iii).
``(C) The number of infants for whom a referral was made
for appropriate services, including services for the affected
family or caregiver, under subsection (b)(2)(B)(iii).''.
(b) Redesignation.--Effective on May 29, 2017, section 106(d) of
the Child Abuse Prevention and Treatment Act (42 U.S.C. 5106a(d)) is
amended by redesignating paragraph (17) (as added by subsection (a)) as
paragraph (18).
SEC. 5. MONITORING AND OVERSIGHT.
(a) Amendment.--Title I of the Child Abuse Prevention and Treatment
Act (42 U.S.C. 5101 et seq.) is further amended by adding at the end
the following:
``SEC. 114. MONITORING AND OVERSIGHT.
``The Secretary shall conduct monitoring to ensure that each State
that receives a grant under section 106 is in compliance with the
requirements of section 106(b), which--
``(1) shall--
``(A) be in addition to the review of the State
plan upon its submission under section 106(b)(1)(A);
and
``(B) include monitoring of State policies and
procedures required under clauses (ii) and (iii) of
section 106(b)(2)(B); and
``(2) may include--
``(A) a comparison of activities carried out by the
State to comply with the requirements of section 106(b)
with the State plan most recently approved under
section 432 of the Social Security Act;
``(B) a review of information available on the
Website of the State relating to its compliance with
the requirements of section 106(b);
``(C) site visits, as may be necessary to carry out
such monitoring; and
``(D) a review of information available in the
State's Annual Progress and Services Report most
recently submitted under section 1357.16 of title 45,
Code of Federal Regulations (or successor
regulations).''.
(b) Table of Contents.--The table of contents in section 1(b) of
the Child Abuse Prevention and Treatment Act (42 U.S.C. 5101 note) is
amended by inserting after the item relating to section 113, the
following:
``Sec. 114. Monitoring and oversight.''.
SEC. 6. RULE OF CONSTRUCTION.
Nothing in this Act, or the amendments made by this Act, shall be
construed to authorize the Secretary of Health and Human Services or
any other officer of the Federal Government to add new requirements to
section 106(b) of the Child Abuse Prevention and Treatment Act (42
U.S.C. 5106a(b)), as amended by this Act.
Passed the House of Representatives May 11, 2016.
Attest:
KAREN L. HAAS,
Clerk.
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Infant Plan of Safe Care Improvement Act (Sec. 2) This bill amends the Child Abuse Prevention and Treatment Act to require the Department of Health and Human Services (HHS), through the national clearinghouse for information relating to child abuse, to maintain and disseminate information about the requirements and best practices relating to the development of plans of safe care for infants born affected by illegal substance abuse, withdrawal symptoms, or a Fetal Alcohol Spectrum Disorder. (Sec. 3) A state plan submitted to HHS for a grant to improve its child protective services system must certify that it has a state law or statewide program relating to child abuse and neglect that includes a plan of safe care for such an infant to ensure its safety and well-being following release from the care of healthcare providers. The state plan of safe care shall: (1) address the health and substance use disorder treatment needs of the infant and affected family or caregiver; and (2) specify the development and implementation by the state of monitoring systems regarding the implementation of such plans to determine whether and in what manner local entities are providing, in accordance with state requirements, referrals to and delivery of appropriate services for the infant and affected family or caregiver. (Sec. 4) Annual state data reports shall include the total number of such infants for whom a plan of safe care was developed, and for whom referrals are made for appropriate services, including services for the affected family or caregiver. (Sec. 5) HHS shall monitor the compliance of each grant-receiving state with applicable current law requirements, including required state policies and procedures regarding care of such infants.
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SECTION 1. SHORT TITLE.
This Act may be cited as the ``FDIC Enforcement Enhancement Act''.
SEC. 2. ENFORCEMENT AGAINST MISREPRESENTATIONS REGARDING FDIC DEPOSIT
INSURANCE COVERAGE.
(a) In General.--Section 18(a) of the Federal Deposit Insurance Act
(12 U.S.C. 1828(a)) is amended by adding at the end the following new
paragraph:
``(4) False advertising, misuse of fdic names, and
misrepresentation to indicate insured status.--
``(A) Prohibition on false advertising and misuse
of fdic names.--No person may--
``(i) use the terms `Federal Deposit',
`Federal Deposit Insurance', `Federal Deposit
Insurance Corporation', any combination of such
terms, or the abbreviation `FDIC' as part of
the business name or firm name of any person,
including any corporation, partnership,
business trust, association, or other business
entity; or
``(ii) use such terms or any other sign or
symbol as part of an advertisement,
solicitation, or other document,
to represent, suggest or imply that any deposit
liability, obligation, certificate or share is insured
or guaranteed by the Federal Deposit Insurance
Corporation, if such deposit liability, obligation,
certificate, or share is not insured or guaranteed by
the Corporation.
``(B) Prohibition on misrepresentations of insured
status.--No person may knowingly misrepresent--
``(i) that any deposit liability,
obligation, certificate, or share is federally
insured, if such deposit liability, obligation,
certificate, or share is not insured by the
Corporation; or
``(ii) the extent to which or the manner in
which any deposit liability, obligation,
certificate, or share is insured by the Federal
Deposit Insurance Corporation, if such deposit
liability, obligation, certificate, or share is
not insured by the Corporation to the extent or
in the manner represented.
``(C) Authority of fdic.--The Corporation shall
have--
``(i) jurisdiction over any person that
violates this paragraph, or aids or abets the
violation of this paragraph; and
``(ii) for purposes of enforcing the
requirements of this paragraph with regard to
any person--
``(I) the authority of the
Corporation under section 10(c) to
conduct investigations; and
``(II) the enforcement authority of
the Corporation under subsections (b),
(c), (d) and (i) of section 8,
as if such person were a state nonmember insured bank.
``(D) Other actions preserved.--No provision of
this paragraph shall be construed as barring any action
otherwise available, under the laws of the United
States or any State, to any Federal or State law
enforcement agency or individual.''.
(b) Enforcement Orders.--Section 8(c) of the Federal Deposit
Insurance Act (12 U.S.C. 1818(c)) is amended by adding at the end the
following new paragraph:
``(4) False advertising or misuse of names to indicate
insured status.--
``(A) Temporary order.--
``(i) In general.--If a notice of charges
served under subsection (b)(1) of this section
specifies on the basis of particular facts that
any person is engaged in conduct described in
section 18(a)(4), the Corporation may issue a
temporary order requiring--
``(I) the immediate cessation of
any activity or practice described,
which gave rise to the notice of
charges; and
``(II) affirmative action to
prevent any further, or to remedy any
existing, violation.
``(ii) Effect of order.--Any temporary
order issued under this subparagraph shall take
effect upon service.
``(B) Effective period of temporary order.--A
temporary order issued under subparagraph (A) shall
remain effective and enforceable, pending the
completion of an administrative proceeding pursuant to
subsection (b)(1) in connection with the notice of
charges--
``(i) until such time as the Corporation
shall dismiss the charges specified in such
notice; or
``(ii) if a cease-and-desist order is
issued against such person, until the effective
date of such order.
``(C) Civil money penalties.--Violations of section
18(a)(4) shall be subject to civil money penalties as
set forth in subsection (i) in an amount not to exceed
$1,000,000 for each day during which the violation
occurs or continues.''.
(c) Technical and Conforming Amendments.--
(1) Section 18(a)(3) of the Federal Deposit Insurance Act
(12 U.S.C. 1828(a)) is amended--
(A) by striking ``this subsection'' the first place
such term appears and inserting ``paragraph (1)''; and
(B) by striking ``this subsection'' the second
place such term appears and inserting ``paragraph
(2)''.
(2) The heading for subsection (a) of section 18 of the
Federal Deposit Insurance Act (12 U.S.C. 1828(a)) is amended by
striking ``Insurance Logo.--'' and inserting ``Representations
of Deposit Insurance.--''.
Passed the House of Representatives July 16, 2007.
Attest:
LORRAINE C. MILLER,
Clerk.
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FDIC Enforcement Enhancement Act - Amends the Federal Deposit Insurance Act (FDIA) to prohibit use of the terms "Federal Deposit," "Federal Deposit Insurance," "Federal Deposit Insurance Corporation," any combination of such terms, or the abbreviation "FDIC," as part of the business name or firm name of any person or business entity, including any advertisement, solicitation, or other document.
Prohibits use of such terms, or any other sign or symbol as part of a document, to represent, suggest, or imply that any deposit liability, obligation, certificate, or share is insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) if in fact the instrument is not insured or guaranteed by the FDIC.
Prohibits knowing misrepresentations of: (1) the federally insured status of any deposit liability, obligation, certificate, or share; or (2) the extent or the manner in which such instruments are insured by the FDIC.
Grants the FDIC jurisdiction over any person that violates this Act, and certain enforcement authority as if the person were a state nonmember insured bank.
Empowers the FDIC to issue orders requiring: (1) immediate cessation; and (2) affirmative action to prevent any further violation, or to remedy an existing one.
Subjects violations of this Act to civil money penalties.
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Select Agent Program Does Not Fully Meet Key Elements of Effective Oversight or Have Joint Strategic Planning Documents to Guide Its Efforts The Select Agent Program does not fully meet key elements of effective oversight. In particular, the program has oversight shortcomings related to each of our five key elements: independence, performing reviews, technical expertise, transparency, and enforcement. In addition, the program does not have joint strategic planning documents to guide its oversight efforts, such as a joint strategic plan and workforce plan. It did, however, begin taking steps to develop a joint strategic plan during the summer of 2017. First, regarding independence, the Select Agent Program is not structurally distinct and separate from all of the laboratories it oversees because the two components of the Select Agent Program are located in CDC and APHIS, both of which also have high-containment laboratories registered with the program. Many experts at our meeting raised concerns that the Select Agent Program cannot be entirely independent in its oversight of CDC and APHIS laboratories because the Select Agent Program is composed of divisions of those agencies. To help reduce conflicts of interest, the program has taken steps such as having APHIS lead inspections of CDC laboratories. However, it has generally done so in response to concerns raised by others. The program itself has not formally assessed all potential risks posed by its current structure and the effectiveness of its mechanisms to address those risks. The Office of Management and Budget’s Circular A-123 requires federal agencies to integrate risk management activities into their program management to help ensure they are effectively managing risks that could affect the achievement of agency objectives. In addition, federal internal control standards state that management should identify, analyze, and respond to risks related to achieving defined objectives. Without (1) regularly assessing the potential risks posed by the program’s current structure and the effectiveness of its mechanisms to address them and (2) taking actions as necessary to ensure any identified risks are addressed, the program may not be aware of or effectively mitigate impairments to its independence that could affect its ability to achieve its objectives. Second, regarding the ability to perform reviews, we found that the Select Agent Program performs several types of reviews to ensure compliance with regulatory and program requirements. However, the program may not target the highest-risk activities in its inspections, in part because it has not formally assessed which activities pose the highest risk to biological safety and security. For example, many experts at our meeting and laboratory representatives we interviewed raised concerns about the amount of time inspectors spend assessing compliance with inventory controls (e.g., by counting and examining vials containing select agents) and reviewing inventory records during the inspection process, which takes time away from inspecting other aspects of biological safety and security. Experts at our meeting said that these activities do little to reduce the risk of theft of select agents (a security concern) because samples could be clandestinely removed from vials and replicated without being detected by the inventory controls currently in place. Further, other laboratory representatives told us that activities to assess compliance with certain program requirements, such as time-consuming reviews of records, did little to reduce risk and were unnecessarily burdensome to both researchers and inspectors. These inspection activities are generally intended to address biological security concerns; however, recent high- profile incidents at registered laboratories have concerned biological safety rather than security. To improve the inspection process and identify trends and associations between inspection findings and risk, a 2015 internal review of the CDC component of the Select Agent Program recommended that the CDC and APHIS components of the program work together to analyze inspection and investigation data. According to program officials, they have not yet addressed the recommendation because they do not currently have adequate tools to do so, but the program is transitioning to a new database that will enhance their ability to identify trends and associations and thereby guide improvements to the inspection process. However, the program did not provide a plan for when or how the program will carry out these analyses to improve the inspection process. Federal internal control standards state that management should identify, analyze, and respond to risks related to achieving defined objectives. Without developing and implementing a plan to identify which laboratory activities carry the highest biological safety and security risks and to respond to those risks by aligning inspections and other oversight efforts to target those activities, the Select Agent Program will not have assurance that it is effectively balancing the potential safety and security gains from its oversight efforts against the use of program resources and the effect on laboratories’ research. We also found that the Select Agent Program did not fully meet the other three key elements of effective oversight: technical expertise, transparency, and enforcement. For example, although the program has taken steps to hire additional staff and enhance the technical expertise of its staff, workforce and training gaps remain. In addition, although the program has increased transparency about registered laboratories and violations of the select agent regulations to the public and registered laboratories since 2016, the information it shares is limited and there is no consensus about what additional information could be shared, given security concerns. Lastly, although the program has authority to enforce compliance with program requirements, it is still working to address past concerns about the need for greater consistency and clarity in actions it takes in exercising this authority. In addition to not fully meeting the five key elements of effective oversight, we found that the Select Agent Program does not have joint strategic planning documents to guide its shared oversight efforts across CDC and APHIS. For example, the program does not have a joint mission statement to collectively define what the program seeks to accomplish through its oversight. It also does not yet have a strategic plan. Agencies can use strategic plans to set goals and identify performance measures for gauging progress towards those goals. Strategic plans can also outline how agencies plan to collaborate with each other to help achieve goals and objectives. The program began taking steps to develop a joint strategic plan during the course of our review and, in August 2017, began soliciting bids from contractors for the plan’s development. The statement of work for the contract stipulates that the contractor shall develop guiding principles for the Select Agent Program along with a mission statement and strategic goals and objectives, among other requirements. However, it does not have any requirements related to development of a joint workforce plan. We have found in the past that agencies’ strategic workforce planning should be clearly linked to the agency’s mission and long-term goals developed during the strategic planning process. Developing a joint workforce plan that assesses workforce and training needs for the program as a whole would help the program to better manage fragmentation by improving how it leverages resources to ensure all workforce and training needs are met. Leveraging resources is especially important given fiscal constraints. In our report, we recommended that CDC and APHIS take several steps to address these findings. First, we made five recommendations to improve independence, including that CDC and APHIS regularly assess the potential risks posed by the program’s structure and the effectiveness of its mechanisms to address those risks, and take actions as necessary to ensure any identified risks are addressed so that impairments to independence do not affect its ability to achieve its objectives. Second, to improve the ability to perform reviews, we recommended that the directors of the Select Agent Program work together to develop and implement a plan to identify which laboratory activities carry the highest biological safety and security risks and to respond to those risks by aligning inspections and other oversight efforts to target those activities. We also made several other recommendations, including recommending that the directors of the Select Agent Program develop a joint workforce plan that assesses workforce and training needs for the program as a whole. Selected Countries and Regulatory Sectors Employ Other Approaches to Promote Effective Oversight Selected countries and regulatory sectors employ approaches to promote effective oversight that sometimes differ from those of the Select Agent Program by, for example, having regulatory bodies that are structurally independent from the entities they oversee or taking a risk-based approach to performing reviews. To illustrate, with regard to independence, Great Britain’s Health and Safety Executive, whose mission is to protect worker and public health and safety and which oversees laboratories that work with pathogens, is an independent government agency. According to officials from the Health and Safety Executive and laboratory representatives, one strength of this approach is that it avoids potential organizational conflicts of interest because none of the laboratories it oversees are part of the same agency. Some other regulatory sectors in the United States, including the Nuclear Regulatory Commission (NRC), are also structurally independent from regulated facilities as a mechanism to ensure independence. Prior to the creation of NRC in 1974, the U.S. Atomic Energy Commission was responsible for both promotion and oversight of the nuclear industry. The Energy Reorganization Act of 1974 established NRC as a separate, independent entity. According to a Senate committee report, this was a response to growing criticism that there was a basic conflict between the U.S. Atomic Energy Commission’s regulation of the nuclear power industry and its development and promotion of new technology for the industry. Related to the ability to perform reviews, regulators in Great Britain and Canada apply a risk-based approach by targeting laboratories with a documented history of performance issues or those conducting higher- risk activities. In both Great Britain and Canada, the organizations that oversee laboratories generally focus their oversight on (1) biological safety, and (2) regulation of all potentially hazardous pathogens in laboratories. In contrast, the Select Agent Program originated from security-related concerns and regulates only those pathogens identified on the U.S. select agent list and no other pathogens that may be handled in high-containment but are not select agents, such as West Nile virus. Other differences we found in approaches include relying on scientists and other laboratory personnel to have requisite technical expertise on the pathogens and activities in their laboratories, sharing incident information on their public websites, and having prosecutorial authority when incidents occur. In conclusion, CDC and APHIS share a critical role in ensuring that important research on select agents can be conducted in high- containment laboratories in a safe and secure manner. The Select Agent Program has made a number of improvements over the past few years, such as hiring additional staff and improving training to enhance expertise. Nevertheless, the program does not fully meet all key elements of effective oversight and more is needed to develop joint strategic plans to collectively guide its shared oversight efforts. In our prior work, we have found that existing federal oversight of high-containment laboratories is fragmented and largely self-policing, among other things. Our October 2017 report, in combination with these past findings, continues to raise questions about whether the current government framework and oversight are adequate. Vice Chairman Griffith, Ranking Member DeGette, and Members of the Subcommittee, this concludes our prepared statement. We would be pleased to respond to any questions that you may have at this time. GAO Contacts and Staff Acknowledgments If you or your staff have any questions about this statement, please contact Mary Denigan-Macauley, Ph.D., Acting Director, Health Care, at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals who made key contributions to this statement include Sushil Sharma, Ph.D., Dr.PH (Assistant Director); Amy Bowser; Caitlin Dardenne, Ph.D.; John Neumann; Cynthia Norris; Timothy M. Persons, Ph.D.; and Lesley Rinner. Staff who made key contributions to the report(s) cited in the statement are identified in the source products. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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Safety lapses have occurred at laboratories in the United States that conduct research on select agents—such as Ebola virus or anthrax bacteria—that may cause serious or lethal infection in humans, animals, or plants, raising concerns about whether oversight is effective. This statement summarizes information contained in GAO's October 2017 report, titled High-Containment Laboratories: Coordinated Actions Needed to Enhance the Select Agent Program's Oversight of Hazardous Pathogens ( GAO-18-145 ). The Federal Select Agent Program—jointly managed by the Departments of Health and Human Services (HHS) and Agriculture (USDA)—oversees laboratories' handling of certain hazardous pathogens known as select agents. However, the program does not fully meet all key elements of effective oversight. For example, the program is not structurally independent from all laboratories it oversees and has not assessed risks posed by its current structure or the effectiveness of mechanisms it has to reduce organizational conflicts of interest. Without conducting such assessments and taking actions as needed to address risks, the program may not effectively mitigate impairments to its independence. In addition, some experts and laboratory representatives GAO interviewed raised concerns that the program's reviews may not target the highest-risk activities, in part because it has not formally assessed which activities pose the highest risk. Without assessing the risk of activities it oversees and targeting its resources appropriately, the program cannot ensure it is balancing its resources against their impact. Moreover, the program does not have strategic planning documents, such as a joint strategic plan and workforce plan, to guide its oversight. Although it began taking steps to develop a joint strategic plan, the program is not developing workforce plans as part of this effort. Developing a joint workforce plan that assesses workforce and training needs for the program as a whole would help the program leverage resources to ensure all workforce and training needs are met. Selected countries and regulatory sectors GAO reviewed employ other approaches to promote effective oversight. For example, in Great Britain, an independent government agency focused on health and safety oversees laboratories that work with pathogens. In addition, in both Great Britain and Canada, regulators (1) focus their oversight on biological safety, because safety incidents provided the impetus for laboratory oversight in these countries and (2) regulate all potentially hazardous pathogens and activities in laboratories.
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Background The federal judiciary consists of the Supreme Court, 12 geographic circuit courts of appeals, 94 district courts, 91 bankruptcy courts, the Court of International Trade, the Court of Appeals for the Federal Circuit, and the Court of Federal Claims. The federal judiciary’s fiscal year 1996 budget is about $3.3 billion, and on September 30, 1995, it employed about 28,000 persons. For fiscal year 1997, the federal judiciary has requested congressional approval of a budget of about $3.6 billion, including a staff of about 31,000. Governance of the federal judiciary is substantially decentralized. The Judicial Conference of the United States, a body of 27 judges over which the Chief Justice of the United States presides, is the federal judiciary’s principal policymaking body. The Conference’s statutory responsibilities include considering administrative problems of the courts and making recommendations to the various courts to promote uniformity of management procedures and the expeditious conduct of court business. The Conference conducts its work principally through about 25 committees. In September 1993, the Judicial Conference established within its Budget Committee an Economy Subcommittee and charged it with reviewing judiciary operations to achieve greater fiscal responsibility, accountability, and efficiency. Created by Congress in 1939, AOUSC provides a wide range of administrative, legal, and program support services to the federal courts, including budgeting, space and facilities, automation, statistical analysis and reports, financial audit, and program and management evaluation. The AOUSC Director serves as the administrative officer for the courts under the supervision and direction of the Judicial Conference. AOUSC’s staff supports the work of the Conference and its committees, including the Economy Subcommittee. AOUSC provides analyses and recommendations on resource allocations to the Executive Committee of the Judicial Conference, which has final authority for resource allocations. Authorized by the same statute that created AOUSC, each of the 12 geographic judicial circuits has a judicial council with the authority to issue all necessary and appropriate orders for the effective and expeditious administration of justice within their circuits. Within each circuit, the Circuit Executive, whose duties vary by circuit, may have responsibility for conducting studies of the business and administration of the courts within the circuit. Neither Congress nor the Judicial Conference has formally charged chief judges with overall responsibility for the administration of their courts. Nevertheless, according to AOUSC, the chief judges of the appellate, district, and bankruptcy courts are generally expected to exercise whatever administrative authority is necessary for the effective and efficient operation of their individual courts. AOUSC program reviews, including on-site reviews of local court operations, are only one means by which the federal judiciary may assess its highly decentralized operations. The Judicial Conference of the United States, the circuit judicial councils, the chief judge of each court, and court unit executives, such as Chief Probation Officers or clerks of court, may all request AOUSC studies and support or initiate their own reviews and assessments. Such studies may be undertaken by AOUSC staff alone, in conjunction with staff from local courts, or by outside experts and consultants, such as the National Academy of Public Administration. Our work focused on AOUSC’s reviews and assessments, principally on-site reviews of local court operations. The organization of this oversight function within AOUSC has varied since responsibility for court audits and disbursement of judicial funds was transferred from the Department of Justice to AOUSC in 1975. After this transfer, AOUSC created an audit unit to perform routine, cyclical financial audits and management reviews of the courts. Before 1985, this unit reviewed the finances and programs of the courts. Several AOUSC auditors, management analysts, and attorneys conducted the reviews, visiting a district for about 2 to 3 weeks interviewing court personnel and reviewing records. Following an exit conference, the review team prepared a report that usually included recommendations. In 1985, AOUSC placed the financial and program review functions on different review cycles. Soon after the current AOUSC Director’s appointment in July 1985, Chief Justice Warren E. Burger established a committee of four judges to study AOUSC and provide advice on improving the agency. According to the AOUSC Director, judges and court officials whom the committee surveyed said AOUSC was too bureaucratic and controlling in its relationship with the courts. At about the same time, judges were telling the AOUSC Director that AOUSC’s management review process should be more sensitive to matters that are “exclusively the concern of the courts.” In 1988, the AOUSC Director discontinued the Office of Audit and Review, created an Office of Audit to conduct court financial reviews; delegated program review responsibilities to the program units; and established an evaluation unit, now known as the Office of Program Assessment (OPA), to oversee and coordinate program review efforts and to carry out special reviews and investigations. AOUSC’s Office of Audit is to conduct routine, cyclical financial reviews and oversee the work of contract financial auditors. Virtually all AOUSC offices have conducted reviews, special studies, evaluations, and surveys, which varied considerably by functional area. These reviews, often undertaken at the request of individual courts, have covered such issues as costs, budgets, spending, workload, outputs, and program implementation results. Some reviews have resulted in recommendations for improvements in such areas as processes and practices and the use of resources or technology. Scope and Methodology In responding to your request, our objective was to review AOUSC’s program assessment and efficiency promotion efforts regarding federal court operations. These operations include such court functions as the clerks of court offices, probation and pretrial services, judicial chambers management support, and statistical reporting. Generally, our review focused on AOUSC oversight activities conducted during fiscal years 1992 through 1994. Our approach was threefold. First, we met with top-level AOUSC officials and were briefed on AOUSC’s oversight and management assistance activities. We also met with managers from AOUSC program divisions that conducted program reviews and provided assistance to local courts to discuss oversight and management assistance functions and activities. Senior AOUSC management officials attended most of our meetings with managers from AOUSC’s program divisions. We reviewed manuals and other documentation on the operations and responsibilities of AOUSC’s management and program offices and divisions and AOUSC’s assessment and efficiency promotion activities. Second, using data maintained by the OPA, we identified 376 on-site reviews (excluding financial audits, judgeship surveys, and other nonprogrammatic reviews) conducted by selected program divisionsduring fiscal years 1992 through 1994 and requested reports on all of them. However, 244 of the reviews listed either did not result in written reports, were erroneous entries, had reports that AOUSC could not locate, were duplicate entries in OPA’s data, were never completed, or had reports that were still in draft form when we requested them. In the end, we reviewed 93 of the 132 written reports available to determine how the process followed in these reviews compared to generally accepted government auditing standards. We used a data collection instrument to systematically collect information from the program review reports, including the office that conducted the review, the person or persons who initiated the review and why, issues addressed, problems noted, efficient and effective practices identified, recommendations made, information available on the implementation of any recommendations, and standards and guidelines used for identifying problems and/or efficient and effective practices. Finally, we interviewed judges and court officials from a selection of appellate, district, and bankruptcy courts plus probation offices in a judgmentally selected cross-section of courts of different sizes in three regions of the country—the Northeast, Midwest, and South. We determined court unit size on the basis of fiscal year 1993 workload. For appellate, district, and bankruptcy courts, we used cases filed (rounded to the nearest hundred) as our measure of workload. For probation offices we used the total number of persons under supervision in each probation office (rounded to the nearest hundred). We also interviewed the chairs of four Judicial Conference committees: the Committee on the AOUSC (current and former chairs), the Committee on Court Administration and Case Management, the Committee on Judicial Resources, and the Budget Committee’s Economy Subcommittee (one of the co-chairs). We did our work primarily in Washington, D.C., between October 1994 and March 1996 in accordance with generally accepted government auditing standards. One or more senior AOUSC officials monitored our discussions with Judicial Conference Committee chairs and most of our meetings with the assistant directors of AOUSC’s program offices; however, we believe we were able to independently obtain needed information from the chairs and assistant directors. We obtained written comments from AOUSC on a draft of this report. Its comments are evaluated in this letter and are reprinted in full in appendix II. AOUSC Has Recently Revised and Restructured Its Program Review Process The need to keep costs down in an era of budgetary constraints has focused attention on the judiciary’s processes to ensure that it is operating as efficiently and effectively as possible. Program and financial reviews are one means of providing judges and managers information on the efficiency and effectiveness of court operations. To ensure that the information from these reviews is reliable, it is important that those conducting the reviews follow generally accepted government auditing standards. From 1988 until 1995, AOUSC’s program review process was decentralized and unstructured and did not always follow these standards. In November 1995, OPA issued written standards for conducting program assessments that, with two exceptions relating to reviewer independence and preparation of reports, track the generally accepted government auditing standards. Generally Accepted Government Auditing Standards Certain laws, regulations, and contracts require auditors who audit federal organizations, programs, activities, and functions to follow the generally accepted government auditing standards promulgated by the Comptroller General. The federal judiciary is not specifically required by statute to follow these auditing standards. AOUSC’s Office of Audit, which conducts financial audits, has chosen to follow the standards and also requires its contract auditors to do so. However, prior to November 1995, AOUSC had not prescribed uniform standards for its nonfinancial review activities. The generally accepted government auditing standards are broad statements of auditors’ responsibilities. They relate to both financial and performance audits and include general standards, which relate to the qualifications of the staff, the audit organization’s and the individual auditor’s independence, the exercise of due professional care in conducting the audit and in preparing related reports, and the presence of quality controls; fieldwork standards, which relate to the planning and supervision of the actual work, examination of compliance with laws and regulations, an understanding of management controls in place, and the quality of the evidence gathered during the audit; and reporting standards, which relate to the requirement for written reports and recommendations, the timeliness and contents of reports, the way in which reports are presented, and the distribution of reports. Until 1995, AOUSC’s Decentralized Oversight Activities Lacked Structure Although the judiciary is not specifically required by statute to follow the generally accepted government auditing standards, AOUSC has followed these standards for its financial audits. AOUSC officials told us they believed the standards were generally appropriate for nonfinancial reviews as well. AOUSC’s financial audit responsibilities are assigned by statute and follow the generally accepted government auditing standards. Until November 1995, however, AOUSC did not require its program offices and divisions to follow standards similar to the generally accepted government auditing standards in conducting program reviews. Each office and division had wide latitude to determine how it would review local court operations, the standards it would use during a review, and whether it would produce a written report. Program units adopted a variety of review approaches, ranging from conducting regular program reviews to having no identifiable review functions. The basic approach for most divisions and offices was one of consultation, with most reviews done at the request of the local court. The generally accepted government auditing standards require that a written report be prepared to communicate the results of the review to all who could act on the report’s recommendations. According to OPA data, 376 program reviews were conducted during fiscal years 1992 through 1994. However, according to OPA officials, only 132 of these resulted in written reports. Of these 132 written reports, 90 (68 percent) were prepared by the Federal Corrections and Supervision Division. One unit, the Contract and Services Division, did not produce reports as a matter of policy. According to OPA data, this division undertook 104 reviews during the 3-year period we reviewed, and it neither required nor produced written reports on the results of its reviews. A 1993 OPA assessment of the Division’s review process noted that its lack of written review results deprived current and successor division management and staff of valuable information about court practices that could help them identify trends, evaluate the success of program changes, and propose new initiatives. In contrast, the Federal Corrections and Supervision Division scheduled routine reviews of probation and pretrial offices, compared their performance to written policies and standards, and produced written reports of the reviews about 90 percent of the time. During the period of our review, AOUSC had no requirement that program units follow up on the implementation of any recommendations made to local courts. We found that follow-up on recommendations was inconsistent. Although the Federal Corrections and Supervision Division generally tracked the implementation of recommendations, most other divisions did not. AOUSC cannot compel a local court to comply with its recommendations. One court resisted upgrading its telephone system for 10 years because it preferred to acquire its system from a specific vendor in a sole-source procurement. AOUSC would not approve a noncompetitive procurement but neither did it require the court to upgrade its costly system, with the court remaining on an expensive lease. The court has only recently replaced its telephone system through a competitive procurement. AOUSC estimated that the new system would save about $133,000 per year. If the new system’s future annual savings had been achieved during the 10 years of the disagreement, the local court and, thus, the judiciary, could have avoided about $1 million in costs. AOUSC officials said such an impasse is unlikely to recur in today’s budget environment. Recent AOUSC Initiatives to Improve Program Review Process Recognizing that its decentralized review process had resulted in reviews of uneven coverage and quality, AOUSC, through OPA, issued standards in November 1995 for conducting program assessments that, with two exceptions, track the generally accepted government auditing standards. The new standards require some type of written record of the results of any review and require follow-up of any reported significant findings and recommendations. OPA also issued a study guide to help AOUSC program unit staff select court units for review and conduct the reviews, and OPA plans to provide training on the new standards to AOUSC personnel in 1996. Finally, AOUSC has directed each program division to develop and share with OPA an internal assessment plan and to provide OPA with a copy of all assessment reports. However, the new OPA standards do not appear to adequately cover two issues in the generally accepted government auditing standards issued by the Comptroller General: independence of the reviewer and preparation of formal reports. Concerning organizational independence, the generally accepted standards state that program reviewers should be organizationally located outside the staff or line management function of the unit being reviewed. OPA’s standards call for review team members to be organizationally independent only “to the extent feasible.” In commenting on the standard, OPA adds that in cases where a review team is not organizationally independent, consideration should be given by management to having a peer review team evaluate the report prior to its issuance. Concerning preparation of formal reports, the generally accepted standard is that reviewers are to prepare written reports communicating the results of each review. The standard points out that written reports (1) communicate the results of reviews to officials at all levels of government, (2) make the results less susceptible to misunderstanding, (3) make the results available for public inspection, and (4) facilitate follow-up to determine whether appropriate corrective actions have been taken. OPA’s standards, however, allow for formal and informal reports, such as trip reports or memoranda to the files. The OPA standards state that management should require formal reports only when the reviewed organization requests one, significant findings are discovered during the review, or follow-up is required on any of the significant findings and recommendations. Copies of each completed report are to be sent to OPA, which is to summarize them for the Administrative Office Committee of the Judicial Conference and as appropriate for senior management of AOUSC. AOUSC has begun to coordinate its review activities. OPA has established a network of 35 program review officers within AOUSC, which is to meet every 1 to 3 months to discuss assessment issues. These officers are also to serve as focal points for reviews within their respective AOUSC program areas. During fiscal year 1996, AOUSC’s automated travel software is to be modified to permit OPA to monitor on-site visits by AOUSC program units, including information on the purpose of the trips and the locations to be visited. OPA has also initiated a series of “triage” visits to local courts in which a team visits for 2 to 3 days to discuss local operations and AOUSC’s relationship to the local court. The goal is to provide broad coverage of court operations and to ensure that program and administrative division reviews are complemented by broader based surveys and reviews. Selection criteria include (1) locations having comparatively low recent review activity by the key program areas; (2) statistical indicators, such as the presence of unusually high- or low-cost operations, unusual workload patterns or case mix, or case dispositions substantially different from national averages; (3) change of chief judge; (4) change of court clerk; (5) geographical factors; and (6) special request and others. Prior to these visits, OPA is to develop a profile of the court by collecting a variety of workload and budgetary data on the local court, plus copies of prior reviews by AOUSC units. From these triage reports, OPA plans to develop a catalogue of common issues. As of May 1, 1996, OPA had completed triage reviews of six district courts and had two reviews under way. These actions, if consistently implemented, should help address many of the weaknesses in the previous program review process. However, AOUSC standards fall short of the generally accepted auditing standards in that they do not require (1) program assessors to be independent of the unit they are assessing or (2) that assessment reports be distributed to all officials who can act on the findings and recommendations. Efforts to Promote Efficient Practices As an effort to reduce spending, in fiscal year 1996 the federal judiciary requested funding for only 86 percent of the staff it estimated would be needed to handle the expected workload. AOUSC officials estimated that the judiciary’s appropriation for salaries and expenses request of about $2.6 billion would have been $139 million higher if the judiciary had requested funds to staff expected workload at 100 percent of staff needed, as determined by staffing formulas. To assist the various courts and administrative units in operating within this constrained budget, the judiciary has established two complementary focal points for identifying, disseminating, and incorporating more efficient ways of doing business. First, in 1993 the Judicial Conference established an Economy Subcommittee within its Budget Committee to (1) review the judiciary’s budget submission, (2) initiate and pursue studies about ways to economize while continuing to provide a consistently high quality of justice, and (3) be an “honest broker” of ideas relative to economy and efficiency. Second, at about the same time, the Conference’s Judicial Resources Committee and Economy Subcommittee directed AOUSC to undertake a comprehensive review of its work measurement methodology for court staffing to determine how greater efficiencies might be incorporated into the methodology. Economy Subcommittee The Economy Subcommittee is a successor to the District Court Efficiencies Task Force. In 1992, at the request of the Judicial Resources Committee, AOUSC established the task force when it identified wide variations in the work processes and use of staff in district court clerks’ offices. In April 1993, the task force, composed of judges and court unit executives, developed a list of potentially efficient practices that were circulated to all district court chief judges for consideration and possible adoption. This list addressed such areas as jury and personnel management, and space and facilities. In coordination with the Judicial Conference’s various program committees, the Economy Subcommittee has sponsored studies to identify better practices. AOUSC created a support office for the Subcommittee, which has compiled a database of better practices, such as cost containment ideas, including those identified by the District Court Efficiencies Task Force. However, the database can be accessed only by the support office staff. Thus, to use the database to identify ideas about how to operate more efficiently, local courts must make a specific request. The Economy Subcommittee is also to serve as a critical reviewer of the budget requests of the program areas represented by each Judicial Conference committee, such as Defender Services or Automation and Technology. Although the Subcommittee can use these reviews as an opportunity to encourage the adoption of more efficient practice, it cannot require their adoption. Work Measurement The Judicial Resources Committee, in conjunction with the Economy Subcommittee, directed AOUSC to undertake a comprehensive program to ensure that greater efficiencies are incorporated in the staffing formulas, which are based on a work measurement methodology. In response, in 1994, a group of court unit executives, working with AOUSC, undertook a study that resulted in the creation of the methods analysis program (MAP).Managed by the Analytical Services Office (ASO), the program analyzes workload flows, processes, and methods in order to identify better, more efficient practices. For each organization reviewed (such as the clerk of court or probation office), ASO is to develop an overall analysis of the functions performed (such as case intake in the clerk of court office) and a detailed documentation and analysis of the work processes used to accomplish that function. The goal is to identify tasks that can be eliminated, transferred, or done more efficiently. The program includes incentives for local court units to adopt the better practices identified by the analysis. After a better practice has been identified and approved, courts will be encouraged, but not required, to adopt it. After several years, the staffing formula used to allocate staff to local courts is to be revised to reflect the effect of the better practices. To encourage immediate adoption of any practices that reduce costs, local courts may keep a portion of any savings they achieve through adoption of the practices. ASO began applying the program with probation offices and plans to review all the major functions of appellate, district, and bankruptcy courts. It recently completed a study of the case opening function in district and bankruptcy clerks’ offices. According to AOUSC officials, there are a variety of other ways in which information on better practices may be shared within the judiciary. For example, judges and other court personnel may share information on better practices in national and regional meetings, such as the meetings of AOUSC advisory groups, which include personnel from local courts. Internal publications, such as the Federal Court Management Report, training programs, and electronic bulletin boards, may also be used to highlight suggestions and findings. Conclusions AOUSC’s role in the oversight of court operations is part of the broader structure of court management and governance. Through its support of the Judicial Conference and its committees, and the provision of guidance and advice to court units throughout the nation, AOUSC can provide a national, comparative perspective on court operations. Through its recommended budget allocations, AOUSC can also help to encourage the adoption of efficient practices throughout the federal judiciary. Until recently, AOUSC’s program review approach lacked structure, written guidance, and a central, accurate, and current repository of reviews and reports. The changes being implemented by AOUSC—establishment of a network of program review officers, publication of a study guide, identification of courts and program units to be visited, and revised standards for conducting program reviews—should, if properly implemented, address many of the oversight weaknesses noted above. However, the standards do not completely track the generally accepted government auditing standards issued by the Comptroller General. OPA’s standards allow AOUSC program and court staff to review programs they are responsible for administering. This is inconsistent with the generally accepted standard. OPA’s standards permit reviews to be performed by less-than-independent teams subject to a peer review. However, this approach may not be sufficient to overcome a potential perception of reviewer bias by knowledgeable third parties. OPA standards also allow “managers” to decide whether formal reports are to be issued after program reviews are conducted. This, too, is inconsistent with the generally accepted standard. OPA standards do not ensure that all review team findings will be documented and made available to judiciary officials who can act on them. AOUSC’s previous efforts at internal oversight lacked structure; the recent changes proposed by OPA represent not only a significant improvement but also a significant change in the way oversight has been conducted within AOUSC. Therefore, it would be prudent to monitor how the review officials and program units are implementing the revised system and operating under the new standards. The judiciary’s efforts to identify efficient practices and encourage their adoption by local court units seem appropriate. Many of these efforts are relatively recent and evidence is not yet available for measuring the extent of success. A key measure in this regard will be the number of local courts and program units that adopt “better practices” and either reduce or avoid increasing their budgets. Recommendations To help ensure that AOUSC’s program assessments meet generally accepted auditing standards, we recommend that the Director of AOUSC direct OPA to amend those standards to provide greater assurance against a potential perception of reviewer bias by knowledgeable third parties and greater assurance that all review team findings will be documented and reported to judiciary officials who can act on them, and check each AOUSC division’s compliance with both its plan for conducting program assessments and the standards and study guide for conducting those assessments. Agency Comments and Our Evaluation AOUSC provided written comments on a draft of this report, which are printed in full in appendix II. AOUSC said that it agrees with the report’s recommendations and intends to “adopt them without reservation.” AOUSC’s written comments also discuss AOUSC activities that were outside the scope of this review. AOUSC provided technical comments separately, which we incorporated as appropriate. We are sending copies of this report to the Chairman of your Subcommittee, the Chairman and Ranking Minority Members of other relevant House and Senate Committees with oversight and appropriations responsibilities for the federal judiciary, and the Director of the Administrative Office of the U.S. Courts. This report was prepared under the direction of William O. Jenkins, Jr., Assistant Director. Other major contributors are listed in appendix III. If you have any questions about this report, please call me on (202) 512-8777. Organization and Functions of the Administrative Office of the U.S. Courts AOUSC provides a broad spectrum of management, administrative, and program support to the federal courts. AOUSC’s executive staff, which oversees the provision of this support, comprises the Director and two associate directors—an Associate Director who is also General Counsel, and an Associate Director of Management and Operations. Associate Director and General Counsel The Associate Director and General Counsel supervised the Office of General Counsel (OGC) which provides legal counsel and services to the AOUSC Director and staff, the Judicial Conference and its committees, and to judges and other court officials. Among other services, OGC arranges legal representation for judges and court officials sued in their official capacity and represents AOUSC in bid protests and other administrative litigation. OGC also responds to judges, court officials, Congress, executive branch agencies, and the general public regarding legal inquiries relating to court operations. AOUSC Management Offices AOUSC has five management offices—the Office of Audit; Office of Management Coordination; Office of Program Assessment; Office of Judicial Conference Executive Secretariat; and the Office of Congressional, External and Public Affairs. Office of Audit The Office of Audit (OA) is responsible for the conduct of comprehensive financial audits of the courts’ financial operations and systems. This office (1) provides guidance and oversight for the routine, cyclical financial audits performed by an outside contractor at each court every 2-1/2 years. The office is also responsible for special audits, such as those conducted for a change in accountable officer,and for audits of the central financial systems that support all of the courts. The Office of Audit periodically summarizes the results of individual audit reports to identify recurring and systemic problems. Office of Management Coordination The Office of Management Coordination (OMC) provides general management and policy analysis support to the AOUSC Director and the Associate Director, Management and Operations, by conducting studies and providing advice on management, planning, organization, and publications. OMC is also responsible for coordinating and monitoring management improvement efforts agencywide in an effort to enhance organizational performance. In addition, OMC provides staff support and assistance to the Judicial Conference Committee on the Administrative Office. OMC coordinates AOUSC responses to committee recommendations and to suggestions or complaints from judicial officers directed to the committee. Office of Program Assessment The Office of Program Assessment (OPA) is responsible for overseeing and monitoring the review and assessment processes for judiciary programs and operations by providing assistance to AOUSC program offices and divisions conducting reviews of court operations and by establishing and maintaining information reporting systems for these reviews. OPA is also responsible for monitoring AOUSC’s management controls program, which has been established to try to maximize the use of resources and to safeguard assets. In addition, OPA coordinates or conducts special reviews, evaluations, or investigations as requested. Office of Judicial Conference Executive Secretariat The Office of Judicial Conference Executive Secretariat (OJCES) provides staff support and assistance in planning and preparing official records of Judicial Conference meetings. OJCES also provides staff support and assistance to the Judicial Conference’s Executive Committee. In addition, OJCES is responsible for ensuring that AOUSC units provide effective staff support for Judicial Conference committees. Office of Congressional, External and Public Affairs The Office of Congressional, External and Public Affairs (OCEPA) is responsible for both the performance and the coordination of activities that involve the relationships of the federal judiciary with Congress, the executive branch, state government entities, the media, bar associations, other legal groups, and the public. OCEPA develops, presents, and promotes legislative initiatives approved by the Judicial Conference; prepares or coordinates responses to all policy or legislative inquiries from Congress; and identifies and monitors congressional activity that might have a major impact upon the federal judiciary. AOUSC Program Offices In addition to the five management offices, AOUSC has six broad program offices—the Office of Automation and Technology; the Office of Court Programs; the Office of Facilities, Security and Administrative Services; the Office of Finance and Budget; the Office of Human Resources and Statistics; and the Office of Judges Programs. Office of Information and Technology1 The Office of Information and Technology (OAT) includes seven offices and divisions, plus two training and support centers. OAT is responsible for the implementation of automated data processing, office automation, and information systems in the judiciary. OAT’s responsibilities include assisting in the formation of the judiciary’s automation plans and budgets, developing and implementing court automated systems, providing liaison services to help ensure that the needs of automation users are met, and overseeing and reporting on the use of the Judiciary Automation Fund. Office of Court Programs The Office of Court Programs’ (OCP) six offices and divisions are responsible for overseeing and supporting the judiciary’s clerks’ offices, court reporters, court interpreters, librarians, staff and conference attorneys, federal public defenders, and probation and pretrial services officers. OCP also is charged with facilitating the development of Judicial Conference policies regarding court administration, defender services, and probation and pretrial services; providing guidance to the courts by preparing procedural manuals; and conducting on-site reviews of court operations. The Court Administration divisions conduct Post Automation Reviews (PARs) in individual courts, and the Federal Corrections and Supervision Division conducts reviews of the Probation and Pretrial Automated Case Tracking System (PACTS) in individual probation and pretrial services offices. The Defender Services Division provides administrative support for and analyses of Defender Services workload and costs. Office of Facilities, Security and Administrative Services The responsibilities of the Office of Facilities, Security and Administrative Services’ (OFSAS) six offices and divisions include security plans and operations (in coordination with the U.S. Marshals Service), procurement, property management, printing, nonautomation contracting, space and facilities, and relocation and travel functions. OFSAS provides security advice to the courts, develops procurement regulations, and assists courts in meeting their space needs. The office is also responsible for providing administrative support and services to AOUSC, including personnel services and management of the Thurgood Marshall Federal Judiciary Building. Recently renamed, it was formerly called the Office of Automation and Technology. Office of Finance and Budget The Office of Finance and Budget’s (OFB) five offices and divisions are responsible for conducting financial and budgetary analyses of judiciary programs, establishing fiscal and accounting policies for the judiciary, and coordinating the development of the judiciary’s budget request to Congress. Through its Economy Subcommittee Support Office, OFB is responsible for coordinating efforts to improve efficiency and economy in court administration. In addition, OFB is responsible for developing the work measurement formulas used to staff the offices of court clerks and probation pretrial offices and produces judicial impact statements that analyze the potential and actual effects of legislation on the judiciary. Office of Human Resources and Statistics The Office of Human Resources and Statistics’ (OHRS) four offices and divisions are responsible for overseeing and managing the judiciary’s human resources and statistics functions, including the administration of personnel, payroll, retirement, and insurance programs. The Analytical Services Office is responsible for studying court work methods in an effort to improve operational efficiency through the judiciary’s new Methods Analysis Program. OHRS also develops training policies for AOUSC and court personnel, administers the new Court Personnel Management System, and analyzes and disseminates court workload data through its Statistics Division. Office of Judges Programs The Office of Judges Programs’ (OJP) five offices and divisions provide administrative services to circuit, district, magistrate, and bankruptcy judges; conduct court surveys to determine the need for additional magistrate and bankruptcy judges; make recommendations regarding long-range planning for the judiciary; and provide staff support for several Judicial Conference committees, such as the Committee on Rules, Practice, and Procedure. OJP also provides technical assistance in chambers and case management, organizes orientation programs for new judges, and assists the Federal Judicial Center in planning and conducting training seminars. Comments From AOUSC Major Contributors to This Report General Government Division, Washington, D.C. New York Field Office James R. Bradley, Senior Evaluator Dana L. DiPrima, Evaluator Rudolf F. Plessing, Senior Evaluator Lucine M. Willis, Evaluator The first copy of each GAO report and testimony is free. 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Pursuant to a congressional request, GAO reviewed the Administrative Office of the U.S. Courts' (AOUSC) assessment of local court operations, focusing on whether AOUSC is promoting efficient administrative practices within the judiciary. GAO found that: (1) AOUSC issued uniform written standards for nonfinancial program reviews in November 1995; (2) most of the reviews requested for fiscal years 1992 through 1994 were not conducted in accordance with generally accepted government auditing standards, contained incomplete reports, were not distributed properly, and did not indicate appropriate corrective actions; (3) AOUSC created a network of 35 program review officers that serve as focal points and advisors for review and assessment activities within AOUSC; (4) the Office of Program Assessment (OPA) has initiated a series of court visits to better identify program units needing additional oversight; (5) OPA does not require its program reviewers to be independent of the units they are assessing or to prepare formal reports for each program review; (6) AOUSC has created a program that achieves savings by systematically identifying better, more efficient practices; and (7) it is too early to determine whether the program is having an impact on operational costs.
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Introduction Transnational terrorists and criminals may collaborate, appropriate shared tactics, and otherwise benefit from interaction, resulting in bolstered capabilities, enhanced organizational infrastructure, improved access to resources, and expanded geographic reach. Historical examples also indicate that terrorist and transnational criminal groups may evolve, converge, transform, or otherwise alter their ideological motivations and organizational composition to appear similar. Although information on the extent and nature of criminal-terrorist relationships, including their impact on U.S. national security, remains anecdotal, many view the potential confluence of criminal and terrorist actors, skills, resources, and violent tactics as a cause for concern. Such enhancements may in turn lengthen the duration of insurgencies, extend the longevity and capabilities of criminal and terrorist organizations, and undermine the ability of fragile governments to exert full control of their territory. Some analysts have identified a series of potentially disturbing patterns that has hastened the expansion of relationships between terrorist and transnational crime groups. First, criminal syndicates appear to be growing in size, scope, and ambition. Globalization has extended their transnational reach, while major developments in technology, trade, and the financial industry have provided them with opportunities to exploit vulnerabilities in emerging criminal sectors, such as cybercrime. Many now maintain a transnational footprint and a flexible and networked membership roster that can adapt more readily to new market niches and establish more fluid alliances with external individuals and groups. Second, the nature and activities of terrorist organizations appear to have also changed. Terrorist groups today, particularly those that most threaten U.S. global interests, appear to be motivated primarily by religious rather than nationalist and ethnic separatist imperatives that were common in the 1960s and 1970s. This shift has resulted in extremist movements that elicit sympathy well beyond a specific country or geographic region. Further, terrorist groups appear to have become more resilient, due to a combination of continued state sponsorship or support, as well as entrepreneurial expansion into profitable criminal activities. Combined, these trends may suggest an increase in geographic overlap where criminals and terrorists could operate and interact. These patterns may also suggest greater blurring of distinctions between one group and the other, the adoption of activities often attributed to the other, or the ad hoc evolution of a group's objectives based on the security challenges they encounter. Key nodes, where interaction is most likely, include prisons; cyberspace, particularly online opportunities for social networking; and ungoverned or difficult-to-govern spaces, which include regions plagued by endemic corruption, conflict or post-conflict zones where legitimate governance has yet to take root, border regions, free trade zones, and urban mega cities where pockets of poverty, violence, criminality, and impunity from national law prevails. Overlap may also be facilitated by the involvement of negligent or hostile governments and kleptocratic or criminal states that may consider sponsorship or support of criminal or terrorist activity of strategic value. Perceived Threat The U.S. government has asserted that terrorism, insurgency, and crime interact in varied and significant ways, to the detriment of U.S. national security interests. In January 2012, the Director of National Intelligence (DNI) reported to Congress that transnational organized crime and its links to international terrorism was among the nation's most pressing national security concerns, specifically identifying the following areas of concern for crime-terrorism interaction: Nuclear proliferation: "We are aware of the potential for criminal service providers to play an important role in proliferating nuclear-applicable materials and facilitating terrorism." Kidnapping for ransom: "Kidnapping for ransom is increasing in many regions worldwide and generates new and deep income streams for transnational criminal networks ... and terrorist networks." Human smuggling: "Those who smuggle humans illegally have access to sophisticated, forged travel papers and the ability to constantly change their smuggling routes—routes that may span multiple continents before reaching their destinations. Smugglers undermine state sovereignty and sometimes facilitate the terrorist threat." Illicit finance: "Terrorists and insurgents will increasingly turn to crime and criminal networks for funding and logistics, in part because of U.S. and Western success in attacking other sources of funding. Criminal connections and activities of both Hizballah and AQIM [Al Qaeda in the Islamic Maghreb] illustrate this trend." DNI James R. Clapper's testimony to Congress in 2012 reiterated the findings of the U.S. intelligence community's 2010 review of threats posed by transnational organized crime. In that review, the first of its kind in 15 years, the intelligence community ultimately concluded that such illicit networks have "dramatically" increased in size, scope, and influence internationally. A public summary of the assessment identified a "threatening crime-terror nexus" as one of five key threats to U.S. national security: Terrorists and insurgents increasingly will turn to crime to generate funding and will acquire logistical support from criminals, in part because of successes by U.S. agencies and partner nations in attacking other sources of their funding. In some instances, terrorists and insurgents prefer to conduct criminal activities themselves; when they cannot do so, they turn to outside individuals and facilitators. Proceeds from the drug trade are critical to the continued funding of such terrorist groups as the Taliban and the Revolutionary Armed Forces of Colombia (FARC). Terrorist organizations such as al-Shabaab and drug trafficking organizations such as the cartels based in Mexico are turning to criminal activities such as kidnapping for ransom to generate funding to continue their operations. Some criminals could have the capability to provide weapons of mass destruction (WMD) material to other terrorist groups, such as Hizballah and al-Qaida in the Islamic Maghreb, though the strength of these drug links and support remain unclear. U.S. intelligence, law enforcement, and military services have reported that more than 40 foreign terrorist organizations have links to the drug trade. Some criminal organizations have adopted extreme and widespread violence in an overt effort to intimidate governments at various levels. DNI Clapper's testimony to Congress in 2013 additionally noted that the U.S. intelligence community is "monitoring the expanding scope and diversity of 'facilitation networks,' which include semi-legitimate travel experts, attorneys, and other types of professionals, as well as corrupt officials, who provide support services to criminal and terrorist groups." Other U.S. government documents characterize the confluence of transnational organized crime and international terrorism as a growing phenomenon. Whereas in previous decades criminal and terrorism links occasionally occurred, such connections appear to be taking place with greater frequency today and may be evolving into more of a matter of practice rather than convenience. According to the U.S. Department of Justice (DOJ), recent investigations suggest that international organized criminals are willing to provide logistical and other support to terrorists. According to the U.S. Drug Enforcement Administration (DEA), 19 of 49 (39%) State Department-designated foreign terrorist organizations (FTOs) have "confirmed links to the drug trade" as of November 2011. In 2003, DEA reported that 14 of 36 (39%) FTOs were involved "to some degree" in illicit narcotics activity. For FY2010, DOJ reported that 29 of the top 63 international drug syndicates, identified as such on the consolidated priority organization target (CPOT) list, were associated with terrorists. The State Department's 2012 Country Reports on Terrorism describes more than 20 FTOs as having financially profited from criminal activity to sustain their terrorist operations (see the Appendix ). Such listed FTOs include Al Shabaab, Army of Islam (AOI), Al Qaeda in the Arabian Peninsula (AQAP), Al Qaeda in Iraq (AQI), Al Qaeda in the Islamic Maghreb (AQIM), Abu Sayyaf Group (ASG), United Self-Defense Forces of Colombia (AUC), Continuity Irish Republican Army (CIRA), Communist Party of the Philippines (CPP), Revolution People's Liberation Party (DHKP/C), National Liberation Army (ELN), Revolutionary Armed Forces of Colombia (FARC), Moroccan Islamic Combatant Group (GICM), Hamas, Hezbollah, Haqqani Network (HQN), Jemaah Ansharut Tauhid (JAT), Jemaah Islamiya (JI), Lashkar I Jhangvi (LJ), Liberation Tigers of Tamil Eelam (LTTE), Kurdistan Workers' Party (PKK), Shining Path (SL), and Tehrik-e Taliban Pakistan (TTP). Such government studies reinforce assessments from the late 1990s that predicted an increase in crime-terrorism interactions. For example, in 1997, a U.S. Department of Defense (DOD) task force study on transnational threats concluded that terrorists groups, religious extremists, anti-government militias, narcotics traffickers, and global criminals were "increasingly linked in new and more cooperative ways." In 2000, a U.S. interagency assessment of international crime threats further highlighted growing crime-terrorism interactions. The assessment identified the end of the Cold War as a major contributor to this development. As certain insurgent and extremist groups were no longer able to rely on Soviet-affiliated state sponsors for aid, some increasingly turned to crime as an alternative source of funds. The assessment also concluded that most crime-terrorism interactions were often fleeting, or based on symbiotic arrangements that were nevertheless strained and marked by suspicion. Some groups, however, viewed criminal activity as not only a lucrative source of funding, but also an effective means to advance their political or ideological objectives. Other groups, meanwhile, underwent transformations in which their primary organization motivations would shift from political to (illicit) profit-driven. U.S. Government Strategies To combat this apparent criminal-terrorist connection, recent Administrations have issued several key strategic documents to guide U.S. government efforts and approach the issue from the perspectives of national security, counterterrorism, anti-crime, and intelligence. The Obama Administration's key strategic documents are described below in chronological order. In August 2009, the Obama Administration issued its National Intelligence Strategy , which included as a primary mission the goal of penetrating and supporting "the disruption of terrorist organizations and the nexus between terrorism and criminal activities." In May 2010, the Obama Administration issued its National Security Strategy , a broad-ranging document that identified key priorities for the United States. One such priority was to combat "transnational criminal threats and threats to governance"—including the "crime-terror nexus." The 2010 National Security Strategy encouraged a "multidimensional strategy" that emphasized citizen security and harm reduction, disruption and dismantling of illicit networks, and bolstering the capacity of foreign governments to enforce the rule of law. In April 2011, the U.S. Department of Defense (DOD) issued a Counternarcotics and Global Threats Strategy . The strategy describes an international security environment characterized by a "confluence of dispersed and decentralized global networks of criminals and terrorists." It further states that such networks are "composed largely of individuals and groups that receive occasional support from corrupt government officials" and "are loosely organized and ever-evolving, pragmatically appearing and disappearing for political-criminal gain." The DOD strategy identifies three strategic goals: to disrupt and disable actors and activities related to trafficking, insurgency, corruption, threat finance, terrorism, drug precursor chemical distribution in Afghanistan and Pakistan; to sharply reduce illicit drug and drug precursor chemical distribution, as well as related transnational organized criminal threats in the Western Hemisphere, particularly Mexico, Central America, Colombia, and Peru; and to mitigate the size, scope, and influence of targeted transnational criminal organizations and trafficking networks such that they pose only limited, isolated threats to U.S. national and international security. In June 2011, the Obama Administration issued its National Strategy for Counterterrorism . Included among its eight "overarching goals" was the goal to "deprive terrorists of their enabling means"—terrorist financing and the facilitation of terrorist travel, materiel smuggling, and communications. The Administration's National Strategy for Counterterrorism sought to achieve this goal by blocking the flow of financial resources to terrorist groups through sanctions, prosecutions, international cooperation, and diplomatic pressure (money laundering and kidnapping for ransom); and working with international partners to identify and prevent terrorist groups from moving its recruits, operatives, and supplies across borders (human and weapons smuggling). In July 2011, the Obama Administration issued its Strategy to Combat Transnational Organized Crime . Among its primary objectives was to "defeat transnational criminal networks that pose the greatest threat to national security by targeting their infrastructures, depriving them of their enabling means, and preventing the criminal facilitation of terrorist activities." Key actions described by the strategy to combat the crime-terrorism nexus included the following: Enhancing intelligence collection on transnational organized crime threats, particularly the potential role of criminal groups in facilitating WMD terrorism. Exposing vulnerabilities in the international financial system that could be exploited by "terrorist and other illicit financial networks" and applying financial tools and sanctions against such networks. Establishing a "whole-of-government plan" to combat kidnapping for ransom as a means to finance terrorists, among other "bad actors." Developing a "comprehensive approach" to dismantling drug trafficking organizations with connections to terrorist groups. Enhancing foreign capabilities through counterterrorism capacity building, foreign law enforcement cooperation, military cooperation, and the strengthening of justice and interior ministries. Patterns in Crime-Terrorism Interaction Limited unclassified anecdotal evidence largely serves as the basis for the current understanding of criminal-terrorist connections. In the absence of comprehensive data, it is difficult to assess whether such anecdotal cases are indicative of a widespread problem, a growing trend, or isolated observation. What is clear from existing literature on the subject, however, is that crime-terrorism interactions can vary significantly and change over time. The following sections summarize several common patterns of crime-terrorism links, with specific examples drawn from a range of court cases, reports, and news articles. Partnership Motivations and Disincentives The underlying rationales for criminal and terrorist group partnerships as well as the conditions that may facilitate the evolution or transformation of a criminal or terrorist group into the other may vary. Collaboration can serve as a force multiplier for both criminal and terrorist groups, bolstering their capabilities, strengthening their infrastructure, and increasing their wealth. On the other hand, partnering could also have the potential of sowing seeds for distrust and competition among illicit actors—vulnerabilities that could be exploited by international security authorities. From the perspective of a terrorist organization, the primary motivation for partnering or adopting criminal tactics would be to sustain and grow the organization for purposes of pursuing or financing its ideological-based activities. Out of this sense of perceived need, the organization may turn to or rely more heavily on partnering with criminal syndicates for continued viability. Common disincentives for partnering would include increased attention from government authorities; fear of compromising internal security; ideological resistance to illicit endeavors; and the availability of sufficient alternative funding sources, such as state sponsors. From the perspective of a criminal syndicate, motivations for cooperating with terrorist organizations would include the near singular purpose of increasing its financial stature. As with terrorist organizations, common disincentives from the perspective of criminal groups may involve increased and unwanted attention from authorities, risk of infiltration, and heightened vulnerability of organization leadership to capture. Criminal groups already in control of lucrative revenue streams may not find the potential for additional business with terrorist groups sufficient to outweigh the costs. Criminal groups may also opt to avoid collaboration with terrorist groups if such interactions would disrupt their relationships with corrupt government officials who are willing to facilitate criminal activities, but not terrorism-related ones. Conditions that may affect the likelihood of confluence include a lack of in-house capabilities and demand for special skills to conduct particular operations. Some groups may be more hesitant to collaborate with outsiders, depending in part on the nature of the operational environment, the presence of competitors, and the opportunity for contact with and the strength of relations between terrorist and criminal elements. Other barriers to cooperation may include cultural, religious, or ideological differences across groups. On the other hand, motivations such as greed or necessity for organizational viability or expansion may induce some groups to welcome or seek out external partners. Individual groups may also transition along an apparent crime-terrorism continuum. Over time, ideologically motivated groups that initially avoid involvement with criminal activities may become increasingly attracted by the lucrative nature of criminal activities. In other instances, criminal groups may become radicalized and apply their criminal expertise to conduct operations that not only result in lucrative illicit profits but also further ideologically oriented goals. In other situations, individuals in a terrorist organization may not follow leadership directives to stay away from individuals in a criminal organization (or vice versa) and may unilaterally develop external relationships. Some analysts suggest that this phenomenon may occur with greater regularity due to the increasingly decentralized nature of terrorist groups and other possible factors. Appropriation of Tactics Criminals and terrorists often share similar tactics to reach their operational goals. These include acts of terrorism and political violence; involvement in criminal activity for profit; money laundering; undetected cross-border movements; illegal weapons acquisition; and government corruption. Changes in the selection of tactics may signify shifts in the strength and capacity of an organization or the ideological desires of the organization's leadership. A criminal group under pressure by authorities or rival criminal groups may react by organizing violent attacks to intimidate the public and deter the government from future pursuit. A terrorist group's loss of state sponsorship may prompt it to find illicit alternatives for funding and operational support. The following sections describe several methods and tactics common to both criminal and terrorist groups, including (1) the use of violence for political effect, (2) crime-for-profit activities, and (3) illicit support activity. Violence for Political Effect Although more commonly associated with terrorist groups, criminal groups have also occasionally used violence as a tactic to change political and public perceptions. Common past examples have included the use of terrorist-style violence, intimidation, and hostage-taking tactics by the Brazilian prison gang and drug trafficking organization (DTO) Primeiro Comando da Capital (PCC) in 2006. In response to counternarcotics pressure in the 1980s and 1990s, the Medellin cartel conducted a wave of violent attacks on Colombian government and civilian targets, including the explosion of a commercial airliner and a truck bomb. The Italian mafia targeted prominent landmarks, politicians, and government officials in response to law enforcement pressure in the 1990s. Drug trafficking-related violence in Mexico, which surged in recent years due to a combination of increased counternarcotics pressure by the government and DTO-on-DTO competition, has at times appeared similar to terrorist-style attacks, with comparable tactics of intimidation. Mexican government officials, for example, have been targeted by traffickers, at times in reprisal for their role in cartel arrests. In May 2008, one of Mexico's highest-ranking law enforcement officials, Edgar Millan Gomez, was assassinated in Mexico City by DTO-affiliated gunmen. In other cases, drug traffickers have deployed small improvised explosive devices (IEDs) against law enforcement officials suspected of working for rival gangs. Observers continue to debate whether the use of political violence as a tactic by Mexican DTOs warrants describing such groups as terrorist organizations. Most observers recognize that few instances of Mexican DTO violence appear to be motivated by ideology or a desire to overthrow the Mexican government. According to the State Department's 2012 Country Reports on Terrorism, there was "no evidence that these criminal organizations had political or ideological motivations, aside from seeking to maintain the impunity with which they conduct their criminal activities." Some have suggested that one of these exceptions may have occurred in September 2008, when a deadly attack on Mexico's Independence Day involving throwing grenades into a crowd of revelers that had gathered for a firework display was suspected to have been organized by drug traffickers. Yet, in this case, some traffickers appeared to distance themselves from the attack, joining in the victims' outcry and refusing to take responsibility for the attack. Other incidents that have raised questions about Mexican drug traffickers' motives and tactics include a casino fire that killed 52 civilians in 2011, and was allegedly instigated by Los Zetas. Crime-for-Profit In addition to organized crime groups, some terrorist organizations may seek funding through criminal activities. Often, the potential profits associated with criminal activity are a motivating factor for both organized crime and terrorist groups. Since the end of the Cold War and corresponding declines in traditional state-sponsored sources of funding, some observers suggest that terrorist groups have become increasingly motivated to generate funds through criminal activity to sustain organizational capabilities. Heightened international counterterrorism measures in the past decade may have further depleted other traditional sources of funds, including private sector donations, which reinforce the desire for terrorist groups to seek alternative funding methods. Criminal activities conducted for profit may range from local crimes of theft, burglary, and extortion to illicit trafficking of high-value commodities on a transnational scale. Terrorist groups may also "tax" other groups or charge a security or protection fee for permitting illicit trafficking activity to take place in a certain region under their control. Although terrorist groups may engage in criminal activity for fundraising, it is not always the case that such groups lose their ideological motivations. As one researcher explains, "[C]riminality does not imply criminalization. It is entirely possible for armed groups to exploit drugs, smuggling, and extortion without becoming motivated by these activities. Resources do not speak for themselves: simply engaging in criminality does not mean that an armed group exists to be criminal." The universe of potential crime-for-profit activities is vast. The following list describes three common transnational manifestations: drug trafficking, cigarette smuggling, and kidnapping-for-ransom. Illicit Support Activity Both criminal and terrorist groups rely on a variety of illicit support activities to further their operations. Although some such activities can be conducted with in-house capabilities and assets, others may require cooperation with external criminal specialists, corrupt "gatekeepers," local and regional "fixers," and "shadow facilitators." The depth and durability of these crime-terrorism relationships for support activities vary. Some terrorist groups view links to outside criminal networks as short-term marriages of convenience, where the actors build ephemeral business ties. These interactions often appear to be distinctly transactional in nature, with one criminal actor or organization providing a specific, tangible service to a terrorist group. In other cases, these relationships will be more synergistic, with terrorist and criminal groups creating enduring coalitions. In such coalition relationships, criminals and terrorists assume complementary but separate roles. Organizational Evolution and Variation Typically, criminal groups are primarily driven by profit motives, whereas terrorist groups are ideologically driven. The motivations that drive terrorist and criminal groups, however, can evolve with time. A purely criminal group may transform to adopt political goals and ideological motivations. Terrorist groups, on the other hand, may shift toward criminality. For some terrorist groups, criminal activity remains secondary to ideological ambitions. For others, profit-making may surpass political aspirations as the dominant operating rationale. The level of involvement and expertise in terrorist or criminal activities may vary, depending on the organization's current leadership, membership composition, geographic distribution of sympathizers and diaspora networks, dependence on state sponsorship, and physical proximity or access to illicit resources. Frequently cited terrorist organizations involved in criminal activity include, among others, ASG, Al Qaeda's affiliates, D-Company, PKK, FARC, Haqqani Network, and Hezbollah. Brief descriptions of these groups' criminal activities are described below. Abu Sayyaf Group (ASG) A Philippines-based terrorist group, ASG appears to have at times prioritized criminal activities over ideological operations. Major shifts toward crime occurred in conjunction with leadership and membership composition changes, which altered the relative importance of ideological zeal and criminal tendencies. During its periods of high criminality, ASG became well known for its success in kidnappings for ransom, maritime piracy, and arms trafficking. Observers suggest that the group's overall drive toward criminal activity has been perpetuated by the group's ability to generate illicit profits, with new recruits tending to be more motivated by ASG's promise of financial wealth rather than ideological convictions. The State Department has listed ASG as an FTO since 1997, and President George W. Bush designated ASG a specially designated global terrorist (SDGT) pursuant to EO 13224 in 2001. Al Qaeda's Affiliates There is no conclusive evidence of senior-level Al Qaeda members directly involved with or motivated by organized crime. Many speculate that this is because of the group's strict ideological beliefs and fear of a loss of credibility if senior leaders were found to be directly involved in such activities. Connections to organized crime activity, however, can be drawn among mid-level and low-level Al Qaeda members and supporters. Moreover, it appears that Al Qaeda's affiliates and franchises do not necessarily share the same aversion to criminal activity. Notable crime-funded Al Qaeda affiliates include AQIM and AQI. Additionally, Al Qaeda's disinclination toward direct involvement in organized crime has not prevented it from cooperating, supporting, and jointly training with other insurgent groups that are more entrenched in trafficking and smuggling activities, including the Haqqani Network and the Taliban. The State Department designated Al Qaeda as an FTO in October 1999, and President George W. Bush designated it as an SDGT pursuant to EO 13224 in 2001. Several of its affiliates have also been designated separately as FTOs, including AQI in December 2004, AQIM in February 2008 (AQIM was also previously designated in March 2002 when it was called the Salafist Group for Call and Combat, GSPC), and AQAP in January 2010. D-Company Dawood Ibrahim, the alleged leader of D-Company, is an INTERPOL fugitive and wanted in connection with the 1993 Mumbai bombing and sanctioned under U.N. Security Council Resolution 1267. Ibrahim was listed in October 2003 by the Treasury Department as a specially designated global terrorist (SDGT), and both Ibrahim and his organization were listed as significant foreign narcotics traffickers (SDNTKs) in May 2008, pursuant to the Foreign Narcotics Kingpin Designation Act. His organization, D-Company, can be characterized as both a transnational criminal syndicate as well as ideologically aligned with terrorist groups operating in South Asia, including Lashkar-e-Taiba (LeT). According to reports, D-Company originated as a smuggling operation in the 1970s. It evolved in the 1990s into an organized crime group not only motivated by profit but also one that engaged in insurgent activity, eventually supporting efforts to smuggle weapons to militant and terrorist groups in the region. By the 1990s, it began to conduct and participate in terrorist attacks, including the March 12, 1993, Bombay bombing. D-Company's criminal activities reportedly span extortion, smuggling, narcotics trafficking, and contract killings. Its apparent willingness to work with and provide logistical, financial, and material support to ideologically motivated violent groups exemplifies the risks associated with converged criminal and terrorists threats. Kurdistan Worker's Party (PKK) Formed in the 1970s and operational since the early 1980s as a Kurdish nationalist group with Marxist-Leninist leanings, the PKK increasingly turned to crime after it lost its state sponsors. By the late 1990s, and particularly after its leader Abdullah Ocalan was captured in 1999, the PKK invested heavily in transnational organized crime activities, such as drug trafficking, arms smuggling, human smuggling, extortion, money laundering, counterfeiting, and illegal cigarettes. By the 1990s, the PKK had formed specialized units to variously carry out militant operations, contraband trafficking, political activities, and information campaigns. As a result, some parts of the PKK appear to behave more like a criminal organization rather than a terrorist or guerrilla organization. According to the U.S. government, many of these criminal activities are centered in Europe, where there is a significant Kurdish diaspora population. The State Department designated the PKK as an FTO in October 1997. The PKK was also designated as an SDGT in 2001. For its alleged involvement in drug trafficking, the President designated the PKK as an SDNTK in May 2008, pursuant to the Foreign Narcotics Kingpin Designation Act. Revolutionary Armed Forces of Colombia (FARC) Operational since the 1960s, the FARC has been described as one of the largest, oldest, most violent, and best-equipped terrorist organization in Latin America. Its longevity is due in part to its involvement in the drug trade. The enormous profit opportunity that drug trafficking has provided to the FARC is widely viewed as the driving factor for its involvement in such criminal activity. According to reports, the FARC first became involved in the drug trade in the 1980s by levying protection fees on coca bush harvesters, buyers of coca paste and cocaine base, and cocaine processing laboratory operators in territory under FARC control. Over time, the FARC took a more direct role in drug production and distribution. By the 2000s, the FARC had reportedly become the world's largest supplier of cocaine. The FARC also reportedly generates revenue from extortion rackets, kidnapping ransoms, and illegal mining. Exploratory peace talks between the Colombian government and the FARC began in August 2012, the outcome of which may have implications for the FARC's future involvement in illicit criminal activities. The State Department designated the FARC as an FTO in October 1997. Haqqani Network The family-run Haqqani Network is commonly described as an insurgent group, in equal measures one of the Taliban's most capable militant factions as well as an enterprising transnational criminal organization. Headquartered in North Waziristan, Pakistan, this insurgent group is suspected of conducting major attacks against allied coalition members of the North Atlantic Treaty Organization (NATO) and U.S. forces in Afghanistan as well as active involvement in a wide range of highly profitable licit and illicit activity. In the 1980s, Jalaluddin Haqqani first gained a reputation as an effective mujahedin commander and U.S. ally against the Soviet Union. He later joined the Taliban regime in the 1990s when in power in Afghanistan. The group continues to maintain relationships not only with Al Qaeda and other militant groups in the region, but also purportedly benefits from a relationship with Pakistan's Inter-Services Intelligence Directorate (ISI)—a relationship strongly decried by America's top ranking military officer in September 2011. As part of a strategy of financial diversification to ensure the organization's resiliency against external pressures, the group also benefits financially from extortion and protection rackets, robbery schemes, kidnapping for ransom, and contraband smuggling (e.g., drugs, precursor chemicals, timber, and chromite). The Haqqanis also reportedly control licit import-export, transportation, real estate, and construction firms through which illicit proceeds can be laundered. Pursuant to the Haqqani Network Terrorist Designation Act of 2012 ( P.L. 112-168 ), the State Department designated the group as an FTO in September 2012. Hezbollah Based in Lebanon, with established cells in Africa, North and South America, Asia, and Europe, Hezbollah is known to have or suspected of having been involved in terrorist attacks against U.S. interests worldwide. Although primarily funded and trained with support from state sponsors, chiefly Iran, Hezbollah also reportedly benefits from a sprawling global commercial network of licit and illicit businesses, largely connected to expatriate Lebanese communities worldwide. Sources of funds include private donors and large-scale investments in legitimate businesses. Criminal indictments and statements by U.S. officials and other experts suggest that Hezbollah has also become well-integrated in the domain of transnational organized crime, deriving profits from a wide range of illicit enterprises, such as drug trafficking, precursor chemical trafficking, counterfeit pharmaceutical trafficking, sales of counterfeit commercial goods and electronics, auto theft and fraudulent re-sale, diamond smuggling, cigarette and baby formula smuggling, credit card fraud, and insurance scams, among potentially many others. Pursuant to EO 12947, Hezbollah was designated in January 1995 as a specially designated terrorist (SDT). The State Department designated Hezbollah as an FTO in 1997. In October 2001, Hezbollah was also designated as an SDGT pursuant to EO 13224. Foreign Policy Responses With recognition that every crime-terrorism partnering circumstance will be different and the tools to identify and address such concerns may change, a wide range of anti-crime and counterterrorism policy options can be considered. The variety of options available, however, also challenges policymakers to consider several key questions in formulating responses. Should a specific agency or an interagency coordinating body be designated as leading U.S. government responses to crime-terrorism threats? Under what circumstances would U.S. responses to crime-terrorism threats be most appropriately led by the intelligence community, military, diplomatic corps, or law enforcement agencies? How can resources and authorities be allocated and managed to avoid excessive duplication while also ensuring effective policy response coverage? The following sections describe selected key foreign policy responses to crime-terrorism nexus threats and related policy considerations for Congress for each response. These may be applied in various combinations or sequences, depending on the specific circumstances. Diplomacy U.S. diplomatic efforts to promote anti-crime and counterterrorism goals occur through bilateral, regional, and multilateral mechanisms. Such efforts are often led by the U.S. Department of State and include initiatives developed by its regional bureaus, the Bureau for International Narcotics and Law Enforcement Affairs (INL), and the Bureau of Counterterrorism (CT). Relevant U.N. treaties to which the United States is party to include the International Convention Against the Taking of Hostages, International Convention for the Suppression of Terrorist Bombings, International Convention for the Suppression of the Financing of Terrorism, U.N. Convention against Transnational Organized Crime, and International Convention for the Suppression of Acts of Nuclear Terrorism. Through the U.N. Security Council, the United States also participates in the Security Council Sanctions Committee. The Sanctions Committee administers and enforces a range of sanctions and targeted measures against Al Qaeda and the Taliban, among others, which include arms embargoes, travel bans, asset freezes, and diplomatic restrictions. Bilaterally, the U.S. government maintains mutual legal assistance treaties (MLATs) and extradition agreements with foreign countries to facilitate transnational investigations and information sharing. Other options available to the State Department include designating entities as FTOs, pursuant to the Immigration and Nationality Act (INA), as amended, and barring known foreign terrorists and transnational organized criminals from entry into the United States and providing grounds to remove and deport such individuals if in the United States, pursuant to several visa ineligibility conditions. (See text box below for more on a recent FTO designation, the Haqqani Network.) Additionally, the U.S. Department of the Treasury's Office of Terrorist Financing and Financial Crimes (TFFC) leads the U.S. delegation in meetings of the Financial Action Task Force (FATF), an international body that develops global regulatory standards for combating money laundering and terrorist financing. Congress has provided direction to relevant federal departments to conduct diplomatic activities to address crime-terrorism issues by enacting legislation that authorizes and appropriates funds to relevant agencies to perform such tasks, as well as by conducting program oversight through hearings and reporting requirements. Given the inherently transnational nature of many current crime-terrorism challenges, diplomacy often plays a central role in responses. The extent to which diplomacy can be effective in combating crime-terrorism threats, however, is limited by delays associated with achieving consensus agreements and potentially long-lasting gaps in foreign political will and capacity. Foreign Assistance Several U.S. departments and agencies administer programs to train foreign law enforcement officials and other security forces; develop legal frameworks in partner nations to criminalize and combat various crime-, drug-, and terrorism-related activities; and support institutional capacity building for foreign internal security and border enforcement entities. U.S. foreign assistance efforts to combat international terrorism or transnational crime can have mutually beneficial implications. In cases of crime-terrorism confluence, some have cautioned that an increasingly blurred line between counterterrorism and anti-crime assistance could reduce foreign aid transparency and raise additional challenges in planning and coordinating projects to avoid redundancy. In some cases, foreign development aid may also risk unintentionally providing illicit groups with an additional source of funding. In regions where known crime-terrorist groups are known to operate, such as Afghanistan, funds intended for development projects have at times benefited illicit groups, who offer development contractors with security and protection services. Most U.S. foreign police assistance is administered through the U.S. Departments of State and Defense, and programs are variously implemented by other U.S. agencies and federal contractors in host nations. In some situations, the U.S. government may be requested to support foreign militaries in their efforts to combat crime-terrorism threats, such as the FARC in Colombia or the Taliban in Afghanistan. In addition to U.S.-funded foreign security forces support efforts, the U.S. Agency for International Development (USAID) is often involved in developing related justice sector and rule of law assistance programs. DOJ maintains in-house expertise through its Office of Overseas Prosecutorial Development Assistance and Training (OPDAT) and International Criminal Investigative Training Assistance Program (ICITAP) to implement capacity building projects that support foreign countries investigate and prosecute cases involving transnational crime and international terrorism. U.S. federal prosecutors may serve as Resident Legal Advisors (RLAs) overseas to support related justice sector training, institution building, and legislative drafting. Congress has played an active role in establishing the scope and amount of U.S. assistance that can be provided for the purposes of counterterrorism and anti-crime. Specific authorities are outlined in the Foreign Assistance Act of 1961, as amended, Title 10 of the U.S. Code, and periodic National Defense Authorization Acts. Additional conditions may also be included in appropriations acts for the various agencies involved in administering foreign assistance for counterterrorism and anti-crime. Financial Actions Several unilateral and multilateral policy mechanisms are available to block transactions and freeze assets of specified terrorist or criminal entities, as well as to strengthen international financial systems through enhanced regulatory requirements. Unilaterally, the Treasury Department's Office of Foreign Assets Control (OFAC) administers and enforces unilateral targeted financial sanctions against a list of foreign entities and individuals (specially designated nationals, or SDNs) that include SDGTs, FTOs, Middle Eastern terrorist organizations found to undermine and threaten Middle East peace process efforts (specially designated terrorists, or SDTs), transnational criminal organizations (TCOs), and specially designated narcotics traffickers and trafficking kingpins (SDNTs and SDNTKs). Authorities for OFAC to designate such entities are derived from executive order and legislative statutes, which include the International Emergency Economic Powers Act (EEPA), the Antiterrorism and Effective Death Penalty Act of 1996 (AEDPA), and the Foreign Narcotics Kingpin Designation Act. Additionally, Title II of the USA PATRIOT ACT of 2001 ( P.L. 108-56 , as amended) introduced several policy tools that strengthened the existing U.S. framework to combat illicit finance. Among other provisions, this act developed a procedure, popularly known as Section 311, to apply enhanced regulatory requirements, called "special measures," against designated jurisdictions, financial institutions, and international transactions that are found to be involved in criminal or terrorist financing activities. At the multilateral level, the United Nations administers several sanctions programs to freeze funds related to persons involved in acts of terrorism, including individuals and entities associated with Al Qaeda and the Taliban, pursuant to U.N. Security Council Resolution 1373 (2001), U.N. Security Council Resolution 1267 (1999), and U.N. Security Council Resolution 1988 (2011). Many observers have argued that a key tool to combat the confluence of crime and terrorism is to follow their overlapping money trails and apply financial sanctions and heightened regulatory conditions to vulnerable financial sectors. Both types of groups require funds to sustain operations, and such funds often intersect with the formal international banking system. Critics of such tools to counter illicit financial transaction suggest that they are often laborious and time-intensive to implement, and not necessarily effective in dismantling crime or terrorism networks. Policymakers have acknowledged that criminals and terrorists continue to exploit opportunities to move funds and hide their financial tracks in multiple ways: in the formal financial system; through centuries-old techniques such as bulk cash smuggling, trade-based money laundering, and hawala-type informal value transfer systems; and through modern technologies such as pre-paid cards, mobile banking systems, and the Internet. Intelligence Although few details are publicly available about the intelligence community's role in combating crime-terrorism threats, intelligence can play a significant role in developing strategic analyses that prioritize crime-terrorism trends of national security significance, as well as in developing operational and tactical responses to detect, influence, and target specific crime-terrorism networks, nodes, plans, and actors. The 2009 National Intelligence Strategy described the nexus between terrorism and criminal activities as among the intelligence community's priorities. In the past, some have suggested that there appeared to be limited, if any, systematic gathering of intelligence related to the nexus between crime and terrorism and, as a result, an incomplete understanding of the scope and nature of relationships between and convergence among terrorists and criminal actors. The Obama Administration's 2011 Strategy to Combat Transnational Organized Crime acknowledged that "a shift in U.S. intelligence collection priorities" since 9/11 resulted in "significant gaps" related to transnational organized crime. The 2011 Strategy also identified the enhancement of "U.S. intelligence collection, analysis, and counterintelligence" on transnational organized crime as "a necessary first step." Since 9/11, numerous bills have addressed terrorism as well a transnational crime-related issues. Similarly, a number of congressional hearings have focused on issues relating to international terrorism and transnational crime. Some observers suggest that heightened congressional focus on the confluence of crime and terrorism may have an impact on the executive branch's approach to the issue and appreciation for the risks and vulnerabilities associated with crime-terrorism partnering arrangements. Military Actions In some cases, particularly in non-permissive security environments in which traditional law enforcement units may have difficulty operating, the U.S. military has been called upon to contribute to certain joint counternarcotics and counterterrorism or counterinsurgency activities. In 2002, for example, Congress first authorized DOD to support a "unified campaign against narcotics trafficking ... [and] activities by organizations designated as terrorist organizations such as the Revolutionary Armed Forces of Colombia (FARC), the National Liberation Army (ELN), and the United Self-Defense Forces of Colombia (AUC)." Although Congress renewed this authority through FY2012 in the National Defense Authorization Act for Fiscal Year 2012 ( P.L. 112-81 ), it has not been codified and is limited only to activities in Colombia. Military operations in Afghanistan provide another example in which DOD has taken an expanded approach to crime-terrorism nexus issues. In late 2008, DOD amended its rules of engagement in Afghanistan to allow U.S. military commanders to target drug traffickers and others who provide material support to insurgent or terrorist groups such as the Taliban and members of hybrid crime-terrorism groups such as the Haqqani Network. DOD further clarified that the U.S. military may accompany and provide force protection in counternarcotics field operations. In some cases, the U.S. military has chosen to take lethal action to rescue or attempt to rescue hostages in kidnapping for ransom situations. U.S. military involvement in situations where there are overlaps between anti-crime and counterterrorism goals is not necessarily warranted or desired. In some situations, political sensitivities and rules of engagement may prevent or prohibit the U.S. Armed Forces from direct involvement. Some observers caution that militarized counternarcotics or anti-crime policies may risk escalating suppression tactics and contribute to violations of human rights. Investigations Various elements of the U.S. Departments of Justice (DOJ) and the Department of Homeland Security (DHS) are tasked with investigating cases that involve alleged prohibited acts related to international terrorism and transnational crime. These include the U.S. Federal Bureau of Investigation (FBI), the U.S. Drug Enforcement Administration (DEA), the International Organized Crime Intelligence and Operations Center (IOC-2), and Immigration and Customs Enforcement (ICE). The State Department, DOD, and FBI also publicize rewards programs for citizen tips that lead to the apprehension of selected high-profile perpetrators of transnational organized crime, including money launderers, human traffickers, and drug traffickers, as well as terrorists. Some observers see the nexus between crime and terrorism as a potential benefit for detection and law enforcement prosecution that could be further exploited. Even if prosecutors do not have sufficient evidence to convict a suspected terrorist of terrorism-related charges, other criminal charges may be effectively used. Furthermore, some criminal charges, such as violations related to drug trafficking, can lead to jail sentences and penalties similar in magnitude to terrorism ones. It remains unclear, however, how effective such law enforcement and prosecution approaches have been to combat terrorism or how frequently such strategies have been implemented in practice, both in the United States and among partner nations, due to the lack of consistency in tracking cases with crime-terrorism nexus connections. Congress may have an interest in assessing how existing statutes have been used to support investigative and prosecution-related activities in response to entities suspected of engaging in terrorism-crime partnering activities. Assessing investigative, prosecution, and sentencing data collected in the 11 years since the attacks of 9/11 may provide Congress with information regarding statutes that have been effectively used to address crime-terrorism partnering activities and areas where additional legislative assistance might be required. Looking Ahead: Implications for Congress Policy issues related to the interaction of international crime and terrorism are inherently complex. While the U.S. government has maintained substantial long-standing efforts to combat terrorism and transnational crime separately, questions remain about how and whether issues related to the interaction of the two threats are handled most effectively across the multiple U.S. agencies involved. Efforts to combat transnational crime can result in positive and negative outcomes with counterterrorism policies, raising fundamental questions about how to prioritize combating crime or terrorism aspects of a case when both elements are present. Further, questions remain on how links between terrorist-criminal activity and potentially related U.S. polices—including but not limited to WMD proliferation, cyber security, post-conflict reconstruction efforts, and counterinsurgency—are integrated across agencies. Since the September 11 attacks, Congress has enacted several landmark bills that have given the U.S. government greater authority and additional tools to counter the convergence of organized crime and terrorism. Less than six weeks after the attack, Congress enacted the USA PATRIOT Act ( P.L. 107-56 ) to strengthen the U.S. government's ability to detect, report, and prevent terrorist activities, including potential connections between organized crime and terrorism. Additionally, Congress enacted the Intelligence Reform and Terrorism Prevention Act of 2004 ( P.L. 108-458 ) and the USA PATRIOT Improvement and Reauthorization Act of 2005 ( P.L. 109-177 ), which further enhanced U.S. government efforts to crack down on terrorist financing and money laundering. Based on recent U.S. assessments, transnational crime and international terrorism appear to intersect and overlap in ways that will, at times, affect U.S. national interests. To this end, Congress may choose to continue to evaluate existing approaches and programs to combat the confluence of crime and terrorism through hearings and requesting or legislating reports to be issued by relevant executive branch agencies and inspector general offices. Congress may also choose to modify, adapt, or enhance existing legislative authorities and mandates to target various dimensions of the problem. Such approaches may be region- or group-specific, or global in scope. More broadly, as policymakers consider the crime-terrorism nexus issue and relevant policy responses, key questions for Congress may include the following: What is the scope of the crime-terrorism issue? What types of crimes are involved? Which groups and actors of both kinds pose the greatest threat to U.S. national security? What political, social, economic, geographic, and demographic circumstances facilitate the interaction between transnational crime and international terrorism? Has the United States successfully exploited the partnering arrangements and differences in motivations and capabilities of terrorist groups and criminal organizations? If so, what lessons learned could apply to current and future activities by such actors? What prevents the U.S. government and international community from disrupting and dismantling current crime-terrorism threats? Which federal government entities have the lead roles for addressing various aspects of the crime-terrorism phenomenon? How are government funds being spent to address concerns about crime-terrorism links? Is there a need to expand or adjust existing congressional authorities to combat the combined crime-terrorism threat? Are the available U.S. foreign policy tools sufficient to meet today's crime-terrorism concerns—and are such tools effectively implemented? If not, what can be improved? Appendix. Terrorist Links to Criminal Financing The following table summarizes the State Department's descriptions of how current foreign terrorist organizations (FTOs) raise funds and whether, if at all, an FTO is involved in criminal activities as a source of revenue. Among the 51 FTOs described in the State Department's most recent Country Reports on Terrorism (from May 2013), sources of funding vary. Common sources of funding include, in various combination, state sponsors, private donors, other terrorist groups, legitimate business activity, proceeds of crime. Popular forms criminal financing include extortion, kidnapping for ransom, drug trafficking, robbery, human smuggling, weapons smuggling, other contraband smuggling, money laundering, bank fraud, credit card fraud, cybercrime, immigration fraud, passport falsification, and illegal charcoal production. For 9 of the 51 FTOs, the State Department reports that funding sources and mechanisms are "unknown."
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This report provides an overview of transnational security issues related to patterns of interaction among international terrorist and crime groups. In addition, the report discusses the U.S. government's perception of and response to the threat. It concludes with an analysis of foreign policy options. In recent years, the U.S. government has asserted that terrorism, insurgency, and crime interact in varied and significant ways, to the detriment of U.S. national security interests. Although unclassified anecdotal evidence largely serves as the basis for the current understanding of criminal-terrorist connections, observers often focus on several common patterns. Partnership Motivations and Disincentives: Collaboration can serve as a force multiplier for both criminal and terrorist groups, as well as a strategic weakness. Conditions that may affect the likelihood of confluence include demand for special skills unavailable within an organization, greed, opportunity for and proclivity toward joint ventures, and changes in ideological motivations. Appropriation of Tactics: Although ideologies and motivations of an organization may remain consistent, criminals and terrorists have shared similar tactics to reach their separate operational objectives. Such tactics include acts of violence; involvement in criminal activity for profit; money laundering; undetected cross-border movements; illegal weapons acquisition; and exploitation of corrupt government officials. Organizational Evolution and Variation: A criminal group may transform over time to adopt political goals and ideological motivations. Conversely, terrorist groups may shift toward criminality. For some terrorist groups, criminal activity remains secondary to ideological ambitions. For others, profit-making may surpass political aspirations as the dominant operating rationale. Frequently cited terrorist organizations involved in criminal activity include Abu Sayyaf Group (ASG), Al Qaeda's affiliates, D-Company, Kurdistan Worker's Party (PKK), Revolutionary Armed Forces of Colombia (FARC), Haqqani Network, and Hezbollah. To combat these apparent criminal-terrorist connections, Congress has maintained a role in formulating U.S. policy responses. Moreover, recent Administrations have issued several strategic documents to guide U.S. national security, counterterrorism, anti-crime, and intelligence activities. In July 2011, for example, the Obama Administration issued the Strategy to Combat Transnational Organized Crime, which emphasized, among other issues, the confluence of crime and terrorism as a major factor in threatening the U.S. global security interests. While the U.S. government has maintained substantial long-standing efforts to combat terrorism and transnational crime separately, Congress has been challenged to evaluate whether the existing array of authorities, programs, and resources sufficiently responds to the combined crime-terrorism threat. Common foreign policy options have centered on diplomacy, foreign assistance, financial actions, intelligence, military action, and investigations. At issue for Congress is how to conceptualize this complex crime-terrorism phenomenon and oversee the implementation of cross-cutting activities that span geographic regions, functional disciplines, and a multitude of policy tools that are largely dependent on effective interagency coordination and international cooperation.
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On February 18, 1943, the United States filed a petition in the United States District Court for the District of Massachusetts to condemn certain land and buildings in Springfield, Massachusetts, for use by the Army for a term initially ending June 30, 1943, with a right to renew for additional yearly periods during the existing national emergency, at the election of the Secretary of War.1 On the same day the District Court authorized the United States to take immediate possession. The respondent, Westinghouse Electric and Manufacturing Company, was lessee of a portion of the condemned property, using it as a warehouse, under a lease dated January 19, 1942, for a term expiring on October 31, 1944. Respondent, in order to comply with the District Court's order of immediate possession, incurred expenses for the removal of its personal property. Subsequently, the Secretary of War exercised his right of renewal and extended the Government's occupancy for two additional yearly periods ending on June 30, 1945. Thus, although the occupancy taken by the United States was initially for a period less than the remainder of respondent's term the renewals eventually exhausted respondent's leasehold. At the time of the initial taking as well as upon each yearly extension, sums were deposited into the District Court as estimated just compensation. It was stipulated that these sums represented the fair market value of the bare, unheated warehouse space taken, leaving open the question whether, as a matter of law, the removal costs incurred by the respondent were to be taken into account in computing just compensation for what was condemned. It was further stipulated that the removal expenses were both reasonable and necessary, and that, taking such removal costs into account, the market rental value of the premises was $25,600 greater on a sublease given by respondent to a temporary occupier than as bare unheated warehouse space. The District Court ruled that removal expenses should be included in the measure of just compensation, and awarded to respondent the stipulated amount. 71 F.Supp. 1001. The Court of Appeals affirmed, 1 Cir., Chief Judge Magruder dissenting. 170 F.2d 752. The disagreement was due not to differences of independent views but to conflicting meanings drawn from the decisions of this Court in United States v. General Motors Corp., 323 U.S. 373, 65 S.Ct. 357, 89 L.Ed. 311, 156 A.L.R. 390, and United States v. Petty Motor Co., 327 U.S. 372, 66 S.Ct. 596, 90 L.Ed. 729. The need for clarification led us to bring the case here. 336 U.S. 950, 69 S.Ct. 879. The General Motors and Petty Motor cases concerned themselves with the situation in which the Government does not take the whole of a man's interest but desires merely temporary occupancy of premises under lease. General Motors held that when such occupancy is for a period less than an outstanding term, removal costs may be considered in the award of 'just compensation' to the temporarily ejected tenant—not as an independent item of damage, but as bearing on the rental value such premises would have on a voluntary sublease by a long-term tenant to a temporary occupier.2 In this holding of what is just, within the requirements of the Fifth Amendment, the Court was scrupulously careful not to depart from the settled rule against allowance for 'consequential losses' in federal condemnation proceedings. 323 U.S. at page 379, 65 S.Ct. at page 360 et seq. When there is an entire taking of a condemnee's property, whether that property represents the interest in a leasehold or a fee, the expenses of removal or of relocation are not to be included in valuing what is taken. That rule was found inapplicable to the new situation presented by the General Motors case—inapplicable, that is, where what was to be valued was 'a right of temporary occupancy of a building equipped for the condemnee's business, filled with his commodities, and presumably to be reoccupied and used, as before, to the end of the lease term on the termination of the Government's use.' 323 U.S. at page 380, 65 S.Ct. at page 360. Petty Motor made clear that the taking of the whole of a tenant's lease does not fall within the General Motors doctrine. The reason for the distinction between the two situations was made explicit in Petty Motor: 'There is a fundamental difference between the taking of a part of a lease and the taking of the whole lease. That difference is that the lessee must return to the leasehold at the end of the Government's use or at least the responsibility for the period of the lease, which is not taken, rests upon the lessee. This was brought out in the General Motors decision. Because of that continuing obligation in all takings of temporary occupancy of leaseholds, the value of the rights of the lessees, which are taken, may be affected by evidence of the cost of temporary removal.' 327 U.S. at page 379—380, 66 S.Ct. at page 600, 90 L.Ed. 729. While it is true that in both the General Motors and Petty Motor cases the Government had retained an option to vary the duration of its occupancy—in the former case it could extend, and in the latter it could shorten—the legal significance of such an option with respect to removal costs was not squarely in issue. It is now. Where the Government initially takes an occupancy for less than the outstanding term of a lease but then exercises its renewal option so as to exhaust the entire lease, shall this be treated merely as a temporary occupancy during part of an outstanding lease and thus within the General Motors doctrine, or as a taking of the whole lease and hence within Petty Motor?3 Here, as in General Motors, the Government initially took over only part of an outstanding lease. But here the Secretary of War in fact continued the Army's occupancy of the premises beyond the expiration of Westinghouse's lease. Judged by the event, therefore, this case was unlike General Motors in that what the Government took was the whole of the lease. It was thus like Petty Motor. The formal difference between this case and Petty Motor was that in this case the Government began with an occupancy shorter than the outstanding lease with a contingent reservation for its extension, while in Petty Motor there was a contingent reservation to shorten an occupancy that nominally exhausted the lease. To make a distinction between taking a part of a lease with notice that the period of occupancy may be extended for the rest of the leasehold, and formally taking a whole leasehold with the right to occupy only a portion of it and throw up the rest, is to make the constitutional requirement for just compensation turn on a wholly barren formality. It is barren because a taking of a contingent occupancy by the Government could be cast in either form by those in charge of its condemnation proceedings without the slightest difference to the Government's interest. The reason for condemnation for a period shorter than a tenant's outstanding term with notice that extensions may absorb the balance of the term (i.e., the form in this case), or for condemnation formally for the whole of an unexpired leasehold with notice that the Government's occupancy may be terminated before the outstanding term has expired (i.e., the form in Petty Motor), is precisely the same. It is a recognition of the contingencies which may determine the duration of the emergency during which the Government seeks temporary occupancy of leased premises. And so it takes a flexible term, casting the burden of the contingency upon the ousted tenant. Under either type of condemnation the United States may in fact move out before the ousted leaseholder's term has expired, thus imposing upon him the duty to return to the premises or make some other burdensome adjustment. In that event, he is placed in precisely the same boat as was the General Motors Corporation, and the cost of removal is therefore admissible in evidence 'as bearing on the market rental value of the temporary occupancy taken.' 323 U.S. at page 383, 65 S.Ct. at page 361, 89 L.Ed. 311, 156 A.L.R. 390. Contrariwise, under either type of condemnation the Government may continue its occupancy throughout the tenant's term. In that event, the situation is governed by Petty Motor and removal costs may not be taken into account. The final severance of a lessee's occupancy as against a temporary interruption of an outstanding leasehold, even though not definitively fixed at the outset, is a difference in degree wide enough to justify a difference in result. The test of the outcome—is the Government merely a temporary occupier of an unexpired leasehold or has it absorbed the term of the lease?—has actuality behind it. Until events have made it clear, we cannot know whether the tenant will have to move back into his leased premises or make some other adjustment, and thus we cannot know whether the reason for the General Motors doctrine operates. Condemnation for indefinite periods of occupancy was a practical response to the uncertainties of the Government's needs in wartime. Law has sufficient flexibility to accommodate itself to these uncertainties by making what is a relatively minor item await the event. To do so does not keep the litigation open longer than it has to be kept open, because the total award for the Government's occupancy cannot be determined until its duration is known. The usual rule for ascertaining value at the time of taking is not disrespected if one item is made a function of the future because only then can it be known whether that item forms a part of what has been 'taken.' The alternative is to require a forecast of the possibility that the tenant will have to move back into the premises. The factors on which such a forecast must be based are too contingent, too unique for guidance by experience, to permit rational assessment. This is a situation whether the law should express 'a judgment from experience as against a judgment from speculation'. Tanner v. Little, 240 U.S. 369, 386, 36 S.Ct. 379, 384, 60 L.Ed. 691. Or, as it was put by Mr. Justice Cardozo for the Court in a relevant situation: 'Experience is then available to correct uncertain prophecy. Here is a book of wisdom that courts may not neglect. We find no rule of law that sets a clasp upon its pages, and forbids us to look within.' Sinclair Refining Co. v. Jenkins Petroleum Process Co., 289 U.S. 689, 698, 53 S.Ct. 736, 739, 77 L.Ed. 1449, 88 A.L.R. 496. An award based on removal costs will of course be delayed until it is known whether the Government's occupancy has exhausted the tenant's leasehold. But this presents no real administrative difficulties. That the essential facts here became known before the time for judicial determination hardly makes this case atypical. Even in the cases where the event is still open, the cost of moving out, insofar as it is to be reflected in just compensation, may be treated as a segregated item. Thus, its amount may be ascertained at an early stage of the judicial proceedings, but the judgment made conditional upon the outcome of the Government's occupancy. And rental payments due from the Government need not be postponed. So long as the duration of the Government's occupancy is undetermined, the District Court must necessarily retain the case for the periodic determination and payment of rental compensation. This is so in the absence of any problem arising out of removal costs. No unfairness or embarassment to the displaced tenant is thus involved by leaving liability based on removal to await the event. In the case before us, it was known at the time of trial in the District Court that respondent's term had been exhausted by the Government's occupancy. Accordingly, the judgment is reversed insofar as it awards $25,600 to respondent. Reversed. Mr. Justice DOUGLAS took no part in the consideration or decision of this case.
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The United States condemned certain premises for use by the Army for a term initially ending June 30, 1943, with an option to renew for additional periods during the existing national emergency. Respondent was lessee of a portion of the premises for a term expiring October 31, 1944, and incurred expenses for the removal of its personal property. Subsequently, the Government extended its occupancy for two additional yearly periods ending June 30, 1945. Held: Although the occupancy taken by the United States was initially for a period less than the remainder of respondent's term, respondent's removal expenses are not relevant in determining just compensation, since respondent's term had been exhausted by the Government's occupancy. Pp. 262-268. (a) When there is an entire taking of a condemnee's property, be it'a leasehold-or a fee, the expenses of removal or relocation are not to be included in valuing what is taken. P. 264. (b) Where the Government initially takes an occupancy for less than the outstanding term of a lease but later exercises a renewal option so as to exhaust the entire lease, this should be treated as a taking of the whole lease. Pp. 265-268. (c) Where the Government initially takes an occupancy for .less than the outstanding term of a lease with an option for extension, an award based on removal costs should be delayed until it is known whether the Government's occupancy has exhausted the tenant's leasehold. P. 268. 170 F. 2d 752, reversed.
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Background NIH conducts and sponsors biomedical research through its institutes and centers (IC), each of which is charged with a specific mission. ICs’ missions generally focus on a given disease; a particular organ; or a stage in development, such as childhood or old age. ICs accomplish their missions chiefly through intramural and extramural research. Intramural research entails government scientists working in the ICs’ own laboratories and clinics, whereas extramural research is conducted at outside research institutions, primarily universities, by scientists who have been awarded extramural research grants from an IC through NIH’s competitive process.$30 billion in fiscal year 2012 was used to support extramural research. Of this $25.2 billion in extramural research grant funding, NIH provided about $16.1 billion to universities. Components of Direct and Indirect Costs Extramural research grants reimburse universities for the direct costs of each research project covered by the grants and a portion of the indirect costs of maintaining their facilities for research use and covering the administrative expenses of the university. Direct costs can be specifically identified with or directly assigned to individual research projects and are relatively easy to define and measure. They include, for example, the researcher’s salary, subawards, equipment, and travel. Indirect costs represent a university’s general support expenses and cannot be specifically identified with individual research projects or institutional activities. They include, for example, building utilities, administrative staff salaries, and library operations. OMB Circular No. A-21 establishes the principles for determining the types of direct and indirect costs that are allowed to be claimed and the methods for allocating such costs to federally funded research at educational institutions, including the establishment and use of indirect cost rates. Indirect costs are divided into two main components, facilities costs and administrative costs. Facilities costs include operations and maintenance expenses, such as for utilities; allowances for depreciation and use of buildings and equipment; interest on debt associated with building and equipment; and library expenses, such as for the use of the library and library materials purchased for research use. general administration expenses, such as the costs associated with executive functions like financial management; departmental administration expenses, including clerical staff and supplies for academic departments; sponsored projects’ administration expenses, which are the costs associated with the office responsible for administering projects and awards funded by external sources; and student administration and services expenses, such as the administration of the student health clinic. Calculation of the Indirect Cost Rate Because indirect costs cannot be specifically attributed to a particular research grant, they are charged via an indirect cost rate that serves as the mechanism for determining the proportion of indirect costs that may be charged to federally funded research awards. OMB Circular No. A-21 outlines the process for establishing an indirect cost rate for universities performing federally funded research. Each university develops a proposed indirect cost rate that is based on university cost data from prior years, which is subsequently negotiated with the federal government to arrive at a final indirect cost rate, in compliance with the principles of OMB Circular A-21. To calculate a university’s indirect cost rate, a percentage of each indirect cost component is allocated to the university’s research function on the basis of benefits received from that component by the research function. For example, a university can measure the square footage of floor space used for research and use this measure to allocate the amount of costs it claims for operating and using the space as a component in its indirect cost rate proposal. Each indirect cost component allocated to research is applied to a modified set of direct costs referred to as “modified total direct costs” (MTDC) to obtain an individual rate for each component. MTDC includes the salaries and wages of those conducting the research, fringe benefits (e.g., pensions), materials and supplies, travel, and the first $25,000 of each subaward. MTDC excludes costs such as equipment costs, capital expenditures, tuition remission, equipment or space rental costs, and the portion of each subaward in excess of $25,000. (See fig. 1.) Universities use a standard format, also known as the long form, for submitting their indirect cost rate proposals to their cognizant rate-setting agency. However, universities whose total direct costs on federal awards do not exceed $10 million in a fiscal year may use a simplified method for determining the indirect cost rate applicable to all federal awards. Whereas universities above the $10 million threshold must use an MTDC base, universities using the simplified method may use either salaries and wages as their base, or MTDC. As already noted, this report focuses on those universities that used the standard format for proposal submission. Proposed Changes to OMB Circular No. A-21 In February 2013, OMB issued proposed guidance that includes revisions to cost principles of OMB Circular No. A-21. The proposed guidance reflects input from the federal and nonfederal financial community, including the Interagency Council on Financial Assistance Reform. The proposed guidance would, among other things, allow more items to be directly charged rather than included as a component of the indirect cost rate. As of September 2013, OMB had not issued final guidance. From 2002 to 2012, NIH Indirect Cost Reimbursements to Universities Increased Faster than for Direct Costs, with Most Going to a Small Number of Universities From fiscal year 2002 to fiscal year 2012, NIH reimbursements to universities for indirect costs associated with NIH-funded extramural research increased at a slightly faster rate than those for direct costs, and during some portions of this period indirect cost growth increased notably faster than direct cost growth. In fiscal year 2012, the 50 universities with the largest research programs received over two thirds of total indirect cost reimbursement. Higher indirect cost rates tended to be associated with universities located in high-cost-of-living areas and privately owned universities. From 2002 to 2012, Reimbursements for Indirect Costs Increased Slightly Faster than Those for Direct Costs, but Increased Notably Faster During Some Periods Reimbursements for indirect costs from fiscal year 2002 through fiscal year 2012 increased slightly faster than reimbursements for direct costs, but increased notably faster during some periods. Over this period, NIH reimbursements for indirect costs grew by about 28.1 percent, from $3.6 billion to $4.6 billion. Over the same period, NIH reimbursement for direct costs grew by about 27.0 percent, from $9 billion to $11.5 billion. However, because there were large differences between indirect and direct growth in some years, indirect cost reimbursements increased notably faster than direct cost reimbursements during some periods. For example, from fiscal year 2002 to 2003, the first year of this period, there was a large increase in direct costs that compensated for greater growth in indirect costs during other years. As a result, from fiscal year 2003 to 2012 indirect costs increased 16.9 percent, from about $3.9 billion to $4.6 billion, while direct costs increased 11.7 percent, from about $10.3 billion to $11.5 billion. Furthermore, in 6 of the 10 years, reimbursements for indirect costs increased relative to those for direct costs, by either increasing at a faster rate or declining at a slower rate. After fiscal year 2005, annual changes in reimbursements were generally small but consistent, with reimbursements for indirect costs increasing relative to direct costs in 5 of 7 years. (See fig. 2 for more details on the annual change in costs.) NIH officials noted that, historically, NIH’s reimbursements for indirect costs have remained a stable percentage of NIH’s total funding for all NIH awards overall. Our analysis specifically for university research, which accounted for almost two-thirds of NIH’s funding for extramural research in fiscal year 2012, indicates that in 2003 about 27.7 percent of NIH reimbursement for university research was for indirect costs, and in 2012 this percentage increased slightly to 28.6 percent. This occurred while NIH’s budget for extramural research conducted at universities—which needs to cover both the direct and the indirect costs of research—slowed in the last few years. For example, during the most recent 5 years (fiscal year 2008 to fiscal year 2012), NIH’s total funding for extramural research conducted at universities increased about 5 percent, whereas it had increased about 21 percent in the 5 previous years (fiscal year 2002 to fiscal year 2007). In 2012 the 50 Universities with the Largest Research Programs Received Most of the Indirect Cost Reimbursements In fiscal year 2012, almost 70 percent of NIH indirect cost reimbursement to universities was provided to about 10 percent of the universities (50 of a total of about 500) receiving NIH funding for extramural research.(See app. I for the indirect cost reimbursements for these top 50 universities.) These top 50 universities had the largest research programs, as defined by the largest amount of reimbursement for direct costs and a relatively large number of research grants. Indirect cost rates for 5 universities out of the top 50 were not available from DCA. adjustment.the highest indirect cost rates among the 50 universities receiving the highest amounts of indirect cost reimbursement in fiscal year 2012. Among the 10 universities in the table, those with the highest indirect cost rates were Mount Sinai Medical School and New York University School of Medicine; Johns Hopkins University and Yale University had the largest research programs as measured by the number of NIH grants awarded. Stakeholders Identified Factors Related to Facilities and Administrative Costs That May Increase Reimbursements for Indirect Costs, but NIH Has Not Assessed Their Potential Impact Stakeholders—university officials, DCA officials, and others—whom we interviewed identified several key factors that may lead to increases in reimbursements for indirect costs provided to universities. Some factors are related to the facilities costs, and others are related to administrative costs. NIH has not assessed the potential impact of future increases in indirect costs on its research mission, including planning for how to deal with these potential increases. Uncapped Facilities Component of the Indirect Cost Rate Provides Few, If Any, Incentives to Control Costs Some stakeholders underscored the importance to the research effort of providing funding for the costs of facilities. They explained that reimbursements for the facilities component of indirect costs—such as the amount of reimbursable square footage, operations and maintenance, building depreciation, and interest costs—help to support research innovation by providing funding for the development and maintenance of state-of-the-art research facilities. Some university officials we interviewed noted that these research facilities are necessary for conducting innovative biomedical research, such as research devoted to the role of genetic mutation for breast cancer that uses advanced lab space and equipment. They also noted that costs for these facilities have increased over time as biomedical research has become increasingly sophisticated. For example, a university’s officials stated that from fiscal year 2002 to fiscal year 2009, the cost of its facilities to support research—including those used to support advancement in data and computing—has grown from about $88 million to about $145 million. DCA officials stated that the uncapped facilities component of the indirect cost rate provides universities few, if any, incentives for controlling these potentially increasing costs. For example, DCA officials noted that there is no limit on reimbursement for interest costs under the facilities component. DCA officials stated that while reimbursements for interest costs may allow universities to support needed renovations or construction of new facilities, the fact that these reimbursements are not capped may also encourage universities to borrow money to build new facilities, which could lead to the building of more new space than is necessary for research needs. Officials also noted that these interest costs are out of DCA’s control and may vary. For example, at the time of our work, interest rates—which are used to determine interest costs— were very low, but they could increase over time, which could increase costs for ongoing building projects or buildings that have already been completed, regardless of future building decisions by universities. Because of this factor, the indirect cost rate could be expected to increase, resulting in a potential increase in the amount of indirect cost reimbursements provided by NIH. In addition, some stakeholders noted that, at the time of our work, 65 of about 500 universities receiving reimbursement for indirect costs in fiscal year 2012 were eligible for a rate increase of 1.3 percent to account for the higher cost of utilities. DCA officials added that OMB’s proposed revisions to Circular No. A-21 would allow all universities to receive some reimbursement for utility costs based on a revised formula. As a result, NIH reimbursements for indirect costs could be expected to increase as more universities would be eligible to include this cost in their indirect cost rates. Administrative Cap Controls Potential Increases in Cost Reimbursement due to Growth in Administrative Costs Incurred by Universities Some stakeholders noted that while the cap on the reimbursement rate for administrative costs—26 percent—helps to control reimbursements for indirect costs, it does not account for the recent increases in administrative costs reportedly incurred by universities. For example, university officials explained that their administrative costs have increased in order to comply with recent changes in regulatory reporting requirements, such as those related to reporting conflicts of interest. Some university officials explained that they have hired additional full-time staff to review and manage various reporting requirements as well as invested in additional information technology (IT) to support new software related to regulatory requirements. Additionally, some stakeholders noted that administrative costs also have increased due to trends in the way biomedical research is conducted, such as an increase in collaboration between universities in research studies and an increased use of IT for biomedical research. For example, some university officials explained that many biomedical research projects now use advanced technology—such as high-sequencing technology or imaging—that requires greater investment in computing resources by the university. Additionally, one university’s officials noted that the advancements in IT provide support for interconnectivity, complex data security and data privacy requirements, and requirements for long-term storage and maintenance of electronic data. According to university officials at another university, in some instances they may charge some advanced computing equipment as a direct cost because it is specifically related to research; however, in most instances these computing resources are included in the administrative component of the indirect cost rate. According to DCA officials, if costs that are part of the capped administrative component increase significantly, indirect cost reimbursements overall could increase if universities begin to categorize some of the costs as part of the uncapped facilities component. Specifically, DCA officials explained that currently there is a provision in Circular No. A-21 that advises certain limits on changing the categorization of certain costs—such as those costs incurred by a university that are associated with increased use of information technology—from the administrative to the facilities component. However, they noted that the proposed revisions to Circular No. A-21 did not include such a provision. DCA officials stated that they may be limited in their ability to control increases in reimbursements associated with these categorization changes if this provision is removed and if university administrative costs continue to increase. NIH Has Not Assessed the Potential Impact of Increases in Indirect Costs on Its Mission NIH has not assessed the potential impact of future increases in indirect costs on its research mission, including planning for how to deal with potential future increases of these costs. As we previously reported, NIH has a program to periodically identify, analyze, and manage significant risks to its objectives, strategy and mission. NIH officials noted that they assess risks related to all extramural research funding as part of this program, and that this assessment does not specifically focus on indirect costs for universities. According to NIH officials, NIH has not conducted such planning because overall indirect costs have remained around 27 percent of NIH’s total budget for all extramural research, and, in their opinion, future cost increases are unlikely to change this figure significantly in spite of factors that may contribute to increased indirect costs. Therefore, NIH officials stated that they do not anticipate the need to consider adjusting reimbursements for indirect costs for most grants below the amount determined by a university’s negotiated indirect cost rate, which would require a change in law or regulation. However, NIH officials told us that should indirect costs rise significantly, they may need to reduce the number of research projects, which have already been reduced in part because of budget limitations and increases in the direct costs of research. NIH noted that the reduced budget in fiscal year 2013 resulted in 700 fewer individual research grants. Even at current levels, indirect costs constitute a significant portion of NIH’s budget at about 20 percent. Therefore, over time, increases in indirect costs could cause further reductions in the number of research projects that NIH could support. Conclusions NIH has indicated that NIH funding for both the indirect and the direct costs of university research provides critical support for biomedical research, covering the indirect costs of operating a research institution and the direct costs of specific research projects. NIH faces uncertainty related to the potential impact of increasing indirect costs on its funding of future research. Among research grants to universities specifically, NIH’s indirect costs are increasing at a faster rate than direct costs. While changes in recent years have generally been small, annual changes in reimbursement for indirect costs have consistently increased relative to those for direct costs, by either increasing at a faster rate or declining at a slower rate. Further, this has occurred while the growth in NIH’s budget for extramural research has slowed in recent years, putting pressure on NIH to find ways to continue to maximize its support of innovative biomedical research. Several factors are expected to contribute to future growth in indirect costs for NIH. These factors include that NIH’s current system of reimbursing indirect costs—through indirect cost rates for each university calculated according to OMB guidance—provides few, if any, incentives for universities to control facilities costs. At the same time, the cost of university facilities to support biomedical research is increasing over time, as cutting-edge research requires more advanced labs and equipment. NIH has not made plans for options that might address these trends—in part because it views increases in indirect costs as having been modest. However, indirect costs already represent one-fifth of NIH’s overall budget and about one-quarter of NIH’s budget for extramural research. NIH has experienced small but consistent increases in indirect costs, and factors suggest that indirect costs could increase more quickly over time in the future. If so, such increases could have an effect over the long term on the number and size of research grants that could be funded, thus posing a risk to scientific discoveries and knowledge. Recommendation To help address the uncertainty NIH faces related to the potential impact of increasing indirect costs on its funding of future research, we recommend that the Director of NIH assess the impact of growth in indirect costs on its research mission, including, as necessary, planning for how to deal with potential future increases in indirect costs that could limit the amount of funding available for total research, including the direct costs of research projects. Agency Comments and Our Evaluation We provided a draft of this report to HHS, and HHS provided written comments (reprinted in app. II). HHS also provided technical comments, which we incorporated as appropriate. HHS indicated that it agreed with our recommendation and that NIH had already taken steps to implement it, but HHS disagreed with a number of our conclusions. Specifically, HHS stated that NIH assesses the impact of indirect costs through its annual budget projections, through planning and congressional justifications, and as part of its risk management program. The draft report acknowledged NIH’s efforts in assessing risk facing its extramural research program. However, NIH has not indicated how these actions would address our recommendation by assessing the potential ongoing impact of indirect costs for universities on its funding of future research. Moreover, NIH has not developed a plan for how to deal with potential continuing increases in indirect costs for universities. Instead, HHS indicated that, in past years, increases in indirect costs have been proportionally consistent with increases in direct costs, and therefore, there is not an immediate risk to NIH’s research portfolio. While the draft report acknowledged that indirect costs have remained a stable percentage of NIH’s overall research costs, it also noted that, for universities—which received almost two-thirds of NIH’s funding for extramural research—indirect costs increased notably faster than direct costs during some recent periods. Further, as indicated in the draft report, there are multiple indications that, for universities, indirect costs are likely to increase at a faster rate in the future, so past stability may not be sustained in future years. We remain convinced that increases in indirect costs could have an effect over the long term on the number and size of research grants that could be funded, thus posing a risk to scientific discoveries and knowledge. In addition, in its comments, HHS included an analysis of indirect costs over the past decade for its overall extramural research portfolio. This analysis was different from our analysis because it focused generally on extramural research rather than specifically on university research. As noted in the draft report, our research questions were focused specifically on universities. Moreover, as institutions of higher education, universities generally have a broader focus on education than research institutions. Further, as noted in the draft report, universities are subject to OMB Circular No. A-21 and their administrative costs are capped, unlike other research institutions. Because of the unique issues that universities face, our analysis of indirect costs excluded nonuniversity research institutions to avoid the possibility of data from these other NIH grantees masking trends for universities, which are the recipients of the largest portion of NIH’s grant funding. Finally, HHS stated that we did not provide an opportunity for the department to provide input on our review of NIH’s assessment of the potential impact of indirect costs on NIH’s research mission. We disagree with this characterization. NIH provided input on this issue to us during three separate meetings. For all three meetings, we provided discussion questions in advance. During one of the meetings, we and NIH officials discussed the key facts that were to be included in the draft report, including this issue. In addition, we offered NIH officials the opportunity to provide additional information in writing, as appropriate. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the Secretary of the Department of Health and Human Services, the Director of the National Institutes of Health, and other interested parties. In addition, the report will be available at no charge on GAO’s website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7114 or at [email protected]. Contact points for our Office of Congressional Relations and Office of Public Affairs can be found on the last page of this report. Other major contributors to this report are listed in appendix III. Appendix I: Indirect Costs and Rates for the Top 50 National Institutes of Health—Funded Universities, Fiscal Year 2012 Weill Medical College of Cornell University Indiana University—Purdue University at Indianapolis n/a = not available: this institution does not negotiate its indirect cost rate with DCA. Appendix II: Comments from the Department of Health and Human Services Appendix III: GAO Contact and Staff Acknowledgments GAO Contact Acknowledgments In addition to the contact named above, Will Simerl, Assistant Director; N. Rotimi Adebonojo; George Bogart; Amy Leone; and Roseanne Price made key contributions to this report.
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NIH reimburses universities for both the direct and indirect costs of conducting research. Indirect costs cover general facility and administrative expenses, and are paid as a percentage, or rate, of certain direct costs of awarded grants. GAO was asked to look at the indirect costs of NIH-funded research. This report (1) identifies changes in reimbursements by NIH to universities for indirect costs of NIH-funded research; and (2) examines key factors affecting NIH reimbursement to universities for indirect costs and what assessment NIH has done to address any impact of these costs on NIH's research mission. GAO analyzed NIH data and interviewed officials at NIH, six universities, and other stakeholders. Universities were selected based on the number of grants and amount of funding received from NIH and their negotiated indirect cost rates. From fiscal year 2002 to fiscal year 2012, indirect cost reimbursements from the National Institutes of Health (NIH) to universities increased slightly faster than those for direct costs, but increased notably faster during some periods. Specifically, from fiscal years 2002 to 2012, indirect costs increased 28.1 percent while direct costs increased 27.0 percent. However, for the fiscal years 2003 to 2012, indirect costs increased notably faster than direct costs, at 16.9 percent and 11.7 percent, respectively. In more recent years, annual changes were generally small but consistent. This increase occurred during a time when growth in NIH's budget for extramural research slowed to 5 percent from fiscal years 2008 to 2012, compared to about 21 percent from fiscal years 2002 to 2007. In fiscal year 2012, about 10 percent of the universities (50 out of about 500) receiving NIH extramural research funding received almost 70 percent of all indirect cost reimbursement provided to universities. Higher indirect cost rates tended to be associated with universities located in high-cost-of-living areas and privately owned universities. Stakeholders--university officials, Department of Health and Human Services (HHS) officials, and others--whom GAO interviewed identified several key factors that may lead to increases in reimbursements for indirect costs provided to universities. Some stakeholders reported that reimbursements for one part of indirect costs--the facilities component--help to support research innovation by providing funding for the development and maintenance of state-of-the-art research facilities. However, officials in HHS's Division of Cost Allocation, which is responsible for determining indirect cost rates, stated that the uncapped facilities component of the indirect cost rate provides universities with few, if any, incentives for controlling these costs. For example, these officials noted that there is no limit on reimbursement for interest costs under the facilities component. This may encourage universities to borrow money to build new facilities, which could lead to building more new space than is necessary for research. Some stakeholders also noted that a 26 percent cap on the reimbursement rate for administrative costs--a second component of indirect costs--helps to control reimbursements for those costs; however, they reported it does not account for the recent increases in costs, such as those for regulatory reporting requirements and changing research needs that require advanced medical and information technologies that are considered administrative. The combination of these trends and factors results in indirect costs growing at a faster rate than direct costs. Indirect costs are one-fifth of NIH's total budget--or $6.2 billion in fiscal year 2012--but NIH officials reported that they have not taken steps to assess the significance of future indirect cost growth for universities, or planned for options that might address these trends or factors--in part because they view increases in indirect costs as having been modest. However, factors suggest that indirect costs could increase more quickly in the future. Over the long term, they could lead to a reduction in the number of research grants that could be funded, thus potentially affecting scientific discoveries and knowledge.
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The appellee, alleging itself to be 'a charitable corporation, organized and existing under the laws of the Kingdom of Spain,' brought a bill in equity in the district court of the United States for Porto Rico against the appellants, alleging them to be citizens of Porto Rico. The object of the suit, generally described, is to assert title to certain lands in Porto Rico, and its determination turns upon the construction of the will of Juan Bautista Silva, an inhabitant of Porto Rico, who died in 1875. The suit, therefore, does not arise under the Constitution, laws, or a treaty of the United States. A decree was entered in favor of the plaintiff, and the defendants appealed to this court. Before entering upon a consideration of the merits of the cause, the jurisdiction of the court below to entertain it, which is questioned, must be passed upon. The district court of the United States for Porto Rico was created, and its jurisdiction defined, by the act of April 12, 1900, establishing a civil government for Porto Rico (31 Stat. at L. 77, chap. 191), as amended by the act of March 2, 1901 (31 Stat. at L. 953, chap. 812). By § 34 of the first act it was provided that—— 'Porto Rico shall constitute a judicial district, to be called the 'district of Porto Rico,' . . . the district court for said district shall be called the district court of the United States for Porto Rico . . . and shall have, in addition to the ordinary jurisdiction of district courts of the United States, jurisdiction of all cases cognizant in the circuit courts of the United States, and shall proceed therein in the same manner as a circuit court.' The jurisdiction was further defined in § 3 of the last act, which provided that 'the jurisdiction of the district court of the United States for Porto Rico in civil cases shall, in addition to that conferred by the act of April 12, 1900, extend to and embrace controversies where the parties, or either of them, are citizens of the United States, or citizens or subjects of a foreign state or states, wherein the matter in dispute exceeds, exclusive of interest or costs, the sum or value of one thousand dollars.' If the court below had jurisdiction, it must be under the amending act, and because the plaintiff was either a citizen of the United States or a citizen or subject of a foreign state. No other ground of jurisdiction has been or can be suggested. It was found by the district court that the plaintiff was a citizen or subject of Spain, and the jurisdiction was sustained upon that theory. Counsel in this court have attempted to sustain the jurisdiction on the ground that the plaintiff, if not a citizen or subject of Spain, is a citizen of the United States. If the plaintiff was neither a citizen of the United States nor a citizen or subject of Spain, it is clear that the court was without jurisdiction. We assume, in favor of the plaintiff, that it was a corporation organized in 1863 by a decree of the Spanish Crown. That decree incorporated an asylum of charity in Ponce. The purposes of the incorporation are described in article 1 of the by-laws, which follows: 'This association recognizes as its principal object the alleviation of human suffering; and for this purpose it will establish an asylum for the poor of the district. When its resources permit it to give its attention to other objects related to its purpose, it will establish schools for poor children of both sexes, under the supervision of Sisters of Charity.' The incorporators were all residents of Ponce, and all the purposes of the corporation were to be accomplished and all its business done in that locality. The first question is whether, after the ratification of the treaty of peace between the United States and Spain, the plaintiff corporation continued to be a citizen or subject of Spain. It is assumed, in passing upon this question, that Congress, in employing the word 'citizen' in this connection, intended to include corporations, in view of the decisions of this court that the word has that meaning when used in the definition of the jurisdiction of the circuit courts of the United States. St. Louis & S. F. R. Co. v. James, 161 U. S. 545, 40 L. ed. 802, 16 Sup. Ct. Rep. 621. By the treaty of peace (30 Stat. at L. 1754), Spain ceded Porto Rico to the United States and thereby parted with all sovereignty over that island. Careful provision was made that the cession should not impair the property or rights of corporations, associations, or individuals. Article 8. It is clear, however, that thereafter the duty to protect property and rights within the ceded territory rested upon the United States. An opportunity was afforded to Spanish subjects, natives of the Peninsula, to preserve their allegiance to the Crown of Spain by making, within a limited time, a declaration to that effect. Article 9. This article obviously had no reference to corporations. No other provisions of the treaty seem relevant to the question before us. We are of opinion that the cession of Porto Rico by Spain to the United States severed all relations between Spain and this corporation, and that thereafter it cannot be regarded in any sense as a citizen or subject of Spain. Spain has no duty to or power over it. We confine this statement to a corporation like the one before us, formed for charitable purposes, and limited in its operations to the ceded territory. A different question (which need not be decided) would be presented if the corporation had other characteristics than those possessed by the one under consideration; as, for instance, if it were a Spanish trading corporation, with a place of business in Spain, but doing business by comity in the island of Porto Rico. The next question is whether the plaintiff corporation is a citizen of the United States. Its status during the period between the cession and the passage of the act to provide a civil government for the island need not be determined. That act created a from of government for Porto Rico and its adjacent islands, in which there was exhibited, with some modifications, the characteristic American separation of the legislative, executive, and judicial powers. The United States has never granted to any territory organized by act of Congress complete self-government, and Porto Rico is no exception to the rule. Indeed, though the act confers a considerable measure of self-government, for reasons deemed sufficient by Congress, it stops short of the power usually conferred upon territories within the continent. This organic act has the provision common to most, if not all, our territories, whether fully incorporated into the United States or not, that Congress may, if it deem advisable, annul all laws enacted by the local legislative assembly. Subject to these limitations, a body politic, under the name of The People of Porto Rico, with a citizenship of its own, is created (§ 7); existing laws, not in conflict with the applicable laws of the United States, are continued in force until altered, amended, or repealed by the legislative assembly or by Congress (§ 8); public property acquired by the United States from Spain is placed under the control of the local government, and the legislative assembly is given power to legislate with respect to it (§ 13); the legislative authority is given 'power by due enactment to amend, alter, modify, or repeal any law or ordinance, civil or criminal, continued in force by this act' (§ 15); the governor is enjoined faithfully to execute the laws, and given to that end the applicable powers of a governor of a territory of the United States (§ 17); the legislative assembly of Porto Rico is constituted (§ 27); and the scope of the legislative power is fully described in § 32, as follows: 'That the legislative authority herein provided shall extend to all matters of a legislative character not locally inapplicable, including power to create, consolidate, and reorganize the municipalities, so far as may be necessary, and to provide and repeal laws and ordinances therefor; and also the power to alter, amend, modify, and repeal any and all laws and ordinances of every character now in force in Porto Rico, or any municipality or district thereof, not inconsistent with the provisions hereof: Provided, however, That all grants of franchises, rights, and privileges or concessions of a public or quasi-public nature shall be made by the executive council, with the approval of the governor, and all franchises granted in Porto Rico shall be reported to Congress, which hereby reserves the power to annul or modify the same.' In the form of government which is typically American, the creation and control of corporations is exclusively a legislative function. We are of opinion that the effect of the organic act is to intrust that function, so far as it relates to a corporation of the kind under consideration, whose essential qualities need not be repeated, to the government of Porto Rico; and that such a corporation is now, if a citizen of any country, a citizen of Porto Rico. We need not consider whether the corporation has more than a de facto existence, subject to the will of the Porto Rican legislature. It follows that the court below had no jurisdiction of this cause. The decree is reversed and the cause remanded to the District Court of the United States for Porto Rico, with instructions to dismiss the bill, without prejudice, for want of jurisdiction.
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All relations between Spain and Porto Rico having been severed by the cession of that Territory by the Treaty of Paris, a corporation organized under the laws of Spain for purely local and charitable purposes in Porto Rico is not to be regarded as a citizen of Spain within the meaning of the provisions of the act of April 12, 1900, c. 191, 31 Stat. 77, as amended by the act of March 2, 1901, c. 812, 31 Stat. 953, relating to the jurisdiction of the District Court of the United States for Porto Rico, nor is such a corporation a citizen of the United States within the meaning of such provision; if it is a citizen of any country it is a citizen of Porto Rico. The people of Porto Rico have been created by Congress and exist as a body politic subject only to the usual reserved power of annulment of territorial legislation; and the government of Porto Rico under the organic act is charged with the creation and control of corporations strictly local in character, and corporations of that nature organized prior to the cession of the island are to be regarded for jurisdictional purposes as citizens of Porto Rico. While by Artic!e IX of the Treaty of Paris between Spain and the United States ,provision is made for Spanish subjects, natives of the peninsula, to preserve their, allegiance to Spain, that article has no reference to corporations; nor is there any other proviAion of the treaty providing therefor. Qutrre and not decided, what the citizenship now is of Spanish corporations doing business in Porto Rico prior to its cession by the Treaty of Paris to the United States.
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SECTION 1. SHORT TITLE.
This Act may be cited as the ``Social Security Beneficiaries
Protection Act''.
SEC. 2. AUTHORITY TO REISSUE BENEFITS MISUSED BY ORGANIZATIONAL
REPRESENTATIVE PAYEES.
(a) OASDI Amendment.--Section 205(j)(5) of the Social Security Act
(42 U.S.C. 405(j)(5)) is amended by inserting after the first sentence
the following new sentence: ``In any case in which a representative
payee that is an organization (regardless of whether it is a `qualified
organization' within the meaning of paragraph (4)(B)) misuses all or
part of an individual's benefit paid to such representative payee, the
Commissioner of Social Security shall certify for payment to the
beneficiary or the beneficiary's alternative representative payee an
amount equal to the amount of such benefit so misused. The provisions
of this paragraph are subject to the limitations of paragraph
(6)(B).''.
(b) SSI Amendment.--Section 1631(a)(2)(E) of such Act (42 U.S.C.
1383(a)(2)(E)) is amended by inserting after the first sentence the
following new sentence: ``In any case in which a representative payee
that is an organization (regardless of whether it is a `qualified
organization' within the meaning of paragraph (4)(B)) misuses all or
part of an individual's benefit paid to such representative payee, the
Commissioner of Social Security shall make payment to the beneficiary
or the beneficiary's alternative representative payee of an amount
equal to the amount of such benefit so misused. The provisions of this
subparagraph are subject to the limitations of subparagraph (F)(ii).''.
(c) Effective Date.--The amendments made by this section shall
apply to any case of benefit misuse by a representative payee with
respect to which the Commissioner of Social Security makes a
determination of misuse after the date of enactment of this Act.
SEC. 3. BONDING AND LICENSING REQUIREMENTS APPLICABLE TO
NONGOVERNMENTAL ORGANIZATIONAL REPRESENTATIVE PAYEES.
(a) OASDI Amendment.--Section 205(j)(4)(B) of the Social Security
Act (42 U.S.C. 405(j)(4)(B)) is amended by striking ``is bonded or
licensed in each State in which it serves as a representative payee''
and inserting ``provides a bond that meets the requirements specified
by the Commissioner of Social Security and is licensed in each State in
which it serves as a representative payee (if licensing is available in
such State)''.
(b) SSI Amendment.--Section 1631(a)(2)(D)(ii)(I) of such Act (42
U.S.C. 1383(a)(2)(D)(ii)(I)) is amended to read as follows:
``(I) provides a bond that meets the requirements specified
by the Commissioner of Social Security and is licensed in each
State in which it serves as a representative payee (if
licensing is available in such State); and''.
(c) Effective Date.--The amendments made by this section shall take
effect on the first day of the thirteenth month beginning after the
date of enactment of this Act.
SEC. 4. FEE FORFEITURE IN CASE OF BENEFIT MISUSE BY QUALIFIED
ORGANIZATIONAL REPRESENTATIVE PAYEES.
(a) OASDI Amendment.--Section 205(j)(4)(A) of the Social Security
Act (42 U.S.C. 405(j)(4)(A)) is amended--
(1) in clause (i), by striking ``A qualified organization''
and inserting ``Except as provided in clause (iii), a qualified
organization''; and
(2) by adding at the end the following new clause:
``(iii) A qualified organization may not collect a fee from an
individual for any month with respect to which the Commissioner of
Social Security or a court of competent jurisdiction has determined
that the organization has misused all or part of the individual's
benefit, and any amount collected by the qualified organization for
such month shall be treated as a misused part of the individual's
benefit for purposes of paragraphs (5) and (6).''.
(b) SSI Amendment.--Section 1631(a)(2)(D) of such Act (42 U.S.C.
1383(a)(2)(D)) is amended--
(1) in clause (i), by striking ``A qualified organization''
and inserting ``Except as provided in clause (v), a qualified
organization''; and
(2) by adding at the end the following new clause:
``(v) A qualified organization may not collect a fee from an
individual for any month with respect to which the Commissioner of
Social Security or a court of competent jurisdiction has determined
that the organization has misused all or part of the individual's
benefit, and any amount collected by the qualified organization for
such month shall be treated as a misused part of the individual's
benefit for purposes of subparagraphs (E) and (F).''.
(c) Effective Date.--The amendments made by this section shall
apply to any month involving benefit misuse by a representative payee
in any case with respect to which the Commissioner of Social Security
makes a determination of misuse after the date of enactment of this
Act.
SEC. 5. LIABILITY OF NONGOVERNMENTAL REPRESENTATIVE PAYEES FOR MISUSED
BENEFITS.
(a) OASDI Amendment.--Section 205(j) of the Social Security Act (42
U.S.C. 405(j)) is amended by redesignating paragraphs (6) and (7) as
paragraphs (7) and (8), respectively, and inserting after paragraph (5)
the following new paragraph:
``(6)(A) If the Commissioner of Social Security or a court of
competent jurisdiction determines that a representative payee that is
not a State or local government agency has misused all or part of an
individual's benefit that was paid to such representative payee under
this subsection, the representative payee shall be liable for the
amount misused, and such amount (to the extent not repaid by the
representative payee) shall be treated as an overpayment of benefits
under this title to the representative payee for all purposes of this
Act and related laws pertaining to the recovery of such overpayments.
Subject to subparagraph (B), upon recovering all or any part of such
amount, the Commissioner shall certify an amount equal to the recovered
amount to such individual or the individual's alternative
representative payee.
``(B) The total of the amount certified to such individual or the
individual's alternative representative payee under subparagraph (A)
and the amount certified under paragraph (5) shall not exceed the total
benefit amount misused by the representative payee with respect to such
individual.''.
(b) SSI Amendment.--Section 1631(a)(2) of such Act (42 U.S.C.
1383(a)(2)) is amended by redesignating subparagraphs (F), (G), and (H)
as subparagraphs (G), (H), and (I), respectively, and inserting after
subparagraph (E) the following new subparagraph:
``(F)(i) If the Commissioner of Social Security or a court of
competent jurisdiction determines that a representative payee that is
not a State or local government agency has misused all or part of an
individual's benefit that was paid to such representative payee under
this paragraph, the representative payee shall be liable for the amount
misused, and such amount (to the extent not repaid by the
representative payee) shall be treated as an overpayment of benefits
under this title to the representative payee for all purposes of this
Act and related laws pertaining to the recovery of such overpayments.
Upon recovering all or any part of such amount, the Commissioner shall
make payment of an amount equal to the recovered amount to such
individual or the individual's alternative representative payee.
``(ii) The total of the amount paid to such individual or the
individual's alternative representative payee under clause (i) and the
amount paid under subparagraph (E) shall not exceed the total benefit
amount misused by the representative payee with respect to such
individual.''.
(c) Effective Date.--The amendments made by this section shall
apply to benefit misuse by a representative payee in any case with
respect to which the Commissioner of Social Security makes a
determination of misuse after the date of enactment of this Act.
SEC. 6. EXTENSION OF THE CIVIL MONETARY PENALTY
AUTHORITY.
(a) In General.--Section 1129(a) of the Social Security Act (42
U.S.C. 1320a-8(a)) is amended--
(1) by striking ``(A)'' and ``(B)'' and inserting ``(i)''
and ``(ii)'', respectively;
(2) by striking ``(a)(1)'' and inserting `` (a)(1)(A)'';
(3) by striking ``(2)'' and inserting ``(B)''; and
(4) by adding at the end the following new paragraph:
``(2) Any person (including an organization, agency, or
other entity (other than a State or local government agency))
who having received, while acting in the capacity as
representative payee pursuant to section 205(j) or section
1631(a)(2), a payment under title II or title XVI for the use
and benefit of another individual, converts such payment, or
any part thereof, to a use that such person knows or should
know is other than for the use and benefit of such other
individual, shall be subject to, in addition to any other
penalties that may be prescribed by law, a civil money penalty
of not more than $5,000 for each such violation.''.
(b) Conforming Amendments.--
(1) Section 1129(b)(3)(A) of such Act (42 U.S.C. 1320a-
8(b)(3)(A)) is amended by striking ``charging fraud or false
statements''.
(2) Section 1129(c)(1) of such Act (42 U.S.C. 1320a-
8(c)(1)) is amended by striking ``and representations'' and
inserting ``, representations, or actions''.
(3) Section 1129(e)(1)(A) of such Act (42 U.S.C. 1320a-
8(e)(1)(A)) is amended by striking ``statement or
representation referred to in subsection (a) was made'' and
inserting ``violation occurred''.
(c) Effective Date.--The amendments made by this section shall be
effective with respect to violations committed after the date of
enactment of this Act.
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Amends SSA title XI part A (General Provisions) to extend civil monetary penalty authority for SSA titles II and XVI with respect to representative payees who misuse and convert a payment under such titles to unauthorized uses.
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Appeal from the United States Court of Appeals for the First Circuit is dismissed for want of jurisdiction. Treating the papers whereon the appeal was taken as a petition for writ of certiorari, the petition is granted. Hopfmann filed this action in the Federal District Court for the District of Massachusetts challenging a provision in the Charter of the Massachusetts Democratic Party. Among the theories he advanced was a claim that the provision, as enforced by Mass.Gen.Laws Ann., ch. 53, §§ 1-121 (West 1975 and Supp.1985), violated the First and Fourteenth Amendments of the United States Constitution. Relying on Hicks v. Miranda, 422 U.S. 332, 344, 95 S.Ct. 2281, 2289, 45 L.Ed.2d 223 (1975), the Court of Appeals held that the claim was foreclosed by this Court's summary disposition of two appeals from the Supreme Judicial Court of Massachusetts in Langone v. Connolly, 460 U.S. 1057, 103 S.Ct. 1510, 75 L.Ed.2d 938 (1983). See 746 F.2d 97, 100-101 (1984). In Hicks, the Court explained the precedential effect of the dismissal "for want of [a] substantial federal question" in Miller v. California, 418 U.S. 915, 94 S.Ct. 3206, 41 L.Ed.2d 1158 (1974): "[Miller] was an appeal from a decision by a state court upholding a state statute against federal constitutional attack. A federal constitutional issue was properly presented, it was within our appellate jurisdiction under 28 U.S.C. § 1257(2), and we had no discretion to refuse adjudication of the case on its merits as would have been true had the case been brought here under our certiorari jurisdiction. We were not obligated to grant the case plenary consideration, and we did not; but we were required to deal with its merits. We did so by concluding that the appeal should be dismissed because the constitutional challenge to the California statute was not a substantial one." 422 U.S., at 343-344, 95 S.Ct., at 2289. Because the Court had jurisdiction over the appeal in Miller, the dismissal involved a rejection of "the specific challenges presented in the statement of jurisdiction." Mandel v. Bradley, 432 U.S. 173, 176, 97 S.Ct. 2238, 2240, 53 L.Ed.2d 199 (1977) (per curiam ). On the other hand, the order disposing of the appeals in Langone read: "Appeals from Sup.Jud.Ct.Mass. dismissed for want of jurisdiction. Treating the papers whereon the appeals were taken as petitions for writs of certiorari, certiorari denied. Reported below: 388 Mass. 185, 446 N.E.2d 43 [1983]." 460 U.S., at 1057, 103 S.Ct., at 1510 (emphasis added). Because the Court dismissed the appeals for lack of appellate jurisdiction, we had no occasion to adjudicate the merits of the constitutional questions presented in the jurisdictional statements. Nor did the denial of certiorari have any precedential effect. See Maryland v. Baltimore Radio Show, Inc., 338 U.S. 912, 919, 70 S.Ct. 252, 255, 94 L.Ed. 562 (1950) (opinion of Frankfurter, J., respecting denial of the petition for certiorari). The judgment of the Court of Appeals is vacated to the extent it relied on the dismissal of the appeals in Langone, and the cause is remanded for further proceedings. It is so ordered.
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Held: In federal-court proceedings wherein it was claimed that the Massachusetts Democratic Party's Charter, as enforced by a Massachusetts statute, violated the First and Fourteenth Amendments, the Court of Appeals erred in concluding, on the basis of Hicks v. Miranda, 422 U. S. 332, that the claim here was foreclosed by this Court's summary disposition of two appeals from the Massachusetts Supreme Judicial Court in Langone v. Connolly, 460 U. S. 1057. Hicks explained the precedential effect of a dismissal by this Court "for want of [a] substantial federal question" where this Court has jurisdiction over an appeal. However, in Langone this Court dismissed the appeals for lack of appellate jurisdiction and thus had no occasion to adjudicate the merits of the constitutional questions presented in the jurisdictional statements. Nor did the denial of certiorari, upon treating the papers whereon the appeals were taken in Langone as petitions for certiorari, have any precedential effect. Appeal dismissed for want of jurisdiction and, treating the papers as a petition for certiorari, certiorari granted; 746 F. 2d 97, vacated and remanded.
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Background Until fiscal year 1998, Indian housing authorities and tribes received most of their funding for low-income housing through programs established under the U.S. Housing Act of 1937 and administered by HUD’s Office of Native American Programs. Through its headquarters and six field offices, and with the help of 217 Indian housing authorities, HUD administered the housing programs that benefited Native American families that live in or near tribal areas. HUD provided funding to construct, maintain, and rehabilitate low-income housing through programs such as Development, Operating Subsidies, and Modernization. On October 26, 1996, the Native American Housing Assistance and Self-Determination Act was signed into law, separating Indian housing from public housing, administratively and financially. The regulations implementing NAHASDA were developed by a negotiated rulemaking committee. The committee had 58 members, 48 of them from geographically diverse small, medium, and large tribes; the other 10 were HUD employees. After review by the Office of Management and Budget, HUD published the final rule implementing NAHASDA on March 12, 1998; it went into effect on April 13, 1998. NAHASDA eliminated 9 of HUD’s 14 separate Indian housing programs, replacing them with a single block grant program with one set of funding criteria for HUD to administer and, according to HUD officials, one system for managing and accounting for funds. The new act also allowed tribes to designate themselves, new housing entities, or existing Indian housing authorities as the housing entity to manage existing housing, to plan and implement housing programs, and to administer block grant funding. This change resulted in the number of housing entities more than doubling, from 217 housing authorities to 575 tribally designated housing entities. Under NAHASDA, to receive funding, each housing entity must submit an Indian housing plan to HUD describing 1-year and 5-year housing goals and objectives, housing needs, and financial resources. HUD Used Competitive and Noncompetitive Processes to Provide Indian Housing Grant Funding Prior to NAHASDA, HUD provided funding directly to Indian housing authorities and tribes through 14 programs for which a total of $2.8 billion was appropriated in fiscal years 1993 through 1997. Each program had its own criteria for awarding and allocating funds and its own system for managing and accounting for the funds. For nine of the programs, Indian housing authorities or tribes competed for funding. The Indian housing authorities and tribes submitted project proposals, which HUD then scored and ranked, awarding grants for the highest-ranked projects. For the other five programs, HUD allocated funds to Indian housing authorities or tribes noncompetitively through a formula or on a first-come, first-served basis. Tables I.1 and I.2 in appendix I describe each program and the criteria used to provide funding. Funding for HUD’s Indian housing programs has remained relatively consistent in recent years, ranging from a low of $491 million in fiscal year 1996 to a high of $593 million in fiscal year 1995, as shown in figure 1. In fiscal year 1997, the last year these programs were funded separately, funding was approximately $562 million, of which almost $322 million, or 57 percent, was awarded through competitive programs. The approximately $240 million (43 percent) remaining was allocated noncompetitively. Figure 2 shows how the fiscal year 1997 funds were distributed. The Formula Used to Determine Fiscal Year 1998 NAHASDA Block Grants Did Not Consider Past Housing Authority Performance or Unspent Funding With the start of the NAHASDA program, HUD applied the act’s allocation formula to determine the amounts of the fiscal year 1998 block grants. The formula considers tribes’ housing needs, but did not include a factor for housing authorities’ past performance. HUD determined that the Department was legally constrained from considering the past management performance of Indian housing authorities. The formula also did not factor in $929 million provided in past years but not yet spent by the Indian housing authorities and tribes. Most of the unspent funding was provided in fiscal years 1993 through 1997 for the Development and Modernization programs, which were intended to assist Indian housing authorities in building new housing and modernizing existing units. The housing entities can continue to use these unspent funds as originally planned or as proposed in their Indian housing plans. NAHASDA Funding Is Based on Two Components—Maintaining Existing Housing and Need for Affordable Housing The NAHASDA block grant formula consists of two components: (1) the costs of operating and modernizing existing housing units and (2) the need for providing affordable housing. A housing entity’s total block grant amount is the sum of the amounts determined under each of these two components—or the amount an Indian housing authority received in fiscal year 1996 for modernization and operating subsidy. To determine funding for the first component—operating and modernizing—HUD calculates the number of existing housing units an entity has and the operating costs of providing that housing. HUD then calculates the modernization costs of keeping these units in good working order. These two cost figures are combined as the entity’s funding amount under the first component of the NAHASDA formula. To calculate funding of the second component of the NAHASDA formula—need for affordable housing—HUD uses various factors. These factors reflect each housing entity’s Native American population, income levels, local housing costs and housing conditions, and the extent of housing shortages. Hence, it is through the calculation of this component that tribal housing needs are considered in the distribution of NAHASDA funding. In allocating funds in the first year of the NAHASDA program, HUD recognized that the data used to calculate block grants may need to be improved. HUD has hired a contractor to review alternative data sources to use when applying the NAHASDA formula. In addition, NAHASDA regulations require that HUD, with the consultation and involvement of the tribes, review the formula and, if necessary, revise the formula within 5 years. Appendix II provides a more detailed description of the current formula. Past Housing Authority Management Performance Was Not a Factor in Calculating Fiscal Year 1998 Block Grants, but Performance Under NAHASDA May Be a Factor in the Future HUD interpreted NAHASDA as legally constraining the Department from considering Indian housing authorities’ past management performance as a factor in determining the eligibility of housing entities for fiscal year 1998 NAHASDA block grants. Indian housing authorities’ past performance came under the requirements and regulations for programs created under the U.S. Housing Act of 1937, requirements and regulations that are no longer in effect since NAHASDA eliminated most of these programs. According to HUD’s Office of General Counsel, there is no provision under NAHASDA allowing HUD, when awarding block grant funding under the act, to consider Indian housing authorities’ failure to comply with requirements and regulations that are no longer in effect. Consequently, the housing entities were given the opportunity to demonstrate good management and performance under NAHASDA. However, HUD does have the authority and has, in several instances, placed conditions, such as additional monitoring and oversight, on the use of grant funds by a housing entity that has a history of poor performance in administering federal grant programs. For example, for a tribe with problems administering its Indian Community Development Block Grant and HOME programs, HUD plans to more closely monitor expenditures of NAHASDA block grant funds and to require that the tribe submit quarterly program and financial reports. In future fiscal years, regulations permit HUD, when dispensing new grants, to consider how well housing entities have managed past NAHASDA grants. NAHASDA regulations allow HUD to sanction poorly managed housing entities by (1) reducing or eliminating future grant funding or (2) replacing the housing entity managing the program. Such actions may be taken if HUD determines, through activities such as reviewing reports provided by tribes or making site visits, that housing entities are substantially noncompliant with NAHASDA regulations. HUD plans to closely monitor housing entities that are having performance problems and to provide them with technical assistance to help them comply with NAHASDA requirements. To monitor and assist these entities, HUD is using Internet e-mail to facilitate the submission and review of Indian housing plans and to respond to housing entities’ questions about the program. Providing additional monitoring and technical assistance may pose a challenge for HUD, given the Department’s decreasing resources. HUD’s Inspector General has stated that effectively overseeing housing entities while simultaneously implementing the NAHASDA program may prove difficult with current HUD staffing because the number of housing entities served by HUD under NAHASDA will more than double. Until the first year of NAHASDA is completed, HUD will not know what the impact this increase in the number of housing entities served will have on its workload. The Deputy Assistant Secretary, Office of Native American Programs, estimated that 221 staff years will be needed to fully implement Indian housing programs. Meanwhile, several changes are planned to accommodate the future workload with the present staffing level of 178 employees. The planned changes include addressing the length and frequency of site visits, modifying some work processes, and using technology to improve efficiency. The Deputy Assistant Secretary added that because of the resource limitations, the office may have to reduce the number of site visits to tribal housing entities during fiscal year 1999. HUD plans to visit only 20 percent of the housing entities, instead of 33 percent as originally planned. Under NAHASDA regulations, the tribes also have a responsibility to monitor the performance and compliance of their housing entities. For example, tribes are required to ensure that their entities prepare periodic progress reports, including annual compliance assessments and performance and audit reports. Unspent Indian Housing Funding Was Not a Factor in Calculating Fiscal Year 1998 NAHASDA Block Grants The unspent $929 million in Indian housing funding was not a factor in calculating the fiscal year 1998 block grants because, according to HUD officials, the unspent funding addresses needs that continue to exist. This funding, awarded in previous years, remains available for housing entities to complete ongoing work or for eligible NAHASDA activities. NAHASDA regulations require housing entities to use unspent funding for housing planned under earlier housing programs if contracts have already been signed. However, if such contracts have not been signed, NAHASDA regulations allow the entities to integrate the funding into their overall NAHASDA housing plan. Housing entities report these unspent funds and the plans for their use as part of the Indian housing plans they submit for HUD’s approval. Officials from HUD’s Office of the Chief Financial Officer told us that some funds, particularly the Development and Modernization funds, have remained unspent because of the construction difficulties some projects on Indian lands have encountered. These difficulties include legal disputes and the remoteness of the Indian lands, which makes access difficult for the builders and other individuals, businesses, and suppliers needed to construct housing. Most of the unspent funding, almost $903 million of it, was provided in fiscal years 1993 through 1997 and was for the Development and Modernization programs. The unspent funding provided in fiscal years 1993 through 1997 is shown by program in figure 3. Over this same 5-year period, HUD provided a total of $2.8 billion for Indian housing programs; thus, about 30 percent of this funding remains unspent. In appendix III, table III.1 shows the unspent Indian housing funding by program over an 18-year period. Table III.2 shows the unspent Indian housing funding over the same period for 15 Indian housing authorities and tribes that have unspent funding of more than $10 million each. Other ($35.9) Operating Subsidies ($12.0) Section 8 Rental Assistance ($10.0) Drug Elimination ($8.6) Economic Development and Support Services ($3.4) Emergency Shelter Grants ($1.0) HOPE I ($0.7) Youth Sports ($0.2) HOME Investment Partnership ($38.9) Development ($511.3) Modernization ($316.5) HUD Has Allocated NAHASDA Block Grants for Fiscal Year 1998 and Requested 1999 Funding As of September 30, 1998, HUD had allocated most of the fiscal year 1998 NAHASDA block grants and had requested funds from the Congress for fiscal year 1999 block grants. To receive grants from the $590 million available for the NAHASDA program in fiscal year 1998, each of the 575 housing entities had to submit an Indian housing plan by July 1, 1998. HUD had received plans representing over 97 percent of the entities by the deadline. As of September 30, 1998, HUD had approved 327 plans representing approximately $548 million and was in the process of reviewing 40 additional plans representing $39 million—for a total of 367 plans and $587 million in fiscal year 1998 block grants. Appendix IV shows the fiscal year 1998 block grant amount for each housing entity. For the fiscal year 1999 program, HUD requested $600 million from the Congress. As of September 30, 1998, however, HUD had not calculated the final fiscal year 1999 block grant allocations because it had not yet received its appropriation. Fiscal year 1999 Indian housing plans are due by July 1, 1999, for HUD’s review and approval. Conclusions Passage and implementation of NAHASDA presents HUD and the Native American tribes with both opportunities and challenges. NAHASDA allows HUD to manage and monitor most housing assistance to tribes through a single program. At the same time, NAHASDA more than doubled the number of grantees that must be assisted and monitored—during a period of declining resources at the Department. As for the tribes, they gained the freedom to set their own priorities and to determine how to best meet their housing needs with the resources available. Yet the tribes will ultimately be responsible for making sure that grant funds are spent efficiently and appropriately. It is too soon to determine how well HUD and the tribes will meet the challenges presented by NAHASDA. Agency Comments We provided the Department of Housing and Urban Development with a draft of this report for review and comment. HUD generally agreed with the report but commented that we should recognize that the Department merely administers the NAHASDA formula. The formula was a product of the negotiated rulemaking process, and the Department did not determine or control the elements of the formula. We have expanded the discussion in our report to reflect this concern. HUD also suggested that we include information on standard spend-out rates for the Development and Modernization programs in our discussion of unspent program funding to allow for a more comprehensive understanding of the issue. We believe that our discussion of the unspent program funding addresses this concern. We point out that most of the unspent funding was appropriated over a recent 5-year period—fiscal years 1993 through 1997. Furthermore, we describe the difficulties of building on Indian lands and point out that Development and Modernization funds can remain unspent because of these difficulties. Consequently, we did not make the suggested change to the report. Additionally, HUD provided a number of suggested technical and clarification comments that we have incorporated as appropriate. Scope and Methodology To determine how HUD awarded and allocated funding to Indian housing authorities and tribes before NAHASDA’s enactment, we reviewed regulations governing HUD’s grant award programs. In addition, we reviewed the applicable HUD handbooks and guidebooks and interviewed officials from HUD’s headquarters Office of Native American Programs in Washington, D.C., and Denver, Colorado, who were familiar with the programs’ funding. To determine the aggregate funding amounts for Indian housing programs in fiscal years 1993 through 1997, we obtained data from HUD’s annual reports. To determine what factors HUD used to allocate Indian housing block grant funding to housing entities under NAHASDA, we reviewed NAHASDA, the final rule developed under the act, notices, and plans for implementing NAHASDA. We also analyzed the NAHASDA block grant allocation formula. We discussed the NAHASDA block grant allocation process and formula with officials of HUD’s Office of Native American Programs who were responsible for NAHASDA’s implementation. In addition, we interviewed members of the NAHASDA Negotiated Rulemaking Committee who participated in drafting the final rule and the block grant allocation formula. To determine the amount, type, and “age” of unspent Indian housing program funds, we analyzed data obtained for us by HUD from its Program Accounting System. We did not systematically verify the accuracy of HUD’s data or conduct a reliability assessment of HUD’s databases as part of this assignment. To determine the status of Indian housing block grant funding for fiscal year 1998, we reviewed HUD’s reports on housing entities’ status in meeting NAHASDA funding requirements and the associated funding amounts. We also interviewed officials of HUD’s Office of Native American Programs who were responsible for calculating and allocating the fiscal year 1998 block grants. We performed our work from June 1998 through November 1998 in accordance with generally accepted government auditing standards. We are sending copies of this report to the Secretary of HUD and the Director, Office of Management and Budget. We will make copies available to others on request. Please call me at (202) 512-7631 if you or your staff have any questions. Major contributors to this report are listed in appendix V. Grant Award Criteria and Fiscal Year 1997 Funding for Competitive and Noncompetitive Indian Housing Programs Fiscal year 1997 funding (dollars in millions) For scoring and ranking proposals — Bureau of Indian Affairs housing needs assessment — Percentage of the area’s total need — Estimated number of units to be funded — Weighted average cost of developing housing within each area — Indian housing authority established under state law or a HUD-approved tribal ordinance — Indian housing authority had the capacity to administer the program as demonstrated by compliance with HUD standards for housing development, modernization, and operations — Indian housing authority met performance eligibility thresholds to apply for housing development funding: environmental review, fiscal closeout, final site approval and control, utility supplier’s firm commitment, and preconstruction certification — Relative unmet need for housing — Relative Indian housing authority occupancy rate compared with the occupancy rates of other eligible Indian housing authorities — Time since last Development grant was approved compared with that for other eligible Indian housing authorities — Current Indian housing authority development “pipeline” activity already in progress — For fiscal year 1997, HUD applied additional factors for scoring and ranking that included clear Indian housing authority demonstration of preplanning housing project activities, site selection that results in cost savings, and innovative approaches to development or financing that reduce housing delivery time or increase the number of units — $1 million base amount for each field office — Additional amount calculated by a formula that considered the latest Census data for the eligible Native American population residing in each area and the extent of poverty and housing overcrowding — Reasonableness of project’s cost — Project’s appropriateness for intended use — Project can be achieved within 2 years — Tribe’s administrative, managerial, and technical capacity — Tribe’s past grants administration — Tribe’s actions to impede development of housing for low- and moderate-income individuals — Outstanding block grant obligations to HUD — Need for project and its design — Project planning — Leveraging of block grant funding (continued) Fiscal year 1997 funding (dollars in millions) Comprehensive Improvement Assistance Program for modernization(Nonemergency) Degree to which — project addressed the housing needs of the tribe and maximized benefits to low-income families — tribe had taken the financial, administrative, and legal actions necessary to undertake the proposed project and had the administrative staff to carry out the project — tribe would use other sources of funding, such as state grants, private mortgage insurance, private contributions, and other federal grants, to leverage funding for the project — Plan for evaluating activities — Plan for establishing a relationship with local law enforcement entities — Coordination with empowerment zone and welfare reform efforts — Description of use of community facilities and bringing back community focus to housing authority properties — Assurance that Indian housing authority has a broad range of tools for making and maintaining a safe community — Indian housing authority’s administrative capacity and relevant experience — Problem’s extent — Support of residents, local government, and community in implementing activities — Soundness of proposed plan — Extent of coordination and participation with other organizations in community planning (continued) Fiscal year 1997 funding (dollars in millions) For scoring and ranking proposals — Formula calculating emergency shelter needs for tribes within each field office area — Form, timeliness, and completeness of application — Tribe’s eligibility as determined by Department of Treasury Office of Revenue Sharing — Eligibility of persons to be served for program assistance — Tribe’s building compliance with disability requirements — Tribe’s capacity to carry out the proposed activities successfully and within a reasonable time — Tribe’s service to the homeless population that is most difficult to reach and serve — Existence of an unmet need for the proposed project — Appropriateness of proposed activities to meet the needs of the served population — Extent of coordination with other community programs — 51 percent or more of the residents included in the proposed project are affected by welfare reform — Proposed activities must take place in a community facility that is easily accessible for applicants — Community resources must be firmly committed to the project — Indian housing authority’s compliance with current programs — Troubled housing authority must use a contract administrator — Indian housing authority’s administrative capacity and relevant experience — Extent of problem and need for project — Soundness of program approach and methodology — Indian housing authority’s ability to leverage project resources — Extent of coordination with community to identify and address problems — Funding provided to field offices to assist Indian housing authorities in providing funds for eligible families — Families, not Indian housing authorities or tribes, must be eligible for assistance — Funding provided to field offices to assist Indian housing authorities in providing funds for eligible families (continued) Fiscal year 1997 funding (dollars in millions) For scoring and ranking proposals — Funding awarded directly to organizations by HUD’s Office of Public and Indian Housing — 51 percent or more of the residents included in the proposed project are affected by welfare reform — Signed agreement between the applicant and the housing authority describing each of their roles and responsibilities — Proposed activities must take place in a community facility that is easily accessible for applicants — Must use the services of a contract administrator or mediator — Must be a registered nonprofit organization — Compliance with current programs and no unresolved audit findings — Contract administrator must not be in default — Letters of support from project participants — Certification of resident organization board elections — Resident organization’s administrative capacity to carry out the project and its relevant experience — Need for the project and extent of the problem — Soundness of program approach and methodology — Resident organization’s ability to leverage project resources — Extent that project reflects a coordinated community-based process identifying and addressing the problem — HUD ONAP awarded a small portion of the funding using a lottery system Fiscal year 1997 funding (dollars in millions) Comprehensive Improvement Assistance Program for modernization(Emergency) For allocating funding to Indian housing authorities or tribes — Funding allocated directly to field offices by HUD’s Office of Public and Indian Housing — HUD approval of Indian housing authority’s comprehensive plan identifying all physical condition and management improvements of existing housing and action plan for achieving them — Coordination with local officials in developing comprehensive plan — Indian housing authority board resolution approving comprehensive plan — Additional assurances or information required from HUD monitoring, audit findings, civil rights compliance findings, or corrective action orders — Formula calculating housing modernization needs of Indian housing authorities — Funding allocated directly to field offices by HUD’s Office of Public and Indian Housing — Indian housing authorities must meet HUD financial management and occupant income requirements — Performance Funding System formula for calculating what a well-managed Indian housing authority would need to operate its housing programs — Compliance with Fair Housing, Civil Rights, and environmental statutes — Housing projects have to be fully available for occupancy — All eligible applications funded subject to the availability of funds — HUD does not allocate funding for loan guarantees to field offices — Tribe must have developed eviction and foreclosure procedures — HUD guarantees loans made by private lenders to applicants that meet loan qualifications (continued) Fiscal year 1997 funding (dollars in millions) Formula Used to Allocate NAHASDA Block Grant Funding Using the block grant formula established under the Native American Housing Assistance and Self-Determination Act of 1996 (NAHASDA), the Department of Housing and Urban Development (HUD) allocates funds to Indian housing entities for (1) the costs of operating and modernizing existing housing units and (2) the need for providing affordable housing activities. In calculating grant amounts for operating and modernizing existing housing, HUD, as specified in the formula, considers inflation since 1996 in the cost of providing these services, the number of housing units an entity operates, and the entity’s cost of providing these services compared with the average cost for all entities. In calculating grant amounts for the need to provide affordable housing activities, HUD considers seven weighted factors specified in the formula indicating the need for housing activities and the cost of obtaining the activities. Additionally, once the block grants are calculated, HUD ensures that the funding amounts meet certain minimum levels. How Funding for Operating and Modernizing Housing Is Calculated HUD calculates an entity’s grant amount for operating and modernizing existing housing using fiscal year 1996 national average funding per housing unit and increasing it to reflect cost increases. After this inflation adjustment, HUD adjusts the national average amount to reflect geographic differences in the cost of operating and modernizing housing for each Indian housing entity. HUD then multiplies each entity’s cost per unit by the number of housing units the entity operates to arrive at its grant amount. Figure II.1 illustrates the formula for calculating funding for operating and modernizing existing housing. Sample Funding Calculation for Operating and Modernizing Existing Housing Housing entities operate a variety of units that are classified into three major types: (1) low-income rental units built under the U.S. Housing Act of 1937, (2) units operated under the Section 8 Rental Assistance program, and (3) Turnkey III and Mutual Help homeownership units. For the NAHASDA block grants, HUD separately calculates grant amounts that reflect the operating and modernizing needs of each of these types of housing units. An entity’s funding reflects these needs and is the sum of two calculations. Table II.1 shows a hypothetical sample calculation of an entity’s funding for operating housing. In calculating funding for operating housing, HUD uses the 1996 national average funding for each of the three types of housing. In our hypothetical sample calculation, we assume that the inflation cost adjustment is 5.3 percent and that the entity’s geographic cost factor is 14 percent above the national average. We also assume that the entity is responsible for operating 150 low-income housing units, 50 Section 8 housing units, and 20 Turnkey III and Mutual Help units. We use the fiscal year 1996 national average funding amount for each type of housing unit in our hypothetical calculation. The national average funding amount for low-income units in fiscal year 1996 was $2,440 per unit. We increase this amount by 5.3 percent for inflation and by 14 percent for operating costs above the national average, and consider that the entity operates 150 low-income units. Given these assumptions, our hypothetical housing entity would receive a grant amount of $439,354 for low-income units. Similar calculations for Section 8 units and for Turnkey III and Mutual Help units yield grant amounts of $217,576 and $12,676, respectively. Adding these three figures together yields a total operating housing grant amount of $669,606. In calculating funding for modernizing housing, HUD bases the average 1996 funding amount on the number of low-income and Turnkey III and Mutual Help units. Section 8 units are excluded in this calculation. The national average funding amount for modernizing housing units in fiscal year 1996 was $1,974 per unit. The block grant uses the same inflation adjustment factor for both operating and modernizing housing. Consequently, we assume a 5.3-percent inflation adjustment for this calculation. Under the block grant, the geographic cost factor for modernizing housing differs from that used for operating housing. In our sample calculation, we assume that the entity’s geographic cost factor is 2 percent below the national average. The resulting grant calculation for modernizing housing is shown in table II.2. We increase the fiscal year 1996 modernizing funding amount by 5.3 percent for inflation, reduce it by 2 percent for below average costs, and consider the 170 housing units the entity operates (150 low-income units and 20 Turnkey III and Mutual Help units). These calculations result in a modernizing grant amount of $346,298. Adding this amount to the $669,606 the entity receives for operating housing results in a total grant of $1,015,904 for operating and modernizing housing. Data Sources HUD Used in Calculating Operating and Modernizing Funding For fiscal year 1998, HUD derived the number of housing units and areas served from reports submitted by Indian housing authorities or tribes. The numbers reported were confirmed by the Department. HUD adjusted costs for inflation using the housing cost component of the Consumer Price Index, published annually by the Bureau of Labor Statistics. HUD adjusted for geographic differences in the cost of operating housing (for example, the costs of maintenance and tenant services) using the larger of the entity’s historical Allowable Expense Levels for calculating operating subsidies under the Public Housing Program (prior to October 1, 1997) or the private sector housing Fair Market Rents, data collected and published annually by HUD. Fair Market Rents represent the rental cost of private sector housing units and reflect geographic differences in rental housing supply and demand in local U.S. housing markets. HUD based the geographic cost factor used to calculate funding for modernizing housing on the cost of building a standard housing unit of moderate design in various geographic locations. Given moderate housing design specifications, HUD calculates the labor, materials, and other costs required to construct such a unit in various locations. These amounts are based on cost surveys conducted by private firms. Thus, the geographic cost factor reflects labor, materials, and other costs in the housing construction industry. How Funding for Need for Additional Housing Is Calculated Once funding for operating and modernizing housing is determined for each entity, HUD totals the funding amounts and deducts the amounts from available appropriations. This calculation results in the amount of funding available to all housing entities to address the need to provide affordable housing activities. The formula for the need for housing activities allocates available funding among entities based on their proportionate share of seven weighted factors and the cost of building a standard housing unit of moderate design in various geographic locations. The geographic cost adjustment factor is the same as or similar to that used in the formula to calculate funding for modernizing housing. Figure II.2 shows the formula for calculating funding for the need for housing activities. Sample Calculation for Need for Housing Activities The formula for calculating funding for the need to provide affordable housing activities uses various weighted need factors. The factors capture the portions of the national population that fall into seven categories and are American Indians or Alaska Natives living in areas where a tribe has jurisdiction or has provided substantial housing services. These categories include the Native American population, low-income households, households with housing cost exceeding half their income, low-income households in need of housing, and households living in overcrowded conditions or without kitchen or plumbing facilities. Table II.3 shows each factor and its associated weight. HUD multiplies each housing entity’s share of each factor by the factor’s assigned weight and adds the total for all factors to produce the entity’s weighted share for the seven need factors. Population (American Indians and Alaska Natives) The third column of table II.3 shows the weight for each of the seven need factors. For example, in our sample calculation, we assume that a housing entity’s jurisdiction covers, or that the entity has provided, substantial housing services to one-half of 1 percent of the total American Indian and Alaska Native population (see factor 1 in the table). This factor receives a weight of 11 percent in the formula. Multiplying the entity’s share of the American Indian and Alaska Native population by the factor’s weight produces the entity’s weighted share for the factor. To produce the entity’s weighted share of the seven factors, we make similar computations for each factor and add the entity’s weighted shares together. HUD uses the formula shown in figure II.3 to calculate an entity’s funding for the need to provide affordable housing activities. To illustrate, we assume that $100 million of the program’s total appropriation remains after the operating and modernizing grants have been allocated. We use the weighted share of the seven need factors as calculated in table II.3, 0.00622. We also assume that the entity’s geographic cost factor is 2 percent below the national average. Multiplying these amounts results in a grant calculation of $609,560 for need for housing activities. Funding for Need for Housing Activities After calculating funding for operating and modernizing housing and for the need for housing activities, HUD combines the amounts into a single block grant. The total grant amount of our hypothetical sample calculation is $1,267,736. Data Sources Used in Calculating Funding for the Need for Housing Activities For fiscal year 1998, HUD used the same geographic cost factor to calculate funding for the need to provide affordable housing activities as it did for modernizing existing housing. HUD obtained data for each of the seven need factors from the 1990 U.S. Census, which HUD updated to reflect current conditions. Housing entities can challenge the Census data by conducting their own surveys subject to HUD guidelines and by submitting the data to HUD for use in calculating grant amounts for need for housing activities. NAHASDA Regulations Provide Minimum Funding Guarantees The NAHASDA regulations establish two kinds of minimum funding levels for housing entities. Consequently, when HUD calculates funding amounts that are below the legislated minimums, housing entities are given additional funds. The first minimum funding level guarantees every entity an allocation that at least equals its fiscal year 1996 funding for operating and modernizing housing. The second minimum funding level guarantees every housing entity an allocation of at least $50,000 for funding the need for affordable housing activities. In subsequent years, HUD will reduce the second minimum funding guarantee to $25,000, and in fiscal year 2002, it will be eliminated. Unspent Indian Housing Funding, 1980-97 Indian housing authority/tribe and programs Navajo Housing Authority, Arizona Choctaw Nation Housing Authority, Oklahoma Association of Village Council Presidents Housing Authority, Alaska Cherokee Nation Housing Authority, Oklahoma Tagiugmiullu Nunamiullu Housing Authority, Alaska Tohono O’odham Housing Authority, Arizona (continued) Indian housing authority/tribe and programs Standing Rock Housing Authority, South Dakota Northern Circle Housing Authority, California Bering Straits Regional Housing Authority, Alaska Navajo Nation of Arizona, New Mexico and Utah Yurok Housing Authority, California Karuk Tribe Housing Authority, California 0 (continued) HUD’s Fiscal Year 1998 Indian Housing Block Grant Amounts Calculated for 575 Housing Entities Alaska Office of Native American Programs (Anchorage, Alaska) (continued) Operating and modernizing existing housing (continued) Operating and modernizing existing housing (continued) Operating and modernizing existing housing (continued) Operating and modernizing existing housing (continued) Operating and modernizing existing housing (continued) Operating and modernizing existing housing Eastern/Woodlands Office of Native American Programs (Chicago, Illinois) (continued) Operating and modernizing existing housing (continued) Northern Plains Office of Native American Programs (Denver, Colorado) (continued) Operating and modernizing existing housing Southern Plains Office of Native American Programs (Oklahoma City, Oklahoma) (continued) Operating and modernizing existing housing (continued) Southwest Office of Native American Programs (Phoenix, Arizona) (continued) Operating and modernizing existing housing (continued) Operating and modernizing existing housing (continued) Operating and modernizing existing housing (continued) Northwest Office of Native American Programs (Seattle, Washington) (continued) Major Contributors to This Report Carol Anderson-Guthrie Robert J. 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Pursuant to a congressional request, GAO reviewed the Department of Housing and Urban Development's (HUD) implementation of the Native American Housing Assistance and Self-Determination Act of 1996 (NAHASDA), focusing on: (1) how HUD allocated funding to Indian housing authorities and tribes before NAHASDA's enactment, and how much was appropriated for Indian programs in fiscal years (FY) 1993 through 1997; (2) identifying the factors HUD used to allocate Indian housing block grant funding to tribes and tribally designated housing entities under NAHASDA, and whether HUD considered current tribal housing needs, past tribal housing management performance, and the magnitude of unspent housing grant funding for incomplete housing projects; (3) the amount, type, and age of unspent funding for incomplete housing projects; and (4) the status of HUD's Indian housing block grant funding for fiscal years 1998 and 1999. GAO noted that: (1) before NAHASDA became effective, HUD distributed funding to Indian housing authorities and tribes through 14 different programs, each having its own criteria for awarding and allocating grant funding; (2) for nine of these programs, funding was awarded competitively, requiring the Indian housing authorities or tribes to submit project proposals, which HUD then scored and ranked; (3) for the other five programs, HUD allocated funding to Indian housing authorities or tribes noncompetively, using formulas or distributing the funds on a first-come, first-serve basis; (4) over fiscal years 1993 through 1997, HUD provided a total of $2.8 billion to Indian housing authorities and tribes through these 14 programs; (5) after NAHASDA went into effect for FY 1998, eliminating 9 of the 14 separate Indian housing programs and replacing them with a single block grant program, HUD used the act's noncompetitive allocation formula to determine the grant amounts for the 575 Indian housing entities; (6) the formula has two components: (a) the costs of operating and modernizing existing housing units; and (b) the need for providing affordable housing activities; (7) the allocation formula does not include a factor for past management performance; (8) HUD's rationale was that there is no authority under the new act for it to consider the authorities' failure to comply with requirements and regulations that are no longer in effect; (9) relying on other guidance, HUD has placed conditions on the use of NAHASDA grant funds if a housing entity has a history of problems with administering other federal grant programs; (10) in subsequent years, HUD can consider performance under NAHASDA when dispensing new grants; (11) the block grant formula also did not consider the approximately $929 million in total unspent Indian housing program funding awarded in previous years because the funding addresses needs that continue to exist; (12) most of the unspent funds were provided in fiscal years 1993 through 1997 through two programs--Development and Modernization; (13) entities must report their planned use of those funds to HUD as part of their Indian housing plans; (14) for FY 1998, $590 million was appropriated for the Indian housing block grants awarded under the new act; (15) as of July 1, 1998, over 97 percent of the housing entities had submitted the required Indian housing plans to HUD describing their planned use of block grant funds and HUD approved 327 of those plans; and (16) for FY 1999, HUD requested $600 million for the program.
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This is an action of replevin involving conflicting claims under certain chattel mortgages executed by Freedman Bros. & Co. formerly merchants in the city of Detroit. The firm was composed of Herman Freedman, who managed its business in Detroit; Benjamin Freedman, who resided in New York, and had entire charge of the buying and of the firm's financial affairs in that city; and Rosa Freedman. At the beginning of the action the mortgaged property was in the custody of Leopold Freud as agent of the People's Savings Bank, plaintiff in error. Bates, Rred & Cooley, the defendants in error, who were the plaintiffs below, claim priority under a mortgage given by Freedman Bros. & Co., February 7, 1881, to secure both the past indebtedness of the latter, amounting to $45,000 and upwards, for goods, wares, and merchandise sold and money loaned to them, and any future liabilities which might be incurred by the mortgagors for other goods purchased, or other moneys borrowed, from the mortgagees; the mortgage covering not only the goods, wares, merchandise, and other personal property then in the mortgagors' stores in Detroit, but also their notes, book-accounts, and securities, and all future additions to or substitutions for such goods and merchandise. o part of said indebtedness was created at the time of the execution of the mortgage. The People's Savings Bank claims under a mortgage made by Freedman Bros. & Co. on the eleventh of February, 1881, to secure certain demand notes, aggregating $49,000, which were executed by that firm on the seventh day of February, 1881, and also 'all other paper indorsed' by it and held by the bank; that mortgage covering all the goods and merchandise then in the mortgagors' stores, and all thereafter put into them. This last mortgage provided that Leopold Freud, the bank's agent, should take immediate possession and sell the goods in the ordinary course of business, applying the proceeds to said indebtedness until the same was paid. The said demand notes represented past indebtedness; for they were given in place of other paper of the mortgagors' then outstanding, and which had not then matured. Each demand note was accompanied by a cognovit or 'confession of judgment,' under which, however, no action was taken. The mortgage to the bank was the first one filed in the proper office in Detroit, though it was not lodged until after the bank had notice, through its agent, that Bates, Reed & Cooley claimed to be in possession of or to have rights in the mortgaged property. Whether the bank, before the mortgage to it was given, had actual notice of the prior mortgage to Bates, Reed & Cooley does not clearly appear. By the statutes of Michigan relating to chattel mortgages it is provided that 'every mortgage, or conveyance intended to operate as a mortgage, of goods and chattels, which shall hereafter be made, which shall not be accompanied by an immediate delivery, and followed by an actual and continued change of possession, of the things mortgaged, shall be absolutely void as against the creditors of the mortgagor, and as against subsequent purchasers or mortgagees in good faith, unless the mortgage, or a true copy thereof, shall be filed in the office of the township clerk of the township, or city clerk of the city, or city recorder of cities having no officer known as city clerk, where the mortgagor resides, except when the mortgagor is a non-resident of the state, when the mortgage, or a true copy thereof, shall be filed in the office of the township clerk of the township, or city clerk of the city, or city recorder of cities having no officer known as city clerk, where the property is.' 2 How. Ann. St. p. 1609, § 6193. John Atkinson, for plaintiffs in error. D. M. Dickinson, for defendants in error. [Argument of Counsel from pages 559-560 intentionally omitted] e HARLAN, after stating the facts in the foregoing language, delivered the opinion of the court: The mortgagees, respectively, insist that there was, within the meaning of the statute, an immediate delivery to them, followed by an actual and continued change of possession of the things mortgaged; the bank claiming to have taken possession under its mortgage on the eleventh of February, 1881, while Bates, Reed & Cooley, denying that the bank ever had such possession as the law requires, contend that they took possession on the fifteenth of February, 1881. But the claim of neither party in that respect is satisfactorily sustained by the proof. The evidence does not show such open, visible, and substantial change of possession as the law required in order to give notice to the public of a change of ownership. Doyle v. Stevens, 4 Mich. 93. In a sense, both parties were in possession by agents early on the morning of the fifteenth of February, each claiming the exclusive right to manage and control the property under the terms of the respective mortgages. As the contest for such management and control was likely to result in an unseemly display of force, the parties, on that day, entered into an agreement which recited their respective claims of priority both of possession and of right, and provided, 'neither party waiving or surrendering any right or advantage,' that the possession of each should remain as it then a s, and that the business should continue as it was then being conducted; all the proceeds of sale being deposited in bank, and remaining there intact until these conflicting claims should be settled by judicial decision or by agreement. The claims were not settled by agreement; and the defendants in error, having insisted that this arrangement was not being carried out in good faith, and having been refused exclusive possession brought this action, as they might do consistently with the agreement, to obtain a judicial determination of their rights. In adopting that course, they surrendered no right they had in the premises. In behalf of the bank it is contended that the mortgage to Bates, Reed & Cooley was fraudulent as against subsequent creditors and mortgagees in good faith, in that the mortgagees contemplated that the mortgagors should remain in possession, and prosecute the business in the ordinary mode. The mortgage of February 7, 1881, certainly contains no provision of that kind. But if the extrinsic evidence establishes that such a course upon the part of Freedman Bros. & Co. was in fact contemplated by Bates, Reed & Cooley, it would only show that the mortgagees were willing to give the mortgagors an opportunity to avoid a suspension of their business and bankruptcy; the additions to the stock in trade being bought under the mortgage, so as to compensate the mortgagees for any diminution in value by reason of goods disposed of in the usual course of business. If the mortgage had, in terms, made provision for such a course upon the part of the mortgagors, as the bank contends was in the contemplation of the mortgagees, it would not be held, as matter of law, to be absolutely void or fraudulent as to other creditors. Oliver v. Eaton, 7 Mich. 108, 112; Gay v. Bidwell, Id. 519, 523; People v. Bristol, 35 Mich. 28, 32; Wingler v. Sibley, Id. 231; Robinson v. Elliott, 22 Wall. 523. The good faith of such transactions, where they are not void upon their face, is, under the statutes of Michigan, a question of fact for the determination of the jury. Oliver v. Eaton and Gay v. Bidwell. That rule does not, however, restrict the power of the court to give to the jury a peremptory instruction covering such an issue, when the evidence is all on one side, or so overwhelmingly on one side as to leave no room to doubt what the fact is. In this case there is an entire absence of any evidence impeaching the good faith of Bates, Reed & Cooley in procuring the mortgage of February 7, 1881. There is nothing whatever to show that they had any purpose to commit a fraud, or to put their mortgagors in such a position that the latter could more readily deceive or defraud other creditors. Besides, as the court below held upon this branch of the case, the bank, in its capacity as a creditor at large, is not entitled to attack the prior mortgage as fraudulent upon the grounds just stated. This general proposition is conceded by counsel; the usual way, he admits, being for the creditor who has no particular claim in the property to acquire a specific interest therein through the levy of an attachment or execution. Hence he says that, while it is often stated that conveyances of this sort are void as to creditors generally, they must put their claims in the form of a judgment or attachment before they are in a position to attack them; the object of the attachment or execution being to bring the attacking party into privity with the property. And such seems to be the rule recognized by the supreme court of Michigan. In Feary v. Cummings, 41 Mich. 376, 383, 1 N. W. Rep. 946, the court, construing a somewhat similar statute, said: 'If the mortgage was made with the intent to hinder, delay, or defraud creditors, (Comp. Laws, § 4713,) or, inasmuch as the possession was not altered, if it was not put on file prior to plaintiffs becoming creditors, it was invalid as against them; the law being that those who became creditors while the mortgage is not fie d are protected, and not merely those who obtain judgments or levy attachment before the filing. Still one, as creditor at large, can question the mortgage. He can only do that by means of some process or proceeding against the property. Section 4706.' In that case the court cites Thompson v. Van Vechten, 27 N. Y. 568, 582, in which it was held, in reference to a somewhat similar statute, that 'the mortgage cannot be legally questioned until the creditor clothes himself with a judgment and execution, or with some legal process, against his property; for creditors cannot interfere with the property of their debtor without process.' But it is argued that this rule does not apply in the case of a creditor who is a second mortgagee in possession. Such possession, it is claimed, gives him the right, by way of defense, and without resorting to attachment and before obtaining judgment, to assert the invalidity of the prior mortgage. There is some apparent support to this position in Putnam v. Reynolds, 44 Mich. 115, 6 N. W. Rep. 198. That was a suit in equity brought to foreclose a chattel mortgage not filed until after the mortgagor had become insolvent, and while his estate was being disposed of by an assignee for the benefit of creditors. The court said that there was reason to believe that the mortgagor acted in bad faith; that the mortgage was left off the record for the purpose of giving the mortgagor a credit to which he was not entitled; in which case the mortgage was void in fact, irrespective of the statute. Upon this ground alone the court declined to give the relief asked, remitting the mortgagee to his remedy, if any he had, at law. It expressly declined to decide whether the rule that creditors cannot attack a mortgage, except indirectly, through a seizure of the property by attachment or other suitable process, applies where the mortgage was originally valid, but is made void by the subsequent neglect of the mortgagee. The case in hand cannot be brought within the principle announced in Putnam v. Reynolds, for the reason, if there were no other, that there was no fraud in fact upon the part of Bates, Reed & Cooley, nor any unreasonable delay in filing the mortgage of February 7, 1881. It was filed shortly after the mortgage to the bank was lodged for record. This disposes of all the material questions in the case preliminary to the main inquiry, whether the bank—the mortgage to it having been really given to secure past indebtedness of the mortgagors—is, in the meaning of the statute, a subsequent 'mortgagee in good faith.' If not, the mere filing of the mortgage of February 11, 1881, before that of February 7, 1881, did not give it priority of right over Bates, Reed & Cooley, and the mortgage that was in fact first executed and delivered must be held to give priority of right. In Kohl v. Lynn, 34 Mich. 360, the supreme court of Michigan said that 'the statute which makes a mortgage of chattels, which has not been recorded, void against subsequent purchasers or mortgagees in good faith, uses those terms in the sense which has always been attached to them by judicial decisions.' Guided by this rule, which we deem a sound one, we concur with the court below in holding that the words 'mortgagee in good faith' mean the same thing as 'mortgagee for a valuable consideration without notice.' It is insisted that the principles announced in Swift v. Tyson, 16 Pet. 1, and Railroad Co. v. National Bank, 102 U. S. 14, sustain the proposition that the bank was a mortgagee in good faith, although the mortgage to it may be held to have been given merely as security for past indebtedness. The general doctrine announced in Swift v. Tyson was that one who becomes the holder of negotiable paper, before its maturity, in the usual course of business, and in payment of an existing debt, is to be deemed to have received it for a valuable consideration, and is therefore unaffected by any equities existing between antecedent partie. In that case Mr. Justice STORY said that the rule was applicable as well when the negotiable instrument was received as security for as when received in payment of a pre-existing debt. In Railroad Co. v. National Bank it was held, conformably to the recognized usages of the commercial world, that 'the transfer before maturity of negotiable paper as security for an antecedent debt merely, without other circumstances, if the paper be so indorsed that the holder becomes a party to the instrument, although the transfer is without express agreement by the creditor for indulgence, is not an improper use of such paper, and is as much in the usual course of commercial business as its transfer in payment of such debt. In either case, the bona fide holder is unaffected by equities or defenses between prior parties of which he had no notice.' Do these principles apply to the case of a chattel mortgage given merely as security for a pre-existing debt, and in obtaining which the mortgagee has neither parted with any right or thing of substance, nor come under a binding agreement to postpone or delay the collection of his demand? Upon principle, and according to the weight of authority, this question must be answered in the negative. The rules established, in the interests of commerce, to facilitate the negotiation of mercantile paper, which, for all practical purposes, passes by delivery as money, and is the representative of money, ought not, in reason, to embrace instruments conveying or transferring real or personal property as security for the payment of money. At any rate, there is nothing in the usages of merchants, as shown in this record, or so far as disclosed in the adjudged cases, indicating that the necessities of commerce require that chattel mortgages be placed upon the same footing in all respects as negotiable securities which have come to the hands of a bona fide holder for value before their maturity. Such a result, if desirable, must be attained by legislation, rather than by judicial decisions. One of the earliest cases in the federal courts upon this subject is that of Morse v. Godfrey, 3 Story, 364, 389. It there appeared that one Reed mortgaged to Godfrey all stock in trade, and nearly all his real estate. The latter subsequently mortgaged the same property to a bank. In a contest between the bank and the assignee in bankruptcy of Reed, the former claimed to be a bona fide purchaser for value, without notice of the invalidity, under the bankrupt law, of the mortgages to Godfrey. Mr. Justice STORY said: 'This leads me to remark that the bank does not stand within the predicament of being a bona fide purchaser for a valuable consideration, without notice, in the sense of the rule upon this subject. The bank did not pay any consideration therefor, nor did it surrender any securities or release any debt due either from Reed or Godfrey to it. The transfer from Godfrey was a simple collateral security, taken as additional security for the old indebtment and liability of the parties to the notes described in the instrument of transfer. It is true that, as between Godfrey and Reed and the bank, the latter was a debtor for value, and the transfer was valid. But the protection is not given by the rules of law to a party in such a predicament merely. He must not only have had no notice, but he must have paid a consideration at the time of the transfer, either in money or other property, or by a surrender of existing debts or securities held for the debts and liabilities. But here the bank has merely possessed itself of the property transferred as auxiliary security for the old debts and liabilities. It has paid or given no new consideration upon the faith of it. It is therefore, in truth, no purchaser for value in the sense of the rule.' After referring to Dickerson v. Tillinghast, 4 Paige, 215, in which it was held by Chancellor WALWORTH that the transfer of an estate upon which there was a prior unrecorded mortgage, in payment of ap re-existing debt, without the transferee giving up any security or divesting himself of any right, or placing himself in a worse situation than he was in before, did not make the latter, who was without notice of the prior mortgage, a grantee or purchaser for a valuable consideration, Mr. Justice STORY proceeded: 'I do not say that I am prepared to go quite to that length, seeing that, by securing the estate as payment, the pre-existing debt is surrendered and extinguished thereby. But here there was no such surrender or extinguishment or payment; and the general principle adopted by the learned chancellor is certainly correct, that there must be some new consideration moving between the parties, and not merely a new security given for the old debts or liabilities, without any surrender or extinguishment of the old debts and liabilities, or the old securities therefor. So that upon this ground alone the title of the bank would fail. The case of Swift v. Tyson, 16 Pet. 1, does not apply. In the first place, there the bill was taken in payment or discharge of a pre-existing debt. In the next place, it was a case arising upon negotiable paper, and who was to be deemed a bona fide holder thereof, to whom equities between other parties should not apply. Such a case is not necessarily governed by the same considerations as those applicable to purchasers of real or personal property under the rule adopted by courts of equity for their protection.' See, also, Rison v. Knapp, 1 Dill. 186, 200, 201. In Johnson v. Peck, 1 Woodb. & M. 336, which was a case of a mortgage given to secure a pre-existing debt due from a mortgagor who had previously purchased the goods under such representations as entitled his vendor to sue to recover them back, Mr. Justice WOODBURY said: 'When rights of third persons intervene in this class of cases they are to be upheld, if those persons purchased the property absolutely, and parted with a new and valuable consideration for it without notice of any fraud. * * * But if they have notice of the fraud, or give no new valuable consideration, or are mere mortgagees, pawnees, or assignees in trust for the debtor, or for him and others, such third persons are to be regarded as holding the goods open to the same equities and exceptions as to title as they were open to in the hands of the mortgagor, pawner, or assignor.' And so in 2 Amer. Lead. Cas. (5th Amer. Ed.) 233, it is stated, and we think properly, as the doctrine established by a preponderance of authority, that, 'whatever the rule may be in the case of negotiable instruments, it is well settled that the conveyance of lands or chattels as security for an antecedent debt will not operate as a purchase for value or defeat existing equities.' See 2 Lead. Cas. Eq. (3d Amer. Ed.) 104; Id. 83, (4th Amer. Ed.) pt. 1. Such, we think, is also the doctrine of the supreme court of Michigan. In Kohl v. Lynn, 34 Mich. 360, the court, after observing that the object of the statute is to protect those who have acquired rights under the circumstances which would render them liable to be defrauded unless protected against instruments of which they knew nothing when acquiring their rights, said: 'It has always been held that a purchaser who had paid nothing could not be thus defrauded, and that no one could be protected as a bona fide purchaser, except to the extent of his payments made before he received such notice as should have prevented him from making further payments. This doctrine has been too uniformly recognized to require discussion or citation of authorities. As Kohl had made no payments at all before the property was replevied from him, he was not a bona fide purchaser, and his rights are subject to the mortgage.' In Stone v. Welling, 14 Mich. 514, 525, where the issue was between the holder of an unrecorded mortgage and a subsequent grantee, who agreed to surrender indebtedness of the grantor to him and others, and put the deed on record without notice of the mortgage, the court said: 'Welling claims that the agreement which was given for the deed was amply sufficient to support it, and to entitle him to the rights of a bona fide purchaser under the recording laws. It was satisfactory, it is said, to Hart; and as to the indebtedness held by Welling and Root against him, it would have the effect of a present discharge. That it was satisfactory to Hart can be of no consequence on this question, since, to constitute Welling a bona fide purchaser, he must have parted with something of value, and not merely given a contract which he could avoid of his title under the deed proved defective. Thomas v. Stone, Walk. Ch. 117; Dixon v. Hill, 5 Mich. 404; Warner v. Whittaker, 6 Mich. 133; Blanchard v. Tyler, 12 mich. 339. Nor do we think the agreement had the effect to discharge any indebtedness. It was executory in its character, covering not only the claims of Welling and Root, but also other claims to be procured by them, and upon which it cannot be claimed that the agreement itself would have any effect whatever.' In Boxheimer v. Gunn, 24 Mich. 373, 379, the defendant in a suit brought to foreclose a recorded mortgage relied upon a subsequent deed of the mortgagor, which he was induced to take under the representation of the latter that the mortgage debt had been paid. After sustaining the claim of the plaintiff upon certain grounds, the court said that the defendant must fail in the suit upon the further ground that, although he acted with good faith, he was not a bona fide purchaser or incumbrancer for value, with equities superior to those of the plaintiff, because it appeared that the conveyance to him was 'merely as a security for a precedent debt,' without his paying or agreeing to pay any other consideration, or relinquishing any remedy or right he may have had. Without further discussion of the authorities cited by counsel, all of which have been carefully examined, we are of opinion that the claim of the bank to be a subsequent mortgagee in good faith cannot be sustained, because the mortgage of February 11, 1881, although first filed, was not given in consideration of its having surrendered, or agreed to surrender, or to postpone the exercise, of any substantial right it had against the mortgagors, but merely as collateral security for past indebtedness. Under such circumstances, the mortgage which was prior in time confers a superior right. Other questions of a minor character are discussed by counsel, but it is not deemed necessary to consider them. We perceive no error in the record, and the judgment is affirmed.
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li Michigan, when a chattel mortgage is attacked as fraudulent against subsequent creditors or mortgagees in good faith, by reason of the mortgagor being permitted to remain in possession and to prosecute his business in the ordinary way, it is the province of the jury to determine whether such fraud is proved; but when the evidence is overwhelming, and leaves no room for doubt as to what the fact is, the court may give the jury a peremptory instruction covering the issue. In Michigan a creditor at large cannot attack a chattel mortgage made by the debtor, except through some judicial process, whereby he acquires an interest in the property; as by levy of attachment or execution. In Michigan be mortgagee in a chattel mortgage, given to secure a preexisting. debt, is not a " mortgagee in good faith," within the intent of the statute of that state which provides that every such mortgage "which shall not be accompanied by an immediate delivery, and followed by an actual and continued change of possession of the things mortgaged, shall be absolutely void as against the creditors of the mortgagor, and as against subsequent purchasers or mortgagees in good faith, unless the mortgage, or a true copy thereof, shall be filed" in the place or places indicated in the act. The doctrine that the bonafide holder for value of negotiable paper, transferred as security for an antecedent debt merely, and without other circumstances, is ufiaffected by equities or defences between prior parties of which he had no notice, does not apply to instruments conveying realor personal property as security, in consideration only of preexisting indebtedness.
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That section 315(a) of
the Communications Act of 1934 (47 U.S.C. 315) is amended to read as
follows:
``(a) Allowance of Television Broadcast Time for certain
Candidates; Censorship Prohibition.--Each licensee operating a
television broadcasting station shall make available without charge to
any legally qualified candidate in the general election for the office
of United States Senator an amount of broadcast time, determined by the
Commission under subsection (d), for use in his or her campaign for
election, subject to the conditions and limitations of subsection (e).
No licensee shall have power of censorship over the material broadcast
under the provisions of this section.
``(b) Equal Opportunities Requirement; Censorship Prohibition;
Allowance of Station Use.--Except in those circumstances to which
subsection (a) applies, if any licensee shall permit any person who is
a legally qualified candidate for any public office to use a
broadcasting station, he or she shall afford equal opportunities to all
other such candidates for the office in the use of such broadcasting
station: Provided, That such licensee shall have no power of censorship
over the material broadcast under the provisions of this section. No
obligation is imposed under this subsection upon any licensee to allow
the use of its station by any such candidate.
``(c) News Appearances Exception; Public Interest; Public Issues
Discussion Opportunities.--Appearance by a legally qualified candidate
on any--
``(1) bona fide newscast;
``(2) bona fide news interview;
``(3) bona fide news documentary (if the appearance of the
candidate is incidental to the presentation of the subject or
subjects covered by the news documentary); or
``(4) on-the-spot coverage of bona fide events (including
but not limited to political conventions and activities
incidental thereto);
shall not be deemed to be use of a broadcasting station within the
meaning of subsections (a) or (b). Nothing in the foregoing sentence
shall be construed as relieving broadcasters, in connection with the
presentation of newscast, news interviews, new documentaries, and on-
the-spot coverage of news events, from the obligation imposed upon them
under this chapter to operate in the public interest and to afford
reasonable opportunity for the discussion of conflicting views on
issues of public importance.
``(d) Rules and Regulations Regarding Allowance of Television
Broadcast Time for Certain Candidates.--The Commission shall, after
consultation with the Federal Election Commission, determine the amount
of television broadcast time that legally qualified major-party
candidates for a Senate office may receive under subsection (a) on the
basis of the amount of television broadcast time used by major-party
candidates in the previous election for the United States Senate,
provided that at a minimum such candidates be provided an amount of
television broadcast time necessary to make a complete presentation of
views to the electorate in the pending election. The amount of
television broadcast time that each candidate is eligible to receive
and the amount of such time that each licensee must make available to
each eligible candidate by name shall be published prior to each Senate
election in the Federal Register by the Commission on a date
established by regulation. The broadcast time made available under
subsection (a) shall be made available during the forty-five-day period
preceding the general election for such office. The Commission shall
ensure that the television broadcast time made available under
subsection (a) shall be made available fairly and equitably, through
licensees commonly used by candidates seeking the particular United
States Senate office, and at hours of the day which reflect television
viewing habits and contemporaneous campaign practices. A legally
qualified candidate of a party other than a party which obtained 5
percent or more of the popular vote in the last presidential election
shall, by regulation of the Commission, be granted an allocation of
broadcast time in proportion to the amount of contributions under $250
such a candidate has received when compared to such contributions
received by candidates of the major parties, provided that such
proportion exceeds 5 percent. The Commission shall require licensees
operating television broadcasting stations to enter into a pooling
agreement to ameliorate any disproportionate financial impact on
particular licensees. For purposes of this subsection, a major party is
a party which obtained more than 5 percent of the popular vote in the
previous presidential election.
``(e) Conditions and Limitations.--The entitlement of any legally
qualified candidate to television broadcast time under subsection (a)
is conditional upon (1) signing an agreement to forgo both the purchase
of any additional amount of television broadcast time, and the
acceptance of any additional amount of television broadcast time
purchased by another, during the period that such time is made
available with respect to such candidacy pursuant to subsection (a) and
the Commission's regulations, and (2) filing a copy of such agreement
with the Commission.
``(f) Penalties and Remedies.--Any candidate who purchases or
accepts purchased television broadcast time in violation of such
agreement shall be subject, upon conviction, to imprisonment of up to
one year or a fine of up to $10,000, or both. Any licensee who sells
television broadcast time to a candidate, who has filed an agreement,
in excess of the time to be provided by such licensee to such candidate
pursuant to subsection (a) and the Commission's regulations shall be
subject to appropriate disciplinary action by the Commission, including
(1) an order requiring the licensee to provide an equal amount of time
to other candidates for the same office, or (2) an order revoking the
licensee's license.''.
Sec. 2. Section 315 of the Communications Act of 1934 is further
amended as follows: (1) in subsection (b) by striking the phrase ``The
charges'' and inserting in lieu thereof ``Except to the extent that the
provisions of subsection (a) apply, the charges''; (2) by redesignating
subsections (b), (c), and (d) as (f), (g), and (h) respectively; and
(3) by adding ``generally'' after ``Rules and regulations'' in
redesignated subsection (h).
Sec. 3. Subsection (a)(7) of section 312 of the Communications Act
of 1934, as amended, is amended to read as follows: ``(7) for willful
or repeated failure to comply with the provisions of section 315 of
this title.''
Sec. 4. Subsection (8) of section 301 of the Federal Election
Campaign Act of 1971 (2 U.S.C. 431), as amended, relating to exclusions
from the definition of contributions, is amended as follows: (1) at the
end of paragraph (B)(xiii) by striking the semicolon; (2) at the end of
paragraph (B)(xiv) by striking the period and inserting ``; and'' in
lieu thereof; and (3) at the end of paragraph (B) by adding the
following: ``(xv) the value of any television broadcast time provided
without charge by a licensee pursuant to section 315(a) of the
Communications Act of 1934, as amended.''
Sec. 5. Subsection (9) of section 301 of the Federal Election
Campaign Act of 1971, as amended, relating to exclusions from the
definition of expenditures, is amended as follows: (1) by inserting
after paragraph (B)(i) the following: ``(ii) the provision without
charge of any television broadcast time by a licensee pursuant to
section 315(a) of the Communications Act of 1934, as amended;'' and (2)
by redesignating subsequent subparagraphs accordingly.
Sec. 6. The Federal Communications Commission shall study the
application of section 315(a) of the Communications Act of 1934, as
amended by this Act, to the first general election campaign conducted
under the provisions of that section and shall report the results of
that study, together with recommendations, including recommendations
for legislation, not later than the first day of March following such
general election. The study shall also evaluate the desirability and
feasibility of extending the provisions of section 315(a) of the
Communications Act of 1934 to primary and other election campaigns.
Sec. 7. The Federal Communications Commission shall promulgate
rules and regulations to implement this Act no later than one hundred
and eighty days after the date of enactment of this Act. Sections 1 and
2 of this Act shall not take effect until the first day of July
following the promulgation of such rules and regulations.
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Amends the Communications Act of 1934 to require each licensee operating a television (TV) broadcasting station to make available without charge to any legally qualified candidate for the Senate an amount of broadcast time as determined by the Federal Communications Commission (FCC) during the 45-day period preceding such election.
Directs the FCC to: (1) determine the amount of TV broadcast time that such candidates may receive on the basis of the amount of broadcast time used by major party candidates in the previous Senate election, provided that at a minimum such candidates be provided sufficient time to make a complete presentation of views; and (2) ensure that such TV broadcast time be made available fairly and equitably and at hours of the day which reflect TV viewing habits and contemporaneous campaign practices.
Requires that a legally qualified candidate of a party other than a party which obtained five percent or more of the popular vote in the last presidential election be granted an allocation of broadcast time in proportion to the amount of contributions under $250 such candidate has received when compared to such contributions received by candidates of the major parties, provided such proportion exceeds five percent. Directs the FCC to require licensees operating TV broadcasting stations to enter into a pooling agreement to ameliorate any disproportionate financial impact on particular licensees.
Conditions the entitlement to TV broadcast time under this Act upon the candidate's: (1) signing an agreement to forego both the purchase of any additional amount of broadcast time and any additional time purchased by another candidate during the period that such time is made available; and (2) filing a copy of such agreement with the FCC.
Sets forth penalties for any candidate who purchases or accepts purchased TV broadcast time in violation of such agreement. Subjects licensees to appropriate disciplinary action by the FCC.
Amends the Federal Election Campaign Act of 1971 to exclude from the definitions of "contributions" and "expenditures" the value of TV broadcast time provided without charge by a licensee pursuant to the Communications Act of 1934.
Directs the FCC to study the provision of free TV broadcast time to Senate candidates and evaluate the feasibility of extending such provision to primary and other election campaigns.
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SECTION 1. SHORT TITLE.
This Act may be cited as the ``Helping Unemployed Workers Act''.
SEC. 2. TEMPORARY EXTENSION OF CERTAIN UNEMPLOYMENT BENEFITS.
(a) Emergency Unemployment Compensation.--Section 4007 of the
Supplemental Appropriations Act, 2008 (Public Law 110-252; 26 U.S.C.
3304 note) is amended--
(1) by striking ``December 31, 2009'' each place it appears
and inserting ``March 31, 2011'';
(2) in the heading for subsection (b)(2), by striking
``December 31, 2009'' and inserting ``March 31, 2011''; and
(3) in subsection (b)(3), by striking ``May 31, 2010'' and
inserting ``August 31, 2011''.
(b) Additional Regular Compensation.--Section 2002(e) of the
Assistance for Unemployed Workers and Struggling Families Act, as
contained in Public Law 111-5 (26 U.S.C. 3304 note; 123 Stat. 438), is
amended--
(1) in paragraph (1)(B), by striking ``January 1, 2010''
and inserting ``April 1, 2011'';
(2) in the heading for paragraph (2), by striking ``January
1, 2010'' and inserting ``April 1, 2011''; and
(3) in paragraph (3), by striking ``June 30, 2010'' and
inserting ``September 30, 2011''.
(c) Full Funding of Extended Benefits.--Section 2005 of the
Assistance for Unemployed Workers and Struggling Families Act, as
contained in Public Law 111-5 (26 U.S.C. 3304 note; 123 Stat. 444), is
amended--
(1) by striking ``January 1, 2010'' each place it appears
and inserting ``April 1, 2011'';
(2) in subsection (c), by striking ``June 1, 2010'' and
inserting ``September 1, 2011''; and
(3) in subsection (d), by striking ``May 30, 2010'' and
inserting ``August 31, 2011''.
SEC. 3. FUNDING FOR TEMPORARY EXTENSION OF CERTAIN UNEMPLOYMENT
BENEFITS.
Section 4004(e)(1) of the Supplemental Appropriations Act, 2008
(Public Law 110-252; 26 U.S.C. 3304 note) is amended by striking ``by
reason of'' and all that follows and inserting the following: ``by
reason of--
``(A) the amendments made by section 2001(a) of the
Assistance for Unemployed Workers and Struggling
Families Act;
``(B) the amendments made by sections 2 through 4
of the Worker, Homeownership, and Business Assistance
Act of 2009; and
``(C) the amendments made by section 2(a) of the
Helping Unemployed Workers Act; and''.
SEC. 4. TEMPORARY FINANCING OF CERTAIN SHORT-TIME COMPENSATION
PROGRAMS.
(a) Payments to States With Certified Programs.--
(1) In general.--Not later than 30 days after the date of
the enactment of this Act, the Secretary shall establish a
program under which the Secretary shall make payments to any
State unemployment trust fund to be used for the payment of
unemployment compensation if the Secretary approves an
application for certification submitted under paragraph (4) for
such State to receive reimbursement for a short-time
compensation program (as referred to in section 3304(a)(4) of
the Internal Revenue Code of 1986 and section 303(a)(5) of the
Social Security Act).
(2) Requirements for certification.--A program may not be
certified, for purposes of this section, unless such program
requires--
(A) a participating employer to submit and comply
with the terms of a written plan approved by the State
agency;
(B) a participating employer to certify that
continuation of health and retirement benefits under a
defined benefit pension plan (as defined by section
3(35) of the Employee Retirement Income Security Act of
1974) is not affected by participation in the program;
and
(C) in the case of employees represented by a
union, that the appropriate official of the union has
agreed to the terms of the employer's written plan and
implementation is consistent with employer obligations
under the National Labor Relations Act.
(3) Full reimbursement.--Subject to subsection (d), the
payment to a State under paragraph (1) shall be an amount equal
to 100 percent of the total amount of benefits paid to
individuals by the State pursuant to the short-time
compensation program for weeks of unemployment--
(A) beginning on or after the date as of which a
certification is issued by the Secretary with respect
to such program; and
(B) ending on or before December 31, 2011.
(4) Certification procedures.--
(A) In general.--Any State seeking reimbursement
under this subsection shall submit an application for
certification at such time, in such manner, and
complete with such information as the Secretary may
require (whether by regulation or otherwise), including
information relating to compliance with the
requirements of paragraph (2). The Secretary shall,
within 30 days after receiving a complete application,
notify the State agency of the State of the Secretary's
findings with respect to the requirements of paragraph
(2).
(B) Findings.--If the Secretary finds that the
short-time compensation program operated by the State
meets the requirements of paragraph (2), the Secretary
shall certify such State's short-time compensation
program, thereby making such State eligible for
reimbursement under this subsection.
(b) Terms of Payments.--Payments made to a State under subsection
(a)(1) shall be payable by way of reimbursement in such amounts as the
Secretary estimates the State will be entitled to receive under this
section for each calendar month, reduced or increased, as the case may
be, by any amount by which the Secretary finds that the Secretary's
estimates for any prior calendar month were greater or less than the
amounts which should have been paid to the State. Such estimates may be
made on the basis of such statistical, sampling, or other method as may
be agreed upon by the Secretary and the State agency of the State
involved.
(c) Limitations.--
(1) General payment limitations.--No payments shall be made
to a State under this section for benefits paid in excess of 26
weeks to an individual by the State pursuant to a short-time
compensation program.
(2) Employer limitations.--No payments shall be made to a
State under this section for benefits paid to an individual by
the State pursuant to a short-time compensation program if such
individual is employed by an employer--
(A) whose workforce during the 3 months preceding
the date of the submission of the employer's short-time
compensation plan has been reduced by temporary layoffs
of more than 20 percent;
(B) on a seasonal, temporary, or intermittent
basis; or
(C) engaged in a labor dispute.
(3) Program payment limitation.--In making any payments to
a State under this section pursuant to a short-time
compensation program, the Secretary may limit the frequency of
employer participation in such program.
(d) Compliance Oversight.--
(1) In general.--A participating employer under this
section is required to comply with the terms of the written
plan approved by the State agency, including provisions related
to retaining participating employees.
(2) Oversight and monitoring.--The Secretary shall
establish an oversight and monitoring process by which State
agencies will ensure that participating employers comply with
the requirements of paragraph (1).
(e) Funding.--There are appropriated, from time to time, out of any
moneys in the Treasury not otherwise appropriated, to the Secretary,
such sums as the Secretary certifies are necessary to carry out this
section (including to reimburse any administrative expenses incurred by
the States in operating such short-time compensation programs).
(f) Definitions.--In this section--
(1) the term ``Secretary'' means the Secretary of Labor;
(2) the term ``State'' includes the District of Columbia,
the Commonwealth of Puerto Rico, and the Virgin Islands; and
(3) the terms ``State agency'' and ``week'' have the
respective meanings given them by section 205 of the Federal-
State Extended Unemployment Compensation Act of 1970.
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Helping Unemployed Workers Act - Amends the Supplemental Appropriations Act, 2008 with respect to the state-established individual emergency unemployment compensation account (EUCA). Extends the Emergency Unemployment Compensation (EUC) program through March 31, 2011.
Amends the Assistance for Unemployed Workers and Struggling Families Act to extend through April 1, 2011: (1) federal-state agreements increasing regular unemployment compensation payments to individuals; and (2) requirements that federal payments to states cover 100% of EUC.
Requires the Secretary of Labor to establish a program under which the Secretary shall make payments to any state unemployment trust fund (including the District of Columbia, the Commonwealth of Puerto Rico, and the Virgin Islands) to be used for the payment of unemployment compensation if the Secretary approves an application to receive 100% reimbursement for up to 26 weeks for a short-time compensation program.
Bars payments to a state for benefits paid to an individual who is employed by an employer: (1) whose workforce during the three months preceding the date of the submission of the employer's short-time compensation plan has been reduced by temporary layoffs of more than 20%; (2) on a seasonal, temporary, or intermittent basis; or (3) engaged in a labor dispute.
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SECTION 1. SHORT TITLE.
This Act may be cited as the ``Wireless Tax Fairness Act of 2011''.
SEC. 2. FINDINGS.
Congress finds the following:
(1) It is appropriate to exercise congressional enforcement
authority under section 5 of the 14th Amendment to the
Constitution of the United States and Congress' plenary power
under article I, section 8, clause 3 of the Constitution of the
United States (commonly known as the ``commerce clause'') in
order to ensure that States and political subdivisions thereof
do not discriminate against providers and consumers of mobile
services by imposing new selective and excessive taxes and
other burdens on such providers and consumers.
(2) In light of the history and pattern of discriminatory
taxation faced by providers and consumers of mobile services,
the prohibitions against and remedies to correct discriminatory
State and local taxation in section 306 of the Railroad
Revitalization and Regulatory Reform Act of 1976 (49 U.S.C.
11501) provide an appropriate analogy for congressional action,
and similar Federal legislative measures are warranted that
will prohibit imposing new discriminatory taxes on providers
and consumers of mobile services and that will assure an
effective, uniform remedy.
SEC. 3. MORATORIUM.
(a) In General.--No State or local jurisdiction shall impose a new
discriminatory tax on or with respect to mobile services, mobile
service providers, or mobile service property, during the 5-year period
beginning on the date of enactment of this Act.
(b) Definitions.--In this Act:
(1) Mobile service.--The term ``mobile service'' means
commercial mobile radio service, as such term is defined in
section 20.3 of title 47, Code of Federal Regulations, as in
effect on the date of enactment of this Act, or any other
service that is primarily intended for receipt on, transmission
from, or use with a mobile telephone or other mobile device,
including but not limited to the receipt of a digital good.
(2) Mobile service property.--The term ``mobile service
property'' means all property used by a mobile service provider
in connection with its business of providing mobile services,
whether real, personal, tangible, or intangible (including
goodwill, licenses, customer lists, and other similar
intangible property associated with such business).
(3) Mobile service provider.--The term ``mobile service
provider'' means any entity that sells or provides mobile
services, but only to the extent that such entity sells or
provides mobile services.
(4) New discriminatory tax.--The term ``new discriminatory
tax'' means a tax imposed by a State or local jurisdiction that
is imposed on or with respect to, or is measured by, the
charges, receipts, or revenues from or value of--
(A) a mobile service and is not generally imposed,
or is generally imposed at a lower rate, on or with
respect to, or measured by, the charges, receipts, or
revenues from other services or transactions involving
tangible personal property;
(B) a mobile service provider and is not generally
imposed, or is generally imposed at a lower rate, on
other persons that are engaged in businesses other than
the provision of mobile services; or
(C) a mobile service property and is not generally
imposed, or is generally imposed at a lower rate, on or
with respect to, or measured by the value of, other
property that is devoted to a commercial or industrial
use and subject to a property tax levy, except public
utility property owned by a public utility subject to
rate of return regulation by a State or Federal
regulatory authority;
unless such tax was imposed and actually enforced on mobile
services, mobile service providers, or mobile service property
prior to the date of enactment of this Act.
(5) State or local jurisdiction.--The term ``State or local
jurisdiction'' means any of the several States, the District of
Columbia, any territory or possession of the United States, a
political subdivision of any State, territory, or possession,
or any governmental entity or person acting on behalf of such
State, territory, possession, or subdivision that has the
authority to assess, impose, levy, or collect taxes or fees.
(6) Tax.--
(A) In general.--The term ``tax'' means a charge
imposed by a governmental entity for the purpose of
generating revenues for governmental purposes, and
excludes a fee imposed on a particular entity or class
of entities for a specific privilege, service, or
benefit conferred exclusively on such entity or class
of entities.
(B) Exclusion.--The term ``tax'' does not include
any fee or charge--
(i) used to preserve and advance Federal
universal service or similar State programs
authorized by section 254 of the Communications
Act of 1934 (47 U.S.C. 254); or
(ii) specifically dedicated by a State or
local jurisdiction for the support of E-911
communications systems.
(c) Rules of Construction.--
(1) Determination.--For purposes of subsection (b)(4), all
taxes, tax rates, exemptions, deductions, credits, incentives,
exclusions, and other similar factors shall be taken into
account in determining whether a tax is a new discriminatory
tax.
(2) Application of principles.--Except as otherwise
provided in this Act, in determining whether a tax on mobile
service property is a new discriminatory tax for purposes of
subsection (b)(4)(C), principles similar to those set forth in
section 306 of the Railroad Revitalization and Regulatory
Reform Act of 1976 (49 U.S.C. 11501) shall apply.
(3) Exclusions.--Notwithstanding any other provision of
this Act--
(A) the term ``generally imposed'' as used in
subsection (b)(4) shall not apply to any tax imposed
only on--
(i) specific services;
(ii) specific industries or business
segments; or
(iii) specific types of property; and
(B) the term ``new discriminatory tax'' shall not
include a new tax or the modification of an existing
tax that either--
(i)(I) replaces one or more taxes that had
been imposed on mobile services, mobile service
providers, or mobile service property; and
(II) is designed so that, based on
information available at the time of the
enactment of such new tax or such modification,
the amount of tax revenues generated thereby
with respect to such mobile services, mobile
service providers, or mobile service property
is reasonably expected to not exceed the amount
of tax revenues that would have been generated
by the respective replaced tax or taxes with
respect to such mobile services, mobile service
providers, or mobile service property; or
(ii) is a local jurisdiction tax that may
not be imposed without voter approval, provides
for at least 90 days' prior notice to mobile
service providers, and is required by law to be
collected from mobile service customers.
SEC. 4. ENFORCEMENT.
Notwithstanding any provision of section 1341 of title 28, United
States Code, or the constitution or laws of any State, the district
courts of the United States shall have jurisdiction, without regard to
amount in controversy or citizenship of the parties, to grant such
mandatory or prohibitive injunctive relief, interim equitable relief,
and declaratory judgments as may be necessary to prevent, restrain, or
terminate any acts in violation of this Act.
(1) Jurisdiction.--Such jurisdiction shall not be exclusive
of the jurisdiction which any Federal or State court may have
in the absence of this section.
(2) Burden of proof.--The burden of proof in any proceeding
brought under this Act shall be upon the party seeking relief
and shall be by a preponderance of the evidence on all issues
of fact.
(3) Relief.--In granting relief against a tax which is
discriminatory or excessive under this Act with respect to tax
rate or amount only, the court shall prevent, restrain, or
terminate the imposition, levy, or collection of not more than
the discriminatory or excessive portion of the tax as
determined by the court.
SEC. 5. GAO STUDY.
(a) Study.--The Comptroller General of the United States shall
conduct a study, throughout the 5-year period beginning on the date of
the enactment of this Act, to determine--
(1) how, and the extent to which, taxes imposed by local
and State jurisdictions on mobile services, mobile service
providers, or mobile property, impact the costs consumers pay
for mobile services; and
(2) the extent to which the moratorium on discriminatory
mobile services taxes established in this Act has any impact on
the costs consumers pay for mobile services.
(b) Report.--Not later than 6 years after the date of the enactment
of this Act, the Comptroller General shall submit, to the Committee on
the Judiciary of the House of Representatives and Committee on the
Judiciary of the Senate, a report containing the results of the study
required subsection (a) and shall include in such report
recommendations for any changes to laws and regulations relating to
such results.
Passed the House of Representatives November 1, 2011.
Attest:
KAREN L. HAAS,
Clerk.
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Wireless Tax Fairness Act of 2011 - Prohibits states or local governments from imposing any new discriminatory tax on mobile services, mobile service providers, or mobile service property (i.e., cell phones) for five years after the enactment of this Act. Defines "new discriminatory tax" as a tax imposed on mobile services, providers, or property that is not generally imposed on, or that is generally imposed at a lower rate on, other types of services, providers, or property, unless such tax was imposed and actually enforced prior to the enactment of this Act.
Amends the federal judicial code to grant jurisdiction to federal district courts to grant injunctive and other appropriate relief to prevent, restrain, or terminate any acts in violation of this Act.
Requires the Comptroller General to conduct a study, throughout the five-year moratorium imposed by this Act, to determine how, and the extent to which, taxes on mobile services, providers, or property impact the costs consumers pay for mobile services and the extent to which such moratorium has any impact on the costs consumers pay for mobile services.
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Applicants Dolman and Wilson were convicted of criminal contempt of court pursuant to 18 U.S.C. § 401(3) for violation of an injunction entered by the United States District Court for the Western District of Washington. Their convictions were affirmed by the Court of Appeals for the Ninth Circuit on September 7, 1978, and their application to stay issuance of the mandate of the Court of Appeals pending determination by this Court of related petitions for certiorari pending before it was denied on November 16. Meanwhile, this Court granted certiorari on October 16 in No. 78-139, Puget Sound Gillnetters Assn. v. United States District Court and No. 78-119, Washington v. United States, 439 U.S. 909, 99 S.Ct. 277, 58 L.Ed.2d 255. There is no question, as the Government maintains in the response which I have requested, that a conviction for criminal contempt may be valid quite apart from the validity of the underlying injunction which was violated, and that the invalidity of an injunction may not ordinarily be raised as a defense in contempt proceedings for its violation. Walker v. Birmingham, 388 U.S. 307, 315-320, 87 S.Ct. 1824, 1829-1830, 18 L.Ed.2d 1210 (1967); United States v. Mine Workers, 330 U.S. 258, 293-294, 67 S.Ct. 677, 695-696, 91 L.Ed. 884 (1947). Applicants' basic contention here is that since they were not named as parties in the action in the District Court in which the United States was plaintiff and the State of Washington defendant, they were not bound by any injunctive decree which was issued by that court. The District Court rejected this contention, and the Court of Appeals affirmed the convictions for criminal contempt relying upon cases from this Court holding that in some circumstances citizens of a State who claim rights pursuant to state law may be deemed "in privity" with a State and be bound by an injunction or decree to which only the State was a party. Tacoma v. Taxpayers of Tacoma, 357 U.S. 320, 340-341, 78 S.Ct. 1209, 1220-1221, 2 L.Ed.2d 1345 (1958); Wyoming v. Colorado, 286 U.S. 494, 506-509, 52 S.Ct. 621, 625-627, 76 L.Ed. 1245 (1932). One of the questions presented in No. 78-139 is this: "Is an individual who conducts business in a state in such privity to that state that a court may directly enjoin the citizen without his being a party to or a participant in the cause of action in which the State is a party? Assuming privity, if an injunctive order is sought against an individual, is that individual entitled to notice of and participation in the injunctive hearing prior to its issuance?" The Government in its response to this application simply does not address that question, and the fact that certiorari has been granted in No. 78-139 suggests that at least some Members of the Court regard the question as being of substance. Both Walker, supra, and Mine Workers, supra, contain language limiting the doctrine that the validity of a conviction for criminal contempt is not vitiated by the invalidity of the underlying injunction to cases in which the court issuing the injunction had jurisdiction of the parties. In Walker, the court quoted approvingly the following language from Howat v. Kansas, 258 U.S. 181, 189-190, 42 S.Ct. 277, 280-281, 66 L.Ed. 550 (1922): "An injunction duly issuing out of a court of general jurisdiction with equity powers, upon pleadings properly invoking its action, and served upon persons made parties therein and within the jurisdiction, must be obeyed by them, however erroneous the action of the court may be . . . ." 388 U.S., at 314, 87 S.Ct., at 1828. (Emphasis supplied.) See also Fed.Rule Civ.Proc. 65(d). The claim made by these applicants is that they were not in fact parties to the proceedings in the District Court, and that the District Court did not have jurisdiction over them merely because the State of Washington was a party. Since this question will be reviewed in No. 78-139, and since there is some possibility that applicants' convictions for criminal contempt would be moot once having been served, even under cases such as Sibron v. New York, 392 U.S. 40, 88 S.Ct. 1889, 20 L.Ed.2d 917 (1968), I think there are substantial arguments which favor the granting of a stay in this case. Nonetheless, I have decided as of now to deny the application. The information available to me as to related proceedings in the Court of Appeals for the Ninth Circuit may not be completely accurate, but I am advised that that court granted a stay at the request of Denne M. Harrington and Gary D. Rondeau, whose appeals from convictions for criminal contempt for violation of the same injunction were consolidated with those of applicants in the Court of Appeals and decided by that court in the same opinion. While applicants did seek a stay from the Court of Appeals of its affirmance of their contempt convictions, it is not apparent from the information available to me that they did so after this Court granted certiorari in No. 78-139, or that they requested the stay pending disposition of a petition for certiorari in their own cases, rather than pending disposition of No. 78-139. Our Rule 27 provides that applications for a stay here will not normally be entertained unless application for a stay has first been made to a judge of the court rendering the decision sought to be reviewed. On the basis of the information before me, I cannot say that applicants have requested a stay from the Court of Appeals for the Ninth Circuit pending disposition by this Court of their petition for certiorari seeking to review the affirmance of their contempt convictions, though I cannot say with certainty that they have not. Because of this uncertainty on my part, because of our grant of certiorari in No. 78-139, and because the Court of Appeals apparently has granted a stay with respect to Harrington and Rondeau, I think it the better exercise of my discretion to require applicants to apply to the Court of Appeals for the Ninth Circuit for a stay pending this Court's disposition of their petition for certiorari. In the event that such an application is denied, I shall entertain a renewed application for a stay on behalf of applicants Dolman and Wilson. Denied.
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Application to stay Court of Appeals' judgment and mandate affirming applicants' criminal contempt convictions for violating District Court's injunction is denied. The Court of Appeals apparently has granted a stay with respect to other individuals who were convicted of criminal contempt for violation of the same injunction; it is uncertain whether applicants have sought a stay from the Court of Appeals pending this Court's disposition of their petition for certiorari; and this Court has granted certiorari in a related case in which applicants' asserted basis for a stay will be reviewed. Accordingly, it is the better exercise of discretion to require applicants to apply to the Court of Appeals for a stay pending this Court's disposition of their petition for certiorari.
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The motion to affirm is granted and the judgment is affirmed on the authority of Wesberry v. Sanders, 376 U.S. 1, 84 S.Ct. 526, without prejudice to the right of the appellants to apply by April 1, 1964, to the District Court for further equitable relief in light of the present circumstances including the imminence of the forthcoming election and 'the operation of the election machinery of Texas' noted by the District Court in its opinion.* The stay heretofore granted by Mr. Justice Black is continued in effect pending timely application for the foregoing relief and final disposition thereof by the District Court. Mr. Justice CLARK joins this disposition, but upon the grounds stated in his separate opinion in Wesberry v. Sanders, 376 U.S., p. 18, 84 S.Ct., p. 535.
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214 F. Supp. 897, affirmed.
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SECTION 1. PREMIUMS FOR MORTGAGE INSURANCE.
(a) In General.--Paragraph (3) of section 163(h) of the Internal
Revenue Code of 1986 (relating to qualified residence interest) is
amended by adding after subparagraph (D) the following new
subparagraph:
``(E) Mortgage insurance premiums treated as
interest.--
``(i) In general.--Premiums paid or accrued
for qualified mortgage insurance by a taxpayer
during the taxable year in connection with
acquisition indebtedness with respect to a
qualified residence of the taxpayer shall be
treated for purposes of this subsection as
qualified residence interest.
``(ii) Phaseout.--The amount otherwise
allowable as a deduction under clause (i) shall
be reduced (but not below zero) by 10 percent
of such amount for each $1,000 ($500 in the
case of a married individual filing a separate
return) (or fraction thereof) that the
taxpayer's adjusted gross income for the
taxable year exceeds $100,000 ($50,000 in the
case of a married individual filing a separate
return).''.
(b) Definition and Special Rules.--Paragraph (4) of section 163(h)
of the Internal Revenue Code of 1986 (relating to qualified residence
interest) is amended by adding at the end the following new
subparagraphs:
``(E) Qualified mortgage insurance.--The term
`qualified mortgage insurance' means--
``(i) mortgage insurance provided by the
Veterans Administration, the Federal Housing
Administration, or the Rural Housing
Administration, and
``(ii) private mortgage insurance (as
defined by section 2 of the Homeowners
Protection Act of 1998 (12 U.S.C. 4901), as in
effect on the date of the enactment of this
subparagraph).
``(F) Special rules for prepaid qualified mortgage
insurance.--Any amount paid by the taxpayer for
qualified mortgage insurance that is properly allocable
to any mortgage the payment of which extends to periods
that are after the close of the taxable year in which
such amount is paid shall be chargeable to capital
account and shall be treated as paid in such periods to
which so allocated. No deduction shall be allowed for
the unamortized balance of such account if such
mortgage is satisfied before the end of its term. The
preceding sentences shall not apply to amounts paid for
qualified mortgage insurance provided by the Veterans
Administration or the Rural Housing Administration.''
SEC. 2. INFORMATION RETURNS RELATING TO MORTGAGE INSURANCE.
Section 6050H of the Internal Revenue Code of 1986 (relating to
information returns relating to mortgage interest) is amended by adding
at the end the following new subsection:
``(h) Returns Relating to Mortgage Insurance Premiums.--
``(1) In general.--The Secretary may prescribe, by
regulations, that any person who, in the course of a trade or
business, receives from any individual premiums for mortgage
insurance aggregating $600 or more for any calendar year, shall
make a return with respect to each such individual. Such return
shall be in such form, shall be made at such time, and shall
contain such information as the Secretary may prescribe.
``(2) Statement to be furnished to individuals with respect
to whom information is required.--Every person required to make
a return under paragraph (1) shall furnish to each individual
with respect to whom a return is made a written statement
showing such information as the Secretary may prescribe. Such
written statement shall be furnished on or before January 31 of
the year following the calendar year for which the return under
paragraph (1) was required to be made.
``(3) Special rules.--For purposes of this subsection--
``(A) rules similar to the rules of subsection (c)
shall apply, and
``(B) the term `mortgage insurance' means--
``(i) mortgage insurance provided by the
Veterans Administration, the Federal Housing
Administration or the Rural Housing
Administration, and
``(ii) private mortgage insurance (as
defined by section 2 of the Homeowners
Protection Act of 1998 (12 U.S.C. 4901), as in
effect on the date of the enactment of this
subparagraph.''.
SEC. 3. EFFECTIVE DATE.
The amendments made by this Act shall apply to amounts paid or
accrued after the date of enactment of this Act in taxable years ending
after such date.
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Amends the Internal Revenue Code to allow the deduction of premiums for mortgage insurance. Provides for the phaseout of such deduction based on income.
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SECTION 1. SHORT TITLE.
This Act may be cited as the ``Southern Campaign of the Revolution
Heritage Area Study Act''.
SEC. 2. DEFINITIONS.
In this Act:
(1) Heritage area.--The term ``Heritage Area'' means the
Southern Campaign of the Revolution Heritage Area.
(2) Secretary.--The term ``Secretary'' means the Secretary
of the Interior.
(3) State.--The term ``State'' means the State of South
Carolina.
(4) Study area.--The term ``study area'' means the study
area described in section 3(b).
SEC. 3. SOUTHERN CAMPAIGN OF THE REVOLUTION HERITAGE AREA STUDY.
(a) In General.--The Secretary, in consultation with State historic
preservation officers, State historical societies, the South Carolina
Department of Parks, Recreation, and Tourism, and other appropriate
entities, shall conduct a study to assess the suitability and
feasibility of designating the study area as the Southern Campaign of
the Revolution Heritage Area.
(b) Description of Study Area.--The study area--
(1) shall include the counties of Anderson, Beaufort,
Charleston, Cherokee, Chester, Chesterfield, Colleton,
Darlington, Dorchester, Fairfield, Florence, Georgetown,
Greenville, Greenwood, Kershaw, Lancaster, Laurens, Marlboro,
Orangeburg, Pickens, Richland, Spartanburg, Sumter, Union,
Williamsburg, and York in the State; and
(2) may include--
(A) National Park Service sites in the State,
including--
(i) the Charles Pickney National Historic
Site;
(ii) Cowpens National Battlefield;
(iii) Fort Moultrie National Monument;
(iv) Kings Mountain National Military Park;
(v) the National Park Service affiliate of
the Historic Camden Revolutionary War Site; and
(vi) the Ninety Six National Historic Site;
(B) sites maintained by the State, including--
(i) Andrew Jackson State Park;
(ii) Colonial Dorchester State Historic
Site;
(iii) Fort Watson;
(iv) Eutaw Springs Battle Site;
(v) Hampton Plantation State Historic Site;
(vi) Landsford Canal State Historic Site;
and
(vii) Musgrove Mill State Park;
(C) other sites in the State that are open to the
public, including--
(i) Goose Creek Church;
(ii) Historic Brattonsville;
(iii) Hopsewee Plantation;
(iv) Middleton Place; and
(v) Walnut Grove Plantation;
(D) the cities of Beaufort, Camden, Cayce,
Charleston, Cheraw, Georgetown, Kingstree, Orangeburg,
and Winusboro, in the State; and
(E) appropriate sites and locations in the State of
North Carolina, as the Secretary determines to be
appropriate.
(c) Requirements.--The study shall include analysis, documentation,
and determinations on whether the study area--
(1) has an assemblage of natural, historic, and cultural
resources that--
(A) represent distinctive aspects of the heritage
of the United States;
(B) are worthy of recognition, conservation,
interpretation, and continuing use; and
(C) would be best managed--
(i) through partnerships between public and
private entities; and
(ii) by linking diverse and sometimes
noncontiguous resources and active communities;
(2) reflects traditions, customs, beliefs, and folklife
that are a valuable part of the story of the United States;
(3) provides--
(A) outstanding opportunities to conserve natural,
historical, cultural, or scenic features; and
(B) outstanding recreational and educational
opportunities;
(4) contains resources that--
(A) are important to any identified themes of the
study area; and
(B) would support interpretation;
(5) includes residents, business interests, nonprofit
organizations, and State and local governments that--
(A) are involved in the planning of the Heritage
Area;
(B) have developed a conceptual financial plan that
outlines the roles of all participants in the Heritage
Area, including the Federal Government; and
(C) have demonstrated support for the designation
of the Heritage Area;
(6) has a potential management entity to work in
partnership with the individuals and entities referred to in
paragraph (5) while encouraging continued State and local
economic activity; and
(7) has a conceptual boundary map that is supported by the
public.
SEC. 4. REPORT.
Not later than the 3rd fiscal year that begins after the date on
which funds are first made available to carry out this Act, the
Secretary shall submit to the Committee on Resources of the House of
Representatives and the Committee on Energy and Natural Resources of
the Senate a report on--
(1) the findings of the Secretary; and
(2) any conclusions and recommendations of the Secretary.
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Southern Campaign of the Revolution Heritage Area Study Act - Directs the Secretary of the Interior to study and report to specified congressional committees on the suitability and feasibility of designating specified South Carolina counties, cities, public sites, other sites maintained by the State, and National Park Service sites in the State, as well as appropriate North Carolina sites, as the Southern Campaign of the Revolution Heritage Area.
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Overview Federal education legislation continues to emphasize the role of assessment in elementary and secondary schools. Perhaps most prominently, the Elementary and Secondary Education Act (ESEA), as amended by the Every Student Succeeds Act (ESSA; P.L. 114-95 ), requires the use of test-based educational accountability systems in states and specifies the requirements for the assessments that states must incorporate into state-designed educational accountability system. These requirements are applicable to states that receive funding under Title I-A of the ESEA, which authorizes aid to local educational agencies (LEAs) for the education of disadvantaged children. Title I-A grants provide supplementary educational and related services to low-achieving and other students attending elementary and secondary schools with relatively high concentrations of students from low-income families. All states currently accept Title I-A funds. For FY2017, the program was funded at $15.5 billion. More specifically, to receive Title I-A funds, states must agree to assess all students annually in grades 3 through 8 and once in high school in the areas of reading and mathematics. Students are also required to be assessed in science at least once within each of three specified grade spans (grades 3-5, 6-9, and 10-12). The results of these assessments are used as part of a state-designed educational accountability system that determines which schools will be identified for support and improvement based on their performance. The results are also used to make information about the academic performance of students in schools and school systems available to parents and other community stakeholders. These requirements have been implemented within a crowded landscape of state, local, and classroom uses of educational assessments, ranging from small-scale classroom assessments to high school exit exams. The emphasis on educational assessment within federal education policies, which has coincided with expanded assessment use in many states and localities, has led to considerable debate about the amount of time being spent taking tests and preparing for tests in schools, the fit between various types of assessments and intended uses, and optimal ways to increase the usefulness of assessments. As student assessments continue to be used for accountability purposes under the ESEA as well as in many other capacities related to federal programs (e.g., for identifying students eligible to receive extra services supported through federal programs), this report provides Congress with a general overview of assessments and related issues. It discusses different types of educational assessments and uses of assessment in support of the aims of federal policies. As congressional audiences sometimes seek clarification on how the assessments required under federal programs fit into the broader landscape of educational assessments, the report situates the types of assessment undertaken in conjunction with federal programs within the broader context of assessments used for varied purposes within schools. The report explains basic concepts related to assessment in accessible language, and it identifies commonly discussed considerations related to the use of assessments. The report provides background information that can be helpful to readers as they consider the uses of educational assessment in conjunction with policies and programs. This report accompanies CRS Report R45049, Educational Assessment and the Elementary and Secondary Education Act , by [author name scrubbed], which provides a more detailed examination of the assessment requirements under the ESEA. This report begins by briefly discussing the current types of assessments used in elementary and secondary education. It then provides a framework for understanding various types of assessments that are administered in elementary and secondary schools. It broadly discusses several purposes of educational assessment and describes the concept of balanced assessment systems. The report also provides a description of technical considerations in assessments, including validity, reliability, and fairness, and discusses how to use these technical considerations to draw appropriate conclusions based on assessment results. This report does not comprehensively or exclusively discuss specific assessments required by federal legislation. The information herein can be applied broadly to all assessments used in elementary and secondary schools, including those required by federal legislation. Examples from federal legislation, such as the ESEA and the Individuals with Disabilities Education Act (IDEA; P.L. 108-446 ), are used to highlight assessment concepts. The examples provided are not exhaustive but rather serve to demonstrate the application of assessment concepts to actual assessments administered in schools. Assessments in Elementary and Secondary Education Students in elementary and secondary education participate in a wide range of assessments, from small-scale classroom assessments to large-scale international assessments. Some assessments are required, and some are voluntary. Some assessment results are reported on an individual level, and some are reported at a group level. Some assessments have high-stakes consequences, and some do not. The most common type of assessment used in educational settings is achievement testing. Although educational assessment involves more than testing, this report uses "assessment" and "test" interchangeably. Among the assessments discussed, state assessments required by the ESEA receive considerable attention in this report. These assessments are administered annually in reading and mathematics to all students in grades 3 through 8 and once in high school. In addition, science assessments are administered once in each of three grade spans (grades 3-5, 6-9, and 10-12). The results of reading and mathematics assessments are used as indicators in the state accountability systems required by Title I-A. Results are aggregated and reported for various groups of students. Though they are not required to do so by federal law, states may require students to pass exit exams to graduate from high school. A state "exit exam" typically refers to one or more tests in different subject areas, such as English, mathematics, science, and social studies. Exit exams can take several forms, including minimum competency exams, comprehensive exams, end-of course exams, or some combination of the three. Students may also participate in national assessments. The National Assessment of Educational Progress (NAEP) is a series of assessments that have been used since 1969. The NAEP tests are administered to students in grades 4, 8, and 12. They cover a variety of content areas, including reading, mathematics, science, writing, geography, history, civics, social studies, and the arts. The NAEP is a voluntary assessment for students; however, states that receive funding under Title I-A of the ESEA are required to participate in the reading and mathematics assessment for grades 4 and 8. A sample of students in each state is selected to participate in the NAEP. Some students are selected to participate in international assessments. There are currently three international assessments that are periodically administered: (1) the Programme for International Student Achievement (PISA), (2) the Progress in International Reading Literacy Study (PIRLS), and (3) the Trends in International Mathematics and Science Study (TIMSS). Participation in international assessments is voluntary, and the countries that choose to participate can vary from one administration to the next. As with the NAEP, a sample of students from a participating country is selected to take the assessment. Certain students also take assessments to qualify for special services. States are required by the federal government to provide special services to students with disabilities and English learners (ELs). To receive special services, a student must be found eligible for services based on a variety of assessments. States are required to designate the specific assessments that determine eligibility. In addition, states are required to assess ELs in English language proficiency, which includes the domains of listening, speaking, reading, and writing. On the surface, it may be difficult to understand why students participate in so many assessments. Each assessment has a specific purpose and reports a specific kind of score. Teaching and learning can benefit from educational assessment, but there is a balance between the time spent on educational assessment and the time spent on teaching and learning. Determining the number and type of assessments to administer in elementary and secondary education is important, and the information in this report is intended to help policymakers as they contribute to these decisions. Assessment Framework Educational assessment is a complex task involving gathering and analyzing data to support decision-making about students and the evaluation of academic programs and policies. There are many ways to classify assessments in frameworks. The framework offered below is meant to provide a context for the remainder of the report and present an easily accessible vocabulary for discussing assessments. This framework addresses the various purposes of assessment, the concept of balanced assessment systems, and the scoring of assessments. After outlining a general assessment framework, this report discusses technical considerations in assessment and how to draw appropriate conclusions based on assessment results. A glossary containing definitions of commonly used assessment and measurement terms is provided at the end of this report. The glossary provides additional technical information that may not be addressed within the text of the report. Purposes of Educational Assessment Educational assessments are designed with a specific purpose in mind, and the results should be used for the intended purpose. Although it is possible that a test was designed for multiple purposes and results could be interpreted and used in multiple ways, it is often the case that test results are used for multiple purposes when the test itself was designed for only one. This "over-purposing" of tests is an issue of concern in education and can undermine test validity. In the sections below, four general purposes of assessment are discussed: instructional, diagnostic (identification), predictive, and evaluative. Instructional Instructional assessments are used to modify and adapt instruction to meet students' needs. These assessments can be informal or formal and usually take place within the context of a classroom. Informal instructional assessments can include teacher questioning strategies or reviewing classroom work. A more formal instructional assessment could be a written pretest in which a teacher uses the results to analyze what the students already know before determining what to teach. Another common type of instructional assessment is progress monitoring. Progress monitoring consists of short assessments throughout an academic unit that can assess whether students are learning the content that is being taught. The results of progress monitoring can help teachers determine if they need to repeat a certain concept, change the pace of their instruction, or comprehensively change their lesson plans. Commercially available standardized tests are often not appropriate to use as instructional assessments. It may be difficult for teachers to access assessments that are closely aligned with the content they are teaching. Even when a commercially available assessment is well aligned with classroom instruction, teachers may not receive results in a timely manner so that they can adapt instruction. Diagnostic (Identification) Diagnostic assessments are used to determine a student's academic, cognitive, or behavioral strengths and weaknesses. These assessments provide a comprehensive picture of a student's overall functioning and go beyond exclusively focusing on academic achievement. Some diagnostic assessments are used to identify students as being eligible for additional school services like special education or English language services. Diagnostic assessments to identify students for additional school services can include tests of cognitive functioning, behavior, social competence, language ability, and academic achievement. The IDEA requires diagnostic assessments for the purpose of determining whether a student is a "child with a disability" who is eligible to receive special education and related services. States develop criteria to determine eligibility for special education and select assessments that are consistent with the criteria for all areas of suspected disability. For example, if it is suspected that a student has an "intellectual disability," a state may administer a test of cognitive functioning, such as the Wechsler Intelligence Scale for Children (WISC). If it is suspected that the same student may have a speech-language impairment, a state may require hearing and vision screenings, followed by a comprehensive evaluation. If it is suspected that a student has "serious emotional disturbance," a state may administer a series of rating scales and questionnaires, such as the Behavioral and Emotional Rating Scale or the Scales for Assessing Emotional Disturbance. Assessments for special education eligibility may also involve more informal measures such as parent interviews and classroom observations. Title I-A of the ESEA requires diagnostic assessments for the purpose of determining whether a student has limited English proficiency. States must ensure that local educational agencies (LEAs) annually assess ELs to determine their level of English language proficiency. The assessment must be aligned to state English language proficiency standards within the domains of speaking, listening, reading, and writing. Most states currently participate in the WIDA consortium, which serves linguistically diverse students. The consortium provides for the development and administration of ACCESS 2.0, which is currently the most commonly used test of English proficiency. Predictive Predictive assessments are used to determine the likelihood that a student or school will meet a particular predetermined goal. One common type of predictive assessment used by schools and districts is a benchmark (or interim) assessment, which is designed primarily to determine which students are on-track for meeting end-of-year achievement goals. Students who are not on-track to meet these goals can be offered more intensive instruction or special services to increase the likelihood that they will meet their goals. Similarly, entire schools or districts that are not on-track can undertake larger, programmatic changes to improve the likelihood of achieving the end goals. Some states are now using a common assessment that is aligned with the Common Core State Standards (CCSS) to meet federal assessment requirements under the ESEA. There are two common assessments currently in place: the Partnership for Assessment of Readiness for College and Career (PARCC) and the Smarter Balanced Assessment Consortium (SBAC). Both PARCC and SBAC administer interim assessments that are intended to be predictive of end-of-year performance. Evaluative Evaluative assessments are used to determine the outcome of a particular curriculum, program, or policy. Results from evaluative assessments are often compared to a predetermined goal or objective. These assessments, unlike instructional, diagnostic, or predictive assessments, are not necessarily designed to provide actionable information on students, schools, or LEAs. For example, if a teacher gives an evaluative assessment at the end of a science unit, the purpose is to determine what a student learned rather than to plan instruction, diagnose strengths and weaknesses, or predict future achievement. Assessments in state accountability systems are typically conducted for an evaluative purpose. These assessments are administered to determine the outcome of a particular policy objective (e.g., determining the percentage of students who are proficient in reading). For example, under the ESEA, states must conduct annual assessments in reading and mathematics for all students in grades 3 through 8 and once in high school. Results from these assessments are then used in the state accountability system to differentiate schools based, in part, on student performance. Some states currently use common assessments (PARCC and SBAC) to meet these federal requirements; other states have opted to use state-specific assessments. The assessment indicators required by the accountability system in the ESEA are based primarily on the result of evaluative assessments. Because these indicators are often reported following the end of an academic year, it would be difficult to use them for instructional or predictive purposes. It would be unlikely to use the results of these assessments to guide instruction for individual students. Balanced Assessment System: Formative and Summative Assessments One assessment cannot serve all the purposes discussed above. A balanced assessment system is necessary to cover all the purposes of educational assessment. A balanced assessment system would likely include assessments for each aforementioned purpose. Federal requirements under the ESEA call for evaluative assessments to be used in the accountability system. States and LEAs, however, conduct additional assessments to serve other purposes in creating a more balanced assessment system. The addition of instructional, diagnostic, and predictive assessments at the state and local levels may contribute to the perception that there are "too many assessments." And while assessments may occasionally intrude on instructional time, some of these are conducted to guide and improve instruction (i.e., instructional and diagnostic assessments). One type of balanced assessment system uses a combination of formative and summative assessments. This type can be seen as overlapping with the purposes of assessment discussed above. That is, the purposes of assessment are embedded within "formative" and "summative" assessments. Generally speaking, formative assessments are those that are used during the learning process in order to improve instruction, and summative assessments are those that are used at the end of the learning process to "sum up" what students have learned. In reality, the line between a formative assessment and a summative assessment is less clear. Depending on how the results of an assessment are used, it is possible that one assessment could be designed to serve both formative and summative functions. The distinction, therefore, between formative and summative assessments often is the manner in which the results are used. If an assessment has been designed so that results can inform future decision-making processes in curriculum, instruction, or policy, the assessment is being used in a formative manner (i.e., for instructional, diagnostic, and predictive purposes). If an assessment has been designed to evaluate the effects or the outcome of curricula, instruction, or policy, the assessment is being used in a summative manner (i.e., for diagnostic or evaluative purposes). For example, a teacher may give a pretest to determine what students know prior to deciding what and how to teach. The results of the pretest may be used to plan instruction; therefore, the pretest is a formative assessment. When the teacher has finished teaching a certain concept or topic, however, the same test could be administered as a posttest. The results of the posttest may be used as the student's grade; therefore, the posttest is a summative assessment. In a balanced assessment system, a state must consider its and the LEAs' needs for various types of information and choose formative and summative assessments consistent with those needs. Formative Assessment While this topic has received a lot of attention in recent years, there is no universal agreement on what constitutes a formative assessment. Teachers, administrators, policymakers, and test publishers use the term "formative assessment" to cover a broad range of assessments, from small-scale, classroom-based assessments that track the learning of individual students to large-scale interim assessments that track the progress of a whole school or district to determine if students will meet certain policy goals. The confusion over exactly what a formative assessment is has led some in the testing industry to avoid the term altogether and others to offer alternative names for certain types of formative assessment. In this section, various types of assessments that have been described as formative will be discussed, including classroom-based and interim assessments. Formative assessments are often used in the classroom. They can be as informal as teacher questioning strategies and observations or as formal as standardized examinations. Teachers use formative assessments for both instructional and predictive purposes. The results of formative assessment can be used to determine holes in a student's knowledge and to adjust instruction accordingly. Teachers may adjust their instruction by changing the pace of instruction, changing the method of delivery, or repeating previously taught content. After these adjustments, teachers may administer another assessment to determine if students are learning as expected. The process of administering assessments, providing feedback to the student, adjusting instruction, and re-administering assessments is what makes the assessment formative. To supplement classroom-based formative assessments, test publishers began promoting commercial formative assessment products in the form of interim assessments. Some testing experts believe that referring to interim assessments as "formative" is inaccurate because the results are not likely to generate information in a manner timely enough to guide instruction. Others believe that these assessments can be used in a formative way to determine how school or LEA practices need to change to meet policy goals. The latter position considers the use of interim assessments as formative assessment at the school or LEA level as opposed to the classroom level. Instead of adjusting teaching practices to increase student learning, this type of formative assessment would require adjusting school or district practices to increase student achievement across the board. Interim assessments can track the progress of students, schools, and LEAs toward meeting predetermined policy goals. For example, as discussed above, PARCC and SBAC provide interim assessments as part of their state assessment systems for reading and mathematics. The results of the interim assessments can be used in a formative way to adjust school or district policies and practices that affect student achievement. While both classroom-based assessments and interim assessments can be considered formative, they are not interchangeable. In classroom-based formative assessment, results are often immediate and instructionally relevant, allowing teachers to adjust instruction. On the other hand, this type of formative assessment may not provide any information on whether a student or school is on-track to be proficient on a future summative assessment. In the case of interim assessments, the content and timing of the assessment is usually determined by the state, not the teacher, making it a less flexible classroom tool. In addition, interim assessments are less likely to be used to guide classroom instruction because the results of the assessments may not be reported quickly enough to be useful to a classroom teacher. Interim assessments can, however, be used to predict whether a school or district is likely to meet predetermined goals on a later summative assessment and to identify areas requiring additional support. Summative Assessment Summative assessments are tests given at the end of a lesson, course, or school year to determine what has been learned. Summative assessments are used for diagnostic or evaluative purposes. Most test results that are reported by the school, LEA, state, or media are based on summative assessments. State assessments required by the ESEA, the NAEP, international assessments, and state exit exams are all summative assessments. Some forms of summative assessment are considered high-stakes assessments because they have rewards and consequences attached to performance. For example, some states require students to pass high-stakes high school exit exams or end-of-course exams to graduate. Under the ESEA, states must use assessments in reading and mathematics to differentiate schools based, in part, on student performance in their accountability systems. Not all summative assessments have high-stakes school or district consequences attached to the results. An end-of-unit mathematics test, for example, is a summative assessment used to determine a student's grade, but there are no school- or LEA-level consequences attached. On a larger scale, NAEP and international assessments are used to provide an overall picture of national and international achievement, but there are no major consequences associated with the results. Types of Tests and How Results Are Reported Test scores are reported in a variety of ways. Sometimes scores may compare an individual to a group of peers in the form of standard scores or percentiles. Other times, scores may indicate a student is "proficient" or has "met expectations" in a certain subject. Misinterpreting test scores or misunderstanding a reported score can lead to inaccurate conclusions regarding the academic performance of students, schools, districts, and states, so it is essential to understand what the reported score actually means. The following sections describe common methods of score reporting in educational assessment, including using scores from norm-referenced tests (NRTs), scores from criterion-referenced tests (CRTs), scaled scores, and performance standards. A brief discussion of the advantages and disadvantages of each type of score is provided. Norm-referenced Tests An NRT is a standardized test in which results compare the performance of an individual student to the performance of a large group of students. NRTs are sometimes referred to as scores of "relative standing." NRTs compare individual scores to a normative sample, which is a group of students with known demographic characteristics (e.g., age, gender, ethnicity, or grade in school). Comparisons are made using two statistical properties of the normative sample: the mean and the standard deviation. NRTs produce raw scores that are transformed into standard scores using calculations involving the mean and standard deviation. The standard score is used to report how a student performed relative to peers. Standard scores are often reported as percentiles because they are relatively easy for parents and educators to interpret, but there are many other types of standard scores that may be reported. Commercially available cognitive and achievement tests are often norm-referenced. For example, the SAT, the Graduate Record Examination (GRE), and the WISC are norm-referenced tests. Language proficiency tests used to identify students who are ELs, such as ACCESS 2.0, are also NRTs. Generally speaking, any test that can report results as a percentile is norm-referenced because it is comparing an individual score against a normative sample. NRTs are particularly useful due to their ease of administration and scoring. Commercially available NRTs usually require no further development or validation procedures, so they are relatively cost-effective and time-efficient. NRTs can often be administered to large groups of students at the same time and are useful for making comparisons across schools, districts, or states. On the other hand, NRTs have been criticized for several reasons. Some fault NRTs for measuring only superficial learning through multiple choice and short-answer formats instead of measuring higher-level skills such as problem solving, reasoning, critical thinking, and comprehension. Others have criticized NRTs for lacking instructional utility because they sample a wide range of general skills within a content area, but NRTs are rarely linked to the standards or curriculum. In addition, results from NRTs can be difficult for educators to interpret because there is no designation of what score denotes mastery or proficiency. Criterion-Referenced Tests A CRT compares the performance of an individual to a predetermined standard or criterion. Like NRTs, CRTs are often standardized. They do not, however, report scores of "relative standing" against a normative sample. CRTs report scores of "absolute standing" against a predetermined criterion. CRTs are designed to determine the extent to which a student has mastered specific curriculum and content skills. "Mastery" of curriculum and content skills is usually determined through a collaborative process involving policymakers, educators, and measurement professionals. Different levels of mastery are set through a combination of measurement techniques and professional judgment. Mastery can be defined in many ways. In the classroom, it may be defined as answering 80% of the items on an assessment correctly. Alternatively, it may be defined as meeting some level of proficiency within a content area based on an observation of the student performing the skills. Unlike NRTs, CRTs are not necessarily designed to differentiate between students or compare an individual student to a normative group. CRT results may be reported as grades, grade equivalents, pass/fail, number correct, percentage correct, scaled scores, or performance standards. They may be measured by multiple choice formats, short-answer formats, rating scales, checklists, rubrics, or performance-based assessments. CRTs are flexible and can be designed to meet various educational needs. The major advantage of CRTs is that they are versatile tests that can be used for a variety of purposes. While many CRTs, like state assessments, are summative tests used for evaluative purposes, other CRTs can be used for instructional, diagnostic, or predictive purposes. They can be directly linked to the standards and curriculum, and the results from CRTs can be used for planning, modifying, and adapting instruction. Additionally, like commercially available NRTs, commercially available CRTs are relatively cost-effective and time-efficient. A disadvantage of CRTs is that they do not typically facilitate good comparisons across schools, LEAs, and states. When using CRTs, there is no normative sample; therefore, there is no common metric for comparisons. It is possible to design CRTs so that comparisons can be made. However, to facilitate good comparisons, it would be necessary to have (1) consistent standards across schools, LEAs, and states; and (2) consistent definitions of "mastery" across schools, districts, and states. In elementary and secondary education, one way that test designers create a common metric for comparisons with CRTs is by using scaled scores and performance standards. Scaled scores and performance standards are two different ways of representing the same assessment result. A scaled score is a single score that exists along a scale ranging from limited mastery of a content area to complete mastery of it. A performance standard is a description of whether a certain level of mastery is achieved based on the grade level of the student. These types of scores are discussed in more detail below. Scaled Scores. State assessments used for accountability often report a scaled score. A scaled score is a standardized score that exists on a common scale that can be used to make annual and longitudinal comparisons across students and subgroups of students. "Scaling" is conducted by adjusting a raw score based on the differences in form difficulty from a "reference form." Just as an NRT score can be compared to a "normative group" of students, a scaled score can be compared to the "reference form." In the case of scaled scores, students and subgroups of students can be compared to each other directly even though there is no "normative group." A scaled score is usually a three- or four-digit score that exists across a scale with cut points determining various levels of mastery. Sometimes, the scaled score is accompanied by a grade level. For each grade level, there is a range of scaled scores that corresponds to students achieving mastery of a specific content area. Scaled scores are particularly useful if they are "vertically scaled." A vertically scaled score can be compared across time and can be used to measure growth of students and student subgroups. A vertically scaled assessment is independent of grade level; however, the descriptors attached to the scaled score (e.g., basic, proficient, advanced) change according to the grade level. For example, consider a group of third grade students and a group of fifth grade students that both scored 300 on a reading assessment. The two groups are comparable in terms of their reading ability; however, a scaled score of 300 may represent that the third-grade students "met expectations" but the fifth-grade students "did not meet expectations." Performance Standards. A performance standard is another way to report results from a CRT. Performance standards are also sometimes referred to as achievement levels. A performance standard is a generally agreed upon definition of a certain level of performance in a content area that is expressed in terms of a cut score. The predetermined cut score denotes a level of mastery or level of proficiency within a content area. An assessment system that uses performance standards typically establishes several cut scores that denote varying levels of mastery. For example, NAEP uses a system of performance standards with three achievement levels: basic, proficient, and advanced. Similarly, common assessments use performance standards to determine whether students met expectations. SBAC uses a four-level system (Level 1 through Level 4), which corresponds to "novice, developing, proficient, and advanced." PARCC uses a five-level system (Level 1 through Level 5), which corresponds to "did not yet meet expectations, partially met expectations, approached expectations, met expectations, and exceeded expectations." Performance standards can be aligned with state content standards and curricula, and results can be used for planning, modifying, and adapting instruction. The main difference between reporting a score as a scaled score or a performance standard is the label itself, which can attach meaning to a score and provide an appropriate context. A CRT may report that a student scored 242 on a scale of 500, but the score of 242 may be meaningless to most educators and parents unless there is some context surrounding it. Performance standards provide the context. If the cut score to meet expectations was predetermined to be 240, a score of 242 would be above the cut score, and therefore the student would be considered to have "met expectations" in the content area. Although they can provide a meaningful context for assessment results, performance standards are criticized for being imprecise and for their inability to adequately measure student growth. While there are rigorous methods of determining cut scores that denote various levels of mastery, there is rarely any meaningful difference between the abilities of a student who scores just below the cut score and a student who scores just above the cut score. Consider the example above in which a score of 240 is the cut score for "met expectations . " One student may score 238 and not be considered to have met expectations, while another student may score 242 and be considered to have met expectations. In reality, the cut score of the performance standard may be making an inappropriate distinction between two students who have similar abilities. Another criticism of performance standards is that they are insensitive to student growth. Suppose the cut score for the "exceeded expectations" level is 300. A student in the previous example could move from a score of 242 to 299 within one year, making considerable progress; however, a score of 242 and a score of 299 are both considered to be within the same performance standard of "met expectations." Technical Considerations in Assessment This section will discuss technical considerations such as validity, reliability, and fairness. It is generally the responsibility of the test developer to investigate the technical characteristics of an assessment and report any relevant statistical information to test users. Usually, this information is reported in testing manuals that accompany the assessment. It is the responsibility of the test user to administer the test as intended and use the reported information concerning validity, reliability, and fairness to interpret test results appropriately. Learning how to evaluate the validity, reliability, and fairness of an assessment allows test users to make appropriate inferences (i.e., conclusions drawn from the result of a test). Inferences may be either appropriate or inappropriate based on a number of technical and contextual factors. Following a discussion of the concepts of validity, reliability, and fairness, this report will conclude with a discussion of how to avoid making inappropriate inferences from educational assessments. It will also highlight some of the issues to consider when making inferences from high-stakes assessments versus low-stakes assessments. Validity Validity is arguably the most important concept to understand when evaluating educational assessments. When making instructional or policy decisions on the basis of an assessment, the question is often asked, "Is the test valid?" Validity, however, is not a property of the test itself; it is the degree to which a certain inference from a test is appropriate and meaningful. The appropriate question to be asked is, therefore, "Is the inference being drawn from the test result valid?" The distinction between these questions may seem unimportant, but consider the following situation. Teachers, administrators, or policymakers often would like to support multiple conclusions from the same assessment. Some of these conclusions, or inferences, may be valid and others may not. For example, the SAT, a college entrance examination intended to measure critical thinking skills that are needed for success in college, is taken by many high school students. Suppose a group of high school seniors in School A scored well on the SAT and a group of high school seniors in School B scored poorly. One potentially valid inference from this result is that seniors from School A are more likely to succeed in college. However, there are many possible inferences that may be less valid. For example, one could infer that School A had a better academic curriculum than School B, or that School A had better teachers than School B. Neither of these inferences may be valid because the SAT was designed for the purpose of predicting the likelihood of success in college and not for the purposes of evaluating teachers or curriculum. The validity of an inference, therefore, is tied inextricably to the purpose for which the test was created. When an assessment is created or a new use is proposed for an existing assessment, a process of validation is seen as necessary. Validation involves collecting evidence to support the use and interpretation of test scores based on the test construct. In testing, a construct is the concept or characteristic that a test is designed to measure. The process of validation includes, at a minimum, investigating the construct underrepresentation and construct irrelevance of the assessment instrument. Construct underrepresentation refers to the degree to which an assessment fails to capture important aspects of the construct. For example, if the construct of an assessment is addition and subtraction skills, the entire construct would include addition, addition with carrying, subtraction, subtraction with borrowing, two-digit addition, two-digit addition with carrying, and so forth. If the assessment does not measure all the skills within a defined construct, it may be susceptible to construct underrepresentation, and the inference based on an assessment score may not reflect the student's actual knowledge of the construct. Similarly, construct irrelevance can threaten the validity of an inference. Construct irrelevance refers to the degree to which test scores are affected by the content of an assessment that is not part of the intended construct. Again, if the construct of an assessment is addition and subtraction skills, any test items that contain multiplication or division would create construct irrelevance, and the inference based on the assessment score may not reflect the student's actual knowledge of the construct. Construct underrepresentation is investigated by answering the question, "Does the assessment adequately cover the full range of skills in the construct?" Construct irrelevance is investigated by answering the question, "Are any skills within the assessment outside of the realm of the construct?" These two questions are investigated using statistical procedures that examine properties of the assessment itself and how the properties of the assessment interact with characteristics of individuals taking the test. One important consideration is to determine if the degree of construct underrepresentation or construct irrelevance differentially affects the performance of various subgroups of the population. If, for example, there was a moderate degree of construct irrelevance (e.g., multiplication questions on an assessment designed to measure addition and subtraction skills), students from higher socioeconomic subgroups may be more likely to score well on a test than students from lower socioeconomic subgroups, even if both subgroups have equal knowledge of the construct itself. Students from higher socioeconomic subgroups are more likely to have learned the irrelevant material, given that they generally have more access to early education and enrichment opportunities. The construct irrelevance, therefore, may lead to an invalid inference that students from higher socioeconomic subgroups outperform students from lower socioeconomic subgroups on a given construct. There are many other types of evidence that may be collected during validation. For example, test developers might compare student scores on the assessment in question with existing measures of the same construct. Or, test developers might investigate how well the assessment in question predicts a later outcome of interest, such as pass rates on a high-stakes exam, high school graduation rates, or job attainment. Validation is not a set of scripted procedures but rather a thoughtful investigation of the construct and proposed uses of assessments. Reliability Reliability refers to the consistency of measurement when the testing procedure is repeated on a population of individuals or groups. It describes the precision with which assessment results are reported and is a measure of certainty that the results are accurate. The concept of reliability presumes that each student has a true score for any given assessment. The true score is the hypothetical average score resulting from multiple administrations of an assessment; it is the true representation of what the student knows and can do. For any given assessment, however, the score that is reported is not a student's true score; it is a student's observed score. The hypothetical difference between the true score and the observed score is measurement error. Measurement error includes student factors, such as general health, attention span, and motivation. It can also include environmental factors, such as the comfort or familiarity of the assessment location. Reliability and measurement error are inversely related: the lower the measurement error, the higher the reliability. As reliability increases, the likelihood that a student's observed score and true score are reasonably equivalent is increased. Reliability can be reported in multiple ways. The most common expressions of reliability in educational assessment are the reliability coefficient, range of uncertainty, and consistency of classification. Reliability Coefficient The reliability coefficient is a number that ranges from 0 to 1. It is useful because it is independent of the scale of the assessment and can be compared across multiple assessments. A reliability coefficient of 0 implies that a score is due completely to measurement error; a reliability coefficient of 1 implies that a score is completely consistent and free of measurement error. There is no rule of thumb for deciding how high a reliability coefficient should be; however, most commercially available assessments report reliability coefficients above 0.8, and many have reliability coefficients above 0.9. The most common types of reliability coefficients used in educational assessment are alternate-form coefficients, test-retest coefficients, inter-scorer agreement coefficients, and internal consistency coefficients. Alternate-form coefficients measure the degree to which the scores derived from alternate forms of the same assessment are consistent. For example, the SAT has multiple forms that are administered each year. A high alternate-form reliability coefficient provides some certainty that a student's score on one form of the SAT would be reasonably equivalent to the student's score on another form of it. Test-retest coefficients measure the stability of an individual student's score over time. If a reading assessment was administered to a student today and re-administered in two weeks, one would expect that the student would have comparable scores across the two administrations. A high test-retest reliability coefficient provides a measure of certainty that a student's score today would be similar to the student's score in the near future. Inter-scorer agreement coefficients measure the degree to which two independent scorers agree when assessing a student's performance. A high inter-scorer agreement coefficient provides a measure of certainty that a student's score would not be greatly affected by the individual scoring the assessment. Internal consistency coefficients are slightly more complicated. They are a measure of the correlation of items within the same assessment. If items within an assessment are related, a student should perform consistently well or consistently poorly on the related items. For example, a mathematics assessment may test multiplication and division skills. Suppose a student is proficient with multiplication but has not yet mastered division. Within the mathematics assessment, the student should score consistently well on the multiplication items and consistently poorly on the division items. A high internal consistency coefficient provides a measure of certainty that related items within the assessment are in fact measuring the same construct. The decisions regarding the type of reliability coefficients to investigate and report depend on the purpose and format of the assessment. For example, many assessments do not use alternate forms, so there would be no need to report an alternate-form coefficient. As another example, consider a test that was designed to measure student growth over a short period of time. In this case, it may not make sense to report a test-retest reliability coefficient because one does not expect any stability or consistency in the student's score over time. Test developers also typically consider the format of the test. In tests with multiple-choice or fill-in-the-blank formats, inter-scorer agreement may not be of great concern because the scoring is relatively objective. However, in tests with constructed responses, such as essay tests or performance assessments, it may be important to investigate inter-scorer agreement because the scoring has an element of subjectivity. Range of Uncertainty—Confidence Intervals As stated above, reliability describes the precision with which assessment results are reported and is a measure of certainty that the results are accurate. Results can often be reported with greater confidence if the observed score is reported along with a range of uncertainty. In educational assessment, the range of uncertainty is usually referred to as a confidence interval. A confidence interval estimates the likelihood that a student's true score falls within a range of scores. The size of the confidence interval, or the size of the range, depends on how certain one needs to be that the true score falls within the range of uncertainty. A confidence interval is calculated by using an estimated true score, the standard error of measurement (SEM), and the desired level of confidence. The confidence interval is reported as a range of scores with a lower limit and an upper limit. In education, it is common to see 90%, 95%, or 99% confidence intervals. The following example illustrates how the size of the confidence interval (i.e., the range of scores) can change as the degree of confidence changes. If the estimated true score of a student is assumed to be 100 and the SEM is assumed to be 10: A 90% confidence interval would be 84 to 116 (a range of 32). In this case, about 90% of the time the student's true score will be contained within the interval from 84 to 116. There is about a 5% chance that the student's true score is lower than 84 and about a 5% chance that the student's true score is higher than 116. A 95% confidence interval would be 80 to 120 (a range of 40). In this case, about 95% of the time the student's true score will be contained within the interval from 80 to 120. There is about a 2.5% chance that the student's true score is lower than 80 and about a 2.5% chance that the student's true score is higher than 120. A 99% confidence interval would be 74 to 126 (a range of 52). In this case, about 99% of the time the student's true score will be contained within the interval from 74 to 126. There is about a 0.5% chance that the student's true score is lower than 74 and about a 0.5% chance that a student's true score is higher than 126. The illustration above demonstrates that the range of scores in a confidence interval increases as the desired level of confidence increases. A 90% confidence interval ranges from 84 to 116 (a range of 32) while a 99% confidence interval ranges from 74 to 126 (a range of 52). Consistency of Classification Consistency of classification is a type of reliability that is rarely reported but can be important to investigate, especially when high-stakes decisions are made with the results of educational assessments. When assessments are used to place students and schools into discrete categories based on performance (e.g., proficient vs. not proficient; pass/fail; Level 1 through Level 4; met expectations vs. partially met expectations), the consistency of classification is of interest. If students with similar abilities are not consistently classified into the same performance standard category, there may be a problem with the reliability of the assessment. Although students may move in and out of performance standard categories over time, students who achieve similarly should be consistently classified into the same performance standard category at any given time. Within school settings, consistency of classification is particularly important when using performance standards to place students in achievement levels based on state assessments. For example, if the classification of students into achievement levels for accountability purposes is not consistent over short periods of time, the accountability system may become highly variable and unreliable. Another example of the importance of consistency of classification is the use of state exit exams to award high school diplomas (i.e., pass/fail). Without consistency in classification, the system that awards diplomas to high school seniors may be unreliable. Consistency of classification has not been well studied in these instances, but statistical modeling demonstrates that it is possible to have considerable fluctuations in classification depending on the reliability of the assessment and the predetermined cut score used to categorize students. Consistency of classification is also relevant for decisions that determine eligibility for services, such as the classification of students with disabilities. Students who are suspected to have a disability are assessed using a wide range of diagnostic assessments. Results of these assessments are interpreted based on state definitions of IDEA disability categories, and students receive special education services if they are determined to be eligible. Over time, while it is possible that students become "declassified" and ineligible for special education services due to their improvement in academic skills or due to a change in the definition of "disability," it may be that the rate of "declassification" is also affected by the reliability of assessments used to determine their initial eligibility and the cut scores that are used in state definitions of disability. Fairness Fairness is a term that has no technical meaning in testing procedures, but it is an issue that often arises in educational assessment and education policy generally. Educational assessments are administered to diverse populations, and fairness presumes that all members of each population are treated equally. The notion of fairness as "equal treatment" has taken several forms: (1) fairness as a lack of bias, (2) fairness as equitable treatment in the testing process, (3) fairness as equality in outcomes of testing, and (4) fairness as opportunity to learn. Fairness as a Lack of Bias Bias is a common criticism in educational assessment; however, it is not well documented or well understood. Test bias exists if there are systematic differences in observed scores based on subgroup membership when there is no difference in the true scores between subgroups. For example, bias can arise when cultural or linguistic factors influence test scores of individuals within a subgroup despite the individuals' inherent abilities. Or, bias can arise when a disability precludes a student from demonstrating his or her ability. Bias is a controversial topic and difficult to address in educational assessment. There is no professional consensus on how to mitigate bias in testing. There are statistical procedures, such as differential item functioning, that may be able to detect bias in specific test items; however, such techniques cannot directly address the bias in the interpretation of assessment results. Test bias, if present, undermines the validity of the inferences based on assessment results. A simple difference in scores between two subgroups does not necessarily imply bias. If a group of advantaged students performs higher on a reading assessment than a group of disadvantaged students, the test may or may not be biased. If the advantaged and disadvantaged students have the same reading ability (true score), and the advantaged students still score higher on the reading assessment (observed score), bias may be present. If, however, the advantaged students have higher reading ability and higher scores on the reading assessment, the test may not be biased. Fairness as Equitable Treatment in the Testing Process Fairness as equitable treatment in the testing process is less controversial and more straightforward than the issue of bias. There is professional consensus that all students should be afforded equity in the testing process. Equity includes ensuring that all students are given a comparable opportunity to demonstrate their knowledge of the construct being tested. It also requires that all students are given appropriate testing conditions, such as a comfortable testing environment, equal time to respond, and, where appropriate, accommodations for students with disabilities and ELs. Equitable treatment affords each student equal opportunity to prepare for a test. This aspect of equitable treatment may be the most difficult to monitor and enforce. In some schools or LEAs, it is common practice to familiarize students with sample test questions or provide examples of actual test questions from previous assessments. In other LEAs, this type of test preparation may not be routine. Furthermore, some students receive test preparation services outside of the classroom from private companies, such as Kaplan, Inc. or Sylvan Learning. The amount of test preparation and the appropriateness of this preparation is not consistent across classrooms, schools, and LEAs and can undermine the validity of inferences drawn from assessments. Fairness as Equality in Outcomes of Testing There is no professional consensus that fairness should ensure equality in the outcomes of testing. Nonetheless, when results are used for high-stakes decisions, such as the use of state exit exams for high school graduation, the issue of "equality in outcomes" can arise. The question of fairness arises when these tests are used to exclude a subgroup of students from a desired result or certification, like earning a high school diploma. For example, if a subgroup of advantaged students is more likely to pass a state exit exam than a subgroup of disadvantaged students, the advantaged students are more likely to graduate from high school, receive a diploma, pursue higher education, and obtain a job. The disadvantaged students are less likely to graduate from high school, which further disadvantages them in their pursuit of higher education or job attainment. "Equality in outcomes" is more likely to be a concern with high-stakes assessments, such as state assessments and state exit exams, than with low-stakes assessments, such as NAEP and international assessments. Fairness as Opportunity to Learn Fairness as opportunity to learn is particularly relevant to educational assessment. Many educational assessments, particularly state assessments used in accountability systems, are aligned with state standards and designed to measure what students know as a result of formal instruction. All students within a state are assessed against the same content and performance standards for accountability. Thus, the question arises: if all students have not had an equal opportunity to learn, is it "fair" to assess all students against the same standard? If low scores are the result of a lack of opportunity to learn the tested material, it might be seen as a systemic failure rather than a characteristic of a particular individual, school, or LEA. The difficulty with affording all students equal opportunity to learn is defining "opportunity to learn." Is exposure to the same curriculum enough to give students the opportunity to learn? Even if all students are exposed to the same curriculum, does the overall school environment influence a student's opportunity to learn? If students are exposed to the same curriculum within the same school environment, does the quality of the classroom teacher influence a student's opportunity to learn? Using Assessment Results: Avoiding Inappropriate Inferences Test users have a responsibility to examine the validity, reliability, and fairness of an assessment to make appropriate inferences about student achievement. There is no checklist that will help determine if an inference is appropriate. Instead, test users are to conduct a thoughtful analysis of the assessment in terms of the construct; purpose; type of scores it reports; and evidence concerning its validity, reliability, and fairness; as well as the context in which the assessment results will be used. If these issues are not carefully considered, inappropriate inferences can lead to a variety of unintended consequences. The sections that follow provide some guidance in the form of sample questions that can be used to consider the appropriateness of inferences about test scores. These guidelines are not intended to be an exhaustive list of considerations but rather a starting point for examining the appropriateness of conclusions drawn from assessments. Construct Sample questions about the construct include the following: What is the content area being assessed (e.g., reading, mathematics)? What is the specific construct that is being measured within the content area (e.g., mathematics computation, mathematical problem solving, measurement, geometry)? Does the construct measure general knowledge within a content area, or is it specifically aligned with the curriculum? Understanding the construct of an assessment can have important implications when comparing the results of two tests. Consider, for example, two of the international assessments mentioned earlier, PISA and TIMSS. Both assessments measure mathematics achievement, but they measure different mathematical constructs. PISA was designed to measure general "mathematical literacy," whereas TIMSS is curriculum-based and was designed to measure what students have learned in school. Students in a particular country may perform well on PISA and poorly on TIMSS, or vice versa. Because the tests measure different mathematical constructs, the assessments are likely sensitive to how mathematics is taught within the country. Thus, if the score for the United States was above the international average on a TIMSS assessment and below the international average for a subsequent PISA assessment, it would not be appropriate to infer that mathematics achievement in the United States is declining, because TIMSS and PISA measure different constructs. Purpose Sample questions about the purpose include the following: What was the intended purpose of the assessment when it was designed (e.g., instructional, predictive, diagnostic, evaluative)? How will teachers, administrators, and policymakers use the results (e.g., formative assessment vs. summative assessment)? Understanding the original purpose of the assessment can help test users determine how the results may be interpreted and how the scores may be used. For example, a state assessment that was designed for evaluative purposes may not lend itself to using scores to modify and adapt instruction for individual students. Most state assessments are primarily summative assessments, and it is difficult to use them in a formative manner because the results may not be reported in a timely fashion to the teachers and the items may not be sensitive to classroom instruction. Alternatively, an interim assessment that was designed for predictive purposes may report results in a more timely manner and allow teachers to target their instruction to students who scored poorly. Interim assessments are often aligned with state summative assessments; however, scores on interim assessments are best not considered definitive indicators of what state assessment scores will be. For example, some summative assessments do not have associated interim assessments. LEAs may choose to use an interim assessment that measures the same construct as a summative assessment (e.g., reading comprehension); however, the measure may not be well-aligned with the summative assessment. If students score poorly on the interim assessment, it is not necessarily indicative that they will score poorly on the summative assessment. There may also be difficulties with the timing of an interim assessment. Classroom instruction has different pacing, depending on the school, teacher, and abilities of the students. If an LEA sets the timeline for the interim assessment, it is possible that some schools or teachers would have not yet covered the content on the interim assessment. Students would likely score poorly on the interim assessment, but if the content is covered and learned later in the year, the students may score well on the summative assessment. Scores Sample questions about scores include the following: Does the score reported compare a student's performance to the performance of others (e.g., NRT)? Does the score reported compare a student's performance to a criterion or standard (e.g., CRT, scaled score, performance standard)? Does the score determine whether a student is "proficient" or has "met expectations" within a certain content area (e.g., performance standards)? Does the score show growth or progress that a student made within a content area (e.g., vertically scaled score)? Misinterpreting scores is perhaps the most common way to make an inappropriate inference. To avoid this, a test user would fully investigate the scale of the assessment and the way in which scores are reported. If scores are reported from NRTs, a student's score can be interpreted relative to the normative sample, which is a group of the student's peers. NRTs cannot, however, determine whether a student met a predetermined criterion or whether a student is proficient within a particular content area. If scores are reported from CRTs, either in the form of scaled scores or performance standards, a student's score can be interpreted relative to a predetermined standard or criterion. When using scaled scores from CRTs, it is possible to make meaningful comparisons between students and subgroups of students. If vertically scaled scores are available, it is possible to measure student growth and make meaningful inferences about how much a student has learned over time. Making appropriate inferences from performance standards can be particularly difficult. Because of the use of performance standards in state assessments, it is important for test users to understand what they do and do not report. Performance standards are used primarily because they can be easily aligned with the state content standards and provide some meaningful description of what students know. Performance standards are hard to interpret, however. Students are classified into categories based on their performance on an assessment, but all students within the same category did not score equally well. Furthermore, scores from performance standards do not lend themselves to measuring a student's growth. A student can score at the lower end of the "met expectations" category, make considerable progress over the next year, and still be in the "met expectations" category at the end of the year. Alternatively, a student could score at the high end of the "did not meet expectations" category, make minimal progress over the next year, and move up into the "met expectations" category. Because of these qualities of performance standards, test users should be cautious about equating the performance of students within the same category, and about making assumptions concerning growth based on movement through the categories. Technical Quality Sample questions about technical quality include the following: Did the test developers provide statistical information on the validity and reliability of the instrument? What kind of validity and reliability evidence was collected? Does that evidence seem to match the purpose of the assessment? Have the test developers reported reliability evidence separately for all the subgroups of interest? Was the issue of fairness and bias addressed, either through thoughtful reasoning or statistical procedures? Commercially available assessments are typically accompanied by a user's manual that reports validity and reliability evidence. Smaller, locally developed assessments do not always have an accompanying manual, but test developers typically have validity and reliability evidence available upon request. It is a fairly simple process to determine whether evidence has been provided, but a much more difficult task to evaluate the quality of the evidence. A thorough discussion of how to evaluate the technical quality of an assessment is beyond the scope of this report. In light of the current uses of assessments in schools, however, some issues are noteworthy: Because schools are required to report state assessment results for various subgroups (i.e., students with disabilities and ELs), it is important that validity and reliability be investigated for each subgroup for which data will be disaggregated. Doing so will reduce the likelihood of bias in the assessment against a particular subgroup. The type of reliability evidence provided should be specific to the assessment. For example, an assessment with constructed responses, such as essay tests or performance assessments, will have a degree of subjectivity in scoring. In this case, it is important to have strong evidence of inter-scorer reliability. In other cases, such as when the assessment format consists of multiple choice or fill-in-the-blank items, inter-scorer reliability may be of lesser importance. A test like the SAT that relies on several alternate forms should report alternate-form reliability. Without a high degree of alternate-form reliability, some students will take an easier version of an assessment and others will take a more difficult version. Unequal forms of the same assessment will introduce bias in the testing process. Students taking the easier version may have scores that are positively biased and students taking the harder version may have scores that are negatively biased. No assessment is technically perfect. All inferences based on an observed score will be susceptible to measurement error, and some may be susceptible to bias. Context of the Assessment Sample questions about the context include the following: Is it a high-stakes or a low-stakes assessment? Who will be held accountable (e.g., students, teachers, schools, states)? Is the validity and reliability evidence strong enough to make high-stakes decisions? Are there confounding factors that may have influenced performance on the assessment? What other information could be collected to make a better inference? The context in which an assessment takes place may have implications for how critical a test user must be when making an inference from a test score. In a low-stakes assessment, such as a classroom-level formative assessment that will be used for instructional purposes, conducting an exhaustive review of the reliability and validity evidence may not be worthwhile. These assessments are usually short, conducted to help teachers adapt their instruction, and have no major consequences if the inference is not completely accurate. On the other hand, for a high-stakes assessment like a state exit exam for graduation, it is important to examine the validity and reliability evidence of the assessment to ensure that the inference is defensible. Consider the consequences of a state exit exam with poor evidence of validity due to a high degree of construct irrelevance. Students would be tested on content outside of the construct and may perform poorly, which may prevent them from earning a high school diploma. Or, consider a state exit exam with poor evidence of reliability due to a high degree of measurement error. Students who are likely to score near the cut score of the assessment may pass or fail largely due to measurement error. Sometimes when inferences for a high-stakes decision are being made, certain protections are placed on the testing process or the test result. For example, some states allow students to take a state exit exam for high school graduation multiple times to lower the probability that measurement error is preventing them from passing. Or, in some cases, a state will consider collecting additional data (such as a portfolio of student work) to determine whether a student has met the requirements for receiving a high school diploma. For other high-stakes decisions, such as differentiating the performance of public schools within state accountability systems, states use the results from state assessments plus other indicators (e.g., attendance rates, graduation rates, and school climate measures). When making a high-stakes decision, using multiple measures of achievement can lead to a more valid inference. While all measures should have adequate technical quality, the use of multiple measures provides protection against making an invalid inference based on one measure that may not have the strongest evidence to support its validity and reliability. If multiple measures are used, it is less likely that one measure disproportionately influences the overall result. Closing Remarks Students in elementary and secondary education participate in a wide range of educational assessments. Assessments are an important tool at many levels—from making instructional decisions in the classroom to making policy decisions for a nation. When used correctly, educational assessments contribute to the iterative process of teaching and learning and guide education policy decisions. Currently, a primary focus of educational assessment is tracking student academic achievement and growth in schools. Assessment is a critical component of accountability systems such as those required under Title I-A of the ESEA. At times, the results of these assessments are used to make high-stakes decisions that affect students, teachers, LEAs, and states. It is therefore important to understand the purpose of educational assessments and to give consideration to the appropriateness of inferences based on assessment results. Appendix. Glossary
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Federal education legislation continues to emphasize the role of assessment in elementary and secondary schools. Perhaps most prominently, the Elementary and Secondary Education Act (ESEA), as amended by the Every Student Succeeds Act (ESSA; P.L. 114-95), requires the use of test-based educational accountability systems in states and specifies the requirements for the assessments that states must incorporate into state-designed educational accountability systems. These requirements are applicable to states that receive funding under Title I-A of the ESEA. More specifically, to receive Title I-A funds, states must agree to assess all students annually in grades 3 through 8 and once in high school in the areas of reading and mathematics. Students are also required to be assessed in science at least once within each of three specified grade spans (grades 3-5, 6-9, and 10-12). The results of these assessments are used as part of a state-designed educational accountability system that determines which schools will be identified for support and improvement based on their performance. The results are also used to make information about the academic performance of students in schools and school systems available to parents and other community stakeholders. As student assessments continue to be used for accountability purposes under the ESEA as well as in many other capacities related to federal programs (e.g., for identifying students eligible to receive extra services supported through federal programs), this report provides Congress with a general overview of assessments and related issues. It discusses different types of educational assessments and uses of assessment in support of the aims of federal policies. The report aims to explain basic concepts related to assessment in accessible language, and it identifies commonly discussed considerations related to the use of assessments. The report provides background information that can be helpful to readers as they consider the uses of educational assessment in conjunction with policies and programs. This report accompanies CRS Report R45049, Educational Assessment and the Elementary and Secondary Education Act, by [author name scrubbed], which provides a more detailed examination of the assessment requirements under the ESEA. The following topics are addressed in this report: Purposes of Assessment: Assessments are developed and administered for different purposes: instructional, diagnostic, predictive, and evaluative. Increasingly, states are attempting to use assessments for these purposes within a balanced assessment system. A balanced assessment system often incorporates various assessment types, such as formative and summative assessments. Formative assessments are used to monitor progress toward a goal and summative assessments are used to evaluate the extent to which a goal has been achieved. Types of Tests: Educational assessments can be either norm-referenced tests (NRTs) or criterion-referenced tests (CRTs). An NRT is a standardized test that compares the performance of an individual student to the performance of a large group of students. A CRT compares the performance of an individual student to a predetermined standard or criterion. The majority of tests used in schools are CRTs. The results of CRTs, such as state assessments required by Title I-A of the ESEA, are usually reported as scaled scores or performance standards. A scaled score is a standardized score that exists along a common scale that can be used to make comparisons across students, across subgroups of students, and over time. A performance standard is a generally agreed upon definition of a certain level of performance in a content area that is expressed in terms of a cut score (e.g., basic, proficient, advanced). Technical Considerations in Assessment: The technical qualities of assessments, such as validity, reliability, and fairness, are considered before drawing conclusions about assessment results. Validity is the degree to which an assessment measures what it is supposed to measure. Reliability is a measure of the consistency of assessment results. The concept of fairness is a consideration of whether there is equity in the assessment process. Fairness is examined so that all participants in an assessment are provided the opportunity to demonstrate what they know and can do. Using Assessment Results Appropriately: Assessment is a critical component of accountability systems, such as those required under Title I-A of the ESEA, and can be the basis of many educational decisions. An assessment can be considered low-stakes or high-stakes, depending on the type of educational decisions made based on its result. For example, a low-stakes assessment may be a formative assessment that measures whether students are on-track to meet proficiency goals. On the other hand, a state high school exit exam is a high-stakes assessment if it determines whether a student will receive a diploma. When the results of assessments are used to make high-stakes decisions that affect students, teachers, districts, and states, it is especially important to have strong evidence of validity, reliability, and fairness. It is therefore important to understand the purpose of educational assessments, and the alignment between the purpose and their use, and to give consideration to the appropriateness of inferences based on assessment results. A glossary containing definitions of commonly used assessment and measurement terms is provided at the end of this report. The glossary provides additional technical information that may not be addressed within the text of the report.
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SECTION 1. SHORT TITLE.
This Act may be cited as the ``Santa Ana River Wash Plan Land
Exchange Act''.
SEC. 2. DEFINITIONS.
In this Act:
(1) Conservation district.--The term ``conservation
district'' means the San Bernardino Valley Water Conservation
District, a political subdivision of the State of California.
(2) Exchange land.--The term ``Exchange Land'' means the
approximately 310 acres of land owned by the Conservation
District generally depicted as ``SBVWCD to BLM'' on the Map.
(3) Map.--The term ``Map'' means the map titled ``Santa Ana
River Wash Land Exchange'' and dated September 03, 2015.
(4) Non-public exchange parcel.--The term ``non-public
exchange parcel'' means the approximately 59 acres of land
owned by the Conservation District generally depicted as
``SBVWCD Equalization Land'' on the Map and is to be conveyed
to the United States if necessary to equalize the fair market
values of the lands otherwise to be exchanged.
(5) Public exchange parcel.--The term ``public exchange
parcel'' means the approximately 90 acres of Federal land
administered by the Bureau of Land Management generally
depicted as ``BLM Equalization Land to SBVWCD'' on the Map and
is to be conveyed to the Conservation District if necessary to
equalize the fair market values of the lands otherwise to be
exchanged.
(6) Public land.--The term ``public land'' means the
approximately 327 acres of Federal land administered by the
Bureau of Land Management generally depicted as ``BLM Land to
SBVWCD'' on the Map.
(7) Secretary.--The term ``Secretary'' means the Secretary
of the Interior.
SEC. 3. EXCHANGE OF LAND; EQUALIZATION OF VALUE.
(a) Exchange Authorized.--Notwithstanding the land use planning
requirements of sections 202, 210, and 211 of the Federal Land Policy
and Management Act of 1976 (43 U.S.C. 1712, 1720-21), subject to valid
existing rights, and conditioned upon any equalization payment
necessary under section 206(b) of the Federal Land Policy and
Management Act of 1976 (43 U.S.C. 1716(b)), and subsection (b) of this
Act, as soon as practicable, but not later than 2 years after the date
of enactment of this Act, the Secretary shall--
(1) quitclaim to the conservation district all right,
title, and interest of the United States in and to the public
land, and any such portion of the public exchange parcel as may
be required to equalize the values of the lands exchanged; and
(2) accept from the conservation district a conveyance of
all right, title, and interest of the conservation district in
and to the exchange land, and any such portion of the non-
public exchange parcel as may be required to equalize the
values of the lands exchanged.
(b) Equalization Payment.--To the extent an equalization payment is
necessary under section 206(b) of the Federal Land Policy and
Management Act of 1976 (43 U.S.C. 1716), the amount of such
equalization payment shall first be made by way of in-kind transfer of
such portion of the public exchange parcel to the conservation
district, or transfer of such portion of the non-public exchange parcel
to the United States, as the case may be, as may be necessary to
equalize the fair market values of the exchanged properties, as such
values are indicated by the appraisal provided for under the Federal
Land Policy and Management Act of 1976 (43 U.S.C. 1716). Such appraisal
shall include an appraisal of the public exchange parcel and the non-
public exchange parcel. The fair market value of the public exchange
parcel or non-public exchange parcel, as the case may be, shall be
credited against any required equalization payment. To the extent such
credit is not sufficient to offset the entire amount of equalization
payment so indicated, any remaining amount of equalization payment
shall be treated as follows:
(1) If the equalization payment is to equalize values by
which the public land exceeds the exchange land and the
credited value of the non-public exchange parcel, conservation
district may make the equalization payment to the United
States, notwithstanding any limitation regarding the amount of
the equalization payment under section 206(b) of the Federal
Land Policy and Management Act of 1976 (43 U.S.C. 1716). In the
event conservation district opts not to make the indicated
equalization payment, the exchange shall not proceed.
(2) If the equalization payment is to equalize values by
which the exchange land exceeds the public land and the
credited value of the public exchange parcel, the Secretary
shall order the exchange without requirement of any additional
equalization payment by the United States to the conservation
district.
(c) Map and Legal Descriptions.--As soon as practicable after the
date of the enactment of this Act, the Secretary shall finalize a map
and legal descriptions of all land to be conveyed under this Act. The
Secretary may correct any minor errors in the map or in the legal
descriptions. The map and legal descriptions shall be on file and
available for public inspection in appropriate offices of the Bureau of
Land Management.
(d) Costs of Conveyance.--As a condition of conveyance, any costs
related to the conveyance under this section shall be paid by the
conservation district.
SEC. 4. APPLICABLE LAW.
(a) Act of February 20, 1909.--
(1) The Act of February 20, 1909 (35 Stat. 641), shall not
apply to the public land and any public exchange land
transferred under this Act.
(2) The exchange of lands under this section shall be
subject to continuing rights of the conservation district under
the Act of February 20, 1909 (35 Stat. 641), on the exchange
land and any exchanged portion of the non-public exchange
parcel for the continued use, maintenance, operation,
construction, or relocation of, or expansion of, groundwater
recharge facilities on the exchange land, to accommodate
groundwater recharge of the Bunker Hill Basin to the extent
that such activities are not in conflict with any Habitat
Conservation Plan or Habitat Management Plan under which such
exchange land or non-public exchange parcel may be held or
managed.
(b) FLPMA.--Except as otherwise provided in this Act, the Federal
Land Policy and Management Act of 1976 (43 U.S.C. 1701 et seq.), shall
apply to the exchange of land under this Act.
SEC. 5. CANCELLATION OF SECRETARIAL ORDER 241.
Secretarial Order 241, dated November 11, 1929 (withdrawing a
portion of the public land for an unconstructed transmission line), is
terminated and the withdrawal thereby effected is revoked.
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Santa Ana River Wash Plan Land Exchange Act This bill directs the Department of the Interior: (1) to quitclaim to the San Bernardino Valley Water Conservation District in California approximately 327 acres of identified federal land administered by the Bureau of Land Management; and (2) in exchange for such land, to accept from the Conservation District a conveyance of approximately 310 acres of its land.
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Background Direct Loan Program Education administers federal student financial aid programs, including the William D. Ford Federal Direct Loan (Direct Loan) program, through the Office of Federal Student Aid. Education issues several types of loans under the Direct Loan program, including subsidized and unsubsidized loans. Prospective borrowers apply and are approved for loans through Education, which then disburses the loan through the borrowers’ school. Upon disbursement of funds, Education assigns each loan to a contracted loan servicer responsible for communicating information to borrowers while they are in school and when they enter repayment. Borrowers receive additional information about their loans and related rights and responsibilities through their loan’s promissory note, Education’s website, and mandatory entrance and exit counseling provided by their school. When borrowers enter repayment, generally 6 months after leaving school, they make payments directly to the assigned servicer. Federal Student Loan Repayment and Postponement Options Education offers a variety of repayment plan options that can help Direct Loan borrowers avoid delinquency and default, including Standard, Graduated, Extended, and Income-Driven. Income-Driven Repayment plans can ease repayment by setting loan payment amounts as a percentage of a borrower’s income and extending the repayment period up to 25 years. Unlike Standard, Graduated, and Extended repayment plans, Income-Driven Repayment plans offer loan forgiveness at the end of the repayment term and monthly payments may be as low as $0 for some borrowers. Extending the repayment period may also result in some borrowers paying more interest over the life of the loan than they would under 10-year Standard repayment. In addition to making monthly payments more manageable and offering the potential for loan forgiveness, Income-Driven Repayment plans may also reduce the risk of default. For example, in 2015, we reported that borrowers in two such plans had substantially lower default rates than borrowers in the Standard repayment plan. Eligible borrowers may also temporarily postpone loan payments through deferment or forbearance. Several different types of deferment are currently available to borrowers, each with their own eligibility criteria. Under deferment, the interest generally does not accrue on subsidized loans, but it continues to accrue on unsubsidized loans. Eligible borrowers can also postpone or reduce loan payments through either a general or mandatory forbearance; however, interest on the loan continues to accrue in each type (see table 1). Most borrowers choose general forbearance, which, unlike most types of mandatory forbearance and deferment, can be issued over the phone with no supporting documentation. As of September 2017, $69.9 billion in outstanding Direct Loans was in general forbearance compared to $6.3 billion in mandatory forbearance, according to Education data. Cohort Default Rate Calculation Education computes CDRs each year for all schools that enroll students who receive funds through the Direct Loan program. To compute a school’s CDR, Education divides the number of student loan borrowers in a CDR cohort—those entering repayment in the same fiscal year—who have defaulted on their loans in the initial 3 years of repayment by the total number of a school’s student loan borrowers in that CDR cohort (see fig. 1). The CDR does not hold schools accountable for borrowers who default after the 3-year period. Borrowers in deferment and forbearance are considered to be “in repayment” and current on their loans for the purpose of calculating a school’s CDR, even though borrowers in these loan statuses are not expected to make any monthly payments. For the 2014 CDR cohort, the national 3-year CDR was 11.5 percent, meaning 11.5 percent of borrowers who first entered repayment in fiscal year 2014 had defaulted on one or more loans by the end of fiscal year 2016. The national CDR has changed over time, peaking at 22.4 percent for the 1990 CDR cohort and declining to a historic low of 4.5 percent for the 2003 CDR cohort (see fig. 2). Beginning with the 2009 CDR cohort, Education switched from a 2-year measurement to a 3-year measurement as required by the Higher Education Opportunity Act. According to Education officials, there are several possible explanations for the general decrease in the national CDR from the 1990 cohort to the 2003 cohort. They include: 1) Education’s efforts to provide schools with default prevention training; 2) the loss of eligibility to participate in federal student aid programs and subsequent closure of many schools with chronically high CDRs in the early 1990s; 3) enactment of legislation in 1998 that increased the length of time a loan can go unpaid before being considered in default, which decreased the likelihood that a borrower would default within the CDR period; and 4) an increase in borrowers consolidating their loans while in school, an option that was eliminated in 2006. Use of the Cohort Default Rate to Hold Schools Accountable Schools with high CDRs may lose eligibility to participate in federal student aid programs. Specifically, Education generally excludes schools from participation in the Direct Loan program if their CDR is above 40 percent for a single year and from participation in the Direct Loan and Federal Pell Grant programs if their CDRs are 30 percent or greater for 3 consecutive years. Schools potentially subject to these sanctions can pursue an appeal. The CDR is the only borrower outcome measure used to determine eligibility for participation in federal student aid programs for all schools. Schools with high CDRs that do not cross these thresholds may also be subject to additional oversight. For example, schools are certified for up to 6 years to maintain eligibility to participate in federal student aid, but schools with high CDRs may only be granted certification for 2 years, according to Education policy. Education policy also prioritizes selection of schools with high CDRs for program review. Further, schools whose CDRs are equal to or exceed 30 percent for any cohort are required to create a Default Prevention Taskforce that develops and submits a default prevention plan to Education to reduce defaults, among other things. Consequences of Student Loan Defaults When borrowers do not make payments on their federal student loans, and the loans are in default, the federal government and taxpayers are left with the costs. Borrowers also face severe financial burdens when their federal student loans go into default. For example, upon default the entire unpaid balance of the loan and any accrued interest is immediately due. The amount owed may increase due to late fees, additional interest, and costs associated with the collection process, including court costs, collection fees, and attorney’s fees. The federal government also has tools to collect on defaulted student loans. For example, under the Treasury Offset Program, the federal government can withhold certain federal or state payments to borrowers, including federal or state income tax refunds and some Social Security benefits, to collect on defaulted student loans. The federal government can generally also garnish up to 15 percent of a defaulted borrower’s disposable pay and apply those funds toward the defaulted loan. There is no limit on how long the government can attempt to collect on defaulted student loans, and student loans are more difficult to eliminate in bankruptcy proceedings than other types of consumer debt. Default Management Consultants Some schools hire default management consultants to help them reduce their CDRs. Education classifies default management consultants as “third-party servicers” and generally has the authority to oversee the services they provide to schools and their students. Schools are required to notify Education when they enter into, modify, or terminate a contract with a third-party servicer. Based on concerns that a significant number of schools had not reported information on the third-party servicers they use as required, Education issued guidance to remind schools of the requirement in January 2015. In addition, Education requires third-party servicers to submit information about the services they provide to schools. As of June 2017, Education reported that it had information on 187 third-party servicers, including 48 that reported providing default management services. Schools must ensure that their third-party servicers, including default management consultants, comply with relevant federal regulations and program requirements. Education also requires third-party servicers to submit an annual compliance audit report that covers the administration of the federal student aid related services they perform to determine compliance with applicable statutes, regulations, and policies. Some Schools’ Consultants Encourage Borrowers to Postpone Loan Payments, Which Can Lower Cohort Default Rates and Increase Borrowers’ Loan Costs Some Schools’ Consultants Encourage Borrowers to Postpone Loan Payments When Better Borrower Options May be Available To help manage their default rates, some schools hired default management consultants that encouraged borrowers with past-due student loans to postpone loan payments through forbearance, even when better borrower options may be available. The nine default management consultants we selected, which served over 1,300 schools, used various methods to contact borrowers and attempted to connect them with their loan servicer for assistance (see fig. 3). Seven of the nine participated in three-way conference calls with the borrower and the loan servicer. Further, one consultant visited past-due borrowers at their home to provide in-person loan counseling and connect them to their loan servicer. Income-Driven Repayment Plans May Be Better Options for Some Struggling Borrowers According to Education, postponing payments through forbearance may be appropriate for some borrowers who face temporary hardships. On the other hand, Income-Driven Repayment plans may be a better option for borrowers who are having difficulty repaying their loans for an extended period of time. These plans base monthly payments on income and family size, and payments may be as low as $0 for those who qualify. Income- Driven Repayment plans also feature the potential for forgiveness of remaining loan balances after 20 or 25 years of repayment. Interest generally continues to accrue on loans in both forbearance and Income-Driven Repayment. Under forbearance, accumulated interest that is not paid during the forbearance period will generally be added to the loan balance, resulting in higher monthly payments when forbearance ends. In contrast, the federal government does not charge the unpaid interest for up to 3 years for some borrowers repaying their loans on Income- Driven Repayment plans, and struggling borrowers on these plans are not generally expected to make higher monthly payments until their financial situation improves. In addition, GAO’s past work found that borrowers in Income-Driven Repayment had substantially lower rates of default than those in Standard repayment. GAO previously found that it is difficult for Education to estimate which borrowers have incomes low enough to benefit from or be eligible for Income-Driven Repayment plans because only borrowers who apply for these plans are required to submit income information to Education. Four consultants sent borrowers who were past due on their loans unsolicited emails and letters that included only a forbearance application and instructed borrowers to return the application to them instead of their loan servicer. Representatives of one consultant said that this practice was to ensure that borrowers completed the forms accurately. According to Education, the application provides an opportunity for borrowers to learn about other repayment and postponement options and the potential costs of forbearance. The application includes a statement informing borrowers about the option to request a deferment or Income-Driven Repayment plan and examples of the additional costs borrowers may incur as a result of interest that continues to accrue during forbearance. While this is correct, the application does not include details about these options; instead, it directs borrowers to Education’s website for more information. Borrowers who only receive a forbearance application may inaccurately assume that forbearance is their only or preferred option. Moreover, borrowers may miss the opportunity to learn about other, potentially more favorable repayment and postponement options from Education’s loan servicers, who are responsible for counseling borrowers and approving forbearance requests. One consultant included an inaccurate statement in letters it sent to borrowers who were past due on their loans. This consultant sent past-due borrowers forbearance applications with letters that inaccurately stated that the federal government can take away Supplemental Nutrition Assistance Program and Supplemental Security Income benefits when borrowers default on a federal student loan. Inaccurate information about the consequences of default could cause a borrower who depends on these benefits to feel undue pressure to choose forbearance, even when eligible for more favorable repayment and postponement options. Further, this consultant’s script for its representatives to use when calling borrowers who are past due on their loans referred exclusively to postponing loan payments. The script instructed representatives to tell borrowers “I am now going to conference you in with your loan servicer and they will process your forbearance over the phone.” Borrowers who hear such statements may feel undue pressure to choose forbearance. The script also instructed representatives to tell the loan servicer that the borrower they were about to speak with was requesting a forbearance. Further, representatives from this consultant were also instructed to tell borrowers to “stick to their guns” on the option they have selected before connecting the borrower with their loan servicer on a three-way call. One consultant previously offered borrowers gift cards as an incentive to put their loans in forbearance. Education has also previously identified the use of gift cards to steer borrowers toward forbearance over other available options. An internal review that Education conducted in 2012 and 2013 found that a chain of schools used gift cards to promote forbearance for purposes of lowering its CDR. According to Education’s findings, a borrower who had attended one of the schools stated that she was current in her payments but was offered a $25 gift card to apply for forbearance. Multiple borrowers included in Education’s review expressed the view that they were pressured or forced to apply for forbearance and were not made aware of other options, such as deferment or Income-Driven Repayment plans. Indeed, offering gift cards may steer borrowers toward forbearance over other available options. While the consultant that offered gift cards to borrowers to lower schools’ CDRs has discontinued this practice, and the school Education reviewed has since closed, these practices may have affected reported CDRs and could be used by other consultants and schools. Schools have a financial interest in preventing borrowers from defaulting within the first 3 years of repayment to ensure that their CDRs remain low enough to meet Education’s requirements for participating in federal student aid programs. Consultants also have a financial interest in preventing borrowers from defaulting during the 3-year CDR period. Eight of the nine consultants we selected did not have any school clients that paid them to contact borrowers who were past due on their loans outside the 3-year CDR period. In addition, four of the nine selected consultants were paid by their client schools based on the number of past-due borrowers they brought current on their loans during the CDR period, and representatives’ salaries or incentives at two of these consultants were calculated based on this as well. Some consultants have an incentive to encourage forbearance in particular as a strategy to prevent borrowers from defaulting within the 3- year CDR period in an effort to lower their client schools’ CDRs. This is because forbearance applications can be processed more quickly than other repayment or postponement options. Loan servicers can grant general forbearance based on a request from borrowers over the phone because there are no documentation requirements, whereas borrowers seeking deferment or an Income-Driven Repayment plan generally must submit a written application. According to Education officials, loan servicers are required to process Income-Driven Repayment plan applications within 15 business days. One consultant sent borrowers a letter that stated it could process a verbal forbearance in 5 minutes. The president of one school that contracted with a consultant that is paid based on the number of borrowers brought current told us that he did not care whether the consultant encouraged the use of forbearance as long as borrowers did not default within the 3-year CDR period and the consultant followed federal regulations. According to Education data, nearly 90 percent of the school’s borrowers were in forbearance during the 2013 CDR period. Consultant payment structures, as well as the difference in processing requirements between forbearance, deferment, and Income-Driven Repayment plans may create incentives for consultants to encourage forbearance over other repayment and postponement options. Postponing Loan Payments Can Increase Borrowers’ Loan Costs and Reduce the Usefulness of the Cohort Default Rate to Hold Schools Accountable While forbearance can be a useful tool for helping borrowers avoid defaulting on their loans in the short term, it increases their costs over time and reduces the usefulness of the CDR to hold schools accountable. To understand the potential financial impact of forbearance during the first 3 years of repayment (the CDR period), we calculated the cost for a borrower with $30,000 in loan debt over 10 years in the Standard repayment plan with varying lengths of time in forbearance (see fig. 4). A borrower on the 10-year Standard repayment plan who did not spend any time in forbearance would pay $39,427 over the life of the loan. Spending all 3 years of the CDR period in forbearance would cost that borrower an additional $6,742, a 17 percent increase over spending no time in forbearance. One borrower we spoke with who took out $34,700 in loans and opted for forbearance accrued about $10,000 in interest in just over 3 years, an amount that the borrower said she would be paying off “for the rest of my days.” Further, the unpaid interest that accrues while a borrower’s loans are in forbearance may result in higher future monthly payments when the forbearance period ends. Borrowers who cannot make these higher monthly payments may eventually default. If schools’ consultants continue to encourage forbearance over other options that may be more beneficial, such as Income-Driven Repayment plans, some borrowers will continue to be at risk of incurring additional costs without any long-term benefits. Education officials and student loan experts we spoke with said that forbearance is intended to be a short-term option for borrowers facing financial difficulties lasting a few months to a year, such as unexpected medical expenses. Longer periods of forbearance, while not typically advantageous to borrowers, can be an effective strategy for schools to manage their CDRs. Specifically, spending 18 months or more—at least half of the CDR period—in forbearance reduces the potential for borrowers to default within the 3-year period (see fig. 5). This is because forbearance keeps borrowers current on their loans, and borrowers would not go into default until they had made no payments for an additional 360 days after the forbearance period ended. Indeed, according to our analysis of Education’s data for the 2013 CDR period, only 1.7 percent of borrowers who were in forbearance for 18 months or more defaulted within the 3-year CDR period, compared to 8.7 percent of borrowers who were in forbearance up to 18 months during this period, and 20.3 percent of borrowers who were not in forbearance during this period. Borrowers who default outside the 3-year CDR period will not negatively affect a school’s CDR. In an online presentation, representatives from one consultant highlighted that forbearance can be a tool for reducing a school’s CDR and stated that borrowers who postponed payments defaulted less often during the CDR period than other past-due borrowers based on a case study they conducted. According to our analysis of Education’s data, the percentage of borrowers whose loans were in forbearance for 18 months or more during the 3-year CDR period increased each year during the 5 cohorts we reviewed, doubling from 10 percent in the 2009 CDR cohort to 20 percent in the 2013 CDR cohort. During the same time period, the percentage of borrowers whose loans were in forbearance for any amount of time increased from 39 percent to 68 percent (see fig. 6). Further, borrowers in forbearance for 18 months or more defaulted in the year after the 3- year CDR period more often than they did during the CDR period. Specifically, 9.4 percent of these borrowers in the 2013 CDR period defaulted in the year following the CDR period, while only 1.7 percent defaulted in the first 3 years of repayment, suggesting that long-term forbearance may have delayed, not prevented, default for these borrowers. Reducing the number of borrowers in long-term forbearance and directing them toward other repayment or postponement options could help reduce the number of borrowers that later default and save the government money. For example, Education estimates that it will not recover a certain percentage of defaulted Direct Loan dollars even if repayment resumes. Specifically, for Direct Loans issued in fiscal year 2018, Education estimates that it will not recover over 20 percent of defaulted loans. These unrecovered defaulted loan amounts total an estimated $4 billion, according to our analysis of Education’s budget data. In addition to cost savings to the government, borrowers who avoid default would not have to face severe consequences, such as damaged credit ratings that may make it difficult to obtain credit, employment, or housing. In addition, the percentage of borrowers who made progress in paying down their loans during each CDR cohort—the repayment rate— decreased from 66 percent for the 2009 cohort to 46 percent for the 2013 cohort (see sidebar). We analyzed these data for a subset of schools with the largest CDR decreases from the 2009 to 2013 cohorts and found that as these schools’ CDRs improved, other borrower outcomes worsened (see app. II for more information about these schools). Specifically, for this subset of schools, the percentage of borrowers in long-term forbearance doubled, and the percentage of borrowers who made progress in paying down their loans during the CDR period decreased by half, suggesting that these schools may be encouraging forbearance as a default management strategy (see fig. 7). Education has acknowledged that when schools encourage borrowers to postpone loan repayment until the 3-year CDR period ends, it can have a distorting effect on the CDR. Borrowers who have postponed their payments through forbearance or deferment are considered to be “in repayment” for the purpose of calculating the CDR, even though they are not expected to make any payments on their loans while in these statuses. As a result, an increased use of forbearance, particularly long- term forbearance, could result in lower CDRs, and therefore fewer schools being sanctioned due to high CDRs. In July 1999, we reported that the CDR understates the actual number of borrowers who default. We suggested that Congress may wish to consider amending the Higher Education Act of 1965 to exclude borrowers with loans in deferment or forbearance at the end of the CDR period from schools’ CDR calculation and include these borrowers in a future CDR cohort after they have resumed making payments on their loans. Education’s Office of Inspector General made a recommendation to the agency to support similar amendments to the law in December 2003. For this report, we examined the impact that removing borrowers in long- term forbearance from the CDR calculation would have on schools’ reported CDRs. For the 2013 cohort, 35 schools from our population had CDRs of 30 percent or higher. When we excluded from our population borrowers who spent 18 months or more in forbearance and did not default within the 2013 CDR period, we found 265 additional schools that would potentially have had a CDR of 30 percent or higher (see app. II for more information about these schools). Schools with CDRs at this level for 3 consecutive years may lose eligibility to offer their students Direct Loans and Pell Grants. Further, 21 of the 265 schools would potentially have had a CDR greater than 40 percent, making them potentially subject to immediately losing eligibility to offer Direct Loans. Of the 265 schools that would have potentially been subject to sanctions based on our alternative calculation, 261 received a combined $2.7 billion in Direct Loans and Pell Grants in academic year 2016-2017. The CDR is a key tool for holding schools accountable for borrower outcomes and protecting borrowers and the federal government from the costs associated with default. The substantial growth in the percentage of borrowers spending at least half of the CDR period in forbearance reduces the CDR’s usefulness to hold schools accountable. This presents risks to the federal government and taxpayers, who are responsible for the costs associated with high rates of default, and to borrowers who may benefit from other repayment or postponement options. Since the way the CDR is calculated is specified in federal law, any changes to its calculation would require legislation to be enacted amending the law. Strengthening the usefulness of the CDR in holding schools accountable, such as by revising the CDR calculation or using other accountability measures to complement or replace the CDR, could help further protect both borrowers and the billions of dollars of federal student aid funds the government distributes each year. Actions Needed to Improve Education’s Oversight of Default Management Strategies and Public Reporting of CDR Sanctions Requirements Needed to Oversee How Schools and their Consultants Communicate Loan Options to Borrowers in Repayment Education’s ability to oversee the strategies that schools and their consultants use to manage CDRs is limited because there are no requirements governing the interactions that schools and their consultants have with borrowers once they leave school. Education requires that schools provide certain information to borrowers about their student loans when they begin and finish school but does not oversee schools’ or their consultants’ communications with borrowers after they leave school. According to Education, the Higher Education Act does not contain explicit provisions that would allow it to impose requirements governing communications that schools and their consultants may have with borrowers who have left school. As noted earlier, we found that some default management consultants, in seeking to help schools lower their CDRs, provided borrowers inaccurate or incomplete information or offered gift cards to encourage forbearance over other repayment or postponement options that may be more beneficial to the borrower. According to Education officials, borrowers are protected from such practices because loan servicers are required to inform borrowers of all available repayment options upon processing a forbearance. Education officials also said that performance-based contracts provide loan servicers an incentive to keep borrowers in repayment. However, a Consumer Financial Protection Bureau report found that borrowers may not be informed about the availability of other repayment plans and instead may be encouraged by their loan servicers to postpone payments through forbearance, which may not be in borrowers’ best interests. Further, some consultant practices we identified, such as instructing borrowers to return the forbearance application to the consultant and remaining on three-way calls with the loan servicer and the borrower, may undermine the role of the loan servicer. Education officials also said that borrowers should be aware of their repayment options because schools are required to inform borrowers of these options through exit counseling when they leave school. However, in 2015 we found gaps in borrowers’ awareness of repayment options. Education’s Office of Federal Student Aid has a strategic goal to help protect borrowers and families from unfair, deceptive, or fraudulent practices in the student loan marketplace. Without clear requirements regarding the information that schools and their consultants provide to borrowers after leaving school, Education cannot effectively oversee schools’ default management strategies. Further, without such requirements, Education cannot ensure that schools and consultants are providing borrowers with the information they need to make informed decisions to manage their loan costs and avoid future default. Education’s Public Reporting of Cohort Default Rate Sanctions Lacks Transparency The limited information Education reports annually to the public about schools that face sanctions for high CDRs overstates the extent to which schools are held accountable for their default rates. Specifically, Education does not report the number of schools that successfully appealed CDR sanctions or the number of schools ultimately sanctioned. For example, with the release of the 2013 CDRs in 2016, Education publicly reported that 10 schools were subject to sanctions, but did not publicly report that 9 schools appealed their sanctions and 8 were successful in their appeals and were thereby not sanctioned (see fig. 8). Office of Management and Budget guidelines call for federal agencies to ensure and maximize the usefulness of information they disseminate to the public. Federal internal control standards call for effective communication with external stakeholders. The number of schools subject to sanction has declined over time—from a high of 1,028 schools in fiscal year 1994 to 10 schools in fiscal year 2017 (see app. III). In addition, unpublished sanction data reveal that a small fraction of borrowers who defaulted on student loans attended schools that have been sanctioned. For example, two schools were ultimately sanctioned in 2016 and accounted for 67 of the nearly 590,000 borrowers whose defaulted loans were included in schools’ 2013 CDRs. By reporting only the number of schools subject to sanction and not those actually sanctioned, Education’s data make it difficult for Congress and the public to assess the CDR’s usefulness in holding schools accountable. Conclusions Preventing student loan defaults is an important goal, given the serious financial risks default poses to borrowers, taxpayers, and the federal government. The CDR, which is specified in federal law, is intended to hold schools accountable when significant numbers of their borrowers default on their student loans during the first 3 years of repayment. However, the metric in its current form creates incentives for schools that may result in unintended consequences for some borrowers. Schools have an interest in preventing their students from defaulting during the CDR period to ensure that they can continue to participate in federal student aid programs, and some schools contract with private consultants to work with borrowers who have fallen behind on their loan payments. Although some of these consultants have recently changed their communications to borrowers, others continue to provide inaccurate or incomplete information to encourage past-due borrowers to choose forbearance over other repayment options. While postponing payments through forbearance may help struggling borrowers avoid default in the near term, it increases borrowers’ ultimate repayment costs and does not necessarily put borrowers on a path to repaying their loans. Moreover, including borrowers who spend 18 months or more in forbearance in the CDR calculation reduces the CDR’s ability to hold schools accountable for high default rates since long periods of forbearance appear to delay—not prevent—default for some borrowers. Absent a statutory change, schools and their consultants seeking to keep CDRs below allowable thresholds will continue to have an incentive to promote forbearance over other solutions that could be more beneficial to borrowers and less costly to the federal government and its taxpayers. Education plays an important role in overseeing schools and their default management consultants to ensure that they are held accountable and student loan borrowers are protected. However, because Education asserts that it lacks explicit statutory authority to establish requirements regarding the information that schools and consultants provide to borrowers after they leave school, Education does not hold them accountable for providing accurate and complete information about repayment and postponement options. In addition, public information on CDR sanctions is important for assessing the usefulness of the CDR to hold schools accountable. Yet, Education’s practice of reporting the number of schools potentially subject to sanction without reporting the number of schools ultimately sanctioned following the appeals process limits transparency about the CDR’s usefulness for Congress and the public. Matters for Congressional Consideration We are making the following two matters for congressional consideration: Congress should consider strengthening schools’ accountability for student loan defaults, for example, by 1) revising the cohort default rate (CDR) calculation to account for the effect of borrowers spending long periods of time in forbearance during the 3-year CDR period, 2) specifying additional accountability measures to complement the CDR, for example, a repayment rate, or 3) replacing the CDR with a different accountability measure. (Matter 1) Congress should consider requiring that schools and default management consultants that choose to contact borrowers about their federal student loan repayment and postponement options after they leave school present them with accurate and complete information. (Matter 2) Recommendation for Executive Action The Chief Operating Officer of the Office of Federal Student Aid should increase the transparency of the data Education publicly reports on school sanctions by adding information on the number of schools that are annually sanctioned and the frequency and success rate of appeals. (Recommendation 1) Agency Comments and Our Evaluation We provided a draft of this product to the Department of Education for review and comment. Education’s comments are reproduced in appendix IV. We also provided relevant report sections to the Consumer Financial Protection Bureau and the nine default management consultants for technical comment. The Consumer Financial Protection Bureau provided technical comments, which we incorporated as appropriate. Education agreed with our recommendation to increase transparency of school sanction data. In its response, Education stated that it makes a significant amount of CDR data publicly available on its website. For example, Education posts CDRs and underlying data for each school for which the rates are calculated and lists schools subject to sanctions as a result of their CDRs. Education also stated that beginning with the release of fiscal year 2015 CDRs, it would provide additional information on its website indicating whether schools subject to sanctions have submitted appeals and the disposition of such appeals. As we recommended in our draft report, Education should also publicly report the number of schools ultimately sanctioned each year. Our draft report included a recommendation for Education to seek legislation to strengthen schools’ accountability for student loan defaults. Education disagreed with this recommendation, asserting that from a separation of powers perspective, it has a responsibility to implement, and not draft, statutes. Education stated that if GAO believes such legislation is needed, it would be best addressed as a matter to Congress. We agree that, as an executive agency, Education is responsible for implementing laws as enacted. However, it is important to note that the President has the “undisputed authority” to recommend legislation to the Congress and the Office of Management and Budget within the Executive Office of the President has outlined procedures for executive branch agencies to submit proposed legislation. Indeed, in making this recommendation, we intended that Education seek legislation through any of the practices used by executive branch agencies in communicating with Congress. In a recent example, both the President’s Budget Request and Education’s Congressional Budget Justification for Fiscal Year 2019 seek a change in the statutory allocation formula for the Federal Work-Study program to focus funds on institutions enrolling high numbers of Pell Grant recipients. Nevertheless, in light of Education’s disagreement with our draft recommendation, and the importance of strengthening schools’ accountability for student loan defaults, we have converted the recommendation into a Matter for Congressional Consideration. Our draft report also included a recommendation for Education to require that schools and default management consultants that contact borrowers about repayment and postponement options after they leave school present accurate and complete information. Education agreed that institutions should provide accurate and complete information about all repayment options. It also stated that institutions should allow the borrower’s stated preference for any given repayment option to guide the ultimate direction of the conversation, and that the information provided should be free from financial incentive. However, Education asserted that it “cannot impose requirements on schools and their consultants without further authority.” Education clarified in a follow-up communication that the Higher Education Act does not contain “explicit provisions” under which it could require schools (and their consultants) to include specific content in the information that they choose to provide to borrowers after the borrowers leave school, but did not address whether there was any other authority under which it could take action in this area. Instead, Education noted that it could provide information to schools and their consultants on best practices in this area. We continue to believe that schools and their consultants should be required to ensure that any information they present to borrowers about repayment and postponement options after they leave school is accurate and complete. As we stated in our draft report, without clear requirements in this area, Education cannot ensure that schools and consultants provide borrowers with the information they need to make informed decisions to manage their loan costs and avoid future default. In light of this, and Education’s response to our draft recommendation, we have converted our recommendation into a Matter for Congressional Consideration. In its comments, Education inaccurately asserted that our findings should be viewed in light of a limited scope. As stated in the draft report, we analyzed trends in forbearance, repayment, and default using national data from Education for the five most recent CDR cohorts for a population of over 4,000 schools. To determine how schools work with borrowers to manage their CDRs, we reviewed the practices of a nongeneralizable sample of nine default management consultants that served over 1,300 schools. These schools accounted for over 1.5 million borrowers in the 2013 CDR cohort. The five consultants that provided inaccurate or incomplete information about forbearance or offered gift cards served about 800 schools, which accounted for over 875,000 borrowers in the 2013 CDR cohort. For each of the consultants, as stated in our draft report, we reviewed documentation including training materials, internal policies and procedures, and examples of correspondence they send to borrowers. Finally, Education inaccurately asserted that we based our findings on a small sample of interviews with 11 borrowers and officials from 3 schools and 4 consultants. We conducted these interviews to better understand borrowers’ loan experiences and the strategies that schools and their consultants use to manage the CDR, and the illustrative interview examples we include in our report do not form the basis of any of our findings or recommendations. In addition, Education commented that the report did not consider the extent to which borrowers enter Income-Driven Repayment plans during the 3-year CDR period or the substantial growth in borrowers participating in these plans over the past several years. Education suggested that such data would be important to consider in determining whether there has been an overreliance on forbearance in the past, and if so, whether any problems in this area are being remedied by the availability of Income- Driven Repayment plans. We have incorporated additional information regarding the increase in borrowers participating in Income-Driven Repayment plans in response. As Education noted in its comments, our draft report acknowledged that increased participation in these plans may have been a factor in the observed increase in overall rates of forbearance since it is common for loan servicers to place borrowers in administrative forbearance while processing applications for Income- Driven Repayment plans. However, as explained in our draft report, since administrative forbearance for this purpose should be for 60 days or less it would not explain the twofold increase in the percentage of borrowers in forbearance for 18 months or longer from CDR cohort years 2009 to 2013. Education also stated that while our report included an example of the additional interest cost incurred by a borrower using forbearance, it did not discuss the potential additional interest costs associated with other repayment options, such as Income-Driven Repayment plans. Education noted that these options could be more costly than forbearance in some instances and all options have consequences for borrowers. We acknowledged in our draft report that interest continues to accrue on loans in Income-Driven Repayment and that the monthly payments of some borrowers on these plans may not be high enough to pay down any principal during the first 3 years of repayment. However, as stated in our draft report, Income-Driven Repayment plans, unlike forbearance, offer borrowers the potential for loan forgiveness after 20 or 25 years of repayment. We have incorporated additional details about the potential costs of these and other repayment plans based on Education’s comments. The potential consequences that Education highlighted in its comments further illustrate the importance of ensuring that borrowers receive accurate and complete information to help them make informed decisions to manage their loan costs and avoid default. In response to our findings regarding communication practices of some default management consultants, Education stated that the draft report did not acknowledge that the forbearance application that selected consultants send to borrowers provides an opportunity for borrowers to learn about other repayment options and the potential costs of forbearance. We have incorporated additional information regarding the information included on the application. Although the form mentions deferment and Income-Driven Repayment, it does not describe these options; instead, it directs borrowers to Education’s website for more information. Therefore, we maintain that borrowers who only receive a forbearance application may inaccurately assume that forbearance is the only or preferred option. Further, Education commented that the draft report did not examine what effect, if any, consultants may have had in encouraging borrowers to seek consecutive forbearances since borrowers can remain in forbearance for no longer than 12 months before they have to reapply. Education also suggested that comparing the use of forbearance at schools that hired consultants that encouraged borrowers to postpone payments with those that did not would have provided a better understanding of the potential impact of such practices. While these topics were beyond the scope of our objectives for this report, Education may wish to explore them in support of its goals to protect borrowers and mitigate risks in the federal student aid programs. We are sending copies of this report to the appropriate congressional committees, the Secretary of the Department of Education, the Director of the Consumer Financial Protection Bureau, and other interested parties. In addition, the report will be available at no charge on GAO’s website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (617) 788-0534 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix V. Appendix I: Objectives, Scope, and Methodology This appendix discusses in detail our methodology for addressing (1) how schools work with borrowers to manage schools’ cohort default rates (CDR), and how these strategies affect borrowers and schools’ accountability for defaults; and (2) the extent to which the Department of Education (Education) oversees the strategies schools and their default management consultants use to manage schools’ CDRs and informs the public about its efforts to hold schools accountable. We conducted this performance audit from May 2016 to April 2018, in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Default Management Consultants – Interviews and Document Requests To determine how schools work with borrowers to manage their cohort default rates, we examined the practices of companies that schools contract with to help them lower their CDRs. Specifically, we selected a nongeneralizable sample of 9 of the 48 default management consultants on file with Education as of December 2016. To select the 9 consultants, we obtained lists of client schools from Education and reviewed websites for each of the 48 consultants to determine the services each company offered. Some companies offered an array of services to schools, while others focused exclusively on default management. We selected our nongeneralizable sample of 9 consultants by prioritizing those with large numbers of client schools, those with a specific focus on default management, or those with unique default management practices based on our review of their websites. These 9 companies served over 1,300 schools. These schools accounted for over 1.5 million borrowers in the 2013 CDR cohort. We reviewed documentation from the 9 consultants on the strategies they use to reduce borrower defaults during the CDR period; their organizational structure; products and services offered; current client schools; internal training materials; contracts and agreements with schools; methods of compensation for employees responsible for outreach to student loan borrowers; internal policies and procedures; and examples of correspondence (e.g., emails, letters, and repayment applications) with borrowers. Based on the information received from these consultants, we cannot determine how many borrowers were contacted or received correspondence from these companies. However, the consultants we spoke to generally indicated that the materials they provided to us were used for all or most of their school clients. To learn more about the strategies schools and default management consultants use to help schools manage their CDRs, we conducted interviews with managers at 4 of the 9 consultants. We also interviewed employees responsible for working with student loan borrowers to discuss the procedures they use to contact or counsel borrowers on loan repayment options. We selected these 4 consultants by prioritizing those that provided default management services to large numbers of client schools, or had unique default management practices based on website reviews. Schools and Borrowers – Interviews and Document Requests To determine how schools work with borrowers to manage schools’ CDRs we selected a nongeneralizable sample of 12 schools for review based on data from Education that suggested that they had successfully lowered their CDRs from the 2009 through 2013 cohorts through forbearance. This sample informed our selection of borrowers. We emailed borrowers who attended these 12 schools and requested interviews with them, and selected 3 of the 12 schools for interviews with school officials and document requests. To select the 12 schools, we analyzed CDRs for the 2009-2013 cohorts from Education’s Cohort Default Rate Database; 3-year forbearance rates for fiscal years 2009-2012 from Education’s Annual Risk Assessment data; and 3-year repayment rates for fiscal years 2009-2014 from Education’s College Scorecard data. We selected the 12 schools from the population that had a CDR calculated for 2013. We excluded schools whose 2013 CDR was calculated using a different formula that Education uses for schools with fewer than 30 borrowers entering repayment in a particular cohort. To be considered for selection, schools had to have had CDRs of 25 percent or above for cohort years 2009-2013 and also be in the following: 1) top 20 percent of year-to-year decreases in CDR; 2) top 20 percent of year-to-year increases in 3-year forbearance rates; or 3) top 20 percent of 3-year forbearances that resulted in default after the 3- year CDR period ended. This analysis resulted in a list of 312 schools, which we randomized within strata based on combinations of institutional control (public, nonprofit, and for-profit), maximum length of degree programs offered (less than 4-year or 4-year and above), and school size (fewer than 1,000 borrowers entering repayment in a given fiscal year and 1,000 or more borrowers entering repayment in a given fiscal year). We removed schools that had fewer than 1,000 borrowers entering repayment in a given fiscal year to mitigate the wide variations in forbearance rates and CDRs that may occur at smaller schools. Finally, we judgmentally selected a total of 12 schools from across the remaining strata, choosing the schools from each stratum in the randomized order. We conducted interviews with officials at 3 of these schools (public, nonprofit, and for-profit) and reviewed documentation on the strategies they use to reduce borrower defaults during the CDR period. To examine how default management strategies may affect borrowers, we obtained record-level data from Education’s National Student Loan Data System (NSLDS) related to the 12 schools we focused on in our review, including data on all loans that entered repayment from fiscal years 2011-2014 and contact information for the borrowers that took out these loans. We weighted the sample toward borrowers whose loans were in deferment, forbearance, or were consolidated during the CDR period or defaulted after the CDR period. We then randomly selected about 6,500 of these borrowers and emailed them a request to discuss their student loan repayment experience with us. We received replies from 49 borrowers and interviewed 11 of them that we thought may have been contacted by their school or a default management consultant. We generally selected borrowers for interviews in the order they replied to us. We also prioritized borrowers whose email responses included student loan experiences that were relevant to our objectives, such as receiving communication from their school about student loan repayment and postponement options. We were not able to interview borrowers who did not provide phone numbers or who provided phone numbers but did not respond to our calls. Data Analysis To determine how schools’ default management strategies affect borrowers and the CDR, we analyzed school-level data from Education on borrowers with loans that were included in schools’ official CDR calculations for the 2009 through 2013 cohorts. We selected the 2009 cohort because it was the first cohort held accountable for the 3-year CDR. The 2013 cohort was the most recent CDR available at the time of our analysis. We identified the year borrowers entered repayment using the same logic that Education does for calculating the CDR. A borrower with multiple loans from the same school whose loans enter repayment during the same cohort fiscal year was included in the formula only once for that cohort fiscal year. We excluded schools whose CDR was calculated using a different formula that Education uses for schools with fewer than 30 borrowers entering repayment in a particular cohort. For the population of 4,138 schools that had a CDR calculated for 2013 and a subset of 364 schools that had CDR decreases of 10 or more percentage points from the 2009 to 2013 cohorts, we analyzed cohort default rates (cohorts 2009-2013); the percentage of borrowers who were in forbearance for any length of time during their first 3 years in repayment (cohorts 2009-2013); the percentage of borrowers who were in forbearance for 18 or more months during their first 3 years in repayment (cohorts 2009-2013); the percentage of borrowers who paid down at least $1 of the principal loan amount during the first 3 years of repayment (cohorts 2009-2013); and the percentage of borrowers who were in forbearance for varying lengths of time during their first 3 years in repayment and then defaulted in the year following the CDR period (2013 cohort). We also calculated an alternative CDR for each of these 4,138 schools, in which we excluded borrowers who spent 18 or more months in forbearance during the 2013 cohort and did not default during the CDR period from their school’s CDR calculation. We analyzed how many schools would have potentially exceeded the 30 percent and 40 percent CDR thresholds for the 2013 cohort and calculated the total amount of Direct Loans and Pell Grants that these schools received in academic year 2016-2017. We did not estimate the number of schools that could become ineligible to participate in federal loan programs under this alternative methodology because such schools would be entitled to an appeal and sanctionable thresholds may change with the advent of new methodologies of calculating the CDR. Further, schools may change their default management strategies in response to an alternative CDR. In addition, we assessed the CDR against government standards for internal control for identifying and responding to risks and goals and objectives in the Office of Federal Student Aid’s Fiscal Year 2015-2019 Strategic Plan. Additionally, we analyzed data from Education’s Integrated Postsecondary Education Data System on sector and program length for these 4,138 schools, as well as for certain subsets of these schools (for more information, see app. II). To assess the reliability of the data elements we analyzed for our study, we (1) performed electronic testing of required data elements; (2) reviewed existing information about the data and the systems that produced them; and (3) interviewed agency officials knowledgeable about the data. We determined that the data were sufficiently reliable for the purposes of this report. Review of Education Documents and Relevant Federal Laws and Regulations To determine the extent to which Education oversees the strategies schools and their default management consultants use to manage schools’ CDRs and informs the public about its efforts to hold schools accountable, we reviewed relevant federal laws, regulations, guidance, and internal documentation from Education on how it oversees schools and default management consultants practices as they relate to the CDR and how it implements and reports CDR sanctions. To better understand how CDRs are used in Education’s oversight of schools, we reviewed relevant regulations and interviewed Education officials responsible for administering program review, recertification for eligibility for federal student aid, and oversight of the CDR including default prevention. We assessed Education’s oversight activities against goals and objectives in the Office of Federal Student Aid’s Fiscal Year 2015-2019 Strategic Plan, government standards for internal control for communicating with stakeholders, and Office of Management and Budget guidelines for disseminating public information. Interviews with Experts and Consumer Advocates To help us understand how the default management strategies used by schools and default management consultants affect borrowers and reported CDRs, we interviewed individuals with expertise on federal student loans. Specifically, we interviewed experts from federal agencies including the Consumer Financial Protection Bureau and Education’s Office of Inspector General. We also interviewed experts from the Association of Community College Trustees, the Career Education Colleges and Universities, the Center for American Progress, The Institute for College Access & Success, Harvard’s Project on Predatory Student Lending, the Illinois Attorney General Office, and Young Invincibles. Appendix II: Sector and Program Length of Schools with Selected Characteristics Appendix II: Sector and Program Length of Schools with Selected Characteristics Schools whose cohort default rates (CDR) were calculated using a different formula that Education uses for schools with fewer than 30 borrowers entering repayment in a particular cohort were excluded from this analysis. Schools were included in this analysis if their CDR decreased by 10 percentage points or more from the 2009 to 2013 CDR cohorts. Foreign schools include schools that are eligible to participate in the Direct Loan program and are located outside the United States. Appendix III: Number of Schools Subject to Department of Education Cohort Default Rate Sanctions, 1991-2017 Appendix IV: Comments from the U.S. Department of Education Appendix V: GAO Contact and Staff Acknowledgments GAO Contact Staff Acknowledgments In addition to the contact named above, Kris Nguyen and Debra Prescott (Assistant Directors), Brian Schwartz (Analyst-in-Charge), Alex Galuten, Raheem Hanifa, John Karikari, Kirsten Lauber, Jeffrey G. Miller, John Mingus, Jeff Tessin, Khristi Wilkins, and Stephen Yoder made key contributions to this report. Additional assistance was provided by Susan Aschoff, Rachel Beers, James Bennett, Deborah Bland, Jason Bromberg, Alicia Cackley, Marcia Carlsen, David Chrisinger, William Colvin, Sheila McCoy, Arthur Merriam, Jessica Orr, Ellen Phelps Ranen, Phillip Reiff, Barbara Steel-Lowney, and Christopher Zbrozek.
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As of September 2017, $149 billion of nearly $1.4 trillion in outstanding federal student loan debt was in default. GAO was asked to examine schools' strategies to prevent students from defaulting and Education's oversight of these efforts. This report examines (1) how schools work with borrowers to manage default rates and how these strategies affect borrowers and schools' accountability for defaults; and (2) the extent to which Education oversees the strategies schools and their default management consultants use to manage schools' default rates. GAO analyzed Education data on student loans that entered repayment from fiscal years 2009–2013, the most recent data at the time of this analysis; reviewed documentation from Education and a nongeneralizable sample of nine default management consultants selected based on the number of schools served (about 1,300 schools as of March 2017); reviewed relevant federal laws and regulations; and interviewed Education officials. According to federal law, schools may lose their ability to participate in federal student aid programs if a significant percentage of their borrowers default on their student loans within the first 3 years of repayment. To manage these 3-year default rates, some schools hired consultants that encouraged borrowers with past-due payments to put their loans in forbearance, an option that allows borrowers to temporarily postpone payments. While forbearance can help borrowers avoid default in the short-term, it increases their costs over time and reduces the usefulness of the 3-year default rate as a tool to hold schools accountable. At five of the nine selected default management consultants (that served about 800 of 1,300 schools), GAO identified examples when forbearance was encouraged over other potentially more beneficial options for helping borrowers avoid default, such as repayment plans that base monthly payments on income. Based on a review of consultants' communications, GAO found four of these consultants provided inaccurate or incomplete information to borrowers about their repayment options in some instances. A typical borrower with $30,000 in loans who spends the first 3 years of repayment in forbearance would pay an additional $6,742 in interest, a 17 percent increase. GAO's analysis of Department of Education (Education) data found that 68 percent of borrowers who began repaying their loans in 2013 had loans in forbearance for some portion of the first 3 years, including 20 percent that had loans in forbearance for 18 months or more (see figure). Borrowers in long-term forbearance defaulted more often in the fourth year of repayment, when schools are not accountable for defaults, suggesting it may have delayed—not prevented—default. Statutory changes to strengthen schools' accountability for defaults could help further protect borrowers and taxpayers. Education's ability to oversee the strategies that schools and their consultants use to manage their default rates is limited. Education's strategic plan calls for protecting borrowers from unfair and deceptive practices; however, Education states it does not have explicit statutory authority to require that the information schools or their consultants provide to borrowers after they leave school regarding loan repayment and postponement be accurate and complete. As a result, schools and consultants may not always provide accurate and complete information to borrowers. Further, Education does not report the number of schools sanctioned for high default rates, which limits transparency about the 3-year default rate's usefulness for Congress and the public.
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Petitioners brought suit in admiralty in the District Court for Southern New York, to recover damages for injury to a shipment of onions on respondent's steamship Vallescura from Spain to New York City. The onions, receipt of which in apparent good condition was acknowledged by the bill of lading, were delivered in New York damaged by decay. The vessel pleaded as a defense an exception, in the bill of lading, from liability for damage by 'decay' and 'perils of the seas,' and that the damage 'was not due to any cause or event arising through any negligence on the part of the vessel, her master, owner or agents.' On the trial there was evidence that the decay was caused by improper ventilation of the cargo during the voyage, and that the failure to ventilate was due in part to closing of the hatches and ventilators made necessary by heavy weather, and in part to the neglect of the master and crew in failing to keep them open at night in fair weather. The District Court entered an interlocutory decree, adjudging that the libelants recover the amount of the damage sustained by them, caused by closing the hatches and ventilators during good weather, and appointing a special commissioner to ascertain and compute the amount of damage. 43 F.(2d) 247. The commissioner, after hearing evidence, found that it was impossible to ascertain how much of the damage was due to want of ventilation in fair weather and how much to want of it in bad. But, after comparing the periods during which the ventilators were negligently closed with those during which they were open or properly closed,1 he stated: 'It would seem, therefore, that the greater part of the damage must have been due to improper shutting of the hatches and ventilators.' He concluded that as the vessel had failed to show what part of the damage was due to bad weather, the petitioner should recover the full amount of the damage. The District Court, accepting the report of the commissioner as presumably correct, as required by Admiralty Rule 43 1/2, 286 U.S. 572 (28 USCA § 723), found no basis for rejecting its conclusions and gave judgment to libelants accordingly. The Court of Appeals for the Second Circuit, reversed, 70 F.(2d) 261, holding that as the damage was within the clause of the bill of lading exempting the vessel from liability for decay, the burden was on petitioner to show what part of the damage was taken out of the exception, because due to respondent's negligence. Although certiorari was granted, 293 U.S. 539, 55 S.Ct. 83, 79 L.Ed. —-, to review this ruling of the court below, most of respondent's argument before us was given over to the contention that the record discloses no finding, by either court below, that any part of the damage was caused by respondent's negligence. The decision of the District Court was made before the promulgation of rule 46 1/2 in Admiralty, 281 U.S. 773 (28 USCA § 723), requiring the trial court to make special findings of fact. No formal findings were made, but in directing entry of the interlocutory decree, and after reviewing the evidence and commenting on the fact that the hatches and ventilators had been kept closed at night in fair weather, a circumstance which the trial judge declared established negligence in the care and custody of the cargo, he stated: 'Thus it appears that this notoriously perishable cargo of Spanish Onions (The Buckleigh (C.C.A.) 31 F.(2d) 241, 1929 A.M.C. 449, 450) was deprived of all ventilation during the nighttime, regardless of the state of the weather. Such treatment was obviously ruinous and must have caused substantial damage.' We have no doubt that this was intended to be a finding that negligence in failing to provide properventilation was the cause of some of the damage and that, as such, it was adequately supported by evidence. The commissioner and the court below assumed it to be such and we so accept it. The failure to ventilate the cargo was not a 'fault or error in navigation or management' of the vessel, from the consequences of which it may be relieved by section 3 of the Harter Act of February 13, 1893, § 3, c. 105, 27 Stat. 445; section 192, tit. 46, U.S.C. (46 USCA § 192). The management was of the cargo, within the meaning of sections 1 and 2 of the act (46 USCA §§ 190, 191), and not of the vessel, to which section 3 relates. The Germanic, 196 U.S. 589, 597, 25 S.Ct. 317, 49 L.Ed. 610; Knott v. Botony Mills, 179 U.S. 69, 73, 74, 21 S.Ct. 30, 45 L.Ed. 90; The Jean Bart, 197 F. 1002, 1006 (D.C.). Hence, we pass to the decisive question whether, in view of the presumptions which aid the shipper in establishing the vessel's liability under a contract for carriage by sea, it was necessary for the petitioners to offer further evidence in order to recover the damage which they have suffered. If, in the state of the proof which the record exhibits, recovery depends upon their ability to produce evidence which would enable the court to separate the amount of damage attributable to respondent's negligence from that attributable to the unavoidable failure to ventilate in bad weather, they have failed to do so and judgment must go against them. But if respondent can relieve itself from liability only by showing what part of the damage was due to sea peril, in that bad weather prevented ventilation, judgment must go against it for the full damages. In general the burden rests upon the carrier of goods by sea to bring himself within any exception relieving him from the liability which the law otherwise imposes on him. This is true at common law with respect to the exceptions which the law itself annexed to his under taking, such as his immunity from liability for act of God or the public enemy. See Carver, Carriage by Sea (7th Ed.) c. I. The rule applies equally with respect to other exceptions for which the law permits him to stipulate. Clark v. Barnwell, 12 How. 272, 280, 13 L.Ed. 985; Rich v. Lambert, 12 How. 347, 357, 13 L.Ed. 1017; The Niagara v. Cordes, 21 How. 7, 29, 16 L.Ed. 41; The Maggie Hammond, 9 Wall. 435, 459, 19 L.Ed. 772; The Edwin I. Morrison, 153 U.S. 199, 211, 14 S.Ct. 823, 38 L.Ed. 688; The Folmina, 212 U.S. 354, 361, 29 S.Ct. 363, 53 L.Ed. 546, 15 Ann.Cas. 748. The reason for the rule is apparent. He is a bailee intrusted with the shipper's goods, with respect to the care and safe delivery of which the law imposes upon him an extraordinary duty. Discharge of the duty is peculiarly within his control. All the facts and circumstances upon which he may rely to relieve him of that duty are peculiarly within his knowledge and usually unknown to the shipper. In consequence, the law casts upon him the burden of the loss which he cannot explain or, explaining, bring within the exceptional case in which he is relieved from liability. See Bank of Kentucky v. Adams Express Co., 93 U.S. 174, 184, 23 L.Ed. 872; Chicago & Eastern Illinois R. Co. v. Collins Produce Co., 249 U.S. 186, 192, 193, 39 S.Ct. 189, 63 L.Ed. 552; New York C. Railroad Co. v. Lockwood, 17 Wall. 357, 379, 380, 21 L.Ed. 627. To such exceptions the law itself annexes a condition that they shall relieve the carrier from liability for loss from an excepted cause only if in the course of the voyage he has used due care to guard against it. Liverpool & Great Western Steam Co. v. Phenix Insurance Co., 129 U.S. 397, 438, 9 S.Ct. 469, 32 L.Ed. 788; Compania De Navigacion la Flecha v. Brauer, 168 U.S. 104, 117, 18 S.Ct. 12, 42 L.Ed. 398. This rule is reconized and continued in the first section of the Harter Act (46 USCA § 190), which makes it unlawful to insert any clause in a bill of lading whereby the carrier shall be relieved of liability for negligence. It is commonly said that when the carrier succeeds in establishing that the injury is from an excepted cause, the burden is then on the shipper to show that that cause would not have produced the injury but for the carrier's negligence in failing to guard against it. Such we may assume the rule to be, at least to the extent of requiring the shipper to give evidence of negligence where the carrier has sustained the burden of showing that the immediate cause of the loss or injury is an excepted peril. Clark v. Barnwell, 12 How. 272, 280, 13 L.Ed. 985; Memphis & C. Railroad Co. v. Reeves, 10 Wall. 176, 189, 190, 19 L.Ed. 909; Western Transportation Co. v. Downer, 11 Wall. 129, 134, 20 L.Ed. 160; The Victory & The Plymothian, 168 U.S. 410, 423, 18 S.Ct. 149, 42 L.Ed. 519; Cau v. Texas & Pacific Ry. Co., 194 U.S. 427, 432, 24 S.Ct. 663, 48 L.Ed. 1053; The Malcolm Baxter, 277 U.S. 323, 334, 48 S.Ct. 516, 72 L.Ed. 901. But this is plainly not the case where the efficient cause of the injury for which the carrier is prima facie liable is not shown to be an excepted peril. The Mohler, 21 Wall. 230, 234, 22 L.Ed. 485; The Edwin I. Morrison, supra, 153 U.S. 211, 14 S.Ct. 823, 38 L.Ed. 688. If he delivers a cargo damaged by causes unknown or unexplained, which had been received in good condition, he is subject to the rule applicable to all bailees, that such evidence makes out a prima facie case of liability. It is sufficient, if the carrier fails to show that the damage is from an excepted cause, to cast on him the further burden of showing that the damage is not due to failure properly to stow or care for the cargo during the voyage. Rich v. Lambert, supra, 12 How. 357, 13 L.Ed. 1017; The Maggie Hammond, supra, 9 Wall. 459, 19 L.Ed. 772; The Folmina, 212 U.S. 354, 361, 29 S.Ct. 363, 53 L.Ed. 546, 15 Ann.Cas. 748; Chesapeake & Ohio R.R. Co. v. A. F. Thompson Manufacturing Co., 270 U.S. 416, 422, 423, 46 S.Ct. 318, 70 L.Ed. 659. Here the stipulation was for exemption from liability for a particular kind of injury, decay. But the decay of a perishable cargo is not a cause; it is an effect. It may be the result of a number of causes, for some of which, such as the inherent defects of the cargo, or, under the contract, sea peril making it impossible to ventilate properly, the carrier is not liable. For others, such as negligent stowage, or failure to care for the cargo properly during the voyage, he is liable. The stipulation thus did not add to the causes of injury from which the carrier court claim immunity. It could not relieve him from liability for want of diligence in the stowage or care of the cargo. It is unnecessary for us to consider whether the effect of the clause is to relieve the carrier from the necessity, in the first instance, of offering evidence of due diligence in caring for a cargo received in good condition, and delivered in a state of decay. See The Hindoustan, 67 F. 794, 795 (C.C.A.2d); The Patria, 132 F. 971, 972 (C.C.A.2d); Loma Fruit Co. v. International Navigation Co., Ltd., 11 F.(2d) 124, 125 (C.C.A.2d); The Gothic Star, 4 F.Supp. 240, 241 (D.C.). For here want of diligence in providing proper ventilation is established and it is found that the failure to ventilate has caused the damage. It is enough that the clause plainly cannot be taken to relieve the vessel from bringing itself within the exception from liability for damage by sea peril where the shipper has carried the burden of showing that the decay is due either to sea peril, in that bad weather prevented ventilation, or to the vessel's negligence. Where the state of the proof is such as to show that the damage is due either to an excepted peril or to the carrier's negligent care of the cargo, it is for him to bring himself within the exception or to show that he has not been negligent. The Folmina, supra. Similarly, the carrier must bear the entire loss where it appears that the injury to cargo is due either to sea peril or negligent stowage, or both, and he fails to show what damage is attributable to sea peril. Corsar v. J. D. Spreckels & Bros. Co., 141 F. 260, 264 (C.C.A.9th); The Gualala, 178 F. 402, 406 (C.C.A.9th); The Jeanie, 236 F. 463, 472 (C.C.A.9th); The Excellent, 16 F. 148 (C.C.); The Nith (Thompson v. The Nith), 36 F. 383, 384 (C.C.); Speyer v. The Mary Belle Roberts, 22 Fed.Cas. 929, No. 13,240 (D.C.); Mainwaring v. The Carrie Delap, 1 F. 874, 879 (D.C.); The Aspasia, 79 F. 91 (D.C.); Knohr & Burchard v. Pacific Creosoting Co., 181 F. 856, 860 (D.C.); The Charles Rohde, 8 F.(2d) 506, 507 (D.C.); H. E. Hodgson & Co., Ltd., v. Royal Mail Steam Packet Co., 33 F.(2d) 337 (D.C.). In each of these cases the carrier is charged with the responsibility for a loss which, in fact, may not be due to his fault, merely because the law, in pursuance of a wise policy, casts on him the burden of showing facts relieving him from liability. The vessel in the present case is in no better position because, upon the evidence, it appears that some of the damage, in an amount not ascertainable, is due to sea peril. That does not remove the burden of showing facts relieving it from liability. If it remains liable for the whole amount of the damage because it is unable to show that sea peril was a cause of the loss, it must equally remain so if it cannot show what part of the loss is due to that cause. Speyer v. The Mary Belle Roberts, supra; The Rona, 5 Asp. 259, 262; Carver, Carriage by Sea (7th Ed.), § 78, p. 114. Since the respondent has failed throughout to sustain the burden, which rested upon it at the outset, of showing to what extent sea peril was the effective cause of the damage, and as the petitioners are without fault, no question of apportionment or division of the damage arises. Reversed.
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1. The provision of § 3 of the Harter Act, relieving vessels and their owners from the consequences of " fault or error in navigation or management" of the vessels, does not relate to damage caused to cargo by failure to care for it properly on the voyage, e. g., failure to give proper ventilation to a shipment of onions, causing decay. P. 303. 2. It is the general rule that a carrier by sea who delivers in bad condition cargo that he received for shipment in good condition must bear the loss unless he can bring himself within some common law or stipulated exception to his general liability. P. 303. 3. To such exceptions the law itself annexes a condition that they shall relieve the carrier from liability for loss from an excepted cause only if in the course of the voyage he has used due care to guard against it; and this is recognized and continued in the first section of the Harter Act, which makes it unlawful to insert any clause in a bill of lading whereby the carrier shall be relieved of liability for negligence. P. 304. 4. A stipulation in a bill of lading excepting liability for damage to perishable cargo by " decay" relates tb decay due to inherent defects in the cargo or caused by excepted perils of the sea; it leaves the carrier liable for decay resulting from negligent stowage of the cargo or failure to care for it properly during the voyage. P. 305. 5. It appeared by the evidence that decay of a cargo of onions was the result of poor ventilation caused by closure of hatches and ventilators for-many hours during the voyage, and that for a specified part of this time the closure was proper because of bad weather, but for the rest of the. time it was improper. Held that the burden was on the carrier to show how much of *the damage was due to the sea peril (excepted in the bill of lading); and that, failing in this, the ship was liable for the entire loss. P. 306. 70 F. (2d) 261, reversed.
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SECTION 1. SHORT TITLE.
This Act may be cited as the ``Family and Medical Leave Enhancement
Act of 2009''.
SEC. 2. ELIGIBLE EMPLOYEE.
Section 101(2)(B)(ii) of the Family and Medical Leave Act of 1993
(29 U.S.C. 2611(2)(B)(ii)) is amended by striking ``less than 50'' each
place it appears and inserting ``fewer than 25''.
SEC. 3. ENTITLEMENT TO ADDITIONAL LEAVE UNDER THE FMLA FOR PARENTAL
INVOLVEMENT AND FAMILY WELLNESS.
(a) Leave Requirement.--Section 102(a) of the Family and Medical
Leave Act of 1993 (29 U.S.C. 2612(a)) is amended by adding at the end
the following new paragraph:
``(5) Entitlement to additional leave for parental
involvement and family wellness.--
``(A) In general.--Subject to subparagraph (B) and
section 103(g), an eligible employee shall be entitled
to leave under this paragraph to--
``(i) participate in or attend an activity
that is sponsored by a school or community
organization and relates to a program of the
school or organization that is attended by a
son or daughter or a grandchild of the
employee; or
``(ii) meet routine family medical care
needs, including for medical and dental
appointments of the employee or a son,
daughter, spouse, or grandchild of the
employee, or to attend to the care needs of
elderly individuals who are related to the
eligible employee, including visits to nursing
homes and group homes.
``(B) Limitations.--
``(i) In general.--An eligible employee is
entitled to--
``(I) not to exceed 4 hours of
leave under this paragraph during any
30-day period; and
``(II) not to exceed 24 hours of
leave under this paragraph during any
12-month period.
``(ii) Coordination rule.--Leave under this
paragraph shall be in addition to any leave
provided under any other paragraph of this
subsection.
``(C) Definitions.--As used in this paragraph:
``(i) School.--The term `school' means an
elementary school or secondary school (as such
terms are defined in section 9101 of the
Elementary and Secondary Education Act of 1965
(20 U.S.C. 7801)), a Head Start program
assisted under the Head Start Act (42 U.S.C.
9831 et seq.), or a child care facility.
``(ii) Community organization.--The term
`community organization' means a private
nonprofit organization that is representative
of a community or a significant segment of a
community and provides activities for
individuals described in subparagraph (A) or
(B) of section 101(12), such as a scouting or
sports organization.''.
(b) Schedule.--Section 102(b)(1) of such Act (29 U.S.C. 2612(b)(1))
is amended by inserting after the third sentence the following new
sentence: ``Leave under subsection (a)(5) may be taken intermittently
or on a reduced leave schedule.''.
(c) Substitution of Paid Leave.--Section 102(d)(2) of such Act (29
U.S.C. 2612(d)(2)) is amended by adding at the end the following new
subparagraph:
``(C) Parental involvement leave and family
wellness leave.--An eligible employee may elect, or an
employer may require the employee, to substitute any of
the accrued paid vacation leave, personal leave, or
family leave of the employee for any leave under
subsection (a)(5). In addition, an eligible employee
may elect, or an employer may require the employee, to
substitute any of the accrued paid medical or sick
leave of the employee for leave provided under clause
(ii) of subsection (a)(5)(A) for any part of the leave
under such clause, except that nothing in this title
shall require an employer to provide paid sick leave or
paid medical leave in any situation in which such
employer would not normally provide any such paid
leave. If the employee elects or the employer requires
the substitution of accrued paid leave for leave
provided under subsection (a)(5)(A), the employer shall
not restrict or limit this substitution or impose any
additional terms and conditions on such leave that are
more stringent on the employee than the terms and
conditions set forth in this Act.''.
(d) Notice.--Section 102(e) of such Act (29 U.S.C. 2612(e)) is
amended by adding at the end the following new paragraph:
``(4) Notice relating to parental involvement and family
wellness leave.--In any case in which an employee requests
leave under paragraph (5) of subsection (a), the employee
shall--
``(A) provide the employer with not less than 7
days' notice or as much notice as is practicable before
the date the leave is to be taken, of the employee's
intention to take leave under such paragraph; and
``(B) in the case of leave to be taken under
subparagraph (A)(ii), make a reasonable effort to
schedule the leave so as not to disrupt unduly the
operations of the employer, subject to the approval of
the health care provider involved (if any).''.
(f) Certification.--Section 103 of such Act (29 U.S.C. 2613) is
amended by adding at the end the following new subsection:
``(g) Certification Related to Parental Involvement and Family
Wellness Leave.--An employer may require that a request for leave under
section 102(a)(5) be supported by a certification issued at such time
and in such manner as the Secretary may by regulation prescribe.''.
(g) Definition of Grandchild.--Section 101 of the Family and
Medical Leave Act of 1993 (29 U.S.C. 2611) is amended by adding at the
end the following new paragraph:
``(14) Grandchild.--The term `grandchild' means a son or
daughter of an employee's son or daughter.''.
SEC. 4. ENTITLEMENT OF FEDERAL EMPLOYEES TO LEAVE FOR PARENTAL
INVOLVEMENT AND FAMILY WELLNESS.
(a) Leave Requirement.--Section 6382(a) of title 5, United States
Code, is amended by adding at the end the following new paragraph:
``(5)(A) Subject to subparagraph (B)(i) and section 6383(f), an
employee shall be entitled to leave under this paragraph to--
``(i) participate in or attend an activity that is
sponsored by a school or community organization and relates to
a program of the school or organization that is attended by a
son or daughter or a grandchild of the employee; or
``(ii) meet routine family medical care needs, including
for medical and dental appointments of a son, daughter, spouse,
or grandchild of the employee, or to attend to the care needs
of elderly individuals who are related to the eligible
employee, including visits to nursing homes and group homes.
``(B)(i) An employee is entitled to--
``(I) not to exceed 4 hours of leave under this paragraph
during any 30-day period; and
``(II) not to exceed 24 hours of leave under this paragraph
during any 12-month period.
``(ii) Leave under this paragraph shall be in addition to any leave
provided under any other paragraph of this subsection.
``(C) For the purpose of this paragraph--
``(i) the term `school' means an elementary school or
secondary school (as such terms are defined in section 9101 of
the Elementary and Secondary Education Act of 1965), a Head
Start program assisted under the Head Start Act, and a child
care facility licensed under State law; and
``(ii) the term `community organization' means a private
nonprofit organization that is representative of a community or
a significant segment of a community and provides activities
for individuals described in subparagraph (A) or (B) of section
6381(6), such as a scouting or sports organization.''.
(b) Schedule.--Section 6382(b)(1) of such title is amended--
(1) by inserting after the second sentence the following
new sentence: ``Leave under subsection (a)(5) may be taken
intermittently or on a reduced leave schedule.''; and
(2) in the last sentence, by striking ``involved,'' and
inserting ``involved (or, in the case of leave under subsection
(a)(5), for purposes of any 30-day or 12-month period),''.
(c) Substitution of Paid Leave.--Section 6382(d) of such title is
amended--
(1) by inserting ``(1)'' after the subsection designation;
and
(2) by adding at the end the following:
``(2) An employee may elect to substitute for leave under
subsection (a)(5), any of the employee's accrued or accumulated annual
or sick leave under subchapter I. If the employee elects to substitute
accumulated annual or sick leave for leave provided under subsection
(a)(5), the employing agency shall not restrict or limit this
substitution or impose any additional terms and conditions on such
leave that are more stringent on the employee than the terms and
conditions set forth in this subchapter.''.
(d) Notice.--Section 6382(e) of such title is amended by adding at
the end the following new paragraph:
``(3) In any case in which an employee requests leave under
paragraph (5) of subsection (a), the employee shall--
``(A) provide the employing agency with not less than 7
days' notice, before the date the leave is to be taken, of the
employee's intention to take leave under such paragraph; and
``(B) in the case of leave to be taken under subparagraph
(A)(ii), make a reasonable effort to schedule the leave so as
not to disrupt unduly the operations of the employer, subject
to the approval of the health care provider involved (if
any).''.
(e) Certification.--Section 6383(f) of such title is amended by
striking ``6382(a)(3)'' and inserting ``paragraph (3) or (5) of section
6382(a)''.
(f) Definition of Grandchild.--Section 6381 of title 5, United
States Code, is amended--
(1) in paragraph (10), by striking ``and'' at the end;
(2) in paragraph (11), by striking the period at the end
and inserting ``; and''; and
(3) by adding at the end the following new paragraph:
``(12) the term `grandchild' means a son or daughter of an
employee's son or daughter.''.
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Family and Medical Leave Enhancement Act of 2009 - Amends the Family and Medical Leave Act of 1993 (FMLA) to cover employees at worksites that employ fewer than 50 employees, but not fewer than 25 employees. Continues to exempt from FMLA coverage employees at worksites that employ fewer than 25 employees (currently 50), if the total number of employees employed by that employer within 75 miles of that worksite is fewer than 25 (currently 50).
Allows an employee covered by FMLA to take up to 4 hours during any 30-day period, and up to 24 hours during any 12-month period, of parental involvement leave to participate in or attend activities that are sponsored by a school or community organization; and (2) relate to a program of the school or organization that is attended by the employee's child or grandchild.
Permits the use of such parental involvement leave to meet routine family medical care needs, including: (1) such employee's medical and dental appointments, or their spouse, child, or grandchild; and (2) the care needs of their related elderly individuals, including visits to nursing homes and group homes.
Allows an employee to elect, or an employer to require, substitution of any of the paid or family leave or paid medical or sick leave of the employee for any leave provided under this Act.
Declares that nothing in this Act shall require an employer to provide paid sick leave or paid medical leave in situations where such employer would not normally provide any such paid leave.
Imposes on the employee requesting leave certain notification requirements. Allows an employer to require certification supporting such requests.
Applies the parental involvement and family wellness leave allowance to federal employees.
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This is a bill in equity, filed in the supreme court of the District of Columbia, by Richard H. Porter against Stephen V. White. The case arises as follows: On the 4th of July, 1868, a convention was concluded between the United States and Mexico, (15 St. 679,) providing for the adjustment of the claims of citizens of either country against the other, under which all claims on the part of citizens of either country upon the other, arising from injuries to their persons or property by the authorities of the other, which might have been presented to either government for its interposition with the other, since the signature of the treaty of Guadalupe Hidalgo, of 1848, and which yet remained unsettled, as well as any other such claims which might be presented within the time specified in the convention, (but not covering any claim arising out of a transaction of a date prior to February 2, 1848,) were referred to two commissioners, one to be appointed by each government, and the two commissioners to appoint an umpire to act in cases on which they might themselves differ in opinion. The decision on each claim was to be given in writing, and to designate whether any sum which might be allowed should be payable in gold or in the currency of the United States. It was provided in the convention that each government engaged 'to consider the decision of the commissioners conjointly, or of the umpire, as the case may be, as absolutely final and conclusive upon each claim decided upon by them or him, respectively, and to give full effect to such decisions without any objection, evasion, or delay whatsoever.' It was further provided that the total amount awarded in all the cases decided in favor of the citizens of one government should be deducted from the total amount awarded to the citizens of the other, and the balance, to the amount of $300,000, should be paid at the city of Mexico, or at the city of Washington, in gold or its equivalent, within 12 months from the close of the commission, to the government in favor of whose citizens the greater amount might have been awarded, without interest or any other deduction h an that specified in article 6 of the convention; and that the residue of such balance should be paid in annual installments, to an amount not exceeding $300,000, in gold or its equivalent, in any one year, until the whole should have been paid. Article 6 provided for the compensation of the commissioners, the umpire, and the secretaries, and provided that the whole expenses of the commission, including contingent expenses, should be defrayed by a ratable deduction on the amount of the sums awarded by the commission, provided that such deduction should not exceed 5 per cent. on the sums so awarded, and that the deficiency, if any, should be defrayed in moieties by the two governments. By successive conventions, (17 St. 861; 18 St. 760, 833,) the duration of the commission, which had been originally limited to two years and six months from the day of the first meeting of the commissioners, was extended until the 31st of January, 1876; and, by a convention concluded April 29, 1876, (19 St. 642,) the time for decision by the umpire was extended until the 20th of November, 1876. By an act of congress passed June 18, 1878, c. 262, (20 St. 144,) entitled 'An act to provide for the distribution of the awards made under the convention between the United States of America and the republic of Mexico, concluded on the 4th day of July, 1868,' it was provided (section 1) as follows: 'That the secretary of state be, and he is hereby, authorized and required to receive any and all moneys which may be paid by the Mexican republic under and in pursuance of the conventions between the United States and the Mexican republic for the adjustment of claims, concluded July fourth, eighteen hundred and sixty-eight, and April twenty-ninth, eighteen hundred and seventy-six; and whenever, and as often as, any installments shall have been paid by the Mexican republic on account of said awards, to distribute the moneys so received in ratable proportions among the corporations, companies, or private individuals, respectively, in whose favor awards have been made by said commissioners, or by the umpires, or to their legal representatives or assigns, except as in this act otherwise limited or provided, according to the proportion which their respective awards shall bear to the whole amount of such moneys then held by him, and to pay the same, without other charge or deduction than is hereinafter provided, to the parties respectively entitled thereto. And in making such distribution and payment, due regard shall be had to the value at the time of such distribution of the respective currencies in which the said awards are made payable; and the proportionate amount of any award of which by its terms the United States is entitled to retain a part, shall be deducted from the payment to be made on such award, and shall be paid into the treasury of the United States as a part of the unappropriated money in the treasury.' Sections 3 and 4 of the same act provided as follows: 'Sec. 3. That out of the payments and installments received from Mexico, as aforesaid, on account of said awards, and out of the moneys which shall be received by the secretary of state under the provisions of this act, the secretary of state shall, when and as the same shall be received and paid, and before any payment to claimants, deduct therefrom and retain a sum not to exceed five per centum of said moneys awarded to citizens of the United States, until the aggregate of the amounts so deducted and retained shall equal the sum of one hundred and fourteen thousand nine hundred and forty-eight dollars and seventy-four cents, being the amount of the expenses of the commission, including contingent expenses paid by the United States in accordance with article six of the treaty, as ascertained and determined in pursuance of the provisions of the said treaty; which said sums, when and as the same are deducted and retained, shall be, by the secretary of state, transmitted to the secretary of the treasury, and passed to h e account of, and be regarded as, unappropriated money in the treasury. Sec. 4. That in the payment of money, in virtue of this act, to any corporation, company, or private individual, the secretary of state shall first deduct and retain or make reservation of such sums of money, if any, as may be due to the United States from any corporation, company, or private individual in whose favor awards shall have been made under the said convention.' Among the awards made by the commission was one to the legal representatives of Austin M. Standish, of $42,486.30; one to the legal representatives of Monroe M. Parsons, of $50,828.76; and one to the legal representatives of Aaron A. Conrow, of $50,497.26; those three persons having been citizens of the United States who were unlawfully killed in Mexico, in 1865, by the Mexican authorities. The awards were made in 1874 or 1875. The bill avers that, in 1869 or 1870, the plaintiff was authorized by powers of attorney from the legal representatives of Standish, Parsons, and Conrow to prosecute their claims for such unlawful killing, before the commission; that the powers of attorney to the plaintiff stipulated that he should be entitled, as compensation for his services and expenses in the prosecution of the claims, to one-half of whatever sums might be awarded by the commission to such legal representatives; that he prosecuted the cases with success, and paid or assumed to pay all the necessary expenses thereof; that, by virtue of his contract, he became entitled to the one-half of the sums awarded, and the legal representatives of the parties recognized his right to such moieties, and respectively claimed for themselves only the one-half of the awards; that there was, at the time of the filing of the bill, in December, 1880, in the custody of the secretary of state of the United States, something over $20,000 applicable to the moieties of the plaintiff upon the three awards, and the secretary was ready and willing to pay the same whenever it should be determined who was entitled thereto; that the plaintiff had, in 1876, borrowed from the defendant $5,000, and given him, as security, a lien upon the moiety of the plaintiff in the Parsons award, and a power of attorney to collect such moiety; that, in 1877, he borrowed from the defendant $2,500 more, and executed to him an absolute assignment of the plaintiff's moiety of the Standish award, with the agreement that, although such assignment was absolute in form, it was to be simply a security for the money borrowed, and for services to be performed by the defendant in collecting the moieties for the plaintiff; that the secretary of state had refused to pay the plaintiff his interest in the awards until the rights of certain parties, who had filed claims with the secretary upon the plaintiff's interest in the fund, should be settled; that the defendant represented to the plaintiff that he (the defendant) could procure the payment of his interest in the awards, if the plaintiff would authorize him to do so, and that, believing such representation, he gave to the defendant 'power of attorney to collect not only the Standish and Parsons cases, which had been assigned to him, but gave him also the said Conrow case, in which the defendant had no interest whatever;' that the defendant was now claiming that he was the absolute owner of the two moieties in the cases of Parsons and Standish, while his only real claim upon the same was on account of his loan of the $7,500; that the defendant also refused to recognize the right of the plaintiff to the moiety of the Conrow claim, falsely alleging that he had purchased the plaintiff's interest therein from one Richard H. Musser, who set up a false claim to the one-half of the plaintiff's moiety of the Conrow claim; that the secretary had decided that none of the claimants had any lien upon the fund except the plaintiff and the defendant, and was ready and willing to pay the amount which was in his control, applicable to the tr ee moieties, upon the joint receipt of the plaintiff and the defendant; and that, inasmuch as she defendant held absolute assignments for the Persons and Standish cases, the secretary would not undertake to decide the rights between the plaintiff and the defendant, but left them to settle their controversy by adjustment, or by the determination of a court of competent jurisdiction. The bill waives an answer on oath, and prays for a decree that the defendant holds the assignment of the plaintiff's moieties in the cases of Standish and Parsons as security for the plaintiff's indebtedness to him for money borrowed, and for no other purpose, and in no other right; that he may be ordered to cancel the moieties or reassign them to the plaintiff, upon the payment to him by the plaintiff of the amount of money, with interest, which the court may find that she plaintiff owes to him; and that he may be decreed to empower the plaintiff to collect from the secretary the amount of the installments in his hands, applicable to all three of the cases. The bill also prays for such other and further relief as may be necessary. A demurrer to the bill was overruled, and the defendant put in an answer. The substance of the answer is that in 1869 or 1870 the legal representatives or next of kin of the three persons referred to made written executory contracts with Musser, whereby he undertook to furnish the necessary money and do the necessary legal work to establish the claims, and the claimants undertook, on such services and money being furnished, to pay him a fee which should equal the moiety of any award in the premises, in each case; that, in pursuance of such contracts, the claimants executed powers of attorney, whereby Musser was constituted attorney in fact, irrevocable, with a statement that the power of attorney was coupled with an interest; that, about that time, there was a verbal contract made between Musser and the plaintiff, whereby it was agreed that the plaintiff should furnish the money and Musser should do the legal work, and the two should divide the fees of Musser under the contract; that the plaintiff failed to furnish the money to carry on the suits, and undertook to dismiss Musser from the cases, leaving Musser with the responsibility of furnishing money and doing the legal work; that, in the discharge of his duties under his agreements with the claimants, Musser retained the legal firm of Pike & Johnson, and the claimants agreed in writing that that firm should receive 25 per cent. of the resulting awards, to be taken from Musser's moiety; that, on the making of the awards; the several claimants executed assignments to Musser and Pike & Johnson for a moiety; of each of the awards; and that, on the 12th of February, 1879, Musser and Pike & Johnson, for the consideration of $30,000, sold and assigned such moiety to the defendant in his own right. There are other allegations in the answer, which it is unnecessary to set forth, in the view we take of the case. A replication was put in to the answer, and proofs were taken on both sides. The court in special term, in February, 1883, made a decree as follows: 'The court finds that the plaintiff is entitled to the one full, equal half of the attorneys' fees in the awards against Mexico by the joint United States and Mexican commission in the case of Mary Ann Conrow, referred to in the bill and proceedings in this case, and the defendant is entitled to the other half. It appearing to the court that the defendant White has been recognized by the state department as entitled to the whole of the said attorneys' fees in said award, and that he has already been paid by the state department, from the installments heretofore paid by Mexico upon said award, the following sums, at the times following, to-wit, on the 5th day of May, 1881, §8,896.81; on the 11th day of April, 1882, $1,806.06; and that there is now on hand in the state department the sum of $1,806.06, applicable to said attorney's fee in said Conrow case, and that thr e are seven more annual installments to be paid by Mexico upon said award,—it is, this 27th day of February, 1883, ordered, adjudged, and decreed that the said defendant do, within five days from this date, pay to the solicitors of said complainant Porter the one-half the said sums by him heretofore received upon said awards, with interest thereon at the rate of six per cent. per annum from the times of payment to him as aforesaid, to-wit, $4,448.41, with interest from the 5th day of May, 1881, and $903.03, with interest thereon from the 11th day of April, 1882; that said defendant assign and transfer to the plaintiff, by such form of conveyance as will be recognized by the state department, the one equal half of the payments yet to be made by Mexico upon said award applicable to attorney's fee, including the amount now in said department applicable to said purpose, and that the defendant pay the costs of this suit within ten days, or that in default thereof, as well as in default of the payment of the amount found due to the said Porter, execution do issue therefor, as upon judgment at law.' This decree was a decision in favor of the plaintiff in regard to the Conrow award only. It did not grant the relief prayed by the bill in respect to the Parsons and Standish awards, and decreed nothing in favor of the plaintiff in regard to those awards. There is nothing in the record to show that either party appealed to the general term of the court; but there appears in the record a decree of the court in general term, made December 24, 1883, which reads as follows: 'This cause came on to be heard at this term, and was argued by counsel; and thereupon, on this 24th day of December, A. D. 1883, upon consideration thereof, it is found by the court that the equities thereof are with the defendant, and that the respective awards of S. Kearney Parsons against Mexico and Mildred Standish against Mexico were not assigned and delivered by the plaintiff to the defendant as security for the return of money, and that the plaintiff is not the assignee of any portion of the award of Mary Ann Conrow against Mexico, but that the defendant, Stephen V. White, is the assignee in his own right of a moiety of each of the said three awards; wherefore it is ordered, adjudged, and decreed by the court that the judgment and decree heretofore entered in favor of plaintiff against the defendant on Febuary 27, 1883, in the special term, be, and the same is hereby, vacated, annulled, and held for naught, and the bill herein is dismissed, and that the defendant, Stephen V. White, do have and recover of the plaintiff, Richard H. Porter, his costs herein expended, taxed at $_____, and that he have execution therefor as in a suit of law, and to said order the plaintiff prays and appeal to the supreme court of the United States, which is allowed.' Although the plaintiff has appealed from the whole of the decree of the court in general term, it is stated in the brief of his counsel that he did not appeal from the decree of the court in special term, and is therefore concluded by the failure of that decree to award relief to him in respect to the Parsons and Standish claims; and that the dispute in this court is limited to his right to one-half of the fees in the Conrow case. Therefore, although the decree of the court in general term finds that the awards in favor of the Parsons and Standish claims were not assigned and delivered by the plaintiff to the defendant as security for the return of money, and although that decree further finds that the defendant is the assignee in his own right of a moiety of each of those two awards, as well as of a moiety of the Conrow award, and although the plaintiff appeals generally from that decree, no question arises in this court as to any claim of the plaintiff to any share of the Parsons and Standish awards, but the only portion of the decree of the court in general term drawn in question is that which declares that the plaintiff is not thea ssignee of any portion of the Conrow award, but that the defendant is the assignee in his own right of a moiety of that award. The claim of Porter in respect to the Conrow award is based upon the contention that he procured Musser to obtain, for a compensation to be paid to him by the plaintiff, powers of attorney from the legal representatives of the three men who had been killed, to prosecute the claims,—the powers of attorney and contracts to contain the plaintiff's name as attorney in fact, with a power of substitution; that Musser procured the powers of attorney, and contracts in writing, in each of the cases, for one-half of the recovery as a fee, but procured the name of Musser to be inserted as attorney, instead of that of the plaintiff; that, on the plaintiff's complaint of this, Musser substituted the plaintiff as attorney in each of the three cases, by an indorsement on the power of attorney itself; that the legal effect of those substitutions was to make the plaintiff the attorney in all three of the cases, instead of Musser; that, under these substitutions, the plaintiff employed attorneys in Washington, who with him prosecuted the cases to success, Musser aiding in taking testimony; that the plaintiff paid Musser in full for all his services; that Musser had no interest in the fees secured under the contracts with the claimants; and that Musser disputed this and, in 1872, employed the firm of Pike & Johnson, after the evidence in the cases had been closed, and the printed arguments had been filed, and the cases were awaiting a hearing. It is further urged, on the part of the plaintiff, that it is admitted in the answer of the defendant that there was a verbal contract between Musser and the plaintiff that the plaintiff should furnish the money and Musser should do the legal work, and that the two should divide the fees of Musser under the contract with the claimants; and much stress is laid upon the decision of this court in Peugh v. Porter, 112 U. S. 737, 5 Sup. Ct. Rep. 361, made January 5, 1885, after the decree of the court in general term in this suit, in which it is said that the agreement between Musser and Porter was 'that each should have an equal interest in the prosecution and proceeds of the claims in case of recovery;' and upon the fact that White was a party to that suit. But there is no evidence in the case that Porter had any assignment in writing of any interest in the Conrow award, or any written instrument creating any lien upon it, or its proceeds, by way of fee or otherwise from either the claimants of that award or from Musser. The power of attorney from the widow of Conrow to Musser, dated December 10, 1869, contains no assignment of any specific interest in the claim, and the substitution of Porter by Musser, indorsed on such power of attorney, and dated July 4, 1870, only states that 'Richard H. Porter is substituted and authorized to act under the powers hereinabove given.' Under these views, the plaintiff has failed to establish and equitable lien on the Conrow fund, by showing any distinct appropriation of a part of that fund in his favor by the widow of Conrow, either directly or indirectly, or any agreement, direct or indirect, that the plaintiff should be paid out of that fund. Wright v. Ellison, 1 Wall. 16; Trist v. Child, 21 Wall. 441, 447; Peugh v. Porter, 112 U. S. 737, 742, 5 Sup. Ct. Rep. 361. On the contrary, the evidence shows that the widow of Conrow, recognizing her agreement with Musser that he should have as compensation one-half of the money which should be awarded to her on the claim, executed, on the 28th of March, 1872, a written power of attorney to the firm of Pike & Johnson to prosecute her claim, which power revoked all prior powers executed by her in that behalf, a like power being executed at the same time by the son of the deceased Conrow; that Mrs. Conrow at that time agreed with Musser and the firm of Pike & Johnson that that firm and Musser should have, between them, as compensation, the one-half of whatever should be awarded to her on the claim; that, on the 19th of December, 1878, she made a written request to the secretary of state to pay one-half of the award to herself, one-fourth of it to Musser, and one-fourth of it to the firm of Pike & Johnson; and that, on the 12th of February, 1879, Musser and the firm of Pike & Johnson, by a written instrument executed by them, assigned to the defendant all their interest in the Conrow claim, the award on that claim having been made to Mrs. Conrow. It is very clear that the plaintiff has no title to any relief against the defendant, whatever he may have against Musser, who is not a party to this suit. There is nothing in the case of Peugh v. Porter which can affect the claim of the plaintiff against the defendant. The decree of the court below in general term is affirmed.
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In this case it was held, on the facts, that the plaintiff in a suit in equity had not established his right to a decree that he is entitled to the one-half of the attorney's fees in an award against Mexico by the joint United States and Mexican commission, which fees had been collected by the defendant. The plaintiff failed to establish any equitable lien on the award, by showing a distinct appropriation of a part of it in his favor, or any agreement for his payment out of it.
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Respondents filed a complaint in the United States District Court for the Western District of Pennsylvania in which they asserted that petitioner's employee insurance benefits and maternity leave regulations discriminated against women in violation of Title VII of the Civil Rights Act of 1964, 78 Stat. 253, as amended by the Equal Employment Opportunity Act of 1972, 42 U.S.C. § 2000e Et seq. (1970 ed. and Supp. IV). The District Court ruled in favor of respondents on the issue of petitioner's liability under that Act, and petitioner appealed to the Court of Appeals for the Third Circuit. That court held that it had jurisdiction of petitioner's appeal under 28 U.S.C. § 1291, and proceeded to affirm on the merits the judgment of the District Court. We [Amicus Curiae Information from page 739 intentionally omitted] granted certiorari, 421 U.S. 987, 95 S.Ct. 1989, 44 L.Ed.2d 476 (1975), and heard argument on the merits. Though neither party has questioned the jurisdiction of the Court of Appeals to entertain the appeal, we are obligated to do so on our own motion if a question thereto exists. Mansfield, Coldwater & Lake Michigan R. Co. v. Swan, 111 U.S. 379, 4 S.Ct. 510, L.Ed. 462 (1884). Because we conclude that the District Court's order was not appealable to the Court of Appeals, we vacate the judgment of the Court of appeals with instructions to dismiss petitioner's appeal from the order of the District Court. Respondents' complaint, after alleging jurisdiction and facts deemed pertinent to their claim, prayed for a judgment against petitioner embodying the following relief: "(a) requiring that defendant establish non-discriminatory hiring, payment, opportunity, and promotional plans and programs; "(b) enjoining the continuance by defendant of the illegal acts and practices alleged herein; "(c) requiring that defendant pay over to plaintiffs and to the members of the class the damages sustained by plaintiffs and the members of the class by reason of defendant's illegal acts and practices, including adjusted backpay, with interest, and an additional equal amount as liquidated damages, and exemplary damages; "(d) requiring that defendant pay to plaintiffs and to the members of the class the costs of this suit and a reasonable attorneys' fee, with interest; and "(e) such other and further relief as the Court deems appropriate." App. 19. After extensive discovery, respondents moved for partial summary judgment only as to the issue of liability. Fed.Rule Civ.Proc. 56(c). The District Court on January 9, 1974, 372 F.Supp. 1146, finding no issues of material fact in dispute, entered an order to the effect that petitioner's pregnancy-related policies violated Title VII of the Civil Rights Act of 1964. It also ruled that Liberty Mutual's hiring and promotion policies violated Title VII.1 Petitioner thereafter filed a motion for reconsideration which was denied by the District Court. Its order of February 20, 1974, 372 F.Supp. at 1163, denying the motion for reconsideration, contains the following concluding language: "In its Order the court stated it would enjoin the continuance of practices which the court found to be in violation of Title VII. The Plaintiffs were invited to submit the form of the injunction order and the Defendant has filed Notice of Appeal and asked for stay of any injunctive order. Under these circumstances the court will withhold the issuance of the injunctive order and amend the Order previously issued under the provisions of Fed.R.Civ.P. 54(b), as follows: "And now this 20th day of February, 1974, it is directed that final judgment be entered in favor of Plaintiffs that Defendant's policy of requiring female employees to return to work within three months of delivery of a child or be terminated is in violation of the provisions of Title VII of the Civil Rights Act of 1964; that Defendant's policy of denying disability income protection plan benefits to female employees for disabilities related to pregnancies or childbirth are (Sic ) in violation of Title VII of the Civil Rights Act of 1964 and that it is expressly directed that Judgment be entered for the Plaintiffs upon these claims of Plaintiffs' Complaint; there being no just reason for delay." 372 F.Supp. 1146, 1164. It is obvious from the District Court's order that respondents, although having received a favorable ruling on the issue of petitioner's liability to them, received none of the relief which they expressly prayed for in the portion of their complaint set forth above. They requested an injunction, but did not get one; they requested damages, but were not awarded any; they requested attorneys' fees, but received none. Counsel for respondents when questioned during oral argument in this Court suggested that at least the District Court's order of February 20 amounted to a declaratory judgment on the issue of liability pursuant to the provisions of 28 U.S.C. § 2201. Had respondents sought Only a declaratory judgment, and no other form of relief, we would of course have a different case. But even if we accept respondents' contention that the District Court's order was a declaratory judgment on the issue of liability, it nonetheless left unresolved respondents' requests for an injunction, for compensatory and exemplary damages, and for attorneys' fees. It finally disposed of none of respondents' prayers for relief. The District Court and the Court of Appeals apparently took the view that because the District Court made the recital required by Fed.Rule Civ.Proc. 54(b) that final judgment be entered on the issue of liability, and that there was no just reason for delay, the orders thereby became appealable as a final decision pursuant to 28 U.S.C. § 1291. We cannot agree with this application of the Rule and statute in question. Rule 54(b)2 "does not apply to a single claim action . . . . It is limited expressly to multiple claims actions in which 'one or more but less than all' of the multiple claims have been finally decided and are found otherwise to be ready for appeal." Sears, Roebuck & Co. v. Mackey, 351 U.S. 427, 435, 76 S.Ct. 895, 899, 100 L.Ed. 1297, 1306 (1956).3 Here, however, respondents set forth but a single claim: that petitioner's employee insurance benefits and maternity leave regulations discriminated against its women employees in violation of Title VII of the Civil Rights Act of 1964. They prayed for several different types of relief in the event that they sustained the allegations of their complaint, see Fed.Rule Civ.Proc. 8(a)(3), but their complaint advanced a single legal theory which was applied to only one set of facts.4 Thus, despite the fact that the District Court undoubtedly made the findings required under the Rule had it been applicable, those findings do not in a case such as this make the order appealable pursuant to 28 U.S.C. § 1291. See Mackey, supra, at 437-438, 76 S.Ct. at 900-901, 100 L.Ed. at 1307-1308. We turn to consider whether the District Court's order might have been appealed by petitioner to the Court of Appeals under any other theory. The order, viewed apart from its discussion of Rule 54(b), constitutes a grant of partial summary judgment limited to the issue of petitioner's liability. Such judgments are by their terms interlocutory, see Fed.Rule Civ.Proc. 56(c), and where assessment of damages or awarding of other relief remains to be resolved have never been considered to be "final" within the meaning of 28 U.S.C. § 1291. See, E. g., Borges v. Art Steel Co., 243 F.2d 350 (CA2 1957); Leonidakis v. International Telecoin Corp., 208 F.2d 934 (CA2 1953); Tye v. Hertz Drivurself Stations, 173 F.2d 317 (CA3 1949); Russell v. Barnes Foundation, 136 F.2d 654 (CA3 1943). Thus the only possible authorization for an appeal from the District Court's order would be pursuant to the provisions of 28 U.S.C. § 1292. If the District Court had granted injunctive relief but had not ruled on respondents' other requests for relief, this interlocutory order would have been appealable under § 1292(a)(1).5 But, as noted above, the court did not issue an injunction. It might be argued that the order of the District Court, insofar as it failed to include the injunctive relief requested by respondents, is an interlocutory order refusing an injunction within the meaning of § 1292(a)(1). But even if this would have allowed respondents to then obtain review in the Court of Appeals, there was no denial of any injunction sought by Petitioner and it could not avail itself of that grant of jurisdiction. Nor was this order appealable pursuant to 28 U.S.C. § 1292(b).6 Although the District Court's findings made with a view to satisfying Rule 54(b) might be viewed as substantial compliance with the certification requirement of that section, there is no showing in this record that petitioner made application to the Court of Appeals within the 10 days therein specified. And that court's holding that its jurisdiction was pursuant to § 1291 makes it clear that it thought itself obliged to consider on the merits petitioner's appeal. There can be no assurance that had the other requirements of § 1292(b) been complied with, the Court of Appeals would have exercised its discretion to entertain the interlocutory appeal. Were we to sustain the procedure followed here, we would condone a practice whereby a district court in virtually any case before it might render an interlocutory decision on the question of liability of the defendant, and the defendant would thereupon be permitted to appeal to the court of appeals without satisfying any of the requirements that Congress carefully set forth. We believe that Congress, in enacting present §§ 1291 d 1292 of Title 28, has been well aware of the dangers of an overly rigid insistence upon a "final decision" for appeal in every case, and has in those sections made ample provision for appeal of orders which are not "final" so as to alleviate any possible hardship. We would twist the fabric of the statute more than it will bear if we were to agree that the District Court's order of February 20, 1974, was appealable to the Court of Appeals. The judgment of the Court of Appeals is therefore vacated, and the case is remanded with instructions to dismiss the petitioner's appeal. It is so ordered. Mr. Justice BLACKMUN took no part in the consideration or decision of this case.
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Respondents filed a complaint alleging that petitioner's employee insurance benefits and maternity leave regulations discriminated against its women employees in violation of Title VII of the Civil Rights Act of 1964, and seeking injunctive relief, damages, costs, and attorneys' fees. After ruling in respondents' favor on their motion for a partial summary judgment on the issue of petitioner's liability under the Act, the District Court, upon denying petitioner's motion for reconsideration, issued an amended order stating that injunctive relief would be withheld because petitioner had filed an appeal and had asked for a stay of any injunction, and directing that, pursuant to Fed. Rule Civ. Proc. 54 (b), final judgment be entered for respondents, there being no just reason for delay. The Court of Appeals, holding that it had jurisdiction of petitioner's appeal under 28 U. S. C. § 1291, affirmed on the merits. Held: 1. The District Court's order was not appealable as a final decision under § 1291. Pp. 742-744. (a) Even assuming that the order was a declaratory judgment on the issue of liability, it nevertheless left unresolved and did not finally dispose of any of the respondents' prayers for relief. P. 742. (b) The order did not become appealable as a final decision pursuant to § 1291 merely because it made the recital required by Rule 54 (b), since that Rule applies only to multiple-claim actions in which one or more but less than all of the claims have been finally decided and are found otherwise ready for appeal, and does not apply to a single-claim action such as this one where the complaint advanced a single legal theory that was applied to only one set of facts. Pp. 742-744. (c) The order, apart from its reference to Rule 54 (b), constitutes a grant of partial summary judgment limited to the issue of petitioner's liability, is by its terms interlocutory, and, where damages or other relief remain to be resolved, cannot be considered "final" within the meaning of § 1291. P. 744. 2. Nor was the order appealable pursuant to 28 U. S. C. § 1292's provisions for interlocutory appeals. Pp. 744-745. (a) Even if the order insofar as it failed to include the requested injunctive relief could be considered an interlocutory order refusing an injunction within the meaning of § 1292 (a) (1), and thus would have allowed respondents then to obtain review in the Court of Appeals, there was no denial of any injunction sought by petitioner and it could not avail itself of that grant of jurisdiction. Pp. 744-745. (b) Even if the order could be considered as an order that the District Court certified for immediate appeal pursuant to § 1292 (b) as involving a controlling question of law as to which there was substantial ground for difference of opinion, it does not appear that petitioner applied to the Court of Appeals for permission to appeal within 10 days as required by § 1292 (b); moreover, there can be no assurance had the other requirements of § 1292 (b) been met that the Court of Appeals would have exercised its discretion to entertain the interlocutory appeal. P. 745. 511 F. 2d 199, vacated and remanded.
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Introduction The renewal of military commission proceedings against Khalid Sheik Mohammad and four others for their alleged involvement in the 9/11 terrorist attacks has focused renewed attention on the differences between trials in federal court and those conducted by military commission. The decision to try the defendants in military court required a reversal in policy by the Obama Administration, which had publicly announced in November 2009 its plans to transfer the five detainees from the U.S. Naval Station in Guantanamo Bay, Cuba, into the United States to stand trial in the U.S. District Court for the Southern District of New York for criminal offenses related to the 9/11 attacks. The Administration's plans to try some Guantanamo detainees in federal civilian court proved controversial, and Congress responded by enacting funding restrictions which barred any non-citizen held at Guantanamo from being transferred into the United States for any purpose, including prosecution. These restrictions, which have been extended for the duration of FY2014, effectively make military commissions the only viable option for trying detainees held at Guantanamo for the foreseeable future, and have resulted in the Administration choosing to reintroduce charges against Mohammed and his co-defendants before a military commission. While military commission proceedings have been instituted against a number of suspected enemy belligerents held at Guantanamo, the Obama Administration has opted to bring charges in federal criminal court against many terrorist suspects held at locations other than Guantanamo. On July 5, 2011, Somali national Ahmed Abdulkadir Warsame was brought to the United States to face terrorism-related charges in a civilian court, after having reportedly been detained on a U.S. naval vessel for two months for interrogation by military and intelligence personnel. Some argued that Warsame should have remained in military custody abroad and face trial before a military commission, while others argued that he should have been transferred to civilian custody immediately. Similar controversy also arose regarding the arrest by U.S. civil authorities and subsequent prosecution of Umar Farouk Abdulmutallab and Faisal Shahzad, who some argued should have been detained and interrogated by military authorities and tried by military commission. This report provides a brief summary of legal issues raised by the choice of forum for trying accused terrorists and a chart comparing authorities and composition of the federal courts to those of military commissions. A second chart compares selected military commissions rules under the Military Commissions Act (MCA), as amended by the Military Commissions Act of 2009, to the corresponding rules that apply in federal court. This chart follows the same order and format used in CRS Report RL31262, Selected Procedural Safeguards in Federal, Military, and International Courts , to facilitate comparison with safeguards provided in international criminal tribunals. For similar charts comparing military commissions as envisioned under the MCA, as passed in 2006, to the rules that had been established by the Department of Defense (DOD) for military commissions and to general military courts-martial conducted under the Uniform Code of Military Justice (UCMJ), see CRS Report RL33688, The Military Commissions Act of 2006: Analysis of Procedural Rules and Comparison with Previous DOD Rules and the Uniform Code of Military Justice , by [author name scrubbed]. For a comparison of the rules established by the MCA 2006 with those found in the MCA 2009 and to the rules that apply to courts martial under the UCMJ, see CRS Report R41163, The Military Commissions Act of 2009 (MCA 2009): Overview and Legal Issues , by [author name scrubbed]. For additional analysis of issues related to the disposition of Guantanamo detainees, including possible trials in federal or military courts, see CRS Report R40139, Closing the Guantanamo Detention Center: Legal Issues , by [author name scrubbed] et al. Background On January 22, 2009, President Barack Obama issued an executive order requiring that the Guantanamo detention facility be closed no later than a year from the date of the order. The order established a task force ("Guantanamo Task Force") to review all Guantanamo detentions to assess whether each detainee should continue to be held by the United States, be transferred or released to another country, or be prosecuted by the United States for criminal offenses. Ongoing military commissions were essentially halted during this review period, although some pretrial proceedings continued to take place. One detainee, Ahmed Ghailani, was transferred in June 2009 to the Southern District of New York for trial in federal court on charges related to his alleged role in the 1998 East Africa Embassy bombings, and was subsequently convicted and sentenced to life imprisonment. President Obama's Detention Policy Task Force issued a preliminary report July 20, 2009, reaffirming that the White House considers military commissions to be an appropriate forum for trying some cases involving suspected violations of the laws of the war, although federal criminal court would be the preferred forum for any trials of detainees. The disposition of each case referred for criminal prosecution is to be assigned to a team comprised of DOJ and DOD personnel, including prosecutors from the Office of Military Commissions. The report also provided a set of criteria to govern the disposition of cases involving Guantanamo detainees. In addition to "traditional principles of federal prosecution," the protocol identifies three broad categories of factors to be taken into consideration: Strength of interest, namely, the nature and gravity of offenses or underlying conduct; identity of victims; location of offense; location and context in which individual was apprehended; and the conduct of the investigation. Efficiency, namely, protection of intelligence source and methods; venue; number of defendants; foreign policy concerns; legal or evidentiary problems; efficiency and resource concerns. Other prosecution considerations, namely, the extent to which the forum and offenses that can be tried there permit a full presentation of the wrongful conduct, and the available sentence upon conviction. On November 13, 2009, Attorney General Holder announced the decision to transfer five "9/11 conspirators" to the Southern District of New York to stand trial, and charges that had previously been brought against these individuals before military commissions were withdrawn without prejudice in January 2010. On January 22, 2010, the Guantanamo Task Force issued its final report concerning the appropriate disposition of each detainee held at Guantanamo. The Task Force concluded that 36 detainees remained subject to active criminal investigations or prosecutions; 48 detainees should remain in preventive detention without criminal trial, as they are "too dangerous to transfer but not feasible for prosecution"; and the remaining detainees may be transferred, either immediately or eventually, to a foreign country. The Administration's plans to bring Khalid Sheik Mohammed and other Guantanamo detainees into the United States proved controversial. Beginning in 2009, Congress began placing funding restrictions in annual appropriations and authorization measures to limit executive discretion to transfer or release Guantanamo detainees into the United States. Because no civilian court operates at Guantanamo, these limitations have effectively made military commissions the only viable option for trying Guantanamo detainees for criminal activity for the foreseeable future. In March 2011, Secretary of Defense Robert Gates announced that the government would resume the filing of charges before military commissions at Guantanamo. Shortly thereafter, Attorney General Eric Holder announced the Obama Administration's reversal of its decision to bring Khalid Sheik Mohammed and his alleged co-conspirators into the United States to face trial in federal court, and stated that they would instead be tried before a military commission at Guantanamo. In April 2012, charges were referred to a military commission against Khalid Sheikh Mohammed, Walid Bin Attash, Ramzi Bin Al Shibh, Ali Abdul-Aziz Ali, and Mustafa Ahmed Al Hawsawi for their alleged involvement in the 9/11 attacks. In October 2012, the U.S. Court of Appeals for the D.C. Circuit, in its first case of an appeal from a military commission conviction, reversed the conviction of Salim Hamdan after determining that Congress did not intend for the offenses it defined in the MCA to apply retroactively ( Hamdan II ). Because the court agreed that the crime of material support for terrorism did not exist as a war crime under the international law of war at the time the relevant conduct occurred (a requirement under the military commissions statute in effect at the time ), it vacated the decision below of the Court of Military Commissions Review (CMCR), which had unanimously affirmed Hamdan's conviction. Some have noted the prevalence of the charge of material support for terrorism in military commission cases to date and question the continued viability of the military commission system in light of this decision. The government did not appeal the decision to the Supreme Court. Instead, the government is appealing the second CMCR appeal of a final verdict, Al Bahlul v. United States. When that case reached the D.C. Circuit on appeal, the government essentially asked the appellate court to overturn Al Bahlul's conviction on the basis that Hamdan II provided binding precedent on the question presented, namely, the validity of convictions for conspiracy, solicitation, and material support of terrorism for conduct preceding passage of the Military Commissions Act (MCA) in 2006. ( Hamdan II did not address conspiracy or solicitation, but the government conceded that these offenses do not constitute universally recognized violations of the international law of war.) The court complied with the request in a per curiam order. The government sought and was granted a rehearing en banc in the Bahlul case. Forum Choice for Terror Suspects U.S. law provides for the trial of suspected terrorists, including those captured abroad, in several ways. Those who are accused of violating specific federal laws are triable in federal criminal court. Provisions in the U.S. Criminal Code relating to war crimes and terrorist activity apply extraterritorially and may be applicable to some detainees. Those accused of violating the law of war or committing the offenses enumerated in the Military Commissions Act (MCA), as amended by the Military Commissions Act of 2009, may be tried by military commissions under the MCA, or by general court-martial under the UCMJ. The procedural protections afforded to the accused in each of these forums may differ. The MCA authorizes the establishment of military commissions with jurisdiction to try alien "unprivileged enemy belligerents" for offenses made punishable by the MCA or the law of war. Notwithstanding the recent amendments to the MCA, which generally enhance due process guarantees for the accused, critics continue to question their constitutionality. One issue that has been raised by proponents of the use of military commissions is the concern that federal criminal courts would endow accused terrorists with constitutional rights they would not otherwise enjoy. The MCA does not restrict military commissions from exercising jurisdiction within the United States, and the Supreme Court has previously upheld the use of military commissions against "enemy belligerents" tried in the United States under procedural rules that differed from the federal rules. The Supreme Court has not settled the question regarding the extent to which constitutional guarantees apply to aliens detained at Guantanamo, making any difference in rights due to location of the trials difficult to predict. Some view the unpredictability of the Supreme Court's acceptance of the military commission procedures as a factor in favor of using civilian trial courts. Sources of Rights The Fifth Amendment to the Constitution provides that "no person shall be ... deprived of life, liberty, or property, without due process of law." Due process includes the opportunity to be heard whenever the government places any of these fundamental liberties at stake. The Constitution contains other explicit rights applicable to various stages of a criminal prosecution. Criminal proceedings provide both the opportunity to contest guilt and to challenge the government's conduct that may have violated the rights of the accused. The system of procedural rules used to conduct a criminal hearing, therefore, serves as a safeguard against violations of constitutional rights that take place outside the courtroom, for example, during arrests and interrogations. The Bill of Rights applies to all citizens of the United States and all aliens within the United States. However, the methods of application of constitutional rights, in particular the remedies available to those whose rights might have been violated, may differ depending on the severity of the punitive measure the government seeks to take and the entity deciding the case. The jurisdiction of various entities to try a person accused of a crime could have a profound effect on the procedural rights of the accused. The type of judicial review available also varies and may be crucial to the outcome. International law also contains some basic guarantees of human rights, including rights of criminal defendants and prisoners. Treaties to which the United States is a party are expressly made a part of the law of the land by the Supremacy Clause of the Constitution and may be codified through implementing legislation, or in some instances, may be directly enforceable by the judiciary. International law is incorporated into U.S. law, but does not take precedence over statute. The law of war, a subset of international law, applies to cases arising from armed conflicts (i.e., war crimes). It remains unclear how the law of war applies to the current hostilities involving non-state terrorists, and the nature of the rights due to accused terrorist/war criminals may depend in part on their status under the Geneva Conventions. The Supreme Court has ruled that Al Qaeda fighters are entitled at least to the baseline protections applicable under Common Article 3 of the Geneva Conventions, which includes protection from the "passing of sentences and the carrying out of executions without previous judgment pronounced by a regularly constituted court, affording all the judicial guarantees which are recognized as indispensable by civilized peoples." Federal Court The federal judiciary is established by Article III of the Constitution and consists of the Supreme Court and "inferior tribunals" established by Congress. It is a separate and co-equal branch of the federal government, independent of the executive and legislative branches, designed to be insulated from the public passions. Its function is not to make law, but rather to interpret law and decide disputes arising under it. Federal criminal law and procedures are enacted by Congress and codified primarily in title 18 of the U.S. Code. The Supreme Court promulgates procedural rules for criminal trials at the federal district courts, subject to Congress's approval. These rules, namely the Federal Rules of Criminal Procedure (Fed. R. Crim. P.) and the Federal Rules of Evidence (Fed. R. Evid.), incorporate procedural rights that the Constitution and various statutes demand. The charts provided at the end of this report cite relevant rules or court decisions, but make no effort to provide an exhaustive list of authorities. There is historical precedent for using federal courts to try those accused of terrorism or war related offenses, including some that might under some circumstances be characterized as "violations of the law or war." The U.S. Constitution empowers Congress to "define and punish Piracies and Felonies committed on the high Seas, and Offences against the Law of Nations." The First Congress provided for the punishment of persons who committed murder or robbery or the like on the high seas, declaring that each offender was to be "taken and adjudged to be a pirate and felon and being thereof convicted," would be sentenced to death. In 1798, Attorney General Charles Lee advised Secretary of State Timothy Pickering that federal courts were fully competent to try and punish pirates, whether U.S. citizens or aliens. Federal courts exercised jurisdiction in many such cases. More recently, several high-profile prosecutions involving terrorism abroad have resulted in federal convictions. The 1985 hijacking of the Achille Lauro by Palestinian Liberation Organization (PLO) terrorists resulted in the federal conviction of a Lebanese suspect on charges of aircraft piracy and hostage-taking, notwithstanding the defendant's claim to have been merely following military orders. Federal courts also handled prosecutions related to the 1993 bombing of the World Trade Center in New York City, the 2000 bombing of the U.S.S. Cole in the Gulf of Aden, and the 1998 U.S. Embassy bombings in Africa. Federal courts are currently handling several high-profile terrorism cases, including that of Sulaiman Abu Ghaith, a former Al Qaeda spokesman and son-in-law of Osama bin Laden who is on trial in Manhattan on charges of providing material support to Al Qaeda and conspiracy to kill Americans. This and other trials slated to begin soon are seen as providing test cases to demonstrate the efficacy or inadequacy of civilian courts for prosecuting terrorism suspects. In March 2010, the Department of Justice released a list of terrorism trials conducted since 2001, and reported a total of 403 unsealed convictions from September 11, 2001, to March 18, 2010. Around 60% of these convictions were charged under criminal code provisions that are not facially terrorism offenses, including such offenses as fraud, immigration violations, firearms offenses, drug-related offenses, false statements, perjury, obstruction of justice, and general conspiracy charges under 18 U.S.C. Section 371, some of which may not have law-of-war analogs that would permit their trial by military commissions. The remaining 40% are what the Justice Department labeled "Category I Offenses" for the purposes of its report, which covers crimes that are directly related to international terrorism. These crimes include the following: Aircraft Sabotage (18 U.S.C. §32) Animal Enterprise Terrorism (18 U.S.C. §43) Crimes Against Internationally Protected Persons (18 U.S.C. §§112, 878, 1116, l201(a)(4)) Use of Biological, Nuclear, Chemical or Other Weapons of Mass Destruction (18 U.S.C. §§175, 175b, 229, 831, 2332a) Production, Transfer, or Possession of Variola Virus (Smallpox) (18 U.S.C. §175c) Participation in Nuclear and WMD Threats to the United States (18 U.S.C. §832) Conspiracy Within the United States to Murder, Kidnap, or Maim Persons or to Damage Certain Property Overseas (18 U.S.C. §956) Hostage Taking (18 U.S.C. §1203) Terrorist Attacks Against Mass Transportation Systems (18 U.S.C. §1993) Terrorist Acts Abroad Against United States Nationals (18 U.S.C. §2332) Terrorism Transcending National Boundaries (18 U.S.C. §2332b) Bombings of Places of Public Use, Government Facilities, Public Transportation Systems and Infrastructure Facilities (18 U.S.C. §2332f) Missile Systems designed to Destroy Aircraft (18 U.S.C. §2332g) Production, Transfer, or Possession of Radiological Dispersal Devices (18 U.S.C. §2332h) Harboring Terrorists (18 U.S.C. §2339) Providing Material Support to Terrorists (18 U.S.C. §2339A) Providing Material Support to Designated Terrorist Organizations (18 U.S.C. §2339B) Prohibition Against Financing of Terrorism (18 U.S.C. §2339C) Receiving Military-Type Training from a Foreign Terrorist Organization (18 U.S.C. §2339D) Narco-Terrorism (21 U.S.C. §1010A) Sabotage of Nuclear Facilities or Fuel (42 U.S.C. §2284) Aircraft Piracy (49 U.S.C. §46502) Violations of the International Emergency Economic Powers Act (IEEPA, 50 U.S.C. §1705(b)) involving E.O. 12947 (Terrorists Who Threaten to Disrupt the Middle East Peace Process); E.O. 13224 (Blocking Property and Prohibiting Transactions With Persons Who Commit, Threaten to Commit, or Support Terrorism or Global Terrorism List); and E.O. 13129 (Blocking Property and Prohibiting Transactions With the Taliban) Military Commissions The Constitution empowers Congress to declare war and "make rules concerning captures on land and water," to define and punish violations of the "Law of Nations," and to make regulations to govern the armed forces. The power of the President to convene military commissions flows from his authority as Commander in Chief of the Armed Forces and his responsibility to execute the laws of the nation. Under the Articles of War and subsequent statute, the President has at least implicit authority to convene military commissions to try offenses against the law of war. The authority and objectives underlying military courts-martial and military commissions are not coextensive. Rather than serving the internally directed purpose of maintaining discipline and order of the troops, the military commission is externally directed at the enemy as a means of waging successful war by punishing and deterring offenses against the law of war. Military commissions have historically been used in connection with military government in cases of occupation or martial law where ordinary civil government was impaired. Jurisdiction of military commissions is limited to time of war and to trying offenses recognized under the law of war or as designated by statute. While case law suggests that military commissions could try U.S. citizens as enemy belligerents, the Military Commissions Act permits only aliens to be tried. The United States first used military commissions to try enemy belligerents accused of war crimes during the occupation in Mexico in 1847, and made heavy use of them in the Civil War and in the Philippine Insurrection. However, prior to President Bush's Military Order of 2001 establishing military commissions for certain alien terrorism suspects, no military commissions had been convened since the aftermath of World War II. As non-Article III courts, military commissions have not been subject to the same constitutional requirements that are applied in Article III courts. The Military Commissions Act authorizes the Secretary of Defense to establish regulations for military commissions in accordance with its provisions. To date, there have been eight convictions of Guantanamo detainees by military commissions, six of which were procured by plea agreement. A few commission rulings have been appealed. Comparison of Authorities and Procedural Rights The following charts provide a comparison of the military commissions under the revised Military Commissions Act and standard procedures for federal criminal court under the Federal Rules of Criminal Procedure and the Federal Rules of Evidence. Chart 1 compares the legal authorities for establishing both types of tribunals, the jurisdiction over persons and offenses, and the structures of the tribunals. Chart 2 , which compares procedural safeguards incorporated in the MCA to those applicable in federal criminal cases, follows the same order and format used in CRS Report RL31262, Selected Procedural Safeguards in Federal, Military, and International Courts , Selected Procedural Safeguards in Federal, Military, and International Courts , by [author name scrubbed], in order to facilitate comparison of the those tribunals to safeguards provided in the international military tribunals that tried World War II crimes at Nuremberg and Tokyo, and contemporary ad hoc tribunals set up by the UN Security Council to try crimes associated with hostilities in the former Yugoslavia and Rwanda. For a comparison with previous rules established under President George W. Bush's Military Order, refer to CRS Report RL33688, The Military Commissions Act of 2006: Analysis of Procedural Rules and Comparison with Previous DOD Rules and the Uniform Code of Military Justice . For a comparison of the rules established by the MCA 2006 with those found in the MCA 2009 and to the rules that apply to courts martial under the UCMJ, see CRS Report R41163, The Military Commissions Act of 2009 (MCA 2009): Overview and Legal Issues , by [author name scrubbed]. Chart 1. Comparison of Rules Authority Procedure Jurisdiction over Persons Jurisdiction over Offenses Composition Chart 2. Comparison of Procedural Safeguards Presumption of Innocence Right to Remain Silent (Freedom from Coerced Statements) Freedom from Unreasonable Searches and Seizures Effective Assistance of Counsel Right to Indictment and Presentment Right to Written Statement of Charges Right to Be Present at Trial Prohibition Against Ex Post Facto Crimes Protection Against Double Jeopardy Speedy and Public Trial Burden and Standard of Proof Privilege Against Self-Incrimination (Freedom from Compelled Testimony) Right to Examine or Have Examined Adverse Witnesses (Hearsay Prohibition, Classified Information) Right to Compulsory Process to Obtain Witnesses (Discovery) Right to Trial by Impartial Judge Right to Trial by Impartial Jury Right to Appeal to Independent Reviewing Authority Protection Against Excessive Penalties
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The renewal of military commission proceedings against Khalid Sheik Mohammad and four others for their alleged involvement in the 9/11 terrorist attacks has focused renewed attention on the differences between trials in federal court and those conducted by military commission. The decision to try the defendants in military court required a reversal in policy by the Obama Administration, which had publicly announced in November 2009 its plans to transfer the five detainees from the U.S. Naval Station in Guantanamo Bay, Cuba, into the United States to stand trial in the U.S. District Court for the Southern District of New York for criminal offenses related to the 9/11 attacks. The Administration's plans to try these and possibly other Guantanamo detainees in federal court proved controversial, and Congress responded by enacting funding restrictions which effectively barred any non-citizen held at Guantanamo from being transferred into the United States. These restrictions, which have been extended for the duration of FY2014, effectively make military commissions the only viable option for trying detainees held at Guantanamo for the foreseeable future, and have resulted in the Administration choosing to reintroduce charges against Mohammed and his co-defendants before a military commission. While military commission proceedings have been instituted against some suspected enemy belligerents held at Guantanamo, the Obama Administration has opted to bring charges in federal criminal court against terrorist suspects arrested in the United States, as well as some terrorist suspects who were taken into U.S. custody abroad but who were not transferred to Guantanamo. Some who oppose the use of federal criminal courts argue that bringing detainees to the United States for trial poses a security threat and risks disclosing classified information, or could result in the acquittal of persons who are guilty. Others have praised the efficacy and fairness of the federal court system and have argued that it is suitable for trying terrorist suspects and wartime detainees, and have also voiced confidence in the courts' ability to protect national security while achieving justice that will be perceived as such among U.S. allies abroad. Some continue to object to the trials of detainees by military commission, despite the amendments Congress enacted as part of the Military Commissions Act of 2009 (MCA), P.L. 111-84, because they say it demonstrates a less than full commitment to justice or that it casts doubt on the strength of the government's case against those detainees. Others question the continued viability of military commissions in light of the recent appellate court decision invalidating the offense of material support of terrorism as to conduct occurring prior to the 2006 enactment of the MCA (Hamdan v. United States). This report provides a brief summary of legal issues raised by the choice of forum for trying accused terrorists and a chart comparing selected military commissions rules under the Military Commissions Act, as amended, to the corresponding rules that apply in federal court. The chart follows the same order and format used in CRS Report RL31262, Selected Procedural Safeguards in Federal, Military, and International Courts, to facilitate comparison with safeguards provided in international criminal tribunals. For similar charts comparing military commissions as envisioned under the MCA, as originally passed in 2006, to the rules that had been established by the Department of Defense (DOD) for military commissions and to general military courts-martial conducted under the Uniform Code of Military Justice (UCMJ), see CRS Report RL33688, The Military Commissions Act of 2006: Analysis of Procedural Rules and Comparison with Previous DOD Rules and the Uniform Code of Military Justice, by [author name scrubbed].
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Introduction This report discusses mortgage markets in selected nations and identifies aspects of housing finance that may suggest interesting policy options as Congress debates housing finance reform in the United States. The report describes similarities and differences in a number of countries by comparing homeownership rates and changes in housing prices. It examines features of each country's primary mortgage market, which homebuyers directly experience when applying for and obtaining a mortgage; and it discusses the secondary mortgage market connections that link national mortgage markets and international financial markets. The report concludes by tentatively identifying what may explain why mortgage markets in three of the four countries examined appear to have more differences than similarities, yet have led to similar rates of homeownership. This report concentrates on the United States, Canada, Denmark, and Australia, occasionally mentioning other nations to provide context. Canada was selected because of its proximity to the United States, similarity of its economy to that of the United Stages, and the distinctive attributes of its housing market. Homeownership rates in Canada and the United States are similar, but Canada has stricter mortgage qualifications (i.e., underwriting standards). Both nations have experienced home price increases over the past 10 years, but Canada has had neither the price level collapse nor the increase in foreclosure rates that the United States has had. Canada funds its mortgages mainly with bank deposits, whereas the United States depends on domestic and international financial markets. The homeowner in the United States typically has a 30-year fixed-rate mortgage (FRM), whereas the Canadian homeowner has a five-year adjustable-rate mortgage (ARM) that is renewed and is designed to be paid in full after 25-30 years. According to the Organization for Economic Cooperation and Development (OECD), Canadian home prices reached a maximum in 2007 that was 60% higher than in 1991, whereas another index developed by Teranet and the National Bank of Canada shows prices continuing to increase. U.S. home prices reached a maximum in 2006 that was 61% greater than in 1991. Denmark is included because it has very strict underwriting standards and has developed a type of covered mortgage bond with specific collateral to guarantee payment if the bond issuer fails. This is similar to covered bonds throughout much of the European Union (EU), including Germany. Homeowners in Denmark can prepay their mortgages by paying either the unpaid balance (as in the United States), or the market value of the mortgage. This market value will be less than the unpaid balance when interest rates have increased. Denmark and the United States are the only two nations where 30-year fixed-rate mortgages are common. Danish house prices reached a maximum in 2007 that was 150% greater than the 1991 house price level. Most Australian mortgages have adjustable interest rates. Australian homeowners can make extra payments on their mortgages; these prepayments can be withdrawn, sometimes by a special credit card. Between 1991 and 2009, home prices in Australia increased by 107%. Homeownership Rates Broadly speaking, homeownership rates are determined by the relative costs of housing tenure options (renting versus owning) and the nonfinancial aspects of owning or renting a home. These factors can vary according to a household's income, savings, age, marital status including number of children, the tax system, anticipated house price changes, government regulations such as land use and zoning, building codes, immigrant status, and availability of desirable rental housing. Some factors including income, age, and family status can affect a person's decision to move out from their parents' home and to form an independent household. Because most homebuyers use a mortgage to finance their purchase, mortgage terms can affect homeownership rates. Homeownership rates vary over time and within a country. For example, in the United States, the national seasonally adjusted homeownership rate reached a peak of 69.4% in the first quarter of 2005; since then, it has trended down with occasional, slight upticks. As an example of regional variation in homeownership rates within the United States, in the second quarter of 2010, the Midwest had the highest rate (70.8%) of any census region, and the West had the lowest rate (61.4%). As shown in Table 1 , homeownership rates for selected developed countries in Europe, North America, Australia, and Asia range from approximately 35% to approximately 97%. The European Union (EU) reports an average homeownership rate of 66.8% with national rates ranging from a low of 43.2% in Germany to a high of 97.0% in Lithuania and Romania. Germany's relatively low homeownership rate is frequently attributed to a policy emphasis on supplying subsidies to rental housing and the integration with the former German Democratic Republic (East Germany). Outside the EU, Switzerland has long had a relatively low homeownership rate (34.6%) that is usually attributed to a high cost of ownership and strong protections for renters, including limits on rent increases. Lithuania and Romania, both EU members, had high homeownership rates following privatization initiatives after their transitions from communism in 1989 and presently lack alternative rental housing. Australia reports a homeownership rate of 69.8%, whereas Japan's homeownership rate is usually estimated around 60%. Figure 1 displays the homeownership rates, graphically sorted by the rate. A cautionary note: As a result of differences in the ways that countries collect and report data, international comparisons of homeownership rate statistics can be misleading. For example, in the United Kingdom, units with long-term rental contracts are considered to be owner occupied, and in Japan dwellings owned by an occupant's parents are listed as owner occupied. House Price Changes In many countries, real (inflation adjusted) house prices were relatively stable from 1991 until approximately 2000. Between 2000 and 2008, prices increased in real terms, peaked, and declined. In this latter time period, most OECD-member countries experienced at least one year of rapid, real house price increases greater than 10%; the greatest price increase (28%) occurred in Ireland during 1998. The United States' maximum annual price increase was 8.2% (2005), Canada's was 9.8% (2006), Denmark's was 19.3% (2006), and Australia's was 16.0% (2003). Between 1991 and 2008, U.S. house prices increased 50%. House prices in Canada increased 60%, Denmark 150%, and Australia 107%. Nations with the largest house price declines since reaching their maximum were Ireland (-0.53), the United States (-0.16), and Iceland (-0.13). Real house prices do not always increase. Between 1991 and 2008, real house prices declined in Japan, Korea, and Switzerland. Figure 2 graphs the price levels for the United States, Canada, Denmark, Australia, Japan, Ireland, and the United Kingdom. The graph emphasizes the point that many other nations had greater increases in housing prices than the United States did. Factors Affecting Mortgage Interest Rates This section discusses how the mortgage interest rate paid by a homeowner is determined in the United States, Canada, Denmark, and Australia. It begins by describing a widely used framework for explaining how mortgage interest rates are determined in the United States and then applies the same framework to the other nations. United States In a benchmark competitive economic model, the interest rate on a fixed-rate mortgage (FRM) depends on four sets of factors: (1) the interest rate for a riskless government bond with the same life; (2) adjustments to reflect borrower risk; (3) adjustments to reflect risks associated with the characteristics of the property; and (4) adjustments to reflect the differences between the government bond and the mortgage. The mortgage industry term for the sum of these adjustments to the base rate represented by the riskless government bond to adjust for risks and structural differences is spread . In the United States, the rule of thumb is that a 30-year FRM is paid off in 7 to 10 years. As a result of the 7-to-10-year life, most mortgage calculations are based on the interest rate on a 10-year Treasury bond. For example, a decrease in the interest rate on 10-year Treasuries will lead to lower mortgage interest rates and more prepayments as borrowers refinance their mortgages to take advantage of lower interest rates. Adjustable-rate mortgages (ARMs) use one of a variety of interest rates plus a mark-up or spread instead of Treasury bonds as the basis for determining the interest rate paid by the borrower. In many economic environments, lenders are willing to offer ARMs with lower interest rates than similar FRMs because the interest rate increases if the index rate or reference increases; this protects the lender against being locked into a loan that pays less than other loans. Borrowers can find ARMs attractive because of the potentially lower interest rates, the chance of future decreases in the mortgage rate, and limits (caps) on the increase in the interest rates. An ARM with a lower or "teaser" initial rate can be attractive to a homebuyer who plans to move before the teaser rate ends. Borrower risk is typically assessed in terms of credit history (perhaps summarized by the borrower's FICO [formerly Fair Isaac Company] score), and debt-to-income ratio. The better an individual's credit history and the lower the debt-to-income ratio, the lower the spread that will be charged. Property Characteristics Property characteristics that influence risk assessments include the loan-to-value (LTV) ratio, and the type of property (owner occupied, investor, condominium, and manufactured housing). In general mortgages, with high LTVs, and mortgages on investor-owned property, on condominiums, and on manufactured housing properties are considered riskier and pay a higher interest rate. Sometimes lenders add a risk premium based on the location of a home. Home Mortgages and Government Bonds To a lender, a home mortgage loan is less valuable than a Treasury (or other government) bond of the same risk, maturity, and interest rate because the home mortgage comes with the option to prepay and risk of default. To compensate for the relatively lower value, lenders seek higher interest rates on mortgages than on Treasury bonds. In the United States, the legal ability of lenders to seek full recourse from homeowners who have defaulted depends on state law, but until the recent recession, lenders frequently assumed that defaulters had few additional assets worth pursuing, regardless of state law. Some of the borrower and property characteristics such as FICO score and LTV jointly determine the mortgage interest rate that is charged. In the United States, lenders advertise mortgage rates on the internet and in newspapers; this rate is adjusted (usually increased) based on borrower and property characteristics. Canada Canadian banks post rates for various types of mortgages. Borrowers with good credit can negotiate appreciable discounts on one type of mortgage (five-year fixed rates, which are explained in the " House Price Changes " section). For example, in 2009, the Canadian Association of Accredited Mortgage Professionals (CAAMP) reported that the average advertised rate on one type of mortgage was 5.97%, but that the average mortgage rate actually paid was 4.74%. Denmark In Denmark, mortgage interest rates are fixed at the time of the loan. The bonds financing the loan are pass-through bonds issued on the stock exchange, where the terms of the bonds exactly match the terms of the loan. Thus, the borrowers pay the market interest rate at the time of the loan, and the rates are posted by the stock exchange. Other European Countries Recent European interest rates on mortgages with short-term initial fixed period rates have been in the range of 3.04% (Spain) to 4.77% (Netherlands); mortgages with long-term initial fixed period rates and 10-year or more maturities have ranged from 4.30% (Germany) to 5.22% (Netherlands). Features of Selected National Mortgage Markets: The Homebuyer's View United States In the United States, mortgages can be split into three general groups: conforming, government insured, and other. Conforming mortgages are those that meet the government-sponsored enterprises' (GSEs) purchase standards and do not exceed the statutory maximum mortgage amounts known as the conforming loan limits. Government-insured mortgages are those guaranteed by the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), or the U.S. Department of Agriculture's rural housing program. The other group includes mortgages that do not qualify as conforming and are not government insured; this can happen if a mortgage exceeds the conforming loan limits (in which case the mortgage is known as a jumbo mortgage), if the borrower's credit quality is too low (in which case the mortgages are called subprime), or the mortgage application lacks full documentation about the borrower's income or assets (in which case the mortgage is called Alt-A, or alternative A). At present, interest rates on FHA-insured and Veterans Affairs-guaranteed mortgages are not based on risk; every borrower pays approximately the same interest rate. As discussed above, the interest rates for conforming mortgages and those in the "other" category are based on the risk associated with borrower, property, and lender characteristics. Research at the Federal Reserve suggests that in normal times the GSEs mortgage market activity reduces the interest rate on mortgages by less 0.5% (50 basis points) compared to a world without GSEs. There is no published research on the impact of the GSEs in the current economic environment, but in 2009 Fannie Mae and Freddie Mac issued 72% of all MBS suggesting that without the GSEs, mortgage availability would be lower and interest rates would be higher. Homeowners pay certain transaction costs that vary across (and sometimes within) nations. In the United States, borrowers frequently pay for real estate appraisals, land surveys, inspections, title insurance (which protects the lenders in case the sellers do not have a clear title to the properties being sold), origination fees (sometimes called points ), lender services, and recording the new ownership and liens with state or local governments. Closing costs are lower in most other nations. Loan Limits In 2010, the conforming loan limit (the maximum mortgage that the GSEs can purchase) is $417,000 except for in high-cost areas in the contiguous 48 states where it varies to a maximum of $729,750. The conforming loan limit in Alaska, Hawaii, Guam, and the U.S. Virgin Islands is $625,500 (50% higher than the regular limit of $417,000), and the high cost maximum is $938,250. The conforming loan limit is reviewed annually. FHA-insured mortgages are limited to $271,050, except for in high-cost areas where the limit varies to a maximum of $625,500. FHA loan limits are set specially in Alaska, Hawaii, Guam, and the U.S. Virgin Islands. The typical loan-to-value ratio in the United States on a new purchase or refinance money mortgage is 80%. Generally, borrowers who do not make at least a 20% downpayment must either purchase private mortgage insurance (PMI), or they obtain a government-insured mortgage. Mortgage Payments In the United States, home mortgages typically are for 30 years and have monthly payments that amortize the entire amount borrowed over the term of the loan. Biweekly mortgage payments, which pay off the loan more quickly, are not as common as they are in some other nations. At times mortgages have been offered requiring only interest (or sometimes a fraction of the interest) to be paid for a period of time Such mortgages stopped being available at the start of the 2007-2009 recession. In the United States, most prime mortgages can be prepaid without penalty. This is most commonly done to refinance a mortgage or when the homeowner moves. Many subprime mortgages with adjustable rates had low introductory rates and prepayment penalties to discourage borrowers from refinancing until after the higher rates became effective. U.S. mortgages can be refinanced to take advantage of lower interest rates or to take equity out of the home. The amount of equity withdrawn increases the size of the mortgage, and it is paid to the homeowner when the refinancing is finalized or closes . Refinancing with an equity withdrawal is known as cash out refinancing . In a refinancing, most closing costs are incurred again. Prior to the current recession, cash out refinancing for more than the amount owed was common. Recently, Freddie Mac has reported that some homeowners have reduced the amount of the new mortgage by using cash to reduce the balance. On reason for a cash in refinancing is that the homeowner wanted to refinance, but needed more equity (money down) to qualify for the mortgage. Assumptions An assumable mortgage allows a new purchaser to take the place of the seller of a home in an existing mortgage. This option would be exercised by the new home purchaser only when it is to his advantage (e.g., can obtain a lower mortgage interest rate than otherwise), and consequently usually a disadvantage to the lender. Most conforming mortgages are not assumable, although the housing GSEs say they will purchase these mortgages on a negotiated (as opposed to a standard) basis. Government-insured mortgages are assumable if the new borrower meets the current credit standards, and if the original borrower agrees to be responsible if the new borrower defaults. This liability makes assumption rare. Foreclosure and Recourse Foreclosure (the forced sale of a house because the borrower is delinquent in making mortgage payments) is governed by state law. In addition to foreclosure and sale of the property to satisfy the debt, some states allow a lender to seek any unpaid balance through the courts (recourse). Even where recourse is permitted, most lenders have rarely exercised this option because most homeowners who default have few additional assets. Taxation Home mortgage interest is generally tax deductable for U.S. taxpayers who itemize deductions. There is a 100% capital gains exemption on a home that the owners have lived in for two of the last five years. For married couples filing jointly the maximum exemption is $500,000 and for taxpayers filing individually the exemption is $250,000. Between April 9, 2008, and June 30, 2010, there were special tax credits ranging from $7,500 to $8,000 for qualifying homebuyers. Subprime Subprime mortgages are those made to borrowers with less than prime credit histories. There is not a formal definition of the term. According to Federal Reserve Chairman Ben S. Bernanke, the annual size of the subprime market ranged from $35 billion (4.5% of the mortgage market) in 1994 to $600 billion (20%) in 2006. Low-Income Homeownership Efforts In the United States, government policies to increase homeownership by low-income households have been the FHA-, VA-, and USDA-insured loan programs and involved the GSEs' affordable housing goals imposed by statute and regulation. There are also programs to provide downpayment assistance to low-income households and tax-free mortgage revenue bonds that municipalities can issue to reduce the mortgage interest rate paid by low- and moderate-income households. Other Nations The only nations in the world offering long-term fixed-rate mortgages are the United States and Denmark . In the other countries, mortgages are for shorter time periods and the interest rates adjust, sometimes monthly, sometimes every few years. This creates the risk that homeowners will not be able to afford the new payments. In Canada, this risk is eliminated by offering adjustable mortgages that extend or shorten the life of the mortgage to reflect the new interest rate. Denmark and Canada place less emphasis than the United States and Australia on homeownership as an aspiration. These other nations support low-income housing through a variety of programs and, in general, do not place as much emphasis on homeownership. The amount of government intervention varies. Canada, Denmark, and Australia do not have anything similar to the GSEs in the United States. In Canada, government mortgage insurance (somewhat similar to the FHA's insurance) plays a major role for all borrowers regardless of income or the amount borrowed. Canada, Denmark, and Australia have some tax support for owner-occupied housing. In Canada and Australia, much of the intervention in the housing markets is to support indigenous and immigrant populations. Arguably, underwriting standards in Canada, Denmark, and Australia have been stricter than in the United States. Canada Key differences between U.S. and Canadian mortgages are as follows: Canadian mortgages are more likely to have adjustable rates, prepayment penalties, and are currently easier to obtain with high loan-to-value (LTV) ratios. Most Canadian mortgages with less than 20% down are 100% guaranteed under the National Housing Act (NHA) by a government corporation (the Canadian Home Mortgage Corporation or CHMC). In contrast, most U.S. mortgages with less than 20% down are privately guaranteed for the difference between the downpayment and 20%. Canadian mortgages typically roll over every five years, even if they amortize over 30 years. If these mortgages are guaranteed by CHMC, the renewal is guaranteed and other banks can take them over. Closing costs are minimal or non-existent for rollovers. Canadian policy is to support programs that make rental and owner-occupied housing viable alternatives for all residents. Typically, various levels of government and nonprofits contribute to reduce the cost of low-income homeownership. In the United States, most government intervention has been to open homeownership to low- and moderate-income households. Minimum downpayments in Canada have fluctuated in recent years from as little as 0% to 5% at the present time. The minimum downpayment in the United States on an FHA mortgage is presently 3.5%. Canadian mortgage payment schedules can be synchronized to one's pay schedule. Canada supports housing options for low-income households through a variety of rental and ownership programs. Typically, various levels of government, CMHC, and nonprofits contribute to reduce the cost of low-income homeownership. Comparing mortgage costs in the United States and Canada is difficult, although one IMF study concluded that when interest rates, refinancing costs, and mortgage insurance costs are considered that similar prime borrowers pay similar amounts. CMHC is a government corporation that is partially supported through appropriations and partially self-funded. Appropriations cover assisted housing, implement other housing policy, and research. Mortgage insurance and securitization are commercially funded through fees, but the government provides the ultimate guarantee. CMHC pays the government for this guarantee. The role of Canadian mortgage brokers has been growing in recent years. The provincial governments license brokers, and in some provinces brokers have a fiduciary responsibility to borrowers. Brokers are not paid yield spread premiums, which amount to extra payments for higher rate mortgages. Loan Limits Unlike the United States, there is no fixed dollar limit on a mortgage that can be securitized with government support. Nor are there any eligibility limits on government mortgage insurance. In 2008 and 2009, the Canadian government enacted a number of mortgage requirements including limiting LTVs to 95%, prohibiting interest only loans, limiting the life of a mortgage to 35 years, and establishing other standards for government mortgages. The government also intervened in the secondary mortgage market by committing to purchase up to C$ 125 billion of insured mortgage pools. Approximately half that amount was spent. In Canada, a conventional mortgage is one with an LTV of 80% or less. Low downpayment mortgages are called high-ratio mortgages. By law, federally regulated depositories can hold a high-ratio mortgage only if there is mortgage insurance to protect against default. This mortgage insurance can be provided by a government corporation, CMHC or a private company. CMHC guarantees 100% of the loan amount and private insurers guarantee 90%. The typical new Canadian mortgage has an LTV of 75%. Types of Mortgages Interest rates on Canadian mortgages can be fixed for the life of the mortgage, or the interest rate can change. Mortgages with changeable interest rates can modify either the amount paid or the life of the mortgage. Canadian mortgages that have adjustable rates are called variable rate mortgages and are tied to market rates. When the rate changes, the mortgage payment remains constant, and the amounts going for principal and interest are adjusted, that is, the amortization schedule and life of the mortgage are adjusted to reflect the new interest rate. Variable rate mortgages can have caps, but those with caps usually have higher interest rates. Based on the length of the mortgage when it was initially taken out, the interest rates on most (62%) Canadian mortgages are fixed for four to five years, but interest rates were fixed for one year or less for 10% of mortgages, and only 12% of mortgages had fixed interest rates for more than five years. Mortgage Payments Canadian mortgage payments are frequently weekly, biweekly or monthly and synchronous with one's pay schedule. Canadian mortgages usually have a term from six months to 10 years, but payments are designed so that it will take 25 to 30 years to pay off the mortgage. The homeowner owes the balance of the loan at the end of the mortgage's term. Unless the homeowner opts to pay off the mortgage in whole or part, the outstanding balance is automatically rolled over into a new mortgage without additional fees. If the mortgage is insured, the homeowner has the option to negotiate a better arrangement with another lender and to transfer the mortgage. This refinancing could be problematic if the balance on the mortgage is more than the value of the home or if lenders reduce their lending. Canadian mortgages can have prepayment penalties (closed mortgages) or not (open mortgages). A closed mortgage prepayment penalty is incurred even if the homeowner moves, although this is frequently waived if the homeowner obtains a new mortgage from the current lender. For closed mortgages, there is a closed period, such as the first three years, during which a certain amount (typically 15%-20%) of the principal can be prepaid. Open mortgages, which are usually for one year, can be prepaid like a U.S. mortgage. If a homeowner moves, the mortgage can be transferred to the new home Assumption Some Canadian mortgages are assumable, which reduces the purchaser's appraisal and lawyer's fees. Some Canadian mortgages can be used to purchase a different home. Both these options reduce the burden of any prepayment penalties. Foreclosure and Recourse Canadian lenders can force delinquent borrowers into bankruptcy. After foreclosure, Canadian lenders can pursue borrowers for any unrecovered losses. Taxation Mortgage interest is not tax deductable in Canada. Capital gains on a principal residence are usually not taxed. Subprime Canada has a small Alt-A or "non-prime" mortgage market for borrowers who do not document their income. In 2006, Canadian non-prime mortgage originations were 5% compared with 14-20% in the United States. Low-Income Homeownership The federal and provincial governments have a number of affordable housing programs, which include rental and homeownership. Low-income homeownership programs frequently target indigenous populations. Denmark Denmark traces its current mortgage finance system to 1797. The Danish mortgage market is based on underwriting criteria established by law, matching mortgages' terms to bond terms (the balance principle), high securitization rates, and recourse lending which makes a borrower personally liable if foreclosure does not raise sufficient funds to cover the outstanding debt and costs of foreclosure. Denmark and the United States offer 30-year mortgages with constant (fixed) interest rates. Mortgages in most other nations are fixed for a few years at most. Mortgages in Denmark are made by specially authorized banks and subject to underwriting criteria established by law. For example, the maximum loan-to-value (LTV) ratio is currently 80% for owner-occupied homes; the maximum LTV on other homes (e.g., vacation) is lower regardless of borrower credit history. Mortgage interest rates are published, and there are no adjustments for borrower characteristics. To qualify for any kind of mortgage, the borrower will typically be required to qualify for a 30-year fixed-rate mortgage. This cost is generally higher than for adjustable-rate mortgages. Recent legislation, including the Financial Business Act of 2009, allows banks to apply to join mortgage banks in issuing Danish mortgage bonds. Another recent change, based on EU requirements, is that collateral must be added to mortgage bonds when an individual mortgage's loan-to-value ratio exceeds 80%. Key differences between the mortgage finance systems in the United States and Denmark are as follows: In Denmark, borrowers have two options to refinance: they can refinance as in the United States or they can purchase their mortgage at the current market price. When interests decrease, they will use the refinancing option. When interest rates increase, bond prices decrease, and Danish homeowners can buy back their mortgages out of the bonds. This second option is not available in the United States. The Danish system uses mortgage bonds. In the United States, Federal Deposit Insurance Corporation (FDIC) regulations protect the government's claim on the assets of an insolvent insured depository by limiting the use of mortgage bonds. Danish mortgage bonds are issued at market rates, and, except for a small processing fee, the corresponding interest rate is passed directly on to the homeowners. All borrowers with the same kind of mortgage will pay the same interest rate. The Danish mortgage bond system does not have risk-based tranches with different repayment priorities. The United States' MBS issued by the GSEs commonly have risk-based tranches. Denmark has statutory underwriting standards that would disqualify some homeowners in the United States. Foreclosure and deficiency judgments in Denmark are based on national law and typically take six months. In the United States, foreclosure and deficiency judgments vary by state and generally provide greater protection for homeowners. Danish mortgage banks retain credit (default) risk and pass onto investors prepayment and interest rate risk. In the United States, most mortgage originators pass on all risk to the secondary mortgage market. The housing GSEs and the federal government retain credit risk, but investment banks in the secondary mortgage market pass credit risk on to investors. Prepayment and interest rate risk is held by whoever purchases the MBS (sometimes the housing GSEs, and sometimes institutional investors). Types of Mortgages The Danish mortgage system offers three types of mortgages: fixed rate, adjustable rate and floating rate. FRMs typically are for 30 years and have the same interest rate for the life of the mortgage. Interest rates are usually higher than the alternatives, but monthly mortgage payments are fixed. The interest rate on ARMs changes at predetermined intervals of one, two, three, four, or five years. The amount of the change depends on the interest index rate on mortgage bonds. ARMs generally offer lower initial interest rates (and monthly payments), but future payments and interest rates are not known. Floating-rate mortgages are similar to ARMs, but the interest rate adjusts at shorter intervals such as three to six months. Floating-rate mortgages are set based on a reference rate (not the bond rate) such as the Copenhagen Interbank Offer Rate (Cibor). Interest rate caps are available. All three types of mortgages can have initial interest-only payments. Mortgages can be payable either in Kroner or Euro, but most are Kroner-denominated. Mortgage Payments Most Danish mortgages are for 30 years and are fully amortized over the term of the mortgage. Prepayment depends, in part, on the type of the mortgage, but all borrowers can prepay their mortgage by purchasing their bond in the market. Mortgage transaction costs (closing costs) are around 0.4% of the amount borrowed compared with 2% in the United States. Fixed-rate mortgages. FRMs can be prepaid by paying the balance owed. If interest rates decrease, which generally raises the price of a bond, the borrower can use this option. If interest rates increase, which generally lowers the price of the bond, the bond repurchase option is used. Adjustable-rate mortgages. ARMs can be prepaid for the amount owed at any interest rate reset, or by purchasing the bond on the market. Floating-rate mortgages. Floating-rate mortgages can be prepaid in three ways: first, for the unpaid balance at an interest rate reset, the same as an ARM; second, at a previously agreed price, typically 100% of the unpaid balance at any time; and third, by purchasing the underlying bonds. Loan Limits There are no absolute limits on the size of Danish mortgages, but there are limits on the LTV (80% for prime residences). Foreclosure and Recourse A typical residential foreclosure in Denmark takes six months from default to sale of the property. The homeowner is responsible if the proceeds of the sale do not cover the amount owed. Further legal action is possible if no other arrangements have been made to repay the balance owed. Assumption Danish mortgages can be assumed by the purchaser of the house. Taxation Mortgage interest payments are partly tax-deductible. There is no tax on capital gains from the sale of one's primary residence. Australia The U.S. and Australian housing finance systems exhibit both similarities and differences. Differences include the following: Australians appear to be more likely to select ARMs over FRMs. From July 2008 through February 2010 (the most recent available data), fewer than 10% of new mortgages have been "fixed rate," which in Australia means fixed for the first five years or less. The reason for this might be that interest rates on ARMs have been much lower than on FRMs. Sometimes borrowers respond to price wars on a portion of the mortgage market. In contrast, in the United States, approximately 85% of mortgages outstanding are fixed rate. Australians that have made extra payments on their mortgages can withdraw the prepaid funds. Some mortgages tie a credit card to the prepaid funds, but other mortgages charge a fee for redraws. This feature is not available in the United States, although U.S. lenders offer home equity lines of credit (HELOCs) that require a new loan application, approval and fees. The Australian government has no equivalent to the U.S. government's guaranteed mortgages. Homeowners obtain mortgages from banks, credit unions and building societies (CUBS), and mortgage originators, which are similar to U.S. mortgage brokers and bankers. Types of Mortgages and Features The Australian mortgage finance system offers fixed- and adjustable-rate mortgages. Fixed-Rate Mortgages. FRMs are generally limited to 15 years or less. Some FRMs convert after one to five years to ARMs for a total term of 25 years. Adjustable-Rate Mortgages. ARMs (commonly called floating-rate mortgages in Australia) are more common than FRMs. Most Australian mortgages are for 20-30 years, with the most typical maturity being 25 years. Monthly payments fully amortize the mortgage. Australian lenders charge most borrowers the same rate. There are, however, discretionary discounts offered to some borrowers, with sources indicating that this discount can be as much as 0.70% (70 basis points). Low documentation loans are available, but they have higher interest rates. Self-employed borrowers frequently have difficulty providing independent verification and take out low-documentation loans even at this higher cost. ARMs usually do not contain any prepayment penalties. FRMs frequently have either a fixed penalty or a penalty based on the difference between fixed and adjustable interest rates. Some Australians pay their mortgages off early by making monthly payments in excess of the contractual amount. Some mortgages have "redraw" facilities that allow households to withdraw excess payments and provide tax advantages to the homeowner. In Australia, the cost of refinancing averages about 1.4% of the mortgage amount. Prepayment fees average over 40% of the refinancing cost. Assumption Australian mortgages cannot be assumed. Mortgage Insurance Unlike the United States, there is no government mortgage insurance in Australia. Authorized deposit-taking institutions (ADIs) making mortgage loans must meet requirements promulgated under Basel II by the Australian Prudential Regulation Authority (APRA). Mortgages are classified as standard eligible or non-standard eligible. To be considered standard, income must be documented and verified, property offered as collateral must be appraised, and the property offered as collateral must be readily marketable. All other mortgages are non-standard. Capital to offset potential losses is reduced for low LTV mortgages, when there is lender insurance covering at least 40% of the mortgage, and for standard mortgages. In the United States, capital requirements are reduced for mortgages packaged by the GSEs into mortgage-backed securities and for government guaranteed mortgages. In the United States, private mortgage insurance is usually required for mortgages with LTVs above 80%. Loan Limits In Australia, there are no loan limits. Foreclosure and Recourse In addition to foreclosing on delinquent borrowers, lenders can use the legal process of sequestration to force borrowers into bankruptcy if the proceeds of foreclosure do not satisfy the debt. In the United States, state law determines if a borrower's other assets can be seized. Taxation Australia's tax system does not provide for any special treatment of mortgage interest. To the extent that a home is one's principal residence and not used to produce income, gains from selling the home are not taxed. When taxed, capital gains on a home are adjusted for inflation. First Time Homebuyers In July 2000, Australia adopted a First Home Owners Grant (FHOG) of AU$ 7,000 (approximately $5,600). Since 2000, there have been a few first homeowners' assistance programs, augmenting the original AU $7,000. Most recently, this has included the "First Home Owners Boost Scheme" between October 2008 and December 2009. However, these temporary programs have expired and only the $7,000 FHOG remains. Since October 2008, Australia has reduced the tax rate on savings dedicated to purchasing a first home. Subprime In the past, subprime (credit-impaired or non-conforming) borrowers have been able to obtain mortgages, but at a higher interest rate than prime borrowers. It is estimated that less than 1% of outstanding loans in 2009 were subprime. Secondary Mortgage Markets: Funding Mortgages United States Mortgages are designed to allow households to purchase homes that cost many times their annual incomes without waiting many years to accumulate sufficient savings to pay the full price. Funding long-term, fixed-rate mortgages, such as the 30-year mortgage, that is most common in the United States and Denmark challenges lenders because most funds directly available to financial intermediaries, such as banks, are for relatively short terms (less than five or 10 years), whereas mortgages are paid off over longer time periods. The United States and the rest of the world have developed different solutions to this mismatch of the duration of funding and mortgages. The prevalence of 30-year self-amortizing, fixed-rate mortgages in the United States makes mortgage funding more difficult than in countries with shorter-term or adjustable mortgages. A bank can minimize its interest rate risk—the risk that its profit margins will be reduced because of rising interest rates—by matching the term of its mortgages to the term of its deposits. As a practical matter, the longest-term insured bank deposits (certificates of deposit) are for five years. When a bank makes a mortgage loan for more than five years, it knows that it will have to obtain new funds or persuade the depositor to roll over the funds when the deposit term expires. The result is that while funding mortgages with federally insured deposits can be profitable, there are certain risks that lenders need to consider. One solution to the long-term funding challenges is ARMs, which are more popular in many other countries, because they shift the lender's interest rate risk to the borrower. In the United States, ARMs have been popular only in times of high fixed interest rates, such as the 1970s. In the United States, a secondary mortgage market has developed in which Fannie Mae, Freddie Mac, Ginnie Mae, and others purchase existing mortgages. The mortgages are pooled into mortgage-backed securities (MBS), which are sold to institutional investors. MBS represent a claim on the monthly payments of the underlying mortgages. Fannie Mae, Freddie Mac, and Ginnie Mae add their guarantee of timely payment of principal and interest to the investor; other MBS issuers do not add any guarantee to the MBS that they create. The MBS are normally liquid and can be resold later to other investors. Between 2001 and 2009, the GSEs share of the MBS market ranged between a low of 40% (2006) and a high of 73% (2008). Since 2008, the GSEs and Ginnie Mae together have issued 95% or more of the MBS issued. Table 3 reports covered bonds and MBS issues as a percentage of all residential mortgages outstanding. In the United States, new MBS volume was 10.1% of mortgages outstanding. In Canada, new MBS volume was 3.6%. In Denmark, new MBS were 0.1%, and new covered bonds were 58.5%. In Australia new MBS were 15.6%. New covered bond issues were negligible or zero in the United States, Canada, and Australia. In many other nations, mortgage funds are frequently raised in financial markets using covered bonds. This financial product, uncommon in the United States, provides the issuer's legal commitment to pay interest and principal, and the pledge of specific mortgages as collateral to guarantee this payment. The mortgages used as cover remain on the issuer's balance sheet. Covered-bond issuers make the payments regardless of the borrower's actions. As required by law or contract, a mortgage in default must be replaced, and if the value of the mortgages declines, additional mortgages (or other specified high-quality assets) must be added to the collateral pool. Like MBS, mortgage bonds are normally liquid and can be resold. Unlike MBS, Danish mortgage bonds are usually not divided into tranches. Canada As a practical matter, the only MBS in Canada are NHA loans pooled by and guaranteed by the government corporation, CMHC. Sometimes lenders will pay for CMHC insurance to allow the mortgages to be pooled. These MBS are pass throughs, have no risk-based tranches, and carry a Canadian government (CMHC) guarantee. In addition to the MBS, the government assumes prepayment and credit risk on Canadian Mortgage Bonds (CMBs). CMHC or a private insurer guarantees the underlying mortgages and CMHC guarantees timely payment of principal and interest on the MBS. This is similar to the roles played by the FHA and Ginnie Mae in the United States. Most non-NHA loans are held and serviced by the original lender. In the CMB program, the Canada Housing Trust purchases NHA MBS and issues the mortgage bonds, which pay interest semi-annually and return the principal at maturity. These mortgage bonds have a payment stream similar to corporate and government bonds, which usually pay interest semi-annually or quarterly and return the principal at maturity. The bonds are issued in sizes as small as C$ 1,000 and can be issued for any term, but usually are for five years. In Canada, depositories hold 69% of residential mortgage debt. Of this 69%, chartered banks, which are depositories, hold 56%. Denmark To raise funds for mortgages, a Danish mortgage bank sells mortgage bonds to investors. By Danish law, the term and interest rate of the mortgages and bonds must match. This is called the "balance principle." The Danish bonds use "tap" funding, that is, mortgages are added to a bond for two or three years. Bond rates are reported in Danish media. The interest rate on a specific mortgage depends on the specific bond used to fund it. Every qualifying applicant for a given mortgage type gets the same interest rate. The mortgage bank passes through homeowner payments to the investor holding the bond funding the specific mortgage, and the bank charges a margin (typically 0.5% of the loan balance) for operating costs including any losses. Until it is paid off, the mortgage remains on the bank's books. There are currently seven Danish mortgage banks and one other bank issuing Danish mortgage bonds. Australia Unlike in the United States, most Australian MBS have adjustable rates. Mortgage originators (brokers) largely sell their mortgages in MBS. The four largest Australian banks, which provide approximately 70% of the mortgage market, generally retain mortgages in portfolio. The CUBS (credit unions and building societies) securitize approximately 22% of their mortgages. The Australian Prudential Regulatory Authority (APRA), which regulates all financial services firms in the country, prohibits covered bonds. Table 3 reports the extent that various countries issue covered bonds and MBS. Conclusion The mortgage markets in all four nations—the United States, Canada, Denmark, and Australia—seem to have more differences than features in common. Yet except for Denmark, they have similar homeownership rates. Some possible reasons for this similar outcome are as follows: Demographic similarities could be more important than institutional details. Some differences in mortgage underwriting, such as minimum downpayment requirements, could delay homeownership on average for relatively short periods of time. Some features, such as the mortgage interest deduction and the treatment of capital gains on owner-occupied homes, could be built into the price of housing, reducing or eliminating the advantages given to homeownership. Bibliography General Green, Richard K. and Susan M. Wachter. "The American Mortgage in Historical and International Context." Journal of Economic Perspectives , vol. 19, no. 4 (Autumn 2005), pp. 93-114. Lehnert, Andreas. "Overview of US Mortgage Markets." Bank for International Settlements. Housing Finance in the Global Financial Market. CGFS Publications no. 26 (2005). At http://www.bis.org/publ/cgfs26cbpapers.htm . Canada Canada Mortgage and Housing Corporation. The Newcomer's Guide to Canadian Housing . 2007. At http://www.cmhc-schl.gc.ca/en/co/buho/upload/TheNewcomersGuide_E.pdf . Kiff, John, Steve Mennill, and Graydon Paulin. "How the Canadian Housing Finance System Performed through the Credit Crisis: Lessons for Other Markets." Journal of Structured Finance (Fall 2010), pp. 1-21. Kiff, John. Canadian Residential Mortgage Markets: Boring but Effective . International Monetary Fund, Working Paper WP/09/130. June 2009. At http://www.imf.org/external/pubs/ft/wp/2009/wp09130.pdf . Klyuev, Vladimir. Show Me the Money: Access to Finance . International Monetary Fund, Working Paper WP/08/22. January 2008. At http://www.imf.org/external/pubs/ft/wp/2008/wp0822.pdf . Denmark Frankel, Allen, Jacob Gyntelberg, Kristian Kjeldsen, and Mattias Persson. "The Danish Mortgage Market." BIS Quarterly Review (March 2004), pp. 95-109. At http://www.bis.org/publ/qtrpdf/r_qt0403h.pdf?noframes=1 . Realkreditradet, The Traditional Danish Mortgage Model . At http://www.realkreditraadet.dk/Files/Filer/Engelsk/2010/Publikation_engelsk.PDF . Australia Ellis, Luci, Sue Black, and Liz Dixon Smith. Housing Finance in Australia: 2005 . Bank for International Settlements. At http://www.bis.org/publ/wgpapers/cgfs26ellis.pdf .
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The United States, Canada, Denmark, and Australia are advanced economies that share many features, but their approaches to financing homeownership have differed. As the U.S. Congress considers housing finance reform, the experiences of these other nations may suggest some potentially useful policy approaches. In recent years, homeownership rates in the United States, Canada, and Australia have been similar: 66.9% in the United States, 68.4% in Canada, and 69.8% in Australia. Denmark's homeownership rate of 54.0% is low for this group of nations and for countries with developed economies. Of these four nations, only the United States and Denmark offer mortgages with payments that are fixed for 30 years. In Australia and Canada (and most of the world), mortgages adjust to current interest rates at intervals of one month to five years. Of the four nations, between 1991 and 2008, house prices increased the most in Australia and Denmark, but other countries including Ireland, the Netherlands, New Zealand, and Norway had still greater increases. Underwriting standards have been the most flexible in the United States and less flexible in Canada and Denmark. Some homeowners in the United States would not qualify for mortgages in Canada or Denmark. The United States and Australia have programs to encourage homeownership. Canada offers limited support for home purchases, and Denmark has no homeownership programs. Nevertheless, homeownership rates are similar in the United States, Australia, and Canada. U.S. and Canadian governments directly or indirectly guarantee most mortgages and assure lenders that mortgage payments will be made in a timely manner. Australia and Denmark have no such government guarantee. In Canada, Denmark, and Australia, borrowers who default remain responsible for any unpaid balances, but it is not clear how frequently this is pursued. In the United States, the ability of lenders to seek compensation beyond a foreclosure sale depends on state law and frequently this remedy is not invoked. Capital gains from the sale of one's main home are usually tax-exempt in all four nations; all but Canada allow taxpayers to deduct mortgage interest payments. Only the U.S. government has a maximum size on the mortgages that it will support. In the other nations, government support is offered to all mortgages. This report will be updated as warranted.
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On March 5, 1975, respondent, a member of the police force in Muskegon, Mich., was charged in a three-count indictment with distribution of various narcotics. Both before his trial in the United States District Court for the Western District of Michigan, and twice during the trial, respondent moved to dismiss the two counts of the indictment which concerned transactions that took place during the preceding September, on the ground that his defense had been prejudiced by preindictment delay. At the close of all the evidence, the court granted respondent's motion. Although the court did not explain its reasons for dismissing the second count, it explicitly concluded that respondent had "presented sufficient proof of prejudice with respect to Count I. App. to Pet. for Cert. 8a. The court submitted the third count to the jury, which returned a verdict of not guilty. The Government sought to appeal the dismissals of the first two counts to the United States Court of Appeals for the Sixth Circuit. That court, relying on our opinion in United States v. Jenkins, 420 U.S. 358, 95 S.Ct. 1006, 43 L.Ed.2d 250 (1975), concluded that any further prosecution of respondent was barred by the Double Jeopardy Clause of the Fifth Amendment, and therefore dismissed the appeal. 544 F.2d 903 (1976). The Government has sought review in this Court only with regard to the dismissal of the first count. We granted certiorari to give further consideration to the applicability of the Double Jeopardy Clause to Government appeals from orders granting defense motions to terminate a trial before verdict. We now reverse. * The problem presented by this case could not have arisen during the first century of this Court's existence. The Court has long taken the view that the United States has no right of appeal in a criminal case, absent explicit statutory authority. United States v. Sanges, 144 U.S. 310, 12 S.Ct. 609, 36 L.Ed. 445 (1892). Such authority was not provided until the enactment of the Criminal Appeals Act, Act of Mar. 2, 1907, h. 2564, 34 Stat. 1246, which permitted the United States to seek a writ of error in this Court from any decision dismissing an indictment on the basis of "the invalidity, or construction of the statute upon which the indictment is founded." Our consideration of Government appeals over the ensuing years ordinarily focused upon the intricacies of the Act and its amendments.1 In 1971, however, Congress adopted the current language of the Act, permitting Government appeals from any decision dismissing an indictment, "except that no appeal shall lie where the double jeopardy clause of the United States Constitution prohibits further prosecution." 18 U.S.C. § 3731 (1976 ed.). Soon thereafter, this Court remarked in a footnote with more optimism than prescience that "[t]he end of our problems with this Act is finally in sight." United States v. Weller, 401 U.S. 254, 255 n. 1, 91 S.Ct. 602, 604, 28 L.Ed.2d 26 (1971). For in fact the 1971 amendment did not end the debate over appeals by the Government in criminal cases; it simply shifted the focus of the debate from issues of statutory construction to issues as to the scope and meaning of the Double Jeopardy Clause. In our first encounter with the new statute, we concluded that "Congress intended to remove all statutory barriers to Government appeals and to allow appeals whenever the Constitution would permit." United States v. Wilson, 420 U.S. 332, 337, 95 S.Ct. 1013, 1018, 43 L.Ed.2d 232 (1975). Since up to that point Government appeals had been subject to statutory restrictions independent of the Double Jeopardy Clause, our previous cases construing the statute proved to be of little assistance in determining when the Double Jeopardy Clause of the Fifth Amendment would prohibit further prosecution. A detailed canvass of the history of the double jeopardy principles in English and American law led us to conclude that the Double Jeopardy Clause was primarily "directed at the threat of multiple prosecutions," and posed no bar to Government appeals "where those appeals would not require a new trial." Id., at 342, 95 S.Ct., at 1021. We accordingly held in Jenkins, supra, 420 U.S., at 370, 95 S.Ct., at 1013, that, whether or not a dismissal of an indictment after jeopardy had attached amounted to an acquittal on the merits, the Government had no right to appeal, because "further proceedings of some sort, devoted to the resolution of factual issues going to the elements of the offense charged, would have been required upon reversal and remand."2 If Jenkins is a correct statement of the law, the judgment of the Court of Appeals relying on that decision, as it was bound to do, would in all likelihood have to be affirmed.3 Yet, though our assessment of the history and meaning of the Double Jeopardy Clause in Wilson, Jenkins, and Serfass v. United States, 420 U.S. 377, 95 S.Ct. 1055, 43 L.Ed.2d 265 (1975), occurred only three Terms ago, our vastly in reased exposure to the various facets of the Double Jeopardy Clause has now convinced us that Jenkins was wrongly decided. It placed an unwarrantedly great emphasis on the defendant's right to have his guilt decided by the first jury empaneled to try him so as to include those cases where the defendant himself seeks to terminate the trial before verdict on grounds unrelated to factual guilt or innocence. We have therefore decided to overrule Jenkins, and thus to reverse the judgment of the Court of Appeals in this case. The origin and history of the Double Jeopardy Clause are hardly a matter of dispute. See generally Wilson, supra, 420 U.S., at 339-340, 95 S.Ct., at 1019-1020; Green v. United States, 355 U.S. 184, 187-188, 78 S.Ct. 221, 223-224, 2 L.Ed.2d 199 (1957); id., at 200, 78 S.Ct., at 230 (Frankfurter, J., dissenting). The constitutional provision had its origin in the three common-law pleas of autrefois acquit, autrefois convict, and pardon. These three pleas prevented the retrial of a person who had previously been acquitted, convicted, or pardoned for the same offense. As this Court has described the purpose underlying the prohibition against double jeopardy: "The underlying idea, one that is deeply ingrained in at least the Anglo-American system of jurisprudence, is that the State with all its resources and power should not be allowed to make repeated attempts to convict an individual for an alleged offense, thereby subjecting him to embarrassment, expense and ordeal and insecurity, as well as enhancing the possibility that even though innocent he may be found guilty." Green, supra, at 187-188, 78 S.Ct., at 223. These historical purposes are necessarily general in nature, and their application has come to abound in often subtle distinctions which cannot by any means all be traced to the original three common-law pleas referred to above. Part of the difficulty arises from the development of other protections for criminal defendants in the years since the adoption of the Bill of Rights. At the time the Fifth Amendment was adopted, its principles were easily applied, since most criminal prosecutions proceeded to final judgment, and neither the United States nor the defendant had any right to appeal an adverse verdict. See Act of Sept. 24, 1789, ch. 20, § 22, 1 Stat. 84. The verdict in such a case was unquestionably final, and could be raised in bar against any further prosecution for the same offense. Soon thereafter, Congress made provision for review of certain criminal cases by this Court, but only upon a certificate of division from the circuit court, and not at the instigation of the defendant. Act of April 29, 1802, ch. 31, § 6, 2 Stat. 159. It was not until 1889 that Congress permitted criminal defendants to seek a writ of error in this Court, and then only in capital cases. Act of Feb. 6, 1889, ch. 113, § 6, 25 Stat. 656.4 Only then did it become necessary for this Court to deal with the issues presented by the challenge of verdicts on appeal. And, in the very first case presenting the issues, United States v. Ball, 163 U.S. 662, 16 S.Ct. 1192, 41 L.Ed. 300 (1896), the Court established principles that have been adhered to ever since. Three persons had been tried together for murder; two were convicted, the other acquitted. This Court reversed the convictions, finding the indictment fatally defective, Ball v. United States, 140 U.S. 118, 11 S.Ct. 761, 35 L.Ed. 377 (1891), whereupon all three defendants were tried again. This time all three were convicte and they again sought review here. This Court held that the Double Jeopardy Clause precluded further prosecution of the defendant who had been acquitted at the original trial5 but that it posed no such bar to the prosecution of those defendants who had been convicted in the earlier proceeding. The Court disposed of their objection almost peremptorily: "Their plea of former conviction cannot be sustained, because upon a writ of error sued out by themselves the judgment and sentence against them were reversed, and the indictment ordered to be dismissed. . . . [I]t is quite clear that a defendant, who procures a judgment against him upon an indictment to be set aside, may be tried anew upon the same indictment, or upon another indictment, for the same offence of which he had been convicted." 163 U.S., at 671-672, 16 S.Ct., at 1195. Although Ball firmly established that a successful appeal of a conviction precludes a subsequent plea of double jeopardy, the opinion shed no light on whether a judgment of acquittal could be reversed on appeal consistently with the Double Jeopardy Clause. Because of the statutory restrictions upon Government appeals in criminal cases, this Court in the years after Ball was faced with that question only in unusual circumstances, such as were present in Kepner v. United States, 195 U.S. 100, 24 S.Ct. 797, 49 L.Ed. 114 (1904). That case arose out of a criminal prosecution in the Philippine Islands, to which the principles of the Double Jeopardy Clause had been expressly made applicable by Act of Congress. Although the defendant had been acquitted in his original trial, traditional Philippine procedure provided for a trial de novo upon appeal. This Court, in reversing the resulting conviction, remarked: "The court of first instance, having jurisdiction to try the question of the guilt or innocence of the accused, found Kepner not guilty; to try him again upon the merits, even in an appellate court, is to put him a second time in jeopardy for the same offense . . . ." Id., at 133, 24 S.Ct., at 806.6 More than 50 years later, in Fong Foo v. United States, 369 U.S. 141, 82 S.Ct. 671, 7 L.Ed.2d 629 (1962), this Court reviewed the issuance of a writ of mandamus by the Court of Appeals for the First Circuit instructing a District Court to vacate certain judgments of acquittal. Although indicating its agreement with the Court of Appeals that the judgments had been entered erroneou ly, this Court nonetheless held that a second trial was barred by the Double Jeopardy Clause. Id., at 143, 82 S.Ct., at 672. Only last Term, this Court relied upon these precedents in United States v. Martin Linen Supply Co., 430 U.S. 564, 97 S.Ct. 1349, 51 L.Ed.2d 642 (1977), and held that the Government could not appeal the granting of a motion to acquit pursuant to Fed.Rule Crim.Proc. 29 where a second trial would be required upon remand. The Court, quoting language in Ball, supra, 163 U.S., at 671, 16 S.Ct., at 1195, stated: "Perhaps the most fundamental rule in the history of double jeopardy jurisprudence has been that '[a] verdict of acquittal . . . could not be reviewed, on error or otherwise, without putting [a defendant] twice in jeopardy, and thereby violating the Constitution.' " 430 U.S., at 571, 97 S.Ct., at 1354. These, then, at least, are two venerable principles of double jeopardy jurisprudence. The successful appeal of a judgment of conviction, on any ground other than the insufficiency of the evidence to support the verdict, Burks v. United States, 437 U.S. 1, 98 S.Ct. 2141, 57 L.Ed.2d 1, poses no bar to further prosecution on the same charge. A judgment of acquittal, whether based on a jury verdict of not guilty or on a ruling by the court that the evidence is insufficient to convict, may not be appealed and terminates the prosecution when a second trial would be necessitated by a reversal.7 What may seem superficially to be a disparity in the rules governing a defendant's liability to be tried again is explainable by reference to the underlying purposes of the Double Jeopardy Clause. As Kepner and Fong Foo illustrate, the law attaches particular significance to an acquittal. To permit a second trial after an acquittal, however mistaken the acquittal may have been, would present an unacceptably high risk that the Government, with its vastly superior resources, might wear down the defendant so that "even though innocent, he may be found guilty." Green, 355 U.S., at 188, 78 S.Ct., at 223. On the other hand, to require a criminal defendant to stand trial again after he has successfully invoked a statutory right of appeal to upset his first conviction is not an act of governmental oppression of the sort against which the Double Jeopardy Clause was intended to protect. The common sense of the matter is most pithily, if not most elegantly, expressed in the words of Mr. Justice McLean on circuit in United States v. Keen, 26 F.Cas. p. 686, No. 15,510 (CC Ind.1839). He vigorously rejected the view that the Double Jeopardy Clause prohibited any new trial after the setting aside of a judgment of conviction against the defendant or that it "guarantees to him the right of being hung, to protect him from the danger of a second trial." Id., at 690. Although the primary purpose of the Double Jeopardy Clause was to protect the integrity of a final judgment, see Crist v. Bretz, 437 U.S. 28, at 33, 98 S.Ct. 2156, at 2159, 57 L.Ed.2d 24, this Court has also developed a body of law g arding the separate but related interest of a defendant in avoiding multiple prosecutions even where no final determination of guilt or innocence has been made. Such interests may be involved in two different situations: the first, in which the trial judge declares a mistrial; the second, in which the trial judge terminates the proceedings favorably to the defendant on a basis not related to factual guilt or innocence. When a trial court declares a mistrial, it all but invariably contemplates that the prosecutor will be permitted to proceed anew notwithstanding the defendant's plea of double jeopardy. See Lee v. United States, 432 U.S. 23, 30, 97 S.Ct. 2141, 2146, 53 L.Ed.2d 80 (1977). Such a motion may be granted upon the initiative of either party or upon the court's own initiative. The fact that the trial judge contemplates that there will be a new trial is not conclusive on the issue of double jeopardy; in passing on the propriety of a declaration of mistrial granted at the behest of the prosecutor or on the court's own motion, this Court has balanced "the valued right of a defendant to have his trial completed by the particular tribunal summoned to sit in judgment on him," Downum v. United States, 372 U.S. 734, 736, 83 S.Ct. 1033, 1034, 10 L.Ed.2d 100 (1963), against the public interest in insuring that justice is meted out to offenders. Our very first encounter with this situation came in United States v. Perez, 9 Wheat. 579, 6 L.Ed. 165 (1824), in which the trial judge had on his own motion declared a mistrial because of the jury's inability to reach a verdict. The Court said that trial judges might declare mistrials "whenever, in their opinion, taking all the circumstances into consideration, there is a manifest necessity for the act, or the ends of public justice would otherwise be defeated." Id., at 580. In our recent decision in Arizona v. Washington, 434 U.S. 497, 98 S.Ct. 824, 54 L.Ed.2d 717 (1975), we reviewed this Court's attempts to give content to the term "manifest necessity." That case, like Downum, supra,8 arose from a motion of the prosecution for a mistrial, and we noted that the trial court's discretion must be exercised with a careful regard for the interests first described in United States v. Perez. Arizona v. Washington, supra, at 514-516, 98 S.Ct., at 836. Where, on the other hand, a defendant successfully seeks to avoid his trial prior to its conclusion by a motion for mistrial, the Double Jeopardy Clause is not offended by a second prosecution. "[A] motion by the defendant for mistrial is ordinarily assumed to remove any barrier to reprosecution, even if the defendant's motion is necessitated by a prosecutorial or judicial error." United States v. Jorn, 400 U.S. 470, 485, 91 S.Ct. 547, 557, 27 L.Ed.2d 543 (1971) (opinion of Harlan, J.). Such a motion by the defendant is deemed to be a deliberate election on his part to forgo his valued right to have his guilt or innocence determined before the first trier of fact. "The important consideration, for purposes of the Double Jeopardy Clause, is that the defendant retain primary control over the course to be followed in the event of such err r." United States v. Dinitz, 424 U.S. 600, 609, 96 S.Ct. 1075, 1080, 47 L.Ed.2d 267 (1976). But "[t]he Double Jeopardy Clause does protect a defendant against governmental actions intended to provoke mistrial requests and thereby to subject defendants to the substantial burdens imposed by multiple prosecutions." Id., at 611, 96 S.Ct., at 1081. We turn now to the relationship between the Double Jeopardy Clause and reprosecution of a defendant who has successfully obtained not a mistrial but a termination of the trial in his favor before any determination of factual guilt or innocence. Unlike the typical mistrial, the granting of a motion such as this obviously contemplates that the proceedings will terminate then and there in favor of the defendant. The prosecution, if it wishes to reinstate the proceedings in the face of such a ruling, ordinarily must seek reversal of the decision of the trial court. The Criminal Appeals Act, 18 U.S.C. § 3731 (1976 ed.), as previously noted, makes appealability of a ruling favorable to the defendant depend upon whether further proceedings upon reversal would be barred by the Double Jeopardy Clause. Jenkins, 420 U.S., at 370, 95 S.Ct., at 1013, held that, regardless of the character of the midtrial termination, appeal was barred if "further proceedings of some sort, devoted to the resolution of factual issues going to the elements of the offense charged, would have been required upon reversal and remand." However, only last Term, in Lee, supra, the Government was permitted to institute a second prosecution after a midtrial dismissal of an indictment. The Court found the circumstances presented by that case "functionally indistinguishable from a declaration of mistrial." 432 U.S., at 31, 97 S.Ct., at 2146. Thus, Lee demonstrated that, at least in some cases, the dismissal of an indictment may be treated on the same basis as the declaration of a mistrial. In the present case, the District Court's dismissal of the first count of the indictment was based upon a claim of preindictment delay and not on the court's conclusion that the Government had not produced sufficient evidence to establish the guilt of the defendant. Respondent Scott points out quite correctly that he had moved to dismiss the indictment on this ground prior to trial, and that had the District Court chosen to grant it at that time the Government could have appealed the ruling under our holding in Serfass v. United States, 420 U.S. 377, 95 S.Ct. 1055, 43 L.Ed.2d 265 (1975). He also quite correctly points out that jeopardy had undeniably "attached" at the time the District Court terminated the trial in his favor; since a successful Government appeal would require further proceedings in the District Court leading to a factual resolution of the issue of guilt or innocence, Jenkins bars the Government's appeal. However, our growing experience with Government appeals convinces us that we must re-examine the rationale of Jenkins in light of Lee, Martin Linen, and other recent expositions of the Double Jeopardy Clause. Our decision in Jenkins was based upon our perceptions of the underlying purposes of the Double Jeopardy Clause, see ante, at 87: " 'The underlying idea, one that is deeply ingrained in at least the Anglo-American system of jurisprudence, is that the State with all its resources and power should not be allowed to make repeated attempts to convict an individual for an alleged offense, thereby subjecting him to embarrassment, expense and ordeal and insecurity . . . .' " Jenkins, supra, 420 U.S., at 370, 95 S.Ct., at 1013, quoting Green, 355 U.S., at 187, 78 S.Ct., at 223. Upon fuller consideration, we are now of the view that this language from Green, while entirely appropriate in the circumstances of that opinion, is not a principle which can be expanded to include situations in which the defendant is responsible for the second prosecution. t is quite true that the Government with all its resources and power should not be allowed to make repeated attempts to convict an individual for an alleged offense. This truth is expressed in the three common-law pleas of autrefois acquit, autrefois convict, and pardon, which lie at the core of the area protected by the Double Jeopardy Clause. As we have recognized in cases from United States v. Ball, 163 U.S. 662, 16 S.Ct. 1192, 41 L.Ed. 300 (1896), to Sanabria v. United States, 437 U.S. 54, 98 S.Ct. 2170, 57 L.Ed.2d 43, a defendant once acquitted may not be again subjected to trial without violating the Double Jeopardy Clause. But that situation is obviously a far cry from the present case, where the Government was quite willing to continue with its production of evidence to show the defendant guilty before the jury first empaneled to try him, but the defendant elected to seek termination of the trial on grounds unrelated to guilt or innocence. This is scarcely a picture of an all-powerful state relentlessly pursuing a defendant who had either been found not guilty or who had at least insisted on having the issue of guilt submitted to the first trier of fact. It is instead a picture of a defendant who chooses to avoid conviction and imprisonment, not because of his assertion that the Government has failed to make out a case against him, but because of a legal claim that the Government's case against him must fail even though it might satisfy the trier of fact that he was guilty beyond a reasonable doubt. We have previously noted that "the trial judge's characterization of his own action cannot control the classification of the action." Jorn, 400 U.S., at 478 n. 7, 91 S.Ct., at 554 (opinion of Harlan, J.), citing United States v. Sisson, 399 U.S. 267, 290, 90 S.Ct. 2117, 2129, 26 L.Ed.2d 608 (1970). See also Martin Linen, 430 U.S., at 571, 97 S.Ct., at 1354; Wilson, 420 U.S., at 336, 95 S.Ct., at 1018. Despite respondent's contentions, an appeal is not barred simply because a ruling in favor of a defendant "is based upon facts outside the face of the indictment," id., at 348, 95 S.Ct., at 1024, or because it "is granted on the ground . . . that the defendant simply cannot be convicted of the offense charged," Lee, 432 U.S., at 30, 97 S.Ct., at 2146. Rather, a defendant is acquitted only when "the ruling of the judge, whatever its label, actually represents a resolution [in the defendant's favor], correct or not, of some or all of the factual elements of the offense charged," Martin Linen, supra, 430 U.S., at 571, 97 S.Ct., at 1355. Where the court, before the jury returns a verdict, enters a judgment of acquittal pursuant to Fed.Rule Crim.Proc. 29, appeal will be barred only when "it is plain that the District Court . . . evaluated the Government's evidence and determined that it was legally insufficient to sustain a conviction." 430 U.S., at 572, 97 S.Ct., at 1355.9 Our opinion in Burks necessarily holds that there has been a "failure of proof," 437 U.S., at 16, 98 S.Ct., at 2149, requiring an acquittal when the Government does not submit sufficient evidence to rebut a defendant's essentially factual defense of insanity, though it may otherwise be entitled to have its case submitted to the jury. The defense of insanity, like the defense of entrapment, arises from "the notion that Congress could not have intended criminal punishment for a defendant who has committed all the elements of a proscribed offense," United States v. Russell, 411 U.S. 423, 435, 93 S.Ct. 1637, 1644, 36 L.Ed.2d 366 (1973), where other facts established to the satisfaction of the trier of fact provide a legally adequate justification for otherwise criminal acts.10 Such a factual finding does "necessarily establish the criminal defendant's lack of criminal culpability," post, at 106 (BRENNAN, J., dissenting), under the existing law; the fact that "the acquittal may result from erroneous evidentiary rulings or erroneous interpretations of governing legal principles," ibid., affects the accuracy of that determination, but it does not alter its essential character. By contrast, the dismissal of an indictment for preindictment delay represents a legal judgment that a defendant, although criminally culpable, may not be punished because of a supposed constitutional violation.11 We think that in a case such as this the defendant, by deliberately choosing to seek termination of the proceedings against him on a basis unrelated to factual guilt or innocence of the offense of which he is accused, suffers no injury cognizable under the Double Jeopardy Clause if the Government is permitted to appeal from such a ruling of the trial court in favor of the defendant. We do not thereby adopt the doctrine of "waiver" of double jeopardy rejected in Green.12 Rather, we conclude that the Double Jeopardy Clause, which guards against Government oppression, does not relieve a defendant from the consequences of his voluntary choice. In Green the question of the defendant's factual guilt or innocence of murder in the first degree was actually submitted to the jury as a trier of act; in the present case, respondent successfully avoided such a submission of the first count of the indictment by persuading the trial court to dismiss it on a basis which did not depend on guilt or innocence. He was thus neither acquitted nor convicted, because he himself successfully undertook to persuade the trial court not to submit the issue of guilt or innocence to the jury which had been empaneled to try him. The reason for treating a trial aborted on the initiative of the trial judge differently from a trial verdict reversed on appeal, for purposes of double jeopardy, is thus described in Jorn, 400 U.S., at 484, 91 S.Ct., at 556 (opinion of Harlan, J.): "[I]n the [second] situation the defendant has not been deprived of his option to go to the first jury, and, perhaps, end the dispute then and there with an acquittal. On the other hand, where the judge, acting without the defendant's consent, aborts the proceeding, the defendant has been deprived of his 'valued right to have his trial completed by a particular tribunal.' " We think the same reasoning applies in pari passu where the defendant, instead of obtaining a reversal of his conviction on appeal, obtains the termination of the proceedings against him in the trial court without any finding by a court or jury as to his guilt or innocence. He has not been "deprived" of his valued right to go to the first jury; only the public has been deprived of its valued right to "one complete opportunity to convict those who have violated its laws." Arizona v. Washington, supra, 434 U.S., at 509, 98 S.Ct., at 832. No interest protected by the Double Jeopardy Clause is invaded when the Government is allowed to appeal and seek reversal of such a midtrial termination of the proceedings in a manner favorable to the defendant.13 It is obvious from hat we have said that we believe we pressed too far in Jenkins, the concept of the "defendant's valued right to have his trial completed by a particular tribunal." Wade v. Hunter, 336 U.S. 684, 689, 69 S.Ct. 834, 837, 93 L.Ed. 974 (1949). We now conclude that where the defendant himself seeks to have the trial terminated without any submission to either judge or jury as to his guilt or innocence, an appeal by the Government from his successful effort to do so is not barred by 18 U.S.C. § 3731 (1976 ed.). We recognize the force of the doctrine of stare decisis, but we are conscious as well of the admonition of Mr. Justice Brandeis: "[I]n cases involving the Federal Constitution, where correction through legislative action is practically impossible, this Court has often overruled its earlier decisions. The Court bows to the lessons of experience and the force of better reasoning, recognizing that the process of trial and error, so fruitful in the physical sciences, is appropriate also in the judicial function." Burnet v. Coronado Oil & Gas Co., 285 U.S. 393, 406-408, 52 S.Ct. 443, 448, 76 L.Ed. 815 (1932) (dissenting opinion). Here, "the lessons of experience" indicate that Government appeals from midtrial dismissals requested by the defendant would significantly advance the public interest in assuring that each defendant shall be subject to a just judgment on the merits of his case, without "enhancing the possibility that even though innocent he may be found guilty." Green, 355 U.S., at 188, 78 S.Ct., at 223. Accordingly, the contrary holding of United States v. Jenkins is overruled. The judgment of the Court of Appeals is therefore reversed, and the cause is remanded for further proceedings. It is so ordered.
|
Respondent, indicted for federal drug offenses, moved before trial and twice during trial for dismissal of two counts of the indictment on the ground that his defense had been prejudiced by preindictment delay. At the close of all the evidence the trial court granted respondent's motion. The Government sought to appeal the dismissals under 18 U. S. C. § 3731 (1976 ed.), which allows the United States to appeal from a district court's dismissal of an indictment except where the Double Jeopardy Clause of the Fifth Amendment prohibits further prosecution. The Court of Appeals, concluding that that Clause barred further prosecution, dismissed the appeal, relying on United States v. Jenkins, 420 U. S. 358. In that case the Court, following the principle underlying the Double Jeopardy Clause that the Government with all its resources and power should not be allowed to make repeated attempts to convict an individual for an alleged offense, held that, whether or not a dismissal of an indictment after jeopardy had attached amounted to an acquittal on the merits, the Government had no right to appeal because "further proceedings of some sort, devoted to the resolution of factual issues going to the elements of the offense charged, would have been required upbn reversal and remand." Held: Where a defendant himself seeks to have his trial terminated without any submission to either judge or jury as to his guilt or innocence, an appeal by the Government from his successful effort to do so does not offend the Double Jeopardy Clause, and hence is not barred by 18 U. S. C. § 3731 (1976 ed.). United States v. Jenkins, supra, overruled. Pp. 87-101. (a) The successful appeal of a judgment of conviction, except on the ground of insufficiency of the evidence to support the verdict, Burks v. United States, ante, p. 1, does not bar further prosecution on the same charge. A judgment of acquittal, whether based on a jury verdict of not guilty or on a ruling by the court that the evidence is insufficient to convict, may not be appealed and terminates the prosecution when a second trial would be necessitated by a reversal. Pp. 87-92. (b) Where no final determination of guilt or innocence has been made a trial judge may declare a mistrial on the motion of the prosecution or upon his own initiative on1y if "there is a manifest necessity for the act, or the ends of public justice would otherwise be defeated," United States v. Perez. 9 Wheat. 579, 580, but where a de fendant successfully seeks to avoid his trial prior to its conclusion hy a motion for a mistrial, the Double .Ieopardv Clause is not offended hy a second prosecution. Such 'tm otion 1 the defendant is deemed to be a deliberate election on his part to forgo his valued right to have his guilt or innocence determined by the first trier of fact. U'ited States v. Dinitz, 424 U. S. 600, 609. Pp. 92-94. (c) At least in some cases, the dismissal of an indictment after jeopard has "attached" may be t reatecd on the same basis as the declaration of a mistrial even fhough a successful Goverrnent appeal would require further trial court proceedings leading to the factual resolution of the issue of guilt or innocence, see Lee v. Uoited States, 432 U. S.2 3; and the Court's growing experience with Government appeals calls for a re-examination of the rationale in Jenkins in light of Lee; United States v. Martin Liven Supply Co., 430 U. S. 564; and other recent expositions of the Double Jeopardy Clause. Pp. 94-95. (d) In a situation such as the instant one, where a defendant chooses to avoid conviction, not because of his assertion that the Government has failed to make out a case against him, but because of a legal claim that the Government's case against him must fail even though it might satisfy the trier of fact that he was guilly beyond a reasonable doubt, the defendant 1b deliberately choosing to seek termination of the trial suffers no injury cognizable under the Double .eopardy Clause if the Government is permitted to appeal from such a trial-court ruling favoring the defendant. The Double Jeopardy Clause, which guards against Government oppression, does not relieve a defendant of the consequences of his voluntary choice. Pp. 95-101. 544 F. 2d 903, reversed and remanded.
|
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Open Fuel Standard Act of 2008'' or
the ``OFS Act''.
SEC. 2. FINDINGS AND PURPOSES.
(a) Findings.--Congress makes the following findings:
(1) The status of oil as a strategic commodity, which
derives from its domination of the transportation sector,
presents a clear and present danger to the United States;
(2) in a prior era, when salt was a strategic commodity,
salt mines conferred national power and wars were fought over
the control of such mines;
(3) technology, in the form of electricity and
refrigeration, decisively ended salt's monopoly of meat
preservation and greatly reduced its strategic importance;
(4) fuel competition and consumer choice would similarly
serve to end oil's monopoly in the transportation sector and
strip oil of its strategic status;
(5) the current closed fuel market has allowed a cartel of
petroleum exporting countries to inflate fuel prices,
effectively imposing a harmful tax on the economy of the United
States of nearly $500,000,000,000 per year;
(6) much of the inflated petroleum revenues the oil cartel
earns at the expense of the people of the United States are
used for purposes antithetical to the interests of the United
States and its allies;
(7) alcohol fuels, including ethanol and methanol, could
potentially provide significant supplies of additional fuels
that could be produced in the United States and in many other
countries in the Western Hemisphere that are friendly to the
United States;
(8) alcohol fuels can only play a major role in securing
the energy independence of the United States if a substantial
portion of vehicles in the United States are capable of
operating on such fuels;
(9) it is not in the best interest of United States
consumers or the United States Government to be constrained to
depend solely upon petroleum resources for vehicle fuels if
alcohol fuels are potentially available;
(10) existing technology, in the form of flexible fuel
vehicles, allows internal combustion engine cars and trucks to
be produced at little or no additional cost, which are capable
of operating on conventional gasoline, alcohol fuels, or any
combination of such fuels, as availability or cost advantage
dictates, providing a platform on which fuels can compete;
(11) the necessary distribution system for such alcohol
fuels will not be developed in the United States until a
substantial fraction of the vehicles in the United States are
capable of operating on such fuels;
(12) the establishment of such a vehicle fleet and
distribution system would provide a large market that would
mobilize private resources to substantially advance the
technology and expand the production of alcohol fuels in the
United States and abroad;
(13) the United States has an urgent national security
interest to develop alcohol fuels technology, production, and
distribution systems as rapidly as possible;
(14) new cars sold in the United States that are equipped
with an internal combustion engine should allow for fuel
competition by being flexible fuel vehicles, and new diesel
cars should be capable of operating on biodiesel; and
(15) such an open fuel standard would help to protect the
United States economy from high and volatile oil prices and
from the threats caused by global instability, terrorism, and
natural disaster.
SEC. 3. OPEN FUEL STANDARD FOR TRANSPORTATION.
Chapter 329 of title 49, United States Code, is amended by adding
at the end the following:
``SEC. 32920. OPEN FUEL STANDARD FOR TRANSPORTATION.
``(a) Definitions.--In this section:
``(1) E85.--The term `E85' means a fuel mixture containing
85 percent ethanol and 15 percent gasoline by volume.
``(2) Flexible fuel automobile.--The term `flexible fuel
automobile' means an automobile that has been warranted by its
manufacturer to operate on gasoline, E85, and M85.
``(3) Fuel choice-enabling automobile.--The term `fuel
choice-enabling automobile' means--
``(A) a flexible fuel automobile; or
``(B) an automobile that has been warranted by its
manufacturer to operate on biodiesel.
``(4) Light-duty automobile.--The term `light-duty
automobile' means--
``(A) a passenger automobile; or
``(B) a non-passenger automobile.
``(5) Light-duty automobile manufacturer's annual
inventory.--The term `light-duty automobile manufacturer's
annual inventory' means the number of light-duty automobiles
that a manufacturer, during a given calendar year, manufactures
in the United States or imports from outside of the United
States for sale in the United States.
``(6) M85.--The term `M85' means a fuel mixture containing
85 percent methanol and 15 percent gasoline by volume.
``(b) Open Fuel Standard for Transportation.--
``(1) In general.--Except as provided in paragraph (2),
each light-duty automobile manufacturer's annual inventory
shall be comprised of--
``(A) not less than 50 percent fuel choice-enabling
automobiles in 2012, 2013, and 2014; and
``(B) not less than 80 percent fuel choice-enabling
automobiles in 2015, and in each subsequent year.
``(2) Temporary exemption from requirements.--
``(A) Application.--A manufacturer may request an
exemption from the requirement described in paragraph
(1) by submitting an application to the Secretary, at
such time, in such manner, and containing such
information as the Secretary may require by regulation.
Each such application shall specify the models, lines,
and types of automobiles affected.
``(B) Evaluation.--After evaluating an application
received from a manufacturer, the Secretary may at any
time, under such terms and conditions, and to such
extent as the Secretary considers appropriate,
temporarily exempt, or renew the exemption of, a light-
duty automobile from the requirement described in
paragraph (1) if the Secretary determines that
unavoidable events not under the control of the
manufacturer prevent the manufacturer of such
automobile from meeting its required production volume
of fuel choice-enabling automobiles due to a disruption
in--
``(i) the supply of any component required
for compliance with the regulations; or
``(ii) the use and installation by the
manufacturer of such component.
``(C) Consolidation.--The Secretary may consolidate
applications received from multiple manufactures under
subparagraph (A) if they are of a similar nature.
``(D) Conditions.--Any exemption granted under
subparagraph (B) shall be conditioned upon the
manufacturer's commitment to recall the exempted
automobiles for installation of the omitted components
within a reasonable time proposed by the manufacturer
and approved by the Secretary after such components
become available in sufficient quantities to satisfy
both anticipated production and recall volume
requirements.
``(E) Notice.--The Secretary shall publish in the
Federal Register--
``(i) notice of each application received
from a manufacturer;
``(ii) notice of each decision to grant or
deny a temporary exemption; and
``(iii) the reasons for granting or denying
such exemptions.
``(F) Labeling.--Each manufacturer that receives an
exemption under this paragraph shall place a label on
each exempted automobile. Such label--
``(i) shall comply with the regulations
prescribed by the Secretary under paragraph
(3); and
``(ii) may only be removed after recall and
installation of the required components.
``(G) Notice of exemption.--Each light-duty
automobile delivered to dealers and first purchasers
that is not a fuel choice-enabling automobile and for
which the manufacturer received an exemption under this
paragraph, shall be accompanied with a written
notification of such exemption, which complies with the
regulations prescribed by the Secretary under paragraph
(3).
``(3) Rulemaking.--Not later than 1 year after the date of
enactment of this Act, the Secretary of Transportation shall
promulgate regulations to carry out this section.''.
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Open Fuel Standard Act of 2008 or the OFS Act - Amends federal transportation law to require each light-duty automobile manufacturer's annual inventory to comprise at least: (1) 50% fuel choice-enabling automobiles in years 2012-2014; and (2) 80% fuel choice-enabling automobiles in 2015, and in each subsequent year.
Defines "fuel choice-enabling automobile" as: (1) a flexible fuel automobile capable of operating on gasoline, E85, and M85; or (2) an automobile capable of operating on biodiesel fuel.
Authorizes a manufacturer to request an exemption from such requirement from the Secretary of Transportation.
Requires: (1) each manufacturer that receives an exemption to place a label on each exempted automobile; and (2) each exempted light-duty automobile delivered to a dealer and first purchaser to be accompanied with a written notification of such exemption.
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In the Republic Aviation Corporation case, the employer, a large and rapidly growing military aircraft manufacturer, adopted, well before any union activity at the plant, a general rule against soliciting which read as follows: 'Soliciting of any type cannot be permitted in the factory or offices.' The Republic plant was located in a built-up section of Suffolk County, New York. An employee persisted after being warned of the rule in soliciting union membership in the plant by passing out application cards to employees on his own time during lunch periods. The employee was discharged for infraction of the rule and, as the National Labor Relations Board found, without discrimination on the part of the employer toward union activity. Three other employees were discharged for wearing UAW-CIO union steward buttons in the plant after being requested to remove the insignia. The union was at that time active in seeking to organize the pla t. The reason which the employer gave for the request was that as the union was not then the duly designated representative of the employees, the wearing of the steward buttons in the plant indicated an acknowledgment by the management of the authority of the stewards to represent the employees in dealing with the management and might impinge upon the employer's policy of strict neutrality in union matters and might interfere with the existing grievance system of the corporation. The Board was of the view that wearing union steward buttons by employees did not carry any implication of recognition of that union by the employer where, as here, there was no competing labor organization in the plant. The discharges of the stewards, however, were found not to be motivated by opposition to the particular union, or we deduce, to unionism. The Board determined that the promulgation and enforcement of the 'no solicitation' rule violated Section 8(1) of the National Labor Relations Act as it interfered with, restrained and coerced employees in their rights under Section 7 and discriminated against the discharged employee under Section 8(3).1 It determined also that the discharge of the stewards violated Section 8(1) and 8(3). As a consequence of its conclusions as to the solicitation and the wearing of the insignia, the Board entered the usual cease and desist order and directed the reinstatement of the discharged employees with back pay and also the rescission of 'the rule against solicitation in so far as it prohibits union activity and solicitation on company property during the employees' own time.' 51 N.L.R.B. 1186, 1189. The Circuit Court of Appeals for the Second Circuit affirmed, 142 F.2d 193, and we granted certiorari, 323 U.S. 688, 65 S.Ct. 55, because of conflict with the decisions of other circuits.2 In the case of Le Tourneau Company of Georgia, two employees were suspended two days each for distributing union literature or circulars on the employees' own time on company owned and policed parking lots, adjacent to the company's fenced in plant, in violation of a long standing and strictly enforced rule, adopted prior to union organization activity about the premises, which read as follows: 'In the future no Merchants, Concern, Company or Individual or Individuals will be permitted to distribute, post or otherwise circulate handbills or posters, or any literature of any description on Company property without first securing permission from the Personnel Department.' The rule was adopted to control littering and petty pilfering from parked autos by distributors. The Board determined that there was no union bias or discrimination by the company in enforcing the rule. The company's plant for the manufacture of earth moving machinery and other products for the war is in the country on a six thousand acre tract. The plant is bisected by one public road and built along another. There is one hundred feet of company-owned land for parking or other use between the highways and the employee entrances to the fenced enclosu es where the work is done, so that contact on public ways or on non-company property with employees at or about the establishment is limited to those employees, less than 800 out of 2100, who are likely to walk across the public highway near the plant on their way to work, or to those employees who will stop their private automobiles, buses or other conveyances on the public roads for communications. The employees' dwellings are widely scattered. The Board found that the application of the rule to the distribution of union literature by the employees on company property which resulted in the lay-offs was an unfair labor practice under Section 8(1) and 8(3). Cease and desist, and rule rescission orders, with directions to pay the employees for their lost time followed. 54 N.L.R.B. 1253. The Circuit Court of Appeals for the Fifth Circuit reversed the Board, 143 F.2d 67, and we granted certiorari because of conflict with the Republic case. 323 U.S. 688, 65 S.Ct. 55. These cases bring here for review the action of the National Labor Relations Board in working out an adjustment between the undisputed right of self-organization assured to employees under the Wagner Act and the equally undisputed right of employers to maintain discipline in their establishments. Like so many others, these rights are not unlimited in the sense that they can be exercised without regard to any duty which the existence of rights in others may place upon employer or employee. Opportunity to organize and proper discipline are both essential elements in a balanced society. The Wagner Act did not undertake the impossible task of specifying in precise and unmistakable language each incident which would constitute an unfair labor practice. On the contrary that Act left to the Board the work of applying the Act's general prohibitory language in the light of the infinite combinations of events which might be charged as violative of its terms. Thus a 'rigid scheme of remedies' is avoided and administrative flexibility within appropriate statutory limitations obtained to accomplish the dominant purpose of the legislation. Phelps Dodge Corporation v. National Labor Relations Board, 313 U.S. 177, 194, 61 S.Ct. 845, 852, 85 L.Ed. 1271, 133 A.L.R. 1217. So far as we are here concerned that purpose is the right of employes to organize for mutual aid without employer interference. This is the principle of labor relations which the Board is to foster. The gravamen of the objection of both Republic and Le Tourneau to the Board's orders is that they rest on a policy formulated without due administrative procedure. To be more specific it is that the Board cannot substitute its knowledge of industrial relations for substantive evidence. The contention is that there must be evidence before the Board to show that the rules and orders of the employers interfered with and discouraged union organization in the circumstances and situation of each company. Neither in the Republic nor the Le Tourneau cases can it properly be said that there was evidence or a finding that the plant's physical location made solicitation away from company property ineffective to reach prospective union members. Neither of these is like a mining or lumber camp where the employees pass their rest as wel as their work time on the employer's premises, so that union organization must proceed upon the employer's premises or be seriously handicapped.3 The National Labor Relations Act creates a system for the organization of labor with emphasis on collective bargaining by employees with employers in regard to labor relations which affect commerce. An essential part of that system is the rovision for the prevention of unfair labor practices by the employer which might interfere with the guaranteed rights. The method for prevention of unfair labor practices is for the Board to hold a hearing on a complaint which has been duly served upon the employer who is charged with an unfair labor practice. At that hearing the employer has the right to file an answer and to give testimony. This testimony, together with that given in support of the complaint, must be reduced to writing and filed with the Board. The Board upon that testimony is directed to make findings of fact and dismiss the complaint or enter appropriate orders to prevent in whole or in part the unfair practices which have been charged. Upon the record so made as to testimony and issues, courts are empowered to enforce, modify or set aside the Board's orders,4 subject to the limitation that the findings of the Board as to facts, if supported by evidence, are conclusive. Plainly this statutory plan for an adversary proceeding requires that the Board's orders on complaints of unfair labor practices be based upon evidence which is placed before the Board by witnesses who are subject to cross-examination by opposing parties.5 Such procedure strengthens assurance of fairness by requiring findings on known evidence. Ohio Bell Tel. Co. v. Public Utilities Comm. of Ohio, 301 U.S. 292, 302, 57 S.Ct. 724, 729, 81 L.Ed. 1093; United States v. Abilene & S. Ry. Co., 265 U.S. 274, 288, 44 S.Ct. 565, 569, 68 L.Ed. 1016. Such a requirement does not go beyond the necessity for the production of evidential facts, however, and compel evidence as to the results which may flow from such facts. Market St. R. Co. v. Railroad Comm. of California et al., 324 U.S. 548, 65 S.Ct. 770. An administrative agency with power after hearings to determine on the evidence in adversary proceedings whether violations of statutory commands have occurred may infer within the limits of the inquiry from the proven facts such conclusions as reasonably may be based upon the facts proven. One of the purposes which lead to the creation of such boards is to have decisions based upon evidential facts under the particular statute made by experienced officials with an adequate appreciation of the complexities of the subject which is entrusted to their administration. National Labor Relations Board v. Virginia Power Co., 314 U.S. 469, 479, 62 S.Ct. 344, 349, 86 L.Ed. 348; National Labor Relations Board v. Hearst Publications, 322 U.S. 111, 130, 64 S.Ct. 851, 860, 88 L.Ed. 1170. In the Republic Aviation Corporation case the evidence showed that the petitioner was in early 1943 a non-urban manufacturing establishment for military production which employed thousands. It was growing rapidly. Trains and automobiles gathered daily many employees for the plant from an area on Long Island, certainly larger than walking distance. The rule against solicitation was introduced in evidence and the circumstances of its violation by the dismissed employee after warning was detailed. As to the employees who were discharged for wearing the buttons of a union steward, the evidence showed in addition the discussion in regard to their right to wear the insignia when the union had not been recognized by the petitioner as the representative of the employees. Petitioner looked upon a steward as a union representative for the adjustment of grievances with the management after employer recognition of the stewards' union. Until such recognition petitioner felt that it would violate its neutrality in labor organization if it permitted the display of a steward button by an employee. From its point of view, such display represented to other employees that the union already was recognized. No evidence was offered that any unusual conditions existed in labor relations, the plant location or otherwise to support any contention that conditions at this plant differed from those occurring normally at any other large establishment. The Le Tourneau Company of Georgia case also is barren of special circumstances. The evidence which was introduced tends to prove the simple facts heretofore set out as to the circumstances surrounding the discharge of the two employees for distributing union circulars. These were the facts upon which the Board reached its conclusions as to unfair labor practices. The Intermediate Report in the Republic Aviation case, 51 N.L.R.B. at 1195, set out the reason why the rule against solicitation was considered inimical to the right of organization.6 This was approved by the Board. Id., 1186. The Board's reasons for concluding that the petitioner's insistence that its employees refrain from wearing steward buttons appear at page 1187 of the report.7 In the Le Tourneau Company case the discussion of the reasons underlying the findings was much more extended. 54 N.L.R.B. 1253, 1258, et seq. We insert in the note below a quotation which shows the character of the Board's opinion.8 Furthermore, in both opinions of the Board full citation of authorities was given including Matter of Peyton Packing Company, 49 N.L.R.B. 828, 50 N.L.R.B. 355, hereinafter referred to.9 The Board has fairly, we think, explicated in these cases the theory which moved it to its conclusions in these cases. The excerpts from its opinions just quoted show this. The reasons why it has decided as it has are sufficiently set forth. We cannot agree, as Republic urges, that in these present cases reviewing courts are left to 'sheer acceptance' of the Board's conclusions or that its formulation of policy is 'cryptic.' See Eastern-Central Motor Carriers Ass'n v. United States, 321 U.S. 194, 209, 64 S.Ct. 499, 506, 88 L.Ed. 668. Not only has the Board in these cases sufficiently expressed the theory upon which it concludes that rules against solicitation or prohibitions against the wearing of insignia must fall as interferences with union organization but in so far as rules against solicitation are concerned, it had theretofore succinctly expressed the requirements of proof which it considered appropriate to outweigh or overcome the presumption as to rules against solicitation. In the Peyton Packing Company case, 49 N.L.R.B. 828, at 843, hereinbefore referred to, the presumption adopted by the Board is set forth.10 Although this definite ruling appeared in the Board's decisions, no motion was made in the court by Republic or Le Tourneau after the Board's decisions for leave to introduce additional evidence to show unusual circumstances involving their plants or for other purposes.11 Such a motion might have been granted by the Board or court in view of the fact that the Intermediate Report in the Republic Aviation case was dated May 21, 1943, and that in Le Tourneau November 11, 1943, while the opinion in the Peyton Packing Company case was given as late as May 18, 1943. We perceive no error in the Board's adoption of this presumption.12 The Board had previously considered similar rules in industrial establishments and the definitive form which the Peyton Packing Company decision gave to the presumption was the product of the Board's appraisal of normal conditions about industrial establishments.13 Like a statutory presumption or one established by regulation, the validity, perhaps in a varying degree, depends upon the rationality between what is proved and what is inferred.14 In the Republic Aviation case, petitioner urges that irrespective of the validity of the rule against solicitation, its application in this instance did not violate Section 8(3), note 1, supra, because the rule was not discriminatorily applied against union solicitation but was impartially enforced against all solicitors. It seems clear, however that if a rule against solicitation is invalid as to union solicitation on the employer's premises during the employee's own time, a discharge because of violation of that rule discriminates within the meaning of Section 8(3) in that it discourages membership in a labor organization. Republic Aviation Corporation v. National Labor Relations Board is affirmed. National Labor Relations Board v. Le Tourneau Company of Georgia is reversed. Mr. Justice ROBERTS dissents in each case.
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1. The National Labor Relations Board was warranted in these cases in finding unfair labor practices, violative of § 8 of the National Labor Relations Act, in the employer's (1) enforcement of a "nosolicitation" rule against the solicitation of union membership by employees on company property during lunch hour; (2) discharge of employees for wearing union "shop steward" buttons in the plant though at a time when a majority of the employees had not designated any collective bargaining representative; and (3) enforcement of a general "no-distribution" rule against distribution of union literature or circulars by employees on their own time though on parking lots owned by the company and adjacent to the plant. Pp. 795, 803. 2. As an administrative agency with power after hearings to determine on the evidence in adversary proceedings whether violations of statutory commands have occurred, the Labor Board, within the limits of its inquiry, may infer from proven facts such conclusions as reasonably may be based on the facts proven. P. 800. 3. It was reasonable for the Labor Board to adopt a presumption of invalidity of a company rule forbidding union solicitation by employees on company property outside of working hours, in the absence of evidence that special circumstances make the rule necessary in order to maintain production or discipline. P. 803. 4. The discharge of an employee for violation of a company rule against solicitation, which rule was invalid as applied to the union solicitation in which the employee engaged on his own time, was discriminatory within the meaning of § 8 (3) of the Act in that it discouraged membership in a labor union, notwithstanding that the rule was enforced impartially against all solicitors. P. 805. 142 F. 2d 193, affirmed. 143 F. 2d 67, reversed.
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On March 14, 1917, Mrs. Woodbury took the Galveston, Harrisburg & San Antonio Railway at San Antonio, Tex., for El Paso, Tex., and checked her trunk, which she took with her. It was lost and she sued the company in a state district court for the value of trunk and contents, which the jury found to be $500. Mrs. Woodbury was traveling on a coupon ticket purchased at Timmins, Ontario, from a Canadian railroad, entitling her to travel over it and connecting lines, from Timmins to El Paso and return, apparently with stop-over privileges. When the trunk was lost she was on her journey out. She was not told, when she purchased her ticket or when she checked her trunk, that there was any limitation upon the amount of the carrier's liability. It did not appear whether the ticket purchased contained notice of any such limitation, nor did it appear what was the law of Canada in this respect. The company insisted that Mrs. Woodbury was on an interstate journey, and that under the Act to Regulate Commerce (Act Feb. 4, 1887, c. 104, 24 Stat. 379, as amended [Comp. St. § 8563 et seq.]), it was not liable for more than $100, since it had duly filed with the Interstate Commerce Commission and published a tariff limiting liability to that amount unless the passenger declared a higher value and paid excess charges, which Mrs. Woodbury had not done. She insisted that her transportation was not subject to the Act to Regulate Commerce, because it began in a foreign country, and that the liability was governed by the law of Canada, which should, in the absence of evidence, be assumed to be like the law of Texas, the forum, and that by the law of Texas the limitation of liability was invalid. The trial court held that she was entitled to recover only $100, and entered judgment for that amount. This judgment was reversed by the Court of Civil Appeals, which entered judgment for Mrs. Woodbury in the sum of $500. 209 S. W. 432. The case came here on writ of certiorari. 250 U. S. 637, 39 Sup. Ct. 493, 63 L. Ed. 1183. The only question before us is the amount of damages recoverable. If Mrs. Woodbury's journey had started in New York, instead of across the border in Canada, the provision in the published tariff would clearly have limited the liability of the carrier to $100; for her journey would have been interstate, although the particular stage of it on which the trunk was lost lay wholly within the state of Texas. Compare Texas & New Orleans Railroad Co. v. Sabine Tramway Co., 227 U. S. 111, 33 Sup. Ct. 229, 57 L. Ed. 442. And the Carmack Amendment (Comp. St. §§ 8604a, 8604aa), under which carriers may limit liability by published tariff, applies to the baggage of a passenger carried in interstate commerce (Boston & Maine Railroad Co. v. Hooker, 233 U. S. 97, 34 Sup. Ct. 526, 58 L. Ed. 368, L. R. A. 1915B, 450 Ann. Cas. 1915D, 593), although it does not deal with liability for personal injuries suffered by the passenger (Chicago, Rock Island & Pacific Railway Co. v. Maucher, 248 U. S. 359, 39 Sup. Ct. 108, 63 L. Ed. 294). The subsequent legislation, the Cummins Amendment (Act March 4, 1915, c. 176, 38 Stat. 1196), as amended by the Act of August 9, 1916, c. 301, 39 Stat. 441 (Comp. St. §§ 8592, 8604a), has not altered the rule regarding liability for baggage. But counsel for Mrs. Woodbury insists that solely because her journey originated in Canada the provisions of the Act to Regulate Commerce do not apply. The contention is that section 1 of the act of 1887 does not apply to the transportation of passengers from a foreign country to a point in the United States. To this there are two answers. The first is that the transportation here in question is not that of a passenger, but of property. Boston & Maine Railroad Co. v. Hooker, supra. The second is that the act does apply to the transportation of both passengers and property from an adjacent foreign country, such as Canada. Section 1 declares that the act applies to 'any common carrier * * * engaged in the transportation of passengers or property * * * from any place in the United States to an adjacent foreign country.' A carrier engaged in transportation by rail to an adjacent foreign country is, at least ordinarily, engaged in transportation also from that country to the United States. The test of the application of the act is not the direction of the movement, but the nature of the transportation as determined by the field of the carriers' operation. This is the construction placed upon the act by the Interstate Commerce Commission. International Paper Co. v. D. & H. Co., 33 Interst. Com. Com'n R. 270, 273, citing T. & P. Ry. Co. v. I. C. C., 162 U. S. 197, 16 Sup. Ct. 666, 40 L. Ed. 940. It is in harmony with that placed upon the words of section 1 of the Harter Act (Act Feb. 13, 1893, c. 105, 27 Stat. 445 [Comp. St. § 8029]), 'any vessel transporting merchandise or property from or between ports of the United States and foreign ports,' which in Knott v. Botany Mills, 179 U. S. 69, 75, 21 Sup. Ct. 30, 45 L. Ed. 90, were construed to include vessels bringing cargoes from foreign ports to the United States. There is a later clause in section 1 which deals specifically with the transportation of property to or from foreign countries; but cases arising under that clause are not applicable here. That clause applies where the foreign country is not adjacent to the United States. The cases which hold that the act does not govern shipments from a foreign country in bond through the United States to another place in a foreign country, whether adjacent or not, are also not in point. Compare United States v. Philadelphia & Reading Ry. Co. (D. C.) 188 Fed. 484; In the Matter of Bills of Lading, 52 Interst. Com. Com'n R. 671, 726-729; M. Canales v. Galveston, Harrisburg & San Antonio Railway Co., 37 Interst. Com. Com'n R. 573. Since the transportation here in question was subject to the Act to Regulate Commerce, both carrier and passenger were bound by the provisions of the published tariffs. As these limited the recovery for baggage carried to $100, in the absence of a declaration of higher value and the payment of an excess charge, and as no such declaration was made and excess charge paid, that sum only was recoverable. Reversed.
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1. The declaration of the Act to Regulate Commerce (§ 1) that it shall apply to any common carrier engaged in the transportation of persons or property from any place in the United States to an adjacent foreign country,contemplates its application also to the transportation by such a carrier from the adjacent foreign country into the United State* since the test of the application of the act is the field of the carrier's operation and not the direction ofthe movement. P. 359. 2. Whei6 a passenger traveling from Canada to Texas and return without any express stipulation as to the liability of the carrier for loss of baggage, through the fault of the carrier lost her trunk in Texas on the journey out, held, that the amount of her recovery was limited under the Carmack Amendment by the carrier's published tariffs filed with the Interstate Commerce Commission. Id. 3. The right of a carrier, under the Carmack Amendment, to limit by tariff the amount of its liability for the baggage of a passenger, was not altered by the Act of March 4, 1915, known as the Cummins Amendment, as amended August 9, 1916. Id. 209 S.W . Rep. 432, reversed.
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The question presented by the certificate of division does not appear to us difficult of solution. Upon principle, an act which is not an offence at the time it is committed cannot become such by any subsequent independent act of the party with which it has no connection. By the clause in question, the obtaining of goods on credit upon false pretences is made an offence against the United States, upon the happening of a subsequent event, not perhaps in the contemplation of the party, and which may be brought about, against his will, by the agency of another. The criminal intent essential to the commission of a public offence must exist when the act complained of is done: it cannot be imputed to a party from a subsequent independent transaction. There are cases, it is true, where a series of acts are necessary to constitute an offence, one act being auxiliary to another in carrying out the criminal design. But the present is not a case of that kind. Here an act which may have no relation to proceedings in bankruptcy becomes criminal, according as such proceedings may or may not be subsequently taken, either by the party or by another. There is no doubt of the competency of Congress to provide, by suitable penalties, for the enforcement of all legislation necessary or proper to the execution of powers with which it is intrusted. And as it is authorized 'to establish uniform laws on the subject of bankruptcies throughout the United States,' it may embrace within its legislation whatever may be deemed important to a complete and effective bankrupt system. The object of such a system is to secure a ratable distribution of the bankrupt's estate among his creditors, when he is unable to discharge his obligations in full, and at the same time to relieve the honest debtor from legal proceedings for his debts, upon a surrender of his property. The distribution of the property is the principal object to be attained. The discharge of the debtor is merely incidental, and is granted only where his conduct has been free from fraud in the creation of his indebtedness or the disposition of his property. To legislate for the prevention of frauds in either of these particulars, when committed in contemplation of bankruptcy, would seem to be within the competency of Congress. Any act committed with a view of evading the legislation of Congress passed in the execution of any of its powers, or of fraudulently securing the benefit of such legislation, may properly be made an offence against the United States. But an act committed within a State, whether for a good or a bad purpose, or whether with an honest or a criminal intent, cannot be made an offence against the United States, unless it have some relation to the execution of a power of Congress, or to some matter within the jurisdiction of the United States. An act not having any such relation is one in respect to which the State can alone legislate. The act des ribed in the ninth subdivision of sect. 5132 of the Revised Statutes is one which concerns only the State in which it is committed: it does not concern the United States. It is quite possible that the framers of the statute intended it to apply only to acts committed in contemplation of bankruptcy; but it does not say so, and we cannot supply qualifications which the legislature has failed to express. Our answer to the question certified must be in the negative; and it will be so returned to the Circuit Court.
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1 An act which is not an offence at the time it is committed cannot become such by any subsequent independent act of the party with which it has no connection. Accordingly, that part of sect. 5132, Rev. Stat., which declares that every personrespecting whom proceedings in bankruptcy are commenced, either upon his own petition or that of a creditor, who, within three months before their commencement, obtains goods upon false pretences with intent to defraud shall be punished by imprisonment, is inoperative to render the act an offence, because its criminal character is to be determined by subsequent proceedings, which, at the time the goods were so obtained, may not have been in his contemplation, and may be instituted, against his will, by another. 2. It is competent for Congress to enforce, by suitable penalties, all legislation necessary or proper to the execution of powers with which it is intrusted; and any act committed with a view of evading such legislation, or fraudulently securing its benefits, may be made an offence against the United States. But it is otherwise, when an act committed in a State has no relation to the execution of a power of Congress, or to any matter within the jurisdiction of the United States.
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Federal Child Care and Early Education Programs and Tax Provisions Several federal programs support child care, education, or related services, primarily for low-income working families. In addition, the tax code includes provisions specifically targeted to assist families with child care expenses. Descriptions of those programs and tax provisions follow, as does Table 1 , which shows funding (or obligations or tax expenditures, where applicable and available) for the programs and tax provisions for the past five years. In many cases, other Congressional Research Service (CRS) reports are referenced as sources for more detailed information about individual programs. Early childhood care and education programs still due to be reauthorized in the 110 th Congress include the Child Care and Development Block Grant and programs under the No Child Left Behind Act (NCLBA). Legislation to reauthorize Head Start ( H.R. 1429 ), a program whose authorization expired with FY2003, was signed into law ( P.L. 110-134 ) by the President on December 12, 2007. All of these programs have continued to receive funding. The NCLBA programs include Elementary and Secondary Education Act (ESEA) Title I, Part A, Early Reading First, Even Start, and the Early Childhood Educator Professional Development program. Programs for young children contained in the Individuals with Disabilities Education Act (IDEA), such as the Preschool Grants program and the Infants and Toddlers program, are not up for reauthorization in the 110 th Congress. Readers should be aware that this report does not attempt to cover all issues connected with each of those reauthorizations. Child Care and Development Block Grant (CCDBG)1 The primary federal grant program funding child care is the CCDBG, which was created in 1990 and reauthorized (through FY2002) and substantially expanded in 1996, as part of welfare reform. The CCDBG is overdue for reauthorization, and the 110 th Congress has inherited this unfinished task. (Although the 109 th Congress completed legislation to provide the mandatory funding portion for the CCDBG through FY2010, the CCDBG Act itself, which outlines the rules of program, and includes the authorization level for discretionary funding, awaits reauthorization. In the meantime, discretionary funding has been provided via the appropriations process.) The CCDBG is administered by the Department of Health and Human Services (HHS), and provides formula block grants to states, which use the grants to subsidize the child care expenses of families with children under age 13, if the parents are working or in school, and family income is less than 85% of the state median. (In practice, many states establish income eligibility levels that are lower than this federal threshold.) Child care services are provided on a sliding fee scale basis, and parents may choose to receive assistance through vouchers or certificates, which can be used with a provider of the parents' choice, including religious providers and relatives. States receiving CCDBG funds must establish child care licensing standards, although federal law does not dictate what these standards should be or what types of providers must be covered. In addition, states must have health and safety requirements applicable to all providers receiving CCDBG subsidies that address prevention and control of infectious diseases, building and physical premises safety, and health and safety training for care givers. However, federal law does not dictate the specific contents of these requirements. The CCDBG is funded through both discretionary and capped entitlement (mandatory) grants (referred to in combination as the Child Care and Development Fund (CCDF)), and state maintenance-of-effort (MOE) and matching requirements apply to part of the entitlement funds. States must use at least 4% of their total funds to improve the quality and availability of child care, and according to statute, must target 70% of entitlement funds on welfare recipients working toward self-sufficiency or families at risk of welfare dependency. However, because all families falling below the 85% of state median income requirement can be categorized as "at risk," the 70% targeting of the welfare or at-risk population does not necessarily mean welfare families must be served. In theory, all funds may be used for low-income, non-welfare, working families. However, state plans indicate that many states guarantee child care to welfare families. No more than 5% of state allotments may be used for state administrative costs. The FY2006 Appropriations Act for the Departments of Labor, HHS, and Education ( P.L. 109-149 ) included roughly $2.1 billion in discretionary funding for the CCDBG. (An across-the-board rescission of 1% brought the precise total to $2.062 billion.) The fourth and final CR ( P.L. 110-5 ) covering FY2007 maintained discretionary funding at the $2.1 billion level. Mandatory (or "entitlement") CCDBG funding beginning in FY2003 through FY2005 was provided at the FY2002 rate ($2.717 billion for the year), under a series of funding extensions. Ultimately, as alluded to earlier, funding for a longer, five-year period (FY2006-FY2010) was included in the Deficit Reduction Act of 2005, a budget spending reconciliation bill ( S. 1932 ), which was signed into law ( P.L. 109-171 ) on February 8, 2006. This law provides $2.917 billion annually for each of FY2006-2010. Temporary Assistance for Needy Families (TANF) TANF, created in the 1996 welfare reform law ( P.L. 104-193 ), provides fixed block grants for state-designed programs of time-limited and work-conditioned aid to needy families with children. The original legislation provided $16.5 billion annually through FY2002, and after a series of twelve temporary extensions, Congress included several welfare provisions (and mandatory child care funding) in its spending budget reconciliation bill ( S. 1932 ), which was signed into law ( P.L. 109-171 ) on February 8, 2006. The law maintains the TANF block grant at $16.5 billion for FY2006-2010. Child care is one of many services for which states may use TANF funding. In FY2006 (the most recent year for which data are available), HHS reports that states spent $1.24 billion in federal TANF funds for child care within the TANF program, and $2.23 billion in state TANF and separate state program (SSP) MOE funds. In addition, states may transfer up to 30% of their TANF allotments to CCDF, to be spent according to the rules of the child care program (as opposed to TANF rules). The transfer from the FY2006 TANF allotment to the CCDBG totaled $1.9 billion (representing 12% of the FY2006 TANF allotment). Child and Adult Care Food Program (CACFP) The CACFP provides federal funds (in some cases commodities) for meals and snacks served in licensed child care centers, family and group day care homes, and Head Start centers. Child care providers that are exempt from state licensing requirements must comply with alternative state or federal standards. Children under 12, migrant children under 15, and children with disabilities of any age may participate, although most are preschoolers. Eligible providers are usually public and private nonprofit organizations. The CACFP is an open-ended entitlement, administered by the Department of Agriculture. For FY2008, obligations are estimated to be $2.289 billion, and $2.172 in FY2007. Social Services Block Grant (SSBG) Title XX of the Social Security Act authorizes Social Services Block Grants, which may be used for social services at the states' discretion. There are no federal income eligibility requirements, targeting provisions, service mandates, or matching requirements. The most recently published HHS analysis of state expenditures indicates over 9% of total SSBG expenditures made in FY2005 ($241 million) were for child care in that year, a decrease from those made for child care in FY2004 ($254 million). Title XX is a capped entitlement, and state allocations are based on relative population size. It should be noted that although the SSBG has an entitlement ceiling, appropriations may not always abide by it. For example, the ceiling in FY2001 was $1.7 billion; however, Congress appropriated $1.725 billion for that year, despite the ceiling. Funding for the SSBG has been held steady at $1.7 billion for the past seven years (most recently, for FY2008), with states retaining authority to transfer up to 10% of their TANF block grants to the SSBG. However, as part of the FY2006 appropriations, in addition to the regular SSBG funding, an additional $550 million was provided in the Defense Appropriations Act ( P.L. 109-148 ), targeted for needs arising from the Gulf Coast Hurricanes of 2005. P.L. 110-28 , signed into law on May 25, 2007, extends the availability of these funds for expenditure through FY2008, as a good portion remained unspent prior to the end of FY2007, and without legislative action, would have been returned to the Treasury. Head Start Head Start provides comprehensive early childhood education and development services to low-income preschool children, on a part- or full-day basis. After unsuccessful attempts in the 109 th Congress to reauthorize the Head Start program (whose authorization had expired with FY2003), legislation reauthorizing the program through FY2012 was passed by the current Congress in November 2007, and that bill, H.R. 1429 / H.Rept. 110-439 , was signed into law ( P.L. 110-134 ) by the President on December 12, 2007. Despite the long period of overdue reauthorization, funding continued to be provided through the appropriations process. Under current law, Head Start funds are provided directly by HHS to local grantees, which must comply with detailed federal performance standards. The available data show funded enrollment for Head Start in FY2006 to have totaled 909,201 children (10% of whom were under age 3, participating in Early Head Start). After three continuing resolutions (CR) had extended temporary funding for Head Start at its FY2006 annual rate, a fourth CR ( H.J.Res. 20 ), signed into law ( P.L. 110-5 ) on February 15, 2007, ultimately provided funding for the entirety of FY2007. This appropriations measure included $6.888 billion for Head Start, an increase of approximately $100 million above the FY2006 level provided in "regular" Head Start funds in the FY2006 HHS appropriations law. The Consolidated Appropriations Act 2008 ( P.L. 110-161 ) includes $6.878 billion for the Head Start program, which reflects a decrease of $10 million compared to the FY2007 funding level. Elementary and Secondary Education Act (ESEA) Title I, Part A ESEA Title I, Part A, is the largest federal program serving disadvantaged children, particularly school-age children. After Head Start, it is the largest program providing early education and care to young children. The U.S. Department of Education estimates that approximately 2% of children served by Title I each year are preschoolers. Preschool services are not separately funded under Title I, Part A—such spending occurs if local educational agencies (LEAs) choose to use some of their Title I funds for this purpose. The Consolidated Appropriations Act of 2008 ( P.L. 110-161 ) provides $14.03 billion for Title I, Part A, an increase of almost $1.2 billion above the FY2007 level of $12.84 billion in funding. Early Reading First The Early Reading First program, authorized by ESEA Title I, Part B, Subpart 2, supports local efforts to enhance the school readiness of young children—particularly those from low-income families—through scientific research-based strategies and professional development that are designed to enhance the verbal skills, phonological awareness, letter knowledge, and pre-reading skills of preschool age children. The program provides competitive grants to eligible local educational agencies (LEAs) and to public or private organizations or agencies that are located in eligible LEAs. The Department of Education may award grants for up to six years. Early Reading First is funded at a level of $113 million for FY2008, $5 million less than the $118 million provided for FY2007. The William F. Goodling Even Start Family Literacy Programs (Even Start) The Even Start program is authorized by ESEA Title I, Part B, Subpart 3, and is intended to integrate early childhood education, adult basic education, and parenting skills education into a unified family literacy program. The program provides grants to states which then distribute them to eligible entities (consisting of a local education agency (LEA) in collaboration with a community based organization). Even Start services generally serve children aged 0-7 and their parents. Even Start services must include adult literacy instruction, early childhood education, instruction to help parents support their child's education, participant recruitment, screening of parents, staff training, and home-based instruction. The Even Start program, first authorized in 1989, grew rapidly in its first years, but it has been subject to increasing criticism in recent years and has seen its funding decline in each year from FY2003 through FY2008. The Education Department's FY2007 CR operating plan provided $82 million in funding for the program, a cut of $17million from the FY2006 funding level of $99 million. As in the FY2007 budget request, the Administration requested no funding for the program for FY2008. However, the Consolidated Appropriations Act of 2008 ( P.L. 110-161 ) provides $66 million for Even Start. In advocating for the program's elimination, the Administration contends that the program has not demonstrated it has been effective in improving child and adult learning outcomes through the integration of the four core services of adult education, parenting education, parent-child activities, and early childhood education. The Administration argues that these conclusions are supported by data from three national evaluations of Even Start. Advocates of continuing the Even Start program argue that the goal of providing integrated family literacy services to an extremely disadvantaged population is so important that the program should not be eliminated. Furthermore, they argue that a thorough study of the impact of legislatively mandated quality improvements to Even Start is needed, as well as a concerted effort to improve the program through implementation of model programs and technical assistance. Early Childhood Educator Professional Development The Department of Education has provided competitive grants to partnerships to improve the knowledge and skills of early childhood educators who work in communities that have high concentrations of children living in poverty. FY2006 funding was $14.5 million, and in FY2007 the department reported an increase of $10,000, for a rounded total of $14.6 million in FY2007. The program received no funding for FY2008. Individuals with Disabilities Education Act (IDEA) Programs The majority of IDEA funding for special education and related services (approximately 90%) goes to school-age children via grants to states. However, IDEA also authorizes two state grant programs for young children: an early intervention program for Infants and Toddlers with disabilities (IDEA, Part C) and a Preschool program for children with disabilities (IDEA, Part 619). The Infants and Toddlers program serves disabled children from birth to two years of age, and the Preschool program generally serves children ages 3 to 5. The Infants and Toddlers program requires that states receiving grants create and maintain a "statewide, comprehensive, coordinated, multidisciplinary, interagency system that provides early intervention services for infants and toddlers with disabilities and their families." Services focus on children experiencing "developmental delay" with respect to physical, mental, or other capacities, and their families. Services are detailed for each child and his or her family in an Individualized Family Service Plan. Services are to be provided, to the maximum extent feasible, in "natural environments," including the home, with other infants and toddlers who are not disabled. States are eligible for Preschool grants under Section 619 of IDEA if they are eligible for grants under IDEA, Part B, grants to states, and they make available free appropriate public education to all disabled children 3 to 5 in the state. In recent years, all states qualified and received preschool grants under this section. Since Part B grants to states are used to serve children with disabilities as young as three years of age (as well as school-age children), Section 619 is not so much a separate program as it is supplementary funding for services to this age group. In general, the provisions, requirements, and guarantees under the grants to states program that apply to school-age children with disabilities also apply to children in this age group. As a result, Section 619 is a relatively brief section of the law, which deals mostly with the state and substate funding formulas for the grants and state-level activities. IDEA was reauthorized during the 108 th Congress. IDEA, Part C, received $436 million in funding for FY2008, the same level provided in FY2007 and FY2006. IDEA, Section 619, is funded at a level of $374 million for FY2008, a decrease from the FY2007 level of $381 million. Child Care Access Means Parents in School (CAMPIS) Authorized under the Higher Education Act amendments of 1998, and first funded for FY1999 at $5 million, the CAMPIS program is designed to support the participation of low-income parents in post-secondary education through campus-based child care services. Discretionary grants of up to four years in duration are awarded competitively to institutions of higher education, to either supplement existing child care services, or to start a new program. Funding for FY2007 was $15.8 million, the same level as in FY2006. Early Learning Fund/Early Learning Opportunities Act Program This HHS program (referred to by both names), authorized by the FY2001 Consolidated Appropriations Act ( P.L. 106-554 ) was last funded in FY2005 at $36 million. The FY2006 Appropriations Act includes no funding for this program. When funded, the program provided grants to communities to enhance school readiness for children under five, specifically by funding efforts to improve the cognitive, physical, social, and emotional development of these children. Although authorized at $600 million, FY2002 funding for the program was set at $25 million; FY2003 funding was set at $34 million (despite the President's FY2003 budget proposal to eliminate the program) and for FY2004, P.L. 108-199 included $34 million for the Early Learning Fund. Dependent Care Tax Credit (DCTC) The DCTC is a non-refundable tax credit for employment-related expenses incurred for the care of a dependent child under 13 or a disabled dependent or spouse, under Section 21 of the tax code. Beginning in tax year 2003, the Economic Growth and Tax Relief Reconciliation Act of 2001 ( P.L. 107-16 ) increased the maximum credit rate to 35% of expenses up to $3,000 for one child (for a credit of $1,050), and up to $6,000 for two or more children (for a credit of $2,100). The 35% rate applies to taxpayers with adjusted gross incomes of $15,000 or less. The rate decreases by 1% for each additional $2,000 increment (or portion thereof) in income until the rate reaches 20% for taxpayers with incomes over $43,000. The Department of the Treasury estimates tax expenditures for the DCTC will be $3.1 billion for tax year 2006. Dependent Care Assistance Program (DCAP) Under Section 129 of the tax code, payments made by a taxpayer's employer for dependent care assistance may be excluded from the employee's income and, therefore, not be subject to federal income tax or employment taxes. The maximum exclusion is $5,000. Section 125 of the tax code allows employers to include dependent care assistance, along with other fringe benefits, in nontaxable flexible benefit or "cafeteria" plans. The Department of the Treasury estimates that tax expenditures associated with the DCAP will be $660 million in tax year 2006. FY2007 Appropriations The FY2007 appropriations process consisted of four continuing resolutions, the last of which ( H.J.Res. 20 ), signed into law ( P.L. 110-5 ) on February 15, 2007, extended through the entirety of FY2007. The final CR language specified a dollar amount for Head Start—$6.889 billion—approximately $100 million more than the regular funding provided for FY2006. (Regular funds totaled $6.786 billion in FY2006 and do not include the supplemental funding that was provided to target needs arising from the 2005 Gulf hurricanes.) FY2008 Appropriations Fiscal Year 2008 began without appropriations bills for the year having been completed. The process extended almost a full quarter into FY2008, with continuing resolutions providing temporary funding during the time it took for the House, Senate, and President to come to agreement on a bill. Ultimately, the President signed the Consolidated Appropriations Act of 2008 ( H.R. 2764 / P.L. 110-161 ) on December 26, 2007, but only after first vetoing a conference agreement submitted by Congress ( H.Rept. 110-424 ). The funding levels that appear in the act (with few exceptions) are subject to an across-the-board reduction of 1.747%. All FY2008 appropriation amounts referenced in this report reflect the across-the-board cut. Chronology of House and Senate FY2008 Appropriations Activity On June 27, 2007, the Senate Appropriations Committee reported a bill ( S. 1720 / S.Rept. 110-107 ) to make appropriations for the Departments of Labor, HHS, and Education. The full Senate did not take up that legislation but later approved the H.R. 3043 conference agreement (subsequently vetoed by the President). H.R. 3043 was initiated in the House (see below). The House Appropriations Committee approved its Labor-HHS-Education bill ( H.R. 3043 / H.Rept. 110-231 ) on July 11, 2007, by voice vote, and the full House passed H.R. 3043 , as amended, on July 19, 2007, by a vote of 276-140. On July 17, 2007, the same day the House floor debate of H.R. 3043 began, the Office of Management and Budget (OMB) issued a Statement of Administration Policy stating its opposition to the bill and threatened a presidential veto if ultimately presented to the President. On November 8, 2007, H.R. 3043 ( H.Rept. 110-424 ), the bill containing appropriations for Labor, HHS, and Education was sent to the President. On November 13, President Bush vetoed the bill, and on November 15, an attempt to override the veto failed in the House by a vote of 277-141 (two-thirds majority required). In December, the House and Senate turned to H.R. 2764 (originally introduced as the State-Foreign Operations Appropriations Act for FY2008) as a vehicle for the omnibus appropriations measure. An amended version of H.R. 2764 became the Consolidated Appropriations Act of 2008 and was agreed to and signed into law by the President on December 26, 2007. The explanatory statement accompanying the bill (and substituting for a conference report) provides for the aforementioned across-the-board cut of 1.747% to most programs and services funded by the bill. Table 2 shows the funding levels approved, in chronological order, by the Senate Appropriations Committee for S. 1720 , by the House for its version, H.R. 3043 , by the House and Senate as part of the conference agreement accompanying H.R. 3043 (which was subsequently vetoed by the President), and ultimately, the funding levels approved by the President and signed into law ( P.L. 110-161 ). All final funding levels reflect the across-the-board reduction of 1.747%. FY2009 President's Budget The Administration released its proposed budget for FY2009 on February 4, 2009. As shown in Table 3 , the President's funding request for most of the early childhood care and education programs discussed in this report mirror the funding levels provided for FY2008. Exceptions include a proposed $149 million increase for the Head Start program, and a $500 million decrease for the Social Services Block Grant (SSBG). In addition to the proposed cut for the coming year, the budget also proposes a plan to eliminate the SSBG entirely in FY2010. For FY2009, the Administration again proposes to eliminate the Even Start program, as well as funding for Early Childhood Educator Professional Development.
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Federal support for child care and education comes in many forms, ranging from grant programs to tax provisions. Some programs serve as specifically dedicated funding sources for child care services (e.g., the Child Care and Development Block Grant, or CCDBG) or education programs (e.g., Elementary and Secondary Education Act, Title I, Part A; Early Reading First; Even Start; the 21st Century Community Learning Centers Program; the Early Childhood Educator Professional Development program; and the Individuals with Disabilities Education Act—Preschool Grants program and Infants and Toddlers program), while for others (e.g., Temporary Assistance for Needy Families, or TANF), child care is just one of many purposes for which funds may be used. In many cases, federal programs target low-income families in need of child care, but in the case of certain tax provisions, the benefits reach middle- and upper-income families as well. This report provides an overview of federal child care, early education, and related programs, and their funding status. Funding for many child care, early education, and related programs is provided each year as part of the annual appropriations process for the Departments of Health and Human Services (HHS), and Education (ED). Fiscal year (FY) 2007 appropriations bills for those departments did not receive floor action in the House or Senate during the 109th Congress, despite the 2007 fiscal year beginning on October 1, 2006. After three continuing resolutions (CRs) provided temporary funding for government operations, a fourth CR, providing funding through the end of FY2007, was ultimately signed into law (P.L. 110-5) on February 15, 2007, shortly after the President's budget request for FY2008 was released. For several but not all of the programs covered by this report, the FY2007 funding levels mirrored those included in the FY2006 appropriations (P.L. 109-149). Funding for Head Start was increased, as was that for Early Reading First. Even Start funding was cut, but not eliminated as had been proposed by the President. The FY2008 appropriations process, which included a series of continuing resolutions that provided temporary funding (at FY2007 levels) and a vetoed conference agreement (H.Rept. 110-424), ultimately culminated in the Consolidated Appropriations Act of 2008 (H.R. 2764) being signed into law (P.L. 110-161) by the President on December 26, 2007. The legislation includes an across-the-board cut (1.747%) to the program funding level amounts contained in the act's language. (The levels included in this report reflect the across-the-board reduction.) On February 4, 2008, the President released his budget request for FY2009. The 110th Congress has not addressed all of the expired (or soon expiring) reauthorizations in the area of early childhood education and care. The CCDBG (expired with FY2002) remains funded without authorization. No Child Left Behind was granted an automatic one-year extension (through FY2008) under the General Education Provisions Act. Head Start reauthorization legislation (H.R. 1429) was approved by this Congress in November 2007, and signed into law (P.L. 110-134) by the President on December 12, 2007.
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SECTION 1. SHORT TITLE.
This Act may be cited as the ``9/11 Memorial Cross National
Monument Establishment Act of 2011''.
SEC. 2. FINDINGS.
Congress finds that--
(1) the 9/11 Memorial Cross is located at the National 9/11
Memorial Museum at the intersection of Albany and Greenwich
Streets at 1 Albany Street, New York, NY 10006;
(2) after the terrorist attacks of September 11, 2001, on
New York City, a massive operation was launched to clear the
site and attempt to find any survivors amongst the rubble;
(3) when One World Trade Center collapsed, it sent debris
down onto 6 World Trade Center, and gutted the interior of the
building. In the midst of the debris was this intact cross
beam, which its discoverer believes came from One World Trade
Center;
(4) first encountered by construction worker Frank
Silecchia in the vicinity of where 6 World Trade Center had
stood, the 17-foot-tall cross became an icon of hope and
comfort throughout the recovery effort in the wake of the
September 11, 2001 attacks;
(5) after a few weeks an expedited approval from the office
of New York Mayor Rudy Giuliani was granted to erect it on a
pedestal on a portion of the former plaza on Church Street near
Liberty;
(6) the 9/11 Memorial Cross was moved by crane on October
3, 2001, and installed on October 4, 2001, where it continued
as a shrine and tourist attraction;
(7) on July 23, 2011, the cross was transported onto the
World Trade Center site and lowered into its permanent setting
inside the Museum, which will open to the public in 2012;
(8) the 9/11 Memorial Cross has received international
attention; and
(9) Port Authority of New York and New Jersey, the World
Trade Center Memorial Foundation and Mayor Michael R.
Bloomberg, have been working together--
(A) to protect the site; and
(B) to develop further educational opportunities
using artifacts from the site itself to tell the story
of not only what happened on 9/11 but the 9-month
recovery period that followed.
SEC. 3. DEFINITIONS.
In this Act:
(1) City.--The term ``City'' means the city of New York,
New York.
(2) Management plan.--The term ``management plan'' means
the management plan for the Monument prepared under section
5(c)(1).
(3) Map.--The term ``map'' means the map entitled
``Proposed Boundary Waco-Mammoth National Monument'', numbered
T21/80,000, and dated April 2009.
(4) Monument.--The term ``Monument'' means the 9/11
Memorial Cross, which is owned by the Museum.
(5) Museum.--The term ``Museum'' means the National 9/11
Memorial Museum in the State.
(6) Secretary.--The term ``Secretary'' means the Secretary
of the Interior.
(7) State.--The term ``State'' means the State of New York.
SEC. 4. 9/11 MEMORIAL CROSS NATIONAL MONUMENT, NEW YORK.
The 9/11 Memorial Cross is hereby established as a national
monument.
SEC. 5. ADMINISTRATION OF MONUMENT.
(a) In General.--The Secretary shall administer the Monument in
accordance with--
(1) this Act; and
(2) any cooperative agreements entered into under
subsection (b)(1).
(b) Authorities of Secretary.--
(1) Cooperative agreements.--The Secretary may enter into
cooperative management agreements with the Museum and the City,
in accordance with section 3(l) of Public Law 91-383 (16 U.S.C.
1a-2(l)).
(2) Acquisition of land.--The Secretary may acquire by
donation from the City any land or interest in land owned by
the City within the proposed boundary of the Monument.
(c) General Management Plan.--
(1) In general.--Not later than 3 years after the date of
enactment of this Act, the Secretary, in consultation with the
Museum and the City, shall complete a general management plan
for the Monument.
(2) Inclusions.--The management plan shall include, at a
minimum--
(A) measures for the preservation of the resources
of the Monument;
(B) requirements for the type and extent of
development and use of the Monument;
(C) identification of the capacity of the Monument
for accommodating visitors; and
(D) opportunities for involvement by the Museum,
City, State, and other local and national entities in--
(i) developing educational programs for the
Monument; and
(ii) developing and supporting the
Monument.
(d) Prohibition of Use of Federal Funds.--No Federal funds may be
used to pay the costs of--
(1) carrying out a cooperative agreement under subsection
(b)(1);
(2) acquiring land for inclusion in the Monument under
subsection (b)(2);
(3) developing a visitor center for the Monument;
(4) operating or maintaining the Monument;
(5) constructing exhibits for the Monument; or
(6) developing the general management plan under subsection
(c).
(e) Use of Non-Federal Funds.--Non-Federal funds may be used to pay
any costs that may be incurred by the Secretary or the National Park
Service in carrying out this section.
(f) Effect on Eligibility for Financial Assistance.--Nothing in
this Act affects the eligibility of the Monument for Federal grants or
other forms of financial assistance that the Monument would have been
eligible to apply for had National Park System status not been
conferred to the Monument under this Act.
(g) Termination of National Park System Status.--
(1) In general.--Designation of the Monument as a unit of
the National Park System shall terminate if the Secretary
determines that Federal funds are required to operate and
maintain the Monument.
(2) Reversion.--If the designation of the Monument as a
unit of the National Park System is terminated under paragraph
(1), any land acquired by the Secretary from the City under
subsection (b)(2) shall revert to the City.
SEC. 6. NO BUFFER ZONES.
Nothing in this Act, the establishment of the Monument, or the
management plan shall be construed to create buffer zones outside of
the Monument.
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9/11 Memorial Cross National Monument Establishment Act of 2011 - Establishes the 9/11 Memorial Cross located at the National 9/11 Memorial Museum in the city of New York, New York, as a national monument.
Requires the Secretary of the Interior to complete a general management plan for such monument.
Terminates designation of such monument as a unit of the National Park System if federal funds are required for the operation and maintenance of the monument.
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Introduction Many Members of the 116 th Congress have demonstrated an ongoing interest in Trump Administration efforts to reform the U.S. Agency for International Development (USAID). The reforms, branded Transformation at USAID , target a broad range of programs, structures, and processes in an effort to improve the agency's efficiency and effectiveness. The reform process was initiated by an executive order and an Office of Management and Budget (OMB) memorandum, both issued in 2017. The OMB memorandum called on U.S. government agencies to submit reform plans focused on making the government "lean, accountable, and more efficient." USAID provided several preliminary plans to the State Department (to which USAID reports) and OMB in the summer of 2017, but the internal restructuring initiative began in earnest after Mark Green was confirmed as USAID Administrator in August 2017. USAID submitted its own reform plan to OMB, separate from State, though USAID cooperated with the State Department's "redesign" initiative as well. OMB's government-wide reform plan, "Delivering Government Solutions in the 21 st Century," released in June 2018, prescribed 32 government-wide reforms, several of which directly related to USAID. These included restructuring U.S. humanitarian assistance programs, establishing a new Development Finance Institution to incorporate USAID credit programs, and changing USAID's Washington, DC-based bureau structure. Soon after the release of the OMB report, USAID finalized and began implementing its reforms, newly branded as Transformation . No single public report or other document comprehensively details the Transformation effort or what it encompasses. This CRS report relies on various publications on the USAID website focused on specific reforms or priorities described as being part of the Transformation , the testimony of USAID Administrator Mark Green before Congress on multiple occasions, implementation documents such as the Country Roadmaps and the Private Sector Engagement Strategy, and the new USAID Policy Framework. Each of these sources differs in what they include, and in the emphasis given to different reform components, making it difficult to ascertain the full picture and the prioritization USAID ascribes to the various elements. Role of Congress . Most of the reforms proposed under Transformation do not require congressional approval, but some require advance notification to Congress. Notification does not require congressional action, but it gives Congress the opportunity to weigh in on the action being notified and to apply "holds" (nonbinding but generally respected requests that action be deferred until a related Member concern is resolved). Nevertheless, Administrator Green appears to have actively involved Congress in the shaping and implementation of Transformation and has suggested that he does not intend to move forward without congressional support. Congress has the power to shape USAID reforms through both oversight activities and funding requirements and restrictions. This report analyzes key elements of current USAID reform efforts under the Transformation umbrella. Although the report highlights key reforms and changes in USAID policy and practice, it is not a comprehensive overview of this broad initiative. The report first discusses key objectives of Transformation , then describes several process, structure, and workforce reforms intended to support these objectives, with an emphasis on reforms that are distinct from prior USAID reform efforts. The report concludes with a discussion of broader issues that may be relevant to congressional perspectives on USAID reforms . Transformation Objectives and Historic Context Transformation at USAID is an implementation framework for reforms that are multifaceted and still evolving. Administrator Green's testimony at April 2018 budget hearings described Transformation as "experience-informed, innovation-driven reforms to optimize our structures and procedures and maximize our effectiveness." In these broad terms, many of the reforms are similar to general government or organization reform efforts in their focus on efficiency and effectiveness. While much of Transformation reflects incremental policy adjustments, several components signal a distinct vision for USAID's role in foreign affairs. As noted, no single public document comprehensively details the components and objectives of Transformation . However, various USAID fact sheets, videos, and statements by Administrator Green since 2018 suggest some of the initiative's key objectives: supporting country transitions toward self-reliant, locally led development; increasing USAID-private sector collaboration in development; supporting U.S. national security strategy; enhancing USAID's core capabilities and strengthening leadership; and using taxpayer dollars more efficiently and effectively. A consistent emphasis across USAID policy documents, including those describing Transformation , is the core objective of "ending the need for foreign assistance" by supporting partner countries' "Journey to Self-Reliance." As Transformation has evolved, moving partner countries toward economic self-sufficiency has become the primary reform objective cited by USAIDâthe one that all the specific reform proposals are designed to support. Other stated objectives, such as advancing national security goals, are deemphasized in later Transformation materials. Many of the proposed Transformation reforms are consistent with efforts by past USAID Administrators. For example, successive Administrations have sought to refine the deployment of foreign assistance to advance U.S. national security, asserting that it should be a major component of U.S. foreign policy strategy. The Obama Administration's USAID Forward initiative focused on bringing new partnerships, innovation, and a renewed focus on results to USAID's work. Under the George W. Bush Administration and Administrator Henrietta Fore, USAID's Development Leadership Initiative focused on building USAID's workforce capacity and leadership. The self-reliance objective at the center of Transformation has been cited as a goal in various USAID document for decades. Nearly every Administration and USAID Administrator has proposed reforms intended to improve USAID's efficiency and effectiveness, and Transformation may be viewed as the latest step in the agency's evolution. Process and Policy Reforms To implement the objectives and strategic priorities of Transformation , the agency is making several changes to its programs and work processes intended to establish a more flexible and field-responsive approach to programming. Much like the strategic objectives described above, these adjustments build on efforts by previous Administrations, aiming to align USAID's approach to development with the current global landscape. The "Journey to Self-Reliance" The organizing principle for USAID policy reforms under Transformation is the "Journey to Self-Reliance." Self-reliance is Transformation's term for a country's ability to plan, finance, and implement solutions to address their own development challenges absent foreign assistance. To operationalize the concept, USAID produced a matrix comprising 17 existing indicators to quantify countries' progress toward ending their need for foreign assistance. These indicators are maintained by third-party sources, including multilateral institutions, think tanks, and nongovernmental organizations (NGOs). USAID selected these indicators based on their perceived alignment with the self-reliance concept, the reputation of reporting institutions, public availability of the underlying data and methodology, comparability across countries, and comprehensiveness of reporting across countries. This matrix, on which all less-developed countries have been plotted (including nonrecipients of U.S. foreign assistance), divides the indicators into two quantitative measures (see Figure 2 ): Commitment is meant to indicate whether a country's government and its people demonstrate a desire to rise beyond their current condition. Capacity is meant to illustrate whether a country has sufficient resources to assist itself in moving beyond poverty. Taken together, these two indices are meant to provide a comprehensive portrait of a country's development status to inform country-level planning. Under this new approach, USAID's five-year country plans, called Country Development Cooperation Strategies, are to prioritize approaches centered on advancing a country's commitment to self-reliance and augmenting its capacity to achieve it. While USAID has long supported efforts to build partner countries' capacity and emphasized their "ownership" of development programs, the "Journey to Self-Reliance" may be unique in making self-sufficiency the primary goal shaping USAID country strategies. This matrix approach reflects a sweeping theory of development that policymakers and observers have long debated. USAID asserts that the "Journey to Self-Reliance" allows for greater tailoring of country-level programming to the unique challenges facing a given country, while also establishing a common metric applicable across all countries. Although the self-reliance indicators are ostensibly a succinct but holistic portrait of a country's development along 17 indicators, they in fact comprise a wide array of issues. USAID argues that this inclusivity strives for an "absence of judgment" about the relative importance of each metric, which may be interpreted as an effort to integrate many theories of development into the framework. In fact, the indicators selected are especially oriented toward theories that connect economic growth to a country's democratic institutions and its markets. The indicators USAID has selected reflect theories of development that continue to generate debate among researchers and practitioners. For example, the theory that a country must lower its trade barriers (measured by the "Trade Freedom" indicator) to achieve prosperity remains heavily contested in academic circles, particularly for developing countries. In addition, the choice to aggregate these indicators into the two composites of "commitment" and "capacity," rather than a single indicator, reflects some weighting: each of the seven "commitment" indicators contributes relatively more to a country's score than each of the 10 "capacity" indicators. To address such concerns, USAID argues that missions should examine these indicators in their local context and evaluate them based on each country's unique conditionâand that these indicators do not reflect a comprehensive diagnosis of the causes of development. The Administration's attention to country-level indicators suggests a reorientation from recent approaches. Recent Administrations have focused on broad, global development challenges, such as climate change and the HIV/AIDS crisis, while implementing such initiatives in targeted subnational regions and municipalities. Together, these global challenges and targeted interventions refocused strategic planning away from the country level. USAID describes the "Journey to Self-Reliance" as a high-level profile of a country's national policy and its institutions, in contrast to past initiatives focused on subnational regions. While USAID notes that progress emerges locally, these indicators track progress only at the national level. It is unclear if this approach will affect USAID's relationship with municipal and regional governments. In the past, commentators have expressed concern that such metrics could be used to cut aid to poor performers, punishing people in need for the actions of their national leaders. USAID asserts that these matrices are not scorecards to determine which countries are "deserving" of aid, but instead are a quantitative tool to inform programmatic allocations. Thus, for example, a poor score on open government may cause a mission to direct farmer-support programs through independent NGOs rather than the national government, as the central government may not be trusted to administer its services effectively. While USAID states that it is definitively not grading countries' performance, it is unclear whether the agency will be plotting countries' advancement over time along the self-reliance matrices, as "journey" implies. Considering the significant lag time in many indicators' reporting, as well as variance in reporting periods across indicators, it may be difficult to draw straightforward conclusions about the effect of any program or policy (whether the partner government's or USAID's) upon a country's self-reliance. Additional Tools: Financing Self-Reliance and Private Sector Engagement Within the "Journey to Self-Reliance" framework, Transformation emphasizes two primary tools for ending the need for foreign assistance: financing self-reliance and private sector engagement. While many of the self-reliance indicators seek to describe the landscape against which USAID is to deploy its programs, these two components of Transformation seek to provide the tools with which to implement those programs. Financing self-reliance focuses on a country's ability to generate sufficient capital to invest in self-reliance, and private sector engagement seeks to create and partner with a private sector entity through which capital can be invested. Financing Self-Reliance A key component of USAID's self-reliance approach is facilitating access to capital for countries to reinvest in their own progress, in line with broader recent trends in development finance. This investment approach occupies a central place in several global development frameworks, including the U.N. Sustainable Development Goals (SDG) agenda and multilateral development banks' "billions to trillions" agenda, which seeks to leverage "billions" of Official Development Assistance (ODA) dollars to mobilize "trillions" of private sector investments in developing countries. Similarly, the 2015 Addis Ababa Action Agenda on financing for development affirmed the importance of strong local enabling environments and responsible fiscal policy to encourage country-owned growth strategies. Transformation 's focus on financing self-reliance builds upon existing U.S. approaches and commitments toward achieving the SDGs. It combines efforts to advance domestic resource mobilization (e.g., tax collection) with strong management of public finances and fiscal transparency to enable effective and accountable administration of the public sector. This approach is designed to create a strong market-based "enabling environment" for private investment, that is, one in which private investors are able to operate with reasonable confidence in the rule of law and protection for their investments. The initiative also prioritizes effective financial markets to enable capital access for economic development investments. Private Sector Engagement Private sector engagement is a central conduit through which Transformation envisions repositioning USAID's role in development and supporting partner country self-sufficiency. USAID released a new Private Sector Engagement Policy (PSE Policy) in April 2019. The approach it outlines is not new, but rather builds on longstanding efforts to leverage the resources of nongovernmental actors, including businesses and charitable foundations, to advance international development. The Global Development Alliance (GDA) program, launched in 2001, has long been USAID's flagship mechanism for incubating and executing public-private partnerships for development assistance. The Obama Administration elevated several such programs when launching the U.S. Global Development Lab (the Lab), an innovation-oriented bureau intended to source breakthrough innovations to address development challenges. The Lab's Development Innovation Ventures (DIV) program, for example, seeks to integrate venture capital approaches into USAID's programs. The Transformation focus on private sector engagement tweaks the existing approach and includes several components not seen in previous Administrations. The Obama Administration generally viewed private sector partnerships as one component of a broader Science, Technology, Innovation, and Partnerships (STIP) agenda. This PSE Policy emphasizes business partnerships as a mechanism to attract solutions from scientists and technology innovators. The "enterprise-driven development" approach articulated in the PSE Policy may be a shift from economic development programs' focus on the market system to a focus on individual enterprises as their programmatic target. While past efforts, such as the GDA program, created partnerships with the private sector to address individual development challenges, the new PSE Policy seeks to infuse a private sector engagement orientation across all programming. The PSE Policy does not clarify the types of private sector partners to be favored. Micro, small, and medium enterprises (MSMEs), for example, a historical focus of USAID programming, are not specifically highlighted, suggesting that this policy may seek to support USAID collaboration with enterprises ranging from multinational corporations to smallholder farmers. Private sector engagement, then, is expected to broaden USAID's partner makeup, integrating nontraditional partners, both in the United States and overseas, by changing the way USAID engages its partners in program design. The PSE Policy is still in early stages of implementation. Many of the tools cited in the strategy have been in place at USAID for several years. The scope and depth of changes in USAID's implementation approach may emerge in the coming months. Procurement and Partnering The USAID Acquisition and Assistance Strategy (A&A Strategy), released in February 2019, gives some indication of the shift in private sector engagement envisioned by Transformation . Restructuring USAID's engagement methodology and sourcing mechanisms is another means by which Transformation aims to build partnerships and promote partner self-sufficiency. Noting that more than 80% of USAID program funds are issued in award and assistance mechanisms to NGOs, the A&A Strategy lays out several shifts to its partnering approach: diversifying USAID's partner base, which has steadily shrunk since 2011; supporting the self-reliance of local partners through capacity building; and establishing a more flexible partnering approach through more collaborative and adaptive award management principles. Reforms from this initiative are still in progress, including the recent launch of a New Partnerships Initiative and expected revisions to USAID's internal series of operational policies, the Automated Directive System. Past experience may inform A&A Strategy implementation. USAID has attempted to expand its partner base in the past, notably under the Obama Administration's USAID Forward initiative. USAID Forward sought to shift funding away from longtime international development firms and NGOs in the U.S. toward organizations based in developing countries, as a means of promoting recipient country "ownership" of their development. The Lab also contributed to new partnering modalities and frameworks such as "co-creation," a model for collaborative program design that is increasingly referenced in USAID's public solicitations. Transformation aims to build on these efforts by highlighting tools that encourage greater collaboration with partners and more adaptive management, consistent with revisions to USAID's process for developing and implementing programs (the "Program Cycle"). Organizational Structure The structural component of Transformation is meant to align the agency's organization with the Administration's stated goals for U.S. international development and humanitarian assistance. This part of Transformations has been subject to the most direct congressional oversight. USAID submitted nine Congressional Notifications (CN) to the appropriate committees in July and August 2018 detailing the proposed structural changes. Upon receipt, each CN was put on "hold," signaling that committee members wanted to look into the proposed changes further. The Administrator has signaled that he will not make changes without the approval of all four congressional oversight committees. Organizationally, USAID is split into two sectionsâfield missions, and headquarters' bureaus and independent officesâeach with its own key functions and personnel. The headquarters' bureaus and offices are divided among four categories: (1) geographic bureaus, (2) functional bureaus, (3) central bureaus, and (4) independent offices (see Figure 3 ). The geographic bureaus directly correspond with country field missions, while the functional bureaus manage cross-cutting sectoral issues, including education, global health, and humanitarian assistance, among others. The central bureaus and independent offices manage day-to-day agency operations, including human resources, security, legislative affairs, and financial management. Leadership Structure Reforms Under Transformation , USAID is seeking to amend the chain of command to include two new Administration-appointed Associate Administrators. Currently, all bureaus report directly to the Administrator and Deputy Administrator. In the reorganization proposal, the Associate Administrators would each be responsible for three bureaus: The Associate Administrator for Relief, Response and Resilience (R3) would manage the Bureaus for Humanitarian Assistance (HA), Conflict Prevention and Stabilization (CPS), and Resilience and Food Security (RFS). The Associate Administrator for Strategy and Operations would oversee the Bureaus for Legislative and Public Affairs (LPA), Policy, Resources and Performance (PRP), and Management (M). By adding the two Associate Administrators, the Deputy Administrator would be responsible only for overseeing the remaining functional bureaus (Global Health and Development, Democracy and Innovation) and geographic bureaus. In establishing this three-pronged oversight structure, USAID aims to relieve the Administrator of some day-to-day oversight responsibilities, allowing the Administrator greater ability to focus on agency-wide management priorities, and to enable additional, functionally specialized leadership voices to represent the agency on the global stage. Some observers and policymakers have expressed concern with these changes; they worry that adding two political appointees might increase politicization of the agency's development decisions. Beyond the proposed leadership additions, reorganization proposals under Transformation are primarily focused on the headquarters' functional and central bureaus and their respective offices. In broad strokes, the agency is moving from four functional bureaus, six central bureaus/offices, and six independent offices to five functional bureaus, three central bureaus, and four independent offices. (For a detailed chart of the proposed structural changes, see the Appendix . ) Two of the proposed changes are presented in greater detail below. Bureau for Humanitarian Assistance Perhaps the most publicized reorganization proposal is the creation of a Bureau for Humanitarian Assistance (HA). This proposal would take the Offices of Food for Peace (FFP) and U.S. Foreign Disaster Assistance (OFDA) out of the Bureau for Democracy, Conflict, and Humanitarian Assistance (DCHA) and combine them into HA. FFP and OFDA would no longer remain separate offices with independent functions; instead, they would be consolidated into one bureau made up of eight officesâthree geographically focused and five technical. USAID cites two primary reasons for the creation of HA: Elevating U.S. humanitarian assistance on the global stage. The Trump Administration maintains that it has placed a greater emphasis on humanitarian assistance than previous Administrationsâalthough such claims are open to debateâbut that having two separate offices within USAID leads to confusion when articulating U.S. humanitarian efforts to the international community. In merging FFP and OFDA and creating HA, USAID contends that it will have one unified, and more prominent, voice on humanitarian assistance on the global stage. Removing duplication of efforts. FFP and OFDA currently share some of the funding appropriated under the international disaster assistance (IDA) account. In combining the two offices, USAID asserts that it can better manage IDA funds by removing the distinction between food and nonfood assistance. In doing so, USAID states that it will be able to respond more quickly and effectively to today's increasingly complex humanitarian emergencies. Housing the humanitarian offices in a stand-alone bureau is not new to USAID. In the 1990s, the agency had a Bureau for Humanitarian Response, which included both FFP and OFDA as distinct offices. It was not until 2001, after a reorganization, that the humanitarian offices were combined with other functions to become the current DCHA Bureau. The HA structural proposal differs from the Bureau for Humanitarian Response in that it dissolves the FFP and OFDA offices as they currently exist. For a number of years, the humanitarian community has engaged with the U.S. government on issues of efficiency, effectiveness, and coordination of humanitarian assistance. Consultations within the U.S. government, Congress, and the broader humanitarian community continue on HA. Specifically, some say the proposed HA elevates USAID's humanitarian functions and is a positive step forward on reform, while others are more skeptical about its broader impact on interagency cooperation, levels of global humanitarian funding, and U.S. leadership and priorities. Food assistance stakeholders, for example, have raised concerns about the dissolution of FFP. Because FFP receives approximately half of its funding through Title II of the Food for Peace Act, most of which must be used to buy U.S. agricultural commodities, some have expressed concern that without the designation of FFP as an independent office, the provision of U.S. in-kind commodities will decline as a percentage of U.S. emergency food assistance. Further, while the proposal notes that FFP's mandated nonemergency programs would remain in HA, some are concerned that the nonemergency programs will be deemphasized in the new bureau context. These FFP-related concerns have been exacerbated by the Administration's repeated requests to eliminate Title II funding in its annual budget requests. Bureau for Democracy, Development, and Innovation The prospective creation of the Bureau for Democracy, Development, and Innovation (DDI) is the largest structural change proposed. It seeks to consolidate the agency's "cross-cutting and sector-specific learning and knowledge management, and other technical assistance," noting that the current structure has left these functions "scattered ⦠inconsistent and uncoordinated." The proposal pulls technical staff from regional bureaus and moves offices from three different bureaus into one. The new bureau would include 10 offices from the Bureau for Economic Growth, Education, and Environment (E3), two offices from DCHA, and four centers currently housed in the Global Development Lab. In addition, the bureau would include technical experts previously embedded in regional bureaus. These changes are intended to make DDI the technical "one-stop-shop" for missions in the field. The new DDI would comprise "centers" and "hubs" to provide "missions with coordinated consultancy services," from education and environment to private sector engagement, youth, and gender equality. DDI has emerged as a controversial component of the structural proposal for Transformation . Supporters believe that in creating one place for "centers" and "hubs," field offices will be able to garner more cohesive technical support for their respective programs. Detractors worry that DDI is an amalgamation of offices with unrelated functions, and that its various components will be unwieldy to manage. The Global Development Lab's absorption into a larger bureau, in particular, may cause concern among supporters that innovation in development is set for a demotion among agency priorities. Workforce Management42 Through Transformation , USAID seeks to modify its workforce management structures and processes to strengthen "the ability of its entire workforce to thrive in, and adapt to, increasingly complex and challenging situations and opportunities." These changes include developing and piloting a new noncareer hiring mechanism, developing and operationalizing a leadership philosophy, and establishing and implementing a knowledge management framework. Much like the rest of Transformation , these pieces are described by the agency as being "employee-led," developed by working groups comprising employees from across the agency. Hiring Mechanisms: The Adaptive Personnel Project USAID staff are hired under more than 20 different hiring mechanisms. These include direct-hire (DH) positions, like Civil and Foreign Service, and non-DH positions, including U.S. personal services contractors (USPSCs), fellows, and institutional support contractors (ISCs), among others. DH positions are generally funded using USAID's Operating Expenses (OE) account and come with the full suite of U.S. government benefits. The non-DH positions are primarily funded using program funds, and benefits vary depending on the mechanism. For example, USPSCs have time-limited contracts and receive a subsidy to arrange for their own health care and life insurance on the open market. ISCs are hired through a parent firm and receive their paychecks, health care, and other benefits through that entity. A key element of the Transformation workforce reforms is a new hiring mechanism designed to address staffing concerns raised in the aftermath of USAID's 2014-2016 West Africa Ebola response. At the peak of that outbreak, the agency deployed 94% of its crisis roster, leaving the agency with little capacity to respond to other crises. Recognizing that this staffing challenge could easily arise again, the agency convened a working group in late 2016 to start developing a new hiring mechanism for crisis response. By 2018, the working group comprised approximately 80 USAID employees from different bureaus and under different employment mechanisms (e.g., DHs, USPSCs) and was supported by experts from the National Academy of Public Administration (NAPA). Since its creation, the working group and consequent plans have been folded into the larger context of Transformation . The new proposed mechanism is the Adaptive Personnel Project (APP), a noncareer, excepted service (potentially Schedule B) mechanism. (Excepted service positions are those not in the Senior Executive or competitive services.) USAID contends that the APP would provide the agency with more workforce flexibility, allowing it to more easily surge and contract with the agency's needs and resources. A few USAID-identified features of the APP include the following: Flexible tenure . Positions could be time-limited, much like current USPSC or Foreign Service Limited (FSL) positions (limited to five years and nine years, respectively), but the time limitations would be determined by the relevant hiring managers. This means that the APP could accommodate a 1-year position for a discrete project or a 10-year tenure with an office if the need for the role continues. "Talent-based . " Nonexcepted federal positions are required to be classified, with each role assigned to a group, series, title, and pay band. Once in a group and series, an employee is effectively locked in; in order to move into a different group and series, the employee would need to apply for the new position. USAID is working with the Office of Personnel Management (OPM) to structure the APP to either use a multidisciplinary approach to the classification system or not adhere to the classification system, allowing APP employees to move across different functional areas with relative ease. Equity in benefits . Even though APP would be noncareer, APP employees would receive government benefits like their career counterparts. This is a departure from the USPSC structure. Streamlined processes . USAID would create a common performance management system for all APP hires. The APP pilot would establish 300 positions for the crisis response offices, including FFP and OFDA (the proposed HA Bureau), OTI, and the Bureau for Global Health. USAID anticipates that many current USPSCs, ISCs, and Participating Agency Service Agreement employees (PASAs) would move into these APP positions, ultimately changing the agency's balance of hiring mechanisms. USAID has determined that it requires congressional approval to use program funds for the APP pilot. It notes that it does not have funds from the Operating Expenses account available to fund the pilot and meet the agency's other personnel needs (i.e., funding DH positions). If it receives approvals from Congress and OPM, USAID states that it will move forward with drafting internal policies and procedures to guide the new personnel system. The agency seeks to have the 300 APP positions filled in 2020. If those positions are filled and the onboarding of APP personnel provides the intended flexibilities, USAID is to expand the project to include an additional 1,200 positions in the following two years. Outlook and Potential Issues for Congress Congress may have several ongoing areas of interest related to U.S. foreign assistance policy and USAID operations and budget. As Members of Congress consider proposed and ongoing USAID reform activities, several cross-cutting issues may emerge, including the following: Role of foreign assistance in broader U.S. foreign policy. At a time when many in Congress have expressed significant concern about the influence of rival powers such as China and Russia in regions in which USAID is active, Members may consider whether the overarching Transformation goal of ending the need for foreign assistance is consistent with U.S. foreign policy and national security interests. U.S. foreign assistance programs are driven by multiple rationales, including supporting U.S. security and diplomatic and commercial interests. Foreign assistance also is widely recognized as a tool of foreign policy, which promotes social and economic development in partner countries, while also enhancing U.S. influence and leverage in those countries. If USAID is successful in ending the need for foreign assistance, Congress and the Administration may consider alternative forms of engagement with current aid partners to maintain U.S. influence and presence. For example, a reorientation to cultural exchange programs like the Fulbright program, as well as increased business ties and investment agreements, may help maintain strong relationships and U.S. influence in countries transitioning away from U.S. aid. USAID f unding . USAID is carrying out Transformation at the same time that the Administration, for a third straight year, has proposed cuts of over 20% to the agency's annual budget. While some of the proposed reforms could reduce agency costs over time, Transformation documents do not appear to specify how the proposed budget cuts, if enacted, would be reflected in program allocation. To date, Congress has not supported the proposed cuts, and appropriations for USAID have remained fairly level in recent years. New positions from r estructuring . The Transformation proposal to add two new Associate Administrator positions at USAID would increase the number of political appointees at the agency, potentially raising concerns about the politicization of USAID's development decisions. Given the challenges some Administrations have faced in filling existing high-level positions, some observers are concerned that the new positions could sit vacant for months or even yearsâpossibly further hamstringing future Administrations' policy crafting and implementation. Impact on existing USAID activities. Overall, Transformation focuses on the newânew strategies, new indicators, and new hiring mechanisms. There is less discussion of what, if anything, may fall away. For example, in staffing, the agency is creating a hiring mechanism to "streamline" the workforceâit discusses plans to eventually phase out one hiring mechanism. This means that as the new hiring mechanism is getting off the ground, the agency would still be managing more than 20 others. Congress may consider asking the agency what other strategies, structures, and processes the agency may plan to phase out or integrate as a result of Transformation . Self- r eliance goals versus c ongressional p riorities. Administrator Green has argued that the self-reliance roadmaps are not just to be used after taking into account congressional directives and country/technical allocations, but as a guide for congressional allocation decisions as well. Congress typically appropriates funds to support priority accounts and sectors (such as global health, basic education, agricultural development, democracy promotion, and women's empowerment) rather than countries. The seeming shift under Transformation to a country-specific aid agenda may conflict with congressional funding of transnational programming, such as countering trafficking and regional trade hubs. Furthermore, the self-reliance indicators themselves may warrant attention. Advising countries that lowering their tariff barriers will signal their commitment to economic prosperity may be difficult to sustain, some may argue, in light of other actions of the Trump Administration, for example. Congress may consult with USAID to ensure its indicator configuration is consistent with its priorities. Other initiatives in Transformation . Transformation was initially launched with several other priorities that do not feature prominently in recent media on the initiative. For example, USAID operational flexibility in nonpermissive environments and programmatic effectiveness in countering violent extremism were core features of Transformation at launch. It is unclear whether these and other priorities have fallen in prominence because they require more interagency coordination, because solutions have been fairly straightforward, because the challenges in those sectors are too intractable to address, or because of other reasons. Congress may also consider seeking additional information on how Transformation would align with the Administration's planned Prosper Africa trade and investment initiative, which is expected to focus, in part, on USAID's three trade hubs in Africa and elements of its trade capacity-building programs. Alignment with State Department . The State Department's Office of Foreign Assistance Resources (F) has maintained a comprehensive database of indicators to quantify the results of U.S. foreign assistance programs since 2006. It is unclear how these indicators, or those used by the Millennium Challenge Corporation, will be used in conjunction with USAID's new self-reliance indicators, if at all. Also unclear is the extent to which the State Department has been engaged with Transformation at USAID, and whether these reforms are aligned with Secretary Pompeo's vision for the future of U.S. diplomatic engagement. Congress may consider whether certain reforms should be broadened to include State Department policies and structure, or elsewhere in government. Impact on Food for Peace programming . The proposed merger of the Offices of U.S. Foreign Disaster Assistance and Food for Peace into the Bureau of Humanitarian Assistance has raised questions about the future of Food for Peace Act Title II programming. The Office of Food for Peace is currently dual-funded, receiving approximately half of its funding through the agriculture appropriations bill and its authorization from regular farm bills. In the proposed HA Bureau, the Office of Food for Peace would cease to exist in name and program officers would be programming food and nonfood assistance side-by-side. Congress has not adopted proposals by multiple Administrations to eliminate Title II programs, and it may seek to further understand how the HA Bureau would be structured to ensure it meets its mandates outlined in the farm bill, including the minimum level of nonemergency programming. Appendix. USAID Structural Transformation
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The U.S. Agency for International Development (USAID) has initiated a series of major internal reforms, branded as Transformation at USAID . The reforms are largely in response to Trump Administration directives aimed at making federal agencies more efficient, effective, and accountable. Most of the reforms proposed under this initiative do not involve statutory reorganization, but USAID Administrator Mark Green has sought congressional input as the reform process is developed and launched, especially in the area of changes to USAID organizational structure. Congress has the power to shape USAID reforms through oversight activities, and through funding requirements and restrictions. Some of these proposed reforms are consistent with efforts by past USAID Administrators and do not represent major changes of course for USAID. At the same time, USAID policy documents signal a consistent emphasis on "ending the need for foreign assistance" by supporting partner countries' "journey to self-reliance." This report highlights reforms that represent new or enhanced approaches to achieving longstanding objectives, including the following: Process and p olicy reforms focused on promoting and measuring partner country progress toward economic self-reliance, engaging the private sector in international development, and reforming procurement practices to better support these broader goals. Organizational s tructure reforms intended to enhance the agency's leadership structure, improve the efficiency of humanitarian assistance programming, and consolidate technically specialized offices within the agency. Workforce management reforms, including the creation of a new noncareer hiring mechanism. The figure below depicts the timing of key events of Transformation implementation to date. Congress may view USAID's reform initiatives through longstanding areas of interest and policy questions, including the relationship between the "journey to self-reliance" and broader U.S. foreign policy concerns, including great power competition; the consistency of the "self-reliance" goal with foreign assistance priorities identified by Congress in annual appropriations legislation; potential impacts of significant USAID funding cuts repeatedly proposed by the Trump Administration; potential impacts of proposed new Senate-confirmed management positions on agency operations; implications of replacing existing strategies, indicators, and mechanisms with new strategies, indicators, and mechanisms proposed in the Transformation initiative; the means for prioritizing goals identified in the new USAID Policy Framework and initiatives such as Prosper Africa, which do not seem appear to fall under the Trans formation umbrella; alignment of USAID policies and foreign assistance indicators with those of other U.S. agencies funding and implementing assistance, including the State Department and the Millennium Challenge Corporation; and the effect on food assistance funded by Congress through multiple channels, including the Food for Peace account, of the proposed bureau restructuring and consolidation of the Offices of U.S. Foreign Disaster Assistance and Food for Peace.
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Introduction The nearly 12,000 federally insured banks and thrifts in the United States, which hold more than $5 trillion in assets, are regulated and supervised by four federal agencies with similar and sometimes overlapping regulatory and supervisory responsibilities. Although many industry representatives, legislators, and regulators have in the past recognized the need for consolidation and modernization of federal bank oversight, major reform proposals changing the structure of bank and thrift oversight have not been adopted. This report was prepared in response to a request from Congressman Charles E. Schumer that we provide information to help evaluate efforts to modernize the U.S. system of financial industry oversight and identify potential avenues for such modernization. Much of the information in this report is based on our studies of the structures and operations of bank regulation and supervision (oversight) activities in Canada, France, Japan, Germany, and the United Kingdom. Overview of the U.S. Banking Industry This report focuses on the oversight of two major categories of depository institutions: commercial banks and thrifts. Commercial banks and thrifts originally served very different purposes and markets. Commercial banks issued debt payable on demand, which was backed by short-term commercial loans. The customers of commercial banks tended to be businesses and wealthy individuals seeking liquid deposit accounts. Savings and loan associations, however, used deposits to fund home mortgages of their members. But, because of the long terms of mortgages, members were restricted in their ability to withdraw their funds. Savings banks were initially designed to provide a range of financial services to the small saver. Their asset portfolios were generally more diversified than those of savings and loan associations to enable them to provide more flexible deposit terms. Despite the historical differences between these institutions, the powers and services of banks and thrifts have converged over time with few practical differences remaining in their authorities, except that these institutions continue to be subject to different regulatory schemes. (See app. I for more information on the history of U.S. bank and thrift oversight.) At the end of 1995, the United States had nearly 12,000 banking institutions. In this report, we refer to commercial banks and thrifts collectively as banking institutions. These institutions held about $5.3 trillion in loans and other assets (see table 1.1). As shown in table 1.1, the 9,941 commercial banks held 81 percent of total bank and thrift assets at the end of 1995. The 2,029 thrifts held 19 percent. Holding Companies Are the Dominant Banking Structure in the United States Holding companies, which are established for a variety of business, regulatory, and tax reasons, are the dominant form of banking structure in the United States. In fact, 96 percent of the assets of all U.S. commercial banks are in banks that are part of a holding company. As of December 31, 1995, about 6,122 bank holding companies and 895 thrift holding companies were operating in the United States. Of those, 4,494 bank holding companies and 833 thrift holding companies each held only 1 bank or thrift. Holding companies may consist of a parent company, banking subsidiaries, nonbanking subsidiaries, and even other holding companies—each of which may have its own banking or nonbanking subsidiaries. Figure 1.1 is a simplified illustration of a hypothetical holding company with wholly owned banking and nonbanking subsidiaries. Parent companies own or control subsidiaries through the ownership of voting stock and generally are “shell” corporations—that is, they do not have operations of their own. Banking subsidiaries are separately chartered banks subject to the same regulation and capital requirements that apply to other banking institutions. Nonbanking subsidiaries are companies that may be engaged in a variety of businesses other than banking; however, any nonbanking activities of a bank holding company subsidiary must be closely related to the business of banking and produce a public benefit. Thrift holding companies may be owned by or own any type of financial services or other business. Many bank holding companies have established nonbank subsidiaries engaged in consumer finance, trust services, leasing, mortgage lending, electronic data processing, insurance underwriting, management consulting services, and securities brokerage services. Holding companies in the United States may also have multiple tiers. For example, as we mentioned above, holding companies may have subsidiary holding companies that have their own banking or nonbanking subsidiaries. Banking subsidiaries may also have their own subsidiaries. However, the activities of these bank subsidiaries are limited to those allowable for their parent institution. The largest holding companies in the United States often have very complex, multitiered structures. Bank and thrift holding companies are particular to the U.S. financial system. In many other countries, nonbanking activities may be conducted either in a bank or in subsidiaries of a bank rather than in subsidiaries of a parent company. U.S. Banking Industry is Consolidating and Changing Its Product Focus The structure of the U.S. banking industry has changed substantially over the past 10 years. The industry is consolidating in response to the removal of legal barriers to geographic expansion, advancing technologies, and the globalization of wholesale banking, among other things. Between 1985 and 1995, the number of banks and thrifts in the United States fell by about 34 percent due to consolidation through mergers and also bank and thrift failures. The number of banks decreased by 4,476—from 14,417 to 9,941. The number of thrifts decreased by 1,597—from 3,626 to 2,029. Industry consolidation has been characterized by a greater concentration of deposits among the largest banking companies in the country. For example, the 10 largest bank holding companies controlled 17.4 percent of bank deposits in 1984; they increased this share to 25.6 percent in 1994. Similarly, the 10 largest thrift institutions increased their share of deposits from 12.4 percent to 17 percent. However, although nationwide concentration has been increasing over the past 10 years, increases in local market concentration have been much more modest relative to the changes at the national level. According to industry analysts, this has occurred because banking institutions not located in the same local market have merged, and constraints imposed by antitrust laws have helped to prevent increases in concentration at the local level. The nature of the activities that banking institutions engage in has also changed drastically over the past several decades. Although traditional lending still dominates banking institutions’ balance sheets, banking institutions have been moving toward more nontraditional products, such as mutual funds, securities, and derivatives and other off-balance sheet products. Banking Institutions’ Share of Total Assets Held in the Financial Services Industry Has Decreased Banking institutions, with about $5.3 trillion in assets at the end of 1995, constitute the largest single segment of the financial services industry. However, banking institutions’ share of the financial services industry shrank from about 45 percent in 1985 to about 30 percent in 1995. This decrease has been attributed to greater competition in the financial services industry. Consumers can now choose from a variety of providers in obtaining financial services once offered only by commercial banks and thrifts. For example, money market mutual funds, securities firms, and insurance companies all now offer interest-bearing transaction accounts. Further, although banks and thrifts were long regarded as the primary providers of consumer credit, such credit is now routinely provided by finance companies as well as by a wide variety of retail firms through credit cards and other means. Current U.S. Oversight Structure Is Complex The federal system of oversight of banking institutions in the United States is a highly complex system. Federal responsibilities for bank authorization, regulation, and supervision are assigned to three bank regulators and one thrift regulator that have jurisdiction over specific segments of the banking industry (see table 1.2). Although Treasury plays no formal role in bank oversight, it has some related responsibilities. Office of the Comptroller of the Currency The Office of the Comptroller of the Currency (OCC) currently has primary responsibility for regulating and supervising national banks—that is, banks with a federal charter. OCC also has primary responsibility for regulating and supervising federal branches and agencies of foreign banks operating in the United States. As of December 31, 1995, OCC was the primary federal supervisor of 2,861 of the 11,970 banking institutions in the United States. Those banks held about 45 percent of the total U.S. banking assets in the United States. Federal Reserve System The Federal Reserve System (FRS) is the federal regulator and supervisor for bank holding companies and their nonbank subsidiaries, and it is the primary federal regulator for state-chartered banks that are members of FRS. It is also a federal regulator for foreign banking organizations operating in the United States. In addition, it regulates foreign activities and investments of FRS member banks (national and state), Edge corporations, and holding companies. As of December 31, 1995, FRS had primary supervisory responsibility for 1,041 of the 11,970 banking institutions in the United States. The assets of these banks represented about 18 percent of the total U.S. banking assets. As of December 31, 1995, FRS also had responsibility for regulating 6,122 bank holding companies, 393 foreign branches, and 153 foreign agencies operating in the United States. Federal Deposit Insurance Corporation The Federal Deposit Insurance Corporation (FDIC) is the primary federal regulator and supervisor for federally insured state-chartered banks that are not members of FRS and for state savings banks whose deposits are federally insured. FDIC is also responsible for administering the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF).Additionally, FDIC is responsible for resolving failed banks and for the disposition of assets from failed banking institutions. At the end of 1995, FDIC was the primary federal regulator and supervisor for 6,632 of the 11,970 insured banking institutions. These banking institutions represented 22 percent of the total U.S. banking assets. Office of Thrift Supervision The Office of Thrift Supervision (OTS) is the primary regulator of all federally- and state-chartered thrifts whose deposits are federally insured and their holding companies. At the end of 1995, it was the primary federal regulator of 1,436 institutions, whose assets represented 14 percent of the total assets held by banking institutions. The Department of the Treasury The Department of the Treasury (Treasury) is one of 14 executive departments that make up the Cabinet. It is headed by the Secretary of the Treasury and performs four basic functions, of which formulating and recommending economic, financial, tax, and fiscal policies is the one most directly related to bank oversight. Ultimately, Treasury is responsible for financially backing up the U.S. guarantee of the deposit insurance fundsand may also approve special resolution options for financial institutions whose failure “could threaten the entire financial system.” In addition, Treasury is a principal player in the development of legislation and policies affecting the financial services industries. Treasury also shares responsibility for managing any systemic financial crises, coordinating financial market regulation, and representing the United States on international financial markets issues. Goals of Bank Oversight Include Safety and Soundness, Stability, and Fairness to Consumers A primary objective of banking institution regulators is to ensure the safe and sound practices and operations of individual banking institutions through regulation, supervision, and examination. The intent of regulators under this objective is primarily to protect depositors and taxpayers from loss, not to prevent banking institutions from failing. To help accomplish this goal, the government has chosen to protect deposits through federal deposit insurance, which provides a safety net to depositors. Financial market stability is also considered a primary goal of banking institution regulators. Because banking institutions play an important role as financial intermediaries that borrow and lend funds, public confidence in banking institutions is critical to economic stability at local and national levels. In support of market stability, regulators seek to resolve problems of financially troubled institutions in ways that maintain confidence in banking institutions and thus prevent depositor runs that could jeopardize the stability of financial markets. Regulators are also aware that the stability of the banking industry depends both on the ability of banking institutions to compete in an increasingly competitive environment and on maintaining competition within the industry. Regulators recognize that although their supervisory oversight should be sufficient to oversee safe and sound bank operations and practices, it should not be so onerous as to stifle the industry and impair banks’ ability to remain competitive with financial institutions in other industries and in other countries. Bank regulators also seek to maintain competition by assessing compliance with antitrust laws. Fairness in, and equal access to, banking services is also an important goal of banking institution regulators. Bank regulators seek to ensure access by assessing institutions’ compliance with consumer protection laws. This goal of the banking regulators is unique to the U.S. bank regulatory structure. Agencies Have Other Major Oversight-Related Responsibilities While the four federal banking regulators share many oversight responsibilities, some of the principal responsibilities of FDIC and FRS fall outside direct regulation and supervision but are related to the goals of bank oversight. For FDIC these include responsibility for administration of the federal deposit insurance funds, resolution of failing and failed banks, and disposition of failed bank assets. For FRS, these include responsibility for monetary policy development and implementation, liquidity lending, and payments and settlements systems operation and oversight. In addition, all four federal regulators may play a role in the management of financial crises, depending on the nature of the crisis. FDIC’s Principal Function Is As Deposit Insurer Although FDIC supervises a large number of banking institutions, its primary function is to insure banking institutions’ deposits up to $100,000. FDIC administers BIF—which predominantly protects depositors of commercial banks—and SAIF—which predominantly protects depositors of thrift institutions. FDIC receives no appropriated government funding. BIF is funded wholly through premiums paid on the deposits of member institutions and with some borrowing authority from the government under prescribed conditions, such as liquidity needs of the insurance funds. SAIF is primarily funded through premiums paid on the deposits of thrift institutions and has similar borrowing authority. Both BIF and SAIF are required by statute to have a minimum reserve ratio of 1.25 percent of insured deposits. According to FDIC, as of December 31, 1995, BIF’s fund balance exceeded the ratio 1.30, but SAIF was not fully capitalized. FDIC relies on primary regulators to verify that institutions outside its direct supervisory jurisdiction are operating in a safe and sound manner. Examinations are to be done by the institution’s primary regulators on all the institutions FDIC insures, and FDIC is to receive copies of all examination reports and enforcement actions. However, FDIC may also protect its interest as the deposit insurer through its backup authority. This allows FDIC to examine potentially troubled banking institutions and take enforcement actions, even when FDIC is not the institution’s primary regulator. In Conjunction With Deposit Insurance Function, FDIC Has Primary Role in Failure Resolution and Failed Bank Asset Disposition Regardless of an institution’s primary regulator, only its chartering authority—the state banking commission, OCC, or OTS—has the formal authority to declare that the banking institution is insolvent. Once the chartering authority becomes aware that one of its institutions has deteriorated to the point of insolvency or imminent insolvency, it is to notify FDIC, which is responsible for arranging an orderly resolution. FDIC is required by law to generally select the resolution alternative it determines to be the least costly to BIF and SAIF. To make this least-cost determination, FDIC must (1) consider and evaluate all possible resolution alternatives by computing and comparing their costs on a present-value basis, using realistic discount rates; and (2) select the least costly alternative on the basis of that evaluation. If, however, the least-cost resolution would create a systemic problem—as determined by FDIC’s Board of Directors with the concurrence of the Federal Reserve Board and the Secretary of the Treasury, then, under the Federal Deposit Insurance Corporation Improvement Act (FDICIA), another resolution alternative could be selected. As of June 30, 1996, no systemic problem had been raised by FDIC in making its resolution decisions. Typically—and particularly in the case of large, known to be troubled, institutions—active communication has taken place among the chartering authorities, primary regulators, FDIC, and FRS as liquidity provider. The interaction and coordination typically includes the sharing of examination information, strategies, and economic information, for example. This communication most commonly takes place when the primary regulator considers failure likely so that all regulatory parties can discharge their responsibilities in an orderly manner. When banks fail, FDIC is appointed receiver, directly pays insured claims to depositors or the acquiring bank, and liquidates the remaining assets and liabilities not assumed by the acquiring bank. FRS Has Several Responsibilities One of the principal responsibilities of FRS is conducting monetary policy. As stated in the Federal Reserve Act, FRS is “to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” FRS conducts monetary policy by (1) using open market operations, the primary tool of monetary policy; (2) determining the reserve requirements that banking institutions must hold against deposits; and (3) determining the discount rate charged banking institutions when they borrow from FRS. FRS is to act independently in conducting its monetary policy. FRS also is to act as lender-of-last-resort to ensure that a temporary liquidity problem at a banking institution does not threaten the viability of the institution or the financial system. Using the discount window, FRS may lend to institutions that are experiencing liquidity problems—for example, when these institutions cannot meet deposit withdrawals. However, when acting in this capacity, FRS requires the lending to be collateralized, and it is to be assured by the banking institution’s primary regulator that the institution is solvent. According to FRS officials, institutions generally do not approach FRS for liquidity loans unless they have no alternative. Liquidity lending may be perceived as a sign that an institution is in trouble, despite the fact that FRS is prohibited from lending to nonviable institutions. In addition, FRS has broad responsibility in the nation’s payments and settlements systems. It is mandated by Congress to act as an intermediary in clearing and settling interbank payments by maintaining reserve or clearing accounts for the majority of banking institutions. As a result, it settles the payment transactions by debiting and crediting the appropriate accounts of banking institutions making payments. In addition, FRS also collects checks, processes electronic fund transfers, and provides net settlement services to private clearing arrangements. Crisis Management Depending on the nature of the situation, federal regulators may play a role in financial system crisis management. FRS, for example, often has a significant role in crisis management in its role as a major participant in financial markets through its liquidity lending, payments and settlements, and other responsibilities. A key role of any central bank is to supply sufficient liquidity to the financial system in a crisis. For example, during the 1987 stock market crash, FRS provided liquidity support to the financial system, encouraged major banks to lend to solvent securities firms, coordinated with Treasury, and encouraged officials to keep the New York Stock Exchange open. During the Ohio Savings and Loan crisis in 1985, FRS intervened with liquidity support until a permanent solution to the instability could be developed. Treasury is also involved in resolving major financial crises, while OCC, OTS, and FDIC have played significant roles involving large bank or thrift failures. Various Federal and State Agencies Oversee Activities of Nonbank Subsidiaries of Banks and Bank Holding Companies Many nonbank subsidiaries of banks and bank holding companies are engaged in securities, futures, or insurance activities. These activities are subject to the oversight of the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), and state insurance regulators, respectively. These regulators may provide information to the Federal Reserve about nonbank subsidiaries of bank holding companies. They may also provide information about nonbank subsidiaries of banks to the responsible primary federal regulator of the parent bank. The primary goals of SEC and CFTC are to maintain fair and orderly markets and public confidence in the financial markets by protecting investors against manipulation, fraud, or other irresponsible practices. The aftermath of the stock market crash of 1929 created a demand for federal oversight of securities and futures activities. The Securities Exchange Act of 1934 created SEC with powers to oversee the securities market exchanges—also called self-regulatory organizations—and to intervene if the exchanges did not carry out their responsibilities for protecting investors. The Commodity Exchange Act of 1936, as amended, governs the trading of commodity futures contracts and options. The Commodity Futures Trading Commission Act of 1974 created the current regulatory structure, consisting of industry self-regulation with government oversight by CFTC. Securities broker-dealers must register with SEC and comply with its requirements for regulatory reporting, minimum capital, and examinations. They must also comply with requirements of the self-regulatory organizations, such as the New York Stock Exchange and the National Association of Securities Dealers. SEC is to monitor broker-dealer capital levels through periodic reporting requirements and regular examinations. CFTC is to review exchange rules, ensure consistent enforcement, and monitor the positions of large traders. CFTC also regulates the activities of various market participants, including futures commission merchants—which must comply with CFTC’s requirements for regulatory reporting, minimum capital, and examinations. In addition, they must comply with the rules imposed by the various exchanges, such as the Chicago Mercantile Exchange and the Chicago Board of Trade as well as the National Futures Association, all of which act as self-regulatory organizations. State Insurance Regulators Regulation of the insurance industry and administration of insurance company receiverships and liquidations are primarily state responsibilities. In general, state legislatures set the rules under which insurance companies must operate. Among their other responsibilities, state insurance departments are to monitor the financial condition of insurers. States use a number of basic methods to assess the financial strength of insurance companies, including reviewing and analyzing annual financial statements, doing periodic on-site financial examinations, and monitoring key financial ratios. State insurance departments are generally responsible for taking action in the case of a financially troubled insurance company. If the insurance company is based in another state, the insurance department can suspend or revoke its license to sell insurance in the department’s state. If a home-based company is failing, the department can put it under state supervision or, in cases of irreversible insolvency, place a company in liquidation. State insurance regulators have established a central structure to help coordinate their activities. The National Association of Insurance Commissioners (NAIC) consists of the heads of the insurance departments of 50 states, the District of Columbia, and 4 U.S. territories. NAIC’s basic purpose is to encourage uniformity and cooperation among the various states and territories as they individually regulate the insurance industry. To that end, NAIC promulgates model insurance laws and regulations for state consideration and provides a framework for multistate “zone” examinations of insurance companies. Objectives, Scope, and Methodology Congressman Charles E. Schumer asked us to provide information to help Congress evaluate efforts to modernize the U.S. system of federal oversight of banks and thrifts. Our objectives were to (1) discuss previously reported problems with the bank oversight structure in the United States, (2) summarize those characteristics of the five countries’ regulatory structures that might be useful for Congress to consider in any U.S. modernization efforts, and (3) identify potential avenues for modernizing the U.S. banking oversight structure. This report does not address federal oversight of credit unions by the National Credit Union Administration (NCUA), which are also classified as depository institutions. Credit unions hold only a small percentage of all depository institution assets—about 5.5 percent. Also, although the legal and practical distinctions between thrifts and banks have all but disappeared in recent years, the core of credit union business remains traditional consumer lending activities. Finally, the most recent proposals to modernize oversight of financial institutions have not included oversight of credit unions within their scope. To address the objectives of this report, we conducted interviews with senior supervisory officials from the Board of Governors of FRS, Federal Reserve Bank of New York, FDIC, OCC, OTS, and SEC. They also provided us with various documents and statistics, including bank and thrift examination manuals, guidance to examiners and banking industry officials, and statistics on the banking industry. In addition to our interviews with U.S. supervisory officials, we met with officials representing the banking industry, including officials from the American Bankers Association, Independent Bankers Association of America, and Conference of State Bank Supervisors. We also met with officials from the accounting profession, including officials from the American Institute of Certified Public Accountants. In conducting our work we also gathered information from many other sources. These include studies of the history of the banking industry; records from congressional hearings related to regulatory restructuring; and professional literature concerned with the industry structure, regulation, and external audits. We also reviewed relevant banking acts and regulations. This review does not constitute a formal legal opinion on the requirements of the laws. Much of this report was based on our reports of the structures and operations of bank regulation and supervision activities in Canada, France, Japan, Germany, and the United Kingdom. When preparing these reports, we interviewed regulatory and industry officials in each country and reviewed relevant banking laws, regulations, industry statistics, and other industry studies. These reports did not assess the effectiveness or efficiency of bank oversight in the countries studied. This report also draws on extensive work that we have done over the past several years on depository institutions, the deposit insurance program, the securities and insurance industries, international competitiveness, and other aspects of the financial services system in the United States. A comprehensive list of our products addressing issues related to the financial services industry is included at the end of this report. (See Related GAO Products.) We conducted our work from July 1995 through June 1996 in accordance with generally accepted government auditing standards. We provided a draft of this report for comment to the heads of FRS, FDIC, OCC, OTS, and Treasury. FRS, FDIC, OCC, and OTS provided written comments, which are discussed at the end of chapter 4 and reprinted in appendixes IV to VII. Treasury did not provide written comments. Each agency also provided technical comments, which we incorporated where appropriate. Bank Oversight Structure Is Redundant All four federal oversight agencies share several supervisory and regulatory responsibilities, including developing and implementing regulations, taking enforcement actions, conducting examinations, and off-site monitoring. Chartering is the responsibility of 2 federal agencies, as well as all 50 states. This structure of shared responsibilities has been characterized by some observers as being inherently inefficient. Furthermore, our work has shown that despite good faith efforts to coordinate their policies and procedures, the four federal bank oversight agencies have often differed on important issues of bank supervision and regulation. Federal Agencies Overseeing Banks and Thrifts Share Several Oversight Responsibilities The division of primary oversight responsibilities among the four oversight agencies is not based on specific areas of expertise, functions, or activities, either of the regulator or the banks for which they are responsible, but based on institution type—thrift or bank, bank charter type—national or state, and FRS membership. Consequently, the four oversight agencies share responsibility for developing and implementing regulations, taking enforcement actions, and conducting examinations and off-site monitoring. All Four Regulators Develop and Implement Regulations and Guidelines Regulations are the primary vehicle through which regulators elaborate on what the laws mean, clarify provisions of the laws, and provide guidance on how the laws are to be implemented. Regulations typically have the force of law—that is, they can be enforced through a court of law. Regulators have, in some cases, issued guidelines rather than regulations because guidelines provide them greater flexibility to change or update as experience dictates. Guidelines, however, are not directly enforceable in court. In most cases, each regulator is responsible for issuing its own regulations for the banking institutions under its jurisdiction. This may result in four sets of regulations implementing essentially the same provision of the law. Unless regulatory coordination in developing regulations is mandated by law, the regulators may develop regulations independently. Even if the regulators develop regulations jointly, on an interagency basis, they each still issue similar individual regulations under their own legal authority. In some instances, law designates a specific regulator to write the regulation for all banking institutions. For instance, FRS has sole rulemaking responsibility for many consumer protection laws. All Four Regulators May Take Enforcement Actions Each regulator has the authority to take enforcement actions against financial institutions under its jurisdiction. Regulators may initiate informal or formal enforcement actions to get bank management to correct unsafe and unsound practices or conditions identified during the banking institution examination. Regulators have broad discretion in deciding which, if any, regulatory action to choose, and they typically make such decisions on a case-by-case basis. Regulators have said that they prefer to work with cooperative banking institution managers to bring about necessary corrective actions as opposed to asserting formal actions. However, bank regulatory officials have also said that they may take more stringent action when the circumstances warrant it. Under agency guidelines, the regulators are to use informal actions for banking institutions if (1) the institution’s overall strength and financial condition make failure a remote possibility and (2) management has demonstrated a willingness to address supervisory concerns. Informal actions generally include meeting with banking institution officers or board of directors to obtain agreement on improvements needed in the safety and soundness of the institution’s operations, requiring banks to issue resolutions to issue commitment letters to the regulators specifying corrective actions to be taken, and initiating memorandums of understanding between regulators and banking institution officers on actions that are to be taken. Informal actions typically are used to advise banking institutions of noted weaknesses, supervisory concerns, and the need for corrective action. The regulators assume that banking institutions understand that if they do not comply with informal actions, regulators may take stronger enforcement actions. Under agency guidelines, the regulators use formal enforcement actions that are authorized in banking laws when informal actions have not been successful in getting management to address supervisory concerns, management is uncooperative, or the institution’s financial and operating weaknesses are serious and failure is more than a remote possibility. Formal enforcement actions generally include such actions as formal written agreements between regulators and bankers; orders to cease and desist unsafe practices or violations; assessments of civil money penalties; and orders for removal, suspension, or prohibition of individuals from banking institution operations. In addition, OCC and OTS may revoke national banking institutions’ charters and place institutions in conservatorship; FDIC may remove an institution’s deposit insurance. Each Regulator Is To Examine Banking Institutions Under its Jurisdiction Under FDICIA, all insured banking institutions are to be examined once every 12 months by federal regulators. These examinations are to be conducted by the regulators with primary jurisdiction over the banking institutions. In addition, FDIC may conduct backup examinations of any bank, if necessary, for the purpose of protecting BIF. The full-scope examinations required under law are usually called safety-and-soundness examinations because their primary purpose is to assess the safety and soundness of a banking institution’s practices and operations. The objectives of these on-site examinations are to test and reach conclusions about the reliability of banking institutions’ systems, controls, and reports; investigate changes or anomalies disclosed by off-site monitoring and analysis; and evaluate those aspects of the institution’s operations for which portfolio managers cannot rely on the banks’ own systems and controls. CAMEL Ratings for Banks and Thrifts Examinations have historically been extensive reviews of loan portfolios. Currently, according to officials with whom we spoke, regulators are moving toward a risk-management approach and concentrating on institutions’ risk profiles and internal controls. Examiners rate five critical areas of operations—capital adequacy (C), asset quality (A), management (M), earnings (E), and liquidity (L)—to determine an overall rating (CAMEL). They use a five-point scale (with one as the best rating and five as the worst) to determine a CAMEL rating that describes the condition of the institution. As a part of the examination process, regulators are to meet with banking institution officials after every examination. In addition, regulators are to hold separate meetings with the bank’s audit committee and management after each examination to discuss the results of the examination. Holding Company Inspections FRS and OTS also conduct holding company inspections. Holding company inspections differ from bank examinations in that the focus of the inspection is to ascertain whether the strength of a bank holding company is being maintained and to determine the consequences of transactions between the parent company, its nonbanking subsidiaries, and the subsidiary banks. According to FRS and OTS guidelines, the major components of an inspection include an assessment of the financial condition of the parent company, its banking subsidiaries, and any nonbanking subsidiaries; a review of intercompany transactions and relationships; an evaluation of the current performance of the company and its a check of the company’s compliance with applicable laws and regulations. BOPEC Ratings for Bank Holding Companies Examiners are to rate five critical areas of the bank holding company—bank subsidiaries (B), other nonbank subsidiaries (O), parent company (P), earnings (E), and capital adequacy (C)—to determine an overall rating referred to as BOPEC. Examiners use a five-point rating scale, similar to that used for CAMEL ratings on banks and thrifts. They also rate management separately as satisfactory, fair, or unsatisfactory. Consumer Compliance and Community Reinvestment Act Examinations Are Done Separately From Safety and Soundness Examinations In addition to safety and soundness examinations, regulators are to conduct examinations of banking institutions focusing on compliance with various consumer protection laws and the Community Reinvestment Act (CRA). A consumer compliance examination results in a compliance rating for an institution’s overall compliance with consumer protection laws to ensure that the provision of banking services is consistent with legal and ethical standards of fairness, corporate citizenship, and the public interest. A compliance rating is to be given to the institution based on the numerical scale ranging from 1 for top-rated institutions to 5 for the lowest-rated institutions. Although the regulators may do a CRA compliance examination separately from a consumer compliance examination, officials from all four regulators said that they generally do both examinations at the same time. The purpose of the CRA examination is to evaluate the institution’s technical compliance with a set of specific rules and to qualitatively evaluate the institution’s efforts and performance in serving the credit needs of its entire community. The CRA examination rating consists of a four-part descriptive scale including “outstanding,” “satisfactory,” “needs to improve,” and “substantial noncompliance.” Under the Financial Institution Reform, Recovery, and Enforcement Act of 1989 (FIRREA), CRA was amended to require that the regulator’s examination rating and a written evaluation of each assessment factor be made publicly available—unlike the safety and soundness or compliance examination ratings, which are not made public by regulators. Off-Site Monitoring and Analysis Supplements Examinations In addition to on-site examinations of banking institutions, each of the regulators engages in off-site monitoring activities. These activities—which generally consist of a review and analysis of bank-submitted data, including call reports, and discussions with bank management—are to help the regulators identify trends, areas of concern, and accounting questions; monitor compliance with requirements of enforcement actions; and formulate supervisory strategies, especially plans for on-site bank examinations. According to examination guidance issued by the regulators, off-site monitoring involves review and analysis of, among other things, quarterly financial reports that banks prepare for and submit to regulators and reports and management letters prepared for banking organizations by external auditors of banks. In general, meetings are not regularly held with banking institution management as part of normal off-site monitoring activities. If off-site monitoring reveals significant changes or issues that could have an impact on the bank, then examiners may meet with management or contact management by telephone to discuss relevant issues. Oversight agencies are focusing more on risk assessment in their off-site monitoring efforts. FDIC officials said that their off-site monitoring programs, such as quarterly reports and off-site reviews, help provide an early indication of a change in an institution’s risk profile. They also said that FDIC has developed new initiatives to improve identifying and monitoring risk. One initiative is the development of decision flowcharts that aid examiners in identifying risks in an institution as well as possible approaches to address them. Another initiative has included increasing the use of technology through the development of an automated examination package and expanding the access that examiners have to internal and external databases in order to provide relevant data to examiners prior to on-site examinations, enabling the examiner to identify specific risks areas. External auditors’ reports, originally prepared to ensure the accuracy of information provided to a banking organization’s shareholders, attest to the fairness of the presentation of the institution’s financial statements and, in the case of large institutions, to management’s assertions about the institution’s financial reporting controls and compliance with certain laws and regulations. Management letters describe important, but less significant, areas in which the banking institution’s management may need to improve controls to ensure reliable financial reporting. Supervisors generally require banking institutions that have an audit—regardless of the scope of the audit—to send the reports, including management letters and certain other correspondence, to the supervisor within a specified time period. Reviews of this information could lead examiners to focus on-site examinations on specific aspects of an institution—such as parts of an institution’s internal control system—or even to eliminate some procedures from the examination plan. The purposes of external audits and safety and soundness examinations differ in important respects and are guided by different standards, methodologies, and assumptions. Even so, external auditors and examiners may review much of the same information. To the extent that examiners could avoid duplicating work done by external auditors, examinations could be more efficient and less burdensome for financial institutions. Supervisors’ Use of External Auditors’ Work Has Been Limited by Various Factors Supervisors’ actual use of external auditors’ work has varied by agency as well as by individual examiner, according to supervisory officials we interviewed. Primary factors in limiting use, according to some officials we interviewed, include skepticism among examiners about the usefulness of the work of external auditors and concerns that the findings of an external audit could be outdated by the time the financial institution is examined by its federal supervisor. Recent Initiatives May Help Increase Supervisory Use of External Auditors’ Work OCC and FDIC recently have undertaken initiatives to improve cooperation between external auditors and examiners and potentially to identify areas in which examiners could better use the work of external auditors. One impetus for improvement efforts was a 1995 report by the Group of Thirty—“Defining the Roles of Accountants, Bankers and Regulators in the United States.” This report recommended, among other things, joint identification by the accounting profession and regulators of areas of reliance on one another’s work; actions by independent audit committees to encourage interaction among regulators, external auditors, and banking institution management; routine use by examiners of audit workpapers; and a permanent board consisting of representatives from each of the federal banking agencies, SEC, the accounting profession, and the banking industry to recommend improvements in the relationship between regulators and external auditors. Regulatory officials we interviewed disagreed with some of the recommendations set out by the Group of Thirty report, and some officials said the report did not give sufficient credit to regulators’ past efforts to work with external auditors. However, regulators generally agreed that this report helped provide some needed momentum for their initiatives. In November 1995, OCC announced plans for a 1-year pilot program to promote greater cooperation between examiners and external auditors and reduce wasteful duplication and oversight burden. The program, which is to involve at least 10 large regional and multinational banks, is expected to result in nonmandatory guidelines on how and under what circumstances examiners and external auditors should work together and use each others’ work. Officials said that certain process-oriented functions where external auditors and examiners are tabulating or verifying the same information—such as documenting and flow-charting internal controls or confirming the existence and proper valuation of bank assets—may be an area where examiners could use the work of external auditors. FRS is also in the process of trying to establish procedures for cooperating more closely with external auditors. As of June 1996, FRS staff had prepared a draft recommendation for the FRS Board to explore opportunities to share information and analytic techniques with external auditors and to seek opportunities to benefit from the work of external auditors. According to FDIC officials, representatives of FDIC have regular meetings with external auditors, and examiners have also recently begun reviewing selected external auditors’ workpapers. Examiners we spoke with told us that information found in the workpapers can be useful because information considered immaterial for financial accounting purposes (which is therefore not discussed in the audit report) can be useful for regulatory purposes. They further found the auditors’ work useful for identifying issues needing management’s attention and providing indicators of management willingness or ability to address those issues. Finally, one of the most important benefits of this workpaper review, according to examiners, is that these reviews promoted expanded communication and interaction between examiners and external auditors and helped acquaint examiners and auditors with each other’s techniques, policies, procedures, and objectives. FDIC officials told us they plan to issue examiner guidance to implement procedures to expand their review of internal and external audit workpapers of institutions that have substantial exposure to higher risk activities, such as trading activities. Officials also said examiners will be expected to contact an institution’s auditor to solicit information that the auditor may have gained from his or her work at the institution since the last examination. Finally, they said that this guidance will require that all Division of Supervision Regional Offices institute a program whereby annual meetings are held between regulators and local accountants to informally discuss accounting, supervisory, and examination policy issues. According to industry officials, OTS—and its predecessor the Federal Home Loan Bank Board (FHLBB)—has had a long-standing history of working with external auditors, and its examiners frequently use the work of external auditors to adjust the scope of examinations. (See app. II for additional information on the use of external auditors in bank supervision.) Chartering of Banking Institutions Is Limited to States, OTS, and OCC Banking institutions have a choice of three chartering authorities: (1) state banking authorities, which charter state banks and thrifts and license state branches and agencies of foreign banks; (2) OTS, which charters national thrifts; and (3) OCC, which charters national banks and licenses federal branches and agencies of foreign banks. FRS and FDIC have no chartering authority. However, according to FDIC, all deposit-taking institutions are required to apply to FDIC for federal deposit insurance before they are chartered. Thus, FDIC may have a powerful influence over chartering decisions. Although the authority to charter is limited, each regulator has responsibility for approving mergers, branching, and change-of-control applications. FRS, FDIC, and OTS share their authority to approve branching and mergers of banking institutions under their jurisdictions with state authorities, while OCC alone reviews national bank branch and merger applications. FRS is responsible for approving bank holding company mergers even though the major banking institutions in the merging holding companies may be supervised by OTS, OCC, or FDIC. Likewise, OTS approves thrift holding company mergers. FRS and FDIC Rely on Supervisory Information to Fulfill Nonoversight Duties; Treasury Obtains Information Primarily Through OCC and OTS As described in chapter 1, in addition to their primary bank oversight functions, FRS and FDIC have other major responsibilities that include administration of the federal deposit insurance funds; failed or failing bank resolution; and asset disposition for FDIC and, for FRS, monetary policy development and implementation, payments and settlements systems operation and oversight, and liquidity lending. FRS and FDIC officials told us that to fulfill their duties, they rely on information obtained under their respective supervisory authorities. FRS officials said that to carry out their responsibilities effectively, they must have hands-on supervisory involvement with a broad cross-section of banks. FRS officials also said that the successful handling of financial crises often depends upon a combination of the insights and expertise gained through banking supervision and those gained from the pursuits of macroeconomic stability. Experience suggests that in times of financial stress, such as the 1987 stock market crash, FRS needs to work closely with the Department of the Treasury and others to maintain market stability. As we have pointed out in the past, the extent to which FRS needs to be a formal supervisor of financial institutions to obtain the requisite knowledge and influence for carrying out its role is an important question that involves policy judgments that only Congress can make. Nevertheless, past experience, as well as evidence from the five foreign oversight structures we studied (see ch. 3 for further discussion) provides support for the need for FRS to obtain direct access to supervisory information. In its comment letter, FRS stated that it needs active supervisory involvement in the largest U.S. banking organizations and a cross-section of others to carry out its key central banking functions. FDIC officials said that their formal supervisory responsibility enables them to maintain staff that can supervise and assess risk. In their view, this gives FDIC the expertise it requires when it needs to intervene to investigate a problem institution. In addition, FDIC officials said that the agency’s supervision of healthy institutions is useful because it increases their awareness of emerging and systemic issues, enabling them to be proactive in carrying out FDIC’s insurance responsibilities. In its comment letter, FDIC reiterated its need for information on the ongoing health and operations of financial institutions and stated that periodic on-site examination remains one of the essential tools by which such information may be obtained. Under FDICIA, FDIC was given backup examination and enforcement authority over all banks. On the basis of an examination by FDIC or the appropriate federal banking agency or “other information,” FDIC may recommend that the appropriate agency take enforcement action with respect to an insured depository institution. FDIC may take action itself if the appropriate federal banking agency does not take the recommended action or provide an acceptable plan for responding to FDIC’s concerns and if FDIC determines that the institution is in an unsafe or unsound condition, the institution is engaging in unsafe or unsound practices and the action will prevent it from continuing those practices, or the institution’s conduct or threatened conduct poses a risk to the deposit insurance fund or may prejudice the interests of depositors. We are on record as favoring a strong, independent deposit insurance function to protect the taxpayers’ interest in insuring more than $2.5 trillion in deposits. Previous work we have done suggests that a strong deposit insurance function can be ensured by providing FDIC with (1) the ability to go into any problem institution on its own, without having to obtain prior approval from another regulatory agency; (2) the capability to assess the quality of bank and thrift examinations, generally; and (3) backup enforcement authority. As described in chapter 1, Treasury also has several responsibilities related to bank oversight, including being the final decisionmaker in approving an exception to FDIC’s least-cost rule and a principal participant in the development of financial institution legislation and policies. These responsibilities require that Treasury regularly obtain information about the financial and banking industries, and, at certain times, institution-specific information. According to Treasury officials, Treasury’s current level of involvement, through its housing of OCC and OTS and their involvement on the FDIC Board of Directors, and the information it receives from the other agencies, like FDIC and FRS, as needed, is sufficient for it to carry out these responsibilities. For example, according to Treasury, officials at OCC and OTS meet regularly with senior Treasury officials to discuss general policy issues and market conditions. In addition, the Secretary of the Treasury meets regularly with the FRS Chairman, and other senior Treasury officials meet regularly with members of the FRS Board. Furthermore, Treasury officials are in frequent contact with FDIC officials about issues relevant to both organizations. Analysts, Regulators, and Legislators Have Identified Disadvantages and Advantages of the Oversight Structure Analysts, legislators, banking institution officials, and numerous past and present regulatory agency officials have identified weaknesses and strengths in the structure of the federal bank oversight system. Some representatives of these groups have broadly characterized the federal system as redundant, inconsistent, and inefficient. Some banking institution officials have also raised concerns about negative effects of the structure on supervisory effectiveness. At the same time, some agency and institution officials have credited the current structure with encouraging financial innovations and providing checks and balances to guard against arbitrary oversight decisions or actions. Bank Oversight Structure Has Contributed to Inefficiencies and Could Cloud Accountability to Congress, According to Regulators and Industry Officials and Analysts A principal concern associated with four regulators essentially conducting the same oversight functions for various segments of the industry is that the system is inefficient in numerous respects. For example, each agency has its own internal support and administrative functions, such as facilities, data processing, and training to support the basic regulatory and supervisory tasks it shares with three other agencies. Concerns about inefficiency have also been raised by banking industry officials and analysts because a number of federal regulatory agencies may oversee the banking and nonbanking subsidiaries in a bank holding company. Inefficiencies could result to the extent that the regulator responsible for supervision of the holding company itself, FRS, might duplicate work done by the primary regulator of the holding company subsidiaries—that is, OTS, OCC, or FDIC. According to SEC officials, another area of potential inefficiency is the lack of uniform regulations of bank securities activities. For example, banking institutions that are not part of a holding company are exempted from SEC filing requirements, such as registering their securities offerings and making periodic filings with SEC. This means that there is a duplication of expertise that both SEC and the federal banking institutions’ regulators must develop and maintain to oversee securities offerings and related activities. Overlapping authority and responsibility for examination of subsidiaries could also have the effect of clouding accountability to Congress in cases of weaknesses in oversight of such subsidiaries. According to testimony by the Comptroller of the Currency in 1994, “it is never entirely clear which agency is responsible for problems created by a faulty, or overly burdensome, or late regulation.” Regulators have also raised concerns about FDIC’s backup examination authority. The backup authority remains open to interpretation and, according to regulatory officials, gives FDIC the authority to examine banking institutions regardless of the examination coverage or conclusions of the primary regulator. Regulatory officials said that they were concerned about FDIC’s backup authority because of the possible duplication of effort and the resulting regulatory burden on the affected banks. FDIC’s Board of Directors has worked with FDIC officials in efforts to establish a policy statement clarifying how this authority will be applied in order to avoid inefficiency or undue burden while allowing FDIC to safeguard deposit insurance funds. Multiplicity of Regulators Creates Inconsistencies Regulators, banking officials, and analysts alike assert that the multiplicity of regulators has resulted in inconsistent treatment of banking institutions in examinations, enforcement actions, and regulatory decisions, despite interagency efforts at coordination. For example, in previous studies, we have identified significant inconsistencies in examination policies and practices among FDIC, OCC, OTS, and FRS, including differences in examination scope, frequency, documentation, loan quality and loss reserve evaluations, bank and thrift rating systems, and examination guidance and regulations. To address some of these problems, the federal agencies have operated under a joint policy statement since June 1993 designed to improve coordination and minimize duplication in bank examination and bank holding company inspections. According to OTS, the oversight agencies have adopted a common examination rating system and have improved coordination of examinations, and some conduct joint examinations when feasible. Some of the differences among banking institution regulators result from differences in the way they interpret and apply regulations. Banking officials told us that the agencies sometimes apply different rules to similar situations and sometimes apply the same rules differently. A 1993 Congressional Budget Office (CBO) study cited frequent disagreements between OCC and FRS on the interpretation of laws governing the permissible activities of national banks. These disagreements resulted in a failed attempt by FRS to prevent one national bank from conducting OCC-approved activities in a bank subsidiary. The CBO study also detailed historical differences between the two agencies in other areas, such as merger approvals. In addition to interpreting regulations differently, the regulatory agencies sometimes enforced them differently as well. For example, we observed that regulatory agencies have given different priority to enforcing consumer protection and community lending legislation. Similarly, in our examination of regulatory impediments to small business lending we also found that the agencies had given conflicting advice to their institutions about the procedures for taking real estate as collateral to support traditional small business working capital and equipment loans. Inconsistency among the regulators in examinations as well as in interpreting, implementing, and enforcing regulations may encourage institutions to choose one charter over another to take advantage of these differences. For example, a merger of banking institutions with differing charters may be purposefully structured to place the application decision with the agency deemed most likely to approve the merger and expand permissible activities. According to some former agency officials, a regulatory agency’s desire to maintain or increase the number of institutions under its jurisdiction could inhibit the agency from taking the most appropriate enforcement action against an institution because that action could prompt a charter switch. Although the statutory mandates that define responsibilities of federal regulators help produce a common understanding of the principal goals of bank regulation, bank regulators may prioritize these goals differently, according to the mission of the particular regulatory agency, among other factors. As a result, a banking organization overseen by more than one of the regulators can have different, and sometimes conflicting, priorities placed on its institutions. Various functions within an agency may also differ in the priority they assign oversight goals. For instance, safety-and-soundness examiners from one agency focus on the goals of safety and soundness and the stability of the system and may emphasize high credit standards that could conflict with community development and investment goals. Other examiners from the same agency focus on consumer protection and community reinvestment performance of banking institutions. According to industry officials, the two types of examiners may have different priorities when assessing banking institution activities, even though each represents the same regulatory agency. As a result, industry officials have said that they are sometimes confused about how consistently the goals are applied to individual institutions as well as across the industry. Regulatory Coordination Is Not Always Efficient Coordination among regulators to ensure consistent regulation and supervisory policies has been encouraged by Congress in FIRREA and FDICIA and, according to agency officials, has taken place through the Federal Financial Institutions Examination Council (FFIEC), various interagency committees or subcommittees, interagency task forces or study groups, or through agency officials working together. Many joint policies and regulations have been developed in this way. Currently, for example, according to several of the oversight agencies, the federal agencies are working to develop consistent regulations and guidelines that implement common statutory or supervisory policies, pursuant to Section 303 of the Riegle Community Development and Regulatory Improvement Act. How they are to coordinate and the degree to which coordination takes place is to be decided on a case-by-case basis. Although acknowledging the need for agency coordination, bank oversight officials have said that efforts to develop uniform policies and procedures—regardless of the coordination means used—can take months, involve scores of people, and still fail to result in uniformity. Further, they said the coordination process has often caused long delays in decisions on important policy issues. Implementation of FDICIA is such a case. Numerous staff from each of the regulatory agencies were involved over an extended period. However, despite this effort, the agencies missed the statutory deadline for the noncapital tripwire provision authorizing closure of banking institutions even when they still have positive capital levels (section 132 of the act) by several months. In addition, banking institution officials have stated that efforts to coordinate have usually led to what too often becomes the “least common denominator” agreement rather than more explicit uniform regulatory guidance. Current Structure May Hamper Effectiveness of Oversight Certain aspects of the U.S. banking oversight structure may also negatively affect regulatory effectiveness. According to FRS testimony, as of April 30, 1996, about 60 percent of the nation’s bank and thrift organizations were supervised by at least two different federal banking agencies. Some holding companies may be subject to oversight by three or all four of the federal oversight entities (see fig. 2.2). The overlapping authority in bank holding company supervision has sometimes been a problem, according to regulatory officials, because each regulator examines only a segment of the holding company and so must rely upon other regulators for information about the remaining segments. Banking officials have said this not only results in a fragmented approach to supervising and examining institutions but also ignores how the banking organization operates and hinders regulators from obtaining a complete picture of what is going on in the organization. According to these officials, the regulatory structure may result in potential blind spots in supervisory oversight and, therefore, may not be the most effective way to guard against risk to banking institutions or the banking system as a whole. Work that we have done supports these assessments. Multiagency System Has Been Credited With Encouraging Financial Innovations and Providing Checks and Balances to Ensure Banks Are Treated Fairly Although banking officials have acknowledged weaknesses in the structure of the U.S. bank oversight system, they have also found strengths. For example, some regulatory officials believe that regulatory monopolies or single regulators run the risk of being inflexible and myopic; are slow to respond to changes in the marketplace; and, in the long term, are averse to risktaking and innovation by banking institutions. These officials have stated that having multiple federal regulators in the U.S. system has resulted in the diversity, inventiveness, and flexibility in the banking system that is important for responding to changes in market share and in technology. These officials consider the present system to be flexible enough to allow market-driven changes and innovations. The same officials have said that the present system of multiple regulators—with the ability of banking institutions to change charters—provides checks and balances against arbitrary actions and rigid and inflexible policies that could stifle healthy growth in the banking industry. Principles for Bank Oversight Modernization On the basis of the extensive work we have done in areas such as bank supervision, enforcement, failure resolution, and innovative financial activities—such as derivatives—we have previously identified four fundamental principles that we believe Congress could use when considering the best approach for modernizing the current regulatory structure. We believe that the federal bank oversight structure should include consolidated and comprehensive oversight of companies owning federally insured banks and thrifts, with coordinated functional regulation and supervision of individual components; independence from undue political pressure, balanced by appropriate accountability and adequate congressional oversight; consistent rules, consistently applied for similar activities; and enhanced efficiency and as low a regulatory burden as possible consistent with maintaining safety and soundness. Aspects of Foreign Bank Oversight Systems May Be Useful to Consider in Efforts to Modernize U.S. Bank Oversight Aspects of bank oversight systems in Canada, France, Germany, Japan, and the United Kingdom (U.K.) may be useful to consider when addressing bank oversight modernization. All of the foreign systems had fewer total entities overseeing banking institutions than did the U.S. system of bank oversight—ranging from one (U.K.) to three (France). No more than two oversight entities in the foreign countries were responsible for any single major oversight activity—chartering, regulation, supervision, or enforcement. In all five countries we studied, banking organizations typically were subject to consolidated oversight, with one oversight entity being legally responsible and accountable for the entire banking organization, including its banking and nonbanking subsidiaries. The oversight systems in the countries we reviewed generally included roles for both central banks and finance ministries. This reflects a close relationship of traditional central bank responsibilities with oversight of commercial banks as well as the national government’s ultimate responsibility to maintain public confidence and stability in the financial system. At the same time, most of the foreign countries incorporated checks and balances to guard against undue political influence and to ensure sound supervisory decisionmaking. The other countries’ deposit insurers had narrower roles than that of FDIC and often were not government entities. Finally, foreign systems incorporated a variety of mechanisms and procedures to ensure consistent oversight and improve efficiency. Foreign Systems Had One to Three Oversight Entities Compared to the U.S. bank oversight structure, with four federal agencies performing many of the same oversight functions, the other countries’ structures looked less complex (see table 3.1 for a brief overview of the other countries’ oversight systems). The total number of bank oversight entities in each of the countries we studied ranged from one (U.K.) to three (France). At one end of the spectrum was the Bank of England, which performed all bank oversight functions. At the other end, in France, were the three independent decisionmaking committees—chartering, regulating, and supervising—all of which were supported by central bank staff. The foreign systems also had fewer oversight entities engaged in chartering, regulation, supervision, and enforcement activities compared to the U.S. system. Although all four U.S. agencies issue rules, conduct examinations, and take enforcement actions—OCC and OTS are the only federal chartering authorities in the United States—the foreign systems had authorized no more than two agencies to perform each of those functions. Other Countries Had One Entity to Charter Banking Institutions In each of the countries we studied, chartering of commercial banking institutions was the responsibility of only one entity. This differs markedly from the U.S. system, in which banking institutions may be chartered by state banking commissions, OTS, or OCC. As in the United States, the chartering entities in the other countries assessed applications on the basis of several factors. The most universal of the factors considered were the adequacy of capital resources and the expertise and character of financial institution management. In the United States, as noted in chapter 1, a banking institution’s federal oversight agency is largely determined by the institution’s charter, and under most circumstances an institution may switch its charter in order to come under the jurisdiction of an agency it may favor. Such switching of regulators is not a possibility in the countries we studied. In Most Other Countries, Regulations Were Issued by One Entity In contrast to the U.S. system, in which each of the four banking institution oversight entities is generally authorized to issue its own regulations or regulatory guidelines, responsibility for issuing regulations in the countries we studied was usually limited to one entity. In France, this responsibility was assigned to the Bank Regulatory Committee; in Germany, to the Federal Bank Supervisory Office (FBSO); in Japan, to the Ministry of Finance; and in the U.K., to the Bank of England. In Canada, however, the bank supervisor and the deposit insurer were both authorized to issue regulations or standards. The insurer had the authority to issue standards pertaining to its operations and functions and those of its members. To guard against monolithic decisionmaking, the regulatory processes in all five countries were designed to include the views of other agencies involved in bank, securities and insurance oversight, and those of the regulated industry. The single-regulator approach in four of the foreign countries we studied and the coordination of regulation between the federal regulator and the deposit insurer in Canada meant that in all five countries, all banking institutions conducting the same lines of business were subject to the same safety and soundness standards, including rules related to permissible activities. This contrasts with the four regulator system in the United States, as discussed in chapter 2. Supervisory Responsibilities Were Shared by No More Than Two Entities, and Only One Had Formal Enforcement Authority In the countries we studied, major supervisory activities were never shared by more than two entities. For purposes of our analysis, we defined these activities as (1) monitoring banks’ financial condition and operations through on-site examinations or inspections, (2) monitoring through the collection and analysis of data in reports filed by banks and through meetings with bank officials and others, and (3) enforcing laws and regulations through formal or informal actions. In Canada, both the bank supervisor and the deposit insurer performed supervisory duties. In France, the supervisory duties were performed by the committee called the Banking Commission; in Germany, by the federal bank supervisor and the central bank; in Japan, by the Ministry of Finance and the Bank of Japan; and in the U.K., by the Bank of England. In four of the five countries we studied, the responsibility for taking formal enforcement actions was limited to one supervisor. For instance, in the U.K., the Bank of England was solely responsible for formal enforcement actions. In Germany, the federal supervisor was responsible for enforcement actions; in France, the Banking Commission; and, in Japan, the Ministry of Finance in Japan. Canada’s deposit insurer could take specific, narrowly defined enforcement actions to protect the deposit insurance fund, such as levying a premium surcharge on individual members or terminating an insured institution’s deposit insurance. Most Foreign Bank Supervisors Said They Conducted On-Site Examinations Less Frequently Than Did U.S. Supervisors Most of the other countries’ bank supervisors said they conducted on-site examinations less frequently than U.S. bank supervisors, and they said that the examinations conducted were often narrower in scope than U.S. examinations. In France, on-site examinations were conducted on average less frequently than every 4 years, depending on the institutions being examined. In Japan, examinations were conducted approximately every 1 to 3 years. Canada’s frequency of on-site examinations, like that of U.S. supervisors’, was to be once a year. Supervisors in Germany and the U.K. said they relied on information collected for them by external auditors rather than conducting their own regularly scheduled on-site examinations. In the three countries that conducted regular on-site examinations, the examinations were to primarily assess the safety and soundness of bank operations and verify the accuracy of data submitted for off-site monitoring purposes. Special purpose examinations, in Canada and elsewhere, were also to be conducted across the industry to determine how specific issues—such as corporate governance—were being handled across the banking system. Supervisors in Other Countries Relied Extensively on Information Provided in Periodic Reports and Meetings In monitoring the financial conditions and operations of banks, most of the supervisory entities in other countries said they generally relied more extensively than supervisors in the United States on off-site information, primarily information in periodic reports submitted by banking institutions. Reporting by banks included information on assets, liabilities, and income, as is the case in the United States, as well as more detailed information. In France, for example, the Banking Commission had implemented a new reporting system for credit institutions for the purpose of collecting and analyzing information for prudential, monetary, and balance of payments purposes. The system was intended to provide an early warning of potential problems in individual banks or in the banking system as a whole. Indicators of potential safety and soundness problems were typically to be discussed with bank officials, whether in meetings or correspondence, and could trigger an on-site examination. Banks in several of the countries were also required to submit information on their major credit exposures, which the regulators could analyze for excessive growth or concentrations that might indicate safety and soundness problems for either the individual bank or the banking system. Other important sources of information included meetings with bank management. For example, supervisors said they often met with management to follow up on information collected through their off-site monitoring. Such meetings could include questions about potential informational discrepancies and any business implications, or they could provide an opportunity for discussions about the institution’s operations. In three countries (Canada, Germany, and the U.K.), work performed by banks’ external auditors also contributed significantly to supervisory information (see discussion below on the contribution of external auditors to bank supervision). As discussed in chapter 2, U.S. federal bank supervisors also monitor the condition of banks using information contained in periodic reports and discussions with bank management. However, U.S. regulators do not collect some of the information that is used for risk assessment purposes overseas, such as the reporting of large credit exposures. Other Countries Used Informal Enforcement Actions More Than Formal Actions As has often been true in the United States, supervisors in each of the countries we reviewed said they preferred to rely principally on informal enforcement actions, such as warnings or persuasion and encouragement. Informal actions generally were regarded by supervisors as easier and faster to put into effect and sufficiently flexible to ensure that the institutions took timely corrective actions. Supervisors also told us that banking institutions understood that if they did not comply with informal actions and recommendations, formal actions were sure to follow. While authorization to take formal actions in most of the foreign countries was limited to the primary supervisor, informal actions sometimes could be taken by more than one oversight entity. In Germany, for example, the central bank could suggest to banks remedies for perceived shortcomings and recommend enforcement actions to the federal supervisor. In Japan, the Bank of Japan also could recommend informal enforcement actions, such as suggested remedies to perceived problems. In Canada, the deposit insurer could recommend enforcement actions to the supervisor as well as take some limited enforcement actions on its own if the insurance fund was considered at risk. The financial services industries in the five countries have, over time, experienced serious failures, control problems, or other financial difficulties that have resulted in significant changes or at least the consideration of such changes to bank oversight structures. These changes include a strengthened on-site examination capability and an increased formality in the supervisory process and use of enforcement actions in several countries. Oversight Entities Were Typically Responsible and Accountable for Entire Banking Organizations, Including Subsidiaries In the five countries we studied, banking organizations typically were subject to consolidated oversight, with an oversight entity responsible and accountable for an entire banking organization, including banking and nonbanking subsidiaries. For instance, if a bank had nonbank subsidiaries regulated by securities or insurance regulators, bank regulators nonetheless were responsible for supervisory oversight of the bank as a whole. The bank regulators would generally rely on the nonbank regulators’ expertise in overseeing the bank’s subsidiaries. For example, in France, the Banking Commission was responsible for the supervision of the parent bank and the consolidated entity, even though securities or insurance activities in bank subsidiaries were the responsibility of other regulators in those areas. In Canada, the federal supervisor was responsible for all federally incorporated financial institutions, such as banks, insurance companies, and trust companies. Securities subsidiaries of banks were the responsibility of provincial securities regulators who shared information with the bank regulator for purposes of consolidated oversight. Regulators in the U.K. also operated under the consolidated oversight approach. For a bank that owned nonbank subsidiaries, the Bank of England remained the lead regulator and had responsibility for the entity as a whole. However, it relied on the expertise of securities and insurance supervisors to provide information on subsidiaries conducting such activities. If the major top-level entity was a securities firm that owned a bank, then the securities regulator was the lead regulator of the entire entity and would rely on the bank regulator for information about the bank. If banks conducted securities or other activities within the bank department rather than in a nonbank subsidiary, then the bank regulator retained supervisory responsibility. In Germany, for example, where universal banks were able to conduct an array of activities from deposits to securities activities within the banking institutions, the federal supervisor was responsible for all bank and nonbank activities conducted within a bank. Other Countries’ Oversight Systems Generally Included Roles for Central Banks and Finance Ministries The oversight systems in the countries we reviewed generally included roles for both central banks and finance ministries, reflecting the close relationship of traditional central bank responsibilities with oversight of commercial banks as well as the national government’s ultimate responsibility to maintain public confidence and stability in the financial system. Central Banks Usually Played Significant Roles in Supervision and Regulatory Decisionmaking Central banks generally played significant roles in supervision and regulatory decisionmaking in the countries we studied, largely based on the premise that central bank responsibilities for monetary policy and other functions, such as crisis intervention, oversight of clearance and settlements systems, and liquidity lending, are interrelated with bank oversight. Although no two countries had identical structures for including central banks in bank oversight, they each accorded their central banks roles that ensured access to, and certain influence over, the banking industry. The central bank’s role was most direct in the U.K., where the Bank of England had sole responsibility for the authorization, regulation, and supervision of banks. Canada had a far less direct role for its central bank in supervision and regulation. Even so, the Bank of Canada influenced supervisory and regulatory decisionmaking as a member of (1) the deposit insurance board; (2) the Financial Institutions Supervisory Committee, an organization established to enhance communication among participants in financial institution regulation and supervision; and (3) the Senior Advisory Committee, which was to meet to discuss major policy changes or legislative proposals affecting bank oversight. However, it had no direct authority over supervisory or regulatory decisionmaking. In France, Germany, and Japan the central bank was one of two principal oversight agencies, but the countries had different structures for involving the central banks in bank oversight. In Germany, the primary supervisor, not the central bank, was authorized to issue banking regulations and, with few exceptions, issue or revoke bank licenses and take enforcement actions against banks. However, a sharp contrast existed between the legally assigned responsibilities of the central bank and its de facto sharing of oversight responsibilities with the federal bank supervisor. The central bank and the federal bank supervisor worked closely together and were considered partners in the formulation of regulatory and supervisory policies. The supervisor was to consult the central bank about all regulations; the central bank was substantively involved in the development of most of the regulations and could veto some. It also had the most active role in day-to-day bank supervision of banks and was very influential in determining the enforcement actions to be taken by the federal bank supervisor. The influence of the central bank in bank oversight arises from its detailed knowledge about banks in Germany, certain legal requirements that it be consulted before supervisory or regulatory action was taken, and the general perception that its nonoversight responsibilities were closely linked with bank oversight. The central bank of France was also very involved in bank oversight, but the structural basis for its involvement differed significantly from that in Germany. The decisionmaking responsibilities for supervision and regulation of banking institutions in France were divided among three different but interrelated oversight committees: one for chartering, one for regulation, and one for supervision. The Bank of France was a member of each of these committees. Its influence over bank oversight stemmed from its chairmanship of two of the three oversight committees—the committee for chartering and the committee for supervision (the Banking Commission); the fact that it staffed all three oversight committees and the examination teams; its authority in financial crises; and its importance in and influence over French financial markets. The Japanese central bank also had some oversight responsibilities derived principally from the contractual agreements it made with financial institutions that opened accounts with the Bank of Japan—including all commercial banks. As a result, it examined these banks on a rotational basis with the Ministry of Finance and also met regularly with bank management. Although only the Ministry had the legal authority to take formal enforcement actions, the central bank provided guidance that banks usually interpreted as binding. Finance Ministries Included in Oversight Structures, Although Roles Varied In all of the countries we reviewed finance ministries were included in oversight structures, although their roles varied. In some countries, the bank supervisors reported to the finance ministries and the finance ministries had final approval authority for regulations or enforcement actions. In other cases, the finance ministry acted as the principal supervisor or a representative of the finance ministry participated as a member of a decisionmaking committee. In most countries, the finance ministries received industrywide information to assist in discharging fiscal policy and other responsibilities. They often did not receive bank-specific information unless the regulator believed an institution to be a potential threat to system stability. In such situations, the finance ministry was to be apprised for crisis management and information purposes, as were the central bank and deposit insurer in order to ensure each could effectively carry out its respective responsibilities. In Canada and Germany, the principal bank supervisor reported to the Minister of Finance. The oversight entities that reported to the finance ministries said that on day-to-day issues they had a significant amount of independence—the government was generally informed only of key regulatory or supervisory decisions. However, the agreement of the finance ministry was usually necessary for these decisions to be carried out. In France, the Ministry of Economic Affairs was represented on each of the three independent oversight committees and chaired one of them. According to oversight and banking officials with whom we spoke, its influence over bank oversight was derived primarily from its chairmanship of the bank regulatory committee and its membership on the chartering and oversight committees, as well as from its position of power in the French cabinet, including its powers of final approval with regard to bank regulations. In Japan, the Minister of Finance was the formal supervisor of banking institutions. It was solely responsible for chartering banking institutions, taking formal enforcement actions, and developing and issuing regulations. In addition, it also examined banks and conducted off-site monitoring. In the U.K., the Bank of England reports to the Chancellor of the Exchequer, who heads the Treasury. The Treasury has no formal role in banking supervision, although it would expect to be consulted on any major regulatory or supervisory decision. The Chancellor does have the power to issue directions to the Bank of England after consultation with the Governor of the Bank, ensuring that the government would have the final say in the event of a disagreement. Historically, the Bank of England has been accorded a high degree of independence in bank regulation and supervision. Foreign Systems Had Checks and Balances to Guard Against Undue Political Influence and Ensure Sound Decisionmaking Other countries’ systems of bank oversight incorporated various checks to guard against undue political influence in bank oversight and to ensure sound decisionmaking. These checks included shared responsibilities and decisionmaking and the involvement of banking institutions in the development of bank oversight policies and other decisionmaking. According to Canadian officials, a degree of overlapping authority of the federal supervisor and the deposit insurer (whose governing board is to include four directors from the private sector) plays a useful role in ensuring integrity in bank oversight. For example, the independent assessments of the deposit insurer could provide a constructive second look at the bank supervisor’s oversight practices. Similarly, the interactions of the supervisor with banking institutions could help the insurer assess risks of particular banking practices. Finally, the federal supervisor is required to consult extensively with banking industry representatives in developing regulations and guidelines. In Canada, the large size and small number of banks enabled banks to be influential players in the financial system, according to supervisory and central bank staff. The large banks believed they had a special responsibility for helping to ensure the stability of the financial system, as well as a self-interest in that stability. We were told by management of some of the major banks that they often related concerns and offered comments about other banks or financial institutions to the federal supervisor or the central bank. In France, a rationale for the committee oversight structure—with the Bank of France and the Ministry of Economic Affairs participating jointly on the committees—was to ensure that no single individual or agency could dominate or dictate oversight decisionmaking, according to Bank of France officials. In addition, the committee structure ensures that the interests of banks are represented. Each of the three bank oversight committees includes four members, including representatives of the banking industry, drawn from outside the Bank of France and the Ministry of Economic Affairs. In Germany, the decisionmaking power of the politically accountable federal bank supervisor was checked by the participation in bank oversight of the very independent central bank. Without the central bank’s accord, very few, if any, important supervisory or regulatory actions would be taken. The central bank’s express approval was legally required for certain regulations, such as those affecting liquidity and capital requirements, to take effect. In addition, the federal supervisor was required by law to consult with banking associations when changes to banking law or regulations were being considered and before banking licenses were issued. In Japan, the Ministry of Finance typically developed policy by consensus, according to Ministry officials—a process that usually involved the input of many parties, such as the central bank, other government agencies, industry groups, and governmental policy councils. In addition, the Japanese central bank’s participation in bank oversight could provide a second opinion on some oversight issues. In the U.K., the Banking Act of 1987 formally established an independent body, known as the Board of Banking Supervision, to bring independent commercial banking experience to bear on banking supervisory decisions at the highest level. In addition to three exofficio members from the Bank of England, the Board’s members are to include six independent members who are to advise the exofficio members on policymaking and enforcement issues. If the Bank decides not to accept the advice of the independent members of the Board, then the exofficio members are to give written notice of that fact to the Chancellor of the Exchequer. Deposit Insurers Generally Had More Narrow Roles Than That of FDIC Deposit insurers in the countries we studied generally had more narrow roles than that of FDIC. This less substantial oversight role may be attributable to the fact that national governments provided no explicit guarantees of deposit insurance and that deposit insurers were often industry administered. Deposit Insurers Viewed Primarily as Sources of Funds and Were Not Explicitly Guaranteed by National Governments The foreign deposit insurers we studied did not have a role in bank oversight as substantial as FDIC’s. As discussed in chapter 1, FDIC is the administrator of federal deposit insurance, the primary federal regulator and supervisor for state-chartered banks that are not members of FRS, and the entity with primary responsibility for determining the least costly resolution of failed banks. In most countries, by contrast, deposit insurers were viewed primarily as a source of funds to help resolve bank failures—either by covering insured deposits or by helping to finance acquisitions of failed or failing institutions by healthy institutions.Supervisory information was generally not shared with these deposit insurers, and resolution decisions for failed or failing banks were commonly made by the primary bank oversight entities with the insurer frequently involved only when its funds were needed to help finance resolutions. The broader role of FDIC as compared to deposit insurers in other countries may be attributable in part to the fact that deposit insurance is federally guaranteed in the United States. For example, FDIC’s involvement in bank resolutions—particularly its responsibility to determine the least costly of resolution methods—helps protect the interests of both the industry and potentially of taxpayers when a bank fails. None of the governments of the other countries we studied provided such an explicit guarantee. Four of the five deposit protection programs—Germany is the exception—also provide less coverage than does the U.S. system. Banking Industries Generally Had Important Roles in Administration of Deposit Protection Systems In Germany and France, deposit protection systems were administered by banking associations, with no direct government involvement. The German commercial banking association administered Germany’s deposit protection plan for commercial banks. The association obtained independent information about its members through external audits conducted by an accounting firm affiliate. It also could play a significant role in resolving troubled institutions. It had the power to intervene and attempt to resolve a member bank’s difficulties and could be pressured by the central bank or bank supervisor to do so. Thus, the German banking industry generally resolved its own problems. In France, the deposit protection system—a loss-sharing agreement among member banks—was administered by the French Bank Association. The French Bank Association itself played a relatively minor role in resolving bank problems. Instead, the Banking Commission was responsible for resolving troubled institutions. In the U.K. and Japan, the responsibility for the administration of deposit insurance was shared by government and the banking industry. Deposit insurers were independent bodies whose boards of directors were headed by government officials and included members from the banking industries. In these countries, the government, not the banking associations, resolved banking institutions’ problems. Canada’s oversight system was most similar to that of the United States. The Canadian deposit insurer did not act as a primary supervisor for any banking institutions; however, like FDIC, it had examination and rulemaking authority—although its powers were more limited than those of FDIC’s. It could take limited enforcement action and was represented on two of Canada’s oversight-related committees. The Canadian deposit insurer generally relied on the primary banking supervisor for examination information it needed to safeguard insurance funds. Until a financially troubled institution was declared insolvent and was placed in liquidation, the bank supervisor had the lead role in resolving that institution. However, the supervisor was to continuously inform the deposit insurer of the institution’s status. The deposit insurer could order a special examination to determine its exposure and possible resolution options if the institution failed. In the case of a failure, the deposit insurer was responsible for developing resolution alternatives and for implementing the chosen resolution plan. Foreign Structures Incorporated Mechanisms and Procedures to Ensure Consistent Oversight and Efficiency Most of the foreign structures with multiple oversight entities incorporated mechanisms and procedures that could ensure consistent and efficient oversight. Some countries relied on the work of external auditors, at least in part, for purposes of efficiency. Unlike in the United States, bank oversight in these countries generally did not include consumer protection or social policy issues. Foreign Oversight Entities Often Shared Staff, Information, and Committee Assignments Coordination mechanisms designed to ensure consistency and efficiency in oversight in the countries we studied included oversight committees or commissions with interlocking boards, shared staff, and mandates or mechanisms to share information and avoid duplication of effort. In Canada, the federal bank supervisor, central bank, and finance ministry each had a seat on the deposit insurer’s board of directors and participated with the deposit insurer on various advisory committees. Also, the Canadian deposit insurer, which had backup supervisory authority to request or undertake special examinations of high-risk institutions, was required to rely for much of its information on the primary supervisor, whose examiners conducted all routine bank examinations and engaged in other data collection activities. In France, central bank employees staffed all three committees charged with oversight responsibilities for chartering, rulemaking, and supervision. In addition, the central bank and the Ministry of Economic Affairs were represented on each of the three oversight committees. In Germany, the central bank and the federal bank supervisor used the same data collection instruments. They were also legally required to share information that could be significant in the performance of their duties. Three of the Foreign Countries’ Supervisors Used External Auditors’ Work to Enhance Efficiency Bank supervisors in three of the five countries whose systems we reviewed used the work of the banks’ external auditors as an important source of supervisory information. In the most striking contrast with the United States’ system, supervisors in Germany and the U.K. used external auditors as the primary source of monitoring information. In Canada, as in the United States, the primary supervisor conducted examinations; information from the banks’ external auditors was to be used to supplement and guide these examinations. Supervisors in all three countries recognized that auditors’ objectives for reviewing a bank’s activities could differ from those of a supervisor, and they also recognized that a degree of conflict could exist between the external auditors’ responsibilities to report to both their bank clients and to the bank supervisory authorities. However, they generally believed that their authority over auditors’ engagements was sufficient to ensure that the external auditors properly discharged their responsibilities and openly communicated with both their bank clients and the oversight authorities. In both Germany and the U.K., supervisors’ use of external auditors’ work was adopted at least in part for purposes of efficiency. In Germany, the use was part of an explicit plan to minimize agency staffing and duplication of effort between examiners and auditors. In the U.K., the use was seen as the most efficient way of introducing the necessary checks on systems controls and as a method compatible with the Bank of England’s traditional approach of supervising banks “based on dialogue, prudential returns, and trust,” according to Bank of England officials. Canada, Germany, and the U.K. differed from the United States in three other important ways: All banking institutions in the three foreign countries were required to have external audits. As discussed in chapter 2, large U.S. banks are required by U.S. oversight agencies to have external audits, and others are encouraged to do so. Bank supervisors in the three foreign countries had more control than U.S. bank supervisors over the work performed by external auditors. In Germany and the U.K., external audits were conducted using specific guidelines developed by the bank regulators, and the scope of individual audits could be expanded by all three regulators, or special audits ordered, to address issues of regulatory concern. By contrast, U.S. supervisors have more limited authority over the scope of external audits. External auditors in the three foreign countries had affirmative obligations to report findings of concern to supervisors. In Canada, external auditors are required to report simultaneously to the institution’s CEO and the bank supervisor anything discovered that might affect the viability of the financial institution. In Germany, external auditors are required by law to immediately report to the bank supervisor information that might result in qualification of the report or a finding of a significant problem. In the U.K., external auditors are required to report to the central bank any breaches in the minimum authorization criteria as well as expectations of a qualified or adverse report. In the United States, however, external auditors are required merely to notify the appropriate banking agency if they withdraw from an engagement. External auditors are required to withdraw from an audit engagement if identified problems are not resolved or if bank management refuses to accept their audit report. Further detail about the role of external audits in U.S. bank supervision is provided in appendix II. Supervisors in Other Countries Generally Did Not Focus on Consumer Protection or Social Policy Issues Bank oversight in the countries we studied, was focused almost exclusively on ensuring the safety and soundness of banking institutions and the stability of financial markets and generally did not include consumer protection or social policy issues. The national governments of the countries we studied used other mechanisms to address these issues or to promote these goals. Consumer protection and antidiscrimination concerns were addressed in many of the other countries by industry associations and government entities other than bank regulators and supervisors. In addition, some of the policy mechanisms used to encourage credit and other services in low- and moderate-income areas in these countries included the chartering of specialized financial institutions and direct government subsidies for programs to benefit such areas. In Canada, for example, the banking industry developed voluntary guidelines related to consumer and small business lending, partly to prevent the need for legislated solutions to perceived problems. Similarly, the banking industries in France and the U.K. also developed industry guidelines on issues such as consumer protection. Bank supervisors in Canada and the U.K. were not responsible for enforcing compliance with these guidelines and best practices, but the bank supervisor in France did have such responsibility. In addition, bank supervisors in the countries we studied were not expressly responsible for assessing compliance with other consumer protection laws, like those involving discrimination or antitrust; but they were responsible, in some countries, for advising their Justice Department equivalents of potential violations identified in carrying out their bank oversight duties. Officials in these countries suggested that concern and attention to various consumer issues were increasing, but they did not anticipate bank regulators would assume any new responsibilities in this area. Conclusions, Recommendations, and Agency Comments Conclusions The division of responsibilities among the four federal bank oversight agencies in the United States—FDIC, FRS, OCC, and OTS—is not based on specific areas of expertise, functions or activities, either of the regulator or the banks for which they are responsible, but based on institution type—bank or thrift, bank charter type—national or state, and whether banks are members of the FRS. Consequently, the four oversight agencies share responsibility for developing and implementing regulations, taking enforcement actions, and conducting examinations and off-site monitoring. Analysts, legislators, banking institution officials, and numerous past and present agency officials have identified weaknesses and strengths in this oversight structure. Some representatives of these groups have broadly characterized the federal system as redundant, inconsistent, and inefficient. Some banking institution officials have also raised concerns about negative effects of the structure on supervisory effectiveness. Some regulators, banking institutions, and analysts alike have asserted that the multiplicity of regulators has resulted in inconsistent treatment of banking institutions in examinations, enforcement actions, and regulatory decisions, despite interagency efforts at coordination. We have cited significant inconsistencies in examination policies and practices among FDIC, OCC, OTS, and FRS, including differences in examination scope, frequency, documentation, loan quality and loss reserve evaluations, bank and thrift rating systems, and examination guidance and regulations. At the same time, some agency and institution officials have credited the current structure with encouraging financial innovations and providing checks and balances to guard against arbitrary oversight decisions or actions. As a result of concerns about the current oversight structure, many proposals have been made to restructure the multiagency system of bank regulation and supervision. These proposals have not been implemented, partly as a result of assertions by FRS and FDIC officials that they rely on information obtained under their respective supervisory authorities to fulfill their nonoversight duties: monetary policy development and implementation, liquidity lending, and operation and oversight of the nation’s payment and clearance systems for FRS; administration of the deposit insurance funds, resolution of failing or failed banks, and disposition of failed bank assets for FDIC. As we have pointed out in the past, the extent to which FRS needs to be a formal supervisor of financial institutions to obtain the requisite knowledge and influence for carrying out its role is an important question that involves policy judgments that only Congress and the President can make. Nevertheless, past experience, as well as evidence from the five foreign oversight structures we studied (see below for further discussion) provides support for the need for FRS to obtain direct access to supervisory information. We have also favored a strong, independent deposit insurance function to protect the taxpayers’ interest in insuring more than $2.5 trillion in deposits. Nonetheless, previous work we have done suggests that a strong deposit insurance function can be ensured by providing FDIC with (1) the ability to go into any problem institution on its own, without having to obtain prior approval from another regulatory agency; (2) the capability to assess the quality of bank and thrift examinations, generally; and (3) backup enforcement authority. Treasury also has several responsibilities related to bank oversight, including being the final decisionmaker in approving an exception to FDIC’s least-cost rule. In addition, Treasury plays a major role in developing legislative and other policy initiatives with regard to financial institutions. Such responsibilities require that Treasury regularly obtain information about the financial and banking industries and, at certain times, institution-specific information. According to Treasury officials, Treasury’s current level of involvement, through its housing of OCC and OTS and their involvement on the FDIC Board of Directors, and the information it receives from the other agencies as needed, is sufficient for it to carry out these responsibilities. On the basis of the work we have done in areas such as bank supervision, enforcement, failure resolution, and innovative financial activities—such as derivatives—we have previously identified four fundamental principles that we believe Congress could use when considering the best approach for modernizing the current regulatory structure. We believe that the federal bank oversight structure should include: (1) clearly defined responsibility for consolidated and comprehensive oversight of entire banking organizations, with coordinated functional regulation and supervision of individual components; (2) independence from undue political pressure, balanced by appropriate accountability and adequate congressional oversight; (3) consistent rules, consistently applied for similar activities; and (4) enhanced efficiency and reduced regulatory burden, consistent with maintaining safety and soundness. In five recent reports, we reviewed the structure and operations of bank regulation and supervision activities in Canada, France, Germany, Japan, and the U.K. Each of the oversight structures of these five countries reflects a unique history, culture, and banking industry, and, as a result, no two of the five oversight structures are identical. Also, all of the countries we reviewed had more concentrated banking industries than does the United States, and all but Japan had authorized their banks to conduct broad securities and insurance activities in some manner. Nevertheless, certain aspects of these structures may be useful to consider in future efforts to modernize banking oversight in the United States, even though no structure as a whole likely would be appropriate to adopt in the United States. In the five countries we studied, banking organizations typically were subject to consolidated oversight, with an oversight entity being legally responsible and accountable for the entire banking organization, including its subsidiaries. If securities, insurance, or other nontraditional banking activities were permissible in bank subsidiaries, functional regulation of those subsidiaries was generally to be provided by the supervisory authority with the requisite expertise. Bank supervisors generally relied on those functional regulators for information but remained responsible for ascertaining the safety and soundness of the consolidated banking organization as a whole. The number of national bank oversight entities in the countries we studied was fewer than in the United States, ranging from one in the U.K. to three in France. Furthermore, in all five countries no more than two national agencies were ever significantly involved in any one major aspect of bank oversight, such as chartering, regulation, supervision, or enforcement. Commercial bank chartering, for example, was the direct responsibility of only one entity in each country. In those countries where two entities were involved in the same aspect of oversight, the division of oversight responsibilities generally was based on whichever entity had the required expertise. The central banks in the countries we studied generally had significant roles in supervisory and regulatory decisionmaking; that is, with the exception of the Canadian central bank, their staffs were directly involved in aspects of bank oversight, and all central banks had the ability to formally or informally influence bank behavior. In large part, central bank involvement was based on the premise that traditional central bank responsibilities for monetary policy, payment systems, liquidity lending, and crisis intervention are closely interrelated with oversight of commercial banks. While no two countries had identical oversight roles for their central banks, each country had an oversight structure that ensured that its central bank had access to information about, and certain influence over, the banking industry. In each of the five countries, the national government recognized that it had the ultimate responsibility to maintain public confidence and stability in the financial system. Thus, each of the bank oversight structures that we reviewed also provided the Ministry of Finance, or its equivalent, with some degree of influence over bank oversight and access to information. Although each country included its finance ministry in some capacity in its oversight structure, most also recognized the need to guard against undue political influence by incorporating checks and balances unique to each country. While central banks and finance ministries generally had substantial roles in bank oversight, deposit insurers, with the exception of the Canada Deposit Insurance Corporation, did not. Their less substantial oversight role may be attributable to the fact that national governments provided no explicit guarantees of deposit insurance and that deposit insurers were often industry-administered. Thus, in most of these countries, deposit insurers were viewed primarily as a source of funds to help resolve bank failures—either by covering insured deposits or by helping to finance acquisitions of failed or failing institutions by healthy institutions. Supervisory information was generally not shared with these deposit insurers, and resolution decisions for failed or failing banks were commonly made by the primary bank oversight entities. Most of the foreign structures with multiple oversight entities incorporated mechanisms and procedures that could ensure consistent and efficient oversight. As a result, banking institutions that were conducting the same lines of business were generally subject to a single set of rules, standards, or guidelines. Coordination mechanisms included having oversight committees or commissions with interlocking boards, shared staff, or mandates to share information. Some countries relied on the work of external auditors, at least in part, for purposes of efficiency. Bank oversight in these countries generally did not include consumer protection or social policy issues. There are many practical problems associated with creating a new agency or consolidating existing functions. Although such issues were beyond the scope of this report, it remains important that transition and implementation issues be thoroughly considered in deliberations about any modernization of bank oversight. Recommendations GAO’s work on the five foreign oversight systems showed that there are a number of different ways to simplify bank oversight in the United States in accordance with the four principles of consolidated oversight, independence, consistency, and enhanced efficiency and reduced burden. GAO recognizes that only Congress can make the ultimate policy judgments in deciding whether, and how, to restructure the existing system. If Congress does decide to modernize the U.S. system, GAO recommends that Congress: Reduce the number of federal agencies with primary responsibilities for bank oversight. GAO believes that a logical step would be to consolidate OTS, OCC, and FDIC’s primary supervisory responsibilities into a new, independent federal banking agency or commission. Congress could provide for this new agency’s independence in a variety of ways, including making it organizationally independent like FDIC or FRS. This new independent agency, together with FRS, could be assigned responsibility for consolidated, comprehensive supervision of those banking organizations under its purview, with appropriate functional supervision of individual components. Continue to include both FRS and Treasury in bank oversight. To carry out its primary responsibilities effectively, FRS should have direct access to supervisory information as well as influence over supervisory decisionmaking and the banking industry. The foreign oversight structures GAO viewed showed that this could be accomplished by having FRS be either a direct or indirect participant in bank oversight. For example, FRS could maintain its current direct oversight responsibilities for state chartered member banks or be given new responsibility for some segment of the banking industry, such as the largest banking organizations. Alternatively, FRS could be represented on the board of directors of a new consolidated banking agency or on FDIC’s board of directors. Under this alternative, FRS’ staff could help support some of the examination or other activities of a consolidated banking agency to better ensure that FRS receives first hand information about, and access to, the banking industry. To carry out its mission effectively, Treasury also needs access to supervisory information about the condition of the banking industry as well as the safety and soundness of banking institutions that could affect the stability of the financial system. GAO’s reviews of foreign regulatory structures provided several examples of how Treasury might obtain access to such information, such as having Treasury represented on the board of the new banking agency or commission and perhaps on the board of FDIC as well. Continue to provide FDIC with the necessary authority to protect the deposit insurance funds. Under any restructuring, GAO believes FDIC should still have an explicit backup supervisory authority to enable it to effectively discharge its responsibility for protecting the deposit insurance funds. Such authority should require coordination with other responsible regulators, but should also allow FDIC to go into any problem institution on its own without the prior approval of any other regulatory agency. FDIC also needs backup enforcement power, access to bank examinations, and the capability to independently assess the quality of those examinations. Incorporate mechanisms to help ensure consistent oversight and reduce regulatory burden. Reducing the number of federal bank oversight agencies from the current four should help improve the consistency of oversight and reduce regulatory burden. Should Congress decide to continue having more than one primary federal bank regulator, GAO believes that Congress should incorporate mechanisms into the oversight system to enhance cooperation and coordination between the regulators and reduce regulatory burden. Although GAO does not recommend any particular action, such mechanisms—which could be adopted even if Congress decides not to restructure the existing system—could include expanding the current mandate of FFIEC to help ensure consistency in rulemaking for similar activities in addition to consistency in examinations; assigning specific rulemaking authority in statute to a single agency, as has been done in the past when Congress gave FRS statutory authority to issue rules for several consumer protection laws that are enforced by all of the bank regulators; requiring enhanced cooperation between examiners and banks’ external auditors; (While GAO strongly supports requirements for annual full-scope, on-site examinations for large banks, GAO believes that examiners could take better advantage of the work already being done by external auditors to better plan and target their examinations.) requiring enhanced off-site monitoring to better plan and target examinations as well as to identify and raise supervisory concerns at an earlier stage. Agency Comments and Our Evaluation FRS, FDIC, OCC, and OTS provided written comments on a draft of this report, which are described below and reprinted in appendixes IV through VII. Treasury also reviewed a draft and provided oral technical comments, which we incorporated where appropriate. FRS agreed that it is useful to consider the experience of other countries in making policy determinations. It also agreed that there are different ways to accommodate the policy goal of modernizing the U.S. supervisory structure. FRS reiterated its opinion that the purpose of bank supervision is to enhance the capability of the banking system to contribute to long-term national economic growth and stability. FRS agreed with our description of the direct involvement of central bank staff in bank oversight in the countries we studied and our recommendation that FRS continue to be included in bank oversight. However, it felt that we should be more specific in stating that FRS needs “active supervisory involvement in the largest U.S. banking organizations and a cross-section of other banking institutions” to carry out its key central banking functions. To clarify what was meant by this statement, a senior FRS official advised us that FRS’ present regulatory authority gives it the access and influence it needs. But if the regulatory structure were changed so that there is only one federal regulator for each banking organization—holding company and all bank subsidiaries—then FRS feels that it would have to be the regulator for the largest banking organizations and a cross-section of others in order to carry out its key central banking functions. We agree that FRS needs to have direct access to supervisory information as well as the ability to influence supervisory decisionmaking and the banking industry if the oversight structure is changed. However, in our studies of foreign oversight structures we found that direct central bank involvement in bank oversight, and access to and influence over the banking industry, could be accomplished in several ways. These could include giving the central bank a formal role as bank supervisor, participating on oversight boards with staff involvement in examination and other areas of supervision, and serving in informal yet influential roles that included participation in oversight by central bank staff. FRS also noted that 88 percent of U.S. banks are part of banking organizations that are actively supervised by no more than two oversight agencies. The portion of activities supervised by the third or fourth agency in holding companies where more than two agencies are involved in oversight is generally small. We acknowledge that most U.S. banks are supervised by no more than two federal banking supervisory agencies. Nevertheless, as the table provided by FRS shows (see app. IV), more than 50 percent of bank assets are held in companies that are supervised by three or four of these agencies. Furthermore, it is the larger, more complex banking institutions—whose failure could pose the greatest danger to the financial system—that are likely to be subject to oversight by more than two agencies, with the potential attendant oversight problems described in our report. In addition, the percentage of assets supervised by additional agencies—which may be relatively small—does not indicate their importance or potential risk to the banking organization. FDIC provided four fundamental principles for an effective bank regulatory structure, which are generally consistent with the principles and recommendations that we advocate. These principles include providing FDIC with an explicit backup supervisory authority, backup enforcement power, and the capability to assess the quality of bank and thrift examinations. We also support providing FDIC with such backup authority. FDIC also noted that the broader regulatory responsibilities related to the role of the deposit insurer require current and sufficient information on the ongoing health and operations of financial institutions. In FDIC’s judgment, periodic on-site examination remains one of the essential tools by which such information may be obtained. FDIC commented on the mechanisms we described that Congress might consider to enhance regulators’ cooperation and coordination and reduce regulatory burden, noting that the current processes for coordinating regulation allow for the consideration of the unique regulatory perspectives of each agency. We agree that the present practice of cooperation, coordination, and communication among the agencies in rulemaking allows the unique viewpoints of each of the oversight agencies to be considered. The assignment of rulemaking authority to a single agency would not preclude incorporating other viewpoints, as evidenced by the current rulemaking process with regard to some consumer protection regulations, where a single agency has been assigned such authority. We believe assigning rulemaking authority for safety and soundness regulations could be one way to attain a more efficient regulatory process. OCC described our report as comprehensive and conveying more about the foreign regulatory structures than has been available to the public, albeit not exhaustive. OCC agreed with us that the foreign structures are not readily adaptable to the United States and described some of its observations about the differences among the five countries’ regulatory structures. Consequently, OCC suggested that Congress consider our suggestions very carefully in making any changes to the oversight structure in the United States. We agree that Congress should be cautious in any consideration it gives to changing the regulatory structure. OTS generally concurred with our principal recommendations and restated its position that consolidation will make the bank oversight system more efficient and effective. It added that reducing the number of federal oversight agencies should be done in a way that preserves a strong and stable regulatory environment and protects agency employees. We agree that the consolidation of any oversight agencies should be done in a way that preserves a strong and stable regulatory environment that is effective, efficient, and responsive to the needs and risks of the supervised institutions. FRS, FDIC, and OTS also noted several regulatory actions and other initiatives underway that are designed to improve coordination—including joint or coordinated examinations—and reduce regulatory and supervisory redundancy and overlap. We believe such efforts are important to the consistency and efficiency of the regulatory structure and have incorporated this information into our report where appropriate. The comment letters from FRS, FDIC, and OTS attest to the unique perspectives of each of the oversight agencies, which we believe provide valuable insights to Congress. As we describe in our report, there is a range of ways to address our recommendations and to capture these perspectives in any congressional consideration of changing the current U.S. bank oversight structure. Therefore, we have incorporated the agencies’ insights in the report where appropriate. In addition, we have included descriptions of the interagency efforts discussed in the agencies’ responses to improve coordination and cooperation and reduce regulatory burden.
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Pursuant to a congressional request, GAO reviewed its previous work on the structure and operations of bank oversight in five countries, focusing on: (1) aspects of those systems that may be useful for Congress to consider in any future modernization efforts; (2) perceived problems with federal bank oversight in the United States; and (3) principles for modernizing the U.S. federal bank oversight structure. GAO found that: (1) the five foreign banking systems reviewed had less complex and more streamlined oversight structures than the United States; (2) in all five countries, fewer national agencies were involved with bank regulation and supervision than in the United States; (3) in all but one of these countries, both the central bank and the ministry of finance had some role in bank oversight, and several of these countries relied on the work of the banks' external auditors to perform certain oversight functions; (4) in all cases, there was one entity that was clearly responsible and accountable for consolidated oversight of banking organizations as a whole; (5) the bank oversight structure in the United States is relatively complex, with four different federal agencies having the same basic oversight responsibilities for those banks under their respective purview; (6) industry representatives and expert observers have contended that multiple examinations and reporting requirements resulting from the shared oversight responsibilities of four different regulators contribute to banks' regulatory burden, and that the federal oversight structure is inherently inefficient; (7) having one agency responsible for examining all U.S. bank holding companies, with a different agency or agencies responsible for examining the holding companies' principal banks, could result in overlap and a lack of clear responsibility and accountability for consolidated oversight of U.S. banking operations; and (8) any modernized banking structure should provide for clearly defined responsibility and accountability for consolidated and comprehensive oversight, independence from undue political pressure, consistent rules, consistently applied for similar activities, and enhanced efficiency and reduced regulatory burden.
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SECTION 1. SHORT TITLE.
This Act may be cited as the ``Whistleblower Improvement Act of
2011''.
SEC. 2. AMENDMENTS TO THE SECURITIES EXCHANGE ACT OF 1934.
(a) Exclusion of Certain Compliance Officers and Internal Reporting
as a Condition of Award.--Section 21F of the Securities Exchange Act of
1934 (15 U.S.C. 78u-6) is amended--
(1) in subsection (b), by redesignating paragraph (2) as
paragraph (3) and inserting after paragraph (1) the following:
``(2) Internal reporting required.--In the case of a
whistleblower who is an employee providing information relating
to misconduct giving rise to the violation of the securities
laws that was committed by his or her employer or another
employee of the employer, to be eligible for an award under
this section, the whistleblower, or any person obtaining
reportable information from the whistleblower, shall--
``(A) first report the information described in
paragraph (1) to his or her employer before reporting
such information to the Commission; and
``(B) report such information to the Commission not
later than 180 days after reporting the information to
the employer.''; and
(2) in subsection (c)(2)--
(A) in subparagraph (C), by striking ``or'' at the
end; and
(B) by redesignating subparagraph (D) as
subparagraph (F) and inserting after subparagraph (C)
the following:
``(D) to any whistleblower who fails to first
report the information described in subsection (b)(1)
that is the basis for the award to his or her employer
before reporting such information to the Commission, in
the case where the misconduct giving rise to the
violation of the securities laws was committed by such
employer or an employee of the employer, unless the
whistleblower alleges and the Commission determines
that the employer lacks either a policy prohibiting
retaliation for reporting potential misconduct or an
internal reporting system allowing for anonymous
reporting, or the Commission determines in a
preliminary investigation not exceeding 30 days that
internal reporting was not a viable option for the
whistleblower based on--
``(i) evidence that the alleged misconduct
was committed by or involved the complicity of
the highest level of management; or
``(ii) other evidence of bad faith on the
part of the employer;
``(E) to any whistleblower who has legal,
compliance, or similar responsibilities for or on
behalf of an entity and has a fiduciary or contractual
obligation to investigate or respond to internal
reports of misconduct or violations or to cause such
entity to investigate or respond to the misconduct or
violations, if the information learned by the
whistleblower during the course of his or her duties
was communicated to such a person with the reasonable
expectation that such person would take appropriate
steps to so respond; and''.
(b) Elimination of Minimum Award Requirement.--Subsection (b)(1) of
such section is amended--
(1) by striking ``shall'' and inserting ``may''; and
(2) by striking ``in an aggregate amount equal to--'' and
all that follows and inserting ``an amount determined by the
Commission but not more than 30 percent, in total, of what has
been collected of the monetary sanctions imposed in the action
or related actions.''.
(c) Exclusion of Whistleblowers Found Culpable.--Subsection
(c)(2)(B) of such section is amended by inserting ``, is found civilly
liable, or is otherwise determined by the Commission to have committed,
facilitated, participated in, or otherwise been complicit in misconduct
related to such violation'' after ``violation''.
(d) Rule of Construction Relating to Other Workplace Policies.--
Subsection (h)(1) of such section is amended by adding at the end the
following:
``(D) Rule of construction.--Nothing in this
paragraph shall be construed as prohibiting or
restricting any employer from enforcing any established
employment agreements, workplace policies, or codes of
conduct against a whistleblower, and any adverse action
taken against a whistleblower for any violation of such
agreements, policies, or codes shall not constitute
retaliation for purposes of this paragraph, provided
such agreements, policies, or codes are enforced
consistently with respect to other employees who are
not whistleblowers.''.
(e) Notification to Employer.--Paragraph (2) of subsection (h) of
such section is amended--
(1) in the paragraph heading, by striking
``confidentiality'' and inserting ``Notification to employer
and confidentiality'';
(2) by redesignating subparagraph (A) through (D) as
subparagraphs (B) through (E), respectively;
(3) by inserting a new subparagraph (A) as follows:
``(A) Notification of investigation.--
``(i) Notification required.--Prior to
commencing any enforcement action relating in
whole or in part to any information reported to
it by a whistleblower, the Commission shall
notify any entity that is to be subject to such
action of information received by the
Commission from a whistleblower who is an
employee of such entity to enable the entity to
investigate the alleged misconduct and take
remedial action, unless the Commission
determines in the course of a preliminary
investigation of the alleged misconduct, not
exceeding 30 days, that such notification would
jeopardize necessary investigative measures and
impede the gathering of relevant facts, based
on--
``(I) evidence that the alleged
misconduct was committed by or involved
the complicity of the highest level
management of the entity; or
``(II) other evidence of bad faith
on the part of the entity.
``(ii) Good faith.--Where an entity
notified under clause (i) responds in good
faith, which may include conducting an
investigation, reporting results of such an
investigation to the Commission, and taking
appropriate corrective action, the Commission
shall treat the entity as having self-reported
the information and its actions in response to
such notification shall be evaluated in
accordance with the Commission's policy
statement entitled `Report of Investigation
Pursuant to Section 21(a) of the Securities
Exchange Act of 1934 and Statement of the
Relationship of Cooperation to Agency
Enforcement Decisions'.''; and
(4) in the heading of subparagraph (B) (as redesignated by
paragraph (3)), by striking ``in general'' and inserting
``Confidentiality''.
SEC. 3. AMENDMENTS TO THE COMMODITY EXCHANGE ACT.
(a) Exclusion of Certain Compliance Officers and Internal Reporting
as a Condition of Award.--Section 23 of the Commodity Exchange Act (7
U.S.C. 26) is amended--
(1) in subsection (b), by redesignating paragraph (2) as
paragraph (3) and inserting after paragraph (1) the following:
``(2) Internal reporting required.--In the case of a
whistleblower who is an employee providing information relating
to misconduct giving rise to the violation of the securities
laws that was committed by his or her employer or another
employee of the employer, to be eligible for an award under
this section, the whistleblower, or any person obtaining
reportable information from the whistleblower, shall--
``(A) first reported the information described in
paragraph (1) to his or her employer before reporting
such information to the Commission; and
``(B) report such information to the Commission not
later than 180 days after reporting the information to
the employer.''; and
(2) in subsection (c)(2)--
(A) in subparagraph (C), by striking ``or'' at the
end; and
(B) by redesignating subparagraph (D) as
subparagraph (F) and inserting after subparagraph (C)
the following:
``(D) to any whistleblower who fails to first
report the information described in subsection (b)(1)
that is the basis for the award to his or her employer
before reporting such information to the Commission, in
the case where the misconduct giving rise to the
violation of the securities laws was committed by such
employer or an employee of the employer, unless the
whistleblower alleges and the Commission determines
that the employer lacks either a policy prohibiting
retaliation for reporting potential misconduct or an
internal reporting system allowing for anonymous
reporting, or the Commission determines in a
preliminary investigation not exceeding 30 days that
internal reporting was not a viable option for the
whistleblower based on--
``(i) evidence that the alleged misconduct
was committed by or involved the complicity of
the highest level of management; or
``(ii) other evidence of bad faith on the
part of the employer;
``(E) to any whistleblower who has legal,
compliance, or similar responsibilities for or on
behalf of an entity and has a fiduciary or contractual
obligation to investigate or respond to internal
reports of misconduct or violations or to cause such
entity to investigate or respond to the misconduct or
violations, if the information learned by the
whistleblower on the course of his or her duties was
communicated to such a person with the reasonable
expectation that such person would take appropriate
steps to so respond; and''.
(b) Cap on Award in Certain Circumstances and Elimination of
Minimum Award Requirement.--Subsection (b)(1) of such section is
amended--
(1) by striking ``shall'' and inserting ``may''; and
(2) by striking ``in an aggregate amount equal to--'' and
all that follows and inserting ``in an amount determined by the
Commission but not more than 30 percent, in total, of what has
been collected of the monetary sanctions imposed in the action
or related actions.''.
(c) Exclusion of Whistleblowers Found Culpable.--Subsection
(c)(2)(B) of such section is amended by inserting ``, is found civilly
liable, or is otherwise determined by the Commission to have committed,
facilitated, participated in, or been complicit in misconduct related
to such a violation'' after ``violation''.
(d) Rule of Construction Relating to Other Workplace Policies.--
Subsection (h)(1) of such section is amended by adding at the end the
following:
``(D) Rule of construction.--Nothing in this
paragraph shall be construed as prohibiting or
restricting any employer from enforcing any established
employment agreements, workplace policies, or codes of
conduct against a whistleblower, and any adverse action
taken against a whistleblower for any violation of such
agreements, policies, or codes shall not constitute
retaliation for purposes of this paragraph, provided
such agreements, policies, or codes are enforced
consistently with respect to other employees who are
not whistleblowers.''.
(e) Notification to Employer.--Paragraph (2) of subsection (h) of
such section is amended--
(1) in the paragraph heading, by striking
``confidentiality'' and inserting ``Notification to employer
and confidentiality'';
(2) by redesignating subparagraph (A) through (D) as
subparagraphs (B) through (E), respectively;
(3) by inserting a new subparagraph (A) as follows:
``(A) Notification to employer.--
``(i) Notification required.--Prior to
commencing any enforcement action relating in
whole or in part to any information reported to
it by a whistleblower, the Commission shall
promptly notify any entity that is to be
subject to such enforcement of information
received by the Commission from a whistleblower
who is an employee of such entity to enable the
entity to investigate the alleged misconduct
and take remedial action, unless the Commission
determines in the course of a preliminary
investigation not exceeding 30 days of the
alleged misconduct, that such notification
would jeopardize necessary investigative
measures and impede the gathering of relevant
facts, based on--
``(I) evidence that the alleged
misconduct was committed by or involved
the complicity of the highest level
management of the entity; or
``(II) other evidence of bad faith
on the part of the entity.
``(ii) Good faith.--Where an entity
notified under clause (i) responds in good
faith, which may include conducting an
investigation, reporting results of such an
investigation to the Commission, and taking
appropriate corrective action, the Commission
shall treat the entity as having self-reported
the information and its actions in response to
such notification shall be evaluated
accordingly.''; and
(4) in the heading of subparagraph (B) (as redesignated by
paragraph (3)), by striking ``in general'' and inserting
``Confidentiality''.
SEC. 4. STUDY.
The Comptroller General shall conduct a study to determine what
impact, if any, the whistleblower incentives program established under
section 21F of the Securities Exchange Act of 1934 (15 U.S.C. 78u-6)
and section 23 of the Commodity Exchange Act (7 U.S.C. 26) has had on
shareholder value. The Comptroller General shall transmit to Congress a
report on the study not later than 18 months after the date of
enactment of this Act.
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Whistleblower Improvement Act of 2011 - Amends the Securities Exchange Act of 1934 and the Commodity Exchange Act to require a whistleblower employee, as a prerequisite to eligibility for a whistleblower award, to: (1) first report information relating to misconduct to his or her employer before reporting it to the Securities and Exchange Commission (SEC), and (2) report such information to the SEC within 180 days after reporting it to the employer.
Prohibits a whistleblower award to any whistleblower who fails to report the relevant information to his or her employer first, unless: (1) the employer lacks either a policy prohibiting retaliation for reporting potential misconduct or an internal reporting system allowing for anonymous reporting, or (2) the SEC determines that internal reporting was not a viable option.
Prohibits a whistleblower award to any whistleblower who has legal or compliance responsibilities and a fiduciary or contractual obligation to investigate internal reports of misconduct or violations if the information learned by the whistleblower during the course of his or her duties was communicated with the reasonable expectation that such person would take appropriate steps to respond.
Makes the whistleblower award discretionary instead of mandatory. Repeals the minimum award requirement.
Prohibits an award to a whistleblower found civilly liable or determined by the SEC to have been complicit in misconduct related to the pertinent violation.
Requires the SEC to notify the pertinent entity before commencing any enforcement action relating to information reported by a whistleblower, unless such notification would jeopardize investigative measures and impede the gathering of relevant facts.
Directs the Comptroller General to study what impact, if any, the whistleblower incentives program has had upon shareholder value.
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After our previous remand, 409 U.S. 1052, 93 S.Ct. 555, 34 L.Ed.2d 506 (1972), the three-judge District Court held that amended New York Social Services Law § 101—a 'engraft(ed) . . . a condition on to the Congressionally prescribed initial AFDC eligibility requirements or on to the grounds for discontinuance of benefits.' 365 F.Supp. 818, 821 (D.C.1973). That condition, the court held, rendered the amended section invalid because in conflict with the Social Security Act, § 402(a), 42 U.S.C. § 602(a), insofar as it required recipient cooperation in a paternity or support action against an absent parent as a condition of eligibility for benefits under the program for Aid to Families with Dependent Children. On June 17, 1974, we noted probable jurisdiction of the appeals of the State and County Commissioners of Social Service, 417 U.S. 943, 94 S.Ct. 3066, 41 L.Ed.2d 664. Since that time, however, on January 4, 1975, Pub.L. 93—647, 88 Stat. 2359, amended § 402(a) of the Social Security Act expressly to resolve the conflict as to eligibility found by the three-judge District Court to exist between the federal and state laws. Amended § 402(a), like New York's amended § 101—a, requires the recipient to cooperate to compel the absent parent to contribute to the support of the child. Section 402(a), as amended, in pertinent part provides:* 'A State plan for aid and services to needy families with children must '(B) to cooperate with the State (i) in establishing the paternity of a child born out of wedlock with respect to whom aid is claimed, and (ii) in obtaining support payments for such applicant and for a child with respect to whom such aid is claimed, or in obtaining any other payments or property due such applicant or such child and that, if the relative with whom a child is living is found to be ineligible because of failure to comply with the requirements of subparagraphs (A) and (B) of this paragraph, any aid for which such child is eligible will be provided in the form of protective payments as described in section 406(b)(2) (without regard to subparagraphs (A) through (E) of such section) . . ..' We affirm the judgment of the three-judge court. Townsend v. Swank, 404 U.S. 282, 92 S.Ct. 502, 30 L.Ed.2d 448 (1971); Carleson v. Remillard, 406 U.S. 598, 92 S.Ct. 1932, 32 L.Ed.2d 352 (1972). In light of the resolution of the conflict by Pub.L. 93—647, we have no occasion to prepare an extended opinion. Affirmed. THE CHIEF JUSTICE, Mr. Justice POWELL, and Mr. Justice REHNQUIST dissent.
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Amendment, subsequent to this Court's noting probable jurisdiction of appeal from judgment of three-judge District Court, of § 402 (a) of Social Security Act resolves question below of conflict between § 402 (a) and provision of New York Social Services Law requiring the recipient, as a condition of eligibility for benefits under the Aid to Families with Dependent Children program, to cooperate to compel the absent parent to contribute to child's support. 365 F. Supp. 818, affirmed.
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Medicaid is a means-tested entitlement program that, in FY2012, financed the delivery of primary and acute medical services, as well as long-term services and supports, to nearly 57 million people and cost states and the federal government a total of $431 billion. Each state designs and administers its own version of Medicaid under broad federal rules. As a result, there is significant variation across states in terms of who is eligible for coverage, what services are available, and which subgroups of beneficiaries are subject to out-of-pocket costs. Cost-sharing requirements may include participation-related cost-sharing, such as monthly premiums or annual enrollment fees, as well as point-of-service cost-sharing such as co-payments—flat dollar amounts paid directly to providers for services rendered. Similar types of out-of-pocket cost-sharing can apply to individuals enrolled in private health insurance, although the amounts to which such beneficiaries may be subject can be higher than the amounts allowed in Medicaid. The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA 1982, P.L. 97-248 , Subtitle B) added to the federal Medicaid statute the authority for states to impose enrollment fees, premiums, or similar charges as well as point-of-service cost-sharing. The Deficit Reduction Act of 2005 (DRA, P.L. 109-171 ) made additional, major changes to cost-sharing requirements that could be applied to Medicaid beneficiaries, including allowing states to permit providers to deny services when a co-payment requirement is not met. In July 2013, the Centers for Medicare and Medicaid Services (CMS) issued new regulations for Medicaid premiums and cost-sharing. Today, participation-related cost-sharing (e.g., premiums) in Medicaid tends to be limited to certain subpopulations, and states use point-of-service cost-sharing more broadly. States can require certain beneficiaries to share in the cost of Medicaid services, but there are limits on (1) the amounts states can impose, (2) the beneficiary groups that can be required to pay, and (3) the services for which cost-sharing can be charged. In general, premiums and enrollment fees are often prohibited. However, premiums may be imposed on enrollees with income above 150% of the federal poverty level (FPL). A survey by the Kaiser Family Foundation found that in state fiscal year (SFY) 2013, 39 states had at least one group able to participate in Medicaid by paying a premium, with a total of 59 different premium programs. States can also impose point-of-service cost-sharing, such as co-payments, coinsurance, deductibles, and other similar charges, on most Medicaid-covered inpatient and outpatient benefits. However, they cannot impose cost-sharing for emergency services or family planning services and supplies. Some subgroups of beneficiaries are exempt from cost-sharing (e.g., children under 18 years of age and pregnant women). The cost-sharing amounts that can be charged vary with income. In SFY2013, 46 states (including the District of Columbia) reported having co-payment requirements. Higher beneficiary cost-sharing is allowed in certain circumstances, and federal regulations modified some of these provisions. Medicaid premiums and service-related cost-sharing incurred by all individuals in a Medicaid household cannot exceed an aggregate limit of 5% of family income applied on either a monthly or quarterly basis, as specified by the state Medicaid agency. States can use either Medicaid state plan amendments (SPAs) or Section 1115 waiver authority in the Social Security Act to establish both premiums and point-of-service cost-sharing. This report includes examples of both types of beneficiary out-of-pocket spending in Medicaid. Other federal regulations (issued October 1, 2013) address out-of-pocket costs for Medicaid beneficiaries enrolled in Medicaid managed care plans. State contracts with Medicaid managed care plans must follow the same federal regulations applicable under the state Medicaid plan, and they also must comply with specific regulatory requirements. Participation-Related Cost-Sharing To obtain health insurance, certain Medicaid enrollees may be subject to monthly premiums, the most common form of participation-related cost-sharing. Such charges are prohibited under Medicaid for many eligibility subgroups. Enrollment fees, premiums or similar charges must adhere to the following rules: a minimum charge of at least $1.00 per month is imposed on (a) one- or two-person families with monthly gross income of $150 or less, (b) three- or four-person families with monthly gross income of $300 or less, and (c) five- or more person families with monthly gross income of $350 or less. Any charge related to gross family income that is above these minimums may not exceed the standards shown in Table 1 : Different federal regulations apply to certain Medicaid subgroups for families with income exceeding 150% FPL (see Table 2 ). Except for premiums applicable to Medicaid beneficiaries classified as medically needy, the state Medicaid agency may choose to terminate individuals' Medicaid coverage on the basis of failure to pay for 60 days or more. Table 2 provides information about optional premiums that states can choose to apply to specific Medicaid subgroups with income that exceeds 150% FPL. For several of these subgroups, states are allowed to set premiums on a sliding scale based on family income. Other caveats apply to specific subgroups, also identified in this table. As of SFY2013, a total of 39 states indicated that at least one group participated in Medicaid by paying premiums, and 11 states and the District of Columbia did not require premiums under Medicaid. Service-Related Cost-Sharing Beneficiary out-of-pocket payments to providers at the time of service can take three forms. A deductible is a specified dollar amount paid for certain services rendered during a specific time period (e.g., per month or quarter) before health insurance (e.g., Medicaid) begins to pay for care. Coinsurance is a specified percentage of the cost or charge for a specific service delivered. A co - payment is a specified dollar amount for each item or service delivered. Deductibles and coinsurance are infrequently used in Medicaid, but co-payments are applied to some services and groups. Federal rules place limits on which services cost-sharing can be applied to (including which specific services are exempt, discussed below) and what amounts can be charged. Cost-sharing can be charged for allowed services regardless of income, but the maximum amount can be substantially higher for individuals with incomes greater than 100% FPL. Table 3 provides a comparison of the maximum charges allowed for service-related cost-sharing applicable to outpatient services and inpatient stays for three family income subgroups. Table 4 provides a comparison of maximum allowable charges for service-related cost-sharing for prescription drugs (preferred and non-preferred) as well as nonemergency use of an emergency department, also based on family income. Some services are exempt from co-payments, including, for example, emergency use of emergency departments. Apart from point-of-service cost-sharing for drugs and nonemergency services provided in an emergency department (described in Table 4 ), federal regulations specify that the maximum allowable cost-sharing dollar amounts will increase annually, beginning October 1, 2015, for certain Medicaid enrollees. Specifically, for individuals with income at or below 100% FPL, the maximum allowable cost-sharing amounts must increase each year by the percentage increase in the medical care component of the consumer price index for all urban consumers (CPI-U) for the period of September to September of the preceding calendar year, rounded to the next higher 5-cent increment. Optional Targeted Cost-Sharing for Specific Medicaid Subgroups Federal Medicaid regulations allow states to target cost-sharing to specific subgroups. For example, the state Medicaid agency may apply cost-sharing to specific groups with family income above 100% FPL. The state Medicaid agency also may target cost-sharing to specified groups of individuals regardless of income for non-preferred drugs and for nonemergency services provided in a hospital emergency department. In states without fee-for-service payment rates, individuals at any income level may not be subject to cost-sharing that exceeds the maximum amounts established for individuals with income at or below 100% FPL for both inpatient and outpatient services and at or below 150% FPL for outpatient services, inpatient stays, prescribed drugs, and nonemergency use of the emergency department (i.e., the co-payment rates by type of service and family income as shown in Table 3 and Table 4 ). In no case can the maximum cost-sharing established by the state be equal to or exceed the amount the state Medicaid agency pays for both inpatient and outpatient services. Certain Medicaid subgroups and specific Medicaid services are exempt from the application of deductibles, coinsurance, co-payments, or similar charges. Such subgroups include individuals classified as either categorically needy or medically needy who are children under the age of 18 (or up to the age of 21 at state option); certain pregnant women for services related to the pregnancy or to any other medical conditions that may complicate the pregnancy; and certain institutionalized individuals who are required to spend all but a minimal amount of their income required for personal needs. Federal statute and regulations prohibit states from requiring out-of-pocket costs for the following exempted services: emergency services (e.g., both inpatient and outpatient services furnished by a qualified provider) that are needed to evaluate or stabilize an emergency medical condition; family planning services and supplies for individuals of childbearing age including contraceptives and pharmaceuticals for which the state claims or could claim a 90% federal share of the total cost; preventive services, including well-baby and well-child care services in either the managed care or fee-for-service delivery systems; pregnancy-related services; provider-preventable services (e.g., health care acquired conditions). Based on data from the same Kaiser Family Foundation survey noted above, 46 states (including the District of Columbia) required co - payments in SFY2013. Five states (Hawaii, Nevada, New Jersey, Rhode Island and Texas) had no co - payment requirements. Two states indicated that co - payments were enforceable (e.g., providers are allowed to deny services when a co - payment requirement is not met). In Arkansas, such enforceability applies to co - payments for adults with income over 100% FPL (pending waiver approval). Maine plans to make pharmacy co -p ayments enforceable for those with income over 100% FPL. In addition, Maryland will end co - payment enforceability for a waiver group as it transitions to the Patient Protection and Affordable Care Act ( ACA ; P.L. 111-148 as amended) expansion coverage. Another Kaiser Family Foundation report noted that, in January 2013, non-zero co - payment amounts for non-preventive physician visits applicable to children in families with income at 151% FPL ranged from a low of $0.50 in Georgia to a high of $25 in Utah and Texas. Higher co - payment amounts for a non-preventive physician visit applied to children in families with income at 201% FPL and ranged from a low of $0.50 in Georgia to a high of $25 in Utah and Texas. In addition, a co - payment amount equal to 10% of the cost of a non-preventive physician visit applied to children in families with income at 201% FPL in Louisiana . Beneficiary Subgroups Not Subject to Premiums or Point-of-Service Cost-Sharing Specific Medicaid subgroups are exempt from out-of-pocket costs, including (1) certain children, (2) pregnant women, (3) individuals in nursing homes or who receive services provided in home and community-based settings, (4) terminally ill individuals receiving hospice care, (5) Indians who receive care through Indian health care providers or through what is called contract health services, and (6) individuals with breast or cervical cancer. Exclusions from the application of both premiums and point-of-service cost-sharing are identified in Table 5 below. Public Notification Requirements Regarding Beneficiary Out-of-Pocket Cost Obligations Federal regulations delineate beneficiary and public notice requirements related to out-of-pocket costs for Medicaid beneficiaries. The state Medicaid agency must provide a public schedule describing current premiums and other cost-sharing requirements, including (1) individuals who are subject to premiums or cost-sharing along with the current amounts; (2) the mechanisms for making payments for required premiums and cost-sharing charges; (3) the consequences for applicants or recipients who do not pay a premium or cost-sharing charge; (4) a list of hospitals charging cost-sharing for nonemergency use of the emergency department; and (5) a list of preferred drugs or a mechanism to access such a list, including the state Medicaid agency website. Finally, state Medicaid agencies must make the public schedule available to a number of subgroups in a manner that ensures that affected applicants, beneficiaries and providers are likely to have access to such a notice. For beneficiaries, this information must be made available at the time of enrollment or reenrollment subsequent to the redetermination of Medicaid eligibility. It must also be made available when premiums, service-related cost-sharing charges, or aggregate limits are revised. For applicants, this information must be available at the time of application. The general public must also have access to this information. When a state wishes to establish or substantially modify existing premiums or cost-sharing, or to change the consequences for nonpayment, the agency must provide the public with advance notice of the state plan amendment (SPA), specifying the amount of premiums or cost-sharing and who will be subject to these charges. The agency must also provide a reasonable opportunity to comment on such SPAs, and it must submit documentation with the SPA to demonstrate that these requirements are met. If premiums or cost-sharing are substantially modified during the SPA approval process, the agency must provide additional public notice.
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The federal Medicaid statute and accompanying regulations include provisions that states can apply to certain program beneficiaries with respect to out-of-pocket cost-sharing, including premiums that may be required on a monthly or quarterly basis, enrollment fees that may be applied on an annual or semiannual basis, and point-of-service cost-sharing (e.g., a co-payment to a Medicaid participating provider for a specific covered service received). To implement these options, states must submit Medicaid state plan amendments (SPAs) detailing these provisions to the federal Centers for Medicare and Medicaid Services (CMS) for approval. This report provides an overview of these federal authorities and includes some state-specific examples.
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Background The government's purchase card program has its origins in Executive Order (E.O.) 12352, issued by President Ronald Reagan in 1982. E.O. 12352 directed agencies to develop programs that simplified procedures and reduced the administrative costs of procurement, particularly with regard to "small" purchases ($25,000 or less). Several agencies subsequently participated in a pilot program that evaluated the use of a commercial credit card, called a purchase card, as an acquisition tool. At the time, even a routine order for widely available items, such as office supplies, typically required agency program staff to submit a written procurement request to a contracting officer, who reviewed it, obtained the necessary signatures, made the actual purchase, and processed the associated paperwork. To critics, this process was inefficient, especially for small purchases. Not only was it time-consuming for both program and procurement personnel, but it also prevented program offices from quickly filling immediate needs. Under the pilot program, nonprocurement staff used purchase cards to conduct small-dollar transactions directly with local suppliers, thus bypassing procurement officers entirely. A report on the pilot program concluded that purchase cards could reduce administrative costs and improve delivery time, and in 1989 the Office of Management and Budget (OMB) tasked the General Services Administration (GSA) with making purchase cards available government-wide. Participation in GSA's purchase card program was not mandatory, and card use did not initially grow as rapidly as some had expected. In 1993, however, a report issued by the National Performance Review (NPR) sparked a number of legislative and regulatory reforms intended to increase purchase card use. The NPR was a Clinton Administration initiative that sought to "reinvent" the federal government by making government operations both less expensive and more efficient. One of the NPR's objectives was to identify opportunities to streamline a number of government-wide processes, including procurement. Drawing on input from experts in the public and private sectors, the NPR's initial report recommended expanding the use of purchase cards across the government, a step it said would "lower costs and reduce bureaucracy in small purchases." In a separate report that focused solely on procurement, the NPR estimated that if half of all small acquisitions were made using purchase cards, the government would realize $180 million in savings annually. The report further recommended amending the Federal Acquisition Regulation (FAR)âthe government's primary source of procurement guidanceâto promote the use of purchase cards for small purchases. Building on the NPR's recommendations, Congress passed the Federal Acquisition Streamlining Act (FASA; P.L. 103-355 ) in 1994. FASA introduced several reforms that increased the use of purchase cards. Among these, Title IV of FASA established a simplified acquisition threshold (SAT) of $100,000 (increased to $250,000 in 2017). Purchases at or below the threshold were exempted from the provisions of a number of procurement laws. This reform obviated the need for procurement officials to make small purchases. To further streamline procedures for the smallest acquisitions, Title IV also established a "micro-purchase" threshold of $2,500 (which was increased to $3,000 in 2006, and again to $10,000 in 2017). FASA further exempted micro-purchases from sections of the Buy American Act and the Small Business Act, and they could be made without obtaining a competitive bid, if the cost was deemed reasonable by the cardholder. At the same time, the Clinton Administration took steps to increase the use of purchase cards. Citing the need to make agency procurement procedures "more consistent with recommendations of the National Performance Review," President Clinton issued Executive Order 12931 on October 13, 1994. E.O. 12931 directed agency heads to (1) expand purchase card use; and (2) delegate the micro-purchasing authority provided in FASA to program offices, which would enable them to make purchases whose value did not exceed the micro-purchase threshold. E.O. 12931 also directed agency heads to streamline procurement policies and practices that were not mandated by statute, and to ensure that their agencies were maximizing their use of the new simplified acquisition procedures. In addition, the FAR was amended in 1994 to designate the purchase card as the "preferred method" for making micro-purchases. Card use increased sharply as agencies implemented these reforms. The dollar value of goods and services acquired with purchase cards increased from $527.0 million in FY1993 to $19.5 billion in FY2011. During that same time span, the number of cardholders nearly tripled to 278,000, and the number of purchase card transactions increased from 1.5 million to just under 22.8 million in FY2011. The flexibility of the purchase card may have contributed to its growth: it could be used for in-store purchases, which allowed the cardholder to take immediate possession of needed goods, or it could be used to place orders by telephone or over the internet and have goods delivered. According to GSA, the use of purchase cards now saves the government $1.7 billion a year in administrative costs. Structure The federal purchase card program is implemented by individual agencies, with the involvement of GSA and OMB. In broad terms, agencies establish and maintain their own programs, but they select pu rchase card services from contracts that GSA negotiates with selected banks, and their programs must conform to the government-wide guidance issued by OMB. Agencies Each agency is responsible for establishing its own purchase card program. The agency, within the framework of OMB guidance, establishes internal rules and regulations for purchase card use and management, decides which of its employees are to receive purchase cards, and handles billing and payment issues for agency purchase card accounts. Two levels of supervision generally exist within an agency's purchase card program. Individual cardholders are assigned to an Approving Official (AO). The AO is considered the "first line of defense" against card misuse, and agency policies often require the AO to ensure that all purchases comply with statutes, regulations, and agency policies. To that end, the AO is responsible for authorizing cardholder purchases, either by approving purchases before they are made or by verifying their legitimacy through reviews of cardholder statements and supporting documentation, such as receipts. The AO may also be required to ensure that statements are reconciled and submitted to the billing office in a timely manner. Each agency also appoints an Agency Program Coordinator (APC) to serve as the agency's liaison to the bank and to GSA. At some agencies, each major component has an APC, one of whom is chosen to serve as the agency's liaison. The APCs are also usually responsible for agency-wide activities, such as developing internal program guidelines and procedures, sampling cardholder transactions to identify fraudulent or abusive purchases, setting up and deactivating accounts, and ensuring that officials and cardholders receive proper training. GSA GSA's primary responsibility is to award and administer contracts with card vendors on behalf of the government. In November 1998, agency purchase card programs began operating under GSA's SmartPay initiative. SmartPay permitted agencies to select a range of credit card products from five banks with which GSA had negotiated contracts. The SmartPay contracts established prices, terms, and conditions for credit card products and services from these five banks. Purchase cards were established as centrally billed accounts under the contracts, which meant that agencies, and not individual cardholders, were billed for purchases. The contracts required agencies to make payment in full at the end of each billing cycle. New purchase card contractsâknown collectively as SmartPay2âtook effect government-wide in November 2008. In November 2018, all federal agencies began operating under SmartPay3 contracts. OMB OMB issues charge card management guidance that all agencies must follow. This guidance, located in Appendix B of OMB Circular A-123, establishes agencies' responsibilities for implementing their purchase, travel, and fleet card programs. Chapter 4 of Appendix B identifies the responsibilities of charge card managers in developing and implementing risk management controls, policies, and practices (often referred to collectively as "internal controls") that mitigate the potential for charge card misuse. Agency charge card managers must ensure that cardholder statements, supporting documentation, and other data are reviewed to detect delinquency and misuse; key duties are separated, such as making purchases, authorizing purchases, and reviewing and auditing purchase documentation; records are maintained for training, appointment of cardholders and authorizing officials, cardholder purchase limits, and related information; disciplinary actions are initiated when cardholders or other program participants misuse their cards; appropriate training is provided for cardholders, approving officials, and other relevant staff; employees are asked about questionable or suspicious transactions; and charge card statement reconciliation occurs in a timely manner. Chapter 4 also identifies administrative and disciplinary actions that may be imposed for charge card misuse, such as deactivation of employee accounts, and it requires managers to refer suspected cases of fraud to the agency's Office of Inspector General or the Department of Justice. Circular A-123 provides OMB with oversight tools by requiring agencies to submit to OMB each year a charge card management plan that details their efforts to implement and maintain effective internal controls and minimize the risk of card misuse and payment delinquency. It also requires agencies to report the number of AOs it has appointed, the average number of monthly purchase card transactions each AO reviews, the number of reported cases of misuse, and the number of disciplinary actions taken in response to misuse. Purchase Card Program Weaknesses Audits of agency purchase card programs conducted by the Government Accountability Office (GAO) and agency inspectors general (IGs) through FY2011 attracted congressional attention with their revelations of abusive purchases made by government employees. Among the many cases of abuse cited by auditors were a Department of Agriculture (USDA) employee who, over a period of six years, used her purchase card to funnel $642,000 to her boyfriend; a Forest Service employee who charged $31,342 to his purchase card for personal items, including Sony PlayStations, cameras, and jewelry; and a Coast Guard cardholder who used his purchase card to buy a beer brewing kitâand then brewed alcohol while on duty. Congress held several hearings to address purchase card misuse and the underlying internal control weaknesses that auditors said allowed it to occur. The following section examines the weaknesses identified in audit reports published between 2002 and 2011, which highlight the issues that led to the passage of the Charge Card Act. Ineffective Transaction Review and Approval Processes One of the primary safeguards against improper use of government purchase cards is the review and approval of cardholder transactions by someone other than the cardholder. As noted, purchase card AOs are usually responsible for reviewing the cardholder's monthly statement. Given that the AO is often the only person other than the cardholder to assess the validity of a purchase before payment is made to the purchase card vendor, the review and approval process is considered one of the most critical components of an agency's purchase card control environment. Steven Kutz, GAO's Managing Director of Forensic Audits and Special Investigations, stated in testimony before the Senate, Basic fraud prevention concepts and our previous audits of purchase card programs have shown that opportunities for fraud and abuse arise if cardholders know that their purchases are not being properly reviewed. Despite the importance of the AO's role in preventing and detecting improper purchases, some agencies failed to ensure that cardholder statements were carefully reviewed prior to their approval. At the Department of Education, auditors estimated that 37% of monthly cardholder statements they reviewed had not been approved by the AO. GAO also estimated that nearly one of every six purchase card transactions government-wide had not been properly authorized. Even when AOs did conduct reviews, they sometimes failed to meet government standards. Agencies are required by OMB to ensure that cardholder statements are compared with supporting documentation, such as invoices and receipts, as part of the review process. This is necessary because purchase card statements are rarely itemized; they usually provide only the store or contractor name and the amount charged. For AOs, receipts and invoices are the principal means of verifying what items were purchased and determining whether those items were for legitimate program purposes. According to GAO, many agencies have not ensured that supporting documentation is available and examined as part of the review and approval process. An audit of the Department of Housing and Urban Development's (HUD's) purchase card program found that the agency did not have adequate documentation for 47% of transactions auditors deemed questionableâpurchases from merchants that are not normally expected to do business with HUDâwhich meant auditors "were unable to determine what was purchased, for whom, and why." Similarly, an audit of the Veterans Health Administration's (VHA's) purchase card program estimated that $313 million of its transactions lacked key supporting documentation. One consequence of these weaknesses was that fraudulent and abusive transactions slipped through the review process unnoticed. For instance, GAO found that AOs at agencies across the government approved cardholder statements that included questionable transactions, such as purchases of jewelry, home furnishings, cruise tickets, electronics, and other consumer goods. At the Forest Service, one employee used her purchase card over a period of years to accumulate more than $31,000 in jewelry and electronics. Similarly, HUD cardholders spent $27,000 at department stores like Macy's and J.C. Penney in a single year. In one egregious case, a Federal Aviation Authority (FAA) employee had his statement approved even though it showed he violated agency policy by charging cash advances to his purchase cardâwhile at a casino. The lack of adequate oversight is also evident where AOs have approved duplicate transactionsâvendors charging the government twice for the same goods or servicesâand purchases made by someone other than the cardholder. One audit identified an estimated $177,187 in duplicate charges at one agency. An audit at FAA discovered that a cardholder had allowed unauthorized individuals to charge over $160,000 to her purchase card account. When an AO identifies unauthorized and duplicate transactions, the agency should use the process described in the SmartPay master contract to dispute the charges. When AOs fail to identify and dispute fraudulent charges, the government often pays them in full or fails to obtain a refund from the purchase card vendor. Inconsistent Program Monitoring GAO further found that many agencies failed to monitor and evaluate the effectiveness of their purchase card controls, a responsibility that is often assigned to the APC. Monitoring and evaluation may include sampling purchase card transactions for potentially improper purchases, ensuring purchase card policies are being properly implemented across the agency or component, and assessing program results. These duties are often unfulfilled. At FAA, for example, an audit found that APCs "generally were not" utilizing available reports to detect misuse and fraud, nor was the headquarters APC taking steps to assess the overall program. Similarly, an audit of the Forest Service purchase card program found that the agency's APCs failed to review sampled transactions for erroneous or abusive purchases, as required by USDA regulations. Lack of Separation of Duties Agencies are required to ensure that key procurement functions are handled by different individuals. When having goods shipped, for example, the same person should not approve and place the order, or place the order and receive the goods. At many agencies, however, the cardholder may perform two functions that should be separated, which increases the possibility that items may be purchased for personal use, lost, or stolen. In March 2008, GAO estimated that agencies were unable to document separation of duties for one of every three purchase card transactions. Three Navy cardholders ordered and received $500,000 of goods for themselves with their purchase cards before getting caught. In this way, inadequate separation of duties may result in millions of dollars of items that cannot be located. Items that are easily converted to personal useâcommonly referred to as "pilferable property"âare particularly vulnerable to loss and theft. The Department of Education, for example, could not account for 241 personal computers bought with purchase cards at a cost of $261,500. An audit of the Federal Emergency Management Agency's (FEMA's) spending on items related to hurricane recovery found that $170,000 worth of electronics equipment acquired with purchase cards had not been recorded in FEMA's property records and could not be found. Inadequate Training Given the complexities of federal procurement policies and procedures, training on the proper use and management of purchase cards is considered an important component of an agency's internal control environment. Through training, cardholders, approving officials, and program managers learn their roles in ensuring compliance with applicable regulations and statutes, and in reducing the risk of improper card use. To that end, OMB requires all agencies to train everyone who participates in a purchase card program. Cardholder training covers federal procurement laws and regulations, agency policies, and proper card use. Approving officials are required to receive the same training as cardholders, in addition to training in their duties as AOs. Program managers are required to be trained in cardholder and AO responsibilities, as well as management, control, and oversight tools and techniques. In addition, all purchase card program participants are supposed to complete their initial training prior to appointment (e.g., becoming a cardholder, or being designated as an AO or program manager) and receive refresher training at least every three years. Agency audits published between 2002 and 2011 revealed a number of agencies had not fully implemented OMB's training requirements. A report by the inspector general at the Department of the Interior (DOI), for example, noted that DOI had not provided any training to its AOs, and concluded that many of those officials were not performing adequate reviews. The AOs themselves reportedly said that they did not know how to conduct a proper review of purchase card transactions, or how and why to review supporting documentationâboth subjects that are normally included in AO training. Similarly, an audit at FAA concluded that the agency's failure to provide refresher training for cardholders and AOs may have contributed to violations of statutory sourcing requirements. The failure to comply with sourcing statutes, which require agencies to purchase certain goods and services from specified vendor categories, may undermine congressional procurement objectives. The Javits-Wagner-O'Day Act (JWOD), for example, requires the government to buy office supplies and services from nonprofits that employ blind and disabled Americans. Cardholder failure to comply with the provisions of JWOD and other sourcing statutes was widespread enough that GAO estimated that tens of millions of dollars of purchase card transactions may have been conducted with vendors other than the ones Congress intended. Excessive Number of Cards Issued and High Credit Limits The number of cardholders grew from under 100,000 in FY1993 to 680,000 in FY2000. After auditors expressed concerns that the government had issued too many credit cards and provided excessive credit limitsâfactors that raised the risk of card misuseâOMB issued a memorandum in April 2002 that required agencies to examine the number of purchase cards they issued and to consider deactivating all cards that were not a "demonstrated necessity." That same year, provisions in the Bob Stump National Defense Authorization Act for FY2003 ( P.L. 107-314 ) required the Department of Defense (DOD) to establish policies limiting both the number of purchase cards it issued and the credit available to cardholders. These reforms contributed to a net decrease of 392,000 government purchase cards between FY2000 and FY2011. Despite this decrease in the total number of purchase card users, audits through FY2011 indicated that a number of agencies, including some with relatively large purchase card programs, did not establish appropriate controls over card issuance and credit limits. A 2006 GAO report on purchase cards at the Department of Homeland Security (DHS), for example, identified 2,468 cardholdersâabout 20% of all DHS cardholdersâwho had not made any purchases in over a year. Similarly, a congressionally directed audit of the Veterans Health Administration's (VHA's) $1.4 billion purchase card program found that VHA had issued cards with credit limits up to 11 times greater than the cardholders' historical spending levels, thereby exposing its program to unnecessary risk. Government Charge Card Abuse Prevention Act In response to these findingsâand evidence of similar abuse in agency travel card programsâCongress passed the Government Charge Card Abuse Prevention Act of 2012 (Charge Card Act; P.L. 112-194 ). The Charge Card Act established new internal control and reporting requirements for both purchase cards (§2), and travel cards (§3 and §4). The following paragraphs examine the Charge Card Act's requirements for purchase cards. Given that the Charge Card Act directly amends the U.S. Code, the requirements are identified by their location in code rather than in the act itself. Management of Purchase Cards Statutory purchase card requirements for civilian agencies are located in a different title of the U.S. Code than those for DOD. The Charge Card Act therefore amended Title 41 to codify the civilian agency provisions and Title 10 to codify DOD's provisions. In addition, the Charge Card Act establishes similar, but not identical, requirements for civilian agencies and DOD. Civilian Purchase Card Program Requirements Section (2)(a)(1) of the Charge Card Act added civilian agency purchase card requirements to Chapter 19, Title 41, of the U.S. Code. The new requirements are found in 41 U.S.C. §1909(a) through (e). 41 U.S.C. §1909(a), Required Safeguards and Internal Controls, requires executive agencies to ensure 1. There is a record of each cardholder that includes the applicable limitations on single transaction and total transactions. 2. Each cardholder is assigned an AO other than the cardholder. 3. Each cardholder and AO are responsible for (a) reconciling the charges appearing on the cardholder's statements with receipts and other supporting documentation; and (b) forwarding a summary report to the certifying official. 4. Any disputed charges or discrepancies between the cardholder's receipts and bank statements are resolved in accordance with the terms of GSA's purchase card contract with the card issuer. 5. Payments on purchase card accounts are made by the prescribed deadlines to avoid interest penalties. 6. Rebates and refunds are reviewed for accuracy and recorded as receipts. 7. Records of each transaction are retained in accordance with record disposition policies. 8. Periodic reviews are performed to determine whether each cardholder needs a purchase card. 9. Appropriate training is provided to each purchase card holder and official responsible for overseeing purchase cards in the agency. 10. The agency has specific policies that establish the number of purchase cards issued by various component organizations and the authorized credit limits for those cards. 11. The agency uses effective systems, techniques, and technologies to identify illegal, improper, or erroneous purchases. 12. The agency invalidates the purchase card of each employee who (a) ceases to be employed by the agency, immediately upon termination, or (b) transfers to another unit of the agency, immediately upon transfer, unless both units are covered by the same purchase card authority. 13. The agency takes steps to recover the cost of any illegal, improper, or erroneous purchases made with a purchase card, including through salary offsets. 41 U.S.C. §1909(b), Guidance, requires the OMB Director to provide guidance on the implementation of the requirements of subsection (a). 41 U.S.C. §1909(c), Penalties and Violations, requires agencies to establish adverse personnel actions or other punishment for cases where a cardholder violates agency purchase card policies or otherwise makes illegal, improper, or erroneous purchases with a card. The prescribed penalties must include dismissal of the employee, as appropriate. In addition, subsection (c) requires the head of each agency with more than $10 million in annual purchase card expenditures to issue a semiannual report on purchase card violations by its employees. The report must be issued jointly with the agency IG and submitted to the OMB Director. 41 U.S.C. §1909(d), Risk Assessment and Audits, requires the IG of each agency to 1. Conduct periodic assessments of agency purchase card programs to identify and analyze the risks of misuse and to use these assessments to develop an audit plan. 2. Audit purchase card transactions in order to identify potential misuse, patterns of misuse, and categories of purchases that could be made with another payment method in order to obtain lower prices. 3. Report the audit results to the agency head, along with recommendations for addressing any findings. 4. Report to the OMB Director on the implementation of the IG's recommendations. The OMB Director must compile the IG reports and transmit them to Congress and the Comptroller General. 41 U.S.C. §1909(e), Relationship to Department of Defense Purchase Card Regulations, clarifies that subsections (a) through (d) do not apply to DOD. DOD Purchase Card Program Requirements Section 2(a)(2) of the Charge Card Act amended 10 U.S.C. §2784(b) to codify new purchase card management requirements for DOD. Only the Charge Card Act requirements are listed below. 10 U.S.C. §2784(b)(2) requires DOD to ensure that each cardholder is assigned an approving official other than the cardholder. 10 U.S.C. §2784(b)(11) requires DOD to use effective systems, techniques, and technologies to prevent or identify potential fraudulent transaction. 10 U.S.C. §2784(b)(12) requires DOD to invalidate the purchase card of each employee who (a) ceases to be employed by DOD, immediately upon termination, (b) transfers to another unit of DOD, immediately upon transfer, unless both units are covered by the same purchase card authority, or (c) is separated or released from active duty or full-time National Guard duty. 10 U.S.C. §2784(b)(13) requires DOD to take steps to recover the cost of any illegal, improper, or erroneous purchases made with a purchase card, including through salary offsets. 10 U.S.C. §2784(b)(15) requires DOD to conduct periodic assessments of agency purchase card programs in order identify and analyze the risks of misuse and to report the results to the OMB Director and Congress. Implementation of the Charge Card Act In an effort to assess compliance with the Charge Card Act and other purchase card requirements across the government, GAO reviewed agency policies and data from FY2014 and released its analysis in 2017. More recently, the Council of the Inspectors General on Integrity and Efficiency (CIGIE) launched a coordinated audit of FY2017 purchase card data. The IGs at 20 agencies sampled a total of 1,255 "high-risk" transactionsâpurchases that potentially violated program policies or proceduresâfrom and shared their findings with CIGIE. By July 2018, the IGs had released their own reports and CIGIE had issued a summary and analysis of the findings. According to the CIGIE analysis, while there were few examples of fraud at the 20 agencies that participated in the project, nearly 51% (501) of the purchases sampled failed to comply with at least one purchase card policy. Patterns of noncompliance, with examples and analysis from the GAO report, individual agency audits, and the CIGIE report are discussed below. Purchases from Prohibited or Questionable Merchants Federal statutes and regulations, including agency-specific regulations, may prohibit the purchase of supplies and services from certain merchants or for certain items. USDA's purchase card guidance, for example, prohibits employees from using their purchase cards to obtain cash advances, bail bonds, personal items, or escort services. Agencies are often able to block merchants of certain categoriesâsuch as cruise lines or casinosâthrough the card-issuing bank. Some merchants, while not prohibited, are considered "questionable" because the items or services they offer may be allowed by agency policies, only if certain conditions are met. A purchase card may be used at a catering company, for example, but only under certain circumstances. Exceptions may be permitted for transactions with prohibited or questionable merchants under limited circumstances, but they must be justified by the cardholder and approved by the AO. The CIGIE analysis found that nearly 8% of high-risk purchases violated agency policies regarding prohibited or questionable merchants. Of those, nearly one-half lacked a written justification and/or authorization from the AO. An IG at one agency found an employee had used his purchase card to lease multiple vehicles at a cost of more than $5,700, and had provided no documentation to support the need and appropriateness of the transaction. In addition, agencies often failed to block merchant categories; one agency permitted transactions at seven types of prohibited businesses. Even when agencies attempted to block certain merchant categories, the technology did not work consistently. The EPA IG found 20 purchase card transactions at merchants who had been blocked by the agencyâthe cards had not been declined at the point of sale. Purchases from Nonmandatory Sources Purchase card holders are required to use mandatory sources to obtain needed supplies, when possible. Cardholders may use other sources only after confirming that the supplies or services they need are not available from a mandatory source. Auditors found, however, that in nearly one out of every five transactions (19.9%), cardholders purchased supplies and services from nonmandatory sources when they could have acquired them from mandatory sources. As a consequence, agencies not only failed to support certain categories of merchants that are mandatory sources, such as people who are blind or severely disabled, but they also may not obtain the best available price and thereby reduce potential cost savings. One cardholder, for example, purchased batteries from a nonmandatory source for $64.49 when they were available from a mandatory source for $11.42âmeaning the agency overpaid by 565%. Similarly, a cardholder at USDA purchased a used Global Positioning System (GPS) device from a nonmandatory source when a new model was available from a mandatory source for 15% less. Purchases from nonmandatory sources may be authorized if a written justification is provided, but cardholders frequently failed to provide one. Auditors at the Department of the Interior (DOI), for example, determined that cardholders had failed to justify purchases from nonmandatory sources 65% of the time. Overall, the CIGIE reported that cardholders provided no justification for a majority of transactions with nonmandatory sources. Other documentation policies were violated as well. The CIGIE data showed that 36% of nonmandatory purchases lacked a requisition request, 32% lacked evidence of receipt, and 6% had no documentation at all. Purchases that Included Sales Tax Generally, federal purchase card transactions are exempt from state and local sales taxes. Cardholders are responsible for ensuring that their transactions do not include sales taxes, and attempting to recover sales taxes if they are paid erroneously. IGs at 20 federal agencies found many instances of purchase card holders paying sales taxesâmore than 5% of the high-risk transactions in the CIGIE study included charges for sales taxes. Of the transactions that included sales tax, 58% lacked a written justification for paying the taxes and 20% of the items may not have been needed by the government. In many cases, agencies did not track whether the sales taxes were recovered. The USDA IG investigated seven transactions that included sales taxes, and none of the cardholders provided any documentation as to whether they attempted to recover the tax charges. An audit of NASA's purchase card transactions found that 7% of all high-risk purchases included sales tax, and that there was no evidence that the cardholders had attempted to reclaim those costs. While sales tax on any single transaction may not be considered significant, the cumulative amount in a fiscal year may total in the hundreds of thousands of dollars. The DOI IG obtained actual tax-paid data from the agency's purchase card program and determined that in the first six months of FY2017, DOI paid $338,212 in sales taxes involving 19,716 transactions. The IG for HUD found the agency expended $42,944 in sales tax on purchase card transactions during FY2018. Purchases that Split Transactions Each purchase card holder is assigned a dollar amount, or threshold, which may not be exceeded on a single transaction. This threshold is known as the single purchase limit. Cardholders may not split a large purchase into smaller ones in order to circumvent the single purchase limit. Auditors typically flag an account that shows multiple purchases from the same vendor on the same day where the total costs exceed the cardholder's single purchase limitâthis pattern is often associated with split transactions. The CIGIE report estimated that 6.6% of all high-risk transactions involved split transactions. The USDA IG, for example, identified a series of transactions on the same day, with the same vendor, for the same product, where the sum of the charges was more than double the cardholder's single purchase limit. Similarly, the NASA IG determined that an employee had tried to circumvent the single transaction limit by making three purchases from the same vendor on the same day. Auditors at the Social Security Administration (SSA) identified split transactions in 6.5% of its sample. The agency suggested that its staff lacked the time to investigate these purchases and determine if they were inappropriate. Implications for Agency Internal Controls Although the CIGIE initiative did not assess the implementation status of every requirement in the Charge Card Act, the IGs' findings indicated weaknesses remain in many agencies' internal controls. In particular, the audit results showed that AOs did not adequately monitor cardholder purchases; employee training on purchase card policies and procedures is insufficient; and agency policies and procedures have gaps. Lack of Adequate Oversight from AOs The Charge Card Act required agencies to strengthen AOs' capacity to monitor cardholder activity. AOs play a central role in preventing and detecting purchase card misuse, as they review cardholder statements to verify any suspicious or questionable transactions. In addition, AOs reconcile transaction records with supporting documentation to ensure that all purchases were appropriate. Audit findings highlighted the ongoing need for AOs to carefully review cardholder transactions. Many transactions that violated agency purchase card policies had not been reviewed and approved by an AO. GAO found that 11% of all the transactions it sampled from FY2014 had not been reviewed and approved by an AO. Similarly, the CIGIE report found that 44% of the transactions involving questionable or prohibited sources and 38% of split transactions had not been reviewed by the AO. These charges may have been questioned had the AOs thoroughly reviewed the purchases. In many cases, AOs approved transactions that lacked complete supporting documentation. GAO estimated that 22% of all purchase card transactions in FY2014 lacked complete documentation. IGs reported that 59% of the purchases that violated agency policies on the use of mandatory sources lacked written justification, as did 58% of the purchases that violated policies prohibiting the payment of sales taxes. In many cases, AOs approved transactions where there was no documentation that the goods or services had been received. The CIGIE report estimated that of the total number of transactions that violated an agency purchase card policy, 27% were approved without a receipt. Lack of Proper Training The Charge Card Act specifies that agencies are to ensure that cardholders and AOs receive appropriate training on their duties. IGs found that at many agencies, purchase card training programs did not cover some policies or refresher training had not occurred within the past three yearsâconditions which are inconsistent with OMB training requirements. Auditors considered the lack of proper training to be a significant weakness with wide-ranging effects. As the EPA IG's office wrote, "cardholder noncompliance primarily resulted from ineffective training and/or a lack of monitoring and control activities." The CIGIE report found, for example, that agency training programs often lacked adequate explanations of the rules governing split transactions, which meant that AOs did not know how to properly identify such purchases and cardholders were unaware that split purchases were violations of policy. The NASA IG recommended that the agency revise its purchase card training program to emphasize minimum documentation requirements, which constituted NASA's largest category of policy violations. Multiple agencies were unable to provide complete training records. The HUD IG found, for example, that the agency had not maintained records of the cardholders and managers who had completed the required training, as did the IG at the Small Business Administration (SBA). Lack of Clear and Complete Policies Agencies develop their own policies to implement government-wide and agency-specific purchase card requirements. The CIGIE report found that agency guidance was often unclear. Consequently, cardholders and managers did not always understand and properly follow purchase card policies. The IG at the Department of State recommended that the agency reissue its purchase card guidance to specify the frequency with which "refresher training" must be completedâa policy which was inconsistently represented at different components. The NASA IG linked one particular weaknessâthe absence of supporting documents for purchase card transactionsâto agency guidance, which was unclear about the document requirements for purchases below $500. The EPA IG recommended that the agency revise its guidance on the use of mandatory sources to make it easier to understand. More than 39% of EPA's noncompliant transactions were related to the inappropriate use of nonmandatory sources. In some cases, agency policies did not provide sufficient information about purchase card requirements. GAO found that several agencies did not require someone other than the cardholder to receive purchases. In addition, the CIGIE report found that while split transactions were a common violation, many agencies "lacked the policies necessary to identify split purchases." The USDA IG identified 1,410 transactions in FY2018 where the agency paid sales taxes and could not determine if any efforts had been made to recover those charges. The IG wrote that This occurred because USDA does not have a policy requiring cardholders to document reasons for paying or attempting to recover sales tax, such as documenting on the receipt or using the AXOL system to describe the transaction. As a result, cardholders are improperly paying sales tax and not documenting why sales taxes were paid or if recovered, making it difficult for approving officials to determine why State and local sales taxes were paid or if any recovery was attempted. Auditors at EPA determined that the agency did not have adequate controls over its purchase card program, in part because the agency lacked a specific policy for the appropriate number of cardholders needed to make purchases at its various components. Concluding Observations Oversight of agency purchase card programs is limited by the availability of data. While the CIGIE report identified areas where implementation of the Charge Card Act is incomplete, not all agencies had provided data and the data provided did not reflect or represent all of the law's requirements. Moreover, implementation of the Charge Card Act is ongoing and some agencies may have already addressed the weaknesses identified in the CIGIE initiative, which analyzed FY2017 data. Going forward, Congress has the option of requesting a study of the implementation of the Charge Chard Act. If GAO were to examine implementation of the Charge Card Act, it would possibly be able to use more recent data and it could target agencies with the highest risk of card misuse, as determined by dollar volume or history of violations, among other criteria. GAO might be asked to evaluate specific requirements, particularly in areas that were cited by auditors prior to the Charge Card Act. Have agencies implemented policies that require separation of duties? Have agencies established appropriate dollar thresholds for various categories of cardholders? Are agencies invalidating purchase cards when an employee terminates employment or is transferred to another component? The CIGIE report noted another potential weaknessâapproximately 8.6% of the high-risk transactions sampled involved purchase card activity on closed accounts. The extent of agency compliance with these and other purchase card requirements will not be known without additional, timely information. In addition to agency efforts, an evaluation of the effectiveness of SmartPay bank services and tools might be useful. As noted, agencies have reported that merchant block codes do not always prevent transactions from being approved at prohibited merchants. In addition, GAO found that SmartPay banks did not always retain records for the amount of time required by their contracts, in part due to confusion over which records were considered part of the transaction. An evaluation of bank services might identify additional issues that need to be addressed. It also might include a comparison of the technologies different agencies utilize and discuss what benefits they have realized. Given the potential for technology to enhance oversight, reduce administrative burden, and mitigate the risk of improper purchases, an assessment of SmartPay bank services may help agencies identify potentially useful technologies they have not yet incorporated into their charge card programs.
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Following their introduction in the mid-1990s, the usage of government purchase cards expanded at a rapid rate. Spurred by legislative and regulatory reforms designed to increase the use of purchase cards for small acquisitions, the dollar volume of government purchase card transactions grew from $527 million in FY1993 to $19.5 billion in FY2011. While the use of purchase cards was credited with reducing administrative costs during that time, audits of agency purchase card programs found varying degrees of waste, fraud, and abuse. One of the most common risk factors cited by auditors was a weak internal control environment: many agencies failed to implement adequate safeguards against card misuse, even as their purchase card programs grew. In response to these findings, Congress passed the Government Charge Card Abuse Prevention Act of 2012 (Charge Card Act; P.L. 112-194 ), which sought to enhance the management and oversight of agency purchase card programs. Drawing on recommendations from the Government Accountability Office (GAO), the Charge Card Act required executive branch agencies to implement a specific set of internal controls, establish penalties for employees who misuse agency purchase cards, and conduct periodic risk assessments and audits of agency purchase card programs. This report begins by providing background on the origin and structure of agency purchase card programs. It then discusses identified weaknesses in agency purchase card controls that have contributed to card misuse, and examines provisions of the Charge Card Act that are intended to address those weaknesses. Finally, the report examines implementation of the Charge Card Act and analyzes ongoing risks to agency purchase card programs.
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Background DNA Analysis of Crime Scene Evidence Analysis of DNA evidence from crime scenes can help law enforcement link offenders or victims to crime scenes. After crimes occur, law enforcement submits physical evidence from crime scenes, victims, and suspects (hereafter referred to as “crime scene evidence”) to labs for analysis. Labs then perform “DNA analysis,” which, as used in this statement, refers to (1) biology screening (locating, screening, identifying, and characterizing blood and other biological stains and substances); and/or (2) DNA testing (identifying and comparing DNA profiles in biological samples). In order to compare the victim’s or offender’s DNA profile to the recovered crime scene DNA, the lab will need to have known biological samples available. Thus, samples are generally collected from victims and may also be collected from others—such as suspects, crime scene personnel, first responders, and consensual sexual partners (in cases of sexual assault). Matching DNA Profiles in the FBI’s Combined DNA Index System Matching DNA profiles from unknown potential offenders to existing DNA profiles can help law enforcement develop investigative leads. If a case has no suspects to compare the DNA evidence to, the DNA profile of the unknown potential offender can be entered in the Federal Bureau of Investigation’s (FBI) Combined DNA Index System (CODIS), where it can be compared to existing DNA profiles at the local, state, or national level. Labs can then compare unknown potential offender profiles to other profiles already in CODIS, including: 1. Profiles generated from evidence taken from other crime scenes and connected to other unknown potential offenders. 2. Profiles generated from samples taken from known convicted offenders, arrestees, and others as required by law (hereafter “offender samples”). According to DOJ, the federal government, all 50 states, the District of Columbia, and Puerto Rico have laws requiring the collection of DNA samples from individuals convicted of certain crimes; in addition, the federal government, over half of the states, and the District of Columbia have laws authorizing the collection of DNA from individuals arrested for certain crimes. When an unknown potential offender’s profile matches another profile within CODIS, a “hit” or investigative lead may be developed and shared with law enforcement, as shown in figure 1 below. Only federal, state, or local government labs that meet the FBI’s Quality Assurance Standards can participate in CODIS. As of January 1, 2018 there were 201 labs that participated in CODIS in the U.S. Of these, 143 performed just forensic casework DNA analysis, 4 performed just offender sample DNA analysis, and 54 performed both. According to the FBI, as of May 2018, the national level of CODIS contained over 16 million profiles generated from offender samples and over 850,000 profiles generated from crime scene evidence. Also, the FBI reported that as of May 2018, CODIS had produced over 422,000 hits that aided more than 406,000 investigations. DOJ’s Capacity Enhancement and Backlog Reduction Grant Program The CEBR grant program is administered by the National Institute of Justice (NIJ), a component within OJP. NIJ, the research arm of DOJ, is responsible for evaluating programs and policies that respond to crime, and providing and administering awards for DNA analysis and forensic activities, among other criminal justice activities. The CEBR grant program is funded by an appropriation “for a DNA analysis and capacity enhancement program and for other local, State, and Federal forensic activities.” The broad appropriations language enables NIJ to allocate funding for a variety of forensic programs at funding levels established by the agency; however, congressional reports accompanying the appropriation have directed that OJP make funding for DNA analysis and capacity enhancement a priority. CEBR awards can be used to enhance capacity and reduce backlogs at government labs that analyze crime scene DNA evidence and/or process offender DNA samples. NIJ defines a “backlogged” request for analysis of crime scene evidence as a request that has not been completed within 30 days of receipt in the laboratory. CEBR is a formula grant program that dates back to 2004. Grant awards are made non-competitively to states and units of local government based on a formula set by DOJ that allocates certain amounts to each state. This formula takes into account each state’s population and associated crime, and guarantees a minimum amount for eligible applicants from each state. CEBR has broad participation from states and local jurisdictions. For instance, in 2017 OJP awarded $61 million in CEBR grants to 131 grantees in 49 states, the District of Columbia, and Puerto Rico. Preliminary Analysis of CEBR Data Show that the Backlog of Requests for Crime Scene DNA Analysis Is Increasing and Stakeholders Attribute This to Various Factors Our preliminary analysis of CEBR grant program data show that the backlog of requests for crime scene DNA analysis has increased by 77 percent from 2011 through 2016, and that demand for such DNA analysis has outpaced laboratory capacity. In our review, we identified numerous factors that have contributed to an increased demand for DNA analysis beyond laboratories’ capacities, including scientific advancements in DNA analysis technology and state laws requiring testing of certain DNA evidence. Preliminary Analysis of CEBR Data Show an Increasing Backlog for Crime Scene DNA Analysis at Laboratories among CEBR Grantees, though Backlogs Vary Among Individual Labs We found that, among CEBR grantees, the reported aggregated backlog of requests for crime scene DNA analysis has increased by 77 percent from 2011 through 2016. As part of the grant application process, NIJ requires applicants for CEBR grants to provide data from all labs in their jurisdiction, even if certain labs will not be using CEBR funds. NIJ does this to assist in understanding nationwide trends in DNA analysis backlogs. The reported growth in the aggregate backlog among CEBR grantees is the result of labs receiving more requests than they were able to complete over time, as shown in the figure below. Although reported aggregate trends show an increase in the backlog among CEBR grantees, the data also reveal that this increase is not uniform across all labs. For example, among the 118 grantees for which we had data from 2011 through 2016, 30 grantees (25 percent) reported an overall decrease in the backlog. In addition, data from CEBR grantees show differences in the average time it takes to process requests (turnaround time) among grantees. Stakeholders also stated, and NIJ has reported, that labs generally have shorter average turnaround times for requests associated with violent crimes than for requests associated with non-violent crimes—because labs generally prioritize requests associated with violent crimes. For our ongoing review, we continue to analyze CEBR data and data from other sources pertaining to this issue. Various Factors, Such as Scientific Advancements, Have Increased Demand for DNA Analysis Beyond Laboratories’ Capacities Based on a review of a selection of studies and discussions with DNA evidence stakeholders, we identified the following factors that are reported to have contributed to an increased demand for crime scene DNA analysis beyond laboratories’ capacities. As a result, these factors are believed to have helped contribute to increased backlogs: Recent scientific advancements have increased the quality of DNA analysis by allowing lab analysts to obtain DNA profiles from smaller amounts of biological evidence. This has increased the amount of evidence that is eligible to be analyzed and, as a result, has increased the demand for DNA testing. One DNA evidence stakeholder was able to produce preliminary data demonstrating that, as a general trend, labs that decreased their turnaround time saw corresponding increases in requests from law enforcement. Other DNA stakeholders, including NIJ, made similar observations. Increased awareness among law enforcement and the public Increased awareness among law enforcement officers of the value of DNA analysis in solving current and older cases has led to law enforcement agencies submitting more DNA evidence to labs for analysis. Further, NIJ and other stakeholder officials we interviewed stated that the volume of DNA profiles in CODIS has increased significantly over recent years. This, in turn, increased the usefulness of DNA evidence in testing suspect DNA profiles against a well-populated database of existing offenders. This usefulness has increased awareness among law enforcement personnel of CODIS, which contributes to increased demand for DNA analysis, thereby contributing to the backlog. Additionally, when deciding whether to submit DNA evidence for analysis, law enforcement and prosecutors may consider jurors’ expectations that DNA analysis is presented. Recent legislation requiring Sexual Assault Kit (SAK) analysis State legislation requiring SAK analysis has caused an increase in demand for DNA analysis. As of July 2018, we identified at least 25 states that have enacted laws requiring law enforcement to submit for testing SAKs that come into law enforcement possession. Eleven of these states also required the submission for testing of previously untested SAKs. Twenty-one of these laws were passed in 2014 or later. In addition to the factors that have contributed to increased demand, resource challenges and constraints on lab capacity are reported to have helped contribute to crime scene evidence backlogs. State and local labs generally receive appropriations from state or local governments and are subject to local funding priorities. Federal grants can help, but even combined federal and jurisdictional funding may not increase lab capacity enough to keep up with increases in demand. Additionally, these labs report facing lengthy hiring and training processes for forensic analysts, and often lose staff to private or federal labs which may offer higher pay, further limiting lab capacity for completing analysis. Preliminary Results Show that DOJ Has Not Clearly Defined and Documented CEBR Grant Program Goals DOJ’s NIJ has not defined CEBR program-wide goals in clear, specific, and measurable terms. We identified statements in NIJ and CEBR program documentation that communicated program-wide goals, but the documentation did not consistently identify the same goals or cite the same number of goals. For example, a stated goal of improving the quality of DNA testing was included in only 2 of 4 NIJ documents we reviewed. In addition, NIJ officials verbally clarified that the CEBR program has two goals, (1) to increase laboratory capacity for DNA analysis, and (2) to reduce backlogs of DNA evidence awaiting analysis. These differences can be seen across goal statements outlined in various NIJ sources as shown in table 1 below. NIJ officials acknowledged that they do not have documentation that further defines the goals of the program in clear, specific, and measurable terms. These goals are specified as increasing laboratory capacity for DNA analysis and reducing backlogs of DNA evidence awaiting analysis. Officials provided an explanation as to what the goals mean. Specifically, officials stated that: Increasing lab capacity refers to increasing samples analyzed, reducing processing times, and increasing the number of DNA profiles uploaded into CODIS—all while either maintaining or increasing the quality of DNA analysis at labs. Reducing backlogs refers to reducing the number of backlogged requests awaiting analysis by more than the number of requests that become backlogged during the same timeframe. Officials stated that although they believe the goal of reducing the crime scene evidence backlog is unachievable in the foreseeable future, they have kept it as a program goal because each year it is included in the appropriation language that supports the program. However, these clarifications and definitions are not available in CEBR documentation, which is an indication that NIJ may not be using clear, specific, and measurable goals to guide program development or assess progress. We continue to evaluate CEBR program goals and we are in the process of evaluating related CEBR performance measures as part of our ongoing work. Preliminary Analysis Shows that OJP Has Established Controls for Conflicts of Interest Related to CEBR Grants, but Has Not Fully Established Controls Related to Lobbying Our preliminary results show that OJP has controls to implement federal requirements associated with conflicts of interest and some controls related to lobbying that apply to both OJP CEBR grant administrators as well as recipients of grant funding; however, OJP has not fully established all appropriate controls related to lobbying. OJP Has Established Controls for Conflicts of Interest Related to CEBR Grants We found that OJP has established controls to implement federal conflicts of interest requirements that apply to OJP employees administering CEBR grants and CEBR grantees. For example, federal law prohibits government employees from participating personally and substantially in particular government matters, such as the administration of federal grants, which could affect their financial interests. We found that OJP has established an agency-wide ethics program and uses tools such as the DOJ Ethics Handbook and annual financial disclosure reports, among others, to help employees and their supervisors to determine whether they have potential conflicts of interest. See table 2 below for a list of the federal conflicts of interest requirements we identified, as well as our preliminary assessment of related OJP controls to ensure that the requirements are met. OJP Has Some Controls for Lobbying as They Apply to Recipients of CEBR Grant Funds, but Has Not Fully Established All Appropriate Controls We found that OJP has established some controls related to lobbying but has not fully established controls needed to meet applicable requirements. Specifically, federal law sets forth several requirements related to lobbying “certification” and “disclosure.” Lobbying certification refers to agreeing not to use appropriated funds to lobby, and lobbying disclosure refers to disclosing lobbying activities with respect to the covered federal action paid for with nonappropriated funds. Federal regulation requires recipients of all federal awards over $100,000 to file certification documents and disclosure forms (if applicable) with the next tier above, and to forward those same forms from the tier below if they issue subawards for $100,000 or more. In the case of CEBR grants, tiers include OJP, grantees, subgrantees, contractors under grantees and subgrantees, and subcontractors. Subawards include subgrants, contracts under grants or subgrants, and subcontracts. We found that OJP had established controls to obtain lobbying certification documents and disclosure forms from grantees, but had not fully established controls to ensure grantees obtain these documents from tiers below them, see table 3 below. OJP has established mechanisms to ensure it obtains lobbying certification documents and disclosure forms from grantees. Specifically, according to OJP, it requires that grant applicants electronically agree to the certification document during the application process; if applicants do not agree to it, they cannot move on in the process. OJP also requires that applicants submit the lobbying disclosure form as part of the grant application process. Upon submission, a grant manager reviews the form for completeness and content and checks a box in an application review checklist. However, OJP has only partially established a mechanism to ensure that, for subawards over $100,000 (1) CEBR grantees obtain certification documents and disclosure forms, as applicable, from tiers below them, and (2) disclosure forms are forwarded from tier to tier until received by OJP. Specifically, OJP requires grant applicants to agree to the certification document set forth in regulation. This certification document, in turn, lists certification and disclosure requirements, and states that, “The undersigned shall require that the language of this certification be included in the award documents for all subawards at all tiers (including subgrants, contracts under grants and cooperative agreements, and subcontracts) and that all subrecipients shall certify and disclose accordingly.” However, the certification document does not state in clear terms what the specific requirements of the regulation are or how they are to be carried out. OJP attorneys responsible for overseeing their implementation were not aware of specific requirements in the regulation. For example, they were not aware that disclosure forms were required to be forwarded from tier to tier until received by OJP. Additionally, 3 of 4 CEBR grantees we spoke with were not aware of one or more of these requirements. Lastly, we found that OJP does not provide guidance to grantees to ensure they understand the requirements nor does OJP follow-up with grantees to ensure they are implementing them. The statute requires that federal agencies “take such actions as are necessary to ensure that the are vigorously implemented and enforced in agency.” As part of our ongoing work, we will continue to monitor and assess OJP’s compliance with statute and regulations related to grantee, subgrantee, and contractor lobbying disclosure requirements and make recommendations, as appropriate. Chairman Grassley, Ranking Member Feinstein, and Members of the Committee, this concludes my prepared statement. I would be pleased to respond to any questions that you may have at this time. GAO Contacts and Staff Acknowledgements If you or your staff members have any questions about this testimony, please contact Gretta L. Goodwin, Director, Homeland Security and Justice at (202) 512-8777 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this testimony included Dawn Locke (Assistant Director), Adrian Pavia (Analyst-in-Charge), Stephanie Heiken, Jeff Jensen, Chuck Bausell, Daniel Bibeault, Pamela Davidson, Eric Hauswirth, Benjamin Licht, Samuel Portnow, Christine San, Rebecca Shea, Janet Temko-Blinder, and Khristi Wilkins. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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Many state and local crime labs have backlogs of requests for DNA analysis of crime scene evidence, as reported by grantees participating in DOJ's CEBR grant program. These backlogs can include sexual assault kits. Since 2011, DOJ's Office of Justice Programs—the primary grant-making arm of DOJ—has awarded nearly $500 million to states and local jurisdictions through the CEBR grant program to help reduce DNA evidence awaiting analysis at crime labs. There have been concerns that these backlogs of unanalyzed evidence have enabled serial offenders to reoffend or have delayed justice. This statement is based on preliminary observations and analyses from GAO's ongoing review of (1) the level of crime scene DNA evidence backlogs among CEBR grantees and the factors that contribute to such backlogs; (2) the extent to which DOJ has clearly defined goals for CEBR; and (3) the extent to which OJP has controls for CEBR related to federal conflicts of interest and lobbying requirements. To develop these preliminary findings, GAO reviewed CEBR grantee data from 2011-2016 (the latest data available) and studies relevant to the DNA backlog, visited selected labs, and interviewed DOJ officials, among others. GAO's preliminary analysis found that, among the Department of Justice's (DOJ) DNA Capacity Enhancement and Backlog Reduction Program (CEBR) grantees (state and local entities with forensic crime labs), the reported aggregated backlog of crime scene DNA analysis requests has increased by 77 percent from 2011-2016. The growth in this reported aggregate backlog is the result of labs receiving more requests than they were able to complete, although they were receiving and completing more requests, as shown in the figure below. GAO's preliminary analysis also found that the National Institute of Justice (NIJ)—the component within DOJ's Office of Justice Programs (OJP) that is responsible for administering CEBR grants—has not defined CEBR program-wide goals in clear, specific, and measurable terms. Additionally, GAO's ongoing work identified statements in NIJ and CEBR program documentation that communicated program-wide goals, but the documentation did not consistently identify the same goals or cite the same number of goals. GAO continues to evaluate CEBR program goals and is in the process of evaluating related CEBR performance measures as part of its ongoing work. GAO's preliminary analysis found that OJP has some controls to implement federal requirements associated with conflicts of interest and lobbying that apply to both OJP CEBR grant administrators as well as recipients of CEBR grant funding, but OJP has not fully established all appropriate controls related to lobbying.
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An Illinois statute of 1903 (Laws 1903, p. 217) amended the act of 1853 (Laws 1853, p. 97) which gave a right of action for wrongful death by adding thereto: 'Provided further, that no action shall be brought or prosecuted in this state to recover damages for death occurring outside of this state.' Our jurisdiction is invoked upon the theory that validity of the amending act was challenged below because of conflict with the federal Constitution. But the point was not raised prior to the petition to the Supreme Court for a rehearing which was overruled without more. 290 Ill. 227, 125 N. E. 20. It could have been presented earlier. According to the well-established rule we may not now consider it, and the writ of error must be dismissed. Godchaux Co. v. Estopinal, 251 U. S. 179, 40 Sup. Ct. 116, 64 L. Ed. 213. Dismissed.
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A federal question which could have been raised before but was first raissd in the state Supreme Court by a petition for rehearing, which that court merey ovemiled, does not confer jurisdiction on this CourL Writ of error to review 290 Illinois, 227, dismissed.
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Prevalence of Identity Theft Appears to be Growing No single hotline or database captures the universe of identity theft victims. Some individuals do not even know that they have been victimized until months after the fact, and some known victims may not know to report or may choose not to report to the police, credit bureaus, or established hotlines. Thus, it is difficult to fully or accurately measure the prevalence of identity theft. Some of the often-quoted estimates of prevalence range from one-quarter to three-quarters of a million victims annually. Generally speaking, the higher the estimate of identity theft prevalence, the greater the (1) number of victims who are assumed not to report the crime and (2) number of hotline callers who are assumed to be victims rather than “preventative” callers. However, we found no information to confirm the extent to which these assumptions are valid. Nevertheless, although it is difficult to specifically or comprehensively quantify identity theft, a number of data sources can be used as proxies or indicators for gauging the prevalence of such crime. These sources include the three national consumer reporting agencies that have call-in centers for reporting identity fraud or theft; the Federal Trade Commission (FTC), which maintains a database of complaints concerning identity theft; the SSA/OIG, which operates a hotline to receive allegations of SSN misuse and program fraud; and federal law enforcement agencies—Department of Justice components, Department of the Treasury components, and the Postal Inspection Service—responsible for investigating and prosecuting identity theft- related cases. Each of these various sources or measures seems to indicate that the prevalence of identity theft is growing. Consumer Reporting Agencies: An Increasing Number of Fraud Alerts on Consumer Files According to the three national consumer reporting agencies, the most reliable indicator of the incidence of identity theft is the number of long- term (generally 7 years) fraud alerts placed on consumer credit files. Fraud alerts constitute a warning that someone may be using the consumer’s personal information to fraudulently obtain credit. Thus, a purpose of the alert is to advise credit grantors to conduct additional identity verification or contact the consumer directly before granting credit. One of the three consumer reporting agencies estimated that its 7- year fraud alerts involving identity theft increased 36 percent over 2 recent years—from about 65,600 in 1999 to 89,000 in 2000. A second agency reported that its 7-year fraud alerts increased about 53 percent in recent comparative 12-month periods; that is, the number increased from 19,347 during one 12-month period (July 1999 through June 2000) to 29,593 during the more recent period (July 2000 through June 2001). The third agency reported about 92,000 fraud alerts for 2000 but was unable to provide information for any earlier year. FTC: An Increasing Number of Calls to the Identity Theft Data Clearinghouse The federal Identity Theft Act (P.L. 105-318) required the FTC to “log and acknowledge the receipt of complaints by individuals who certify that they have a reasonable belief” that one or more of their means of identification have been assumed, stolen, or otherwise unlawfully acquired. In response to this requirement, on November 1, 1999, FTC established a toll-free telephone hotline (1-877-ID-THEFT) for consumers to report identity theft. Information from complainants is accumulated in a central database (the Identity Theft Data Clearinghouse) for use as an aid in law enforcement and prevention of identity theft. From its establishment in November 1999 through September 2001, FTC’s Identity Theft Data Clearinghouse received a total of 94,100 complaints from victims, including 16,784 complaints transferred to the FTC from the SSA/OIG. In the first month of operation, the Clearinghouse answered an average of 445 calls per week. By March 2001, the average number of calls answered had increased to over 2,000 per week. In December 2001, the weekly average was about 3,000 answered calls. However, FTC staff noted that identity theft-related statistics may, in part, reflect enhanced consumer awareness and reporting. SSA/OIG: An Increasing Number of Fraud Hotline Allegations SSA/OIG operates a fraud hotline to receive allegations of fraud, waste, and abuse. In recent years, SSA/OIG has reported a substantial increase in calls related to identity theft. For example, allegations involving SSN misuse increased more than fivefold, from about 11,000 in fiscal year 1998 to about 65,000 in fiscal year 2001. A review performed by SSA/OIG of a sample of 400 allegations of SSN misuse indicate that up to 81 percent of all allegations of SSN misuse related directly to identity theft. “… our office has investigated numerous cases where individuals apply for benefits under erroneous SSNs. Additionally, we have uncovered situations where individuals counterfeit SSN cards for sale on America’s streets. From time to time, we have even encountered SSA employees who sell legitimate SSNs for hundreds of dollars. Finally, we have seen examples where SSA’s vulnerabilities in its enumeration business process [i.e., the process for issuing SSNs] adds to the pool of SSNs available for criminal fictitious identities.” Federal Law Enforcement: Increasing Indications of Identity Theft-Related Crime Although federal law enforcement agencies do not have information systems that specifically track identity theft cases, the agencies provided us with statistics for identity theft-related crimes. Regarding bank fraud, for instance, the FBI reported that its arrests increased from 579 in 1998 to 645 in 2000—and was even higher (691) in 1999. The Secret Service reported that, for recent years, it has redirected its identity theft-related efforts to focus on high-dollar, community-impact cases. Thus, even though the total number of identity theft-related cases closed by the Secret Service decreased from 8,498 in fiscal year 1998 to 7,071 in 2000, the amount of fraud losses prevented in these cases increased from a reported average of about $73,000 in 1998 to an average of about $218,000 in 2000. The Postal Inspection Service, in its fiscal year 2000 annual report, noted that identity theft is a growing trend and that the agency’s investigations of such crime had “increased by 67 percent since last year.” Technology Affords Increased Opportunities for Identity Theft “The availability of information on the Internet, in combination with the advances in computer hardware and software, makes it easier for the criminal to assume the identity of another for the purposes of committing fraud. For example, there are web-sites that offer novelty identification cards (including the hologram). After downloading the format, fonts, art work, and hologram images, the information can be easily modified to resemble a state- issued driver’s license. In addition to drivers’ licenses, there are web-sites that offer birth certificates, law enforcement credentials (including the FBI), and Internal Revenue Service forms.” Similarly, the SSA/OIG has noted that, “The ever-increasing number of identity theft incidents has exploded as the Internet has offered new and easier ways for individuals to obtain false identification documents, including Social Security cards.” Aliens Use Fraudulent Documents to Obtain Entry, Employment, and Other Benefits Aliens and others have used identity theft or other forms of identity fraud to create fraudulent documents that might enable individuals to enter the country and seek job opportunities. With nearly 200 countries using unique passports, official stamps, seals, and visas, the potential for immigration document fraud is great. In addition, more than 8,000 state or local offices issue birth certificates, driver’s licenses, and other documents aliens can use to establish residency or identity. This further increases the number of documents that can be fraudulently used by aliens to gain entry into the United States, obtain asylum or relief from deportation, or receive such other immigration benefits as work permits or permanent residency status. Reportedly, large-scale counterfeiting has made employment eligibility documents widely available. For example, in May 1998, INS seized more than 24,000 counterfeit Social Security cards in Los Angeles after undercover agents purchased 10,000 counterfeit INS permanent resident cards from a counterfeit document ring. Attempting Entry into the United States with Fraudulent Documents Generally, when a person attempts to enter the United States at a port of entry, INS inspectors require the individual to show one of several documents that would prove identity and/or authorize entry. These documents include border crossing cards, alien registration cards, nonimmigrant visas, U.S. passports or other citizenship documents, foreign passports or citizenship documents, reentry permits, refugee travel documents, and immigrant visas. At ports of entry, INS inspectors annually intercept tens of thousands of fraudulent documents presented by aliens attempting to enter the United States. As table 1 shows, INS inspectors intercepted over 100,000 fraudulent documents annually in fiscal years 1999 through 2001. Generally, about one-half of all the intercepted documents were border crossing cards and alien registration cards. Attempting to Obtain Employment with Fraudulent Documents The availability of jobs is one of the primary magnets attracting illegal aliens to the United States. Immigration experts believe that as long as opportunities for employment exist, the incentive to enter the United States illegally will persist and efforts at the U.S. borders to prevent illegal entry will be undermined. The Immigration Reform and Control Act (IRCA) of 1986 made it illegal for employers to knowingly hire unauthorized aliens. IRCA requires employers to comply with an employment verification process intended to provide employers with a means to avoid hiring unauthorized aliens. The process requires newly hired employees to present documentation establishing their identity and eligibility to work. From a list of 27 acceptable documents, employees have the choice of presenting 1 document establishing both identity and eligibility to work (e.g., an INS permanent resident card) or 1 document establishing identity (e.g., a driver’s license) and 1 establishing eligibility to work (e.g., a Social Security card). Generally, employers cannot require the employees to present a specific document. Employers are to review the document or documents that an employee presents and complete an Employment Eligibility Form, INS Form I-9. On the form, employers are to certify that they have reviewed the documents and that the documents appear genuine and relate to the individual. Employers are expected to judge whether the documents are obviously fraudulent. INS is responsible for checking employer compliance with IRCA’s verification requirements. Significant numbers of aliens unauthorized to work in the United States have used fraudulent documents to circumvent the employment verification process designed to prevent employers from hiring them. For example, INS data showed that about 50,000 unauthorized aliens were found to have used 78,000 fraudulent documents to obtain employment over the 20-month period from October 1996 through May 1998. About 60 percent of the fraudulent documents used were INS documents; 36 percent were Social Security cards, and 4 percent were other documents, such as driver’s licenses. Also, we noted that counterfeit employment eligibility documents were widely available. For instance, in November 1998 in Los Angeles, INS seized nearly 2 million counterfeit documents, such as INS permanent resident cards and Social Security cards, which were headed for distribution points around the country. Attempting to Obtain Other Benefits with Fraudulent Documents Aliens have also attempted to use fraudulent documents or other illegal means to obtain other immigration benefits, such as naturalization or permanent residency. Document fraud encompasses the counterfeiting, sale, or use of false documents, such as birth certificates, passports, or visas, to circumvent U.S. immigration laws and may be part of some benefit application fraud cases. Such fraud threatens the integrity of the legal immigration system. Although INS has not quantified the extent of immigration benefit fraud, agency officials told us that the problem was pervasive and would increase. In one case, for example, an immigration consulting business filed 22,000 applications for aliens to qualify under a legalization program. Nearly 5,500 of the aliens’ claims were fraudulent and 4,400 were suspected of being fraudulent. In another example, according to an INS Miami District Office official, during the month of January 2001 its investigative unit received 205 leads, of which 84 were facilitator cases (e.g., cases involving individuals or entities who prepare fraudulent benefit applications or who arrange marriages for a fee for the purpose of fraudulently enabling an alien to remain in the United States). In both of these examples, fraudulent documents played a role in the attempts to obtain immigration benefits. Identity Theft and Fraudulent Documents Can Be Components of Serious Crimes “In addition to the credit card and financial fraud crimes often committed, identity theft is a major facilitator of international terrorism. Terrorists have used stolen identities in connection with planned terrorist attacks. An Algerian national facing U.S. charges of identity theft, for example, allegedly stole the identities of 21 members of a health club in Cambridge, Massachusetts, and transferred the identities to one of the individuals convicted in the failed 1999 plot to bomb the Los Angeles International Airport.” The events of September 11, 2001, have increased the urgency of being able to effectively authenticate the identity of individuals. Alien Smugglers Use Fraudulent Documents In addition to using identity theft or identity fraud to enter the United States illegally and seek job opportunities, some aliens have used fraudulent documents in connection with serious crimes, such as narcotics trafficking and terrorism. For instance, according to INS, although most aliens are smuggled into the United States to pursue employment opportunities, some are smuggled as part of a criminal or terrorist enterprise. INS believes that its increased enforcement efforts along the southwest border have prompted greater reliance on alien smugglers and that alien smuggling is becoming more sophisticated, complex, organized, and flexible. In a fiscal year 2000 threat assessment, INS predicted that fraud in obtaining immigration benefits would continue to rise as the volume of petitions for benefits grows and as smugglers search for other methods to introduce illegal aliens into the United States. Also, INS believes organized crime groups will increasingly use smugglers to facilitate illegal entry of individuals into the United States to engage in criminal activities. Alien smugglers are expected to increasingly use fraudulent documents to introduce aliens into the United States. Conspirator in World Trade Center Bombing Used Fraudulent Document to Enter United States “One of the conspirators in the World Trade Center bombing entered the country on a photo-substituted Swedish passport in September 1992. The suspect used a Swedish passport ‘expecting to pass unchallenged through the INS inspection area at New York’s Kennedy Airport—since an individual bearing a valid Swedish passport does not even need a visa to enter the United States.’ When the terrorist arrived at John F. Kennedy International Airport (JFK), an INS inspector suspected that the passport had been altered. A search of his luggage revealed instructional materials for making bombs; the subject was detained and sentenced to six months’ imprisonment for passport fraud. In March 1994 he was convicted for his role in the World Trade Center bombing and sentenced to 240 years in prison and a $500,000 fine.” Furthermore, regarding this terrorist incident, a United States Sentencing Commission report noted that, “The World Trade Center defendant used, and was in possession of, numerous false identification documents, such as photographs, bank documents, medical histories, and education records from which numerous false identities could have been created.” FBI and State Department Views on Links between Identity Theft or Fraud and Terrorism “Terrorist financing methods range from the highly sophisticated to the most basic. There is virtually no financing method that has not at some level been utilized by terrorists and terrorist groups. Traditionally, their efforts have been aided considerably by the use of correspondent bank accounts, private banking accounts, offshore shell banks, … bulk cash smuggling, identity theft, credit card fraud, and other criminal operations such as illegal drug trafficking. (Emphasis added.) “There often is a nexus between terrorism and organized crime, including drug trafficking. … Both groups make use of fraudulent documents, including passports and other identification and customs documents to smuggle goods and weapons.” SSA/OIG Investigating Links between SSN Misuse and Terrorism “Under the direction of the U.S. Department of Justice (DOJ), investigators subpoenaed records for all 9,000 airport employees with security badges to identify instances of SSN misuse. They identified 61 individuals with the highest-level security badges and 125 individuals with lower level badges who misused SSN’s. A Federal grand jury indicted 69 individuals for Social Security and INS violations. Sixty-one of the 69 individuals arrested had an SSN misuse charge by the U.S. Attorney. On December 11, 2001, SSA’s OIG agents and other members of the Operation Safe Travel Task Force arrested 50 individuals. To date, more than 20 have been sentenced after pleading guilty to violations cited in the indictments. Many are now involved in deportation proceedings. There were other similar airport operations after the Salt Lake City Operation, and more are underway.” In the May 2002 report, the SSA Inspector General noted that identity theft begins, in most cases, with the misuse of an SSN. In this regard, the Inspector General emphasized the importance of protecting the integrity of the SSN, especially given that this “de facto” national identifier is the “key to social, legal, and financial assimilation in this country” and is a “link in our homeland security goal.” Efforts to Prevent Identity Theft and Other Forms of Identity Fraud Are Important In its 1999 study of identity theft, the United States Sentencing Commission reported that SSNs and driver’s licenses are the identification means most frequently used to generate or “breed” other fraudulent identifiers. Also, in early 1999, following passage of the federal Identity Theft Act, the U.S. Attorney General’s Council on White Collar Crime established the Subcommittee on Identity Theft to foster coordination of investigative and prosecutorial strategies. Subcommittee leadership is vested in the Fraud Section of the Department of Justice’s Criminal Division, and membership includes various federal law enforcement and regulatory agencies, as well state and local law enforcement representation. The subcommittee chairman told us that, since the terrorist incidents of September 11, 2001, the subcommittee has begun to focus more on prevention. For example, the chairman noted that the American Association of Motor Vehicle Administrators attended a recent subcommittee meeting to discuss ways to protect against counterfeit or fake driver’s licenses. The May 2002 SSA/OIG report, cited previously, stated that, “while the ability to punish identity theft is important, the ability to prevent it is even more critical.” In this regard, the Inspector General noted that effective protections to prevent SSN misuse must be put in place at three stages— before issuance of the SSN, during the life of the number holder, and upon that individual’s death. Other prevention efforts designed to enhance technologies in support of identification and verification functions include the following: The Enhanced Border Security and Visa Entry Reform Act of 2002 (P.L. 107-173), signed by the President on May 14, 2002, requires that all travel and entry documents (including visas) issued by the United States to aliens be machine-readable and tamper-resistant and include standard biometric identifiers by October 26, 2004. Also, the act requires the Attorney General to install machine readers and scanners at all U.S. ports of entry by this date so as to allow biometric comparison and authentication of all U.S. travel and entry documents and of all passports issued by visa waiver countries.
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Identity theft involves "stealing" another person's personal identifying information, such as their Social Security number, date of birth, or mother's maiden name, and using that information to fraudulently establish credit, run up debt, or take over existing financial accounts. Another pervasive category is the use of fraudulent identity documents by aliens to enter the United States illegally to obtain employment and other benefits. The prevalence of identity theft appears to be growing. Moreover, identity theft is not typically a stand-alone crime; rather identity theft is usually a component of one or more white-collar or financial crimes. According to Immigration and Naturalization Service (INS) officials, the use of fraudulent documents by aliens is extensive, with INS inspectors intercepting tens of thousands of fraudulent documents at ports of entry in each of the last few years. These documents were presented by aliens attempting to enter the United States to seek employment or obtain naturalization or permanent residency status. Federal investigations have shown that some aliens use fraudulent documents in connection with more serious illegal activities, such as narcotics trafficking and terrorism. Efforts to combat identity fraud in its many forms likely will command continued attention for policymakers and law enforcement to include investigating and prosecuting perpetrators, as well as focusing on prevention measures to make key identification documents and information less susceptible to being counterfeited or otherwise used fraudulently.
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Background VA provides nursing home care for some veterans, as required, and makes these services available to other veterans on a discretionary basis, as resources permit. Specifically, VA is required by law to provide nursing home care to any veteran who needs it for a service-connected disability and to any veteran who needs it and has a service-connected disability rated at 70 percent or greater. However, VA provides most of its nursing home care to veterans on a discretionary basis, as resources permit. VA’s policy on nursing home eligibility requires that VA networks provide nursing home care to veterans with 60 percent service-connected disability ratings who are either unemployable or who have been determined by VA to be permanently and totally disabled. For all other veterans, VA’s policy is to provide nursing home care on a discretionary basis, with certain veterans having higher priority, including veterans who require care following a hospitalization. CLCs provide both short-stay (90 days or less) and long-stay (more than 90 days) services. According to VA data, almost 94 percent of the residents admitted to CLCs in fiscal year 2010 were short-stay. Short-stay care in CLCs includes skilled nursing care, rehabilitation, restorative care, maintenance care for those awaiting alternative placement, hospice, and respite care. The remaining admissions, about 6 percent, were long-stay. Long-stay care includes dementia care, maintenance care, and care for those with spinal cord injury and disorders. Responsibility for VA’s medical facilities, including CLCs, rests with both VA’s networks and VA headquarters. Almost all of VA’s 132 CLCs, located throughout VA’s 21 networks, are colocated with or in close proximity to a VA medical center (VAMC). While networks are charged with the day-to-day management of the VAMCs within their network, VA headquarters maintains responsibility for establishing national policy and overseeing both networks and VAMC operations. Within VA headquarters, Geriatrics and Extended Care is responsible for developing VA’s policies and other national actions related to the quality of care and quality of life in VA’s CLCs. The Office of the Deputy Under Secretary for Health for Operations and Management, through each network, ensures that VAMCs, including CLCs, comply with VA’s policies and implement other national actions. The LTCI contract, which began in September 2010, is for 1 year, and provides for LTCI to conduct reviews between September 2010 and August 2011. VA may exercise an option to renew for each of 4 additional years through August 2015. Officials from both Geriatrics and Extended Care and the Office of the Deputy Under Secretary for Health for Operations and Management share responsibility for administering VA’s contract with LTCI. LTCI uses the Centers for Medicare & Medicaid Services’ scope and severity scale for classifying nursing home deficiencies. There are four severity classifications, with the least serious deficiencies rated as having the potential for minimal harm and the most serious deficiencies rated as immediate jeopardy situations—in which residents are potentially or actually at risk of dying or being seriously injured. The remaining two severity classifications are actual harm and potential for more than minimal harm. The scope of deficiencies—or the number of residents potentially or actually affected by the deficient care—may be rated as isolated, pattern, or widespread. VA policy requires that all VAMCs be accredited by The Joint Commission. As part of the accreditation process for a VAMC, which occurs on average every 3 years, The Joint Commission surveys and accredits any CLC associated with the VAMC. VA requires CLCs to meet The Joint Commission long-term care standards. CLCs are also subject to periodic reviews by VA’s OIG. VA Headquarters Established a Process for Responding to LTCI-Identified Deficiencies, but Cannot Provide Reasonable Assurance That Deficiencies Have Been Resolved VA headquarters established a process for responding to deficiencies identified at CLCs during the 2007 and 2008 reviews. This process, which requires CLCs to submit corrective action plans addressing LTCI- identified deficiencies—such as how CLCs will address a lack of competent nursing staff and a failure to provide a sanitary and safe living environment—is also being used during the 2010 and 2011 LTCI reviews. However, because of weaknesses in the process, VA headquarters cannot provide reasonable assurance that deficiencies that could potentially affect the quality of care and quality of life of residents are resolved. VA Headquarters’ Process Requires Corrective Action Plans and, for 2007 and 2008, National Training and Education VA headquarters established a process for responding to LTCI-identified deficiencies that requires each CLC to develop a corrective action plan addressing all deficiencies identified and submit it to VA headquarters within 30 days of receiving an LTCI report. The plans may include actions such as training CLC staff on clinical policies and procedures or implementing nursing and interdisciplinary rounds to monitor the clinical issues related to the deficiencies. VA headquarters officials review each corrective action plan to determine whether the actions can be expected to correct all identified deficiencies and whether the time frames for completing the actions are reasonable. The officials then provide each CLC feedback by telephone, discussing any revisions to the corrective action plans that may be necessary. The officials document these discussions using hand-written notes on hard copies of CLCs’ corrective action plans, which are not shared with VA networks and CLCs. VA headquarters officials told us they may schedule additional telephone calls with CLCs when significant revision of a corrective action plan is necessary or if the officials want an update on the implementation of the plan. For deficiencies identified in the 2007 and 2008 LTCI reviews, the documentation showed that officials had at least two telephone calls with 29 of the 116 CLCs reviewed. Three of these 29 CLCs received more than two follow-up calls. When additional calls were made, VA headquarters required the CLCs to submit an updated corrective action plan. While VA’s process requires that all deficiencies identified be addressed, it gives priority to deficiencies at the immediate jeopardy or actual harm levels. When LTCI review teams identify such deficiencies during a survey, they are required to notify VA headquarters and the relevant VAMC. LTCI identified immediate jeopardy or actual harm deficiencies at 25 of the 116 CLCs (about 22 percent) reviewed in 2007 and 2008, and at 10 of the 67 CLCs (about 15 percent of the CLCs) reviewed in 2010 and 2011 as of March 31, 2011. After the 2007 and 2008 LTCI reviews, VA headquarters officials analyzed the deficiencies from the 116 reviews and from the analysis developed eight clinical high-risk categories. According to these officials, the eight categories, which included medication management, infection control, and peripherally inserted central catheter (PICC) lines, posed the greatest risk to residents’ health and safety. (See table 1.) The officials then implemented a national training and education initiative to address the eight categories. VA headquarters convened a workgroup that developed national training guidelines and checklists for evaluating CLC staff competencies in each of the eight categories. The workgroup included representatives from Geriatrics and Extended Care, the Office of Nursing Services, Nutrition and Food Services, and the Infectious Diseases Program Office. A VA headquarters official told us that the workgroup included the last three offices because the majority of LTCI-identified deficiencies were related to nursing, nutrition, and infection control issues. VA headquarters provided the VA networks and CLCs with the national guidelines and checklists and required CLCs to incorporate them into their training and education policies. VA headquarters required CLCs to report whether they had met the following four requirements for each of the eight clinical high-risk categories: (1) establish CLC policies, (2) adopt procedures for implementing the policies, (3) design an assessment to observe staff proficiency in providing care matching the established procedure, and (4) establish a plan for ongoing training and assessment of staff, including new staff. In addition, CLCs were required to directly observe staff providing care to CLC residents and report the percentage of staff that had been observed as being proficient in the procedures necessary to comply with CLCs’ policies for each of the eight clinical high-risk categories. If CLCs did not meet all four requirements for each category or had observed less than 90 percent of their staff as proficient in providing care in any one of the clinical high-risk categories, they were to develop and submit corrective action plans to VA headquarters. According to the documentation we reviewed, in most categories, the majority of CLCs indicated that they had met the requirements of the national training and education initiative. However, in every category there were CLCs that did not meet these requirements and had to submit a corrective action plan. For example, for the medication management clinical high-risk category, 14 of the 132 CLCs submitted a corrective action plan because they either were not in compliance with the four requirements or had not observed at least 90 percent of their staff as being proficient in providing care. After LTCI’s 2010 and 2011 reviews of VA’s CLCs are complete, VA headquarters plans to analyze the deficiencies identified by LTCI. To facilitate the analysis, VA headquarters is working with LTCI to track and note trends with regard to deficiencies on a quarterly basis. LTCI provides quarterly reports to VA headquarters, which include data on which deficiencies are the most frequently identified nationally. For each CLC, these reports include data on the total number of deficiencies identified and the categories in which the identified deficiencies fall. VA headquarters officials expect that these quarterly reports will facilitate the identification of national areas for improvement as well as help them review CLCs’ performance on the LTCI reviews over time. VA Headquarters Cannot Provide Reasonable Assurance That All Deficiencies Are Resolved Because of Weaknesses in Its Process for Responding to Deficiencies When responding to LTCI-identified deficiencies, VA headquarters does not always maintain clear and complete documentation of the feedback it provides to CLCs regarding their corrective action plans. In addition, VA headquarters does not require VA networks to report on the status of CLCs’ implementation of their corrective action plans or to verify CLCs’ self-reported compliance with the requirements of the national training and education initiative. Without the ability to determine whether CLCs appropriately responded to feedback, fully implemented their corrective action plans from the 2007 and 2008 LTCI reviews, or fully complied with requirements of the national training and education initiative, and without the ability to determine the status of corrective action plans that CLCs are implementing during LTCI’s 2010 and 2011 reviews, VA headquarters does not have reasonable assurance that LTCI-identified deficiencies are resolved. Lack of clear and complete documentation of feedback. VA headquarters does not always maintain clear and complete documentation of the feedback it provides CLCs about their corrective action plans, which is not consistent with good management practices as outlined in federal internal control standards. According to these standards, internal control activities, such as VA headquarters’ feedback, should be clearly and completely documented in a manner that is accurate, timely, and helps provide reasonable assurance that program objectives are being achieved. VA headquarters uses an unsystematic approach for documenting the feedback it provides to CLCs regarding their corrective action plans. The approach relies solely on hard copies of CLCs’ action plans that have hand-written notes on them, which are not shared with the VA networks and CLCs, to document the feedback provided during VA headquarters’ telephone calls with CLCs. We found that this approach did not always result in clear—that is, understandable to anyone not involved in the telephone feedback calls—and complete documentation. In particular, the documentation we reviewed did not always clearly and completely indicate the specific feedback provided to CLCs, including actions VA headquarters advised CLCs to take to address weaknesses with their corrective action plans. For example, for one CLC we obtained two corrective action plans from VA headquarters. One was an older action plan and the other was a revised action plan. The older action plan contained no notes or any indication of the content of VA headquarters’ feedback that resulted in the revised action plan, so we were unable to independently determine whether the revised action plan addressed VA headquarters’ feedback. In addition, we found that the plans for 19 of the 50 2007 and 2008 CLC corrective action plans that we reviewed—or about 38 percent of the plans—lacked any notes documenting the feedback that VA headquarters gave CLCs on the telephone calls. Lack of reporting requirement for VA networks. VA headquarters does not require its networks to report on the status of CLCs’ implementation of their corrective action plans, and VA headquarters does not routinely schedule additional telephone calls with CLCs following the submission of initial corrective action plans and VA’s initial telephone calls. For example, VA headquarters held additional telephone calls with only 25 percent of CLCs following the 2007 and 2008 LTCI reviews, and 15 percent of the CLCs following the 2010 and 2011 LTCI reviews, as of March 31, 2011. Therefore, VA headquarters does not know whether CLCs fully implemented their plans and corrected all LTCI-identified deficiencies. Federal standards for internal control state that the findings of reviews should be promptly resolved and that information on the status of the findings should be communicated to management so that management can provide reasonable assurance that a program is achieving its objectives—in this case, that CLCs are providing quality care and maintaining veterans’ quality of life. VA headquarters officials told us that beyond the initial telephone calls with CLCs, VA headquarters does not receive any additional information from CLCs regarding the implementation status of their corrective action plans. Rather, VA headquarters officials expect the findings of the 2010 and 2011 LTCI reviews will help them determine whether CLCs resolved all deficiencies identified by LTCI in 2007 and 2008—2 or 3 years after the deficiencies were first identified. Lack of verification requirement for national initiative. We found that VA headquarters relied on self-reported information from CLCs regarding (1) compliance with all four requirements for each of the eight clinical high-risk categories and (2) the percentage of staff that were observed to be proficient in treatments and procedures associated with the categories. VA headquarters did not specify to its networks that they should verify the accuracy of CLCs’ self-reported information. Reliance on self-reported information is inconsistent with federal standards for internal control specifying that management should be able to provide reasonable assurance about the accuracy of data—in this case, that VA networks verify the accuracy of CLCs’ self-reported information. Although we cannot generalize to all networks, neither of the two VA networks we visited requested documentation to verify CLCs’ self-reported information for the national training and education initiative. Further, the 2010 and 2011 LTCI reviews indicate that some CLCs are not in compliance with the requirements for the eight clinical high-risk categories stemming from the 2007 and 2008 reviews. For example, a CLC reported to VA headquarters that by June 2009 it would have a policy in place for training and educating its staff on PICC lines—one of the eight clinical high-risk categories. However, when LTCI reviewed this CLC in 2010, it found that this CLC had failed to provide proper care and treatment when administering medication to a resident through a PICC line. When LTCI asked to see the CLC’s policy related to PICC lines, the CLC’s staff stated that the CLC did not have one. VA Headquarters Receives Information about CLCs from Multiple Sources, but Does Not Analyze It to Assess and Manage Risks In addition to LTCI reviews, VA headquarters obtains information about CLCs from a variety of other sources that could be used to more comprehensively identify risks associated with the care and quality of life of CLC residents. VA headquarters does not analyze all of these sources, and for those sources it does analyze, VA evaluates each source in isolation without comparing the information it receives across all available sources to identify major or commonly cited risks and trends. As a result, VA headquarters’ current approach to identifying risks in CLCs may result in missed opportunities to detect patterns and trends in information about the quality of care and quality of life within a CLC or across many CLCs. Without considering information from all available sources and comparing it across different sources, VA headquarters cannot adequately identify and manage risks in CLCs. VA Headquarters Receives Useful Information about CLCs from Multiple Sources We found that VA headquarters receives information about the quality of care and quality of life in CLCs from at least nine different sources. The type of information VA headquarters receives from each of these sources, and how often the agency receives it, varies. The nine sources of information about CLCs are the following: LTCI. Conducts annual unannounced reviews that assess the extent to which CLCs follow 176 federal long-term care standards. LTCI review teams observe the delivery of care for a sample of residents in order to examine such areas as medication management, infection control practices, and respect for residents’ rights and dignity. LTCI provides VA headquarters a report of all deficiencies identified. VA headquarters then shares the report with the network and the reviewed CLC. The CLC is expected to correct identified deficiencies. The Joint Commission. Performs accreditation surveys every 3 years, on average, assessing CLCs’ compliance with 227 long-term care standards, such as infection control practices and resident assessments. When The Joint Commission surveyors find noncompliance, they determine whether a systemic problem exists by assessing the CLC’s established policies and processes. This determination is the basis for whether CLCs are found deficient in a long-term care standard. VA networks and CLCs receive survey reports from The Joint Commission, which identify specific deficiencies. CLCs are required to resolve the deficiencies within certain time frames in order to maintain accreditation. OIG. Performs its Combined Assessment Program reviews at VAMCs, including CLCs, about every 3 years. Under this program, OIG reviews selected VAMC activities, including CLC activities, to assess the effectiveness of patient care administration (the process of planning and delivering patient care) and quality management (the process of monitoring quality of care to identify and correct harmful and potentially harmful practices and conditions). CLCs typically are part of each Combined Assessment Program review. Upon completion of each review, OIG issues a report to VA headquarters, the network, and the VAMC, which identifies the VAMC’s deficiencies, including any deficiencies identified in the CLC. VA requires VAMCs, including CLCs, to fully resolve deficiencies within a year of the completion of a Combined Assessment Program review. VA Office of the Medical Inspector (OMI). Conducts investigations to determine the validity of allegations made by complainants regarding the care provided to veterans, including residents of CLCs. If an allegation is validated, the VAMC, including the CLC, is required to address any recommendations made by OMI. System-wide Ongoing Assessment and Review Strategy (SOARS). Performs reviews of VAMCs, including CLCs, every 3 years to evaluate readiness for some external and internal reviews, such as those by The Joint Commission and OIG. It is a consultative program within VA designed to identify programmatic weaknesses in VAMCs, including CLCs. SOARS teams issue reports to VA networks and VAMCs, including CLCs, with recommendations based on identified deficiencies, and VAMCs and CLCs are expected to implement the recommendations. Quality Measures and Quality Indicators. Report the percentage of residents in a CLC who have certain conditions, such as a pressure ulcer, or residents who are at risk for developing certain conditions, such as CLC residents who have limited mobility and are at risk of developing a pressure ulcer. CLCs periodically assess residents and enter information about their conditions into a database, which automatically calculates percentage scores for 24 categories of quality measures and quality indicators. Data are available on an ongoing basis. Artifacts of Culture Change Tool. Reports the extent to which CLCs provided resident-centered care. Using a standard self-assessment tool, CLCs score their own performance in certain areas, such as allowing residents to choose when they eat meals, bathe, and sleep. CLCs report their scores to VA headquarters every 6 months. Issue Briefs. Provide specific information to VA headquarters officials regarding unusual incidents, such as deaths, disasters, or anything else that happens at a VAMC, including a CLC, that might generate media interest or affect care. Complaints. Provide information from veterans or their representatives about the quality of care or the quality of life in VAMCs, including CLCs. VA Headquarters Does Not Consider the Potential Usefulness of All Available Information to Assess and Manage Risks in CLCs VA headquarters’ approach for identifying risks associated with the quality of care and quality of life of CLC residents is deficient in two respects—it does not comprehensively analyze information from all available sources, and it does not compare findings across these sources. Without analyzing information from all available sources and comparing the results, VA headquarters’ assessments of risks in CLCs are incomplete. According to federal internal control standards, management should assess the risks the agency may face from both external and internal sources. The standards state that a risk management process includes (1) comprehensively identifying risks associated with achieving an agency’s goals (for example, providing quality of care and quality of life in CLCs); (2) estimating the significance of the risks; and (3) determining actions to mitigate the risks, such as developing or clarifying policies or targeting reviews of noncompliant CLCs. VA headquarters’ current approach relies significantly on the analysis of findings from LTCI reviews of CLCs. VA headquarters also relies on analysis of the findings from The Joint Commission accreditation surveys and the Artifacts of Culture Change tool. (See app. I for a detailed description of these analyses.) While these three separate analyses enable VA headquarters to identify trends in each source of information, such as the most frequently cited deficiencies across all CLCs or the average number of deficiencies per CLC, they do not provide a complete assessment of the risks that would be identified by evaluating all nine sources. Information VA headquarters receives about the quality of care and the quality of life in CLCs from the remaining six sources—OIG, OMI, SOARS, quality measures and quality indicators, issue briefs, and complaints—could also be valuable in identifying patterns in CLC-related findings. VA headquarters officials we interviewed said they do not typically analyze information they receive about CLCs from these six sources because they do not always believe that doing so would be valuable for identifying trends and patterns regarding the quality of care and quality of life in CLCs. For example, VA headquarters officials said that they do not extract CLC-related findings from OIG Combined Assessment Program reviews because the reviews typically do not include enough CLC-related findings to warrant analysis. However, when we analyzed findings from the 77 OIG Combined Assessment Program reviews that were completed at VAMCs that have CLCs between October 1, 2009, and June 20, 2011, we found that 49 of the reviews—or about 64 percent—included at least one finding related to the quality of care or quality of life in a CLC. Without analyzing information from all available sources about the quality of care and quality of life in CLCs, VA headquarters’ assessments of risks in CLCs are incomplete. VA headquarters does not compare information across all sources to identify patterns of findings for an individual CLC, CLCs within a network, or all CLCs nationwide. Rather, VA headquarters analyzes the findings from three sources separately to identify trends in the findings. However, it does not compare the findings from one source to the findings from the other sources. One source’s findings, in isolation, may not present the significance of certain risks, especially those that may suggest immediate risks for residents within a given CLC or across all CLCs. However, if related information that VA headquarters receives was compared across different sources concurrently, VA headquarters officials would be better positioned to recognize the risks to CLC residents. One example we identified of the benefit from considering the usefulness of multiple information sources is in the area of pain management. In this regard, we found that in fiscal years 2009 and 2010, VA headquarters’ quality indicator and quality measure data showed that about 25 percent of all long-stay CLC residents and 40 percent of all short-stay CLC residents experienced moderate to severe pain. In June 2007, OMI investigated allegations about the quality of care for a resident at one CLC and found, among other things, that the CLC had failed to adequately manage the resident’s pain. Three months later, in September 2007, LTCI conducted a review of the same CLC and found that staff were not performing assessments after administering pain medications to determine whether the medication had been effective. In November 2009, the OIG visited the same CLC as part of a Combined Assessment Program review and found that staff had not documented pain medication effectiveness within the required time frames nearly two-thirds of the time that pain medications were administered. If VA had comprehensively analyzed OMI information—which it does not analyze—along with LTCI information that was available in 2007 and compared this information with the information from the 2009 OIG review and quality indicator and quality measure data, VA headquarters would have been better informed about the significance of the risks and what actions might have helped to mitigate the risks of pain medication management problems at this CLC. Conclusions The 46,000 elderly and disabled veterans annually who are residents in VA’s CLCs depend on VA to provide them with quality care and maintain their quality of life. The weaknesses in VA headquarters’ process for resolving LTCI-identified deficiencies put veterans at risk of persistent deficiencies that could become more serious over time. VA headquarters officials told us that they intend to use the findings of the 2010 and 2011 LTCI reviews to determine whether deficiencies that were first identified by LTCI 2 to 3 years earlier have been resolved. However, VA headquarters cannot provide reasonable assurance of resolution of deficiencies because it does not (1) clearly document the feedback that it provides to CLCs about corrective action plans for LTCI-identified deficiencies, (2) require VA networks to report on the status of CLCs’ implementation of action plans, and (3) verify CLCs’ self-reported information about their implementation of the requirements of the national training and education initiative. Unaddressed, these weaknesses in VA headquarters’ process for responding to LTCI-identified deficiencies may compromise the quality of care and quality of life of veterans in CLCs. Even though VA headquarters receives information about the quality of care and quality of life in CLCs from LTCI and a variety of other sources, the agency does not comprehensively analyze all available information to identify and manage risks in CLCs. Because VA headquarters does not analyze information from all available sources, it may be missing opportunities to detect trends and patterns in findings from different information sources for a CLC, CLCs within a network, or all CLCs. Without comprehensively analyzing information from all available sources, VA headquarters cannot fully identify risks in CLCs, estimate the significance of the risks, or take actions to mitigate them. Recommendations for Executive Action To provide reasonable assurance that LTCI-identified deficiencies are resolved and that veterans receive quality care and maintain their quality of life in VA CLCs, we recommend that the Secretary of Veterans Affairs direct the Under Secretary for Health to take the following two actions: For reviews conducted by LTCI under the current contract and any similar future contracts, (1) clearly and completely document the feedback provided to CLCs about their corrective action plans, (2) require VA networks to provide periodic reports on the status of CLCs’ implementation of their corrective action plans, and (3) develop and implement a process for verifying any information reported directly to VA headquarters by CLCs. Develop and implement a process to comprehensively identify, estimate, and mitigate risks in CLCs by analyzing and comparing all available information regarding the quality of care and quality of life in CLCs. Agency Comments and Our Evaluation In its comments on a draft of this report, VA concurred with our recommendations and described the department’s planned actions to implement them. VA did not provide technical comments on the draft report. VA’s comments are included in appendix II. To address our recommendation that, for reviews conducted by LTCI, VA headquarters should document the feedback provided to CLCs about their corrective action plans, require VA networks to report periodically on the status of CLCs’ implementation of corrective action plans, and implement a process for verifying information CLCs report directly to VA headquarters, VA stated that it plans to develop and implement a national feedback process by the end of the second quarter of fiscal year 2012 as part of its response to results from the LTCI reviews. VA stated that the process will include having VA networks work with VAMC leadership to develop a comprehensive action plan to address areas of concern highlighted in the LTCI reviews, using a standardized template for CLCs’ corrective action plans, and requiring VAMCs to post corrective action plans on a secure database and provide updated corrective action plans at least monthly. VA indicated that the process will provide access to the status of action plans at any time and that officials from VA headquarters will provide oversight to ensure completion of action plans, including requiring VA networks to validate completion of all action items. VA, however, did not specify in its comments whether its process would include a step to document the feedback provided to CLCs about their corrective actions plans. We believe it is important for VA to document feedback provided to CLCs as part of its process To address our recommendation that VA headquarters develop and implement a process to comprehensively identify, estimate, and mitigate risks in CLCs by analyzing and comparing all available information regarding quality of care and quality of life, VA stated that it plans to design a process that will use all available information about the quality of care and quality of life in CLCs. VA indicated that this process would allow officials to analyze and compare information for individual CLCs, for CLCs within a VA network, and across all CLCs nationwide. VA intends to design this process during the first quarter of fiscal year 2012 and plans to use the process to analyze and compare CLC information and begin reporting it during the second quarter of fiscal year 2012. We commend this effort and encourage VA to proceed with these plans. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Secretary of Veterans Affairs, appropriate congressional committees, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs are on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. Appendix I: VA Headquarters’ Analysis of Information about the Quality of Life and Care in Community Living Centers Frequency of analysis Description of VA headquarters analysis Identify the most frequently cited deficiencies nationally. Identify the total number of deficiencies per community living center (CLC). Classify deficiencies identified in each CLC into 1 of 17 different groups (e.g., activities, environment, infection control, medication, etc.). Use these groups to track trends in deficiencies by VA network and by CLC. Determine whether each CLC was substantially compliant with federal long-term care standards. Identify most frequently cited findings for two areas: 1. Direct impact: includes findings that are likely to present an 2. immediate risk to residents’ safety or quality of care; for example, resident assessment and pain management. Indirect impact: includes findings that pose less immediate risk to residents’ safety or quality of life, but could become more serious over time; for example, care planning and ensuring that corridors, hallways, and doors remain free from obstructions that would prevent exit in the event of a fire. Calculate average number of findings per CLC. Calculate average performance on 30 measures and indicators, by VA network and nationally; for example, percentage of long-stay residents who have experienced moderate to severe pain. Calculate average scores, by VA network and nationally, for areas such as care practices (e.g., allowing residents to choose when they eat, bathe, and sleep) and leadership (e.g., holding regular community meetings that encourage the participation of staff, residents, and families). Appendix II: Comments from the Department of Veterans Affairs Appendix III: GAO Contact and Staff Acknowledgments GAO Contact Staff Acknowledgments In addition to the contact named above, Mary Ann Curran, Assistant Director; Stella Chiang; Julie Flowers; Alison Goetsch; Aaron Holling; Alexis MacDonald; Elizabeth Morrison; and Lisa Motley were major contributors to this report. Related GAO Products VA Long-Term Care: Trends and Planning Challenges in Providing Nursing Home Care to Veterans. GAO-06-333T. Washington, D.C.: January 9, 2006. VA Long-Term Care: Oversight of Nursing Home Program Impeded by Data Gaps. GAO-05-65. Washington, D.C.: November 10, 2004.
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The Department of Veterans Affairs (VA) annually provides care to more than 46,000 elderly and disabled veterans in 132 VA-operated nursing homes, called community living centers (CLC). After media reports of problems with the care delivered to veterans in CLCs, VA contracted with the Long Term Care Institute, Inc. (LTCI), a nonprofit organization that surveys nursing homes, to conduct in-depth reviews of CLCs in 2007-2008 and again in 2010-2011. GAO was asked to evaluate VA's approach to managing veterans' quality of care and quality of life in CLCs. This report examines (1) VA's response to and resolution of LTCI-identified deficiencies and (2) information VA collects about the quality of care and quality of life in CLCs and how VA uses it to identify and manage risks. To do this work, GAO interviewed officials from VA headquarters, examined all 116 2007-2008 and 67 2010-2011 LTCI reviews, and analyzed 50 CLCs' corrective action plans for 2007-2008 and 23 such plans for 2010-2011. VA headquarters established a process for responding to deficiencies identified at CLCs during the 2007 and 2008 LTCI reviews. VA is using the process, which requires CLCs to submit corrective action plans addressing LTCI-identified deficiencies--such as how CLCs will address a lack of competent nursing staff and a failure to provide a sanitary and safe living environment--during the 2010 and 2011 LTCI reviews. On the basis of its analysis of the deficiencies identified in 2007 and 2008, VA headquarters also developed a national training and education initiative. VA headquarters officials told GAO that they plan to analyze the deficiencies identified during the 2010 and 2011 reviews and identify national areas for improvement. However, GAO found weaknesses in VA's process for responding to and resolving LTCI-identified deficiencies. First, VA headquarters does not maintain clear and complete documentation of the feedback it provides to CLCs regarding their corrective action plans. Second, VA headquarters does not require VA's networks, which oversee the operations of VA medical facilities, including CLCs, to report on the status of CLCs' implementation of corrective action plans or to verify CLCs' self-reported compliance with the requirements of the national training and education initiative. Because of these weaknesses, VA headquarters cannot provide reasonable assurance that LTCI-identified deficiencies are resolved. For example, without requiring networks to report on the status of CLCs' implementation of their corrective action plans, VA headquarters cannot determine whether CLCs' corrective action plans are fully implemented. Unaddressed, weaknesses in VA headquarters' process for responding to LTCI-identified deficiencies may compromise the quality of care and quality of life of veterans in CLCs. VA headquarters' current approach to identifying risks associated with the quality of care and quality of life of CLC residents does not comprehensively analyze information from all available sources, and for the sources VA does analyze, it does not compare findings across sources. VA's approach relies significantly on the analysis of findings from LTCI reviews of CLCs. However, in addition to LTCI reviews, VA headquarters obtains information about CLCs from a variety of other sources, such as VA's Office of Inspector General (OIG), but does not analyze the information from all these other sources. Further, for the sources it does analyze, VA headquarters evaluates each source in isolation and does not compare the findings from one source with findings from the other sources. Therefore, VA headquarters' current approach to identifying risks in CLCs may result in missed opportunities to detect patterns and trends in information about the quality of care and quality of life within a CLC or across many CLCs. For example, in comparing findings from VA's Office of the Medical Inspector, OIG, LTCI, and VA's quality indicator and quality measure data for one CLC, GAO found a pattern of deficiencies related to pain management. Without considering information from all available sources and comparing it across sources, VA headquarters cannot fully identify risks in CLCs, estimate the significance of the risks, or take actions to mitigate them.
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Background Medicare is the nation’s health insurance program for those aged 65 and older and certain disabled individuals. All beneficiaries may receive health care through Medicare’s traditional FFS arrangement. Alternatively, a beneficiary may enroll in a Medicare managed care plan if one is available in the county in which he or she lives. The vast majority of the nation’s 39 million Medicare beneficiaries remain in the traditional FFS program, but enrollment in Medicare managed care plans has grown rapidly in recent years. Currently, about 17 percent of all Medicare beneficiaries are enrolled in a managed care plan. Medicare Managed Care Before BBA As of December 1, 1998, about 90 percent of Medicare’s managed care enrollees were in risk plans. Such plans assumed the financial risk of providing care for a fixed monthly per-beneficiary fee paid by Medicare. Payment rates were determined for each county on the basis of the average adjusted per capita FFS spending in that county. Because these plans were assumed to be able to provide services more efficiently than the FFS sector, Medicare law set payment rates at 95 percent of the FFS amount in each county. These county rates were adjusted up or down on the basis of enrollees’ demographic characteristics, such as age and gender. The adjustments, known as risk adjustments, were intended to account for differences in beneficiaries’ expected health care costs. That is, payment rates for enrollees who were expected to require more medical care were supposed to be higher than the rates for healthier enrollees. This payment methodology has been criticized for a number of weaknesses. Basing payments on per capita FFS spending resulted in significant variation in capitation rates across counties that did not necessarily reflect differences in costs faced by managed care plans.Rural areas, which generally had much lower payment rates than urban areas, often had few or no managed care plans. In addition, years of research indicated that Medicare’s payment methodology and demographic risk adjusters resulted in excess payments to plans because they generally attracted healthier beneficiaries with below-average health care costs. Consequently, many managed care enrollees would have cost Medicare less if they had stayed in the FFS sector. In 1997 the Physician Payment Review Commission estimated that Medicare paid as much as $2 billion annually in excess payments to managed care plans. Historical Trends in Plan Participation and Enrollment In recent years, plan participation in Medicare has grown steadily (see fig. 1). Between 1987 and 1991, however, the number of plans dropped dramatically, from 165 to 93. The number of enrollees affected by these withdrawals was fairly small because many of the terminating plans had few or no enrollees. In fact, HMO enrollment has steadily increased each year, even during the years when the number of plans decreased. In the last 3 years, enrollment in Medicare plans has more than doubled, from about 3 million in 1995 to over 6 million in 1998. Managed care enrollment is not evenly distributed nationwide. A comparison of counties with Medicare managed care plan enrollment greater than 5 percent in 1995 and 1998 shows that enrollment has increased in many counties but remains concentrated in the West, Northeast, and Florida. (See fig. 2.) BBA Changes to Medicare Managed Care The BBA substantially changed the method used to set the payment rates for Medicare managed care plans. As of January 1, 1998, plan payments for each county are based on the highest rate resulting from three alternative methodologies: a minimum payment amount, a minimum increase over the previous year’s payment, or a blend of national and local FFS spending (see app. II for a description of the new payment methodology). The changes were intended to address criticisms of the original payment system by loosening the link between local FFS spending increases and managed care rate increases in each county. In addition, the establishment of a minimum payment rate was meant to encourage plans to offer services in rural areas, which have historically had low payment rates and few participating plans. The BBA also directed the Secretary of Health and Human Services to develop and implement a better risk-adjustment system based on beneficiaries’ health status by January 1, 2000. The BBA created the Medicare+Choice program, effective January 1, 1999, to broaden beneficiaries’ health plan options. In addition to HMOs, two new types of managed care organizations were allowed to participate in Medicare: provider-sponsored organizations (PSO) and preferred provider organizations (PPO). The BBA also permits private indemnity plans to serve Medicare beneficiaries and allows beneficiaries to participate in medical savings accounts. Traditional FFS Medicare remains available to all beneficiaries. Other BBA provisions changed the requirements for plans participating in Medicare+Choice. For example, plans are required to implement new and more comprehensive quality improvement programs. Compared with pre-BBA requirements, plans must also collect more information on such activities as appeals filed by enrollees and the number and type of the services provided by the plan; in addition, plans must report more information to HCFA and to beneficiaries. The BBA moved up the date for plans to submit their benefit package proposals from November 15 to May 1 of each year, allowing more lead time to coordinate the beneficiary information campaign. Additionally, the BBA eliminated the requirement that no more than 50 percent of a plan’s enrollment may consist of Medicare and Medicaid beneficiaries. The elimination of this restriction means that Medicare plans can now serve areas without first building a commercial base. Plans’ Concerns About BBA Changes While expressing support for many of the changes implemented under the Medicare+Choice program, officials from organizations representing managed care plans have also voiced a number of concerns about payment rates and the administrative burden created by some of the new requirements. They stated that the recent rate increases have not kept pace with plan costs or medical inflation. In both 1998 and 1999, many health plans received the minimum 2-percent payment increase. Managed care plans are also concerned about the impact that the new risk-adjustment methodology will have on payments. HCFA estimates that the new risk-adjustment methodology, which will be phased in over 5 years beginning in 2000, will reduce plan payments by $11.2 billion over the period from 2000 to 2004. This reduction is in addition to the Congressional Budget Office’s (CBO) estimates of $22.5 billion in savings between 1998 and 2002 from the BBA’s plan payment changes. In addition, officials from organizations representing managed care plans believed that many of the new BBA requirements, as implemented by HCFA, are overly prescriptive, too costly, and being phased in too quickly. HCFA has responded to some of these concerns, for example, by giving plans more flexibility in meeting the new quality improvement requirements. Plans would also prefer a later submission date for their benefit package proposals so they can base their proposals on more current data. They believed that the May 1 date—8 months before the start of the contract year—is too early. Plans have to meet a similar deadline in order to participate in the Federal Employees Health Benefits Plan (FEHBP): they must submit similar benefit and rate information by May 31 each year to allow FEHBP to coordinate an information campaign for federal employees. To respond to plan concerns, HCFA officials recently changed Medicare’s benefit proposal submission date to July 1, 1999, for the year 2000. Plans, however, continue to have concerns about these and other aspects of the new Medicare+Choice regulations and would like to see further revisions. Withdrawals Reduce Access to Plans for Some Beneficiaries, but New Plan Entries May Increase Access for Others In the fall of 1998, an unusually large number of plans decided to not renew their Medicare contracts for 1999 or to reduce the number of counties in which they offered services. As a result of these decisions, about 7 percent of all Medicare managed care enrollees had to switch to another plan or return to FFS. A small group of the affected beneficiaries was left with no choice but to return to FFS. While some plans were deciding to leave, however, a number of plans were applying to enter the program or expand their existing service areas. If HCFA approves all of these applications, the number of beneficiaries with access to a managed care plan could increase in 1999 compared with 1998. Withdrawals Reduced or Eliminated Managed Care Option for Some Plan Members As of December 1, 1998, there were 346 plans to serve Medicare beneficiaries in specific locations. Each plan represents a contract to serve a particular geographic area. Many managed care organizations, such as Aetna/U.S. Healthcare and Kaiser, operate numerous plans across the country. MCOs terminated 45 (or 13 percent) of these plans as of January 1, 1999. The vast majority of organizations involved in these terminations, however, continue to offer services to Medicare beneficiaries in other areas. For example, Aetna/U.S. Healthcare dropped its plans in Delaware and Maryland but continues to offer plans in California and Florida. An additional 54 plans (16 percent) reduced the number of counties in their service areas. Nonetheless, over 70 percent of the plans operating in December 1998 remain in Medicare with no reduction in their service areas. These withdrawal decisions affected about 407,000 enrollees who could not continue receiving services in their chosen plan. Instead, they had to either choose a new managed care plan (if one was available in their county) or switch to FFS. About 61,000 of these enrollees, or 1 percent of the total Medicare managed care population, lived in counties in which no other Medicare+Choice plan was offered. Even if another managed care plan was available, about 450 beneficiaries affected by the withdrawals had end-stage renal disease (ESRD) and thus had to return to FFS.Medicare prohibits beneficiaries with ESRD from joining a managed care plan, although they may stay in a plan if they develop the disease while enrolled. For all affected beneficiaries, plan withdrawals can be highly disruptive and costly. Those who return to FFS typically face higher out-of-pocket costs than they incurred as managed care enrollees. Beneficiaries who choose another plan may have to switch health care providers and may have different benefit coverage. Of the 957 counties that were covered by Medicare managed care plans as of September 1, 1998, 406 experienced at least one plan withdrawal; 94 of these counties were left with no Medicare plans. However, of all the instances of plans withdrawing from a county, about 37 percent were by plans withdrawing from a county with 100 or fewer managed care enrollees, including 43 instances in which a plan withdrew from a county with no enrollees. For example, Southeastern United Medigroup of Kentucky eliminated 11 counties from its service area, but had no enrollees in those counties. Consequently, while over 40 percent of counties with at least one plan experienced a plan withdrawal, only 7 percent of managed care enrollees were affected. New Plan Applications May Mitigate Effects of Withdrawals While some plans have chosen to curtail their participation in Medicare, new plans are entering the program and some existing plans are expanding the areas they serve. HCFA has approved applications from 10 new plans that were able to enroll beneficiaries as of January or February 1999. HCFA is also reviewing 30 additional new plan applications. In addition, 6 service area expansions had been approved and 14 other service area expansion applications were pending as of January 1999. The number of recently approved and pending applications suggests that there is still considerable plan interest in participating in Medicare. Furthermore, total managed care enrollment has increased following the drop that occurred in January 1999 and is now slightly higher than it was when the withdrawals took effect. The 10 new Medicare plans approved by HCFA as of January 20, 1999, offer services in Florida, Hawaii, Illinois, New Jersey, New Mexico, New York, Ohio, Oregon, Washington, West Virginia, and Wisconsin (fig. 3 shows the counties affected by the new plans and by plan withdrawals). Fourteen of the new or pending plans are applying to enter counties that previously had no Medicare managed care options. In 1998, for example, no plans were available in any of the counties in which the newly approved plans in Illinois and Oregon are offering services. One pending new plan has applied to offer services in 68 counties in Iowa, Minnesota, and South Dakota that did not have any plan as of September 1998. Figure 4 shows those counties that have pending new plan applications or pending service area expansions. Even with these newly approved plans, the number of counties with at least one Medicare managed care plan decreased from 957 in September 1998 to 883 in January 1999 (see table 1). However, if all pending new applications and expansions are approved, 1,045 counties will have at least one managed care plan, including 181 counties that had no such plans in 1998. These counties are identified in figure 5 along with those counties that no longer have a plan as a result of the withdrawals and service area reductions. Although it is too early to estimate the impact of the recently approved and pending applications on managed care enrollment, it is possible to calculate the number of beneficiaries that have a plan available in their counties. In September 1998, 28.4 million beneficiaries lived in counties served by at least 1 managed care plan (see table 2). In January 1999, that number dropped by almost 800,000 beneficiaries because of plan withdrawals and service area reductions. However, if all pending new applications and service area expansions are approved, slightly more beneficiaries in 1999 will have the option to join a managed care plan than did in 1998. Nonetheless, fewer beneficiaries will have more than one plan to choose from even if all the new applications are approved. Most of the new plan applications are from traditional HMOs. Thus far, HCFA has approved one PSO and no PPOs, medical savings accounts, or private FFS plans. However, it may be too early to assess how many of these new types of health plans will be interested in participating in the program. Medicare+Choice is still very new, and interim final regulations governing the program were just published in June 1998. Plans had little time to prepare and submit applications for 1999. The number and diversity of applications may increase in future years as plans become more familiar with the new program. However, officials from organizations representing managed care plans believe that the reduced growth in payments and increased administrative burden under Medicare+Choice may discourage future plan participation. Several Factors, Such as Payment, Enrollment, and Level of Competition, Are Associated With Plan Participation No one factor can explain why plans choose to participate in particular counties. Although plans obviously consider payment rates, many other factors also influence their business decisions. Our previous work showed that some areas, such as Boston, Massachusetts, had relatively high payment rates in 1993 but few managed care plans and enrollees. Other areas, such as a number of Oregon counties, had low payment rates but still had several managed care plans with high enrollment in 1995. The pattern of recent plan withdrawals suggests that several factors, including payment rates, may have influenced plans’ decisions. A plan was more likely to withdraw from a county where payment rates were low relative to other counties in the plan’s service area, the plan had been operating since 1992, the plan had low enrollment, or the plan was in a weak competitive position compared with other plans in the county. An unusually high number of plans also withdrew from FEHBP in 1998, suggesting that general market conditions may have played some role in the Medicare plan withdrawals. In some respects, the current Medicare withdrawals are similar to those that occurred in the late 1980s. At that time, many plans left Medicare because they were unable to attract members and were unprofitable. Other factors, such as plans’ inability to establish provider networks, also may have influenced the current withdrawals, but we were unable to quantify those effects. Plans Withdrew From Both High- and Low-Payment Counties Both before and after the recent withdrawals, managed care plans were much more likely to offer services in high-payment-rate counties than in low-payment-rate counties. In 1999, for example, 91 percent of counties with monthly payment rates over $694 are served by a managed care plan. By contrast, only 11 percent of counties with the minimum payment rate of approximately $380 are served by a managed care plan. High-payment-rate counties, however, were disproportionately affected by the withdrawals (see table 3). Over 90 percent of the counties with the highest payment rates experienced a plan withdrawal, compared with 34 percent of counties with the lowest payment rate. It is possible that some plans withdrew from high-payment-rate counties because they anticipated that these counties will receive below-average payment increases in the coming years. In fact, for those counties with payments based on a blend of national and local FFS spending as specified in the BBA, this payment blending provision (expected to be implemented for the first time in 2000) will result in smaller payment increases for higher-payment-rate counties and larger payment increases for lower-payment-rate counties (see app. II for more information on the BBA’s payment provisions). In addition, over the next 5 years, Medicare payments for graduate medical education (GME) will be eliminated from the blended rates. Because GME spending is concentrated in high-payment-rate counties, its removal will disproportionately slow payment rate growth in high-payment-rate counties. Although a smaller percentage of low-payment counties were affected by withdrawals compared with high-payment counties, enrollees living in the low-payment counties were more likely to be affected by the withdrawals. For example, 16 percent of enrollees who lived in counties with the lowest payment rates were affected by a plan withdrawal compared with 1 percent of enrollees in the highest-payment-rate counties (see table 4). These findings indicate that the plans that withdrew from high-payment counties had relatively few members. For plans that dropped selected counties from their service areas, payment rates appear to be one factor that influenced their decisions. In 1999, for example, PacifiCare of Arizona withdrew from four of the eight counties in its service area, withdrawing primarily from counties with the lowest payment rates. It continued to provide services in Pinal County, which had the highest payment of all the counties in its service area, but dropped Cochise County, where the payment rate was about 25 percent lower. To assess the impact of relative county payment rates on plans’ service area decisions, we compared the payment rate for each county in a plan’s service area with the highest county payment rate in that plan’s service area. We repeated our calculation for every plan. The results (shown in table 5) suggest that counties with payment rates that were low relative to the maximum county payment rate in a given service area were disproportionately affected by service area reductions. For example, while plans reduced their service areas in 5 percent of counties with payments that were between 90 and 100 percent of a plan’s maximum-payment-rate county, they reduced their service areas in 28 percent of counties that had payment rates between 50 and 60 percent of the plan’s maximum-payment- rate county. Enrollment, Competition Level, and Other Factors Also Influence Participation Decisions Several factors, in addition to payment rates, appear to be associated with a plan’s decision to withdraw from a specific county: short length of time operating in the county, low enrollment, and a weak competitive position compared with other Medicare plans in a county. The Medicare managed care program expanded rapidly in recent years; many new plans entered the program, and existing plans expanded the areas they served. The recent withdrawals may represent a market correction—some plans with low Medicare enrollment and in counties dominated by large plans may have concluded that they could not compete effectively and so withdrew. A number of plans left the Medicare program between 1988 and 1991 for similar reasons. Moreover, the market conditions that led to the recent withdrawals may not be unique to the Medicare program. The experience of FEHBP, which also sustained an unusually high number of plan withdrawals this year, suggests that plans may be reacting to general market conditions as well as program-specific ones. Plans were more likely to withdraw from counties in which they had less Medicare experience. We looked at all instances in which a Medicare plan provided services in a county as of February 1998 and determined how long the plan had participated in Medicare in that county. In less than 1 percent of the instances in which a plan entered a county for the first time between 1980 and 1986—that is, plans with more than 12 years of Medicare experience in a county—did the plan withdraw from that county in 1998 (see fig. 6). In contrast, plans were much more likely to withdraw from areas in which they had less than 7 years experience. For example, about one-third of the plans with 5 years of Medicare experience in a county withdrew from that county in 1998. The withdrawal pattern suggests a retrenchment from the rapid growth of Medicare managed care that began in 1994. Plans that had difficulty attracting or retaining enrollees in a county were also more likely to withdraw from that county (see table 6). In almost a third of the instances in which a plan had no enrollees in a county, the plan withdrew from that county. In contrast, in only 12 percent of the instances in which a plan had more than 1,000 enrollees in a county did the plan withdraw. A plan was also more likely to withdraw from a county if it faced larger competitors. Specifically, a plan was more likely to withdraw from a county if its Medicare market share in that county was small relative to the market share of the plan with the highest Medicare enrollment in the county. The bigger the difference in market shares, the more likely the smaller plan was to withdraw from the county. Moreover, the smaller plan was more likely to withdraw if the rest of the market was dominated by a few firms rather than divided up among many firms. Some plans may have withdrawn from counties where they found it difficult to build or maintain provider networks. For example, a Medicare HMO in a rural area of North Dakota withdrew from the program when its hospital provider discontinued its contract with the plan. A HCFA official also told us that the two plans that withdrew from Utah made their decisions early in 1998, before the publication of the interim final regulations implementing Medicare+Choice. According to the official, the plans withdrew because they could not contract with enough physicians to maintain adequate provider networks. Physicians wanted higher reimbursements than the plan was willing or able to pay. Officials from organizations that represent managed care plans have also cited the administrative burden of the new Medicare+Choice requirements as a significant reason for plan withdrawal decisions. For the most part, however, this burden was not so great as to induce MCOs to leave the Medicare program entirely. Many national MCOs, such as Aetna/U.S. Healthcare or Kaiser, offer numerous plans across the country. Nearly all of the MCOs that terminated a Medicare plan in one area continued to operate Medicare plans in other areas. Nonetheless, it may be that the increased administrative requirements, coupled with the expected slow growth in payments and the uncertainties associated with a new risk-adjustment methodology, affected some plans’ participation decisions. Finally, an anomaly related to the transition from the previous Medicare managed care program to Medicare+Choice may have played a role in the unusually high number of withdrawals witnessed this year. Under the previous managed care program, if a plan withdrew from a county, it could not reenter that area for 5 years. The BBA included a similar provision for Medicare+Choice plans, but did not make it retroactive to include plans with contracts under the earlier program. Plans that withdrew before January 1, 1999, have by definition never been Medicare+Choice plans. Consequently, these plans do not face the exclusion period and can reenter any county without waiting 5 years. The effect of this provision may have been to concentrate some of the plan withdrawals in 1998. Some plans may have viewed this year as a one-time opportunity to pull back from the program while they waited to see what future changes might bring. Small Reductions Seen in Availability of Some Benefits Medicare managed care plans have typically offered more generous benefits—such as coverage for prescription drugs, dental care, and hearing exams—than those available in the FFS program. Although the extent of extra benefits varies by plan, they are more commonly offered in high-payment counties. Since the BBA payment changes were implemented, overall beneficiary access to plans that offer certain additional benefits declined slightly. However, beneficiaries who live in low-payment-rate counties experienced greater decreases in access between 1997 and 1999 than the average beneficiary. While the current benefit changes are having a greater impact on beneficiaries in low-payment counties, the BBA constraints on plan payment increases may lead plans to offer less generous benefits in the future to all beneficiaries than they have in the past. Because of limitations in the available data sources, we can only report on whether a plan offered a particular benefit. The scope of the actual benefit may vary significantly among plans and over time. For example, while two plans may offer coverage of prescription drugs, one plan may have a dollar cap on the benefit and offer coverage only for plan-approved drugs, while the second plan may cover drugs without any limitations. Our study did not distinguish between these two different benefit levels. Plans in counties with lower payments have generally offered fewer additional benefits; as a result, fewer beneficiaries living in lower-payment counties have had the opportunity to join plans that offer these benefits compared with beneficiaries living in higher-payment counties. In 1997, for example, only 61 percent of beneficiaries living in counties with payments under $330 (and with at least one plan) had access to a Medicare plan that offered prescription drug coverage, while 100 percent of beneficiaries living in counties with payments over $658 had such access (see fig. 7). Benefit Changes Had Larger Impact on Beneficiaries in Low-Payment Counties In comparing 1997 and 1999 plan benefit packages for beneficiaries living in counties with at least one managed care plan, we found that access to plans offering different additional benefits decreased slightly after the BBA payment changes (see fig. 8). For example, 71 percent of beneficiaries had access to foot care in 1997, but only 64 percent had access to such coverage in 1999. Access to physical examinations and immunizations did not change. The only benefit for which beneficiary access increased was prescription drug coverage—a benefit valued highly by beneficiaries who enroll in plans. Plans may be choosing to offer a different mix of benefits—substituting prescription drug coverage for other services. It is also possible that the drug benefit plans are offering is more limited; for example, it may have a lower maximum dollar amount that the plan will pay. Most beneficiaries with access to a managed care plan can enroll without paying a separate monthly premium. The percentage of beneficiaries living in counties where plans require enrollees to pay a monthly premium increased slightly from 12 percent in 1997 to 15 percent in 1999 (see fig. 9). In addition, the percentage of beneficiaries living in counties where the minimum plan premium was over $40 increased slightly. Although the changes in beneficiary access to plans offering additional benefits were relatively small, these benefit reductions were concentrated in low-payment-rate counties (see fig. 10). Access to plans offering additional benefits remained nearly constant for beneficiaries in high-payment-rate counties, although we do not know whether plans changed the scope of these benefits. For example, the percentage of beneficiaries in the lowest-payment-rate category with access to Medicare plans offering eye exams decreased from 98 percent in 1997 to 72 percent in 1999. In contrast, all beneficiaries living in the highest-payment-rate counties could obtain covered eye exams from a managed care plan in both years. Access to a plan offering prescription drug coverage, the only benefit for which overall beneficiary access increased between 1997 and 1999, decreased slightly for beneficiaries living in the lowest-payment-rate counties. The decrease in access to plans offering additional benefits in the lowest-payment counties is interesting because these counties experienced an average payment increase of 23 percent between 1997 and 1999 compared with a 4-percent increase for all other counties. It is unclear why coverage of additional benefits would decrease in the lowest-payment counties, given their relatively large payment increase in the past 2 years and higher-than-average payment increases expected in the future. Without data on the level of benefits being offered, the picture is incomplete. Plans in higher-payment-rate counties typically have more competitors than plans in lower-payment counties. Faced with more competition, plans in high-payment-rate counties may prefer to reduce benefit levels rather than eliminate benefit categories altogether. For example, a plan may lower the dollar limit on a prescription drug benefit or impose certain restrictions on the benefit. Plans facing less competition in lower-payment-rate counties may be more willing to eliminate benefits in the face of rising costs. Plans Signal Desire to Revise 1999 Benefit Offerings BBA constraints on plan payment increases may lead to more global reductions in future plan benefits. One indication of this potential effect is the effort by plans to revise their 1999 benefit packages. In 1998, plans were required to submit their proposed 1999 benefit packages to HCFA much earlier than in previous years and before HCFA had published the regulations implementing the new Medicare+Choice requirements. After HCFA published the new regulations in June 1998, some plans asked to revise their 1999 benefit packages. They argued that their initial submissions did not include the estimated costs of complying with the new regulations. In addition, plans noted that health care costs, especially prescription drug costs, had grown much faster than they had anticipated earlier. HCFA did not allow plans to revise their 1999 benefit packages because doing so might undermine the benefit submissions process. Plans normally establish benefit packages before they know what their competitors will offer. HCFA officials believe this uncertainty may motivate plans to offer more generous benefits. If plans were allowed to revise their benefit packages after they knew what other plans were offering, HCFA was concerned that plans whose original benefit packages were more generous than their competitors’ might reduce enrollee benefits or raise premiums. In addition, it would have been difficult for HCFA to review and approve benefit changes for all plans and still meet the statutory deadline for providing beneficiaries with comparative plan information. As a result of HCFA’s decision, some plans may have withdrawn from the program because they could not afford to provide the benefit packages they initially proposed. Other plans remained in the program but may revise their benefit packages in the future. Conclusions The Medicare provisions of the BBA were intended to control the growth in Medicare expenditures and offer beneficiaries more health plan options. Toward those ends, the BBA slowed the rate of growth in FFS payments to certain health care providers, such as hospitals and physicians, and mandated new payment methodologies for other FFS providers, such as home health agencies. At the same time, the BBA addressed a number of known problems with the Medicare managed care program. It revised plan payments to address significant overpayment problems and to encourage managed care plans to offer services in areas with few plans. It also allowed new types of plans to participate in Medicare and imposed new requirements to ensure the quality of care provided by plans. When plans announced they would be withdrawing from Medicare or reducing the areas in which they offered services, however, some observers expressed concern about the future of Medicare managed care and debated whether certain provisions established by the BBA should be revised. While future plan participation should be monitored, it is premature to conclude that Medicare+Choice must be radically revised to ensure the success of Medicare managed care. Enrollees affected by the withdrawals had to choose another plan or return to FFS, but only 1 percent of previously covered managed care enrollees were left without any Medicare+Choice plans. At the same time, HCFA has approved a small number of new plans and is reviewing 30 new plan applications, indicating continued plan interest in participating in Medicare. Some of these new plans, if approved, would offer services in counties that previously had few or no managed care plans. The current movement of plans in and out of Medicare may be primarily the normal reaction of plans to market competition and conditions. While the new payment rates and regulations were undoubtedly considered by plans in making their participation decisions, other factors associated with plan withdrawals—recent entry in the county, low enrollment, and higher levels of competition—suggest that a number of Medicare plans withdrew from markets in which they had difficulty competing. During the early years of the Medicare managed care program, a number of plans with low enrollment that were not operating profitably also withdrew from the program. The BBA transformed the Medicare risk program into Medicare+Choice with the goal of taking advantage of the efficiencies and choices that exist in the private managed care market. Medicare may not be able to harness these benefits without also experiencing some of the adjustments that occur in the health care market. Agency Comments and Our Evaluation In commenting on our report, HCFA found our analysis of plan participation in the Medicare+Choice program to be sound and agreed with our findings and conclusions. HCFA emphasized that recent trends in the overall managed care market, such as low profit margins, increased competition, and plan consolidations, played a major role in plans’ Medicare+Choice participation decisions. HCFA also noted that the withdrawal of many plans from FEHBP suggests the significance of overall market trends in plans’ decision-making. In its comments, HCFA listed the Medicare+Choice program changes it has proposed to (1) protect beneficiaries affected by plan withdrawals and (2) promote program stability by alleviating plans’ concerns regarding certain administrative requirements. (HCFA’s comments appear in app. III.) HCFA also provided us with technical comments, which we incorporated in the report where appropriate. We also provided a copy of the draft to representatives of the American Association of Health Plans (AAHP) and the Health Insurance Association of America (HIAA). Both groups expressed concern that our report understates the role of reductions in payment increases and the heavier administrative burden created by the Medicare+Choice regulations on the recent plan withdrawals. Similarly, they disagree with our conclusion that plans may be responding to current market conditions and competition. Instead, they believe that significant changes in program payments and regulations are needed to ensure future plan and beneficiary participation in Medicare+Choice. (AAHP’s and HIAA’s comments appear in apps. IV and V.) Both groups also provided technical comments, which we incorporated where appropriate. We recognize that the payment rates and administrative requirements of Medicare+Choice may have played a role in the decisions of some plans to withdraw from a county, particularly plans with low enrollment. However, we also believe that plan participation decisions are based on a number of factors. The relative importance of any single factor can be difficult to determine, in part because the significance of its role may vary among plans. We agree with AAHP and HIAA that plan participation in Medicare+Choice should be monitored, but we continue to believe that it is premature to conclude that the program needs to be radically revised. We are sending copies of this report to the Honorable Donna E. Shalala, Secretary of Health and Human Services, and other interested parties. We will make copies available to others on request. If you or your staffs have any questions about this report, please call me at (202) 512-7114 or James Cosgrove at (202) 512-7029. Other major contributors to this report include Kathryn Linehan, Susanne Seagrave, Patricia Spellman, and Michelle St. Pierre. Scope, Methodology, and Data Sources We reviewed pertinent laws, regulations, HCFA policies, and research by others to obtain information on the Medicare+Choice program, including its new payment methodology and new requirements for plans. To obtain different perspectives on why plans withdrew or reduced their service areas, we interviewed officials at HCFA’s Center for Health Plans and Providers and representatives from the American Association of Health Plans and the Health Insurance Association of America. We conducted our study from December 1998 to March 1999 in accordance with generally accepted government auditing standards; however, we did not independently verify data obtained from HCFA. To identify counties with a risk plan in 1998, we used HCFA’s September 1998 Medicare Managed Care Geographic Service Area Report (GSAR). We excluded cost, demonstration, and health care prepayment plans from our analyses. In cases in which the contract type was not identified with the plan name and contract number, this information was verified using the September 1998 Medicare Managed Care Market Penetration for All Medicare Plan Contractors—Quarterly State/County/Plan Data Files, September 1998 Medicare Managed Care Contract and Segment Service Area File, or HCFA’s Plan Information Control System. The GSAR provides a list of the service areas for all risk and cost managed care contracts. The count of enrollees by plan by county in a plan’s service area as of September 1998 was obtained from the State/County/Plan Penetration Files. To determine the effects of competitive market forces on plans’ decisions to withdraw from particular counties, we used this enrollee information to construct market shares for each plan in each county. We then used a linear probability regression model to analyze the market share information. To analyze the changes in plan participation in the Medicare+Choice program, we used HCFA data on the 1999 Medicare+Choice plan contracts. HCFA provided us with a list of plans that withdrew from the program or reduced their service areas as of January 1, 1998, and the counties and number of enrollees affected. We used this source to determine enrollees affected by withdrawing plans, because data from the State/County/Plan Penetration Files would have overstated the number of enrollees affected by service area reductions in those cases where a plan withdrew from only part of a county. HCFA also provided a list of new Medicare+Choice plans and service area expansion applications approved and under review as of January 1999 and the counties affected. We noted some inconsistencies between the service areas listed on the GSAR and the list of contract nonrenewals and service area reductions. To improve the accuracy of the GSAR, counties were added if they appeared on the contract nonrenewal/service area reduction file and were listed on the Plan Information Control System as part of a plan’s contracted service area but excluded from the original GSAR. We excluded Guam, Puerto Rico, and the Virgin Islands from the county-level analyses. In some of the analyses, the same counties are defined as separate entities if plans can contract with them separately. For example, Los Angeles County, California, is divided into Los Angeles - 1 and Los Angeles - 2; they are counted separately because plans may contract with them separately. The independent cities of Virginia are also counted as separate counties because their payment rates differ from those of their counties, and plans contract to serve these areas as if they were independent counties. County-level payment rate information for 1990 to 1999 for Medicare risk plans and Medicare+Choice plans, including payment reductions resulting from the removal of graduate medical education (GME) spending, was obtained from the HCFA Web site. In addition, we obtained a February 1998 file from HCFA’s Office of Information Systems containing historical county-level information on the year that plans first entered individual counties. There are 29 cases in which plans that withdrew from a particular county in January 1999 are not listed in the historical county-level information as ever having served that county. Some plans may have started serving these counties after February 1998, or the information might have been inadvertently omitted from the historical county-level information. As a result, the total number of plan/county combinations affected by the recent withdrawals contained in this file is incomplete. We obtained information on the number of Medicare beneficiaries by county and Medicare managed care enrollees by county and plan from HCFA. The September 1998 Medicare Managed Care Market Penetration for All Medicare Plan Contractors—Quarterly State/County Data Files showed the number of Medicare beneficiaries by county. This file was used to determine the net effect of the plan withdrawals, new plans, and service area expansions on Medicare beneficiary access to 1999 Medicare+Choice plans and benefits. Similarly, 1997 beneficiaries by county were counted from the December 1997 State/County Penetration Files. Medicare managed care plan enrollment for 1999 was obtained from the September 1998 State/County/Plan Penetration Files. To obtain information on benefits offered by plans in 1999, we used the 1999 Medicare Compare database and the January 1999 Medicare Managed Care Monthly Report. Merging these two sources provided us with plan benefits at a county level. We compared the 1999 benefits with 1997 benefits to identify any changes. We chose 1997 because it was the year before the implementation of the BBA changes. To obtain information on benefits offered by plans in 1997, we used the December 1997 GSAR, the December 1997 Medicare Managed Care Monthly Report, and the 1997 adjusted community rate submissions. Merging these three sources gave us benefits provided by each plan at a county level. Where a plan provided flexible benefits to a county in 1997, those benefits were used in the analyses. Of the 307 risk plans that contracted with HCFA in December 1997, we did not have benefit information for 10 plans. These 10 plans were excluded from both the benefit and premium analyses. Of the 311 plans contracting with HCFA in January 1999, 5 plans were excluded from the benefit analysis and 8 plans were excluded from the premium analysis because of a lack of benefit or premium information. BBA Changes to Plan Payment Methodology The BBA changed how payments to Medicare managed care plans were calculated in response to criticisms that the rates (1) overcompensated many plans for the beneficiaries they served, (2) varied greatly among counties, and (3) were too low in certain rural areas. This appendix describes the pre-BBA and post-BBA payment methodologies. Plan Payments Before the BBA Before the BBA changed the rate-setting process in 1998, the monthly amount Medicare paid managed care plans for each plan enrollee was directly tied to local spending in the FFS program. Although the actual rate-setting formula was complex, the methodology, in effect, was as follows. Each year, HCFA estimated how much it would spend in each county to serve the “average” FFS Medicare beneficiary. Because managed care plans were assumed to be more efficient than FFS, Medicare set plan payments in each county at 95 percent of the FFS amount. Payments for individual beneficiaries were based on county of residence. Because some beneficiaries were expected to require more health care services than others, HCFA adjusted the payment for each beneficiary up or down from the county payment depending on the beneficiary’s age, sex, and eligibility for Medicaid and whether the beneficiary was a resident in an institution. In 1997, the average county payment was $395 per month. This average increases to $468 when weighted by the number of beneficiaries in each county. From county to county, however, the rates vary dramatically. For example, a plan that served an average beneficiary in Arthur County, Nebraska, would have received about $221 per month. A plan that served a similar beneficiary in Richmond County (Staten Island), New York, would have received approximately $767. The wide variation in capitation rates among counties reflected the underlying variation in Medicare per-beneficiary FFS spending, which in turn was the result of local differences in the price and use of medical services. New Rate-Setting Process Under the BBA The BBA loosened the link between the payment rate in each county and the average FFS spending in that county. This change was made to reduce the wide disparity in payment rates that existed under the previous system. Payment rates in each county are now set at the highest of three possible payment rates: a minimum or “floor” rate, a minimum increase rate, and a “blended” rate. The BBA established a floor rate of $367 in 1998. The floor rate will be increased each year to reflect overall growth in Medicare spending. The BBA also established a minimum rate increase of at least 2 percent each year in every county. Finally, the BBA specified a blended rate for each county that reflects a combination of local and national average FFS spending. The blended rate is designed to reduce payment rate variation among counties. Blending will reduce payment increases in counties whose average FFS spending has been higher than the national average and will create larger payment increases in counties whose average FFS spending has been lower than the national average. Over time, the blended rate will rely more heavily on the national rate and less on the local rate. In 1998 and 1999, plans received either the floor rate or a 2-percent increase over their payment from the previous year. Because of a BBA requirement to keep overall county payments budget neutral to what they would have been without the legislation, no county received the blended rate in 1998 or 1999. For the year 2000, however, payment for 63 percent of counties will be based on the blended rate. Comments From the Health Care Financing Administration Comments From the Health Insurance Association of America Comments From the American Association of Health Plans The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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Pursuant to a congressional request, GAO provided information on managed care plans' decisions to leave the Medicare program or to reduce the geographic areas that they serve, focusing on: (1) plans that receive capitated payments; (2) the patterns of plan and beneficiary participation in managed care; (3) factors associated with plans' decisions to enter or leave the Medicare Choice program; and (4) changes in plans' benefit packages and premiums. GAO noted that: (1) although an unusually large number of managed care plans left the Medicare program, a number of new plans have demonstrated their interest in serving beneficiaries by applying to enter the program or expanding the areas in which they offer services; (2) last fall, shortly before Medicare Choice was implemented, 45 plans announced they would not renew their Medicare contracts and 54 others announced they would reduce the geographic areas in which they provided services; (3) about 407,000 enrollees had to choose a new managed care plan or switch to fee-for-service; (4) at the same time, however, several new plans applied to enter the program; (5) thus far, the Health Care Financing Administration has approved 10 new plans for 1999 and is reviewing 30 additional plan applications; (6) some of the pending plan applications are for counties that previously had few or no managed care plans; (7) plan withdrawals cannot be traced to a single cause; a variety of factors appear to be associated with plans' participation decisions; (8) payment level is one factor that influences where plans offer services, but withdrawals were not limited to counties with low payments; (9) when a plan reduced its service area, however, GAO found that counties with low payment rates relative to payments in the rest of a plan's service area were more likely to experience a withdrawal than counties with higher payment rates; (10) a review of other factors suggests that a portion of the withdrawals may have been the result of plans deciding that they were unable to compete effectively in certain areas; (11) for example, plans were more likely to withdraw from counties where they had begun operating since 1992, where they had attracted fewer enrollees, or where they faced larger competitors; (12) some plans have indicated that they withdrew from areas where they were unsuccessful in establishing sufficient provider networks; (13) a broad comparison of plan benefit packages from 1997 and 1999 indicates modest reductions in the inclusion of certain benefits; (14) in 1999, a slightly greater percentage of beneficiaries can join a plan that offers prescription drug coverage, while a slightly smaller percentage of beneficiaries have access to a plan offering dental care, hearing exams, and foot care; (15) beneficiaries living in the lowest-payment-rate areas experienced greater decreases in access than the average beneficiary; and (16) those living in the lowest payment areas experienced a decrease in access to plans offering prescription drug benefits, while beneficiaries in higher payment areas saw an increase in access to plans offering drug benefits.
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The plaintiff in error filed his petition on April 26, 1884, in the circuit court of the city of Richmond, against Greenhow, the defendant, as treasurer of the city of Richmond, praying for a rule nisi, commanding the said Greenhow to show cause why a peremptory mandamus should not be awarded to the plaintiff, commanding the said treasurer to issue to the petitioner a certificate in writing, stating that he had made the deposit required by law in payment of his license tax, was a sample merchant in said city. The petition set forth that the tender made in payment of this deposit consisted of coupons cut from bonds issued by the state of Virginia, and, by contract with the state therein declared, receivable in payment of all taxes, debts, demands, and dues to the state, and that the tender was refused by the treasurer, and a certificate of deposit withheld, because the 112th section of an act of the general assembly of Virginia, approved March 15, 1884, for the purpose of assessing taxes on persons, property, and incomes and licenses, requires that all license taxes shall be paid in gold or silver coin, United States treasury notes, or national bank-notes, and not in coupons; and another act of the general assembly of the state, approved March 7, 1884, to regulate the granting of licenses, likewise forbids the payment of license taxes in coupons. The alternative writ prayed for was denied by the circuit court of the city of Richmond, and, on a petition for a writ of error, its judgment dismissing the petition therefor was affirmed by the supreme court of appeals of the state. This being a case in which, by mandamus, the plaintiff in error seeks to compel the officers of the state of Virginia specifically to receive coupons instead of money in payment of license taxes, it comes within the exact terms of the decision of a majority of this court in Antoni v. Greenhow, 107 U. S. 769, S. C. 2 SUP. CT. REP. 91, according to which the plaintiff in error is remitted to the remedy provided by the act of January 14, 1882, entitled 'An act to prevent frauds upon the common wealth and the holders of her securities in the collection and disbursement of revenues.' The judgment of the supreme court of appeals of Virginia is therefore affirmed. FIELD and HARLAN, JJ., adhere to the views expressed in their dissenting opinions in Antoni v. Greenhow, but they agree that the principles announced by the majority in that case, if applied to the present case, require an affirmance of the judgment below.
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United States, it may be sued by its own citizens. This would be to deprive the State, with regard to its own citizens, of its sovereign right of exemption from suit. It seems to us that the absurdity of this proposition is its sufficient answer. Unless the State chooses to allow itself to be sued, it cannot be sued; it has this prerogative if no other. It is admitted, in point of form, that it ca'inot be sued by the citizens of other States, or of foreign States, because of the Eleventh Amendment. The whole argument of the opinions of the majority of the court is directed to the object of showing that the State is not sued in the suits under consideration. We do not remember that it is anywhere contended that the State can be sued by its own citizens, against its own law, merely because the Eleventh Amendment does not in terms extend to that case. In our judgment none of these suits can be maintained, for the reason that they are in substance and effect suits against the State of Virginia. We have not thought it necessary or proper to make any -emarks on the moral aspects of the case. If Virginia or any other State has the prerogative of exemption from judicial prosecution, and of determining her owu public policy with regard to the mode of redeeming her obligations, it is not for this court, when considering the question of her constitutional rights% to pass any judgment upon the propriety of her conduct on the one side or on the other.
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Mr Chief Justice Marshall considered the certificate evidence that there were such laws as those stated in it; but the laws should be produced. He would have been willing that the paper should be read, unless objected to; but being objected to, it was not evidence. Mr Whipple then offered in evidence, to show the course of legislation in Rhode Island in particular cases, a copy of the proceedings of the legislature upon petitions presented for relief in the cases stated in them. The copy of the proceedings in each case was certified by Henry Bowen, secretary of state of the state of Rhode Island, and to the whole was subjoined the certificate of Lemuel Arnold, 'governor, captain-general and commander-in-chief of the state of Rhode Island and Providence Plantations,' under the seal of the state, that 'Henry Bowen was secretary of the state,' duly elected and qualified according to law. The paper thus certified and offered in evidence, contained a copy of a petition to the legislature of Rhode Island, dated New York, 29th November 1784, signed by 'Grace Babcock, of Philipsborough in the state of New York, widow, relict of Luke Babcock, clerk.' The petitioner prayed the legislature to authorise her to dispose of a mortgage held by her husband at the time of his decease, on one fourth part of a lot and dwelling house in New York. Luke Babcock left three minor children. On the 3d March 1785, the prayer of the petition was granted; and by resolution it was declared that a deed of the mortgaged premises should 'convey to the purchaser all the right and title of said Luke Babcock, at the time of his decease, in and unto the said premises.' 2. Also the petition of John Read of the county of Bristol, in the state of Massachusetts, presented on the last Monday in June 1785. John Read was the executor of William Read of the same county and state, deceased. The petition stated, that the property of the deceased had, on the report of a commissioner, been adjudged capable of paying no more than twelve shillings and sixpence in the pound. That an attachment had been issued against the real estate of the deceased in Newport, and against his heirs and devisees by one of the creditors, for money alleged to be due to him, and a judgment obtained thereon. The petition prayed that the action so brought might be stayed, the demand of the plaintiff should be 'examined; and for such sum as should be found due to him, he may be admitted to receive his proportion with the other creditors of the said estate;' and that such part of the real estate of William Read, situate in the county of Newport, should be sold, as should be sufficient to pay his debts, under the direction, and with the approbation of the judge of probate for the city of Newport, or the town council in which the estate laid; and that the deed or deeds for the same, should convey to the purchaser a good and indefeasible estate of inheritance in fee simple. The legislature, by a resolution passed July 1, 1785, granted the prayer of the petition; and also 'resolved, with the consent of the attaching creditor, that the proceeding on his aforesaid action be stayed.' 3. Also the petition of Lucy Jenks, 'widow and relict of Gideon Jenks of Brookfield, in the county of Worcester, Massachusetts, deceased, and administratrix to the said deceased's estate.' The petition stated that 'there were debts against the estate of the deceased, amounting to two hundred and twenty-eight pounds sixteen shillings and sixpence, and that selling the personal estate to discharge them, would greatly distress the petitioner and her children, being eleven in number, all in their minority excepting one daughter.' The petition prayed leave to dispose of all the real estate of the deceased in North Providence, in the county of Providence, to be appropriated towards the payment of the said debts, as recommended by the judge of probate for the county of Worcester aforesaid. On the 8th September 1790, the legislature voted 'that the petition be received, and the prayer thereof be granted.' The proceedings of the legislature of Rhode Island, in six other cases, on the petitions of individuals in matters of a private nature, were also certified in the same manner. Mr Webster, for the plaintiffs, objected to the admission of the papers as evidence. They were private acts; and if they are to be given in evidence, it would be necessary and proper for the plaintiffs to have an opportunity to examine into the facts of the cases to which the laws refer. Mr Wirt, for the defendant, contended, that the evidence was legal. There is no written constitution in Rhode Island, and the proceedings now offered are adduced to show the law and practice of the state by her highest tribunal, in the full and undoubted exercise of the powers entrusted to it. The judges having severally expressed their opinion, Mr Chief Justice MARSHALL said, the evidence objected to is understood to be offered to prove that certain proceedings have been had at different times in the legislature of Rhode Island, on private petitions of a similar nature with that before the court; and that there have been certain usages and proceedings in the legislature of Rhode Island, in regard to the administration and sale of the estates of deceased persons for their debts, which will establish, that it has for a long period by usage, and righfully, exercised the authority contended for by the defendant. The public laws of a state may without question be read in this court; and the exercise of any authority which they contain, may be deduced historically from them: but private laws, and special proceedings of the character spoken of, are governed by a different rule. They are matters of fact, to be proved as such in the ordinary manner. This court cannot go into an inquiry as to the existence of such facts upon a writ of error, if they are not found on the record. The evidence, if not objected to, might have been heard; but since it is controverted, the matter of fact must be ascertained in the circuit court. Mr Justice BALDWIN dissented. [Upon this decision, the parties consented to remand the cause to the circuit court for further inquiry into the facts.]
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A paper certified by the secretary of state of Rhode Island, and by the governor, under the seal of the state, stating that certain laws were passed by the legislature of that state, and that certain matters were cognizable by the general assembly of Rhode Island, and of the practice of the assembly of Rhode Island in eases of a particular description; is not evidence on ihe argument ofa cause before this court. Usage and custom sheovld be proved in the circuit court on the trial of the case in which it may be referred to; and evidence nf the same is not admissible in this court, if not found in the record. A certificate from the secretary ofstate of the state of Rhode Island, also certified by the governor under the seal of the state, was offered to prove that certain proceedings have been had at different times in the legislature of Rhode Island on private petitions, relative to the administration and sale of theestates of deceased persons for the payment of their debts; and that there have been certain usages and proceedihgs in the legislature of that state in.regard to the same. By the court: the prblic laws of a state may, without question, be read in this cnurtt and the exercise of any authority Wihich they contain may be derived historically from them. But private laws, and special proceedings of this cha. racter, are governed by a different rule. They are matters of fact, to be proved as such in the ordinary mannzr. This court cannot go into an inquiry as to the existence of such facts upon a writ of .error, if they are not found in the record.
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Petitioner was tried and convicted of knowingly transporting a woman in interstate commerce for the purpose of prostitution, in violation of the White Slave Traffic Act, 18 U.S.C. § 2421, 18 U.S.C.A. § 2421. At the trial, the woman, who had since the date of the offense married the petitioner, was ordered, over her objection and that of the petitioner, to testify on behalf of the prosecution.1 The Court of Appeals, on appeal from a judgment of conviction, affirmed the ruling of the District Court. 263 F.2d 304. As the case presented significant issues concerning the scope and nature of the privilege against adverse spousal testimony, treated last Term in Hawkins v. United States, 358 U.S. 74, 79 S.Ct. 136, 3 L.Ed.2d 125, we granted certiorari. 360 U.S. 908, 79 S.Ct. 1299, 3 L.Ed.2d 1259. We affirm the judgment. First. Our decision in Hawkins established, for the federal courts, the continued validity of the common-law rule of evidence ordinarily permitting a party to exclude the adverse testimony of his or her spouse. However, as that case expressly acknowledged, the common law has long recognized an exception in the case of certain kinds of offenses committed by the party against his spouse. Id., 358 U.S. at page 75, 79 S.Ct. at page 137, citing Stein v. Bowman, 13 Pet. 209, 221, 10 L.Ed. 129. Exploration of the precise breadth of this exception, a matter of some uncertainty, see 8 Wigmore, Evidence (3d ed.), § 2239, can await a case where it is necessary. For present purposes it is enough to note that every Court of Appeals which has considered the specific question now holds that the exception, and not the rule, applies to a Mann Act prosecution, where the defendant's wife was the victim of the offense.2 Such unanimity with respect to a rule of evidence lends weighty credentials to that view. While this Court has never before decided the question, we now unhesitatingly approve the rule followed in five different Circuits. We need not embark upon an extended consideration of the asserted bases for the spousal privilege (see Hawkins, supra, 358 U.S. at pages 77—78, 79 S.Ct. at pages 138—139; Wigmore, op. cit., supra, § 2228(3)) and an appraisal of the applicability of each here, id., § 2239, for it cannot be seriously argued that one who has committed this 'shameless offense against wifehood,' id., at p. 257, should be permitted to prevent his wife from testifying to the crime by invoking an interest founded on the marital relation or the desire of the law to protect it. Petitioner's attempt to prevent his wife from testifying, by invoking an asserted privilege of his own, was properly rejected. Second. The witness-wife, however, did not testify willingly, but objected to being questioned by the prosecution, and gave evidence only upon the ruling of the District Court denying her claimed privilege not to testify. We therefore consider the correctness of that ruling.3 The United States argues that, once having held, as we do, that in such a case as this the petitioner's wife could not be prevented from testifying voluntarily, Hawkins establishes that she may be compelled to testify. For, it is said, that case specifically rejected any distinction between voluntary and compelled testimony. 358 U.S. at page 77, 79 S.Ct. at page 138. This argument fails to take account of the setting of our decision in Hawkins. To say that a witness-spouse may be prevented from testifying voluntarily simply means that the party has a privilege to exclude the testimony;4 when, on the other hand, the spouse may not be compelled to testify against her will, it is the witness who is accorded a privilege. In Hawkins, the Government took the position that the spousal privilege should be that of the witness, and not that of the party, so that while the wife could decline to testify, she could not be prevented from giving evidence if she elected not to claim a privilege which, it was said, belonged to her alone. Brief for the United States, No. 20, O.T.1958, pp. 22 43. In declining to hold that the party had no privilege, we manifestly did not thereby repudiate the privilege of the witness. While the question has not often arisen, it has apparently been generally assumed that the privilege resided in the witness as well as in the party. Hawkins referred to 'a rule which bars the testimony of one spouse against the other unless both consent,' supra, 358 U.S. at page 78, 79 S.Ct. at page 138. (Emphasis supplied.) See Stein v. Bowman, supra, 13 Pet. at page 223 (wife cannot 'by force of authority be compelled to state facts in evidence'); United States v. Mitchell, supra, 137 F.2d at page 1008 ('the better view is that the privilege is that of either spouse who chooses to claim it'); Wigmore, op. cit., supra, § 2241; McCormick, Evidence, § 66, n. 3. In its Hawkins brief, the Government, while calling for the abolition of the party's privilege, urged that the commonlaw development could be explained, and its policies fully vindicated, by recognition of the privilege of the witness. Brief, pp. 22—25, 33, 42—43; see Hawkins, supra, 358 U.S. at pages 77, and concurring opinion, at page 82, 79 S.Ct. at pages 139, 141. At least some of the bases of the party's privilege are in reason applicable to that of the witness. As Wigmore puts it, op. cit., supra, at p. 264: '(W)hile the defendant-husband is entitled to be protected against condemnation through the wife's testimony, the witness-wife is also entitled to be protected against becoming the instrument of that condemnation,—the sentiment in each case being equal in degree and yet different in quality.' In light of these considerations, we decline to accept the view that the privilege is that of the party alone. Third. Neither can we hold that, whenever the privilege is unavailable to the party, it is ipso facto lost to the witness as well. It is a question in each case, or in each category of cases, whether, in light of the reason which has led to a refusal to recognize the party's privilege, the witness should be held compellable. Certainly, we would not be justified in laying down a general rule that both privileges stand or fall together. We turn instead to the particular situation at bar. Where a man has prostituted his own wife, he has committed an offense against both her and the marital relation, and we have today affirmed the exception disabling him from excluding her testimony against him. It is suggested, however, that this exception has no application to the witness-wife when she chooses to remain silent. The exception to the party's privilege, it is said, rests on the necessity of preventing the defendant from sealing his wife's lips by his own unlawful act, see United States v. Mitchell, supra, 137 F.2d at pages 1008—1009; Wigmore, op cit., supra, § 2239, and it is argued that where the wife has chosen not to 'become the instrument' of her husband's downfall, it is her own privilege which is in question, and the reasons for according it to her in the first place are fully applicable. We must view this position in light of the congressional judgment and policy embodied in the Mann Act. 'A primary purpose of the Mann Act was to protect women who were weak from men who were bad.' Denning v. United States, 5 Cir., 247 F. 463, 465. It was in response to shocking revelations of subjugation of women too weak to resist that Congress acted. See H.R.Rep. No. 47, 61st Cong., 2d Sess., pp. 10—11. As the legislative history discloses, the Act reflects the supposition that the women with whom it sought to deal often had no independent will of their own, and embodies, in effect, the view that they must be protected against themselves. Compare 18 U.S.C. § 2422, 18 U.S.C.A. § 2422 (consent of woman immaterial in prosecution under that section). It is not for us to re-examine the basis of that supposition. Applying the legislative judgment underlying the Act, we are led to hold it not an allowable choice for a prostituted witness-wife 'voluntarily' to decide to protect her husband by declining to testify against him. For if a defendant can induce a woman, against her 'will,' to enter a life of prostitution for his benefit—and the Act rests on the view that he can—by the same token it should be considered that he can, at least as easily, persuade one who has already fallen victim to his influence that she must also protect him. To make matters turn upon ad hoc inquiries into the actual state of mind of particular women, thereby encumbering Mann Act trials with a collateral issue of the greatest subtlety, is hardly an acceptable solution. Fourth. What we have already said likewise governs the disposition of the petitioner's reliance on the fact that his marriage took place after the commission of the offense. Again, we deal here only with a Mann Act prosecution, and intimate no view on the applicability of the privilege of either a party or a witness similarly circumstanced in other situations. The legislative assumption of lack of independent will applies as fully here. As the petitioner by his power over the witness could, as we have considered should be assumed, have secured her promise not to testify, so, it should be assumed, could he have induced her to go through a marriage ceremony with him, perhaps 'in contemplation of evading justice by reason of the very rule which is now sought to be invoked.' United States v. Williams, D.C., 55 F.Supp. 375, 380. The ruling of the District Court was correctly upheld by the Court of Appeals.5 Affirmed.
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Petitioner was tried and convicted in a Federal District Court of knowingly transporting a woman in interstate commerce for the purpose of prostitution, in violation of 18 U. S. C. § 2421. At the trial, the woman, who had married petitioner since the date of the'offense, was ordered over her objection and that of petitioner to testify for the prosecution. Held: The ruling was correct and the judgment is affirmed. Pp. 525-531. (a) Though the common-law rule of evidence ordinarily permitting a defendant to exclude the adverse testimony of his or her spouse still applies in the federal courts, there is -an exception which permits the defendant's wife to testify against him when she was the victim of a violation of § 2421. Pp. 526-527. (b) The privilege, accorded by the general rule resides in the witness as well as in the defendant. Pp. 527-529. (c) In view of the purpose of § 2421, a prostituted witness-wife may not protect her husband by declining to testify against him. Pp. 529-530. (d) A different conclusion is not required by,t he fact that the marriage took place after the commission of the offense. Pp. 530-531. 263 F. 2d 304, affirmed.
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In establishing a federal death penalty for certain drug offenses under the Anti-Drug Abuse Act of 1988, 21 U.S.C. § 848(e), Congress created a statutory right to qualified legal representation for capital defendants in federal habeas corpus proceedings. § 848(q)(4)(B). This case presents the question whether a capital defendant must file a formal habeas corpus petition in order to invoke this statutory right and to establish a federal court's jurisdiction to enter a stay of execution. * Petitioner Frank Basil McFarland was convicted of capital murder on November 13, 1989, in the State of Texas and sentenced to death. The Texas Court of Criminal Appeals affirmed the conviction and sentence, McFarland v. State, 845 S.W.2d 824 (1992), and on June 7, 1993, this Court denied certiorari. 508 U.S. ----, 113 S.Ct. 2937, 124 L.Ed.2d 686. Two months later, on August 16, 1993, the Texas trial court scheduled McFarland's execution for September 23, 1993. On September 19, McFarland filed a pro se motion requesting that the trial court stay or withdraw his execution date to allow the Texas Resource Center an opportunity to recruit volunteer counsel for his state habeas corpus proceeding. Texas opposed a stay of execution, arguing that McFarland had not filed an application for writ of habeas corpus and that the court thus lacked jurisdiction to enter a stay. The trial court declined to appoint counsel, but modified McFarland's execution date to October 27, 1993. On October 16, 1993, the Resource Center informed the trial court that it had been unable to recruit volunteer counsel and asked the court to appoint counsel for McFarland. Concluding that Texas law did not authorize the appointment of counsel for state habeas corpus proceedings, the trial court refused either to appoint counsel or to modify petitioner's execution date. McFarland then filed a pro se motion in the Texas Court of Criminal Appeals requesting a stay and a remand for appointment of counsel. The court denied the motion without comment. Having failed to obtain either the appointment of counsel or a modification of his execution date in state court, McFarland, on October 22, 1993, commenced the present action in the United States District Court for the Northern District of Texas by filing a pro se motion stating that he "wish[ed] to challenge [his] conviction and sentence under [the federal habeas corpus statute,] 28 U.S.C. § 2254." App. 41. McFarland requested the appointment of counsel under 21 U.S.C. § 848(q)(4)(B) and a stay of execution to give that counsel time to prepare and file a habeas corpus petition.1 The District Court denied McFarland's motion on October 25, 1993, concluding that because no "post conviction proceeding" had been initiated pursuant to 28 U.S.C. § 2254 or § 2255, petitioner was not entitled to appointment of counsel and the court lacked jurisdiction to enter a stay of execution. App. 77. The court later denied a certificate of probable cause to appeal. On October 26, the eve of McFarland's scheduled execution, the Court of Appeals for the Fifth Circuit denied his application for stay. 7 F.3d 47. The court noted that federal law expressly authorizes federal courts to stay state proceedings while a federal habeas corpus proceeding is pending, 28 U.S.C. § 2251, but held that no such proceeding was pending, because a "motion for stay and for appointment of counsel [is not] the equivalent of an application for habeas relief." Id., at 49. The court concluded that any other federal judicial interference in state court proceedings was barred by the Anti-Injunction Act, 28 U.S.C. § 2283. Shortly before the Court of Appeals ruled, a federal magistrate judge located an attorney willing to accept appointment in McFarland's case and suggested that if the attorney would file a skeletal document entitled "petition for writ of habeas corpus," the District Court might be willing to appoint him and grant McFarland a stay of execution. The attorney accordingly drafted and filed a pro forma habeas petition, together with a motion for stay of execution and appointment of counsel. As in the Gosch case, see n. 1, supra, despite the fact that Texas did not oppose a stay, the District Court found the petition to be insufficient and denied the motion for stay on the merits. McFarland v. Collins, 7 F.3d 47 (WD Tex., 1993). On October 27, 1993, this Court granted a stay of execution in McFarland's original suit pending consideration of his petition for certiorari. 510 U.S. ----, 114 S.Ct. 374, 126 L.Ed.2d 324. The Court later granted certiorari, 510 U.S. ----, 114 S.Ct. 544, 126 L.Ed.2d 446 (1993), to resolve an apparent conflict with Brown v. Vasquez, 952 F.2d 1164 (CA9 1991). "In any post conviction proceeding under section 2254 or 2255 of title 28, seeking to vacate or set aside a death sentence, any defendant who is or becomes financially unable to obtain adequate representation or investigative, expert, or other reasonably necessary services shall be entitled to the appointment of one or more attorneys and the furnishing of such other services in accordance with paragraphs (5), (6), (7), (8), and (9)" (emphasis added). On its face, this statute grants indigent capital defendants a mandatory right to qualified legal counsel2 and related services "[i]n any [federal] post conviction proceeding." The express language does not specify, however, how a capital defendant's right to counsel in such a proceeding shall be invoked. Neither the federal habeas corpus statute, 28 U.S.C. § 2241 et seq., nor the rules governing habeas corpus proceedings define a "post conviction proceeding" under § 2254 or § 2255 or expressly state how such a proceeding shall be commenced. Construing § 848(q)(4)(B) in light of its related provisions, however, indicates that the right to appointed counsel adheres prior to the filing of a formal, legally sufficient habeas corpus petition. Section § 848(q)(4)(B) expressly incorporates 21 U.S.C. § 848(q)(9), which entitles capital defendants to a variety of expert and investigative services upon a showing of necessity: "Upon a finding in ex parte proceedings that investigative, expert or other services are reasonably necessary for the representation of the defendant, . . . the court shall authorize the defendant's attorneys to obtain such services on behalf of the defendant and shall order the payment of fees and expenses therefore" (emphasis added). The services of investigators and other experts may be critical in the preapplication phase of a habeas corpus proceeding, when possible claims and their factual bases are researched and identified. Section 848(q)(9) clearly anticipates that capital defense counsel will have been appointed under § 848(q)(4)(B) before the need for such technical assistance arises, since the statute requires "the defendant's attorneys to obtain such services" from the court. § 848(q)(9). In adopting § 848(q)(4)(B), Congress thus established a right to preapplication legal assistance for capital defendants in federal habeas corpus proceedings. This interpretation is the only one that gives meaning to the statute as a practical matter. Congress' provision of a right to counsel under § 848(q)(4)(B) reflects a determination that quality legal representation is necessary in capital habeas corpus proceedings in light of "the seriousness of the possible penalty and . . . the unique and complex nature of the litigation." § 848(q)(7). An attorney's assistance prior to the filing of a capital defendant's habeas corpus petition is crucial, because "[t]he complexity of our jurisprudence in this area . . . makes it unlikely that capital defendants will be able to file successful petitions for collateral relief without the assistance of persons learned in the law." Murray v. Giarratano, 492 U.S. 1, 14, 109 S.Ct. 2765, 2772, 106 L.Ed.2d 1 (1989) (KENNEDY, J., joined by O'CONNOR, J., concurring in judgment); see also id., at 28 (STEVENS, J., joined by Brennan, Marshall, and BLACKMUN, JJ., dissenting) ("[T]his Court's death penalty jurisprudence unquestionably is difficult even for a trained lawyer to master"). Habeas corpus petitions must meet heightened pleading requirements, see 28 U.S.C. § 2254 Rule 2(c), and comply with this Court's doctrines of procedural default and waiver, see Coleman v. Thompson, 504 U.S. ----, 112 S.Ct. 1845, 119 L.Ed.2d 1 (1992). Federal courts are authorized to dismiss summarily any habeas petition that appears legally insufficient on its face, see 28 U.S.C. § 2254 Rule 4, and to deny a stay of execution where a habeas petition fails to raise a substantial federal claim, see Barefoot v. Estelle, 463 U.S. 880, 894, 103 S.Ct. 3383, 3395, 77 L.Ed.2d 1090 (1983). Moreover, should a defendant's pro se petition be summarily dismissed, any petition subsequently filed by counsel could be subject to dismissal as an abuse of the writ. See McCleskey v. Zant, 499 U.S. 467, 494, 111 S.Ct. 1454, 1470, 113 L.Ed.2d 517 (1991). Requiring an indigent capital petitioner to proceed without counsel in order to obtain counsel thus would expose him to the substantial risk that his habeas claims never would be heard on the merits. Congress legislated against this legal backdrop in adopting § 848(q)(4)(B), and we safely assume that it did not intend for the express requirement of counsel to be defeated in this manner. The language and purposes of § 848(q)(4)(B) and its related provisions establish that the right to appointed counsel includes a right to legal assistance in the preparation of a habeas corpus application. We therefore conclude that a "post conviction proceeding" within the meaning of § 848(q)(4)(B) is commenced by the filing of a death row defendant's motion requesting the appointment of counsel for his federal habeas corpus proceeding.3 McFarland filed such a motion and was entitled to the appointment of a lawyer. Even if the District Court had granted McFarland's motion for appointment of counsel and had found an attorney to represent him, this appointment would have been meaningless unless McFarland's execution also was stayed. We therefore turn to the question whether the District Court had jurisdiction to grant petitioner's motion for stay. Federal courts cannot enjoin state court proceedings unless the intervention is authorized expressly by federal statute or falls under one of two other exceptions to the Anti-Injunction Act. See Mitchum v. Foster, 407 U.S. 225, 226, 92 S.Ct. 2151, 2153, 32 L.Ed.2d 705 (1972). The federal habeas corpus statute grants any federal judge "before whom a habeas corpus proceeding is pending " power to stay a state court action "for any matter involved in the habeas corpus proceeding." 28 U.S.C. § 2251 (emphasis added). McFarland argues that his request for counsel in a "post conviction proceeding" under § 848(q)(4)(B) initiated a "habeas corpus proceeding" within the meaning of § 2251, and that the District Court thus had jurisdiction to enter a stay. Texas contends, in turn, that even if a "post conviction proceeding" under § 848(q)(4)(B) can be triggered by a death row defendant's request for appointment of counsel, no "habeas corpus proceeding" is "pending" under § 2251, and thus no stay can be entered, until a legally sufficient habeas petition is filed. The language of these two statutes indicates that the sections refer to the same proceeding. Section 848(q)(4)(B) expressly applies to "any post conviction proceeding under section 2254 or 2255"—the precise "habeas corpus proceeding[s]" that § 2251 involves. The terms "post conviction" and "habeas corpus" also are used interchangeably in legal parlance to refer to proceedings under § 2254 and § 2255. We thus conclude that the two statutes must be read in pari materia to provide that once a capital defendant invokes his right to appointed counsel, a federal court also has jurisdiction under § 2251 to enter a stay of execution. Because § 2251 expressly authorizes federal courts to stay state court proceedings "for any matter involved in the habeas corpus proceeding," the exercise of this authority is not barred by the Anti-Injunction Act. This conclusion by no means grants capital defendants a right to an automatic stay of execution. Section 2251 does not mandate the entry of a stay, but dedicates the exercise of stay jurisdiction to the sound discretion of a federal court. Under ordinary circumstances, a capital defendant presumably will have sufficient time to request the appointment of counsel and file a formal habeas petition prior to his scheduled execution. But the right to counsel necessarily includes a right for that counsel meaningfully to research and present a defendant's habeas claims. Where this opportunity is not afforded, "[a]pproving the execution of a defendant before his [petition] is decided on the merits would clearly be improper." Barefoot, 463 U.S., at 889, 103 S.Ct., at 3392. On the other hand, if a dilatory capital defendant inexcusably ignores this opportunity and flouts the available processes, a federal court presumably would not abuse its discretion in denying a stay of execution. A criminal trial is the "main event" at which a defendant's rights are to be determined, and the Great Writ is an extraordinary remedy that should not be employed to "relitigate state trials." Id., at 887, 103 S.Ct., at 3391. At the same time, criminal defendants are entitled by federal law to challenge their conviction and sentence in habeas corpus proceedings. By providing indigent capital defendants with a mandatory right to qualified legal counsel in these proceedings, Congress has recognized that federal habeas corpus has a particularly important role to play in promoting fundamental fairness in the imposition of the death penalty. We conclude that a capital defendant may invoke this right to a counseled federal habeas corpus proceeding by filing a motion requesting the appointment of habeas counsel, and that a district court has jurisdiction to enter a stay of execution where necessary to give effect to that statutory right. McFarland filed a motion for appointment of counsel and for stay of execution in this case, and the District Court had authority to grant the relief he sought. The judgment of the Court of Appeals is reversed. It is so ordered.
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Title 21 U. S. C. § 848(q)(4)(B) entitles capital defendants to qualified legal representation in any "post conviction proceeding" under 28 U. S. C. § 2254 or § 2255, sections of the federal habeas corpus statute. Having failed to obtain a modification of his impending execution date in Texas state court, petitioner McFarland commenced this action in the Federal District Court by filing a pro se motion stating that he wished to challenge his conviction and death sentence under § 2254, requesting the appointment of counsel under § 848(q)(4)(B), and seeking a stay of execution to give that counsel time to prepare and file a habeas petition. The court denied the motion, concluding that because no "post conviction proceeding" had been initiated, McFarland was not entitled to counsel and the court lacked jurisdiction to issue a stay. In denying his subsequent stay application, the Court of Appeals noted that § 2251 authorizes a federal judge, before whom a "habeas corpus proceeding is pending," to stay a state action, but held that no federal proceeding was pending because a motion for stay and for appointed counsel was not the equivalent of a habeas petition. Heldk A capital defendant need not file a formal habeas corpus petition in order to invoke his right to counsel under § 848(q)(4)(B) and to establish a federal court's jurisdiction to enter a stay of execution. Pp. 854-859. (a) The language and purposes of § 848(q)(4)(B) and its related provisions establish that the right to qualified appointed counsel adheres before the filing of a formal, legally sufficient habeas petition and includes a right to legal assistance in the preparation of such a petition. Thus, a "post conviction proceeding" within §848(q)(4)(B)'s meaning is commenced by the filing of a death row defendant's motion requesting the appointment of counsel for his federal habeas proceeding. McFarland fied such a motion and was entitled to the appointment of a lawyer. Pp. 854-857. (b) The District Court had jurisdiction to grant McFarland's motion for stay of execution. The language of §§848(q)(4)(B) and 2251 indicates that "post conviction" and "habeas corpus" refer to the same proceeding. Thus, the two statutes must be read in pari materia to provide that once a capital defendant invokes his right to appointed counsel under §848(q)(4)(B), a proceeding is "pending" under § 2251, such that the federal court has jurisdiction to enter a stay in its sound discretion. The Anti-Injunction Act does not bar the exercise of this authority, since § 2251 expressly authorizes a stay of state-court proceedings "for any matter involved in the habeas corpus proceeding." Pp. 857-858. 7 F. 3d 47, reversed.
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SECTION 1. SHORT TITLE.
This Act may be cited as the ``Protecting Access to Diabetes
Supplies Act of 2015''.
SEC. 2. STRENGTHENING RULES APPLIED IN CASE OF COMPETITION FOR DIABETIC
TESTING STRIPS.
(a) Special Rule Applied in Case of Competition for Diabetic
Testing Strips.--
(1) In general.--Paragraph (10) of section 1847(b) of the
Social Security Act (42 U.S.C. 1395w-3(b)) is amended--
(A) in subparagraph (A), by striking the second
sentence and inserting the following new sentence:
``The volume for such types of products shall be
determined through the use of multiple sources of data
that measure consumption and utilization of diabetic
testing strips among individuals in the United
States.''; and
(B) by adding at the end the following new
subparagraphs:
``(C) Demonstration of ability to furnish types of
diabetic testing strips.--With respect to the program
described in subparagraph (A), the Secretary shall
reject a bid submitted by an entity if the entity does
not, as part of the demonstration to the Secretary
described in such subparagraph submitted by the entity,
demonstrate that the entity has an ability to furnish
the types of diabetic testing strips included in its
bid, including an ability to obtain and maintain an
inventory of such strips by volume in a manner
consistent with its bid.
``(D) Use of unlisted types in calculation of
percentage.--In determining under subparagraph (A)
whether a bid submitted by an entity under such
subparagraph covers 50 percent (or such higher
percentage as the Secretary may specify) of all types
of diabetic testing strip products, the Secretary may
not attribute a percentage to types of diabetic testing
strips that the Secretary does not provide the entity
with the option to identify by type and market share
volume.
``(E) Contract requirement.--Any contract entered
into with an entity for diabetic testing strips under
the competition conducted pursuant to paragraph (1)
shall include a requirement that the entity offers,
makes available to, and maintains in inventory of (or
otherwise has ready access to, such as through
purchasing contracts) each of the types of diabetic
testing strip products that is included in the bid
submitted by the entity. In the case that an entity
enters into such a contract with the Secretary and
fails to fulfill the requirement described in the
preceding sentence, the Secretary shall terminate such
contract.
``(F) Monitoring adherence to demonstration.--The
Secretary shall establish a process to monitor, on an
ongoing basis, the extent to which an entity that
enters into a contract with the Secretary for diabetic
testing strips under the competition conducted pursuant
to paragraph (1) adheres to the demonstration that the
entity provided to the Secretary under subparagraph
(A).''.
(2) Conforming amendment.--Section 1847(b)(3)(A) of the
Social Security Act (42 U.S.C. 1395w-3(b)(3)(A)) is amended by
adding at the end the following new sentence: ``In the case
that such a contract is for diabetic testing strips, such
contract shall include the information required under paragraph
(10)(E).''
(b) Codifying and Expanding Anti-Switching Rule.--Section 1847(b)
of the Social Security Act (42 U.S.C. 1395w-3(b)), as amended by
subsection (a)(1), is further amended--
(1) by redesignating paragraph (11) as paragraph (12); and
(2) by inserting after paragraph (10) the following new
paragraph:
``(11) Additional special rule in case of competition for
diabetic testing strips.--
``(A) In general.--With respect to diabetic testing
strips furnished by an entity to an individual under
the competitive acquisition program established under
this section, the entity shall furnish to the
individual the brand of such strips that is compatible
with the home blood glucose monitor selected by the
individual.
``(B) Prohibition on influencing and
incentivizing.--An entity described in subparagraph (A)
may not attempt to influence or incentivize the
individual described in such subparagraph to switch the
brand of glucose monitor or testing strips selected by
the individual, including by--
``(i) persuading, pressuring, or advising
the individual to switch such brand; or
``(ii) furnishing information about
alternative brands to the individual in the
case that the individual has not requested such
information.
``(C) Provision of information.--An entity
described in subparagraph (A) may not communicate
directly to an individual described in such
subparagraph until the entity has verbally provided the
individual with standardized information, to be
supplied to the entity by the Secretary, that describes
the rights of the individual with respect to the
entity. The information described in the preceding
sentence shall include information regarding--
``(i) the requirements established in
subparagraphs (A) and (B);
``(ii) the right of the individual to
contact other mail order suppliers of diabetic
testing strips or to purchase such strips at a
retail pharmacy in the case that the entity is
not able to furnish the brand of such strips
that is compatible with the home blood glucose
monitor selected by the individual; and
``(iii) the right of the individual
described in subparagraph (D) to reject
diabetic testing strips furnished to the
individual by the entity.
``(D) Individuals allowed to switch from unwanted
products.--
``(i) In general.--The Secretary shall
establish a process under which an individual
furnished with diabetic testing strips under
the competitive acquisition program established
under this section may reject the strips by
notification, including notification by
telephone or electronic mail, to the supplier
and to the Secretary.
``(ii) Consequences of rejection.--In the
case that an individual rejects diabetic
testing strips under clause (i)--
``(I) any payment made to the
supplier under this title for a portion
of such strips furnished for use during
the period beginning with the date on
which the individual rejects the strips
shall be recovered by the Secretary;
and
``(II) the individual may obtain
different diabetic testing strips from
a supplier, and the Secretary shall
process a claim for such different
diabetic testing strips without regard
to any benefit or coverage limitations
arising from the fact that a claim has
already been submitted and payment made
for the rejected diabetic testing
strips.
``(iii) Prohibition on future claims.--In
the case that an individual rejects diabetic
testing strips under clause (i), the supplier
who supplied the rejected diabetic testing
strips to the individual may not submit
additional claims for payment on behalf of the
individual for the type or brand of diabetic
testing strips so rejected by the individual,
unless the individual makes a separate
expression of consent to the supplier to be
furnished with such type or brand of diabetic
testing strips by the supplier.''.
(c) Effective Date.--The amendments made by this section shall
apply with respect to diabetic testing strips furnished on or after
July 1, 2016.
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Protecting Access to Diabetes Supplies Act of 2015 Amends title XVIII (Medicare) of the Social Security Act to revise the special competitive acquisition program rule applied to diabetic testing strips to require the volume for such types of products to be determined through the use of multiple sources of data that measure consumption and utilization of such strips among individuals in the United States. Directs the Secretary of Health and Human Services to reject any bid submitted by an entity under the competitive acquisition program that does not demonstrate that it can furnish the types of strips included in its bid. Requires an entity to furnish to an individual the brand of strips compatible with the individual's home blood glucose monitor. Prohibits an entity from attempting to influence or incentivize an individual to switch the brand of glucose monitor or testing strips selected. Prohibits an entity from communicating directly to such an individual until it has given the individual verbally standardized information about the individual's rights with respect to the entity. Directs the Secretary to establish a process under which an individual furnished with diabetic testing strips under a competitive acquisition program may reject them by notifying the supplier and the Secretary. Permits the individual to obtain different strips from another supplier and have a new claim processed.
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SECTION 1. SHORT TITLE.
This Act may be cited as the ``Hydrogen Future Act of 1996''.
SEC. 2. DEFINITIONS.
For purposes of titles II and III--
(1) the term ``Department'' means the Department of Energy; and
(2) the term ``Secretary'' means the Secretary of Energy.
TITLE I--HYDROGEN
SEC. 101. PURPOSES AND DEFINITIONS.
(a) Section 102(b)(1) of Public Law 101-566 (42 U.S.C. 12401(b)(1))
is amended to read as follows:
``(1) to direct the Secretary of Energy to conduct a research,
development, and demonstration program leading to the production,
storage, transport, and use of hydrogen for industrial, residential,
transportation, and utility applications;''.
(b) Section 102(c) of Public Law 101-566 (42 U.S.C. 12401(c)) is
amended--
(1) in subsection (1) by striking ``; and'' inserting ``;'';
(2) by redesignating subsection (2) as subsection (3); and
(3) by inserting before subsection (3) (as redesignated) the
following new subsection:
``(2) `Department' means the Department of Energy; and''.
SEC. 102. REPORTS TO CONGRESS.
(a) Section 103 of Public Law 101-566 (42 U.S.C. 12402) is amended
to read as follows:
``Sec. 103. Report to Congress
``(a) Not later than January 1, 1999, the Secretary shall transmit
to Congress a detailed report on the status and progress of the
programs authorized under this Act.
``(b) A report under subsection (a) shall include, in addition to
any views and recommendations of the Secretary--
``(1) an analysis of the effectiveness of the programs
authorized under this chapter, to be prepared and submitted to the
Secretary by the Hydrogen Technical Advisory Panel established
under section 108 of this Act; and
``(2) recommendations of the Hydrogen Technical Advisory Panel
for any improvements in the program that are needed, including
recommendations for additional legislation.''.
(b) Section 108(d) of Public Law 101-566 (42 U.S.C. 12407(d)) is
amended--
(1) by adding ``and'' at the end of paragraph (1);
(2) by striking ``; and'' at the end of paragraph (2) and
inserting a period; and
(3) by striking paragraph (3).
SEC. 103. HYDROGEN RESEARCH AND DEVELOPMENT.
(a) Section 104 of Public Law 101-566 (42 U.S.C. 12403) is amended
to read as follows:
``Sec. 104. Hydrogen research and development
``(a) The Secretary shall conduct a hydrogen research and
development program relating to production, storage, transportation,
and use of hydrogen, with the goal of enabling the private sector to
demonstrate the technical feasibility of using hydrogen for industrial,
residential, transportation, and utility applications.
``(b) In conducting the program authorized by this section, the
Secretary shall--
``(1) give particular attention to developing an understanding
and resolution of critical technical issues preventing the
introduction of hydrogen into the marketplace;
``(2) initiate or accelerate existing research in critical
technical issues that will contribute to the development of more
economic hydrogen production and use, including, but not limited
to, critical technical issues with respect to production (giving
priority to those production techniques that use renewable energy
resources as their primary source of energy for hydrogen
production), liquefaction, transmission, distribution, storage, and
use (including use of hydrogen in surface transportation); and
``(3) survey private sector hydrogen activities and take steps
to ensure that research and development activities under this
section do not displace or compete with the privately funded
hydrogen research and development activities of United States
industry.
``(c) The Secretary is authorized to evaluate any reasonable new or
improved technology, including basic research on highly innovative
energy technologies, that could lead or contribute to the development
of economic hydrogen production, storage, and utilization.
``(d) The Secretary is authorized to evaluate any reasonable new or
improved technology that could lead or contribute to, or demonstrate
the use of, advanced renewable energy systems or hybrid systems for use
in isolated communities that currently import diesel fuel as the
primary fuel for electric power production.
``(e) The Secretary is authorized to arrange for tests and
demonstrations and to disseminate to researchers and developers
information, data, and other materials necessary to support the
research and development activities authorized under this section and
other efforts authorized under this chapter, consistent with section
106 of this Act.
``(f) The Secretary shall carry out the research and development
activities authorized under this section only through the funding of
research and development proposals submitted by interested persons
according to such procedures as the Secretary may require and evaluate
on a competitive basis using peer review. Suchfunding shall be in the
form of a grant agreement, procurement contract, or cooperative
agreement (as those terms are used in chapter 63 of title 31, United
States Code).
``(g) The Secretary shall not consider a proposal submitted by a
person from industry unless the proposal contains a certification that
reasonable efforts to obtain non-Federal funding for the entire cost of
the project have been made, and that such non-Federal funding could not
be reasonably obtained. As appropriate, the Secretary shall require a
commitment from non-Federal sources of at least 50 percent of the cost
of the development portion of such a proposal.
``(h) The Secretary shall not carry out any activities under this
section that unnecessarily duplicate activities carried out elsewhere
by the Federal Government or industry.
``(i) The Secretary shall establish, after consultation with other
Federal agencies, terms and conditions under which Federal funding will
be provided under this chapter that are consistent with the Agreement
on Subsidies and Countervailing Measures referred to in section
101(d)(12) of the Uruguay Round Agreement Act (19 U.S.C.
3511(d)(12)).''.
(b)(1) Section 2026(a) of the Energy Policy Act of 1992 (42 U.S.C.
13436(a)) is amended by striking ``, in accordance with sections 3001
and 3002 of this Act,''.
(2) Effective October 1, 1998, section 2026 of the Energy Policy
Act of 1992 (42 U.S.C. 13436) is repealed.
SEC. 104. DEMONSTRATIONS.
Section 105 of Public Law 101-566 (42 U.S.C. 12404) is amended by
adding at the end the following new subsection:
``(c) The Secretary shall require a commitment from non-Federal
sources of at least 50 percent of the cost of any demonstration
conducted under this section.''.
SEC. 105. TECHNOLOGY TRANSFER.
Section 106(b) of Public Law 101-566 (42 U.S.C. 12405(b)) is
amended by adding to the end of the subsection the following:
``The Secretary shall also foster the exchange of generic,
nonproprietary information and technology, developed pursuant to this
chapter, among industry, academia, and the Federal Government, to help
the United States economy attain the economic benefits of this
information and technology.''.
SEC. 106. AUTHORIZATION OF APPROPRIATIONS.
Section 109 of Public Law 101-566 (42 U.S.C. 12408) is amended--
(1) by striking ``to other Acts'' and inserting ``under other
Acts'';
(2) by striking ``and'' from the end of paragraph (2);
(3) by striking the period from the end of paragraph (3) and
inserting ``;''; and
(4) by adding at the end of the section the following:
``(4) $14,500,000 for fiscal year 1996;
``(5) $20,000,000 for fiscal year 1997;
``(6) $25,000,000 for fiscal year 1998;
``(7) $30,000,000 for fiscal year 1999;
``(8) $35,000,000 for fiscal year 2000; and
``(9) $40,000,000 for fiscal year 2001.''.
TITLE II--FUEL CELLS
SEC. 201. INTEGRATION OF FUEL CELLS WITH HYDROGEN PRODUCTION SYSTEMS.
(a) Not later than 180 days after the date of enactment of this
section, and subject to the availability of appropriations made
specifically for this section, the Secretary of Energy shall solicit
proposals for projects to prove the feasibility of integrating fuel
cells with--
(1) photovoltaic systems for hydrogen production; or
(2) systems for hydrogen production from solid waste via
gasification or steam reforming.
(b) Each proposal submitted in response to the solicitation under
this section shall be evaluated on a competitive gas is using peer
review. The Secretary is not required to make an award under this
section in the absence of a meritoriousproposals.
(c) The Secretary shall give preference, in making an award under
this section, to proposals that--
(1) are submitted jointly from consortia including academic
institutions, industry, State or local governments, and Federal
laboratories; and
(2) reflect proven experience and capability with technologies
relevant to the systems described in subsections (a)(1) and (a)(2).
(d) In the case of a proposal involving development or
demonstration, the Secretary shall require a commitment from non-
Federal sources of at least 50 percent of the cost of the development
or demonstration portion of the proposal.
(e) The Secretary shall establish, after consultation with other
Federal agencies, terms and conditions under which Federal funding will
be provided under this title that are consistent with the Agreement on
Subsidies and Countervailing Measures referred to in section 101(d)(12)
of the Uruguay Round Agreement Act (19 U.S.C. 3511(d)(12)).
SEC. 202. AUTHORIZATION OF APPROPRIATIONS.
There are authorized to be appropriated, for activities under this
section, a total of $50,000,000 for fiscal years 1997 and 1998, to
remain available until September 30, 1999.
TITLE III--DOE SCIENTIFIC AND TECHNICAL PROGRAM QUALITY
SEC. 301. TEMPORARY APPOINTMENTS FOR SCIENTIFIC AND TECHNICAL EXPERTS
IN DEPARTMENT OF ENERGY RESEARCH AND DEVELOPMENT
PROGRAMS.
(a) The Secretary, utilizing authority under other applicable law
and the authority of this section, may appoint for a limited term, or
on a temporary basis, scientists, engineers, and other technical and
professional personnel on leave of absence from academic, industrial,
or research institutions to work for the Department.
(b) The Department may pay, to the extent authorized for certain
other Federal employees by section 5723 of title 5, United States Code,
travel expenses for any individual appointed for a limited term or on a
temporary basis and transportation expenses of his or her immediate
family and his or her household goods and personal effects from that
individual's residence at the time of selection or assignment to his or
her duty station. The Department may pay such travel expenses to the
same extent for such an individual's return to the former place of
residence from his or her duty station, upon separation from the
Federal service following an agreed period of service. The Department
may also pay a per diem allowance at a rate not to exceed the daily
amounts prescribed under section 5702 of title 5 to such an individual,
in lieu of transportation expenses of the immediate family and
household goods and personal effects, for the period of his or her
employment with the Department. Notwithstanding any other provision of
law, the employer's contribution to any retirement, life insurance, or
health benefit plan for an individual appointed for a term of one year
or less, which could be extended for no more than one additional year,
may be made or reimbursed from appropriations available to the
Department.
Speaker of the House of Representatives.
Vice President of the United States and
President of the Senate.
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TABLE OF CONTENTS:
Title I: Hydrogen
Title II: Fuel Cells
Title III: DOE Scientific and Technical Program Quality
Hydrogen Future Act of 1996 -
Title I: Hydrogen
- Amends the Spark M. Matsunaga Hydrogen Research, Development, and Demonstration Act of 1990 to replace its mandate for a comprehensive five-year program management plan for hydrogen research with a mandate that the Secretary of Energy conduct a research and development program relating to hydrogen production, storage, transportation, and use, with the goal of enabling the private sector to demonstrate the technical feasibility of using hydrogen for industrial, residential, transportation, and utility applications. Requires a detailed progress report to the Congress, including recommendations of the Hydrogen Technical Advisory Panel.
(Sec. 103) Amends the Energy Policy Act of 1992 to repeal the mandate for a renewable hydrogen energy program, effective October 1, 1998.
(Sec. 104) Amends the Spark M. Matsunaga Hydrogen Research, Development, and Demonstration Act of 1990 to direct the Secretary to require a commitment from non-Federal sources of at least 50 percent of demonstration costs.
(Sec. 105) Directs the Secretary to foster the exchange of generic, nonproprietary information and technology, developed pursuant to the Act, among industry, academia, and the Federal Government to help the United States economy attain the economic benefits of the relevant information and technology.
(Sec. 106) Authorizes appropriations for FY 1996 through 2001.
Title II: Fuel Cells
- Instructs the Secretary to solicit proposals for projects to prove the feasibility of integrating fuel cells with: (1) photovoltaic systems for hydrogen production; or (2) systems for hydrogen production from solid waste via gasification or steam reforming. Mandates proposal evaluation on a competitive basis using peer review. Prescribes proposal review guidelines.
(Sec. 202) Authorizes appropriations for FY 1997 and 1998, to remain available until September 30, 1999.
Title III: DOE Scientific and Technical Program Quality
- Authorizes the Secretary to appoint scientific, technical, and professional personnel on leave of absence from academic, industrial, or research institutions to work for DOE for a limited term, or on a temporary basis. Sets forth compensation guidelines.
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SECTION 1. SHORT TITLE.
This Act may be cited as the ``Foreign Investment Security Act of
2005''.
SEC. 2. CONGRESSIONAL AUTHORITY UNDER DEFENSE PRODUCTION ACT.
Section 721 of the Defense Production Act of 1950 (50 U.S.C. App.
2170) is amended--
(1) in subsection (a)--
(A) by striking ``30'' and inserting ``60''; and
(B) by adding at the end the following: ``The
findings and recommendations of any such investigation
shall be sent immediately to the President and to the
Committee on Banking, Housing, and Urban Affairs of the
Senate and the Committee on Financial Services of the
House of Representatives for review.'';
(2) in subsection (b)--
(A) by inserting before the first period ``, or in
such instance at the request of the chairman and
ranking member of the Committee on Banking, Housing,
and Urban Affairs of the Senate or the Committee on
Financial Services of the House of Representatives'';
(B) in paragraph (2), by inserting before the
period ``, and the findings and recommendations of such
investigation shall be sent immediately to the
President and to the Committee on Banking, Housing, and
Urban Affairs of the Senate and the Committee on
Financial Services of the House of Representatives for
review''; and
(C) by striking ``30'' and inserting ``60'';
(3) in subsection (f)--
(A) by striking ``designee may'' and inserting
``designee shall'';
(B) in paragraph (4), by striking ``and'' at the
end;
(C) in paragraph (5), by striking the period at the
end and inserting ``; and''; and
(D) by adding at the end the following:
``(6) the long-term projections of United States
requirements for sources of energy and other critical resources
and materials and for economic security.'';
(4) in subsection (g)--
(A) by striking ``The President'' and inserting the
following:
``(1) In general.--The President''; and
(B) by adding at the end the following:
``(2) Quarterly submissions.--The Secretary of the Treasury
shall transmit to the Committee on Banking, Housing, and Urban
Affairs of the Senate and the Committee on Financial Services
of the House of Representatives on a quarterly basis, a
detailed summary and analysis of each merger, acquisition, or
takeover that is being reviewed, was reviewed during the
preceding 90-day period, or is likely to be reviewed in the
coming quarter by the President or the President's designee
under subsection (a) or (b). Each such summary and analysis
shall be submitted in unclassified form, with classified
annexes as the Secretary determines are required to protect
company proprietary information and other sensitive
information. Each such summary and analysis shall include an
appendix detailing dissenting views.''; and
(5) by adding at the end the following new subsections:
``(l) Congressional Authority.--
``(1) In general.--If the President does not suspend or
prohibit an acquisition, merger, or takeover under subsection
(d), the acquisition, merger, or takeover may not be
consummated until 10 legislative days after the President
notifies the Congress of the decision not to suspend or
prohibit. If a joint resolution objecting to the proposed
transaction is introduced in either House of Congress by the
chairman of one of the appropriate congressional committees
during such 10-legislative-day period, the transaction may not
be consummated until 30 legislative days after the date on
which such resolution is introduced.
``(2) Disapproval upon passage of resolution.--If a joint
resolution introduced under paragraph (1) is enacted into law,
the transaction may not be consummated.
``(3) Considerations.--The Committee on Banking, Housing,
and Urban Affairs of the Senate and the Committee on Financial
Services of the House of Representatives shall review any
findings and recommendations submitted under subsection (a) or
(b), and any joint resolution under paragraph (1) of this
subsection shall be based on the factors outlined in subsection
(f).
``(4) Senate procedure.--Any joint resolution under
paragraph (1) shall be considered in the Senate in accordance
with the provisions of section 601(b) of the International
Security Assistance and Arms Export Control Act of 1976 (Public
Law 94-329, 90 Stat. 765).
``(5) House consideration.--For the purpose of expediting
the consideration and enactment of a joint resolution under
paragraph (1), a motion to proceed to the consideration of any
such joint resolution shall be treated as highly privileged in
the House of Representatives.
``(m) Thorough Review.--The President, or the President's designee,
shall ensure that an acquisition, merger, or takeover that is completed
prior to a review or investigation under this section shall be fully
reviewed for national security considerations, even in the event that a
request for such review is withdrawn.''.
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Foreign Investment Security Act of 2005 - Amends the Defense Production Act of 1950 relating to authorized investigations of the effects on national security of a proposed acquisition, merger, or takeover (transaction) by or with foreign persons which could result in foreign control of persons engaged in U.S. commerce to: (1) extend the time to commence such investigation; (2) require the findings and recommendations of any investigation to be sent immediately to the President and specified congressional committees for review; (3) require certain factors to be considered as part of such investigation, including the effect on domestic production and long-term projections of U.S. requirements for sources of energy and other critical resources; (4) direct the Secretary of the Treasury to report quarterly to such committees a detailed summary and analysis of each transaction being, or likely to be, reviewed; and (5) subject the President's decision not to suspend or prohibit a transaction to a congressional approval process.
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Background Each day, an estimated 13,400 people worldwide are newly infected with HIV; more than 20 million have died from AIDS since 1981. HIV is transmitted both sexually (through sexual intercourse with an infected person) and nonsexually (through the sharing of needles or syringes with an infected person; unsafe blood transfusions; or the passing of the virus from mother to child during pregnancy, childbirth, or breastfeeding). However, the majority of HIV infections worldwide are transmitted sexually. About two-thirds of the estimated 40 million people currently living with HIV/AIDS are in sub-Saharan Africa where, according to the Joint United Nations Programme on HIV/AIDS (UNAIDS), adult HIV prevalence averaged 7.4 percent in 2004. Nature of AIDS Epidemic in PEPFAR Countries HIV/AIDS is an urgent and growing health problem, driven by complex factors that present challenges to HIV prevention. The nature of the AIDS epidemic varies among the 15 PEPFAR focus countries, 12 of which are in sub-Saharan Africa (see fig. 1). In addition, the groups most vulnerable to HIV infection vary among the focus countries. For example, while girls and young women are most vulnerable in some countries, populations typically considered high-risk groups, such as intravenous drug-users or commercial sex workers, are most vulnerable in others. Figure 1 shows that although the epidemic in some focus countries is concentrated in certain populations, in other focus countries it has spread among the general population. PEPFAR Funding and Requirements In fiscal year 2004, the U.S. Congress appropriated $2.4 billion for global HIV/AIDS efforts, directing $865 million of this amount to four accounts: (1) the GHAI account, which received most of the funding; (2) the Child Survival and Health account; (3) the Prevention of Mother to Child Transmission account; and (4) CDC’s Global AIDS Program. In this report, the term PEPFAR funding describes funds appropriated to these four accounts in the 15 focus countries, as well as bilateral HIV/AIDS funding in five additional countries. For fiscal years 2004 and 2005, total PEPFAR funding consists of central and country-level actual appropriations allocated by OGAC for prevention, care, and treatment activities. Similarly, PEPFAR prevention funding for these fiscal years consists of central and country-level actual appropriations allocated by OGAC for prevention activities (AB, blood safety, PMTCT, safe medical injections, and “other prevention”). For fiscal year 2006, total PEPFAR funding consists of planned central and country-level PEPFAR funding for prevention, care, and treatment activities that have not yet been approved by OGAC. PEPFAR prevention funding for fiscal year 2006 consists of planned central and country-level PEPFAR funding for prevention activities that have not yet been approved by OGAC. The Leadership Act specifies the percentages of PEPFAR funds to be allocated for HIV/AIDS prevention, treatment, and care for fiscal years 2006-2008. For example, the act recommends that 20 percent of funds appropriated pursuant to the act be spent on prevention and 15 percent on palliative care for those living with the disease. The act also requires that, beginning in fiscal year 2006, at least 55 percent of funds appropriated pursuant to the act be spent on treatment and at least 10 percent on orphans and vulnerable children. (See fig. 2.) See page 14 for information on additional spending recommendations and requirements specifically related to prevention funds. ABC Model and Abstinence- Until-Marriage Spending Requirement The Leadership Act finds that “behavior change, through the use of the ABC model, is a very successful way to prevent the spread of HIV” and requires that prevention funding be set aside for abstinence-until-marriage programs. It defines the model as “‘Abstain, Be faithful, use Condoms,’ in order of priority.” The ABC model is based, in part, on the experience of Uganda, which implemented an ABC campaign in the 1980s and observed a decline in HIV/AIDS prevalence by 2001. Although substantial debate exists about the extent to which each component of the model is responsible for reducing HIV prevalence in individual countries, there is general consensus that using the ABC model can have a positive impact in combating HIV/AIDS. In November 2004, a key consensus statement authored by eight leading public health experts observed that “all three elements of are essential to reducing HIV incidence, although the emphasis placed on individual elements needs to vary according to the target population.” For example, it noted that “for those who have not started sexual activity the first priority should be to encourage abstinence or delay of sexual onset” and, “when targeting sexually active adults, the first priority should be to promote mutual fidelity with an uninfected partner as the best way to assure avoidance of HIV infection.” Finally, according to the document, “all people should have accurate and complete information about different prevention options, including all three elements of the ABC approach.” The statement was signed by more than 125 prominent figures, including the President of Uganda; the Archbishop of the Anglican Church of South Africa; officials from UNAIDS, the World Health Organization, and the World Bank; and dozens of other academics, representatives of faith-based groups, and public health advocates. In promoting the ABC model, the Leadership Act authorizes prevention activities that provide information on delaying sexual debut; abstinence; fidelity and monogamy; reduction of casual sexual partnering; reducing sexual violence and coercion, including child marriage, widow inheritance, and polygamy; and where appropriate, use of condoms. The act also requires that at least one-third of prevention funding appropriated pursuant to the act be spent on abstinence-until-marriage programs. The act recommended this spending distribution for fiscal years 2004-2005 and made it mandatory for fiscal years 2006-2008. In June 2004, OGAC notified Congress that it defines abstinence-until-marriage activities as programs that address both abstinence and faithfulness. Specifically, OGAC stated that abstinence-until-marriage programs would focus on achieving two goals: (1) encouraging individuals to be abstinent from sexual activity outside of marriage to protect themselves from exposure to HIV and other sexually transmitted infections and (2) encouraging individuals to practice fidelity in sexual relationships, including marriage, to reduce their risk of exposure to HIV. PEPFAR Prevention Program Areas The five PEPFAR prevention program areas—abstinence/faithfulness (AB), blood safety, prevention of mother-to-child transmission (PMTCT), safe medical injections, and other prevention—are divided into two groups: those aimed at preventing sexual transmission and those aimed at preventing nonsexual transmission of the disease. (See fig. 3.) The sexual transmission prevention program areas are focused as follows. delay of first sexual activity, secondary abstinence, faithfulness in marriage and monogamous relationships, reduction of sexual partners among sexually active unmarried social and community norms related to the above practices. “Other prevention” activities include the purchase and promotion of condoms, management of sexually transmitted infections (if not in a palliative care setting), and messages or programs to reduce injection drug use and related risks. (See app. II for examples of AB and “other prevention” programs that are being implemented under PEPFAR. For information on the organizations that have implemented sexual transmission prevention programs under PEPFAR, see http://www.state.gov/s/gac/.) Office of the Global AIDS Coordinator The Leadership Act provided for the establishment of an HIV/AIDS Coordinator, within the Department of State, to lead the U.S. response to HIV/AIDS abroad. The Coordinator’s authorities and duties include carrying out international prevention, care, treatment, and other HIV/AIDS- related activities through NGOs and U.S. executive branch agencies and coordinating their efforts. The agencies primarily responsible for implementing PEPFAR are the Department of State, USAID, and HHS. OGAC, established within the Department of State in January 2004, has been responsible for developing a global HIV/AIDS strategy and administering PEPFAR. OGAC’s Key Strategic Principles OGAC’s overall strategic cornerstones and principles, laid out in its 5-year global HIV/AIDS strategy for PEPFAR, include commitments to respond with urgency to the crisis; make policy decisions that are evidence based; demand accountability for results; implement programs that are suited to local needs and host government develop and strengthen integrated HIV/AIDS prevention, treatment, and focus on rapid service delivery. OGAC’s Prevention Target for PEPFAR OGAC’s 5-year strategy states the PEPFAR prevention goal—announced by the President and repeated in the Leadership Act—of averting 7 million infections in the 15 focus countries. Although PEPFAR is authorized through fiscal year 2008, OGAC plans to reach its prevention goal by the year 2010. This prevention goal is cumulative; that is, infections averted in 2004 through 2009 will count toward the final total of infections averted by 2010. In addition, this goal is to be reached both through PEPFAR activities and through interventions by other donors and the host nations. (See app. III for a discussion of OGAC’s indicators, models, and method for measuring infections averted, including the challenges that OGAC faces in measuring infections averted and, thus, in assessing the success of its prevention activities.) PEPFAR Awards Process PEPFAR funding for the 15 focus countries is allocated both centrally and at the country level. Central awards are multicountry awards that are managed by U.S. agency headquarters in Washington, D.C. These one-time, 5-year awards are intended to increase funding for program activities with high levels of congressional interest and minimal existing activities in the field. Country-level awards are managed by the focus country teams. Each year, to receive country-level funding for the coming fiscal year, country teams submit budgets, or “operational plans,” to OGAC outlining planned activities and the organizations that will implement them (implementing partners). The plans are subject to OGAC’s review and approval. (See app. IV for a description of OGAC’s review process and a time line of the PEPFAR awards process.) Country teams consider a variety of criteria when selecting implementing partners, such as the applicant organizations’ ability to scale up rapidly, sustain programs, and function in-country; the strength of their administrative and financial controls; and the extent to which their priorities mirror those of the host government and the U.S. government. Teams also often place a priority on working with local, indigenous organizations rather than large, international organizations. In addition, many country teams take steps to encourage faith-based organizations to apply for funding, although none of the teams reserves a specific percentage or amount of funding for faith- based organizations. For example, they may write grants specifically designed for organizations that use a faith-based approach or instruct prime implementing partners to work with small faith-based organizations that lack the capacity or experience to handle large amounts of funding. PEPFAR Prevention Funding in the 15 Focus Countries Grew Significantly during First 3 Years PEPFAR prevention funding in the 15 focus countries increased by more than 40 percent between fiscal years 2004-2005 and by an additional 10 percent between fiscal years 2005 and 2006. At the same time, the proportion of total PEPFAR funding in the 15 focus countries dedicated to prevention declined from 33 to 20 percent. The proportion of total focus country PEPFAR prevention funding that was allocated to each of the five prevention program areas varied from fiscal year 2004 to fiscal year 2006, and individual country teams reported varying allocations among AB and “other prevention.” However, there are limitations in the reliability of the reported figures. PEPFAR Prevention Funding in the 15 Focus Countries Increased in Fiscal Years 2004-2006 PEPFAR prevention funding in the 15 focus countries increased from $207 million in fiscal year 2004 to $294 million in fiscal year 2005, or by more than 40 percent. It further increased to $322 million—about 10 percent—in fiscal year 2006. (See fig. 4.) For each of fiscal years 2004 through 2006, about 30 percent of the 15 focus countries’ total PEPFAR prevention funding was awarded centrally. Although the majority of funding for blood safety (91 percent) and safe medical injection (91 percent) activities was awarded centrally, only 21 percent of AB funding was awarded centrally. None of the “other prevention” funding was awarded centrally. In addition, PEPFAR prevention funding for the individual focus country teams generally increased between fiscal years 2004 and 2005 and, for most of the countries, increased again slightly in 2006. The amount of PEPFAR prevention funding for each focus country team varies. (See fig. 5.) Proportion of Focus Countries’ PEPFAR Funding Dedicated to Prevention Has Declined The proportion of PEPFAR funding in the 15 focus countries dedicated to prevention declined from 33 percent in fiscal year 2004 to 20 percent in fiscal year 2006, consistent with the Leadership Act’s recommendation that one-fifth of funds appropriated pursuant to the act be spent on prevention. (See fig. 6.) OGAC’s fiscal year 2004 operational plan predicted this decline, noting that the proportion of total PEPFAR funding allocated to prevention would likely begin to decrease relative to the proportion allocated to care and treatment. OGAC expected the proportion allocated to care and treatment to increase over time because (1) previous U.S. global HIV/AIDS efforts had focused on prevention and (2) factors such as limited infrastructure and a lack of adequately trained staff in the focus countries lengthen the time required to develop and expand treatment and care programs. For most of the focus country teams, the proportion of PEPFAR funding dedicated to prevention also declined in fiscal years 2004-2006. (See fig. 7.) Proportion of Focus Countries’ PEPFAR Prevention Funding Allocated to Each Prevention Program Area Varied in Fiscal Years 2004- 2006, but Data Reliability Has Limitations The proportion of total PEPFAR prevention funding that the 15 focus country teams reported allocating to each of the five prevention program areas varied to some extent during fiscal years 2004-2006. (See fig. 8.) However, there are limitations in the reliability of these data because of challenges and inconsistencies in country teams’ categorization of funding for certain integrated ABC programs and some broad sexual transmission prevention activities. The lack of a standardized method for categorizing these programs means that, to some extent, the varied numbers of funding reported across fiscal years may reflect the variations in categorization methods rather than actual differences. (See app. V for a description of country teams’ varying methods for categorizing sexual transmission prevention funding and the effect of this variation on the reported allocations’ reliability.) We analyzed country teams’ reported allocations for AB and “other prevention” for fiscal year 2005 and found that these allocations also varied. For example, 11 country teams reported allocating between 40 and 60 percent of their sexual transmission prevention funding to AB, 3 teams reported allocating somewhat over 60 percent, and 1 reported allocating slightly less than 40 percent to AB. (See fig. 9.) PEPFAR Sexual Transmission Prevention Strategy Is Driven by ABC Approach, Abstinence- Until-Marriage Spending Requirement, and Local Prevention Needs The PEPFAR strategy for preventing sexual transmission of HIV has three primary components: (1) the ABC model and OGAC guidance for implementing it, (2) the abstinence-until-marriage spending requirement and OGAC’s interpretation of it, and (3) country teams’ strategies for responding to local prevention needs. OGAC adopted the ABC model as its primary sexual transmission prevention strategy and, in August 2005, provided guidance for country teams to use in applying the model. To guide the teams’ application of the requirement that at least 33 percent of prevention funding appropriated pursuant to the Leadership Act fund abstinence-until-marriage programs, OGAC directed the teams to spend at least 50 percent of their prevention funds on sexual transmission prevention and 66 percent of those funds on AB activities. Finally, in designing their sexual transmission prevention strategies, country teams respond to local factors, such as the host government’s capacity to expand activities in sexual transmission prevention program areas, as well as to the ABC model and the spending requirement. PEPFAR Sexual Transmission Prevention Strategy Is Based Primarily on ABC Model and OGAC’s ABC Guidance OGAC adopted the ABC model, endorsed by the Leadership Act, as the primary PEPFAR strategy for preventing sexual transmission of HIV. The PEPFAR 5-year strategy states that evidence from Uganda and other countries “demonstrates the effectiveness of a balanced approach to behavior change that encourages the adoption of ‘ABC’ behaviors.” In January 2005, OGAC released guidance to country teams to shape their incorporation of the ABC model into their sexual transmission prevention strategies. The guidance identifies key principles that country teams should consider in developing and implementing ABC programs. The model should be applied in accordance with local prevention needs. The guidance states that one of PEPFAR’s commitments is to ensure “that interventions be informed by, and responsive to, local needs, local epidemiology, and distinctive social and cultural patterns.” Prevention activities should be integrated. The guidance notes that “all implementing partners must harmonize at the community level.” Prevention activities should be coordinated with the HIV/AIDS strategies of host governments. Prevention interventions should be driven by best practices. Taking these principles into account, the guidance states that “the optimal balance of ABC activities will vary across countries according to the patterns of disease transmission, the identification of core transmitters (i.e., those at highest risk of transmitting HIV), cultural and social norms, and other contextual factors.” In addition, OGAC’s ABC guidance contains rules for country teams to follow in developing and implementing their sexual transmission prevention strategies. First, the guidance specifies the components of the ABC model that should be targeted to certain populations. For example, messages about abstinence-until-marriage and delay of first sexual activity should be targeted to youths; fidelity should be emphasized for married couples and those in monogamous relationships; and condom use should be promoted to those who practice risky sexual behaviors, such as commercial sex workers and individuals who have sex with someone of unknown HIV status. Second, the guidance sets parameters on the prevention messages that may be delivered to youths. Specifically, although PEPFAR funds may be used to deliver age-appropriate AB information to in-school youths aged 10 to 14 years, the funds may not be used to provide information on condoms to these youths. When students are identified as being at risk, they may be referred to out-of-school programs that provide integrated ABC information and that provide condoms. Under these rules, PEPFAR funds may be used to provide integrated ABC information to youths older than 14. OGAC also released the following guidance regarding the use of PEPFAR funds for ABC programs: Any PEPFAR-funded program that provides information about condoms must also provide information about abstinence and faithfulness. PEPFAR funds may not be used to physically distribute or provide condoms in school settings. PEPFAR funds may not be used in schools for marketing efforts to promote condoms to youths. PEPFAR funds may not be used in any setting for marketing campaigns that target youths and encourage condom use as the primary intervention for HIV prevention. PEPFAR funds may be used to target at-risk populations with specific outreach, services, comprehensive prevention messages, and condom information and provision. The guidance defines at-risk groups as commercial sex workers and their clients, sexually active discordant couples or couples with unknown HIV men who have sex with men, people living with HIV/AIDS, and those who have sex with an HIV-positive partner or one whose status is unknown. PEPFAR Strategy Is Shaped by Abstinence-Until- Marriage Spending Requirement and OGAC’s Implementation of the Requirement The PEPFAR strategy reflects the Leadership Act’s abstinence-until- marriage spending requirement, as well as OGAC’s recent policies implementing this requirement. Having defined abstinence-until-marriage activities as AB programs, in late August 2005, OGAC issued policies to help ensure that the 33 percent spending requirement is met. These policies directed each of the 15 focus country teams and 5 additional country teams to spend at least 50 percent of their prevention funding on sexual transmission prevention and at least 66 percent of that amount on AB activities. In other words, OGAC requires country teams to spend $2.00 on AB activities for every $1.00 they spend on “other prevention” activities—a 2-to-1 ratio. To show compliance with the spending requirement, country teams’ operational plans must isolate the amount of funding spent on AB activities. OGAC’s policies relate to the Leadership Act’s requirement in the sense that, if a country spends exactly half of its prevention funding on sexual transmission prevention and two-thirds of that funding on AB activities, it will then spend one-third of its total prevention funding on AB. Figure 10 provides an illustrative example of a country team’s prevention funding strictly allocated according to OGAC’s policies. In certain cases, OGAC allows country teams to submit justifications requesting exemptions to the spending requirement, as defined by the 50 percent and 66 percent policies. For example, OGAC guidance to the country teams states that if 80 percent of a country’s epidemic is among prostitutes, a team can submit a justification for spending a higher proportion of sexual transmission prevention funds on correct and consistent condom use. However, the guidance also cautions that, in a generalized epidemic, a very strong justification is required for not meeting the 66 percent policy. The guidance adds that OGAC expects all focus country teams, in particular those with total PEPFAR funding exceeding $75 million, to adhere to the policies implementing the spending requirement. OGAC also directed country teams to apply the spending requirement to all PEPFAR prevention funding (about $357 million in fiscal year 2006). OGAC adopted this policy although it determined that, as a matter of law, the requirement applies only to funds appropriated to the GHAI account (about $322 million for prevention in fiscal year 2006). Under OGAC’s policy, the abstinence-until-marriage spending requirement applies to prevention funding from the CDC’s Global AIDS Program, the Child Survival and Health account, the Freedom Support Act account, and the GHAI account. However, when reporting to Congress on compliance with the spending requirement, OGAC reports only the allocation of funds under the GHAI account. PEPFAR Strategy Also Includes Country Teams’ Responses to Local Needs Country teams’ sexual transmission prevention strategies are shaped both by high-level requirements and local context. In each PEPFAR country, country teams design their sexual transmission prevention strategies in response to the ABC model and the abstinence-until-marriage spending requirement. At the same time, in accordance with OGAC’s ABC guidance, the strategies take into account local factors such as the host nation’s capacity to expand activities in the prevention program areas, the nature of the HIV/AIDS epidemic in the country, the average age when sexual activity begins, and the prevalence of certain social norms. For example, in a country where new HIV infections are largely occurring among high-risk groups, such as intravenous drug users or sex workers, the team determines how to effectively promote condom use to these populations while reserving the required percentage of prevention funding for AB activities. Likewise, in a country where sexual activity typically begins at a relatively low average age, the team decides how best to provide effective prevention messages to youths while taking into account the parameters that OGAC has established for delivering ABC messages to youths of different ages. ABC Guidance and Abstinence-Until- Marriage Spending Requirement Present Challenges for Country Teams Country teams face challenges related to two key drivers of the PEPFAR sexual transmission prevention strategy—OGAC’s guidance for applying the ABC model to country-level programs and the Leadership Act’s abstinence-until-marriage spending requirement. Although many country teams reported that they have found OGAC’s ABC guidance to be clear and several said that it did not present implementation challenges, two-thirds of focus country teams also reported that a lack of clarity in aspects of the guidance has led to interpretation and implementation challenges. OGAC officials told us that they are aware of these issues and plan to clarify the guidance. About half of the focus country teams indicated that adherence to the spending requirement can undermine the integrated nature of HIV/AIDS prevention programs. In addition, 17 of the 20 country teams required to meet the abstinence-until-marriage spending requirement, absent exemptions, reported that the requirement would prevent them from allocating prevention resources in accordance with local HIV/AIDS prevention needs. OGAC’s August 2005 policies implementing the spending requirement have allowed some of these country teams to address these concerns but have further constrained other teams from designing locally responsive HIV/AIDS prevention programs. Finally, OGAC’s policy of applying the spending requirement to all PEPFAR prevention funding, including funds not appropriated to the GHAI account, may further constrain country teams’ ability to address local prevention needs. Unclear ABC Guidance Creates Challenges for Many Focus Country Teams Interpreting and implementing OGAC’s ABC guidance has created challenges for most of the focus country teams. Although many teams told us that they generally found the guidance to be clear, and several said that it did not present implementation challenges, 10 of the 15 focus country teams we interviewed cited instances where components of the guidance were ambiguous and caused confusion. The guidance’s definition of at-risk groups is open to varying interpretations, causing confusion about which groups may be targeted. Six focus country teams and some implementing partners expressed uncertainty regarding the populations that should be considered at-risk in accordance with the ABC guidance. Five of these teams expressed concern that certain populations that need ABC messages in their countries might not receive them because they do not fit the ABC guidance definition of at-risk. For example, one team noted that the majority of HIV infections in its country are transmitted from one partner to another in either married or stable, cohabitating relationships. However, this team told us that they understood the ABC guidance on high-risk groups to be relevant only to a “limited epidemic” (unlike the generalized epidemic in which they were working) and that married couples do not count as high-risk under PEPFAR. As a result, they believed that a program designed to reach these individuals through ABC messages to a broad population would not be allowed. In addition, three teams questioned how to apply the definition of at-risk in a generalized epidemic. The guidance does not clearly delineate permissible C activities, causing confusion about proper use of PEPFAR funds. OGAC’s ABC guidance places restrictions on activities promoting condom use, but it does not clearly distinguish permissible and nonpermissible activities. For example, the guidance states that condom use programs should provide full and accurate information about correct and consistent condom use, including how to obtain them. The guidance also places restrictions on promoting or marketing condoms to youths; however, it does not explain how providing condom information differs from condom promotion or marketing. Several NGOs that receive PEPFAR funding expressed concern to us about crossing the line between providing information about condoms and promoting or marketing condoms. For example, representatives of a PEPFAR-supported organization that runs a youth camp for students (aged 15-17) told us that condom use is addressed during camp sessions only when youths ask specific questions. However, staff said that they feel “constrained” when they hear these questions, because they do not want to say more than is allowed under PEPFAR guidelines. Another implementing partner representative said that although the organization views condom demonstrations as appropriate in some settings, it believes that condom demonstrations, even to adults, are prohibited under PEPFAR. OGAC’s guidance also does not explain whether ABC approaches for broader audiences in a generalized epidemic may include condom social marketing. Although a senior OGAC official told us that broad condom social marketing is appropriate in certain situations, five focus country teams reported that, in their understanding, PEPFAR funds may not be used for broad condom social marketing, even to adults in a generalized epidemic. Guidance regarding mixed-age groups is absent, causing confusion about who may receive the ABC message. The ABC guidance prohibits PEPFAR-funded programs in schools from providing condom information to youths younger than 15, but the guidance does not discuss the application of this age cutoff to groups that include youths younger and older than 15. Four focus country teams noted that the age cutoff for providing condom information to youths presents challenges because classrooms and out-of-school programs often include mixed- age groups. Two teams told us that, in these situations, only AB messages are typically provided to the entire group and, as a result, some older youths who need ABC messages may not receive them. OGAC officials informed us that they were aware that certain components of the ABC guidance could be difficult to interpret. For example, they noted that they understood that it may be confusing for the definition of at-risk groups to include individuals who have sex with someone of unknown status. They explained that, although they had intended the guidance not to be overly prescriptive and looked to the country teams to determine how to apply rules in different situations, they planned to clarify certain parts of the guidance. In December 2005, OGAC officials provided us a document that gives country teams some additional clarification on how to apply the ABC guidance. For example, the document addresses issues such as preventing transmission among discordant couples and working within the context of a generalized epidemic. According to OGAC officials, they will update this document each year to respond to country teams’ requests for additional clarification and to provide technical assistance as the teams prepare their operational plans. Country teams can provide feedback to OGAC on the ABC guidance and other issues through Washington-based interagency teams (core teams) specifically assigned to support them. Meeting Abstinence-Until- Marriage Spending Requirement Presents Challenges for Majority of Country Teams Satisfying the Leadership Act’s abstinence-until-marriage spending requirement challenges many country teams’ efforts to adhere to two principles of the PEPFAR sexual transmission prevention strategy. Country teams consistently told us that they value the ABC model, and several noted the importance of AB messages. At the same time, about half of the 15 focus country teams reported that meeting the abstinence-until-marriage spending requirement undermines their ability to integrate ABC programs as required by the guidance. In addition, most of the 20 PEPFAR teams required to meet the spending requirement or receive exemptions reported that fulfilling the requirement, including OGAC’s 50 percent and 66 percent policies implementing it, presents challenges to their ability to respond to local epidemiology and cultural and social norms. Our analysis shows that OGAC should just reach the overall 33 percent target by granting exemptions to some country teams and requiring other teams to dedicate more than 33 percent of prevention funds to AB activities. Exempted teams are, to some degree, able to address the challenges they identified related to the spending requirement; however, country teams that are not exempted from the requirement face additional challenges, such as reduced funding for certain prevention programs. Our analysis suggests that “other prevention” allocations declined noticeably in country teams that were not exempted from the spending requirement but stayed constant in those that were. Finally, OGAC’s policy of applying the spending requirement to all PEPFAR prevention funds—although it determined that, as a matter of law, the requirement applies only to funds appropriated to the GHAI account—may further constrain country teams’ ability to address local prevention needs. Country Teams Value the ABC Model In several of our structured interviews, focus country teams endorsed the ABC model and noted the importance of AB messages. For example, one team told us that a balanced ABC approach was well within the host country’s prevention approach, and another stated that each component of the model has a role to play. Another country team noted that, because of the country’s high HIV/AIDS prevalence rate, abstinence is an appropriate message for both youths and adults. Several teams also emphasized the importance of AB messages. For example, one team told us that it has integrated AB messages throughout all prevention activities. Other teams noted the particular importance of AB messages for certain populations, consistent with the ABC guidance. One country team told us that, because it is focused on preventing HIV transmission among youths, its prevention programming focuses on AB activities. Similarly, another explained that youths in its country almost always receive exclusively AB messages. Finally, a U.S. government official in one of the focus countries we visited told us that abstinence is an important message for young girls in that country because of their lack of negotiating power in relationships. Spending Requirement Can Undermine Integration of Prevention Programs Because it requires country teams to segregate AB funding from funding for “other prevention,” the abstinence-until-marriage spending requirement can undermine the teams’ ability to design and implement programs that integrate the components of the ABC model—one of the guiding principles of the PEPFAR sexual transmission prevention strategy. Eight of the 15 focus country teams indicated that segregating AB from “other prevention” funding compromises the integration of their programs. Examples of the problems they cited include the following: Segregating program funding compromises the integration of ABC activities, especially for at-risk groups that need comprehensive messages. One focus country team told us that artificially splitting programs for the military (traditionally considered an at-risk group) between AB and “other prevention” disaggregates what should be integrated and potentially lowers effectiveness. This team noted that there are clear links between programming and implementation. In other words, the way that a program is reported on paper affects the way that it is put into practice. Segregating program funding limits some country teams’ ability to shift program focus to meet changing prevention needs. One focus country team indicated that segregating program funding reduces the team’s ability to respond flexibly as program beneficiaries’ needs change over time. According to OGAC officials, once funds are designated as AB, they can be used only for AB purposes. This effectively locks teams into allocation decisions made when their operational plans were approved. A team that funds a prevention program for people living with HIV/AIDS stated that, although the program includes faithfulness messages, the team does not classify any funding for the program as AB, because it cannot predict the portion of the project that should be dedicated to the faithfulness component and does not want to lose its flexibility to “do what is appropriate.” Another country team explained that its work with commercial sex workers will focus on correct and consistent condom use but will also include income-generation activities. Once the sex workers find an alternative means of income, AB messages become more relevant for them. This team stated that segregating program funding undermines the continuity inherent in integrated programs. Country Teams Report That Meeting Spending Requirement Challenges Their Ability to Respond to Local Prevention Needs A large majority of the 20 PEPFAR country teams required to meet the abstinence-until-marriage spending requirement or obtain exemptions reported that the requirement presents challenges to their efforts to respond to local prevention needs. Seventeen of these teams reported— either through documents submitted to OGAC or through structured interviews—that meeting the spending requirement, including OGAC’s 50 percent and 66 percent policies implementing it, challenges their ability to develop interventions that are responsive to local epidemiology and social norms. Between September 2005 and January 2006, 10 of these teams submitted documents to OGAC requesting exemption from the spending requirement as it was defined in OGAC’s August 2005 guidance. These documents highlight various challenges that the country teams associated with meeting the spending requirement, including the following: Reduced spending for PMTCT. Three country teams identified cuts in PMTCT as a constraint that they would face if required to meet the spending requirement. For example, one country team wrote that “reaching the sexual prevention and AB would have required drastically reducing the PMTCT budget $1.4 million to $350,000.” Limited funding to deliver appropriate prevention messaging to high- risk groups. Several teams noted that AB messages are not well-suited for high-risk groups. According to one country team, “it is very important to direct a certain amount of prevention funding to high-risk groups located along transport corridors, and AB messaging is not always appropriate.” Lack of responsiveness to cultural and social norms. Country teams identified specific characteristics about the epidemics in their countries that require a different allocation of funding than would be allowed under the spending requirement. For example, a team explained that dedicating a large portion of prevention funds to AB would be inappropriate, given conservative social norms—youths in their country “are not sexually active at an early age; the age of marriage and the age of first sexual experience were both estimated at 20 years.” Cuts in medical and blood safety activities. One country team highlighted these cuts as a potential consequence of meeting the spending requirement. Elimination of care programs. One country team wrote that care and “other policy programs” would be cut if it were held to the spending requirement. In addition, seven teams that did not submit documents requesting exemption from the spending requirement—they did not meet OGAC’s proposed criteria for requesting exemptions— identified, in structured interviews, specific program constraints related to meeting the abstinence- until-marriage spending requirement. (While some of these teams commented specifically on the original 33 percent requirement, as written in the 2003 Leadership Act, others commented on OGAC’s 50 percent and 66 percent policies implementing the Leadership Act’s requirement.) These constraints included the following: Difficulty reaching certain populations with comprehensive ABC messages. One country team stated that, because of the abstinence- until-marriage spending requirement, it had limited funding for comprehensive ABC messages to the general public. In this focus country, the AIDS epidemic is generalized but is largely fueled by populations determined to be most at risk of contracting HIV, such as commercial sex workers and truck drivers. Most of this country’s “other prevention” funding is reserved for its most-at-risk populations. However, because one-third of prevention funding must be reserved for AB programs, the team had little sexual transmission prevention funding to deliver integrated ABC messages to those in the general population who, although at risk for contracting HIV, are not among the most-at-risk populations. Limited or reduced funding for programs targeted at high-risk groups. A focus country team told us that, to meet the spending requirement, it had to cut “other prevention” funding by 50 percent. Team members explained that, as a result, services for married discordant couples, sexually active youths, and commercial sex workers were reduced. In general, this team noted that allocating funding in accordance with the spending requirement is not appropriate for the country’s epidemic and has reduced the quality of the team’s prevention programming. In a focus country with one of the world’s highest national HIV/AIDS prevalence rates, a team member told us that meeting the spending requirement had forced the team to substantially reduce planned funding for a prevention program for people living with HIV/AIDS. Reduced funding for PMTCT services. In fiscal year 2005, the spending requirement led one country team to reduce planned funding for its PMTCT program, thereby limiting services for pregnant women and their children. (Although the Leadership Act did not make the spending requirement mandatory until fiscal year 2006, OGAC encouraged country teams to spend 33 percent of prevention funds on AB activities prior to that year, consistent with the act’s recommendation.) This focus country lacks a health care system for providing PMTCT services and, as a result, the team has had significant trouble reaching its target for preventing infections through PMTCT activities. However, at the start of fiscal year 2005, OGAC directed the country team to reduce planned funding for PMTCT and dedicate more funding to AB activities, because the team’s allocation of prevention funds to AB fell short of 33 percent. In another country, where the U.S. government has been the largest supporter of the PMTCT program, the team told us that complying with the spending requirement would likely force it to shift resources away from PMTCT and thus reduce needed PMTCT commodities and services. Difficulty funding programs for condom procurement and condom social marketing. One focus country team told us that the spending requirement had complicated its efforts to address a condom shortage in the country. To reserve funding to procure condoms, the team was required to cut funding for other programs in the “other prevention” program area and to shift funds from the care category. Another focus country team stated that, because of the spending requirement, it would likely have to reduce funding for condom social marketing. In this country, the U.S. government has traditionally paid to market condoms socially, and a non-U.S. donor has paid to procure them. OGAC’s Policies Allow It to Meet the Overall 33 Percent Target Our analysis shows that OGAC’s policies implementing the 33 percent spending requirement should allow it to just fulfill the Leadership Act’s spending requirement for fiscal year 2006, with the 20 country teams dedicating, in total, slightly more than 33 percent of reported planned prevention funds to AB activities. OGAC officially approved exemptions for the 10 country teams that requested them. As a result, all but one of these teams dedicated less than 33 percent of planned fiscal year 2006 prevention funds for AB activities—about 23 percent on average. At the same time, the 10 country teams that did not submit requests for exemption were generally required to spend more than 33 percent of planned prevention funds on AB activities; fiscal year 2006 data for these teams indicate that, on average, they will each spend around 37 percent of total reported planned prevention funding on AB activities. Under OGAC’s policies implementing the spending requirement, any country team that spends more than half of prevention funding on sexual transmission prevention will have to spend more than 33 percent of its total prevention funding on AB. For example, a team that plans to spend 60 percent of prevention funding on sexual transmission prevention to meet local needs will have to spend at least 40 percent of total prevention funding on AB activities to comply with OGAC’s 66 percent policy. For fiscal year 2006, all but two of the country teams that did not request exemptions planned to spend more than half of total prevention funds on sexual transmission prevention—about 57 percent on average. As a result, these country teams also must spend more than 33 percent of prevention funds on AB. According to an OGAC official, OGAC would have been unable to meet the 33 percent target if it had allowed many of the country teams with the largest amounts of PEPFAR funding to submit exemptions to the spending requirement. For fiscal year 2006, only one of the five top-funded focus country teams submitted an exemption request. OGAC’s Policies Give Some Country Teams Greater Flexibility but Further Constrain Others OGAC’s policies implementing the abstinence-until-marriage spending requirement allow it to respond to the concerns of teams that received exemptions but prevent it from addressing the remaining country teams’ concerns. Teams that received exemptions were, to some degree, able to avoid the challenges related to meeting the spending requirement that they had identified in requesting exemption. For example, a country team that requested exemption because “the epidemic in is still concentrated primarily among injection drug users and sex workers” planned to dedicate 89 percent of total prevention funds to “other prevention” and only 4 percent to AB. Another team whose exemption request noted that the epidemic in their country “requires that resources be directed towards high-risk populations, and populations likely to engage in risky sexual behaviors” received approval to limit AB funding to 28 percent of its total planned prevention funds and reserved 22 percent of planned prevention funds for “other prevention.” Under OGAC’s policies, however, some nonexempted country teams are unable to avoid challenges presented by the spending requirement. As noted above, 7 of the 10 country teams that did not submit requests for exemption identified specific concerns about cutting or reducing funding for certain prevention programs. In allocating funds to meet the spending requirement, country teams are primarily limited to shifting resources among three prevention program areas—“other prevention,” PMTCT, and AB. (This limitation occurs because the overwhelming majority of funds spent on safe medical injections and blood safety are centrally awarded funds, over which the country teams have no budgetary control.) If, for example, a country team’s planned funding has a less than 2-to-1 ratio of AB funds to “other prevention” funds, the team can increase AB funding to reach the required ratio by reducing funds in “other prevention,” PMTCT, or a combination of the two. The team can also consider taking funds from the treatment and care program areas and placing them in the AB category. Data on total actual and planned spending allocations for the focus country teams that did not request exemption from the spending requirement suggest a noticeable decline in “other prevention” funding between fiscal year 2005, when the spending requirement was not mandatory, and fiscal year 2006. Although some of this shift may be due to varying methods of categorizing sexual transmission prevention programs and some changes in categorization methods across fiscal years (see app. V), the data demonstrate a common trend across these teams. For the nonexempted focus country teams, total funding for “other prevention” declined by about $5 million from fiscal year 2005 to fiscal year 2006, falling from about 23 percent to about 18 percent of total prevention funding, while total funding for AB activities increased by about $25 million, rising from about 27 percent to about 36 percent of total prevention funding. By contrast, in the focus country teams that received exemptions, total prevention funding for “other prevention” increased slightly by about $700,000, remaining at around 21 percent of total prevention funding, and total prevention funding for AB activities increased by about $7 million, from about 23 percent to about 28 percent of total prevention funding. Figure 11 shows the allocation of prevention funds by nonexempted and exempted focus country teams for fiscal years 2005 (actual funds) and 2006 (planned funds). Overall levels of PMTCT funding stayed relatively constant for both nonexempted and exempted focus country teams. Overall, the proportion of funding dedicated to PMTCT in the focus countries was about 23 percent in fiscal year 2005 and about 22 percent in fiscal year 2006. Focus countries’ total PMTCT funding was $66.3 million in fiscal year 2005 and $67.5 million in fiscal year 2006. OGAC’s Application of Spending Requirement to All U.S. Prevention Funding May Further Challenge Country Teams OGAC’s decision to apply the abstinence-until-marriage spending requirement to all PEPFAR prevention funding—although it determined that, as a matter of law, the requirement applies only to funds in the GHAI account—may further challenge some country teams’ ability to address HIV prevention needs at the local level. According to OGAC officials, they have chosen to apply the spending requirement to all PEPFAR prevention funding in response to a PEPFAR principle that HIV/AIDS programs should be integrated within and across agencies. These officials expressed the opinion that allowing country teams to apply the spending requirement to only a portion of prevention funding would compromise this integration. The officials added that the amount of PEPFAR funding not appropriated to the GHAI account is relatively small. For fiscal year 2006, non-GHAI prevention funds amount to about $35 million (10 percent) of PEPFAR prevention funding—that is, about $6 million (2 percent) of the focus country teams’ planned PEPFAR prevention funds and about $29 million (82 percent) of the five additional country teams’ planned PEPFAR prevention funds. Because of OGAC’s policy decision, country teams are constrained from allocating non-GHAI funding to meet local needs if the allocations do not comply with the spending requirement. For example, for fiscal year 2006, one focus country team received about $1.5 million in prevention funding that was not covered by the GHAI account. As a country with a generalized epidemic and total PEPFAR funding exceeding $75 million, this team did not submit a justification requesting exemption from the spending requirement, but it identified constraints resulting from meeting the requirement—specifically, that it would likely have to reduce funding for condom social marketing. Because of OGAC’s policy regarding non-GHAI prevention funding, this country team will be unable to apply the $1.5 million to the condom social marketing programs for which funding was likely reduced. Conclusions Responding to the severity and urgency of the global HIV/AIDS crisis, PEPFAR and its authorizing legislation, the U.S. Leadership Against HIV/AIDS, Tuberculosis and Malaria Act of 2003, significantly increased the United States’ commitment to fight the epidemic. Country teams consistently indicated that the ABC model is a useful tool for preventing sexual transmission of HIV, and many expressed the importance of AB messages for certain populations. However, the Leadership Act’s requirement that country teams spend at least 33 percent of prevention funding appropriated pursuant to the act on abstinence-until-marriage programs has presented challenges to country teams’ ability to adhere to the PEPFAR sexual transmission prevention strategy. In particular, it has challenged their ability to integrate the components of the ABC model and respond to local needs, local epidemiology, and distinctive social and cultural patterns. OGAC has established policies implementing the requirement that respond to these concerns while allowing it to meet the overall 33 percent spending target. Under these policies, some country teams have, to some degree, been able to avoid problems—such as limited funding to deliver appropriate prevention messages to high-risk groups— that would have occurred had they been subject to the spending requirement. However, other country teams, especially those with large amounts of PEPFAR funding and those facing generalized epidemics, have faced further constraints that have affected their ability to respond to local prevention needs. Finally, OGAC’s application of the spending requirement to $35 million in funds not appropriated to the GHAI account may also hamper country teams’ ability to develop locally responsive prevention programs. OGAC may be able to address some of these constraints by reconsidering its policy of applying the spending requirement to all PEPFAR prevention funding; however, the amount of funding not covered by the GHAI account is relatively small. Reversing this policy would not enable OGAC to fully address the underlying challenges that country teams face in having to reserve a specific percentage of their prevention funds for abstinence-until-marriage programs. Recommendation for Executive Action Because meeting the 33 percent abstinence-until-marriage spending requirement can challenge country teams’ ability to allocate prevention resources in a manner consistent with the PEPFAR sexual transmission prevention strategy, we recommend that the Secretary of State direct the U.S. Global AIDS Coordinator to take the following action: collect information from the country teams each fiscal year on the spending requirement’s effect on their HIV sexual transmission prevention programming and provide this information in an annual report to Congress. This information should include, for example, the justifications submitted by country teams requesting exemption from the spending requirement. The information collected should be used by the U.S. Global AIDS Coordinator to, among other things, assess whether the spending requirement should be applied solely to funds appropriated to the Global HIV/AIDS Initiative account, in line with OGAC’s legal determination that the requirement applies only to these funds. Matters for Congressional Consideration Given the challenges that meeting the abstinence-until-marriage spending requirement presents to country teams attempting to implement locally responsive and integrated HIV/AIDS prevention programs, Congress, in its ongoing oversight of PEPFAR, should review and consider the information provided by OGAC regarding the spending requirement’s effect on country teams’ efforts to prevent the sexual transmission of HIV and use this information to assess the extent to which the spending requirement supports the Leadership Act’s endorsement of both the ABC model and strong abstinence-until-marriage programs. Agency Comments and Our Evaluation The Department of State/OGAC, HHS, and USAID provided combined written comments on a draft of this report. (See app. VI for a reprint of their comments and our response.) In their letter, they highlighted the value of a comprehensive ABC approach in preventing sexual transmission of HIV and cited recent data from Kenya and Zimbabwe showing that where sexual behaviors have changed—as evidenced by increased primary and secondary abstinence, fidelity, and condom use—HIV prevalence has declined. Consistent with our report’s discussion, they also stated that more work is needed to understand these data and to identify which interventions may have influenced them. In response to our finding that interpreting and implementing the ABC guidance has created challenges for most of the focus country teams, they stated that they are working to improve efforts to communicate policy to country teams through various methods, such as weekly e-mails and constant contact between the core team leaders and the field. The agencies stated that the Leadership Act’s emphasis on AB activities has helped move them toward a balanced ABC strategy. They also accepted our recommendation that, given challenges country teams face in allocating prevention resources, they should collect information from the country teams each fiscal year regarding the spending requirement’s effect on their HIV sexual transmission prevention programming. The agencies disagreed with our recommendation to consider whether the Leadership Act’s spending requirement should be applied solely to funds appropriated to the GHAI account, in line with OGAC’s legal determination that the requirement applies only to these funds. First, they stated that applying the spending requirement to only one part of the budget would harm their efforts to use a unified budget approach. Second, they stated that the issue is becoming less salient over time because non-GHAI funds have declined in the focus countries. As a result of the agencies’ comments, we have clarified our recommendation to ask that they consider making this policy change after reviewing the information they collect on the effects of the spending requirement. We believe that this recommendation may be particularly relevant for the five additional country teams required, absent exemptions, to meet the spending requirement because non-GHAI funds represent over 80 percent of their total PEPFAR prevention funding. OGAC and USAID also provided technical comments, which we have incorporated where appropriate. We are sending copies of this report to interested congressional committees. We also will make copies available to others on request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions, please contact me at (202) 512-3149 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix VII. Scope and Methodology Under the Comptroller General’s authority, in this report we (1) review trends and allocation of the President’s Emergency Plan for AIDS Relief (PEPFAR) prevention funding, (2) describe the PEPFAR strategy for preventing the sexual transmission of HIV, and (3) identify key challenges associated with applying the PEPFAR sexual prevention strategy. Our work focuses primarily on the 15 PEPFAR focus countries: Botswana, Cote d’Ivoire, Ethiopia, Guyana, Haiti, Kenya, Mozambique, Namibia, Nigeria, Rwanda, South Africa, Tanzania, Uganda, Vietnam, and Zambia. As part of our efforts to collect information on all three objectives, we conducted structured interviews between June 2005 and January 2006 with key Department of State, U.S. Agency for International Development (USAID), Department of Health and Human Service–Centers for Disease Control and Prevention (HHS/CDC), and other U.S. agency staff responsible for implementing HIV/AIDS programs in the 15 focus countries. We conducted 11 of these structured interviews over the telephone and 4 during site visits to Botswana, Ethiopia, South Africa, and Zambia in July 2005. Our structured interview document contained open-ended questions related to each of our three objectives. To develop questions for the structured interview, we reviewed key documents from the Office of the U.S. Global AIDS Coordinator (OGAC) and other U.S. government agencies, as well as country teams’ operational plans. We also interviewed key U.S.-based officials from OGAC, USAID, and HHS/CDC. We pretested our questions with four of our initial respondents and refined our questions based on their input. We conducted follow-up interviews with our respondents to obtain supplementary information. To summarize the open-ended responses and develop categories for the analysis, we first grouped open-ended qualitative interview responses into a set of overarching issue areas and then, within each of those issue areas, we grouped the interview data into subcategories. To ensure the validity and reliability of our analysis, these subcategories were reviewed by a methodologist, who proposed modifications. After discussion of these suggestions, we determined a final set of subcategories. We then tallied the number of respondents providing information in each subcategory. We also requested information from the five additional PEPFAR country teams that receive at least $10 million in PEPFAR funding. In October 2005, we sent standardized questions to these teams on three areas: (1) their PEPFAR funding (particularly how their prevention funding was broken down by spending account); (2) their experiences developing country operational plans; and (3) the effects, if any, of the abstinence-until- marriage spending requirement on their prevention programming. We received responses from two of these country teams. To examine trends and allocation of PEPFAR prevention funding, we reviewed budget data provided to us by OGAC on fiscal year 2004 planned and approved country-level funding; OGAC’s Country Operational Plan and Reporting System (COPRS), a central U.S. government data system developed to support the collection and analysis of data related to Emergency Plan planning and reporting requirements; and data provided to us by OGAC on centrally awarded funding. To determine how country teams categorize funding for integrated programs that include AB and “other prevention” components in their country operational plans, we reviewed the President’s Emergency Plan for AIDS Relief FY06 Country Operational Plan Final Guidance (revised Aug. 22, 2005), as well as country teams’ operational plans. We determined that these data were sufficiently reliable for some purposes. (See app. V for a discussion of specific data limitations.) Finally, we interviewed U.S.-based officials from OGAC. To describe the PEPFAR strategy for preventing the sexual transmission of HIV, we reviewed the 2003 Leadership Act; The President’s Emergency Plan for AIDS Relief: U.S. Five-Year Global HIV/AIDS Strategy (February 2004); OGAC guidance to country teams, including its ABC Guidance #1 For United States Government In-Country Staff and Implementing Partners Applying the ABC Approach to Preventing Sexually- Transmitted HIV Infections within the President’s Emergency Plan for AIDS Relief (March 2005); and each focus country team’s 5-year HIV/AIDS strategy for PEPFAR. We also interviewed key U.S.-based officials from OGAC, USAID, and HHS/CDC. To identify challenges associated with implementing the PEPFAR sexual transmission prevention strategy, we (1) interviewed nongovernmental organizations (NGOs) that receive PEPFAR prevention funding; (2) conducted site visits to Botswana, Ethiopia, South Africa, and Zambia in July 2005; and (3) reviewed country teams’ requests for exemption from the spending requirement. Prior to conducting our fieldwork, we selected the top five NGO recipients of fiscal year 2005 PEPFAR funding for AB activities and the top five NGO recipients of fiscal year 2005 PEPFAR funding for “other prevention” activities to interview. Because two of these organizations were on both lists, we selected a total of eight organizations, of which we interviewed six, but were unable to meet with the remaining two. For our July 2005 fieldwork, we selected a targeted sample of PEPFAR focus countries to visit based on six criteria: (1) the amount of the country’s fiscal year 2004 PEPFAR funding dedicated to HIV prevention; (2) the percentage of the country’s fiscal year 2004 PEPFAR funding dedicated to HIV prevention; (3) the amount of the country’s fiscal year 2004 PEPFAR funding dedicated to preventing the sexual transmission of HIV; (4) the percentage of the focus country’s fiscal year 2004 PEPFAR funding for preventing sexual transmission of HIV dedicated to abstinence/faithfulness; (5) the percentage of the focus country’s fiscal year 2004 PEPFAR funding for preventing sexual transmission of HIV dedicated to “other” prevention methods, such as condom promotion; and (6) HIV/AIDS prevalence. In the countries that we visited, we interviewed key U.S. government officials, host country government officials, nongovernmental organizations (NGOs), faith-based organizations, local community-based organizations, and program beneficiaries, and we observed programs in all five prevention program areas being implemented. The information we obtained during these site visits related primarily to challenges associated with interpreting and implementing the ABC guidance. Last, we reviewed excerpts of documents that country teams submitted requesting exemption from OGAC’s policies implementing the abstinence-until-marriage spending requirement. These documents were submitted by both focus country teams and some of the additional teams required to meet the requirement. Finally, to further develop our understanding of challenges associated in general with preventing HIV/AIDS, we attended prevention conferences in Washington, D.C., and reviewed reports prepared by NGOs, private AIDS foundations, UNAIDS, and other multilateral and international institutions. We also interviewed representatives of some of these organizations. We conducted our work from February 2005 to February 2006 in accordance with generally accepted government auditing standards. AB and “Other Prevention” Programs in Four Focus Countries Fiscal year 2005 program descriptions of abstinence/faithfulness (AB) and “other prevention” programs in the four focus countries that we visited demonstrate the diversity of approaches that the President’s Emergency Plan for AIDS Relief (PEPFAR) country teams use to prevent HIV/AIDS. Country teams employ a host of methods to reach communities, such as mass media interventions, one-on-one communication, and capacity building for local organizations. The degree to which they emphasize these methods varies. For example, the Botswana team dedicates its largest single pot of AB funding to a capacity-building program, while the South Africa team dedicates its highest funded AB award to a mass media program. Because the congressional abstinence-until-marriage requirement and the Office of the U.S. Global AIDS Coordinator’s (OGAC) policies interpreting it were not in effect in fiscal year 2005, the funding amounts for each of the four country teams do not show a 2-to-1 ratio of AB to “other prevention” funding. Botswana For fiscal year 2005, the following four programs accounted for about 70 percent of the Botswana team’s total country-level AB funding: $800,000 to strengthen Botswana-based, nongovernmental organizations through a central Botswana HIV/AIDS umbrella organization that will become a leading partner in the HIV/AIDS response and expand services provided by the sector. This umbrella organization works with local faith-based organizations, community- based organizations, and nongovernmental organizations (NGOs) to fund, among other programs, AB prevention activities. $550,000 to fund a radio drama that models positive behaviors and provides information on various issues related to HIV/AIDS, such as abstinence, faithfulness, partner reduction, healthy relationships, and basic HIV information. The drama is reinforced with activities such as road shows, discussion groups, and contests. This program also receives funding under “other prevention.” $400,000 to conduct a social marketing campaign promoting the “be faithful” message. This project also builds capacity of local partners to develop behavior change community messages and promote AB messages. $350,000 to support a nationwide door-to-door community HIV education program, which trains field officers to inform, educate, and mobilize the community on topics such as abstinence and faithfulness. This program also receives funding under “other prevention.” For the same fiscal year, the following five programs accounted for about 70 percent of the Botswana team’s total country-level “other prevention” funding: $1,095,000 to fund a radio drama that promotes counseling and testing, information on antiretroviral treatment and adherence, prevention of mother-to-child transmission (PMTCT), stigma reduction, disclosure of HIV status, and alcohol and domestic abuse. This program also receives funding under AB, as noted above. $375,000 to reduce HIV transmission among individuals with sexually-transmitted infections. This program works with health care professionals and their clients to improve management of sexually transmitted infections, with the goal of better identifying populations at high risk for transmitting HIV and quickly linking them with HIV treatment and related services. $350,000 to support a nationwide door-to-door community HIV education program, which trains field officers to inform, educate, and mobilize the community on topics such as condom use, voluntary counseling and testing, PMTCT, stigma reduction, and related life skills. This program also receives funding under AB, as noted above. $349,000 to fund technical assistance. This program covers salaries for three staff members, travel, printing of technical materials to support “other prevention” projects, participation in domestic and international conferences, and temporary duty visits by colleagues based in the United States. $325,000 to lay the groundwork for potential implementation of four prevention programs areas: provision of the antiretroviral treatment Tenofovir prior to exposure to HIV infection, male circumcision, commercial sex work, and gender and HIV/AIDS. For the first two program areas, the program works with key stakeholders to determine how each service, if proven effective as a prevention strategy, would be introduced to the health care community and general population. For the second two program areas, the program gathers implementing partners and stakeholders to discuss some of the gender issues that inhibit HIV prevention efforts, to share best practices on these issues, and to outline research and programmatic needs and priorities. Ethiopia For fiscal year 2005, the following four programs accounted for about 70 percent of the Ethiopia team’s total country-level AB funding: $1,170,000 to continue and expand HIV/AIDS behavior change programs targeting youths with AB messages. This program uses a youth action toolkit and a sports-related program to model and reinforce AB behaviors for primary school students aged 11-14, as well as in-school and out-of-school youths aged 15-20. $900,000 to reach high-risk groups and youths, teachers, and community leaders with behavior change communication messages. This program targets three high-risk groups: short-distance minibus drivers, taxi drivers, and their assistants; commercial sex workers; and a regional police force. AB is the primary prevention message for these groups. However, this program also receives funding under “other prevention” to provide non-AB messages for commercial sex workers. $420,000 to provide comprehensive prevention services along a transport corridor. This program targets communities along the transport corridor between Addis Ababa and Djibouti with community prevention education programs promoting AB and reduction of stigma and discrimination. For example, the program targets 30,000 in-school youths living along the corridor with an abstinence-only education program called Lessons for Life. This program also receives funding under “other prevention.” $400,000 to promote AB messages through the media. This program trains journalists to increase accurate knowledge of HIV/AIDS and reduce stigma and discrimination, focusing on the promotion of abstinence and faithfulness prevention messages. For the same year, one program accounted for about 70 percent of Ethiopia’s total country-level “other prevention” funding. $2,900,000 to procure, distribute, and market condoms to population groups at risk of transmitting HIV. This program will promote 100 percent condom use in targeted locations where high- risk groups congregate, such as bars and hotels, and will be supported by behavior change and social marketing campaigns. This program will also assure condom supplies at health facilities, such as hospitals and PMTCT centers, and supply condoms to kiosks and marketing outlets in urban settings. South Africa For fiscal year 2005, the following seven programs accounted for about 70 percent of the South Africa team’s total country-level AB funding: $3,100,000 to produce and broadcast HIV AB messages via television. This program broadcasts AB messages to 350 waiting rooms in public health facilities, which are complemented by discussions facilitated by trained health care workers. It also produces a popular television drama series exploring the challenges and life experiences of young people living in a rural community, especially their struggles with HIV/AIDS and associated social problems. This program includes significant AB messaging. Themes in the television drama are linked with targeted community mobilization, such as discussion groups. $900,000 to promote and strengthen AB messages through churches, schools, community-based organizations, and NGOs. This program conducts peer education activities, trains teachers in an AB-based curriculum, and holds community meetings and workshops to promote innovative HIV prevention programs that incorporate strong AB messages. $400,000 to implement three AB activities: a school-based AB program, a program promoting mutual monogamy, and a program targeting AB preventative behaviors among orphans and vulnerable children. The school-based program integrates AB messages into “Life Skills” education in six schools. The monogamy program targets members of faith-based groups with an AB curriculum and peer support for abstinence and faithfulness, among other activities. The program for orphans and vulnerable children trains youth caregivers in prevention; developing, disseminating, and advocating AB messages; and promoting dialogue. This program also receives other funding through the prevention, care, and treatment program areas. $400,000 to implement AB-focused prevention programs through faith-based organizations and traditional leaders and to focus attention on the need for AB programs for men who have sex with men. This program develops national HIV/AIDS strategies for five faith- based groups and aims to improve leadership among traditional leaders in the areas of HIV/AIDS advocacy and human rights. It also develops a national strategy to stimulate a programmatic and policy focus on providing AB prevention messages to men who have sex with men and holds a sensitization workshop to increase stakeholders’ capacity to implement successful programs that target these men. $400,000 to implement a door-to-door HIV prevention campaign. This program recruits and trains 400 community members as peer educators and counselors to provide information to households on HIV/AIDS prevention and preventative behaviors. These educators and counselors promote voluntary counseling and testing services and PMTCT services, as well as teach proper condom use, when appropriate. These volunteers also mobilize communities to address stigma and discrimination associated with HIV/AIDS. $400,000 to produce mass media interventions with AB components. The program supports development of a television program for the family audience that covers issues such as HIV/AIDS and all aspects of treatment; messages on prevention and stigma, such as abstinence/faithfulness and voluntary counseling and testing; and masculinity and gender as they relate to HIV/AIDS. It also supports development of television and radio programs and related materials for children and their parents. These programs and materials cover HIV/AIDS from a child’s perspective, focusing on the impact of HIV/AIDS on children’s lives and on the school system and promoting prevention messages, particularly abstinence/faithfulness. They also cover other topics such as nutrition, lifestyle, gender, and masculinity. These youth-focused programs are complemented by community mobilization interventions, such as youth clubs to discuss the issues presented in different episodes. This program also receives funding under the treatment program area. $350,000 to work with teachers’ unions on a prevention peer education and AIDS management prevention program. This program uses trained school union representatives to facilitate weekly discussion groups among teachers on issues such as self-awareness, an understanding of one’s own sexuality, and decision-making skills as they relate to abstinence, faithfulness, and sex. The program also receives other funding through the prevention, care, and treatment program areas. For the same year, the following five programs accounted for about 70 percent of the South Africa team’s total country-level “other prevention” funding: $2,800,000 to produce and broadcast AB and other prevention messages via television. See program description above under the AB program area. $1,400,000 to train “Master Trainers” from public and private health sector unions. Master trainers will conduct HIV and AIDS prevention education programs for union membership, senior union leadership, and others. This program will also implement a young workers’ campaign involving life skills-based education to help young workers embrace a healthy lifestyle, including adoption of safe sexual practices. $500,000 to support the sexually transmitted infections and HIV prevention unit of the National Department of Health. Support includes providing logistics, management, and technical assistance in the procurement, warehousing, distribution, and teaching of the national male and female condom programs. $449,259 to provide technical assistance to government health programs, support the distribution of condoms, and operate programs targeting high-risk groups. The program provides support and technical advice on the development and rollout of government programs, including comprehensive HIV management services, such as HIV prevention services and sexually transmitted infection prevention and treatment services. The program also supports a commercial sex workers project, which provides condoms, sexually transmitted infection treatment, and support for leaving sex work. $365,000 to address the HIV/AIDS prevention needs of youths and underserved groups, such as drug users. This program conducts an assessment in three cities to better understand and respond to populations that are vulnerable to HIV infection. The program also funds a specialist to develop a youth prevention strategy for the National Department of Health and to build the capacity of local youth-serving organizations to provide skill-building and youth specific interventions. Zambia For fiscal year 2005, the following two programs accounted for about 65 percent of the Zambia team’s total country-level AB funding: $2,000,000 to strengthen the capacity of local community organizations to implement AB programs that target youths with comprehensive skills-based AB prevention activities. This program provides training for teachers on HIV/AIDS prevention, with an AB emphasis. It also reviews existing AB prevention curricula and programs and assists the Zambian Ministry of Education in introducing new modules on preventing gender-based sexual violence. In addition, the program establishes a school-managed student-driven grants program to implement AB prevention activities for youths and involve parents. Finally, the program distributes leaflets and life skills booklets in support of an AB message. $1,480,000 for a consortium of faith-based and community-based organizations to implement abstinence promotion activities. The focus of this program is a small grants program for organizations to work with youths. These organizations combine abstinence messaging with business management and vocational training in order to decrease economic vulnerability among youths. The organizations also use sports camps and “coming of age” ceremonies to reach youths. Finally, the program promotes fidelity and partner reduction among adults through extensive home-based care programs and district-level training sessions. For the same year, two programs accounted for about 75 percent of the Zambia team’s total country-level “other prevention” funding. $3,379,574 for prevention interventions for at-risk groups living and working at border and high transit sites. This program targets sex workers and their clients, truck drivers, mini bus drivers, and uniformed personnel at border and high-transit sites with services including sexually transmitted infection management, counseling and testing, referrals for antiretroviral treatment, behavior change interventions that promote partner reduction and condom use, and condom social marketing. Communication methods used include peer education, outreach work, drama, one-on-one counseling, group discussion, mass media, and local-based promotional activities. This program also receives funding under the AB program area. $2,600,000 to provide HIV prevention messages to adults and youths. This program will provide support to discordant couples through faithfulness and condom-use messages. It will also expand activities targeting at-risk groups with messages on healthy practices and correct and consistent condom use. For example, the program will use community outreach activities such as education sessions with transport workers, uniformed personnel, and police on personal risk- assessment skills and condom-negotiation skills. In addition, this program supports in-school anti-AIDS clubs and a youth radio program that provides A, B, and C messages. This program also receives funding under the AB program area. Prevention Program Indicators and Methods of Measuring PEPFAR Prevention Program Results The Office of the U.S. Global AIDS Coordinator (OGAC) requires country teams to report the number of individuals reached through specific prevention programs, but assessing overall progress toward reaching prevention goals presents major challenges. OGAC requires that country teams report on indicators such as the number of individuals reached by the program. OGAC plans, over time, to estimate progress toward the President’s Emergency Plan for AIDS Relief (PEPFAR) prevention goal by using U.S. Census Bureau statistical modeling of countries’ HIV/AIDS prevalence trends, but these estimates may not be available for several years and will not link averted infections to specific types of prevention programs. OGAC had initially planned to use an alternative modeling approach that linked results to types of programs within the countries, but it dropped that approach because of limited research data on the effectiveness of particular prevention activities. OGAC Tracks the Number of Individuals Reached by Prevention Programs as a Performance Indicator OGAC requires country teams to report several performance indicators, which generally capture the number of individuals reached or trained for each prevention program aimed at sexual transmission. Specifically, for abstinence/faithfulness (AB) activities they report on the number of individuals reached through community outreach that promotes HIV/AIDS prevention through abstinence and/or being faithful, number of individuals reached through community outreach that promotes HIV/AIDS prevention through abstinence, and number of individuals trained to promote HIV/AIDS prevention programs through abstinence and/or being faifthful. For “other prevention” activities, they report on the number of targeted condom service outlets, number of individuals reached through community outreach that promotes HIV/AIDS prevention through other behavior change beyond abstinence and/or being faithful, and number of individuals trained to promote HIV/AIDS prevention through other behavior change beyond abstinence and/or being faithful. OGAC tracks similar indicators for prevention programs outside the sexual transmission area. These include four indicators for prevention of mother- to-child transmission (PMTCT), two for blood safety, and one for safe injections. OGAC Will Estimate Progress Toward Infections Averted Goal Using Statistical Model OGAC plans, over time, to estimate progress toward the PEPFAR goal of averting 7 million infections by 2010 by using a statistical model of epidemiological trends developed by the U.S. Census Bureau. The model will compare “expected” HIV incidence rates in particular countries with “actual” incidence rates and use those comparisons to estimate the number of infections that have been averted through PEPFAR and related prevention programs. This model attempts to estimate the number of infections averted over time, but it cannot attribute this change to any specific intervention or to the success of particular types of programs. Specifically, the model estimates entail the following elements for each country: Establish “baseline” projections of HIV incidence for future years, using country data on prevalence rates through 2003 to make projections. This baseline prevalence is what would theoretically occur in the country in the absence of interventions such as PEPFAR. The prevalence data used to make these projections are obtained primarily from surveys in prenatal clinics. The projections are made using assumptions about the rate of transmission of the virus in different segments of the population and about other factors such as death rates. Estimate actual HIV prevalence trends in countries in future years, using country survey data from the prenatal clinics, beginning with data collected in 2004. Calculate the number of infections averted in each country as the difference between (1) the number of new infections each year that would be associated with the baseline prevalence rates and (2) the number of new infections each year that would be associated with the prevalence rates observed after implementation of PEPFAR and other prevention efforts. Thus, if the Census model projected, for example, that based on trends in place prior to the initiation of PEPFAR programs, there would be 300,000 new HIV infections in Kenya between 2005 and 2008, and actual survey data in future years indicated there were 200,000, then PEPFAR would be assumed to have contributed to averting 100,000 infections in Kenya during that period. Estimating infections averted over time using OGAC’s modeling approach involves substantial challenges and the reliability of the estimates is not known, according to Census officials. A key challenge is the lack of data on prevalence rates in many developing countries. Because of that lack of data, a single long-term study of prevalence trends in Musaka, Uganda, serves as the basis for several assumptions that underlie Census projections on baseline prevalence rates. These assumptions include, for example, the average age when individuals begin to be sexually active and infection rates among migrant populations. In addition, estimating changes in prevalence rates over time, and thus, infections averted, is complicated by the fact that impacts of behavioral change programs can occur over a period of time. For example, the impact on prevalence rates of providing life skills programs targeted at younger students who are not sexually active might not be observed for some period of time. Thus, prevalence data gathered in 2008, for example, may not show the full impact of PEPFAR prevention programs over the previous year or two. OGAC Considered Alternative Method of Measuring Infections Averted In March 2004, OGAC convened a technical modeling group to determine a methodology for measuring infections averted under PEPFAR. The group assessed alternative modeling approaches and initially considered the Goals Model (developed by the Futures Group) as an appropriate tool. The Goals Model is based on published research studies of the effectiveness of various prevention strategies and on conversion factors that translate dollars spent on a given prevention intervention into the number of infections averted. In contrast to the Census model described in the previous section, the GOALS model links estimates of infections averted to specific types of prevention programs carried out under PEPFAR and their spending levels. In September 2004, the Futures Group presented estimates of infections that would be averted during PEPFAR’s first year to the Technical Modeling Group. The Futures Group estimated, based on country operational plans, that between 550,000 and 580,000 infections would be averted in the initial 14 focus countries in fiscal year 2004 and that condom promotion and voluntary counseling and testing programs were more likely to avert infections than other prevention interventions. There was debate within the Modeling Group about the merits of applying the Goals Model. Of particular concern were limitations in the research underlying the model on the effectiveness of different types of programs in preventing HIV transmission. For example, the research included very few studies that assessed the effectiveness of abstinence programs in limiting HIV transmission. Although some working group members believed that the Goals Model, despite being an imperfect tool, could provide needed insights regarding prevention programs’ progress in averting infections, OGAC concluded that the model could yield misleading results and was not the best method to adopt. OGAC Is Planning Some Limited Targeted Evaluations of Prevention Programs To acquire information about the effectiveness of specific PEPFAR prevention programs, especially in the AB area, OGAC plans to carry out and fund targeted evaluations on a very limited scale. According to OGAC, targeted evaluations are rapid studies that can provide evidence-based information to improve prevention programming in the near term. In the sexual transmission prevention area, these evaluations will be done on a small sample of AB programs. The bulk of the funding for targeted evaluations comes through central PEPFAR funds. In 2004, OGAC invested about $2 million in targeted evaluations of AB programs to be carried out over 2 years. Some country teams are also doing some limited targeted evaluations of AB programs through their country operational plans. According to an OGAC official, the targeted evaluations will have limited use because of their small scale and the amount of time before results are available. PEPFAR Planning and Reporting Process The operational plans that the President’s Emergency Plan for AIDS Relief (PEPFAR) country teams submit to the Office of the U.S. Global AIDS Coordinator (OGAC) each year identify, among other things, the organizations that will implement the proposed activities and program descriptions. When OGAC receives the operational plans, it implements a three-part review process, including a technical review, a programmatic review, and a principals’ review. At the conclusion of the reviews, OGAC submits a notification to the relevant congressional committees, informing them of the activities it plans to implement under PEPFAR in the current fiscal year. Once Congress approves the notification, funds can be transferred to the field for obligation. The process for transferring and obligating funds and the length of time it takes to complete this process varies by agency, but all implementing partners are instructed to expend their funds within 12 months of receiving them. In addition to submitting operational plans, country teams are required to submit semiannual and annual progress reports to OGAC each fiscal year. These reports identify obligations that have occurred in the past fiscal year, as well as results of the various activities. Figure 12 provides a time line of OGAC’s planning and reporting requirements and the PEPFAR funding cycle. Methods for Reporting Allocations among PEPFAR Prevention Program Areas Country teams have used varying methods to categorize funding for certain integrated abstinence/faithfulness/condom use (ABC) programs and to categorize funding for broader sexual transmission prevention components that are not clearly defined as abstinence/faithfulness (AB) or “other prevention,” owing to challenges they face in categorizing these programs. Because of the teams’ varying methods for categorizing this funding, the reported allocations for the AB and “other prevention” program areas are of limited reliability. In our structured interviews, 10 of the 15 focus country teams noted the difficulty of categorizing funding for certain integrated ABC programs. For example, some officials told us that, although they do the best they can to estimate the portion of funding for an integrated ABC program that will be used for AB versus “other prevention” activities, it can be difficult to predict in advance how much funding will be used for AB or “other prevention” activities when a program provides a variety of HIV prevention messages that may vary based on the needs of program participants. A review of fiscal year 2006 country operational plans indicates that, within the sexual transmission prevention program area, country teams use different methods for categorizing integrated programs that have ABC components in their plans. Some country teams have categorized integrated ABC programs entirely as “other prevention,” while others have divided some or all of these programs between AB and “other prevention” (with the C component categorized under “other prevention” and the AB component categorized as AB). For example, one country team’s fiscal year 2006 operational plan shows one of its integrated ABC programs split between the AB and “other prevention” program areas but two of its integrated ABC programs placed entirely in the “other prevention” program area. Another country team placed all of its integrated ABC programs entirely in the “other prevention” program area rather than split these programs between the AB and “other prevention” areas. Our structured interviews also showed that country teams have used different methods for categorizing funding for integrated ABC programs for planning and reporting. Following are methods used by country teams we interviewed: Twelve of the 15 country teams told us that they split at least some of their integrated ABC programs into the AB and “other prevention” program areas. Most of these teams told us that they do not split all of their integrated programs into the different prevention program. Instead, some of these teams told us that they categorize some integrated programs entirely in the “other prevention” program area, while some also said that they had placed entirely in the AB program area some programs that primarily focus on AB but may provide limited information on condoms. The other three country teams told us that, in general, they do not split any of their integrated ABC programs; instead, they categorize these programs entirely in the “other prevention” program area. These three teams said that, in general, they categorize only programs that include AB components, but no C component, in the AB program area. Three country teams reported that they categorize some integrated ABC programs based on the target group; for example, integrated programs for youths may be categorized entirely in the AB program area, while integrated programs for most-at-risk groups may be categorized entirely in the “other prevention” program area. In addition, we found that certain broader components of sexual transmission prevention programs that are not clearly defined as AB or “other prevention” may appear in either program area. For example, activities addressing issues such as stigma reduction, peer pressure, and child, spouse, or substance abuse may be categorized as either AB or “other prevention,” depending on the country team’s judgment and factors such as a program’s focus or target population. Although these activities could be considered AB because they address social and community norms related to abstinence and faithfulness, they could also arguably be considered “other prevention.” One country team’s proposed fiscal year 2006 operational plan illustrates how the same types of broad prevention activities may fall under AB or “other prevention,” depending on the specific program. This operational plan contains one program categorized entirely as AB that aims to strengthen the capacity of military chaplains to provide counseling on issues including child, spouse, and substance abuse; management of family crisis, illness, death, and trauma; and alcohol addiction. This program also plans to develop abstinence-based literature and toolkits for the chaplains to disseminate to military personnel and their families and to support anti-AIDS youth clubs that provide HIV/AIDS education on abstinence and antidiscrimination against people living with HIV/AIDS. This country team’s operational plan also contains a program categorized entirely as “other prevention” that supports drama groups to provide messages to the country’s defense forces on topics including abstinence and faithfulness; HIV counseling and testing; stigma reduction; child and spousal abuse; and alcohol-related issues, as well as correct and consistent use of condoms. Because of the varying methods used by country teams to categorize integrated ABC prevention programs and because of the inclusion of certain broad prevention activities (such as stigma reduction) in both AB and “other prevention,” a country team’s reported AB spending may not truly reflect the amount of funding actually supporting AB activities. Likewise, a country team’s “other prevention” spending may not be a clear indicator of how much funding is going to non-AB sexual prevention activities. Some AB activities are occurring in the “other prevention” program area, suggesting that country teams may be implementing more AB activities than first appear in their operational plans. At the same time, however, activities that can be categorized as AB or “other prevention,” depending on a country team’s judgment, are also occurring in the AB program area. Overall, we consider these data to be sufficiently reliable for the purposes of this engagement. In particular, while there are some limitations in the reliability of these reported data, they are useful for identifying general trends and patterns across fiscal years and program areas. Joint Comments from State, USAID, and HHS The following are GAO’s comments on the joint letter from the Department of State, the U.S. Agency for International Development, and the Department of Health and Human Services, dated March 21, 2006. GAO Comments 1. In their letter, the agencies stated that “financing for all methods of prevention have increased under PEPFAR” and that, “even as the amount of funding dedicated to a program area rises, the percentage of overall funding dedicated to it may decline.” Although PEPFAR funding in the 15 focus countries increased substantially in all five prevention program areas between fiscal years 2004 and 2005, figure 8 of our report shows that funding dropped in two prevention program areas between fiscal years 2005 and 2006. Specifically, PEPFAR funding for “other prevention” in the 15 focus countries declined from $65.8 million to $61.6 million, and blood safety funding declined from $53.3 million to $50 million. In addition, funding for prevention of mother-to-child transmission stayed relatively constant, with $66.3 million in fiscal year 2005 and $67.5 million in fiscal year 2006. 2. The agencies commented that our report reflects misunderstanding of the relationship between PEPFAR programming and reporting mechanisms, noting that “it is not the case that each program must be only AB, or only C.” Our report acknowledges that country teams have funded integrated ABC programs through PEPFAR. We explain that these programs are often split between the AB and “other prevention” program areas for reporting purposes, but we do not suggest that each program must be AB only or C only. Rather, we note, for example, that once funds are designated as AB, they can be used only for AB purposes, effectively locking teams into allocation decisions made when their operational plans were approved. In other words, the ratio of AB to “other prevention” funding within an integrated ABC program cannot change over the course of a funding year. Eight of the 15 focus country teams indicated that segregating AB funding from “other prevention” program areas compromises the integration of their programs. For example, it can limit their ability to shift program focus to meet changing prevention needs. Because of this potential, one country team chose not to split funding between AB and “other prevention” for a prevention program for persons living with HIV/AIDS that includes faithfulness messages because it could not predict the portion of the project that should be dedicated to the faithfulness component and did not want to lose flexibility to “do what is appropriate.” 3. The agencies stated in their letter that “the ABC guidance had been issued approximately 2 to 5 months prior to country teams’ interviews.” As we note in our report, country teams first received the draft ABC guidance in January 2005. The final guidance, distributed to country teams in March 2005, differed from the draft guidance only in its discussion of human papilloma virus. We conducted an initial round of structured interviews with the focus country teams in June and July 2005. We conducted a follow-up round of structured interviews with the focus country teams between August 2005 and January 2006. 4. The agencies commented that “it is important to note that certain examples provided in the report to demonstrate confusion regarding the ABC guidance are in fact clearly spelled out in the guidance. In these cases, the issues are actually related to implementation, not the guidance document.” Our report states that both interpreting and implementing OGAC’s ABC guidance has created challenges for country teams. For example, while the guidance clearly states that “discordant couples should be encouraged to use condoms consistently and correctly,” it does not stipulate whether broad condom social marketing programs are therefore appropriate when much of a country’s population consists of discordant couples. Similarly, while the guidance clearly states that in-school youths 14 and younger should not receive condom-related information, it does not address the issue of how youth groups that cross this age divide should be handled. We recognize that guidance on a subject as complex as prevention of sexual HIV transmission will naturally lead to questions and believe that the agencies’ commitment to continually improve their efforts to communicate policy to the field should help resolve these questions. 5. The agencies’ letter stated that they have “been able to approve the allocations of countries that submitted justifications without requiring other countries to make offsetting adjustments to their proposed prevention allocations.” However, in our structured interviews, seven country teams that were not exempted from the abstinence-until- marriage spending requirement identified specific program constraints related to the requirement. As we note in our report, some of these teams commented specifically on OGAC’s 50 percent and 66 percent policies implementing the Leadership Act’s requirement. For example, one country team told us that, because of OGAC’s policies, it was required to cut funding for programs in the “other prevention” program area and to shift funding from the care category in order to address a condom shortage in that country. Another country team told us that, because of OGAC’s policies, it had been required to substantially reduce the amount of funding it had planned to dedicate to a prevention program for people living with HIV/AIDS. These examples illustrate the adjustments to prevention programming that some country teams have had to make to offset the effects of programming decisions made by teams exempted from the spending requirement. Further, OGAC could not meet the Leadership Act’s overall 33 percent target without requiring that, overall, more than 33 percent of prevention funds in nonexempted countries be spent on AB activities. 6. The agencies commented that they had asked some of the country teams that did not submit justifications if they wanted to do so and that they said no. We also did not ask all country teams that did not submit justifications whether they had wanted to do so. However, one country team told us that, although it was struggling to meet the spending requirement, OGAC officials had made it clear that submitting a justification was not an option. 7. The agencies stated that applying the spending requirement only to funds appropriated to the Global HIV/AIDS Initiative (GHAI) account would signal a step backward in the integration of U.S. government agencies’ activities. We recognize that exercising this option may entail some trade-offs and, as a result, have modified our recommendation to ask that the agencies consider this change after reviewing information collected on the effects of the spending requirement. 8. The agencies also stated that applying the spending requirement solely to funds appropriated to the GHAI account would have little impact because non-GHAI funds account for between 1 and 2 percent of focus country teams’ budgets. We acknowledge in our conclusions that the amount of overall PEPFAR funding not appropriated to the Global HIV/AIDS Initiative account is relatively small. We also acknowledge that reversing this policy would not enable OGAC to fully address the underlying challenges that the country teams face in having to reserve a specific percentage of their prevention funds for abstinence-until- marriage programs. However, unlike the focus country teams, which receive very limited funding not appropriated to the GHAI account, the five additional country teams that OGAC requires to meet the spending requirement—unless they receive exemptions—receive more than 80 percent of their PEPFAR prevention funds in non-GHAI funding. GAO Contact and Staff Acknowledgments GAO Contact Staff Acknowledgments In addition to the individual named above, Celia Thomas (Assistant Director), Elizabeth Singer, Elisabeth Helmer, David Dornisch, Mary Moutsos, Reid Lowe, Kay Halpern, and Etana Finkler made key contributions to this report.
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The U.S. Leadership Against HIV/AIDS, Tuberculosis, and Malaria Act of 2003 authorizes the President's Emergency Plan for AIDS Relief (PEPFAR) and promotes the ABC model (Abstain, Be faithful, or use Condoms). It recommends that 20 percent of funds appropriated pursuant to the act be spent on prevention and requires that, starting in fiscal year 2006, 33 percent of prevention funds appropriated pursuant to the act be spent on abstinence-until-marriage. The Office of the U.S. Global AIDS Coordinator (OGAC) is responsible for administering PEPFAR. GAO reviewed PEPFAR prevention funds, described PEPFAR's strategy to prevent sexual HIV transmission, and examined related challenges. In fiscal years 2004-2006, the PEPFAR prevention budget increased by almost 55 percent, from $207 million to $322 million. During this time, the prevention share of the total PEPFAR budget fell from 33 to 20 percent, consistent with the Leadership Act's recommendation that 20 percent of funds appropriated pursuant to the act should support prevention. The PEPFAR strategy for preventing sexual transmission of HIV is largely shaped by the ABC model and the abstinence-until-marriage spending requirement. In addition to adopting the ABC model, OGAC developed guidance for applying it--stating, for instance, that prevention interventions should be integrated and respond to local epidemiology and cultural norms. OGAC also established policies for applying the spending requirement for fiscal year 2006. To meet the 33 percent spending requirement, it mandated that country teams--PEPFAR officials in the field--spend half of prevention funds on sexual transmission prevention and two-thirds of those funds on abstinence/faithfulness (AB) activities. At the same time, OGAC permitted certain teams, especially those with relatively small budgets, to seek waivers from this policy to help them respond to local prevention needs. OGAC also applied the spending requirement to all PEPFAR prevention funding as a matter of policy, although it determined that, as a matter of law, it applies only to funds appropriated to the Global HIV/AIDS Initiative account. OGAC's ABC guidance and the abstinence-until-marriage spending requirement, including OGAC's policies for implementing it, have presented challenges for country teams. First, although most teams found the ABC guidance generally clear, two-thirds reported that ambiguities in some parts of the guidance led to uncertainty about implementing the model. OGAC officials told GAO that they plan to clarify the guidance. Second, although several teams told GAO that they value the ABC model and emphasize AB messages for certain populations, teams also reported that the spending requirement can limit their efforts to design prevention programs that are integrated and responsive to local prevention needs. Seventeen of 20 country teams reported that fulfilling the spending requirement, including OGAC's policies implementing it, presents challenges to their ability to respond to local prevention needs. Ten of these teams (primarily those with smaller PEPFAR budgets) received exemptions from the requirement, allowing them to dedicate less than 33 percent of prevention funds to AB activities. In general, the nonexempted teams were effectively required to spend more than 33 percent of prevention funds on AB activities; as a result, OGAC should just meet the overall 33 percent spending requirement for fiscal year 2006. However, to meet the requirement, nonexempted country teams have, in some cases, reduced or cut funding for certain prevention programs, such as programs to deliver comprehensive ABC messages to populations at risk of contracting HIV. Finally, OGAC's decision to apply the spending requirement to all PEPFAR prevention funds may further challenge teams' ability to address local prevention needs.
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Background NASA’s mission is to drive advances in science, technology, aeronautics, and space exploration and contribute to education, innovation, our country’s economic vitality, and the stewardship of the Earth. To accomplish this mission, NASA establishes programs and projects that rely on complex instruments and spacecraft. NASA’s portfolio of major projects ranges from space satellites equipped with advanced sensors to study the Earth to a spacecraft which plans to return a sample from an asteroid to a telescope intended to explore the universe to spacecraft to transport humans and cargo to and beyond low-Earth orbit. Some of NASA’s projects are expected to incorporate new and sophisticated technologies that must operate in harsh, distant environments. The life cycle for NASA space flight projects consists of two phases— formulation, which takes a project from concept to preliminary design, and implementation, which includes building, launching, and operating the system, among other activities. NASA further divides formulation and implementation into phase A through phase F. Major projects must get approval from senior NASA officials at key decision points before they can enter each new phase. Figure 1 depicts NASA’s life cycle for space flight projects. Formulation culminates in a review at key decision point C, known as project confirmation, where cost and schedule baselines are established and documented in a decision memorandum. To inform those baselines, each project with a life-cycle cost estimated to be greater than $250 million must also develop a joint cost and schedule confidence level (JCL). The JCL initiative, adopted in January 2009, is a point-in-time estimate that, among other things, includes all cost and schedule elements, incorporates and quantifies known risks, assesses the impacts of cost and schedule to date, and addresses available annual resources. NASA policy requires that projects be baselined and budgeted at the 70 percent confidence level. Our ongoing work on NASA’s major projects includes assessments of 18 major NASA projects. Figure 2 includes more information on the projects. NASA Cost and Schedule Performance and Implementation of Best Practices Our ongoing work indicates that NASA has made progress over the past 5 years in a number of key acquisition management areas, but it faces significant risks in some of its major projects. On the positive side, the cost and schedule performance of NASA’s portfolio of major projects in development has improved and most current projects are adhering to their committed cost and schedule baselines. In addition, NASA has maintained recent improvements in the implementation of key product development best practices, which can help reduce risk in projects. Our preliminary results indicate that although NASA’s overall performance has improved, its portfolio of major projects continues to experience cost and schedule growth and development risks in major projects, such as Orion and the Space Launch System, warrant the committee’s continued attention. Overall Cost Performance of the Portfolio Our preliminary results show that the cost and schedule performance of NASA’s portfolio of major projects in development continues to improve. In 2016, overall development cost growth for the portfolio of 12 development projects, excluding the James Webb Space Telescope (JWST), fell to 1.3 percent and launch delays averaged 4 months. Both of those measures are at or near the lowest levels we have reported since we began our annual reviews in 2009 (see fig. 3). NASA has made positive changes in the past 5 years that have helped contribute to the improved performance of its projects. Among other things, we previously reported that NASA adopted a new policy to help project officials with management, cost and schedule estimating, and maintenance of adequate levels of reserves; established a management review process to enable NASA’s senior management to more effectively monitor a project’s performance, including cost, schedule, and cross- cutting technical and nontechnical issues; and has improved external oversight by increasing transparency into project costs. Congressional action has also helped improve visibility into NASA’s cost and schedule performance. In 2005, Congress required NASA to report cost and schedule baselines for all programs and projects with estimated life-cycle costs of at least $250 million that have been approved to proceed to implementation. Congress also required NASA to report to it when development cost growth or schedule delays exceeded certain thresholds. Our ongoing work indicates that NASA’s most recent improvements in its overall cost performance have also been driven, in part, by the addition of new, large programs to the portfolio. The cost and schedule performance of any portfolio is affected by its composition. New projects are less likely to have experienced cost and schedule growth than older ones, so they generally help improve portfolio performance. Eight of the 12 major projects in development established baselines within the last 2 years, and cost and schedule performance collectively has improved as projects in the portfolio have become, on average, younger. We will continue to monitor these trends as NASA’s current major projects progress through the project life cycle to see if the improvements in the portfolio’s cost and schedule performance are sustained. Project Rebaselines Our ongoing work shows that most current NASA projects have stayed within the cost and schedule estimates in their development baselines, both this year and throughout their life cycles, but the portfolio continues to experience cost and schedule growth. This growth was driven by projects that experienced significant cost growth and exceeded their development cost baselines. When a project exceeds its development cost baseline by 30 percent, it is rebaselined if it is to be continued. NASA has rebaselined a major project each year for 8 out of the last 9 years. Table 1 shows the development cost growth for each of the rebaselined projects. Our ongoing work also shows that the cost growth associated with rebaselined projects often overwhelms the positive cost performance within the remainder of the portfolio both on an annual and life-cycle basis. In July 2015, NASA approved a new baseline for the Space Network Ground Segment Sustainment (SGSS) project, which increased its estimated development costs from $368 million to $677 million and extended its completion date from June 2017 to September 2019. Cost growth from the SGSS was not offset by better performing projects, such as the Origins-Spectral Interpretation-Resource Identification-Security- Regolith Explorer (OSIRIS-REx) asteroid sampling mission. OSIRIS-REx reported lower than expected development costs for the second consecutive year, even though it is at a stage in the life cycle when projects often realize cost growth. The project attributes its $78.2 million decrease in development cost to several factors, including a mature mission concept and rigorous risk management process. Our preliminary results indicate that the projects in NASA’s current portfolio with the highest development costs, including Space Launch System and Orion, are entering the stage when most rebaselines occur. Projects appear most likely to rebaseline between their critical design and system integration reviews. All eight major projects that rebaselined during the last 9 years did so after their critical design review and the three projects in the 2016 portfolio that rebaselined did so before holding their systems integration review. Nine projects in the current portfolio are in this stage of development—Exploration Ground Systems; Ice, Cloud, and Land Elevation Satellite-2 (ICESat-2); Ionospheric Connection (ICON); JWST; Orion; SGSS; Space Launch System; Solar Probe Plus (SPP); and Transiting Exoplanet Survey Satellite (TESS). Three projects—ICESat-2, JWST, and SGSS—have already rebaselined. If a rebaseline occurs on any of the other six projects, it could add anywhere from almost $60 million to more than $2 billion to the development cost of the portfolio. We will continue to examine these nine projects as part of our annual assessments until they launch, but they also warrant the committee’s continued oversight attention. Our ongoing work has also found that the Space Launch System and Orion, the two largest projects in this critical stage of development, face cost, schedule, and technical risks. For example, the Space Launch System program has expended significant amounts of schedule reserve over the past year to address delays with development of the core stage, which is the Space Launch System’s propellant tank and structural backbone. The Orion program continues to face design challenges, including redesigning the heat shield following the determination that the previous design used in the first flight test in December 2014 would not meet requirements for the first uncrewed flight. The standing review boards for each program have raised concerns about the programs’ ability to remain within their cost and schedule baselines. If cost overruns materialize on these programs, they could have a ripple effect on the portfolio and result in the potential postponement or even force the cancellation of projects in earlier stages of development. We have ongoing work on both of these programs and we plan to issue reports on them later this summer. Implementation of Development Best Practices Our ongoing work indicates that NASA has maintained recent improvements in the technology maturity and design stability of its projects as measured against best practices. As of 2015, 9 of the 11 major projects in NASA’s 2016 portfolio that have passed the preliminary design review have matured all heritage or critical technologies to a technology readiness level (TRL) 6—a large increase since 2010 (see fig. 4). The 12th project in development, Exploration Ground Systems, did not report any critical or heritage technologies, so it was omitted from this analysis. Our prior best practices work has shown that reaching a TRL 6—which indicates that a representative prototype of the technology has been demonstrated in a relevant environment that simulates the harsh conditions of space—can minimize risks for space systems entering product development. Projects falling short of this standard before the preliminary design review, a milestone that generally precedes the project’s final design and fabrication phase, may experience subsequent technical problems, which can result in cost growth and schedule delays. Our ongoing work indicates that NASA has also sustained improvements it has made since 2010 in the design stability of its major projects. The average percentage of engineering drawings released at critical design review for NASA’s 2016 portfolio of major projects was 72 percent, roughly the same percentage as last year. This is a significant improvement since 2010, but is still short of the GAO-identified best practice of 90 percent (see fig. 5). Further, a majority of projects in development maintained mass and power reserves that met or exceeded NASA requirements. NASA projects have also continued to minimize design changes after the critical design review—another measure of design stability. Our prior work on product development best practices shows that at least 90 percent of engineering drawings should be releasable by the critical design review to lower the risk of subsequent cost and schedule growth. The NASA Systems Engineering Handbook also includes this metric. In 2012, NASA established additional technical leading indicators to assess design maturity. These indicators include (1) the percentage of actual mass margin versus planned mass margin and (2) the percentage of actual power margin versus planned power margin. NASA has updated its project management policy and its systems engineering policy to require projects to track these metrics. Projects that do not achieve design stability by critical design review may experience design changes and manufacturing problems, which can result in cost growth and schedule delays. Management Challenges NASA’s portfolio is composed of a few large projects that face a lot of pressures and challenges. Any cost growth within these projects can have grave consequences for smaller projects that are critical to a number of scientific endeavors. In November 2015, the NASA Office of the Inspector General issued its annual report on NASA’s top management and performance challenges. Examples of challenges identified in the report include managing NASA’s science portfolio, space flight operations in low earth orbit, positioning NASA for deep space exploration, and securing NASA’s information technology systems and data. We agree with the challenges identified by the Inspector General and our ongoing and prior work has highlighted additional areas where it will be important for NASA to continue its efforts to reduce acquisition risk, including implementing project management tools, demonstrating sustained cost and schedule performance, and developing plans that will help the agency appropriately direct future investments. Implementation of Management Tools As part of our ongoing work, we found that NASA is taking steps to improve its project management tools but has not yet fully implemented best practices. Earned Value Management. NASA has made progress implementing earned value management (EVM) analysis—a key project management tool—but the agency has not yet fully implemented a formal EVM surveillance plan in accordance with best practices. EVM has been a critical part of the agency’s efforts to understand project development needs and to reduce cost and schedule growth. When implemented well, EVM integrates information on a project’s cost, schedule, and technical efforts for management and decision makers by measuring the value of work accomplished in a given period and comparing it with the planned value of work scheduled for that period and the actual cost of work accomplished. NASA has made progress rolling out EVM at its centers and is supporting these efforts with training, including classroom and online training to projects at its various centers. In 2012, we recommended that NASA require projects to implement formal EVM surveillance programs. NASA partially concurred, but according to NASA officials, they have not implemented the recommendation due to resource constraints. Proper surveillance of EVM contractor data is a best practice in the NASA Earned Value Management Implementation Handbook and GAO’s Cost Estimating and Assessment Guide. Without implementing proper surveillance, a project may be utilizing unreliable EVM data to inform its cost and schedule decision making. NASA has taken other steps to address the intent of our recommendation, but we continue to find issues with the quality of EVM data. In our December 2015 review of the James Webb Space Telescope, we found project EVM data anomalies and recommended that project officials require the contractors to explain and document all such anomalies in their monthly EVM reports. A continuous surveillance program could have identified these anomalies earlier, allowing the project to pursue corrective action with its contractors. NASA concurred with this recommendation and recently sent us documentation concerning steps it has taken to address it. We are currently reviewing that information to determine if NASA has implemented the recommendation. Joint Confidence Level. In 2009, in order to ensure that cost and schedule estimates were realistic and projects thoroughly planned for anticipated risks, NASA began requiring that programs and projects with estimated life-cycle costs of $250 million or more develop a JCL prior to key decision point C. However, there is no requirement for NASA projects to update their JCLs and our prior work has found that projects do not regularly update cost risk analyses to take into account newly emerged risks. Our cost estimating best practices recommend that cost estimates should be updated to reflect changes to a program or kept current as it moves through milestones. As new risks emerge on a project, an updated cost risk analysis can provide realistic estimates to decision-makers, including the Congress. This is especially true for NASA’s largest projects as updated estimates may require the Congress to consider a variety of actions. Schedule Development. Our best practices work stresses the importance of a reliable schedule because not only is it a road map for systematic project execution, but also a means by which to gauge progress, identify and resolve potential problems, and promote accountability. According to NASA officials, a project’s ability to efficiently execute a quality JCL analysis is directly tied to the quality of the underlying data, especially a project schedule. Independent assessors—a group of technical experts within NASA who do not actively work on a specific project or program—noted that when they are reviewing a project’s JCL, one of the most common areas that projects struggle with is developing a reliable schedule. For example, our ongoing work found that the Orion program’s standing review board raised concerns that the program’s schedule is missing activities which could affect the program’s ability to accurately identify what is driving the schedule. Officials in NASA’s Cost Analysis Division told us that various schedule related tools have been developed and already made available to projects and additional tools are in development. Sustained Cost and Schedule Performance A key management challenge that NASA faces is whether the improvement in the cost and schedule performance we have seen in the agency’s overall portfolio of major projects can be translated to new, large projects that have been recently baselined and added to the portfolio. These additions include its human spaceflight projects, which includes the Space Launch System, Orion, and Exploration Ground Systems program that is developing systems and infrastructure to support assembly, test, and launch of the Space Launch System and Orion. In our February 2015 High Risk Update, we noted that NASA’s human spaceflight projects are at critical points in implementation and, as I noted earlier, we found that all three projects are entering the stage where most project rebaselines appear most likely to occur—between their critical design and system integrations reviews. This is an area where the agency has not been tested since a similarly large and complex project, the James Webb Space Telescope, underwent a replan in September 2011 that resulted in a 78 percent increase in life-cycle costs—increasing to $8.835 billion— and a schedule delay of 52 months—delaying the planned launch date to October 2018. In addition, NASA will have to demonstrate that it is able to sustain cost and schedule performance in its Commercial Crew Program, which is NASA’s effort to facilitate the private demonstration of safe and reliable transportation services to carry NASA astronauts and cargo to and from the International Space Station. NASA is partnering with commercial providers and its approach includes tailoring its spaceflight project life cycle. Our high-risk report identified key areas where NASA could better anticipate and mitigate risks with respect to these human spaceflight programs, including ensuring that adequate and ongoing assessments of risks are conducted given that the impacts of any potential miscalculations will be felt across the portfolio, ensuring that projects’ JCLs are updated regularly, and ensuring that the long-term project costs are understood. Long-Term Planning and Stability Our ongoing and prior work has also found that NASA has established cost and schedule baselines for the Space Launch System, Orion, and Exploration Ground Systems, but the baselines provide little visibility into long-term planning and costs. The baselines for the Space Launch System and Exploration Ground Systems are through the first Exploration Mission (EM-1), during which NASA plans to fly an uncrewed Orion some 70,000 kilometers beyond the moon, and the Orion program’s baseline is through the second Exploration Mission (EM-2), which NASA plans to fly beyond the moon to further test performance with a crewed Orion vehicle. In October 2015, NASA issued its Journey to Mars, which NASA identifies as a document that, among other things, communicates its strategy and plans to get to Mars. However, the document does not provide additional details on future exploration missions, making it difficult to understand NASA’s vision for what type and how many missions it will take to get to Mars. Without this information, decisionmakers do not have visibility into how NASA expects to invest to develop, operate, and sustain a capability over the long term. Having a complete picture of costs can enable both the Congress and the administration to set priorities for both the short and long term. In May 2014, we recommended that NASA establish separate cost and schedule baselines for each additional capability that encompass all life-cycle costs, to include operations and sustainment. NASA partially concurred with our recommendation and stated that it had established separate programs for Space Launch System, Orion, and Exploration Ground Systems. Further, NASA stated that the Space Launch System program had gone further by adopting a block upgrade approach to ensure more realistic long-range investment planning and more effective resource allocations through the budget process. However, NASA stated that it does not intend to carry life-cycle estimates for the Space Launch System program through an end-of- program date because the strategic parameters of such analysis are in the process of being defined. NASA has yet to take action on this recommendation. The Space Leadership Preservation Act of 2015 The various provisions of the act being discussed today propose changes in NASA’s leadership structure and long-term contracting authorities, among other areas. In a prior testimony, sponsors of the act emphasized that the provisions are aimed at making NASA more professional and less political by giving the agency greater stability. The concept of stability is an important one for NASA since projects require heavy investments— both in terms of time and money—and require cooperation and support from a variety of communities, who sometimes have competing interests, including academic institutions, partnering countries, the science community, and industry, to name a few. We have not studied how the act’s specific provisions, including the types of leadership structures being proposed, could affect stability for NASA’s projects. However, based on our prior work on NASA’s and the Department of Defense’s (DOD) acquisition management efforts, we would like to offer the following observations: If NASA were to implement a board of directors as outlined in the proposed legislation, the board itself must be willing to hold program managers and leadership accountable by canceling programs that do not perform well. If programs with an unsound business case are allowed to continue, their poor performance could have dramatic consequences on the overall portfolio. Insight into program performance, independent assessments, and regular reporting on progress are all necessary tools to enable leadership to hold managers accountable. DOD has used multiyear contracts under other authorities to acquire weapon systems and believes these tools are helpful in negotiating lower prices. However, longer term commitments to contracts will not necessarily produce better results if they are not accompanied by best practices. Our past work at DOD has found that it is difficult to precisely determine the impact of multiyear contracting executed under a different authority on actual procurement costs and that savings did not appear to have materialized as expected in budget justifications to Congress in three case studies we looked at, and ultimately more funding was needed to buy the systems. Further, multiyear procurement contracts can provide stability for contractors doing business with the government, but they also can reduce Congress’s and NASA’s flexibility in making changes to programs and budgets unless the government is willing to pay the cancellation fees associated with doing so. In closing, I would like to emphasize that achieving stability through leadership and contracting changes may offer benefits, but one of the most important factors in achieving stability is a sound business case that balances the necessary resources—technologies, design knowledge, funding, and time—needed to transform a chosen concept into a product. As our ongoing and prior work shows, more effort is still needed to improve NASA’s cost estimating, scheduling practices, and contractor oversight. Robust, long-term plans and realistic estimates are also needed to guide decisions and to secure longer term support. We look forward to continuing to work with NASA and this Committee in instituting these improvements. Chairman Smith, Ranking Member Johnson, and Members of the Committee, this completes my prepared statement. I would be pleased to respond to any questions that you may have at this time. GAO Contact and Staff Acknowledgments If you or your staff have any questions about this testimony, please contact Cristina T. Chaplain, Director, Acquisition and Sourcing Management at (202) 512-4841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. GAO staff who made key contributions to this statement include Ronald Schwenn, Assistant Director; Molly Traci, Assistant Director; Laura Greifner; Kurt Gurka; Katherine Lenane; Erin Preston; Roxanna Sun; and Kristin Van Wychen. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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The proposed Space Leadership Preservation Act of 2015, which includes provisions related to NASA's leadership structure, budget development, and contracting authorities, would affect the way NASA develops its vision for space exploration and executes the projects that implement it. It could also have implications for NASA's acquisition management, which is an area on GAO's High Risk list. In March 2015, GAO found that projects continued a general positive trend of limiting cost and schedule growth, maturing technologies, and stabilizing designs, but that NASA faced several challenges that could affect its ability to effectively manage its portfolio. This statement provides our preliminary observations on (1) the cost and schedule performance of NASA's portfolio of major projects and the implementation of product development best practices on these projects and (2) management challenges. This statement also provides observations on the proposed legislation. This statement is based on ongoing work to be published in March 2016 and GAO's February 2015 High Risk Update, as well as GAO's extensive prior body of work on NASA's major acquisitions. GAO's ongoing work indicates that the National Aeronautics and Space Administration (NASA) has made progress over the past 5 years in a number of key acquisition management areas, but it faces significant risks in some of its major projects. On the positive side, the cost and schedule performance of NASA's portfolio of major projects in development has improved and most current projects are adhering to their committed cost and schedule baselines. In addition, NASA has maintained recent improvements in the implementation of key product development best practices, which can help reduce risk in projects. Although NASA's overall performance has improved, GAO's preliminary results show that NASA has rebaselined a major project for each year 8 out of the last 9 years, which means the projects experienced significant cost or schedule growth. This often occurs as projects prepare to begin system assembly, integration, and test; nine projects will be in that phase of development in 2016, including the Orion Multi-Purpose Crew Vehicle (Orion) and Space Launch System, which are human spaceflight programs with significant development risks. As NASA continues its efforts to reduce acquisition risk, GAO's ongoing and prior work highlights three areas of management challenges that, if addressed, will help the agency appropriately direct future investments: Implementing Management Tools. NASA has continued to implement improved project management tools to manage acquisition risks, but these efforts have not always been consistent with best practices in areas such as cost estimating or fully addressed GAO's prior recommendations. For example, NASA has made progress rolling out earned value management (EVM)—a key project management tool—at its centers but has not implemented formal EVM surveillance, which is considered a best practice by both NASA and GAO. Demonstrating Sustained Cost and Schedule Performance. A key management challenge that NASA faces is whether the improvement in the cost and schedule performance GAO has seen in the agency's overall portfolio of major projects can be translated to large, recently baselined projects that have been added to the portfolio. This includes its human spaceflight projects, which are at critical points of implementation. Long-Term Planning and Stability. NASA has established cost and schedule baselines for Space Launch System, Orion, and Exploration Ground Systems—a program that is developing systems and infrastructure to support assembly, test, and launch of the Space Launch System and Orion—but the baselines provide little visibility into long-term planning and costs. NASA recently issued a strategy for its journey to Mars, but the document does not provide details on future exploration missions making it difficult to understand NASA's vision for what type and how many missions it will take to get to Mars. The proposed Space Leadership Preservation Act of 2015 is aimed, in part, at achieving greater stability at NASA. From an acquisition perspective, GAO's prior work indicates that one of the most important factors for achieving stability is having a sound business case that balances program requirements and resources, such as technology, funding, and time.
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Introduction The Prevent All Cigarette Trafficking Act (PACT Act) requires remote retailers of cigarettes and smokeless tobacco—that is, retailers who sell cigarettes and smokeless tobacco without a face-to-face transaction with the buyer—to pay all state and local taxes before delivering the purchased goods. Three remote retailers have challenged the PACT Act on the ground that it violates the Due Process Clause. In Quill Corp. v. North Dakota , the Supreme Court held that the Due Process Clause of the Fourteenth Amendment "requires some definite link, some minimum connection, between a state and the person, property, or transaction it seeks to tax and that the income attributed to the State for tax purposes must be rationally related to values connected with the taxing State." In Red Earth LLC v. United States and Gordon v. Holder , the federal district courts for the Western District of New York and the District of Columbia, respectively, granted preliminary injunctions concluding, among other things, that the plaintiffs were likely to prevail in demonstrating that the PACT Act's requirement that remote retailers pay the state and local taxes of the jurisdictions to which they send cigarettes and smokeless tobacco violates due process because it does not require minimum contacts. The U.S. Court of Appeals for the Second Circuit upheld the preliminary injunction in Red Earth , and the U.S. Court of Appeals for the D.C. Circuit will consider the preliminary injunction in Gordon on appeal in the coming months. In Musser's Inc. v. United States , the federal district court for the Eastern District of Pennsylvania rejected the due process argument because, it concluded, the PACT Act is merely a federal statute that requires compliance with state and local laws and does not implicate due process. The PACT Act, the court determined, is no different in principle from other federal statutes that incorporate state law. Moreover, the court determined, the plaintiff had minimum contacts with the jurisdictions into which it shipped tobacco products because it transacted business through its interactive website. The Supreme Court stated in Quill : "While Congress has plenary power to regulate commerce among the states and may thus authorize state actions that burden interstate commerce, it does not similarly have the power to authorize violations of the Due Process Clause." It seems from this statement that Congress may not be able to require remote retailers to pay taxes to jurisdictions with which they do not have minimum contacts. It appears, therefore, that the constitutionality of the PACT Act would depend on what constitutes minimum contacts for remote retailers. In Quill , in the context of catalogue retailers, the Supreme Court noted that in connection with jurisdiction to adjudicate lawsuits against out-of-state defendants, it has said that the existence of minimum contacts depends on the degree to which the retailer has "purposefully avail[ed] itself of an economic market in forum State" or "purposefully directed" activities at the state's residents. Moreover, in Quill , the Supreme Court wrote that due process requires that the tax paid must be rationally related to "values connected with the taxing State." In another case, the Supreme Court wrote that this requirement means that the state must give something for which it can ask return. The PACT Act Among the purposes of the PACT Act were to require remote sellers of cigarettes and smokeless tobacco to abide by the same laws that apply to law-abiding brick and mortar retailers; to increase the collection of federal, state, and local excise taxes; to discourage cigarette smuggling; and to reduce youth access to inexpensive cigarettes and smokeless tobacco. To increase the taxes collected on remote sales of cigarettes and smokeless tobacco, the PACT Act does two things. First, the PACT Act in effect deems interstate sales to be intrastate sales: With respect to delivery sales into a specific State and place, each delivery seller shall comply with— All state, local, tribal, and other laws generally applicable to sales of cigarettes or smokeless tobacco , as if the delivery sales occurred entirely within the specific state and place , including laws imposing— excise taxes; licensing and tax-stamping requirements; restrictions on sales to minors; and other payment obligations or legal requirements relating to the sale, distribution, or delivery of cigarettes or smokeless tobacco. Second, the PACT Act requires that prior to delivery, a remote seller pay to the state and local government all taxes that apply to sales of cigarettes and smokeless tobacco in the buyer's locality and apply required stamps or other indicia to indicate that the taxes have been paid. Legal Background Two constitutional provisions govern state taxation of out-of-state businesses doing business within the state: the Commerce Clause and the Due Process Clause of the Fourteenth Amendment. Under the Commerce Clause, state taxes may not be imposed in a manner that unduly burdens or discriminates against interstate commerce. Under the Due Process Clause, states may not impose taxes on a foreign business unless the business has a sufficient connection to the state and the taxes reasonably relate to value that the taxpayer receives from the state. Congress may authorize state activities that would otherwise violate the Commerce Clause, but it may not authorize state activities that would violate the Due Process Clause. The Commerce Clause and the Due Process Clause, therefore, are "analytically distinct." The remote retailers have challenged the PACT Act under the Due Process Clause. The due process issue is governed by the Supreme Court's opinion in Quill . In Quill , the Court considered whether the State of North Dakota could require an out-of-state mail order retailer to collect a use tax on merchandise sold in the state. The retailer argued that the Due Process Clause required that it have a physical presence in the state in order to satisfy the requirement of minimum contacts. Concluding that the reasoning for state taxation of out-of-state businesses was "comparable" to reasoning for jurisdiction over out-of-state defendants, the Court quoted its opinion in Burger King Corp. v. Rudzewicz , in which the Court upheld the jurisdiction of Florida courts over an out-of-state franchisee who remotely conducted business in Florida and had a contract with a Florida corporation: Jurisdiction in these circumstances may not be avoided merely because the defendant did not physically enter the forum State. Although territorial presence frequently will enhance a potential defendant's affiliation with a State and reinforce the reasonable foreseeability of suit there, it is an inescapable fact of modern commercial life that a substantial amount of business is transacted solely by mail and wire communications across state lines, thus obviating the need for physical presence within a State in which business is conducted. So long as a commercial actor's efforts are purposefully directed toward residents of another State, we have consistently rejected the notion that an absence of physical contacts can defeat personal jurisdiction there. Because the retailer in Quill had directed a "deluge of catalogues" to North Dakota residents, the Court concluded that the retailer had "fair warning" that it would be subject to the tax and that it had purposefully directed its activities at North Dakota residents, unquestionably satisfying the requirement for minimum contacts. Under Quill , therefore, the issue is whether the out-of-state business has directed its activities at the taxing state and whether, as a result, it has fair warning that it would be liable for the taxes. The Litigation Red Earth LLC v. United States In Red Earth , the plaintiffs, members of the Seneca Nation of Indians who own and operate tobacco retail businesses that advertise on the Internet and take telephone and mail orders, sought a preliminary injunction against, among other things, enforcement of the PACT Act's requirement that they pay taxes on their sales of tobacco products. The plaintiffs claimed that the PACT Act violates the Due Process Clause because "it subjects them to the taxing jurisdiction of state and local governments without regard to whether they have sufficient minimum contacts with those taxing jurisdictions." The United States argued that there was no due process problem with the PACT Act because minimum contacts were satisfied by the fact that the plaintiffs maintain websites advertising their products for sale and the fact that plaintiffs ship their goods into the taxing jurisdictions. The district court rejected these arguments. The court found two problems with the argument that maintaining a website provided minimum contacts. First, not all the plaintiffs have websites. The PACT Act, however, applies to all the plaintiffs whether they have websites or not. Second, the websites are "passive." The court noted that, "The website is akin to a virtual mail order catalog of cigarettes and smokeless tobacco, available for interested customers to view from their home computer (if they specifically seek out the website by doing an Internet search), but with no ability to consummate the purchase over the Internet." Purchasers can merely get information off the website but the purchase is not consummated until the retailer receives a money order. Therefore, a passive website, the court determined, did not satisfy the requirement for minimum contacts. The court also rejected the United States' argument that a shipment into a state satisfied the minimum contacts requirement. As the court put it, "it would appear that the defendants are urging this Court to conclude that each sale itself creates the minimum contacts necessary to impose a duty to collect taxes on an out-of-state seller." While conceding that such a bright-line rule was appealing, the court rejected it because the Supreme Court and the federal courts of appeals have not adopted the rule and "existing cases suggest the opposite—that a single, isolated sale may not be enough to subject a seller to a foreign jurisdiction." The court could find no cases holding that a single sale satisfied the minimum contacts requirement but found a number of cases holding that a single sale did not satisfy the requirement. Moreover, the court wrote, if a single sale were sufficient, the Supreme Court in Quill would likely have based its decision on the defendant's sale into the state instead of the defendant's "continuous and widespread solicitation of business" within North Dakota, including a "deluge of catalogues" sent into the state. Ultimately, the court wrote: By failing to require any minimum contacts before subjecting the out-of-state retailer to "all state, local, tribal, and other laws generally applicable to sales of cigarettes or smokeless tobacco," Congress is broadening the jurisdictional reach of each state and locality without regard to the constraints imposed by the Due Process Clause. That it cannot do. It would appear that the PACT Act seeks to legislate the due process requirement out of the equation. The district court granted the plaintiffs' motion for a preliminary injunction. The government appealed to the U.S. Court of Appeals for the Second Circuit, challenging the district court's conclusion that the PACT Act violated the Due Process Clause. The Court of Appeals characterized the issue as "whether Congress can, consistent with constitutional due process, require a vendor to submit to the taxing jurisdiction of any state into which it makes at least one sale, without regard to the extent of that vendor's contact with the state." The court upheld the district court's preliminary injunction: The PACT Act requires a seller to collect state and local taxes based on its making of one delivery, but the federal courts have for decades steered away from the question of whether a single sale is enough to satisfy the requirements of due process. The Supreme Court has never found that a single isolated sale is sufficient. Nor has it held that a single sale into a state is insufficient for due process purposes, although its previous holdings suggest as much. Where the underlying constitutional question is close, a court reviewing the issuance of a preliminary injunction should uphold the injunction and remand for trial on the merits. Because the district court reached a reasonable conclusion on a close question of law, there is no need for us to decide the merits at this preliminary stage. Musser's Inc. v. United States In Musser 's , the plaintiff was a tobacco retailer who did business in all 50 states through an interactive website and the telephone. Like the plaintiffs in Red Earth , the plaintiff in Musser's sought a preliminary injunction on the ground that the PACT Act requires retailers to pay state and local taxes even though they do not have minimum contacts with the jurisdictions, in violation of the Due Process Clause. The district court denied the injunction under two alternative analyses. First, the court rejected the Red Earth district court's analysis because it concluded the court in that case erred in analyzing the PACT Act as if the taxes were imposed by a state: [T]he Act's tax-payment requirement is not being imposed by a state, acting unilaterally, but by Congress, and the legislative due process analysis must reflect the federal character of the legislation. In regulating interstate commerce, Congress has for decades required interstate businesses to comply with state and local law. For example, firearms, distributors, online pharmacies, farmers, distributors of explosives, inter alia , have all been required by Congress to ensure that the sale of their products are in compliance with all state and local laws of the states in which they distribute/deliver the products. Federal requirements like these have been found not to offend due process. Interstate businesses are subject to the legislative jurisdiction of Congress, which is free to require compliance with state and local law as a condition of engaging in interstate commerce. The court's analysis could be interpreted as conflating Congress's authority under the Commerce Clause to allow state regulation of interstate commerce with the separate issue of Congress's authority to allow state taxation of out-of-state businesses that do not have minimum contacts with the taxing jurisdiction. Second, the court concluded that the plaintiff had minimum contacts in all 50 states because of the interactive nature of its website. The court employed the sliding scale approach developed by the court in Zippo Mfg. Co. v. Zippo Dot Com, Inc. : At one end of the spectrum are situations where a defendant clearly does business over the Internet. If the defendant enters into contracts with residents of a foreign jurisdiction that involve the knowing and repeated transmission of computer files over the Internet, personal jurisdiction is proper. At the opposite end are situations where a defendant has simply posted information on an Internet website which is accessible to users in foreign jurisdictions. A passive website that does little more than make information available to those who are interested in it is not grounds for the exercise of personal jurisdiction. The middle ground is occupied by interactive websites where a user can exchange information with the host computer. In these cases, the exercise of jurisdiction is determined by examining the level of interactivity and commercial nature of the exchange of information that occurs on the website. In Musser's , the court concluded the plaintiff had purposefully availed itself of doing business in all 50 states because, "[i]ts website does more than post information, or exchange information. Customers can place orders over the Internet, pay for the products over the Internet, and have those products delivered to states in which they live.… [S]elling products over the Internet and knowingly conducting business through the Internet in a state is a sufficient contact to satisfy due process concerns." Thus, it appears that under the court's reasoning, minimum contacts would be satisfied by a single sale if that sale were transacted through an interactive website. Gordon v. Holder Gordon, a member of the Seneca Nation of Indians, owns a store and a telephone order business that sells cigarettes and other tobacco products. He has a passive website that directs viewers to call his store to place an order. Like the plaintiffs in Red Earth and Musser's , Gordon sought a preliminary injunction against enforcement of the PACT Act's requirement that he pay the state and local taxes of the jurisdictions to which he sends tobacco products on the ground that it violates due process because it does not require minimum contacts. Initially, the district court denied Gordon's motion because it determined it was untimely. Gordon appealed the denial to the U.S. Court of Appeals for the D.C. Circuit (D.C. Circuit). The Court of Appeals reversed and remanded the case to the district court, concluding that the motion was timely. The Court of Appeals offered the following observation to the district court: The government's suggestion that there can be no Due Process violations when Congress authorizes state levies based on minimum contacts collapses the Due Process and Commerce Clause aspects of Gordon's claims. As the Supreme Court has explained, the inquiries are analytically distinct and should not be treated as if they were synonymous. Even national legislation which can permissibly sanction burdens on interstate commerce—cannot violate Due Process principles of "fair play and substantial justice." Although Quill did not deal with excise taxes, there remains an open question whether a national authorization of disparate state levies on e-commerce renders concerns about presence and burden obsolete: Quill 's analytical approach is instructive. Before the district court on remand, the government made two arguments in response to Gordon's due process claim: "(a) because the PACT Act is a federal law, Gordon need only have minimum contacts with the United States, not any individual state; and (b) even if minimum contacts with each state are required, each of Gordon's tobacco sales into a state satisfies minimum contacts with that state." In support of the first argument, the government cited Supreme Court cases in which, it claimed, the Court found that in situations in which Congress required interstate businesses to comply with the laws of the jurisdiction to which they shipped their products, the interstate businesses were not subject to the jurisdiction of any particular states. The court distinguished those cases because the statutes at issue "merely required individuals to comply with existing state laws, [but] the PACT Act appears to impose a new, independent duty on the delivery seller by requiring that they ensure that the applicable state and local taxes are paid." Furthermore, the court believed the U.S. Court of Appeals for the D.C. Circuit had rejected this argument by stating, in remanding the case back to the district court, that "'while Congress has plenary power to regulate commerce among the States and thus may authorize state actions that burden interstate commerce, it does not similarly have the power to authorize violations of the Due Process Clause.'" The court discussed the opinion in Musser's and wrote that, in concluding that the PACT Act was like federal statutes requiring compliance with state law, the Musser's court "collapses the Due Process and Commerce Clause aspects" of the PACT Act challenge, as the D.C. Circuit found the government did when the court rejected the government's similar argument. Before addressing the government's argument that each of Gordon's sales establishes minimum contacts, the court reviewed "the seminal due process cases setting forth the personal jurisdiction law upon which Quill built." The court reviewed International Shoe Co. v. Washington , in which "the Supreme Court framed the relevant [due process] inquiry as whether a defendant had minimum contacts with the jurisdiction such that the maintenance of the suit does not offend traditional notions of fair play and substantial justice." Next, the court outlined the reasoning in Burger King Corp. v. Rudzewicz , in which the Court held that personal jurisdiction can be found "[s]o long as a commercial actor's efforts are purposefully directed toward residents of another State." The district court quoted the Supreme Court's opinion in Burger King : Jurisdiction is proper … where the contacts proximately result from actions by the defendant himself that create a substantial connection with the forum State. Thus where the defendant deliberately has engaged in significant activities within a State, or has created continuing obligations between himself and residents of the forum, he manifestly has availed himself of the privilege of conducting business there, and because his activities are shielded by the benefits and protections of the forum's laws it is presumptively not unreasonable to require him to submit to the burdens of litigation in that forum as well. The district court wrote that the Burger King Court "noted that a single act can support jurisdiction so long as it creates a substantial connection with the forum." However, acts which "create only an attenuated affiliation with the forum" are not sufficient because litigation in the forum is not reasonably foreseeable. The district court explained that in World-Wide Volkswagen Corp. v. Woodson , the Supreme Court elaborated "that the foreseeability that is critical to due process analysis … is that the defendant's conduct and connection with the forum state are such that he should reasonably anticipate being haled into court there." This focus on foreseeability, the Supreme Court wrote, "gives a degree of predictability to the legal system that allows potential defendants to structure their primary conduct with some minimum assurance as to where that conduct will and will not render them liable to suit." Finally, the district court discussed Quill : Addressing Quill's due process challenge, the Supreme Court summarized its earlier due process jurisprudence, stating that "[t]he Due Process Clause requires some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax … and that income attributed to the State for tax purposes must be rationally related to values connected with the taxing State." In Quill , "[t]he Court found that Quill's mail order business had minimum contacts with North Dakota sufficient to meet the requirement of due process because there was no question that Quill purposefully directed its activities at North Dakota residents, that the magnitude of those contacts is more than sufficient for due process purposes, and that the use tax is related to the benefits Quill receives from access to the State." The district court found that the Quill standard was not met in Gordon . "[T]he Court cannot say that Gordon's business purposefully avails itself of the benefits of [the] economic market of the states into which he sells his products or that it purposefully directed its activities at residents of these states." Moreover, even if a single sale in a state could provide the requisite "minimum connection," the district court did not "find that the tax on Gordon's products is rationally related to the values connected with the taxing State." Quoting the Supreme Court in MeadWestvaco Corp. v. Illinois Dept. of Revenue , the district court stated that fulfillment of this requirement depends on "whether the taxing power exerted by the state bears fiscal relation to protection, opportunities and benefits provided by the state—that is, whether the state has given anything for which it can ask return." "The Court cannot determine what, if any, protection, opportunities, [or] benefits Gordon receives from the state into which he delivers his products, aside from the fact that his buyer resides there." Accordingly, the court found that the PACT Act may violate due process. "In sum, this Court concludes that Gordon has a likelihood of success on his claim that due process is not satisfied by a single sale of cigarettes into a state." Conclusion In authorizing state taxation of out-of-state businesses in the PACT Act, Congress appears to have exercised its authority under the Commerce Clause to subject out-of-state businesses to state laws that would otherwise violate the Commerce Clause. However, if the PACT Act subjects out-of-state businesses to the taxing authority of states with which they do not have minimum contacts, it appears that its provisions may not comport with the requirements of the Due Process Clause. The courts in Red Earth and Gordon analyzed the constitutionality of the PACT Act under the Due Process Clause exclusively and considered whether the PACT Act authorized state taxation of retailers that do not have minimum contacts with the taxing jurisdiction. The opinion in Musser's may be interpreted as conflating the Commerce Clause and the due process analyses to conclude that the PACT Act does not implicate due process. Even applying the due process analysis exclusively, however, it is not clear whether higher courts will conclude that a single sale into a jurisdiction satisfies the due process requirement of minimum contacts. As the U.S. Court of Appeals for the Second Circuit noted in reviewing the preliminary injunction in Red Earth , whether one sale into a jurisdiction satisfies the due process requirements for minimum contacts is a "close question."
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The Jenkins Act requires out-of-state sellers of cigarettes to register and file a report with the states in which they sell cigarettes listing the name, address, and quantity of cigarettes sold to state residents. In the past, the states would use this information to collect taxes from the buyers directly. However, with the rise of Internet sales of cigarettes, compliance with the Jenkins Act was very low, and it was estimated that billions of dollars of state and local taxes went unpaid. In 2010, Congress passed the Prevent All Cigarette Trafficking Act (PACT Act), which amends the Jenkins Act, to address this problem. The PACT Act requires remote retailers of cigarettes and smokeless tobacco—that is, retailers who sell without an in-person transaction with the buyer—to pay the state and local taxes of the jurisdiction in which the buyer receives the goods. Three remote retailers have challenged the PACT Act in federal courts seeking to enjoin enforcement of the act, claiming that forcing remote sellers to pay state and local taxes violates due process. The Supreme Court held in Quill Corp. v. North Dakota that the Due Process Clause of the Fourteenth Amendment "requires some definite link, some minimum connection, between a state and the person, property, or transaction it seeks to tax and that the income attributed to the State for tax purposes must be rationally related to values connected with the taxing State." In Red Earth LLC v. United States and Gordon v. Holder, the federal district courts for the Western District of New York and the District of Columbia, respectively, issued preliminary injunctions, concluding that the plaintiffs were likely to succeed in demonstrating that the PACT Act violates due process because it subjects the retailers to the taxing authority of foreign states regardless of whether they have the required minimum contacts with the taxing jurisdictions. The Court of Appeals for the Second Circuit upheld the Red Earth preliminary injunction, and the United States has appealed the preliminary injunction issued in Gordon to the U.S. Court of Appeals for the D.C. Circuit. In Musser's Inc. v. United States, the federal district court for the Eastern District of Pennsylvania rejected the due process argument, concluding that because the PACT Act is federal legislation, the due process requirements of the Fourteenth Amendment, which applies to states, do not apply. The PACT Act, the Musser's court determined, is not different in principle from other federal statutes that incorporate state laws. In any event, the court determined, because the plaintiff took orders over the Internet, it had minimum contacts in the jurisdictions into which it shipped tobacco products. The Supreme Court stated in Quill: "While Congress has plenary power to regulate commerce among the states and may thus authorize state actions that burden interstate commerce, it does not similarly have the power to authorize violations of the Due Process Clause." In Gordon, the district court for the District of Columbia characterized the issue as whether one sale into a taxing jurisdiction satisfied the due process requirement for minimum contacts, and concluded it did not. The U.S. Court of Appeals for the Second Circuit, in upholding the preliminary injunction in Red Earth, described the issue as a "close question."
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SECTION 1. SHORT TITLE.
This Act may be cited as the ``Build the Fence Now Act of 2011''.
SEC. 2. TWO-LAYERED REINFORCED FENCING ALONG THE ENTIRE UNITED STATES-
MEXICO BORDER.
(a) In General.--Subparagraph (A) of section 102(b)(1) of the
Illegal Immigration Reform and Immigrant Responsibility Act of 1996
(Public Law 104-208; 8 U.S.C. 1103 note) is amended to read as follows:
``(A) Two-layered reinforced fencing.--
``(i) In general.--In carrying out
subsection (a) and in accordance with clause
(ii) of this subparagraph, the Secretary of
Homeland Security shall--
``(I) construct two layers of
reinforced fencing along the entire
international land border between the
United States and Mexico; and
``(II) provide for the installation
of additional physical barriers, roads,
lighting, cameras, radars, and sensors
along the entire length of the
international border between the United
States and Mexico and the United States
and Canada to gain operational control
of such border.
``(ii) Clarification.--In carrying out
subsection (a), the Secretary of Homeland
Security shall construct a second layer of
reinforced fencing in any area along the
international land border between the United
States and Mexico that, as of the date of the
enactment of this subparagraph, has only one
layer of fencing.
``(iii) Construction deadline.--The
Secretary shall ensure the completion of the
construction of such two-layered reinforced
fencing and the installation of such additional
physical barriers, roads, lighting, cameras,
radars, and sensors by not later than the date
that is--
``(I) two years after the date of
the enactment of this subparagraph with
respect to the international land
border between the United States and
Mexico; and
``(II) five years after the date of
the enactment of this subparagraph with
respect to the international land
border between the United States and
Canada.''.
(b) Repeal of Consultation Requirement.--Subparagraph (C) of
section 102(b)(1) of the Illegal Immigration Reform and Immigrant
Responsibility Act of 1996 is repealed.
(c) Limitation on Requirements.--Subparagraph (D) of section
102(b)(1) of the Illegal Immigration Reform and Immigrant
Responsibility Act of 1996 is amended to read as follows:
``(C) Limitation on requirements.--
``(i) Determination and report.--If the
Secretary of Homeland Security determines that
the installation of the two-layered reinforced
fencing required under subparagraph (A)(i)(I)
in a particular location along the
international border of the United States and
Mexico is topographically impractical, the
Secretary shall submit to Congress a report on
the specific alternative measures the Secretary
determines necessary to achieve and maintain
operational control over the international
border at such location.
``(ii) Follow-up action.--The installation
of the two-layered reinforced fencing required
under subparagraph (A)(i)(I) shall not apply
with respect to any location specified in the
report required under clause (i) of this
subparagraph if a subsequent Act of Congress
exempts any such location from such fencing
requirement and authorizes the specific
alternative measures referred to in such
report.''.
(d) Clerical Amendment.--Section 102(b)(1) of the Illegal
Immigration and Immigrant Responsibility Act of 1996 is amended, in the
paragraph heading, by striking ``along southwest border''.
(e) Authorization of Appropriations.--There are authorized to be
appropriated such sums as may be necessary to carry out the amendment
made by subsection (a).
SEC. 3. TUNNEL TASK FORCE.
Subject to the availability of appropriations for such purpose, the
fiscal year 2012 budget of the Tunnel Task Force, a joint force
comprised of Immigration and Customs Enforcement (ICE), Customs and
Border Patrol (CBP), and Drug Enforcement Administration (DEA)
personnel tasked to pinpoint tunnels that are utilized by drug lords
and ``coyotes'' to smuggle narcotics, illegal aliens, and weapons,
shall be increased by 100 percent above the fiscal year 2007 budget.
Such increase shall be used to increase personnel, improve
communication and coordination between participant agencies, upgrade
technology, and offer cash rewards and appropriate security to
individuals who provide the Tunnel Task Force with accurate information
on existing tunnels that breach the international borders of the United
States.
SEC. 4. AERIAL VEHICLES AND SURVEILLANCE SYSTEMS.
(a) Authorization.--The Secretary of Homeland Security shall
develop and implement a program to fully integrate and utilize aerial
surveillance technologies, including unmanned aerial vehicles and
related equipment, to enhance the security of the international borders
between the United States and Mexico and the United States and Canada
by conducting continuous monitoring and border surveillance of the
entirety of such borders, including equipment such as--
(1) additional sensors;
(2) satellite command and control; and
(3) other necessary equipment for operational support.
(b) Authorization of Appropriations.--There are authorized to be
appropriated such sums as may be necessary to carry out subsection (a).
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Build the Fence Now Act of 2011 - Amends the Illegal Immigration Reform and Immigrant Responsibility Act of 1996 to require the Secretary of Homeland Security (DHS) to: (1) construct two layers of reinforced fencing along the entire international land border between the United States and Mexico; (2) provide for the installation of additional physical barriers, roads, lighting, cameras, radars, and sensors along the entire length of the international border between the United States and Mexico and the United States and Canada; and (3) complete such work within two years along the U.S.-Mexico border and within five years along the U.S.-Canada border.
Increases the FY2012 budget of the Tunnel Task Force (a joint Immigration and Customs Enforcement [ICE], Customs and Border Patrol [CBP], and Drug Enforcement Administration [DEA] force tasked to pinpoint smuggling tunnels) by 100% above the FY2007 budget.
Directs the Secretary to implement a program to fully integrate and utilize aerial surveillance technologies, including unmanned aerial vehicles, to enhance the security of the international borders between the United States and Mexico and the United States and Canada.
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. . . 'They were the only measure of value which the people had, and their use was a matter of almost absolute necessity. In the light of these facts, it seems hardly less than absurd to say that these dollars must be regarded as identical in kind and value with the dollars which constitute the money of the United States. We cannot shut our eyes to the fact that they were essentially different in both respects.' The ordinance of the convention of North Carolina of October, 1865, establishes, as a presumption of law, that contracts to pay 'dollars' made during the war, are presumed to be payable in Confederate currency, subject to evidence of a different intent. And the valuation by statute of North Carolina of value of Confederate currency for month of May, 1862, shows that the demand of the complainants is unreasonable. The learned counsel then went into argument based on a special history, which he gave of the bonds, to show that if payable in full, in lawful money of the United States, they were void as usurious. [In view of the decision hereinafter made, p. 560, on the point thus set up, the Reporter has not in his statement given any special history of the bonds; and now does not give any argument on the point as made.] Mr. H. W. Guion, contra, who contended among other things—if the facts of the case did not repel all presumptions that the bonds were payable in Confederate notes, and if these bonds were within the meaning of the statutes of North Carolina—that those statutes impaired the obligation of contracts, and so were unconstitutional; that the parties had made in 1862 a contract, using in it the well-known word of 'dollars;' that it was for the courts to interpret the meaning of the word in accordance with the settled rules of law and evidence; that these acts passed in 1866 changed this state of things, and assumed that the parties meant not what the words, judicially interpreted, declared, but what the legislature determined to be the presumable and presumed meaning; that the acts put the whole burden of proof upon him who previously was not called on to make any proof; that they thus changed both the meaning which the law gave to words, the tribunal which should settle that meaning and the rules of evidence to ascertain it; that the acts were retrospective; operating on existing contracts, and as a practical result converting valuable securities into worthless paper. Mr. Justice FIELD, after stating the case, delivered the opinion of the court, as follows: The question presented, and the sole question under the pleadings, is whether the bonds issued in May, 1862, of the Atlantic, Tennessee and Ohio Railroad Company, a corporation created by the State of North Carolina, were solvable in Confederate notes or in the legal currency of the United States. The company, in its answer, expresses a readiness to pay in legal currency the equivalent of the bonds, if their values be estimated upon the assumption that the bonds were payable in Confederate notes. In support of the position taken by the company, and the trustees representing the company, reliance is placed upon the decision of this court in Thorington v. Smith,3 and the ordinance of North Carolina of October, 1865, relating to contracts made during the war, and the Scaling Act of the State passed in 1866. The treasury notes of the Confederate government were issued early in the war, and, though never made a legal tender, they soon, to a large extent, took the place of coin in the insurgent States. Within a short period they became the principal currency in which business in its multiplied forms was there transacted. The simplest purchase of food in the market, as well as the largest dealings of merchants, were generally made in this currency. Contracts thus made, not designed to aid the insurrectionary government, could not, therefore, without manifest injustice to the parties, be treated as invalid between them. Hence, in Thorington v. Smith, this court enforced a contract payable in these notes, treating them as a currency imposed upon the community by a government of irresistible force. As said in a later case, referring to this decision, 'It would have been a cruel and oppressive judgment, if all the transactions of the many millions of people composing the inhabitants of the insurrectionary States, for the several years of the war, had been held tainted with illegality because of the use of this forced currency, when those transactions were not made with reference to the insurrectionary government.'4 The Confederate notes, being greatly increased in volume from time to time as the exigencies of the Confederate government required, and the probability of their ultimate redemption growing constantly less, necessarily depreciated in value as the war progressed, until, in some portions of the insurgent territory, at the close of the year 1863, $20 in these notes, and at the close of the year 1864, $40 possessed only the purchasing power of $1 in lawful money.5 The precious metals, however, still constituted the legal money of the insurgent States, and alone answered the statutory definition of dollars, but in fact had ceased in nearly all, certainly in a large part of the dealings of parties, to be the measures of value. When the war closed, these notes, of course, became at once valueless and ceased to be current, but contracts made upon their purchasable quality, and in which they were designated as dollars, existed in great numbers. It was at once evident that great injustice would in many cases be done to parties if the terms used were interpreted only by reference to the coinage of the United States or their legal-tender notes, instead of the standard adopted by the parties. The legal standard and the conventional standard differed, and justice to the parties could only be done by allowing evidence of the sense in which they used the terms, and enforcing the contracts thus interpreted. The anomalous condition of things at the South had created in the meaning of the term 'dollars' an ambiguity which only parol evidence could in many instances remove. It was, therefore, held in Thorington v. Smith, where this condition of things, and the general use of Confederate notes as currency in the insurgent States were shown, that parol evidence was admissible to prove that a contract between parties in those States during the war payable in 'dollars,' was in fact made for the payment of Confederate dollars; the court observing, in the light of the facts respecting the currency of the Confederate notes, which were detailed, that it seemed 'hardly less than absurd to say that these dollars must be regarded as identical in kind and value with the dollars which constitute the money of the United States.' The decision upon which reliance is placed, as thus seen, only holds that a contract made during the war in the insurgent States, payable in Confederate notes, is not for that reason invalid, and that parol evidence, under the peculiar condition of things in those States, is admissible to prove the value of the notes, at the time the contract was made, in the legal currency of the United States. In the absence of such evidence the presumption of law would be that by the term 'dollars,' the lawful currency of the United States was intended. This case affords, therefore, no support to the position of the appellants here, for no evidence was produced by them that payment of the bonds in Confederate notes was intended by the railroad company when they were issued, or by the parties who purchased them. The ordinance of North Carolina of October, 1865, recognized the difference between the standard of value existing in that State during the war, and usually referred to in the contracts of parties, and the legal standard adopted by the government of the United States. It required that the legislature should provide a scale of depreciation of the Confederate currency from the time of its first issue to the end of the war; and declared that all existing contracts solvable in money, whether under seal or not, made after the depreciation of that currency, before the 1st day of May, 1865, and then unfulfilled (except official bonds, and penal bonds payable to the State), should 'be deemed to have been made with the understanding that they were solvable in money of the value of the said currency;' but at the same time provided that it should be 'competent for either of the parties to show, by parol or other relevant testimony, what the understanding was in regard to the kind of currency in which the same were solvable,' and that in such case 'the true understanding' should regulate the value of the contract. The act of the legislature of the State, passed in 1866, adopted a scale of depreciation of Confederate currency as required by the ordinance, designating the value in such currency of the gold dollar on the first day of each month, from November, 1861, to April, 1865. The ordinance and act require the courts, in the construction of contracts made in the insurgent States between certain dates, to assume as a fact that the parties intended by the term 'dollars' Confederate notes, and understood that the contracts were solvable in that currency; and they thus throw upon the party contesting the truth of the assumed fact the burden of establishing a different understanding. It is contended by the complainants that the ordinance and statute in thus giving a supposed conventional meaning to the terms used, in the absence of any evidence on the subject, instead of the meaning which otherwise would attach to the terms, impair the obligation of the contracts between them and the railroad company, and are, therefore, void. Upon this question we refrain from expressing any opinion. It is unnecessary that we should do so, for there is sufficient in this case to rebut the presumption required by the ordinance and statute. The understanding of the parties may be shown from the nature of the transaction, and the attendant circumstances, as satisfactorily as from the language used. A contract, for example, to pay $50 for a night's lodging at a house of public entertainment, where similar accommodation was usually afforded for one-twentieth of that sum in coin, accompanied by proof of a corresponding depreciation of Confederate notes, would leave little doubt that the parties had Confederate money in contemplation when the contract was made. In Thorington v. Smith the land was sold for the nominal sum of $45,000, when its value in coin was only $3000, a most persuasive fact to the conclusion that Confederate notes were alone intended in the original transaction. So, on the other hand, contracts made payable out of the Confederate States, or at distant periods, such as may be supposed to be desired as investments of moneys, or given upon a consideration of gold, would, in the absence of other circumstances, justify the inference that the parties contemplated payment in the legal currency of the country. In the present case the intention of the railroad company that the principal of its bonds should be paid in lawful money instead of Confederate notes may justly be inferred, we think, from the nature of the contracts, particularly the long period before they were to mature. When they were issued, in May, 1862, it could not have been in the contemplation of the parties that the war would continue from seven to thirteen years. It is well known that at that time it was the general expectation on all sides that the war would be one of short duration. The Confederate notes were only payable by their terms after a ratification of peace between the Confederate States and the United States. The bonds of the railroad were intended for sale in the markets of the world generally, and not merely in the Confederate States; they were payable to bearer, and, therefore, transferable by delivery. They state on their face that they may be converted into the stock of the company, at par, by the holder. The declarations of the officers of the company up to July, 1863, show that the company treated the bonds as having an exceptional value, and not subject to the fluctuation of Confederate currency. Repeated declarations of the officers were made to that import. There is sufficient in these circumstances to repel the presumption created by the ordinance and act of North Carolina, and that being repelled, the ordinary presumption of law as to the meaning of the parties in the terms used must prevail. With reference to the interest payable semi-annually a different presumption cannot be allowed, as the interest must follow the character of the principal. The other questions presented by counsel are not raised on the pleadings. Usury, as a defence, should have been specially pleaded or set up in the answer to entitle it to consideration. DECREE AFFIRMED.
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THE ATLANTIC, TENNESSEE AND OHIO RAILROAD COMPANY, THas CHARLOTTE AND SOUTH CAROLINA RAILROAD COMPANY, JOSEPH WILSON AND ANDERSON MITCHELL,
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The motion to dismiss the appeal in this case is now before the court. Counsel for the Pullman Company took the appeal directly from the circuit court to this court, on the theory that the case involved the construction or application of the constitution of the United States, because of the holding of the court below that the cause of action alleged by the Central Company in its cross bill was, under the circumstances, a proper subject of equitable cognizance; and counsel claimed it was really nothing but a legal cause of action, in regard to which the cross defendant was entitled to a trial by jury under the constitution of the United States. There being room for doubt in regard to the soundness of such contention, the counsel also took an appeal to the circuit court of appeals, and we think that by this action he did not waive any right of appeal which he would otherwise have had. Whichever route may be the correct one, either directly from the circuit court or through the circuit court of appeals, it is unnecessary to decide, because the case is now properly before us either by appeal or by the writ of certiorari, and we therefore proceed to determine it upon the merits. The Pullman Company, complainant in the original suit, insists that it had the right to discontinue that suit at its own cost before any decree was obtained therein, and the refusal of the court below to grant an order of discontinuance upon its application is the first ground of objection to the decree herein. The general proposition is true that a complainant in an equity suit may dismiss his bill at any time before the hearing, but to this general proposition there are some well recognized exceptions. Leave to dismiss a bill is not granted where, beyond the incidental annoyance of a second litigation upon the subject-matter, such action would be manifestly prejudicial to the defendant. The subject is treated of in City of Detroit v. Detroit City Ry. Co., in an opinion by the circuit judge, and reported in 55 Fed. 569, where many of the authorities are collected, and the rule is stated substantially as above. The rule is also referred to in Chicago & A. R. Co. v. Union Mill-Rolling Co., 109 U. S. 702, 3 Sup Ct. 594. From these cases we gather that there must be some plain, legal prejudice to defendant to authorize a denial of the motion to discontinue. Such prejudice must be other than the mere prospect of future litigai on rendered possible by the discontinuance. If the defendants have acquired some rights which might be lost or rendered less efficient by the discontinuance, then the court, in the exercise of a sound discretion, may deny the application. Stevens v. The Railroads, 4 Fed. 97, 105. Unless there is an obvious violation of a fundamental rule of a court of equity or an abuse of the discretion of the court, the decision of a motion for leave to discontinue will not be reviewed here. Upon an examination of the facts relating to the motion, we think the circuit court was right, in the exercise of its discretion, in denying the same. The original bill was framed really on two theories: (1) That, by reason of an election made under the eighth clause in the lease, the Pullman Company had terminated the lease, and it was therefore bound under its provisions to return the property which it had received from the Central Company. It stated in its bill the impossibility of returning a large portion of the property which it had received; it announced its willingness to make substantial performance of its contract contained in the lease; and it asked the court to aid it therein by decreeing exactly what it should do for the purpose of carrying out equitably and fairly its obligations incident to its termination of the lease under the clause above mentioned. The other theory rested upon what was a substantial allegation of the invalidity of the lease as having been made without authority of law, and therefore in violation of the corporate duties of the Central Company, and on that account not enforceable against the Pullman Company beyond the obligation of the latter company to make return of just compensation for the property demised. Upon that theory the bill asked, not that the court should set aside or cancel the lease, but that it should aid the parties by decreeing just what relief should be given by the complainant to the lessor in the execution of its duty to make some compensation for the property it received, and which it stated its willingness to make, and, to that end, that an accounting might be had, and the amount ascertained that should be paid to the Central Company in discharge of the obligations of the complainant in that behalf. Thus, the Pullman Company came into a court of equity, and in substance alleged that the lease had been terminated by it under the eighth clause, and it also alleged that the lease was void as ultra vires, and in either event it tendered such relief as the court might think was proper and fair under the circumstances. A large amount of proof had been taken under the issues made in this original bill and the answer thereto, and, before the case was concluded, the decision of this court was made in which the lease was declared to be void. The only obligation left under the original bill of complainant after the decision of this court was the obligation to return such portion of the property received by it as the court should determine to be right, or to make some compensation to the Central Company for the same; and this obligation it had offered in the original bill to carry out. The Pullman Company had also obtained an injunction in the original suit, restraining the Central Company from commencing further legal proceedings to recover rent under the lease; and, after obtaining this injunction and taking testimony relating to the subject-matter of the original bill, the complainant should not be permitted, under these circumstances, to dismiss that bill, and thus withdraw the whole case from the jurisdiction of the court, and thereby blot out its tenders of relief contained in its original bill, grounded, among others, upon the allegation that the lease was void, and asking the aid of the court to decree the precise terms upon which its obligations to the Central Company might be fulfilled. The denial of the motion was made in connection with the application of the Central Company to file a cross bill in which it would seek to avail itself of the tenders made by the Pullman Company in the original bill. Such an application for leave to file a cross bill seeking affirmative relief, while at the same time availing itself of those tenders of relief made by the original complainants, would furnish additional ground for the exercise of the discretion of the court in refusing to grant the application for leave to discontinue. We think there was no error committed by the court below in refusing the leave asked for. The further objection is made by the counsel for the Pullman Company that it was error to allow the cross bill to be filed in this case. Counsel for the Pullman Company assert that the cause of action for a return of the property is a purely legal one, of which a court of equity has no jurisdiction, and that it can acquire none simply by the filing of a cross bill. Whatever may be the original character of the liability of the Pullman Company to return or make compensation for the property, we are of opinion that, under the facts above set forth, it cannot object to the filing of the cross bill, or to the determination of the amount of its liability by a court of equity. It had itself voluntarily appealed to the jurisdiction of such a court for the purpose of obtaining its aid in decreeing the terms upon which its obligations to the Central Company might be fulfilled and the lease terminated, either under the eighth clause in the lease or because of its invalidity as being ultra vires. Having thus appealed to equity for its aid, and the lease having been conclusively determined to have been void, we think it was within the fair discretion of the court to retain jurisdiction of the cause and of the original complainant, and to permit the filing of a cross bill in which the cross complainant might seek affirmative relief, and at the same time avail itself of the tenders made by the complainant in its original bill. The facts which were set up in the cross bill closely affected one of the theories upon which the original bill was filed, viz. the invalidity of the lease. They were relevant to the matters in issue in the original suit, and, in seeking affirmative relief, the cross complainant is but amplifying and making clearer the foundations for the intervention of equity which had been appealed to by the Pullman Company, and the continued intervention of which would greatly speed a final termination of all matters for litigation between the parties. The court below did not err in permitting the cross bill to be filed. This brings us to a discussion of the principles upon which a recovery in this case should be founded. The so-called 'lease' mentioned in this case has been already pronounced illegal and void by this court. 139 U. S. 24, 11 Sup. Ct. 478. The contract or lease was held to be unlawful and void, because it was beyond the powers conferred upon the Central Company by the legislature, and because it involved an abandonment by that company of its duty to the public. It was added that there was strong ground also for holding that the contract between the parties was void because in unreasonable restraint of trade, and therefore contrary to public policy. In making the lease, the lessor was certainly as much in fault as the lessee. It was argued on the part of the Central Company that even if the contract sued on were void, yet that having been fully performed on the part of the lessor, and the benefits of it received by the lessee for the period covered by the declaration in that case, the defendant should be estopped from setting up the invalidity of the contract as a defense to the action to recover compensation for that period. But it was answered that this argument, though sustained by the decisions in some of the states, finds no support in the judgments of this court, and cases in this court were cited in which such recoveries were denied. It is true that courts in different states have allowed a recovery in such cases, among the latest of which is the caseo f Gaslight Co. v. Claffy, 151 N. Y. 24, 45 N. E. 390, where Chief Judge Andrews, of the court of appeals, examines the various cases; and that court concurred with him in permitting a recovery of rent upon a void lease where the lessee had enjoyed the benefits of the possession of the property of the lessor during the time for which the recovery of rent was sought. But in the case of this lease, now before the court, a recovery of the rent due thereunder was denied the lessor, although the lessee had enjoyed the possession of the property in accordance with the terms of the lease. It was said (page 60 of the report in 139 U. S., and page 488, 11 Sup. Ct.): 'The courts, while refusing to maintain any action upon the unlawful contract, have always striven to do justice between the parties so far as could be done consistently with adherence to law, by permitting property or money parted with on the faith of the unlawful contract to be recovered back or compensation to be made for it. In such case, however, the action is not maintained upon the unlawful contract nor according to its terms, but on an implied contract of the defendant to return, or, failing to do that, to make compensation for, the property or money which it had no right to retain. To maintain such an action was not to affirm, but disaffirm, the unlawful contract.' And the opinion of the court ended with the statement that 'whether this plaintiff could maintain any action against this defendant, in the nature of a quantum meruit or otherwise, independently of the contract, need not be considered, because it is not presented by this record, and has not been argued. This action, according to the declaration and evidence, was brought and prosecuted for the single purpose of recovering sums which the defendant had agreed to pay by the unlawful contract, and which, for the reasons and upon the authorities above stated, the defendant was not liable for.' The principle is not new; but, on the contrary, it has been frequently announced, commencing in cases considerably over 100 years old. It was said by Lord Mansfield, in Holman v. Johnson (decided in 1775) 1 Cowp. 341, that 'the objection that a contract is immoral or illegal, as between the plaintiff and defendant, sounds at all times very ill in the mouth of the defendant. It is not for his sake, however, that the objection is ever allowed; but it is founded in general principles of policy, which the defendant has the advantage of, contrary to the real justice, as between him and the plaintiff, by accident, if I may so say. The principle of public policy is this: Ex dolo malo non oritur actio. No court will lend its aid to a man who founds his cause of action upon an immoral or an illegal act.' The cases upholding this doctrine are numerous and emphatic. Indeed, there is really no dispute concerning it, but the matter of controversy in this case is as to the extent to which the doctrine should be applied to the facts herein. Many of the cases are referred to and commented upon in the opinion delivered in the case in 139 U. S. 24, 11 Sup. Ct. 478, already cited. The right to a recovery of the property transferred under an illegal contract is founded upon the implied promise to return or make compensation for it. For illustrations of the general doctrine as applied to particular facts, we refer in the margin to a few of the multitude of cases upon the subject.1 They are substantially unanimous in expressing the view that in no way and through no channels, directly or indirectly, will the courts allow an action to be maintained for the recovery of property delivered under an illegal contract where, in order to maintain such recovery, it is necessary to have recourse to that contract. The right of recovery must rest upon a disaffirmance of the contract, and it is permitted only because of the desire of courts to do justice as far as possible to the party who has made payment or delivered property under a void agreement, and which inj ustice he ought to recover. But courts will not in such endeavor permit any recovery which will weaken the rule founded upon the principles of public policy already noticed. We may now examine the record herein, and learn the grounds for the recovery which has been permitted, and determine therefrom whether the judgment in favor of the Central Company should be in all things affirmed, or, if not, then how far the liability of the cross defendant extends, and, if possible, what should be the amount of the judgment against it. In referring the case to the master for the purpose of taking the account between the parties, the learned district judge stated the principle upon which the liability of the cross defendant rested. He said: 'The property must therefore be returned or paid for. The former is impossible. The property has subtantially disappeared. It has become incorporated with the business and property of the plaintiff, and cannot be separated. Compensation must therefore be made. What, then, is the measure of compensation? Clearly, we think, the value of the property when received, together with its earnings since, less the amount paid as rent. In ascertaining the value, the annual rental may be considered; but it does not afford a conclusive nor an entirely safe measure of value, because the unlawful consideration (that the Central Company would abstain from exercising its franchises) entered into it. For the same reason, the earnings cannot be measured by the rent. The value of the property and earnings must be ascertained from a careful examination of the property, the business, and its earnings at the time they passed into plaintiff's hands and subsequently. It is not their value to the plaintiff we want, but to the defendant; in effect, what is lost by parting with them. The value of both property and earnings may have been worth more to the plaintiff with the business united, but this cannot be considered.' Acting under these directions of the court, the master, in his opinion, said: 'Passing to the consideration of the main question raised in the present reference, viz. what the Central Transportation Company lost by the transfer of its property to the Pullman Company, the measure of damages as determined by the court requires the master to ascertain: '(1) What was the value to the Central Transportation Company in 1870 of the property transferred? '(2) What was earned by the Pullman Company between January 1, 1870, and January 1, 1885, from the use of the property transferred? '(3) The difference between the amount so received by the Pullman Company and the rental paid by it to the Central Transportation Company for the above period. '(4) The total amount to be paid by the Pullman Company, as of January 1, 1885, deduced as above, together with interest thereon from January 1, 1885, to date of final decree.' The master proceeded to determine the value in 1870 of the property then transforred. In ascertaining it he said: 'The value of the stock on the street is a positive indication of the estimate placed on the property by the public. That it is not entirely a satisfactory measure of value must be conceded, but in the judgment of the master, supported as it is by the best independent estimate that the evidence affords, it should be accepted as the fairest criterion of value.' He accordingly reported the value of the property when received as $58 a share (the par value being $50 per share, or a total par value of $2,200,000), making the total market value of the shares $2,552,000, which sum he reported as the value of the property transferred. When the report came before the court, exceptions having been taken, among other things, to the findings of the value of the property when delivered, the court said: 'It is the value of the property at the time it should have been returned that the Pullman Company should be charged with. Inasmuch as this value would be difficult of ascertainment by the transportation company exceptb y reference to the value in 1870, it was considered proper to direct the inquiry to the latter date. Presumably the value increased. The evidence fully justifies the presumption. If it decreased, the Pullman Company could and should have shown it. The master's valuation in 1870 is therefore to be taken as the value in 1885, when the property should have been returned. The payment of this sum, with interest from January 1, 1885, seems necessary to a just settlement, treating the value of the use and the rents paid prior to that date as balancing each other. A decree may be prepared accordingly, dismissing the exceptions and confirming the report.' Judgment based upon the value of the property at $2,552,000 on the 1st of January, 1885, with interest from that time, was therefore entered; and it amounted, as stated, to the sum of $4,235,044. We are of opinion that the court erred in the manner of ascertaining the value of the property transferred by the Central Company. The market value of its stock was not a proper measure of the value of the property, and such error resulted in largely increasing the supposed value of the property which the cross defendant was under liability to account for. The capital stock of this corporation had been increased from an original amount, of $200,000 in 1862, to $2,200,000 in 1870. During this time it had been doing an increasing and a profitable business, and it was supposed that such business might increase in the future. The market price of the shares of stock in a manufacturing corporation includes more than the mere value of the property owned by it; and whatever is included in that price beyond and outside of the value of its property is a factor which in a case like this cannot be taken into consideration in determining the liability of the cross defendant. Whatever that something may be, it is not that kind of property which was delivered, or that can be returned, or compensation made in lieu of its return. It is not property at all, within the meaning of the word as understood in such a case as this. The value of the franchise for one thing enters into the computation of market value. This was, of course, not assigned to the Pullman Company, nor were the shares of the capital stock of the Central Company, all of which remained in the hands of its original owners. The probable prospective capacity for earnings also enters largely into market value, and future possible earnings again depend to a great extent upon the skill with which the affairs of the company may be managed. These considerations, while they may enhance the value of the shares in the market, yet do not in fact increase the value of the actual property itself. They are matters of opinion, upon which persons selling and buying the stock may have different views. A liability to return or make compensation for property received cannot be properly extended, so as to include other considerations than those of the actual value of that property. In this particular case a consideration entering into the market value of the shares must have been the probability or possibility of renewals of the contracts owned by the company for the use of its cars upon the railroads of the companies with which it had such contracts, and the possibility of extending its business in the future under contracts with other railroads. These considerations, while they affect more or less the value in the market of the shares of a corporation, do not constitute the value of the property which a party impliedly promises to pay for upon the agreement being determined void under which the property was received. The faith which a purchaser of stock in such a company has in the ability with which the company will be managed, and in the capacity of the company to make future earnings, may be well or ill founded. It is but matter of opinion, which in itself is not property. While the value of the property is one of the material factors going to make up the market value of h e stock, yet it is plainly not the sole one. Mere speculation has not uncommonly been known to exercise a potent influence on the market price of stock. The capacity to make any future earnings in this case by the lessee arose out of the transfer of the property to it, and grew out of the lease itself, and that capacity would therefore be partly founded upon the illegal contract, and could not otherwise exist. As the market value of the shares of this stock was made up to some extent, at least, of certain factors which the lessee cannot, under the rules of law, be held responsible for in this case, it follows that such value cannot furnish a safe guide in measuring the responsibility of the lessee in an utterly void lease. The court therefore erred in taking the market value of the shares of this stock as a proper or just measure of the value of the property transferred. We must therefore take the property that actually was transferred, and determine its value in some other way than by this resort to the market price of the stock. The property transferred consisted (a) of cars, bedding, etc.; (b) contracts which the Central Company owned with railroad companies for the use of its cars on their roads; (c) patents covering the construction and use of sleeping cars owned by the Central Company, and by it transferred under the lease to the Pullman Company; and (d) $17,000 in cash. It seems to us these values must be taken separately, because, for reasons hereafter suggested, the value of the contracts and patents does not enter into the problem. As to the value of the cars: We agree with the court below that it is now impossible to decree their return, for the reasons stated. They have substantially disappeared. The property has become incorporated with the business and property of the Pullman Company. Compensation therefore must be made. The master found that the value of the cars as vehicles, together with their equipment, at the time of the transfer, was $710,846.50. This is probably a pretty high figure, judging from the whole evidence in the case upon that subject; yet still we are inclined to think that the master was justified in arriving at that sum. We take this value for the reason that the Pullman Company agreed in the lease to keep the cars in good order and repair, and renewed and reconstructed as often as might be needful during the whole term of the lease. During the fifteen years elapsing from 1870, up to January, 1885, no violation 15 years must be treated as closed, so that complained of; and we think the whole transaction between the parties during those 1k years must be treated as closed, so that no examination should be made in regard to anything that happened within that time. We must assume the provisions of the lease were fully carried out by both parties, particularly as no complaints were made of nonperformance. We therefore assume the cars were kept in good order, and, when necessary, were reconstructed and renewed up to January, 1885. The value at that time may be taken to be as great as the master found it to be for 1870. It is very probable the assumption is not in accordance with the fact, and that the property had greatly depreciated. But, as we refuse to look into the transactions between the parties during that period, we will hold the value in 1885 to have been the same as in 1870, on the presumption that the Pullman Company fulfilled its obligations between those dates. What rule of compensation should be deduced from such finding will be alluded to hereafter. We next come to consider the various contracts. They were entered into with different railroad companies for certain definite periods, and their time of expiration was stated in the contracts themselves. They were valuable only as they were used by the lessee, and its right to use them sprang from and was determined by the lease itself. They were assigned to the lessee for the purpose of enabling it to avail itself of the rights therein created, and t use the cars with the consent of the railroads to which the contracts applied. Whether any use was made of these contracts or not, they became daily less valuable as they daily neared their termination. The use made of them did not impair their value. The passage of time did that. The rental that was paid by the lessee included compensation for use, and, to that extent the transaction was closed, and the compensation paid up to the time when the contracts themselves had expired, which was prior to the time when the lease was declared void and payment of rent ceased. There is no principle with which we are familiar that will permit the value of those contracts when assigned to the Pullman Company to enter into and form a part of the value of the property for which the company is to make compensation, when, from the nature of the thing itself, its value necessarily, and from the simple passage of time, decreased daily; and, upon the arrival of the date named for the expiration of the contract, it ceased to have any value. We think the contracts were not extended by the legislative extension of the charter of the Central Company by the act of 1870. Some of these contracts were to last during the corporate life of the Central Company. At the time they were made, the charter of the company would expire in 20 years from December 30, 1862, or on December 30, 1882. We do not think the contracts meant that they were to cover any further time to which the legislature might thereafter extend the charter of the company. Some language to that effect would have been contained in the contracts if such had been the meaning of the parties. All the contracts had therefore expired by the end of 1882. Now, upon what principle can it be urged that the lessee should compensate the lessor for the value of these contracts when delivered to it, when it had paid for the use, and the property was of such a nature that it became valueless by mere limitation of time? In 1885 they had gone out of existence, and, of course, had no value. The basis for a recovery of property or compensation for its value, in cases of illegal agreements, rests upon the implied contract to return it or pay for it, because there is no right in the party in possession to retain it. If, at the time when otherwise it would or ought to be returned, it has ceased to exist by virtue of the termination of its legal existence, how can it be returned? How can a promise to return or make compensation therefor be implied in the case of a contract having but a limited time to run, and the value of which diminishes daily until the contract itself and its value are wholly extinguished by expiration of time, and where the use of this intangible right during its existence was fully paid for by the party to whom it was assigned? There is no implication of a promise to make any further compensation for such a species of property than is made by praying for its use while it remained in legal existence. When that time expired, the value was gone; and, while it lived, it had been paid for. We have been able to find no case where any principle was laid down which would authorize or justify a recovery of the value of property at the time of delivery, which, before its return became proper, had passed out of existence by limitation of time, and the use of which was paid for during its lifetime. What other contracts may have been made by the Pullman Company with railroad companies would form no factor in the value of the contracts assigned. If others were obtained, they had never been the property of the Central Company, and the latter could only make a pretense of a claim in regard to them by virtue of and through the illegal contract. A resort to the illegal instrument cannot be permitted for the purpose of sustaining any recovery. The same may be said of the patents which the Central Company also undertook to transfer, as they had all expired before January, 1885. They simply protected the use of the cars which had been constructe under them, and they diminished in value as each day brought them nearer to their expiration; and, when that time arrived, they were absolutely valueless. During all that time they were included in the consideration for the payment of rent made by the Pullman Company under the terms of the lease. The contracts and the patents must be eliminated from the value of the property. Nor can we accede to the view that the Pullman Company is liable for the earnings of the property which it realized by means of putting such property to the very use which the lease provided. It had the right while both parties acquiesced to so use the property. There is no question of trustee in the case. Root v. Railroad Co., 105 U. S. 189, 215. The property was placed in its hands by the lessor, and in accordance with the terms of the agreement. It was not then impressed with any trust, according to any definition of that term known to us. Although the title did not pass, and was not intended to pass, the lessee did nothing with the property other than was justified by the lease. His liability is based only upon an implied promise to return or make compensation therefor. This implication of a promise would not arise until one or the other party chose to terminate the lease, for the law implies such promise in order only that justice, so far as possible, may be done. So long as neither party takes any objection to the agreement, and both carry it out, there is no room for any differences; and no promise to return the property or make compensation is necessary, and none is therefore implied. The use of the property is lawful as between the parties, so long as the lease was not repudiated by either, and the rent compensates for the use. After the repudiation, the promise is then implied; and it is fulfilled by the payment of the value of the property at the time the promise is implied, and interest thereon from that time. As to the claim of the lessor that its business has been broken up, its contracts with railroads terminated, and the corporation left in a condition of inability to again take up its former plans, and that all this should be regarded in the measure of the relief to which it should be entitled, the same considerations which we have already adverted to must be entertained. These are results of the illegality of the contract entered into between these parties, and its subsequent repudiation on that ground; and in regard to such illegality the Central Company is certainly as much in the wrong as the cross defendant herein. The former knew the extent of its obligations under its charter as well as the latter did, and the illegal provisions of the lease were quite as much its doings as they were those of the cross defendant. To grant relief based upon these facts would be so clearly to grant relief to one of the parties to an illegal contract, based upon the contract itself or upon alleged damages arising out of its nonfulfillment, that nothing more need be said upon that branch of the subject. It is emphatically an application of the rule that in such a case the position of the defendant is the better. We conclude that the cross defendant is not liable for the contracts and patents transferred, nor for the possible damage the Central Company may have sustained, as above stated. It is liable for the value of the cars, furniture, etc., transferred. It is a liberal estimate of the value of this property to say that it amounted in 1885 to as much as it did in 1870; yet we are disposed to deal in as liberal a manner with the cross complainant as we fairly may, while not violating any settled principle of law, in order to give to it such measure of relief as the circumstances of the case seem to justify. We therefore take the value of the property in the cars, etc., in 1885, at the sum of $710,846.50. To that, we think, should be added the $17,000 cash received from the Central Company, making a total of $727,846.50 and interest from January 1, 1885, for whc h the cross defendant is liable, together with costs. Although the Central Company may have been injured by the result of this lease, yet that is a misfortune which has overtaken it by reason of the rule of law which declares void a lease of such a nature; and, while the company may not have incurred any moral guilt, it has nevertheless violated the law by making an illegal contract, and one which was against public policy, and it must take such consequences as result therefrom. The judgment appealed from must be reversed, and the case remitted to the circuit court for the Eastern district of Pennsylvania, with directions to enter a judgment for the Central Transportation Company in accordance with this opinion. Mr. Justice HARLAN dissented. Mr. Justice WHITE dissented on the ground that the judgment appealed from was for the correct amount, and should not be reduced.
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By taking an appeal to the Circuit Court of Appeals the Pullman Company did not, under the peculiar circuinstances of this case, waive its tight to appeal to this court, and the case being now before this court either on appeal or- by the writ of certiorari, it has jurisdiction. In order to authorize a denial of a plaintiff's motion to discontinue a suit in equity, there must be some plain legal prejudice to the defendant, other than the mere prospect of future litigation, rendered possible by the discontinuance. Unless there be an obvious violation of a fundamental rule of a court of equity, or 'an abuse of the discretion of the court, the decision of a motion for leave to discontinue will not be reviewed here. The decision of the Circuit Court in depying the .motion of the Pullman Company to discontinue its suit was right, as was also its decision permitting the Central Company to file a cross bill. In no way, and through no channels, directly or indirectly, will courts allow an action to be maintained for the recovery of 'property delivered under an illegal contract, where, in order to maintain such recovery, is is necessary to have recourse to that contract; but the right of recovery must rest ow a disaffirmance of the contract, and is permitted only because of the desire of courts to do justice, as far as possible to the party who has made payment or delivered property under a void agreemet, which in justice he ought to recover, and no recovery will be permitted which will weaken said rule founded upon the principles of public policy. Acting upon those settled principles the cotrt decides: (1) That the Central Company is entitled to recover from the Pullman Company the value of the property transferred by it to that company *hen the lease took effect, with interest, as that property has substantially disappeared, and cannot now be returned; (2) That the value of that property is not to be ascertained from the market value of the shares of the Central Company's stock at that time, but by the value of the property transferred; (3) That the value of the contracts with railroad companies transferred by the Central Company form no part of the sum which it is entitled to recover; (4) That the saife principle applies to the patents transferred which had all expired; (5) That it is not entitled to recover anything -for the breaking up of its business by reason of the contracts being adjudged illegal.
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Background The IG Act establishes OIGs both at select major federal agencies, called establishments, and at some smaller agencies, called designated federal entities (DFE), to conduct oversight of their programs and operations. The IG Act also sets out, among other things, (1) the duties and responsibilities of each IG with respect to the entity within which its office is established; (2) how IGs are appointed, whether by the President with the advice and consent of the Senate, or by the head of the DFE; and (3) the processes for removing an IG. Duties, Responsibilities, and Authorities under the IG Act The IG Act established OIGs to be independent and objective units to (1) conduct and supervise audits and investigations relating to the programs and operations of government establishments; (2) provide leadership and coordination and recommend policies for activities designed to promote economy, efficiency, and effectiveness in the administration of and to prevent and detect fraud and abuse in such programs and operations; and (3) provide a means for keeping the head of the agency and Congress fully and currently informed about problems and deficiencies relating to the administration of such programs and operations and the necessity for and progress of corrective action. IGs covered by the IG Act have been granted broad oversight authority, including to conduct, supervise, and coordinate audits and investigations; directly access the records and information related to the applicable agency’s programs and operations; request assistance from other federal, state, and local government agencies; subpoena information and documents; administer oaths when conducting interviews; hire staff and manage their own resources; and receive and respond to complaints from agency employees, whose identities are to be protected. In addition to their duties, responsibilities, and authorities in conducting their oversight work, IGs derive independence through numerous provisions in the IG Act. These provisions include the following: the requirement that IGs be appointed without regard to political affiliation and solely on the basis of integrity and demonstrated ability; the authority to select, appoint, and employ OIG officers and employees, as noted above; the authority of IGs to report violations of law directly to the Department of Justice; the requirement for agency heads to transmit the IGs’ semiannual reports of their activities to Congress without alteration; the authority of IGs to perform any audit or investigation without interference from the agency head or others except under certain conditions specified by the act; and the requirement for the President or the agency head to communicate to Congress the reasons for removing an IG. IGs Established by the IG Act and the Appointment Process The IG Act establishes the basis on which an IG is to be appointed; which OIGs are required to have presidentially appointed, Senate confirmed (PAS) IGs; and which are DFE OIGs, with IGs appointed by the heads of the agencies. For the purposes of the IG Act, subject to some specifically enumerated exceptions, the head of the DFE is the DFE’s board or commission, or if an entity does not have a board or commission, any person or persons designated by statute as the head of the DFE. Of the 64 active IG offices established under the IG Act, 32 have PAS IGs and 32 have DFE IGs. Both PAS and DFE IGs are required to be appointed without regard to political affiliation and solely on the basis of integrity and demonstrated ability in accounting, auditing, financial analysis, law, management analysis, public administration, or investigations. See table 1 for a list of PAS and DFE agencies as designated by the IG Act. The process for appointing PAS IGs generally has three main steps: (1) President’s selection and nomination, (2) Senate’s evaluation and confirmation, and (3) President’s official appointment. CIGIE assists the White House Office of Presidential Personnel (OPP) in the vetting of candidates for the IG nomination process. According to CIGIE officials, CIGIE’s Candidate Recommendations Panel receives résumés for potential candidates in various ways, including submissions from interested candidates through a link on the CIGIE website. The CIGIE panel also proactively reaches out to potential candidates who members of this panel believe would be good choices for IG positions. According to a CIGIE official, during the prior administration, the panel reviewed résumés from potential IG candidates and sent the résumés of those most qualified to the White House OPP for its process. Under the current administration, the CIGIE panel conducts interviews of potential IG candidates in addition to reviewing résumés, and then refers those candidates that the panel deems the most qualified to the White House OPP. CIGIE’s panel assesses potential candidates’ leadership philosophy and skills, as well as their understanding of the independent, non-partisan role of an IG. PAS IGs may be removed from office by the President, who must communicate the reasons for removal in writing to both Houses of Congress not later than 30 days before the removal. A DFE IG is appointed by the head of the entity in accordance with the applicable laws and regulations governing appointments within that entity. DFE IGs do not require presidential appointment or Senate confirmation. DFE IGs may be removed from office by the agency heads, or for an entity led by a board or a commission, removal requires written concurrence of a two-thirds majority of the board or commission. Similar to the President removing a PAS IG, the head of the entity must communicate the reasons for removal in writing to both Houses of Congress not later than 30 days before the removal. After a PAS IG retires or otherwise leaves office, the Federal Vacancies Reform Act of 1998 (Vacancies Act) instructs the official previously serving as first assistant to the vacant position to perform the duties of that position in an acting capacity, absent other action by the President. For DFE OIGs, acting IGs may be appointed according to laws, regulations, and policies governing appointments for each agency. Neither the IG Act nor the Vacancies Act places limits on the authority of acting IGs (relative to that of officially appointed IGs) to carry out the statutory responsibilities of the IG. However, the IG Act’s requirement for congressional notification prior to removal of a permanent IG does not apply to an acting IG. IG Vacancies as of Fiscal Year 2017 and the Number and Duration of IG Vacancies for Fiscal Years 2007 through 2016 As of September 30, 2017, there were 12 IG vacancies in the 64 IG Act offices. Over the 10-year period covering fiscal years 2007 through 2016, the total number of IG vacancies varied with a low of 6 total vacancies as of the end of fiscal year 2007 to a high of 11 vacancies as of the end of fiscal years 2009, 2014, and 2016. In addition, some OIGs experienced prolonged continuous vacancies ranging from over 1 year to approximately 6 years. Twelve IG Positions Were Vacant as of September 30, 2017 As of September 30, 2017, there were 12 IG vacancies consisting of 10 vacancies in PAS IGs and 2 in DFE IGs, as shown in table 2. Two of these vacancies had presidential nominations that were awaiting Senate evaluation as of September 30, 2017. During fiscal year 2017, four OIGs had an IG position that became vacant: Small Business Administration, Federal Election Commission, Department of Housing and Urban Development, and Tennessee Valley Authority. Number of IG Vacancies Varied from Fiscal Years 2007 through 2016 For the 10-year period from October 1, 2007, through September 30, 2016, the total number of IG vacancies at the ends of the fiscal years ranged from 6 to 11 vacancies, as shown in figure 1. For the PAS IGs, the number of IG vacancies increased from 3 at the end of fiscal year 2007 to 9 at the end of fiscal year 2016. For DFE IGs, the number of IG vacancies ranged from 0 to 4 vacancies at the ends of the fiscal years during the 10-year period. The Cumulative Duration of IG Vacancies Ranged from Less Than 1 Month to Almost 6 Years for Fiscal Years 2007 through 2016 From October 1, 2006, through September 30, 2016, 53 of the 64 IG Act offices experienced vacancies, as shown in figure 2. Of the 32 PAS IGs, 26 experienced at least one vacancy during the 10-year period with the cumulative duration ranging from 25 days to 5 years and 258 days. Of the 32 DFE IGs, 27 experienced at least one vacancy during the 10-year period with the cumulative duration ranging from 13 days to 3 years and 67 days. Of the 26 PAS IGs that had vacancies during the 10-year period from fiscal years 2007 through 2016, 20 experienced at least one vacancy with a cumulative duration of more than 1 year, and for 11 of these IGs the cumulative vacancy period was over 3 years, as shown in figure 3. In addition, 5 of the 20 agencies with a cumulative IG vacancy of 1 year or more were the result of the agency experiencing two or more periods of IG vacancy over the 10-year period. The Department of State experienced the longest period of continuous PAS IG vacancy during the 10-year period, with 5 years and 258 days without a permanent IG. The Department of State IG vacancy began on January 16, 2008, and no nomination was made by the President until June 27, 2013. The nominee was confirmed by the Senate on September 17, 2013, and the vacancy ended on September 30, 2013. The Department of the Interior experienced the second longest PAS IG vacancy during the 10-year period, with 4 years and 273 days without a permanent IG as of the end of fiscal year 2016, and the vacancy remained as of the end of fiscal year 2017. The Department of the Interior IG vacancy began on January 1, 2012. The acting IG was nominated by the President on June 8, 2015. The nomination was received in the Senate and referred to the Committee on Energy and Natural Resources, which held a hearing on October 20, 2015. The nomination was returned to the President on January 3, 2017, under the provisions of a Senate rule that require nominations that are not confirmed or rejected during the congressional session be returned to the President. Once returned, the Senate will not consider the nomination until the President provides the Senate a new nominee. Other PAS IGs experienced several vacancies throughout the 10-year period. For example, the Department of Defense OIG had four periods of vacancy from fiscal years 2007 through 2016, two of them 1 year or longer, and one that began in January 2016 and remained vacant as of September 30, 2016. Of the 27 DFE IG offices that experienced IG vacancies during the 10- year period from fiscal years 2007 through 2016, 12 experienced at least one vacancy with a cumulative duration of more than 1 year as shown in figure 4. In addition, 5 of the 12 agencies with a cumulative IG vacancy of 1 year or more were the result of the agency experiencing two or more periods of IG vacancy over the 10-year period. The U.S. International Trade Commission (USITC) experienced the longest continuous DFE IG vacancy during the 10-year period, with 3 years and 67 days without a permanent IG. The position was filled and the vacancy ended on December 6, 2009. In fiscal year 2011, we reported that the USITC OIG lacked an appointed IG and adequate budget and staff resources for fiscal years 2005 through 2009, which contributed significantly to the OIG’s limited oversight of USITC. We recommended that the Chairman of USITC revise formal orientation information provided to the commissioners to include sections on, among other things, the responsibilities of the Chairman to maintain an appointed IG. USITC implemented these recommendations. The National Archives and Records Administration experienced the second longest DFE IG vacancy during the 10-year period, with 2 years and 190 days without a permanent IG. The vacancy started when the IG was placed on administrative leave, which lasted from September 14, 2012, until August 9, 2014. The National Archives and Records Administration was not able to replace the IG during this time. The position was eventually filled on March 23, 2015. Acting IG, OIG Employee, and Permanent IG Views on the Impact of IG Vacancies, and Permanent IG Suggestions for Improving the Appointment Process We surveyed the acting IGs and OIG employees who worked under an acting IG among the 64 active OIGs established under the IG Act and asked for their views on the impact that having an acting IG has on an OIG’s ability to carry out its duties and responsibilities. While overall the survey responses indicated that having an acting IG had no impact on the OIGs’ ability to perform their statutory functions, responses varied in areas related to (1) planning and conducting work, (2) interacting with agency management, and (3) managing the OIG and personnel. In addition, a number of survey responses also pointed to challenges or positive outcomes in their experiences of working under an acting IG, and certain permanent IGs provided suggestions for improvements in the IG appointment process. For details on our survey methodology, see appendix I. Acting IG and OIG Employee Views on the Impact of IG Vacancies Views on the Impact of IG Vacancies on the OIG’s Ability to Plan and Conduct Work Acting IGs: When asked whether, during their tenure as acting IGs, the vacancy had a positive impact, negative impact, or no impact on several areas related to the OIG’s ability to plan and conduct work, overall, at least eight of the nine acting IGs indicated that having an acting IG had no impact on the OIG’s ability to plan and conduct work. Table 3 summarizes the responses from the acting IGs related to the OIG’s ability to plan and conduct audit work. One of the nine acting IGs reported that the vacancy had a positive impact on developing comprehensive work plans for audits, investigations, and other OIG work, as well as addressing high-risk and high-priority issues. OIG employees: As shown in figure 5, the estimated percentage of OIG employees who worked under an acting IG who believe this has no impact ranged by question from 49 percent to 69 percent for the areas related to the OIG’s ability to plan and conduct audit work. In contrast, based on our survey results, almost a quarter of the OIG employees believed that working under an acting IG had a negative effect on their OIG’s ability to complete reports and other OIG work products in a timely fashion, issue high-visibility or high-risk reports, and address high-risk and high-priority issues. According to the survey results, from 6 percent to 13 percent of the employees found a positive impact in these areas. We also asked OIG employees to identify any additional challenges, in written comments, that they experienced in relation to their work under an acting IG. Four OIG employees provided responses related to the ability to plan and conduct work, specifically, on the timely completion of reports and other OIG work products, as noted in the following examples of individual comments: “However, seemed to struggle to ‘see the forest through the trees’ and the timeliness (and associated impact) of our work suffered significantly.” “Sometimes it would take longer to get a report out because were a review from the IG.” We also asked OIG employees to identify any positive outcomes or improvements based on their experiences with working under an acting IG. The following are some OIG employee written responses that were received regarding positive outcomes or improvements, which were related to the acting IG’s ability to plan and conduct work. The acting IG came from within the OIG. Thirteen OIG employees provided comments related to the acting IG coming from within the OIG ranks and having expertise in the agency issues, as noted in the following examples of individual comments: “Our acting IG was already a part of our OIG when appointed. Thus, they were already invested in the mission, our offices, and staff.” “The acting Inspector General had significant experience with agency management, and with our office processes and procedures, so products were issued timely.” “A positive is that the acting Inspector General usually comes with a wealth of knowledge about the OIG’s current practices and can hit the ground running to keep things moving along effectively.” “Because of the acting IG’s investigative background as well as his lack of interest in further political appointment I think we actually got more done than under the former and current IG.” Views on the Impact of IG Vacancies on the OIG’s Ability to Interact with Agency Management Acting IGs: When asked whether, during their tenure as acting IGs, the vacancy had a positive impact, negative impact, or no impact on the OIG’s ability to interact with agency management, seven of the nine acting IGs indicated that there was no impact on the OIG’s ability to interact with the agency. Other acting IGs indicated a positive impact in regard to responsiveness from agency management, meeting with senior agency leadership, responsiveness of agency to recommendations, and timely access to agency documentation. One of the nine acting IGs indicated a negative impact regarding responsiveness of the agency to recommendations, and another saw a negative impact in timely access to agency documentation, as summarized in table 4. While the majority of the acting IGs responded that there was no impact in interactions with agency management, in commenting about challenges faced during their acting IG tenure that affected their ability to carry out their responsibilities, one acting IG commented that agency managers failed several times to disclose relevant information that affected both the results and timeliness of the OIG’s audit work. In addition, one acting IG found that agency officials were more open to recommendations and more supportive of the OIG during the acting IG’s tenure than under the previous permanent IG tenure. OIG employees: As shown in figure 6, we estimate that 63 percent of the OIG’s employees working under an acting IG believed that there was no impact on the responsiveness from agency management and an estimated 65 percent believed that there is no impact on timely access to agency documentation. Based on our survey results, the estimates for positive impact ranged from 7 percent to 9 percent, and approximately 17 percent of the OIG employees believed that working under an acting IG has a negative impact on these two areas. Acting IGs: Responses of the acting IGs regarding their ability to manage the OIG and employees varied by question, as summarized in table 5. For example, regarding employee morale, four of the nine acting IGs indicated that an acting IG leading the office had a negative impact, three indicated that the vacancy had a positive impact, and one indicated that the vacancy had no impact. In written comments included in the survey, three acting IGs provided additional information regarding restructuring the office and developing or changing office policy. Specifically, two acting IGs indicated a reluctance to make changes that could not be easily reversed by an incoming appointed IG or to “shake up the organization” only to experience further changes once an IG was in place. The third acting IG identified constraints as typical for acting officials in making personnel, policy, or organizational changes, especially when the length of the tenure as the acting official is unknown. We also asked the acting IGs if they had faced any challenges during their tenure that affected their ability to carry out their statutory duties and responsibilities. Of the three acting IG respondents who answered “yes,” two provided written responses citing challenges in the area of OIG management and personnel, such as difficulty in promotions and hiring decisions and OIG employee resistance to changes. For example, one acting IG indicated that the acting IG needed to get a special delegation from the agency to approve certain office promotions and hiring decisions. Another acting IG indicated the agency’s Office of General Counsel had to resolve a matter involving an employee who refused to relinquish his or her duties after the acting IG’s decision to reassign the employee. OIG employees: As shown in figure 7, just over 50 percent of the OIG employees working under an acting IG believe that an acting IG had no impact or a positive impact on these two areas. We also estimate that about 36 percent of the OIG employees believed that working for an acting IG negatively affected employee morale and about 23 percent believed that it negatively affected the ability to attract and retain qualified employees. We asked OIG employees to identify any additional challenges they have experienced in relation to their work under an acting IG. Eighty-three employees provided written responses, and 65 of those responses were related to areas that affect the ability to manage the OIG and its personnel, which are summarized below. Strategic planning. Nineteen OIG employees provided comments related to difficulty in strategic planning, as noted in the following examples of individual comments: “An acting IG is a caretaker, someone internal who is expected to maintain the status quo. Therefore, having an acting IG in place for an extended period may have delayed the implementation of reforms or bold changes that would normally be expected from new leadership.” “Internal processes, which may need to be changed, may not change in anticipation of the new leadership.” “Certain decisions such as ‘strategic vision’ or filling high-level positions within the organization may be delayed pending appointment of a permanent IG.” “ are not as willing to make changes at the agency because it may not be what the new IG wants. [Acting IGs] are more stewards of the organization until the new IG arrives.” Uncertainty. Fifteen OIG employees provided comments related to the uncertainty within the OIG, as noted in the following examples of individual comments: “The ability to make long-term decisions is affected due to uncertainty incoming Inspector General will support the decisions made by the acting Inspector General.” “Waiting for a permanent selection and the uncertainty as to the future impact of the person selected is disconcerting. It also negatively affects employee morale and motivation.” “Working under an acting Inspector General creates a climate of uncertainty within the organization . . . . They hesitate to make a decision that would be contrary to the views and/or opinions of the new IG and put them in what they perceive to be a bad light.” “I think the biggest challenges we had were related to employee morale and the direction of the organization as a whole. Employees did not know who was going to permanently lead the organization, or when the decision would be made on this.” Staffing. Twelve OIG employees provided comments related to addressing staffing needs or issues with staffing, as noted in the following examples of individual comments: “There were several difficulties related to meeting human resource needs without the proper authority to make decisions such as removals, promotions and/or bonuses.” “Issues with staffing could not be finalized pending the appointment of a new IG.” “Everyone except a select few in the OIG senior staff was leaving.” Morale. Eight OIG employees provided comments related to morale issues, as noted in the following examples of individual comments: “Promotions were unnecessarily delayed under the acting IG. Not good for morale.” “Certain issues relating to personnel management were left unaddressed or dismissed (i.e., problem managers) morale to dip among staff members.” “The acting IG appeared to have the need to prove to the agency what power they had. This, in effect, caused a great discord amongst not only agency management and OIG, but also between the OIG and the rest of the agency that we are still working to overcome.” Lack of leadership and office structure. Eight OIG employees provided comments related to the lack of leadership and office structure, as noted in the following examples of individual comments: “ management organization was seemingly dysfunctional. In part, because alliances likely to change once permanent IG .” “There isn’t a sense of real structure without IG.” “Lack of guidance on ongoing audits at that time. The acting IG wore too many hats: Acting IG, Assistant IG for Audits, and Assistant IG for Investigations.” Acting IGs are risk-averse pending permanent IG nomination. Two OIG employees provided the following comments related to the pending IG nomination: “I think it’s fair to say, although granted, it is a generalization, that an acting IG is more likely to be tentative and risk-averse than a fully confirmed IG. Also, within the OIG itself, senior staff may likewise be tentative and risk-averse knowing that new leadership is in the wings.” “The acting IGs are always hesitant to make waves . . . . One of them was in the process of being nominated, so didn’t want to do anything that could be seen as controversial or unpopular with staff. It the status quo being continued until a new official is confirmed.” Negatively affects budget discussions. One employee provided the following comment related to budget discussions: “In budget discussions with Congress and the administration, there is no trust that the acting IG understands the will of Congress . . . or has administration support.” We also asked OIG employees to identify any additional positive outcomes or improvements, in written comments, based on their experience from having an acting IG. Sixty-five employees provided written responses, and 12 of those responses related to the acting IG’s ability to manage the OIG and personnel, which are summarized below. Higher morale. Twelve OIG employees provided comments related to higher morale with an acting IG, as noted in the following examples of individual comments: “ scores remarkably higher under .” “The acting IG, a career civil servant, established trusting relationships meant for the long haul with the leadership team and staff, and also members of the overseen agency, and with the Congress. Morale was high and productivity was exceptionally high.” “I believe that the morale and overall quality of work that I witnessed at OIG offices during the tenures of the two acting IGs that I worked for was superior to that of offices that I worked in under one or more Senate-confirmed IGs.” Acting IG, Permanent IG, and OIG Employee Views on the Impact of IG Vacancies on the Ability to Maintain Independence and Permanent IG Suggestions regarding Independence The following summarizes (1) responses from acting IGs, permanent IGs, and OIG employees regarding the impact, if any, of a prolonged vacancy on the OIG’s ability to maintain independence and (2) permanent IGs’ suggestions on how to improve independence. Acting IG Views on the Impact of IG Vacancies on the Ability to Maintain Independence We asked acting IGs if they felt that serving as an acting IG instead of a permanent IG created threats (such as self-interest threat or bias threat) to their independence of mind or independence in appearance, and eight responded “no” and one responded “yes.” The eight acting IGs who responded “no” to independence threats provided additional written comments to explain their answers, as noted in the following examples of individual explanations: “Because I’d been in the office since inception . . . I understood the importance of independence in all aspects.” “I was appointed to carry out the duties and functions of the IG and that is what I did to the best of my abilities. As an OIG employee, independence is always a factor, regardless of position and taking on additional duties and responsibilities did not impact that.” “I stated clearly and repeatedly to agency management and to Capitol Hill stakeholders that I was not interested in seeking the IG nomination on a permanent basis, in order to mitigate any concerns about independence or bias that could arise from seeking an appointment from officials I was charged with auditing/investigating.” “I declined the position of permanent Inspector General, in part to preserve my independence in the face of the potential conflict that could be perceived were I seeking the appointment. Serving in an acting capacity per se creates no threat to independence in fact or in appearance insofar as I am concerned based on my experience.” “Serving as acting IG had no threats to independence.” The acting IG that responded “yes” commented that there may be an appearance of independence problem if the acting IG is lobbying for the permanent position. We also asked the acting IGs if their independence was ever questioned by agency officials or others because of their role. Eight of the nine acting IGs answered “no,” while one acting IG answered “yes” and indicated that an external entity had questioned the independence of the acting IG. The acting IG further commented that certain Members of Congress had questioned the independence of acting IGs. Permanent IG Views on the Impact of IG Vacancies on the Ability to Maintain Independence We asked 52 permanent IGs whether they felt that an acting IG is inherently less independent than a permanent IG and whether an acting IG is less independent in appearance. While the majority of permanent IGs who responded did not think that acting IGs are inherently less independent, they did indicate by a similar majority that an acting IG is less independent in appearance than a permanent IG, especially in situations when the acting IGs are applying for the IG positions. Of the 49 IGs who responded to the question of whether an acting IG is inherently less independent, 13 said “yes,” 30 said “no,” and 6 responded that they had no basis for judgment, as shown in figure 8. Of the13 permanent IGs that answered “yes” to the acting IG being inherently less independent, 12 provided written comments as noted in the following examples of individual explanations. An acting IG who is a candidate for position. Six permanent IGs provided comments related to an acting IG who is seeking the permanent position, as noted in the following examples of individual comments: “If the selecting officials (or recommending officials) are also subject to audit or investigation by the acting , and the acting is interested in the permanent position they may actually be influenced to not report aggressively.” “They could be perceived as less independent if they are a candidate for the job and they often are.” “Generally speaking, the position of Inspector General would be a desirable promotion for an acting IG (sometimes the Deputy IG). An acting/Deputy IG, interested in the IG position and striving to impress the agency leadership/White House for consideration of the IG job, could be less aggressive (independent) in an effort to please the ‘hiring official’ (agency head/White House). Agency leaders/White House understand this dynamic, so in order to avoid/minimize any negative reports by the OIG, the agency heads can delay filling IG positions in order to have more ‘control’ over their acting IG.” Lack of Senate confirmation. Three permanent IGs provided comments in this category related to an acting IG having less authority to deal with agency officials and Congress than a permanent IG as the acting IG lacked Senate confirmation, as noted in the following individual comments: “Not having the full backing of the President, nor confirmation of the Senate, does not provide an even playing field when the IG negotiates with PAS agency heads and other PAS or senior level officials.” “First, because the agency knows that the acting IG is only temporarily in that position, the willingness of agency officials (particularly middle management and component leadership) to inappropriately respond to and challenge OIG oversight efforts increases. Second, an acting PAS IG (unlike a confirmed PAS IG) has not been approved for that position by the Senate and therefore doesn’t have that stamp of approval if there is a need to respond to inappropriate efforts by the agency to interfere with the OIG.” “In my experience, discussions between the Dept’s political leaders and the ‘permanent,’ politically-appointed IG (as well as between Congress and that IG) are different—more frank—in substance and tone.” Of the 30 permanent IGs that answered “no” to the acting IG being inherently less independent, 28 provided written comments as noted in the following examples of individual explanations. An acting IG has the same statutory authority as a permanent IG. Eight permanent IGs provided responses related to the acting IG having the same statutory authority as a permanent IG and the OIG structure having independence safeguards, as noted in the following examples of individual comments: “Because of the inherent structure of an OIG, with the independence safeguards that are derived from the IG Act, the Office of Inspector General should continue to be independent even if headed by an acting IG.” “An acting IG has the same independence protections as a ‘permanent IG’.” “ have the same statutory powers as an appointed IG to fulfill their role.” Having a permanent title should not be a factor in independence. Ten permanent IGs provided responses related to a permanent title not being a factor in independence as the acting IGs are held to the same standards and independence is driven by the acting IG’s character and background, as noted in the following examples of individual comments: “Independence is a matter of personal mindset and perceptions drawn by others based on individual/Office actions. Having the permanent title is not a key element required in order for the above to effectively exist.” “An acting IG can carry out his/her responsibilities as independently as a permanent IG; there are no inherent restrictions on their ability/capacity due solely to status. It boils down to the individual involved and their willingness/ability to do so in the context in which they operate.” “The independence resides in the position regardless of whether being occupied by an acting or permanent IG.” “The independence of an IG is largely driven by his or her character, background, and experience.” “Independence is obtained by the characteristics of the individual in the position of Inspector General. Just because the person occupying the position is ‘acting’ does not mean they are not independent.” An acting IG is usually a career OIG employee. Five permanent IGs provided comments related to the acting IG being a career OIG employee and knowing the importance of independence, as noted in the following examples of individual comments: “Career OIG employees place a high value on the independence of the office.” “Generally acting IGs come from within the OIG and have long service in the community and an understanding of and commitment to the role of the IG.” We also asked permanent IGs whether they felt that an acting IG is less independent in appearance than a permanent IG. Thirty of the 49 IGs who responded to this question answered “yes” and 13 answered “no,” as shown in figure 9. Of the 30 permanent IGs who answered “yes” to this question, 27 provided written comments, some of which are summarized below. An acting IG will be less independent in appearance if he or she is seeking the permanent position. Sixteen permanent IGs provided comments related to an acting IG being less independent in appearance if he or she is seeking the permanent position or perceived to be seeking the permanent IG position, as noted in the following examples of individual comments: “There will always be an appearance issue regarding the judgment of an acting IG if that individual is seeking the permanent position.” “There may be an appearance that an acting IG is less independent from the agency, particularly where he or she is seeking to become the permanent IG and needs the endorsement of the agency to move forward. This scenario could create an appearance of, or an actual, conflict of interest.” “If the incumbent aspires to the permanent appointment, I feel the designation as acting Inspector General carries the inherent risk that the incumbent may be vulnerable to political pressures, since the incumbent’s chances of being appointed as the permanent Inspector General may be adversely influenced by sensitive or controversial decisions made during the period that he/she served as acting Inspector General.” “An ‘acting’ may be reluctant to assert independence if the acting believes that he or she may be in the running for the vacant IG job. This may create a conflict under certain facts.” “Unfortunately, if an acting IG is interested in becoming the IG, people who are looking for reasons to find fault with their work can make an argument that they are pulling punches to better their chances of being selected. I don’t think this is true in most cases, but the argument is made.” An acting IG is also perceived as less independent. Six permanent IGs provided comments related to an acting IG being perceived as less independent by Congress, the public, and other organizations, as noted in the following examples of individual comments: “I am aware of at least one instance where the press and certain Members of Congress speculated or implied that an acting IG who wanted to be considered for appointment as the IG was lenient toward the agency.” “Congress and the public . . . have both expressed this concern.” “There is an inherent suspicion that the acting IG will pull his or her punches on audits and inspections in order to get nominated by the agency he is auditing.” “Some judge an acting IG for the actions they take or don’t take through the prism of partisan politics and often unfairly ascribe decisions to the acting IG’s interest in becoming an IG.” Of the 13 permanent IGs who answered “no,” 11 provided written comments, some of which are summarized below. Acting IGs have the same authority as permanent IGs. Three permanent IGs provided comments related to an acting IG having the same authority as a permanent IG, as noted in the following examples of individual comments: “The law doesn’t change and tenets such as independence are the same regardless of whether you are acting or not.” “An acting IG still heads an independent Office of Inspector General and as long as that office continues to act independently, there should be no appearance issue.” “The acting Inspector General has the same authority as a permanent IG.” Acting IGs should be able to perform their work independently. One permanent IG provided the following comment related to an acting IG performing his or her work independently: “I don’t necessarily think an acting IG has an appearance of lack of independence per se. Again, I think it depends on the acting IG, the agency, and the relationship between the OIG and the agency.” We also asked permanent IGs for suggestions on how the independence of the acting IG role could be improved. Although the majority of permanent IGs did not provide specific suggestions, the following summarizes the 12 written responses received: Expedite the appointment process (7 respondents). Make acting IGs ineligible for the permanent position (1 respondent). Establish a legislative solution for filling positions quickly (1 respondent). Specifically, there should be requirements that (1) acting IGs be named within 30 days of vacancy and the IG position filled within a certain amount of time; (2) DFE IG positions be filled within 180 days of a vacancy, and if not, the agency head should be required to report every 30 days to the agency’s oversight committees on the reason for delay; and (3) for PAS IG positions, a candidate should be nominated within 180 days. For visibility, make clear whether the acting IG is under consideration for the permanent position (1 respondent). The administration should do this for a PAS IG, and the agency should for a DFE IG. Extend statutory protection to acting IGs (1 respondent). “The independence of the acting Inspector General role could be improved by extending the same protections mandated for the Inspector General position to the acting Inspector General (as appropriately tailored for the temporary nature of the ‘acting’ role).” Rotate the individuals who will be in the acting IG position (1 respondent). In addition to views on the acting IG’s independence, we asked permanent IGs to provide additional comments and identify any challenges related to the acting IG role and prolonged IG vacancies. Thirty-one written responses were provided for this question, some of which are summarized below. Importance of permanent IGs. Six permanent IGs provided written comments related to the importance of the permanent IG and impediments in the role of acting IGs, as noted in the following examples of individual comments: “Prolonged IG vacancies are never good, and negatively impact the entire IG community and CIGIE because we need fully engaged IGs who can participate in IG and CIGIE business knowing that they will be in the position for the long-term and without wondering when and whether they will be replaced.” “IG vacancies have been allowed to be vacant for years. While the role of an acting IG may be filled successfully, it is important to each agency/department to have a permanent IG who is appointed by the appropriate process.” “Extended vacancies undermine the system of checks and balances.” “I generally believe that it is detrimental for an OIG to have a prolonged IG vacancy with an acting IG. I believe that acting IGs may be disinclined to take necessary agency actions because of their temporary status. In addition, the acting IG is vulnerable to attacks on his or her independence, particularly where he or she is seeking a permanent position and requires the agency’s endorsement.” Effect on strategic planning. Eight respondents pointed out challenges acting IGs face in long-term planning, as noted in the following examples of individual comments: “One of the biggest challenges to an acting IG may be the ability to make long-term plans for the organization.” “A prolonged vacancy creates a leadership gap for the OIG and the entity.” “Acting IGs do not feel empowered to take on new initiatives or projects on behalf of the office, and may feel inhibited in terms of management issues, including hiring.” Authority. Four respondents commented on the need for authority provided by permanent leadership, as noted in the following examples of individual comments: “Regardless of whether the discussion is focused on acting IG positions or any acting leadership position (within Mission or otherwise), there is some level of authority in terms of institutional impact and ability to effect change that comes from knowing those advancing mission have some level of anticipated continuity in service and ability to see things through.” “The acting did a remarkable job at getting the office through a very difficult time, but largely saw as a caretaker. [The acting IG] did not feel comfortable doing the things that I immediately recognized needed to be done. The Office’s work got little traction while the acting was in charge, in part because the Office was without a permanent leader and the agency did not feel compelled to pay attention to OIG recommendations.” “I believe the greatest challenge to anyone in an acting role has more to do with authority than it has to do with independence . . . . I believe it is often difficult for anyone in an acting position to think long-term and make decisions that have long-term implications because they (1) have no idea how long they will be acting and (2) may be overruled or have decisions reversed by a permanent appointee. So I think acting individuals tend to ‘keep the home fires burning’ as well as they can but don’t necessarily think in terms of leading the organization in the direction it needs to go in the future, especially since they don’t know what the future will bring.” OIG morale. Four respondents reported morale problems in OIGs without a permanent IG, as noted in the following examples of individual comments: “Prolonged vacancies in senior leadership positions, whether in an OIG or other government offices, can lead career employees to lose their focus and their dedication to fulfill the mission of the office. When new leadership is finally put into place, it often encounters stiff resistance to any changes because the employees have enjoyed being ‘home alone’.” “The prolonged vacancy at the agency diminished the stature of the office and did not make it an inviting place for experienced oversight staff to want to work.” IG vacancies seen as lack of support. Five respondents reported that prolonged vacancies are seen as a lack of congressional or agency support for the OIG, as noted in the following examples of individual comments: “Prolonged vacancies in the IG position . . . can be viewed by some as a lack of support for the IG oversight mission on the part of the Administration and Congress.” “Any individual serving in any position with the word ‘acting’ in front of it inherently carries less authority than the same individual in the same position serving in a permanent capacity. The longer an IG position is left vacant the greater the appearance that the agency does not want to have an IG providing oversight.” OIG Employees’ Views on the Impact of IG Vacancies on the Ability to Maintain Independence OIG employees’ views on the inherent independence of an acting IG as compared to the independence of a permanent IG are summarized in figure 10. Based on our survey, we estimate that 16 percent of the OIG employees believe that an acting IG is inherently less independent than a permanent IG. Of the employees who responded “yes,” 25 provided written explanations along with their answers, some of which are summarized below. The acting IG may be seeking a permanent position. Eleven OIG employees provided comments related to the acting IG seeking a permanent position, as noted in the following examples of individual comments: “If interested in permanent appointment, there is a risk that acting IG becomes more interested in being liked by and pleasing the agency, thus independence could be impaired.” “An acting Inspector General may be seeking an IG appointment. He/she wants the agency to like him, to support his nomination, and may kowtow to them. This dynamic may result in a ‘don’t rock the boat’ mentality.” “If the acting IG is going to be a candidate for the IG position, and is appointed by the head of the agency, they may stay away from reviewing sensitive issue areas.” The acting IG came from within the OIG. Three OIG employees provided comments related to the acting IG selected from within the OIG having preconceived notions, as noted in the following examples of individual comments: “Our acting Inspector General was previously the IG for Audits and Evaluation. As such, entered the position with substantial preconceived notions about the other directorates. In contrast, our permanent IG came to the position with limited preconceived notions. In the future, it would be better if the Acting IG came from another IG (as opposed to temporarily promoting from within).” “I believe that an acting IG is inherently less independent because he or she has no official term, may either receive an appointment as IG, or be replaced at the discretion of the President.” “Bring in an acting IG from another agency for independence reasons or ensure other acting positions are filled and the acting IG is not performing multiple roles.” Based on our survey, we estimate that 52 percent of the OIG employees believe that an acting IG is not inherently less independent than a permanent IG. Of the 71 employees who responded “no” to this question, 56 provided written explanations, some of which are summarized below. There is no difference between the permanent IG and an acting IG. Eighteen OIG employees provided comments related to the acting IG and permanent IG as having no difference, as noted in the following examples of individual comments: “We saw absolutely no difference in the independence of the acting IG the appointed IG.” “The acting title (as compared to a permanent IG title) is irrelevant. It ALL comes down to the specific individual occupying the position.” “The Inspector General is independent by law. The authority of the position is the same, whether it is filled by an acting IG or a permanent IG. . . . I have not encountered circumstances in which I felt the acting IG was inherently less independent.” “The acting IG at was the Deputy IG who is a strong ethical and principled leader. There was no change to our mission, focus, or independence, nor in our ability to conduct our work. To suggest that, merely because there was an acting IG, independence was inherently compromised is unfounded, bespeaks a lack of understanding of OIG standards and ethics, and is just wrong.” “The acting IG served as any IG would be expected to in the area of independence. No difference there.” An acting IG is independent. Nineteen OIG employees provided comments related to the acting IG’s independence, as noted in the following examples of individual comments: “Based on my experience, both acting IGs were career OIG employees understood and embraced independence.” “I felt the acting IG was very independent and did a fantastic job.” “All persons within the OIG are to be objective and independent, no matter their position.” “ acting IG the same level of independence that is expected of all IG employees.” “ acting IG is as independent as our previous and is not hesitant to report problems and weaknesses to Congress.” An acting IG and permanent IG follow the same independence standards. Six OIG employees provided comments related to the acting IG and permanent IG as having the same independence standards, as noted in the following examples of individual comments: “The acting is subject to the same standards.” “The acting IG is just as important and they adhered to all the laws and regulations as the IG.” “Acting or permanent, they are held to the same standards of independence.” An acting IG position is not less independent. Six OIG employees provided comments related to the acting IG position not being less independent and depending on the individual in the role, as noted in the following examples of individual comments: “Whether an acting IG is able to maintain independence is dependent upon the person holding the position and his or her confidence, strength of character, leadership capabilities and subject matter expertise. The same is true for IGs.” “It depends on the individual. If a particular acting IG is a strong person, who puts aside any desire to pander to the agency head in the hope of being made permanent, there would be no effect on his/her independence.” We also asked OIG employees to identify any additional challenges they experienced in relation to working under an acting IG. Overall, 83 employees provided written responses, and 4 of those responses were additional challenges related to OIG independence, as noted in the following examples of individual comments: “Having worked in OIGs and observed functioning in other OIGs, the acting IG issue seems serious. There are subtle pressures to go along with management. Few acting IGs deliberately decide to compromise their principles, but many seem to wind up doing so.” “Because the acting IG wanted to gain the support of others, was not independent.” “The one challenge I am concerned with an acting IG is if that person has applied for the IG position and will not commit to certain decisions that will negatively impact their opportunity to obtain the permanent position as IG.” We also asked OIG employees to provide suggestions on how the independence of the acting IG role could be improved. The majority of the 25 respondents who provided written comments to this question did not provide suggestions for improving the independence. The comments that provided suggestions are summarized below: Timely appoint an IG (4 respondents). Consult with other CIGIE IGs to help monitor and assess the acting IG based on clear criteria and expectations (1 respondent). Limit the amount of time an acting IG can serve (1 respondent). Bring in an acting IG from another agency for independence reasons or ensure that other acting positions are filled and the acting IG is not performing multiple roles (1 respondent). Suggestions from Permanent IGs for Improving the Appointment Process Prolonged IG vacancies have been the subject of congressional hearings because of the importance of these key oversight positions. Delays in the presidential nomination and Senate confirmation process for all positions filled by this process, including PAS OIGs, have also been the subject of recent academic studies. For example, a recent study that explored the failure of nominations and the delay in confirmation of successful nominations across recent administrations from 1981 to 2014, found that nominations for the IG position had about a 24 percent failure rate. Given that in recent years, certain OIGs have experienced prolonged IG vacancies, especially IGs that require presidential nomination and Senate confirmation, we asked the 52 surveyed permanent IGs to provide comments on their experience with the appointment process and any suggestions for improving the process and minimizing the duration of IG vacancies. Comments were provided by 45 permanent IGs in these areas, including eight suggestions to minimize the duration of IG vacancies, as noted in the following individual comments: “One thing that could be improved an agreement between the , Congress and on a format for information. I was required to provide essentially the same information (with small variations) three times. But the precise formatting and framing of the questions [asked of the nominees] was different in each case, taking time and creating the possibility of inconsistencies.” “A possible suggestion would be to improve the timeliness of the selection, vetting, and confirmation process of IGs, particularly given the current number of vacancies. IGs play a vital role in ensuring that government programs and operations are functioning efficiently and effectively, and greater emphasis on the part of the White House and Congress to nominate and confirm IGs in a timely manner would provide great benefit.” “I believe the process could be improved by streamlining the number of committees involved so that each nominee need only obtain approval from one committee.” “While I worked through the paperwork requirements efficiently, it was a tremendous lift and I wonder if all that is required is necessary and in the form it took. I found a good degree of duplication in what was asked of from the . . . and Senate. I think there are opportunities to streamline with better coordination.” “ a timeline from start to finish would be helpful. I also recommend that Congress prioritize IG confirmations above most other confirmations.” “Faster consideration and vote would be useful.” “The Senate be required to act on IG candidates within 90 days of their nomination by the President.” “Although I think it is very important for any IG to have a strong working relationship with the agency head, it seems inappropriate for the agency head to have a strong voice in selecting the nominee for a residentially appointed, Senate-confirmed IG who is supposed to provide independent oversight of the agency. I suggest changing the process to omit the pre-selection interview with the agency head and substitute instead a pre-nomination courtesy meeting.” Agency Comments and Our Evaluation We provided a draft of this report to CIGIE for comment and CIGIE shared the draft with the 64 OIGs active under the IG Act. CIGIE and the OIGs at the National Credit Union Administration and U.S. Election Assistance Commission provided written comments, which are discussed below and reprinted in appendixes II, III, and IV, respectively. CIGIE expressed appreciation for the review and analysis efforts that we conducted for the purposes of this report. CIGIE also noted some information regarding the Central Intelligence Agency IG and the Intelligence Community IG, which were outside the scope of our work. CIGIE stated that both IGs are PAS and that the Central Intelligence Agency IG position has been vacant for over 3 years. The National Credit Union Administration OIG stated that while it did not have a vacancy during the 10-year period we reviewed, it agreed that looking at this area to reduce IG vacancies is an important endeavor. The U.S. Election Assistance Commission OIG expressed concurrence with the facts as they pertain to its office and stated that the report will contribute to improving the appointment process for IGs. In addition, CIGIE and the OIGs at the Appalachian Regional Commission, Denali Commission, Department of Commerce, Department of Education, Department of Housing and Urban Development, Federal Deposit Insurance Corporation, General Services Administration, National Reconnaissance Office, and U.S. Election Assistance Commission provided technical comments, which we incorporated as appropriate. The remaining OIGs did not provide comments. We are sending copies of this report to the Executive Director of CIGIE and to the 64 IG Act offices listed in this report as well as interested congressional committees. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-2623 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix V. Appendix I: Objectives, Scope, and Methodology The objectives of this report were to determine (1) the status of inspector general (IG) vacancies as of the end of fiscal year 2017, and the number and duration of the IG vacancies for fiscal years 2007 through 2016, and (2) the views of the IG community on the impacts, if any, of IG vacancies on the Offices of Inspector General’s (OIG) ability to effectively carry out their duties, including views on independence and permanent IG suggestions for improvements in the appointment process. To address these objectives we included in our scope the 64 active OIGs that were established under the IG Act of 1978, as amended (IG Act). To determine the status of IG vacancies as of the end of fiscal year 2017, we obtained the vacancy data from the 64 OIGs active under the IG Act, and documented any changes for fiscal year 2017. To identify IG vacancies and changes for fiscal years 2007 through 2016, we first obtained vacancy data from the Council of the Inspectors General on Integrity and Efficiency (CIGIE). We interviewed CIGIE personnel to obtain an understanding of issues related to IG vacancies and to discuss the reliability of the vacancy data. Data obtained from CIGIE included the resignation dates of the permanent IGs, vacancy start and end dates, names of the acting IGs, names of newly appointed IGs, and whether each IG was presidentially appointed, Senate confirmed (PAS) or appointed by the head of a designated federal entity (DFE). We also obtained nominations from Congress.gov, which included information on nominated IGs and the status of those nominations. As part of our data reliability procedures, we confirmed the vacancy data with the 64 OIGs established under the IG Act. We reviewed and summarized the IG vacancy data and documented any changes in IG vacancies for fiscal years 2007 through 2016. In 2014, the IG appointment structure for the IGs of the National Security Agency and National Reconnaissance Office was changed from DFE to PAS. For the 10-year period under review, these two OIGs experienced vacancies during both their DFE and new PAS status. However, to avoid duplicating the agencies, we only counted the number and length of vacancies for each agency under the PAS IGs. To obtain the views of the IG community—specifically, permanent IGs, acting IGs, and employees working under an acting IG—on the impact that a prolonged IG vacancy can have on the OIG’s ability to carry out its duties effectively, including any impact on independence, we conducted web-based surveys of 54 IG Act OIGs. These surveys included both multiple choice and open-ended questions for written responses to obtain the views of the IG community on the impacts of vacancies, if any, and views on independence, challenges, and positive outcomes. The surveyed groups were as follows: Fifty-two permanent IGs serving as of August 22, 2017.We used both multiple choice questions and open-ended questions to obtain their views on the impact that an IG vacancy could have on the OIG’s ability to conduct its oversight, including any independence issues presented by acting IG. We also asked the permanent IGs to provide any suggestions for improvements in the appointment process. The survey was administered on the web from August 22, 2017, through September 29, 2017. The survey response rate of permanent IGs was 96 percent: 50 of the 52 permanent IGs completed the survey. Two permanent IGs did not respond to the survey. Nine acting IGs who had served for over 365 days from fiscal years 2014 through 2016. We used both multiple choice questions and open-ended questions to obtain their views on the impact that a prolonged vacancy could have on the acting IG’s ability to carry out his or her duties, including any impact on independence. The survey was administered on the web from August 22, 2017, through September 29, 2017. The survey response rate of acting IGs was 100 percent. While 14 acting IGs met our selection criteria, 4 have either retired or have since left the government and were not surveyed. The National Reconnaissance Office’s acting IG was excluded because of concerns regarding sensitive personally identifiable information. Of the 9 remaining acting IGs, 2 are now permanent IGs but provided responses for their acting IG tenure, which were included with those of the 7 acting IGs. In this report, we refer to all nine as acting IGs. A stratified random sample of 185 OIG employees consisting of 39 Senior Executive Service (SES) employees and 146 non-SES OIG employees, from OIGs with an acting IG in place for over 365 days from fiscal years 2014 through 2016. We used both multiple choice questions and open-ended questions to obtain the employee views about challenges related to working under an acting IG as compared to a permanent IG. The web-based survey was administered from September 11, 2017, through September 29, 2017. We had a weighted survey response rate of 71 percent; 133 of the sample of 185 employees completed the survey. Because we followed a probability procedure based on random selections, our OIG employee sample is only one of a large number of samples that we might have drawn. Since each sample could have provided different estimates, we express our confidence in the precision of our particular sample’s results as a 95 percent confidence interval (e.g., plus or minus 10 percentage points). This is the interval that would contain the actual population value for 95 percent of the samples we could have drawn. Confidence intervals are provided along with each sample estimate in the report. Estimates from the employee survey are generalizable to the population of employees from OIGs that had an acting IG in place for over 365 days from fiscal years 2014 through 2016. To minimize nonsampling errors, and to enhance data quality, we employed recognized survey design practices in the development of the questionnaire and in the collection, processing, and analysis of the survey data. To minimize errors arising from differences in how questions might be interpreted and to reduce variability in responses that should be qualitatively the same, we conducted pretests with permanent IGs, acting IGs, and employees. To ensure that we obtained a variety of perspectives on our survey questions, we randomly selected three permanent IGs, two acting IGs, and two employees for the pretests. Based on their feedback, we revised each survey in order to improve the clarity of the questions. An independent survey specialist within GAO also reviewed a draft of each survey prior to its administration. To reduce nonresponse, another source of nonsampling error, we followed up by e-mail or phone with the IGs, acting IGs, and employees who had not responded to encourage them to complete the survey. We did not survey a total of 10 IG Act OIGs. Nine OIGs were not surveyed because there was no permanent IG in position or the acting IG at the time of our survey did not meet our criteria of serving for more than 365 days from fiscal year 2014 through 2016. Those OIGs were at the U.S. Postal Service, Social Security Administration, Small Business Administration, Office of Personnel Management, National Security Agency, Federal Election Commission, Department of Housing and Urban Development, Department of Energy, and Department of Defense. In addition, one OIG, the National Reconnaissance Office, was not surveyed because of concerns regarding sensitive personally identifiable information. We also performed a two-step content analysis on the open-ended survey responses to summarize key ideas. In the first step, analysts read the respondents’ comments and jointly developed categories for them. In the second step, each open-ended response was coded by one analyst, and then those codes were verified by another analyst. Any coding discrepancies were resolved by the analysts discussing the comments and then agreeing on the code. In some cases, we edited responses for clarity or grammar. Views expressed in the open-ended questions may not be representative of all acting IGs, permanent IGs, or employees on given topics. We did not assess the merits of the individual comments or suggestions provided in response to the open-ended survey questions. We conducted this performance audit from February 2017 to March 2018 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Appendix II: Comments from the Council of the Inspectors General on Integrity and Efficiency Appendix III: Comments from the National Credit Union Administration Office of Inspector General Appendix IV: Comments from the U.S. Election Assistance Commission Office of Inspector General Appendix V: GAO Contact and Staff Acknowledgments GAO Contact Staff Acknowledgments In addition to the contact named above, Elizabeth Martinez (Assistant Director), Carl Barden, Jason Kirwan, Christopher Klemmer, Jill Lacey, Won Lee, Yvonne Moss, and Lisa Rowland made key contributions to this report.
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The IG Act established OIGs to conduct and supervise audits and investigations; recommend policies to promote economy, efficiency, and effectiveness; and prevent and detect fraud and abuse. The Inspector General Empowerment Act of 2016 included a provision for GAO to review prolonged IG vacancies during which a temporary appointee has served as the head of the office. This report addresses (1) the status of IG vacancies as of the end of fiscal year 2017, and the number and duration of IG vacancies for fiscal years 2007 through 2016, and (2) the IG community's views about how IG vacancies impact the OIGs' ability to carry out their duties effectively, including views on the impact on independence. GAO analyzed data related to IG vacancies; interviewed officials from the Council of the Inspectors General on Integrity and Efficiency (CIGIE); and conducted a web-based survey to obtain the views of (1) the 52 permanent IGs serving as of August 22, 2017; (2) 9 acting IGs who had served in OIGs that had vacancies of over 365 days during fiscal years 2014 through 2016; and (3) a stratified random sample of employees in OIGs with IG vacancies of over 365 days during fiscal years 2014 through 2016. Survey response rates ranged from 71 percent to 100 percent. CIGIE and nine OIGs provided technical comments, which were incorporated as appropriate. For the 10-year period covering fiscal years 2007 through 2016, 53 of the 64 IG Act OIGs experienced one or more periods of IG vacancy with the cumulative durations ranging from about 2 weeks to 6 years. Plan and conduct work. Overall, at least eight of the nine acting IGs responded “no impact” for the questions in this area. The estimated percentage of OIG employees who believed that working under an acting IG has “no impact” ranged by question from 49 percent to 69 percent, “negative impact” ranged from about 8 percent to 24 percent, and “positive impact” ranged from 6 percent to 13 percent. Interact with agency management. The responses of seven of the nine acting IGs and 63 percent to 65 percent of OIG employees indicated that an acting IG position had no impact in this area. Approximately 16 percent of the OIG employees believed that there was a negative impact on timely access to documentation, while 7 percent believed that there was a positive impact. Managing OIG and personnel. Four of the nine acting IGs and about 36 percent of OIG employees responded that an acting IG position had a negative impact on employee morale. An estimated 44 percent of employees believed that working under an acting IG had no impact on employee morale while about 10 percent believed it had a positive impact. Four acting IGs also responded that it had a negative impact on office restructuring. With regard to independence, GAO's survey of permanent IGs found that while the majority who responded did not think that acting IGs are inherently less independent, they did indicate by a similar majority that an acting IG is less independent in appearance than a permanent IG, especially when the acting IG is applying for the IG position.
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Background From May 2003 through June 2004, the CPA, led by the United States and the United Kingdom, was the UN-recognized coalition authority responsible for the temporary governance of Iraq and for overseeing, directing, and coordinating the reconstruction effort. In May 2003, the CPA dissolved the military organizations of the former regime and began the process of creating or reestablishing new Iraqi security forces, including the police and a new Iraqi army. Over time, multinational force commanders assumed responsibility for recruiting and training some Iraqi defense and police forces in their areas of responsibility. In May 2004, the President issued a National Security Presidential Directive, which stated that, after the transition of power to the Iraqi government, the Department of State (State), through its ambassador to Iraq, would be responsible for all U.S. activities in Iraq except for security and military operations. U.S. activities relating to security and military operations would be the responsibility of the Department of Defense (DOD). The Presidential Directive required the U.S. Central Command (CENTCOM) to direct all U.S. government efforts to organize, equip, and train Iraqi security forces. The Multi-National Security Transition Command-Iraq, which operates under Multi-National Force-Iraq (MNF-I), now leads coalition efforts to train, equip, and organize Iraqi security forces. Other U.S. government agencies also play significant roles in the reconstruction effort. The U.S. Agency for International Development (USAID) is responsible for projects to restore Iraq’s infrastructure, support healthcare and education initiatives, expand economic opportunities for Iraqis, and foster improved governance. The U.S. Army Corps of Engineers provides engineering and technical services to USAID, State, and military forces in Iraq. In December 2005, the responsibilities of the Project Contracting Office (PCO), a temporary organization responsible for program, project, asset, and financial management of construction and nonconstruction activities, were merged with those of the U.S. Army Corps of Engineers Gulf Region Division. On June 28, 2004, the CPA transferred power to an interim sovereign Iraqi government, the CPA was officially dissolved, and Iraq’s transitional period began. Under Iraq’s transitional law, the transitional period included the completion of a draft constitution in October 2005 and two subsequent elections—a referendum on the constitution and an election for a permanent government. The Iraqi people approved the constitution on October 15, 2005, and voted for representatives to the Iraq Council of Representatives on December 15, 2005. As of February 3, 2006, the Independent Electoral Commission of Iraq had not certified the election results for representatives. Once certified, the representatives are to form a permanent government. According to U.S. officials and Iraqi constitutional experts, the new Iraqi government is likely to confront the same issues it confronted prior to the referendum—the power of the central government, control of Iraq’s natural resources, and the application of Islamic law. According to U.S. officials, once the Iraqi legislature commences work, it will form a committee that has 4 months to recommend amendments to the constitution. To take effect, these proposed amendments must be approved by the Iraqi legislature and then Iraqi citizens must vote on them in a referendum within 2 months. Security, Measurement, and Sustainability Challenges in Rebuilding and Stabilizing Iraq The United States faces three key challenges in stabilizing and rebuilding Iraq. First, the unstable security environment and the continuing strength of the insurgency have made it difficult for the United States to transfer security responsibilities to Iraqi forces and to engage in rebuilding efforts. Second, inadequate performance data and measures make it difficult to determine the overall progress and impact of U.S. reconstruction efforts. Third, the U.S. reconstruction program has encountered difficulties with Iraq’s inability to sustain new and rehabilitated infrastructure projects and to address maintenance needs in the water, sanitation, and electricity sectors. U.S. agencies are working to develop better performance data and plans for sustaining rehabilitated infrastructure. Strength of the Insurgency Has Made It Difficult to Transfer Security Responsibilities to Iraqi Forces and Engage in Rebuilding Efforts Over the past 2½ years, significant increases in attacks against the coalition and coalition partners have made it difficult to transfer security responsibilities to Iraqi forces and to engage in rebuilding efforts in Iraq. The insurgency in Iraq intensified through October 2005 and has remained strong since then. Poor security conditions have delayed the transfer of security responsibilities to Iraqi forces and the drawdown of U.S. forces in Iraq. The unstable security environment has also affected the cost and schedule of rebuilding efforts and has led, in part, to project delays and increased costs for security services. Recently, the administration has taken actions to integrate military and civilian rebuilding and stabilization efforts. Insurgency Has Intensified and Delayed the Transfer of Security Responsibilities The insurgency intensified through October 2005 and has remained strong since then. As we reported in March 2005, the insurgency in Iraq— particularly the Sunni insurgency—grew in complexity, intensity, and lethality from June 2003 through early 2005. According to a February 2006 testimony by the Director of National Intelligence, insurgents are using increasingly lethal improvised explosive devices and continue to adapt to coalition countermeasures. As shown in figure 1, enemy-initiated attacks against the coalition, its Iraqi partners, and infrastructure increased in number over time. The highest peak occurred during October 2005, around the time of Ramadan and the October referendum on Iraq’s constitution. This followed earlier peaks in August and November 2004 and January 2005. According to a senior U.S. military officer, attack levels ebb and flow as the various insurgent groups—almost all of which are an intrinsic part of Iraq’s population— rearm and attack again. As the administration has reported, insurgents share the goal of expelling the coalition from Iraq and destabilizing the Iraqi government to pursue their individual and, at times, conflicting goals. Iraqi Sunnis make up the largest portion of the insurgency and present the most significant threat to stability in Iraq. In February 2006, the Director of National Intelligence reported that the Iraqi Sunnis’ disaffection is likely to remain high in 2006, even if a broad, inclusive national government emerges. These insurgents continue to demonstrate the ability to recruit, supply, and attack coalition and Iraqi security forces. Their leaders continue to exploit Islamic themes, nationalism, and personal grievances to fuel opposition to the government and recruit more fighters. According to the Director, the most extreme Sunni jihadists, such as al-Qaeda in Iraq, will remain unreconciled and continue to attack Iraqi and coalition forces. The remainder of the insurgency consists of radical Shia groups, some of whom are supported by Iran, violent extremists, criminals, and, to a lesser degree, foreign fighters. According to the Director of National Intelligence, Iran provides guidance and training to select Iraqi Shia political groups and weapons and training to Shia militant groups to enable anticoalition attacks. Iran also has contributed to the increasing lethality of anticoalition attacks by enabling Shia militants to build improvised explosive devices with explosively formed projectiles, similar to those developed by Iran and Lebanese Hizballah. The continuing strength of the insurgency has made it difficult for the multinational force to develop effective and loyal Iraqi security forces, transfer security responsibilities to them, and progressively draw down U.S. forces in Iraq. The Secretary of Defense and MNF-I recently reported progress in developing Iraqi security forces, saying that these forces continue to grow in number, take on more responsibilities, and increase their lead in counterinsurgency operations in some parts of Iraq. For example, in December 2005 and January 2006, MNF-I reported that Iraqi army battalions and brigades had assumed control of battle space in parts of Ninewa, Qadisiyah, Babil, and Wasit provinces. According to the Director for National Intelligence, Iraqi security forces are taking on more- demanding missions, making incremental progress toward operational independence, and becoming more capable of providing security. In the meantime, coalition forces continue to support and assist the majority of Iraqi security forces as they develop the capability to operate independently. However, recent reports have recognized limitations in the effectiveness of Iraqi security forces. For example, DOD’s October 2005 report notes that Iraqi forces will not be able to operate independently for some time because they need logistical capabilities, ministry capacity, and command and control and intelligence structures. In the November 2005 National Strategy for Victory in Iraq, the administration cited a number of challenges to developing effective Iraqi security forces, including the need to guard against infiltration by elements whose first loyalties are to institutions other than the Iraqi government and to address the militias and armed groups that are outside the formal security sector and government control. Moreover, according to the Director of National Intelligence’s February 2006 report, Iraqi security forces are experiencing difficulty in managing ethnic and sectarian divisions among their units and personnel. GAO’s classified report on Iraq’s security situation provided further information and analysis on the challenges to developing Iraqi security forces and the conditions for the phased drawdown of U.S. and other coalition forces. Security Situation and Management Issues Have Affected Rebuilding Efforts The security situation in Iraq has affected the cost and schedule of reconstruction efforts. Security conditions have, in part, led to project delays and increased costs for security services. Although it is difficult to quantify the costs and delays resulting from poor security conditions, both agency and contractor officials acknowledged that security costs have diverted a considerable amount of reconstruction resources and have led to canceling or reducing the scope of some reconstruction projects. For example, in March 2005, USAID cancelled two task orders related to power generation that totaled nearly $15 million to help pay for the increased security costs incurred at another power generation project in southern Baghdad. In another example, work was suspended at a sewer repair project in central Iraq for 4 months in 2004 due to security concerns. In January 2006, State reported that direct and indirect security costs represent 16 to 22 percent of the overall cost of major infrastructure reconstruction projects. In addition, the security environment in Iraq has led to severe restrictions on the movement of civilian staff around the country and reductions of a U.S. presence at reconstruction sites, according to U.S. agency officials and contractors. For example, the Project Contracting Office reported in February 2006, the number of attacks on convoys and casualties had increased from 20 convoys attacked and 11 casualties in October 2005 to 33 convoys attacked and 34 casualties in January 2006. In another example, work at a wastewater plant in central Iraq was halted for approximately 2 months in early 2005 because insurgent threats drove away subcontractors and made the work too hazardous to perform. In the assistance provided to support the electoral process, U.S.-funded grantees and contractors also faced security restrictions that hampered their movements and limited the scope of their work. For example, IFES was not able to send its advisors to most of the governorate-level elections administration offices, which hampered training and operations at those facilities leading up to Iraq’s Election Day on January 30, 2005. While poor security conditions have slowed reconstruction and increased costs, a variety of management challenges also have adversely affected the implementation of the U.S. reconstruction program. In September 2005, we reported that management challenges such as low initial cost estimates and delays in funding and awarding task orders have led to the reduced scope of the water and sanitation program and delays in starting projects. In addition, U.S. agency and contractor officials have cited difficulties in initially defining project scope, schedule, and cost, as well as concerns with project execution, as further impeding progress and increasing program costs. These difficulties include lack of agreement among U.S. agencies, contractors, and Iraqi authorities; high staff turnover; an inflationary environment that makes it difficult to submit accurate pricing; unanticipated project site conditions; and uncertain ownership of project sites. Our ongoing work on Iraq’s energy sectors and the management of design- build contracts will provide additional information on the issues that have affected the pace and costs of reconstruction. Recent Actions to Integrate Military and Civilian Rebuilding and Stabilization Efforts The Administration has taken steps to develop a more comprehensive, integrated approach to combating the insurgency and stabilizing Iraq. The National Strategy for Victory in Iraq lays out an integrated political, military, and economic strategy that goes beyond offensive military operations and the development of Iraqi security forces in combating the insurgency. Specifically, it calls for cooperation with and support for local governmental institutions, the prompt dispersal of aid for quick and visible reconstruction, and central government authorities who pay attention to local needs. Toward that end, U.S. agencies are developing tools for integrating political, economic, and security activities in the field. For example, USAID is developing the Focused Stabilization Strategic City Initiative that will fund social and economic stabilization activities in communities within 10 strategic cities. The program is intended to jump-start the development of effective local government service delivery by directing local energies from insurgency activities toward productive economic and social opportunities. The U.S. embassy in Baghdad and MNF-I are also developing provincial assistance teams as a component of an integrated counterinsurgency strategy. These teams would consist of coalition military and civilian personnel who would assist Iraq’s provincial governments with (1) developing a transparent and sustained capability to govern; (2) promoting increased security, rule of law, and political and economic development; and (3) providing the provincial administration necessary to meet the basic needs of the population. It is unclear whether these two efforts will become fully operational, as program documents have noted problems in providing funding and security for them. Limited Performance Data and Measures and Inadequate Reporting Present Difficulties in Determining Progress and Impact of Rebuilding Effort State has set broad goals for providing essential services, and the U.S. program has undertaken many rebuilding activities in Iraq. The U.S. program has made some progress in accomplishing rebuilding activities, such as rehabilitating some oil facilities to restart Iraq’s oil production, increasing electrical generation capacity, restoring some water treatment plants, and building Iraqi health clinics. However, limited performance data and measures make it difficult to determine and report on the progress and impact of U.S. reconstruction. Although information is difficult to obtain in an unstable security environment, State reported that it is currently finalizing a set of metrics to track the impact of reconstruction efforts. In the water and sanitation sector, the Department of State has primarily reported on the numbers of projects completed and the expected capacity of reconstructed treatment plants. However, we found that the data are incomplete and do not provide information on the scope and cost of individual projects nor do they indicate how much clean water is reaching intended users as a result of these projects. Moreover, reporting only the number of projects completed or under way provides little information on how U.S. efforts are improving the amount and quality of water reaching Iraqi households or their access to sanitation services. Information on access to water and its quality is difficult to obtain without adequate security or water-metering facilities. Limitations in health sector measurements also make it difficult to relate the progress of U.S. activities to its overall effort to improve the quality and access of health care in Iraq. Department of State measurements of progress in the health sector primarily track the number of completed facilities, an indicator of increased access to health care. However, the data available do not indicate the adequacy of equipment levels, staffing levels, or quality of care provided to the Iraqi population. Monitoring the staffing, training, and equipment levels at health facilities may help gauge the effectiveness of the U.S. reconstruction program and its impact on the Iraqi people. In the electricity sector, U.S. agencies have primarily reported on generation measures such as levels of added or restored generation capacity and daily power generation of electricity; numbers of projects completed; and average daily hours of power. However, these data do not show whether (1) the power generated is uninterrupted for the period specified (e.g., average number of hours per day); (2) there are regional or geographic differences in the quantity of power generated; and (3) how much power is reaching intended users. Information on the distribution and access of electricity is difficult to obtain without adequate security or accurate metering capabilities. Opinion surveys and additional outcome measures have the potential to gauge the impact of the U.S. reconstruction efforts on the lives of Iraqi people and their satisfaction with these sectors. A USAID survey in 2005 found that the Iraqi people were generally unhappy with the quality of their water supply, waste disposal, and electricity services but approved of the primary health care services they received. In September 2005, we recommended that the Secretary of State address this issue of measuring progress and impact in the water and sanitation sector. State agreed with our recommendation and stated in January 2006 that it is currently finalizing a set of standard methodologies and metrics for water and other sectors that could be used to track the impact of U.S. reconstruction efforts. Iraq’s Capacity to Operate and Maintain U.S.-Funded Projects Presents Sustainability Problems The U.S. reconstruction program has encountered difficulties with Iraq’s ability to sustain the new and rehabilitated infrastructure and address maintenance needs. In the water, sanitation, and electricity sectors, in particular, some projects have been completed but have sustained damage or become inoperable due to Iraq’s problems in maintaining or properly operating them. State reported in January 2006 that several efforts were under way to improve Iraq’s ability to sustain the infrastructure rebuilt by the United States. In the water and sanitation sector, U.S. agencies have identified limitations in Iraq’s capacity to maintain and operate reconstructed facilities, including problems with staffing, unreliable power to run treatment plants, insufficient spare parts, and poor operations and maintenance procedures. The U.S. embassy in Baghdad stated that it was moving from the previous model of building and turning over projects to Iraqi management toward a “build-train-turnover” system to protect the U.S. investment. However, these efforts are just beginning, and it is unclear whether the Iraqis will be able to maintain and operate completed projects and the more than $1 billion in additional large-scale water and sanitation projects expected to be completed through 2008. In September 2005, we recommended that the Secretary of State address the issue of sustainability in the water and sanitation sector. State agreed with our recommendation and stated that it is currently working with the Iraqi government to assess the additional resources needed to operate and maintain water and sanitation facilities that have been constructed or repaired by the United States. In the electricity sector, the Iraqis’ capacity to operate and maintain the power plant infrastructure and equipment provided by the United States remains a challenge at both the plant and ministry levels. As a result, the infrastructure and equipment remain at risk of damage following their transfer to the Iraqis. In our interviews with Iraqi power plant officials from 13 locations throughout Iraq, the officials stated that their training did not adequately prepare them to operate and maintain the new U.S.- provided gas turbine engines. Due to limited access to natural gas, some Iraqi power plants are using low-grade oil to fuel their natural gas combustion engines. The use of oil-based fuels, without adequate equipment modification and fuel treatment, decreases the power output of the turbines by up to 50 percent, requires three times more maintenance, and could result in equipment failure and damage that significantly reduces the life of the equipment, according to U.S. and Iraqi power plant officials. U.S. officials have acknowledged that more needs to be done to train plant operators and ensure that advisory services are provided after the turnover date. In January 2006, State reported that it has developed a strategy with the Ministry of Electricity to focus on rehabilitation and sustainment of electricity assets. Although agencies have incorporated some training programs and the development of operations and maintenance capacity into individual projects, problems with the turnover of completed projects, such as those in the water and sanitation and electricity sectors, have led to a greater interagency focus on improving project sustainability and building ministry capacity. In May 2005, an interagency working group including State, USAID, PCO, and the Army Corps of Engineers was formed to identify ways to address Iraq’s capacity-development needs. The working group reported that a number of critical infrastructure facilities constructed or rehabilitated under U.S. funding have failed, will fail, or will operate in suboptimized conditions following handover to the Iraqis. To mitigate the potential for project failures, the working group recommended increasing the period of operational support for constructed facilities from 90 days to up to 1 year. In January 2006, State reported that it has several efforts under way focused on improving Iraq’s ability to operate and maintain facilities over time. As part of our ongoing review of Iraq’s energy sector, we will be assessing the extent to which the administration is providing funds to sustain the infrastructure facilities constructed or rehabilitated by the United States. Iraq Faces Challenges in Financing Future Needs As the new Iraqi government forms, it must plan to secure the financial resources it will need to continue the reconstruction and stabilization efforts begun by the United States and international community. Initial assessments in 2003 identified $56 billion in reconstruction needs across a variety of sectors in Iraq. However, Iraq’s needs are greater than originally anticipated due to severely degraded infrastructure, post-conflict looting and sabotage, and additional security costs. The United States has borne the primary financial responsibility for rebuilding and stabilizing Iraq; however, its commitments are largely obligated and remaining commitments and future contributions are not finalized. Further, U.S. appropriations were never intended to meet all Iraqi needs. International donors have provided a lesser amount of funding for reconstruction and development activities; however, most of the pledged amount is in the form of loans that Iraq has just begun to access. Finally, Iraq’s ability to contribute financially to its additional rebuilding and stabilization needs is dependent upon the new government’s efforts to increase revenues obtained from crude oil exports, reduce energy and food subsidies, control government operating expenses, provide for a growing security force, and repay external debt and war reparations. Iraqi Needs May be Greater Than Originally Anticipated Initial assessments of Iraq’s needs through 2007 by the U.N., World Bank, and the CPA estimated that the reconstruction of Iraq would require about $56 billion. The October 2003 joint UN/World Bank assessment identified $36 billion, from 2004 through 2007, in immediate and medium-term needs in 14 priority sectors, including education, health, electricity, transportation, agriculture, and cross-cutting areas such as human rights and the environment. For example, the assessment estimated that Iraq would need about $12 billion for rehabilitation and reconstruction, new investment, technical assistance, and security in the electricity sector. In addition, the assessment noted that the CPA estimated an additional $20 billion would be needed from 2004 through 2007 to rebuild other critical sectors such as security and oil. Iraq may need more funding than currently available to meet the demands of the country. The state of some Iraqi infrastructure was more severely degraded than U.S. officials originally anticipated or initial assessments indicated. The condition of the infrastructure was further exacerbated by post-2003 conflict looting and sabotage. For example, some electrical facilities and transmission lines were damaged, and equipment and materials needed to operate treatment and sewerage facilities were destroyed by the looting that followed the 2003 conflict. In addition, insurgents continue to target electrical transmission lines and towers as well as oil pipelines that provide needed fuel for electrical generation. In the oil sector, a June 2003 U.S. government assessment found that more than $900 million would be needed to replace looted equipment at Iraqi oil facilities. These initial assessments assumed reconstruction would take place in a peace-time environment and did not include additional security costs. Further, these initial assessments assumed that Iraqi government revenues and private sector financing would increasingly cover long-term reconstruction requirements. This was based on the assumption that the rate of growth in oil production and total Iraqi revenues would increase over the next several years. However, private sector financing and government revenues may not yet meet these needs. According to a January 2006 International Monetary Fund (IMF) report, private sector investment will account for 8 percent of total projected investment for 2006, down from 12 percent in 2005. In the oil sector alone, Iraq will likely need an estimated $30 billion over the next several years to reach and sustain an oil production capacity of 5 million barrels per day, according to industry experts and U.S. officials. For the electricity sector, Iraq projects that it will need $20 billion through 2010 to boost electrical capacity, according to the Department of Energy’s Energy Information Administration. Future Contributions for Iraq Reconstruction May Be Limited The United States is the primary contributor to rebuilding and stabilization efforts in Iraq. Since 2003, the United States has made available about $30 billion for activities that have largely focused on infrastructure repair and training of Iraqi security forces. As priorities changed, the United States reallocated about $5 billion of the $18.4 billion fiscal year 2004 emergency supplemental among the various sectors, over time increasing security and justice funds while decreasing resources for the water and electricity sectors. As of January 2006, of the $30 billion appropriated, about $23 billion had been obligated and about $16 billion had been disbursed for activities that included infrastructure repair, training, and equipping of the security and law enforcement sector; infrastructure repair of the electricity, oil, and water and sanitation sectors; and CPA and U.S. administrative expenses. These appropriations were not intended to meet all of Iraq’s needs. The United States has obligated nearly 80 percent of its available funds. Although remaining commitments and future contributions have not been finalized, they are likely to target activities for building ministerial capacity, sustaining existing infrastructure investments, and training and equipping the Iraqi security forces, based on agency reporting. For example, in January 2006, State reported a new initiative to address Iraqi ministerial capacity development at 12 national ministries. According to State, Embassy Baghdad plans to undertake a comprehensive approach to provide training in modern techniques of civil service policies, requirements-based budget processes, information technology standards, and logistics management systems to Iraqi officials in key ministries. International donors have provided a lesser amount of funding for reconstruction and development activities. According to State, donors have provided about $2.7 billion in multilateral and bilateral grants—of the pledged $13.6 billion—as of December 2005. About $1.3 billion has been deposited by donors into the two trust funds of the International Reconstruction Fund Facility for Iraq (IRFFI), of which about $900 million had been obligated and about $400 million disbursed to individual projects, as of December 2005. Donors also have provided bilateral assistance for Iraq reconstruction activities; however, complete information on this assistance is not readily available. Most of the pledged amount is in the form of loans that the Iraqis have recently begun to access. About $10 billion, or 70 percent, of the $13.6 billion pledged in support of Iraq reconstruction is in the form of loans, primarily from the World Bank, the IMF, and Japan. In September 2004, the IMF provided a $436 million emergency post-conflict assistance loan to facilitate Iraqi debt relief, and in December 2005, Iraq secured a $685 million Stand-By Arrangement (SBA) with the IMF. On November 29, 2005, the World Bank approved a $100 million loan within a $500 million program for concessional international development assistance. Iraq Must Address Budget Constraints to Contribute to Future Rebuilding and Stabilization Efforts Iraq’s fiscal ability to contribute to its own rebuilding is constrained by the amount of revenues obtained from crude oil exports, continuing subsidies for food and energy, growing costs for government salaries and pensions, increased demands for an expanding security force, and war reparations and external debt. Crude oil exports account for nearly 90 percent of the Iraqi government revenues in 2006, according to the IMF. Largely supporting Iraq’s government operations and subsidies, crude oil export revenues are dependent upon export levels and market price. The Iraqi 2006 budget has projected that Iraq’s crude oil export revenues will grow at an annual growth rate of 17 percent per year (based on an average production level of 2 million bpd in 2005 to 3.6 million bpd in 2010), estimating an average market price of about $46 per barrel. Oil exports are projected to increase from 1.4 million bpd in 2005 to 1.7 million bpd in 2006, according to the IMF. Iraq’s current crude oil export capacity is theoretically as high as 2.5 million bpd, according to the Energy Information Administration at the Department of Energy. However, Iraq’s crude oil export levels have averaged 1.4 million bpd as of December 2005, in part due to attacks on the energy infrastructure and pipelines. In January 2006, crude oil export levels fell to an average of about 1.1 million bpd. Further, a combination of insurgent attacks on crude oil and product pipelines, dilapidated infrastructure, and poor operations and maintenance have hindered domestic refining and have required Iraq to import significant portions of liquefied petroleum gas, gasoline, kerosene, and diesel. According to State, the Iraqi Oil Ministry estimates that the current average import cost of fuels is roughly $500 million each month. Current government subsidies constrain opportunities for growth and investment and have kept prices for food, oil, and electricity low. Before the war, at least 60 percent of Iraqis depended on monthly rations—known as the public distribution system (PDS)—provided by the UN Oil for Food program to meet household needs. The PDS continues to provide food subsidies to Iraqis. In addition, Iraqis pay below-market prices for refined fuels and, in the absence of effective meters, for electricity and water. Low prices have encouraged over-consumption and have fueled smuggling to neighboring countries. Food and energy subsidies account for about 18 percent of Iraq’s projected gross domestic product (GDP) for 2006. As part of its Stand-By Arrangement with the IMF, Iraq plans to reduce the government subsidy of petroleum products, which would free up oil revenues to fund additional needs and reduce smuggling. According to the IMF, by the end of 2006, the Iraqi government plans to complete a series of adjustments to bring fuel prices closer to those of other Gulf countries. However, it is unclear whether the Iraqi government will have the political commitment to continue to raise fuel prices. Generous wage and pension benefits have added to budgetary pressures. Partly due to increases in these benefits, the Iraqi government’s operating expenditures are projected to increase by over 24 percent from 2005 to 2006, according to the IMF. As a result, wages and pensions constitute about 21 percent of projected GDP for 2006. The IMF noted that it is important for the government to keep non-defense wages and pensions under firm control to contain the growth of civil service wages. As a first step, the Iraqi government plans to complete a census of all public service employees by June 2006. Iraq plans to spend more resources on its own defense. Iraq’s security- related spending is currently projected to be about $5.3 billion in 2006, growing from 7 to about 13 percent of projected GDP. The amount reflects rising costs of security and the transfer of security responsibilities from the United States to Iraq. The Iraqi government also owes over $84 billion to victims of its invasion of Kuwait and international creditors. As of December 2005, Iraq owed about $33 billion in unpaid awards resulting from its invasion and occupation of Kuwait. As directed by the UN, Iraq currently deposits 5 percent of its oil proceeds into a UN compensation fund. Final payment of these awards could extend through 2020 depending on the growth of Iraq’s oil proceeds. In addition, the IMF estimated that Iraq’s external debt was about $51 billion at the end of 2005. Conclusion For the past 2½ years, the United States has provided $30 billion with the intent of developing capable Iraqi security forces, rebuilding a looted and worn infrastructure, and supporting democratic elections. However, the United States has confronted a lethal insurgency that has taken many lives and made rebuilding Iraq a costly and challenging endeavor. It is unclear when Iraqi security forces will be able to operate independently, thereby enabling the United States to reduce its military presence. Similarly, it is unclear how U.S. efforts are helping Iraq obtain clean water, reliable electricity, or competent health care. Measuring the outcomes of U.S. efforts is important to ensure that the U.S. dollars spent are making a difference in the daily lives of the Iraqi people. In addition, the United States must ensure that the billions of dollars it has already invested in Iraq’s infrastructure are not wasted. The Iraqis need additional training and preparation to operate and maintain the power plants, water and sewage treatment facilities, and health care centers the United States has rebuilt or restored. In response to our reports, State has begun to develop metrics for measuring progress and plans for sustaining the U.S.-built infrastructure. The administration’s next budget will reveal its level of commitment to these challenges. But the challenges are not exclusively those of the United States. The Iraqis face the challenge of forming a government that has the support of all ethnic and religious groups. They also face the challenge of addressing those constitutional issues left unresolved from the October referendum— power of the central government, control of Iraq’s natural resources, and the application of Islamic law. The new government also faces the equally difficult challenges of reducing subsidies, controlling public salaries and pensions, and sustaining the growing number of security forces. This will not be easy, but it is necessary for the Iraqi government to begin to contribute to its own rebuilding and stabilization efforts and to encourage investment by the international community and private sector. We continue to review U.S. efforts to train and equip Iraqi security forces, develop the oil and electricity sectors, reduce corruption, and enhance the capacity of Iraqi ministries. Specifically, we will examine efforts to stabilize Iraq and develop its security forces, including the challenge of ensuring that Iraq can independently fund, sustain, and support its new security forces; assess issues related to the development of Iraq’s energy sector, including the sectors’ needs as well as challenges such as corruption; and examine capacity-building efforts in the Iraqi ministries. Mr. Chairman, this concludes my prepared statement. I will be happy to answer any questions you or the other Committee members may have. Contact and Staff Acknowledgments: For further information, please contact Joseph A. Christoff on (202) 512- 8979. Individuals who made key contributions to this testimony were Monica Brym, Lynn Cothern, Bruce Kutnick, Steve Lord, Sarah Lynch, Judy McCloskey, Micah McMillan, Tet Miyabara, Jose Pena III, Audrey Solis, and Alper Tunca. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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The United States, along with coalition partners and various international organizations, has undertaken a challenging and costly effort to stabilize and rebuild Iraq following multiple wars and decades of neglect by the former regime. This enormous effort is taking place in an unstable security environment, concurrent with Iraqi efforts to transition to its first permanent government. The United States' goal is to help the Iraqi government develop a democratic, stable, and prosperous country, at peace with itself and its neighbors, a partner in the war against terrorism, enjoying the benefits of a free society and a market economy. In this testimony, GAO discusses the challenges (1) that the United States faces in its rebuilding and stabilization efforts and (2) that the Iraqi government faces in financing future requirements. This statement is based on four reports GAO has issued to the Congress since July 2005 and recent trips to Iraq. Since July 2005, we have issued reports on (1) the status of funding and reconstruction efforts in Iraq, focusing on the progress achieved and challenges faced in rebuilding Iraq's infrastructure; (2) U.S. reconstruction efforts in the water and sanitation sector; (3) U.S. assistance for the January 2005 Iraqi elections; and (4) U.S. efforts to stabilize the security situation in Iraq (a classified report). The United States faces three key challenges in rebuilding and stabilizing Iraq. First, the security environment and the continuing strength of the insurgency have made it difficult for the United States to transfer security responsibilities to Iraqi forces and progressively draw down U.S. forces. The security situation in Iraq has deteriorated since June 2003, with significant increases in attacks against Iraqi and coalition forces. In addition, the security situation has affected the cost and schedule of rebuilding efforts. The State Department has reported that security costs represent 16 to 22 percent of the overall costs of major infrastructure projects. Second, inadequate performance data and measures make it difficult to determine the overall progress and impact of U.S. reconstruction efforts. The United States has set broad goals for providing essential services in Iraq, but limited performance measures present challenges in determining the overall impact of U.S. projects. Third, the U.S. reconstruction program has encountered difficulties with Iraq's inability to sustain new and rehabilitated infrastructure projects and to address basic maintenance needs in the water, sanitation, and electricity sectors. U.S. agencies are working to develop better performance data and plans for sustaining rehabilitated infrastructure. As the new Iraqi government forms, it must plan to secure the financial resources it will need to continue the reconstruction and stabilization efforts begun by the United States and international community. Iraq will likely need more than the $56 billion that the World Bank, United Nations, and CPA estimated it would require for reconstruction and stabilization efforts from 2004 to 2007. More severely degraded infrastructure, post-2003 conflict looting and sabotage, and additional security costs have added to the country's basic reconstruction needs. However, it is unclear how Iraq will finance these additional requirements. While the United States has borne the primary financial responsibility for rebuilding and stabilizing Iraq, its commitments are largely obligated and future commitments are not finalized. Further, U.S. appropriations were never intended to meet all Iraqi needs. In addition, international donors have mostly committed loans that the government of Iraq is just beginning to tap. Iraq's ability to financially contribute to its own rebuilding and stabilization efforts will depend on the new government's efforts to increase revenues obtained from crude oil exports, reduce energy and food subsidies, control government operating expenses, provide for a growing security force, and repay $84 billion in external debt and war reparations.
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The people of the State of California do enact as follows:
SECTION 1.
The heading of Chapter 4.6 (commencing with Section 1070) of Part 3 of Division 2 of the Labor Code is amended to read:
CHAPTER 4.6. Public Transit Service Contracts and Contracts for the Collection and Transportation of Solid Waste
SEC. 2.
Section 1070 of the Labor Code is amended to read:
1070.
The Legislature finds and declares all of the following:
(a) That when public agencies with jurisdiction over public transit services or the collection and transportation of solid waste award contracts to operate bus and rail services, or to provide for the collection and transportation of solid waste to a new contractor, qualified employees of the prior contractor who are not reemployed by the successor contractor face significant economic dislocation as a result.
(b) That those displaced employees rely unnecessarily upon the unemployment insurance system, public social services, and health programs, increasing costs to these vital government programs and placing a significant burden upon both the government and the taxpayers.
(c) That it serves an important social purpose to establish incentives for contractors who bid on public transit service contracts or contracts for the collection and transportation of solid waste to retain qualified employees of the prior contractor to perform the same or similar work.
SEC. 3.
Section 1071 of the Labor Code is amended to read:
1071.
The following definitions apply to this chapter:
(a) “Awarding authority” means any local government agency, including any city, county, special district, transit district, joint powers authority, or nonprofit corporation that awards or otherwise enters into contracts for public transit services or for the collection and transportation of solid waste performed within the State of California.
(b) “Bidder” means any person who submits a bid to an awarding authority for a public transit service contract, an exclusive contract for the collection and transportation of solid waste, or a subcontract.
(c) “Contractor” means any person who enters into a public transit service contract or an exclusive contract for the collection and transportation of solid waste with an awarding authority.
(d) “Employee” means any individual who works for a contractor or subcontractor under a contract. “Employee” does not include an executive, administrative, or professional employee exempt from the payment of overtime compensation within the meaning of subdivision (a) of Section 515 or any person who is not an “employee” as defined under Section 2(3) of the National Labor Relations Act (29 U.S.C. Sec. 152(3)).
(e) “Person” means any individual, proprietorship, partnership, joint venture, corporation, limited liability company, trust, association, or other entity that may employ individuals or enter into contracts.
(f) “Public transit services” means the provision of passenger transportation services to the general public, including paratransit service.
(g) “Service contract” means any contract the principal purpose of which is to provide public transit services or the exclusive right to provide collection and transportation of solid waste through the use of employees.
(h) “Solid waste” has the same meaning as defined in Section 40191 of the Public Resources Code.
(i) “Subcontractor” means any person who is not an employee who enters into a contract with a contractor to perform a portion of the contractor’s express obligations under a service contract. “Subcontractor” does not include a contractor’s vendors, suppliers, insurers, or other service providers.
SEC. 4.
Section 1072 of the Labor Code is amended to read:
1072.
(a) A bidder shall declare as part of the bid for a service contract whether or not the bidder will retain the employees of the prior contractor or subcontractor for a period of not less than 90 days, as provided in this chapter, if awarded the service contract.
(b) An awarding authority letting a service contract out to bid shall give a 10 percent preference to any bidder who agrees to retain the employees of the prior contractor or subcontractor pursuant to subdivision (a).
(c) (1) If the awarding authority announces that it intends to let a service contract out to bid, the existing service contractor, within a reasonable time, shall provide to the awarding authority the number of employees who are performing services under the service contract and the wage rates, benefits, and job classifications of those employees. In addition, the existing service contractor shall make this information available to any entity that the awarding authority has identified as a bona fide bidder. This information shall be made available to each bona fide bidder in writing at least 30 days before bids for the service contract are due, whether by inclusion of the information in the request for bids or otherwise. If the successor service contract is awarded to a new contractor, the existing contractor shall provide the names, addresses, dates of hire, wages, benefit levels, and job classifications of employees to the successor contractor. The duties imposed by this subdivision shall be contained in all service contracts.
(2) A successor contractor or subcontractor who agrees to retain employees pursuant to subdivision (a) shall retain employees who have been employed by the prior contractor or subcontractors, except for reasonable and substantiated cause. That cause is limited to the particular employee’s performance or conduct while working under the prior contract or the employee’s failure of any controlled substances and alcohol test, physical examination, criminal background check required by law as a condition of employment, or other standard hiring qualification lawfully required by the successor contractor or subcontractor.
(3) The successor contractor or subcontractor shall make a written offer of employment to each employee to be retained pursuant to subdivision (a). That offer shall state the time within which the employee must accept that offer, but in no case less than 10 days. Nothing in this section requires the successor contractor or subcontractor to pay the same wages or offer the same benefits provided by the prior contractor or subcontractor.
(4) If, at any time, the successor contractor or subcontractor determines that fewer employees are required than were required under the prior contract or subcontract, the successor contractor or subcontractor shall retain qualified employees by seniority within the job classification. In determining those employees who are qualified, the successor contractor or subcontractor may require an employee to possess any license that is required by law to operate the equipment that the employee will operate as an employee of the successor contractor or subcontractor.
SEC. 5.
Section 1075 is added to the Labor Code, to read:
1075.
Notwithstanding any other provision of this chapter, the following shall apply to service contracts for the collection and transportation of solid waste:
(a) A successor contractor or subcontractor shall be required to retain only employees of a contractor or subcontractor under a prior service contract whose employment would be terminated if the service contract were awarded to another contractor or subcontractor.
(b) A successor contractor or subcontractor shall not be required to retain an employee of a contractor or subcontractor under a prior service contract under any of the following circumstances:
(1) If the employee of the prior contractor or subcontractor does not meet any standard hiring qualification lawfully required by the successor contractor or subcontractor for the position.
(2) If the successor contractor or subcontractor would be required to terminate or reassign an existing employee covered under a collective bargaining agreement with the successor contractor or subcontractor in order to hire the employee of the prior contractor or subcontractor.
(3) If, and to the extent, the actual number of employees meeting the requirements of this chapter exceeds the number of those employees communicated to bona fide bidders in accordance with paragraph (1) of subdivision (c) of Section 1072.
(c) An employee or his or her agent shall not bring an action against a successor contractor or subcontractor under subdivision (a) of Section 1073 without first giving the successor contractor or subcontractor written notice of the violation or breach and 30 days to cure the violation or breach. An awarding authority shall not terminate a service contract under subdivision (a) of Section 1074 without first giving the successor contractor or subcontractor written notice of the violation or breach and 30 days to cure the violation or breach.
(d) This chapter shall only apply to service contracts for the collection and transportation of solid waste when an awarding agency decides to let an exclusive solid waste collection and transportation contract out to bid. It is not intended to determine whether or not a local agency should procure a service contract by inviting bids, extend an existing service contract, renegotiate its service contract with the prior contractor, or exercise any other right it possesses pursuant to Section 40059 of the Public Resources Code to determine aspects of solid waste handling that are of local concern.
(e) This chapter does not modify, limit, or abrogate in any manner any franchise, contract, license, or permit granted or extended by a city, county, or other local government agency before January 1, 2017.
SEC. 6.
Section 1076 is added to the Labor Code, to read:
1076.
The amendments and additions to this chapter made by the act adding this section shall not apply to contracts awarded before January 1, 2017, or to contracts for which the bid process has been completed before January 1, 2017.
SEC. 7.
If the Commission on State Mandates determines that this act contains costs mandated by the state, reimbursement to local agencies and school districts for those costs shall be made pursuant to Part 7 (commencing with Section 17500) of Division 4 of Title 2 of the Government Code.
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Existing law requires a local government agency letting a public transit service contract out to bid to give a bidding preference for contractors and subcontractors who agree to retain for a specified period certain employees who were employed to perform essentially the same services by the previous contractor or subcontractor. Such a contractor or subcontractor is required to offer employment to those employees, except for reasonable and substantiated cause. Existing law requires a successor contractor or subcontractor that determines that fewer employees are needed than under the prior contract to retain qualified employees by seniority within the job classification. The existing contractor is required to provide prescribed information regarding employment under the existing service contract to the awarding authority, any entity that the awarding authority identifies as a bona fide bidder, and the successor contractor. Existing law authorizes an employee who was not offered employment or who has been discharged in violation of existing law, or his or her agent, to bring an action against the successor contractor or subcontractor in any superior court having jurisdiction over the successor contractor or subcontractor. Existing law authorizes an awarding authority to terminate a service contract under prescribed circumstances.
This bill would expand the application of these provisions to exclusive contracts for the collection and transportation of solid waste. The bill would require the information provided to a bona fide bidder to be made available in writing at least 30 days before bids for the service contract are due. The bill would establish certain provisions applicable only to service contracts for the collection and transportation of solid waste, including limits on the requirement to retain employees and specified requirements for notice and opportunity to cure in the context of civil action or termination. The bill would not apply to contracts awarded before January 1, 2017, or to contracts for which the bid process has been completed before January 1, 2017. By requiring local agencies to give a bidding preference under these provisions to those contractors and subcontractors for the collection and transportation of solid waste, this bill would impose a state-mandated local program.
The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.
This bill would provide that, if the Commission on State Mandates determines that the bill contains costs mandated by the state, reimbursement for those costs shall be made pursuant to these statutory provisions.
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Background In 1997 and 1998, the quality of service IRS provided to taxpayers was identified as a problem both in and outside IRS. The Vice President’s National Performance Review looked within and across federal agencies at how existing programs could operate more efficiently and effectively and what activities the government should be doing. After hearing from citizens, legislators, and others that IRS needed to improve in meeting the needs of taxpayers, NPR commissioned a Customer Service Task Force. The Task Force made more than 200 recommendations for customer service improvements. The Senate Finance Committee held hearings during which taxpayers, IRS employees, and others testified about instances of taxpayer abuse and mistreatment. At the same time, a new Commissioner received thousands of improvement suggestions from meetings held with employees across the nation. The Commissioner was also formulating long-term plans for restructuring IRS according to the functional groups of taxpayers it serves (e.g., wage earners, small businesses, and large corporations) in accordance with the IRS Restructuring and Reform Act of 1998. A major information systems modernization was under way, as were efforts to make IRS’ systems Year 2000 compliant. To meet our reporting objective, we reviewed our prior work and IRS documents and interviewed cognizant officials about the overall strategy for managing the customer service improvement efforts and about activities related to the implementation of the selected individual initiatives. We requested comments on a draft of this report from the Commissioner of Internal Revenue. We received written comments, which are discussed near the end of this letter and reprinted in appendix III. We did our work primarily at IRS headquarters in Washington, D.C., between April 1998 and January 1999, in accordance with generally accepted government auditing standards. (See app. I for more details on our scope and methodology.) IRS Strategy for Managing Customer Service Improvements Shows Promise But Could Be Improved IRS established a promising strategy for managing the implementation of the agency’s customer service initiatives. The development and use of management information on costs and benefits, milestones and completion dates, and performance measures would strengthen its management strategy. A Program Office and Steering Committee Managed Implementation IRS’ basic management strategy was to establish a central office, TSI, in January 1998 to manage the overall implementation of customer service improvements that were being carried out by many different IRS and Treasury offices. The head of TSI was authorized to build a staff and create a strategy for the coordinated review and implementation of the more than 5,000 improvement initiatives IRS received. At the same time the Commissioner established TSI, he created an executive steering committee, with himself as chair, to oversee the implementation activities. The steering committee was to provide decisions on matters affecting the implementation of the recommended initiatives and was to ensure that initiatives being implemented were consistent with IRS’ overall business strategy. We have found that this kind of centralized coordination of crosscutting programs is an effective management strategy. It can be used to identify program overlap, duplication, or fragmentation. Coordination also helps to ensure that program efforts are mutually reinforcing. TSI Created a Database By April 1998, the 12-person TSI staff had created a database of the initiatives and begun using it to categorize the initiatives on its agenda. TSI grouped the recommendations into functional areas, identified sources of suggestions, and linked similar suggestions from different sources together. The database also had fields for information on the priority level, impact, and cost of implementing initiatives—data that could potentially be used to monitor implementation and facilitate effective management and oversight of work on initiatives. According to TSI officials, however, this information was not routinely completed and updated by offices implementing the initiatives. TSI Had Early Management Problems Early actions to develop the database notwithstanding, TSI had problems in carrying out its responsibilities during its first months of operation. Officials said that the problems arose in large part from the sheer volume of improvement initiatives on its agenda. The TSI staff was not able to evaluate and prioritize the more than 5,000 mandates, recommendations, and suggestions that came from sources including Congress, task force groups, and individual employees and taxpayers. TSI officials said that efforts to determine accountability for work, especially when two or more offices shared responsibility, and to track the progress being made on individual initiatives were also hampered by the large volume of initiatives. Prioritization Process Was an Important First Step in Managing Implementation As of January 1999, IRS had taken several actions to address its problems. Top IRS management established criteria for prioritization in September 1998. To determine what initiatives to implement in the short term, officials said that IRS criteria were that legislative mandates were top priorities and that all initiatives selected were to show taxpayers, employees, and external stakeholders (e.g., NPR and Congress) that IRS was changing. In January 1999, IRS leadership approved a list of 157 initiatives as primary customer service improvement actions, drastically reducing the number to be managed by TSI in the short term. The initiatives selected were organized under 19 strategic categories (e.g., protect taxpayer rights, improve and increase the use of education and delinquency prevention techniques, and create an IRS culture that values employees and rewards top-quality service). An “owner”—an IRS executive—was assigned as the official accountable for each strategic category and the initiatives being implemented within it. Each strategic category contributed to one of IRS’ three strategic goals: (1) service to each taxpayer; (2) service to all taxpayers; or (3) productivity through a quality work environment. This prioritization process was a necessary first step to setting realistic goals for progress based on IRS’ capacity to take on additional responsibilities. It reduced the number of improvement actions to a manageable level and established accountability for carrying out the work. It also made it feasible to expect that TSI could track the progress being made in implementing the priority initiatives. TSI also made improvements to its database that gave offices implementing the individual initiatives on-line access to information. This change was designed, in part, to make it easier and more efficient to track progress being made on individual initiatives. Management Strategy Could Be Improved IRS’ management strategy could be improved. As our review was being completed, TSI had requested that the owners of each primary initiative enter an “action plan” into the database with information on start and completion dates and milestones. As of March 1999, TSI was working with managers of individual initiatives to finalize the action plans. TSI officials said that they expected to use the action plans to monitor progress being made and to keep current on the status of the initiatives. However, IRS had not assessed the need for information on expected costs and benefits and how results of the initiatives were to be measured. TSI officials said that consideration of how to systematically collect standard information on costs and benefits of the initiatives and plans for measuring their results was in an early discussion stage. TSI had concentrated its efforts on prioritization and then developing information on initiatives’ key milestones and completion dates. It had not developed plans to seek information on costs, benefits, or results for individual initiatives. As of January 1999, managers for a few of the 25 initiatives we reviewed had documented management information on costs and benefits, milestones and completion dates, and anticipated results. For 19 of the 25 initiatives we reviewed (see app. II), we asked for documentation of this management information. These 19 initiatives were in process and had progressed past the planning and design phases. We found that 11 of the 19 initiatives had written plans with milestone dates for reaching key points and an estimated final completion date. Cost- benefit analyses were done for eight initiatives, and written documentation of performance measures to gauge expected results were done in seven instances. Managers on individual initiatives provided a number of reasons why some types of management information were not developed. For example: The manager for an initiative to administer preemployment screening assessments to applicants for customer service positions said that IRS leadership wanted the screening assessments to be used for hiring for the 1999 filing season. She noted that there was not enough time to prepare formal project management documents before that hiring began in September 1998. The manager of an initiative to provide tax information to small start-up businesses jointly with the Small Business Administration said that it was not possible to track individual taxpayers who received the information to directly measure how receiving it improved their compliance with tax laws. The manager of an initiative to provide customer service training to all IRS employees said that since the commitment to this training was made by the Acting Commissioner to the Senate Finance Committee, a cost-benefit analysis was not necessary to decide whether the project should be completed. Our work evaluating the implementation of the Government Performance and Results Act has documented the difficulties that agencies face in developing management information, particularly measures of results. Extenuating circumstances, such as short time frames and difficulties identifying benefits and costs, may even preclude the development of management information in some instances. Moreover, factors such as scope and complexity can drive the level of detail necessary. For example, one would not expect to see as much detail in a plan to study why people hang up when they use an automated telephone menu as in a plan to begin using complex new call router technology. However, our work has also shown that public sector agencies can and do overcome obstacles to successfully implement strategic management principles and become more results-oriented. Such efforts have resulted in improved performance. For example, the National Oceanic and Atmospheric Administration began to measure the extent to which it could increase the advance notice it gave the public before severe weather events, instead of counting the number of forecasts it made. The emphasis is significant because having more time to prepare should lessen the loss of life and property. The Coast Guard’s Office of Marine Safety, Security, and Environmental Protection improved its mission effectiveness with fewer people and at lower cost. It did so by giving field commanders greater authority and by investing in activities and processes that went most directly to the goal of reducing risks on the water. Measuring performance allows agencies to track the progress they are making toward their goals and gives managers crucial information on which to base their organizational and management decisions. No picture of what government is accomplishing with the taxpayers’ money can be complete without management information on benefits and costs. It provides agencies with tools to determine whether they have used public resources economically, efficiently, and effectively to achieve the purposes for which they were appropriated. Viewing program performance in light of costs can be important on at least two levels. First, it can help Congress make informed decisions. Second, it can give taxpayers an accounting of what government is providing in return for their tax dollars. Conclusions As of January 1999, IRS had established priorities, reduced the number of initiatives to a manageable level, aligned them with its strategic goals and objectives, and assigned accountability for individual initiatives. IRS also improved its ability to monitor and track individual initiatives by providing on-line access to its database and by asking managers responsible for work on individual initiatives to input information on milestones and completion dates. As IRS moves forward on its customer service improvements, we believe its strategy for managing the initiatives would be enhanced by having information on expected costs and benefits, milestones and completion dates, and performance measures. IRS has already linked the initiatives to its strategic goals and objectives and begun to collect information pertaining to timeliness. However, it has not determined how much the initiatives are likely to cost, what benefits are expected to be achieved, and how results will be measured. We recognize that the level of detail that might be needed likely would vary from initiative to initiative. The TSI database could serve as a tool not only to monitor implementation, but also to facilitate effective management and oversight. Consistent information—including cost, benefit, and performance results data, provided and kept current through on-line access—could be the link between project teams, IRS’ leadership, and other stakeholders. Recommendations We recommend that the Commissioner of Internal Revenue develop an approach and provide guidance to managers for determining the appropriate cost and benefit information for the customer service initiatives and for measuring the results of the initiatives in relation to IRS’ customer service objectives. We also recommend that the Commissioner of Internal Revenue enhance the TSI database to include this management information for the use of IRS’ project teams, leadership, and other stakeholders. Agency Comments We provided a draft of this report for comment to the Commissioner of Internal Revenue. The comments are summarized below and reproduced in appendix III. IRS said that our report was a fair and balanced assessment of its strategy for implementing customer service improvements—recognizing both the strengths of the strategy and how it could be improved. IRS noted that the report indicated our willingness to go beyond identifying problems and to collaborate in developing pragmatic solutions. IRS agreed that it needed to address the two recommendations we made for enhancing its customer service improvement strategy. It noted that some steps were already being taken to collect information on the expected costs and benefits of improvement initiatives, and it recognized that the design of relevant measures of results were also very important. We are sending copies of this report to Representative William J. Coyne, Ranking Minority Member of your Subcommittee; The Honorable Robert E. Rubin, Secretary of the Treasury; The Honorable Charles O. Rossotti, Commissioner of Internal Revenue; and other interested parties. We will also make copies available to others upon request. This report was prepared under the direction of Alton C. Harris, Assistant Director. Other major contributors are listed in appendix IV. If you have any questions, please call me on (202) 512-9110 or Mr. Harris on (404) 679- 1854. Objectives, Scope, and Methodology Objective At the request of the Chairman of the House Subcommittee on Oversight, Committee on Ways and Means, we agreed to assess IRS’ strategy for managing the implementation of its customer service initiatives—including whether IRS had developed information on expected costs and benefits, milestones and completion dates, and performance measures to gauge results. To provide some perspective on the type of work being done to improve customer service, we also agreed to provide information on the progress made on 25 initiatives. (See app. II.) Scope and Methodology To address this objective, we interviewed officials and reviewed documentation and our prior reports that addressed the importance of strategic planning in federal program management. We interviewed officials from TSI and the Customer Service Task Force at IRS headquarters. Using a standard set of questions, we also interviewed IRS officials responsible for implementing 25 of IRS’ customer service initiatives. We asked them whether they developed and used selected project management information and what progress they were making in implementing the initiatives. At 3-month intervals over the course of our review, we requested updates of a TSI database that organized and categorized the customer service initiatives. We received database updates in April 1998 and July 1998. In October 1998 and January 1999, TSI officials advised us that no status reports were available because IRS had temporarily suspended follow-up activities on the individual initiatives to focus on the prioritization of all initiatives. We did not independently verify the TSI database, but we did examine its accuracy for the 25 improvement initiatives that we included in our review. We reviewed planning documents that had been prepared for 19 of the 25 initiatives. Work on these initiatives was in process and had progressed past the design and planning stages. We determined, and TSI officials agreed, that they were initiatives that would benefit from having management information on costs and benefits, milestones and completion dates, and performance measures to gauge results. The 25 initiatives we selected for detailed review were chosen before IRS had prioritized its initiatives, reducing the number of primary actions to 157. They were all recommendations of the IRS Customer Service Task Force and were chosen to reflect a cross section of the major customer improvement efforts. Several initiatives were included that addressed improvements in telephone assistance and employee training because more than 70 percent of IRS’ $103 million in fiscal year 1999 appropriations to implement customer service improvements was targeted for these two areas. For each improvement area, we judgmentally selected initiatives to study based on their potential to have a positive impact on IRS’ customer service. TSI officials agreed that all of the projects we selected were significant initiatives. (See app. II for a list of the initiatives we reviewed and information on the progress made in implementing them.) Our review of the 25 initiatives recommended by the Task Force was not intended to assess IRS’ overall progress in improving customer service. Rather, the analysis was to provide information on some of the work being done on initiatives recommended by the Task Force. During our review, IRS approved a list of 157 initiatives as customer service improvements with the highest priority for implementation in the short term. We did not assess the prioritization criteria used. We did our work primarily at IRS headquarters in Washington, D.C. We also interviewed an official in the IRS Southeast Region in Atlanta, GA, and we attended a training conference in Arlington, VA, to prepare IRS trainers to deliver new customer service training to employees. On March 19, 1999, we provided a draft of this report for comment to the Commissioner of IRS. We received the Commissioner’s written comments on April 12, 1999. They are reproduced in appendix III and discussed at the end of the letter. IRS' Progress on 25 Customer Service Improvement Initiatives Table II.1 shows the results of our review of progress made on 25 customer service improvement initiatives. In selecting the initiatives to review, we determined and TSI officials agreed that they had great potential for improving customer service. Six of the 25 initiatives that we reviewed were closed as of January 1999. Sixteen initiatives were in process, and three had been deferred. Initiatives were classified as closed because officials believed that they had completed work on them or they did not need to complete them. For example, the initiative to expand telephone serve to 7 days a week, 24 hours a day by January 1, 1999, was classified as closed because IRS had taken this action. The initiative to create a plan for effective alternatives to serve customers before closing a walk-in office was classified as closed because IRS did not plan to close any walk-in offices; thus, no plan for alternatives was needed. Initiatives classified as in process included those in various stages of implementation. For example, an initiative in the early stages of implementation was the effort to improve the national distribution of information to IRS employees. An IRS official said that major improvements in the national distribution of information to IRS employees could not be achieved until all employees had access to computers and were on a standard computer network. While awaiting the required information systems upgrades, however, IRS started smaller scale projects to improve communication. These included issuing a newsletter containing information on IRS’ modernization efforts to all employees. An initiative that was closer to full implementation was an initiative to assess the skills of IRS employees and train those with the most critical needs. Assessment instruments were developed and testing was underway for employees working in Customer Service, Collection, Examination, and Support Services. Some training had started to improve employees’ skills as identified by the testing. Initiatives were deferred because IRS determined that other projects had higher priorities or because timing was not appropriate for implementation. For example, IRS decided not to attempt to standardize the format and content of its written responses to taxpayers until it had completed an initiative that was under way to rewrite all of its notices. Table II.1: Progress on 25 Customer Service Improvement Initiatives as of January 1999 Initiative Market Telefile aggressively to individual taxpayers. In 1999, begin using new call router technology to provide information that is geared to specific customer needs, such as the tax implications of the sale of a house, retirement, or job change. Before closing a walk-in office, create a plan for effective alternatives to serve customers. Establish a uniform set of leadership competencies for all levels of management. Description of work done Officials said that IRS’ current practice of mailing Telefile information, rather than traditional tax filing packages, to taxpayers who are potentially eligible for Telefile is the most aggressive marketing strategy it could use. Officials said that the call router was implemented in December 1998, although IRS has plans for a number of enhancements to the system. By January 1, 1998, expand telephone service to 6 days a week, 16 hours a day. By January 1, 1999, expand telephone service to 7 days a week, 24 hours a day. In 1999, work to enable taxpayers to file paperless returns by eliminating the need for mailing in W-2s and other forms for paper signature in a way that does not jeopardize law enforcement. Use multiple strategies to reduce demand on the telephone lines, such as educating customers on when to expect refunds. Officials said that no further action was needed on this initiative because IRS does not plan to close any walk-in offices. Officials said that the Office of Personnel Management (OPM) revalidated a set of leadership competencies that federal agencies could use in their entirety or adapt as needed. IRS used the OPM model to develop its own model. It was used in1998 as part of the selection process for new executives. Officials said that IRS implemented these actions in January 1999. In February 1998, IRS started preparing a policy to guide its effort in this area, according to project officials. A pilot test is being conducted during the 1999 filing season on substitutes for signatures on electronically filed returns. Complete a study of why people hang up when they use the automated menu and recommend needed modifications to current plans. Assess the skills of IRS employees and train those with the most critical needs. IRS had several efforts under way to reduce demand on telephone lines. These included providing tax law assistance by electronic mail, improving the clarity of and reducing the number of notices, thereby reducing the need for taxpayers to call, and managing telephone calls away from live assistors and onto automated systems where possible. IRS had the study under contract, with an expected delivery in June 1999. Create a skills bank that identifies the skills of IRS employees. In 1998, have an intensive agencywide special training program to introduce employees to the new approach to customer service. Assessment instruments were developed and testing was under way for employees working in the Customer Service, Collection, Examination, and Support Services areas. Some training to improve employees’ skills as identified by the testing had begun. Officials said that IRS developed databases of information on the results of assessments administered to measure employees’ general competencies (e.g., communication and listening skills) and technical skills. Each of 22 field education branch offices managed a database and sent their data to a centralized database. When IRS’ integrated personnel system is in place, these databases are to be integrated into it. IRS developed and piloted a course, but suspended it in late 1998 at the request of the National Treasury Employees Union (NTEU). The course was redesigned, and an official said that training was to resume in May 1999 and be completed by December 1999. Over the long term, change how IRS selects, trains, evaluates, rewards, and supports its employees so they can better serve customers. Work with NTEU to design and test a balanced scorecard to evaluate IRS and its employees in 1998. Improve national distribution of information to IRS employees. Separate projects addressed the selection, training, evaluation, rewards, and support portions of this broad recommendation. For example, a pilot test was done using assessment instruments to measure the skills and abilities of applicants for customer service positions. A team proposed several ways to redesign IRS’ performance management system, including how employees were evaluated and rewarded, and was awaiting feedback from management. Another team offered ways to implement a range of options (e.g., pay for performance and a streamlined external competitive selection process) that IRS could use to motivate and reward employees. In 1998, IRS developed a measurement system that was intended to balance measures of business results with measures of customer and employee satisfaction. Implementation of the balanced measurement system in 1999 is to begin with new operational measurements for three key functions: customer service, examinations, and collections. IRS communications activities were integrated into a single office. While awaiting completion of information management systems upgrades that would make distribution of information to employees quicker and easier, the office was making improvements on a smaller scale. For example, it began producing a newsletter, New Directions, which informed employees about IRS’ modernization efforts. According to officials, IRS organized and funded projects under three STAWRS initiatives: streamlined customer service, single- point filing, and simplified requirements. To give small businesses a single point for reporting tax and wage data to meet the requirements of IRS, Social Security Administration, Department of Labor, and state agencies, continue to work to support the Simplified Tax and Wage Reporting Systems (STAWRS) program. By the end of 1998, eliminate additional unnecessary notices. This will eliminate more than 45 million pieces of mail annually, almost one-third of the total number of notices that IRS has been sending to taxpayers. Seek to route telephone calls from small businesses to specific individuals who have training and the authority to answer business tax questions and resolve tax account problems. Give all locations the ability to input power-of- attorney authorizations and hold the person receiving the authorization responsible for ensuring the input. Track complaints, beginning immediately, using the Taxpayer Advocate’s Problem Resolution Information System (PROMIS). By the end of 1998, IRS had eliminated 32 notices, which generated 22 million pieces of mail to taxpayers annually. Officials said that they are researching the possible elimination of five more notices that generate an additional 30 million pieces of mail. IRS officials said that this initiative is being partially addressed through the call routing system available to all taxpayers. Additionally, they had planned to pilot test the use of a separate toll free telephone number for business calls. However, this project was deferred. A regional advocate team examined this issue and reported on it in November 1998. The report was forwarded to the Taxpayer Advocate, National Accounts Section, and others for review. No decision had been made on whether to implement the initiative nationwide. As part of its test of a new customer feedback system, IRS was doing limited tracking of complaints. Beginning in 1998, team up with other federal agencies, financial institutions, tax preparers, state and local authorities, and others to provide tax information, training, and consultative services to small start-up businesses. The initiative is designed to make record-keeping, filing, and payment requirements as simple and easy as possible. Use a preemployment screening assessment tool, based on technical and behavioral skills, for all external applicants. Beginning in 1999, open additional temporary community-based locations during peak season to make publications and forms available in banks, libraries, shopping malls, and other locations. Analyze the costs and benefits of handling all federal tax deposit penalties in one centralized location. Reassign a case to the next higher management level when a complaint is unresolved after a reasonable period of time. Standardize the format and content of written responses, using appropriate commercial software. IRS had projects under way to address portions of this recommendation, including three projects with federal agencies to distribute tax information and a project with selected states to make obtaining federal identification numbers easier for new businesses. Preemployment screening assessments were done for applicants for customer service positions at four pilot sites for the 1999 filing season, according to an IRS official. IRS was opening additional locations in libraries, post offices, and copy centers for distributing forms and publications in 1999. Comments From the Internal Revenue Service The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. 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Pursuant to a congressional request, GAO provided information on the Internal Revenue Service's (IRS) efforts to improve customer service. GAO noted that: (1) IRS' strategy for managing the implementation of its customer service initiatives shows promise but could be improved; (2) IRS' basic approach was to establish a central office, the Taxpayer Service and Treatment Improvement Program (TSI), and form a high-level steering committee, chaired by the Commissioner, to oversee the implementation of improvement initiatives that were being carried out by many different IRS and Department of the Treasury offices; (3) TSI and the steering committee were established in January 1998; (4) in its early months, TSI had problems carrying out its responsibilities; (5) officials attributed most of the problems to the large number of potential initiatives on the agenda; (6) by January 1999, TSI and the steering committee had taken steps to: (a) prioritize the initiatives, reducing the number to 157 primary initiatives; (b) align these initiatives to IRS' newly established strategic goals and objectives; and (c) assign accountability for their completion to specific executives; (7) TSI provided offices involved in day-to-day implementation of individual initiatives with on-line access to the central information database it had developed to categorize and monitor progress on the initiatives; (8) IRS could further improve its customer service management strategy; (9) by January 1999, TSI had identified a need for information on milestones and completion dates for each primary initiative and asked offices implementing individual initiatives to input this information into its database; (10) however, TSI had not assessed the need for information on: (a) expected costs and benefits; and (b) performance measures; (11) managers in a few of the offices implementing initiatives GAO reviewed had documented all these types of information on their own, but this information was not being used by IRS' leadership; (12) as past GAO reports have shown, not only do high-performing, results-oriented organizations set priorities, align activities with mission-related goals and objectives, and assign accountability, but they also develop and use information to monitor progress and evaluate results; (13) information on costs, benefits, milestones and completion dates, and performance measures is critical to successfully managing for results; (14) although it can be difficult to develop, this information provides agencies with tools they can use to monitor and evaluate how efficiently and effectively programs are achieving their purposes; and (15) it is important to help determine whether public resources have been used to achieve the purposes for which they were appropriated.
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There are two well-settled rules of decision, invoked respectively by the parties. One, that findings of fact made by the Land Department in the progress of a contest before it are conclusive upon the courts; the other, that questions of fact decided by a state court are not subject to review by this court in proceedings on error. Upon the record these questions of fact and law appear: First. Was the original entry allowed to Jacobus on July 6, 1892, rightful? In other words, was his evidence of settlement, occupation, and good faith true, and, if so, did it entitle him to priority over Hill, his contestant? Second. If that entry was valid, was the commutation entry made on September 20, 1892, illegal? Third. If so, was the defect which invalidated it subject to removal under the act of June 3, 1896? Fourth. If removable, was there anything in the conduct of Jacobus or his grantees after the original entry to prevent the removal? With reference to the first question, it appears that the original entry to Jacobus followed a contest between himself and Hill. In that contest testimony was taken before the local land officers upon the question whether Jacobus had performed the acts required of a settler upon public lands, and, upon a review, the Commissioner of the General Land Office, on April 29, 1892, found in favor of his settlement, residence, and improvements and allowed the entry. No appeal was taken from this decision, and if nothing else appeared the findings would obviously be conclusive in the courts as between Jacobus and Hill. It is undoubtedly true that, until the legal title has passed from the government, proceedings in the land office are in fieri, and a question, whether of fact or law, may be reopened for consideration. Michigan Land & Lumber Co. v. Rust, 168 U. S. 589-592, 42 L. ed. 591, 592, 18 Sup. Ct. Rep. 208, and cases cited. It is insisted that the validity of the original entry was relitigated IN THE LAND OFFICE IN PURSUANCE OF THE COntest made by hill in october, 1893, and a different conclusion reached. While the power of reexamination is not to be doubted, yet a decision upon a question of fact, once made in a special proceeding finally terminated, should not be regarded as overthrown by findings in a subsequent proceeding in the Department unless it appears that those findings directly overrule, or are necessarily inconsistent with, the prior decision. The application of Hill, in 1893, to contest the entry of Jacobus, charged as a basis of contest that Jacobus never settled on the land in good faith, but for the purpose of speculation; that he did not reside on the land during the next six months preceding the making of his final proof, and that he had sold the land to one W. E. McCord. A hearing was had upon this contest before the local land officers, and quite a volume of testimony taken. Their decision was adverse to Jacobus. It was affirmed by the Commissioner of the General Land Office, and reaffirmed by the Secretary of the Interior. In their decision the local land officers stated the questions to be considered in these words: 'Letter 'H' of November 18, 1893, directed this office to order a hearing on the charges. 'The two questions to be passed upon are: (1) Did Jacobus abandon the land? (2) Was the sale of the land to McCord and McLeod a bar to the offering of supplemental proof?' And upon the first question they found as follows: 'Upon the first point the testimony of the witness is extremely conflicting. It is admitted by Jacobus that he worked at his trade in Superior and Iron River most of the time during his occupancy of the land, but it seems also fairly well established by the testimony or Mrs. Jacobus and numerous other witnesses that her residence was upon the land, barring certain absences on account of sickness and visits. Their cabin and its housekeeping equipment were superior to those of most homesteaders, and the clearing, in extent and cultivation, compared favorably with that of others in the same neighborhood. 'After learning that supplemental proof would probably be required, Mrs. Jocobus returned to the land in February, 1893, where she remained about a week, when she returned to Iron River and remained for some weeks while being treated for rheumatism. She made a brief visit to the claim in March, went there again in the latter part of May, remaining two weeks, and returned for the same time in July. This was apparently her last stay upon the land until after supplemental proof was offered, September 20. A small crop of vegetables and hay was raised that season, as in the two years before. 'Upon the whole, the residence of Jacobus upon the land was fairly satisfactory until after the offering of his first proof; but it is clear that his subsequent residence was for the sole purpose of enabling him to make proof in order to secure title for his transferees.' After this they considered the effect of the sale of the land to McCord and McLeod, and in so doing commented upon the character of the occupation by Jacobus and his wife during the spring and summer of 1893, closing with a decision in these words: 'We are of the opinion therefore, that Jacobus' supplemental proof cannot be sustained, and that the entry should be canceled and a preference right of entry awarded the contestant, Hill.' Apparently the character of the occupation and improvements by Jacobus prior to the original entry of July 6, 1892, was not a matter considered by the local land officers, although it is true that there was some testimony respecting it. They did not pretend to disturb the approval of the sufficiency of Jacobus' occupation and improvements made in allowing that entry after the conclusion of the original contest between Hill and Jacobus. They assumed that that matter was already settled. This is evident from the two questions which they say were presented, and if they considered it at all, they doubtless thought the testimony was not such as to justify any change in the previous conclusion. This decision was affirmed by the Commissioner of the General Land Office. In his opinion, after reciting the contest, the decision, and the grounds of appeal, the fact of the commutation of the homestead entry, the direction to Jacobus to furnish supplemental proof, as the commutation was premature, he says: 'It is shown by the evidence that defendant had a small log house on the land; that it was well finished and well furnished; that he had about 2 acres cleared; that the improvements were worth about $200. He did not have any stock of any description, no chickens or other poultry; that on December 27, 1892, defendant sold said land to Divid McLeod and W. E. McCord for $4,250 cash. 'On the question of residence the testimony is very conflicting. 'Defendant's wife stayed on the land a part of the time and defendant worked in his barber shop in the town of Iron River, and stayed there nearly all the time, working at his trade; he made occasional visits to the land on the Sabbath day. 'It also appears that the defendant rented three rooms in Iron River after he had sold the land, and he, with his wife, moved into them; that after defendant learned that he was required to furnish supplemental proof, because his commutation was premature, his wife moved back to the land, but defendant still remained in Iron River, making occasional visits to the land on the Sabbath and returning the same day.' Obviously the time of occupation referred to was after the commutation. This is made clear by a comparison of this opinion with that of the local land officers. If other grounds were relied on than those stated in the opinion of the local land officers, they would have been distinctly stated, and the fact that the decision was based upon the character of the occupation and improvements prior to the original entry would have been made clear. This conclusion is strengthened by the final declaration of the Commissioner: 'The sale and conveyance of the land is clearly proven, and it is also as clearly shown that the land was reconveyed to defendant so that he could submit his final supplemental proof for the benefit of McLeod and McCord; hence your opinion is affirmed.' This decision of the Commissioner of the General Land Office was sustained by the Secretary of the Interior in an opinion which contains no recital of facts, but simply says: 'Said decision fairly sets forth all the facts in this case, and the conclusion therein reached is sustained by the testimony, and is in conformity with law and the decisions of the Department, and is hereby affirmed.' In the final opinion of the supreme court of the state is this statement: 'We still think it plain, therefore, that no questions involving Jacobus' proceedings up to and including the final proof of September, 1892, were passed upon in the consideration of the contest had in 1894. Indeed, this seems to be the view of appellant's counsel as well, for he declares in his brief that 'no question of mala fides was found in the making of proofs [of September, 1892], nor was the subject considered. Simply from the evidence, which was the same as the affidavits, they determined the second question which they stated at the outset, that the sale of the land to McCord and McLeod was a bar to the offering of supplemental proof." [117 Wis. 313, 94 N. W. 67.] While no such admission is found in the brief filed in this court, possibly the omission may have been induced by the stress of the case. We agree, therefore, with that court, that there is noting in the record to justify a conclusion that the Land Department ever changed its finding, made in allowng the original entry, of the sufficiency of Jacobus' occupation and improvements up to that time. It is also worthy of notice in passing that the supreme court, in its opinion, held that the representations and instrument made and executed by Hill estopped him from questioning the validity of the original entry, so far, at least, as against the plaintiff, although they would not bar the United States from reclaiming the land. We proceed, therefore, to a consideration of the other questions. At the time the commutation was allowed neither Jacobus nor the land officers had actual knowledge of the act of March 3, 1891. Such is the finding of the state court, and, being a question of fact, this finding is conclusive. Prior thereto a commutation made as this was would have been valid, and there is neither finding nor testimony that Jacobus or the land officers acted in bad faith in the matter. There was simply a proceeding, theretofore legal and proper, taken in actual ignorance of a restraining statute. The act of 1896 was obviously passed to reach such a case as this, in which a commutation was allowed within less than fourteen months from the date of the homestead entry, and to do away with the objection on account of the matter of time. Certain provisions were incorporated in order to prevent injustice to other parties. But, as between the government and the entryman, its purpose was to give validity to the commutation if it would have been valid had not the act of 1891 been passed. Upon what ground did the Land Department set aside the commutation entry, and afterwards refuse to reinstate it? The original entry was July 6; the commutation September 20,—not three months thereafter. The act of 1891 allowed commutation only fourteen months or over after the entry. The commutation, therefore, was illegal. Within less than six months after the original entry, and four months after the commutation, Jacobus sold and conveyed the land, and his grantees became thereafter the parties solely interested. Pre-emption and homestead entries by statute must be made for the exclusive use and benefit of the parties making the entries (Rev. Stat. §§ 2262, 2290), and in each case an affidavit to that effect is required. Whatever Jacobus did after his conveyance in December, 1892, was not for his exclusive use and benefit. He attempted to get around the limitations and requirement of the statute by taking a reconveyance from his grantees, giving to them, at the same time, a mortgage to secure the consideration stated in the deed, and by an affidavit stating that, at the time of his conveyance, in December, he reserved about 2 acres of land where his house and other improvements were located, and that when he heard of the act requiring fourteen months' residence before commutation he again took possession of the tract, and continued in occupation and cultivation. This was held insufficient to avoid the restraint of the statute, and upon this ground the commutation entry was set aside. The local land officers, in their opinion, say: 'The bare statement of facts points to the conclusion that the sale of the land in December, 1892, was absolute, and that the subsequent reisdence of Jacobus upon the land was as the agent of the transferees, and for the purpose of acquiring title for them. This conclusion is strongly supported by the admission of Jacobus upon cross-examination. 'Jacobus, by the deed executed in December, 1892, devested himself of all right and title to the land. Granting, therefore, that the reconveyance of September 1st, 1893, was made in good faith by all parties, the slender residence of the wife, during the spring and summer of 1893, was not upon the homestead of Jacobus, but upon land in which he had no claim or interest, and the residence, such as it was, could not avail him in making supplemental proof. But we think all the circumstances—the time at which the conveyance from McCord and McLeod to Jacobus was made, the execution of the mortgage, and the evidence of Jacobus himself show that the land was not reconveyed to Jacobus in good faith, but for the sole purpose of enabling him to make supplemontal proof for the benefit of his grantees. We are of the opinion, therefore, that Jacobus' supplemental proof cannot be sustained, and that the entry should be canceled, and a preference right of entry awarded to the contestant, Hill.' While the Commissioner of the General Land Office, in his opinion, concludes: 'The sale and conveyance of the land is clearly proven, and it is also clearly shown that the land was reconveyed to defendant, so that he could submit his final supplemental proof for the benefit of McLeod and McCord; hence, your opinion is affirmed, and defendant's homestead and his cash entry for the land involved is held for cancelation.' While these opinions may have correctly declared the law as it stood when they were delivered, we may remark, in passing, that Jacobus seems to have acted in an honest effort to protect his grantees from the consequences of a mistake made by himself and the local land officers at the time of the commutation. When the act of 1896 was passed the matter was still pending in the Department, and no entry had been made by Hill. The motions by Jacobus for a review and to confirm his entry were denied by the Secretary of the Interior, the ground of the decision being, as stated in a communication to the Commissioner of the General Land Office: 'The evidence in the cases at bar clearly shows that the entry was not made in good faith, and the proof submitted by the entryman was fraudulent, as fully set out in your office decision of January 23, 1895. 'It is likewise impossible to confirm the entry under the provisions of the act of June 3, 1896, for the same reason; namely, the practice of fraud in making proofs.' The reference in this to the decision of the Commissioner makes it clear that the fraud and the want of good faith mentioned were in the commutation entry and the supplemental proofs. Evidently the Secretary ruled that the act of 1896 did not confirm a previous premature commutation entry if the entryman was guilty of any fraud or wrong subsequent thereto in attempting to make good the title acquired thereby. We do not so understand the law. If, at the time of the commutation entry, there had been no fraud or lack of good faith, and the only defect was in the matter of time, we do not think the confirmation authorized by the act of 1896 is destroyed by anything like that shown to have been done by Jacobus in his effort to protect the title he had conveyed to McCord and McLeod. In other words, if the commutation entry was rightful save for the fact that it was premature, the act of 1896 does away with that objection and confirms the entry; and the right to that confirmation is not destroyed by that which the entryman may have done in a subsequent effort to protect his title. We see no error in the proceedings, and the judgment is affirmed.
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Where a commutation entry made in good faith after the passage of the act of March 3, 1891, 26 Stat. 1098, was rightful, save for the fact that it was premature, the act of June 3, 1896, 29 Stat. 197, does away with that objection and confirms the entry, and the right to such confirmation is not destroyed by anything that the entryman may have done in subsequent efforts to protect his title.
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Background Innovation is a dynamic process through which problems and challenges are defined, new and creative ideas are developed, and new solutions are selected and implemented. It is also a complex process that involves taking iterative steps to solve problems. Innovation requires an environment that encourages participants to challenge traditional practices without fear of repercussions. Ideally, innovation participants are empowered to be creative and make mistakes, and appropriate risk- taking is not only tolerated but encouraged. Some federal leaders are trying various innovation tools, including on-line idea submission programs, competitions, and prizes, as ways of unleashing employee creativity. For example, in a memorandum issued in March 2010, the administration urged federal agencies to use challenges and prizes to crowdsource innovative approaches to government initiatives and programs. At relatively low costs, crowdsourcing initiatives can garner valuable and creative solutions that may not have come through traditional means. As another example, the Presidential Innovation Fellows program pairs top innovators from the private sector, nonprofit organizations, and academia with top innovators in government to collaborate during focused six- to thirteen-month periods. The program aims to develop solutions that can save lives, save taxpayer money, and fuel job creation. For example, the goal of one of the program’s projects is to identify information critical to saving lives and mitigating damage in a disaster. Even with the efforts of some federal leaders to encourage innovation, federal government-wide scores tracking how agencies foster and reward employee innovation dropped in 2013 for the second year in a row. OPM’s 2013 Federal Employee Viewpoint Survey, released in November 2013, found that only 35 percent of federal workers believe that creativity and innovation are rewarded, with positive responses in this area showing a steady decline of six percentage points over the past three years. Research suggests that half of all innovations are not initiated by organizational leaders. Instead, research shows that it is important to have processes for gathering stakeholders’ and front-line workers’ views to identify areas for possible improvement. As an innovation tool, labs are based on the idea that the competencies needed for systematic innovation—such as intelligent risk-taking to develop new services, products and processes—are not the same as those required for daily operations. Innovation labs seek to provide approaches, skills, models, and tools beyond those that most employees are trained in and use to do their work. In addition, public sector innovation labs can be viewed as attempts to create an organizational response to a range of challenges to innovation, as innovation efforts face unique obstacles in the public sector. For example, funding for new public ventures is limited, and the risks of innovation are high in government. A defining characteristic of the public sector is that it is subject to broad scrutiny, so that when an innovation fails or is less than a complete success, there is the prospect of political consequences. With constrained budgets expected to continue into the foreseeable future, innovation in our public services is a necessity. In the last decade, many public sector organizations around the globe have set up facilities with the explicit purpose of supporting innovation efforts. For example, Denmark’s MindLab, started in 2002, is a cross-governmental innovation unit that is part of the country’s Ministry of Business and Growth, the Ministry of Education, the Ministry of Employment, and Odense Municipality, and which collaborates with the Ministry for Economic Affairs and the Interior. The group covers broad policy areas including areas such as entrepreneurship, digital self-service, education, and employment. OPM’s lab was modeled, in part, on Denmark’s MindLab. OPM officials, consistent with other innovation lab representatives we interviewed, maintained that, unlike a typical conference room, innovation labs can be easily reconfigured for large groups and smaller breakout sessions. They allow users to write on walls and preserve visual artifacts more easily than typical cubicles and traditional office space. This can be done with very low-tech tools such as markers and a whiteboard. Figure 1 shows a view of OPM’s lab. Organizations with different missions are pursuing a lab-based strategy to foster innovation. For example, organizations—including OPM—use their labs as a space where participants can conceptualize and prototype new products or processes outside their normal environment. Many also use their labs as a teaching space where participants can exchange ideas and information through classes, workshops, presentations, or other events. Figure 2 shows how innovation labs we surveyed from the public, private, and nonprofit sectors share common design elements, and how these different organizations generally use their labs for multiple and similar purposes. OPM Lab Activities Are Intended to Build Capacity for Innovation and Support Project- Based Problem Solving Based on OPM documents, the innovation lab’s start-up costs totaled approximately $1.1 million including facility upgrades and construction, equipment, and training and other personnel costs. (See table 1 for a breakdown of costs.) In building the lab, OPM worked with the General Services Administration (GSA) and contracted with both design and architectural firms to renovate a former storage room in the sub-basement of its headquarters building. The 3,000 square foot renovated space presents an open layout with a meeting area for up to two dozen people and is surrounded by breakout areas and team rooms. The physical renovation of the facility was completed in March 2012, after the installation of final technology equipment, asbestos abatement, and enhancements to ventilation and life-safety systems. According to OPM, to make the space useful for any purpose, much of the funding for the improvements and construction of the space would have been required. OPM officials said that in fiscal year 2013, the lab’s total operating budget, including all contracting costs, was $476,000, which supported a build up to 5.5 full-time equivalent (FTE) employees over the last seven months of fiscal year 2013. Officials expect this amount will remain stable in the coming fiscal years, proportional to a full fiscal year. OPM’s Lab Is Managed and Operated By a Core Group of Staff Operational responsibility for the innovation lab has been assigned to OPM’s Employee Services Division and is managed by the agency’s Deputy Associate Director of Strategic Workforce Planning. According to OPM officials, since February 2013, the lab has grown from 1 FTE to roughly 6 FTEs. Specifically, as of the end of summer 2013, day-to-day operations in the lab are carried out by 4 FTE staff members, 1 FTE intern, 1 part-time intern, and 1 part-time staff member whose time is divided between the innovation lab and OPM’s Resource Management Office. A core group of staff from OPM’s Employee Services Division have been trained in human-centered design and also contribute up to 15 percent of their time in the lab. According to OPM officials, the lab reached its maximum fiscal year 2013 funding level of 5.5 FTEs in July 2013. A brief description of each position is provided in table 2. OPM Employed a Phased Approach to Lab Development Initially Focusing on Capacity Building OPM has taken a phased approach to developing the lab programming (activities taking place in the lab) and the policies governing lab use (such as priority-setting policies for lab projects). According to OPM documents, each phase has incorporated an element of experimentation, review, and a shift in strategy based on lessons learned. Phase I lasted from March through June 2012. During these first 4 months after the lab was built, OPM made the space available to the OPM workforce for meetings and events. OPM leadership also used this time to investigate an appropriate problem-solving approach to pair with the lab that would be consistent with approaches used by other labs; they determined that a human-centered design approach and curriculum would complement OPM employees’ technical expertise and analytic competencies. OPM also began to recruit interested staff from the Employee Services Division to be trained in human-centered design fundamentals: this staff would then support project sessions in the lab as part of their collateral duties. Phase II lasted from July 2012 through March 2013 and consisted mostly of facilitated sessions with OPM project teams. During these sessions, Employee Services staff worked with project teams to generate ideas to long-standing problems through exercises such as project or strategic planning, brainstorming sessions, or stakeholder mapping aimed at discussing and testing potential solutions. Topics discussed during these sessions involved a variety of initiatives directed at improving OPM processes and addressing government-wide human resources challenges. OPM officials noted that innovation lab projects have included, among others, designing an implementation plan with other federal agencies to collect valid, accurate, and timely data on the federal cyber security workforce; updating the government-wide strategy for veterans recruitment; attracting and retaining individuals with talent in science, technology, engineering, and mathematics disciplines; and specific challenges unique to individual agencies. Phase III lasted from April through November 2013. In Phase III, OPM continued to provide facilitated design sessions and in some cases, follow-on coaching to program offices from within OPM and OPM-led projects. For example, a facilitated design session included lab staff working with the Food and Drug Administration’s (FDA) Battery Working Group to more effectively engage with the group’s external stakeholders. According to an OPM case study about the lab, eight FDA employees attended the Fundamentals of Human-Centered Design course. Following the course, lab staff provided planning support for a public workshop with over 200 participants from stakeholder groups including medical device and battery manufacturers, other regulatory groups, and hospital staff; lab staff also attended the Battery-Powered Medical Device workshop to support the FDA team in their use of design methods. According to an FDA participant, their collaboration with the lab helped them engage in stakeholder dialogue that would not have been otherwise possible. OPM lab staff also began to offer classes in the lab designed to develop mission-critical skills federal workers need to become better problem solvers. The OPM lab offers courses such as Human-Centered Design Fundamentals, Prototyping in the Public Sector, and Communicating Visually, among other topics. These classes are available to OPM staff and other federal workers. Staff also made the lab available for federal communities of practice to convene. According to lab staff, the lab is becoming a hub for a number of standing meetings of a growing community of federal innovators and innovation communities of practice. Table 3 presents a summary of OPM’s human-centered design lab activities since its inception. Lab staff report that in the future they intend to expand from their session- based work and targeted design support projects, such as those consultative sessions that took place in the lab during Phase III. While some of these more episodic projects may continue to occur, the lab’s focus will be on creating and establishing large-scale projects typically involving stakeholders from either wholly within OPM or across different agencies that are working on crosscutting issues. As discussed later in the report, projects appropriate for this design method would have diverse users, be more complex, and be called immersion projects. These would be the most structured activities undertaken in the lab, characteristically being longer-term activities that could take up to six months of intense collaboration with project owners and a diverse group of stakeholders. OPM’s Lab Is Similar in Mission and Design to Other Innovation Labs, but OPM Needs to Systematically Evaluate the Lab’s Performance We identified a common set of challenges that can undermine organizations’ efforts to use innovation labs and a set of prevalent practices that the organizations employ to address these challenges and support their labs’ success and sustainability. OPM has incorporated some of these practices, such as pairing a distinct space with a structured approach to problem-solving, but has not implemented others, such as developing meaningful performance measures. Although OPM has begun reaching out to other federal innovators, the agency has not fully leveraged the experience of other agencies employing similar approaches. OPM Has Dedicated Physical Space, a Problem-Solving Approach, and Plans to Undertake Long-Term Immersion Projects As a prevalent practice for encouraging and supporting greater innovation, both the literature and representatives from the organizations we reviewed stressed the benefits of pairing a dedicated physical space with a structured framework rooted in design-thinking principles. Many of the lab representatives said building or establishing a distinct space carries an important symbolic value as it signals an organization-level commitment to a culture that supports innovation. However, simply building a lab is not sufficient to change an organization’s culture; it is necessary to also introduce a new framework for problem solving. Although these organizations use different terminology to describe their selected frameworks, such as agile development and human-centered design, the general principles are similar. They include placing users at the center of the desired solution—research on successful innovation practices shows the importance of engaging customers and understanding their needs. Further, they include extensive collaboration with relevant stakeholders, experimentation, prototyping, and iterative steps to find a solution. A primary objective of this approach is to allow for failure in the beginning of the design cycle, so that organizations can manage and learn from early mistakes, rather than try to recover from an expensive, comprehensive failure upon implementation. For example, Census and HUD have similar problem-solving frameworks for lab use. As figure 3 shows, the Census Center for Applied Technology and the HUD Innovation Lab rely on a five-step framework to guide innovation in their labs. As another example, although CFPB does not have a dedicated physical space, it used a similar framework to develop its on-line mortgage disclosure form. According to CFPB’s Creative Director for Technology and Innovation, designers interacted with end-users including mortgage applicants, prototyped different forms, and made refinements based on continual feedback before launching the new form. On its website, CFPB describes its design process in detail, including prototyping and feedback sessions with consumers, lenders, and mortgage brokers. OPM’s lab provides a menu of design services to meet the specific needs of various projects. The lab’s larger-scale immersion project work will involve taking a complex problem through OPM’s problem-solving framework, which encompasses steps for problem framing to learning about users to analysis to concept development, testing, and rapid iterative steps. This problem-solving framework is similar to those employed by other innovation labs. As discussed earlier in this report, similar to other organizations with labs, OPM is using its lab for a variety of purposes including as a learning space for classes on human-centered design principles and techniques and as a meeting space for interagency task teams and communities of practice. As originally envisioned in its strategic and performance plans, the lab was designed to host a mix of activities rooted in the human- centered design approach, including longer-term design challenges. Moreover, OPM lab staff asserted that to gain an organization’s confidence and to instill a culture of innovation, it is necessary for a successful innovation lab to have an array of sufficiently compelling projects that demonstrate how the lab approach can lead to performance improvements. Based on our interviews with public and private sector organizations with similar innovation facilities, larger-scale problem-solving projects were common activities in their innovation labs’ service portfolios. As an example, Denmark’s MindLab has contributed to tackling several pressing social issues including simplifying the process for managing claims related to industrial accidents and shortening the time before injured workers return to the market. Opportunities to showcase a new approach to problem solving reduce the likelihood that the lab might lose its distinction as different from a traditional meeting space or classroom usually associated with training facilities. Consistent with what staff from other labs told us, OPM officials said they needed the past two years to first introduce agency staff to human- centered design concepts and applications before they could initiate an immersion project. Lab staff said this phased approach was necessary for several reasons. Targeted design support sessions allowed lab staff to expose lab users to design methods and provided opportunities for collaboration. These sessions also allowed lab staff to quickly show value for program offices in response to a specific need. For example, OPM lab staff members were able to help FDA staff plan and engage with over 200 different stakeholders at a conference. They also said targeted design support is a critical way for emerging design practitioners to develop and hone their own skills before applying them to a longer term, and higher stakes, project engagement. Lab staff said overall these sessions benefited both the users of the lab, who developed new skills to take to their home offices, such as problem framing and engaging with stakeholders, as well as lab employees, who continue to grow and refine their human-centered design skills. In a December 2013 document, OPM staff stated they intend to create and establish these longer-term immersion projects and evaluate their impact during the next phase of the lab’s development. OPM Has Not Fully Developed Meaningful Performance Measures Measuring the long-term outcomes of innovation labs is a prevalent practice for building acceptance and demonstrating the value of the labs. Consistent with our literature review, several representatives we interviewed from other innovation labs concurred with the director of innovation at Denmark’s innovation lab, MindLab, who said that innovation labs need to know how much they are spending and their outcomes. According to the director, the labs must also be able to attribute where the change happens based on their work. In addition, lab staff must be prepared to present a narrative of their work. He acknowledged that innovation labs are risky because they look different, and they have a different focus than other government entities. The director said that, as a result, innovation lab officials need to show where the funds are going along with the benefits and results of those investments. Representatives from newer labs—i.e. those operating less than three years—stated they primarily rely on output measures to gauge their initial efforts such as number of users, ways in which the lab is being used, classes or events held in the lab, and anecdotal evidence. Developing outcome measures is more challenging for several reasons. Appropriate outcome measures are often not obvious at the onset of a project. Moreover, agencies may not have appropriate measures or baseline data when they start using an innovation lab as a problem-solving tool, and the role of the lab in driving a successful innovation may not always be clear. Given these challenges to accurately measuring innovation and the value of an innovation lab, lab managers from labs that have been operating for a longer period of time told us they focus on developing meaningful milestones and measures applicable to different phases of the innovation lifecycle, such as problem generation, idea generation, and skills development. For example, the UNICEF Innovation Unit—which has been helping member-country offices set up innovation labs since 2006—and several European initiatives developed a set of benchmarks intended to help them measure the value of public sector labs and identify ways in which the lab’s performance can be improved. The benchmarks UNICEF developed span across six categories, such as problem definition and idea generation, internal and external collaboration, and secondary effects. Within each category, they include a list of questions intended to assess their strengths and weaknesses. For example, they want to know whether labs are helping employees define problems and generate ideas, strengthen internal collaborations, and build external partnerships. They also measure the extent to which work done in the labs results in new team or staff capacity, excitement and goodwill toward the organization, and an increase in leverage and influence in their field. OPM is undertaking a similar effort to establish benchmarks that will help lab staff gauge the extent to which lab users are learning and applying many of these same skills, but the lab is not mature enough to have results. OPM documents state that the goal of OPM’s innovation lab is to provide federal workers with 21st century skills in design-led innovation, and the intended purpose of the lab is to provide a physical space for project- based problem solving. The documents also note that the value of the lab can be measured, in part, by how well it helps develop the mission-critical competencies to improve the federal workforce’s ability to solve problems and deliver results. In its strategy document, OPM laid out the following high-level goals for the innovation lab: Employees assigned to the innovation lab should go back to their home organization with an understanding of, and an appreciation for, the power of innovative approaches to problem solving. Employees should be equipped to implement similar methodologies in their home organizations on future projects. As the innovation lab matures, and as more and more projects are completed, the notion of using innovation to tackle complex problems will gain traction across the organization. Eventually, leaders and employees across OPM will vie to get their issues sent to the innovation lab for resolution. This in turn will contribute to a decrease in organizational silos, and a concurrent increase in cross-organizational teams addressing one organization’s issues. In the same document, OPM officials also described an evaluation strategy resembling an agile approach. Specifically, OPM described these goals as moving targets which would be achieved through an evolving and self-correcting process. Lab staff immediately started to track lab activities and outputs, such as number of participating people and agencies, and how participants used the lab, such as consultative sessions, follow-on coaching, training classes, or as a meeting space. Five months after the lab opened, they also started to survey users who participated in day-long facilitated sessions. For example, there was a one-page evaluation that asked respondents to rate the appropriateness of the environment and quality of the facilitators. The surveys also asked whether users would recommend the lab to colleagues and whether human-centered design problem-solving tools can be used as an effective tool government-wide. The responses were generally positive—about 82 percent of respondents (84 out of 103) said they would recommend the lab to someone else, providing a baseline for subsequent survey findings. According to lab staff, they periodically reviewed the available data and adjusted their strategy for operating the lab. Starting in March 2013, a year after the lab opened, OPM lab staff began work on a program evaluation framework to more systematically measure the lab’s progress toward meeting their overarching goals. To evaluate the extent to which lab participants are learning and applying innovative approaches, lab staff intends to measure the lab’s performance along three overarching categories: service experience, skill development, and project outcome. According to the framework, resources dedicated to evaluation efforts will reflect the resources needed to host lab-sponsored events. Episodic events such as consulting sessions will correspond to a “light-touch” follow-up effort, such as immediately surveying all participants on their session experience and skills development. More long-term, resource-intensive efforts such as immersion projects will employ a more robust follow-up effort that, in addition to assessing the session experience and skills development, will also address project- specific outcomes. Collection of assessment data in all three areas will include the administration of surveys to participants both before and right after a session, and some services will involve the administration of surveys to participants before a service and subsequent periodic check- ins. Depending on the nature of the lab session, information on skill development and outcomes will also be obtained from session clients in pre-session scoping conversations and periodic, post-session check-ins using either surveys, or interviews. For one type of session, assessment of participant skill development will also include a survey of participant supervisors. Lab staff has used a series of surveys to measure participant experience and skills development, and to capture specific project-related outcomes for the different services they offer. However, the survey instruments are unlikely to yield data that would be of sufficient capacity, credibility, and relevance to indicate the nature and extent to which the lab is achieving what it intends to accomplish or its value to those who use the lab space. Although there are several items across all surveys that are reasonably aligned with generally accepted questionnaire and item design principles, there are limitations associated with many items where language is ambiguous, where the intent of the question is not clear, and directions are lacking. For example, phrases such as “changed behavior” or “tangible outputs you can move forward” are open to numerous interpretations and are likely to engender an array of responses that range from being relevant to not at all relevant or relatable to the purposes or objectives of the session. In addition, some of the items may be more likely to engender responses with a greater likelihood of being subject to a respondent’s social desirability bias. For example, the respondent may want to provide answers that are socially desirable, maintain the status quo, or make a good impression. While some customization is to be expected, the surveys did not indicate any approach to evaluate some core aspects of the lab and its value using a consistently presented set of the same questions. For example, the question asking participants about the likelihood that they would recommend the lab to someone else is the type of item that could, with revision, be incorporated in all of the surveys. Analyses of a core set of items by type of lab event or service would enable lab staff to discern and compare where participants were more and less engaged in lab activities and curricula. Consequently, these survey instruments and the items on them may be susceptible to various types of question and respondent bias and could, when the responses are analyzed, produce results that would be difficult to interpret or link to expected participant effects, or to the intent or activities of the workshop session. Moreover, lab staff has not developed outcome measures or milestones related to customer experience and skills development. The evaluation framework being developed by OPM does not include interim performance targets or measures. Best practices state that new initiatives benefit when managers set time-bounded, quantifiable interim goals, establish related performance measures, collect data, and use that information to assess and adjust their performance. To evaluate the overall performance of MindLab, the director said he develops an annual work plan, which describes the number and types of projects and other activities the lab will undertake, as well as the relative resource allocation to those projects and activities. He said his staff also conducts an annual review of the budget and actual expenditures with the board. OPM lab staff has been tracking outputs—such as number of participants and number and type of activities—meaning that they have baseline data which could inform realistic, meaningful targets and measures related to lab use and activities for the upcoming year. Although they continue to refine their surveys, they could use the results from earlier versions to establish targets and measures related to customer experience and skills development. Meaningful measures or milestones could help them assess their progress toward improving participants’ ability to solve problems and accurately measure the effect of working in the lab on services, products, and processes. As mentioned previously, the lab plans to host the more resource- intensive immersion projects. To demonstrate that the lab is operating as originally intended, evaluation plans will be needed for specific immersion projects that can help track cost-benefits and performance improvement outcomes. OPM stated that evaluation plans will be prepared for each immersion project to account for project outcomes. They indicated that they wanted to host their first immersion project within the next several months. OPM Has Started Efforts to Connect with the Federal Innovation Community, but Has Not Fully Leveraged Other Agencies’ Efforts Another prevalent practice we identified included leveraging other innovation labs’ efforts to try to increase the value of the lab approach. Studies show that information sharing and interorganizational networks can be a powerful driver supporting innovation. One study showed that interorganizational networks of innovators help members develop new products at a faster rate with lower investment commitments, due in large part to the information sharing that takes place. Sharing information can help mitigate the risks and uncertainty that typically characterize innovation ventures. Best practices state the importance of establishing channels of communication and other mechanisms that facilitate knowledge-sharing and building networks of like-minded communities to help agencies achieve crosscutting objectives. For example, the Census Bureau’s Chief Technology Officer suggested a way in which innovation leaders could share information and pool resources. Specifically, instead of each agency creating its own technology innovation lab with its own hardware, software, and associated maintenance, they could use a common innovation infrastructure service in the public cloud. Every agency could still have their own branded offering and could still provide access in their own facility or at their regional offices. However, an outside vendor could provide the infrastructure. For example, if an agency wanted to experiment with some unique visual analytic tools, they could purchase what they need on a subscription service; this would eliminate agencies buying all the tools themselves. While labs provide a physical space where innovators can convene, federal agencies are not fully aware of their growing community. As of June 2013, OPM was unaware that other agencies such as Census, HUD, and NASA were pursuing a lab approach to promote innovation. Moreover, the lab directors at these agencies were not aware or only marginally aware of OPM’s lab and its resources or other federal innovation labs. OPM’s efforts to develop an innovation lab occurred around the same time or pre-dated those of other agencies we interviewed. According to OPM officials, during its first year of operations, OPM lab staff focused their efforts on promoting awareness of the lab and its resources internally to OPM staff. In their second year, OPM lab staff planned more activities intended to promote the lab and its resources externally to connect with federal agencies’ innovation efforts. Staff noted the OPM lab is the hub of various interagency networks of innovation practitioners. For example, an interagency community of practice on idea generation meets in the lab on a monthly basis. OPM’s lab staff also reported that they host weekly trainings in the lab on best practices, including webinars about measuring the success of enterprise-level design efforts and the value of visualizing information. These training sessions include case study presentations from other federal agencies, such as GSA, and non-federal entities. In addition, OPM has shared best practices with other public sector design labs across the globe by participating in a number of conferences. OPM is also collaborating with a current Presidential Innovation Fellow, who is building an innovation toolkit. Although projects in the lab are currently managed and for the most part delivered by OPM employees, staff noted that they are increasingly looking to leverage detailees, short-term assignments, and other ways to harness the potential of talent from other agencies. OPM staff said they also give regular tours of their innovation lab for other government entities already supporting innovation initiatives or developing them. In addition to these activities, OPM hosted a convening of federal innovators to compare various agencies’ innovation communication efforts across the agencies. Several federal officials we interviewed said they would welcome the opportunity to communicate as the need arose with a community of peers to exchange information and ideas and trouble-shoot problems related to the start-up and maintenance of their labs. For example, CFPB’s Creative Director for Technology and Innovation said it would be helpful to find out what other bureaus and departments are doing to incorporate design principles, so that she could exchange ideas and information. An official from NASA’s Swamp Works noted that it would be beneficial to show that others in the federal sector are also looking at innovation labs. To that end, simply knowing the innovation community exists and how agency staff leading innovation efforts can initiate a conversation related to a specific topic would likely be beneficial and would help avoid the risk of a fragmented innovation community. OPM’s 2014 through 2018 Strategic Plan Indicates It Intends to Use the Lab to Advance OPM Priorities Because innovation necessarily entails culture change, experimentation, periodic setbacks, and often resource investments, another prevalent practice necessary to sustain a lab includes leadership support. Innovation labs are one tool that agencies can use to foster innovation. Agency officials and lab directors we interviewed said leaders must be willing to embrace experimentation within the lab and understand that smart failures—failures that result from trial and error, where the alternative would be to do something truly risky due to lack of evidence— are part of the design process. For example, the Census Bureau’s Chief Technology Officer noted that support by Census Bureau leadership is critical to ensure staff participation and the continued availability of funds to drive innovation in its Center for Applied Technology lab. Other lab directors highlighted several strategies they use to balance the risks and failures that accompany a problem-solving methodology rooted in a more experimental approach. These include accelerated timelines of three to six months, which allows organizations to quickly shelve projects that are without merit. Some lab leaders also noted that a quick win or early success can give new labs the underlying support they need to take on riskier projects. In March 2014, OPM released its 2014 through 2018 strategic plan, which states that the agency plans to seek new, innovative ways to accomplish its work of advancing human resource management in the federal government. In the strategic plan, OPM indicates that, among other things, it intends to use the innovation lab and human-centered design methods to address OPM’s operational challenges. Conclusions For OPM and the rest of the federal government, finding more efficient and effective ways of doing business to help meet rising citizen demands for public services is critical, particularly in an era of continued fiscal and budgetary constraints. OPM’s innovation lab is one such tool intended to give rise to solutions of complex problems facing the federal government. Consistent with other innovation labs, development of performance and outcome measures, tools to assess performance, and further leveraging the experience of other organizations undertaking similar efforts will also be critical. Having clear and specific outcome measures will help OPM track and evaluate the extent to which the lab is meeting its original intent and over time, to make any necessary adjustments. Otherwise, OPM’s innovation efforts may not be able to demonstrate the types of results initially envisioned. Recommendations for Executive Action We recommend that the Director of OPM take the following actions to help substantiate the lab’s original goals of enhancing skills in innovation and supporting project-based problem solving: Direct lab staff to develop a mix of performance targets and measures to help them monitor and report on their progress toward lab goals. Output targets could include number and type of lab activities over the next year. Outcome targets and measures should correspond to the lab’s overarching goals to build organizational capacity to innovate and achieve specific innovations in concrete operational challenges. Direct lab staff to review and refine the set of survey instruments to ensure that taken as a whole, they will yield data of sufficient credibility and relevance to indicate the nature and extent to which the lab is achieving what it intends to accomplish or is demonstrating its value to those who use the lab space. For example, lab staff should consider the following actions: Developing a standard set of questions across all service offerings. Revising the format and wording of existing questions related to skills development to diminish the likelihood of social desirability bias and use post-session questions that ask, in a straight- forward way, about whether, or the extent to which, new information was acquired. Replacing words or phrases that are ambiguous or vague with defined or relevant terminology (e.g., terms actually used in the session) so that the respondent can easily recognize a link between what is being asked and the content of the session. Direct lab staff to build on existing efforts to share information and knowledge within the federal innovation community. For example, OPM lab staff could reach out to other agencies with labs such as Census, HUD, and NASA’s Kennedy Space Center to share best practices and develop a credible evaluation framework. Agency Comments and Our Evaluation We provided a draft of this report to the Director of OPM for review and comment. The director provided written comments, which we have reprinted in appendix IV. In summary, OPM generally concurred with our recommendations and described ongoing and planned steps to refine evaluation efforts and further leverage other federal innovation labs. For the recommendations on evaluating performance, the director described a competency-based skills gap pilot the lab is undertaking, based on targets from pre- and post-testing of participants in lab activities. We acknowledge that this is an important step in developing performance measures, and OPM will also need targets and measures to demonstrate the lab’s value in achieving specific innovations in concrete operational challenges. For the recommendation on leveraging other federal agency innovation efforts, the director noted OPM’s work seeking out information and contacts from other innovation endeavors, including lab-based ones. We acknowledge OPM’s more recent emphasis in this area, including participating in an interagency community of practice on innovation. Federal officials we interviewed said they would welcome the opportunity to communicate as the need arose with a community of peers. To clarify, the report recognizes sustained organizational leadership as a prevalent practice for the success of innovation labs. However, this was not a specific report recommendation, but an acknowledgement regarding the general role leadership plays in ensuring the success of innovation labs. In her response, the director stated that OPM recently released its 2014 through 2018 strategic plan, which she said demonstrates OPM leadership’s commitment to the advancement of work in the lab. Accordingly, we updated the report to reflect the most current information available at the time of our publication. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the Director of OPM and appropriate congressional committees. This report will also be available at no charge on our website at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-4749 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff members who made major contributions to this report are listed in appendix V. Appendix I: Objectives, Scope, and Methodology This appendix provides information on the scope of work and the methodology used to (1) describe the Office of Personnel Management (OPM) innovation lab’s start-up and operating costs, staffing and organization, activities, and policies governing the lab’s use, and (2) assess how OPM’s innovation lab compares to other organizations’ innovation labs, including how it uses benchmarks and associated metrics and how it addresses potential challenges to innovation. To address the first objective, we reviewed documentation and met several times with OPM staff overseeing the lab and its activities. We reviewed the lab’s construction and operations’ budget, including the funding sources for the lab, and interviewed agency officials knowledgeable about the lab’s budget. Based on interviews and e-mail exchanges with knowledgeable OPM and General Services Administration staff and reviewed documents, we found OPM’s lab expense data to be sufficiently reliable for the purposes of our report. We reviewed spreadsheets maintained by lab staff tracking lab outputs, such as workshops hosted in the lab and number of attendees. We also reviewed lab performance materials such as the lab’s performance plan, user surveys, and the results of those surveys. Survey specialists in our Center for Design, Methods, and Analysis reviewed the lab user surveys using internal review guidance that is typically performed on draft GAO surveys as part of our development process and required before deployment of a survey. In addition to reviewing with lab staff the documents they provided us, we interviewed them about OPM’s process for identifying and selecting a lab strategy, lab staff’s approach to implementing a human-centered design curriculum, and their goals for the lab. To address the second objective, we conducted a detailed literature search of material from academic institutions, global management consultants, professional associations, think tanks, news outlets, and various other organizations. We also reviewed literature documenting public, private, and academic innovation efforts and associated positive and negative outcomes. Our literature search helped us identify benchmarks and associated metrics applicable to the development and use of innovation facilities in the public, private, and nonprofit sectors. We also interviewed OPM lab staff on how they intend to identify outcomes— such as cost reductions, performance improvements, or other results— from projects undertaken by OPM since the inception of the lab. We used the findings from our literature review to identify organizations with innovation facilities having a dedicated physical space and using problem-solving methods similar to OPM’s lab. We selected a mix of 11 public, nonprofit, and private organizations to visit or interview. In addition, we met with an official from the Consumer Financial Protection Bureau (CFPB). While CFPB lacks a dedicated innovation lab, the agency has a reputation among federal agencies as a leader in innovative website development. Table 4 lists the organizations we visited in person or interviewed their representatives by telephone. At every lab we visited or contacted, we interviewed lab representatives about the history of the lab, including why they decided to pursue a lab strategy; how the lab is used; the protocols for engaging participants; how lab directors measure the performance of the lab; challenges to promoting innovation within the organization; and practices for addressing those challenges. Based on our literature search, we identified common challenges that can hamper organizations’ efforts to use labs as innovation vehicles and prevalent practices that can support labs’ success and sustainability. In addition, we reviewed our interview records to identify commonly recurring challenges and prevalent practices that can support labs’ success and sustainability. We verified that the challenges and prevalent practices we identified during our literature search were also those more often cited during the interviews. We also interviewed representatives from two management consultancies that promote problem-solving approaches rooted in design-thinking principles, IDEO and Luma. OPM contracted with Luma to help design the lab and implement human-centered design programming. We spoke with their representatives to understand the challenges their clients face in changing organizational culture and the benchmarks and metrics they advise their clients to adopt to measure the performance of new labs and problem-solving methods. In addition, we interviewed officials from three public-sector organizations—San Francisco Mayor’s Office of Civic Innovation, Canada’s Public Policy Forum, and United Kingdom Behavioural Insights Team—that are pursuing strategies to promote innovation in their organizations but opted not to build innovation labs. They spoke to us about the challenges that prevented them from building labs and the steps they are taking to incorporate human-centered design-like problem- solving methods without a physical lab. We conducted this performance audit from July 2013 to March 2014 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Appendix II: Innovation Labs Share Similar Design Elements and Problem-Solving Methods This table contains the same text portrayed in figure 2 and shows how innovation labs we surveyed from the public, private, and nonprofit sectors generally use their labs for multiple and similar purposes. Purpose of lab To help deliver on President Obama’s vision of a more effective and efficient government for the American people by supporting a government-wide community of innovators. How is it used Dedicated space where OPM and interagency teams can take a problem through a full design cycle. This includes problem framing, learning about users, analysis, concept development, testing, and rapid iteration. Capacity building—lab hosts classes and workshops. Meeting space for OPM staff and other federal workers and interagency communities of practice. To provide a “safe zone” where Census staff can explore new technology solutions without impact to production operations. Dedicated space where lab and other Census staff can develop, test, and implement ideas into production outside the standard production environment Capacity building—lab hosts presentations of new technologies and solutions. To provide a dedicated space where NASA KSC engineers can quickly resolve problems related to deep-space exploration. Space where 20 NASA engineers and scientists prototype and test emerging technologies. Swamp Works has contracts with other NASA centers worth about $7 million a year. Provide a space that looks different from the traditional office environment, where HUD employees can accelerate the development of solutions more efficiently than other available approaches. Dedicated space where HUD lab staff and mission area leads can develop, test, and implement ideas into production within a compressed timeframe. Provide a neutral space for government ministries to work with citizens and businesses to create new solutions for society. Ministry officials from Danish Ministries of Business and Growth, Education, and Employment use the MindLab space and resources to take a problem through the full design cycle. Capacity building—lab hosts classes, conferences, and workshops. Nonprofit Help the organization become more flexible, agile, and better prepared for global changes by providing spaces where 135 country offices can collaborate with local partners. Dedicated spaces where UNICEF country office staff and their local partners can take a problem through a full design cycle. Sector Nonprofit Provides space, practical skill building, and programming for Harvard students, faculty, staff, alumni, and others engaged in new ventures, nonprofit creation, product or service innovation, small business development, and related educational and research activities. How is it used Incubator, workspace, and programming for start-up ventures involving Harvard students, and their partners. Teaching space for Harvard students. Meet-up space for local community. Nonprofit To tackle tough social issues, such as family breakdown and social inequality, by building Australia’s social innovation capability. Laboratory for co-designing new social programs for vulnerable populations—this includes generating ideas, conducting ethnographic research, and prototyping potential solutions. Meet-up space: TACSI hosts events, workshops, and conferences for social change community. Capacity building for other social innovators. Provide a dedicated physical space in the heart of the Cambridge, MA tech sector that can accelerate the speed of product development, increase collaboration, and attract new talent. Office space for moving new and emerging technologies through the development pipeline. Meet-up space for local tech community. Recruitment tool for top tech talent. To build a strong and permanent research and development presence in Cambridge, MA where Microsoft researchers and programmers can build relationships with local universities, biotech, and healthcare companies. Office space for moving new and emerging technologies through the development pipeline. Meet-up space for local tech community. Recruitment tool for top tech talent. Provide a dedicated physical space where Fidelity executives explore how emerging technologies can improve products and processes for internal business units. Laboratory where FCAT staff can identify solutions and develop new products and processes for Fidelity business units. Hosts conferences, workshops, and social events related to technological and social innovation. Provide a dedicated physical space that exemplifies how environment can promote creativity and collaboration where Deloitte’s future leaders can hypothesize, research, and test new ideas. Leadership development institute for Deloitte’s highest performing consultants A think tank where fellows develop innovative yet practical strategies governments can use to transform the way they deliver their services and prepare for the challenges ahead Capacity building—GovLab educates Deloitte account teams on these emerging trends. Appendix III: Office of Personnel Management’s Innovation Lab Non-Design Programmed Activities, Calendar Years 2012-13 Quarter (calendar year) Q1 2012 Number of participants per meeting (ranges) Appendix IV: Comments from the Office of Personnel Management Appendix V: GAO Contact and Staff Acknowledgments GAO Contact Seto J. Bagdoyan, (202) 512-4749 or [email protected]. Staff Acknowledgments In addition to the contact named above, Thomas Gilbert, Assistant Director, and Judith Kordahl, Analyst-in-Charge, supervised the development of this report. Jessica Nierenberg and Anthony Patterson made significant contributions to all aspects of this report. Other important contributors included Thomas Beall, Karin Fangman, Donna Miller, and Robert Robinson.
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Organizations from around the globe are emphasizing that strategies promoting innovation are vital to solving complex problems. To try to instill a culture of innovation in its agency, OPM followed the lead of a number of private sector companies, nonprofit organizations, and government bodies by creating an innovation lab. GAO was asked to examine the lab. Specifically, GAO 1) described the lab's start-up costs, staffing and organization, activities, and policies governing the lab's use, and 2) assessed how OPM's innovation lab compares to other organizations' innovation labs, including how it uses benchmarks and metrics and how it addresses challenges to innovation. GAO reviewed cost, staffing, and performance information. GAO also reviewed relevant literature on innovation and interviewed officials from public, private, and nonprofit organizations with innovation facilities similar to OPM's lab. In March 2012, the Office of Personnel Management (OPM) opened its innovation lab, a distinct physical space with a set of policies for engaging people and using technology in problem solving. The goals of OPM's innovation lab are to provide federal workers with 21st century skills in design-led innovation, such as intelligent risk-taking to develop new services, products, and processes. OPM's lab was built at a reported cost of $1.1 million, including facility upgrades and construction, equipment and training, and other personnel costs. The lab employs approximately 6 full-time equivalents, including a director, and in fiscal year 2013, the lab's operating costs were approximately $476,000, including salaries. OPM's innovation lab is similar in mission and design to other innovation labs GAO reviewed, and OPM has incorporated some of the prevalent practices that other labs use to sustain their operations. Specifically, OPM is using its lab for a variety of projects, including as a classroom for building the capacity to innovate in the federal government. Lab staff indicated that they plan to begin long-term immersion projects—complex projects with diverse users—within a few months. OPM plans to develop and implement evaluation plans specific to each immersion project that will help them track cost benefits or performance improvement benefits associated with the projects. Starting in March 2013, OPM lab staff began work on a program evaluation framework to more systematically measure the lab's progress toward meeting its overarching goals. In addition, lab staff members are tracking lab activities, such as classes and workshops, and are surveying lab users about the quality of their experience in the lab. However, they have not developed performance targets or measures related to project outcomes, and without a rigorous evaluation framework that can help OPM track the lab's performance, it will be hard to demonstrate that the lab is operating as originally envisioned. While labs provide a physical space where innovators can convene, federal agencies are not fully aware of their growing community. However, OPM is taking steps to ensure work done in the lab is shared across OPM and with other federal innovators—for example, by hosting weekly training sessions in the lab on best practices. Studies show that information sharing and interorganizational networks can be a powerful driver supporting innovation.
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It does not appear, from the proceedings before the District Court, that the land claimed is within the Northern Judicial District of California. This is necessary to give that court jurisdiction. It can exercise no power over any claim, where the land lies in the Southern Judicial District of the same State. This court has often held, unless the jurisdiction of the Circuit or District Court appear in the record, the judgment of such court may be reversed on a writ of error. It is therefore important, that in dealing with land titles, the jurisdiction of the inferior court should appear in the proceeding. From a map of the State of California, recently published, it appears the land claimed in this case lies in the Southern District, and if so, no jurisdiction attached to the court where the proceeding was instituted. For the purpose of correcting the proceeding in this respect, the decision of the District Court is reversed, and the cause is remanded to that court with leave to amend the proceeding in regard to the jurisdiction of the District Court, and to any other matter of form or substance which may be necessary. This cause came to be heard on the transcript of the record from the District Court of the United States for the Northern District of California, and it not appearing therefrom that the land claimed is within the Northern Judicial District of California, it is, on consideration thereof now here ordered and decreed by this court that the decree of the said District Court in this cause be, and the same is hereby reversed, and that this cause be, and the same is hereby remanded to the said District Court, with leave to amend the proceedings in regard to the jurisdiction of the said District Court, and also in regard to any other matter of form or substance which may be necessary.
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Upon an appeal from the District Court of the United States for the Northern District of California, where it did not appear, from the proceedings, whether the land, claimed was within the Northern or Southern District, this court will reverse the judgment of the District Court and remand the case for the purpgse of making its jurisdiction apparent, (if it should have any,) and of correcting any other matter of form or substance which may be necessary.
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This case is here on direct appeal, pursuant to 28 U.S.C. §§ 1253,1 2325, from an order of the District Court which permanently enjoined the Interstate Commerce Commission from enforcing, against the appellee railway system,2 an order requing the application of increased revenues to deferred capital improvements and deferred maintenance as a condition for the nonsuspension of the rate increases. 392 F.Supp. 358 (ED Va.1975). In April 1974, the Nation's railroads,3 including the appellees, filed with the Interstate Commerce Commission a joint petition for a general revenue increase "with respect to the revenue needs of all carriers by railroad operating in the United States." App. 97. Ex parte No. 305, Nationwide Increase of Ten Percent in Freight Rates and Charges, 1974. The proposed tariffs included a 10% Increase in the level of freight rates. In their petition, the railroads alleged in part: "The railroad industry is capital-intensive and must generate huge amounts of capital annually just to replace stationary facilities and equipment as it becomes worn out or obsolete. When earnings are inadequate to support this level of spending, as now, then a process of asset liquidation occurs accelerating as facilities and equipment are consumed by increased traffic. Even if the liquidation of assets is arrested by earnings sufficient to support maintenance and replacement there is a further need to modernize and expand capacity if the railroads are to be able to meet sharply increasing demands upon them for economic and efficient transportation. There is presently an abundance of data and analysis which reliably establishes that billions of dollars are needed immediately and in the coming decade for maintenance and improvement of the Nation's rail transportation plant." App. 107. On June 3, 1974, the Commission entered an order which noted "that the nation's railroads are in need of additional freight revenues to offset recently incurred costs of materials, other than fuel, and to provide an improved level of earnings . . . ." Jurisdictional Statement 42a. The Commission found that the Nation's railroads were "in danger of further deterioration detrimental to the public interest . . .," Ibid., and recognized that "without the additional revenues to be derived from increased freight rates and charges, the earnings of the nation's railroads would be insufficient to enable them under honest, economical and efficient management to provide adequate and efficient railroad transportation services . . . ." Ibid. The Commission concluded that "the increases proposed would, if permitted to become effective, generate additional revenues sufficient to enable the carriers to prevent further deterioration and improve service." At the same time, it noted that "if the schedules were permitted to become effective as filed and without conditions designed to promote service improvements, the increases proposed would be unjust and unreasonable and contrary to the dictates of the national transportation policy . . . ." Id., at 42a-43a. The Commission, therefore, suspended the operation of the new schedules, but authorized the railroads to file new tariffs, subject to conditions providing that revenues generated by the increases "should be expended for capital improvements and deferred maintenance of plant and equipment and the amount needed for increased material and supply cost, other than fuel." Id., at 46a.4 On July 18, 1974, the Commission entered the second pertinent order in this case. This order defined "deferred maintenance"5 and "delayed capital improvements."6 T order also provided that "up to 3 percentage points of the 10-percent authorization may be applied to increased material and supply costs excluding fuel, provided such costs have been incurred." (Id., at 59a.) The order also permitted increased income taxes to be excluded in determining the balance of funds to be applied to deferred maintenance and delayed capital improvements. On July 30, appellee Chessie System sought reconsideration of the Commission's order of July 18 "for the reason that under the Commission's definitions of deferred maintenance and delayed capital improvements they will be unable to apply any of the increased revenues derived from the Ex parte No. 305 proceeding (other than those earmarked for increased material and supply costs) to any projects now scheduled or which may be scheduled in the foreseeable future." App. 222. Chessie alleged it had no such "deferred maintenance" or "delayed capital improvements": "No worthwhile project on Chessie System designed to improve its transportation service to the shipping public has ever been deferred because financing or funding was not available. None will be as long as Chessie System earnings are at levels adequate enough to attract capital. Chessie System has never stinted in its expenditures to provide adequate and efficient transportation service to its customers." (Emphasis in original.) Id., at 223. Cheie further noted that it had made significant expenditures for capital improvements in the six months prior to the Commission order. It pointed out that these projects did not qualify under the Commission's definition because the funds had been committed before June 1, 1974, and the projects "had not been deferred because funding or financing was not available." Id., at 224. Unless it was permitted to apply these additional revenues to these earlier commitments, contended Chessie, "(t)hey will simply lie dormant in a sterile, segregated account which will result in several serious consequences both to Chessie System and the shipping public." Id., at 225. Basically, argued Chessie, the consequence of the order was to place Chessie "at a distinct competitive disadvantage vis-a-vis other railroads, which for one reason or another have deferred maintenance or delayed capital improvements within the meaning of the Commission's order. These lines will be able to use the additional revenues to buy cars and other equipment while Chessie System's money will lie fallow. In effect, the order penalizes Chessie System and other efficient carriers and rewards only those railroads which are inefficient." Ibid. Chessie specifically asked the Commission to permit the expenditure of funds generated by the increases for any valid corporate purpose if the railroad had no deferred maintenance or deferred capital improvements as defined by the Commission's order. Chessie, for the first time, also argued that the Commission, "exceeded its statutory authority by conditioning the use to which the revenues derived from Ex parte No. 305 might be applied." Id., at 226. By order dated August 9, 1974, the Commission denied the petition for reconsideration but did significantly clarify its earlier orders. While reiterating its intention that the authorized increases, over and above the increased costs of material and supplies, other than fuel, had to be used exclusively for reducing deferred maintenance of plant and equipment and delayed capital improvements, the Commission left "to the railroad managemes' decision how the funds segregated in accordance with the July 18, 1974, order shall be applied to expenditures for the various specific items of equipment and other properties." Jurisdictional Statement 81a. The Commission pointed out that "the petition and verified statements of railroad officials seeking the increases authorized herein are replete with references to the need for revenues to provide funds for great, but unspecified, amounts of deferred maintenance and delayed capital improvements . . . ." Id., at 81a-82a. The Commission did note that "certain railroads . . . may have anticipated authorization of the increases by initiating improvement projects, or scheduling or otherwise committing and recognizing them in capital budgets prior to June 1, 1974." Id., at 82a. Under those circumstances, if the projects otherwise qualified as delayed capital improvements, the Commission stated that it would be "consistent with the Commission's intention that the authorized increases could be applied" to those projects. Ibid. The present suit was commenced by Chessie on August 15, 1974. Chessie sought to set aside the June 3, July 18, and August 9 orders of the Commission. No other railroad joined in this action. On August 18, a single District Judge issued a temporary restraining order which prohibited the Commission from "enforcing the limiting conditions on the use of plaintiffs' revenues and of certain reporting conditions included in (the) Orders . . . ." App. 33. On August 16, most of the country's railroads filed with the Commission another petition for clarification and modification of its July 18 and August 9 orders. The Commission reopened the matter and held oral argumentn August 27. Appellee Chessie System resisted appearing at this argument on the ground that its filing a complaint in the United States District Court deprived the Commission of further jurisdiction over it. The Commission, however, ordered that counsel representing the Chessie System be present at oral argument and be prepared to orally "show cause why any change should be made in the conditions and requirements contained in the outstanding orders in this proceeding." Jurisdictional Statement 91a-92a. On October 3, the Commission concluded that if any railroad was "unable to use the full amount of the funds generated by the increase for deferred maintenance or delayed capital improvements" it might "expend such funds for new and additional capital improvements providing advanced approval is obtained from the Commission . . . ." Id., at 104a. Chessie amended its complaint in the District Court to challenge this order as well. It claimed that its maintenance and capital projects will not qualify as "new and additional capital improvement," App. 37, under the Commission's order since that order defined such projects as those "over and above those presently undertaken, scheduled or otherwise committed . . . ." Id., at 38. The District Court enjoined the Interstate Commerce Commission from enforcing against Chessie those portions of the challenged orders that required revenues derived from Ex parte No. 305 to be spent for specified purposes. After rejecting the preliminary defenses raised by the Commission, the court concluded that the conditions imposed by the Commission on the expenditures of the increased revenues were unlawful. The court began with the proposition that the Commission can impose conditions that have been expressly or impliedly authorized by law. It found, of course, no express authorization in the Interstate Commerce Act for the Commission to condion withholding suspension of a rate increase on how the additional revenue is spent. Examining the possibility of implied authority, the court noted that the Commission had not previously conditioned withholding the suspension of rates on control of a railroad's expenditures, and that, therefore, no court had considered the precise issue presented by this case. However, the District Court noted that it had been held, in other contexts, that the Commission lacks statutory authority to order the railroads how to spend their funds. Missouri Pacific R. Co. v. Norwood, 42 F.2d 765 (WD Ark.1930), aff'd, 283 U.S. 249, 51 S.Ct. 458, 75 L.Ed. 1010 (1931); ICC v. United States ex rel. Los Angeles, 280 U.S. 52, 70, 50 S.Ct. 53, 56, 74 L.Ed. 163 (1929). These cases, said the District Court, "unmistakenly establish that the Commission has no general power to control a railroad's expenditures. No provision of (49 U.S.C.) § 15(7), authorizing suspension of rate increases, implies that the Commission may exercise, as an incident to suspension, the control over expenditures that Congress has otherwise withheld from it." 392 F.Supp., at 367. The court therefore concluded "that Congress has not authorized the Commission to control a carrier's expenditure of funds as a condition to withholding the suspension of rates." Ibid. We noted probable jurisdiction. 423 U.S. 923, 96 S.Ct. 264, 46 L.Ed.2d 248 (1975). The precise question presented in this case, while one of first impression in this Court, is also a narrow one. In their application before the Commission, the railroads sought to justify the proposed general revenue increase on several grounds, including the need for additional funds for deferred capital and deferred maintenance expenditures. We are confronted with the question of whether the Commission may, as a condition for not suspending and subsequently investigating the lawfulness of a proposed tariff, require the railroads to devote the additional revenues to a need which, they allege, justifies the increase. The overall statutory mandate of the Commission in railroad ratemaking proceedings can, for present purposes, be stated quite simply. The Congress has charged the Commission with the task of determining whether the rates proposed by the carriers are "just and reasonable." 49 U.S.C. § 1(5).7 In fulfilling this obligation, the Commission must assess the proposed rates not only against the backdrop of the National Transportation Policy, 54 Stat. 899, 49 U.S.C. preceding § 1, but also with specific reference to the statutory criteria set forth by the Congress to guide the ratesetting process.8 These provisions, in short, require the Commission to ensure that the rate imposed on the traveling or the shipping public will support both an economically sound and efficient rail transportation system. This Court has recently set out the regulatory scheme for the setting of railroad rates mandated by the Interstate Commerce Act, 24 Stat. 379, as amended, 49 U.S.C. § 1 Et seq. See United States v. SCRAP, 412 U.S. 669, 672-674, 93 S.Ct. 2405, 2408, 37 L.Ed.2d 254 (1973). Rates, in the first instance, are set by the railroads. The proposed rate is filed with the Commission and notice is given to the public. After 30 days' notice (or a shorter period, if authorized by the ICC), the rate becomes effective. 49 U.S.C. § 6(3). The Commission has the authority, during that 30-day period, to suspend the proposed tariff for a maximum of seven months in order to investigate the lawfulness of the new rates. 49 U.S.C. § 15(7).9 At the end of the sevenmonth suspension period, t proposed rate becomes effective unless the ICC has, prior to the deadline, completed the investigation and found that the rate is unlawful. See generally Arrow Transportation Co. v. Southern R. Co., 372 U.S. 658, 83 S.Ct. 984, 10 L.Ed.2d 52 (1963). Ex parte No. 305, The proceeding at issue here, was a "general revenue proceeding." The railroads, while not seeking specific authority for an increase in the rate applicable to any particular commodity or group of commodities, proposed to increase the average rates charged. The power to suspend the proposed rates pending investigation the regulatory tool at issue here was added to the Interstate Commerce Act by the Mann-Elkins Act of 1910, 36 Stat. 552. Its purpose was to protect the public from the irreparable harm resulting in unjustified increases in transportation costs10 by giving the Commission "full opportunity for . . . investigation"11 Before the tariff became effective. It provided a "means . . . for checking at the threshold new adjustments that might subsequently prove to be unreasonable or discriminatory, safeguarding the community against irreparable losses and recognizing more fully that the Commission's essential task is to establish and maintain reasonable charges and proper rate relationships." I. Sharfman, The Interstate Commerce Commission 59 (1931). The exigencies of competition, seasonal and other demand trends, and the influences of the general economy over a seven-month period can make implementation of this suspension mechanism a particularly potent tool. That potency was well recognized, even at its creation. Senator Elkins referred to it as a "tremendous power."12 Senator Cummins characterized it as "an order in the nature of a preliminary injunction,"13 a characterization later attributed to an almost identical statute. Air Freight Forwarder Assn., 8 C.A.B. 469, 474 (1947). The Commission's setting of this particular condition precedent to the immediate implementation of the rate incree was directly related to its mandate to assess the reasonableness of the rates and to suspend them pending investigation if there is a question as to their legality. The ICC could have simply suspended the rates originally proposed by the railroads for the full statutory seven-month period. Instead, it pursued a more measured course and offered an alternative tailored far more precisely to the particular circumstances presented. The railroads had made the representation that the increase was justified, at least in part, by the need to take care of deferred maintenance and deferred capital expenditures. If the railroads did, in fact, use the increased revenues for such purposes, the Commission perceived no reason to impose a suspension of the tariff or to undertake a lengthy investigation and, consequently, no reason to frustrate the clear congressional intent that "just and reasonable" rates be implemented. Delay through suspension would only have aggravated the already poor condition of some of the railroads. On the other hand, the Commission was cognizant of a history of poor financial planning by the railroads in regard to outlays of this nature. Supra, at 504 n. 4. If the revenues derived from the new tariffs, once received, were used for other purposes, an investigation prior to their implementation might indeed be warranted. In upholding what we find to be a legitimate, reasonable, and direct adjunct to the Commission's explicit statutory power to suspend rates pending investigation, we do not imply that the Commission may involve itself in the financial management of the carriers. See ICC v. United States ex rel. Los Angeles, 280 U.S. 52, 50 S.Ct. 53, 74 L.Ed. 163 (1929). The action taken by the Commission here is both conceptually and functionally different from any attempt to require specific management action, whether it be of a financial or operational nature; it specied no particular projects and it set no priorities. In deciding not to suspend the rates and investigate their lawfulness on the condition that the revenues be used in the broadly defined areas of "delayed capital improvements" and "deferred maintenance," the Commission simply held the railroads to their representation that the increase was justified by needs in these two areas. The railroads were, of course, not required to submit a tariff imposing such a condition on the use of the resulting revenue. They had the option to continue to insist on an unconditional increase, to submit proof of its reasonableness to the Commission, and, if successful, or if the investigation were not completed within the statutory seven-month period, to collect rates based on the new tariffs. In this Court, Chessie has argued that its particular financial situation makes it unable to use Ex parte No. 305 revenues and, consequently, the application of the Commission's action to it is arbitrary and capricious. The Commission, on the other hand, submits that there is sufficient evidence in the proceedings before it to demonstrate that Chessie did in fact have deferred maintenance items upon which these revenues could be expended. Moreover, the Commission points out that Chessie was not required to join the other railroads in the cancellation of the original tariff and the refiling of the one conditioned on the use of revenues in these two areas. Since the District Court held that the Commission did not have the power to impose conditions on the refiling of the tariff, it did not address this question. Chessie, if it so chooses, may raise the matter on remand in the District Court. Accordingly, the judgment is reversed, and the case is remanded for further proceedings consistent with this opinion. Reversed and remanded. Mr. Justice POWELL took no part in the consideration or decision of this case. Selected Sections of the Railroad Revitalization and Regulatory Reform Act, Pub.L. No. 94-210, 90 Stat. 31: Sec. 202. (a) Section 1(5) of the Interstate Commerce Act (49 U.S.C. 1(5)) is amended by inserting "(a)" immediately after "(5)" and by adding at the end thereof the following new sentence: "The provisions of this subdivision shall not apply to common carriers by railroad subject to this part." (b) Section 1(5) of the Interstate Commerce Act (49 U.S.C. 1(5)), as amended by subsection (a) of this section, is further amended by adding at the end thereof the following new subdivisions: "(b) Each rate for any service rendered or to be rendered in the transportation of persons or property by any common carrier by railroad subject to this part shall be just and reasonable. A rate that is unjust or unreasonable is prohibited and unlawful. No rate which contributes or which would contribute to the going concern value of such a carrier shall be found to be unjust or unreasonable, or not shown to be just and reasonable, on the ground that such rate is below a just or reasonable minimum for the service rendered or to be rendered. A rate which equals or exceeds the variable costs (as determined through formulas prescribed by the Commission) of providing a service shall be presumed, unless such presumption is rebutted by clear and convincing evidence, to contribute to the going concern value of the carrier or carriers proposing such rate (hereafter in this paragraph referred to as the 'proponent carrier'). In determining variable costs, the Commission shall, at the request of the carrier proposing the rate, determine only those costs of the carrier proposing the rate and only those costs of the specific service in question, except where such specific data and cost information is not available. The Commission shall not include in variable cost any expenses which do not vary directly with the level of service provided under the rate in question. Notwithstanding any other provision of this part, no rate shall be found to be unjust or unreasonable, or not shown to be just and reasonable, on the ground that such rate exceeds a just or reasonable maximum for the service rendered or to be rendered, unless the Commission has first found that the proponent carrier has market dominance over such service. A finding that a carrier has market dominance over a service shall not create a presumption that the rate or rates for such service exceed a just and reasonable maximum. Nothing in this paragraph shall prohibit a rate increase from a level which reduces the going concern value of the proponent carrier to a level which contributes to such going concern value and is otherwise just and reasonable. For the purposes of the preceding sentence, a rate increase which does not raise a rate above the incremental costs (as determined through formulas prescribed by the Commission) of rendering the service to which such rate applies shall be presumed to be just and reasonable. "(c) As used in this part, the terms "(i) 'market dominance' refers to an absence of effective competition from other carriers or modes of transportation, for the traffic or movement to which a rate applies; and "(ii) 'rate' means any rate or charge for the transportation of persons or property. "(d) Within 240 days after the date of enactment of this subdivision, the Commission shall establish, by rule, standards and procedures for determining, in accordance with section 15(9) of this part, whether and when a carrier possesses market dominance over a service rendered or to be rendered at a particular rate or rates. Such rules shall be designed to provide for a practical determination without administrative delay. The Commission shall solicit and consider the recommendations of the Attorney General and of the Federal Trade Commission in the course of establishing such rules." (e) Section 15 of the Interstate Commerce Act (49 U.S.C. 15), as amended by this Act, is further amended (1) by adding at the end of paragraph (7) thereof the following new sentence: "This paragraph shall not apply to common carriers by railroad subject to this part."; and (2) by inserting a new paragraph (8) as follows: "(8)(a) Whenever a schedule is filed with the Commission by a common carrier by railroad stating a new individual or joint rate, fare, or charge, or a new individual or joint classification, regulation, or practice affecting a rate, fare, or charge, the Commission may upon the complaint of an interested party or upon its own initiative, order a hearing concerning the lawfulness of such rate, fare, charge, classification, regulation, or practice. The hearing may be conducted without answer or other formal pleading, but reasonable notice shall be provided to interested parties. Such hearing shall be completed and a final decision rendered by the Commission not later than 7 months after such rate, fare, charge, classification, regulation, or practice was scheduled to become effective, unless, prior to the expiratn of such 7-month period, the Commission reports in writing to the Congress that it is unable to render a decision within such period, together with a full explanation of the reason for the delay. If such a report is made to the Congress, the final decision shall be made not later than 10 months after the date of the filing of such schedule. If the final decision of the Commission is not made within the applicable time period, the rate, fare, charge, classification, regulation or practice shall go into effect immediately at the expiration of such time period, or shall remain in effect if it has already become effective. Such rate, fare, charge, classification, regulation, or practice may be set aside thereafter by the Commission if, upon complaint of an interested party, the Commission finds it to be unlawful. "(b) Pending a hearing pursuant to subdivision (a), the schedule may be suspended, pursuant to subdivision (d), for 7 months beyond the time when it would otherwise go into effect, or for 10 months if the Commission makes a report to the Congress pursuant to subdivision (a), except under the following conditions: "(i) in the case of a rate increase, a rate may not be suspended on the ground that it exceeds a just and reasonable level if the rate is within a limit specified in subdivision (c), except that such a rate change may be suspended under any provision of section 2, 3, or 4 of this part or, following promulgation of standards and procedures under section 1(5)(d) of this part, if the carrier is found to have market dominance, within the meaning of section 1(5)(c)(i) of this part, over the service to which such rate increase applies; or "(ii) in the case of a rate decrease, a rate may not be suspended on the ground that it is below a just and reasonable level if the rate is within a limit specified in subdivision (c), except that such a rate change may be suspended under any provision of section 2, 3, or 4 of this part, or for the purposes of investigating such rate change upon a complaint that such rate change constitutes a competitive practice which is unfair, destructive, predatory or otherwise undermines competition which is necessary in the public interest. "(c) The limitations upon the Commission's power to suspend rate changes set forth in subdivisions (b)(i) and (ii) apply only to rate cnges which are not of general applicability to all or substantially all classes of traffic and only if "(i) the rate increase or decrease is filed within 2 years after the date of the enactment of this subdivision; "(ii) the common carrier by railroad notifies the Commission that it wishes to have the rate considered pursuant to this subdivision; "(iii) the aggregate of increases or decreases in any rate filed pursuant to clauses (i) and (ii) of this subdivision within the first 365 days following such date of enactment is not more than 7 per centum of the rate in effect on January 1, 1976; and "(iv) the aggregate of the increases or decreases for any rate filed pursuant to clauses (i) and (ii) of this subdivision within the second 365 day-period following such date of enactment is not more than 7 per centum of the rate in effect on January 1, 1977. "(d) The Commission may not suspend a rate under this paragraph unless it appears from specific facts shown by the verified complaint of any person that "(i) without suspension the proposed rate change will cause substantial injury to the complainant or the party represented by such complainant; and "(ii) it is likely that such complainant will prevail on the merits. The burden of proof shall be upon the complainant to establish the matters set forth in clauses (i) and (ii) of this subdivision. Nothing in this paragraph shall be construed as establishing a presumption that any rate increase or decrease in excess of the limits set forth in clauses (iii) or (iv) of subdivision (c) is unlawful or should be suspended. "(e) If a hearing is initiated under this paragraph with respect to a proposed increased rate, fare, or charge, and if the schedule is not suspended pending such hearing and the decision thereon, the Commission shall require the railroads involved to keep an account of all amounts received because of such increase from the date such rate, fare, or charge became effective until the Commission issues an order or until 7 months after such date, whichever first occurs, or, if the hearings are extended pursuant to subdivision (a), until an order issues or until 10 months elapse, whichever first occurs. The account shall specify by whom and on whose behalf the amounts are paid. In its final order, the Commission shall require the common carrier by railroad to refund to the person on whose behalf the amounts were paid that portion of such increased rate, fare, or charge found to be not justified, plus interest at a rate which is equal to the average yield (on the date such schedule is filed) of marketable securities of the United States which have a duration of 90 days. With respect to any proposed decreased rate, fare, or charge which is suspended, if the decrease or any part thereof is ultimately found to be lawful, the common carrier by railroad may refund any part of the portion of such decreased rate, fare, or charge found justified if such carrier makes such a refund available on an equal basis to all shippers who participated in such rate, fare, or charge according to the relative amounts of traffic shipped at such rate, fare, or charge. "(f) In any hearing under this section, the burden of proof is on the common carrier by railroad to show that the proposed changed rate, fare, charge, classification, rule, regulation, or practice is just and reasonable. The Commission shall specifically consider, in any such hearing, proof that such proposed changed rate, fare, charge, classification, rule, regulation, or practice will have a significantly adverse effect (in violation of section 2 or 3 of this part) on the competitive posture of shippers or consignees affected thereby. The Commission shall give such hearing and decision preference over all other matters relating to railroads pending before the Commission and shall make its decision at the earliest practicable time." Sec. 205. Section 15a of the Interstate Commerce Act (49 U.S.C. 15a) is amended (1) by adding at the end of paragraph (2) and at the end of paragraph (3) the following new sentence: "This paragraph shall not apply to common carriers by railroad subject to this part."; and (2) by redesignating paragraph (4) as paragraph (6), and by inserting immediately after paragraph (3) the following new paragraph: "(4) With respect to common carriers by railroad, the Commission shall, within 24 months after the date of enactment of this paragraph, after notice and an opportunity for a hearing, develop and promulgate (and thereafter revise and maintain) reasonable standards and procedures for the establishment of revenue levels adequate under honest, economical, and efficient management to cover total operating expenses, including depreciation and obsolescence, plus a fair, reasonable, and economic profit or return (or both) on capital employed in the business. Such revenue levels should (a) provide a flow of net income plus depreciation adequate to support prudent capital outlays, assure the repayment of a reasonable level of debt, permit the raising of needed equity capital, and cover the effects of inflation and (b) insure retention and attraction of capital in amounts adequate to provide a sound transportation system in the United States. The Commission shall make an adequate and continuing effort to assist such carriers in attaining such revenue levels. No rate of a common carrier by railroad shall be held up to a particular level to protect the traffic of any other carrier or mode of transportation, unless the commission finds that such rate reduces or would reduce the going concern value of the carrier charging the rate."
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In April 1974, virtually all the Nation's railroads, including appellees, the Chessie System, filed with the Interstate Commerce Commission (ICC) a joint petition for a general revenue increase, stating as a reason therefor that "billions of dollars are needed immediately and in the coming decade for maintenance and improvement of the Nation's rail transportation plant." Though the ICC on June 3, 1974, suspended the operation of the new schedules, it authorized the railroads to file new tariffs subject to conditions that would assure that the additional revenue would be expended for "delayed capital improvements" and "deferred maintenance" of plant and equipment, defining those terms in a subsequent order, which also permitted up to 3% of the revenue derived from the increase to be applied to higher nonfuel material and supply costs. Thereafter, appellees, alleging that they had no "deferred maintenance" or "delayed capital improvements" that would qualify under the ICC's definitions; that they were precluded from applying the additional revenues to earlier commitments; and that they were placed at a competitive disadvantage with railroads that could meet the ICC's conditions, sought reconsideration from the ICC. Dissatisfied with the ICC's response, appellees brought this suit attacking the lawfulness of the conditions imposed and seeking to have the ICC's orders set aside. The District Court issued an injunction prohibiting the ICC from enforcing against appellees those portions of the challenged orders that required revenues to be spent for specified purposes, concluding that "Congress has not authorized the [ICC] to control a carrier's expenditure of funds as a condition to withholding the suspension of rates." Held: The ICC may, as a condition for not suspending and subsequently investigating the lawfulness of a proposed tariff, require the railroads to devote the additional revenues for the purposes the carriers invoked in support of the increase. Pp. 509-515. (a) Imposition of the condition precedent to the immediate implementation of the rate increase was directly related to the ICC's statutory mandate to assess the reasonableness of the rates and to suspend them if there was a question as to their legality. Instead of suspending the proposed rates for the seven-month statutory period, as it could have done, the ICC offered an alternative more precisely tailored to the particular circumstances presented. P. 514. (b) Since the District Court held that the ICC did not have the power to impose conditions on the refiling of the tariff, it did not consider appellees' contention that their inability to use the new revenues makes the ICC's action arbitrary and capricious as to them, and that question may, if appellees choose, be raised on remand. P. 515. 392 F. Supp. 358, reversed and remanded.
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The Internal Revenue Code provides that taxpayers seeking a refund of taxes unlawfully assessed must comply with tax refund procedures set forth in the Code. Under those procedures, a taxpayer must file an administrative claim with the Internal Revenue Service before filing suit against the Government. Such a claim must be filed within three years of the filing of a return or two years of payment of the tax, whichever is later. The Tucker Act, in contrast, is more forgiving, allowing claims to be brought against the United States within six years of the challenged conduct. The question in this case is whether a taxpayer suing for a refund of taxes collected in violation of the Export Clause of the Constitution may proceed under the Tucker Act, when his suit does not meet the time limits for refund actions in the Internal Revenue Code. The answer is no. I A taxpayer seeking a refund of taxes erroneously or unlawfully assessed or collected may bring an action against the Government either in United States district court or in the United States Court of Federal Claims. 28 U. S. C. §1346(a)(1); EC Term of Years Trust v. United States, 550 U. S. ___, ___, and n. 2 (2007) (slip op., at 2, and n. 2). The Internal Revenue Code specifies that before doing so, the taxpayer must comply with the tax refund scheme established in the Code. United States v. Dalm, 494 U. S. 596, 609–610 (1990). That scheme provides that a claim for a refund must be filed with the Internal Revenue Service before suit can be brought, and establishes strict timeframes for filing such a claim. In particular, 26 U. S. C. §7422(a) specifies: “No suit or proceeding shall be maintained in any court for the recovery of any internal revenue tax alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the [IRS].” The Code further establishes a time limit for filing such a refund claim with the IRS: To receive a “refund of an overpayment of any tax imposed by this title in respect of which tax the taxpayer is required to file a return,” a refund claim must be filed no later than “3 years from the time the return was filed or 2 years from the time the tax was paid, whichever of such periods expires the later.” §6511(a). And §6511(b)(1) mandates that “[n]o credit or refund shall be allowed or made” if a claim is not filed within the time limits set forth in §6511(a). “Read together, the import of these sections is clear: unless a claim for refund of a tax has been filed within the time limits imposed by §6511(a), a suit for refund … may not be maintained in any court.” Dalm, supra, at 602. In 1978, Congress levied a tax “on coal from mines located in the United States sold by the producer,” 26 U. S. C. §4121(a)(1), and specifically applied this tax to coal exports, see §4221(a) (1994 ed.) (excepting from the general ban on taxing exports those taxes imposed under, inter alia, §4121). In 1998, a group of companies challenged the tax in the District Court for the Eastern District of Virginia, contending that it violated the Export Clause of the Constitution. That Clause provides that “No Tax or Duty shall be laid on Articles exported from any State.” Art. I, §9, cl. 5. The District Court agreed and held the tax unconstitutional. Ranger Fuel Corp. v. United States, 33 F. Supp. 2d 466, 469 (1998). The Government did not appeal, and the IRS acquiesced in the District Court’s holding. See IRS Notice 2000–28, 2000–1 Cum. Bull. 1116, 1116–1117 (IRS Notice). The respondents here, three coal companies, had all paid taxes on coal exports under §4121(a) “[s]ince as early as 1978.” App. to Pet. for Cert. 36a. After §4121(a) was held unconstitutional as applied to coal exports, the companies filed timely administrative claims in accordance with the refund scheme outlined above, seeking a refund of coal taxes they had paid in 1997, 1998, and 1999. The IRS refunded those taxes, with interest. The companies also filed suit in the Court of Federal Claims seeking a refund of $1,065,936 in taxes paid between 1994 and 1996. They did not file any claim for those taxes with the IRS; any such claim would of course have been denied, given the limits set forth in §6511. See IRS Notice, at 1117 (“Claims [for a refund of taxes paid under §4121] must be filed within the period prescribed by §6511”). Notwithstanding the failure of the companies to file timely administrative refund claims, the Court of Federal Claims allowed the companies to pursue their suit directly under the Export Clause. Jurisdiction rested on the Tucker Act, 28 U. S. C. §1491(a)(1), and the companies limited their claim to taxes paid within that statute’s 6-year limitations period, §2501 (2000 ed. and Supp. V). In allowing the companies to proceed outside the confines of the Internal Revenue Code refund procedures, the court relied on the decision of the Court of Appeals for the Federal Circuit in Cyprus Amax Coal Co. v. United States, 205 F. 3d 1369 (2000). Andalex Resources, Inc. v. United States, 54 Fed. Cl. 563, 564 (2002). The Court of Federal Claims did not, however, allow the companies to recover interest on the taxes paid under 28 U. S. C. §2411. That provision requires the Government to pay interest “for any overpayment in respect of any internal-revenue tax,” but the court held that the statute applied only to refund claims brought under the Code, not to claims brought directly under the Export Clause. 54 Fed. Cl., at 566. The Court of Appeals affirmed in part and reversed in part. It first refused to revisit its holding in Cyprus Amax, and therefore upheld the ruling that the companies could pursue their claim under the Export Clause, despite having failed to file timely administrative refund claims. 473 F. 3d 1373, 1374–1375 (CA Fed. 2007). The Court of Appeals reversed the Court of Federal Claims interest holding, however, finding that the Government was required to pay the companies interest on the 1994–1996 amounts under §2411. Id., at 1376. We granted certiorari, 552 U. S. __ (2007), and now reverse. II A The outcome here is clear given the language of the pertinent statutory provisions. Title 26 U. S. C. §7422(a) states that “[n]o suit … shall be maintained in any court for the recovery of any internal revenue tax alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund … has been duly filed with” the IRS. (Emphasis added.) Here the companies did not file a refund claim with the IRS for the 1994–1996 taxes, and therefore may bring “[n]o suit” in “any court” to recover “any internal revenue tax” or “any sum” alleged to have been wrongfully collected “in any manner.” Five “any’s” in one sentence and it begins to seem that Congress meant the statute to have expansive reach. Moreover, the time limits for filing administrative refund claims in §6511—set forth in an “unusually emphatic form,” United States v. Brockamp, 519 U. S. 347, 350 (1997)—apply to “any tax imposed by this title,” 26 U. S. C. §6511(a) (emphasis added). The statute further provides that “[n]o credit or refund shall be allowed or made after the expiration of the period of limitation prescribed in subsection (a) … unless a claim for credit or refund is filed by the taxpayer within such period.” §6511(b)(1). Again, this language on its face plainly covers the companies’ claim for a “refund” of “tax[es] imposed by” Title 26, specifically 26 U. S. C. §4121. The companies argue that these statutory provisions are ambiguous, Brief for Respondents 43–45, but we cannot imagine what language could more clearly state that taxpayers seeking refunds of unlawfully assessed taxes must comply with the Code’s refund scheme before bringing suit, including the requirement to file a timely administrative claim. Indeed, we all but decided the question presented over six decades ago in United States v. A. S. Kreider Co., 313 U. S. 443 (1941). Section 1113(a) of the Revenue Act of 1926, like the refund claim provision in §7422(a) of the current Code, prescribed that “[n]o suit or proceeding shall be maintained in any court for the recovery of any internal-revenue tax alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected until a claim for refund or credit has been duly filed with the Commissioner of Internal Revenue,” and established a time limit for bringing suit once the claim-filing requirement had been met. 44 Stat. 116. Like the companies here, A. S. Kreider had failed to file a tax-refund action within that limitations period. See 313 U. S., at 446. And, like the companies here, A. S. Kreider argued that it was instead subject only to the longer 6-year statute of limitations under the Tucker Act. Id., at 447. We rejected the claim, holding that the Tucker Act limitations period “was intended merely to place an outside limit on the period within which all suits must be initiated” under that Act, and that “Congress left it open to provide less liberally for particular actions which, because of special considerations, required different treatment.” Ibid. We held that the limitations period in §1113(a) was “precisely that type of provision,” finding that Congress created a shorter statute of limitations for tax claims because “suits against the United States for the recovery of taxes impeded effective administration of the revenue laws.” Ibid. If such suits were allowed to be brought subject only to the 6-year limitations period in the Tucker Act, we explained, §1113(a) would have “no meaning whatever.” Id., at 448. So too here. The refund scheme in the current Code would have “no meaning whatever” if taxpayers failing to comply with it were nonetheless allowed to bring suit subject only to the Tucker Act’s longer time bar. B The companies gamely argue for a different result here because the coal tax at issue was assessed in violation of the Export Clause of the Constitution. They spend much of their brief arguing that the Export Clause itself creates a cause of action against the Government, which can be brought directly under the Tucker Act. See Brief for Respondents 8–25. We need not decide this question here, because it does not matter. If the companies’ claims are subject to the Code provisions, those claims are barred whatever the source of the cause of action. We there- fore turn to the companies’ assertion that their claims are somehow exempt from the broad sweep of the Code provisions. The companies do not argue for such an exemption simply because their claims are based on a constitutional violation. As they acknowledge, id., at 34, a “constitutional claim can become time-barred just as any other claim can,” Block v. North Dakota ex rel. Board of Univ. and School Lands, 461 U. S. 273, 292 (1983). Further, Congress has the authority to require administrative exhaustion before allowing a suit against the Government, even for a constitutional violation. See, e.g., Ruckelshaus v. Monsanto Co., 467 U. S. 986, 1018 (1984); Christian v. New York State Dept. of Labor, 414 U. S. 614, 622 (1974); Aircraft & Diesel Equipment Corp. v. Hirsch, 331 U. S. 752, 766–767 (1947). These principles are fully applicable to claims of unconstitutional taxation, a point highlighted by what we have said in other cases about the Anti-Injunction Act. That statute commands that (absent certain exceptions) “no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court.” 26 U. S. C. §7421(a). The “decisions of this Court make it unmistakably clear that the constitutional nature of a taxpayer’s claim … is of no consequence” to whether the prohibition against tax injunctions applies. Alexander v. “Americans United” Inc., 416 U. S. 752, 759 (1974). This is so even though the Anti-Injunction Act’s prohibitions impose upon the wronged taxpayer requirements at least as onerous as those mandated by the refund scheme—the taxpayer must succumb to an unconstitutional tax, and seek recourse only after it has been unlawfully exacted. We see no reason why compliance with straightforward administrative requirements and reasonable time limits to seek a refund once a tax has been paid should lead to a different result. The companies assert that Export Clause claims in particular must be treated differently from constitutional claims in general. This is so, they argue, because the Clause is not simply a limitation on the taxing authority but a prohibition that “carves one particular economic activity completely out of Congress’s power.” Brief for Respondents 11. That distinction is without substance and totally manipulable: If the pertinent authority is regarded as the power to tax exports, the Clause is indeed a complete prohibition on congressional power. But if the pertinent authority is instead viewed as the “Power To lay and collect Taxes,” U. S. Const., Art. I, §8, cl. 1, then the Clause is properly regarded as a limitation on that power. We do not question the importance of the Export Clause to the success of the enterprise in Philadelphia in 1787, see Brief for Respondents 11–13, but we see no basis for treating taxes collected in violation of its terms differently from taxes challenged on other grounds. Indeed, the companies more or less give up the game when they acknowledge that their claims are subject to the Tucker Act’s statute of limitations. See id., at 34. The question is thus not whether the companies’ refund claim under the Export Clause can be limited, but rather which limitation applies. The companies are therefore left to argue that, despite the explicit and expansive statutory language described above, the refund scheme in Title 26 does not apply to their case as a matter of statutory interpretation. We find this ambitious argument unavailing. The companies seek to support it by characterizing the refund scheme set out in the Code as “pro-government and revenue-protective,” and therefore “constitutionally dubious” as applied to Export Clause cases. Id., at 28–29. Given this potential constitutional infirmity, the companies argue, Congress could not have intended the refund scheme to apply to taxes assessed in violation of the Export Clause. See Ashwander v. TVA, 297 U. S. 288, 341 (1936) (Brandeis, J., concurring). We disagree. To begin with, any argument that Congress did not mean to require those in the companies’ position to comply with the tax refund scheme runs into a powerful impediment, for “[t]he ‘strong presumption’ that the plain language of the statute expresses congressional intent is rebutted only in ‘rare and exceptional circumstances.’ ” Ardestani v. INS, 502 U. S. 129, 135 (1991) (quoting Rubin v. United States, 449 U. S. 424, 430 (1981)). As we have already explained, the language of the relevant statutes emphatically covers the facts of this case. In any event, we see no constitutional problem at all. Congress has indeed established a detailed refund scheme that subjects complaining taxpayers to various requirements before they can bring suit. This scheme is designed “to advise the appropriate officials of the demands or claims intended to be asserted, so as to insure an orderly administration of the revenue,” United States v. Felt & Tarrant Mfg. Co., 283 U. S. 269, 272 (1931), to provide that refund claims are made promptly, and to allow the IRS to avoid unnecessary litigation by correcting conceded errors. Even when the constitutionality of a tax is challenged, taxing authorities do in fact have an “exceedingly strong interest in financial stability,” McKesson Corp. v. Division of Alcoholic Beverages and Tobacco, Fla. Dept. of Business Regulation, 496 U. S. 18, 37 (1990), an interest they may pursue through provisions of the sort at issue here. We do not see why invocation of the Export Clause would deprive Congress of the power to protect this “exceedingly strong interest.” Congress may not impose a tax in violation of the Export Clause (or any other constitutional provision, for that matter). But it is certainly within Congress’s authority to assure that allegations of taxes unlawfully assessed—whether the asserted illegality is based upon the Export Clause or any other provision of law—are processed in an orderly and timely manner, and that costly litigation is avoided when possible. The companies’ claim that the Code procedures are themselves excessively burdensome is belied by the companies’ own invocation of those procedures for taxes paid within the Code’s limitations period, which resulted in full refunds with interest. C As a fallback argument, the companies maintain that even if the refund scheme applies to Export Clause cases generally, it does not “apply to taxes that are, on their face, unconstitutional.” Brief for Respondents 39. They rely for this proposition on Enochs v. Williams Packing & Nav. Co., 370 U. S. 1 (1962), a case dealing with the Anti-Injunction Act, 26 U. S. C. §7421(a). Despite that Act’s broad and mandatory language, we explained that “if it is clear that under no circumstances could the Government ultimately prevail, … the attempted collection may be enjoined if equity jurisdiction otherwise exists. In such a situation the exaction is merely in ‘the guise of a tax.’ ” 370 U. S., at 7 (quoting Miller v. Standard Nut Margarine Co. of Fla., 284 U. S. 498, 509 (1932)). See also Bob Jones Univ. v. Simon, 416 U. S. 725, 745–746 (1974) (reaffirming the “under no circumstances” rule of Williams Packing). On the force of Williams Packing, the companies argue that the refund scheme should similarly be read as inapplicable to situations in which there are “no circumstances” under which the tax imposed could be held valid under the Export Clause. The trouble with this is that §7422, the primary statute governing the refund process, is written much more broadly than §7421(a), the statute at issue in Williams Packing. Section §7422(a) states that “[n]o suit … shall be maintained in any court for the recovery of any internal revenue tax alleged to have been erroneously or illegally assessed or collected … until a claim for refund or credit has been duly filed with the” IRS. (Emphasis added.) This language generally tracks that of the Anti-Injunction Act, which also applies to suits “restraining the assessment or collection of any tax.” §7421(a) (emphasis added). But §7422(a) goes on to apply its prohibition against suit absent a proper refund claim to “any sum alleged to have been excessive or in any manner wrongfully collected.” (Emphasis added.) Even if we agreed that a facially unconstitutional tax for purposes of the tax refund scheme is “merely in ‘the guise of a tax,’ ” Williams Packing, supra, at 7 (quoting Standard Nut Margarine, supra, at 509), and therefore not a “tax alleged to have been erroneously or illegally assessed or collected,” §7422(a), it would nevertheless clearly fall into the broader category of “any sum … in any manner wrongfully collected,” ibid. Moreover, even if we were to accept the companies’ argument that the “under no circumstances” limitation on the Anti-Injunction Act applies to the refund scheme, they still would not prevail. We made clear in Williams Packing that “the question of whether the Government has a chance of ultimately prevailing is to be determined on the basis of the information available to it at the time of suit. Only if it is then apparent that, under the most liberal view of the law and the facts, the United States cannot establish its claim, may the suit for an injunction be maintained.” 370 U. S., at 7. A tax injunction suit, of course, is brought at the time the Government attempts to assess a tax on the taxpayer. Thus, if we applied the Williams Packing “under no circumstances” rule to the refund scheme, we would judge the Government’s chances of success as of the time the tax was assessed. In this case, the companies seek refunds for taxes paid between 1994 and 1996. At that time, the scope of the Export Clause was sufficiently debatable that we granted certiorari in 1996, see United States v. International Business Machines Corp., 517 U. S. 843, and again in 1998, see United States v. United States Shoe Corp., 523 U. S. 360, to clear it up. What is more, the District Court that struck down the application of §4121(a) to coal exports partially relied on these cases in arriving at its decision, Ranger Fuel Corp., 33 F. Supp. 2d, at 469, and the IRS cited, inter alia, International Business Machines, supra, in its acquiescence notice, see IRS Notice, at 1116. Indeed, we would think that if the unconstitutionality of the coal export tax were so obvious that the Government had no chance of prevailing, someone paying the tax—such as these companies—would have successfully challenged it earlier than 20 years after its enactment. We therefore hold that the plain language of 26 U. S. C. §§7422(a) and 6511 requires a taxpayer seeking a refund for a tax assessed in violation of the Export Clause, just as for any other unlawfully assessed tax, to file a timely administrative refund claim before bringing suit against the Government. Because we find that the Court of Appeals erred in allowing the companies to bring suit seeking a refund for the 1994–1996 taxes, we do not reach the question whether the Court of Appeals also erred in awarding the companies interest on those amounts under 28 U. S. C. §2411. The judgment of the Court of Appeals is reversed. It is so ordered.
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The Internal Revenue Code requires a taxpayer seeking a refund of taxes unlawfully assessed to file an administrative claim with the Internal Revenue Service (IRS) before filing suit against the Government, see 26 U. S. C. §7422(a). Such claim must be filed within three years of the filing of a tax return or two years of the tax’s payment, whichever is later, see §6511(a). In contrast, the Tucker Act allows claims to be brought against the Government within six years of the challenged conduct. Respondent coal companies paid taxes on coal exports under a portion of the Code later invalidated under the Export Clause of the Constitution. They filed timely administrative claims and recovered refunds of their 1997–1999 taxes, but sought a refund of their 1994–1996 taxes in the Court of Federal Claims without complying with the Code’s refund procedures. Nevertheless, the court allowed them to proceed directly under the Export Clause and the Tucker Act. Affirming in relevant part, the Federal Circuit ruled that the companies could pursue their Export Clause claim despite their failure to file timely administrative refund claims. Held: The plain language of 26 U. S. C. §§7422(a) and 6511 requires a taxpayer seeking a refund for a tax assessed in violation of the Export Clause, just as for any other unlawfully assessed tax, to file a timely administrative refund claim before bringing suit against the Government. Pp. 4–12. (a) Because the companies did not file a refund claim with the IRS for the 1994–1996 taxes, they may, under §7422(a), bring “[n]o suit” in “any court” to recover “any internal revenue tax” or “any sum” alleged to have been wrongfully collected “in any manner.” Moreover, §6511’s time limits for filing administrative refund claims—set forth in an “unusually emphatic form,” United States v. Brockamp, 519 U. S. 347, 350—apply to “any tax imposed by [Title 26],” §6511(a) (emphasis added). Contrary to the companies’ claim that these statutes are ambiguous, the provisions clearly state that taxpayers must comply with the Code’s refund scheme before bringing suit, including the filing of a timely administrative claim. Indeed, this question was all but decided in United States v. A. S. Kreider Co., 313 U. S. 443, where the Court held that the limitations period in the Revenue Act then in effect, not the Tucker Act’s longer period, applied to tax refund actions. As was the case there, the current Code’s refund scheme would have “no meaning whatever,” id., at 448, if taxpayers failing to comply with it were nonetheless allowed to bring suit subject only to the Tucker Act’s longer time bar. Pp. 4–6. (b) The companies nonetheless assert that their claims are exempt from the Code provisions’ broad sweep because the claims derive from the Export Clause. The principles that a “constitutional claim can become time-barred just as any other claim can,” Block v. North Dakota ex rel. Board of Univ. and School Lands, 461 U. S. 273, 292, and that Congress has the authority to require administrative exhaustion before allowing a suit against the Government, even for a constitutional violation, see, e.g., Ruckelshaus v. Monsanto Co., 467 U. S. 986, 1018, are fully applicable to unconstitutional taxation claims. The companies’ attempt to distinguish Export Clause claims on the ground that the Clause is not simply a limitation on taxing authority but a prohibition carving particular economic activity out of Congress’s power is without substance and totally manipulable. There is no basis for treating taxes collected in violation of that Clause differently from taxes challenged on other grounds. Because the companies acknowledge that their claims are subject to the Tucker Act’s time bar, the question is not whether their refund claim can be limited, but rather which limitation applies. Their argument that, despite explicit and expansive statutory language, the Code’s refund scheme does not apply to their case as a matter of statutory interpretation is unavailing. They claim that Congress could not have intended it to apply a “constitutionally dubious” refund scheme to taxes assessed in violation of the Export Clause, but the statutory language emphatically covers the facts of this case. In any event, there is no constitutional problem. Congress’s detailed scheme is designed “to advise the appropriate officials of the demands or claims intended to be asserted, so as to insure an orderly administration of the revenue,” United States v. Felt & Tarrant Mfg. Co., 283 U. S. 269, 272, to provide that refund claims are made promptly, and to allow the IRS to avoid unnecessary litigation by correcting conceded errors. Even when a tax’s constitutionality is challenged, taxing authorities have an “exceedingly strong interest in financial stability,” McKesson Corp. v. Division of Alcoholic Beverages and Tobacco, Fla. Dept. of Business Regulation, 496 U. S. 18, 37, that they may pursue through provisions of the sort at issue. There is no reason why invoking the Export Clause would deprive Congress of the power to protect this interest. The companies’ claim that the Code procedures are excessively burdensome is belied by their own invocation of those procedures for taxes paid within the Code’s limitations period, which resulted in full refunds with interest. Pp. 6–10. (c) The companies’ fallback argument—that even if the refund scheme applies to Export Clause cases generally, it does not apply when taxes are unconstitutional on their face—is rejected. Enochs v. Williams Packing & Nav. Co., 370 U. S. 1, distinguished. Pp. 10–12. 473 F. 3d 1373, reversed. Roberts, C. J., delivered the opinion for a unanimous Court.
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Background Overview of Federal Disability Benefit Programs The Social Security Administration administers two main programs that provide benefits to individuals with disabilities: SSI and DI. Adults are generally considered disabled if (1) they cannot perform work that they did before; (2) they cannot adjust to other work because of their medical condition(s); and (3) their disability has lasted, or is expected to last, at least 1 year or is expected to result in death. SSI is a means-tested income assistance program that provides monthly cash benefits to individuals who are disabled, blind, or aged and meet, among other things, the program’s assets and income restrictions. In fiscal year 2015, SSA expects to pay an estimated $60 billion in SSI benefits to about 8.5 million recipients. SSA’s primary disability program, the DI program, provides monthly cash benefits to adults not yet at full retirement age when the individual is disabled and has worked long enough to qualify for disability benefits. In fiscal year 2015, SSA expects to pay an estimated $147 billion in DI benefits to about 11 million workers with disabilities and their spouses and dependents. Some disability recipients receive both SSI and DI benefits because of their work history and the low level of their income and resources. SSA expects costs for these programs to increase in the coming years. SSA’s Disability Determination Process SSA’s disability determination process is complex and involves offices at the federal and state level (see fig.1). The process begins at an SSA field office, where a staff member determines whether a claimant meets the programs’ nonmedical eligibility criteria. Claims from individuals meeting these criteria are then evaluated by state DDS staff, who review medical and other evidence and make the initial disability decision. SSA funds the DDSs, which are run by the states, to process disability claims in accordance with SSA regulations, policies, and guidelines. Some DDSs may be independent state agencies, while others may be part of other state agencies with broader missions, such as departments of human services. If an initial claim is denied, claimants have several opportunities for appeal within SSA, starting with a reconsideration; then a hearing before an SSA administrative law judge (ALJ); and finally at the Appeals Council, which is SSA’s final administrative appeals level. If the claimant is determined to be eligible for SSI or DI, SSA will calculate the benefit amount and begin to pay benefits. A claimant may also be entitled to past-due benefits for the months in which his or her SSI or DI cash payments were pending during the disability decision-making process. Role of Appointed Representatives Claimants may choose to appoint a representative to assist them through the disability application process and in their interactions with SSA. Appointed representatives can be attorneys or nonattorneys, and, as long as they meet SSA’s requirements for representatives, their experience can range from being a family member appointed as a representative on a one-time basis to a professional representative working at a for-profit or nonprofit organization. A representative may act on a claimant’s behalf in a number of ways, including helping the claimant complete the disability application, obtaining and submitting evidence in support of a claim, and supporting the claimant during the hearings and appeals process. To appoint a representative, a claimant must sign a written notice appointing the individual to be his or her representative in dealings with SSA and file the notice with SSA. Representatives can file this notice using a standard form, which contains the name and address of the representative. The standard form also indicates whether and how the representative would like to be paid—by the claimant, directly by SSA out of a claimant’s past-due benefits (known as a direct payment), or by a third party. Representatives have commonly been involved at SSA’s hearings and Appeals Council levels, but evidence suggests that representatives have become increasingly involved at the initial stage of the disability determination process. SSA data compiled for this report show that the proportions of SSI and DI claims with a representative at the initial level increased between 2004 and 2013. From 2004 to 2013, initial SSI claims with a representative increased dramatically, from almost 11,000 claims in 2004 (less than 1 percent of all initial SSI claims) to about 278,000 claims in 2013 (about 14 percent of claims). Initial DI claims with a representative also increased over the same time period, from almost 100,000 claims (about 8 percent of claims) to more than 413,000 claims (about 20 percent of claims). (See fig. 2.) In 2013, two-thirds of the representatives associated with initial claims were attorneys and one-third were nonattorneys. These trends may, in part, reflect legislative actions that expanded payment options for representatives in the disability determination process. For example, the Social Security Protection Act of 2004 temporarily allowed attorney representatives to receive direct payments from SSA, out of claimants’ past-due benefits, for SSI claims, and also required a demonstration project under which SSA’s direct payment system applied to qualified nonattorney representatives. These policy changes were made permanent in 2010. SSI/DI Advocacy Initiated by States, Counties, and Other Third Parties States and counties have engaged in SSI/DI advocacy efforts for years because it can benefit individuals with disabilities as well as the state and counties. When states are successful in helping eligible individuals on state- or county-administered assistance programs navigate the complex disability application process and obtain federal disability benefits, the individuals and their families not only may generally receive a higher monthly income but can also potentially receive benefits on a long-term basis. At the same time, successful SSI/DI advocacy efforts allow states to reduce benefit costs or reinvest cost savings into expanding services or serving other individuals. The financial incentives for states to pursue SSI/DI advocacy increased in two ways with the creation of the TANF program in 1996 and subsequent changes to TANF requirements. As some researchers noted, under the former program, Aid to Families with Dependent Children, states received less than half of any savings achieved through transferring individuals to SSI. Under TANF, however, states retain the savings from federal and state funds that would have been used to support those individuals and can use those funds for other allowable benefits or services. At the same time, the new work participation requirements of the TANF program required a percentage of each state’s caseload to participate in employment-related activities. States that do not meet required work participation rates are at risk of having their annual TANF block grants reduced. Therefore, the work requirements provided incentives for states to remove certain families from the calculation of the work participation rate, including individuals with disabilities who have significant barriers to work. States have taken different approaches to SSI/DI advocacy. Some states designate state employees to provide SSI/DI advocacy services, while others contract with for-profit or nonprofit organizations or legal aid groups. Some states do not have SSI/DI advocacy programs at all. Furthermore, some SSI/DI advocacy efforts are at the county or local level. In addition to states and counties, other third parties—such as hospitals and private insurance companies—also contract for SSI/DI advocacy services. For example, hospitals contract with companies to obtain reimbursement for medical care provided to patients who do not have health insurance by helping patients establish eligibility for various federal, state, and county programs, such as SSI and Medicaid. Insurance companies may also contract with companies to help individuals receiving long-term disability benefits apply for federal disability benefits, in part because federal disability benefits can reduce the amount the insurance company must pay. State Assistance Programs Serving Individuals Who May Qualify for Federal Disability Benefits States—and county and local governments, in some cases—administer a number of assistance programs for low-income individuals and families, some of whom have disabilities that may qualify them for federal disability programs. In many instances, these low-income individuals can qualify for SSI due to their income and assets, among other factors. Some may also qualify for DI benefits, if they have a sufficient work history. As a result, states may direct SSI/DI advocacy services to people receiving benefits from any of the following programs: TANF: This federal block grant provides funds to states for a wide range of benefits and services, including state cash assistance programs for needy families with children. TANF is administered by HHS’s Administration for Children and Families at the federal level and by state and, in some cases, county agencies. State TANF programs provide temporary, monthly cash payments to low-income families with children while preparing parents for employment. A percentage of each state’s caseload must participate in a minimum number of hours of employment-related activities unless they are exempt. State General Assistance: These programs provide cash assistance to poor individuals who do not qualify for other assistance programs (e.g., they do not have children and are not elderly). As of January 2011, 30 states had General Assistance programs, and most states require individuals to be unemployable generally because of a physical or mental condition. Other State Assistance Programs: Other populations or programs states may target for SSI/DI advocacy include, for example, homeless individuals or individuals receiving state medical assistance or foster care payments. Interim Assistance Reimbursement to States Some states may receive funds from SSA, known as Interim Assistance Reimbursement (IAR), for assistance they provide (i.e., cash assistance provided through state programs like General Assistance to meet basic needs) to an individual who is waiting for approval of SSI benefits. If the individual’s SSI claim is successful, SSA uses the claimant’s past-due benefits to reimburse the state for this interim assistance. States may, in turn, use these funds to finance their SSI/DI advocacy efforts. To qualify for reimbursement, any interim assistance an individual receives while awaiting SSA’s decision must be funded only from state or local funds. Interim assistance payments to a needy individual that contain any federal funds do not qualify for reimbursement. For example, IAR is generally not payable to states for assistance payments related to programs like Medicaid and TANF because the federal government partially funds these programs. To participate in the IAR program, a state must have an IAR agreement with SSA and a written authorization from the individual allowing SSA to reimburse the state from his or her past-due benefits. As of 2014, 36 states and the District of Columbia have IAR agreements with SSA. Little Is Known About the Extent of Advocacy Contracts, but Evidence Suggests Such Contracts Account for a Small Proportion of Claims Nationwide Limited Information Exists, but We Identified 16 States with Some Type of SSI/DI Advocacy Contract in 2014 Little is known about the extent to which states or counties contract for SSI/DI advocacy services. While SSA has oversight of the federal SSI and DI programs, officials told us that they do not know which states or counties are contracting for SSI/DI advocacy services, in part because that information is not necessary to achieve SSA’s mission, which includes delivering retirement, survivor, and disability benefits and services to eligible individuals and their families. While SSA collects some data on representatives working on behalf of claimants, it does not collect information on whether these representatives are working under contract to a state or county. Similarly, HHS has oversight of the federal TANF program and collects information about how states use TANF block grant funds but, according to HHS officials, the agency does not have statutory authority to collect information on states’ contracts for SSI/DI advocacy. In addition to the absence of comprehensive data from SSA and HHS, it is difficult to determine the extent of these contracts nationwide because this practice is diffused among different agencies and different levels of government, depending on the state. Furthermore, we did not identify research that provides a national picture of state SSI/DI advocacy contracting practices. For example, one study we reviewed looked at the overlap between the TANF and SSI populations, but it was not the purpose of the study to examine the extent to which states were contracting for SSI/DI advocacy services. The study did not include recipients of other benefit programs, like state-funded General Assistance, that we found were commonly served by SSI/DI advocacy contracts. Despite limited national-level data, we identified at least 16 states, as of August 2014, that had some type of active contract or grant for SSI/DI advocacy in 2014: California, Colorado, Delaware, Hawaii, Massachusetts, Minnesota, Nevada, New York, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, Tennessee, Virginia, and Wisconsin. (See fig. 3.) Half of the 16 states we identified contracted with multiple organizations in 2014, including for-profit, nonprofit, and legal aid organizations, according to state and county officials we contacted. For example, according to state officials, the Wisconsin Department of Children and Families contracted with 8 organizations (both for-profit and nonprofit) for SSI/DI advocacy services, with each covering different geographic areas, as part of a larger contract for TANF employment support services. At the same time, 7 states reported they had a state contract or grant with a single nonprofit or legal aid organization. For example, Tennessee officials stated they provided a grant to a legal aid organization to work with about 100 TANF recipients per year who may be eligible for federal disability benefits. Within states, we identified SSI/DI advocacy contracts at different levels of government. In several states, we identified only county-level contracts (see fig. 3), and in one state, New York, we identified at least one contract at the state, county, and city level. Specifically, according to state officials, New York had a statewide Disability Advocacy Program that provided grants to a group of nonprofit and legal aid organizations to help individuals appeal their claim after it was initially denied. Westchester County also had a contract with a for-profit organization for SSI/DI advocacy. In addition, officials from New York City’s Wellness, Comprehensive Assessment, Rehabilitation and Employment (WeCARE) program reported that they contract with two nonprofit organizations to provide SSI/DI advocacy services. We also observed recent changes in states’ SSI/DI advocacy contracting practices. We identified multiple states that have ended, or plan to end, their SSI/DI advocacy contracts, and at least one state that is planning to renew a contract it ended several years ago. Several state officials and experts cited reasons for ending or renewing SSI/DI advocacy contracts, including financial considerations. For example, according to state officials, Maryland had a contract for over a decade with an organization to work with TANF recipients who may be eligible for federal disability benefits. The state paid this organization for each disability application submitted; however, state officials told us they ended this contract in 2009 because it was no longer financially practical. According to state officials, in 2014, the state planned to issue a new request for proposals for SSI/DI advocacy that will only pay the contractor for approved claims. Officials told us that they expect that the performance-based compensation structure of the contract will make it financially practical again. In contrast, officials in Delaware told us they had a contract with a single nonprofit organization for about 6 years to work with TANF recipients, but the contract expires in 2014 and will not be renewed due to the relatively low success rate achieved by the contractor. After the contract expires, state employees will provide these services instead, which officials believe will be a better use of resources. Similarly, we identified two additional states that have opted to have state employees provide SSI/DI advocacy services. State SSI/DI Advocacy Contracts May Account for a Small Proportion of Disability Claims Nationwide, but Other Third-Party Contracts May Be More Prevalent While state and county SSI/DI advocacy contracts may account for a small proportion of disability claims nationwide, SSI/DI advocacy contracts held by other third parties, such as hospitals and long-term disability insurance companies, may be more prevalent. Since information on SSI/DI advocacy contracts is not available in SSA’s databases, and data on representatives, in general, are limited, we used available data from a 2014 SSA OIG report to estimate the percentage of claims associated with SSI/DI advocacy contracts. Specifically, these data indicate that nonattorney representatives working on behalf of a government entity accounted for an estimated 5 percent of all initial SSI and DI claims with nonattorney representatives adjudicated in 2010. Claims from these government SSI/DI advocacy contracts represent about 1 percent of all initial SSI and DI claims in 2010. By comparison, data indicate that claims associated with contracts held by other third parties—specifically, hospitals and long-term disability insurance companies—were more prevalent, accounting for an estimated 30 percent of initial SSI and DI claims with nonattorney representatives adjudicated in 2010. (See fig. 4.) Selected Sites Represented Different Approaches to SSI/DI Advocacy but Were Similar in Many Respects We selected three sites—Hawaii; Minnesota; and Westchester County, New York—to illustrate different approaches to SSI/DI advocacy, in terms of the number and types of organizations they contracted with and geographic coverage. Despite these differences, however, the three sites were similar in many respects. For example, all three sites articulated a similar goal for their SSI/DI advocacy contracts, targeted similar populations, and generally paid SSI/DI advocacy contractors only for approved claims, among other similarities (see table 1). See appendix II for more detailed information on each site. Each site articulated a two-part goal for its SSI/DI advocacy contract: maximizing assistance for individuals with disabilities while also reducing state or county expenditures. Helping individuals on state or county benefits apply for Social Security disability benefits is allowable under current program rules and may result in greater financial support to individuals and their families if they are eligible. In all three sites, the maximum SSI disability benefit was higher than the maximum benefit provided by General Assistance or TANF. For example, Minnesota officials explained that Minnesota’s General Assistance benefits are lower than SSI. In addition, individuals receiving SSI may also be eligible for other support programs, such as medical assistance and food assistance. At the same time, officials from all three sites told us that moving individuals off state benefit programs and onto federal disability programs has financial benefits for the state or county. As discussed earlier, when the federal government pays the SSI or DI benefits, states can use the funds saved for other purposes, such as expanding services or serving other individuals. Populations Served All three sites targeted SSI/DI advocacy services to General Assistance and TANF populations. Each site also targeted recipients of at least one other program. For example, in addition to General Assistance and TANF, Minnesota’s contract specified that recipients of a state-funded Group Residential Housing program are eligible for SSI/DI advocacy services. In another example, Westchester County’s contract included children in foster care who may be eligible for SSI. Services Provided The contractors we selected in the three sites generally reported providing similar services to the state or county, and to claimants, including performing an initial disability screening, assisting with filling out the SSI and/or DI application, and representing the claimant throughout the disability determination process. Each of the contractors reported receiving referrals from sources such as state or county caseworkers or TANF employment services contractors and then screening these individuals to identify those likely to meet Social Security disability criteria. For example, the Westchester County contractor receives monthly lists of individuals receiving General Assistance or TANF benefits who have been determined to be unable to work due to a disability. Contractor officials mail a letter to individuals on these lists, introducing their services and inviting individuals to call their toll-free number to set up an initial screening. Similarly, Hawaii’s SSI/DI advocacy subcontractor reported that, under the new contract, it will receive referrals from the primary state contractor. The screening process varied across contractors; some had structured tools to guide the process while others had a more informal initial intake appointment. The four contractors we selected reported a wide range in the percentage of referrals for which applications were filed, from less than 20 percent for one contractor to over 90 percent for another. Further, contractors reported a range of approval rates, and the contractor that likely filed applications for the smallest percentage of referred individuals reported achieving the highest approval rates at SSA (over 80 percent) of the contractors for which we obtained data. However, there are a number of factors contributing to these rates that we could not examine, such as the nature and quality of the referrals and the level of the claimant’s participation in the process. Two of the contractors noted that screening out obviously ineligible individuals benefits SSA in that the contractors are not contributing to SSA workloads by submitting claims unlikely to be approved. After the contractors determine that an individual is potentially eligible for federal disability benefits, they assist him or her with completing an application for SSI and/or DI. With the claimant’s permission, staff from these organizations also become the claimant’s appointed representative, which allows the staff person to interact with SSA on behalf of the claimant during the disability determination process. Representatives from these organizations told us they generally focus on gathering and summarizing available medical evidence rather than providing referrals to doctors and specialists to obtain new medical evidence. The contractors reported that they generally file concurrent applications for SSI and DI. They generally file the DI application online, but they differed in how they filed the SSI application. Two of the organizations we selected—the for- profit contractor in Minnesota and the contractor in Westchester County— reported filling out the SSI application on the claimant’s behalf, while the other two organizations reported sending or accompanying the claimant to the SSA field office to file the application. The organizations also reported supporting claimants up to the hearings and Appeals Council levels, if necessary. See table 2 for a comparison of the SSI/DI advocacy services the contractors in our three selected sites reported providing. The representatives in each site generally reported interacting frequently with local SSA field offices and, to a lesser extent, the state DDS, in conducting their SSI/DI advocacy work. For example, the for-profit contractor we selected in Minnesota had offices across the street from SSA’s Minneapolis field office, and representatives from this contractor reported hand-delivering SSI paper applications. In another example, officials from the Westchester County contractor reported having good working relationships with all of the SSA field offices in the county, noting that their representatives typically talk with field office staff daily by phone. Staff we interviewed in each of the local field offices we selected generally had positive feedback on their interactions with representatives from the selected SSI/DI advocacy contractors. For example, they noted that the representatives are helpful and easier to get in touch with or more responsive than other representatives. In addition, staff we interviewed generally said that claims submitted by these representatives are of equal or better quality than claims submitted by other representatives. In general, the DDS staff we interviewed did not express an opinion on the responsiveness of the representative or on the overall quality of claims. Compensation In each site, SSI/DI advocacy contractors were generally paid only for disability claims that SSA approved. Payments ranged from $900 to $3,000 per approved claim. One site paid the same amount for an approved claim, regardless of the level of the adjudication process in which it was approved, while contractors in two sites were paid higher amounts for claims approved at the reconsideration and/or hearings or Appeals Council levels. Two of the sites—Minnesota and Westchester County, New York—also offered payments for assisting claimants undergoing continuing disability reviews, which SSA conducts to determine whether individuals receiving benefits continue to meet program disability requirements. Hawaii was unique among the three sites in that the state paid the primary contractor a set monthly fee but the primary contractor paid the SSI/DI advocacy subcontractor per approved claim. The relatively “flat fee” compensation structure in the SSI/DI advocacy contracts differs from SSA’s direct payment structure and may create an incentive for representatives to submit claims that can be favorably decided in a more timely manner. Whereas selected SSI/DI advocacy contractors’ fees are a set amount, regardless of how long it takes to decide a claim, under the Social Security Act eligible representatives can elect to be paid by SSA directly out of a claimant’s past-due benefits and potentially earn more when claims take longer to be approved. Their fee is a maximum of 25 percent of the past-due benefits for approved claims, up to $6,000. Funding Sources All sites at least partially offset the costs of their advocacy contracts with federal Interim Assistance Reimbursement (IAR) funds from SSA. In two of the sites—Hawaii and Minnesota—officials reported that they received more IAR money than they spent on their SSI/DI advocacy contracts. Through the IAR program, SSA reimburses participating states for the assistance they provided to individuals while awaiting the approval of SSI benefits. In order for the state to receive reimbursement, the state must have the claimant sign a written authorization that allows the state to be paid out of the claimant’s past-due benefits. Approved Claims The number of individuals moved onto federal disability programs as a result of the SSI/DI advocacy contracts in all three sites accounted for a small percentage of the total number of approved SSI and DI claims in their respective states or county. Specifically, Minnesota was the largest of the three sites in all respects: amount paid under the contract, geographic reach, and number of approved claims. Yet the 1,112 claims approved statewide in state fiscal year 2013 was relatively small compared to the roughly 24,000 disability claims approved by SSA in the state in calendar year 2012, the most recent year available. Similarly, Hawaii and Westchester County’s 342 and 136 claims approved in state fiscal or contract year 2013, respectively, each represented small proportions of all disability claims approved by SSA in the state or county in calendar year 2012. SSA’s Controls over Representatives Providing SSI/DI Advocacy Services to States and Other Third Parties Are Limited SSA Does Not Have Specific Controls and Readily Available Data on Representatives, Particularly Those Paid by States and Other Third Parties SSA has a number of controls in place—including rules and regulations—related to appointed representatives in the disability determination process, but it does not have controls specific to organizations providing SSI/DI advocacy services to states and other third parties. SSA’s existing controls over representatives include broad guidelines regarding who may represent disability claimants, including qualifications for attorneys and nonattorneys. SSA regulations also set forth specific rules of conduct that apply to all representatives. For example, representatives are required, with reasonable promptness, to obtain evidence in support of the claim, submit such evidence as soon as practicable, help claimants respond to requests for information from SSA as soon as practicable, and to be familiar with relevant laws and regulations. Representatives are prohibited from, among other things, knowingly collecting any fees in violation of applicable law or regulation. In addition, nonattorney representatives who wish to be eligible for direct payment of their fees out of a claimant’s past-due benefits also must satisfy a number of statutory criteria. Nonattorney representatives who do not wish to be eligible for direct payment of their fees, such as those waiving direct payment and working under contract to a state or county, do not have to satisfy these criteria but are still required by SSA’s regulations to be capable of giving valuable help to claimants and to have good character and reputation. SSA’s controls apply to individual representatives, and not to the organizations they work for, including those under contract to states or other third parties, because SSA only conducts business with and recognizes individuals as representatives. In 2008, SSA issued proposed rules that would have recognized organizations, in addition to individuals, as representatives. In other words, under the proposed rules a claimant could appoint an organization or firm to represent them rather than a single individual from that organization. In the proposed rules, SSA stated that the business practices of those who represent claimants have changed, and many representatives practice in group settings and provide their services collectively to claimants. However, the agency did not issue final rules on this topic. SSA officials told us that they still believe that having organizations serve as appointed representatives would be beneficial, but the agency would face challenges implementing this change, including modifying SSA’s current data systems. SSA also does not have readily available data on representatives, particularly those paid by third parties. Specifically, SSA’s current data on representatives are limited, kept in separate systems, and are not used to monitor or report trends on claims with representatives (see table 3). In particular, SSA collects less information about representatives the agency does not directly pay out of claimants’ past-due benefits, and information on these representatives is not tracked in SSA’s data systems. Federal government internal control standards state that agencies should have adequate access to timely data and information, and mechanisms in place for routinely assessing risks related to interactions with entities and parties outside the government that could affect agency operations. In order to make timely and accurate decisions, identify trends, and assess risks—including those related to program integrity—SSA needs ongoing and up-to-date information on representatives. This is particularly important given that representatives have become increasingly involved at the initial levels of the disability determination process, according to our analysis of SSA data. SSA Has Several Initiatives That Could Improve Information on Representatives but Uncertainties Exist SSA has several efforts under way to improve its collection and use of data as well as its ability to assess risks related to representatives. First, SSA recently initiated the Registration, Appointment, and Services for Representatives project, with the goal of providing staff more accurate, up-to-date information about the representatives who assist claimants in the disability process. SSA officials stated that the agency currently captures information on representatives in separate, stand-alone systems that are not well-integrated, which has resulted in concerns about payment inefficiencies and privacy. SSA plans to integrate information from the various systems on representatives, creating one system as the sole source for information on representatives. SSA officials told us that the agency may identify new data elements related to representatives to capture in the system, such as the organizations they are associated with, but there currently is no plan to collect this information. Another facet of this initiative involves giving representatives expanded access to the disability eFolder, SSA’s electronic system containing all of the documents pertaining to a disability claim. Once implemented, authorized and registered representatives will have the ability to view documents for their clients contained in the eFolder and download and print them. Officials from two professional organizations of representatives and some SSA staff we interviewed reported that giving representatives access to the eFolder would be beneficial. By requiring representatives to register to gain access, SSA could gather more information on representatives. According to SSA’s vision statement for this project, successful implementation would provide SSA more readily available data—and enhanced abilities to respond to management requests for information—on representatives. However, as of September 2014, SSA officials reported that this project is in the early planning phase, future funding is uncertain, and no timeline for completion has been established. Enhanced collection and use of data on appointed representatives may also be important for planned initiatives related to the detection of potential fraud. SSA is in the early stages of exploring computerized tools to enhance efforts to systematically detect potential fraud. Using data from recent alleged fraud cases involving representatives, SSA plans to use computer analytics to examine various characteristics of disability claims and determine those which may be fraudulent. Known as predictive analytics, these computer systems and tools can help identify patterns of potentially fraudulent disability claims. However, as discussed earlier, SSA does not consistently collect some data that may aid in its analytics effort, such as information on the organizations or firms with which individual representatives may be associated. The absence of readily available data on representatives hinders SSA’s ability to detect patterns of potential fraud. Specifically, SSA’s current data systems do not allow staff to identify, in a timely manner, large volumes of claims with the same representative and the same impairments, which can be a risk factor for potential fraud, according to SSA officials we interviewed. SSA Does Not Coordinate with Third Parties Contracting for SSI/DI Advocacy, Which May Result in Overpayments SSA does not coordinate its direct payments to representatives with states and other third parties that might also pay representatives. As a result, it is possible that both SSA and a state or third party could pay the representative, resulting in more than one payment. More specifically, under the current system of payments, a representative working under contract to a state could (1) request direct payment from SSA (deducted from the claimant’s past-due benefits) for representing a particular claimant, and (2) also submit an invoice to the state requesting payment under the terms of the SSI/DI advocacy contract. Generally, SSA prescribes the maximum fee allowed, and representatives may not knowingly collect more than the fee that SSA authorizes them to receive for a case. However, we found that in cases involving SSI/DI advocacy payments, representatives might be able to collect payments from the state as well as through SSA fee withholding, totaling more than the authorized amount. Unless SSA and the state or other third party share information on their payments or have policies and procedures in place to prevent such cases, representatives may receive both SSA and state payments that total more than the SSA-authorized fee. In 2007, we reported on this risk of overpayments to representatives and recommended that SSA take steps to address it. However, SSA has not fully implemented our recommendation because SSA did not know which states were paying representatives or the true extent of the problem, according to a senior agency official. SSA has taken some steps to clarify authorized payments for representatives. For example, in 2011, SSA revised the form a claimant uses to appoint a representative (form 1696) to more clearly indicate how a representative would like to be paid. Specifically, the updated form requires representatives to declare whether they intend to be paid by (1) the claimant directly,(2) SSA, out of the claimant’s past-due benefits, or (3) a third party. (See fig. 5.) Although the revised form more clearly delineates allowable fee arrangements, SSA officials acknowledged that this overpayment vulnerability still exists. Officials told us that the agency would not know if a representative was paid from another source outside SSA. The agency is dependent upon the claimant or the third party to inform SSA about an overpayment to a representative. Although the updated appointment form makes it more clear that representatives must choose one type of fee arrangement, some SSA staff we interviewed reported that claimants often do not fully understand the forms they are signing or the implications. One state we studied has developed practices in an attempt to avoid these types of overpayments, but these practices are not universal. Officials in Minnesota stated that they recently began requiring contracted organizations to submit copies of their signed form 1696 so the state could verify that the representatives checked the appropriate box for payment. By looking more closely at the award notices SSA sends to claimants and representatives, state officials reported discovering three instances in 2014 when a representative did not check the appropriate box to waive direct payment from SSA and could have received an overpayment. Minnesota officials plan to work with a local SSA field office to conduct an audit of a sample of claims to identify such cases. According to a Minnesota official, this effort would begin in December 2014. Officials we interviewed in the other two selected sites reported that they do not require representatives from contracted organizations to submit these signed SSA forms, nor did they have plans to audit claims to detect overpayments. SSA does not systematically coordinate with states and other third parties on the payment of representatives. For example, SSA has not issued guidance to states or third parties or shared any best practices on preventing overpayments. SSA and state officials in Minnesota reported that as SSA expands representative access to the eFolder during the disability determination process, providing controlled third party access could efficiently facilitate the detection of potential overpayments. For example, states could use their access to portions of the eFolder to easily check the form 1696 submitted by the representative and any additional documents, such as fee agreements, to prevent overpayment. However, SSA can only provide access to an eFolder if it is permissible under federal privacy laws. In general, coordination is important because the risk of overpayment goes beyond the 16 states we identified with state or county SSI/DI advocacy contracts. As discussed earlier, we estimated that about 30 percent of all initial disability claims with nonattorney representatives are potentially associated with SSI/DI advocacy contracts held by other third parties, such as hospitals and long-term disability insurers. Conclusions SSI/DI advocacy, while serving a practical purpose for states, counties, and individuals, raises questions about the role third parties and representatives play in the disability determination process. Many of these questions—such as the extent of SSI/DI advocacy and the impact of this practice—cannot be answered because so little data exist. Since representatives are increasingly involved in this process and are working on behalf of a diverse set of third parties, it is critical that SSA management and employees have mechanisms for monitoring trends and patterns related to claims with representatives. SSA anticipates being able to combine data across its systems in order to evaluate data variations on representatives but those plans are under development. SSA’s current efforts also face a number of uncertainties which, if left unaddressed, may undermine the agency’s ability to improve data on representatives. In the absence of readily available data—particularly data on those representatives paid by third parties—SSA is poorly positioned to identify trends or patterns that may present risks to program integrity. One such risk is making overpayments to representatives who are also being paid by third parties. SSA has not taken steps to adequately eliminate this vulnerability. Without enhanced coordination between SSA and third parties, some representatives may improperly receive payments. This financial vulnerability presents a strong case for enhanced oversight over representatives in the disability determination process. Recommendations for Executive Action As part of initiatives currently under way to improve agency information on claims with appointed representatives and detect potential fraud associated with representatives, the Commissioner of the Social Security Administration should consider actions to provide more timely access to data on representatives and enhance mechanisms for identifying and monitoring trends and patterns related to representation, particularly trends that may present risks to program integrity. Specifically, SSA could: Identify additional data elements, or amendments to current data collection efforts, to improve information on all appointed representatives, including those under contract with states and other third parties; Implement necessary policy changes to ensure these data are collected. This could include enhancing technical systems needed to finalize SSA’s 2008 proposed rules that would recognize organizations as representatives; and Establish mechanisms for routine data extracts and reports on claims with representatives. To address risks associated with potential overpayments to representatives and protect claimant benefits, the Commissioner of the Social Security Administration should take steps to enhance coordination with states, counties, and other third parties with the goal of improving oversight and preventing and identifying potential overpayments. This coordination could be conducted in a cost-effective manner, such as issuing guidance to states and other third parties on vulnerabilities for overpayment; sharing best practices on how to prevent overpayments; or considering the costs and benefits, including any privacy and security concerns, of providing third parties controlled access to portions of the eFolder to facilitate the detection of potential overpayments. Agency Comments and Our Evaluation We provided a draft of this product to the Social Security Administration (SSA) and the Department of Health and Human Services (HHS) for comment. SSA and HHS provided technical comments, which we have incorporated as appropriate. In its written comments, reproduced in appendix III, SSA partially agreed with our two recommendations and raised its overall concern that our report misrepresents and overstates the nature of states’ payments to representatives. The agency did not provide any further support for this assertion; it is unclear the basis on which SSA could make this statement, given that officials repeatedly told us during the course of our work that the agency has no information or data on states’ contracts. Our report makes it clear that the full extent of states’ and counties’ SSI/DI advocacy practices is unknown, given the absence of national-level data. Given these limitations, we believe that our work fairly and accurately describes what is known about the extent of SSI/DI advocacy contracts and payments nationwide. SSA also noted that our report did not address other types of SSI/DI advocacy contracts, such as those held by insurance companies. Indeed, it was not within the scope of our report to do so. We did note that other types of SSI/DI advocacy contracts—such as those held by insurance companies or hospitals—represented an estimated 30 percent of initial disability claims with nonattorney representatives in 2010. The prevalence of these SSI/DI advocacy contracts, and the growing involvement of representatives at the initial disability determination level, presents a strong case for SSA to have greater information on these third parties and the payments they may receive. SSA partially agreed with our first recommendation to consider actions to provide more timely access to data on representatives and enhance mechanisms for identifying and monitoring trends and patterns related to representation. SSA acknowledged that the report accurately describes initiatives the agency has underway to improve the use and collection of data related to representatives. SSA stated that, as part of these efforts, the agency may identify additional data elements that may be helpful to collect and consider any necessary policy changes. SSA raised concerns, however, that expanding data collection to a more detailed level could negatively affect other agency priorities. We fully acknowledge that SSA has competing priorities and limited resources. With this in mind, we wrote the recommendation to provide SSA flexibility in implementation, including suggesting that the agency leverage current initiatives. We continue to believe that SSA should consider steps to improve available data on appointed representatives to better monitor the involvement of these third parties in the disability determination process. SSA partially agreed with our second recommendation to take steps to enhance coordination with states, counties, and other third parties with the goal of improving oversight and preventing and identifying potential overpayments. In its general comments, SSA stated that its rules allow representatives to receive fee payments, and that any payments made by states are outside of SSA’s authority for oversight purposes. SSA also stated that our report did not provide sufficient evidence to warrant enhanced coordination and noted that the agency takes the necessary actions to recoup fees when it learns of a potential fee violation. Our report notes, however, that SSA is dependent upon the claimant or the third party to inform SSA about an overpayment to a representative. In our audit work in selected states, we also noted three instances when a representative attempted to be paid by SSA and the state. While we recognize that payments made by states to representatives are outside of SSA’s jurisdiction, SSA has established rules of conduct for representatives, and these rules prohibit a representative from collecting fees over the amount SSA has authorized. Enhanced coordination could increase SSA’s and third party payers’ ability to detect potential overpayments. Finally, SSA suggested that we explicitly state in our report that we did not find any indications of fraud committed by representatives working under contracts to states or other third parties (referred to by SSA in its comments as “facilitators”). The objectives of this work were focused on (1) identifying the extent to which states are involved in SSI/DI advocacy, (2) examining different approaches to this work, and (3) assessing the key controls that SSA has in place to ensure that organizations working under contract to states and other third parties follow program rules and regulations. As such, we did not have any findings on the extent of any possible fraudulent activity associated with these SSI/DI advocacy contracts. We do note in the report, however, that SSA field office staff we interviewed in our three selected sites generally had positive feedback on their interactions with representatives working under contract to the state or county, and that claims they submitted were of the same or better quality than claims submitted by other representatives. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from its issue date. At that time, we will send copies of this report to the appropriate congressional committees, the Secretary of the Department of Health and Human Services, the Commissioner of the Social Security Administration, and other interested parties. In addition, the report will be made available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7215 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix IV. Appendix I: Objectives, Scope, and Methodology In conducting our review of state Supplemental Security Income (SSI)/Disability Insurance (DI) advocacy practices, our objectives were to examine (1) what is known about the extent to which states are contracting with private organizations to identify and move eligible individuals from state- or county- administered benefit programs to Social Security disability programs, (2) how SSI/DI advocacy practices compare across selected sites, and (3) the key controls the Social Security Administration (SSA) has in place to ensure these organizations follow SSI/DI program rules and regulations. We conducted this performance audit from September 2013 through December 2014 in accordance with generally accepted government auditing standards. These standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. This appendix provides a detailed account of the data sources used to answer these questions, the analyses we conducted, and any limitations we encountered. The appendix is organized into three sections. Each section presents the methods we used for the corresponding objective. Specifically, section I describes the information sources and methods we used to identify state SSI/DI advocacy contracts, estimate the proportion of claims associated with these contracts, and analyze national trends in claims with representatives. Section II describes the information sources and methods we used to explore selected SSI/DI advocacy approaches. Section III describes the information sources and methods we used to assess SSA’s policies and controls related to representatives. Section I: Identifying the Extent of State SSI/DI Advocacy Contracts To determine the extent to which states are contracting with private organizations for SSI/DI advocacy services, we used a multi-faceted approach. Due to the absence of national-level data on SSI/DI advocacy contracts, we combined information from various sources. Specifically, we analyzed data from SSA’s Office of the Inspector General (OIG); performed independent research, including conducting Internet searches and following up on contracts identified in past GAO work; and interviewed government officials, representatives from organizations providing SSI/DI advocacy services, and a wide range of stakeholders and experts. Data Analysis Analysis of a Random Sample of Social Security Disability Claims We used data from a 2014 report issued by SSA’s OIG to estimate the percentage of initial claims in 2010 with nonattorney representatives working under a government SSI/DI advocacy contract, as well as the percentage that were potentially working under contract with another third party, such as a hospital or long-term disability insurance company. As part of its report, the OIG selected a random sample of 275 SSI and DI adjudicated claims from the population of 857,855 adjudicated claims with a representative in calendar year 2010, 201 of which were for initial claim determinations. Of these 201 initial claim determinations, 83 were represented by nonattorney representatives, while the remainder had attorney representatives. The OIG used information in the claim files, as well as Internet research, to determine the type of nonattorney representative associated with each sampled claim. The OIG did not conduct similar work for claims with attorney representatives. We independently reviewed and verified the OIG’s work papers for the sampled claims with a nonattorney representative, including selected documents from the electronic claim files. To verify that the OIG’s categorizations of the type of representative were correct, we completed a blind categorization of the type of representative involved in each claim (that is, we completed our own categorization of the type of representative, without first reviewing the OIG’s determination) for the sample of 83 cases. A second analyst then confirmed the categorization. We discussed any discrepancies between our categorizations and the OIG’s with the OIG staff who performed the work. We obtained additional information about the claim in several cases and documented the final categorization. Using methods appropriate for a simple random sample, we estimated the percentage of initial claims with determinations in 2010 with nonattorney representatives working under SSI/DI advocacy contracts with government entities, as well as the percentage that were potentially working under contract with another third party, such as a hospital or long-term disability insurance company. Because the sample was selected using a probability procedure based on random selections, the sample is only one of a large number of samples that might have been drawn. Since each sample could have provided different estimates, we express our confidence in the precision of our particular sample’s results as a 95-percent confidence interval (e.g., plus or minus 7 percentage points). This is the interval that would contain the actual population value for 95 percent of the samples we could have drawn. All estimates in this report have a margin of error, at the 95-percent confidence level, of plus or minus 10 percentage points or fewer. Based on our discussions with the OIG and our verification process, we determined that the estimates were sufficiently reliable for the purposes of this report. Analysis of SSA Data on Trends in Representation We also analyzed SSA data extracted from the Appointed Representative Database, the Modernized Claims System, and the Supplemental Security Income Record, for calendar years 2004-2013 to provide information regarding total SSI and DI claims as well as claims with attorney and nonattorney representatives, as context for our findings. We interviewed SSA officials regarding these data and reviewed the computer code SSA used to extract these data, and determined they were sufficiently reliable for these purposes. Review of Prior GAO Work and Internet Research To identify states and counties that were likely to have an SSI/DI contract, we followed up on prior GAO work and performed Internet research. Specifically, we contacted officials in the states that, in 2007, reported paying representatives to assist individuals with their SSI claims to determine if these payments were part of a contract and, if so, if the contract was still in place as of 2014. We also performed an Internet search to identify additional SSI/DI advocacy contracts or requests for proposals. Using a uniform set of search terms, we performed this search for all states (and the District of Columbia) for which we did not have information regarding their potential SSI/DI advocacy contracting activity from our interviews (see below). We confirmed the status of these contracts or proposals with state, county, or city officials, as appropriate. Interviews To supplement our data analyses and Internet searches, we conducted interviews with a number of stakeholders to learn more about this contracting practice and obtain leads for states that may have current SSI/DI advocacy contracts. Specifically, we interviewed officials from SSA and the Department of Health and Human Services (HHS) to determine what information each agency collected and maintained regarding state contracts for SSI/DI advocacy. Through these interviews, we also explored what other data were readily available that could be used to determine the extent of this contracting practice. To obtain leads on potential state or county contracts, we worked with two professional groups—the National Association of State TANF Administrators and the National Council of Disability Determination Directors—who contacted their members on our behalf. With regard to state or county contracts identified through these interviews and from information provided through these professional groups, we followed up directly with state or county officials to confirm this information. To learn more about this contracting practice and obtain leads for states that may have current SSI/DI advocacy contracts, we also interviewed researchers at academic and advocacy organizations. These included: American Enterprise Institute American Public Human Services Association Center on Budget and Policy Priorities Center for Law and Social Policy Consortium for Citizens with Disabilities Federal Reserve Bank of San Francisco Mathematica Policy Research MDRC National Association of Disability Examiners National Association of Disability Representatives National Association of State TANF Administrators National Council of Disability Determination Directors [representing state Disability Determination Services (DDS) directors] National Council of Social Security Management Associations (representing SSA field office and teleservice center managers) National Organization of Social Security Claimants’ Representatives Social Security Advisory Board In addition, we interviewed representatives from organizations that, based on our preliminary audit work, were providing SSI/DI advocacy services to states or counties. These included Chamberlin Edmonds, the Legal Aid Society of Hawaii, MAXIMUS, Public Consulting Group, and South Metro Human Services. We also interviewed officials from Policy Research Associates, which provides technical assistance, under a contract to the Substance Abuse and Mental Health Services Administration, for the national SSI/SSDI Outreach, Access and Recovery (SOAR) program. Section II: Exploring Selected SSI/DI Advocacy Approaches In order to obtain in-depth information on the different ways in which states and counties contract with private organizations for SSI/DI advocacy services, we selected a nongeneralizable sample of three sites with SSI/DI advocacy contracts that had an established history of contracting for SSI/DI advocacy services and represented a variety of approaches. We also selected one state in which the Temporary Assistance for Needy Families (TANF) administering agency and the state DDS were divisions under the same state agency, in light of concerns about potential conflicts of interest (the agency issuing the contract to help people apply for federal disability benefits is under the same state agency as the agency making the decision about eligibility for federal disability benefits). Specifically, we selected (1) a state that contracts with a nonprofit, legal aid organization (Hawaii), (2) a state that contracts with multiple organizations, including for-profit, nonprofit, and legal aid organizations (Minnesota), and (3) a county that contracts with a for-profit company (Westchester County, New York). In each site, we obtained key documents—such as the request for proposals and the signed, current contracts—and data in order to describe the various aspects of the sites’ SSI/DI advocacy practices. For example, we gathered information on how the states or county and their contractors identified potentially eligible individuals, the types of services provided by the organizations to claimants, compensation structures, and other information. We obtained data on the total amounts paid to the contractors in state fiscal year or contract year 2013. We also obtained information on how the site funds its SSI/DI advocacy contracts, and whether any funding was provided through an Interim Assistance Reimbursement (IAR) agreement with SSA. We collected and analyzed available data from the three sites on the number of individuals referred to the contractor and the number of claims filed and approved by SSA in state fiscal year 2013, or the most recent complete year available. We interviewed state/county and contractor officials knowledgeable about the data and compared states’/counties’ and contractors’ reported data and determined the data were sufficiently reliable for our purposes. To put these sites’ data on approved claims in context, we also obtained data from SSA on the number of SSI and DI approved claims in each state or county in calendar year 2012, the most recent year these federal data were available. In each site, we also conducted in-depth interviews with (1) the government agency administering the contract, (2) officials from the organization(s) working under the contract, (3) SSA officials in the relevant regional office and at least one field office, and (4) state DDS administrators and staff. In the field offices and state DDSs, we randomly selected staff to interview who met certain qualifications. We conducted these interviews either in person or by phone. We also contacted the state auditors for each state, and in all three sites, they confirmed they had no current work regarding SSI/DI advocacy contracting, nor had they done any work in this area within the past 10 years. Prior to issuing this report, we shared a statement of facts with officials from the state or county agency and the selected contractor(s) in the three sites to confirm that the key information used to formulate our analyses and findings were current, correct, and complete. These entities provided technical comments, which we incorporated, as appropriate. Section III: Assessing SSA Policies and Controls Related to Representatives In order to assess the controls SSA has in place related to representatives contracted by third-party organizations to perform SSI/DI advocacy, we reviewed relevant documents and reports, and conducted interviews with key officials from SSA. Review of Documents Describing SSA’s Controls We reviewed relevant federal laws; proposed and final regulations; program policies and procedures, such as SSA’s Program Operations Manual System; and other program documentation, as well as reports and testimonies from SSA, SSA’s OIG, and the Social Security Advisory Board. We compared SSA’s efforts with their own policies and procedures, federal government internal control standards, and prior recommendations from GAO and the Social Security Advisory Board. Interviews with SSA Officials To understand SSA’s policies, procedures, and data controls related to appointed representatives, we interviewed officials in a number of SSA departments in headquarters. These included: Office of Disability Adjudication and Review Office of Disability Determinations Office of Disability Programs Office of Income Security Programs Office of the Inspector General Office of Research, Evaluation, and Statistics Office of Retirement and Survivors Insurance Systems To gain additional perspectives on how SSA policies are implemented and challenges regarding appointed representatives in the disability determination process, particularly those under contract to a state or county, we incorporated relevant questions into the interviews conducted in our three selected sites. Also, as noted above, we interviewed representatives from national organizations representing SSA field office managers, administrative law judges, DDS administrators, and DDS examiners. Approach to SSI/DI advocacy In the beginning of 2014, Hawaii had a contract with a legal aid organization to provide Supplemental Security Income (SSI)/Disability Insurance (DI) advocacy services statewide. In July 2014, this organization became a subcontractor to a company that performs medical and psychological evaluations for the state’s cash assistance programs. Specifically, the primary contractor is responsible for determining whether applicants and recipients of the state’s General Assistance (GA) and Temporary Assistance for Needy Families (TANF) programs have disabilities that prevent them from engaging in work at a certain level. Previously, the state had two separate contracts for SSI/DI advocacy and medical and psychological evaluations. State officials told us that they combined those services into a single contract, in part, to streamline the referral process for SSI/DI advocacy. If the primary contractor determines that an individual’s disability meets Social Security criteria, they refer the individual directly to their advocacy subcontractor rather than indirectly through state caseworkers, as was done under the prior contract. Disability screening process Previously, a prospective claimant could be referred by a state caseworker or walk into the legal aid office. Referrals now come from the primary contractor. Hawaii’s SSI/DI advocacy subcontractor told us they conduct a screening assessment to obtain basic information—such as information on the individual’s impairments, the doctors they have seen, and medications they are taking—and have the claimant sign key forms, including the Social Security Administration (SSA) form required to formally appoint the advocacy worker as their representative. If an individual does not appear eligible for federal disability benefits, the representative would decline to officially represent them but might provide some assistance. Assistance filing a claim Hawaii’s SSI/DI advocacy subcontractor reported that most representatives fill out available portions of the SSA disability application online, such as the DI portion. They call the local SSA field office to schedule an appointment for the claimant to meet with an SSA claims representative to complete the SSI portion of the application, which is not available online. They said representatives typically do not accompany the claimant to the field office, nor do they refer claimants to doctors or medical specialists. Representation during the disability determination process The advocacy subcontractor reported that its representatives will provide additional information to SSA or the state Disability Determination Services (DDS) on the claimant’s disabilities or functioning, upon request. The representative may also check to ensure the claimant attends any examinations scheduled by the DDS. If an initial application is denied, the representative may schedule another appointment with the claimant to review the case and determine whether to file a reconsideration or, later, an appeal. Approach to SSI/DI advocacy In 2014, Minnesota contracted with 55 organizations across the state, ranging from small law firms to large for-profit and nonprofit organizations. Some organizations served individuals statewide, while others served specific geographic areas or populations, such as tribal communities. Minnesota’s request for proposals for SSI/DI advocacy services had two components: one for its general SSI/DI advocacy program and another for its SSI/SSDI Outreach, Access, and Recovery (SOAR) program. Minnesota’s SOAR program is based on a national advocacy model that focuses on homeless individuals or individuals at risk of homelessness who have a mental illness and/or a co-occurring substance abuse disorder. Organizations could submit proposals to provide services under one or both components. Minnesota offered higher payments under the SOAR program because, according to state officials, the homeless population requires more intensive services. Specifically, the state provided a $2,500 payment for approved applications that included a complete medical summary report—a key component of the SOAR model. Contractor(s) 55 total: Disability screening process Officials at the for-profit contractor we selected—operating under the SSI/DI advocacy component of the contract—reported that they receive referrals from county or hospital caseworkers. Officials at the nonprofit contractor we selected—operating mainly under the SOAR component of the contract—reported that it receives informal referrals from staff at homeless shelters or mental health or urgent care clinics. The for-profit officials also reported having limited access to a state database, which allows them to verify that a referred individual is a recipient of one of the eligible state programs. Both organizations conduct initial screenings to obtain information, such as the individual’s impairments and work history. The nonprofit organization also gathers information on the individual’s history of homelessness. If it appears that the individual will meet Social Security disability criteria, both organizations’ staff reported that they will meet with the claimant to fill out the application and sign key forms, including the form required to formally appoint the SSI/DI advocacy staff as their representative. Assistance filing a claim Representatives from both organizations reported filling out available portions of the application online, such as the DI portion, but they differed in how they completed the SSI portion of the application, which is not available online. Representatives from the for-profit organization fill out the SSI application on behalf of the claimant and either mail or hand-deliver it to the local SSA field office. Representatives from the nonprofit organization typically accompany the claimant to the field office to complete the application and often provide transportation to ensure the claimant attends the appointment. Representatives from both organizations said they typically gather available medical information but refer the claimant to medical providers or specialists, as needed, if the existing records are insufficient. The nonprofit organization also has a psychologist on staff to perform evaluations and psychological testing if existing records are insufficient. Representation during the disability determination process Representatives from both organizations work with the claimant to ensure he or she attends any examinations the DDS schedules and provide the DDS, upon request, with additional information on the claimant’s disabilities or functioning. If an initial application is denied, the representatives will review the case with the claimant and determine whether to file a reconsideration or, later, an appeal. Approach to SSI/DI advocacy Westchester County’s contractor, a national for-profit organization, performed its SSI/DI advocacy services from its office in another state. Officials from Westchester County and the organization told us that providing services by phone can be particularly beneficial for individuals with severe disabilities. Approved claims: 136 Contractor(s) For-profit company Compensation structure Payment for each approved claim: $3,000 (adult disability claim) $2,000 (foster care SSI claim) $1,500 (CDR) Disability screening process Westchester County’s SSI/DI advocacy contractor reported that it receives referrals on a monthly basis from the county’s three employment services contractors. According to county officials, these contractors identify people receiving GA or TANF who are unable to work for reasons such as a disability, and provide lists of these people to the SSI/DI advocacy contractor. The advocacy contractor mails a letter to each referred individual, introducing their services and inviting them to call a toll-free number to determine their potential eligibility for Social Security disability benefits. During this screening, a representative from the organization gathers information on the individual’s current medical condition, work history, and educational level. If it appears that the individual will meet Social Security disability criteria, the representative will fill out the application and have the claimant sign key forms, including the form required to formally appoint the SSI/DI advocacy worker as their representative. Targeted populations GA (known as Safety Net Assistance) Assistance filing a claim Officials from the advocacy organization said that representatives fill out available portions of the disability applications online, such as the DI application. The representative also fills out the SSI application on behalf of the claimant and mails it to the appropriate SSA field office. Representatives gather available medical information, but do not refer claimants to additional doctors or specialists. Instead, if claimants have a limited medical history, the representatives will refer them to the county for treatment or request that their physicians provide treatment notes or an assessment of their functioning. Representation during the disability determination process Representatives work with the claimant to ensure he or she attends any examinations the DDS schedules and provide the DDS with additional information on the claimant’s disabilities or functioning, upon request. If an initial application is denied, the representative will review the case and schedule a telephone appointment with the claimant to discuss options and determine whether to file a request for a hearing. Appendix III: Comments from the Social Security Administration Appendix IV: GAO Contact and Staff Acknowledgments GAO Contact Daniel Bertoni, Director, (202) 512-7215 or [email protected]. Staff Acknowledgments In addition to the contact named above, Erin Godtland (Assistant Director), Rachael Chamberlin (Analyst-in-Charge), Julie DeVault, Alison Grantham, and Michelle Loutoo Wilson made key contributions to this report. Additional contributors include: James Ashley, James Bennett, David Chrisinger, Rachel Frisk, Alexander Galuten, Monika Gomez, Kimberly McGatlin, Daniel Meyer, Matthew Saradjian, Monica Savoy, Almeta Spencer, Nyree Ryder Tee, Shana Wallace, Margaret Weber, and Candice Wright.
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For years, states and counties have helped individuals who receive state or county assistance apply for federal disability programs. Federal benefits can be more generous, and moving individuals to these programs can allow states and counties to reduce their benefit costs or reinvest savings into other services. Some states have hired private organizations to help individuals apply for federal benefits, but the extent and nature of this practice is not well-known. GAO was asked to study this practice. This report examines (1) what is known about the extent to which states have SSI/DI advocacy contracts with private organizations, (2) how SSI/DI advocacy practices compare across selected sites, and (3) the key controls SSA has to ensure these organizations follow SSI/DI program rules and regulations. GAO reviewed relevant federal laws, regulations, and program rules; selected three sites to illustrate different contracting approaches; reviewed prior studies, including one by SSA's Office of the Inspector General with a generalizable sample of disability claim files; and interviewed SSA, state, and county officials and contractors. Little is known about the extent to which states are contracting with private organizations to help individuals who receive state or county assistance apply for federal disability programs. Representatives from these private organizations help individuals apply for Supplemental Security Income (SSI) and Disability Insurance (DI) from the Social Security Administration (SSA). Available evidence suggests that this practice—known as SSI/DI advocacy—accounts for a small proportion of federal disability claims. Using a variety of methods, including interviewing stakeholders, GAO identified 16 states with some type of SSI/DI advocacy contract in 2014. In addition, GAO analyzed a sample of 2010 claims nationwide and estimated that such contracts accounted for about 5 percent of initial disability claims with nonattorney representatives, or about 1 percent of all initial disability claims. Representatives working under contract to other third parties, such as private insurers and hospitals, accounted for an estimated 30 percent of initial disability claims with nonattorney representatives. Three selected sites represented different approaches to SSI/DI advocacy, but were similar in many respects. For example, Minnesota contracted with 55 nonprofit and for-profit organizations, while Hawaii and Westchester County, New York, each had a single contractor: a legal aid organization, and a for-profit company, respectively. At the same time, all three sites targeted recipients of similar state and county programs, such as General Assistance, and generally paid contractors only for approved disability claims, among other similarities. SSA has controls to ensure representatives follow program rules and regulations, but these controls are not specific to those working under contract to states or other third parties and may not be sufficient to assess risks and prevent overpayments—known by SSA as fee violations. Specifically: Despite the growing involvement of different types of representatives in the initial disability determination process, SSA does not have readily available data on representatives, particularly those it does not pay directly. This hinders SSA's ability to identify trends and assess risks, a key internal control. SSA's existing data are limited and are not used to provide staff with routine information, such as the number of claims associated with a given representative. SSA has plans to combine data on representatives across systems, but these plans are still in development. SSA does not coordinate its direct payments to representatives with states or other third parties that might also pay representatives, a risk GAO identified in 2007. In cases involving SSI/DI advocacy contracts, a representative may be able to collect payments from both the state and from SSA, potentially resulting in an overpayment—a violation of SSA's regulations.
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By the act of Congress of March 3d, 1887, chap. 376, it was provided that if, at the completion of the adjustments of land grants thereby directed to be made, or sooner, it appeared that lands had been from any cause erroneously certified or patented to or for any company claiming by, through, or under grant from the United States to aid in the construction of a railroad, it should be the duty of the Secretary of the Interior to thereupon demand from such company a relinquishment or reconveyance to the United States of all such lands, whether within granted or indemnity limits; and, if the company did not reconvey within ninety days after demand made, it should thereupon be the duty of the Attorney General to commence and prosecute in the proper courts the necessary proceedings to cancel the patents, certification, or other evidence of title theretofore issued for the lands, and to restore the title thereof to the United States. 24 Stat. at L. 556 (U. S. Comp. Stat. 1901, p. 1595). In United States v. Missouri, K. & T. R. Co. 141 U. S. 360, 380, 382, 35 L. ed. 766, 773, 774, 12 Sup. Ct. Rep. 13, 21, which was an action brought by the United States after the passage of the above statute to have certain patents for land canceled, this court, after observing that as to some of the lands the United States appeared to have a direct interest in them, said: 'As to others, it is under an obligation to claimants under the homestead and pre-emption laws to undo the wrong alleged to have been done by its officers, in violation of law, by removing the cloud cast upon its title by the patents in question, and thereby enable it to properly administer these lands, and to give clear title to those whose rights, under those laws, may be superior to those of the railway company. A suit, therefore, to obtain a decree annulling the patents in question, so far as it is proper to do so, was required by the duty the government owed, as well to the public as to the individuals who acquired rights which the patents, if allowed to stand, may defeat or embarrass.' Reference was made in that case to United States v. San Jacinto Tim Co. 125 U. S. 273, 286, 31 L. ed. 747, 752, 8 Sup. Ct. Rep. 850, in which it was held that the United States could sue to set aside a patent improperly issued, where it appeared that there was an obligation on the part of the United States to the public, or to any individual, or where it had any interest of its own; also, to United States v. Beebe, 127 U. S. 338, 342, 32 L. ed. 121, 123, 8 Sup. Ct. Rep. 1083, in which it was held that patents procured by fraud could be canceled at the suit of the United States, where that was necessary to be done in order that it might fulfill its obligations to others. The court then observed: 'These principles equally apply where patents have been issued by mistake, and they are specially applicable where, as in the present case, a multiplicity of suits, each one depending upon the same facts and upon the same question of law, can be avoided, and where a comprehensive decree, covering all contested rights, would accomplish the substantial ends of justice.' See also United States v. Oregon & C. R. Co. 176 U. S. 28, 44 L. ed. 358, 20 Sup. Ct. Rep. 261. In this state of the law, the present suit was brought by the United States against the Oregon & California Railroad Company in order to obtain a decree canceling certain patents for lands which, it was alleged, had been illegally, and by mistake, issued in the name of the United States to that company, which succeeded to the rights of the Oregon Central Railroad Company. The case was heard upon a stipulation as to evidence, from which the following facts appear: By the act of Congress of July 25th, 1866, chap. 242, 14 Stat. at L. 239, the California & Oregon Railroad Company, and such company organized under the laws of Oregon as the legislature of the latter state designated, were authorized to locate, construct, and maintain a railroad and telegraph line between Portland, Oregon, and the Central Pacific Railroad Company in California. For the purpose of aiding in the construction of that line, Congress granted to those companies, their successors and assigns, every alternate odd-numbered section of public lands, not mineral, to the amount of twenty sections per mile (ten on each side) of the railroad line. But the act provided that when any of the alternate sections or parts of sections should be found 'to have been granted, sold, reserved, occupied by homestead settlers, pre-empted, or otherwise disposed of, other lands, designated as aforesaid, shall be selected by said companies in lieu thereof, under the direction of the Secretary of the Interior, in alternate sections designated by odd numbers, as aforesaid, nearest to, and not more than 10 miles beyond the limits of, said first-named alternate sections; and as soon as the said companies, or either of them, shall file in the office of the Secretary of the Interior a map of the survey of said railroad, or any portion thereof, not less than 60 continuous miles from either terminus, the Secretary of the Interior shall withdraw from sale public lands herein granted on each side of said railroad, so far as located and within the limits before specified. . . . Settlers under the provisions of the homestead act who comply with the terms and requirements of said act shall be entitled, within the limits of said grant, to patents for an amount not exceeding 80 acres of the land so reserved by the United States, anything in this act to the contrary notwithstanding.' The Oregon Central Railroad Company was designated by the Oregon legislature as the company organized under the laws of Oregon, entitled to receive the granted lands in Oregon, and the benefits and privileges of the above act of 1866. Prior to October, 1869, that company definitely fixed on the ground and surveyed the first section of the railroad in Oregon. That section extended from Portland to Jefferson, and comprised not less than 60 continuous miles from the northern terminus of the road; and on October 25th, 1869, the company filed in the office of the Secretary of the Interior, and on January 29th, 1870, the Secretary duly accepted and approved, a map of the survey and definite location of that section. During the year 1869 and the months of January and February, 1870, the company definitely fixed on the ground and surveyed the second section of its road, which section comprised not less than 124 continuous miles from Jefferson; and on March 26th, 1870, filed in the office of the Secretary, and on March 29th, 1870, that officer accepted and approved, a map of the survey and definite location of that section. On the 7th of April, 1870, the Commissioner of the General Land Office, under the direction of the Secretary of the Interior, withdrew all the odd-numbered sections of land lying within 30 miles on each side of the railroad (as shown on the map of survey and definite location, filed with the Secretary on March 26th, 1870) from sale or location, pre-emption or homestead entry; and that withdrawal remained continuously thereafter in force, except so far as, if at all, it was affected by an order of the Secretary made August 15th, 1887, revoking the order of April 7th, 1870, as to the odd-numbered sections lying within the indemnity limits of the grant made in 1866, and declaring the odd-numbered sections lying within such indemnity limits to be restored to the public domain, subject to pre-emption and homestead entry, as well as to the provisions of the above grant. The lands so withdrawn April 7th, 1870, were within the jurisdiction of the district local land office at Roseburg, and notice of such withdrawal was received at that office on April 25th, 1870. During the years 1868 and 1869, and prior to December the 25th, 1869, the Oregon Central Railroad Company constructed and fully equipped the first 20 miles of the railroad contemplated by the act of 1866, commencing at Portland and extending along the line shown upon the map filed in the office of the Secretary of the Interior on October the 29th, 1869. And in the years 1869 and 1870, and prior to September the 1st, 1870, the above two companies fully equipped the second 20 miles of the railroad, commencing at the end of the first constructed 20 miles and extending along the line shown on the map to a point distant 40 miles from the commencement of the railroad at Portland,—a portion of the second 20 miles having been constructed by the Oregon Central Railroad Company, the remainder by the defendant. The whole line of railroad contemplated by the act of 1866, commencing at the end of the second constructed 20 miles, was constructed by the defendant company during the years 1870, 1871, and 1872; and prior to December the 4th, 1872, the entire line from Portland to Roseburg was continuously operated for all the purposes contemplated by Congress. Commissioners were appointed by the President to examine the railroad as constructed from Portland to Roseburg. That duty was performed, and they reported to the President, under oath, that the railroad between those points had been completed and equipped in all respects as required, and was ready for the service contemplated by the act of 1866. Those reports were duly accepted and approved by the President. The report as to the seventh, eighth, and ninth sections, including the last 78 miles of the road from Portland to Roseburg, was made on July 10th, 1878, and the next day was accepted and approved. The remaining part of the road in Oregon, extending from Roseburg to the southern boundary of that state, was constructed, fully equipped, and made ready by the defendant company during the years 1878 to 1889, inclusive, and all prior to the year 1900. It was duly examined by commissioners, who reported thereon, and their reports were accepted and approved. All the lands described in the bill of complaint are distant more than 20 miles from, but lie within 30 miles on one side of, the road extending from Jefferson to Roseburg, shown on the map filed March 26th, 1870; and they were all included and embraced by the withdrawal made by the Secretary on the 7th of April, 1870. No part or portion of the lands described in the bill of complaint are mineral lands, nor are they included by any exception or reservation from the indemnity land grant in Oregon, made by the act of 1866, except so far as, if at all, they were excepted or reserved therefrom by reason of the settlements and facts hereinafter to be referred to. On August 16th, 1892, all the lands described in the bill were free and clear for selection by the defendant company as part and parcel of the indemnity lands granted by the act of Congress, except so far as, if at all, they were excepted or reserved by those settlements and facts. On the 16th of August, 1892, and the 19th of October, 1892, the defendant company filed with the register and receiver of the United States land office at Roseburg its several lists selecting the lands in question as indemnity lands in lieu of lands of equal area, parts of odd-numbered sections within the primary limits of the grant made in 1866 and otherwise disposed of by the United States prior to the passage of that act. Those lists were accompanied by the fees, costs, and charges required by law, and in all respects conformed to the directions, rules, regulations, and requirements of the Secretary of the Interior and of the Commissioner of the General Land Office. They were severally approved and certified by the register and receiver, and the defendant company had not then, nor has it subsequently, selected or received lands in lieu of those therein described as the basis of selections by it made, other than the lands so selected by said lists. In the following years the following persons, each being a duly qualified entryman under the homestead laws of the United States, settled upon the lands respectively claimed for them in this suit, to wit: 1869, Louis [Charles] Heller; 1878, J. R. Peters; 1878, John Sapp; 1882, George C. Peck; 1883, Uriah W. Wren; 1885, Baxter W. Jenkins; 1885, Charles E. Barton; 1888, Joseph A. Cox; 1889, Charles W. Seeley; 1889, John W. Carey; 1890, F. W. Huddleston; 1890, Alfred R. Young; 1890, Abraham M. Peck. Each person made his settlement with the intention of making a homestead entry of the lands, whenever that could be done under the acts of Congress. After the date of settlement each settler continuously resided and made improvements upon his land in the way of a dwelling house, barn, outhouses, fencing, clearing, and planting of trees. And on October 27th, 1892, within ninety days after the official plat of the survey of the lands was filed in the United States land office at Roseburg, each settler, in good faith, filed a formal application in the land office for a homestead entry of and for the lands upon which he settled and improved and upon which he continuously resided after the date of his first occupancy. On the 20th of February, 1893, the Commissioner of the Land Office and the Secretary of the Interior having approved the selections made by the railroad company, a patent was issued, conveying to it all the lands in dispute. But when the company's lists were approved, neither the Commissioner nor the Secretary had any knowledge of the adverse claims of the above settlers to the lands upon which they respectively resided, and which the United States now claims for them. On the 27th day of October, 1893, the land grant made by the act of 1866 being still unadjusted, the Commissioner of the Land Office demanded of the railroad company a reconveyance of the lands covered by the patent of 1893, upon the ground that the patent to it had been erroneously issued. The company refused to reconvey, and claims to be the owner of such lands. Hence the present suit to have that patent canceled. The circuit court, upon final hearing, found the equities of the case to be with the United States, and a decree was entered, canceling the patent issued to the Oregon & California Railroad Company. That decree was affirmed by the circuit court of appeals. 1. Some of the questions referred to in argument as bearing upon the issues presented by the record have been determined by decisions of this court rendered since this litigation commenced. In Hewitt v. Schultz, 180 U. S. 139, 45 L. ed. 463, 21 Sup. Ct. Rep. 309, which related to the grant of lands made to the Northern Pacific Railroad Company by the act of July 2d, 1864, chap. 217 (13 Stat. at L. 365), this court accepted the construction of that act as adopted and adhered to by the Land Department, and held that the Secretary of the Interior had no power, simply upon the definite location of the Northern Pacific Railroad, to withdraw from the operation of the pre-emption and homestead laws lands within the indemnity limits of the road as defined by Congress. Northern P. R. Co. v. Miller, 7 Land Dec. 100, 125; Northern P. R. Co. v. Davis, 19 Land Dec. 87, 90. In the present case, the line of the railroad, opposite to which are the lands here in dispute, was definitely located in 1870, while (with the exception of one tract, about which the railroad company makes no question) the lands in dispute were not settled upon until after that year. We have seen that, upon acceptance of the map of definite location, the Secretary of the Interior, according to the stipulated facts, made an order (which was duly received at the local land office) withdrawing all the odd-numbered sections within 30 miles on each side of the road shown on the map of survey and definite location, from sale or location, pre-emption or homestead entry. That withdrawal included the odd-numbered sections in the indemnity limits, within which the lands in dispute were situated. We hold on the authority of Hewitt v. Schultz that it was beyond the power of the Secretary to make such an order in respect of lands within the indemnity limits of the grant made by the act of 1866. The reasoning in that case, touching this proposition, applies to the case now before us. In 1887 the Secretary, as if to remove the apparent obstacle placed in the way of pre-emption and homestead settlers created by the order of 1870, made an order revoking the previous one of withdrawal so far as it related to indemnity limits, and declaring the odd-numbered sections lying within the entire indemnity limits of the grant restored to the public domain and subject to pre-emption and homestead entry, as well as to the provisions of the act of 1866. We need not discuss here the question of the power of the Secretary of the Interior to revoke an order of withdrawal once legally made and notice thereof given at the local land office. It is sufficient to say that the railroad company did not, by the order of 1870, relating to lands within the indemnity limits, acquire an interest in any particular odd-numbered sections within those limits; nor did that order prevent the bona fide occupancy by settlers of odd-numbered sections within such limits up to the time of the approval of selections made by the railroad company of lieu lands to supply any deficit in the place limits. In Nelson v. Northern P. R. Co., decided at the present term of the court [188 U. S. 108, ante, p. 302, 23 Sup. Ct. Rep. 302], it was held that the act of 1864, making a land grant to the Northern Pacific Railroad Company, and the act of May 14th, 1880, chap. 89,1 for the relief of settlers on the public lands, recognized the right at any time prior to definite location to settle upon the unsurveyed public lands embraced by the grant of 1864, notwithstanding there was, at the time, in existence an order of withdrawal, based only upon a map of general route not issued pursuant to any express direction of Congress; provided such settlement was accompanied by residence on the land, in good faith, with the intention on the part of the settler to avail himself of the benefits of the homestead law as soon as the lands were surveyed. This decision rested mainly on the ground that Congress intended by the act of 1864 to protect the rights of bona fide settlers acquired before the railroad company had, by an accepted map of definite location, obtained a vested interest in particular odd-numbered sections granted. These principles are applicable to the present case if, as contended by the United States, the railroad company did not acquire, and could not have acquired, an interest in specific sections of lands within the indemnity limits before their actual and approved selection, under the direction of the Secretary, prior to the date of occupancy by the respective settlers. 2. We have seen, from the stipulated facts, that it was not until 1892 that the railroad company made its selection of lands within the indemnity limits, to supply deficiencies in its place or granted limits. But this occurred after each one of the entrymen whose rights the government is now seeking to protect had made his settlement with the intention to follow it up by a bona fide entry under the homestead laws. In other words, the lands were 'occupied by homestead settlers' (to use the words of the granting act of 1866) at the time they were selected by the railroad company. Now, it has long been settled that while a railroad company, after its definite location, acquires an interest in the odd-numbered sections within its place or granted limits,—which interest relates back to the date of the granting act,—the rule is otherwise as to lands within indemnity limits. As to lands of the latter class, the company acquires no interest in any specific sections until a selection is made with the approval of the Land Department; and then its right relates to the date of the selection. And nothing stands in the way of a disposition of indemnity lands, prior to selection, as Congress may choose to make. In Ryan v. Central P. R. Co. 99 U. S. 382, 25 L. ed. 305, which was a contest as to lands within the indemnity limits, this court said: 'It was within the secondary or indemnity territory where that deficiency was to be supplied. The railroad company had not and could not have any claim to it until specially selected, as it was, for that purpose.' And the reason given was that 'when the road was located and the maps were made, the right of the company to the odd sections first named became ipso facto fixed and absolute. With respect to the 'lieu lands,' as they are called, the right was only a float, and attached to no specific tracts until the selection was actually made in the manner prescribed.' In St. Paul & S. C. R. Co. v. Winona & St. P. R. Co. 112 U. S. 720, 731, 28 L. ed. 872, 876, 5 Sup. Ct. Rep. 334, 340, the court, referring to this principle, said: 'The reason of this is that, as no vested right can attach to the lands in place—the odd-numbered sections within 6 miles on each side of the road until these sections are ascertained and identified by a legal location of the line of the road, so, in regard to the lands to be selected within a still larger limit, their identification cannot be known until the selection is made. It may be a long time after the line of the road is located before it is ascertained how many sections or parts of sections within the primary limits have been lost by sale or pre-emption. It may be still longer before a selection is made to supply this loss.' After observing that twenty years expired in that case after the location of the road before any selection of lieu lands was made, the court added: 'Was there a vested right in this company, during all this time, to have, not only these lands, but all the other odd sections within the 20-mile limits on each side of the line of the road, await its pleasure? Had the settlers in that populous region no right to buy of the government because the company might choose to take them, or might, after all this delay, find out that they were necessary to make up deficiencies in other quarters? How long were such lands to be withheld from market, and withdrawn from taxation, or forbidden to cultivation?' To the same effect are the following cases: Grinnell v. Chicago, R. I. & P. R. Co. 103 U. S. 739, 26 L. ed. 456; Cedar Rapids & M. River R. Co. v. Herring, 110 U. S. 27, 28 L. ed. 56, 3 Sup. Ct. Rep. 485; Kansas P. R. Co. v. Atchison, T. & S. F. R. Co. 112 U. S. 414, 421, 28 L. ed. 794, 797, 5 Sup. Ct. Rep. 208; Sioux City & St. P. R. Co. v. Chicago, M. & St. P. R. Co. 117 U. S. 406, 408, 29 L. ed. 928, 929, 6 Sup. Ct. Rep. 790; Barney v. Winona & St. P. R. Co. 117 U. S. 228, 232, 29 L. ed. 858, 860, 6 Sup. Ct. Rep. 654; Wisconsin C. R. Co. v. Price County, 133 U. S. 496, 508, 513, 33 L. ed. 687, 693, 10 Sup. Ct. Rep. 341; Nelson v. Northern P. R. Co. 188 U. S. 108, ante, 302, 23 Sup. Ct. Rep. 302. Having regard to the adjudged cases, it is to be taken as established that, unless otherwise expressly declared by Congress, no right of the railroad company attaches or can attach to specific lands within indemnity limits until there is a selection under the direction, or with the approval, of the Secretary. 3. But it is contended that, as the selection by the company (except as to the tract which was occupied in 1869, before any* selection by the company of lieu lands) was prior to the application by the respective settlers for entry under the homestead laws, its right to the lands in question was superior to that asserted by the settlers. This view is completely met by the fact that the settler, by prior occupancy in good faith, could avail himself of the homestead acts whenever, by an official survey, the way is opened by the government for him to do so, and by the fact that, within ninety days after these lands were surveyed, he filed in the proper office his application to enter them under the homestead laws of the United States. He moved with due diligence to protect and perfect the right acquired by his occupancy of the land with the intention to avail himself of the benefit of those laws. That right was not to be affected or impaired by the fact that the lands were not surveyed at the date of occupancy. Nelson v. Northern P. R. Co. 188 U. S. 108, ante, p. 302, 23 Sup. Ct. Rep. 302; Ard v. Brandon, 156 U. S. 537, 543, 39 L. ed. 524, 526, 15 Sup. Ct. Rep. 406, 409; Tarpey v. Madsen, 178 U. S. 215, 219, 44 L. ed. 1042, 1044, 20 Sup. Ct. Rep. 849, 850. In the Ard Case the court said: 'The law deals tenderly with one who, in good faith, goes upon the public lands with a view of making a home thereon. If he does all that the statute prescribes as the condition of acquiring rights, the law protects him in those rights, and does not make their continued existence depend alone upon the question whether or no he takes an appeal from an adverse decision of the officers charged with the duty of acting upon the application.' In the Tarpey Case it was said that 'the right of one who has actually occupied [public lands], with an intent to make a homestead or pre-emption entry, cannot be defeated by the mere lack of a place in which to make a record of his intent;' that if a settler was in possession before definite location, 'with a view of entering it as a homestead or pre-emption claim, and was simply deprived of his ability to make his entry or declaratory statement by the lack of a local land office, he could, undoubtedly, when such office was established, have made his entry or declaratory statement in such way as to protect his rights.' So, if the condition of the lands, being unsurveyed, prevents the making, by a bona fide occupant, of a proper application of record to enter them under the homestead laws, his rights will not be lost, if, after the lands are surveyed, he applied in due time to enter the lands under those laws. And such has been held to be the object and effect of the act of May 14th, 1880, chap. 89, 21 Stat. at L. 140 (U. S. Comp. Stat. 1901, p. 1392). We could not otherwise adjudge in this case without holding that the mere selection of the lands by the railroad company displaced or destroyed the rights of a bona fide settler arising from previous occupancy with the intention of making the required homestead entry whenever he was permitted to do so. We cannot so hold. We adjudge that the rights which bona fide occupancy gave to the settler under the act of 1866 are not defeated by a mere selection afterwards of the lands by the railroad company,—the settler having, after the lands were surveyed, promptly taken the necessary steps to protect his rights under the homestead laws. And in such case, the entry made under those laws relates back to the date of settlement on the lands. It was so substantially held in Nelson v. Northern P. R. Co. 188 U. S. 108, ante, p. 302, 23 Sup. Ct. Rep. 302. 4. It is also said that all the lands within the indemnity limits were required to supply the deficit in place limits arising from the disposition, prior to definite location, by sale and otherwise, of lands within the granted limits. But the extent to which lieu lands could be required to supply such deficit in place lands could not be properly or legally determined until there was an adjustment of the grant of lands in respect of place limits. In any event, no such adjustment having taken place prior to the date of the settler's bona fide occupancy, his rights, based upon such occupancy, would not be affected by the fact, subsequently appearing, in whatever way, that all the odd-numbered sections within the indemnity limits were needed to supply deficiencies in place limits. At the time the settler went upon the land, in good faith, to make it his home and to perfect his title under the homestead laws, there was nothing of record that stood in the way of his right to occupy the lands and to remain thereon until he could perfect his title by formal entry under the homestead laws. Other points were made in the argument of the case, but they need not be specially noticed, as what we have said requires, independently of those points, an affirmance of the decree of the Circuit Court and the Circuit Court of Appeals. The decree is affirmed. Mr. Justice Brewer and Mr. Justice McKenna took no part in the decision of this case.
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In a suit brought under the act of Congress of March 3, 1887, c. 376, to compel the reconveyance of lands covered by patent issued February 20, 1893 on the ground that it included land to which there were adverse claims of settlers to the land on which they respectively resided and which the United States now claimed for them, Held: (1) That under the land grant acts the railroad company did not acquire and could not have acquired an interest in specific sections of land within the indemnity limits specified in the grant before their actual and approved selection under the direction of the Secretary of the Interior, prior to the date of occupancy by the respective settlers. (2) No right of the railroad company attaches or can attach to specific lands within indemnity limits until there is a selection under the direction or with the approval of the Secretary of the Interior. (3) The rights which bona fide occupancy gave to the settler under the act of 1866 are not defeated by a mere selection afterwards of the land by the railroad company-the settler having, after the lands were surveyed, promptly taken the necessary steps to protect his rights under the homestead law. In such case, the entry made under these laws relates back to the date of the settlement of the lands. (4) It cannot be claimed that all the lands within the indemnity limits were required to supply deficits, when there had been no adjustment and determination of the amount of lieu lands required prior to his bonafide occupancy of the land.
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SECTION 1. SHORT TITLE.
This Act may be cited as the ``Family Act of 2011''.
SEC. 2. FINDINGS.
Congress finds the following:
(1) The World Health Organization formally recognizes
infertility as a disease, and the Centers for Disease Control
and Prevention have stated that infertility is an emerging
public health priority.
(2) According to the Centers for Disease Control and
Prevention, approximately 3,000,000 have infertility.
(3) Medical insurance coverage for infertility treatments
is sparse and inconsistent at the State level--only 8 States
have passed laws to require comprehensive infertility coverage,
and under those State laws most employer-sponsored plans are
exempt; therefore, coverage for treatments such as in vitro
fertilization is limited. According to Mercer's 2005 National
Survey of Employer-Sponsored Health Plans, in vitro
fertilization was covered by 19 percent of large employer-
sponsored health plans and only 11 percent of small employer-
sponsored health plans. Even in States with coverage mandates,
out-of-pocket expenses for these treatments are significant.
SEC. 3. CREDIT FOR CERTAIN INFERTILITY TREATMENTS.
(a) In General.--Subpart A of part IV of subchapter A of chapter 1
of the Internal Revenue Code of 1986 is amended by inserting before
section 24 the following new section:
``SEC. 23A. CREDIT FOR CERTAIN INFERTILITY TREATMENTS.
``(a) Allowance of Credit.--In the case of an eligible individual,
there shall be allowed as a credit against the tax imposed by this
chapter for the taxable year an amount equal to 50 percent of the
qualified infertility treatment expenses paid or incurred during the
taxable year.
``(b) Limitations.--
``(1) Dollar limitation.--The aggregate amount of qualified
infertility treatment expenses which may be taken into account
under subsection (a) for all taxable years shall not exceed
$13,360 with respect to any eligible individual.
``(2) Income limitation.--
``(A) In general.--The amount otherwise allowable
as a credit under subsection (a) for any taxable year
(determined after the application of paragraph (1) and
without regard to this paragraph and subsection (c))
shall be reduced (but not below zero) by an amount
which bears the same ratio to the amount so allowable
as--
``(i) the amount (if any) by which the
taxpayer's adjusted gross income exceeds
$150,000; bears to
``(ii) $40,000.
``(B) Determination of adjusted gross income.--For
purposes of subparagraph (A), adjusted gross income
shall be determined without regard to sections 911,
931, and 933.
``(3) Denial of double benefit.--
``(A) In general.--No credit shall be allowed under
subsection (a) for any expense for which a deduction or
credit is taken under any other provision of this
chapter.
``(B) Grants.--No credit shall be allowed under
subsection (a) for any expense to the extent that
reimbursement or other funds in compensation for such
expense are received under any Federal, State, or local
program.
``(C) Insurance reimbursement.--No credit shall be
allowed under subsection (a) for any expense to the
extent that payment for such expense is made, or
reimbursement for such expense is received, under any
insurance policy.
``(4) Limitation based on amount of tax.--In the case of a
taxable year to which section 26(a)(2) does not apply, the
credit allowed under subsection (a) for any taxable year shall
not exceed the excess of--
``(A) the sum of the regular tax liability (as
defined in section 26(b)) plus the tax imposed by
section 55; over
``(B) the sum of the credits allowable under this
subpart (other than this section) and section 27 for
the taxable year.
``(c) Carryforwards of Unused Credit.--
``(1) Rule for years in which all personal credits allowed
against regular and alternative minimum tax.--In the case of a
taxable year to which section 26(a)(2) applies, if the credit
allowable under subsection (a) exceeds the limitation imposed
by section 26(a)(2) for such taxable year reduced by the sum of
the credits allowable under this subpart (other than this
section), such excess shall be carried to the succeeding
taxable year and added to the credit allowable under subsection
(a) for such succeeding taxable year.
``(2) Rule for other years.--In the case of a taxable year
to which section 26(a)(2) does not apply, if the credit
allowable under subsection (a) exceeds the limitation imposed
by subsection (b)(4) for such taxable year, such excess shall
be carried to the succeeding taxable year and added to the
credit allowable under subsection (a) for such succeeding
taxable year.
``(3) Limitation.--No credit may be carried forward under
this subsection to any taxable year after the 5th taxable year
after the taxable year in which the credit arose. For purposes
of the preceding sentence, credits shall be treated as used on
a first-in first-out basis.
``(d) Qualified Infertility Treatment Expenses.--For purposes of
this section--
``(1) In general.--The term `qualified infertility
treatment expenses' means amounts paid or incurred for the
treatment of infertility via in vitro fertilization if such
treatment is--
``(A) provided by a licensed physician, licensed
surgeon, or other licensed medical practitioner, and
``(B) administered with respect to a diagnosis of
infertility by a physician licensed in the United
States.
``(2) Treatments in advance of infertility arising from
medical treatments.--In the case of expenses incurred in
advance of a diagnosis of infertility for fertility
preservation procedures which are conducted prior to medical
procedures that, as determined by a physician licensed in the
United States, may cause involuntary infertility or
sterilization, such expenses shall be treated as qualified
infertility treatment expenses--
``(A) notwithstanding paragraph (1)(B), and
``(B) without regard to whether a diagnosis of
infertility subsequently results.
Expenses for fertility preservation procedures in advance of a
procedure designed to result in infertility or sterilization
shall not be treated as qualified infertility treatment
expenses.
``(3) Infertility.--The term `infertility' means the
inability to conceive or to carry a pregnancy to live birth,
including iatrogenic infertility resulting from medical
treatments such as chemotherapy, radiation or surgery. Such
term does not include infertility or sterilization resulting
from a procedure designed for such purpose.
``(e) Eligible Individual.--For purposes of this section, the term
`eligible individual' means an individual--
``(1) who has been diagnosed with infertility by a
physician licensed in the United States, or
``(2) with respect to whom a physician licensed in the
United States has made the determination described in
subsection (d)(2).
``(f) Filing Requirements.--Married taxpayers must file joint
returns. Rules similar to the rules of paragraphs (2), (3), and (4) of
section 21(e) shall apply for purposes of this section.
``(g) Adjustments for Inflation.--
``(1) Dollar limitations.--In the case of a taxable year
beginning after December 31, 2012, the dollar amount in
subsection (b)(1) shall be increased by an amount equal to--
``(A) such dollar amount; multiplied by
``(B) the cost-of-living adjustment determined
under section 1(f)(3) for the calendar year in which
the taxable year begins, determined by substituting
`calendar year 2011' for `calendar year 1992' in
subparagraph (B) thereof.
If any amount as increased under the preceding sentence is not
a multiple of $10, such amount shall be rounded to the nearest
multiple of $10.
``(2) Income limitation.--In the case of a taxable year
beginning after December 31, 2002, the dollar amount in
subsection (b)(2)(A)(i) shall be increased by an amount equal
to--
``(A) such dollar amount; multiplied by
``(B) the cost-of-living adjustment determined
under section 1(f)(3) for the calendar year in which
the taxable year begins, determined by substituting
`calendar year 2001' for `calendar year 1992' in
subparagraph (B) thereof.
If any amount as increased under the preceding sentence is not
a multiple of $10, such amount shall be rounded to the nearest
multiple of $10.''.
(b) Conforming Amendments.--
(1) The table of sections for subpart A of part IV of
subchapter A of chapter 1 of the Internal Revenue Code of 1986
is amended by inserting before the item relating to section 24
the following new item:
``Sec. 23A. Credit for certain infertility treatments.''.
(2) Section 36C(b)(4) of such Code is amended by striking
``section 25D'' and inserting ``sections 23A and 25D''.
(3) Section 25(e)(1)(C)(ii) of such Code is amended by
inserting ``23A,'' before ``24,''.
(4) Section 25D(c)(1)(B) of such Code is amended by
striking ``section 27'' and inserting ``sections 23A and 27''.
(5) Section 1400C(d)(1) of such Code is amended by striking
``section 25D'' and inserting ``sections 23A and 25D''.
(6) Section 1400C(d)(2) of such Code is amended by
inserting ``23A,'' after ``23,''.
(c) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2011.
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Family Act of 2011 - Amends the Internal Revenue Code to allow an income-based tax credit for 50% of qualified infertility treatment expenses. Allows $13,360 of such expenses to be taken into account for purposes of such credit for all taxable years. Defines "qualified infertility treatment expenses" as amounts paid for the treatment of infertility via in vitro fertilization if such treatment is provided by a licensed physician, surgeon, or other medical practitioner and is administered with respect to a diagnosis of infertility by a physician licensed in the United States.
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SECTION 1. SHORT TITLE.
This Act may be cited as the ``Cyber Economic Espionage
Accountability Act''.
SEC. 2. FINDINGS AND SENSE OF CONGRESS.
(a) Findings.--Congress finds the following:
(1) The United States faces persistent cyber espionage of
intellectual property from foreign governments that threatens
United States economic and national security interests, results
in an unfair competitive advantage for foreign companies, and
is a major contributor to the loss of manufacturing jobs in the
United States.
(2) Cyber espionage of intellectual property by foreign
actors is one of the most pressing issues facing innovators and
entrepreneurs in the United States today.
(3) The National Counterintelligence Executive stated in
its October 2011 biennial economic espionage report that
``Chinese actors are the world's most active and persistent
perpetrators of economic espionage'' and that ``United States
private sector firms and cybersecurity specialists have
reported an onslaught of computer network intrusions that have
originated in China''.
(4) The National Counterintelligence Executive also stated
that ``Russia's intelligence services are conducting a range of
activities to collect economic information and technology from
U.S. targets''.
(5) The People's Republic of China, the Russian Federation,
and other countries threaten the privacy of United States
citizens by accessing and exploiting personally identifiable
information through cyber economic espionage.
(6) The People's Republic of China, the Russian Federation,
and other countries responsible for such cyber economic
espionage are members of the World Trade Organization (WTO) and
have agreed to comply with the global system of rules and
obligations governing the international commerce and trade
among member states.
(7) The United States has recognized the membership of the
People's Republic of China, the Russian Federation, and other
countries into the WTO by granting them Permanent Normal Trade
Relations (PNTR) status under United States law.
(8) Cyber economic espionage undermines the cooperative
relationships between the United States and countries
tolerating or encouraging such activities.
(b) Sense of Congress.--It is the sense of Congress that--
(1) cyber economic espionage should be a priority issue in
all economic and diplomatic discussions with the People's
Republic of China, including during all meetings of the U.S.-
China Strategic and Economic Dialogue, and with the Russian
Federation and other countries determined to encourage,
tolerate, or conduct such cyber economic espionage at
appropriate bilateral meetings;
(2) the United States should intensify diplomatic efforts
in appropriate international fora such as the United Nations,
the Organisation for Economic Cooperation and Development
(OECD), and summits such as the G-8 and G-20 summits, to
address the harm to the international economic order by cyber
economic espionage; and
(3) the Department of Justice should increase its efforts
to bring economic espionage criminal cases against offending
foreign actors, with penalties to include both fines and
imprisonment, as well as encourage further cooperation among
countries to address cyber economic espionage through criminal
prosecutions.
SEC. 3. IDENTIFICATION OF PERSONS RESPONSIBLE FOR CYBER ESPIONAGE OF
INTELLECTUAL PROPERTY OF UNITED STATES PERSONS.
(a) In General.--Not later than 120 days after the date of the
enactment of this Act, the President shall submit to the appropriate
congressional committees a list of persons who are officials of a
foreign government or persons acting on behalf of a foreign government
that the President determines, based on credible information--
(1) are responsible for cyber espionage of intellectual
property of United States persons; or
(2) acted as an agent of or on behalf of a person in a
matter relating to an activity described in paragraph (1).
(b) Updates.--The President shall submit to the appropriate
congressional committees an update of the list required by subsection
(a) as new information becomes available.
(c) Form.--
(1) In general.--The list required by subsection (a) shall
be submitted in unclassified form.
(2) Exception.--The name of a person to be included in the
list required by subsection (a) may be submitted in a
classified annex only if the President--
(A) determines that it is vital for the national
security interests of the United States to do so;
(B) uses the annex in such a manner consistent with
congressional intent and the purposes of this Act; and
(C) 15 days prior to submitting the name in a
classified annex, provides to the appropriate
congressional committees notice of, and a justification
for, including or continuing to include each person in
the classified annex despite any publicly available
credible information indicating that the person engaged
in an activity described in paragraph (1) or (2) of
subsection (a).
(3) Public availability.--The unclassified portion of the
list required by subsection (a) shall be made available to the
public and published in the Federal Register.
(d) Removal From List.--A person may be removed from the list
required by subsection (a) if the President determines and reports to
the appropriate congressional committees not less than 15 days prior to
the removal of the person from the list that credible information
exists that the person did not engage in the activity for which the
person was added to the list.
(e) Requests by Chairperson and Ranking Member of Appropriate
Congressional Committees.--
(1) In general.--Not later than 120 days after receiving a
written request from the chairperson and ranking member of one
of the appropriate congressional committees with respect to
whether a person meets the criteria for being added to the list
required by subsection (a), the President shall submit a
response to the chairperson and ranking member of the committee
which made the request with respect to the status of the
person.
(2) Form.--The President may submit a response required by
paragraph (1) in classified form if the President determines
that it is necessary for the national security interests of the
United States to do so.
(3) Removal.--If the President removes from the list
required by subsection (a) a person who has been placed on the
list at the request of the chairperson and ranking member of
one of the appropriate congressional committees, the President
shall provide the chairperson and ranking member with any
information that contributed to the removal decision. The
President may submit such information in classified form if the
President determines that such is necessary for the national
security interests of the United States.
(f) Nonapplicability of Confidentiality Requirement With Respect to
Visa Records.--The President shall publish the list required by
subsection (a) without regard to the requirements of section 222(f) of
the Immigration and Nationality Act (8 U.S.C. 1202(f)) with respect to
confidentiality of records pertaining to the issuance or refusal of
visas or permits to enter the United States.
SEC. 4. INADMISSIBILITY OF CERTAIN ALIENS.
(a) Ineligibility for Visas.--An alien is ineligible to receive a
visa to enter the United States and ineligible to be admitted to the
United States if the alien is on the list required by section 3(a).
(b) Current Visas Revoked.--The Secretary of State, in consultation
with the Secretary of Homeland Security, shall revoke, in accordance
with section 221(i) of the Immigration and Nationality Act (8 U.S.C.
1201(i)), the visa or other documentation of any alien who would be
ineligible to receive such a visa or documentation under subsection (a)
of this section.
(c) Waiver for National Security Interests.--
(1) In general.--The Secretary of State may waive the
application of subsection (a) or (b) in the case of an alien
if--
(A) the Secretary determines that such a waiver--
(i) is necessary to permit the United
States to comply with the Agreement between the
United Nations and the United States of America
regarding the Headquarters of the United
Nations, signed June 26, 1947, and entered into
force November 21, 1947, or other applicable
international obligations of the United States;
or
(ii) is in the national security interests
of the United States; and
(B) prior to granting such a waiver, the Secretary
provides to the appropriate congressional committees
notice of, and a justification for, the waiver.
(2) Timing for certain waivers.--Notification under
subparagraph (B) of paragraph (1) shall be made not later than
15 days prior to granting a waiver under such paragraph if the
Secretary grants such waiver in the national security interests
of the United States in accordance with subparagraph (A)(ii) of
such paragraph.
(d) Regulatory Authority.--The Secretary of State shall prescribe
such regulations as are necessary to carry out this section.
SEC. 5. FINANCIAL MEASURES.
(a) Freezing of Assets.--
(1) In general.--The President shall exercise all powers
granted by the International Emergency Economic Powers Act (50
U.S.C. 1701 et seq.) (except that the requirements of section
202 of such Act (50 U.S.C. 1701) shall not apply) to the extent
necessary to freeze and prohibit all transactions in all
property and interests in property of a person who is on the
list required by section 3(a) of this Act if such property and
interests in property are in the United States, come within the
United States, or are or come within the possession or control
of a United States person.
(2) Exception.--Paragraph (1) shall not apply to persons
included on the classified annex under section 3(c)(2) if the
President determines that such an exception is vital for the
national security interests of the United States.
(b) Waiver for National Security Interests.--The Secretary of the
Treasury may waive the application of subsection (a) if the Secretary
determines that such a waiver is in the national security interests of
the United States. Not less than 15 days prior to granting such a
waiver, the Secretary shall provide to the appropriate congressional
committees notice of, and a justification for, the waiver.
(c) Enforcement.--
(1) Penalties.--A person that violates, attempts to
violate, conspires to violate, or causes a violation of this
section or any regulation, license, or order issued to carry
out this section shall be subject to the penalties set forth in
subsections (b) and (c) of section 206 of the International
Emergency Economic Powers Act (50 U.S.C. 1705) to the same
extent as a person that commits an unlawful act described in
subsection (a) of such section.
(2) Requirements for financial institutions.--Not later
than 120 days after the date of the enactment of this Act, the
Secretary of the Treasury shall prescribe or amend regulations
as needed to require each financial institution that is a
United States person and has within its possession or control
assets that are property or interests in property of a person
who is on the list required by section 3(a) if such property
and interests in property are in the United States to certify
to the Secretary that, to the best of the knowledge of the
financial institution, the financial institution has frozen all
assets within the possession or control of the financial
institution that are required to be frozen pursuant to
subsection (a).
(d) Specially Designated Nationals List.--The Secretary of the
Treasury shall include on the list of specially designated nationals
and blocked persons maintained by the Office of Foreign Assets Control
of the Department of the Treasury each person who is on the list
required by section 3(a) of this Act.
(e) Regulatory Authority.--The Secretary of the Treasury shall
issue such regulations, licenses, and orders as are necessary to carry
out this section.
SEC. 6. REPORT TO CONGRESS.
Not later than one year after the date of the enactment of this Act
and annually thereafter, the Secretary of State and the Secretary of
the Treasury shall submit to the appropriate congressional committees a
report on--
(1) the actions taken to carry out this Act, including--
(A) the number of persons added to or removed from
the list required by section 3(a) during the year
preceding the report, the dates on which such persons
have been added or removed, and the reasons for adding
or removing them; and
(B) if few or no such persons have been added to
that list during that year, the reasons for not adding
more such persons to the list; and
(2) efforts by the executive branch to encourage the
governments of other countries to impose sanctions that are
similar to the sanctions imposed under this Act.
SEC. 7. DEFINITIONS.
In this Act:
(1) Admitted; alien.--The terms ``admitted'' and ``alien''
have the meanings given those terms in section 101 of the
Immigration and Nationality Act (8 U.S.C. 1101).
(2) Appropriate congressional committees.--The term
``appropriate congressional committees'' means--
(A) the Committee on Armed Services, the Committee
on Financial Services, the Committee on Foreign
Affairs, the Committee on Homeland Security, the
Committee on the Judiciary, and the Permanent Select
Committee on Intelligence of the House of
Representatives; and
(B) the Committee on Armed Services, the Committee
on Banking, Housing, and Urban Affairs, the Committee
on Foreign Relations, the Committee on Homeland
Security and Governmental Affairs, the Committee on the
Judiciary, and the Select Committee on Intelligence of
the Senate.
(3) Financial institution.--The term ``financial
institution'' has the meaning given that term in section 5312
of title 31, United States Code.
(4) United states person.--The term ``United States
person'' means--
(A) a United States citizen or an alien lawfully
admitted for permanent residence to the United States;
or
(B) an entity organized under the laws of the
United States or of any jurisdiction within the United
States, including a foreign branch of such an entity.
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Cyber Economic Espionage Accountability Act - Expresses the sense of Congress that: cyber economic espionage should be a priority issue in all economic and diplomatic discussions with the People's Republic of China, including during all meetings of the U.S.-China Strategic and Economic Dialogue, and with the Russian Federation and other countries determined to encourage, tolerate, or conduct such cyber economic espionage at appropriate bilateral meetings; the United States should intensify diplomatic efforts in appropriate international fora such as the United Nations (U.N.), the Organisation for Economic Cooperation and Development (OECD), and summits including the G-8 and G-20 summits, to address the harm to the international economic order by cyber economic espionage; and the Department of Justice (DOJ) should increase its efforts to bring economic espionage criminal cases against offending foreign actors, with penalties to include both fines and imprisonment, as well as encourage further cooperation among countries to address cyber economic espionage through criminal prosecutions. Directs the President to submit to Congress, publish, and update a list of foreign government officials or persons acting on behalf of a foreign government that the President determines, based on credible information, are responsible for cyber espionage of intellectual property of U.S. persons or have acted as an agent of, or on behalf of, a person in a matter relating to such cyber espionage activity. Defines a "U.S. person" as: (1) a U.S. citizen or an alien lawfully admitted for permanent residence to the United States; or (2) an entity organized under the laws of the United States or of any jurisdiction within the United States, including a foreign branch of such an entity. Requires the list to be publicly available in unclassified form, but permits persons to be listed in a classified annex if the President determines it is vital for U.S. national security interests. Makes aliens appearing on the list ineligible to: (1) receive a visa to enter the United States, and (2) be admitted to the United States. Requires the Secretary of State to revoke the visa or other documentation of any alien who would be ineligible under such standard. Authorizes the Secretary to waive such ineligibility to comply with international obligations or for national security purposes. Directs the President to exercise powers granted by the International Emergency Economic Powers Act (except with respect to the national emergency declaration requirements for unusual and extraordinary threats) to freeze and prohibit all transactions in all property and property interests of a listed person if such property and interests are in the United States, come within the United States, or are or come within the possession or control of a U.S. person. Exempts persons included on the classified annex if the President determines that such an exception is vital for U.S. national security interests. Permits waivers by the Secretary of the Treasury for U.S. national security interests. Sets forth penalties under the International Emergency Economic Powers Act. Directs the Treasury Secretary to prescribe regulations requiring financial institutions to certify that, to the best of their knowledge, they have frozen all listed persons' assets within their possession or control (if such property and interests are in the United States) that are required to be frozen. Requires persons listed by the President under this Act to be included on the list of specially designated nationals and blocked persons maintained by the Office of Foreign Assets Control.
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SECTION 1. SHORT TITLE.
This Act may be cited as the ``Gifted and Talented Students
Education Act of 2001''.
SEC. 2. FINDINGS AND PURPOSE.
(a) Findings.--The Congress makes the following findings:
(1) Gifted and talented students give evidence of high
performance capability in specific academic fields, or in areas
such as intellectual, creative, artistic, or leadership
capacity, and require services or activities not ordinarily
provided by a school in order to fully develop such
capabilities. Gifted and talented students are from all
cultural, racial, and ethnic backgrounds, and socioeconomic
groups. Some such students have disabilities and for some,
English is not their first language. Many students from such
diverse backgrounds have been historically underrepresented in
gifted education programs.
(2) Because gifted and talented students generally are more
advanced academically, are able to learn more quickly and study
in more depth and complexity than others their age, the
students have special educational needs that require
opportunities and experiences that are different from those
generally available in regular education programs.
(3) Parents and families are essential partners to schools
in developing appropriate educational services for gifted and
talented students. They need access to information, research,
and support regarding the characteristics of gifted children
and their educational and social and emotional needs, as well
as information on available strategies and resources for
education in State and local communities.
(4) There currently is no Federal requirement to identify
or serve the Nation's approximately 3,000,000 gifted and
talented students.
(5) While some States and local educational agencies
allocate resources to educate gifted and talented students,
others do not. Additionally, State laws and State and local
funding, identification, and accountability mechanisms vary
widely, resulting in a vast disparity of services for this
special-needs population.
(6) If the United States is to compete successfully in the
global economy, it is important that more students achieve to
higher levels, and that highly capable students receive an
education that prepares them to perform the most highly
innovative and creative work that is necessary in today's
workplace.
(7) The performance of twelfth-grade advanced students in
the United States on the Third International Mathematics and
Science Study (TIMSS) was among the lowest in the world. In
each of 5 physics content areas in the study and in each of 3
math content areas in the study, the performance of physics and
advanced mathematics students in the United States was among
the lowest of the participating countries.
(8) Elementary school students who are gifted and talented
have already mastered 35 to 50 percent of the material covered
in a school year in several subject areas before the school
year begins.
(9) In 1990, fewer than 2 cents out of every $100 spent on
elementary and secondary education in the United States was
devoted to providing challenging programming for the Nation's
gifted and talented students.
(b) Purpose.--The purpose of this Act is to provide grants to
States to support programs, classes, and other services designed to
meet the needs of the Nation's gifted and talented students in
elementary schools and secondary schools.
SEC. 3. PROGRAM AUTHORIZATION AND ACTIVITIES.
(a) In General.--If the amount appropriated under section 11 for a
fiscal year equals or exceeds $50,000,000, then the Secretary may award
grants to State educational agencies from allotments under section 4 to
enable the State educational agencies to award grants to local
educational agencies under section 6 for developing or expanding gifted
and talented education programs, and providing direct educational
services and materials through 1 or more of the following activities:
(1) Developing and implementing programs to address State
and local needs for inservice training programs for general
educators, specialists in gifted and talented education,
administrators, school counselors, or other personnel at the
elementary and secondary levels.
(2) Making materials and services available through State
regional education service centers, universities, colleges, or
other entities.
(3) Providing direct educational services and materials to
gifted and talented students, which may include curriculum
compacting, modified or adapted curriculum, acceleration,
independent study, and dual enrollment.
(4) Supporting innovative approaches and curricula used by
local educational agencies, individual schools, or consortia of
schools or local educational agencies.
(5) Providing challenging, high-level course work to
individual students or groups of students in schools and school
districts that do not have the resources to otherwise provide
the courses through new and emerging technologies, including
distance learning, developing curriculum packages, compensating
distance-learning educators, or providing other relevant
activities or services, but not for purchasing or upgrading of
technological hardware.
(b) State Infrastructure Costs.--
(1) In general.--A State educational agency may use not
more than 10 percent of the funds received under this Act for--
(A) establishment and implementation of a peer
review process for grant applications under section 7;
(B) supervision of the awarding of funds to local
educational agencies (including consortia of local
educational agencies) to support gifted and talented
students in the State;
(C) planning, supervision, and processing of funds
made available under this Act;
(D) monitoring and evaluation of programs and
activities assisted under this Act;
(E) dissemination of general program information;
(F) creating a State gifted education advisory
board; and
(G) providing technical assistance under this
section.
(2) Education and support.--Not more than 2 percent of the
total amount received under this Act by the State may be used
by the State educational agency to provide information,
education, and support to parents and caregivers of gifted and
talented children to enhance their ability to participate in
decisions regarding their children's educational programs. Such
education, information, and support shall be developed and
carried out by parents and caregivers or by parents and
caregivers in partnership with the State.
SEC. 4. ALLOTMENT TO STATES.
(a) Reservation of Funds.--From the amount made available to carry
out this Act for any fiscal year, the Secretary shall reserve \1/2\ of
1 percent for the Secretary of the Interior for programs under this Act
for teachers, other staff, and administrators in schools operated or
funded by the Bureau of Indian Affairs.
(b) Formula.--Except as provided in subsection (c), from the total
amount made available to carry out this Act for a fiscal year that
remains after making the reservation under subsection (a), the
Secretary shall allot to each State an amount that bears the same
relation to the total remaining amount as the number of children ages 5
through 18 in the State for the preceding academic year bears to the
total number of all such children in all States for such year.
(c) Minimum Award.--No State receiving an allotment under
subsection (b) may receive less than \1/2\ of 1 percent of the total
amount allotted under such subsection.
(d) Reallotment.--If any State does not apply for an allotment
under this section for any fiscal year, the Secretary shall reallot
such amount to the remaining States in accordance with this section.
SEC. 5. STATE APPLICATIONS.
(a) In General.--To be eligible to receive a grant under section 3
or 8, a State educational agency shall submit an application to the
Secretary at such time, in such manner, and accompanied by such
information as the Secretary may reasonably require.
(b) Contents.--The application described in subsection (a) shall
include assurances--
(1) that the State educational agency is designated as the
agency responsible for the administration and supervision of
programs assisted under this Act;
(2) of the State educational agency's ability to provide
matching funds for the activities to be assisted under this Act
in an amount equal to not less than 20 percent of the grant
funds to be received, which matching funds shall be provided in
cash or in-kind;
(3) that funds received under this Act shall be used to
identify and support gifted and talented students, including
students from all economic, ethnic, and racial backgrounds,
students of limited English proficiency, students with
disabilities, and highly gifted students;
(4) that funds received under this Act shall be used only
to supplement, not supplant, the amount of State and local
funds expended for the specialized education and related
services provided for the education of gifted and talented
students; and
(5) that the State shall develop and implement program
assessment models to evaluate educational effectiveness and
ensure program accountability.
(c) Approval.--The Secretary shall approve an application of a
State educational agency under this section if such application meets
the requirements of this section.
SEC. 6. DISTRIBUTION TO LOCAL EDUCATIONAL AGENCIES.
(a) Grant Competition.--A State educational agency shall use not
less than 88 percent of the funds made available to the State education
agency under this Act to award grants, on a competitive basis, to local
educational agencies (including consortia of local educational
agencies) to support programs, classes, and other services designed to
meet the needs of gifted and talented students.
(b) Size of Grant.--A State educational agency shall award a grant
under subsection (a) for any fiscal year in an amount sufficient to
meet the needs of the students to be served under the grant.
SEC. 7. LOCAL APPLICATIONS.
(a) Application.--To be eligible to receive a grant under this Act,
a local educational agency (including a consortium of local educational
agencies) shall submit an application to the State educational agency.
(b) Contents.--Each such application shall include--
(1) an assurance that the funds received under this Act
will be used to identify and support gifted and talented
students, including gifted and talented students from all
economic, ethnic, and racial backgrounds, such students of
limited English proficiency, and such students with
disabilities;
(2) a description of how the local educational agency will
meet the educational needs of gifted and talented students,
including the training of personnel in the education of gifted
and talented students; and
(3) an assurance that funds received under this Act will be
used to supplement, not supplant, the amount of funds the local
educational agency expends for the education of and related
services for, the education of gifted and talented students.
SEC. 8. COMPETITIVE GRANTS TO STATES.
If the amount appropriated under section 11 for a fiscal year is
less than $50,000,000, then the Secretary may use the funds that are
not reserved under section 4(a) to award grants, on a competitive
basis, to State educational agencies to enable the State educational
agencies to begin implementing activities described in section 3
through the awarding of grants on a competitive basis to local
educational agencies.
SEC. 9. REPORTING.
Not later than 1 year after the date of enactment of this Act and
for each subsequent year thereafter, the State educational agency shall
submit an annual report to the Secretary that describes the number of
students served and the activities supported with funds provided under
this Act. The report shall include a description of the measures taken
to comply with the accountability requirements of section 5(b)(5).
SEC. 10. DEFINITIONS.
In this Act:
(1) Gifted and talented.--
(A) In general.--Except as provided in subparagraph
(B), the term ``gifted and talented'' when used with
respect to a person or program--
(i) has the meaning given the term under
applicable State law; or
(ii) in the case of a State that does not
have a State law defining the term, has the
meaning given such term by definition of the
State educational agency or local educational
agency involved.
(B) Special rule.--In the case of a State that does
not have a State law that defines the term, and the
State educational agency or local educational agency
has not defined the term, the term has the meaning
given the term in section 14101 of the Elementary and
Secondary Education Act of 1965 (20 U.S.C. 8801).
(2) Local educational agency.--The term ``local educational
agency'' has the meaning given the term in section 14101 of the
Elementary and Secondary Education Act of 1965 (20 U.S.C.
8801).
(3) Secretary.--The term ``Secretary'' means the Secretary
of Education.
(4) State.--The term ``State'' means each of the 50 States,
the District of Columbia, and the Commonwealth of Puerto Rico.
(5) State educational agency.--The term ``State educational
agency'' has the meaning given the term in section 14101 of the
Elementary and Secondary Education Act of 1965 (20 U.S.C.
8801).
SEC. 11. AUTHORIZATION OF APPROPRIATIONS.
There is authorized to be appropriated to carry out this Act,
$160,000,000 for each of fiscal years 2002, 2003, 2004, 2005, and 2006.
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Gifted and Talented Students Education Act of 2001 - Authorizes the Secretary of Education to make grants to State educational agencies to assist local educational agencies to develop or expand gifted and talented education programs through one or more of the following activities: (1) professional development programs; (2) technical assistance; (3) innovative approaches and curricula; (4) emerging technologies, including distance learning; and (5) direct educational services and materials, which may include compacted, modified, or adapted curricula, acceleration, independent study, and dual enrollment.
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In Kelly v. Robinson, 479 U.S. 36, 50, 107 S.Ct. 353, 361, 93 L.Ed.2d 216 (1986), this Court held that restitution obligations imposed as conditions of probation in state criminal actions are nondischargeable in proceedings under Chapter 7 of the Bankruptcy Code, 11 U.S.C. § 701 et seq. The Court rested its holding on its interpretation of the Code provision that protects from discharge any debt that is "a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit, and is not compensation for actual pecuniary loss." § 523(a)(7). Because the Court determined that restitution orders fall within § 523(a)(7)'s exception to discharge, it declined to reach the question whether restitution orders are "debt[s]" as defined by § 101(11) of the Code. In this case, we must decide whether restitution obligations are dischargeable debts in proceedings under Chapter 13, § 1301 et seq. The exception to discharge relied on in Kelly does not extend to Chapter 13. We conclude, based on the language and structure of the Code, that restitution obligations are "debt[s]" as defined by § 101(11). We therefore hold that such payments are dischargeable under Chapter 13. * In September 1986, respondents Edward and Debora Davenport pleaded guilty in a Pennsylvania court to welfare fraud and were sentenced to one year's probation. As a condition of probation, the state court ordered the Davenports to make monthly restitution payments to the county probation department, which in turn would forward the payments to the Pennsylvania Department of Public Welfare, the victim of the Davenports' fraud. Pennsylvania law mandates restitution of welfare payments obtained through fraud, Pa.Stat.Ann., Tit. 62, § 481(c) (Purdon Supp.1989), and directs the probation section to "forward to the victim the property or payments made pursuant to the restitution order," 18 Pa.Cons.Stat. § 1106(e) (1988). In May 1987, the Davenports filed a petition under Chapter 13 in the United States Bankruptcy Court for the Eastern District of Pennsylvania. In their Chapter 13 statement, they listed their restitution obligation as an unsecured debt payable to the Department of Public Welfare. Soon thereafter, the Adult Probation and Parole Department of Bucks County (Probation Department) commenced a probation violation proceeding, alleging that the Davenports had failed to comply with the restitution order. The Davenports informed the Probation Department of the pending bankruptcy proceedings and requested that the Department withdraw the probation violation charges until the bankruptcy issues were settled. The Probation Department refused, and the Davenports filed an adversary action in Bankruptcy Court seeking both a declaration that the restitution obligation was a dischargeable debt and an injunction preventing the Probation Department from undertaking any further efforts to collect on the obligation. While the adversary action was pending, the Bankruptcy Court confirmed the Davenports' Chapter 13 plan without objection from any creditor.1 Although notified of the proceedings, neither the Probation Department nor the Department of Public Welfare filed a proof of claim in the bankruptcy action. Meanwhile, the Probation Department proceeded in state court on its motion to revoke probation. Although the court declined to revoke the Davenports' probation and extended their payment period, it nonetheless ruled that its restitution order remained in effect. The Bankruptcy Court subsequently held that the Davenports' restitution obligation was an unsecured debt dischargeable under 11 U.S.C. § 1328(a). 83 B.R. 309 (ED Pa.1988). On appeal, the District Court reversed, holding that state-imposed criminal restitution obligations cannot be discharged in a Chapter 13 bankruptcy. 89 B.R. 428 (ED Pa.1988). The District Court emphasized the federalism concerns that are implicated when federal courts intrude on state criminal processes, id., at 430, and relied substantially on dicta in Kelly, supra, 479 U.S., at 50, 107 S.Ct., at 361, where the Court expressed "serious doubts whether Congress intended to make criminal penalties 'debts' " under the Code. The Court of Appeals for the Third Circuit reversed, concluding that "the plain language of the chapter" demonstrated that restitution orders are debts within the meaning of the Code and hence dischargeable in proceedings under Chapter 13. In re Johnson-Allen, 871 F.2d 421, 428 (1989). To address a conflict among Bankruptcy Courts on this issue,2 we granted certiorari, 493 U.S. 808, 110 S.Ct. 49, 107 L.Ed.2d 18 (1989). Our construction of the term "debt" is guided by the fundamental canon that statutory interpretation begins with the language of the statute itself. Landreth Timber Co. v. Landreth, 471 U.S. 681, 685, 105 S.Ct. 2297, 2301, 85 L.Ed.2d 692 (1985). Section 101(11) of the Bankruptcy Code defines "debt" as a "liability on a claim." This definition reveals Congress' intent that the meanings of "debt" and "claim" be coextensive. See also H.R.Rep. No. 95-595, p. 310 (1977); S.Rep. No. 95-989, p. 23 (1978), U.S.Code Cong. & Admin.News 1978, p. 5787. Thus, the meaning of "claim" is crucial to our analysis. A "claim" is a "right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured." 11 U.S.C. § 101(4)(A) (emphasis added). As is apparent, Congress chose expansive language in both definitions relevant to this case. For example, to the extent the phrase "right to payment" is modified in the statute, the modifying language ("whether or not such right is . . .") reflects Congress' broad rather than restrictive view of the class of obligations that qualify as a "claim" giving rise to a "debt." See also H.R.Rep. No. 95-595, supra, at 309, U.S.Code Cong. & Admin.News 1978, p. 6266 (describing definition of "claim" as "broadest possible" and noting that Code "contemplates that all legal obligations of the debtor . . . will be able to be dealt with in the bankruptcy case"); accord, S.Rep. No. 95-989, supra, at 22, U.S.Code Cong. & Admin.News 1978, p. 5808. Petitioners maintain that a restitution order is not a "right to payment" because neither the Probation Department nor the victim stands in a traditional creditor-debtor relationship with the criminal offender. In support of this position, petitioners refer to Kelly's discussion of the special purposes of punishment and rehabilitation underlying the imposition of restitution obligations. 479 U.S., at 52, 107 S.Ct., at 362. Petitioners also emphasize that restitution orders are enforced differently from other obligations that are considered "rights to payment." In Kelly, the Court decided that restitution orders fall within 11 U.S.C. § 523(a)(7)'s exception to discharge provision, which protects from discharge any debt "to the extent such debt is for a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit, and is not compensation for actual pecuniary loss." In reaching that conclusion, the Court necessarily found that such orders are "not compensation for actual pecuniary loss." Rather, "[b]ecause criminal proceedings focus on the State's interests in rehabilitation and punishment," the Court held that "restitution orders imposed in such proceedings operate 'for the benefit of' the State" and not " 'for . . . compensation' of the victim." 479 U.S., at 53, 107 S.Ct., at 363. Contrary to petitioners' argument, however, the Court's prior characterization of the purposes underlying restitution orders does not bear on our construction of the phrase "right to payment" in § 101(4)(A). The Court in Kelly analyzed the purposes of restitution in construing the qualifying clauses of § 523(a)(7), which explicitly tie the application of that provision to the purpose of the compensation required. But the language employed to define "claim" in § 101(4)(A) makes no reference to purpose. The plain meaning of a "right to payment" is nothing more nor less than an enforceable obligation, regardless of the objectives the State seeks to serve in imposing the obligation. Nor does the State's method of enforcing restitution obligations suggest that such obligations are not "claims." Although neither the Probation Department nor the victim can enforce restitution obligations in civil proceedings, Commonwealth v. Mourar, 349 Pa.Super. 583, 603, 504 A.2d 197, 208 (1986), vacated and remanded on other grounds, 517 Pa. 83, 534 A.2d 1050 (1987), the obligation is enforceable by the substantial threat of revocation of probation and incarceration. That the Probation Department's enforcement mechanism is criminal rather than civil does not alter the restitution order's character as a "right to payment." Indeed, the right created by such an order made as a condition of probation is in some sense greater than the right conferred by an ordinary civil obligation, because it is secured by the debtor's freedom rather than his property. Accordingly, we do not regard the purpose or enforcement mechanism of restitution orders as placing such orders outside the scope of § 101(4)(A). Moving beyond the language of § 101, the United States, appearing as amicus in support of petitioners, contends that other provisions in the Code, particularly the exemption to the automatic stay provision, § 362(b)(1), and Chapter 7's distribution of claims provision, § 726, reflect Congress' intent to exempt restitution orders from discharge under Chapter 13. We are not persuaded, however, that the language or the structure of the Code as a whole supports that conclusion. Section 362(a) automatically stays a wide array of collection and enforcement proceedings against the debtor and his property.3 Section 362(b)(1) exempts from the stay "the commencement or continuation of a criminal action or proceeding against the debtor." According to the Senate Report, the exception from the automatic stay ensures that "[t]he bankruptcy laws are not a haven for criminal offenders." S.Rep. No. 95-989, supra, at 51, U.S.Code Cong. & Admin.News 1978, p. 5837. Section 362(b)(1) does not, however, explicitly exempt governmental efforts to collect restitution obligations from a debtor. Cf. 11 U.S.C. § 362(b)(2) ("collection of alimony, maintenance, or support" is not barred by the stay). Nonetheless, the United States argues that it would be anomalous to construe the Code as eliminating a haven for criminal offenders under the automatic stay provision while granting them sanctuary from restitution obligations under Chapter 13. We find no inconsistency in these provisions. Section 362(b)(1) ensures that the automatic stay provision is not construed to bar federal or state prosecution of alleged criminal offenses. It is not an irrational or inconsistent policy choice to permit prosecution of criminal offenses during the pendency of a bankruptcy action and at the same time to preclude probation officials from enforcing restitution orders while a debtor seeks relief under Chapter 13. Congress could well have concluded that maintaining criminal prosecutions during bankruptcy proceedings is essential to the functioning of government but that, in the context of Chapter 13, a debtor's interest in full and complete release of his obligations outweighs society's interest in collecting or enforcing a restitution obligation outside the agreement reached in the Chapter 13 plan. The United States' reliance on § 726 is likewise unavailing. That section establishes the order in which claims are settled under Chapter 7. Subsection 726(a)(4) assigns a low priority to "any allowed claim, whether secured or unsecured, for any fine, penalty, or forfeiture . . . to the extent that such fine, penalty, forfeiture, or damages are not compensation for actual pecuniary loss suffered by the holder of such claim." The United States argues that the phrase "fine, penalty, or forfeiture" should be construed to apply only to civil fines, penalties, and forfeitures, and not to criminal restitution obligations. Otherwise, State and Federal Governments will receive disfavored treatment relative to other creditors both in Chapter 7 and Chapter 13 proceedings, see § 1325(a)(4) (a Chapter 13 plan must ensure that unsecured creditors receive no worse treatment than they would under Chapter 7), a result the United States regards as anomalous given the strength of the governmental interest in collecting restitution payments. The central difficulty with the United States' construction of § 726(a)(4) is that it conflicts with Kelly's holding that § 523(a)(7), the exception to discharge provision, applies to criminal restitution obligations. 479 U.S., at 51, 107 S.Ct., at 362 (§ 523(a)(7) "creates a broad exception for all penal sanctions"). The United States acknowledges that the phrase "fine, penalty, or forfeiture" as it appears in § 726(a)(4) must have the same meaning as in § 523(a)(7). We are unwilling to revisit Kelly's determination that § 523(a)(7) "protects traditional criminal fines [by] codif[ying] the judicially created exception to discharge for fines." Ibid. (emphasis added). Thus, we reject the view that §§ 523(a)(7) and 726(a)(4) implicitly refer only to civil fines and penalties.4 The United States' position here highlights the tension between Kelly's interpretation of § 523(a)(7) and its dictum suggesting that restitution obligations are not "debts." See supra, at 557. As stated above, Kelly found explicitly that § 523(a)(7) "codifies the judicially created exception to discharge" for both civil and criminal fines. 479 U.S., at 51, 107 S.Ct., at 362. Had Congress believed that restitution obligations were not "debts" giving rise to "claims," it would have had no reason to except such obligations from discharge in § 523(a)(7). Given Kelly's interpretation of § 523(a)(7), then, it would be anomalous to construe "debt" narrowly so as to exclude criminal restitution orders. Such a narrow construction of "debt" necessarily renders § 523(a)(7)'s codification of the judicial exception for criminal restitution orders mere surplusage. Our cases express a deep reluctance to interpret a statutory provision so as to render superfluous other provisions in the same enactment. See, e.g., Mackey v. Lanier Collection Agency & Service, Inc., 486 U.S. 825, 837, 108 S.Ct. 2182, 2189, 100 L.Ed.2d 836 (1988). Moreover, in locating Congress' policy choice regarding the dischargeability of restitution orders in § 523(a)(7), Kelly is faithful to the language and structure of the Code: Congress defined "debt" broadly and took care to except particular debts from discharge where policy considerations so warranted. Accordingly, Congress secured a broader discharge for debtors under Chapter 13 than Chapter 7 by extending to Chapter 13 proceedings some, but not all, of § 523(a)'s exceptions to discharge. See 5 Collier on Bankruptcy ¶ 1328.01[1][c] (15th ed. 1986) ("[T]he dischargeability of debts in chapter 13 that are not dischargeable in chapter 7 represents a policy judgment that [it] is preferable for debtors to attempt to pay such debts to the best of their abilities over three years rather than for those debtors to have those debts hanging over their heads indefinitely, perhaps for the rest of their lives") (footnote omitted). Among those exceptions that Congress chose not to extend to Chapter 13 proceedings is § 523(a)(7)'s exception for debts arising from a "fine, penalty, or forfeiture." Thus, to construe "debt" narrowly in this context would be to override the balance Congress struck in crafting the appropriate discharge exceptions for Chapter 7 and Chapter 13 debtors. Our refusal to carve out a broad judicial exception to discharge for restitution orders does not signal a retreat from the principles applied in Kelly. We will not read the Bankruptcy Code to erode past bankruptcy practice absent a clear indication that Congress intended such a departure. Kelly, supra, 479 U.S., at 47, 107 S.Ct., at 359 (citing Midlantic National Bank v. New Jersey Dept. of Environmental Protection, 474 U.S. 494 (1986)). In Kelly, the Court examined pre-Code practice and identified a general reluctance "to interpret federal bankruptcy statutes to remit state criminal judgments." 479 U.S., at 44, 107 S.Ct., at 360. This pre-Code practice informed the Court's conclusion that § 523(a)(7) broadly applies to all penal sanctions, including criminal fines. Here, on the other hand, the statutory language plainly reveals Congress' intent not to except restitution orders from discharge in certain Chapter 13 proceedings. This intent is clear from Congress' decision to limit the exceptions to discharge applicable to Chapter 13, § 1328(a), as well as its adoption of the "broadest possible" definition of "debt" in § 101(11). See supra, at 558. Nor do we conclude lightly that Congress intended to interfere with States' administration of their criminal justice systems. Younger v. Harris, 401 U.S. 37, 46, 91 S.Ct. 746, 751, 27 L.Ed.2d 669 (1971). As the Court stated in Kelly, permitting discharge of criminal restitution obligations may hamper the flexibility of state criminal judges in fashioning appropriate sentences and require state prosecutors to participate in federal bankruptcy proceedings to safeguard state interests. 479 U.S., at 49, 107 S.Ct., at 360. Certainly the legitimate state interest in avoiding such intrusions is not lessened simply because the offender files under Chapter 13 rather than Chapter 7. Nonetheless, the concerns animating Younger cannot justify rewriting the Code to avoid federal intrusion. Where, as here, congressional intent is clear, our sole function is to enforce the statute according to its terms. Restitution obligations constitute debts within the meaning of § 101(11) of the Bankruptcy Code and are therefore dischargeable under Chapter 13. The decision of the Court of Appeals is affirmed. It is so ordered.
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Respondents pleaded guilty to welfare fraud and were ordered by a Pennsylvania court, as a condition of probation, to make monthly restitution payments to petitioner county probation department for petitioner state welfare department. Subsequently, respondents filed a petition under Chapter 13 of the Bankruptcy Code in the Bankruptcy Court, listing the restitution obligation as an unsecured debt. After the probation department commenced a probation violation proceeding in state court, alleging that respondents had failed to comply with the restitution order, respondents filed an adversary action in the Bankruptcy Court seeking both a declaration that the restitution obligation was a dischargeable debt and an injunction preventing the probation department from undertaking any further efforts to collect on the obligation. The Bankruptcy Court held that the obligation was an unsecured debt dischargeable under Chapter 13. The District Court reversed, relying on Kelly v. Robinson, 479 U. S. 36, which held that restitution obligations are nondischargeable in Chapter 7 proceedings because they fall within Code § 523(a)(7)'s exception to discharge for a debt that is a government "fine, penalty, or forfeiture . . . and is not compensation for actual pecuniary loss." The District Court emphasized the Court's dicta in Kelly that Congress did not intend to make criminal penalties "debts" under the Code. The court also emphasized the federalism concerns that are implicated when federal courts intrude on state criminal proceedings. The Court of Appeals reversed. Held: The Code's language and structure demonstrate that restitution obligations constitute "debts" within the meaning of § 101(11) and are therefore dischargeable under Chapter 13. Pp. 557-564. (a) Section 101(11)'s definition of "debt" as a "liability on a claim" reveals Congress' intent that the meanings of "debt" and "claim" be coextensive. Furthermore, § 101(4)(a)'s definition of a "claim" as a "right to payment" broadly contemplates any enforceable obligation of the debtor, including a restitution order. Petitioners' reliance on Kelly's discussion emphasizing the special purposes of punishment and rehabilitation that underlie the imposition of restitution obligations is misplaced. Unlike § 523(a)(7), which explicitly ties its application to the purpose of the compensation, § 104(4)(A) makes no reference to the objectives the State seeks to serve in imposing an obligation. That the probation department's enforcement mechanism is criminal rather than civil also does not alter the restitution order's character as a "right to payment" and, indeed, may make the right greater than that conferred by an ordinary civil obligation, since it is secured by the debtor's freedom rather than his property. Pp. 557-560. (b) Other Code provisions do not reflect a congressional intent to exempt restitution orders from Chapter 13 discharge. Section 362(b)(1), which removes criminal prosecutions of the debtor from the operation of the Code's automatic stay provision, is not inconsistent with granting him sanctuary from restitution orders under Chapter 13. Congress could well have concluded that maintaining criminal prosecutions during bankruptcy proceedings is essential to the functioning of government, but that a debtor's interest in full and complete release of his obligations outweighs society's interest in collecting or enforcing a restitution obligation outside the agreement reached in a Chapter 13 plan. Nor must § 726(a)(4)-which in effect establishes the order for settlement of claims under such plans, assigning a low priority to a claim "for any fine, penalty, or forfeiture"-be construed to apply only to civil fines and not to criminal restitution orders in order to assure that governments do not receive disfavored treatment relative to other creditors. That construction conflicts with Kelly's holding that the quoted phrase, when used in § 523(a)(7), applies to criminal restitution obligations. It also highlights the tension between Kelly's interpretation of § 523(a)(7) and its dictum suggesting that restitution obligations are not "debts." If Congress believed that such obligations were not "debts" giving rise to "claims," it would have had no reason to except the obligations from discharge, and § 523(a)(7) would be mere surplusage. Moreover, Kelly is faithful to the language and structure of the Code: Congress defined "debt" broadly and carefully excepted particular debts from discharge where policy considerations so warranted. In thus securing a broader discharge of debtors under Chapter 13 than Chapter 7, Congress chose not to extend § 523(a)(7)'s exception to Chapter 13. Thus, it would override the balance Congress struck in crafting the appropriate discharge exceptions to construe "debt" narrowly in this context. Pp. 560-563. (c) This holding does not signal a retreat from the principles applied in Kelly. The Code will not be read to erode past bankruptcy practice absent a clear indication that Congress intended such a departure. However, where, as here, congressional intent is clear, the Court's function is to enforce the statute according to its terms, even where this means concluding that Congress intended to interfere with States' administration of their criminal justice systems. Pp. 563-564. 871 F. 2d 421, affirmed.
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Petitioner Elijah Manuel was held in jail for some seven weeks after a judge relied on allegedly fabricated evidence to find probable cause that he had committed a crime. The primary question in this case is whether Manuel may bring a claim based on the Fourth Amendment to contest the legality of his pretrial confinement. Our answer follows from settled precedent. The Fourth Amendment, this Court has recognized, establishes “the standards and procedures” governing pretrial detention. See, e.g., Gerstein v. Pugh, 420 U. S. 103, 111 (1975) . And those constitutional protections apply even after the start of “legal process” in a criminal case—here, that is, after the judge’s determination of probable cause. See Albright v. Oliver, 510 U. S. 266, 274 (1994) (plurality opinion); id., at 290 (Souter, J., concurring in judgment). Accordingly, we hold today that Manuel may challenge his pretrial detention on the ground that it violated the Fourth Amendment (while we leave all other issues, including one about that claim’s timeliness, to the court below). I Shortly after midnight on March 18, 2011, Manuel was riding through Joliet, Illinois, in the passenger seat of a Dodge Charger, with his brother at the wheel. A pair of Joliet police officers pulled the car over when the driver failed to signal a turn. See App. 90. According to the complaint in this case, one of the officers dragged Manuel from the car, called him a racial slur, and kicked and punched him as he lay on the ground. See id., at 31–32, 63.[1] The policeman then searched Manuel and found a vitamin bottle containing pills. See id., at 64. Suspecting that the pills were actually illegal drugs, the officers conducted a field test of the bottle’s contents. The test came back negative for any controlled substance, leaving the officers with no evidence that Manuel had committed a crime. See id., at 69. Still, the officers arrested Manuel and took him to the Joliet police station. See id., at 70. There, an evidence technician tested the pills once again, and got the same (negative) result. See ibid. But the technician lied in his report, claiming that one of the pills was “found to be . . . positive for the probable presence of ecstasy.” Id., at 92. Similarly, one of the arresting officers wrote in his report that “[f ]rom [ his] training and experience, [ he] knew the pills to be ecstasy.” Id., at 91. On the basis of those statements, another officer swore out a criminal complaint against Manuel, charging him with unlawful possession of a controlled substance. See id., at 52–53. Manuel was brought before a county court judge later that day for a determination of whether there was probable cause for the charge, as necessary for further detention. See Gerstein, 420 U. S., at 114 (requiring a judicial finding of probable cause following a warrantless arrest to impose any significant pretrial restraint on liberty); Ill. Comp. Stat., ch. 725, §5/109–1 (West 2010) (implementing that constitutional rule). The judge relied exclusively on the criminal complaint—which in turn relied exclusively on the police department’s fabrications—to support a finding of probable cause. Based on that determination, he sent Manuel to the county jail to await trial. In the somewhat obscure legal lingo of this case, Manuel’s subsequent detention was thus pursuant to “legal process”—because it followed from, and was authorized by, the judge’s probable-cause determination.[2] While Manuel sat in jail, the Illinois police laboratory reexamined the seized pills, and on April 1, it issued a report concluding (just as the prior two tests had) that they contained no controlled substances. See App. 51. But for unknown reasons, the prosecution—and, critically for this case, Manuel’s detention—continued for more than another month. Only on May 4 did an Assistant State’s Attorney seek dismissal of the drug charge. See id., at 48, 101. The County Court immediately granted the request, and Manuel was released the next day. In all, he had spent 48 days in pretrial detention. On April 22, 2013, Manuel brought this lawsuit under 42 U. S. C. §1983 against the City of Joliet and several of its police officers (collectively, the City). Section 1983 creates a “species of tort liability,” Imbler v. Pachtman, 424 U. S. 409, 417 (1976) , for “the deprivation of any rights, privileges, or immunities secured by the Constitution,” §1983. Manuel’s complaint alleged that the City violated his Fourth Amendment rights in two ways—first by arresting him at the roadside without any reason, and next by “detaining him in police custody” for almostseven weeks based entirely on made-up evidence. See App. 79–80.[3] The District Court dismissed Manuel’s suit. See 2014 WL 551626 (ND Ill., Feb. 12, 2014). The court first held that the applicable two-year statute of limitations barred Manuel’s claim for unlawful arrest, because more than two years had elapsed between the date of his arrest (March 18, 2011) and the filing of his complaint (April 22, 2013). But the court relied on another basis in rejecting Manuel’s challenge to his subsequent detention (which stretched from March 18 to May 5, 2011). Binding Circuit precedent, the District Court explained, made clear that pretrial detention following the start of legal process could not give rise to a Fourth Amendment claim. See id., at *1 (citing, e.g., Newsome v. McCabe, 256 F. 3d 747, 750 (CA7 2001)). According to that line of decisions, a §1983 plaintiff challenging such detention must allege a breach of the Due Process Clause—and must show, to recover on that theory, that state law fails to provide an adequate remedy. See 2014 WL 551626, at *1–*2. Because Manuel’s complaint rested solely on the Fourth Amendment—and because, in any event, Illinois’s remedies were robust enough to preclude the due process avenue—the District Court found that Manuel had no way to proceed. See ibid. The Court of Appeals for the Seventh Circuit affirmed the dismissal of Manuel’s claim for unlawful detention (the only part of the District Court’s decision Manuel appealed). See 590 Fed. Appx. 641 (2015). Invoking its prior caselaw, the Court of Appeals reiterated that such claims could not be brought under the Fourth Amendment. Once a person is detained pursuant to legal process, the court stated, “the Fourth Amendment falls out of the picture and the detainee’s claim that the detention is improper becomes [one of] due process.” Id., at 643–644 (quoting Llovet v. Chicago, 761 F. 3d 759, 763 (CA7 2014)). And again: “When, after the arrest[,] a person is not let go when he should be, the Fourth Amendment gives way to the due process clause as a basis for challenging his detention.” 590 Fed. Appx., at 643 (quoting Llovet, 761 F. 3d, at 764). So the Seventh Circuit held that Manuel’s complaint, in alleging only a Fourth Amendment violation, rested on the wrong part of the Constitution: A person detained following the onset of legal process could at most (although, the court agreed, not in Illinois) challenge his pretrial confinement via the Due Process Clause. See 590 Fed. Appx., at 643–644. The Seventh Circuit recognized that its position makes it an outlier among the Courts of Appeals, with ten others taking the opposite view. See id., at 643; Hernandez-Cuevas v. Taylor, 723 F. 3d 91, 99 (CA1 2013) (“[T]here is now broad consensus among the circuits that the Fourth Amendment right to be free from seizure but upon probable cause extends through the pretrial period”).[4] Still, the court decided, Manuel had failed to offer a sufficient reason for overturning settled Circuit precedent; his argument, albeit “strong,” was “better left for the Supreme Court.” 590 Fed. Appx., at 643. On cue, we granted certiorari. 577 U. S. ___ (2016). II The Fourth Amendment protects “[t]he right of the people to be secure in their persons . . . against unreasonable . . . seizures.” Manuel’s complaint seeks just that protection. Government officials, it recounts, detained—which is to say, “seiz[ed]”—Manuel for 48 days following his arrest. See App. 79–80; Brendlin v. California, 551 U. S. 249, 254 (2007) (“A person is seized” whenever officials “restrain[ ] his freedom of movement” such that he is “not free to leave”). And that detention was “unreason-able,” the complaint continues, because it was based solely on false evidence, rather than supported by probable cause. See App. 79–80; Bailey v. United States, 568 U. S. 186, 192 (2013) (“[T]he general rule [is] that Fourth Amendment seizures are ‘reasonable’ only if based on probable cause to believe that the individual has committed a crime”). By their respective terms, then, Manuel’s claim fits the Fourth Amendment, and the Fourth Amendment fits Manuel’s claim, as hand in glove. This Court decided some four decades ago that a claim challenging pretrial detention fell within the scope of the Fourth Amendment. In Gerstein, two persons arrested without a warrant brought a §1983 suit complaining that they had been held in custody for “a substantial period solely on the decision of a prosecutor.” 420 U. S., at 106. The Court looked to the Fourth Amendment to analyze—and uphold—their claim that such a pretrial restraint on liberty is unlawful unless a judge (or grand jury) first makes a reliable finding of probable cause. See id., at 114, 117, n. 19. The Fourth Amendment, we began, establishes the minimum constitutional “standards and procedures” not just for arrest but also for ensuing “detention.” Id., at 111. In choosing that Amendment “as the rationale for decision,” the Court responded to a concurring Justice’s view that the Due Process Clause offered the better framework: The Fourth Amendment, the majority countered, was “tailored explicitly for the criminal justice system, and it[ ] always has been thought to define” the appropriate process “for seizures of person[s] . . . in criminal cases, including the detention of suspects pending trial.” Id., at 125, n. 27. That Amendment, standing alone, guaranteed “a fair and reliable determination of probable cause as a condition for any significant pretrial restraint.” Id., at 125. Accordingly, those detained prior to trial without such a finding could appeal to “the Fourth Amendment’s protection against unfounded invasions of liberty.” Id., at 112; see id., at 114.[5] And so too, a later decision indicates, those objecting to a pretrial deprivation of liberty may invoke the Fourth Amendment when (as here) that deprivation occurs after legal process commences. The §1983 plaintiff in Albright complained of various pretrial restraints imposed after a court found probable cause to issue an arrest warrant, and then bind him over for trial, based on a policeman’s unfounded charges. See 510 U. S., at 268–269 (plurality opinion). For uncertain reasons, Albright ignored the Fourth Amendment in drafting his complaint; instead, he alleged that the defendant officer had infringed his substantive due process rights. This Court rejected that claim, with five Justices in two opinions remitting Albright to the Fourth Amendment. See id., at 271 (plurality opinion) (“We hold that it is the Fourth Amendment . . . under which [ his] claim must be judged”); id., at 290 (Souter, J., concurring in judgment) (“[I]njuries like those [ he] alleges are cognizable in §1983 claims founded upon . . . the Fourth Amendment”). “The Framers,” the plurality wrote, “considered the matter of pretrial deprivations of liberty and drafted the Fourth Amendment to address it.” Id., at 274. That the deprivations at issue were pursuant to legal process made no difference, given that they were (allegedly) unsupported by probable cause; indeed, neither of the two opinions so much as mentioned that procedural circumstance. Relying on Gerstein, the plurality stated that the Fourth Amendment remained the “relevan[t]” constitutional provision to assess the “deprivations of liberty”—most notably, pretrial detention—“that go hand in hand with criminal prosecutions.” 510 U. S., at 274; see id., at 290 (Souter, J., concurring in judgment) (“[R]ules of recovery for such harms have naturally coalesced under the Fourth Amendment”). As reflected in Albright’s tracking of Gerstein’s analysis, pretrial detention can violate the Fourth Amendment not only when it precedes, but also when it follows, the start of legal process in a criminal case. The Fourth Amendment prohibits government officials from detaining a person in the absence of probable cause. See supra, at 6. That can happen when the police hold someone without any reason before the formal onset of a criminal proceeding. But it also can occur when legal process itself goes wrong—when, for example, a judge’s probable-cause determination is predicated solely on a police officer’s false statements. Then, too, a person is confined without constitutionally adequate justification. Legal process has gone forward, but it has done nothing to satisfy the Fourth Amendment’s probable-cause requirement. And for that reason, it cannot extinguish the detainee’s Fourth Amendment claim—or somehow, as the Seventh Circuit has held, convert that claim into one founded on the Due Process Clause. See 590 Fed. Appx., at 643–644. If the complaint is that a form of legal process resulted in pretrial detention unsupported by probable cause, then the right allegedly infringed lies in the Fourth Amendment.[6] For that reason, and contrary to the Seventh Circuit’s view, Manuel stated a Fourth Amendment claim when he sought relief not merely for his (pre-legal-process) arrest, but also for his (post-legal-process) pretrial detention.[7] Consider again the facts alleged in this case. Police officers initially arrested Manuel without probable cause, based solely on his possession of pills that had field tested negative for an illegal substance. So (putting timeliness issues aside) Manuel could bring a claim for wrongful arrest under the Fourth Amendment. And the same is true (again, disregarding timeliness) as to a claim for wrongful detention—because Manuel’s subsequent weeks in custody were also unsupported by probable cause, and so also constitutionally unreasonable. No evidence of Manuel’s criminality had come to light in between the roadside arrest and the County Court proceeding initiating legal process; to the contrary, yet another test of Man-uel’s pills had come back negative in that period. Allthat the judge had before him were police fabrications about the pills’ content. The judge’s order holding Manuel for trial therefore lacked any proper basis. And that means Manuel’s ensuing pretrial detention, no less than his original arrest, violated his Fourth Amendment rights. Or put just a bit differently: Legal process did not expunge Manuel’s Fourth Amendment claim because the process he received failed to establish what that Amendment makes essential for pretrial detention—probable cause to believe he committed a crime.[8] III Our holding—that the Fourth Amendment governs a claim for unlawful pretrial detention even beyond the start of legal process—does not exhaust the disputed legal issues in this case. It addresses only the threshold inquiry in a §1983 suit, which requires courts to “identify the specific constitutional right” at issue. Albright, 510 U. S., at 271. After pinpointing that right, courts still must determine the elements of, and rules associated with, an action seeking damages for its violation. See, e.g., Carey v. Piphus, 435 U. S. 247 –258 (1978). Here, the parties particularly disagree over the accrual date of Manuel’s Fourth Amendment claim—that is, the date on which the applicable two-year statute of limitations began to run. The timeliness of Manuel’s suit hinges on the choice between their proposed dates. But with the following brief comments, we remand that issue to the court below. In defining the contours and prerequisites of a §1983 claim, including its rule of accrual, courts are to look first to the common law of torts. See ibid. (explaining that tort principles “provide the appropriate starting point” in specifying the conditions for recovery under §1983); Wallace v. Kato, 549 U. S. 384 –390 (2007) (same for accrual dates in particular). Sometimes, that review of common law will lead a court to adopt wholesale the rules that would apply in a suit involving the most analogous tort. See id., at 388–390; Heck v. Humphrey, 512 U. S. 477 –487 (1994). But not always. Common-law principles are meant to guide rather than to control the definition of §1983 claims, serving “more as a source of inspired examples than of prefabricated components.” Hartman v. Moore, 547 U. S. 250, 258 (2006) ; see Rehberg v. Paulk, 566 U. S. 356, 366 (2012) (noting that “§1983 is [not] simply a federalized amalgamation of pre-existing common-law claims”). In applying, selecting among, or adjust-ing common-law approaches, courts must closely attend to the values and purposes of the constitutional right at issue. With these precepts as backdrop, Manuel and the City offer competing views about what accrual rule should govern a §1983 suit challenging post-legal-process pretrial detention. According to Manuel, that Fourth Amendment claim accrues only upon the dismissal of criminal charges—here, on May 4, 2011, less than two years before he brought his suit. See Reply Brief 2; Brief for United States as Amicus Curiae 24–25, n. 16 (taking the same position). Relying on this Court’s caselaw, Manuel analogizes his claim to the common-law tort of malicious prosecution. See Reply Brief 9; Wallace, 549 U. S., at 389–390. An element of that tort is the “termination of the . . . proceeding in favor of the accused”; and accordingly, the statute of limitations does not start to run until that termination takes place. Heck, 512 U. S., at 484, 489. Man-uel argues that following the same rule in suits like his will avoid “conflicting resolutions” in §1983 litigation and criminal proceedings by “preclud[ing] the possibility of the claimant succeeding in the tort action after having been convicted in the underlying criminal prosecution.” Id., at 484, 486; see Reply Brief 10–11; Brief for United States as Amicus Curiae 24–25, n. 16. In support of Manuel’s position, all but two of the ten Courts of Appeals that have recognized a Fourth Amendment claim like his have incorporated a “favorable termination” element and so pegged the statute of limitations to the dismissal of the criminal case. See n. 4, supra.[9] That means in the great majority of Circuits, Manuel’s claim would be timely. The City, however, contends that any such Fourth Amendment claim accrues (and the limitations period starts to run) on the date of the initiation of legal process—here, on March 18, 2011, more than two years before Manuel filed suit. See Brief for Respondents 33. According to the City, the most analogous tort to Manuel’s constitutional claim is not malicious prosecution but false arrest, which accrues when legal process commences. See Tr. of Oral Arg. 47; Wallace, 549 U. S., at 389 (noting accrual rule for false arrest suits). And even if malicious prosecution were the better comparison, the City continues, a court should decline to adopt that tort’s favorable-termination element and associated accrual rule in adjudicating a §1983 claim involving pretrial detention. That element, the City argues, “make[s] little sense” in this context because “the Fourth Amendment is concerned not with the outcome of a prosecution, but with the legality of searches and seizures.” Brief for Respondents 16. And finally, the City contends that Manuel forfeited an alternative theory for treating his date of release as the date of accrual: to wit, that his pretrial detention “constitute[d] a continuing Fourth Amendment violation,” each day of which triggered the statute of limitations anew. Id., at 29, and n. 6; see Tr. of Oral Arg. 36; see also Albright, 510 U. S., at 280 (Ginsburg, J., concurring) (propounding a similar view). So Manuel, the City concludes, lost the opportunity to recover for his pretrial detention by waiting too long to file suit. We leave consideration of this dispute to the Court of Appeals. “[W]e are a court of review, not of first view.” Cutter v. Wilkinson, 544 U. S. 709 , n. 7 (2005). Because the Seventh Circuit wrongly held that Manuel lacked any Fourth Amendment claim once legal process began, the court never addressed the elements of, or rules applicable to, such a claim. And in particular, the court never confronted the accrual issue that the parties contest here.[10] On remand, the Court of Appeals should decide that question, unless it finds that the City has previously waived its timeliness argument. See Reply to Brief in Opposition 1–2 (addressing the possibility of waiver); Tr. of Oral Arg. 40–44 (same). And so too, the court may consider any other still-live issues relating to the contours of Manuel’s Fourth Amendment claim for unlawful pretrial detention. * * * For the reasons stated, we reverse the judgment of the Seventh Circuit and remand the case for further proceedings consistent with this opinion. It is so ordered.Notes 1 Because we here review an order dismissing Manuel’s suit, we accept as true all the factual allegations in his complaint. See, e.g., Leatherman v. Tarrant County Narcotics Intelligence and Coordination Unit, 507 U. S. 163, 164 (1993) . 2 Although not addressed in Manuel’s complaint, the police department’s alleged fabrications did not stop at this initial hearing on probable cause. About two weeks later, on March 30, a grand jury indicted Manuel based on similar false evidence: testimony from one of the arresting officers that “[t]he pills field tested positive” for ecstasy. App. 96 (grand jury minutes). 3 Manuel’s allegation of unlawful detention concerns only the period after the onset of legal process—here meaning, again, after the County Court found probable cause that he had committed a crime. See supra, at 3. The police also held Manuel in custody for several hours between his warrantless arrest and his first appearance in court. But throughout this litigation, Manuel has treated that short period as part and parcel of the initial unlawful arrest. See, e.g., Reply Brief 1. 4 See also Singer v. Fulton County Sheriff, 63 F. 3d 110, 114–118 (CA2 1995); McKenna v. Philadelphia, 582 F. 3d 447, 461 (CA3 2009); Lambert v. Williams, 223 F. 3d 257, 260–262 (CA4 2000); Castellano v. Fragozo, 352 F. 3d 939, 953–954, 959–960 (CA5 2003) (en banc); Sykes v. Anderson, 625 F. 3d 294, 308–309 (CA6 2010); Galbraith v. County of Santa Clara, 307 F. 3d 1119, 1126–1127 (CA9 2002); Wilkins v. De-Reyes, 528 F. 3d 790, 797–799 (CA10 2008); Whiting v. Traylor, 85 F. 3d 581, 584–586 (CA11 1996); Pitt v. District of Columbia, 491 F. 3d 494, 510–511 (CADC 2007). 5 The Court repeated the same idea in a follow-on decision to Gerstein. In County of Riverside v. McLaughlin, 500 U. S. 44, 47 (1991) , we considered how quickly a jurisdiction must provide the probable-cause determination that Gerstein demanded “as a prerequisite to an extended pretrial detention.” In holding that the decision should occur within 48 hours of an arrest, the majority understood its “task [as] articulat[ing] more clearly the boundaries of what is permissible under the Fourth Amendment.” 500 U. S., at 56. In arguing for still greater speed, the principal dissent invoked the original meaning of “the Fourth Amendment’s prohibition of ‘unreasonable seizures,’ insofar as it applies to seizure of the person.” Id., at 60 (Scalia, J., dissenting). The difference between the two opinions was significant, but the commonality still more so: All Justices agreed that the Fourth Amendment provides the appropriate lens through which to view a claim involving pretrial detention. 6 The opposite view would suggest an untenable result: that a person arrested pursuant to a warrant could not bring a Fourth Amendment claim challenging the reasonableness of even his arrest, let alone any subsequent detention. An arrest warrant, after all, is a way of initiating legal process, in which a magistrate finds probable cause that a person committed a crime. See Wallace v. Kato, 549 U. S. 384, 389 (2007) (explaining that the seizure of a person was “without legal process” because police officers “did not have a warrant for his arrest”); W. Keeton, D. Dobbs, R. Keeton, & D. Owen, Prosser and Keeton on Law of Torts §119, pp. 871, 886 (5th ed. 1984) (similar). If legal process is the cut-off point for the Fourth Amendment, then someone arrested (as well as later held) under a warrant procured through false testimony would have to look to the Due Process Clause for relief. But that runs counter to our caselaw. See, e.g., Whiteley v. Warden, Wyo. State Penitentiary, 401 U. S. 560 –569 (1971) (holding that an arrest violated the Fourth Amendment because a magistrate’s warrant was not backed by probable cause). And if the Seventh Circuit would reply that arrest warrants are somehow different—that there is legal process and then again there is legal process—the next (and in our view unanswerable) question would be why. 7 Even the City no longer appears to contest that conclusion. On multiple occasions during oral argument in this Court, the City agreed that “a Fourth Amendment right . . . survive[d] the initiation of process” at the hearing in which the county judge found probable cause and ordered detention. Tr. of Oral Arg. 31; see id., at 33 (concurring with the statement that “once [an] individual is brought . . . before a magistrate, and the magistrate using the same bad evidence says, stay here in jail . . . until we get to trial, that that period is a violation of the Fourth Amendment”); id., at 51 (stating that a detainee has “a Fourth Amendment claim” if “misstatements at [such a probable-cause hearing] led to ongoing pretrial seizure”). 8 The dissent goes some way toward claiming that a different kind of pretrial legal process—a grand jury indictment or preliminary examination—does expunge such a Fourth Amendment claim. See post, at 9, n. 4 (opinion of Alito, J.) (raising but “not decid[ing] that question”); post, at 10 (suggesting an answer nonetheless). The effect of that view would be to cut off Manuel’s claim on the date of his grand jury indictment (March 30)—even though that indictment (like the County Court’s probable-cause proceeding) was entirely based on false testi-mony and even though Manuel remained in detention for 36 days longer.See n. 2, supra. Or said otherwise—even though the legal process he received failed to establish the probable cause necessary for his continued confinement. We can see no principled reason to draw that line. Nothing in the nature of the legal proceeding establishing probable cause makes a difference for purposes of the Fourth Amendment: Whatever its precise form, if the proceeding is tainted—as here, by fabricated evidence—and the result is that probable cause is lacking, then the ensuing pretrial detention violates the confined person’s Fourth Amendment rights, for all the reasons we have stated. By contrast (and contrary to the dissent’s suggestion, see post, at 9, n. 3), once a trial has occurred, the Fourth Amendment drops out: A person challenging the sufficiency of the evidence to support both a conviction and any ensuing incarceration does so under the Due Process Clause of the Fourteenth Amendment. See Jackson v. Virginia, 443 U. S. 307, 318 (1979) (invalidating a conviction under the Due Process Clause when “the record evidence could [not] reasonably support a finding of guilt beyond a reasonable doubt”); Thompson v. Louisville, 362 U. S. 199, 204 (1960) (striking a conviction under the same provision when “the record [wa]s entirely lacking in evidence” of guilt—such that it could not even establish probable cause). Gerstein and Albright, as already suggested, both reflected and recognized that constitutional division of labor. See supra, at 6–8. In their words, the Framers “drafted the Fourth Amendment” to address “the matter of pretrial deprivations of liberty,” Albright, 510 U. S., at 274 (emphasis added), and the Amendment thus provides “standards and procedures” for “the detention of suspects pending trial,” Gerstein, 420 U. S., at 125, n. 27 (emphasis added). 9 The two exceptions—the Ninth and D. C. Circuits—have not yet weighed in on whether a Fourth Amendment claim like Manuel’s includes a “favorable termination” element. 10 The dissent would have us address these questions anyway, on the ground that “the conflict on the malicious prosecution question was the centerpiece of Manuel’s argument in favor of certiorari.” Post, at 2. But the decision below did not implicate a “conflict on the malicious prosecution question”—because the Seventh Circuit, in holding that detainees like Manuel could not bring a Fourth Amendment claim at all, never considered whether (and, if so, how) that claim should resemble the malicious prosecution tort. Nor did Manuel’s petition for certiorari suggest otherwise. The principal part of his question presented—mirroring the one and only Circuit split involving the decision below—reads as follows: “[W]hether an individual’s Fourth Amendment right to be free from unreasonable seizure continues beyond legal process.” Pet. for Cert. i. That is exactly the issue we have resolved. The rest of Manuel’s question did indeed express a view as to what would follow from an affirmative answer (“so as to allow a malicious prosecution claim”). Ibid. (And as the dissent notes, the Seventh Circuit recounted that he made the same argument in that court. See post, at 2, n. 1.) But as to that secondary issue, we think (for all the reasons just stated) that Manuel jumped the gun. See supra, at 11–14. And contra the dissent, his doing so provides no warrant for our doing so too.
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During a traffic stop, police officers in Joliet, Illinois, searched petitioner Elijah Manuel and found a vitamin bottle containing pills. Suspecting the pills to be illegal drugs, the officers conducted a field test, which came back negative for any controlled substance. Still, they arrested Manuel and took him to the police station. There, an evidence technician tested the pills and got the same negative result, but claimed in his report that one of the pills tested “positive for the probable presence of ecstasy.” App. 92. An arresting officer also reported that, based on his “training and experience,” he “knew the pills to be ecstasy.” Id., at 91. On the basis of those false statements, another officer filed a sworn complaint charging Manuel with unlawful possession of a controlled substance. Relying exclusively on that complaint, a county court judge found probable cause to detain Manuel pending trial. While Manuel was in jail, the Illinois police laboratory tested the seized pills and reported that they contained no controlled substances. But Manuel remained in custody, spending a total of 48 days in pretrial detention. More than two years after his arrest, but less than two years after his criminal case was dismissed, Manuel filed a 42 U. S. C. §1983 lawsuit against Joliet and several of its police officers (collectively, the City), alleging that his arrest and detention violated the Fourth Amendment. The District Court dismissed Manuel’s suit, holding, first, that the applicable two-year statute of limitations barred his unlawful arrest claim, and, second, that under binding Circuit precedent, pretrial detention following the start of legal process (here, the judge’s probable-cause determination) could not give rise to a Fourth Amendment claim. Manuel appealed the dismissal of his unlawful detention claim; the Seventh Circuit affirmed. Held: 1. Manuel may challenge his pretrial detention on Fourth Amendment grounds. This conclusion follows from the Court’s settled precedent. In Gerstein v. Pugh, 420 U. S. 103 , the Court decided that a pretrial detention challenge was governed by the Fourth Amendment, noting that the Fourth Amendment establishes the minimum constitutional “standards and procedures” not just for arrest but also for “detention,” id., at 111, and “always has been thought to define” the appropriate process “for seizures of person[s] . . . in criminal cases, including the detention of suspects pending trial,” id., at 125, n. 27. And in Albright v. Oliver, 510 U. S. 266 , a majority of the Court again looked to the Fourth Amendment to assess pretrial restraints on liberty. Relying on Gerstein, the plurality reiterated that the Fourth Amendment is the “relevan[t]” constitutional provision to assess the “deprivations of liberty that go hand in hand with criminal prosecutions.” Id., at 274; see id., at 290 (Souter, J., concurring in judgment) (“[R]ules of recovery for such harms have naturally coalesced under the Fourth Amendment”). That the pretrial restraints in Albright arose pursuant to legal process made no difference, given that they were allegedly unsupported by probable cause. As reflected in those cases, pretrial detention can violate the Fourth Amendment not only when it precedes, but also when it follows, the start of legal process. The Fourth Amendment prohibits government officials from detaining a person absent probable cause. And where legal process has gone forward, but has done nothing to satisfy the probable-cause requirement, it cannot extinguish a detainee’s Fourth Amendment claim. That was the case here: Because the judge’s determination of probable cause was based solely on fabricated evidence, it did not expunge Manuel’s Fourth Amendment claim. For that reason, Manuel stated a Fourth Amendment claim when he sought relief not merely for his arrest, but also for his pretrial detention. Pp. 6–10. 2. On remand, the Seventh Circuit should determine the claim’s accrual date, unless it finds that the City has previously waived its timeliness argument. In doing so, the court should look to the common law of torts for guidance, Carey v. Piphus, 435 U. S. 247 –258, while also closely attending to the values and purposes of the constitutional right at issue. The court may also consider any other still-live issues relating to the elements of and rules applicable to Manuel’s Fourth Amendment claim. Pp. 11–15. 590 Fed. Appx. 641, reversed and remanded. Kagan, J., delivered the opinion of the Court, in which Roberts, C. J., and Kennedy, Ginsburg, Breyer, and Sotomayor, JJ., joined. Thomas, J., filed a dissenting opinion. Alito, J., filed a dissenting opinion, in which Thomas, J., joined.
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SECTION 1. SHORT TITLE.
This Act may be cited as the ``Zeroing In American Energy Act of
2008''.
SEC. 2. FINDINGS.
The Congress makes the following findings:
(1) Establishing a clean energy future requires new
innovative technologies.
(2) Solar energy offers the United States tremendous
domestic energy opportunities.
(3) The Southwestern United States is the Saudi Arabia of
solar energy.
(4) The publication Scientific American, in its January of
2008 issue, theorized a ``Grand Plan for Solar'' that suggests
theoretically solar power could provide 69 percent of America's
electricity by 2050.
(5) Establishing a new solar energy future will require a
strong public-private partnership.
SEC. 3. DEVELOPING SOLAR ENERGY ON FEDERAL LANDS.
(a) In General.--The Secretary of the Interior shall carry out in
accordance with this section a program for the leasing of Federal lands
for the the advancement, development, assessment, installation, and
operation of commercial photovoltaic and concentrating solar power
energy systems.
(b) Identification of Lands for Leasing.--
(1) Lands selection.--The Secretary of the Interior, acting
through the Director of the Bureau of Land Management and in
consultation with the Secretary of Energy, shall--
(A) identify lease sites comprising a total of
6,400,000 acres of Federal lands under the jurisdiction
of the Bureau of Land Management in the States of
Arizona, California, New Mexico, Nevada, and Utah, that
are suitable and feasible for the installation and
operation of photovoltaic and concentrating solar power
energy systems, subject to valid existing rights; and
(B) incorporate solar energy development into the
relevant agency land use and resource management plans
or equivalent plans for the lands identified under
subparagraph (A).
(2) Minimum and maximum acreage of sites.--Each individual
lease site identified under paragraph (1)(A) shall be a minimum
of 1280 acres and shall not exceed 12,800 acres.
(3) Lands released for leasing.--The Secretary shall
release for leasing under this section lease sites identified
under paragraph (1), in acreages that meet the following annual
milestones:
(A) By 2010, 79,012 acres.
(B) By 2011, 316,049 acres.
(C) By 2012, 711,111 acres.
(D) By 2013, 1,300,000 acres.
(E) By 2014, 2,000,000 acres.
(F) By 2015, 2,800,000 acres.
(G) By 2016, 3,700,000 acres.
(H) By 2017, 4,650,000 acres.
(I) By 2018, 5,800,000 acres.
(J) By 2019, 6,400,000 acres.
(4) Lands not included.--The following Federal lands shall
not be included within a solar lands leasing program:
(A) Components of the National Landscape
Conservation System.
(B) Wilderness and Wilderness Study Areas.
(C) Wild and Scenic Rivers.
(D) National Scenic and Historic Trails.
(E) Monuments.
(F) Resource Natural Areas.
(c) Competitive Lease Sale Requirements Leasing Procedures.--
(1) Nominations.--The Secretary shall accept at any time
nominations of land identified under subsection (b) for leasing
under this Act, from any qualified person.
(2) Competitive lease sale required.--
(A) In general.--Except as otherwise specifically
provided by this Act, all land to be leased under this
Act that is not subject to leasing under subsection (3)
shall be leased to the highest responsible qualified
bidder, as determined by the Secretary.
(B) Annual sales required.--The Secretary shall
hold a competitive lease sale under this Act at least
once every year for land in a State with respect to
which there is a nomination pending under paragraph (1)
of land otherwise available for leasing.
(3) Noncompetitive leasing.--The Secretary shall make
available for a period of 2 years for noncompetitive leasing
any tract for which a competitive lease sale is held under
paragraph (2), but for which the Secretary does not receive any
bids in such sale.
(4) Pending lease applications.--It shall be a priority for
the Secretary to ensure timely completion of administrative
actions and process applications for leasing of Federal lands
described in subsection (b)(1)(A) for installation and
operation of photovoltaic and concentrating solar power energy
systems, that are pending on the date of enactment of this
subsection.
(d) Leasing Time Period.--Any lease of lands under this section
shall be effective for a period of 30 years, with an option to renew
once for an additional period of 30 years.
SEC. 4. ROYALTY.
(a) Reservation of Royalty.--
(1) In general.--Production of solar energy under a lease
under this Act shall be subject to a royalty described in
paragraph (2), which shall be assessed and collected by the
Secretary of the Interior, acting through the Minerals
Management Service. The leaseholder shall be liable for payment
of such royalty.
(2) Royalty for projects under the federal solar lands
leasing program.--The royalty under paragraph (1) shall be--
(A) 0.25 percent per kw/h on energy produced undert
the lease in years 1 through 5 of the lease;
(B) 0.5 percent per kw/h on energy produced under
the lease in years 5 through 15 of the lease;
(C) 1 percent per kw/h on energy produced under the
lease in years 15 through 30 of the lease; and
(D) 1 percent per kw/h on energy produced under the
lease after year 30.
(3) Revenue sharing.--Of the amount received by the United
States as royalty under this subsection for a leased tract--
(A) one-third shall be paid to the State in which
the lands are located; and
(B) one-third shall be paid to the county in which
the lands are located.
(b) Duties of Leaseholders.--
(1) Payment of royalty.--A person who is required to make
any royalty payment under this section shall make such payments
to the United States at such times and in such manner as the
Secretary may by rule prescribe.
(2) Joint and severable liability.--Any person liable for
royalty payments under this section who assigns any payment
obligation shall remain jointly and severally liable for all
royalty payments due for the claim for the period.
(3) Affirmation of payment responsibility.--Any person
paying royalties under this section shall file a written
instrument, together with the first royalty payment, affirming
that such person is responsible for making proper payments for
all amounts due for all time periods for which such person has
a payment responsibility. Such responsibility for the periods
referred to in the preceding sentence shall include any and all
additional amounts billed by the Secretary and determined to be
due by final agency or judicial action.
(4) Recordkeeping.--Records required by the Secretary under
this section shall be maintained for 7 years after release of
financial assurance unless the Secretary notifies the
leaseholder that the Secretary has initiated an audit or
investigation involving such records and that such records must
be maintained for a longer period. In any case when an audit or
investigation is underway, records shall be maintained until
the Secretary releases the operator of the obligation to
maintain such records.
(5) Audits.--The Secretary may conduct such audits of all
leaseholders directly or indirectly involved in the production
of solar energy on lands leased under this section as the
Secretary considers necessary for the purposes of ensuring
compliance with the requirements of this section. For purposes
of performing such audits, the Secretary shall, at reasonable
times and upon request, have access to, and may copy, all
books, papers, and other documents that relate to compliance
with any provision of this section by any person.
(6) Provision of protected information.--Trade secrets,
proprietary, and other confidential information protected from
disclosure under section 552 of title 5, United States Code,
popularly known as the Freedom of Information Act, shall be
made available by the Secretary to other Federal agencies as
necessary to assure compliance with this Act and other Federal
laws.
(7) Underreporting.--
(A) Penalty.--If there is any underreporting of
royalty owed on energy produced under a lease for any
production month by any person liable for royalty
payments under this section, the Secretary shall assess
a penalty of not greater than 10 percent of the amount
of that underreporting.
(B) Waiver or reduction authorized.--The Secretary
may waive or reduce a penalty assessed under this
paragraph if the person liable for royalty payments
under this section corrects the underreporting before
the date such person receives notice from the Secretary
that an underreporting may have occurred, or before 90
days after the date of the enactment of this section,
whichever is later.
(C) Waiver required.--The Secretary shall waive any
portion of an assessment under this paragraph
attributable to that portion of the underreporting for
which the person responsible for paying the royalty
demonstrates that--
(i) such person had written authorization
from the Secretary to report royalty on the
value of the production on basis on which it
was reported;
(ii) such person had substantial authority
for reporting royalty on the value of the
production on the basis on which it was
reported;
(iii) such person previously had notified
the Secretary, in such manner as the Secretary
may by rule prescribe, of relevant reasons or
facts affecting the royalty treatment of
specific production which led to the
underreporting; or
(iv) such person meets any other exception
which the Secretary may, by rule, establish.
(D) Treatment as federal share.--Subsection (b)(4)
shall not apply to penalties received by the United
States under this paragraph.
(E) Underreporting defined.--For the purposes of
this subsection, the term ``underreporting'' means the
difference between the royalty on the value of the
production that should have been reported and the
royalty on the value of the production that was
reported, if the value that should have been reported
is greater than the value that was reported.
SEC. 5. PROGRAMMATIC ENVIRONMENTAL IMPACT STATEMENT.
(a) In General.--Not later than 18 months after the date of
enactment of this Act, in accordance with section 102(2)(C) of the
National Environmental Policy Act of 1969 (42 U.S.C. 4332(2)(C)), the
Secretary of the Interior shall complete a programmatic environmental
impact statement for the solar leasing program under section 3.
(b) Final Regulation.--Not later than 6 months after the completion
of the programmatic environmental impact statement under this section,
the Secretary shall publish a final regulation implementing this
section.
SEC. 6. STUDY.
Not later than 2 years after the date of enactment of this Act, the
Secretary of the Interior shall complete a study of--
(1) Federal lands available for possible consideration of
leasing for a compressed air energy storage system;
(2) barriers to additional access to Federal lands for
transimission of energy produced under leases awarded under the
solar energy leasing program under this Act; and
(3) the need for energy transmission corridors on public
lands to address identified congestion or constraints.
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Zeroing In American Energy Act of 2008 - Requires the Secretary of the Interior to conduct a program for the leasing of federal lands for the advancement, development, assessment, installation, and operation of commercial photovoltaic and concentrating solar power energy systems.
Requires the Secretary, acting through the Director of the Bureau of Land Management (BLM) and in consultation with the Secretary of Energy, to: (1) identify lease sites comprising 6.4 million acres of federal lands under BLM jurisdiction in Arizona, California, New Mexico, Nevada, and Utah that are suitable and feasible for the installation and operation of such energy systems; and (2) incorporate solar energy development into the relevant agency land use and resource management plans or equivalent plans for such identified sites.
Sets forth provisions concerning: (1) the size of such sites; (2) annual milestones for the number of acres of sites to be leased by each of the years 2010-2019; and (3) the collection and payment of royalties from projects under such program.
Prohibits the following federal lands from being included within such program: (1) Components of the National Landscape Conservation System; (2) Wilderness and Wilderness Study Areas; (3) Wild and Scenic Rivers; (4) National Scenic and Historic Trails; (5) Monuments; and (6) Resource Natural Areas.
Requires the Secretary to complete: (1) a programmatic environmental impact statement for such program prior to implementing it; and (2) a study of federal lands available for a compressed air energy storage system, barriers to access to federal lands for transmission of energy produced under the program, and the need for energy transmission corridors on public lands.
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This was a suit to set aside a will probated in common form, and to avoid its probate. The suit was begun in the United States court for the Indian Territory, wherein the will had been probated, and was transferred to an Oklahoma court when that state was admitted into the Union. The plaintiff ultimately prevailed and the supreme court of the state affirmed the judgment. 38 Okla. 596, 134 Pac. 859, 43 Okla. 267, 142 Pac. 755. The Federal question in the case is whether certain statutes bearing upon such a suit were put in force in the Indian Territory by the act of May 2, 1890, chap. 182, § 31, 26 Stat. at L. 81, whereby Congress adopted and extended over the Indian Territory certain general laws of Arkansas 'in force at the close of the session of the general assembly of that state of 1883, as published in 1884 in the volume known as Mansfield's Digest,' where 'not locally inapplicable or in conflict with' that or some other act of Congress. In Arkansas there were probate courts and courts of general jurisdiction designated as circuit courts, while for the Indian Territory only one court had been established at that time, and it was a court of general jurisdiction. In view of this the act declared that 'the United States court in the Indian Territory herein referred to shall have and exercise the powers of courts of probate under said laws,' and 'wherever in said laws of Arkansas the courts of record of said state are mentioned the said court in the Indian Territory shall be substituted therefor.' Among the Arkansas laws enumerated in the act was chapter 155, containing sections numbered from 6490 to 6548. The section under which the will was probated declares: 'Sec. 6522. When any will shall be exhibited for probate, the court of probate . . . may and shall receive the probate thereof in common form, without summoning any party, and shall grant a certificate of probate, or, if the will be rejected, shall grant a certificate of rejection; . . .' Other sections (6509 and 6521) provide for an appeal to the circuit court from an order of the probate court establishing or rejecting a will, and for bringing in parties and giving a hearing de novo upon the appeal. The sections under which the suit was brought read as follows: 'Sec. 6523. Any person interested who, at the time of the final decision in the circuit court, resided out of this state, and was proceeded against by order of appearance only, without actual appearance, or being personally served with process, and any other person interested who was not a party to the proceedings by actual appearance, or being personally served with process, may, within three years after such final decision in the circuit court, by a bill in chancery, impeach the decision and have a retrial of the question of probate; and either party shall be entitled to a jury for the trial thereof. An infant, not a party, shall not be barred of such proceedings in chancery until twelve months after attaining full age.' 'Sec. 6525. If any person interested in the probate of any will shall appear within five years after the probate or rejection thereof, and, by petition to the circuit court of the county in which such will was established or rejected, pray to have any such will rejected, if previously established, or proven, if previously rejected by the court of probate, it shall be the duty of the circuit court to direct an issue to try the validity of such will, which issue shall in all cases be tried by a jury.' As the functions of the probate and circuit courts in Arkansas were united in a single court in the Indian Territory, it seems plain, as was held by the supreme court of Oklahoma in this case, that the sections (6509 and 6521) dealing with appeals from the probate to the circuit court were not applicable to the conditions in the Indian Territory, and therefore were not adopted by the act of Congress. It hardly was intended that a court at all times presided over by a single judge should entertain appeals from its own decisions. The contention advanced respecting § 6523 is that it related only to decisions of the circuit court upon appeals from the probate court, and was inapplicable where such an appeal could not be had, and therefore was not adopted. This point was not considered in the opinion of the supreme court of Oklahoma, and it need not be decided here. However it might be resolved, the result in the present case would be the same. The contention made respecting § 6525 is that it was not adopted, because not in force in Arkansas at the close of the session of the general assembly of 1883. The claim that it was not then in force is based upon a decision of the supreme court of Arkansas in 1885, holding that it was impliedly repealed by the inclusion in the civil practice act of 1868, which was a later enactment, of certain provisions regulating appeals from the probate to the circuit court, and prescribing the effect to be given to the latter's decision upon such an appeal. Dowell v. Tucker, 46 Ark. 438. Of course, that decision was controlling in Arkansas, but it has little bearing upon the question here presented, and for these reasons: Section 6525 was published in 1884 in Mansfield's Digest as a general law 'in force at the close of the general assembly of 1883' (see title page of that publication), and the supreme court of the state had been treating it as such (Tobin v. Jenkins, 29 Ark. 151; Janes v. Williams, 31 Ark. 175, 189; Jenkins v. Tobin, 31 Ark. 306, 308; Mitchell v. Rogers, 40 Ark. 91, 93-95). Besides, the particular provisions of the civil practice act which ultimately were regarded as effecting its implied repeal in Arkansas—they became §§ 6509 and 6521 of Mansfield's Digest—were not adopted by the act of Congress, because inapplicable to the conditions in the Indian Territory. In these circumstances we think the adopting act, rightly interpreted, put the section in force there. Separated, as it then was, from the restraining influence of the supposedly conflicting provisions of the civil practice act, it assumed its normal place among the other laws with which it was adopted. This conclusion is not opposed to our decisions in Adkins v. Arnold, 235 U. S. 417, 59 L. ed. 294, 35 Sup. Ct. Rep. 118, and Perryman v. Woodward, 238 U. S. 148, 59 L. ed. 1242, 35 Sup. Ct. Rep. 830, as seems to be claimed by the plaintiff in error, but, on the contrary, is in accord with what actually was there decided. Other questions are discussed in the briefs, but as they are not Federal, but essentially local, they cannot be re-examined by us. Judgment affirmed.
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Sections 6509 and 6521, Mansfield's Digest of the General Laws of Arkansas dealing with appeals from the Probate to the. Circuit Court, were not put in force in Indian Territory by the Act of May 2, 1890, c. 182, § 31, 26 Stat. 81, as they were inapplicable to conditions then existing in:Indian Territory. Section 6525 upon being adopted and separated from conflicting provisions of the Civil Practice Act of Arkansas, assumed its normal place among the other laws with which it was adopted and was put in force by the Act of May 2, 1890. Quwre whether § 6523 was adopted by the Act of 1890. 43 Oklahoma, 267, affirmed.
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At times, it appears that a major segment of the drug industry cannot avoid being the center of controversy. Firms that develop, produce, and sell brand-name or patented drugs have been praised for their successes in developing safer or more effective versions of existing medicines and new medicines that advance the treatment of a variety of diseases. Yet these same firms have been rebuked for selling the same drugs at higher prices in the United States than in many other developed countries; their attempts to minimize competition from cheaper generic drugs; their relatively high profitability; and spending as much or more on advertising and product promotion than research and development (R&D). Framing these contrasting sentiments is a continuing debate among lawmakers over the best way to improve access to medicines for Americans of all ages and income levels, without establishing costly new federal entitlement programs or undermining key incentives for new drug development. An important issue in this debate is the likely impact of initiatives of this sort on the commercial development of new medicines. Some initiatives would entail significant changes in one or more of the federal policies affecting new drug development. The federal government plays a varied and far-reaching role in that process. This role encompasses a variety of laws and programs, including direct federal funding of drug-related research and development (R&D), federal regulation of the safety and efficacy of new medicines and the use and promotion of approved medicines, federal patent protection for prescription drugs, federal support of biomedical research and education in universities, federal financing of drug purchases through Medicaid and Medicare, and federal tax subsidies for research and the purchase of health insurance and medicines. This report examines one of the federal policies influencing the domestic climate for new drug development: federal taxation of firms that develop, produce, and sell drugs as a main line of business. As will be seen, the federal tax code affects the incentive to invest in new drug development in several ways. The net result of these interactions forms the core of the report. More specifically, the report analyses the drug industry's federal tax burden from 1995 to 2006, the most recent year for which federal corporate tax return data are available. This burden refers to the federal income taxes paid by drugmakers as a percentage of their taxable income; tax returns with and without net income are used to compute the industry's federal tax burden. Depending on its size, this burden has the potential to constrain the incentives for business investment in new drug development. The report begins with an examination of the distinguishing traits of the drug industry, then identifies the tax provisions that have the biggest impact on the industry's return on investment, and concludes with an assessment of the effects of federal taxation of the industry on the incentives to invest in new drug development. As discussed in this report, the drug industry encompasses a varied collection of corporations, all of whom derive the largest share of their income from one or more of the following commercial activities: (1) manufacturing biological and medicinal products; (2) processing botanical drugs and herbs; (3) isolating active medicinal ingredients from botanical drugs and herbs; and (4) producing pharmaceutical products intended for internal and external use in such forms as tablets, capsules, powders, ointments, and solutions. This group of firms includes both large, traditional pharmaceutical firms that tend to concentrate on developing small-molecule drugs from chemicals, makers of generic versions of such drugs, and small, fledgling biotechnology firms that focus on developing biologics, which are large-molecule drugs derived from living cells. In the period examined here, the vast majority of drug firms had no net income, and thus no tax liability. But drug firms with net income accounted for most of the industry's assets and gross income. It is unclear from available business tax data if the drug firms with losses were primarily producers of pharmaceuticals or biologics. Excluded from the group of drug firms discussed here are firms organized as non-corporate entities, such as partnerships and limited liability companies. It is not known how much these firms contribute to total income, assets, employment, or tax liability for the drug industry. But their shares are unlikely to be substantial, since the drug firms (e.g., GlaxoSmithKline, Merck, Pfizer, Lilly, Amgen) that account for most industry profits and taxes are all organized as corporations. The information presented here may be of use to the 111 th Congress as it weighs the advantages and disadvantages of proposals to modify how health care is financed and delivered in the United States. Distinguishing Characteristics of the Drug Industry Relevant to Its Federal Tax Burden Many industries have distinctive traits, which can be thought of as defining features tied to the goods and services they sell, the technologies used to produce them, and the main forces driving competitive success and long-term growth in employment and output. The drug industry is one of these industries. What arguably distinguishes firms that develop, produce, promote, and sell patented or branded drugs is their propensity to invest heavily in R&D and advertising, a focus on certain therapeutic categories to the exclusion of others, a strong reliance on patents to generate profits and bolster competitiveness, and an extensive network of foreign subsidiaries. As this report shows, several of these traits have important implications for the industry's federal tax burden. Heavy Spending on R&D Relative to Sales The drug industry is one of the most research-intensive of all U.S. industries. This means that it spends a large amount on R&D relative to its receipts. At the same time, drug firms receive little direct R&D funding from federal government agencies. According to estimates by the National Science Foundation, U.S. producers of drugs and medicines spent the equivalent of 12.7% of domestic net sales on domestic R&D in 2005; by contrast, the same ratio that year was 3.3% for all industries and 3.6% for manufacturing. U.S. producers of drugs and medicines spent $34.8 billion of their own and other non-federal funds on domestic R&D in 2005, while federal spending on domestic drug R&D totaled only $41 million. Many drug firms invest heavily in R&D simply because it has long served as the industry's primary engine for growth in sales and profits. Those that become industry leaders achieve and sustain their stature by developing a steady stream of products that gain wide acceptance among doctors and their patients. Though discovering and developing new drugs often is a time-consuming, risky, and costly process, firms that succeed can earn sizable profits, at least until generic versions of the drugs or so-called me-too patented drugs enter the market. Because drug patents have a finite life, leading drug firms face continuing pressure to develop new and innovative drugs to lay a solid foundation for future growth. Those firms whose development efforts falter often end up struggling to survive in the face of stiff generic competition for their key drugs whose patent protection has expired. In recent years, some firms in this position have merged with larger, more successful firms in order to remain in business, while those that develop so-called blockbuster drugs prosper. Advances in the technology for finding promising new drug candidates over the past quarter century have greatly increased the number of drug compounds with significant therapeutic potential being discovered. Yet the entry of new breakthrough drugs into the market appears to have slowed considerably in the past 10 to 20 years. A 2002 study by the National Institute for Health Care Management Foundation found that 35% of the 1,035 new drug applications approved by the FDA from 1989 to 2000 were new molecular entities (NMEs), which the FDA defines as drugs containing novel active ingredients, and that about one-third of those NMEs (or 15% of new drug approvals) were deemed to offer significant therapeutic advantages over existing drugs. In addition, the number of NMEs approved by the FDA has decreased steadily since reaching a peak of 56 in 1996: a total of 17 NMEs were approved in 2007. Substantial Investment in Advertising and Product Promotion Most major drug firms also spend large sums on promoting the use of their branded products directly to physicians and consumers. Firms that develop new innovative medicines seem especially inclined to invest heavily in advertising. Early in a new drug's commercial life cycle, advertising and promotion typically are aimed at capturing a major share of the market as quickly as possible. But later in the cycle, the main thrust of these efforts often shifts to fending off or thwarting competition from generic drugs or me-too drugs. According to one source, promotional spending by drug firms totaled $10.4 billion in 2007, down from $12.0 billion in 2006, but up from $4.3 billion in 1996. Of the amount spent in 2007, $3.7 billion went into direct advertising to consumers, and $6.7 billion was directed at physicians and other health care providers. The high priority given to informing doctors and encouraging what seems to be a form of brand loyalty among them reflects a fundamental feature of the market for prescription drugs that is absent from the markets for many other consumer goods and services. In deciding which drugs to use in treating an illness, consumers defer to the judgment and consent of third parties—namely, doctors and insurance companies. Fragmented Competitive Structure Another distinguishing trait of the drug industry is its fragmented competitive structure. This fragmentation has two critical aspects. One concerns the markets for brand-name drugs themselves; the other is related to what might be described as the technological focus or orientation of drug firms. No single firm or small cluster of firms dominates the domestic market for branded drugs. According to U.S. Census Bureau, in 2002, the most recent year for which figures are available, the four largest producers contributed 34% of the value of domestic shipments of medicines; the eight largest, 49%; and the 20 largest, 70%. The absence of a dominant seller is partly due to the multitude of therapeutic categories and the high cost of carving out a position of dominance in any particular category. Some drug formularies, which are lists of approved drugs that are covered under specific insurance plans, encompass as many as 16 therapeutic categories and over 100 sub-categories. Drugs classified in one sub-category generally cannot be substituted for drugs in another sub-category. For this reason, the economist F. M. Scherer once described the drug industry as a "collection of differentiated oligopolies." Nonetheless, some firms are able to establish at least a temporary supremacy in certain segments of the market for prescription drugs. Such dominance is most likely to arise when a firm brings a new innovative drug to the market. For example, Wyeth has dominated the market for female hormone replacement therapy, while Pfizer has captured a substantial lead in the market for cholesterol-reducing medications. Some firms create what amount to new markets with their drug innovations, as Pfizer did with its launch of Viagra for the treatment of erectile dysfunction, and Merck did with its development of Proscar for the treatment of enlarged prostrate glands. The drug industry can also be divided into three subgroups that differ primarily in their approach to new drug development. Those subgroups are pharmaceutical firms, biotechnology firms, and generic drug firms. Though mergers and strategic alliances involving firms from all subgroups have blurred the boundaries among the three subgroups in recent years, it still remains the case that pharmaceutical firms tend to focus on developing small-molecule drugs from chemicals; biotechnology firms tend to focus on developing biologics, which are large-molecule drugs derived from living cells; and generic drug firms tend to focus on making low-cost copies of branded drugs that have lost their patent protection. While comprehensive data on profits for firms in each subgroup are hard to find, there is little doubt that the average pharmaceutical firm is larger in assets, sales, and employment, and more profitable than the average biotech or generic drug firm. Pharmaceutical firms compete against biotech and generic drug firms in many therapeutic categories. But the scope of competition between the pharmaceutical and biotech subgroups has narrowed in recent years, as pharmaceutical firms have invested tens of billions of dollars in acquiring biotech firms. Strong Reliance on Patent Protection under Regulatory Oversight by the Food and Drug Administration The central role played by technological innovation in the growth and transformation of the drug industry over time points to another key distinguishing trait of the industry: a heavy reliance by leading firms on patents for drugs that have gained regulatory approval to generate relatively high rates of return on investment and bolster or sustain their dominance in segments of the market where they compete. Patents grant to their owners a temporary legal monopoly over the commercial uses of an invention. In the United States and most other advanced industrialized nations, the life of a patent has been 20 years from the date of application since June 8, 1995. A patent holder may license other firms to exploit the invention in exchange for royalties, which can be thought of as compensation for relinquishing exclusive control over the commercial applications of a new technology. Drug firms claim patents for the design of drug compounds, their formulation as drug therapies, their uses in treating diseases, and their methods of manufacture. Under the Drug Price Competition and Patent Term Restoration Act of 1984, drug companies may obtain an extension of the life of their patents of as much as five years to compensate for time lost during clinical testing. Patents serve as an important competitive weapon for leading drug firms. Their usefulness in the quest for profits and growth is inextricably bound up with the lengthy, costly, and stringent approval process that all promising new drug candidates must undergo before they can be sold in the United States. The Food and Drug Administration (FDA) regulates the introduction of new drugs. It requires that new drugs pass through three phases of clinical testing on humans. Phase I is intended to test the safety of a new drug. Phase II begins to test the efficacy of the drug, as it continues to examine its safety at higher doses. In the third and final phase, the drug is subjected to more complex and rigorous tests for the purpose of ascertaining its safety, efficacy, and optimal dosages using relatively large groups of ill patients. Once the FDA confers its stamp of approval, everyone in the industry knows what the innovating drug company knows: that the drug provides the desired therapy. In the absence of patent protection, imitators could easily develop identical substitutes at a fraction of the cost incurred by the innovator. But by obtaining a patent for the molecular design of the drug, the innovator can effectively block entry by substitutes for a number of years, as slight variations in the design must undergo the full testing and approval process. For this reason, it is not surprising that drug industry executives tend to view patents as a highly effective mechanism for appropriating the returns to investment in R&D. According to the results of a survey of 650 R&D managers from 130 industries conducted by Richard Levin in the mid-1970s, R&D managers in the pharmaceutical industry gave product patents a higher rating as a means of protecting the competitive advantages from technological innovation than did the R&D managers in any other industry. More recently, in an analysis of the results of a 1994 survey of R&D managers at U.S. manufacturing firms with a minimum of $5 million in sales or with business units with at least 20 employees, Wesley Cohen, Richard Nelson, and John Walsh found that the drug industry had the highest mean percentage (50.2%) of product innovations for which patents were deemed an effective mechanism for capturing the returns to those innovations; the average mean percentage for patents for all manufacturing industries was 34.8%. The industry's aggressive use of patents for products that have gained regulatory approval may explain why drug firms have long been among the most profitable of all firms. From 1960 to 1991, the reported rate of return on stockholders' equity for the pharmaceutical firms included in the annual ranking of the top 500 industrial corporations by Fortune magazine averaged 18.4%, compared to 11.9% for all firms; as recently as 2001, pharmaceuticals ranked first in return on shareholders' equity (33.2%) among the 48 industries represented in the Fortune 500; in 2007, the industry ranked 12 th (20.3%) out of 51 industries. One indication that patents are critical to the profitability of drug firms lies in the difference in selling prices between branded drugs and their generic counterparts. Patented medicines often command much higher prices than their generic counterparts, which enter the market only after the patents expire. Extensive Foreign Operations No account of the distinctive traits of the U.S. drug industry with a bearing on its federal tax treatment would be complete if it failed to mention the industry's extensive operations in U.S. possessions and foreign countries. For many U.S.-based drug firms, these operations have had a significant impact upon their revenue streams, competitive postures, and federal tax burdens. Most major U.S. drug firms own foreign subsidiaries that manufacture and sell drugs and conduct R&D; many of these subsidiaries are located in Europe and Japan, the two largest regional markets (measured in U.S. dollars) for patented medicines after the United States. Like U.S. automobile producers, major pharmaceutical firms recognized in the 1960s that if they were to have success in foreign markets, they needed to establish a manufacturing and research presence in those markets. There are several ways to illuminate the large foreign presence of the drug industry. Perhaps the most comprehensive source of data on foreign direct investment abroad by U.S. firms is the U.S. Department of Commerce. According to Commerce data, in 2005, a total of 46 U.S.-based drug firms with domestic assets valued at $447 billion had established a total of 421 majority-owned foreign affiliates with assets valued at $181 billion. Most of these firms should be regarded as pharmaceutical firms. Sales by the foreign affiliates that year totaled $126 billion, and they employed 207,900 workers. A second but more limited source of information on the foreign operations of U.S. drug firms is the Pharmaceutical Research and Manufacturers of America (PhRMA), the primary trade association for the domestic drug industry. Most member companies should be regarded as pharmaceutical firms. In 2007, domestic sales by PhRMA member companies amounted to an estimated $190 billion, while foreign sales by U.S.-based PhRMA member companies and the U.S. affiliates of foreign-based PhRMA member companies totaled an estimated $82 billion, or 43% of domestic sales. In the same year, PhRMA member companies spent an estimated $35 billion on domestic R&D, while foreign R&D spending by U.S.-based PhRMA member companies and the U.S. affiliates of foreign-based PhRMA member companies totaled an estimated $9 billion, or 26% of domestic R&D spending. Although the importance of foreign markets varies from company to company, it appears that the U.S. drug industry may derive as much as 40% of its revenue from foreign sales. The industry's foreign operations may account for an even higher portion of its overall profits. In 2003, six of the largest U.S.-based pharmaceutical firms received over 65% of their combined profits from foreign operations, up from about 38% in 1994. Federal Income Taxes Paid by the Drug Industry Between 1990 and 2006 Federal income taxes paid from 1990 to 2006 by corporations that derive the largest share of their income from the manufacture and sale of drugs are shown in Table 1 . The figures in the table are taken from tax returns filed by corporations with and without net income and include any corporate alternative minimum taxes owed by drug firms. In collecting and publishing corporate tax data by industry, the IRS defines the drug industry in the same manner as the North American Industry Classification System. According to that definition, the industry consists of firms that derive the largest share of their revenue from one or more of the following sources: manufacturing biological and medicinal products; processing botanical drugs and herbs; isolating active medicinal ingredients from botanical drugs and herbs; and manufacturing pharmaceutical products for internal and external use in forms such as tablets, capsules, vials, powders, and solutions. The industry's taxable income shown in Table 1 combines domestic income earned by U.S.-based corporations and U.S. affiliates of foreign-based firms and a portion of the income earned by foreign branches and subsidiaries of U.S.-based corporations. Such a mix is appropriate because the United States, unlike many other developed countries, taxes business income on the basis of residence, not according to territorial source. Consequently, corporations chartered in the United States owe taxes to the federal government on their worldwide income. U.S.-based firms also pay income taxes to foreign governments on much of the income earned by their foreign affiliates. To avoid double taxation of this income, U.S. tax law permits U.S.-based firms to claim a credit for foreign income tax payments that cannot exceed their U.S. tax liability on the foreign-source income. In addition, U.S. affiliates of corporations chartered in other countries are required to pay federal income taxes on any income they earn in the United States. Federal tax law permits U.S.-based firms to defer the payment of federal income taxes on profits earned by their foreign subsidiaries until those profits have been repatriated to the U.S. parent. It is clear from the figures in the table that the industry benefitted from existing business tax credits (excluding the foreign tax credit): from 1990 to 2006, its average tax liability after credits was 86% of its average tax liability before credits. (The reason for excluding the foreign tax credit from these calculations is explained below.) At the same time, it is clear that the combined value of these credits trended downward from 1990 to 2000 and then reversed course. The primary force behind this decline was a phase-out of the possessions tax credit that commenced in late 1997 and stretched through the end of 2005. In addition, the relatively high levels of taxable income in 2005 and 2006 were due to the billions of dollars in foreign earnings drug firms repatriated from overseas subsidiaries under the temporary repatriation tax holiday established by the American Jobs Creation Act of 2004 (see pp. 19-20). The main tax credits claimed by the drug industry are shown in Table 2 . Their impact on the industry's federal tax burden is discussed below. Foreign Tax Credit Unlike the other tax credits shown in the table, the foreign tax credit confers no benefit on a firm that claims it. Section 901 of the Internal Revenue Code (IRC) permits a corporation chartered in the United States and paying income and related taxes to a foreign government through a foreign subsidiary to claim a limited credit for those taxes in the tax year when the foreign earnings are repatriated as dividends. This statutory provision is intended to avoid the double taxation of income earned by foreign branches or subsidiaries of U.S.-based corporations and repatriated to the U.S. parents. As a result, the foreign tax credit should be added to a firm's tax liability in measuring its federal tax burden. The credit may not exceed the federal income tax owed on repatriated foreign-source income and may not offset any federal tax owed on domestic-source income. In addition, the U.S. Treasury does not refund foreign income taxes paid in excess of the federal tax liability for repatriated foreign-source income. For foreign tax credits earned after October 22, 2004, any such excess may be carried back one year and then carried forward up to 10 years, subject to the same limitations. Possessions and Puerto Rican Economic Activity Tax Credit The drug industry was a major beneficiary of what was known until 1996 as the possessions tax credit under IRC Section 936. Under the Small Business Job Creation Act of 1996, the credit was revised and reborn as the Puerto Rican Economic Activity Credit (PREAC) under IRC Section 30A; it expired on December 31, 2005. In 2005, the industry was able to reduce its federal income tax liability by more than 2% by using the credit; drug firms accounted for 53% of the total amount of the credit claimed by all industries. When the PREAC was available from 1997 to 2005, corporations chartered in the United States could exclude from federal taxation as much as 40% of their income from business operations in Puerto Rico, the U.S. Virgin Islands, and other U.S. territorial possessions. To take advantage of the exclusion, a firm had to derive 80% of its overall gross income from business operations in one or more of these possessions, and 75% from the active conduct of a business there. The PREAC itself was equal to a firm's tax liability on possession-source income, subject to one of two alternative caps enacted in 1993. Under one cap—known as the "economic-activity limitation"—the credit was restricted to certain wage and depreciation costs; under the second cap—known as the "percentage limitation"—the credit was limited to 40% of the credit a firm could have claimed under rules that applied before 1993. Under a provision of the Small Business Job Protection Act of 1996, the credit was modified to phase out by the end of 2005 for firms claiming it in 1996 and was repealed immediately for all other firms. The act also set forth separate phase-out rules for firms subject to the percentage limitation and those subject to the economic-activity limitation. There is some evidence the drug industry responded to the possessions tax credit by establishing a substantial manufacturing presence in Puerto Rico. According to a 1992 report by the then General Accounting Office, a total of 26 drug firms owned manufacturing operations there in 1990. The firms realized an estimated tax savings of $10.1 billion that year from those operations, which produced 17 of the 21 most commonly prescribed drugs in the United States in the early 1990s. Prior-Year Minimum Tax Credit Corporations over a certain size, like individuals, are subject to two parallel income tax systems: the regular income tax and the alternative minimum tax (AMT). Each tax year, a corporation is required to compute its tax liability under both systems and pay whichever is greater. Each tax system has its own rules for the measurement of income and use of deductions, and the tax rates for each differ. In general, the corporate AMT is erected upon a broader definition of income and a less generous set of deductions. Furthermore, most business tax credits, such as the research tax credit, cannot be used to reduce AMT liability. In computing its AMT, a corporation begins with its regular taxable income and modifies it through a series of additional computations known as adjustments and preferences. Adjustments may or may not raise taxable income for the AMT, while preferences are determined on a property-by-property basis and affect taxable income only to the extent that they increase it. Because the corporate AMT is based on a broader measure of taxable income than the regular corporate income tax, nearly every corporation would pay the AMT every year if it were not the case that the AMT rate is much lower than the maximum rate under the regular tax system. The tax rate under the corporate AMT is 20%, whereas the top corporate tax rate is 35%. This means that a corporation's taxable income must be at least 75% greater under the AMT than the regular tax before the corporation must pay the AMT. A firm ends up paying the AMT mostly because of differences in the timing of certain deductions, especially the deduction for depreciation. Many corporations can and do switch between paying the AMT and paying the regular tax. As a result, a credit for taxes paid under the AMT is allowed to keep the AMT from leading to the collection of taxes in excess of the value of timing differences for certain deductions. The tax credit for AMT payments can be used only to offset future regular income tax liability; any unused credits may be carried forward indefinitely. But the AMT credit cannot be used to lower a business taxpayer's regular tax liability below its tentative minimum tax. This means that if a corporation pays the AMT in two consecutive years and then uses its AMT credits over the following two years, its total tax liability in that period would be equal to what it would have been if it had paid the regular tax only. In effect, the AMT accelerates payment of the regular tax. There is an opportunity cost to this acceleration in the form of forgone earnings from using the AMT payments for some other purpose. The longer the gap between paying the AMT and using all AMT credits, the greater this cost. As shown in Table 2 , the AMT credits claimed by drug firms varied widely from year to year. Nevertheless, on the whole, they accounted for a small share of the credits used in any given year. In 2005, for example, the AMT credits used by pharmaceutical firms came to 2% of the AMT credits claimed by all industries. Such an outcome is not surprising. The corporations that are most likely to pay the AMT are those that invest heavily in assets subject to accelerated depreciation under the regular tax system, relative to their earnings. Differences in the treatment of depreciation of these assets between the corporate AMT and the regular tax system account for most of the adjustments and preferences that enter into the computation of the AMT. On the whole, drug firms invest less in such assets as a share of earnings than the manufacturing sector as a whole, which typically accounts for half of total corporate AMT liability in a tax year. In 2002, for instance, pharmaceutical firms spent the equivalent of 5.0% of their value added on plant and equipment; by contrast, manufacturing firms spent 6.6% of their combined value added for the same purpose. General Business Credit The general business credit (GBC) under IRC Section 38 consists of 31 separate and distinct tax credits. Each credit is computed separately on the appropriate tax form. In general, the GBC may not exceed a business taxpayer's net regular income tax, less the greater of its tentative minimum tax liability, or 25% of the net regular tax liability above $25,000. In this case, a taxpayer's net regular income tax liability is defined as the sum of its regular tax liability and alternative minimum tax liability, less all non-refundable credits. If the GBC is greater than this limitation in a tax year, the excess may be carried back one year or forward up to 20 years (with some exceptions). Thus, the GBC a firm may claim in a tax year is the sum of GBCs carried forward to that year, the GBC for that year, and GBCs carried back to that year. As Table 2 shows, most of the drug industry's allowable claims for the GBC since 1990 apparently have been derived from a single credit: the credit for increasing research expenditures under IRC Section 41. From 1991 to 2006, the research credit claimed by the industry exceeded its allowable GBC in every year except 1995, 2003, and 2005. In the same period, the cumulative value of the research credit claimed by the industry exceeded the cumulative value of its allowable GBC by $1.1 billion. These differences indicate that at least some pharmaceutical firms have had sizable reserves of unused research tax credits to draw upon to reduce their regular tax liabilities in future years. Research Tax Credit Under IRC Section 41, business taxpayers may claim a tax credit for their spending on qualified research above a base amount. The incremental design is intended to give firms an incentive to spend more on research than they otherwise would. The credit lowers the after-tax cost of undertaking qualified research above the base amount: one dollar of the credit reduces that cost by the same amount. The research credit is composed of five separate and distinct non-refundable credits: a regular research credit, an alternative incremental research credit (or AIRC), an alternative simplified incremental credit (or ASIC), a credit for contract basic research, and a credit for contract energy research. All five are due to expire at the end of 2009, and the AIRC is unavailable in 2009. A business taxpayer may claim no more than the basic and energy research credits and one of the remaining three in a single tax year. To prevent a taxpayer from reaping a double tax benefit from the same expenditure, any research tax credit claimed must be subtracted from the amount of qualified research expenses deducted under IRC Section 174. Most claims for the credit involve the regular credit. It has been extended 13 times and significantly modified six times. The credit is equal to 20% of a firm's qualified spending on eligible research conducted in the United States and its territorial possessions above a base amount. Several rules governing the use of the credit tend to push its marginal effective rate below its statutory rate for many of the firms that use it. Of particular importance are the definition of qualified research and the requirements that the deduction for qualified research expenses under IRC Section 174 be reduced by the amount of the research tax credit, and that the base amount equal 50% or more of current-year research expenses. The regular, alternative, and basic research credits apply to the following expenses only: wages and salaries of researchers, supplies and materials used in qualified research, leased computer time for qualified research, and 65% to 100% of payments for contract research (depending on the nature of the research and the type of entity conducting it). Among all industries, the drug industry is a leading beneficiary of the research credit: in 2006, it claimed $902 million in research tax credits, or 12% of the total amount of such claims by all industries. Yet there is reason to suspect that the credit has not had a major impact on investment in new drug development in recent years. From 2000 to 2006, the drug industry's total claims for the credit represented 3% of total domestic R&D spending by PhRMA member companies. In addition, even drug firms that spend hundreds of millions of dollars or more on R&D cannot expect to take advantage of the regular credit in a given tax year. A 2001 CRS report estimated that Merck was unable to claim a regular research tax credit in 1998, despite spending $1.8 billion on R&D that year. The explanation for this result lay in the rules governing the regular credit's use, especially the requirement that the base amount be equal to 50% or more of current-year expenditures on qualified research. These rules may also explain why relatively few drug firms claim the research credit from year to year: in 2005, for instance, no more than one in five of pharmaceutical firms that filed a corporate income tax return claimed the research tax credit. Orphan Drug Credit Only one of the credits shown in Table 2 seems targeted at the drug industry: the orphan drug tax credit. In 2006, firms classified in the industry by the IRS contributed 52% of the total value of claims for the credit by all industries. Under IRC Section 45C, a firm may claim a tax credit equal to half the cost of human clinical trials for drugs intended to treat rare diseases; such drugs are also known as orphan drugs. The credit indirectly subsidizes the cost of capital for investment in the development of such drugs, as human clinical trials, which are conducted in three phases, constitute the most time-consuming and costliest step in the new drug development process. The statutory provision defines a rare disease or condition as one likely to afflict fewer than 200,000 individuals residing in the United States, or one likely to afflict more than 200,000 such individuals but for which there is no realistic prospect of recovering R&D costs from U.S. sales alone. The credit applies to expenditures for the supplies and the wages and salaries of researchers used in clinical trials for orphan drugs, but not for the structures and equipment used in the trials. It is a permanent provision of the tax code and a component of the general business credit, and thus subject to its limitations. Since the orphan drug credit was enacted in 1983 as one of a series of measures aimed at stimulating increased investment in the development of new drugs to treat rare diseases and conditions, at least 325 such drugs have gained regulatory approval in the United States. But contrary to the credit's intended purpose, some of them went on to become major sources of revenue for their producers, including Glaxo Wellcome's anti-AIDS drug Retrovir AZT, Amgen's anti-anemia drug Epogen, and Genentech's human growth hormone Protropin. Federal Tax Burden on the Drug Industry and Major U.S. Industries from 2000 to 2006 Generally, the federal tax burden on an industry refers to how the tax code affects its return on past investment. This effect emerges through the definition of taxable income, adjustments to taxable income (e.g., deductions and exemptions), tax rates, and adjustments to tax liability (e.g., tax credits and minimum tax payments). For the most part, these provisions serve the dual purpose of raising the revenue needed to fund government operations and programs and offering firms meaningful incentives to engage in or eschew certain activities. The tax credit for increasing research expenditures obviously exemplifies the second purpose. Expressed in its simplest terms, an industry's federal tax burden indicates how much of its profits it must surrender to comply with current tax law. As this burden expands and all other things being equal, firms have fewer funds than they otherwise would to use as they wish. Economists define a firm's tax burden as its share of real pre-tax economic income paid in taxes. But it is difficult to determine a firm's economic income from business tax return data, as certain provisions in the tax code drive a wedge between a business taxpayer's economic income and its taxable income. So another approach must be taken to measure business tax burdens. One option is to substitute taxable income as determined under current federal tax law for pre-tax economic income. This approach is used here. A widely used measure of an industry's federal tax burden is its average effective tax rate, which is the ratio of its federal income tax liability after credits to its taxable income, expressed as a percentage. As such, the ratio reveals the net effect of the federal tax code on the industry's pre-tax returns on previous investments. Some economists construe this effect as the extent to which the tax code penalizes or rewards the economic activities of the firms making up the industry. There are some limitations to the usefulness of the average effective tax rate as a measure of an industry's federal tax burden. One limitation is that the rate reflects the impact of the tax code on the returns to an industry's previous investments; thus it may be an unreliable indicator of the federal tax burden on current or future investments. In addition, average effective tax rates do not provide a comprehensive measure of the federal tax burden for an industry because they cannot capture the influence of provisions in the tax code that accelerate the timing of tax deductions or delay the recognition of income for tax purposes. A better measure would be the marginal effective tax rate for an industry, which would capture the effect of all relevant tax provisions on its pre-tax returns on new investment. But it is difficult to compute such a rate for most industries because the value of some widely used tax benefits (e.g., expensing of R&D costs) cannot be estimated using available financial or tax return data, and not all firms in an industry invest the same amount in the same mix of assets in a given tax year. Nonetheless, if average effective tax rates are applied consistently across industries and over time, they can shed light whether their federal tax burdens differ, and if so, to what extent. Table 3 shows the average effective federal tax rates for the drug industry and all major U.S. industries from 2001 to 2006. As noted above, the rates compare the industries' federal income tax liability after all credits except the foreign tax credit with their worldwide taxable income (as reported on their federal income tax returns). As such, they address neither the domestic tax burden on domestic income nor the worldwide tax burden on worldwide income for the industries. Instead, the rates represent something of a hybrid of the two measures: the federal tax burden on domestic income plus foreign income that has been recognized for federal tax purposes. As noted earlier, the foreign tax credit should be excluded from an industry's net tax liability because the credit is intended to prevent the double taxation of foreign-source income. Including it would understate the federal tax burden on the industries, in some cases by a significant margin. The data in the table indicate that the drug industry's federal tax burden in 2001 to 2006 was similar to the average tax burden for all industries. Such a finding may come as a surprise to those who have the impression that the industry long has benefitted unfairly or disproportionately from certain business tax preferences. Though the table does not show this, the industry's tax burden did rise in the late 1990s, driven by a phase-out of the possessions tax credit that began in 1997 and lasted through 2005. If marginal effective federal tax rates could be computed for typical investments made by the industries shown in Table 3 , it is likely that the rate for the drug industry would be among the lower ones. This is because the effects of some tax preferences that tend to benefit drug firms more than other firms are not fully reflected in average effective tax rates. These preferences involve both the deferral of federal income taxes and accelerated depreciation. Three tax preferences in particular are likely to yield significant tax savings for U.S.-based drug firms and thus warrant further examination: (1) the deferral of federal income taxes on net income retained by foreign subsidiaries of U.S.-based corporations; (2) the expensing (or deduction as a current cost) of qualified research spending; and (3) the expensing of advertising and promotional costs. Deferral of Federal Income Taxes on Foreign-Source Income As noted above, the federal government taxes corporations based or chartered in the United States on their worldwide income and grants them tax credits for foreign income tax payments they make on foreign-source profits up to their federal tax liability on those profits. But federal tax law does not treat all foreign-source income equally. Profits earned by foreign branches of a U.S.-based corporation are subject to federal taxation in the year when they are earned, regardless of whether the profits are repatriated to the U.S. corporate parent. In contrast, profits earned by foreign corporate subsidiaries of the same corporation are subject to U.S. taxation only when they are repatriated to the parent firm in the form of dividends, royalty payments, or other income. The subsidiaries' profits may be taxed by the host countries, but any profits they retain are exempt from federal taxation until the profits are repatriated. Such an exemption represents a deferral of U.S. income tax liability. Deferral of this variety can generate a substantial tax benefit, particularly in cases where U.S. firms locate subsidiaries in countries with lower tax rates than the United States. The reason lies in the time value of money. In essence, a dollar received today is worth more than the same dollar received in some future year. So the longer a taxpayer can defer a tax payment, the less it is worth in current dollars. As a result, U.S.-based firms with subsidiaries in countries with lower tax rates than the United States can reduce the present value of their federal tax burden by having the subsidiaries retain their earnings for one or more years. Although these subsidiaries may pay income taxes on their annual earnings to host-country governments, those taxes would be lower than the U.S. income taxes that would be due on the same profits in the year when they were earned. Thus, the opportunity to defer federal taxes on foreign-source income gives U.S.-based firms a significant incentive to invest in countries with lower income tax rates than the United States. There is some evidence that U.S.-based drug firms have taken advantage of this opportunity. According to a 2004 article in Tax Notes , the effective foreign income tax rate on the foreign profits of six major U.S. pharmaceutical firms was 17.6% in 2003, while the maximum U.S. corporate tax rate was 35%. Unrepatriated foreign earnings reported by the same six companies rose from $10.1 billion at the end of 1993 to $101.0 billion at the end of 2004, a tenfold increase. And another report in Tax Notes pointed out that six pharmaceutical firms were among the top 20 of 67 U.S.-based multinational firms ranked according to accumulated undistributed or unrepatriated foreign earnings reported in the 10-K reports they filed for 2003 with the Securities and Exchange Commission. Temporary Dividends Received Deduction Under IRC Section 965 Further evidence that the drug industry is a major beneficiary of the opportunity to defer federal taxes on profits earned by the foreign corporate subsidiaries of U.S.-based corporations comes from the industry's response to a provision in the American Jobs Creation Act of 2004 (AJCA, P.L. 108-357 ) that granted U.S.-based firms a temporary tax reduction for the repatriation of some of those profits. Under IRC Section 965, which was added by AJCA, U.S. corporations could claim a deduction equal to 85% of the cash dividends above a base-period-amount they received from their controlled foreign corporations (CFCs) and then invested in the United States according to an eligible plan approved by a top corporate officer and the board of directors. For corporations paying a marginal tax rate of 35%, the deduction lowered the tax rate on any dividends received to 5.25%: 0.35 x 0.15. Corporations were allowed to claim the dividends received deduction (DRD) once: either in their last tax year before October 22, 2004 (the date when AJCA was signed into law) or their first tax year during the 12 months starting on October 22, 2004. The base-period amount for a corporation was defined as the average amount of cash dividends it received from CFCs in three of the five most recent tax years ending on or before June 30, 2003, disregarding the years with the lowest and highest repatriation amounts. In addition, the DRD was limited to the greater of $500 million, or the amount of earnings permanently reinvested outside the United States (as shown on a firm's most recent balance sheet after June 30, 2003), or 35% of the tax liability attributed to earnings permanently reinvested outside the United States. A recent study by the Internal Revenue Service (IRS) found that 843 U.S.-based corporations claimed the one-time DRD by repatriating $362 billion in cash dividends from 2004 through 2006. Drug firms accounted for 3% of all the firms claiming the deduction but contributed 32% of the entire amount of repatriated cash dividends. The average drug firm repatriated $3.6 billion in qualifying dividends, compared to $370 million for the average firm. In addition, drug firms claiming the deduction reported permanently reinvested foreign earnings equal to 13% of their assets; for all firms claiming the deduction, the same ratio was under 2% of their assets. Transfer of Intangible Assets Like Drug Patents to Low-Tax Countries The opportunity to defer U.S. taxes on the profits of foreign corporate subsidiaries is linked to a practice used by major U.S.-based pharmaceutical firms to reduce their worldwide tax burdens. It entails the transfer of drug manufacturing and intangible assets like drug patents to offshore subsidiaries in countries whose corporate tax rates are lower than those of the United States. While the extent of this practice and its impact on the federal tax burdens of drug firms are not well-documented, its basic elements are well-established. In what could be regarded as the standard or classic case, seeking to lower the effective worldwide tax rate it reports to shareholders, a U.S.-based drug company transfers a patent for a drug it has developed to a subsidiary located in a country with lower corporate tax rates than the United States. The subsidiary then helps fund further research in the United States on the drug, allowing it to claim ownership of the patent without having to buy it from its American parent. Once the drug is approved for sale in the United States, the subsidiary produces it at a cost of a few cents a pill. The pills are then shipped to the American parent, which sells them to pharmacies or wholesalers for several dollars a pill. But in accounting for the profit from U.S. sales of the drug on its federal income tax return, the American parent company attributes almost the entire amount to the foreign subsidiary, not itself, because the subsidiary holds the patent for the drug. The final result is that most of the profit is transferred to the host country for the subsidiary and taxed there, while the remainder is taxed at a higher rate in the United States. No federal income tax can be levied on the subsidiary's share of the profit until it is repatriated. This practice is not necessarily illegal under U.S. tax law. But it does make it possible to use loopholes or gaps in the law to shelter profits in so-called foreign tax havens. Since drug prices are higher in the United States than in most other developed countries, the legality of this practice has been questioned. Some argue such a price difference is proof that the vast share of industry profits should be attributed to U.S. operations, not to any foreign operations. Yet that apparently is not the case. According to a 2006 analysis by Martin Sullivan of Tax Analysts, nine of the largest U.S. pharmaceutical firms reported to shareholders that foreign earnings accounted for 69.9% of their combined worldwide profits in 2005, up from 39.2% in 1999. Proceeding on the assumption that an industry's profits should be assigned to the location of "value-creating economic activity" for tax purposes, Sullivan estimated that reported foreign profits should have accounted for 43% of the combined worldwide profits for these firms in 2005. This meant that an additional 27% of the firms' worldwide profits that year should have been subject to U.S. taxation. Expensing of Qualified Research Spending Drug firms also derive substantial benefit from the tax treatment of research expenditures under IRC Section 174. Under that provision, a business taxpayer may deduct as a current expense (or expense) its research expenditures in the tax year when they are made. To qualify for this treatment, those expenditures must meet the following criteria: (1) they must relate to a firm's trade or business, (2) they cannot be considered capital costs, and (3) they must be directed at "activities intended to discover information that would eliminate uncertainty concerning the development or improvement of a product." In practice, only the wages and salaries of research personnel, the cost of supplies and materials used in qualified research, and related overhead costs may be deducted under IRC Section 174. By contrast, the cost of structures and equipment used in this research must be recovered over 15 years and three years, respectively, using allowable depreciation methods. Business spending on R&D typically creates intangible assets (such as patents) that generate a stream of revenue over a number of years. Such an outcome indicates that the economic life of these assets is longer than one year, a view that has been backed by several studies. So it seems reasonable and fair that a firm, in computing its taxable income, should treat its spending on R&D as a capital expense that is recovered over the useful life of the assets it generates, using an appropriate depreciation method. Yet the tax code allows firms to treat R&D expenditures as a current expense rather than a capital expense. This option gives rise to a significant subsidy for business R&D investment in the form of a reduced marginal effective tax rate on the returns to this investment. In theory, expensing (or the deduction of the entire amount of a capital expenditure in the year when it is made) lowers the marginal effective tax rate on the returns to investment in affected assets to zero. The addition of the research tax credit under IRC Section 41 makes the rate negative for eligible investments. Consequently, the user cost of capital for R&D investment is significantly lower than for many other investments a firm might make, including the acquisition of new plant and equipment. Supporters of the expensing of R&D expenditures say that such a subsidy is justified on the grounds that it addresses a market failure associated with investment in research: namely, that firms tend to invest less than optimal amounts in research because they cannot appropriate all the returns to innovation. Drug firms are likely to benefit from this tax subsidy more than many other firms because of the drug industry's strong propensity to invest in R&D. In 2006, according to estimates by the National Science Foundation (NSF), drug firms spent an estimated 13.5% of their domestic net sales on R&D performed in the United States. By contrast, the same ratio for all industries was 3.4%; for manufacturing firms, 3.6%; and for non-manufacturing firms, 2.9%. Drug firms spent $38.8 billion on R&D in 2006, according to the NSF. Assuming that its average effective federal tax rate that year was the same as its average effective federal tax rate for 2000 to 2005 (31%), and that the entire amount could be deducted as a current expense under IRC Section 174, the industry was able to lower its tax liability in 2006 by $12 billion by deducting the full amount of its R&D expenditures. Expensing of Advertising Spending Drug firms also appear to benefit disproportionately from the tax treatment of outlays for business advertising. Under current federal tax law, advertising expenses are deductible in the tax year when they are incurred, provided they pass two tests: (1) they are reasonable in amount; and (2) they are related to a firm's lines of business. These expenses must serve the purpose of developing goodwill among customers or soliciting immediate sales. There is a clear similarity in the tax treatment of outlays for advertising and outlays for R&D: both are deductible as a current expense. Expensing constitutes a significant tax subsidy in that it theoretically leads to a marginal effective tax rate of zero on any profits generated by an asset. In the case of advertising, this tax treatment would be justified on economic grounds if advertising yielded no benefits for a firm beyond the year when the cost of the advertising is incurred. But this might not be the case. There is some evidence that spending on advertising can create intangible assets with economic lives extending beyond a single year. In certain markets (including prescription drugs), advertising fosters the growth of what might be called brand recognition and consumer loyalty. These effects can operate like an intangible asset in that they can boost a firm's profits and keep them at levels they might not attain otherwise. For instance, Ernst R. Berndt and three colleagues found in a study of the U.S. market for anti-ulcer drugs that efforts by leading manufacturers to promote H 2 -antagonist prescription drugs to physicians through detailing and medical journal advertising had "substantial effects" on the growth of domestic demand for the drugs and the sellers' market shares from 1977 to 1993. In doing the study, they divided these marketing efforts into those aimed at expanding overall demand for H 2 -antagonist drugs, and those aimed solely at expanding the market shares of the leading sellers. Berndt and his colleagues then estimated that the cumulative value of the marketing intended to expand overall demand depreciated at a rate of zero, but that the cumulative value of the marketing intended to expand market shares depreciated at an annual rate of close to 40%. Others have estimated that the depreciation rate for the intangible assets created by commercial advertising falls in the range of 20% to 30%. To the extent that advertising creates intangible assets with economic lives of longer than one year, the expensing permitted under current tax law has the effect of lowering the cost of capital for investment in advertising, relative to the cost of capital for investment in assets with longer tax lives, all other things being equal. Still, there is lingering uncertainty about the actual rate at which advertising loses its economic value. Available evidence points to differing conclusions about the economic life of advertising; it also indicates that the true depreciation rate may differ considerably by mode of advertising (e.g., television advertising, magazine advertising, radio advertising). As a result, it is difficult to assess to what extent the tax code subsidies investment in advertising. Whatever the actual degree of subsidy, there is little question that drug firms benefit more from the expensing of advertising expenditures than many other firms because of their relatively strong propensity to invest in advertising. In 2005, the most recent year for which U.S. corporate tax data are available, the drug industry claimed a total deduction for advertising equal to 4.6% of business receipts; for all industries, the share was 1.2%. Drug firms deducted $13.1 billion for advertising that year, yielding a tax savings of $4.3 billion at the industry's average effective federal tax rate of 32.5% that year. Federal Tax Policy and Investment in New Drug Development Tax policy is one of many channels through which the federal government influences the domestic climate for new drug development. Business taxation helps shape this climate through its impact on a firm's user cost of capital for R&D investment and its supply of internal funds (or retained earnings). The user cost of capital is the cost a firm incurs as a result of owning a tangible or intangible asset. It embraces both the opportunity cost of forgoing other investments and the direct costs of ownership, such as depreciation, the acquisition cost of the asset, and taxes. In general, the user cost of capital indicates the rate of return an investment project must earn in order to break even. As a firm's user cost of capital declines, the number of investment projects it can profitably undertake increases, all other things being equal. There is considerable evidence that business investment responds to changes in the user cost of capital, although the magnitude and duration of the response over the business cycle are matters of ongoing debate and research among economists. One factor affecting the user cost of capital is the tax burden on the returns to an investment. Generally, as this burden decreases, so does the cost of capital. A widely used measure of this burden is the marginal effective tax rate. This rate, which is calculated by subtracting the after-tax rate of return on a new investment from the pre-tax rate of return and dividing by the pretax rate of return, reflects the statutory income tax rate faced by a firm, as modified by any tax provisions that subsidize or penalize the investment. Under current law, the federal tax burden on the returns to R&D investment is relatively low because of two research tax subsidies discussed earlier: (1) the tax credit for increases in research spending above a base amount under IRC Section 41, and (2) the option to deduct qualified research expenditures as a current expense under IRC Section 174. In combination, they have the potential to push the cost of capital for R&D investments below that of most other investments a firm might make, such as purchases of plant or equipment or instituting a new training program for employees. According to an analysis by economist Bill Cox, the credit and expensing allowance have the combined effect of taxing the returns to R&D investment at a negative rate, which is to say that after-tax rates of return exceed pre-tax rates of return. The same two tax subsidies can also boost R&D investment by increasing a firm's cash flow or supply of internal funds. Some firms base their annual R&D budgets on the amount of money they expect to have on hand after paying all expenses in a given year. For them, the cost of internal funds may be significantly lower than the cost of external funds, such as capital raised through borrowing or issuing new shares of stock. Small start-up biotechnology firms are especially likely to find themselves in this position, as potential investors or lenders may lack the needed information to evaluate their long-term prospects for commercial success. A firm's supply of internal funds depends in part on how much it earns in profits and how much of those profits it must set aside to cover its anticipated income tax liability. In the short run, firms that rely heavily on retained earnings to finance new R&D investments can invest more as their tax liabilities fall, all other things being equal. Of course, a firm could use any increase in cash flow for other purposes, including hiring new employees, training current employees, or paying higher dividends to shareholders or owners. In addition, the opportunity under federal tax law to move profits to subsidiaries located in low-tax countries through the transfer of drug patents to those subsidiaries and the deft use of transfer pricing can make it possible for major U.S.-based pharmaceutical firms to reduce their worldwide tax burden. An indicator of the effect of tax policy on new drug development is the drug industry's federal tax burden, as measured by average effective tax rates. From 2000 to 2006, the industry's rate was nearly the same as the average rate for all industries. Yet in the same period, the average drug firm devoted a much higher percentage of its revenue to R&D than the average firm. So while the average drug firm pays about the same amount of federal income tax per dollar of taxable income as the average firm, the former spends a larger share of each dollar of gross income on the development of new technology. This difference suggests that new drug development is driven by forces other than federal tax subsidies. Among the key ones are the opportunities for novel drug compounds opened up through advances in basic research, the regulatory requirements for the drug approval process, the competitive strategies of drug firms, and the potential earnings from investing in the development of new drugs. It is also worth noting that not all drug firms are affected equally by federal taxation. The typical pharmaceutical firm has profits and thus can take advantage of the research and orphan drug tax credits, the expensing of advertising and research expenditures, and the deferral of profits earned by foreign subsidiaries to lower its tax burden and boost its after-tax rate of return on equity. By contrast, the typical biotech firm has a net operating loss and thus can take advantage of none of those tax incentives in the short run. The typical generic drug firm has a tax profile that more closely resembles that of the pharmaceutical firm, with the exception that the former spends a fraction of what the latter spends on drug discovery, drug testing and clinical trials, and advertising and promotion.
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A key issue in congressional debates over expanding consumer access to prescription drugs is the impact of proposed initiatives on the development of new medicines. Some of the initiatives entail significant changes in one or more of the federal policies affecting new drug development. One such policy is federal taxation of firms that invest in this development. This report examines the impact of federal taxation on the incentive to invest in new drug development. More specifically, it looks at the provisions in current tax law that affect the performance of the drug industry, compares the industry's federal tax burden with that of other major industries, and assesses the effect of federal taxation on the incentive to invest in new drug development. This information may be useful to the 111th Congress as it considers the pros and cons of proposed changes in the U.S. health care system. The report will be updated as necessary. An industry's federal tax burden refers to the effects of federal taxation on its return on investment through statutory provisions that define taxable income, make adjustments to this income, and establish tax rates and credits against tax liability. Economists generally measure an industry's federal tax burden as its average effective tax rate, which is the ratio of its federal tax liability after all credits (except the foreign tax credit) to its taxable income, expressed as a percentage. This measure has some limitations, such as the inability of average effective rates to capture the effects of tax provisions that accelerate the timing of deductions or delay the recognition of income. A comparison of average effective federal tax rates for the drug industry and major U.S. industries indicates that the share of the drug industry's worldwide net income paid as federal taxes was similar to the average share for all industries from 2000 through 2006. This has not always been the case. For much of the 1990s, the drug industry's tax burden was significantly lower than the average tax burden for all industries. But starting in the late 1990s, the drug industry's federal tax burden began to rise as the U.S. possessions tax credit was phased out. Drug firms were major beneficiaries of this credit. They also appear to benefit substantially, if not disproportionately, from three tax preferences whose combined effect is not fully reflected in average tax rates: (1) the deferral of federal income tax on the retained earnings of foreign subsidiaries of U.S.-based corporations, (2) the expensing of research outlays, and (3) the expensing of advertising outlays. Available evidence suggests that current federal tax law bolsters the incentive to invest in new drug development for some firms but not for others. The most powerful drivers of this investment seem to be the quest by certain drug firms for sustained competitive advantage and profit growth and the available technological opportunities for developing new, safe, and effective medicines. Still, all other things being equal, a substantial increase in the industry's tax burden might slow growth in this investment by raising the industry's cost of capital and reducing its cash flow.
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On the trial of this cause the agreement of September 13th, 1861, was admitted in evidence, without the exhibit to which it refers, against two objections of the defendants: 1st, that it was incomplete without the exhibit; 2d, that it was invalid, because executed by one of the firm of Kelly & Co. after its dissolution. The answer to the first objection consists in the fact that no exhibit, though mentioned in the agreement as annexed to it, was in truth annexed. The parties executed the agreement, and acted upon it without this document being attached. The agreement cannot, therefore, be treated as incomplete in the absence of the exhibit; it was only ineffectual to pass the amounts specified in that paper; it was effectual to pass all other matters mentioned. The contract was not intended merely to transfer certain assets; it had for a further object to ascertain the amount of the indebtedness of the defendants from the examination of their books by an accountant. It was clearly admissible in connection with the statement of the accountant to show the amount of such indebtedness. To the second objection the answer is equally brief and conclusive. The agreement was admitted, 'subject to the proof to be given thereafter,' and it was subsequently proved that the agreement was ratified by the other partner of the firm of Kelly & Co., and the fact of ratification is specially found by the jury. The principal objections urged for a reversal of the judgment rest upon the idea that the agreement of September 13th, 1861, was a submission to arbitration, and the report or statement of Quigg was the award of an arbitrator; and that both are to be judged by the strict rules applicable to arbitrations and awards. This is, however, a mistaken view of the agreement and report. As observed by counsel, there was no dispute or controversy between the parties to be submitted to arbitration; nor was anything to be submitted to the judgment or discretion of Quigg. The books of account of the defendants were to determine the amount due; about these there was no controversy. The only duty of Quigg was to examine them as an accountant and to state what they exhibited. The objection that the report was not made from the accounts as they stood on the books at the time they were placed in the hands of Quigg, is not one which can affect the result. The object of submitting the books to him for examination was to ascertain the exact amount of the indebtedness of the defendants to the plaintiffs. For this purpose it was in his power to write up the books, to correct errors discovered, and make entries of what had been omitted by oversight or mistake. It is to be presumed that the parties desired to arrive at a just result, not to have a balance struck from the books without regard to their correctness. The agreement provides that the amount due was to be ascertained by Quigg, under the supervision of the parties, and the proof shows that this was done under the immediate supervision of one of the defendants. Besides, Quigg was examined as a witness in the case, and exhibited the books, and testified as to the balance they showed and the entries made by him. These books were, of themselves, admissible as evidence of the balance due by the defendants, independent of the agreement of September 13th, 1861. Upon the evidence they furnished, taken in connection with the testimony of Quigg, the verdict of the jury may be sustained without reference to his report. They showed the amount received from the sales of coal furnished to the defendants to which the plaintiffs were entitled; and for such amount the recovery can be upheld under the common counts, for money had and received. JUDGMENT AFFIRMED.
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1. Where agents, in the sale of an article, acknowledging a debt of unascertained amount due their principals, sign an agreement passing certain debts described as "all accounts hereunto attached,: and marked Exhibit A,"-no exhibit, however, being then or afterwards annexed,-and "all other debts die" (for the particular article), the contract having the further purpose of ascertaining, with certainty, from an examination by an nccountant of the books of the assigning party the exact amount due,-the contract, in connection with the report of the accountant, may, on a suit for the amount found due, be read in evidencei, ven without the exhibit pever annexed. 2. Where, to a suit against a partnership for debt, the defence is, that a former partner has unwarrantably signed the firm name after dissolution of the partnership, the paper signed may be read in evidence by itself, it being so read, however, "subject to the proof to be given hereafter." 3. Where a party who has been, and still is, carrying on an agency in the sale of anything for another, becomes thus indebted to this other, and agrees that an accountant shall examine the books of account and ascertain from them the exact amount due, "4t he amount so found to be due and owing to be final,"-the agreement is not "a submission to arbitration," nor is the amount found by the accountant an " award" in any such sense as will make them subject to the strict rules governing arbitrations and awards.
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This case involves the validity of a qualifying test administered to applicants for positions as police officers in the District of Columbia Metropolitan Police Department. The test was sustained by the District Court but invalidated by the Court of Appeals. We are in agreement with the District Court and hence reverse the judgment of the Court of Appeals. * This action began on April 10, 1970, when two Negro police officers filed suit against the then Commissioner of the District of Columbia, the Chief of the District's Metropolitan Police Department, and the Commissioners of the United States Civil Service Commission.1 An amended complaint, filed December 10, alleged that the promotion policies of the Department were racially discriminatory and sought a declaratory judgment and an injunction. The respondents Harley and Sellers were permitted to intervene, their amended complaint asserting that their applications to become officers in the Department had been rejected, and that the Department's recruiting procedures discriminated on the basis of race against black applicants by a series of practices including, but not limited to, a written personnel test which excluded a disproportionately high number of Negro applicants. These practices were asserted to violate respondents' rights "under the due process clause of the Fifth Amendment to the United States Constitution, under 42 U.S.C. § 1981 and under D.C.Code § 1-320."2 Defendants answered, and discovery and various other proceedings followed.3Respondents then filed a motion for partial summary judgment with respect to the recruiting phase of the case, seeking a declaration that the test administered to those applying to become police officers is "unlawfully discriminatory and thereby in violation of the due process clause of the Fifth Amendment . . . ." No issue under any statute or regulation was raised by the motion. The District of Columbia defendants, petitioners here, and the federal parties also filed motions for summary judgment with respect to the recruiting aspects of the case, asserting that respondents were entitled to relief on neither constitutional nor statutory grounds.4 The District Court granted petitioners' and denied respondents' motions. 348 F.Supp. 15 (DC1972). According to the findings and conclusions of the District Court, to be accepted by the Department and to enter an intensive 17-week training program, the police recruit was required to satisfy certain physical and character standards, to be a high school graduate or its equivalent, and to receive a grade of at least 40 out of 80 on "Test 21," which is "an examination that is used generally throughout the federal service," which "was developed by the Civil Service Commission, not the Police Department," and which was "designed to test verbal ability, vocabulary, reading and comprehension." Id., at 16. The validity of Test 21 was the sole issue before the court on the motions for summary judgment. The District Court noted that there was no claim of "an intentional discrimination or purposeful discriminatory acts" but only a claim that Test 21 bore no relationship to job performance and "has a highly discriminatory impact in screening out black candidates." Ibid. Respondents' evidence, the District Court said, warranted three conclusions: "(a) The number of black police officers, while substantial, is not proportionate to the population mix of the city. (b) A higher percentage of blacks fail the Test than whites. (c) The Test has not been validated to establish its reliability for measuring subsequent job performance." Ibid. This showing was deemed sufficient to shift the burden of proof to the defendants in the action, petitioners here; but the court nevertheless concluded that on the undisputed facts respondents were not entitled to relief. The District Court relied on several factors. Since August 1969, 44% Of new police force recruits had been black; that figure also represented the proportion of blacks on the total force and was roughly equivalent to 20- to 29-year-old blacks in the 50-mile radius in which the recruiting efforts of the Police Department had been concentrated. It was undisputed that the Department had systematically and affirmatively sought to enroll black officers many of whom passed the test but failed to report for duty. The District Court rejected the assertion that Test 21 was culturally slanted to favor whites and was "satisfied that the undisputable facts prove the test to be reasonably and directly related to the requirements of the police recruit training program and that it is neither so designed nor operates (Sic ) to discriminate against otherwise qualified blacks' Id., at 17. It was thus not necessary to show that Test 21 was not only a useful indicator of training school performance but had also been validated in terms of job performance "The lack of job performance validation does not defeat the Test, given its direct relationship to recruiting and the valid part it plays in this process." Ibid. The District Court ultimately concluded that "(t)he proof is wholly lacking that a police officer qualifies on the color of his skin rather than ability" and that the Department "should not be required on this showing to lower standards or to abandon efforts to achieve excellence."5 Id., at 18. Having lost on both constitutional and statutory issues in the District Court, respondents brought the case to the Court of Appeals claiming that their summary judgment motion, which rested on purely constitutional grounds, should have been granted. The tendered constitutional issue was whether the use of Test 21 invidiously discriminated against Negroes and hence denied them due process of law contrary to the commands of the Fifth Amendment. The Court of Appeals, addressing that issue, announced that it would be guided by Griggs v. Duke Power Co., 401 U.S. 424, 91 S.Ct. 849, 28 L.Ed.2d 158 (1971), a case involving the interpretation and application of Title VII of the Civil Rights Act of 1964, and held that the statutory standards elucidated in that case were to govern the due process question tendered in this one.6 168 U.S.App.D.C. 42, 512 F.2d 956 (1975). e court went on to declare that lack of discriminatory intent in designing and administering Test 21 was irrelevant; the critical fact was rather that a far greater proportion of blacks four times as many failed the test than did whites. This disproportionate impact, standing alone and without regard to whether it indicated a discriminatory purpose, was held sufficient to establish a constitutional violation, absent proof by petitioners that the test was an adequate measure of job performance in addition to being an indicator of probable success in the training program, a burden which the court ruled petitioners had failed to discharge. That the Department had made substantial efforts to recruit blacks was held beside the point and the fact that the racial distribution of recent hirings and of the Department itself might be roughly equivalent to the racial makeup of the surrounding community, broadly conceived, was put aside as a "comparison (not) material to this appeal." Id., at 46 n. 24, 512 F.2d, at 960 n. 24. The Court of Appeals, over a dissent, accordingly reversed the judgment of the District Court and directed that respondents' motion for partial summary judgment be granted. We granted the petition for certiorari, 423 U.S. 820, 96 S.Ct. 33, 46 L.Ed.2d 37 (1975), filed by the District of Columbia officials.7 Because the Court of Appeals erroneously applied the legal standards applicable to Title VII cases in resolving the constitutional issue before it, we reverse its judgment in respondents' favor. Although the petition for certiorari did not present this ground for reversal,8 our Rule 40(1)(d)(2) provides that we "may notice a plain error not presented";9 and this is an appropriate occasion to invoke the Rule. As the Court of Appeals understood Title VII,10 employees or applicants proceeding under it need not concern themselves with the employer's possibly discriminatory purpose but instead may focus solely on the racially differential impact of the challenged hiring or promotion practices. This is not the constitutional rule. We have never held that the constitutional standard for adjudicating claims of invidious racial discrimination is identical to the standards applicable under Title VII, and we decline to do so today. The central purpose of the Equal Protection Clause of the Fourteenth Amendment is the prevention of official conduct discriminating on the basis of race. It is also true that the Due Process Clause of the Fifth Amendment contains an equal protection component prohibiting the United States from invidiously discriminating between individuals or groups. Bolling v. Sharpe, 347 U.S. 497, 74 S.Ct. 693, 98 L.Ed. 884 (1954). But our cases have not embraced the proposition that a law or other official act, without regard to whether it reflects a racially discriminatory purpose, is unconstitutional Solely because it has a racially disproportionate impact. Almost 100 years ago, Strauder v. West Virginia, 100 U.S. 303, 25 L.Ed. 664 (1880), established that the exclusion of Negroes from grand and petit juries in criminal proceedings violated the Equal Protection Clause, but the fact that a particular jury or a series of juries does not statistically reflect the racial composition of the community does not in itself make out an invidious discrimination forbidden by the Clause. "A purpose to discriminate must be present which may be proven by systematic exclusion of eligible jurymen of the proscribed race or by unequal application of the law to such an extent as to show intentional discrimination." Akins v. Texas, 325 U.S. 398, 403-404, 65 S.Ct. 1276, 1279, 89 L.Ed. 1692, 1696 (1945). A defendant in a criminal case is entitled "to require that the State not deliberately and systematically deny to members of his race the right to participate as jurors in the administration of justice." Alexander v. Louisiana, 405 U.S. 625, 628-629, 92 S.Ct. 1221, 1224, 31 L.Ed.2d 536 (1972). See also Carter v. Jury Comm'n, 396 U.S. 320, 335337, 339, 90 S.Ct. 5, 526-528, 529, 24 L.Ed.2d 549, 560-561, 562 (1970); Cassell v. Texas, 339 U.S. 282, 287-290, 70 S.Ct. 629, 631-633, 94 L.Ed. 839, 847-849 (1950); Patton v. Mississippi, 332 U.S. 463, 468-469, 68 S.Ct. 184, 187, 92 L.Ed. 76, 80 (1947). The rule is the same in other contexts. Wright v. Rockefeller, 376 U.S. 52, 84 S.Ct. 603, 11 L.Ed.2d 512 (1964), upheld a New York congressional apportionment statute against claims that district lines had been racially gerrymandered. The challenged districts were made up predominantly of whites or of minority races, and their boundaries were irregularly drawn. The challengers did not prevail because they failed to prove that the New York Legislature "was either motivated by racial considerations or in fact drew the districts on racial lines"; the plaintiffs had not shown that the statute "was the product of a state contrivance to segregate on the basis of race or place of origin." Id., at 56, 58, 84 S.Ct., at 605, 11 L.Ed.2d, at 515. The dissenters were in agreement that the issue was whether the "boundaries . . . were purposefully drawn on racial lines." Id., at 67, 84 S.Ct., at 611, 11 L.Ed.2d, at 522. The school desegregation cases have also adhered to the basic equal protection principle that the invidious quality of a law claimed to be racially discriminatory must ultimately be traced to a racially discriminatory purpose. That there are both predominantly black and predominantly white schools in a community is not alone violative of the Equal Protection Clause. The essential element of De jure segregation is "a current condition of segregation resulting from intentional state action. Keyes v. School Dist. No. 1, 413 U.S. 189, 205, 93 S.Ct. 2686, 2696, 37 L.Ed.2d 548 (1973). The differentiating factor between De jure segregation and so-called De facto segregation . . . is Purpose or Intent to segregate." Id., at 208, 93 S.Ct., at 2696, 37 L.Ed.2d, at 561. See also Id., at 199, 211, 213, 93 S.Ct. at 2692, 2698, 2699, 37 L.Ed.2d, at 558, 564, 566. The Court has also recently rejected allegations of racial discrimination based solely on the statistically disproportionate racial impact of various provisions of the Social Security Act because "(t)he acceptance of appellants' constitutional theory would render suspect each difference in treatment among the grant classes, however lacking in racial motivation and however otherwise rational the treatment might be." Jefferson v. Hackney, 406 U.S. 535, 548, 92 S.Ct. 1724, 1732, 32 L.Ed.2d 285, 297 (1972). And compare Hunter v. Erickson, 393 U.S. 385, 89 S.Ct. 557, 21 L.Ed.2d 616 (1969), with James v. Valtierra, 402 U.S. 137, 91 S.Ct. 1331, 28 L.Ed.2d 678 (1971). This is not to say that the necessary discriminatory racial purpose must be express or appear on the face of the statute, or that a law's disproportionate impact is irrelevant in cases involving Constitution-based claims of racial discrimination. A statute, otherwise neutral on its face, must not be applied so as invidiously to discriminate on the basis of race. Yick Wo v. Hopkins, 118 U.S. 356, 6 S.Ct. 1064, 30 L.Ed. 220 (1886). It is also clear from the cases dealing with racial discrimination in the selection of juries that the systematic exclusion of Negroes is itself such an "unequal application of the law . . . as to show intentional discrimination." Akins v. Texas, supra, 325 U.S., at 404, 65 S.Ct., at 1279, 89 L.Ed., at 1696. Smith v. Texas, 311 U.S. 128, 61 S.Ct. 164, 85 L.Ed. 84 (1940); Pierre v. Louisiana, 306 U.S. 354, 59 S.Ct. 536, 83 L.Ed. 757 (1939); Neal v. Delaware, 103 U.S. 370, 26 L.Ed. 567 (1881). A prima facie case of discriminatory purpose may be proved as well by the absence of Negroes on a particular jury combined with the failure of the jury commissioners to be informed of eligible Negro jurors in a community, Hill v. Texas, 316 U.S. 400, 404, 62 S.Ct. 1159, 1161, 86 L.Ed. 1559, 1562 (1942), or with racially non-neutral selection procedures, Alexander v. Louisiana, supra ; Avery v. Georgia, 345 U.S. 559, 73 S.Ct. 891, 97 L.Ed. 1244 (1953); Whitus v. Georgia, 385 U.S. 545, 87 S.Ct. 643, 17 L.Ed.2d 599 (1967). With a prima facie case made out, "the burden of proof shifts to the State to rebut the presumption of unconstitutional action by showing that permissible racially neutral selection criteria and procedures have produced the monochromatic result." Alexander, supra, 405 U.S., at 632, 92 S.Ct., at 1226, 31 L.Ed.2d, at 542. See also Turner v. Fouche, 396 U.S. 346, 361, 90 S.Ct. 532, 540, 24 L.Ed.2d 567, 579 (1970); Eubanks v. Louisiana, 356 U.S. 584, 587, 78 S.Ct. 970, 973, 2 L.Ed.2d 991, 994 (1958). Necessarily, an invidious discriminatory purpose may often be inferred from the totality of the relevant facts, including the fact, if it is true, that the law bears more heavily on one race than another. It is also not infrequently true that the discriminatory impact in the jury cases for example, the total or seriously disproportionate exclusion of Negroes from jury venires may for all practical purposes demonstrate unconstitutionality because in various circumstances the discrimination is very difficult to explain on nonracial grounds. Nevertheless, we have not held that a law, neutral on its face and serving ends otherwise within the power of government to pursue, is invalid under the Equal Protection Clause simply because it may affect a greater proportion of one race than of another. Disproportionate impact is not irrelevant, but it is not the sole touchstone of an invidious racial discrimination forbidden by the Constitution. Standing alone, it does not trigger the rule, McLaughlin v. Florida, 379 U.S. 184, 85 S.Ct. 283, 13 L.Ed.2d 222 (1964), that racial classifications are to be subjected to the strictest scrutiny and are justifiable only by the weightiest of considerations. There are some indications to the contrary in our cases. In Palmer v. Thompson, 403 U.S. 217, 91 S.Ct. 1940, 29 L.Ed.2d 438 (1971), the city of Jackson, Miss., following a court decree to this effect, desegregated all of its public facilities save five swimming pools which had been operated by the city and which, following the decree, were closed by ordinance pursuant to a determination by the city council that closure was necessary to preserve peace and order and that integrated pools could not be economically operated. Accepting the finding that the pools were closed to avoid violence and economic loss, this Court rejected the argument that the abandonment of this service was inconsistent with the outstanding desegregation decree and that the otherwise seemingly permissible ends served by the ordinance could be impeached by demonstrating that racially invidious motivations had prompted the city council's action. The holding was that the city was not overtly or covertly operating segregated pools and was extending identical treatment to both whites and Negroes. The opinion warned against grounding decision on legislative purpose or motivation, thereby lending support for the proposition that the operative effect of the law rather than its purpose is the paramount factor. But the holding of the case was that the legitimate purposes of the ordinance to preserve peace and avoid deficits were not open to impeachment by evidence that the councilmen were actually motivated by racial considerations. Whatever dicta the opinion may contain, the decision did not involve, much less invalidate, a statute or ordinary having neutral purposes but disproportionate racial consequences. Wright v. Council of City of Emporia, 407 U.S. 451, 92 S.Ct. 2196, 33 L.Ed.2d 51 (1972), also indicates that in proper circumstances, the racial impact of a law, rather than its discriminatory purpose, is the critical factor. That case involved the division of a school district. The issue was whether the division was consistent with an outstanding order of a federal court to desegregate the dual school system found to have existed in the area. The constitutional predicate for the District Court's invalidation of the divided district was "the enforcement until 1969 of racial segregation in a public school system of which Emporia had always been a part." Id., at 459, 92 S.Ct., at 2202, 33 L.Ed.2d, at 60. There was thus no need to find "an independent constitutional violation." Ibid. Citing Palmer v. Thompson, we agreed with the District Court that the division of the district had the effect of interfering with the federal decree and should be set aside. That neither Palmer Nor Wright was understood to have changed the prevailing rule is apparent from Keyes v. School Dist. No. 1, supra, where the principal issue in litigation was whether to what extent there had been purposeful discrimination resulting in a partially or wholly segregated school system. Nor did other later cases, Alexander v. Louisiana, supra, and Jefferson v. Hackney, supra, indicate that either Palmer or Wright had worked a fundamental change in equal protection law.11 Both before and after Palmer v. Thompson, however, various Courts of Appeals have held in several contexts, including public employment, that the substantially disproportionate racial impact of a statute or official practice standing alone and without regard to discriminatory purpose, suffices to prove racial discrimination violating the Equal Protection Clause absent some justification going substantially beyond what would be necessary to validate most other legislative classifications.12 The cases impressively demonstrate that there is another side to the issue; but, with all due respect, to the extent that those cases rested on or expressed the view that proof of discriminatory racial purpose is unnecessary in making out an equal protection violation, we are in disagreement. As an initial matter, we have difficulty understanding how a law establishing a racially neutral qualification for employment is nevertheless racially discriminatory and denies "any person . . . equal protection of the laws" simply because a greater proportion of Negroes fail to qualify than members of other racial or ethnic groups. Had respondents, along with all others who had failed Test 21, whether white or black, brought an action claiming that the test denied each of them equal protection of the laws as compared with those who had passed with high enough scores to qualify them as police recruits, it is most unlikely that their challenge would have been sustained. Test 21, which is administered generally to prospective Government employees, concededly seeks to ascertain whether those who take it have acquired a particular level of verbal skill; and it is untenable that the Constitution prevents the Government from seeking modestly to upgrade the communicative abilities of its employees rather than to be satisfied with some lower level of competence, particularly where the job requires special ability to communicate orally and in writing. Respondents, as Negroes, could no more successfully claim that the test denied them equal protection than could white applicants who also failed. The conclusion would not be different in the face of proof that more Negroes than whites had been disqualified by Test 21. That other Negroes also failed to score well would, alone, not demonstrate that respondents individually were being denied equal protection of the laws by the application of an otherwise valid qualifying test being administered to prospective police recruits. Nor on the facts of the case before us would the disproportionate impact of Test 21 warrant the conclusion that it is a purposeful device to discriminate against Negroes and hence an infringement of the constitutional rights of respondents as well as other black applicants. As we have said, the test is neutral on its face and rationally may be said to serve a purpose the Government is constitutionally empowered to pursue. Even agreeing with the District Court that the differential racial effect of Test 21 called for further inquiry, we think the District Court correctly held that the affirmative efforts of the Metropolitan Police Department to recruit black officers, the changing racial composition of the recruit classes and of the force in general, and the relationship of the test to the training program negated any inference that the Department discriminated on the basis of race or that "a police officer qualifies on the color of his skin rather than ability." 348 F.Supp., at 18. Under Title VII, Congress provided that when hiring and promotion practices disqualifying substantially disprortionate numbers of blacks are challenged, discriminatory purpose need not be proved, and that it is an insufficient response to demonstrate some rational basis for the challenged practices. It is necessary, in addition, that they be "validated" in terms of job performance in any one of several ways, perhaps by ascertaining the minimum skill, ability, or potential necessary for the position at issue and determining whether the qualifying tests are appropriate for the selection of qualified applicants for the job in question.13 However this process proceeds, it involves a more probing judicial review of, and less deference to, the seemingly reasonable acts of administrators and executives than is appropriate under the Constitution where special racial impact, without discriminatory purpose, is claimed. We are not disposed to adopt this more rigorous standard for the purposes of applying the Fifth and the Fourteenth Amendments in cases such as this A rule that a statute designed to serve neutral ends is nevertheless invalid, absent compelling justification, if in practice it benefits or burdens one race more than another would be far-reaching and would raise serious questions about, and perhaps invalidate, a whole range of tax, welfare, public service, regulatory, and licensing statutes that may be more burdensome to the poor and to the average black than to the more affluent white.14 Given that rule, such consequences would perhaps be likely to follow. However, in our view, extension of the rule beyond those areas where it is already applicable by reason of statute, such as in the field of public employment, should await legislative prescription. As we have indicated, it was error to direct summary judgment for respondents based on the Fifth Amendment. We also hold that the Court of Appeals should have affirmed the judgment of the District Court granting the motions for summary judgment filed by petitioners and the federal parties. Respondents were entitled to relief on neither constitutional nor statutory grounds. The submission of the defendants in the District Court was that Test 21 complied with all applicable statutory as well as constitutional requirements; and they appear not to have disputed that under the statutes and regulations governing their conduct standards similar to those obtaining under Title VII had to be satisfied.15 The District Court also assumed that Title VII standards were to control the case identified the determinative issue as whether Test 21 was sufficiently job related and proceeded to uphold use of the test because it was "directly related to a determination of whether the applicant possesses sufficient skills requisite to the demands of the curriculum a recruit must master at the police academy." 348 F.Supp., at 17. The Court of Appeals reversed because the relationship between Test 21 and training school success, if demonstrated at all, did not satisfy what it deemed to be the crucial requirement of a direct relationship between performance on Test 21 and performance on the policeman's job. We agree with petitioners and the federal parties that this was error. The advisability of the police recruit training course informing the recruit about his upcoming job, acquainting him with its demands, and attempting to impart a modicum of required skills seems conceded. It is also apparent to us, as it was to the District Judge, that some minimum verbal and communicative skill would be very useful, if not essential, to satisfactory progress in the training regimen. Based on the evidence before him, the District Judge concluded that Test 21 was directly related to the requirements of the police training program and that a positive relationship between the test and training-course performance was sufficient to validate the former, wholly aside from its possible relationship to actual performance as a police officer. This conclusion of the District Judge that training-program validation may itself be sufficient is supported by regulations of the Civil Service Commission, by the opinion evidence placed before the District Judge, and by the current views of the Civil Service Commissioners who were parties to the case.16 Nor is the conclusion closed by either Griggs or Albemarle Paper Co. v. Moody, 422 U.S. 405, 95 S.Ct. 2362, 45 L.Ed.2d 280 (1975); and it seems to us the much more sensible construction of the job-relatedness requirement. The District Court's accompanying conclusion that Test 21 was in fact directly related to the requirements of the police training program was supported by a validation study, as well as by other evidence of record;17 and we are not convinced that this conclusion was erroneous. The federal parties, whose views have somewhat changed since the decision of the Court of Appeals and who still insist that training-program validation is sufficient, now urge a remand to the District Court for the purpose of further inquiry into whether the training-program test scores, which were found to correlate with Test 21 scores, are themselves an appropriate measure of the trainee's mastership of the material taught in the course and whether the training program itself is sufficiently related to actual performance of the police officer's task. We think a remand is inappropriate. The District Court's judgment was warranted by the record before it, and we perceive no good reason to reopen it, particularly since we were informed at oral argument that although Test 21 is still being administered, the training program itself has undergone substantial modification in the course of this litigation. If there are now deficiencies in the recruiting practices under prevailing Title VII standards, those deficiencies are to be directly addressed in accordance with appropriate procedures mandated under that Title. The judgment of the Court of Appeals accordingly is reversed. So ordered. Mr. Justice STEWART joins Parts I and II of the Court's opinion.
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Respondents Harley and Sellers, both Negroes (hereinafter respondents), whose applications to become police officers in the District of Columbia had been rejected, in an action against District of Columbia officials (petitioners) and others, claimed that the Police Department's recruiting procedures, including a written personnel test (Test 21), were racially discriminatory and violated the Due Process Clause of the Fifth Amendment, 42 U. S. C. § 1981, and D. C. Code § 1-320. Test 21 is administered generally to prospective Government employees to determine whether applicants have acquired a particular level of verbal skill. Respondents contended that the test bore no relationship to job performance and excluded a disproportionately high number of Negro applicants. Focusing solely on Test 21, the parties filed cross-motions for summary judgment. The District Court, noting the absence of any claim of intentional discrimination, found that respondents' evidence supporting their motion warranted the conclusions that (a) the number of black police officers, while substantial, is not proportionate to the city's population mix; (b) a higher percentage of blacks fail the test than whites; and (c) the test has not been validated to establish its reliability for measuring subsequent job performance. While that showing sufficed to shift the burden of proof to the defendants in the action, the court concluded that respondents were not entitled to relief, and granted petitioners' motion for summary judgment, in view of the facts that 44% of new police recruits were black, a figure proportionate to the blacks on the total force and equal to the number of 20- to 29-year-old blacks in the recruiting area; that the Police Department had affirmatively sought to recruit blacks, many of whom passed the test but failed to report for duty; and that the test was a useful indicator of training school performance (precluding the need to show validation in terms of job performance) and was not designed to, and did not, discriminate against otherwise qualified blacks. Respondents on appeal contended that their summary judgment motion (which was based solely on the contention that Test 21 invidiously discriminated against Negroes in violation of the Fifth Amendment) should have been granted. The Court of Appeals reversed, and directed summary judgment in favor of respondents, having applied to the constitutional issue the statutory standards enunciated in Griggs v. Duke Power Co., 401 U. S. 424, which held that Title VII of the Civil Rights Act of 1964, as amended, prohibits the use of tests that operate to exclude members of minority groups, unless the employer demonstrates that the procedures are substantially related to job performance. The court held that the lack of discriminatory intent in the enactment and administration of Test 21 was irrelevant; that the critical fact was that four times as many blacks as whites failed the test; and that such disproportionate impact sufficed to establish a constitutional violation, absent any proof by petitioners that the test adequately measured job performance. Held: 1. The Court of Appeals erred in resolving the Fifth Amendment issue by applying standards applicable to Title VII cases. Pp. 238-248. (a) Though the Due Process Clause of the Fifth Amendment contains an equal protection component prohibiting the Government from invidious discrimination, it does not follow that a law or other official act is unconstitutional solely because it has a racially disproportionate impact regardless of whether it reflects a racially discriminatory purpose. Pp. 239-245. (b) The Constitution does not prevent the Government from seeking through Test 21 modestly to upgrade the communicative abilities of its employees rather than to be satisfied with some lower level of competence, particularly where the job requires special abilities to communicate orally and in writing; and respondents, as Negroes, could no more ascribe their failure to pass the test to denial of equal protection than could whites who also failed. Pp. 245-246. (c) The disproportionate impact of Test 21, which is neutral on its face, does not warrant the conclusion that the test was a purposely discriminatory device, and on the facts before it the District Court properly held that any inference of discrimination was unwarranted. P. 246. (d) The rigorous statutory standard of Title VII involves a more probing judicial review of, and less deference to, the seemingly reasonable acts of administrators and executives than is appropriate under the Constitution where, as in this case, special racial impact but no discriminatory purpose is claimed. Any extension of that statutory standard should await legislative prescription. Pp. 246-248. 2. Statutory standards similar to those obtaining under Title VII were also satisfied here. The District Court's conclusion that Test 21 was directly related to the requirements of the police training program and that a positive relationship between the test and that program was sufficient to validate the test (wholly aside from its possible relationship to actual performance as a police officer) is fully supported on the record in this case, and no remand to establish further validation is appropriate. Pp. 248-252. 168 U. S. App. D. C. 42, 512 F. 2d 956, reversed.
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This is a negligence case under the Federal Employers' Liability Act, 35 Stat. 65, 45 U.S.C. § 51, 45 U.S.C.A. § 51. Petitioner, an employee of respondent, was injured while shifting various railroad cars on its tracks in and about the Ford Motor Company plant at Norfolk, Virginia. His first cause of action charged respondent with negligence in requiring the shifting of the cars in such an accelerated time and with such inexperienced help that petitioner was injured in attempting to carry out his instructions. In his second claim petitioner alleged that the physician furnished petitioner by respondent subsequent to his injury administered him improper treatment, thus aggravating his injury, and that respondent was responsible for such negligence. At the close of the case, the trial judge sustained the motion of respondent to strike petitioner's evidence and discharged the jury. On petition for writ of error claiming that the issues should have been presented to the jury, the Virginia Supreme Court of Appeals rejected the petition and, in effect, affirmed the judgment, without written opinion. Believing that the question posed was of importance in the uniform administration of this federal statute, we granted certiorari. 359 U.S. 964, 79 S.Ct. 883, 3 L.Ed.2d 833. We conclude that the issue of negligence as to the injury should have been submitted to the jury, but that the evidence was insufficient to support the malpractice claim. Petitioner was a yard conductor for respondent. On July 3, 1957, he was instructed to 'shift' or 'spot' various railway cars to a loading platform on a spur track of the Ford Motor Company at Norfolk. There were 43 cars involved. Some were empty and standing at the loading tracks at the plant. These had to be moved out to make way for the loaded cars which were outside the plant in respondent's shifting yards. The job called for them to be lined up and then moved to particular positions or spots on the tracks at the loading platform in the plant where Ford employees might remove their contents. On the morning of the accident there were designated at the Ford loading platform some 22 spots to which the loaded cars were to be switched. Two brakemen were assigned to assist petitioner in the operation. Petitioner was to complete the spotting during the lunch period at the Ford plant, which was 30 minutes. The evidence shows that neither of the brakemen assigned to petitioner was experienced in this particular operation. The senior brakeman had never spotted cars at the plant before, nor had he worked as a senior brakeman. The other brakeman had spotted cars at the plant for only a short period. Railroad employees classed the Ford 'switching operation' as 'a hot job' because 'you do your job a little faster there than you would in the yard.' In the opinion of brakemen who had spotted cars there, the minimum time for completion of an operation involving this many cars was 50 minutes, and the maximum well over an hour. Since petitioner was instructed to perform the task in 30 minutes, it was necessary for him to work faster than he normally would. In addition, the senior brakeman had informed petitioner of his inexperience, which required petitioner to take a position on top of the boxcars in order to be ready to assist the brakemen. Normally, petitioner would have taken his position on the ground where a conductor, such as he, usually carried out his assigned duties. When one of the brakemen called for assistance in the spotting operation, petitioner ran along the top of the boxcars toward the brakeman to give him help, but, upon coming to a gondola car, was obliged to descend the ladder of the boxcar next to it. Petitioner slipped on the ladder and fell to the ground, suffering the injury complained of here. The record indicates that petitioner would have taken his position on the ground rather than on the railroad cars but for the inexperience of the brakemen. This required petitioner to take his position on top of the cars in order to assist the brakemen—a function not ordinarily performed by a yard conductor. We think it should have been left to the jury to decide whether the respondent's direction to complete the spotting operation within 30 minutes,1 plus the inexperience of the brakemen assigned to perform this 'hot job,' might have precipitated petitioner's injury. 'The debatable quality of that issue, the fact that fair-minded men might reach different conclusions, emphasize the appropriateness of leaving the question to the jury. The jury is the tribunal under our legal system to decide that type of issue (Tiller v. Atlantic Coast Line R. Co., 318 U.S. 54, 63 S.Ct. 444, 87 L.Ed. 610) as well as issues involving controverted evidence. Jones v. East Tennessee, V. & G.R. Co., 128 U.S. 443, 445, 9 S.Ct. 118, 32 L.Ed. 478; Washington & Georgetown R. Co. v. McDade, 135 U.S. 554, 572, 10 S.Ct. 1044, 1049, 34 L.Ed. 235. To withdraw such a question from the jury is to usurp its functions.' Bailey v. Central Vermont R. Co., 1943, 319 U.S. 350, 353—354, 63 S.Ct. 1062, 1064, 87 L.Ed. 1444.2 As to the malpractice claim, the trial court held that the railroad would not be liable for any negligence on the part of Dr. Leigh, the physician it furnished petitioner. We need not pass on this issue, however, since we find no evidence sufficient to support a malpractice recovery. Proof of malpractice, in effect, requires two evidentiary steps: evidence as to the recognized standard of the medical community in the particular kind of case, and a showing that the physician in question negligently departed from this standard in his treatment of plaintiff. The trial judge acknowledged these to be the tests of malpractice and allowed petitioner's counsel to make an offer of proof, although ruling that the railroad was not responsible for Dr. Leigh's actions. The evidence shows that the physician was of unquestioned qualification ad treated petitioner in accordance with his best medical judgment and long practice. The only evaluation concerning his treatment was that of Dr. Thiemeyer, another physician who had treated petitioner, who testified that he did not 'think that (the treatment) is proper.' Dr. Thiemeyer's opinion was that 'a fracture should be immobilized until it is healed sufficiently to bear weight without jeopardy of its healing,' and that he 'would say that activity would aggravate this fracture in that period.' This offer of proof was fatally deficient. No foundation was laid as to the recognized medical standard for the treatment of such a fracture. No standard having been established, it follows that the offer of proof was not sufficient. The trial judge, therefore, was correct in declining to submit the malpractice claim to the jury. In view of our holding on the first cause of action, the judgment is reversed and the case is remanded for further proceedings not inconsistent with this opinion. It is so ordered. Reversed and remanded. For the reasons set forth in his opinion in Rogers v. Missouri Pacific R. Co., 352 U.S. 500, 524, 77 S.Ct. 443, 459, 1 L.Ed.2d 493, Mr. Justice FRANKFURTER is of the view that the writ of certiorari was improvidently granted. As I read the record and the briefs, petitioner's theory was that this accident would not have happened had he not been forced to work on top of the cars, instead of on the ground where he usually worked, in consequence of (1) the company's instructions to perform the car-shifting operation in unusually short order, and (2) its failure to supply him with experienced helpers. Under the Rogers 'rule of reason,' 352 U.S. 500, 77 S.Ct. 443, 1 L.Ed.2d 493, I suppose it could be said that there was an issue for the jury on both scores, in light of the not unequivocal testimony of the petitioner, quoted in my Brother WHITTAKER'S opinion, and the other matters referred to in the Court's opinion. Even so, this makes out no case for the jury, unless there is evidence that one or both of these factors contributed to increase the normal hazards of petitioner's employment. I think there is no such evidence. The record is barren of anything showing why this accident occurred. There was no evidence whatever that either the car or the ladder from which the petitioner fell was faulty. Petitioner admitted to being an experienced railroad worker whose duties had at times carried him up and down ladders and on the tops of railroad cars. At the time of his fall the cars had stopped moving, or nearly so. When asked by the trial court to explain how he happened to fall, all petitioner could say was 'it might have been grease or anything on my shoe'; and this was pure conjecture, as the record shows. More especially, petitioner did not say that he fell because he was 'rushed.' In these circumstances, to hold that the jury might have found that what respondent did contributed to enhance the normal hazards of petitioner's employment is, in my opinion, to say in effect that the jury should have been allowed to substitute atmosphere for evidence and speculation for reason. On the basis of the criteria governing our certiorari jurisdiction, this case has not been profitable business for this Court. I would affirm.
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In this action under the Federal Employers' Liability Act to recover damages for injuries resulting from petitioner's fall from a freight car while acting as a conductor in charge of shifting various railroad cars on respondent's tracks at an industrial plant, held: 1. The issue whether the injury was caused by respondent's direction to complete the shifting operation in 30 minutes, plus the inexperience of the brakemen assigned to help him, should have been left to the jury. Pp. 355-357. 2. The evidence was insufficient to support petitioner's claim that the physician furnished by respondent to petitioner after the accident administered improper treatment. Pp. 357-358. Judgment reversed and cause remanded.
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SECTION 1. SHORT TITLE.
This Act may be cited as the ``Leave Ethanol Volumes at Existing
Levels Act'' or the ``LEVEL Act''.
SEC. 2. REPEAL OF EXPANSION OF RENEWABLE FUEL PROGRAM.
(a) Definitions.--Section 211(o)(1) of the Clean Air Act (42 U.S.C.
7545(o)(1)) is amended to read as follows:
``(1) Definitions.--In this section:
``(A) Cellulosic biomass ethanol.--The term
`cellulosic biomass ethanol' means ethanol derived from
any lignocellulosic or hemicellulosic matter that is
available on a renewable or recurring basis,
including--
``(i) dedicated energy crops and trees;
``(ii) wood and wood residues;
``(iii) plants;
``(iv) grasses;
``(v) agricultural residues;
``(vi) fibers;
``(vii) animal wastes and other waste
materials; and
``(viii) municipal solid waste.
The term also includes any ethanol produced in
facilities where animal wastes or other waste materials
are digested or otherwise used to displace 90 percent
or more of the fossil fuel normally used in the
production of ethanol.
``(B) Waste derived ethanol.--The term `waste
derived ethanol' means ethanol derived from--
``(i) animal wastes, including poultry fats
and poultry wastes, and other waste materials;
or
``(ii) municipal solid waste.
``(C) Renewable fuel.--
``(i) In general.--The term `renewable
fuel' means motor vehicle fuel that--
``(I)(aa) is produced from grain,
starch, oilseeds, vegetable, animal, or
fish materials including fats, greases,
and oils, sugarcane, sugar beets, sugar
components, tobacco, potatoes, or other
biomass; or
``(bb) is natural gas produced from
a biogas source, including a landfill,
sewage waste treatment plant, feedlot,
or other place where decaying organic
material is found; and
``(II) is used to replace or reduce
the quantity of fossil fuel present in
a fuel mixture used to operate a motor
vehicle.
``(ii) Inclusion.--The term renewable fuel
includes--
``(I) cellulosic biomass ethanol
and waste derived ethanol; and
``(II) biodiesel (as defined in
section 312(f) of the Energy Policy Act
of 1992 (42 U.S.C. 13220(f))) and any
blending components derived from
renewable fuel (provided that only the
renewable fuel portion of any such
blending component shall be considered
part of the applicable volume under the
renewable fuel program established by
this subsection).
``(D) Small refinery.--The term `small refinery'
means a refinery for which the average aggregate daily
crude oil throughput for a calendar year (as determined
by dividing the aggregate throughput for the calendar
year by the number of days in the calendar year) does
not exceed 75,000 barrels.''.
(b) Renewable Fuel Program.--Paragraph (2) of section 211(o) of the
Clean Air Act (42 U.S.C. 7545(o)(2)) is amended as follows:
(1) Regulations.--Clause (i) of subparagraph (A) is amended
by striking the last sentence.
(2) Applicable volumes of renewable fuel.--Subparagraph (B)
is amended to read as follows:
``(B) Applicable volume.--For the purpose of
subparagraph (A), the applicable volume of renewable
fuel for each calendar year shall be 7,500,000,000
gallons.''.
(c) Applicable Percentages.--Paragraph (3) of section 211(o) of the
Clean Air Act (42 U.S.C. 7545(o)(3)) is amended as follows:
(1) In subparagraph (A), by striking ``each of calendar
years 2005 through 2021'' and inserting ``each calendar year''.
(2) In subparagraph (A), by striking ``transportation fuel,
biomass-based diesel, and cellulosic biofuel'' and inserting
``gasoline''.
(3) In subparagraph (B)(i), by striking ``each of calendar
years 2005 through 2021'' and inserting ``each calendar year''.
(4) In subparagraph (B), by striking ``transportation
fuel'' and inserting ``gasoline'' in clause (ii)(II).
(d) Cellulosic Biomass Ethanol or Waste Derived Ethanol.--Paragraph
(4) of section 211(o) of the Clean Air Act (42 U.S.C. 7545(o)(4)) is
amended to read as follows:
``(4) Cellulosic biomass ethanol or waste derived
ethanol.--For the purpose of paragraph (2), 1 gallon of
cellulosic biomass ethanol or waste derived ethanol shall be
considered to be the equivalent of 2.5 gallons of renewable
fuel.''.
(e) Credit Program.--Paragraph (5) of section 211(o) of the Clean
Air Act (42 U.S.C. 7545(o)(5)) is amended by striking subparagraph (E).
(f) Waivers.--
(1) In general.--Paragraph (7) of section 211(o) of the
Clean Air Act (42 U.S.C. 7545(o)(7)) is amended--
(A) in subparagraph (A), by striking ``, by any
person subject to the requirements of this subsection,
or by the Administrator on his own motion''; and
(B) by inserting ``State'' before ``petition for a
waiver'' in subparagraph (B).
(2) Cellulosic biofuel.--Paragraph (7) of section 211(o) of
the Clean Air Act (42 U.S.C. 7545(o)(7)) is amended by striking
subparagraph (D).
(3) Biomass-based diesel.--Paragraph (7) of section 211(o)
of the Clean Air Act (42 U.S.C. 7545(o)(7)) is amended by
striking subparagraphs (E) and (F).
(g) Periodic Reviews.--Section 211(o) of the Clean Air Act (42
U.S.C. 7545(o)) is amended by striking paragraph (11).
(h) Savings Clause.--Section 211(o) of the Clean Air Act (42 U.S.C.
7545(o)) is amended by striking paragraph (12).
(i) Regulations.--Section 211 of the Clean Air Act (42 U.S.C. 7545)
is amended by striking paragraph (2) of subsection (v).
(j) Other Provisions.--
(1) Environmental and resource conservation impacts.--
Section 204(b) of the Energy Independence and Security Act of
2007 (Public Law 110-140) is repealed.
(2) Effective date, savings provision, and transition
rules.--Section 210 of the Energy Independence and Security Act
of 2007 (Public Law 110-140) is repealed.
(k) Effective Date.--The amendments made by this section shall take
effect on January 1 of the first calendar year following the date of
enactment of this Act.
(l) Estimates for First Calendar Year.--Prior to January 1 of the
first calendar year following the date of enactment of this Act--
(1) the Administrator of the Energy Information
Administration shall provide to the Administrator of the
Environmental Protection Agency an estimate, under section
211(o)(3) of the Clean Air Act, as amended by this Act, with
respect to such calendar year, of the volumes of gasoline
projected to be sold or introduced into commerce in the United
States; and
(2) based on the estimate provided under paragraph (1), the
Administrator of the Environmental Protection Agency shall
determine and publish in the Federal Register, with respect to
such calendar year, the renewable fuel obligation for such
calendar year under section 211(o)(3) of the Clean Air Act, as
amended by this Act.
SEC. 3. PROHIBITION OF AUTHORIZATION OF HIGHER ETHANOL BLENDS.
(a) Prohibition.--Notwithstanding any provision of the Clean Air
Act (42 U.S.C. 7401 et seq.), the Administrator of the Environmental
Protection Agency may not permit or authorize (including by granting a
wavier through the fuels and fuel additives waiver process under
section 211(f)(4) of such Act (42 U.S.C. 7545(f)(4))) the introduction
into commerce of gasoline that--
(1) contains greater than 10-volume-percent ethanol;
(2) is intended for general use in conventional gasoline-
powered onroad or nonroad vehicles or engines; and
(3) is not, on or before the date of enactment of this
Act--
(A) registered in accordance with section 211(b) of
such Act (42 U.S.C. 7545(b)); and
(B) lawfully sold in the United States.
(b) Repeal of Existing Waivers.--
(1) In general.--Any waiver described in paragraph (2) is
repealed and shall have no force or effect.
(2) Waiver.--A waiver described in this paragraph--
(A) is a waiver granted pursuant to section
211(f)(4) of the Clean Air Act (42 U.S.C. 7545(f)(4))
prior to the date of enactment of this Act that permits
or authorizes the introduction into commerce of
gasoline that contains greater than 10-volume-percent
ethanol for general use in conventional gasoline-
powered onroad or nonroad vehicles or engines; and
(B) includes the following:
(i) ``Partial Grant and Partial Denial of
Clean Air Act Waiver Application Submitted by
Growth Energy To Increase the Allowable Ethanol
Content of Gasoline to 15 Percent; Decision of
the Administrator'' published at 75 Fed. Reg.
68094 (November 4, 2010).
(ii) ``Partial Grant of Clean Air Act
Waiver Application Submitted by Growth Energy
To Increase the Allowable Ethanol Content of
Gasoline to 15 Percent; Decision of the
Administrator'' published at 76 Fed. Reg. 4662
(January 26, 2011).
(3) Exception.--Paragraph (1) shall not apply with respect
to a waiver to the extent such waiver permits or authorizes the
introduction into commerce of gasoline--
(A) that is described in paragraph (2)(A); and
(B) that is, on or before the date of enactment of
this Act--
(i) registered in accordance with section
211(b) of the Clean Air Act (42 U.S.C.
7545(b)); and
(ii) lawfully sold in the United States.
(c) Study.--Not later than 2 years after the date of enactment of
this Act, the Administrator of the Environmental Protection Agency
shall conduct, and submit to Congress the results of, a comprehensive
study on--
(1) the effects of the introduction into commerce of an
ethanol-gasoline blend described in subsection (b)(2)(A) on
consumer products, including--
(A) onroad and nonroad vehicles;
(B) nonroad engines (such as lawn mowers); and
(C) any other applicable gasoline-powered vehicles,
engines, and devices;
(2) the impact of an ethanol-gasoline blend described in
subsection (b)(2)(A) on--
(A) engine performance of conventional gasoline-
powered onroad and nonroad vehicles and nonroad
engines;
(B) emissions from the use of the blend; and
(C) materials compatibility and consumer safety
issues associated with the use of such blend (including
the identification of insufficient data or information
for some or all of such vehicles and engines with
respect to each of the issues described in this
subparagraph and subparagraphs (A) and (B)); and
(3) the ability of wholesale and retail gasoline
distribution infrastructure, including bulk storage, retail
storage configurations, and retail equipment (including
certification of equipment compatibility by independent
organizations), to introduce such an ethanol-gasoline blend
into commerce without widespread intentional or unintentional
misfueling by consumers.
|
Leave Ethanol Volumes at Existing Levels Act or the LEVEL Act - Amends the Clean Air Act to revise the renewable fuel program, including by: (1) redefining "renewable fuel"; (2) revoking the requirement that the Administrator ensure that renewable fuel achieves a 20% reduction in lifecycle greenhouse gas emissions compared to baseline lifecycle greenhouse gas emissions; (3) reducing the volume of renewable fuel that is required to be in gasoline sold or introduced into commerce in the United States to 7.5 billion gallons for each year; (4) requiring the Administrator of the Energy Information Administration to provide to the Administrator of the Environmental Protection Agency (EPA) an estimate of the volumes of gasoline (currently of transportation fuel, biomass-based diesel, and cellulosic biofuel) projected to be sold or introduced into commerce in the following year; (5) making one gallon of cellulosic biomass ethanol or waste derived ethanol equivalent to 2.5 gallons of renewable fuel; (6) repealing provisions concerning cellulosic biofuel and biomass-based diesel; and (7) repealing a requirement that the Administrator of EPA promulgate fuel regulations to implement measures to mitigate adverse impacts on air quality as the result of renewable fuel requirements. Amends the Energy Independence and Security Act of 2007 to repeal provisions requiring EPA to report to Congress on current and future impacts of the renewable fuel requirements on environmental issues, resource conservation issues, and the growth and use of cultivated invasive or noxious plants and their impacts on the environment and agriculture. Prohibits the Administrator from permitting or authorizing (including by granting a waiver through the fuels and fuel additives waiver process) the introduction into commerce of gasoline that: (1) contains greater than 10% ethanol by volume, (2) is intended for general use in conventional gasoline-powered vehicles or engines, and (3) is not a registered fuel or fuel additive that is lawfully sold in the United States before enactment of this Act. Repeals waivers that permit the introduction into commerce of gasoline that contains greater than 10-volume-percent ethanol for general use in conventional gasoline-powered vehicles or engines, including: (1) the "Partial Grant and Partial Denial of Clean Air Act Waiver Application Submitted by Growth Energy To Increase the Allowable Ethanol Content of Gasoline to 15 Percent; Decision of the Administrator"; and (2) the "Partial Grant of Clean Air Act Waiver Application Submitted by Growth Energy To Increase the Allowable Ethanol Content of Gasoline to 15 Percent; Decision of the Administrator." Excepts waivers for such gasoline that is a registered fuel or fuel additive that is lawfully sold in the United States before enactment of this Act. Requires the Administrator to study: (1) the effects of the introduction into commerce of an ethanol-gasoline blend on consumer products; (2) the impact of such blend on engine performance of conventional gasoline-powered vehicles and nonroad engines, emissions from the use of the blend, and materials compatibility and consumer safety issues associated with the use of such blend; and (3) the ability of wholesale and retail gasoline distribution infrastructure to introduce such blend into commerce without widespread misfueling by consumers.
|
For over 30 years the Attorney General has possessed statutory authority to withhold the deportation of an alien upon a finding that the alien would be subject to persecution in the country to which he would be deported. The question presented by this case is whether a deportable alien must demonstrate a clear probability of persecution in order to obtain such relief under § 243(h) of the Immigration and Nationality Act of 1952, 8 U.S.C. § 1253(h) (1976 ed.), as amended by § 203(e) of the Refugee Act of 1980, Pub.L. 96-212, 94 Stat. 107. * Respondent, a Yugoslavian citizen, entered the United States in 1976 to visit his sister, then a permanent resident alien residing in Chicago. Petitioner, the Immigration and Naturalization Service (INS), instituted deportation proceedings against respondent when he overstayed his 6-week period of admission. Respondent admitted that he was deportable and agreed to depart voluntarily by February 1977. In January 1977, however, respondent married a United States citizen who obtained approval of a visa petition on his behalf. Shortly thereafter, respondent's wife died in an automobile accident. The approval of respondent's visa petition was automatically revoked, and petitioner ordered respondent to surrender for deportation to Yugoslavia. Respondent moved to reopen the deportation proceedings in August 1977, seeking relief under § 243(h) of the Immigration and Naturalization Act, which then provided: "The Attorney General is authorized to withhold deportation of any alien within the United States to any country in which in his opinion the alien would be subject to persecution on account of race, religion, or political opinion and for such period of time as he deems to be necessary for such reason." 8 U.S.C. § 1253(h) (1976 ed.). Respondent's supporting affidavit stated that he had become active in an anti-Communist organization after his marriage in early 1977, that his father-in-law had been imprisoned in Yugoslavia because of membership in that organization, and that he feared imprisonment upon his return to Yugoslavia. In October 1979, the Immigration Judge denied respondent's motion to reopen without conducting an evidentiary hearing.1 The Board of Immigration Appeals (BIA) upheld that action, explaining: "A Motion to reopen based on a section 243(h) claim of persecution must contain prima facie evidence that there is a clear probability of persecution to be directed at the individual respondent. See Cheng Kai Fu v. INS, 386 F.2d 750 (2 Cir.1967), cert. denied, 390 U.S. 1003, 88 S.Ct. 1247, 20 L.Ed.2d 104 (1968). Although the applicant here claims to be eligible for withholding of deportation which was not available to him at the time of his deportation hearing, he has not presented any evidence which would indicate that he will be singled out for persecution." App. to Pet. for Cert. 34-35. Respondent did not seek judicial review of that decision. After receiving notice to surrender for deportation in February 1981, respondent filed his second motion to reopen.2 He again sought relief pursuant to § 243(h) which then—because of its amendment in 1980—read as follows: "The Attorney General shall not deport or return any alien . . . to a country if the Attorney General determines that such alien's life or freedom would be threatened in such country on account of race, religion, nationality, membership in a particular social group, or political opinion." 8 U.S.C. § 1253(h)(1). Although additional written material was submitted in support of the second motion, like the first, it was denied without a hearing. The Board of Immigration Appeals held that respondent had not shown that the additional evidence was unavailable at the time his first motion had been filed and, further, that he had still failed to submit prima facie evidence that "there is a clear probability of persecution" directed at respondent individually.3 Thus, the Board applied the same standard of proof it had applied regarding respondent's first motion to reopen, notwithstanding the intervening amendment of § 243(h) in 1980. The United States Court of Appeals for the Second Circuit reversed and remanded for a plenary hearing under a different standard of proof. Stevic v. Sava, 678 F.2d 401 (1982). Specifically, it held that respondent no longer had the burden of showing "a clear probability of persecution," but instead could avoid deportation by demonstrating a "well-founded fear of persecution." The latter language is contained in a definition of the term "refugee" adopted by a United Nations Protocol to which the United States has adhered since 1968. The Court of Appeals held that the Refugee Act of 1980 changed the standard of proof that an alien must satisfy to obtain relief under § 243(h), concluding that Congress intended to abandon the "clear probability of persecution" standard and substitute the "well-founded fear of persecution" language of the Protocol as the standard. Other than stating that the Protocol language was "considerably more generous" or "somewhat more generous" to the alien than the former standard, id., at 405, 406, the court did not detail the differences between them and stated that it "would be unwise to attempt a more detailed elaboration of the applicable legal test under the Protocol," id., at 409. The court concluded that respondent's showing entitled him to a hearing under the new standard. Because of the importance of the question presented, and because of the conflict in the Circuits on the question,4 we granted certiorari, 460 U.S. 1010, 103 S.Ct. 1249, 75 L.Ed.2d 479 (1983). We now reverse and hold that an alien must establish a clear probability of persecution to avoid deportation under § 243(h). The basic contentions of the parties in this case may be summarized briefly. Petitioner contends that the words "clear probability of persecution" and "well-founded fear of persecution" are not self-explanatory and when read in the light of their usage by courts prior to adoption of the Refugee Act of 1980, it is obvious that there is no "significant" difference between them. If there is a "significant" difference between them, however, petitioner argues that Congress' clear intent in enacting the Refugee Act of 1980 was to maintain the status quo, which petitioner argues would mean continued application of the clear-probability-of-persecution standard to withholding of deportation claims. In this regard, petitioner maintains that our accession to the United Nations Protocol in 1968 was based on the express "understanding" that it would not alter the "substance" of our immigration laws. Respondent argues that the standards are not coterminous and that the well-founded-fear-of-persecution standard turns almost entirely on the alien's state of mind. Respondent points out that the well-founded-fear language was adopted in the definition of a refugee contained in the United Nations Protocol adhered to by the United States since 1968. Respondent basically contends that ever since 1968, the well-founded-fear standard should have applied to withholding of deportation claims, but Congress simply failed to honor the Protocol by failing to enact implementing legislation until adoption of the Refugee Act of 1980, which contains the Protocol definition of refugee. Each party is plainly correct in one regard: in 1980 Congress intended to adopt a standard for withholding of deportation claims by reference to pre-existing sources of law. We begin our analysis of this case by examining those sources of law. Legislation enacted by the Congress in 1950,5 1952,6 and 19657 authorized the Attorney General to withhold deportation of an otherwise deportable alien if the alien would be subject to persecution upon deportation. At least before 1968, it was clear that an alien was required to demonstrate a "clear probability of persecution" or a "likelihood of persecution" in order to be eligible for withholding of deportation under § 243(h) of the Immigration and Nationality Act of 1952, 8 U.S.C. § 1253(h) (1964 ed.). E.g., Cheng Kai Fu v. INS, 386 F.2d 750, 753 (CA2 1967), cert. denied, 390 U.S. 1003, 88 S.Ct. 1247, 20 L.Ed.2d 104 (1968); Lena v. INS, 379 F.2d 536, 538 (CA7 1967); In re Janus and Janek, 12 I. & N. Dec. 866, 873 (BIA 1968); In re Kojoory, 12 I. & N.Dec. 215, 220 (BIA 1967). With certain exceptions, this relief was available to any alien who was already "within the United States," albeit unlawfully and subject to deportation. The relief authorized by § 243(h) was not, however, available to aliens at the border seeking refuge in the United States due to persecution. See generally Leng May Ma v. Barber, 357 U.S. 185, 78 S.Ct. 1072, 2 L.Ed.2d 1246 (1958). Since 1947, relief to refugees at our borders has taken the form of an "immigration and naturalization policy which granted immigration preferences to 'displaced persons,' 'refugees,' or persons who fled certain areas of the world because of 'persecution or fear of persecution on account of race, religion, or political opinion.' Although the language through which Congress has implemented this policy since 1947 has changed slightly from time to time, the basic policy has remained constant—to provide a haven for homeless refugees and to fulfill American responsibilities in connection with the International Refugee Organization of the United Nations." Rosenberg v. Yee Chien Woo, 402 U.S. 49, 52, 91 S.Ct. 1312, 1314, 28 L.Ed.2d 592 (1971). Most significantly, the Attorney General was authorized under § 203(a)(7) of the Immigration and Nationality Act of 1952, 8 U.S.C. § 1153(a)(7)(A)(i) (1976 ed.), to permit "conditional entry" as immigrants for a number of refugees fleeing from a Communist-dominated area or the Middle East "because of persecution or fear of persecution on account of race, religion, or political opinion." See also § 212(d)(5) of the Act, 8 U.S.C. § 1182(d)(5) (granting Attorney General discretion to "parole" aliens into the United States temporarily for emergency reasons). An alien seeking admission under § 203(a)(7) was required to establish a good reason to fear persecution. Compare In re Tan, 12 I. & N. Dec. 564, 569-570 (BIA 1967), with In re Ugricic, 14 I. & N. Dec. 384, 385-386 (Dist.Dir.1972).8 In 1968 the United States acceded to the United Nations Protocol Relating to the Status of Refugees, Jan. 31, 1967, [1968] 19 U.S.T. 6223, T.I.A.S. No. 6577. The Protocol bound parties to comply with the substantive provisions of Articles 2 through 34 of the United Nations Convention Relating to the Status of Refugees, 189 U.N.T.S. 150 (July 28, 1951)9 with respect to "refugees" as defined in Article 1.2 of the Protocol. Article 1.2 of the Protocol defines a "refugee" as an individual who "owing to a well-founded fear of being persecuted for reasons of race, religion, nationality, membership of a particular social group or political opinion, is outside the country of his nationality and is unable or, owing to such fear, is unwilling to avail himself of the protection of that country; or who, not having a nationality and being outside the country of his former habitual residence, is unable or, owing to such fear, is unwilling to return to it." Compare 19 U.S.T. 6225 with 19 U.S.T. 6261 (1968). Two of the substantive provisions of the Convention are germane to the issue before us. Article 33.1 of the Convention provides: "No Contracting State shall expel or return ('refouler') a refugee in any manner whatsoever to the frontiers of territories where his life or freedom would be threatened on account of his race, religion, nationality, membership of a particular social group or political opinion." 19 U.S.T., at 6276. Article 34 provides in pertinent part: "The Contracting States shall as far as possible facilitate the assimilation and naturalization of refugees. . . ." Ibid.10 The President and the Senate believed that the Protocol was largely consistent with existing law. There are many statements to that effect in the legislative history of the accession to the Protocol. E.g., S.Exec.Rep. No. 14, 90th Cong., 2d Sess., 4 (1968) ("refugees in the United States have long enjoyed the protection and the rights which the protocol calls for"); id., at 6, 7 ("the United States already meets the standards of the Protocol"); see also, id., at 2; S.Exec. K, 90th Cong., 2d Sess., III, VII (1968); 114 Cong.Rec. 29391 (1968) (remarks of Sen. Mansfield); id., at 27757 (remarks of Sen. Proxmire). And it was "absolutely clear" that the Protocol would not "requir[e] the United States to admit new categories or numbers of aliens." S.Exec.Rep. No. 14, supra, at 19. It was also believed that apparent differences between the Protocol and existing statutory law could be reconciled by the Attorney General in administration and did not require any modification of statutory language. See, e.g., S.Exec. K, supra, at VIII. Five years after the United States' accession to the Protocol, the Board of Immigration Appeals was confronted with the same basic issue confronting us today in the case of In re Dunar, 14 I. & N. Dec. 310 (1973). The deportee argued that he was entitled to withholding of deportation upon a showing of a well-founded fear of persecution, and essentially maintained that a conjectural possibility of persecution would suffice to make the fear "well founded." The Board rejected that interpretation of "well founded," and stated that a likelihood of persecution was required for the fear to be "well founded." Id., at 319. It observed that neither § 243(h) nor Article 33 used the term "well-founded fear," and stated: "Article 33 speaks in terms of threat to life or freedom on account of any of the five enumerated reasons. Such threats would also constitute subjection to persecution within the purview of section 243(h). The latter has also been construed to encompass economic sanctions sufficiently harsh to constitute a threat to life or freedom, Dunat v. Hurney, 297 F.2d 744 (3 Cir., 1962); cf. Kovac v. INS, 407 F.2d 102 (9 Cir., 1969). In our estimation, there is no substantial difference in coverage of section 243(h) and Article 33. We are satisfied that distinctions in terminology can be reconciled on a case-by-case consideration as they arise." Id., at 320. The Board concluded that "Article 33 has effected no substantial changes in the application of section 243(h), either by way of burden of proof, coverage, or manner of arriving at decisions," id., at 323,11 and stated that Dunar had failed to establish "the likelihood that he would be persecuted. . . . Even if we apply the nomenclature of Articles 1 and 33, we are satisfied that respondent has failed to show a well-founded fear that his life or freedom will be threatened," id., at 324. Although before In re Dunar, the Board and the courts had consistently used a clear-probability or likelihood standard under § 243(h), after that case the term "well-founded fear" was employed in some cases.12 The Court of Appeals for the Seventh Circuit, which had construed § 243(h) as applying only to "cases of clear probability of persecution" in a frequently cited case decided before 1968, Lena v. INS, 379 F.2d 536, 538 (1967), reached the same conclusion in a case decided after the United States' adherence to the Protocol. Kashani v. INS, 547 F.2d 376 (1977). In that opinion Judge Swygert reasoned that the "well founded fear of persecution" language could "only be satisfied by objective evidence," and that it would "in practice converge" with the "clear probability" standard that the Seventh Circuit had previously "engrafted onto [§] 243(h)." Id., at 379. Other Courts of Appeals appeared to reach essentially the same conclusion. See e.g., Fleurinor v. INS, 585 F.2d 129, 132, 134 (CA5 1978); Pereira-Diaz v. INS, 551 F.2d 1149, 1154 (CA9 1977); Zamora v. INS, 534 F.2d 1055, 1058, 1063 (CA2 1976). While the Protocol was the source of some controversy with respect to the standard for § 243(h) claims for withholding of deportation, the United States' accession did not appear to raise any questions concerning the standard to be applied for § 203(a)(7) requests for admission. The "good reason to fear persecution" language was employed in such cases. See, e.g., In re Ugricic, 14 I. & N. Dec., at 385-386.13 Section 203(e) of the Refugee Act of 1980 amended the language of § 243(h), basically conforming it to the language of Article 33 of the United Nations Protocol.14 The amendment made three changes in the text of § 243(h), but none of these three changes expressly governs the standard of proof an applicant must satisfy or implicitly changes that standard.15 The amended § 243(h), like Article 33, makes no mention of a probability of persecution or a well-founded fear of persecution. In short, the text of the statute simply does not specify how great a possibility of persecution must exist to qualify the alien for withholding of deportation. To the extent such a standard can be inferred from the bare language of the provision, it appears that a likelihood of persecution is required.16 The section literally provides for withholding of deportation only if the alien's life or freedom "would" be threatened in the country to which he would be deported; it does not require withholding if the alien "might" or "could" be subject to persecution. Finally, § 243(h), both prior to and after amendment, makes no mention of the term "refugee"; rather, any alien within the United States is entitled to withholding if he meets the standard set forth. Respondent understandably does not rely upon the specific textual changes in § 243(h) in support of his position that a well-founded fear of persecution entitles him to withholding of deportation. Instead, respondent points to the provision of the Refugee Act which eliminated the ideological and geographical restrictions on admission of refugees under § 203(a)(7) and adopted an expanded version of the United Nations Protocol definition of "refugee." This definition contains the well-founded-fear language and now appears under § 101(a)(42)(A) of the Immigration and Nationality Act, 8 U.S.C. § 1101(a)(42)(A). Other provisions of the Immigration and Nationality Act, as amended, now provide preferential immigration status, within numerical limits, to those qualifying as refugees under the modified Protocol definition17 and renders a more limited class of refugees, though still a class broader than the Protocol definition, eligible for a discretionary grant of asylum.18 Respondent, however, is not seeking discretionary relief under these provisions, which explicitly employ the well-founded-fear standard now appearing in § 101(a)(42)(A). Rather, he claims he is entitled to withholding of deportation under § 243(h) upon establishing a well-founded fear of persecution. Section 243(h), however, does not refer to § 101(a)(42)(A). Hence, there is no textual basis in the statute for concluding that the well-founded-fear-of-persecution standard is relevant to a withholding of deportation claim under § 243(h). Before examining the legislative history of the Refugee Act of 1980 in order to ascertain whether Congress nevertheless intended a well-founded-fear standard to be employed under § 243(h), we observe that the Refugee Act itself does not contain any definition of the "well-founded fear of persecution" language contained in § 101(a)(42)(A). The parties vigorously contest whether the well-founded-fear standard is coterminous with the clear-probability-of-persecution standard. Initially, we do not think there is any serious dispute regarding the meaning of the clear-probability standard under the § 243(h) case law.19 The question under that standard is whether it is more likely than not that the alien would be subject to persecution. The argument of the parties on this point is whether the well-founded-fear standard is the same as the clear-probability standard as just defined, or whether it is more generous to the alien. Petitioner argues that persecution must be more likely than not for a fear of persecution to be considered "well founded." The positions of respondent and several amici curiae are somewhat amorphous. Respondent seems to maintain that a fear of persecution is "well founded" if the evidence establishes some objective basis in reality for the fear. This would appear to mean that so long as the fear is not imaginary—i.e., if it is founded in reality at all it is "well founded." A more moderate position is that so long as an objective situation is established by the evidence, it need not be shown that the situation will probably result in persecution, but it is enough that persecution is a reasonable possibility. Petitioner and respondent seem to agree that prior to passage of the Refugee Act, the Board and the courts actually used a clear-probability standard for § 243(h) claims. That is, prior to the amendment, § 243(h) relief would be granted if the evidence established that it was more likely than not that the alien would be persecuted in the country to which he was being deported; relief would not be granted merely upon a showing of some basis in reality for the fear, or if there was only a reasonable possibility of persecution falling short of a probability. Petitioner argues that some of the prior case law using the term "well-founded fear" simply used that term interchangeably with the phrase "clear probability." Respondent agrees in substance, but argues that although prior cases employed the term "well-founded fear," they misconstrued the meaning of the term under the United Nations Protocol. For purposes of our analysis, we may assume, as the Court of Appeals concluded, that the well-founded-fear standard is more generous than the clear-probability-of-persecution standard because we can identify no basis in the legislative history for applying that standard in § 243(h) proceedings or any legislative intent to alter the pre-existing practice. The principal motivation for the enactment of the Refugee Act of 1980 was a desire to revise and regularize the procedures governing the admission of refugees into the United States. The primary substantive change Congress intended to make under the Refugee Act, and indeed in our view the only substantive change even relevant to this case, was to eliminate the piecemeal approach to admission of refugees previously existing under § 203(a)(7) and § 212(d)(5) of the Immigration and Nationality Act, and § 108 of the regulations, and to establish a systematic scheme for admission and resettlement of refugees. S.Rep. No. 96-256, p. 1 (1979) (S.Rep.); U.S.Code Cong. & Admin.News 1980, p. 141; H.R.Rep. No. 96-608, pp. 1-5 (1979) (H.R. Rep.). The Act adopted, and indeed, expanded upon, the Protocol definition of "refugee," S.Rep., at 19; H.R.Rep., at 9-10, and intended that the definition would be construed consistently with the Protocol, S.Rep., at 9, 20. It was plainly recognized, however, that "merely because an individual or group of refugees comes within the definition will not guarantee resettlement in the United States. The Committee is of the opinion that the new definition does not create a new and expanded means of entry, but instead regularizes and formalizes the policies and practices that have been followed in recent years." H.R.Rep., at 10. The Congress distinguished between discretionary grants of refugee admission or asylum and the entitlement to a withholding of deportation if the § 243(h) standard was met. See id., at 17-18.20 Elimination of the geographic and ideological restrictions under the former § 203(a)(7) was thought to bring the United States' scheme into conformity with its obligations under the Protocol, see S.Rep., at 4, 15-16,21 and in our view these references are to the United States' obligations under Article 34 to facilitate the naturalization of refugees within the definition of the Protocol. There is, as always, some ambiguity in the legislative history—the term "asylum," in particular, seems to be used in various ways, see, e.g., S.Rep., at 9, 16—but that is understandable given that the same problem with nomenclature has been evident in case law as well. See In re Lam, Interim Dec. No. 2857, p. 5 (BIA, Mar. 24, 1981). Going to the substance of the matter, however, it seems clear that Congress understood that refugee status alone did not require withholding of deportation, but rather, the alien had to satisfy the standard under § 243(h), S.Rep., at 16. The amendment of § 243(h) was explicitly recognized to be a mere conforming amendment, added "for the sake of clarity," and was plainly not intended to change the standard. H.R.Rep., at 17-18. The Court of Appeals' decision rests on the mistaken premise that every alien who qualifies as a "refugee" under the statutory definition is also entitled to a withholding of deportation under § 243(h). We find no support for this conclusion in either the language of § 243(h), the structure of the amended Act, or the legislative history.22 We have deliberately avoided any attempt to state the governing standard beyond noting that it requires that an application be supported by evidence establishing that it is more likely than not that the alien would be subject to persecution on one of the specified grounds. This standard is a familiar one to immigration authorities and reviewing courts, and Congress did not intend to alter it in 1980. We observe that shortly after adoption of the Refugee Act, the Board explained: "As we have only quite recently acquired jurisdiction over asylum claims, we are only just now beginning to resolve some of the problems caused by this addition to our jurisdiction, including the problem of determining exactly how withholding of deportation and asylum are to fit together." In re Lam, Interim Dec. No. 2857, p. 6, n. 4 (BIA, Mar. 24, 1981). Today we resolve one of those problems by deciding that the "clear probability of persecution" standard remains applicable to § 243(h) withholding of deportation claims. We do not decide the meaning of the phrase "well-founded fear of persecution" which is applicable by the terms of the Act and regulations to requests for discretionary asylum. That issue is not presented by this case. The Court of Appeals granted respondent relief based on its understanding of a standard which, even if properly understood, does not entitle an alien to withholding of deportation under § 243(h). Our holding does, of course, require the Court of Appeals to reexamine this record to determine whether the evidence submitted by respondent entitles him to a plenary hearing under the proper standard. The judgment of the Court of Appeals is reversed, and the cause is remanded for further proceedings consistent with this opinion. It is so ordered.
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After he was ordered to surrender for deportation, respondent alien in 1977 moved to reopen the deportation proceedings, seeking relief under § 243(h) of the Immigration and Nationality Act of 1952 (INA), which then authorized the Attorney General to withhold deportation of an alien upon a finding that the alien "would be subject to persecution" in the country to which he would be deported. The Immigration Judge denied the motion without a hearing, and was upheld by the Board of Immigration Appeals (BIA), which held that respondent had not met his burden of showing that there was a clear probability of persecution. Respondent did not appeal this decision. Subsequently, in 1981, after receiving another notice to surrender for deportation, respondent filed a second motion to reopen, again seeking relief under § 243(h), which in the meantime had been amended by the Refugee Act of 1980-in conformity with the language of Article 33 of the 1968 United Nations Protocol Relating to the Status of Refugees that had been acceded to by the United States-to provide that the Attorney General shall not deport an alien if the Attorney General determines that the alien's "life or freedom would be threatened" in the country to which he would be deported. This motion was also denied without a hearing under the same standard of proof as was applied in the previous denial. The Court of Appeals reversed and remanded, holding that respondent no longer had the burden of showing "a clear probability of persecution," but instead could avoid deportation by showing a "well-founded fear of persecution," the latter language being contained in a definition of the term "refugee" adopted by the United Nations Protocol. The court concluded that the Refugee Act of 1980 so changed the standard of proof, and that respondent's showing entitled him to a hearing under the new standard. Held: An alien must establish a clear probability of persecution to avoid deportation under § 243(h). Pp. 413-430. (a) At least before 1968, it was clear that an alien was required to demonstrate a "clear probability of persecution" or a "likelihood of persecution" to be eligible for withholding of deportation under § 243(h). Relief under § 243(h) was not, however, available to aliens at the border seeking refuge in the United States due to persecution. They could seek admission only under § 203(a)(7) of the INA, and were required to establish a good reason to fear persecution. The legislative history of the United States' accession to the United Nations Protocol discloses that the President and Senate believed that the Protocol was consistent with existing law. While the Protocol was the source of some controversy with respect to the standard of proof for § 243(h) claims for withholding of deportation, the accession to the Protocol did not appear to raise any questions concerning the standard to be applied for § 203(a)(7) requests for admission, the "good reason to fear persecution" language being employed in such cases. Pp. 414-420. (b) While the text of § 243(h), as amended in 1980, does not specify how great a possibility of persecution must exist to qualify an alien for withholding of deportation, to the extent a standard can be inferred from the bare language, it appears that a likelihood of persecution is required. The section provides for a withholding of deportation only if the alien's life or freedom "would" be threatened, not if he "might" or "could" be subject to persecution. Respondent is seeking relief under § 243(h), not under provisions which, as amended by the Refugee Act, employ the "well-founded fear" standard that now appears in § 201(a)(42)(A) of the INA and that was adopted from the United Nations Protocol's definition of "refugee." Section 243(h) does not refer to § 201(a)(42)(A). Hence, there is no textual basis in the statute for concluding that the wellfounded-fear-of-persecution standard is relevant to the withholding of deportation under § 243(h). The 1980 amendment of § 243(h) was recognized by Congress as a mere conforming amendment, added "for the sake of clarity," and was plainly not intended to change the standard for withholding deportation. There is no support in either § 243(h)'s language, the structure of the amended INA, or the legislative history for the Court of Appeals' conclusion that every alien who qualifies as a "refugee" under the statutory definition is also entitled to a withholding of deportation under § 243(h). The Court of Appeals granted respondent relief based on its understanding of a standard which, even if properly understood, does not entitle an alien to withholding of deportation under § 243(h). Pp. 421-430. 678 F. 2d 401, reversed and remanded.
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This is a suit by Heye, a cotton broker in Bremen, against the petitioner, a cotton exporter in Texas, to recover sums that Heye had to pay on its account. The payments were made upon cotton sold by Heye as the petitioner's agent, to different buyers, for alleged failure of the cotton to correspond to the description upon which the price was based. In pursuance of the contracts and the rules of the Bremen Cotton Exchange the claims of the buyers were submitted to arbitration, which resulted in awards against the plaintiff for a total of 312,749.30 German marks, alleged to be equal to about $74,820.52. Before the present suit was brought another one had been carried to judgment in the same District, in which that amount was claimed. At that time Heye had paid only $36,610.96 of the awards. The judge directed a verdict for the sum that the plaintiff had paid and another item not now in issue. Heye now has paid the whole and brings this suit to recover the amount of the later payment not embraced in the former judgment. He prevailed in the District Court, and the judgment was affirmed with a modification as to payment by the Circuit Court of Appeals. 248 Fed. 636, 160 C. C. A. 536. The main question on the merits is whether the former judgment was conclusive as to the validity of the awards, but that upon which the certiorari was granted was a preliminary one, as is shown by the fact that certiorari was denied in the former suit. 234 U. S. 759, 34 Sup. Ct. 676, 58 L. Ed. 1580. After the case had been taken to the Circuit Court of Appeals a motion was made to dismiss or suspend the suit on the ground that Heye had become an alien enemy by reason of the declaration of war between Germany and the United States. The Circuit Court of Appeals, however, affirmed the judgment with the modification that it should be paid to the clerk of the trial court and by him turned over to the Alien Property Custodian, with further details not material here. Upon the last-mentioned question, although it seemed proper that it should be set at rest, we can feel no doubt. The plaintiff had got his judgment before war was declared, and the defendant, the petitioner, had delayed the collection of it by taking the case up. Such a case was disposed of without discussion by Chief Justice Marshall speaking for the Court in Owens v. Hanney, 9 Cranch, 180, 3 L. Ed. 697; Kershaw v. Kelsey, 100 Mass. 561, 564, 97 Am. Dec. 124, 1 Am. Rep. 142. There is nothing 'mysteriously noxious' (Coolidge v. Inglee, 13 Mass. 26, 37) in a judgment for an alien enemy. Objection to it in these days goes only so far as it would give aid and comfort to the other side. Hanger v. Abbott, 6 Wall. 532, 536, 18 L. Ed. 939; McConnell v. Hector, 3 B. & P. 113, 114. Such aid and comfort were prevented by the provision that the sum recovered should be paid over to the Alien Property Custodian, and the judgment in this respect was correct. When the alien enemy is defendant justice to him may require the suspension of the case. Watts, Watts & Co. v. Unione Austriaca di Navigazione, 248 U. S. 9, 22, 39 Sup. Ct. 1, 63 L. Ed. 100, 3 A. L. R. 323. On the merits the first question is whether the former judgment was conclusive as to the validity of the awards, assuming them to have been identified as the same that were sued upon in the former case. Taking merely the former declaration and judgment it could not be said with certainty that some of the awards might not have been held invalid and that the defendant had not satisfied the whole obligation found to exist. But we have before us the fact that the Court directed a verdict and the charge. From the latter, as also from the answer, apart from a general denial, it appears that the awards were dealt with as a whole and that the objections to them were general. The objections were overruled, and the Court assumed that the awards were obligatory, but cut down the amount to be recovered to the sum that had been paid. The case went to the Circuit Court of Appeals and the same things appear in the report of the case there. Heye v. Birge-Forbes Co., 212 Fed. 112, 128 C. C. A. 628. (Certiorari denied. 234 U. S. 759, 34 Sup. Ct. 676, 58 L. Ed. 1580.) In the present case both parties moved the Court to direct a verdict. Beuttell v. Magone, 157 U. S. 154, 157, 15 Sup. Ct. 566, 39 L. Ed. 654; Empire State Cattle Co. v. Atchison, Topeka & Santa Fe Ry. Co., 210 U. S. 1, 8, 28 Sup. Ct. 607, 52 L. Ed. 931, 15 Ann. Cas. 70. Taking that and the fact that the same judge seems to have presided in both suits into account we should be slow to disturb his decision that the issue was determined in the former one if we felt more doubt than we do. But we are satisfied the decision of the two Courts below was right. We shall deal summarily with two or three highly technical arguments urged against the affirmation of the judgment. One is that the depositions of Heye and a witness were not returned as required by the Texas statute providing for taking them, with a suggestion that, as Heye was a party, his deposition could not be taken at all. As to the latter point it is to be noticed that it did not present an attempt to fish for information from the opposite party and that an agreement was made that 'time notice and copy are hereby waived,' and that 'the officer may proceed to take and return the depositions of the witness on the original direct and cross interrogatories, but commission is not waived.' Whatever may be the general rule (as to which see Blood v. Morrin [C. C.] 140 Fed. 918), we think that this objection is not fairly open. As to the mode of return not having followed strictly the Texas statute, because the officer to whom the commission was directed did not put the depositions into the mail and certify on the envelopes that he had done so, a sufficient answer is that that course was impossible owing to the war, and that the officer did transmit the depositions in the only practicable way. He gave them to an American consul and had them transmitted to the Department of State and then through the mail to the clerk. The integrity of the depositions is not questioned, the statute was complied with in substance, and justice is not to be defeated now by a matter of the barest form. We see no error in the finding that section 477 of the German Civil Code did not bar the claim. Assuming the question to be open the Court was warranted in finding that a six months' limitation to claims for defect of quality did not apply where the claims had been submitted to arbitration and passed upon. The same is true with regard to the taking the value of the German mark at par in the absence of evidence that it had depreciated at the time of the plaintiff's payments. On the whole case our conclusion is that the judgment should be affirmed. Judgment affirmed.
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A judgment for an alien enemy is objectionable only in so far as it may give aid and comfort to the other side in the war. P. 323. A judgment recovered in the District Court by an alien enemy before he became such, the satisfaction of which was delayed by the other party's appeal until the intervention of war, may properly be reviewed, during the war, and affirmed with directions that the money be paid to the clerk of the trial court to be turned over to the Alien Property Custodian; and a motion to dismiss or suspend the action is correctly denied. Id. Where a broker who became liable for his principal on several arbitration awards sued for their aggregate amount and was given a directed verdict and a judgment against the principal for the part which he had then paid, and, having paid the remainder, sued again to recover that also, held, that the former judgment was conclusive in the second action as to the validity of the awards, it appearing, not only from the petition and judgment, but from other parts of the record of the former case, including the answer, the judge's charge and the opinion of the Circuit Court of Appeals, that the validity of all the awards alike was there in issue and was sustained. P. 323. In determining whether a former judgment, given upon a directed verdict, involved the same issues of fact as are presented in a second action before the same judge in which both parties submit the point by requests for a peremptory instruction, especial weight attaches to the judge's decision. P. 324. The objection that the deposition of a plaintiff in the District Court cannot be taken on his own behalf is waived by a stipulation waiving time and notice and allowing the officer to proceed to take and return it on interrogatories. Id. That in the return of foreign depositions the officer commissioned did not put them into the mail and certify to the fact on the envelopes, as required by a state law, is immaterial where the war made compliance impossible and where the officer transmitted them in the only practicable way, though an American consul to the State Department and thence by mail to the clerk. Id. The six months' limitation of the German Civil Code, § 477, on claims for defect of quality in goods sold, does not apply to awards of arbitration based on such claims. P. 325. In an action to recover amounts paid on defendant's account in Germany, it is not error to take the value of the German mark at par in the absence of evidence that it had depreciated when the plaintiff made the payments. Id. 248 Fed. Rep. 636, affirmed. 9 THE case is stated in the opinion.
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Introduction The United States is considering fundamental changes in its natural gas supply policy. Facedwith rising natural gas demand and perceived limitations in North American gas production, manyin government and industry are encouraging greater U.S. imports of liquefied natural gas (LNG). Recent activities by Congress, the Federal Energy Regulatory Commission, the Department ofEnergy, and other federal agencies to promote greater LNG supplies have included changingregulations, clarifying regulatory authorities, and streamlining the approval process for new LNGimport terminals. While forecasts vary, many analysts expect LNG to account for 12% to 21% oftotal U.S. gas supply by 2025, up from approximately 3% in 2005. If these forecasts are correct, U.S.natural gas consumers will become increasingly dependent upon LNG imports to supplement NorthAmerican pipeline gas supplies. Recent measures before Congress seek to encourage both domestic gas supply and newLNG terminal construction. The Alaska Natural Gas Pipeline Act of 2004 (15 U.S.C. § 720, et seq .)provides loan guarantees (Sec. 116) and other incentives for an Alaska gas pipeline. The EnergyPolicy Act of 2005 ( P.L. 109-58 ) includes various incentives for domestic natural gas producers(Title III, Subtitle E). The act also amends Section 3 of the Natural Gas Act of 1938, granting theFederal Energy Regulatory Commission (FERC) explicit and "exclusive" authority to approveonshore LNG terminal siting applications (Sec. 311c) among other provisions. Other proposals inthe 109th Congress, including H.R. 4318 , H.R. 3918 , and H.R. 3811 would lift federal restrictions on natural gas exploration and production on federal submergedlands of the Outer Continental Shelf. S. 1310 would authorize the expansion of a naturalgas transmission pipeline on federal lands in the Northeast. While an increase in LNG imports is already underway, federal officials and Members ofCongress have been debating the merits and risks of U.S. LNG dependency. In April, 2005, forexample, President Bush stated that "One of the great sources of energy for the future is liquefiednatural gas.... We need more terminals to receive liquefied natural gas...." (1) In June, 2005 Department ofEnergy Secretary Samuel Bodman remarked that "LNG seems to offer a solution to ... the growingdemand for natural gas that we will see all around the globe." (2) In November, 2005 FederalReserve Chairman Alan Greenspan testified before Congress that "severe reaction of natural gasprices to the production setbacks that have occurred in the Gulf highlights again the need to ... importlarge quantities of far cheaper, liquefied natural gas (LNG) from other parts of the world." (3) Some in Congress havequestioned the implications of such a policy, however, drawing analogies to the consequences ofU.S. dependency on foreign oil and citing potential instability among foreign LNG suppliers. (4) Others have expressedconcern about LNG safety and vulnerability to terrorism. (5) Specific questions are emerging about the implications of greater LNG imports to the UnitedStates. LNG has substantial physical infrastructure requirements and there are uncertainties abouthow this infrastructure would be integrated into North America's existing gas network. The potentialeffects of larger LNG imports on U.S. natural gas prices will be driven by the global LNG marketstructure, although that market structure is still evolving. Political relationships among countries inthe LNG trade may also change as LNG becomes increasingly important to their economies. This report will review the status of U.S. LNG imports, including projections of future U.S.LNG demand within the growing international LNG market. The report will summarize recentpolicy activities related to LNG among U.S. federal agencies, as well as private sector plans for LNGinfrastructure development. The report also will introduce key policy considerations in LNGinfrastructure and market structure, highlighting current market information and key uncertainties. Finally, the report will identify key questions in LNG import policy development. Background Natural gas is widely used in the United States for heating, electricity generation, industrialprocesses, and other applications. In 2005, U.S. natural gas consumption was 22 trillion cubic feet(Tcf), accounting for 23% of total U.S. energy consumption. (6) Until recently, nearly all U.S.natural gas was supplied from North American wells and transported through the continent's vastpipeline network to regional markets. In 2003, however, due to constraints in North Americannatural gas production, the United States sharply increased imports of natural gas from overseas inthe form of liquefied natural gas (LNG). While absolute levels remain limited today, growth in LNGimports to the United States is expected by many analysts to accelerate over the next 20 years,reflecting growing domestic demand and expectations for a global expansion in LNG trade. What Is LNG? When natural gas is cooled to temperatures below minus 260°F it condenses into liquefiednatural gas, or "LNG." As a liquid, natural gas occupies only 1/600th the volume of its gaseous state,so it is stored more effectively in a limited space and is more readily transported by tanker ship. Atypical tanker, for example, can carry 138,000 cubic meters of LNG -- enough to supply the dailyenergy needs of over 10 million homes. (7) When LNG is warmed, it "regasifies" and can be used for the samepurposes as conventional natural gas. The physical infrastructure of LNG includes several interconnected elements as illustratedin Figure 1 . In producing countries, natural gas is extracted from gas fields and transported bypipeline to central liquefaction plants where it is converted to LNG and stored. Liquefaction plantsare built at marine terminals so the LNG can be loaded onto special tanker ships for transportoverseas. Tankers deliver their LNG cargo to import terminals in other countries where the LNGcan again be stored or regasified and injected into pipeline systems for delivery to end users. ThisLNG infrastructure requires large capital investments. In addition to gas field development costs,a new liquefaction plant costs approximately $2-$3 billion, and an import terminal costs $500million to $1 billion. One LNG tanker costs $150-$200 million. (8) Figure 1: LNG Supply Chain Source: Oil & Gas Journal. Nov. 10, 2003. p64. Due to the high capital costs of LNG infrastructure, LNG trade has traditionally relied uponlong-term fuel purchase agreements in order to secure project financing for the entire supply chain. Of over 160 major LNG supply contracts in force around the world as of June 2005, well over 90%had a contract term of 15 years or longer. (9) While these contracts have increasingly incorporated someflexibility by accommodating extra LNG deliveries, for example, or allowing shipments to bediverted, they have only allowed for a limited supply-demand response compared to other globalcommodities markets. U.S. LNG Import Experience and Projections The United States has used LNG commercially since the1940s. Initially, LNG facilitiesstored domestically produced natural gas to supplement pipeline supplies during times of high gasdemand. In the 1970's LNG imports began to supplement domestic gas production. Between 1971and 1981, developers built four U.S. import terminals: in Massachusetts, Maryland, Georgia, andLouisiana. (10) Dueprimarily to a drop in domestic gas prices, however, two of these terminals quickly closed. Importsto the other two terminals remained small for the next 30 years. In 2002, U.S. LNG imports wereonly 0.17 Tcf, less than 1% of U.S. natural gas supply. (11) Figure 2: U.S. Natural Gas Wellhead Price ($/Mcf) Source: Energy Information Administration. Natural Gas Weekly Update . Jan. 19, 2006. United States demand for LNG has been increasing dramatically since 2003. This growthin LNG demand has been occurring in part because North American natural gas production appearsto have plateaued, so it has not been able to keep pace with growth in demand. As a result, U.S.natural gas prices have become higher and more volatile. As Figure 2 shows, gas prices at thewellhead have risen from around $2.00/Mcf through most of the 1990s to an average above$6.00/Mcf and a peak above $10.00/Mcf in 2005. (12) At the same time, international prices for LNG have fallenbecause of increased supplies and lower production and transportation costs, making LNG morecompetitive with domestic natural gas. (13) While cost estimation is speculative, some industry analystsbelieve that LNG can be economically delivered to U.S. pipelines for approximately $2.50 to$3.50/Mcf. (14) Forecasts by the Energy Information Administration (EIA), National Petroleum Council, andother groups project expansion in U.S. LNG imports over the next 20 years. Specific LNG forecastsvary based on methodology and market assumptions, but most expect LNG to account for 12% to21% of U.S. natural gas supplies by 2025. (15) EIA's reference forecast projects U.S. LNG imports to reach 4.13Tcf in 2025, which equates to approximately 16% of total U.S. gas supply for that year, upsubstantially from the 2005 market share of about 3%. (16) Figure 3 details projected U.S. LNG imports relative to othernatural gas supplies in EIA's forecast. Figure 3: Projected U.S. Natural Gas Production and Imports (Tcf) Source: Energy Information Administration. Annual Energy Outlook 2006. Dec. 2005. Table A13. Global LNG Market Development Projections of accelerated growth in U.S. LNG demand reflect a general expansion in theglobal natural gas market. According to the EIA's most recent international forecast "natural gas isexpected to be the fastest growing component of world primary energy consumption." (17) EIA projects global naturalgas demand to rise by an average 2.3 percent annually for the next 20 years, with "the largestincreases ... projected for the transitional economies of Eastern Europe and the former Soviet Union... and for emerging Asia," much of it to fuel electricity generation. (18) A significant part of thisglobal gas demand growth is expected to be met by new supplies of LNG. Long-term projectionsof global LNG growth vary, but most major energy companies and industry analysts expect globalLNG demand to roughly triple by 2020, from 6 Tcf in 2003, to 18 Tcf or more in 2020. (19) According to EIAprojections, 18 Tcf would account for approximately 13% of global natural gas consumption in2020. (20) LNG Safety and Security Natural gas is combustible, so an uncontrolled release of LNG poses a hazard of fire or, inconfined spaces, explosion. LNG also poses hazards because it is so cold. Because LNG tankersand terminals are highly visible and easily identified, they may also be vulnerable to terrorist attack. Assessing the potential risk from LNG releases is controversial. A 1944 accident at one of thenation's first LNG facilities, for example, killed 128 people and initiated public fears about LNGhazards which persist today. (21) But technology improvements and standards since the 1940'sappear to have made LNG facilities safer. Between 1944 and 2006, LNG terminals experiencedapproximately 13 serious accidents, with two fatalities, directly caused by LNG. (22) Since international LNGshipping began in 1959, tankers have carried 40,000 LNG cargoes without a serious accident at seaor in port. (23) In January2004, however, a fire at an LNG processing facility in Algeria killed an estimated 27 workers andinjured 74 others. (24) The Algeria accident raised new questions about LNG facility safety and security. A number of technical studies since the terror attacks of September 11, 2001, have beencommissioned to reevaluate the safety hazards of LNG terminals and associated shipping. Thesestudies have caused controversy because, due to differences in analytic assumptions, some havereached inconsistent conclusions about the potential public hazard of LNG terminal accidents orterror attacks. In an effort to resolve these inconsistencies, the Department of Energy commissioneda comprehensive LNG hazard study from Sandia National Laboratories. The Sandia report, releasedin December 2004, determined that a worst-case, "credible" LNG tanker fire could emit harmfulthermal radiation up 2,118 meters (1.3 miles) away. (25) Although, the report concluded that "risks from accidental LNGspills ... are small and manageable," it also concluded that "the consequences from an intentional[tanker] breach can be more severe than those from accidental breaches." (26) Both proponents andopponents of new LNG terminals have cited the Sandia findings to support their positions. Thecontroversy continues. LNG Policy Activities of the Federal Government The federal government has been actively promoting increased LNG imports. Through newregulation, administrative actions, and legislation, federal agencies and Congress have tried to fosterLNG capital investment, streamline the LNG terminal approval process, and promote global LNGtrade. FERC Regulations. The Federal EnergyRegulatory Commission (FERC) grants federal approval for the siting of new onshore LNG facilitiesand interstate gas pipelines, and also regulates prices for interstate gas transmission. (27) In December, 2002, theFERC exempted LNG import terminals from rate regulation and open access requirements. Thisregulatory action, commonly called the "Hackberry decision" allowed import terminal owners to setmarket-based rates for terminal services, and allowed terminal developers to secure proprietaryterminal access for corporate affiliates with investments in LNG supply. (28) These regulatory changesgreatly reduced investment uncertainty for potential LNG developers, and assured access to theirown terminals. (29) InFebruary 2004, FERC streamlined the LNG siting approval process through an agreement with theU.S. Coast Guard and the Department of Transportation to coordinate review of LNG terminal safetyand security. The agreement "stipulates that the agencies identify issues early and quickly resolvethem." (30) FERC alsoannounced a new branch devoted to LNG within its Office of Energy Projects. (31) Between 1999 and 2005, FERC approved the reactivation of the two idled U.S. LNGterminals, and subsequently approved the expansion of the four existing import terminals in thecontinental United States. In September, 2003, FERC approved the Cameron LNG project inHackberry, LA, the first new LNG import terminal to be sited in the continental United States in over25 years. (32) Thecommission has since approved eight additional terminals (in Texas, Louisiana, and Massachusetts),and as of January, 2006 has received 12 additional terminal siting applications. (33) In 2004, FERC alsoapproved the construction of two new gas pipelines connecting Florida to proposed LNG importterminals in the Bahamas. (34) The terminals and pipelines approved to date by FERC couldincrease total U.S. LNG import capacity to approximately 7.0 Tcf per year. Offshore Terminal Regulations. In November,2002, Congress passed the Maritime Transportation Security Act of 2002 ( P.L. 107-295 ), whichtransferred jurisdiction for offshore LNG terminal siting approval from the FERC to the MaritimeAdministration (MARAD) and the U.S. Coast Guard (USCG). According to the Department ofEnergy, the act ... streamlined the permitting process and relaxedregulatory requirements. Owners of offshore LNG terminals are allowed proprietary access to theirown terminal capacity, removing what had once been a major stumbling block for potentialdevelopers of new LNG facilities.... The streamlined application process ... promises a decisionwithin 365 days.... (35) The proprietary access provisions for offshore terminals are similar to those set by FERC for onshoreterminals to ensure equal treatment for both kinds of facilities. In November, 2003, the MARADand USCG approved the Port Pelican project, the first offshore LNG terminal ever to be sited in U.S.waters. The agencies have subsequently approved Energy Bridge (January, 2004) and Gulf Landing(February, 2005), two additional offshore LNG projects. All three terminals would be located in theGulf of Mexico. Their combined annual capacity would be approximately 1.2 Tcf. As of January,2006, the agencies were reviewing seven additional offshore terminal applications, two off theCalifornia coast, four in the Gulf of Mexico, and two off the coast of Massachusetts. Congressional Activities. In 2005, Congresspassed and President Bush signed the Energy Policy Act of 2005 ( P.L. 109-58 ). The Energy PolicyAct is generally seen as promoting new LNG terminal development in several ways. As noted earlierin this report, the act resolved certain state-federal jurisdictional disputes by granting the FERCexplicit and "exclusive" authority to approve onshore LNG terminal siting applications (Sec. 311c).The act also codifies the "Hackberry decision"discussed above (Sec. 311c). The act designates theFERC as the "lead agency for the purposes of coordinating all applicable Federal authorizations" andfor complying with federal environmental requirements (Sec. 313a). It also establishes the FERC'sauthority to set schedules for federal authorizations and establishes provisions for judicial review ofFERC's siting decisions in the U.S. Court of Appeals, among other administrative provisions (Sec.313b). The act also requires FERC to promulgate regulations for pre-filing of LNG import terminalsiting applications and directs FERC to consult with designated state agencies regarding safetyconsiderations in considering such applications. It permits states to conduct safety inspections ofLNG terminals in conformance with federal regulations, although it retains enforcement authorityat the federal level. The act also requires LNG terminal operators to develop emergency responseplans including cost-sharing to reimburse state and local governments for safety and security costs(Sec. 311d). Key Issues in U.S. LNG Import Policy Federal actions are facilitating greater U.S. LNG imports, and the private sector is respondingwith plans for new LNG facilities. Nonetheless, concerns are emerging about the infrastructureneeds of LNG, the future structure of global LNG trade, and the relationship between the UnitedStates and other LNG market participants. Physical Infrastructure Requirements To meet U.S. LNG imports of 4.13 Tcf in 2025 as projected by the EIA would requiresignificant additions to North American import terminal capacity. Along with expansions at fourexisting terminals, six to ten new import terminals would be needed. LNG developers haveproposed over 30 new terminals with a combined import capacity far exceeding what would likelybe needed the meet the projections ( Figure 4 ). (36) These developers include multi-national corporations with thefinancial resources and project experience to develop such facilities. At issue is where theseterminals would be built, how they would be integrated into the nation's existing gas infrastructure,and how they might be secured against accident or terrorist attack. Figure 4: Existing and Proposed LNG Import Terminals in North America Source: Federal Energy Regulatory Commission (FERC). "Existing and Proposed North American LNG Terminals." Office of Energy Projects. Washington, DC. Jan. 23, 2006. http://www.ferc.gov/industries/lng/indus-act/terminals/exist-prop-lng.pdf Terminal Siting. Choosing acceptable sites fornew LNG terminals has proven controversial. As noted earlier in this report, federal agencies haveapproved the siting of ten new terminals in the Gulf of Mexico as well as two new Florida pipelinesfor proposed terminals in the Bahamas. But many developers have sought to build terminals nearerto major consuming markets in California and the Northeast, as Figure 4 shows. Developers haveproposed terminals near consuming markets to avoid pipeline bottlenecks and to minimizetransportation costs. In 2003, soon after LNG deliveries to the Cove Point resumed, natural gas forthe local Maryland market was priced well below conventional gas supplies transported by pipelinefrom the Gulf of Mexico. (37) If new terminals are built far from key consumer markets,delivered gas might cost more than if LNG terminals were built locally. As of January, 2006, federal agencies have approved only one new LNG import terminaloutside the Gulf of Mexico, in Massachusetts. Such near-to-market terminal proposals havestruggled for approval due to community concerns about LNG safety, effects on local commerce, andother potential negative impacts. LNG terminal opposition is not unlike that experienced by someother types of industrial and utility facilities. Due to local community opposition, LNG developershave already withdrawn terminal projects recently proposed in California, Maine, North Carolina,Florida, and Mexico. Other terminal proposals in Rhode Island, New York, New Jersey and Canadaare facing stiff community opposition. In Alabama, a state assumed by many to be friendly to LNGdevelopment, community groups have effectively blocked two onshore terminal proposals and havecalled for LNG import terminals to be built only offshore. (38) In some cases state and local agencies are at odds with federal agencies over LNG terminalsiting approval. For example, Delaware's environmental secretary has blocked the development ofan LNG terminal on the Delaware-New Jersey border ruling that part of the terminal would extendinto Delaware's waters and violate Delaware's Coastal Zone Act. (39) The United StatesSupreme Court has appointed a special master to resolve the dispute. (40) In January, 2005,Massachusetts and Rhode Island filed petitions in federal court to reverse FERC's approval of anLNG import terminal to be sited in Fall River, Massachusetts. (41) In 2004, the CaliforniaPublic Utilities Commission (CPUC) sued FERC in federal court over FERC's assertion of solejurisdiction over the siting of an LNG terminal in Long Beach. The CPUC dropped its suit, however,after the passage of P.L. 109-58 mooted its arguments. Local opposition for LNG terminals has been strong in the Northeast, which has aconstrained gas transmission infrastructure. Northeast gas prices are higher than in other parts of thecountry. In Maine, for example, the monthly average wholesale price of gas delivered betweenOctober, 2004 and October, 2005 was $12.09/Mcf, compared to $8.27/Mcf in Louisiana. (42) Were the same pricedifferential to hold in the future, Maine consumers would have to pay $3.81/Mcf, or 46 percent, morefor LNG delivered to Louisiana rather than the Maine coast. Many factors like weather, pipelinetariffs, and new natural gas supplies from Canada could significantly change relative prices. Nonetheless, if recent regional pricing patterns persist, displacing a handful of proposed LNGterminals from consumer markets to the Gulf of Mexico could cost regional gas consumers billionsof dollars in extra pipeline transportation charges. On the other hand, siting new terminals in morereceptive locations could help bring them into service more quickly, and could still exert downwardpressure on gas prices while alleviating community safety concerns. Pipeline Infrastructure. LNG supplies to theUnited States have been such a small share of the total market that they have had little discernibleinfluence on the development of North America's gas pipeline network. If projections of U.S. LNGgrowth prove correct, however, LNG terminals may have more impact on pipeline infrastructure inthe future. As additional LNG import capacity is approved, how new terminals will be physicallyintegrated into the existing pipeline network becomes a consideration. LNG terminals may affect pipeline infrastructure in two ways. First, new terminals andterminal expansions must be connected to the interstate pipeline network through sufficient"takeaway" pipeline capacity to handle the large volumes of imported natural gas. Depending uponthe size, location and proximity of a new terminal to existing pipelines, ensuring adequate takeawaycapacity may require new pipeline construction. For example, the owner of the Elba Island, GAterminal intends to build a 191-mile pipeline to transport additional gas volume from the terminal'splanned expansion. (43) Energy experts have expressed concern, however, that interstate pipeline capacity may not besufficient to handle future LNG supplies without substantial new pipeline additions. (44) The availability of pipelinecapacity directly affects pipeline transportation costs, so it is an important consideration in evaluatingthe economics of LNG versus traditional pipeline supplies in specific markets. Second, if gas imported as LNG cannot move freely through interstate pipeline systems,consumers may not realize the lower prices that result from additional gas availability. One industryobserver remarked, "without more infrastructure, gas may face the kind of glut plaguing the electricutility industry, with too much generating capacity and too few connections." (45) For this reason, some LNGdevelopers advocate building LNG terminals in traditional gas producing regions, where pipelinenodes are located. According to one industry executive, "it doesn't make a lot of sense to build aterminal and then have to build a huge pipeline." (46) Others argue that the most costly constraints in the gas pipelinenetwork are at the ends of the pipelines, not the beginnings. Gas is expensive in Boston, forexample, because there are few pipelines supplying the region -- a transportation constraint thatwould not be alleviated by pumping more gas into pipelines in the Gulf of Mexico. As one seniorFERC official has reportedly remarked, "putting more and more LNG plants in the Gulf, while itmay be good for the overall gas supply situation in this country, won't do a whole lot for the regionalgas needs of New England." (47) It is not clear, therefore, whether adding LNG supplies totraditional producing regions would be less costly for consumers than building in-market terminalsand adding to regional pipeline capacity. In addition to requiring sufficient takeaway capacity, LNG terminals likely will influencepipeline network flows. Major U.S. pipeline systems were designed primarily to move gas fromtraditional producing regions (e.g., Gulf Coast, Appalachia, Western Canada) to consuming regions(e.g, Northeast, Midwest). If most new LNG capacity is built in the Gulf of Mexico, then traditionalgas flows would be maintained. If a number of new terminals are built in consuming regions,however, they may change historical gas transportation patterns, potentially displacing traditionalproduction and changing infrastructure constraints. Among other potential impacts, some analystshave suggested that new LNG terminals will result in "less market leverage and probably lower cashflows" for some existing pipelines because new LNG supplies may be able to reach consumermarkets by alternate routes. (48) Predicting the overall effects of long term changes in gas flowsis a complex problem, although such changes may have important implications for current pipelineutilization and for future pipeline investments. Interchangeability. LNG consists primarily ofmethane, but it may also contain significant quantities of other hydrocarbon fuels, such as ethane,propane and butane. The quantity of these other fuels in LNG affects the overall heat content in theLNG and varies depending upon its source. In markets outside the United States, LNG containsmore non-methane fuels and, therefore, has a higher heat content than traditional U.S. natural gassupplies. LNG with a high heat content can cause problems when imported into the United Statesbecause it may damage pipelines and natural gas-fired equipment (e.g., electric power turbines)which are designed for a lower heat content. There are a number of potential technical solutions toLNG interchangeability problems, such as stripping out the non-methane fuels, blending the LNGwith domestic natural gas, and "diluting" the LNG with nitrogen. (49) These solutions mayinvolve significant added expense to LNG processing, however, which could be reflected in highernatural gas prices. The FERC has been working with natural gas trade associations to establishappropriate national policies for natural gas interchangeability and quality. The FERC has addressedsome interchangeability issues on a case by case basis, and has proposed more general regulationson natural gas quality and interchangeability, but the commission's expressed preference is that thegas industry and gas quality stakeholders reach their own consensus on interchangeability. (50) Safety and Physical Security. To protect thepublic from an LNG accident or terrorist attack, the federal government imposes numerous safetyand security requirements on LNG infrastructure. The nature and level of risk associated with LNGis the subject of ongoing debate among industry, government agencies, researchers and localcommunities. (51) Whatever the specific risk levels are determined to be, they could multiply as the number of LNGterminals and associated tanker shipments grows. Likewise, the costs associated with mitigatingthese risks are also likely to increase. To the extent these costs are not borne by the LNG industry,they may represent an ongoing burden to public agencies such as the Coast Guard, law enforcement,and emergency response agencies. Securing tanker shipments against terrorist attacks may be the most significant publicexpense associated with LNG. CRS has estimated the public cost of security for an LNG deliveryto the Everett terminal to be on the order of $80,000, excluding costs incurred by the terminalowner. (52) Marinesecurity costs at other LNG terminals could be lower than for Everett because they are farther fromdense populations and may face fewer vulnerabilities, but could still be on the order of $20,000 to$40,000 per shipment. If LNG imports increase as projected, the number of vessels calling at LNGterminals serving the United States would increase from 99 (0.17 Tcf) in 2002 to over 2300 (4.13Tcf) in 2025. (53) Atcurrent levels of protection, marine security costs would then be in the range of $46 million to $92million annually. (54) Recognizing the added security needs associated with the LNG trade, the Coast Guard's FY2006budget includes an additional $11 million in general maritime security funding over FY2005 levels. These resources are for new small response boats and associated crew to increase the Coast Guard'soperational presence and response posture, enforce security zones, and escort LNG tankers and otherhigh interest vessels. (55) Congress included provisions in P.L. 109-58 requiring new LNG terminal applicants toinclude plans for security cost-sharing with state and local government agencies (Sec. 311d). Thepublic costs of LNG security also may decline as federally mandated security systems and plans areimplemented. Nonetheless, because the accounting of security costs is ambiguous and may be tiedto uncertain sources of federal funding, such as Department of Homeland Security grants, somepolicy makers remain concerned about LNG security costs and the potential diversion of CoastGuard and safety agency resources from other activities. Supply Bottlenecks. Because U.S. LNG terminalsprocess large volumes of LNG, the potential for one facility to bottleneck supply might not berecognized. A disruption at a U.S. import terminal (or at an associated supplier's export terminal)could effect regional gas availability. Hurricanes Katrina and Rita, which struck the Gulf of Mexico in 2005, forced the temporaryclosure of the Lake Charles LNG terminal and raised questions about the vulnerability to futurehurricanes of multiple new LNG import terminals in the same region. (56) In March, 2004, strikingworkers at an export terminal in Trinidad stopped all LNG operations -- interrupting shipments fromthe largest U.S. supplier and the sole supplier to the Everett terminal. Although the strike endedquickly and U.S. gas demand at the time was moderate, one gas trader stated that if the strike hadoccurred during the heart of winter it might have exacerbated already high Northeast gas prices. (57) Similarly, when LNGshipments to the Everett LNG terminal were suspended after the terror attacks of September 11,2001, markets analysts feared shortages of gas for heating and curtailments of gas deliveries toregional power plants in New England. (58) Some industry analysts view the Gulf hurricanes, Trinidad strike, and September 11, 2001events as new supply risks the United States could face as LNG becomes a larger share of gas supply. Others view these kinds of events as ordinary supply uncertainties readily managed in other fuelmarkets. As one consultant stated, they are not problems that should make the industry shyaway from developing LNG trade ... they are just problems that should make you consider how youare going to structure long-term LNG contracts and estimate what kind of premiums you are goingto pay over indigenous pipeline supply. (59) The future sensitivity of U.S. natural gas markets to LNG terminal disruptions is difficult to forecastand will be driven by factors such as supply diversity and pipeline development. Nonetheless, theconcentration of incremental gas supplies among perhaps a dozen major import facilities may raisenew concerns about the security of U.S. natural gas supply. Global LNG Market Structure In his 2003 congressional testimony, Federal Reserve Chairman Alan Greenspan asserted thatincreasing LNG import capacity would create "a price-pressure safety valve" for North Americannatural gas markets which would be "likely to notably damp the levels and volatility of Americannatural gas prices." (60) Basic market economics suggest that increasing marginal gas supplies from any source would tendto lower gas prices. But the long-term effectiveness of LNG in moderating gas prices will besignificantly influenced by global LNG supply, the development of an LNG spot market, andpotential market concentration. Global LNG Supply. The belief that LNG canserve as a "price-pressure safety valve" by setting a price ceiling on natural gas assumes thatsufficient LNG would be available at that price to satisfy all incremental gas demand. Otherwise, gas prices would be capped by potentially more costly North American production alternatives. Thequestion, then, is whether there will be sufficient LNG production abroad to supply incremental U.S.demand and sufficient global infrastructure to distribute it. Table 1 summarizes basic characteristics of existing or potential LNG exporters. As thetable shows, 2005 global LNG production capacity currently operating totaled approximately 9.1 Tcfper year. Table 1 also shows an additional 15.8 Tcf of global capacity proposed for service by2015, with more proposals likely in the future. If all these proposed facilities were constructed, totalglobal production capacity could exceed 24 Tcf annually, exceeding EIA's projected global LNGdemand of 18 Tcf in 2020. Global tanker capacity also appears to be keeping up with LNG demand growth. Currenttanker orders will add 130 ships to the current operating fleet of 191, increasing the overall numberof LNG vessels 250% from the fleet size of 127 tankers in 2001. (61) Based on these figures,there appears to be sufficient interest among existing and potential exporters to meet both short-termand long-term global LNG demand projections. It remains to be seen which of these export projectswill be constructed and how they will be integrated into the global LNG trade. Table 1: Global Natural Gas Reserves and LNG ProductionCapacity Sources: "World LNG Map: 2005 Edition." Petroleum Economist . 2005; "Major LNG Gas Projectsto 2015." Reuter's News . Jan. 5, 2006; Oil & Gas Journal , Vol. 103, No. 47. Dec. 19, 2005. EnergyInformation Administration; Trade press. Spot Market Growth. Some gas market analystsbelieve that a robust short-term or "spot" market for LNG is essential for U.S. importers to manageprice and supply risk, and to do business cost-effectively. An LNG spot market could allow forshort-term balancing of physical supply and demand. It could also offer greater LNG price discoveryand transparency, benefitting companies negotiating long-term LNG contracts and potentially servingas a more relevant index for LNG contract price escalators than traditional petroleum indexes. (62) A spot market might alsosupport financial trading and derivatives, important tools for managing price risk, especially duringperiods of volatile prices. (63) In recent years, the global LNG market has seen limited, but increasing short-term trade.Short-term contracts accounted for 11% of global LNG transactions in 2005, up from less than 2%in 1998, and have already enabled physical market balancing. In 2005, for example, just afterHurricanes Katrina and Rita struck the Gulf of Mexico, Suez Energy (owner of the Everett LNGterminal) purchased a spot LNG cargo to meet its obligations to its New England customers. (64) In 2003-2004, SouthKorea purchased 36 spot cargoes of LNG to meet extra residential heating demand duringwinter. (65) In December, 2003, Indonesia sought four LNG cargoes from rival producers to meet delivery contractsfollowing production problems at its Bontang plant. (66) Unlike petroleum markets where all prices are essentially short-term, analysts believe LNGtrade will stabilize with some mix of long and short-term contracts since infrastructure costs are sohigh. No new LNG liquefaction project yet has been launched without a long term contract. Thelikely size of an LNG spot market is difficult to predict, however at least one major exporter expects30% of global LNG capacity will ultimately trade on the spot market. (67) Coupled with projectionsof overall LNG demand growth, a 30% spot market share implies a tripling in spot market volumesby 2020. It is an open question, however, whether this volume of spot trade in LNG will materializeand if it will offer the full range of benefits realized in comparable commodity markets. A concern related to LNG spot market development is the potential role of marketintermediaries. In the late 1990's, independent marketers like Enron and Dynegy emerged toparticipate in trading of natural gas, electricity, and other energy commodities. These marketparticipants increased market liquidity, selling risk management services to both producers andconsumers. Many marketers fell into bankruptcy, however, following the California electricity crisisin 2001 and subsequent scandals. A handful of major banks are beginning to pursue newpartnerships with LNG terminal companies (e.g., Morgan Stanley - Cheniere Energy) to facilitateLNG trading and marketing, but such partnerships have yet to fully develop. (68) It is unclear, therefore,which entities may ultimately succeed in providing the LNG industry with the capabilities neededfor a fully functioning market. Market Concentration. Some industry analystsbelieve the future LNG market may be susceptible to concentration-related inefficiencies. They notethat only a limited number of buyers and sellers can effectively participate in LNG trade because thecapital requirements are so great. (69) Many analysts also believe that a relatively small number ofexporting countries are likely to account for the majority of LNG trade in the foreseeable future. Based on LNG's similarity to the world oil trade, some observers are concerned about thepossible emergence of a natural gas export cartel analogous to the Organization of PetroleumExporting Countries (OPEC). One analyst remarked: Might a few countries come to dominate the supply ofLNG and adopt policies harking back to the confrontational OPEC of the 1970's? An association ofsome kind among LNG exporters is likely. Many of them are also oil exporters, and the desire tocompare fiscal terms will be irresistible. (70) In March, 2004, at the Fourth Annual Gas Exporting Countries Forum, 15 major natural gasexporters established an "executive bureau" to develop common policies and joint initiativesregarding natural gas exports. According to press accounts, some forum members viewed the bureauas "a major step toward creating an OPEC-like organization to regulate gas production." (71) Some analysts have alsopointed to apparent efforts by Russian gas company, Gazprom, "to sketch out the basic terms forbroad cooperation in the gas sector between Russia and Iran" the two countries controlling the largestnatural gas reserves in the world. (72) Other analysts are more skeptical of a potential natural gas cartel,citing the predominance of long-term contracts for LNG trade, divergent national interests, and otherfactors as barriers to collaboration. (73) The ability of a cartel to play a similar role in gas as OPEC does in oil is debatable. OPECmember countries currently control over 75% of the world's proven oil reserves and approximately40% of global oil supply. (74) By comparison, OPEC members control approximately 50% ofproven world gas reserves and approximately 59% of global LNG production capacity projected for2015 (Table 1 ). When non-LNG sources are accounted for, however, OPEC countries' share ofglobal gas supply would be approximately 5% in 2015. Based on these figures alone, it is difficultto draw conclusions about the potential market power of an association of LNG exporters. It ispossible, however, that the diversity of LNG suppliers, and the competitive relationship betweenLNG and traditional pipeline gas could make the world LNG market somewhat different than thatof oil. Global Trade and Politics. Continued growth ofUnited States demand in an integrated global LNG market may affect trading and politicalrelationships with key market participants. According to one estimate, by 2015 the United Statesmay be the world's largest LNG importer, accounting for 22% of global volumes ( Figure 5 ). SouthKorea, Spain, and the UK will also be importing large quantities of LNG, and may be joined bydeveloping nations including India and China, seeking greater imports for rapidly growingeconomies. Figure 5: Global LNG Import Market Shares Projected for 2015 Source: Deutsche Bank Securities, Inc. "Global LNG: Exploding the Myths." July 22. 2004. p2. In an integrated global LNG market, individual country energy polices may significantlyaffect LNG price and availability worldwide. In 2001 and 2002, for example, after the Japanesegovernment forced Tokyo Electric Power to shut down over a dozen nuclear plants for safetyreasons, Japanese utilities relied more heavily on fossil fuels for electricity generation. Accordingto the EIA: the result was a significant increase in Japan's demandfor LNG, so that the majority of world spot cargoes were delivered to the Japanese market. Japan'sincreased reliance on LNG probably contributed to the reduction in short-term deliveries of LNG tothe United States... (75) Japan's nuclear energy policies also affected South Korea, which depends on flexible spot LNGsupplies to meet winter heating demand. With LNG supplies in Asia suddenly scarce, South Koreahad to pay a substantial premium to attract spot cargoes originally destined for Spain. (76) In 2004-2005, Spainattracted numerous LNG spot cargoes "at the expense of the US" in response to record cold weatherand inadequate hydroelectric power supplies. (77) Despite record cold temperatures and record high natural gasprices after the Gulf hurricanes, U.S. LNG terminals were operating at less than 50% capacity inDecember, 2005. (78) Trade with LNG exporters such as Iran, Nigeria, and Venezuela may also raise geopoliticalconcerns. According to one analyst, "question remains on the merits of increasing reliance onimported energy ... if supply sources are from a region perceived as politically unstable orinhospitable to U.S. interests." (79) In part to mitigate such risks, the DOE has been encouraging thedevelopment of LNG supplies in South America and West Africa rather than the Middle East. According to the former DOE Assistant Secretary for Policy and International Affairs, "DOE istrying to make countries like Equatorial Guinea as attractive as possible to investors while aimingto limit the countries' potential political instability through contract and regulatory reform." (80) LNG trade may also be linked to broader trading and political relationships among key LNGpartners. For example, in the fall of 2004, China's interest in securing LNG supplies from Iran "putit in direct conflict with U.S. efforts to force Iran to renounce its ambitions to become a nuclearweapons state." (81) Ina 2004 meeting with U.S. Energy Secretary Spencer Abraham, the Prime Minister of Trinidadreportedly used his country's status as the largest U.S. LNG supplier to seek most favored nationstatus for Trinidad's energy exports, duty free U.S. access for all Trinidadian-packaged products, andU.S. aid to offset gas exploration costs. (82) Russia's brief withholding of natural gas supplies to Ukraine andparts of the European Union in January, 2006 in what was widely perceived as both an economic andpolitical dispute have raised additional concerns about political linkages among future natural gasmarket participants. (83) It is interesting to note that several European countries, including Italy, Ukraine, Poland, Hungary,Croatia, have since proposed the construction of new LNG imports terminals to reduce theirdependence on Russian pipeline natural gas supplies. Russia's plans to become a major LNGexporter may further complicate the global natural gas trade. It is difficult to predict the nature of trading and political relationships either among LNGimporters, or between specific LNG importing and exporting countries over a 20-year time frame. Nonetheless, experience suggests that global LNG trade may introduce new risks and opportunitiesamong trading countries that warrant consideration in LNG policy debate. Conclusions As long as domestic demand outpaces North American natural gas production, the option ofdeveloping LNG import capacity appears economically attractive. Currently, LNG supplies 3% ofU.S. natural gas, but both industry and government project this figure to rise to as much as 21% by2025. Such an increase would pose a number of practical, immediate challenges, such as ensuringadequate production and import capacity, integrating LNG efficiently into the existing natural gassupply network, and securing LNG infrastructure against accident or terrorist attack. Publicopposition to LNG-related facilities and new trading relationships in an increasingly integratedglobal gas market will also bear upon the expansion of the industry. As the practical challenges to LNG import expansion are addressed, the policy discussionturns to the long-term implications of increased LNG imports in the nation's energy supply. Intentionally or not, the United States may be starting down a path of dependency on LNG importssimilar to its current dependency on foreign oil. Such a dependency would represent a major shiftin the nation's energy policy, and may have far-reaching economic impact. Because U.S. naturalgas markets are regional, major consuming areas such as California and the Northeast might beparticularly affected. Some energy analysts believe that U.S. dependency on imported LNG is inevitable; the onlyuncertainty is how quickly it will occur. Others disagree, promoting instead familiar alternativessuch as greater domestic gas production, switching to oil or other energy sources, and conservation. Recent measures before Congress affect LNG imports by providing incentives for domestic gasproduction and for new LNG terminal construction. If Congress considers the relative merits of LNGand other energy supply alternatives, three overarching policy questions may emerge. Is expanding LNG imports the best option for meeting long-term natural gasdemand in the United States? What future role, if any, should the federal government play in facilitating theongoing development of LNG infrastructure in the United States and abroad? How might Congress mitigate the risks of the global LNG trade within thecontext of national energy policy? The answers to these questions may flow from enhanced understanding of the infrastructure andmarket structure issues discussed in this report. With incomplete information and limited policyanalysis, LNG imports may look unrealistically attractive to some, but unreasonably risky to others. The reality probably lies somewhere in between. It may not be possible to predict the LNG future20 years from now, but choices made now can substantially affect that future.
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Liquefied natural gas (LNG) imports to the United States are increasing to supplementdomestic gas production. Recent actions by Congress and federal agencies have promoted greaterLNG supplies by changing regulations, clarifying siting authorities, and streamlining the approvalprocess for LNG import terminals. Were these policies to continue and gas demand to grow, LNGmight account for as much as 21% of U.S. gas supply by 2025, up from 3% in 2005. Congress isexamining the infrastructure and market implications of greater U.S. LNG demand. There are concerns about how LNG capacity additions would be integrated into the nation'sgas infrastructure. Meeting projected U.S. LNG demand would require six to ten new importterminals in addition to expanding existing terminals. Twelve new terminals, most in the Gulf ofMexico, are approved, but public opposition has blocked many near-to-market terminals whichmight save billions of dollars in gas transportation costs. New LNG terminals can also require moreregional pipeline capacity to transport their supply, although this capacity may not be available inkey markets. Securing LNG infrastructure against accidents and terrorist attacks may also be achallenge to public agencies. Since import terminals process large volumes of LNG, a breakdownat any facility has the potential to bottleneck supply. LNG's effectiveness in moderating U.S. gas prices will be determined by global LNG supply,the development of a "spot" market, potential market concentration, and evolving tradingrelationships. There appears to be sufficient interest among LNG exporters to meet global demandprojections, although some new export projects may not be built. An LNG spot market, which mayhelp U.S. companies import LNG cost-effectively, is also growing. Although some analysts believea cartel may influence the future LNG market, the potential effectiveness of a such a cartel is unclear. Whether exporters cooperate or not, an integrated global LNG market may change trading andpolitical relationships. Individual country energy polices may affect LNG price and supplyworldwide. Trade with LNG exporters perceived as unstable or inhospitable to U.S. interests mayraise concerns about supply reliability. Recent measures before Congress seek to encourage both domestic gas supply and new LNGterminal construction. The Energy Policy Act of 2005 ( P.L. 109-58 ) includes incentives for domesticgas producers and grants the Federal Energy Regulatory Commission "exclusive" authority toapprove onshore LNG terminal siting applications, among other provisions. Other proposals in the109th Congress, including H.R. 4318 , H.R. 3918 , and H.R. 3811 would lift federal restrictions on natural gas development on the Outer Continental Shelf. AsCongress debates U.S. natural gas policy, three questions emerge: (1) Is expanding LNG imports thebest option for meeting natural gas demand in the United States? (2) What future role, if any, shouldthe federal government play in facilitating the development of LNG infrastructure domestically andabroad? (3) How might Congress mitigate the risks of the global LNG trade within the context ofnational energy policy? This report will be updated as events warrant.
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SECTION 1. SHORT TITLE.
This Act may be cited as the ``Civil Rights Act of 1997''.
SEC. 2. FINDINGS AND PURPOSE.
(a) Findings.--Congress finds that--
(1) the fifth and fourteenth amendments to the Constitution
guarantee that all individuals are entitled to equal protection
of the laws, regardless of race, color, national origin, or
sex;
(2) the Supreme Court, in Adarand Constructors, Inc. v.
Pena, 515 U.S. 200 (1995), recently affirmed that this
guarantee of equality applies to Federal actions;
(3) the Federal Government currently conducts over 150
programs, including contracting programs, that grant
preferences based on race, color, national origin, or sex; and
(4) the Federal Government also grants preferences in
employment based on race, color, national origin, or sex.
(b) Purpose.--The purpose of this Act is to provide for equal
protection of the laws and to prohibit discrimination and preferential
treatment in the Federal Government on the basis of race, color,
national origin, or sex.
SEC. 3. PROHIBITION AGAINST DISCRIMINATION AND PREFERENTIAL TREATMENT.
Notwithstanding any other provision of law, neither the Federal
Government nor any officer, employee, or agent of the Federal
Government shall--
(1) intentionally discriminate against, or grant a
preference to, any person or group based in whole or in part on
race, color, national origin, or sex, in connection with--
(A) a Federal contract or subcontract;
(B) Federal employment; or
(C) any other federally conducted program or
activity; or
(2) require or encourage a Federal contractor or
subcontractor, or the recipient of a license or financial
assistance, to discriminate intentionally against, or grant a
preference to, any person or group based in whole or in part on
race, color, national origin, or sex, in connection with any
Federal contract or subcontract or Federal license or financial
assistance.
SEC. 4. AFFIRMATIVE ACTION PERMITTED.
This Act does not prohibit or limit any effort by the Federal
Government or any officer, employee, or agent of the Federal
Government--
(1) to encourage businesses owned by women and minorities
to bid for Federal contracts or subcontracts, to recruit
qualified women and minorities into an applicant pool for
Federal employment, or to encourage participation by qualified
women and minorities in any other federally conducted program
or activity, if such recruitment or encouragement does not
involve granting a preference, based in whole or in part on
race, color, national origin, or sex, in selecting any person
for the relevant employment, contract or subcontract, benefit,
opportunity, or program; or
(2) to require or encourage any Federal contractor,
subcontractor, or recipient of a Federal license or Federal
financial assistance to recruit qualified women and minorities
into an applicant pool for employment, or to encourage
businesses owned by women and minorities to bid for Federal
contracts or subcontracts, if such requirement or encouragement
does not involve granting a preference, based in whole or in
part on race, color, national origin, or sex, in selecting any
individual for the relevant employment, contract or
subcontract, benefit, opportunity, or program.
SEC. 5. CONSTRUCTION.
(a) Historically Black Colleges and Universities.--Nothing in this
Act shall be construed to prohibit or limit any act that is designed to
benefit an institution that is an historically Black college or
university on the basis that the institution is an historically Black
college or university.
(b) Indian Tribes.--This Act does not prohibit any action taken--
(1) pursuant to a law enacted under the constitutional
powers of Congress relating to the Indian tribes; or
(2) under a treaty between an Indian tribe and the United
States.
(c) Certain Sex-Based Classifications.--This Act does not prohibit
or limit any classification based on sex if--
(1) the classification is applied with respect to
employment and the classification would be exempt from the
prohibitions of title VII of the Civil Rights Act of 1964 by
reason of section 703(e)(1) of such Act (42 U.S.C. 2000e-
2(e)(1)); or
(2) the classification is applied with respect to a member
of the Armed Forces pursuant to statute, direction of the
President or Secretary of Defense, or Department of Defense
policy.
(d) Immigration and Nationality Laws.--This Act does not affect any
law governing immigration or nationality, or the administration of any
such law.
SEC. 6. COMPLIANCE REVIEW OF POLICIES AND REGULATIONS.
Not later than 1 year after the date of enactment of this Act, the
head of each department or agency of the Federal Government, in
consultation with the Attorney General, shall review all existing
policies and regulations that such department or agency head is charged
with administering, modify such policies and regulations to conform to
the requirements of this Act, and report to the Committee on the
Judiciary of the House of Representatives and the Committee on the
Judiciary of the Senate the results of the review and any modifications
to the policies and regulations.
SEC. 7. REMEDIES.
(a) In General.--Any person aggrieved by a violation of section 3
may, in a civil action, obtain appropriate relief (which may include
back pay). A prevailing plaintiff in a civil action under this section
shall be awarded a reasonable attorney's fee as part of the costs.
(b) Construction.--This section does not affect any remedy
available under any other law.
SEC. 8. EFFECT ON PENDING MATTERS.
(a) Pending Cases.--This Act does not affect any case pending on
the date of enactment of this Act.
(b) Pending Contracts and Subcontracts.--This Act does not affect
any contract or subcontract in effect on the date of enactment of this
Act, including any option exercised under such contract or subcontract
before or after such date of enactment.
SEC. 9. DEFINITIONS.
In this Act, the following definitions apply:
(1) Federal government.--The term ``Federal Government''
means executive and legislative branches of the Government of
the United States.
(2) Preference.--The term ``preference'' means an advantage
of any kind, and includes a quota, set-aside, numerical goal,
timetable, or other numerical objective.
(3) Historically black college or university.--The term
``historically Black college or university'' means a part B
institution, as defined in section 322(2) of the Higher
Education Act of 1965 (20 U.S.C. 1061(2)).
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Civil Rights Act of 1997 - Prohibits discrimination or preferences in Federal employment and contracting and other Federal programs and activities on the basis of race, color, national origin, or sex. Prohibits requiring or encouraging any Federal contractor or subcontractor to so discriminate or grant a preference.
Declares that this Act does not prohibit or limit encouraging contract bidding, recruiting employees, encouraging participation in other programs or activities or requiring or encouraging Federal contractors, subcontractors, or recipients of Federal licenses or financial assistance to so recruit or encourage, if the recruiting or encouraging does not involve granting a preference. Prohibits construing this Act to prohibit or limit: (1) any act designed to benefit historically Black colleges or universities; or (2) any action under a Federal law or treaty relating to the Indian tribes. Declares that this Act does not prohibit or limit employment classifications based on sex if sex is a bona fide occupational qualification reasonably necessary to normal operation or the classification is applied regarding an armed forces member.
Allows any aggrieved person to obtain, in a civil action, appropriate relief (including back pay). Requires awarding a prevailing plaintiff attorney's fees as part of the costs.
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Order.— It appearing from the twelfth report made by the receiver in this cause that an action recently was commenced against him in the District Court of Wichita County, Tex., by J. H. Duhon and H. J. Kebideaux to recover from him certain moneys for the drilling of a river-bed well, now known as No. 168 and also as Delta well, which had been drilled prior to the receivership; and it being asserted that such action was commenced in disregard of the exclusive jurisdiction of this court over the said receivership and the said receiver; it is ordered that the said J. H. Duhon and H. J. Kebideaux, show cause in this court on Monday, the 26th day of May, 1924, why they should not be enjoined from prosecuting or maintaining the said action in the District Court of Wichita County, Tex., unless in the meantime they shall have dismissed that action and filed in this court due proof of such dismissal. Order.—After considering the twelfth report of the receiver herein and the earlier reports referred to therein, it is ordered that all parties in interest be accorded until and including the 23d day of May, 1924, to prepare and file with the clerk in printed form such suggestions, contentions, and supporting arguments as they severally may desire to present respecting the following subjects: 1. The extent to which and the manner in which the expenses of conducting and administering the receivership shall be spread over the several impounded funds in the receiver's custody and over the several areas and tracts from which such funds were derived, and also the proportions in which such expenses shall be deducted from the payments ultimately to be made to the several claimants who may be entitled to receive those funds from the receiver. 2. The mode of distributing or disposing of expenses incurred and losses sustained in respect of wells which have proved unremunerative. 3. Whether the order of June 1, 1921, authorizing the receiver to make certain payments reimbursing operators and drillers of river-bed wells (256 U. S. 607, 41 Sup. Ct. 539, 65 L. Ed. 1114, 1118) shall be changed and enlarged so as to include and cover river-bed wells which subsequently proved to be unremunerative in instances where the same operator had drilled or was in process of drilling other river-bed wells which have proved productive and have yieled funds from which such reimbursement may be made—reference being particularly had to wells numbered 149, 150, 151, 155, 161, and 163 described on pages 9 and 10 of the receiver's tenth report. 4. Whether the order of June 1, 1921, just mentioned shall be further changed and enlarged so as to include and cover river-bed well No. 139, otherwise known as the Burk-Senator well.
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1. Order to show cause why prosecution of an action brought against the receiver in this case should not be enjoined. 2. Order fixing time for filing suggestions, contentions, and arguments, (1), respecting the distribution and incidence of receivership expenses, including those incurred, and losses sustained, from unremunerative wells; and, (2), respecting authority for receiver to reimburse operators and drillers of wells in certain cases.
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Background Oil—the product of the burial and transformation of biomass over the last 200 million years—has historically had no equal as an energy source for its intrinsic qualities of extractability, transportability, versatility, and cost. But the total amount of oil underground is finite, and, therefore, production will one day reach a peak and then begin to decline. Such a peak may be involuntary if supply is unable to keep up with growing demand. Alternatively, a production peak could be brought about by voluntary reductions in oil consumption before physical limits to continued supply growth kick in. Not surprisingly, concerns have arisen in recent years about the relationship between (1) the growing consumption of oil and the availability of oil reserves and (2) the impact of potentially dwindling supplies and rising prices on the world’s economy and social welfare. Following a peak in world oil production, the rate of production would eventually decrease and, necessarily, so would the rate of consumption of oil. Oil can be found and produced from a variety of sources. To date, world oil production has come almost exclusively from what are considered to be “conventional sources” of oil. While there is no universally agreed-upon definition of what is meant by conventional sources, IEA states that conventional sources can be produced using today’s mainstream technologies, compared with “nonconventional sources” that require more complex or more expensive technologies to extract, such as oil sands and oil shale. Distinguishing between conventional and nonconventional oil sources is important because the additional cost and technological challenges surrounding production of nonconventional sources make these resources more uncertain. However, this distinction is further complicated because what is considered to be a mainstream technology can change over time. For example, offshore oil deposits were considered to be a nonconventional source 50 years ago; however, today they are considered conventional. For the purpose of this report, and consistent with IEA’s classification, we define nonconventional sources as including oil sands, heavy oil deposits, and oil shale. Some oil is being produced from these nonconventional sources today. For example, in 2005 Canada produced about 1.6 million barrels per day of oil from oil sands, and Venezuelan production of extra-heavy oil for 2005 was projected to be about 600,000 barrels per day. Currently, however, production from these sources is very small compared with total world oil production. Oil Production Has Peaked in the United States and Most Other Countries Outside the Middle East According to IEA, most countries outside the Middle East have reached their peak in conventional oil production, or will do so in the near future. The United States is a case in point. Even though the United States is currently the third-largest, oil-producing nation, U.S. oil production peaked around 1970 and has been on a declining trend ever since. (See fig. 1.) Looking toward the future, EIA projects that U.S. deepwater oil production will slightly boost total U.S. production in the near term. However, this increase will end about 2016, and then U.S. production will continue to decline. Given these projections, it is clear that future increases in U.S. demand for oil will need to be fulfilled through increases in production in the rest of the world. Increasing production in other countries has to date been able to more than make up for declining U.S. production and has resulted in increasing world production. (See fig. 2.) Oil Is Critical in Satisfying the U.S. and World Demand for Energy Oil accounts for approximately one-third of all the energy used in the world. Following the record oil prices associated with the Iranian Revolution in 1979-80 and with the start of the Iran-Iraq war in 1980, there was a drop in total world oil consumption, from about 63 million barrels per day in 1980 to 59 million barrels per day in 1983. Since then, however, world consumption of petroleum products has increased, totaling about 84 million barrels per day in 2005. In the United States, consumption of petroleum products increased an average of 1.65 percent annually from 1983 to 2004, and averaged 20.6 million barrels per day in 2005, representing about one-quarter of all world consumption. EIA projects that U.S. consumption will continue to increase and will reach 27.6 million barrels per day in 2030. As figure 3 shows, the transportation sector is by far the largest U.S. consumer of petroleum, accounting for two-thirds of all U.S. consumption and relying almost entirely on petroleum to operate. Within the transportation sector, light vehicles are the largest consumers of petroleum energy, accounting for approximately 60 percent of the transportation sector’s consumption of petroleum-based energy in the United States. Figure 3 also shows that while consumption of petroleum products in other sectors has remained relatively constant or increased slightly since the early 1980s, petroleum consumption in the transportation sector has grown at a significant rate. Relationship of Supply and Demand of Oil to Oil Price The price of oil is determined in the world market and depends mainly on the balance between world demand and supply. Recent world production of oil has been running at near capacity to meet rising demand, which has put upward pressure on oil prices. Figure 4 shows that world oil prices in nominal terms—unadjusted for inflation—are higher than at any time since 1950, although when adjusted for inflation, the high prices of 2006 are still lower than were reached in the 1979-80 price run-up following the Iranian Revolution and the beginning of the Iran-Iraq war. All else being equal, oil consumption is inversely correlated with oil price, with higher oil prices inducing consumers to reduce their oil consumption. Specifically, increases in crude oil prices are reflected in the prices of products made from crude oil, including gasoline, diesel, home heating oil, and petrochemicals. The extent to which consumers are willing and able to reduce their consumption of oil in response to price increases depends on the cost of switching to activities and lifestyles that use less oil. Because there are more options available in the longer term, consumers respond more to changes in oil prices in the longer term than in the shorter term. For example, in the short term, consumers can reduce oil consumption by driving less or more slowly, but in the longer term, consumers can still take those actions, but can also buy more fuel-efficient automobiles or even move closer to where they work and thereby further reduce their oil consumption. Supply and demand, in turn, affect the type of oil that is produced. Conventional oil that is less expensive to extract using lower-cost drilling techniques will be produced when oil prices are lower. Conversely, oil that is expensive to produce because of the higher cost technologies involved may not be economical to produce at low oil prices. Producers are unlikely to turn to these more expensive oil sources unless oil prices are sustained at a high enough level to make such an enterprise profitable. Given the importance of oil in the world’s energy portfolio, as cheaper oil reserves are exhausted in the future, nations will need to make the transition to more and more expensive and difficult-to-access sources of oil to meet energy demands. Recently, for example, a large discovery of oil in the Gulf of Mexico made headlines; however, this potential wealth of oil is located at a depth of over 5 miles below sea level, a fact that adds significantly to the costs of extracting that oil. Timing of Peak Oil Production Depends on Uncertain Factors Most studies estimate that oil production will peak sometime between now and 2040, although many of these projections cover a wide range of time, including two studies for which the range extends into the next century. Key uncertainties in trying to determine the timing of peak oil are the (1) amount of oil throughout the world; (2) technological, cost, and environmental challenges to produce that oil; (3) political and investment risk factors that may affect oil exploration and production; and (4) future world demand for oil. The uncertainties related to exploration and production also make it difficult to estimate the rate of decline after the peak. Studies Predict Widely Different Dates for Peak Oil Most studies estimate that oil production will peak sometime between now and 2040, although many of these projections cover a wide range of time, including two studies for which the range extends into the next century. Figure 5 shows the estimates of studies we examined. Amount of Oil in the Ground Is Uncertain Studies that predict the timing of a peak use different estimates of how much oil remains in the ground, and these differences explain some of the wide ranges of these predictions. Estimates of how much oil remains in the ground are highly uncertain because much of these data are self- reported and unverified by independent auditors; many parts of the world have yet to be fully explored for oil; and there is no comprehensive assessment of oil reserves from nonconventional sources. This uncertainty surrounding estimates of oil resources in the ground comprises the uncertainty surrounding estimates of proven reserves as well as uncertainty surrounding expected increases in these reserves and estimated future oil discoveries. Oil and Gas Journal and World Oil, two primary sources of proven reserves estimates, compile data on proven reserves from national and private company sources. Some of this information is publicly available from oil companies that are subject to public reporting requirements—for example, information provided by companies that are publicly traded on U.S. stock exchanges that are subject to the filing requirements of U.S. federal securities laws. Information filed pursuant to these laws is subject to liability standards, and, therefore, there is a strong incentive for these companies to make sure their disclosures are complete and accurate. On the other hand, companies that are not subject to these federal securities laws, including companies wholly owned by various OPEC countries where the majority of reserves are located, are not subject to these filing requirements and their related liability standards. Some experts believe OPEC estimates of proven reserves to be inflated. For example, OPEC estimates increased sharply in the 1980s, corresponding to a change in OPEC’s quota rules that linked a member country’s production quota in part to its remaining proven reserves. In addition, many OPEC countries’ reported reserves remained relatively unchanged during the 1990s, even as they continued high levels of oil production. For example, IEA reports that reserves estimates in Kuwait were unchanged from 1991 to 2002, even though the country produced more than 8 billion barrels of oil over that period and did not make any important new oil discoveries. At a 2005 National Academy of Sciences workshop on peak oil, OPEC defended its reserves estimates as accurate. The potential unreliability of OPEC’s self- reported data is particularly problematic with respect to predicting the timing of a peak because OPEC holds most of the world’s current estimated proven oil reserves. On the basis of Oil and Gas Journal estimates as of January 2006, we found that of the approximately 1.1 trillion barrels of proven oil reserves worldwide, about 80 percent are located in the OPEC countries, compared with about 2 percent in the United States. Figure 6 shows this estimate in more detail. USGS, another primary source of reported estimates, provides oil resources estimates, which are different from proved reserves estimates. Oil resources estimates are significantly higher because they estimate the world’s total oil resource base, rather than just what is now proven to be economically producible. USGS estimates of the resource base include past production and current reserves as well as the potential for future increases in current conventional oil reserves—often referred to as reserves growth—and the amount of estimated conventional oil that has the potential to be added to these reserves. Estimates of reserves growth and those resources that have the potential to be added to oil reserves are important in determining when oil production may peak. However, estimating these potential future reserves is complicated by the fact that many regions of the world have not been fully explored and, as a result, there is limited information. For example, in its 2000 assessment, USGS provides a mean estimate of 732 billion barrels that have the potential to be added as newly discovered conventional oil, with as much as 25 percent from the Arctic—including Greenland, Northern Canada, and the Russian portion of the Barents Sea. However, relatively little exploration has been done in this region, and there are large portions of the world where the potential for oil production exists, but where exploration has not been done. According to USGS, there is less uncertainty in regions where wells have been drilled, but even in the United States, one of the areas that has seen the greatest exploration, some areas have not been fully explored, as illustrated by the recent discovery of a potentially large oil field in the Gulf of Mexico. Limited information on oil-producing regions worldwide also leads USGS to base its estimate of reserves growth on how reserves estimates have grown in the United States. However, some experts criticize this methodology; they believe such an estimate may be too high because the U.S. experience overestimates increases in future worldwide reserves. In contrast, EIA believes the USGS estimate may be too low. In 2005, USGS released a study showing that its prediction of reserves growth has been in line with the world’s experience from 1996 to 2003. Given such controversy, uncertainty remains about this key element of estimating the amount of oil in the ground. In 2000, USGS’ most recent full assessment of the world’s key oil regions, the agency provided a range of estimates of remaining world conventional oil resources. The mean of this range was at about 2.3 trillion barrels comprising about 890 billion barrels in current reserves and 1.4 trillion barrels that have the potential to be added to oil reserves in the future. Further contributing to the uncertainty of the timing of a peak is the lack of a comprehensive assessment of oil from nonconventional sources. For example, the three key sources of oil estimates—Oil and Gas Journal, World Oil, and USGS—do not generally include oil from nonconventional sources. This is an important issue because oil from nonconventional sources is thought to exist in large quantities. For example, IEA believes that oil from nonconventional sources—composed primarily of Canadian oil sands, extra-heavy oil deposits in Venezuela, and oil shale in the United States—could account for as much as 7 trillion barrels of oil, which could greatly delay the onset of a peak in production. However, IEA also points out that the amount of this nonconventional oil that will eventually be produced is highly uncertain, which is a result of the challenges facing this production. Despite this uncertainty, USGS experts noted that Canadian oil sands and Venezuelan extra-heavy oil production are under way now and also suggested that proven reserves from these sources will be growing considerably in the immediate future. Uncertainty Remains about How Much Oil Can Be Produced from Proven Reserves, Hard-to-Reach Locations, and Nonconventional Sources It is also difficult to project the timing of a peak in oil production because technological, cost, and environmental challenges make it unclear how much oil can ultimately be recovered from (1) proven reserves, (2) hard- to-reach locations, and (3) nonconventional sources. To increase the recovery rate from oil reserves, companies turn to enhanced oil recovery (EOR) technologies, which DOE reports has the potential to increase recovery rates from 30 to 50 percent in many locations. These technologies include injecting steam or heated water; gases, such as carbon dioxide; or chemicals into the reservoir to stimulate oil flow and allow for increased recovery. Opportunities for EOR have been most aggressively pursued in the United States, EOR technologies currently contribute approximately 12 percent to U.S. production, and carbon dioxide EOR alone is projected to have the potential to provide at least 2 million barrels per day by 2020. However, technological advances, such as better seismic and fluid-monitoring techniques for reservoirs during an EOR injection, may be required to make these techniques more cost-effective. Furthermore, EOR technologies are much costlier than the conventional production methods used for the vast majority of oil produced. Costs are higher because of the capital cost of equipment and operating costs, including the production, transportation, and injection of agents into existing fields and the additional energy costs of performing these tasks. Finally, EOR technologies have the potential to create environmental concerns associated with the additional energy required to conduct an EOR injection and the greenhouse gas emissions associated with producing that energy, although EIA has stated that these environmental costs may be less than those imposed by producing oil in previously undeveloped areas. Even if sustained high oil prices make EOR technologies cost-effective for an oil company, these challenges and costs may deter their widespread use. The timing of peak oil is also difficult to estimate because new sources of oil could be increasingly more remote and costly to exploit, including offshore production of oil in deepwater and ultra-deepwater. Worldwide, industry analysts report that deepwater (depths of 1,000 to 5,000 feet) and ultra-deepwater (5,000 to 10,000 feet) drilling efforts are concentrated offshore in Africa, Latin America, and North America, and capital expenditures for these efforts are expected to grow through at least 2011. In the United States, deepwater and ultra-deepwater drilling, primarily in the Gulf of Mexico, could reach 2.2 million barrels per day in 2016, according to EIA estimates. However, accessing and producing oil from these locations present several challenges. At deepwater depths, penetrating the earth and efficiently operating drilling equipment is difficult because of the extreme pressure and temperature. In addition, these conditions can compromise the endurance and reliability of operating equipment. Operating costs for deepwater rigs are 3.0 to 4.5 times more than operating costs for typical shallow water rigs. Capital costs, including platforms and underwater pipeline infrastructures, are also greater. Finally, deepwater and ultra-deepwater drilling efforts generally face similar environmental concerns as shallow water drilling efforts, although some deepwater operations may pose greater environmental concerns to sensitive deepwater ecosystems. It is unclear how much oil can be recovered from nonconventional sources. Recovery from these sources could delay a peak in oil production or slow the rate of decline in production after a peak. Expert sources disagree concerning the significance of the role these nonconventional sources will play in the future. DOE officials we spoke with emphasized the belief that nonconventional oil will play a significant role in the very near future as conventional oil production is unable to meet the increasing demand for oil. However, IEA estimates of oil production have conventional oil continuing to comprise almost all of production through 2030. Currently, production of oil from key nonconventional sources of oil—oil sands, heavy and extra-heavy oil deposits, and oil shale—is more costly and presents environmental challenges. Oil Sands Oil sands are deposits of bitumen, a thick, sticky form of crude oil, that is so heavy and viscous it will not flow unless heated. While most conventional crude oil flows naturally or is pumped from the ground, oil sands must be mined or recovered “in-situ,” before being converted into an upgraded crude oil that can be used by refineries to produce gasoline and diesel fuels. Alberta, Canada, contains at least 85 percent of the world’s proven oil sands reserves. In 2005, worldwide production of oil sands, largely from Alberta, contributed approximately 1.6 million barrels of oil per day, and production is projected to grow to as much as 3.5 million barrels per day by 2030. Oil sand deposits are also located domestically in Alabama, Alaska, California, Texas, and Utah. Production from oil sands, however, presents significant environmental challenges. The production process uses large amounts of natural gas, which generates greenhouse gases when burned. In addition, large-scale production of oil sands requires significant quantities of water, typically produce large quantities of contaminated wastewater, and alter the natural landscape. These challenges may ultimately limit production from this resource, even if sustained high oil prices make production profitable. Heavy and Extra-Heavy Oils Heavy and extra-heavy oils are dense, viscous oils that generally require advanced production technologies, such as EOR, and substantial processing to be converted into petroleum products. Heavy and extra- heavy oils differ in their viscosities and other physical properties, but advanced recovery techniques like EOR are required for both types of oil. Known extra-heavy oil deposits are primarily in Venezuela—almost 90 percent of the world’s proven extra-heavy oil reserves. Venezuelan production of extra-heavy oil was projected to be 600,000 barrels of oil per day in 2005 and is projected to be sustained at this rate through 2040. Heavy oil can be found in Alaska, California, and Wyoming and may exist in other countries besides the United States and Venezuela. Like production from oil sands, however, heavy oil production in the United States presents environmental challenges in its consumption of other energy sources, which contributes to greenhouse gases, and potential groundwater contamination from the injectants needed to thin the oil enough so that oil will flow through pipes. Oil Shale Oil shale is sedimentary rock containing solid bituminous materials that release petroleum-like liquids when the rock is heated. The world’s largest known oil shale deposit covers portions of Colorado, Utah, and Wyoming, but other countries, such as Australia and Morocco, also contain oil shale resources. Oil shale production is under consideration in the United States, but considerable doubts remain concerning its ultimate technical and commercial feasibility. Production from oil shale is energy-intensive, requiring other energy sources to heat the shale to about 900 to 1,000 degrees Fahrenheit to extract the oil. Furthermore, oil shale production is projected to contaminate local surface water with salts and toxics that leach from spent shale. These factors may limit the amount of oil from shale that can be produced, even if oil prices are sustained at high enough levels to offset the additional production costs. More detailed information on these technologies is provided in appendix III. Political and Investment Risk Factors Create Uncertainty about the Future Rate of Oil Exploration and Production Political and investment risk factors also could affect future oil exploration and production and, ultimately, the timing of peak oil production. These factors include changing political conditions and investment climates in many countries that have large proven oil reserves. Experts we spoke with told us that they considered these factors important in affecting future oil exploration and production. Political Conditions Create Uncertainties about Oil Exploration and Production In many countries with proven reserves, oil production could be shut down by wars, strikes, and other political events, thus reducing the flow of oil to the world market. If these events occurred repeatedly, or in many different locations, they could constrain exploration and production, resulting in a peak despite the existence of proven oil reserves. For example, according to a news account, crude oil output in Iraq dropped from 3.0 million barrels per day before the 1990 gulf war to about 2.0 million barrels per day in 2006, and a labor strike in the Venezuelan oil sector led to a drop in exports to the United States of 1.2 million barrels. Although these were isolated and temporary oil supply disruptions, if enough similar events occurred with sufficient frequency, the overall impact could constrain production capacity, thus making it impossible for supply to expand along with demand for oil. Using a measure of political risk that assesses the likelihood that events such as civil wars, coups, and labor strikes will occur in a magnitude sufficient to reduce a country’s gross domestic product (GDP) growth rate over the next 5 years, we found that four countries—Iran, Iraq, Nigeria, and Venezuela—that possess proven oil reserves greater than 10 billion barrels (high reserves) also face high levels of political risk. These four countries contain almost one-third of worldwide oil reserves. Countries with medium or high levels of political risk contained 63 percent of proven worldwide oil reserves, on the basis of Oil and Gas Journal estimates of oil reserves. (See fig. 7.) Even in the United States, political considerations may affect the rate of exploration and production. For example, restrictions imposed to protect environmental assets mean that some oil may not be produced. Interior’s Minerals Management Service estimates that approximately 76 billion barrels of oil lie in undiscovered fields offshore in the U.S. outer continental shelf. However, Congress has enacted moratoriums on drilling and exploration in this area to protect coastlines from unintended oil spills. In addition, policies on federal land use need to take into account multiple uses of the land, including environmental protection. Environmental restrictions may affect a peak in oil production by barring oil exploration and production in environmentally sensitive areas. Investment Climate Creates Uncertainty about Oil Exploration and Production Foreign investment in the oil sector could be necessary to bring oil to the world market, according to studies we reviewed and experts we consulted, but many countries have restricted foreign investment. Lack of investment could hasten a peak in oil production because the proper infrastructure might not be available to find and produce oil when needed, and because technical expertise may be lacking. The important role foreign investment plays in oil production is illustrated in Kazakhstan, where the National Commission on Energy Policy found that opening the energy sector to foreign investment in the early 1990s led to a doubling in oil production between 1998 and 2002. In addition, we found that direct foreign investment in Venezuela was strongly correlated with oil production in that country, and that when foreign investment declined between 2001 and 2004, oil production also declined. Industry officials told us that lack of technical expertise could lead to less sophisticated drilling techniques that actually reduce the ability to recover oil in more complex reservoirs. For example, according to industry officials, some Russian wells have difficulties with high water cut—that is, a high ratio of water to oil—making oil difficult to get out of the ground at current prices. This water cut problem stems from not using technically advanced methods when the wells were initially drilled. We have previously reported that the Venezuelan national oil company, PDVSA, lost technical expertise when it fired thousands of employees following a strike in 2002 and 2003. In contrast, other national oil companies, such as Saudi Aramco, are widely perceived to possess considerable technical expertise. According to our analysis, 85 percent of the world’s proven oil reserves are in countries with medium-to-high investment risk or where foreign investment is prohibited, on the basis of Oil and Gas Journal estimates of oil reserves. (See fig. 8.) For example, over one-third of the world’s proven oil reserves lie in only five countries—China, Iran, Iraq, Nigeria, and Venezuela—all of which have a high likelihood of seeing a worsening investment climate. Three countries with large oil reserves—Saudi Arabia, Kuwait, and Mexico—prohibit foreign investment in the oil sector, and most major oil-producing countries have some type of restrictions on foreign investment. Furthermore, some countries that previously allowed foreign investment, such as Russia and Venezuela, appear to be reasserting state control over the oil sector, according to DOE. Foreign investment in the oil sector also may be limited because national oil companies control the supply. Figure 9 indicates that 7 of the top 10 companies are national or state-sponsored oil and gas companies, ranked on the basis of oil production. The 3 international oil companies that are among the top 10 are BP, Exxon Mobil, and Royal Dutch Shell. National oil companies may have additional motivations for producing oil, other than meeting consumer demand. For instance, some countries use some profits from national companies to support domestic socioeconomic development, rather than focusing on continued development of oil exploration and production for worldwide consumption. Given the amount of oil controlled by national oil companies, these types of actions have the potential to result in oil production that is not optimized to respond to increases in the demand for oil. In addition, the top 8 oil companies ranked by proven oil reserves are national companies in OPEC-member countries, and OPEC decisions could affect future oil exploration and production. For example, in some cases, OPEC countries might decide to limit current production to increase prices or to preserve oil and its revenue for future generations. Figure 10 shows IEA’s projections for total world oil production through 2030 and highlights the larger role that OPEC production will play after IEA’s projected peak in non-OPEC oil production around 2010. Future World Demand for Oil Is Uncertain Uncertainty about future demand for oil—which will influence how quickly the remaining oil is used—contributes to the uncertainty about the timing of peak oil production. EIA projects that oil will continue to be a major source of energy well into the future, with world consumption of petroleum products growing to 118 million barrels per day by 2030. Figure 11 shows world petroleum product consumption by region for 2003 and EIA’s projections for 2030. As the figure shows, EIA projects that consumption will increase across all regions of the world, but members of the Organization for Economic Cooperation and Development (OECD) North America, which includes the United States, and non-OECD Asia, which includes China and India, are the major drivers of this growth. Future world oil demand will depend on such uncertain factors as world economic growth, future government policy, and consumer choices. Specifically: Economic growth drives demand for oil. For example, according to IEA, in 2003 the world experienced strong growth in oil consumption of 2.0 percent, with even stronger growth of 3.6 percent in 2004, from 79.8 million barrels per day to 82.6 million barrels per day and China accounted for 30 percent of this increase, driven largely by China’s almost 10 percent economic growth that year. EIA projects the Chinese economy will continue to grow, but factors such as the speed of reform of ineffective state-owned companies and the development of capital markets adds uncertainty to such projections and, as a result, to the level of future oil demand in China. Future government policy can also affect oil demand. For example, environmental concerns about gasoline’s emissions of carbon dioxide, which is a greenhouse gas, may encourage future reductions in oil demand if these concerns are translated into policies that promote biofuels. Consumer choices about conservation also can affect oil demand and thereby influence the timing of a peak. For example, if U.S. consumers were to purchase more fuel-efficient vehicles in greater numbers, this could reduce future oil demand in the United States, potentially delaying a time at which oil supply is unable to keep pace with oil demand. Such uncertainties that lead to changes in future oil demand ultimately make estimates of the timing of a peak uncertain, as is illustrated in an EIA study on peak oil. Specifically, using future annual increases in world oil consumption, ranging from 0 percent, to represent no increase, to 3 percent, to represent a large increase, and out of the various scenarios examined, EIA estimated a window of up to 75 years for when the peak may occur. Factors That Create Uncertainty about the Timing of the Peak Also Create Uncertainty about the Rate of Decline Factors that create uncertainty about the timing of the peak—in particular, factors that affect oil exploration and production—also create uncertainty about the rate of production decline after the peak. For example, IEA reported that technology played a key role in slowing the decline and extending the life of oil production in the North Sea. Uncertainty about the rate of decline is illustrated in studies that estimate the timing of a peak. IEA, for example, estimates that this decline will range somewhere between 5 percent and 11 percent annually. Other studies assume the rate of decline in production after a peak will be the same as the rise in production that occurred before the peak. Another methodology, employed by EIA, assumes that the resulting decline will actually be faster than the rise in production that occurred before the peak. The rate of decline after a peak is an important consideration because a decline that is more abrupt will likely have more adverse economic consequences than a decline that is less abrupt. Alternative Transportation Technologies Face Challenges in Mitigating the Consequences of the Peak and Decline In the United States, alternative transportation technologies have limited potential to mitigate the consequences of a peak and decline in oil production, at least in the near term, because they face many challenges that will take time and effort to overcome. If the peak and decline in oil production occur before these technologies are advanced enough to substantially offset the decline, the consequences could be severe. If the peak occurs in the more distant future, however, alternative technologies have a greater potential to mitigate the consequences. Development and Adoption of Technologies to Displace Oil Will Take Time and Effort Development and widespread adoption of the seven alternative fuels and advanced vehicle technologies we examined will take time, and significant challenges will have to be overcome, according to DOE. These technologies include ethanol, biodiesel, biomass gas-to-liquid, coal gas-to- liquid, natural gas and natural gas vehicles, advanced vehicle technologies, and hydrogen fuel cell vehicles. Ethanol Ethanol is an alcohol-based fuel produced by fermenting plant sugars. Currently, most ethanol in the United States is made from corn, but ethanol also can be made from cellulosic matter from a variety of agricultural products, including trees, grasses, and forestry residues. Corn ethanol has been used as an additive to gasoline for many years, but it is also available as a primary fuel, most commonly as a blended mix of 85 percent ethanol and 15 percent gasoline. As a primary fuel, corn ethanol is not currently available on a large national scale and federal agencies do not consider it to be cost-competitive with gasoline or diesel. The cost of corn feedstock, which accounts for approximately 75 percent of the production cost, is not projected to fall dramatically in the future, in part, because of competing demands for agricultural land use and competing uses for corn, primarily as livestock feed, according to DOE and USDA. DOE and USDA project that more cellulosic ethanol could ultimately be produced than corn ethanol because cellulosic ethanol can be produced from a variety of feedstocks, but more fundamental reductions in production costs will be needed to make cellulosic ethanol commercially viable. Production of ethanol from cellulosic feedstocks is currently more costly than production of corn ethanol because the cellulosic material must first be broken down into fermentable sugars that can be converted into ethanol. The production costs associated with this additional processing would have to be reduced in order for cellulosic ethanol to be cost-competitive with gasoline at today’s prices. In addition, corn and cellulosic ethanol are more corrosive than gasoline, and the widespread commercialization of these fuels would require substantial retrofitting of the refueling infrastructure—pipelines, storage tanks, and filling stations. To store ethanol, gasoline stations may have to retrofit or replace their storage tanks, at an estimated cost of $100,000 per tank. DOE officials also reported that some private firms consider capital investment in ethanol refineries to be risky for significant investment, unless the future of alternative fuels becomes more certain. Finally, widespread use of ethanol would require a turnover in the vehicle fleet because most current vehicle engines cannot effectively burn ethanol in high concentrations. Biodiesel Biodiesel is a renewable fuel that has similar properties to petroleum diesel but can be produced from vegetable oils or animal fats. It is currently used in small quantities in the United States, but it is not cost- competitive with gasoline or diesel. The cost of biodiesel feedstocks— which in the United States largely consist of soybean oil—are the largest component of production costs. The price of soybean oil is not expected to decrease significantly in the future owing to competing demands from the food industry and from soap and detergent manufacturers. These competing demands, as well as the limited land available for the production of feedstocks, also are projected to limit biodiesel’s capacity for large-volume production, according to DOE and USDA. As a result, experts believe that the total production capacity of biodiesel is ultimately limited compared with other alternative fuels. Biomass Gas-to-Liquid Biomass gas-to-liquid (biomass GTL) is a fuel produced from biomass feedstocks by gasifying the feedstocks into an intermediary product, referred to as syngas, before converting it into a diesel-like fuel. This fuel is not commercially produced, and a number of technological and economic challenges would need to be overcome for commercial viability. These challenges include identifying biomass feedstocks that are suitable for efficient conversion to a syngas and developing effective methods for preparing the biomass for conversion into a syngas. Furthermore, DOE researchers report that significant work remains to successfully gasify biomass feedstocks on a large enough scale to demonstrate commercial viability. In the absence of these developments, DOE reported that the costs of producing biomass GTL will be very high and significant uncertainty surrounding its ultimate commercial feasibility will exist. Coal Gas-to-Liquid Coal gas-to-liquid (coal GTL) is a fuel produced by gasifying coal into a syngas before being converted into a diesel-like fuel. This fuel is commercially produced outside the United States, but none of the production facilities are considered profitable. DOE reported that high capital investments—both in money and time—deter the commercial development of coal GTL in the United States. Specifically, DOE estimates that construction of a coal GTL conversion plant could cost up to $3.5 billion and would require at least 5 to 6 years to construct. Furthermore, potential investors are deterred from this investment because of the risks associated with the lengthy, uncertain, and costly regulatory process required to build such a facility. An expert at DOE also expressed concern that the infrastructure required to produce or transport coal may be insufficient. For example, the rail network for transporting western coal is already operating at full capacity and, owing to safety and environmental concerns, there is significant uncertainty about the feasibility of expanding the production capabilities of eastern coal mines. Coal GTL production also faces serious environmental concerns because of the carbon dioxide emitted during production. To mitigate the effect of coal GTL production, researchers are considering options for combining coal GTL production with underground injection of sequestered carbon dioxide to enhance oil recovery in aging oil fields. Natural Gas and Natural Gas Vehicles Natural gas is an alternative fuel that can be used as either a compressed natural gas or a liquefied natural gas. Natural gas vehicles are currently available in the United States, but their use is limited, and production has declined in the past few years. According to DOE, large-scale commercialization of natural gas vehicles is complicated by the widespread availability and lower cost of gasoline and diesel fuels. Furthermore, demand for natural gas in other markets, such as home heating and energy generation, presents substantial competitive risks to the natural gas vehicle industry. Production costs for natural gas vehicles are also higher than for conventional vehicles because of the incremental cost associated with a high-pressure natural gas tank. For example, light- duty natural gas vehicles can cost $1,500 to $6,000 more than comparable conventional vehicles, while heavy-duty natural gas vehicles cost $30,000 to $50,000 more than comparable conventional vehicles. Regarding infrastructure, retrofitting refueling stations so that they can accommodate natural gas could cost from $100,000 to $1 million per station, depending on the size, according to DOE. Although refueling at home can be an option for some natural gas vehicles, home refueling appliances are estimated to cost approximately $2,000 each. Advanced Vehicle Technologies Advanced vehicle technologies that we considered included lightweight materials and improvements to conventional engines that increase fuel economy, as well as hybrid vehicles and plug-in hybrid electric vehicles that use an electric motor/generator and a battery pack in conjunction with an internal combustion engine. Hybrid electric vehicles are commercially available in the United States, but these are not yet considered competitive with comparable conventional vehicles. DOE experts report that demand for such vehicles is predicated on their cost- competitiveness with comparable conventional vehicles. Hybrid electric vehicles, for example, cost $2,000 to $3,500 more to buy than comparable conventional vehicles and currently constitute around 1 percent of new vehicle registrations in the United States. In addition, electric batteries in hybrid electric vehicles face technical challenges associated with their performance and reliability when exposed to extreme temperatures or harsh automotive environments. Other advanced vehicle technologies, including advanced diesel engines and plug-in hybrids, are (1) in the very early stages of commercial release or are not yet commercially available and (2) face obstacles to large-scale commercialization. For example, advanced diesel engines present an environmental challenge because, despite their high fuel efficiency, they are not expected to meet future emission standards. Federal researchers are working to enable the engine to burn more cleanly, but these efforts are costly and face technical barriers. Plug-in hybrid electric vehicles are not yet commercially feasible because of cost, technical, and infrastructure challenges facing their development. For example, plug-in electric hybrids cost much more to produce than conventional vehicles, they require significant upgrades to home electrical systems to support their recharging, and researchers have yet to develop a plug-in electric with a range of more than 40 miles on battery power alone. Hydrogen Fuel Cell Vehicles A hydrogen fuel cell vehicle is powered by the electricity produced from an electrochemical reaction between hydrogen from a hydrogen- containing fuel and oxygen from the air. In the United States, these vehicles are still in the development stage, and making these vehicles commercially feasible presents a number of challenges. While a conventional gas engine costs $2,000 to $3,000 to produce, the stack of hydrogen fuel cells needed to power a vehicle costs $35,000 to produce. Furthermore, DOE researchers have yet to develop a method for feasibly storing hydrogen in a vehicle that allows a range of at least 300 miles before refueling. Fuel cell vehicles also are not yet able to last for 120,000 miles, which DOE believes to be the target for commercial viability. In addition, developing an infrastructure for distributing hydrogen—either through pipelines or through trucking—is expected to be complicated, costly, and time-consuming. Delivering hydrogen from a central source requires a large amount of energy and is considered costly and technically challenging. DOE has determined that decentralized production of hydrogen directly at filling stations could be a more viable approach than centralized production in some cases, but a cost-effective mechanism for converting energy sources into hydrogen at a filling station has yet to be developed. More detailed information on these technologies is provided in appendix IV. Consequences Could Be Severe If Alternative Technologies Are Not Available Because development and widespread adoption of technologies to displace oil will take time and effort, an imminent peak and sharp decline in oil production could have severe consequences. The technologies we examined currently supply the equivalent of only about 1 percent of U.S. annual consumption of petroleum products, and DOE projects that even under optimistic scenarios, these technologies could displace only the equivalent of about 4 percent of annual projected U.S. consumption by around 2015. If the decline in oil production exceeded the ability of alternative technologies to displace oil, energy consumption would be constricted, and as consumers competed for increasingly scarce oil resources, oil prices would sharply increase. In this respect, the consequences could initially resemble those of past oil supply shocks, which have been associated with significant economic damage. For example, disruptions in oil supply associated with the Arab oil embargo of 1973-74 and the Iranian Revolution of 1978-79 caused unprecedented increases in oil prices and were associated with worldwide recessions. In addition, a number of studies we reviewed indicate that most of the U.S. recessions in the post-World War II era were preceded by oil supply shocks and the associated sudden rise in oil prices. Ultimately, however, the consequences of a peak and permanent decline in oil production could be even more prolonged and severe than those of past oil supply shocks. Because the decline would be neither temporary nor reversible, the effects would continue until alternative transportation technologies to displace oil became available in sufficient quantities at comparable costs. Furthermore, because oil production could decline even more each year following a peak, the amount that would have to be replaced by alternatives could also increase year by year. Consumer actions could help mitigate the consequences of a near-term peak and decline in oil production through demand-reducing behaviors such as carpooling; teleworking; and “eco-driving” measures, such as proper tire inflation and slower driving speeds. Clearly these energy savings come at some cost of convenience and productivity, and limited research has been done to estimate potential fuel savings associated with such efforts. However, DOE estimates that drivers could improve fuel economy between 7 and 23 percent by not exceeding speeds of 60 miles per hour, and IEA estimates that teleworking could reduce total fuel consumption in the U.S. and Canadian transportation sectors combined by between 1 and 4 percent, depending on whether teleworking is undertaken for 2 days per week or the full 5-day week, respectively. If the peak occurs in the more distant future or the decline following a peak is less severe, alternative technologies have a greater potential to mitigate the consequences. DOE projects that the alternative technologies we examined have the potential to displace up to the equivalent of 34 percent of annual U.S. consumption of petroleum products in the 2025 through 2030 time frame. However, DOE also considers these projections optimistic—it assumes that sufficient time and effort are dedicated to the development of these technologies to overcome the challenges they face. More specifically, DOE assumes sustained high oil prices above $50 per barrel as a driving force. The level of effort dedicated to overcoming challenges to alternative technologies will depend in part on the price of oil, with higher oil prices creating incentives to develop alternatives. High oil prices also can spark consumer interest in alternatives that consume less oil. For example, new purchases of light trucks, SUVs, and minivans declined in 2005 and 2006, corresponding to a period of increasing gasoline prices. Gasoline demand has also grown slower in 2005 and 2006—0.95 and 1.43 percent, respectively—compared with the preceding decade, during which gasoline demand grew at an average rate of 1.81 percent. In the past, high oil prices have significantly affected oil consumption: U.S. consumption of oil fell by about 18 percent from 1979 to 1983, in part because U.S. consumers purchased more fuel-efficient vehicles in response to high oil prices. While current high oil prices may encourage development and adoption of alternatives to oil, if high oil prices are not sustained, efforts to develop and adopt alternatives may fall by the wayside. The high oil prices and fears of running out of oil in the 1970s and early 1980s encouraged investments in alternative energy sources, including synthetic fuels made from coal, but when oil prices fell, investments in these alternatives became uneconomic. More recently, private sector interest in alternative fuels has increased, corresponding to the increase in oil prices, but uncertainty about future oil prices can be a barrier to investment in risky alternative fuels projects. Recent polling data also indicate that consumers’ interest in fuel efficiency tends to increase as gasoline prices rise and decrease when gasoline prices fall. Federal Agencies Do Not Have a Coordinated Strategy to Address Peak Oil Issues Federal agency efforts that could contribute to reducing uncertainty about the timing of a peak in oil production or mitigating its consequences are spread across multiple agencies and are generally not focused explicitly on peak oil issues. Federal agency-sponsored studies have expressed a growing concern over the potential for a peak, and officials from key agencies have identified options for reducing the uncertainty about the timing of a peak in oil production and mitigating its consequences. However, there is no strategy for coordinating or prioritizing such efforts. Federal Agencies Have Many Programs and Activities Related to Peak Oil Issues, but Peak Oil Generally Is Not the Main Focus of These Efforts Federal agencies have programs and activities that could be directed to reduce uncertainty about the timing of a peak in oil production or to mitigate the consequences of such a peak. For example, with regard to reducing uncertainty, DOE provides information and analysis about global supply and demand for oil and develops projections about future trends. Specifically, DOE’s EIA regularly surveys U.S. operators to gather data about U.S. oil reserves and compiles reserves data for foreign countries from other sources. In addition, EIA prepares both a domestic and international energy outlook, which includes projections for future oil supply and demand. As previously discussed, USGS provides estimates of oil resources that have the potential to add to reserves in the United States. Interior’s Minerals Management Service also assesses oil resources in the offshore regions of the United States. In addition, several agencies conduct activities to encourage development of alternative technologies that could help mitigate the consequences of a decline in oil production. For example, DOE promotes development of alternative fuels and advanced vehicle technologies that could reduce oil consumption in the transportation sector by funding research and development of new technologies. In addition, USDA encourages development of biomass-based alternative fuels, by collaborating with industry to identify and test the performance of potential biomass feedstocks and conducting research to evaluate the cost of producing biomass fuels. DOT provides funding to encourage development of bus fleets that run on alternative fuels, promote carpooling among consumers, and conduct outreach and education concerning telecommuting. In addition, DOT is responsible for setting fuel economy standards for automobiles and light trucks sold in the United States. While these and other programs and activities could be used to reduce uncertainty about the timing of a peak in oil production and mitigate its consequences, agency officials we spoke with acknowledged that most of these efforts are not explicitly designed to do so. For example, DOE’s activities related explicitly to peak oil issues have been limited to conducting, commissioning, or participating in studies and workshops. Agencies Have Options to Reduce Uncertainty and Mitigate Consequences but Lack a Coordinated Strategy Several federally sponsored studies we reviewed reflect a growing concern about peak oil and identify a need for action. For example: DOE has sponsored two studies. A 2003 study highlighted the benefit of reducing the uncertainty surrounding the timing of a peak to mitigate its potentially severe global economic consequences. A 2005 study examined mitigating the consequences of a peak and concluded the following: “Timely, aggressive mitigation initiatives addressing both the supply and the demand sides of the issue will be required.” While EIA’s 2004 study of the timing of peak oil estimates that a peak might occur closer to 2050, EIA recognized that early preparation was important because of the long period required for widespread commercial production and adoption of new energy technologies. In its 2005 study of energy use in the military, the U.S. Army Corps of Engineers emphasized the need to develop alternative technologies and associated infrastructure before a peak and decline in oil production. In addition, in response to growing peak oil concerns, DOE asked the National Petroleum Council to study peak oil issues. The study is expected to be completed by June 2007. In light of these concerns, agency officials told us that it would be worthwhile to take additional steps to reduce the uncertainty about the timing of a peak in oil production. EIA believes it could reduce uncertainty surrounding the timing of peak oil production if it were to robustly extend the time horizon of its analysis and projection of global supply and demand for crude oil presented in its domestic and international energy outlooks. Currently, EIA’s projections extend only to 2030, and officials believe that consideration of peak oil would require a longer horizon. Also, the international outlook is fairly limited, in part because EIA no longer conducts its detailed Foreign Energy Supply Assessment Program. EIA is seeking to restart this effort in fiscal year 2007. In addition, USGS officials told us that better and more complete information about global oil resources could be used to improve estimates by EIA of the timing of a peak. USGS officials said their estimates of global oil resources could be improved or expanded in the following four ways: Add information on certain regions—which USGS refers to as “frontier regions”—where little is known about oil resources. Add information on nonconventional resources outside the United States. USGS believes these resources will play a large role in future oil supply, and, therefore, accurate estimates of these resources should be included in any attempts to determine the timing of a peak. Calculate reserves growth by country. USGS considers this information important because of the political and investment conditions that differ by country and will affect future oil production and exploration. Provide more complete information for all major oil-producing countries. USGS noted that its assessment has some “holes” where resources in major-producing countries have not yet been estimated completely. In addition to these actions reducing the uncertainty about the timing of a peak, agency officials also told us that they could take additional steps to mitigate the consequences of a peak. For example, DOE officials reported that they could expand their efforts to encourage the development of alternative fuels and advanced vehicle technologies. These efforts could be expanded by conducting more demonstrations of new technologies, facilitating greater information sharing among key industry players, and increasing cost share opportunities with industry for research and development. Agency officials told us such efforts can be essential to developing and encouraging the technologies. Although there are many options to reduce the uncertainty about the timing of a peak or to mitigate its potential consequences, according to DOE, there is no formal strategy to coordinate and prioritize federal programs and activities dealing with peak oil issues—either within DOE or between DOE and other key agencies. Conclusions The prospect of a peak in oil production presents problems of global proportion whose consequences will depend critically on our preparedness. The consequences would be most dire if a peak occurred soon, without warning, and were followed by a sharp decline in oil production because alternative energy sources, particularly for transportation, are not yet available in large quantities. Such a peak would require sharp reductions in oil consumption, and the competition for increasingly scarce energy would drive up prices, possibly to unprecedented levels, causing severe economic damage. While these consequences would be felt globally, the United States, as the largest consumer of oil and one of the nations most heavily dependent on oil for transportation, may be especially vulnerable among the industrialized nations of the world. In the longer term, there are many possible alternatives to using oil, including using biofuels and improving automotive fuel efficiency, but these alternatives will require large investments, and in some cases, major changes in infrastructure or break-through technological advances. In the past, the private sector has responded to higher oil prices by investing in alternatives, and it is doing so now. Investment, however, is determined largely by price expectations, so unless high oil prices are sustained, we cannot expect private investment in alternatives to continue at current levels. If a peak were anticipated, oil prices would rise, signaling industry to increase efforts to develop alternatives and consumers of energy to conserve and look for more energy-efficient products. Federal agencies have programs and activities that could be directed toward reducing uncertainty about the timing of a peak in oil production, and agency officials have stated the value in doing so. In addition, agency efforts to stimulate the development and adoption of alternatives to oil use could be increased if a peak in oil production were deemed imminent. While public and private responses to an anticipated peak could mitigate the consequences significantly, federal agencies currently have no coordinated or well-defined strategy either to reduce uncertainty about the timing of a peak or to mitigate its consequences. This lack of a strategy makes it difficult to gauge the appropriate level of effort or resources to commit to alternatives to oil and puts the nation unnecessarily at risk. Recommendation for Executive Action While uncertainty about the timing of peak oil production is inevitable, reducing that uncertainty could help energy users and suppliers, as well as government policymakers, to act in ways that would mitigate the potentially adverse consequences. Therefore, we recommend that the Secretary of Energy take the lead, in coordination with other relevant agencies, to prioritize federal agency efforts and establish a strategy for addressing peak oil issues. At a minimum, such a strategy should seek to do the following: Monitor global supply and demand of oil with the intent of reducing uncertainty surrounding estimates of the timing of peak oil production. This effort should include improving the information available to estimate the amount of oil, conventional and nonconventional, remaining in the world as well as the future production and consumption of this oil, while extending the time horizon of the government’s projections and analysis. Assess alternative technologies in light of predictions about the timing of peak oil production and periodically advise Congress on likely cost- effective areas where the government could assist the private sector with development and adoption of such technologies. Agency Comments and Our Evaluation We provided the Departments of Energy and the Interior with a draft of this report for their review and comment. DOE generally agreed with our message and recommendations and made several clarifying and technical comments, which we addressed in the body of the report as appropriate. Appendix V contains a reproduction of DOE’s letter and our detailed response to their comments. Specifically, DOE commented that the draft report did not make a distinction between a peak in conventional versus a peak in total (conventional and nonconventional) oil. We agree that we have not made this distinction, in part because the numerous studies of peak oil that we reviewed did not always make such a distinction. Furthermore, we do not believe a clear distinction between these two peak concepts is possible, in part because the definition of what is conventional oil versus nonconventional oil is not universally agreed on. However, the information we have reported regarding uncertainty about the timing of a peak applies to either peak oil concept. DOE also commented that our use of certain technical phrases, including the distinction between heavy and extra-heavy oils and the distinction between oil consumption and demand, may be confusing to some readers, and we have made changes to the text to avoid such confusion. DOE commented that the draft report wrongly attributed environmental concerns to the use of enhanced oil recovery techniques, stating that the environmental community prefers such techniques on existing oil fields to exploration and development of new fields. We do not disagree that the environmental costs of these techniques may be smaller than for other activities and we have added text to express DOE’s views on this matter. However, our point in listing the cost and environmental challenges of enhanced oil recovery techniques is that increasing oil production in the future could be more costly and more environmentally damaging than production of conventional oil, using primary production methods. For this reason we disagree with DOE’s comment that we should remove the references to environmental challenges. Finally, DOE pointed out that the draft report was primarily focused on transportation technologies that are used to power autonomous vehicles, and they stated that a broader set of technologies that could displace oil should be considered. We agree with their characterization of the draft report. We chose transportation technologies because transportation accounts for such a large part of U.S. oil consumption and because DOE and other agencies have numerous programs and activities dealing with technologies to displace oil in the transportation sector. We also agree that a broader set of technologies should be considered in the long run as potential ways to mitigate the consequences of a peak in oil production. We encourage DOE and other agencies to fully explore the options to displace oil as they implement our recommendations to develop a strategy to reduce the uncertainty surrounding the timing of a peak in oil production and advise Congress on cost-effective ways to mitigate the consequences. Interior generally agreed with our message and recommendations in the draft report and made clarifying and technical comments, which we addressed in the body of the report as appropriate. Appendix VI contains a reproduction of Interior’s letter and our detailed response to its comments. Specifically, Interior emphasized that it has a major role to play in estimating global oil resources, and that this effort should be made in conjunction with the efforts of DOE. We agree and encourage DOE to work in conjunction with Interior and other key agencies in establishing a strategy to coordinate and prioritize federal agency efforts to reduce the uncertainty surrounding the timing of a peak and to advise Congress on how best to mitigate consequences. Interior also commented that mitigating the consequences of a peak is outside their purview. We agree, and, in this report, we focus on examples of work that Interior could undertake to assist in reducing the uncertainty surrounding the estimates of global oil resources. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 30 days from the report date. At that time, we will send copies of this report to interested congressional committees, other Members of Congress, the Secretaries of Energy and the Interior, and other interested parties. We also will make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. Should you or your staffs need further information, please contact me at 202-512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made contributions to this report are listed in appendix VII. Appendix I: Scope and Methodology To examine estimates of when oil production could peak, we reviewed key peak oil studies conducted by government agencies and oil industry experts. We limited our review to those studies that were published and excluded white papers or unpublished research. For studies that we cited in this report, we reviewed their estimate of the timing, methodology, and assumptions about the resource base to ensure that we properly represented the validity and reliability of their results and conclusions. We also consulted with federal government agencies and oil companies, as well as academic and research organizations, to identify the uncertainties associated with the timing of a peak. As part of our examination of the timing of peak oil production, we assessed other factors that could affect oil exploration and production. Specifically, we examined the challenges facing future technologies that could enhance the global production of oil, including technologies for increasing recovery from conventional reserves as well as technologies for producing nonconventional oil. To examine these technologies, we met with experts at the Department of Energy’s (DOE) National Energy Technology Laboratory, and synthesized information provided by these experts. In addition, we examined political and investment risks associated with global oil exploration and production using Global Insight’s Global Risk Service. For each country, Global Insight’s country risk analyst estimates the subjective probability of 15 discrete events for political risk, and 22 discrete events for investment risk in the upstream oil and gas sectors. The probability is estimated for the next 5 years. Senior analysts then meet to review the scores to ensure cross-country consistency. The summary score is derived by weighting different groups of factors and then summing across the groups. For political risk, external and internal political risks are the two groups of factors. For investment risk in the oil and gas sectors, the factors are: investment/maintenance risk, input risk, production risk, sales risk, and revenue/repatriation risk. We compared political and investment risk with Oil and Gas Journal oil reserves estimates. Oil and Gas Journal reserves estimates are limited by the fact that they are not independently verified by the publishers and are based on surveys filled out by the countries. Because most countries do not reassess annually, some estimates in this survey do not change each year. We divided the countries into risk categories of low, medium, and high on the basis of quartiles and natural break points in the data. To obtain the percentage of reserves held by public companies and by national oil companies, we used the Petroleum Intelligence Weekly list of top 50 companies worldwide. The Petroleum Intelligence Weekly data are limited by reliance on company reports and other information sources provided by companies and the generation of estimates for those companies that do not release regular or complete reports. Estimates were created for most of the state-owned oil companies in figure 9 of this report. The limitations of these data reflect the uncertainty in estimates of the amount of oil in the ground, and our report does not rely on precise estimates of oil reserves but rather on the uncertainty about the amount of oil throughout the world and the challenges to exploration and production of oil. Therefore, we found these data to be sufficiently reliable for the purposes of our report. We also spoke with officials at the Securities and Exchange Commission and with DOE as well as experts in academia and industry. In addition, we reviewed documents from the Department of the Interior and the International Energy Agency (IEA). To assess the potential for transportation technologies to mitigate the consequences of a peak and decline in oil production, we examined options to develop alternative fuels and technologies to reduce energy consumption in the transportation sector. In particular, we focused on technologies that would affect automobiles and light trucks. We consulted with experts to devise a list of key technologies in these areas and then reviewed DOE programs and activities related to developing these technologies. To assess alternative fuels and advanced vehicle technologies, we met with various experts at DOE, including representatives from the National Energy Technology Laboratory and the National Renewable Energy Laboratory, and reviewed information provided by officials from various offices at DOE. In addition, we spoke with officials from the U.S. Department of Agriculture (USDA) and the Department of Transportation regarding the development of these technologies in the United States. We did not attempt to comprehensively list all technologies or to conduct a governmentwide review of all programs, and we limited our scope to what government officials at key federal agencies know about the status of these technologies in the United States. In addition, we did not conduct a global assessment of transportation technologies. We reviewed numerous studies on the relationship between oil and the global economy and, in particular, on the experiences of past oil price shocks. To identify federal government activities that could address peak oil production issues, we spoke with officials at DOE and the United States Geological Survey (USGS), and gathered information on federal programs and policies that could affect uncertainty about the timing of peak oil production and the development of alternative transportation technologies. To gain further insights into the federal role and other issues surrounding peak oil production, we convened an expert panel in Washington, D.C., in conjunction with the National Research Council of the National Academy of Sciences. On May 5, 2006, these experts commented on the potential economic consequences of a transition away from conventional oil; factors that could affect the severity of the consequences; and what the federal role should be in preparing for or mitigating the consequences, among other things. We recorded and transcribed the meeting to ensure that we accurately captured the panel members’ statements. Appendix II: Key Peak Oil Studies This appendix lists the studies cited in figure 5 of this report. (a) L.F. Ivanhoe. “ Updated Hubbert Curves Analyze World Oil Supply.” World Oil. Vol. 217 (November 1996): 91-94. (b) Albert A. Bartlett. “ An Analysis of U.S. and World Oil Production Patterns Using Hubbert-Style Curves.” Mathematical Geology. Vol. 32, no.1 (2000). (c) Kenneth S. Deffeyes. “ World’s Oil Production Peak Reckoned in Near Future.” Oil and Gas Journal. November 11, 2002. (d) Volvo. Future Fuels for Commercial Vehicles. 2005. (e) A.M. Samsam Bakhtiari. “ World Oil Production Capacity Model Suggests Output Peak by 2006-2007.” Oil and Gas Journal. April 26, 2004. (f) Richard C. Duncan. “ Peak Oil Production and the Road to the Olduvai Gorge.” Pardee Keynote Symposia. Geological Society of America, Summit 2000. (g) David L. Greene, Janet L. Hopson, and Jai Li. Running Out Of and Into Oil: Analyzing Global Oil Depletion and Transition Through 2050. Oak Ridge National Laboratory, Department of Energy, October 2003. (h) C.J. Campbell. “ Industry Urged to Watch for Regular Oil Production Peaks, Depletion Signals.” Oil and Gas Journal. July 14, 2003. (i) Merril Lynch. Oil Supply Analysis. October 2005. (j) Ministére de l’Economie Des Finances et de l’Industrie. L’industrie pétrolière en 2004. 2005. (k) International Energy Agency. World Energy Outlook 2004. Paris France: 101-103. (l) Jean Laherrère. Future Oil Supplies. Seminar Center of Energy Conversion, Zurich: 2003. (m) Peter Gerling, Hilmar Remple, Ulrich Schwartz-Schampera, and Thomas Thielemann. Reserves, Resources and Availability of Energy Resources. Federal Institute for Geosciences and Natural Resources, Hanover, Germany: 2004. (n) John D. Edwards. “ Crude Oil and Alternative Energy Production Forecasts for the Twenty-First Century: The End of the Hydrocarbon Era.” American Association of Petroleum Geologists Bulletin. Vol. 81, no. 8 (August 1997). (o) Cambridge Energy Research Associates, Inc. Worldwide Liquids Capacity Outlook to 2010, Tight Supply or Excess of Riches. May 2005. (p) John H. Wood, Gary R. Long and David F. Morehouse. Long Term World Oil Supply Scenarios. Energy Information Administration: 2004. (q) Total. Sharing Our Energies: Corporate Social Responsibility Report 2004. (r) Shell International. Energy Needs, Choices and Possibilities: Scenarios to 2050. Global Business Environment: 2001. (s) Directorate-General for Research Energy. World Energy, Technology and Climate Policy Outlook: WETO 2030. European Commission, EUR 20366: 2003. (t) Exxon Mobil. The Outlook for Energy: A View to 2030. Corporate Planning. Washington, D.C.: November 2005. (u) Harry W. Parker. “ Demand, Supply Will Determine When World Oil Output Peaks.” Oil and Gas Journal. February 25, 2002. (v) M.A. Adelman and Michael C. Lynch. “ Fixed View of Resource Limits Creates Undue Pessimism.” Oil and Gas Journal. April 7, 1997. Appendix III: Key Technologies to Enhance the Supply of Oil This appendix contains brief profiles of technologies that could enhance the future supply of oil. This includes technologies for (1) increasing the rate of recovery from proven oil reserves using enhanced oil recovery; (2) producing oil from deepwater and ultra-deepwater reservoirs; and (3) producing nonconventional oil, such as oil sands and oil shale. For each technology, we provide a short description, followed by selected information on the key costs, potential production, readiness, key challenges, and current federal involvement. Although some of these technologies are in production or development throughout the world, the following profiles primarily focus on the development of these technologies in the United States. Enhanced Oil Recovery Enhanced oil recovery (EOR) refers to the third stage of oil production, whereby sophisticated techniques are used to recover remaining oil from reservoirs that have otherwise been exhausted through primary and secondary recovery methods. During EOR, heat (such as steam), gases (such as carbon dioxide (CO)), or chemicals are injected into the reservoir to improve fluid flow. Thermal and gas injection techniques account for almost all EOR activity in the United States, with CO EOR occurs in the Permian Basin in Texas. Most EOR efforts in the United States are currently managed by small, independent operators. Globally, EOR has been introduced in a number of countries, but North America is estimated to represent over half of all global EOR production. Costs associated with EOR production vary by reservoir, but reported marginal costs for oil recovery using EOR can range from $1.42 per barrel to $30 per barrel. Key capital costs include new drills, reworking of existing drills, reconfiguring gathering systems, and modification of the injection plant and other surface facilities. EOR currently contributes approximately 12 percent to the U.S. production of oil. EOR is projected to increase average recovery rates in reservoirs from 30 percent to 50 percent. Upper-end estimates of EOR’s future recovery potential in the United States include the following: 1.0 million barrels per day by 2015 and 2.5 million barrels per day by 2025. Thermal, gas, and chemical injection technologies are currently commercially available. Key areas for further development exist, including sweep efficiency and water shut-off methods. Key challenges facing the development of EOR include the following: (1) a lack of industry-accepted, economical fluid injection systems; (2) a reliance on out-of-date practices and limited data due to lack of familiarity with state-of-the-art imaging and reluctance to risk investment in technologies; and (3) unwillingness on the part of some operators to assume the risks associated with EOR. DOE is involved in several industry consortia and individual programs, designed to develop EOR, including conducting research and development and educating small producers about EOR. Deepwater and Ultra- Deepwater Drilling Deepwater drilling refers to offshore drilling for oil in depths of water between 1,000 and 5,000 feet, while ultra-deepwater drilling refers to offshore drilling in depths of water between 5,000 and 10,000 feet, according to DOE. The department reported that oil production at these depths involves a number of differences over shallow water drilling, such as drills that operate in extreme conditions, pipes that withstand deepwater ocean currents over long distances, and floating rigs as opposed to fixed rigs. The primary region for domestic deepwater drilling is the Gulf of Mexico, where deepwater drilling has become a major focus in recent years, particularly as near-shore oil production in shallow water has been declining. Globally, deepwater drilling occurs offshore in many locations, including Africa, Asia, and Latin America. Costs vary by rig type, but the three key components of cost for deepwater and ultra-deepwater drilling include the following: (1) the daily vessel rental rate, (2) materials, and (3) drilling services. The average market rate for Gulf of Mexico rigs can range from $210,000 per day to $300,000 per day. Overall, the projected marginal costs of deepwater drilling range from 3.0 to 4.5 times the cost of shallow water drilling. Current deepwater production in the Gulf of Mexico is estimated at 1.3 million barrels per day. Deepwater production in the Gulf of Mexico is projected to exceed 2 million barrels per day in the next 10 years. Commercial deepwater drilling at depths of more than 1,000 feet in the Gulf of Mexico has been under way since the mid-1970s. Companies are currently exploring prospects for drilling in depths of more than 5,000 feet, and since 2001, 11 discoveries of ultra-deepwater wells at depths of more than 7,000 feet have been announced. Examples of some of the key challenges facing the development of deepwater and ultra-deepwater drilling include the following: (1) rig issues, such as finding ways to adapt and use lower-cost rigs and improving the ability to moor vessels in deepwater; (2) drilling equipment reliability at high pressures and temperatures; and (3) reducing the costs of drilling and producing at deepwater and ultra-deepwater depths. DOE is not directly involved in deepwater and ultra-deepwater drilling, but it does fund projects that could impact such drilling. The Energy Policy Act of 2005 authorized some funding for research and development of alternative oil and gas activities, including deepwater drilling. Oil Sands Oil sands are deposits of bitumen, a thick, sticky form of crude oil, which is so heavy and viscous that it will not flow unless heated or diluted with lighter hydrocarbons. It must be rigorously treated to convert it into an upgraded crude oil before it can be used by refineries to produce gasoline and diesel fuels. While conventional crude flows naturally or is pumped from the ground, oil sands must be mined or recovered “in-situ,” or in place. During oil sands mining, approximately 2 tons of oil sands must be dug up, moved, and processed to produce 1 barrel of oil. During in-situ recovery, heat, solvents, or gases are used to produce the oil from oil sands buried too deeply to mine. The largest deposit of oil sands globally is found in Alberta, Canada—accounting for at least 85 percent of the world’s oil sands reserves—although DOE reported that deposits of oil sands can also be found in the United States in Alabama, Alaska, California, Texas, and Utah. Commercial Canadian oil sands are being produced at $18 to $22 per barrel. Key infrastructure costs to support oil sands production in the United States would include construction of roads, pipelines, water, and energy production facilities. The 2005 production of Canadian oil sands yielded 1.6 million barrels of oil per day and production is projected to grow to as much as 3.5 million barrels per day by 2030. Current U.S. production of oil sands currently yields less than 175,000 barrels per year, and future production of U.S. oil sands will depend on the industry’s investment decisions. Production of Canadian oil sands is currently in the commercial phase. U.S. oil sands production is only in the demonstration phase, and adapting Canadian technologies to the characteristics of U.S. oil sands will require time. Examples of key challenges facing the development of oil sands include the following: (1) evaluating and alleviating environmental impacts, particularly concerning water consumption; (2) accessing the federal lands on which most of the U.S. oil sands are located; (3) addressing the increased demand on roads, schools, and other infrastructure that would result from the need to construct production facilities in some remote areas of the west; and (4) addressing the increased need for natural gas, electricity, and water for production. There are currently no federal programs to develop the U.S. oil sands resource, although the Energy Policy Act of 2005 called for the establishment of a number of policies and actions to encourage the development of unconventional oils in the United States, including oil sands. The Bureau of Land Management, which manages most of the federal lands where oil sands occur, maintains an oil sands leasing program. Heavy and Extra- Heavy Oils Heavy and extra-heavy oils are dense, viscous oils that generally require advanced production technologies, such as EOR, and substantial processing to be converted into petroleum products. Heavy and extra- heavy oils differ in their viscosities and other physical properties, but advanced recovery techniques like EOR are required for both types of oil. Heavy and extra-heavy oil reserves occur in many regions around the world, with the Orinoco Oil Belt in Eastern Venezuela comprising almost 90 percent of the total extra-heavy oil in the world. In the United States, heavy oil reserves are primarily found in Alaska, California, and Wyoming, and some commercial heavy oil production is occurring domestically. The cost of producing heavy and extra-heavy oil is greater than the cost of producing conventional oil, due to, among other things, higher drilling, refining, and transporting costs. The 2005 Venezuelan extra-heavy oil production was estimated to be 600,000 barrels of oil per day and is projected to at least sustain this production rate through 2030. In 2004, production of heavy oil in California was 474,000 barrels per day. In December 2005, heavy oil production in Alaska was 42,500 barrels per day, but some project Alaskan production to increase to 100,000 barrels per day in 5 years. Extra-heavy oil production is in the commercial phase in Venezuela. Heavy oil production technologies are currently commercially available and employed in the United States. Development of the heavy oil resource in the United States faces environmental, economic, technical, permitting, and access-to-skilled- labor challenges. There has not been a specific DOE program focused on heavy oil, as most of the research and developments have been handled under the general research umbrella for EOR. The Energy Policy Act of 2005 called for an update of the 1987 technical and economic assessment of heavy oil resources in the United States. Oil Shale Oil shale refers to sedimentary rock that contains solid bituminous materials that are released as petroleum-like liquids when the rock is heated. To obtain oil from oil shale, the shale must be heated and the resultant liquid must be captured, in a process referred to as “retorting.” Oil shale can be produced by mining followed by surface retorting or by in-situ retorting. The largest known oil shale deposits in the world are in the Green River Formation, which covers portions of Colorado, Utah, and Wyoming. Estimates of the oil resource in place range from 1.5 trillion to 1.8 trillion barrels, but not all of the resource is recoverable. In addition to the Green River Formation, Australia and Morocco are believed to have oil shale resources. At the present time, a RAND study reported there are economic and technical concerns associated with the development of oil shale in the United States, such that there is uncertainty regarding whether industry will ultimately invest in commercial development of the resource. On the basis of currently available information, oil shale cannot compete with conventional oil production. At the present time, and given current technologies and information, Shell Oil reports that it may be able to produce oil shale for $25 to $30 per barrel. Infrastructure costs for oil shale production include the following: additional electricity, water, and transportation needs. A RAND study expects a dedicated power plant for the production of oil shale to exceed $1 billion. The Green River Basin is believed to have the potential to produce 3 million to 5 million barrels per day for hundreds of years. Given the current state of the technology and associated challenges, however, it is possible that 10 years from now, the oil shale resource could be producing 0.5 million to 1.0 million barrels per day. Oil shale is not presently in the research and development stage. Shell Oil has the most advanced concept for oil shale, and it does not anticipate making a decision regarding whether to attempt commercialization until 2010. Examples of key challenges facing the development of oil shale include the following: (1) controlling and monitoring groundwater, (2) permitting and emissions concerns associated with new power generation facilities, (3) reducing overall operating costs, (4) water consumption, and (5) land disturbance and reclamation. The Energy Policy Act of 2005 called for the establishment of a number of policies and actions to encourage the development of unconventional oils in the United States, including oil shale. Appendix IV: Key Technologies to Displace Oil Consumption in the Transportation Sector This appendix contains brief profiles of key technologies that could displace U.S. oil consumption in the transportation sector. These technologies include alternative fuels to supplement or substitute for gasoline as well as advanced vehicle technologies to increase fuel efficiency. For each technology, on the basis of information provided by federal experts, we provide a short description, followed by selected information on the costs, potential production or displacement of oil, readiness, key challenges, and current federal involvement. Although some of these technologies are in production or development throughout the world, the following profiles primarily focus on the development of these technologies in the United States. Ethanol Ethanol is a grain alcohol-based, alternative fuel made by fermenting plant sugars. It can be made from many agricultural products and food wastes if they contain sugar, starch, or cellulose, which can then be fermented and distilled into ethanol. Pure ethanol is rarely used for transportation; instead, it is usually mixed with gasoline. The most popular blend for light- duty vehicles is E85, which is 85 percent ethanol and 15 percent gasoline. The technology for producing ethanol, at least from certain feedstocks, is generally well established, and ethanol is currently produced in many countries around the world. In Brazil, the world’s largest producer, ethanol is produced from sugar cane. In the United States, more than 90 percent of ethanol is produced from corn, but efforts are under way to develop methods for producing ethanol from other biomass materials, including forest trimmings and agricultural residues (cellulosic ethanol). Currently, corn ethanol is primarily produced and used across the Midwest. The current cost of producing ethanol from corn is between $0.90 to $1.25 per gallon, depending on the plant size, transportation cost for the corn, and the type of fuel used to provide steam and other energy needs for the plant. The projected cost of producing ethanol from biomass is expected to drop significantly to about $1.07 per gallon by 2012. The current cost of producing of ethanol from biomass is not cost competitive, but by 2012 it is projected to be about $1.07 per gallon. Key infrastructure costs associated with ethanol include retrofitting refueling stations to accommodate E85 (estimated at between $30,000 and $100,000) and constructing or modifying pipelines to transport ethanol. The 2005 production of ethanol in the United States was approximately 4 billion gallons. By 2014-15, corn ethanol production is expected to peak at approximately 9 billion to 18 billion gallons annually. Assuming success with cellulosic ethanol technologies, experts project cellulosic ethanol production levels of over 60 billion gallons by 2025-30. Corn ethanol is commercially produced today and continues to expand rapidly. Cellulosic ethanol is in the demonstration phase, but it is projected to be demonstrated by 2010. For corn ethanol, key challenges include the necessary infrastructure changes to support ethanol distribution and the ability and willingness of consumers to adapt to ethanol. For cellulosic ethanol, several technical challenges still remain, including improving the enzymatic pretreatment, fermentation, and process integration. For cellulosic ethanol, economic challenges are high feedstock and production costs and the initial capital investment. The federal government is currently involved in numerous efforts to develop ethanol. Several federal agencies collaborate with industry to accelerate the technologies, reduce the cost of the technologies, and assist in developing the infrastructure. Biodiesel Biodiesel is a renewable fuel that has similar properties to petroleum diesel, but it can be produced from vegetable oils or animal fats. Like petroleum diesel, biodiesel operates in compression-ignition engines. Blends of up to 20 percent biodiesel (B20) can be used in nearly all diesel equipment and are compatible with most storage and distribution equipment. These low-level blends generally do not require any engine modifications. Higher blends and 100 percent biodiesel (B100) may be used in some engines with little or no modification, although transportation and storage of B100 requires special management. Biodiesel is currently produced and used as a transportation fuel around the world. In the United States, the biodiesel industry is small but growing rapidly, and refueling stations with biodiesel can be found across the country. The current wholesale cost of pure biodiesel (B100) ranges from about $2.90 to $3.20 per gallon, although recent sales have been reported at $2.75 per gallon. To date, there has been limited evaluation of the projected infrastructure costs required for biodiesel. However, it is acknowledged that there are infrastructure costs associated with installation of manufacturing capacity, distribution, and blending of the biodiesel. In 2005, U.S. production of biodiesel was 75 million gallons, and DOE projects about 3.6 billion gallons per year by 2015. Under a more speculative scenario requiring major changes in land use and price supports, experts project it would be possible to produce 10 billion gallons of biodiesel per year. While biodiesel is commercially available, in many ways it is still in development and demonstration. Key areas of focus for development and demonstration include quality, warranty coverage, and impact of air pollutant emissions and compatibility with advanced control systems. Experts project that, with adequate resources, key remaining developments could be resolved in the next 5 years. Initial capital costs are significant and the technical learning curve is steep, which deters many potential investors. Economic challenges are significant for biodiesel. In the absence of the $1 per gallon excise tax, biodiesel would not likely be cost-competitive. DOE is currently collaborating with the biodiesel and automobile industries in funding research and development efforts on biodiesel use, and USDA is conducting research on feedstocks. Coal and Biomass Gas-to-Liquids Gas-to-liquid (GTL) alternatives include the production of liquid fuels from a variety of feedstocks, via the Fisher-Tropsch process. In the Fischer- Tropsch process, feedstocks such as coal and biomass are converted into a syngas, before the gas is converted into a diesel-like fuel. The diesel-like fuel is low in toxicity and is virtually interchangeable with conventional diesel fuels. Although these technologies have been available in some form since the 1920s, and coal GTL was used heavily by the German military during World War II, GTL technologies are not widely used today. Currently, there is no commercial production of biomass GTL and the only commercial production of coal GTL occurs in South Africa, where the Sasol Corporation currently produces 150,000 barrels of fuel from coal per day. Extensive research and development, however, is currently under way to further develop this technology because automakers consider GTL fuels viable alternatives to oil without compromising fuel efficiency or requiring major infrastructure changes. Coal. Construction of a precommercial coal GTL plant is estimated at $1.7 billion, while construction of a commercial coal GTL is estimated at $3.5 billion. Biomass. Potential costs associated with biomass GTL are uncertain, given the early stage of the technology. Infrastructure costs associated with both biomass and coal GTLs are expected to be substantial, given the necessary modifications to pipelines, refueling centers, and storage facilities. Coal. Experts project that, at most, 80,000 barrels per day could be produced by 2015 and 1.7 million barrels per day by 2030. Biomass. Some experts project biomass GTL to have the potential to produce up to approximately 1.4 million barrels-of-oil-equivalent per day by 2030. Coal. Coal GTL is commercially available in South Africa, but the technology has not yet been commercially adopted in the United States. Biomass. Biomass GTL is currently in research and development, nearing the demonstration stage. Experts project that biomass GTL production could be demonstrated at the pilot scale by 2012. Coal. Key challenges facing coal GTL include technology integration, for example integrating various processes with combined cycle turbine and CO Light-duty natural gas vehicles are estimated to cost an additional $1,000 per vehicle. Heavy-duty natural gas vehicles are estimated to cost an additional $10,000 to $30,000 per vehicle. Natural gas refueling stations are estimated to cost $100,000 to $1 million to build, while home fueling appliances cost approximately $2,000 per year. Currently, natural gas vehicles displace approximately 65 million gallons of diesel fuel per year. There is a potential niche market in heavy-duty vehicles for natural gas, which could displace 1,500 million gallons of gasoline per year. Natural gas vehicles are commercially available now, but their overall use is limited on a national scale and production has been declining in recent years. Heavy-duty natural gas vehicles are in the final stages of research and development. Examples of some key challenges facing the adoption of natural gas vehicles include the following: (1) the higher cost of high-pressure fuel tanks for consumers, (2) the costly upgrades to the existing refueling infrastructure, and (3) the availability and cost of natural gas. There is currently no federal funding or research focusing on natural gas vehicles. Advanced Vehicle Technologies Vehicle technologies encompass several different efforts to reduce vehicles’ oil consumption. Increasing the efficiency of the internal combustion engine, specifically advanced diesel engines, is considered a first step toward other engine technologies. For example, researchers are working to improve the emissions profile of advanced diesel engines through techniques such as low-temperature combustion, which would enable the engine to burn more cleanly so that emissions control at the tailpipe is less burdensome. Another set of technologies are hybrid electric and plug-in hybrid electric vehicles. Hybrid vehicles use a battery alongside the internal combustion engine to facilitate the capture of braking energy as well as to provide propulsion, while plug-in hybrids use a different battery and can be powered by battery alone for an extended period. Researchers are examining how to build longer-lasting and less- expensive batteries for hybrid and plug-in hybrid vehicles. Finally, a range of ongoing work is attempting to improve the efficiency of conventional vehicles. For example, lightweight materials have the potential to improve efficiency by reducing vehicle weight. Oil consumption can also be cut by reducing the rolling resistance of tires, increasing the efficiency of transmission technologies that move the energy from the engine to the tires, and improving how power is managed within the vehicle. Advanced diesel engines. DOE does not have information on the potential cost of this technology. Officials told us that this information is proprietary. Hybrid electric and plug-in hybrid vehicles. DOE officials told us that these vehicles can cost several thousand dollars more than conventional vehicles, although some of the incremental cost in hybrid vehicles currently on the market may be related to additional amenities, rather than the hybrid technology. Lightweight materials. DOE officials told us that lightweight carbon fiber materials currently cost approximately $12 to $15 per pound, and that their goal is to reduce this cost to $3 to $5 per pound. Information was not available on costs associated with other technologies to improve conventional vehicle efficiency. DOE estimates that the oil savings that would result from its vehicle technology efforts, including research on internal combustion engines, hybrids, and other vehicle efficiency measures, is 20,000 barrels per day by 2010, up to 1.07 million barrels per day by 2025. DOE was not able to estimate oil savings for plug-in hybrids for fiscal year 2007. Advanced diesel engines. Low-temperature combustion that would reduce the emissions burden of diesel engines is under research and development. Hybrid electric and plug-in hybrid electric vehicles. Hybrid electric vehicles are currently on the market, although research continues on longer-lasting, less expensive batteries for both hybrid and plug-in hybrid electric vehicles. DOE’s goal is to have plug-in hybrids commercially available by 2014, although officials considered this an aggressive goal. Lightweight vehicle materials. Lightweight materials, such as aluminum, magnesium, and polymer composites, have made inroads into vehicle manufacturing. However, research and development are still under way on reducing the costs of these materials. By 2012, DOE aims to make the life- cycle costs of glass- and carbon-fiber-reinforced composites, along with several other lightweight materials, comparable to the costs for conventional steel. Advanced diesel engines. Reducing the emissions of nitrogen oxides and particulate matter to meet government requirements is a key challenge for the diesel engine combustion process. Emissions reduction will help make more efficient advanced diesel engines cost-competitive with gasoline engines because it will reduce the cost and energy consumption of tailpipe emissions treatment. Hybrid electric and plug-in hybrid electric vehicles. Battery cost is one of the central challenges for hybrid electric and plug-in hybrid electric vehicles. DOE officials told us that their goal is to reduce the cost of a battery pack for a hybrid electric vehicle from approximately $920 today to $500 by 2010. Technological challenges include extending the life of the battery pack to last the life of the car, and improving power electronics in the vehicle. Researchers are using lithium-ion and lithium polymer chemistries in the next generation of batteries, instead of the current nickel metal hydride. Officials told us that plug-in hybrids face infrastructure challenges, such as the capacity of household electric wiring systems to recharge a plug-in, and the capacity of the electricity grid if plug-in hybrids are widely adopted. Battery lifetime and cost are also challenges for plug-in hybrids. Lightweight vehicles. The cost of lightweight materials is the largest barrier to their widespread adoption. In addition, manufacturing capacity for lightweight materials occurs primarily in the aerospace industry and is not available for producing automotive components for lightweight materials. Advanced diesel engines. DOE currently conducts research into combustion technology. For example, federal funds are supporting fundamental research to understand low-temperature combustion technology, and the industry is attempting to establish the operating parameters of an engine that facilitate low-temperature combustion. Hybrid electric and plug-in hybrid electric vehicles. DOE’s FreedomCAR program sponsors research that supports the development of hybrid vehicles, specifically with respect to improving the performance, and reducing the cost, of electric batteries. Lightweight vehicles. DOE currently funds research and development on lightweight materials. Hydrogen Fuel Cell Vehicles A hydrogen fuel cell vehicle is powered by the electricity produced from an electrochemical reaction between hydrogen from a hydrogen- containing fuel and oxygen from the air. A fuel cell power system has many components, the key one being the fuel cell “stack,” which is many thin, flat cells layered together. Each cell produces energy and the output of all of the cells is used to power a vehicle. Currently, hydrogen fuel cell vehicles are still under development in the United States, and a number of challenges remain for them to become commercially viable. In the United States, government and industry are working on research and demonstration efforts, to facilitate the development and commercialization of hydrogen fuel cell vehicles. Because hydrogen fuel cells are still in an early stage of development, the ultimate cost of hydrogen fuel cells is uncertain, but the goal is to make them competitive with gasoline-powered vehicles. A fuel cell stack currently costs about $35,000, and a hydrogen fuel cell vehicle about $100,000. An ongoing cost-share effort between the federal government and the industry is working toward price targets of $2 to $3 per gallon of gasoline equivalent for hydrogen at the refueling station. Federal experts project that hydrogen fuel cell vehicles could have the potential to displace 0.28 million barrels per day by 2025. Hydrogen fuel cell vehicle technologies are still in research, development, and demonstration. Federal experts project that the technology is not likely to be commercially viable before 2015. Key challenges facing the commercialization of hydrogen fuel cell vehicles include the following: (1) hydrogen storage; (2) cost and durability of the fuel cell; and (3) infrastructure costs for producing, distributing, and delivering hydrogen. The federal government conducts research with industry to improve the feasibility of the technology and reduce the costs. The government facilitates information-sharing among industry leaders by analyzing sensitive information on hydrogen fuel cell performance from leading automotive and oil companies. Appendix V: Comments from the Department of Energy The following are GAO’s comments on the Department of Energy’s letter dated February 7, 2007. GAO Comments 1. We agree that we have not defined a peak as either a peak in conventional or total oil—conventional plus nonconventional. In the course of our study, we found that experts conducting the timing of peak oil studies also do not agree on a single peak concept. Different studies by these experts use different estimates for oil remaining and, as a result, implicitly have different concepts of a peak—a conventional versus a total oil peak. We have added language to the report to clarify this point. The lack of agreement on a peak concept mirrors the disagreement about the very definition of conventional oil versus nonconventional oil. The distinction regarding what portion of heavy oil is conventional is debated by experts. For example, USGS would consider the heavy oil produced in California as conventional oil, while IEA would not—the latter considers all heavy (and extra- heavy) oil to be nonconventional. For the purposes of this report, we have adopted IEA’s definition of nonconventional oil, which includes all heavy oil. 2. We agree that the use of heavy and extra-heavy oil may be confusing in sections of this report, and we have implemented some of the suggestions that DOE provided in their technical comments. 3. With regard to the inclusion of some ethanol in petroleum consumption as reported on page 1 of the report, we asked EIA staff to identify how much of such nonpetroleum liquids are in the figure. They told us that just under one-third of 1 percent of the world petroleum consumption data they report is comprised of ethanol, and we noted this in a footnote on page 1 of the report. We decided to continue to call it petroleum consumption, rather than “liquids consumption” as suggested by DOE because the former is what EIA calls it and because the nonpetroleum component is so small. 4. We agree that our language regarding the use of oil consumption and oil demand is confusing in some sections of the report. Overall, the report makes the point that, all other things equal, the faster the world consumes oil, the sooner we will use up the oil and reach a peak. The report also makes the point that future demand for oil, which depends on many factors, including world economic growth, will determine just how fast we consume oil. We have made some changes to the text to clarify when we are talking about consumption of oil and when we are talking about the demand for oil. 5. We do not disagree that the environmental costs of EOR are lower than for some of the other technologies examined, and we did not try to rank the environmental costs of all the alternatives we examined. However, we believe that these costs are relevant for assessing the potential impacts of producing more of our oil using such technologies. Therefore, we left that discussion in the report but added language attributing DOE’s views on this. 6. We agree with DOE’s assessment that there is a broader range of transportation technologies besides those used to power autonomous vehicles. We chose to focus on the technologies that experts currently believe have the most potential for reducing oil consumption in the light-duty vehicle sector, which accounts for 60 percent of the transportation sector’s consumption of petroleum-based energy. We encourage DOE and other agencies to consider the full range of oil- displacing technologies as they implement our recommendations to develop a strategy to reduce uncertainty about the timing of a peak in oil production and advise Congress on cost-effective ways to mitigate the consequences of such a peak. Appendix VI: Comments from the Department of the Interior The following are GAO’s comments on the Department of the Interior’s letter dated February 14, 2007. GAO Comments 1. We agree that DOE and Interior will both play a vital role in implementing our recommendation. We have made the appropriate wording change to the Highlights page of the report to clarify that our recommendation is that DOE work in conjunction with other key agencies to establish a strategy to coordinate and prioritize federal agency efforts to reduce the uncertainty surrounding the timing of a peak and to advise Congress on how best to mitigate consequences. 2. We agree that mitigating the consequences of a peak is outside the purview of Interior. The examples cited highlight the areas where Interior can help reduce the uncertainty surrounding the estimates of global resources. We have changed the wording accordingly to make this distinction clear. Appendix VII: GAO Contact and Staff Acknowledgments Staff Acknowledgments In addition to the contact person named above, Mark Gaffigan, Acting Director; Frank Rusco, Assistant Director; Godwin Agbara; Vipin Arora; Virginia Chanley; Mark Metcalfe; Cynthia Norris; Diahanna Post; Rebecca Sandulli; Carol H. Shulman; Barbara Timmerman; and Margit Willems- Whitaker made key contributions to this report.
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The U.S. economy depends heavily on oil, particularly in the transportation sector. World oil production has been running at near capacity to meet demand, pushing prices upward. Concerns about meeting increasing demand with finite resources have renewed interest in an old question: How long can the oil supply expand before reaching a maximum level of production--a peak--from which it can only decline? GAO (1) examined when oil production could peak, (2) assessed the potential for transportation technologies to mitigate the consequences of a peak in oil production, and (3) examined federal agency efforts that could reduce uncertainty about the timing of a peak or mitigate the consequences. To address these objectives, GAO reviewed studies, convened an expert panel, and consulted agency officials. Most studies estimate that oil production will peak sometime between now and 2040. This range of estimates is wide because the timing of the peak depends on multiple, uncertain factors that will help determine how quickly the oil remaining in the ground is used, including the amount of oil still in the ground; how much of that oil can ultimately be produced given technological, cost, and environmental challenges as well as potentially unfavorable political and investment conditions in some countries where oil is located; and future global demand for oil. Demand for oil will, in turn, be influenced by global economic growth and may be affected by government policies on the environment and climate change and consumer choices about conservation. In the United States, alternative fuels and transportation technologies face challenges that could impede their ability to mitigate the consequences of a peak and decline in oil production, unless sufficient time and effort are brought to bear. For example, although corn ethanol production is technically feasible, it is more expensive to produce than gasoline and will require costly investments in infrastructure, such as pipelines and storage tanks, before it can become widely available as a primary fuel. Key alternative technologies currently supply the equivalent of only about 1 percent of U.S. consumption of petroleum products, and the Department of Energy (DOE) projects that even by 2015, they could displace only the equivalent of 4 percent of projected U.S. annual consumption. In such circumstances, an imminent peak and sharp decline in oil production could cause a worldwide recession. If the peak is delayed, however, these technologies have a greater potential to mitigate the consequences. DOE projects that the technologies could displace up to 34 percent of U.S. consumption in the 2025 through 2030 time frame, if the challenges are met. The level of effort dedicated to overcoming challenges will depend in part on sustained high oil prices to encourage sufficient investment in and demand for alternatives. Federal agency efforts that could reduce uncertainty about the timing of peak oil production or mitigate its consequences are spread across multiple agencies and are generally not focused explicitly on peak oil. Federally sponsored studies have expressed concern over the potential for a peak, and agency officials have identified actions that could be taken to address this issue. For example, DOE and United States Geological Survey officials said uncertainty about the peak's timing could be reduced through better information about worldwide demand and supply, and agency officials said they could step up efforts to promote alternative fuels and transportation technologies. However, there is no coordinated federal strategy for reducing uncertainty about the peak's timing or mitigating its consequences.
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It is contended that neither the plaintiff in the pending suit nor the bondholders whom it represents were parties or privies to the actions in the state court; that therefore the judgments of the latter court were not conclusive in the foreclosure proceeding as to the nature of the causes of action; that whether they were for torts or breaches of contracts is for the determination of the Federal court, and further, that when the property passed from the old to the new water company, it passed subject to the fifty-thousand dollar mortgage, and that under this statute, if applicable at all, only the interest in the property acquired by the second water company was responsible for the damages caused by its negligence. On the other hand, it is contended that the statute deals with judgments,—not claims for damages caused by negligence; that the decision of the state court as to the nature of the cause of action is as much a part of the judgment as the determination of the amount to be recovered; that a judgment which in terms is for damages caused by negligence, if entered by a court having jurisdiction, is made by the statute superior to any mortgage; that, by the mortgage, the mortgagee and the bondholders it represents agree to accept such judgment as conclusive, and to subordinate their mortgage to its lien; that to hold that the transfer of property encumbered by a mortgage from one company to another puts that mortgage outside the statute practically destroys its beneficial intent; that such has been the holding of the supreme court of the state, and is a holding which the Federal courts will follow. We shall assume, without deciding, that the nature of the causes of action upon which the state judgments were rendered is open for consideration in the Federal court in the foreclosure proceeding. The statute subordinates the mortgage to judgments for torts. Now, what is the judgment? It is a determination that, upon the facts stated, the plaintiff is entitled to recover so much money. It may not be essential that it recite whether the facts stated show a breach of contract or a tort, but it is essential that the judgment should be considered as a determination that, upon those facts, the plaintiff is entitled to recover. And it must be assumed that under the statute the mortgagee and the bondholders it represents agree to accept the judgment as conclusive in this respect, or, if not conclusive, at least prima facie evidence. In this foreclosure proceeding the record of the proceedings in the state courts was introduced in evidence. Taking the Fisher Case, for illustration, the complaint set out fully the contract made between the city of Greensboro and the water company, and the proceedings by which the title to the property passed from the one company to the other; alleged the destruction by fire of the plaintiff's property, and that he was free from all negligence in the matter. It added: 'The plaintiff alleges, . . . that the defendant company was culpably negligent and wilfully careless of its duty and obligations, both to the city of Greensboro and its inhabitants, under the said contract, and by virtue also of the duties, obligations, and responsibilities which it assumed when it undertook to supply water to the city of Greensboro and its inhabitants for a stipulated price, which was paid to it by the said city.' It then set forth as matters of negligence on the part of the water company the 'carelessly, wilfully, and negligently failing to keep a sufficient quantity of water in its storage water tank in the said city of Greensboro, necessary for the purpose of extinguishing fire, together with the other uses to which it was applied;' also a failure 'to keep its pumping engine ready at all times, and particularly on the day of the fire above referred to, to supply the needed fire pressure, in that it negligently failed to keep a suitable person at said engine or pumping house, or near the same, for the purpose of responding to the demands for water for the extinguishment of fire, and especially did it fail so to do at the time the property of the plaintiff was burned;' and closed with this averment: 'That it was through no fault of the plaintiff that the said fire occurred, or that the same was not immediately extinguished; but that the negligence and omissions of duty, heretofore complained of on the part of the defendant company, was the proximate cause of the destruction of his property, whereby the defendant company becomes liable therefor.' The answer consisted mainly of denials in separate paragraphs of the averments in corresponding paragraphs of the complaint, specifically denying the validity of the contracts between the city and the original water company. Questions were submitted to the jury and answers returned, establishing the making of the contracts, the attempt on the part of the company to perform its stipulations, its failure to do so successfully, and also that the plaintiff was injured by the negligence of the defendant. Upon this record the supreme court of North Carolina ruled that the action was one in tort, saying: 'We think the plaintiff was entitled to judgment as prayed for. There was an express and legal obligation upon the part of the defendant to provide and furnish ample protection against fires, and a breach of that obligation and a consequential damage to the plaintiff. Although action may have been maintained upon a promise implied by law, yet an action founded in tort was the more proper form of action, and the plaintiff so declared. He stated the facts out of which the legal obligation arose, fully, and also the obligation itself, and the breach of it, and the damage resulting from that breach. 1 Chitty, Pl. 155; 5 Thomp. Corp. § 6340.' 128 N. C. 375, 379, 38 S. E. 912. From the conclusion thus reached we are not inclined to dissent, and for these reasons: One may acquire by contract an opportunity for acts and conduct in which parties other than those with whom he contracts are interested, and for negligence in which he is liable in damages to such other parties. A company is chartered to construct and operate a railroad. Proceeding thereunder it constructs and operates its road. Nothing may be said in the charter in reference to the manner in which the road shall be operated or the particular acts which it must do. Yet, without any such specification, it is under an implied obligation to exercise reasonable care in both construction and operation. If, from undue speed, failure to give proper warnings, or other like acts or omissions, individuals are injured, they may recover for such injuries, and their actions to recover sound in tort. Doubtless in the same transaction there may be negligence and breach of contract. If a railroad company contracts to carry a passenger, there is an implied obligation that he will be carried with reasonable care for his safety. A failure to exercise such care, resulting in injury to the passenger, gives rise to an action ex contractu for breach of the contract, or as well to an action for the damages on account of the negligence,—an action sounding in tort. But where there is no contract, and the injuries result from a failure of the corporation to exercise reasonable care in the discharge of the duties of its public calling, actions to recover therefor are strictly and solely actions ex delicto. Pollock, in his treatise, groups torts into three classes, in the last of which he specifies 'breach of absolute duties specially attached to the occupation of fixed property, to the ownership and custody of dangerous things, and to the exercise of certain public callings.' Webb's Pollock, Torts, p. 7. This, it is said, implies the existence of some absolute duty not arising from personal contract with the other party to the action. And here we are met with the contention that, independently of contract, there is no duty on the part of the water company to furnish an adequate supply of water; that the city owes no such duty to the citizen, and that contracting with a company to supply water imposes upon the company no higher duty than the city itself owed, and confers upon the citizen no greater right against the company than it had against the city; that the matter is solely one of contract between the city and the company, for any breach of which the only right of action is one ex contractu on the part of the city. It is true that a company contracting with a city to construct waterworks and supply water may fail to commence performance. Its contractual obligations are then with the city only, which may recover damages, but merely for breach of contract. There would be no tort, no negligence, in the total failure on the part of the company. It may also be true that no citizen is a party to such a contract, and has no contractual or other right to recover for the failure of the company to act; but, if the company proceeds under its contract, constructs and operates its plant, it enters upon a public calling. It occupies the streets of the city, acquires rights and privileges peculiar to itself. It invites the citizens, and if they avail themselves of its conveniences, and omit making other and personal arrangements for a supply of water, then the company owes a duty to them in the descharge of its public calling, and a neglect by it in the discharge of the obligations imposed by its charter, or by contract with the city, may be regarded as a breach of absolute duty, and recovery may be had for such neglect. The action, however, is not one for breach of contract, but for negligence in the discharge of such duty to the public, and is an action for a tort. 'The fact that a wrongful act is a breach of a contract between the wrongdoer and one person does not exempt him from the responsibility for it as a tort to a third person injured thereby.' Osborne v. Morgan, 130 Mass. 102, 104, 39 Am. Rep. 437. See also Emmons v. Alvord, 177 Mass. 466, 470, 59 N. E. 126. An individual may be under no obligation to do a particular thing, and his failure to act creates no liability; but if he voluntarily attempts to act and do the particular thing, he comes under an implied obligation in respect to the manner in which he does it. A surgeon, for instance, may be under no obligation, in the absence of contract, to assume the treatment of an injured person, but if he does undertake such treatment, he assumes likewise the duty of reasonable care in such treatment. The owner of a lot is not bound to build a house or store thereon, but if he does so he comes under an implied obligation to use reasonable care in the work to prevent injury therefrom to others. Holmes, Common Law, p. 278. Even if the water company was under no contract obligations to construct waterworks in the city or to supply the citizens with water, yet, having undertaken to do so, it comes under an implied obligation to use reasonable care; and if, through its negligence, injury results to an individual, it becomes liable to him for the damages resulting therefrom, and the action to recover is for a tort, and not for breach of contract. With reference to the contention that only the interest in the property required by the second water company was responsible for the damages caused by its negligence,—a contention which, if sustained, would result in giving priority to the fifty-thousand dollar mortgage,—the argument is that by the statute 'mortgages of incorporate companies . . . shall not have power to exempt the property or earnings of such incorporations . . . for torts committed by such incorporation;' that the torts were committed by the second water company; that its purchase was of the property of the first company, subject to the fifty-thousand dollar mortgage, and therefore over that property thus encumbered, and that only, were the judgments given priority. There is, doubtless, force in this contention. But this is not a penal statute, to be construed strictly, but remedial in its nature, and to be construed liberally, to carry into effect the intention of the legislature and provide the adequate remedy which it intended. Theobvious purpose was to make the corporate property situate in the state security against torts committed by its owner, and it would materially impair, if not wholly destroy, the statute, and thus set at naught that purpose, if the corporation constructing the plant could place a mortgage thereon for its entire value, and then, by sale, to a new corporation, enable the purchaser to use that property discharged of all substantial responsibility. In reference to a kindred question arising under the same statute, the supreme court of North Carolina said in Wilmington & W. R. Co. v. Burnett, 123 N. C. 210, 214, 31 S. E. 602, that under such construction 'this statute would be a false light held out to such claimants to induce them to furnish material and labor,—thinking they had a security, when in fact they had none.' It is more reasonable to hold that the statute imposes upon the investment made by a corporate company in its plant a responsibility for torts committed by it or any subsequent corporate owner, and that that responsibility cannot be avoided by any mortgage or other encumbrance voluntarily placed upon the property. Security to the individual citizen is to go hand in hand with the franchise and privilege granted by the state. We see no other question requiring notice, and the decree of the Circuit Court is affirmed. Mr. Justice White, Mr. Justice Peckham, and Mr. Justice McKenna dissented.
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Section 1255 of the Code of North Carolina of 1883 provides that mortgages of corporations shall not exempt the property mortgaged from execution for judgments obtained in the state courts against the corporation for torts and certain other causes. A corporation constructed a plant for supplying a city with water, having received exclusive authority therefor from the city. It executed two mortgages, under the foreclosure of the second of which its plant was sold, subject to the first mortgage, to a new corporation, which then executed a further mortgage. Subsequently judgments were rendered in actions brought by property-owners against the new corporation for damages caused, as charged in the conplaints and recited in the judgments by its negligence. On foreclosure of the outstanding mortgages the holders of these judgments were given priority over the mortgagees, notwithstanding the contention of the latter that the property owners had no contractual relations with, or right to maintain these actions against, the water company, that the judgments were not conclusive, the mortgagees not being parties thereto, and that only the equity acquired by the new company was subject to any judgment lien. In affirming the decision, held that: Under the statute the mortgagees agreed to accept the judgments as conclusive of the amounts due. And the record, showing that negligence was alleged in the complaints and adjudged by the state court, discloses judgments in actions of tort. One may by contract acquire an opportunity for acts and conduct in which parties other than those with whom he contracts are interested and for negligence in which he is liable to such other parties. While a citizen may have no individual claim against a company contracting to supply water to a city for its failure to do anything under the contract, he may have a claim against it, after it has entered upon a contract and is engaged in supplying the city with water, for damages resulting from negligence and in such a case the action is not for breach of contract but for a tort. Section 1255 is not a penal statute, but remedial, and should be liberally construed to give effect to the intent of the legislature to make the property of corporations security against its torts, and imposes upon the plant of a corporation responsibility for torts which cannot be avoided by a conveyance to a new corporation.
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SECTION 1. SHORT TITLE.
This Act may be cited as the ``Ensuring Small Businesses Can Export
Act of 2015''.
SEC. 2. FINDINGS.
(a) In General.--Congress finds that--
(1) the Export-Import Bank of the United States
administers--
(A) the Working Capital Loan Guarantee Program,
which--
(i) facilitates finance for businesses, in
particular small businesses, that have
exporting potential but need working capital
funds to produce or market goods or services
for export;
(ii) provides repayment guarantees to
lenders on short- and medium-term working
capital loans made to qualified exporters,
which loans are secured by export-related
accounts receivable and inventory;
(iii) provides a guarantee of up to 90
percent of the principal and interest on a loan
made to an exporter by a private lender for
export-related accounts receivable; and
(iv) provides a guarantee of up to 75
percent for export-related inventory;
(B) the Global Credit Express Loan Program, which
provides direct working capital loans to small
businesses for a 6- or 12-month revolving line of
credit of not more than $500,000; and
(C) the Export Credit Insurance Program, which--
(i) extends credit terms to foreign
customers;
(ii) insures against nonpayment by
international buyers;
(iii) covers both commercial and political
losses with a 95-percent guarantee; and
(iv) arranges financing through a lender by
using insured receivables as additional
collateral;
(2) the export loan programs of the Export-Import Bank of
the United States described in subparagraphs (A), (B), and (C)
of paragraph (1) are less appealing to small businesses due to
lending restrictions on loans under those programs, which
provide that--
(A) the loans may not be used when the export
product being financed has less than 50-percent United
States content;
(B) the loans may not be used to finance sales to
foreign military buyers, with which a growing number of
small businesses are contracting; and
(C) contracts and purchase orders supported by
letters of credit may not be used in determining the
borrowing base; and
(3) the Small Business Administration administers--
(A) the Export Working Capital Program, established
under section 7(a)(14) of the Small Business Act (15
U.S.C. 636(a)(14)), which provides short-term working
capital, including revolving lines of credit, of not
more than $5,000,000 with a 90-percent guarantee;
(B) the International Trade Loan Program,
established under section 7(a)(16) of the Small
Business Act (15 U.S.C. 636(a)(16)), which provides
financing of not more than $5,000,000 with a 90-percent
guarantee for fixed assets, or to improve a competitive
position that has been adversely affected by import
competition; and
(C) the Export Express Program, established under
7(a)(34) of the Small Business Act (15 U.S.C.
636(a)(34)), under which--
(i) exporters are provided with a
streamlined method to obtain financing backed
by the Small Business Administration for loans
and lines of credit of not more than $500,000;
(ii) lenders use their own credit decision
process and loan documentation;
(iii) the Small Business Administration
determines eligibility and provides a loan
approval in 36 hours or less; and
(iv) the guarantee is 90 percent for a loan
that is not more than $350,000 and 75 percent
for a loan that is more than $350,000 and not
more than $500,000.
(b) Additional Findings.--Congress further finds that--
(1) the export loan programs of the Small Business
Administration described in subparagraphs (A), (B), and (C) of
subsection (a)(3)--
(A) are not restricted by the limitations described
in subparagraphs (A), (B), and (C) of subsection
(a)(2); and
(B) should be commended for their flexibility,
quick turnaround times, and the one-on-one assistance
from Small Business Administration personnel in
structuring loan deals, negotiating payment terms, and
ensuring that the financial needs of small businesses
are met;
(2) the Export-Import Bank of the United States only has
Regional Export Finance Managers co-located in 12 Department of
Commerce United States Export Assistance Centers, whereas the
Small Business Administration--
(A) has Regional Export Finance Managers co-located
in 20 United States Export Assistance Centers; and
(B) currently has Regional Export Finance Managers
co-located in 10 additional United States Export
Assistance Center locations that the Export-Import Bank
of the United States does not, including in--
(i) Arlington, Virginia;
(ii) Boston, Massachusetts;
(iii) Charlotte, North Carolina;
(iv) Cleveland, Ohio;
(v) Denver, Colorado;
(vi) Los Angeles, California;
(vii) New Orleans, Louisiana;
(viii) Philadelphia, Pennsylvania;
(ix) Portland, Oregon; and
(x) St. Louis, Missouri;
(3) the Small Business Jobs Act of 2010 (15 U.S.C. 631
note) increased the maximum loan size under the 2 largest
export loan programs administered by the Small Business
Administration to $5,000,000, which could cover approximately
80 percent of all small business export loans currently
guaranteed by taxpayers through the Export-Import Bank of the
United States;
(4) the export loan programs administered by the Small
Business Administration and the export loan programs
administered the Export-Import Bank of the United States are--
(A) duplicative of each other, except for the
Export Credit Insurance Program of the Export-Import
Bank of the United States; and
(B) under the current structure, competing against
each other for small business clients; and
(5) the Export Credit Insurance Program of the Export-
Import Bank of the United States is a vital component of export
loan programs.
(c) Declaration of Policy.--It is hereby declared to be the policy
of this Act--
(1) that, should the statutory authority for the export
loan programs administered by the Export-Import Bank of the
United States lapse, the Small Business Administration shall
serve the small business clients of the Export-Import Bank of
the United States under existing statutory authority of the
Small Business Act (15 U.S.C. 631 et seq.);
(2) to create an Export Credit Insurance Program within the
Small Business Administration similar to the Export Credit
Insurance Program of the Export-Import Bank of the United
States; and
(3) to ensure that small business exporters are served by
the programs of the Small Business Administration.
SEC. 3. EXPORT CREDIT INSURANCE PROGRAM.
Section 22 of the Small Business Act (15 U.S.C. 649) is amended--
(1) by redesignating subsection (l) as subsection (m); and
(2) by inserting after subsection (k) the following:
``(l) Export Credit Insurance Program.--
``(1) In general.--The Administrator shall establish a
program under which the Administration shall provide insurance
for the exports of small business concerns, including insurance
against nonpayment by international buyers.
``(2) Regulations.--Not later than 90 days after the date
of enactment of this subsection, the Administrator shall
promulgate regulations to carry out the program established
under paragraph (1), which shall be, to the maximum extent
practicable, substantially similar to the Export Credit
Insurance Program of the Export-Import Bank of the United
States, as in effect on the day before the date of enactment of
this subsection.''.
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Ensuring Small Businesses Can Export Act of 2015 This bill declares that it is the policy of this Act: that, should the statutory authority for the export loan programs administered by the Export-Import Bank of the United States lapse, the Small Business Administration (SBA) shall serve the Bank's small business clients under existing statutory authority of the Small Business Act; to create an SBA Export Credit Insurance Program similar to the Bank's; and to ensure that small business exporters are served by SBA programs. The bill also amends the Small Business Act to require the SBA to establish a program to provide insurance for the exports of small businesses, including insurance against nonpayment by international buyers.
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SECTION 1. SHORT TITLE.
This Act may be cited as the ``Tax Accountability Act of 2017''.
SEC. 2. PROHIBITION ON AWARD OF CONTRACT OR GRANT IN EXCESS OF
SIMPLIFIED ACQUISITION THRESHOLD TO POTENTIAL CONTRACTOR
OR GRANT APPLICANT WITH SERIOUSLY DELINQUENT TAX DEBT.
(a) Governmental Policy.--It is the policy of the United States
Government that no Government contracts or grants should be awarded to
individuals or companies with seriously delinquent Federal tax debts.
(b) Disclosure and Evaluation of Contract Offers From Delinquent
Federal Debtors.--
(1) In general.--The head of any executive agency that
issues a solicitation for bids or a request for proposals for a
contract in an amount greater than the simplified acquisition
threshold shall require each person that submits a bid or
proposal to submit with the bid or proposal a form--
(A) certifying whether such person has a seriously
delinquent tax debt; and
(B) authorizing the Secretary of the Treasury to
disclose to the head of the agency information limited
to describing whether the person has a seriously
delinquent tax debt.
(2) Impact on responsibility determination.--The head of
any executive agency, in evaluating any offer received in
response to a solicitation issued by the agency for bids or
proposals for a contract, shall consider a certification that
the offeror has a seriously delinquent tax debt to be
definitive proof that the offeror is not a responsible source
as defined in section 113 of title 41, United States Code.
(3) Debarment.--
(A) Requirement.--Except as provided in
subparagraph (B), the head of an executive agency shall
initiate a suspension or debarment proceeding against a
person after receiving an offer for a contract from
such person if--
(i) such offer contains a certification (as
required under paragraph (1)(A)) that such
person has a seriously delinquent tax debt; or
(ii) the head of the agency receives
information from the Secretary of the Treasury
(as authorized under paragraph (1)(B))
demonstrating that such a certification
submitted by such person is false.
(B) Waiver.--The head of an executive agency may
waive subparagraph (A) with respect to a person based
upon a written finding of urgent and compelling
circumstances significantly affecting the interests of
the United States. If the head of an executive agency
waives subparagraph (A) for a person, the head of the
agency shall submit to the Committee on Oversight and
Government Reform of the House of Representatives and
the Committee on Homeland Security and Governmental
Affairs of the Senate, within 30 days after the waiver
is made, a report containing the rationale for the
waiver and relevant information supporting the waiver
decision.
(4) Release of information.--The Secretary of the Treasury,
in consultation with the Director of the Office of Management
and Budget, shall make available to all executive agencies a
standard form for the authorization described in paragraph
(1)(B).
(5) Revision of regulations.--Not later than 270 days after
the date of the enactment of this Act, the Federal Acquisition
Regulation shall be revised to incorporate the requirements of
this section.
(c) Disclosure and Evaluation of Grant Applications From Delinquent
Federal Debtors.--
(1) In general.--The head of any executive agency that
offers a grant in excess of an amount equal to the simplified
acquisition threshold shall require each grant applicant to
submit with the grant application a form--
(A) certifying whether such applicant has a
seriously delinquent tax debt; and
(B) authorizing the Secretary of the Treasury to
disclose to the head of the agency information limited
to describing whether the applicant has a seriously
delinquent tax debt.
(2) Impact on determination of financial stability.--The
head of any executive agency, in evaluating any application for
a grant offered by the agency, shall consider a certification
under paragraph (1)(A) that the grant applicant has a seriously
delinquent tax debt to be definitive proof that the applicant
is high-risk and shall--
(A) decline the grant application;
(B) ensure that the applicant does not receive any
future grant offered by the agency; and
(C) in the case of an applicant that has, as of the
date on which the grant application is denied under
subparagraph (A), an existing grant previously awarded
by the agency, take appropriate measures under
guidelines issued by the Office of Management and
Budget pursuant to paragraph (5) for enhanced oversight
of the applicant.
(3) Debarment.--
(A) Requirement.--Except as provided in
subparagraph (B), the head of an executive agency shall
initiate a suspension or debarment proceeding against a
grant applicant after receiving a grant application
from such applicant if--
(i) such application contains a
certification (as required under paragraph
(1)(A)) that such applicant has a seriously
delinquent tax debt; or
(ii) the head of the agency receives
information from the Secretary of the Treasury
(as authorized under paragraph (1)(B))
demonstrating that such a certification
submitted by such applicant is false.
(B) Waiver.--The head of an executive agency may
waive subparagraph (A) with respect to an applicant
based upon a written finding of urgent and compelling
circumstances significantly affecting the interests of
the United States. If the head of an executive agency
waives subparagraph (A) for an applicant, the head of
the agency shall submit to the Committee on Oversight
and Government Reform of the House of Representatives
and the Committee on Homeland Security and Governmental
Affairs of the Senate, within 30 days after the waiver
is made, a report containing the rationale for the
waiver and relevant information supporting the waiver
decision.
(4) Release of information.--The Secretary of the Treasury,
in consultation with the Director of the Office of Management
and Budget, shall make available to all executive agencies a
standard form for the authorization described in paragraph
(1)(B).
(5) Revision of regulations.--Not later than 270 days after
the date of the enactment of this Act, the Director of the
Office of Management and Budget shall revise such regulations
as necessary to incorporate the requirements of this section.
(d) Definitions and Special Rules.--For purposes of this section:
(1) Executive agency.--The term ``executive agency'' has
the meaning given such term in section 133 of title 41, United
States Code.
(2) Seriously delinquent tax debt.--
(A) In general.--The term ``seriously delinquent
tax debt'' means a Federal tax liability that--
(i) has been assessed by the Secretary of
the Treasury under the Internal Revenue Code of
1986; and
(ii) may be collected by the Secretary by
levy or by a proceeding in court.
(B) Exceptions.--Such term does not include--
(i) a debt that is being paid in a timely
manner pursuant to an agreement under section
6159 or section 7122 of such Code;
(ii) a debt with respect to which a
collection due process hearing under section
6330 of such Code, or relief under subsection
(a), (b), or (f) of section 6015 of such Code,
is requested or pending;
(iii) a debt with respect to which a
continuous levy has been issued under section
6331 of such Code (or, in the case of an
applicant for employment, a debt with respect
to which the applicant agrees to be subject to
such a levy); and
(iv) a debt with respect to which such a
levy is released under section 6343(a)(1)(D) of
such Code.
(e) Effective Date.--This section shall apply with respect to
contracts and grants awarded on or after the date occurring 270 days
after the date of the enactment of this Act.
SEC. 3. INELIGIBILITY OF NONCOMPLIANT TAXPAYERS FOR FEDERAL EMPLOYMENT.
(a) In General.--Chapter 73 of title 5, United States Code, is
amended by adding at the end the following:
``SUBCHAPTER VIII--INELIGIBILITY OF NONCOMPLIANT TAXPAYERS FOR FEDERAL
EMPLOYMENT
``Sec. 7381. Definitions
``For purposes of this subchapter--
``(1) The term `seriously delinquent tax debt' means a
Federal tax liability that has been assessed by the Secretary
of the Treasury under the Internal Revenue Code of 1986 and may
be collected by the Secretary by levy or by a proceeding in
court, except that such term does not include--
``(A) a debt that is being paid in a timely manner
pursuant to an agreement under section 6159 or section
7122 of such Code;
``(B) a debt with respect to which a collection due
process hearing under section 6330 of such Code, or
relief under subsection (a), (b), or (f) of section
6015 of such Code, is requested or pending;
``(C) a debt with respect to which a continuous
levy has been issued under section 6331 of such Code
(or, in the case of an applicant for employment, a debt
with respect to which the applicant agrees to be
subject to such a levy); and
``(D) a debt with respect to which such a levy is
released under section 6343(a)(1)(D) of such Code;
``(2) the term `employee' means an employee in or under an
agency, including an individual described in sections 2104(b)
and 2105(e); and
``(3) the term `agency' means--
``(A) an Executive agency;
``(B) the United States Postal Service;
``(C) the Postal Regulatory Commission; and
``(D) an employing authority in the legislative
branch.
``Sec. 7382. Ineligibility for employment
``(a) In General.--Subject to subsection (c), an individual is
ineligible to be appointed or to continue serving as an employee if
such individual--
``(1) has a seriously delinquent tax debt;
``(2) does not submit the certification required under
subsection (b); or
``(3) does not submit an authorization form requested under
section 7383(b)(1).
``(b) Disclosure Requirement.--The head of each agency shall take
appropriate measures to ensure that each individual applying for
employment with such agency shall be required to submit (as part of the
application for employment) certification that such individual does not
have any seriously delinquent tax debt.
``(c) Regulations.--The Office of Personnel Management, in
consultation with the Internal Revenue Service, shall, for purposes of
carrying out this section with respect to the executive branch,
promulgate any regulations which the Office considers necessary, except
that such regulations shall provide for the following:
``(1) All applicable due process rights, afforded by
chapter 75 and any other provision of law, shall apply with
respect to a determination under this section that an applicant
is ineligible to be appointed or that an employee is ineligible
to continue serving.
``(2) Before any such determination is given effect with
respect to an individual, the individual shall be afforded 180
days to demonstrate that such individual's debt is one
described in subparagraph (A), (B), (C), or (D) of section
7381(1).
``(3) An employee may continue to serve, in a situation
involving financial hardship, if the continued service of such
employee is in the best interests of the United States, as
determined on a case-by-case basis and certified as such by the
head of the agency.
``(d) Reports to Congress.--The Director of the Office of Personnel
Management shall report annually to the Committee on Oversight and
Government Reform of the House of Representatives and the Committee on
Homeland Security and Governmental Affairs of the Senate on the number
of exemptions requested and the number of exemptions granted under
subsection (c)(3).
``Sec. 7383. Review of public records
``(a) In General.--Each agency shall provide for such reviews of
public records as the head of such agency considers appropriate to
determine if a notice of lien has been filed pursuant to section 6323
of the Internal Revenue Code of 1986 with respect to an employee of or
an applicant for employment with such agency.
``(b) Additional Requests.--If a notice of lien is discovered under
subsection (a) with respect to an employee or applicant for employment,
the agency may--
``(1) request that the employee or applicant execute and
submit a form authorizing the Secretary of the Treasury to
disclose to the head of the agency information limited to
describing whether--
``(A) the employee or applicant has a seriously
delinquent tax debt; or
``(B) there is a final administrative or judicial
determination that such employee or applicant committed
any act described under section 7385(b); and
``(2) request that the Secretary of the Treasury disclose
any information so authorized to be disclosed.
``(c) Authorization Form.--The Secretary of the Treasury shall make
available to all agencies a standard form for the authorization
described in subsection (b)(1).
``Sec. 7384. Confidentiality
``Neither the head nor any other employee of an agency may--
``(1) use any information furnished under the provisions of
this subchapter for any purpose other than the administration
of this subchapter;
``(2) make any publication whereby the information
furnished by or with respect to any particular individual under
this subchapter can be identified; or
``(3) permit anyone who is not an employee of such agency
to examine or otherwise have access to any such information.
``Sec. 7385. Adverse actions for employees who understate taxes or fail
to file
``(a) In General.--
``(1) In general.--Subject to subsection (c) and paragraph
(2) of this subsection, the head of an agency may take any
personnel action against an employee of such agency if there is
a final administrative or judicial determination that such
employee committed any act described under subsection (b).
``(2) Personnel actions.--In paragraph (1), the term
`personnel action' includes separation but does not include
administrative leave or any other type of paid leave without
duty or charge to leave.
``(b) Acts.--The acts referred to under subsection (a)(1) are--
``(1) willful failure to file any return of tax required
under the Internal Revenue Code of 1986, unless such failure is
due to reasonable cause and not to willful neglect; or
``(2) willful understatement of Federal tax liability,
unless such understatement is due to reasonable cause and not
to willful neglect.
``(c) Procedure.--Under regulations prescribed by the Office of
Personnel Management, an employee subject to a personnel action under
this section shall be entitled to the procedures provided under
sections 7513 or 7543, as applicable.''.
(b) Clerical Amendment.--The analysis for chapter 73 of title 5,
United States Code, is amended by adding at the end the following:
``SUBCHAPTER VIII--INELIGIBILITY OF NONCOMPLIANT TAXPAYERS FOR FEDERAL
EMPLOYMENT
``7381. Definitions.
``7382. Ineligibility for employment.
``7383. Review of public records.
``7384. Confidentiality.
``7385. Adverse actions for employees who understate taxes or fail to
file.''.
(c) Effective Date.--This section, and the amendments made by this
section, shall take effect 270 days after the date of the enactment of
this Act.
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Tax Accountability Act of 2017 This bill declares that no government contracts or grants should be awarded to individuals or companies with seriously delinquent federal tax debts. Agencies offering a grant or issuing a solicitation for bids or a request for proposals for a contract in an amount greater than the simplified acquisition threshold (currently $150,000) shall require each person that submits a grant application, bid, or proposal to: (1) certify whether such person has a seriously delinquent tax debt, and (2) authorize the Department of the Treasury to disclose to the agency whether the person has a seriously delinquent tax debt. Agencies shall consider a person who has a seriously delinquent tax debt not to be a responsible source and thus the person may not be awarded contracts. Agencies must consider a grant applicant who has a seriously delinquent tax debt high risk, shall decline the grant application, and must ensure that the applicant does not receive future grants offered by the agency. Subject to waiver, agencies shall initiate a suspension or debarment proceeding against a person making offers or applying for grants who has a seriously delinquent tax debt or who falsely certified whether the person has a seriously delinquent tax debt. Individuals with seriously delinquent tax debts are not eligible for federal employment. Agencies must provide for review of public records to determine if a tax lien has been filed on employees or applicants for employment. Agencies may take certain personnel action against employees who fail to file a tax return or understate their tax liability.
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