Background The federal government and states share responsibility for the financing and administration of the Medicaid program. With regard to financing, Medicaid is funded jointly by the federal government and states, with FMAP rates ranging from a statutory minimum of 50 percent to a statutory maximum of 83 percent. Under PPACA, expenditures for Medicaid expansion enrollees are matched at 90 percent for fiscal year 2020. Program administrative responsibilities are shared between states and the federal government. State administrative responsibilities include, among other things, determining eligibility, enrolling beneficiaries, and adjudicating claims. With regard to eligibility, states are primarily responsible for verifying eligibility and enrolling Medicaid beneficiaries. These responsibilities include verifying and validating individuals’ eligibility at the time of application and periodically thereafter, accurately assigning enrollees to the appropriate eligibility group, and promptly disenrolling individuals who are not eligible. PPACA requires states to use third-party sources of data to verify eligibility to the extent practicable. Consequently, states have had to make changes to their eligibility systems, including implementing electronic systems for eligibility determination and coordinating systems to share information. In addition, states have had to make changes to reflect new sources of documentation and income used for verification. In certain circumstances, states may delegate responsibility to the federal government to make eligibility determinations. At the federal level, CMS is responsible for overseeing states’ design and operation of their Medicaid programs and ensuring that federal funds are appropriately spent. CMS oversees state enrollment of beneficiaries and reporting of expenditures. For example: CMS reviews and approves states’ Medicaid eligibility verification plans, which rely primarily on information available through data sources—including federal data sources such as the Social Security Administration and the Internal Revenue Services, or state data sources such as state tax records or unemployment information— rather than paper documentation from families. CMS has various review processes in place to ensure that expenditures reported by states are supported and consistent with Medicaid requirements. The agency also has processes to check whether the correct federal matching rates were applied only to expenditures receiving a higher than standard federal matching rate, which can include certain types of services and populations. CMS estimates Medicaid improper payments, including improper payments due to erroneous beneficiary eligibility determinations. Although CMS has not calculated the improper payments related to beneficiary eligibility determinations since 2014, it plans to begin reporting this estimate in November 2019. CMS Oversight of Medicaid Eligibility Determinations and Related Expenditures Has Gaps Our previous work has identified gaps in CMS oversight of Medicaid eligibility determinations, which affect the federal matching rate. An accurate determination of eligibility is critical to ensuring that only eligible individuals are enrolled, that they are enrolled in the correct eligibility group, and that states’ expenditures are appropriately matched with federal funds for Medicaid enrollees. The implications of inaccurate eligibility determinations can be significant, especially given the growth in enrollment and spending of the expansion population, which represented nearly one quarter of program enrollment and federal expenditures in fiscal year 2017. (See fig. 1.) In September 2016, we reported on our undercover testing for determining Medicaid eligibility and the vulnerabilities we found. We found weaknesses that led to inaccurate eligibility determinations. For example, three of eight fictitious applications we submitted to federal and state marketplaces were approved for Medicaid, despite having identity information that did not match Social Security Administration records. These results, while illustrative of the challenges of assuring accurate eligibility determinations, cannot be generalized. With respect to CMS’s reviews of eligibility determinations, in 2015, we also found that CMS did not review federal Medicaid eligibility determinations in the states that delegated such authority to the federal government. Based on our findings, we made the following recommendations. CMS should use information obtained from state and federal eligibility reviews to inform the agency’s review of expenditures for different eligibility groups in order to ensure that expenditures are reported correctly and matched appropriately. In February 2019, we considered this recommendation implemented, as CMS confirmed that it was sharing information between its eligibility reviews and quarterly expenditure reviews regarding Medicaid expansion enrollees. CMS should conduct reviews of federal Medicaid eligibility determinations to ascertain their accuracy and institute corrective action plans where necessary. CMS has taken some action to review federal eligibility determinations; however, until the review results are publicly reported, which CMS expects to occur in November 2019, this recommendation is not fully implemented. We will continue to monitor CMS’s implementation of this recommendation. In August 2018, we reported that improvements in oversight of state expenditures could help CMS ensure that individuals are enrolled in the correct Medicaid eligibility group. CMS processes for reviewing expenditures reported by states and FMAP rates collectively have had a considerable federal financial benefit, with CMS resolving errors that reduced federal spending by over $5.1 billion in fiscal years 2014 through 2017. However, we identified weaknesses in how CMS targets its resources to address risks when reviewing whether states’ expenditures are supported and consistent with Medicaid requirements. For example: CMS devotes similar levels of staff resources to review expenditures despite differing levels of risk across states. For example, the number of staff reviewing California’s expenditures—which represent 15 percent of federal Medicaid spending—is similar to the number reviewing Arkansas’ expenditures, which represents 1 percent of federal Medicaid spending. Additionally, CMS reviews a sample of claims for expansion enrollees to examine Medicaid expansion expenditures, but the sample size does not account for previously identified risks in a state’s program. Specifically, as we noted in a 2015 report, CMS’s sampling review of expansion expenditures was not linked to or informed by reviews of eligibility determinations conducted by CMS, some of which identified high levels of eligibility determination errors. To address these weaknesses, we made three recommendations, including that the Administrator of CMS revise the sampling methodology for reviewing expenditures for the Medicaid expansion population to better target reviews to areas of high risk. CMS concurred with this recommendation, but in November 2018, CMS officials indicated that given the agency’s resources, they believe the current sampling methodology is sufficient and have no plans to revise it. However, we continue to believe action is needed to better target areas of high risk and this recommendation remains unimplemented. Our examination of Medicaid eligibility determinations will continue as we have work underway that will describe how selected states decide the basis of eligibility for individuals who may qualify for Medicaid under more than one category of eligibility, such as a low-income individual with a disability; what is known about the accuracy of Medicaid eligibility determinations and selected states’ processes to improve the accuracy of determinations; and CMS efforts to recoup funds related to eligibility errors. We expect to complete this work early next year. CMS Efforts to Improve Medicaid Data Could Benefit Program Oversight Improvements in Medicaid data could benefit program oversight, including ensuring that only eligible beneficiaries are enrolled. CMS has acknowledged the need for improved Medicaid data and the Transformed Medicaid Statistical Information System (T-MSIS) initiative is the agency’s primary effort—conducted jointly with states—to improve its collection of Medicaid expenditure and utilization data. According to CMS officials, aspects of T-MSIS are designed to broaden the scope and improve the quality of state-reported data, as well as the data’s usefulness for states. T-MSIS also includes automated quality checks that should improve the quality of data that states report. In addition, T-MSIS is designed to capture significantly more data from states than was previously reported. For example, T-MSIS will include a beneficiary eligibility file that will have expanded information on enrollees, such as their citizenship, immigration, and disability status; and expanded diagnosis and procedure codes associated with their treatments. T-MSIS also is intended to benefit states by reducing the number of reports CMS requires them to submit, and by improving program efficiency by allowing states to compare their data with other states’ data in the national repository or with information in other CMS repositories, including Medicare data. With the continued implementation of T-MSIS, CMS has taken an important step toward developing a reliable national repository for Medicaid data. While recognizing CMS’s progress, we have made several recommendations aimed at improving the quality and usefulness of T- MSIS data. For example, we recommended in 2017 that CMS refine its T- MSIS data priority areas to identify those that are critical for reducing improper payments and expedite efforts to assess and ensure their quality. CMS has implemented this recommendation, yet other recommendations that CMS concurred with related to T-MSIS have not been fully implemented, including outlining a specific plan and associated time frames for using T-MSIS data for oversight. Further Collaboration with Stakeholders Could Improve Program Oversight and Better Ensure Appropriate Enrollment We have previously reported that oversight of the Medicaid program could be further improved through leveraging and coordinating program integrity efforts with state agencies, state auditors, and other partners. CMS has engaged state agencies and other partners to promote program integrity through the Medicaid Integrity Institute, a national training program for states, and other partnerships to combat Medicaid fraud. These efforts have created more opportunities for program integrity professionals to collaborate, share best practices, and ultimately increase the effectiveness of their oversight activities. We have also testified that state auditors are uniquely positioned to help CMS in its oversight of state Medicaid programs, because of their roles and responsibilities—which can include carrying out or overseeing their state’s single audits. Through their program integrity reviews, state auditors have identified improper payments in the Medicaid program and deficiencies in the processes used to identify them. For example, state auditors have found that in some cases their state Medicaid agencies’ eligibility determinations did not identify or address beneficiaries’ changes in circumstances, and in other cases relied on incorrect or incomplete income or asset information. A 2018 audit of New Jersey’s Medicaid program found the state was not identifying and disenrolling some deceased individuals. When state auditors conducted a data match to a Social Security number verification service, they found managed care payments of $510,834 and fee-for-service claims of $217,913 for 41 individuals after their reported date of death. Auditors recommended that the eligibility system be reconciled with a Social Security number validation service on a periodic basis to better identify deceased individuals. In 2017, state auditors in North Carolina found that most of the 10 sample county departments of social services did not consistently provide adequate oversight or controls for the eligibility determination of new applications and re-certifications. For new applications, the auditors showed accuracy error rates ranging from 1 percent to nearly 19 percent; for redeterminations of eligibility, accuracy error rates ranged from 1 percent to 23 percent. Based on information from an independent verification service, state auditors in New York found, during a 9-month period in 2014, that 354 Medicaid enrollees were actually deceased, and that the state made $325,030 in Medicaid payments for a subset of these individuals. Auditors noted that the state’s eligibility system did not have a standard process to periodically verify the life status of all enrollees and end coverage for deceased individuals. In April 2019, the Comptroller General and representatives from the National State Auditors Association sent a letter to CMS requesting changes to the Compliance Supplement to leverage state auditors’ ability to examine key areas of Medicaid, including improvements in the oversight of Medicaid eligibility processes. The Compliance Supplement—which is issued by the OMB based on agency input and direction—is used by state auditors during their annual audit of state entities that administer federal financial assistance programs, including Medicaid. In June 2019, OMB issued the 2019 Compliance Supplement, which included changes related to overseeing testing of eligibility determinations that GAO and the state auditors had proposed. Specifically, the supplement now permits state auditors to test eligibility determinations to ensure that beneficiaries qualify for the Medicaid program and are in the appropriate enrollment category. The supplement also notes a requirement for states to coordinate with other state and federal insurance affordability programs, including the federally facilitated exchanges. These changes to the Compliance Supplement will better enable state auditors to audit states’ eligibility determinations to ensure beneficiaries qualify for the Medicaid program and are enrolled in the correct eligibility group. Such eligibility determinations will supplement CMS’s eligibility determination reviews and may yield insights into program weaknesses that CMS could learn from and potentially address nationally. We continue to believe that CMS could help improve program integrity by further providing state auditors with a substantive and ongoing role in auditing their state Medicaid programs. Chairman Toomey, Ranking Member Stabenow, and Members of the Subcommittee, this concludes my prepared statement. I would be pleased to respond to any questions you may have. GAO Contact and Staff Acknowledgments If you or your staff members have any questions concerning this testimony, please contact me at (202) 512-7114 or yocomc@gao.gov. Contact points for our Office of Congressional Relations and Public Affairs may be found on the last page of this statement. Other individuals who made key contributions to this testimony include Leslie V. Gordon (Assistant Director), Kristin Ekelund (Analyst-in-Charge), Michael Erhardt, Arushi Kumar, and Drew Long. Also contributing were Susan Anthony, Vikki Porter, and Emily Wilson. Appendix I: Selected GAO Recommendations to Strengthen Oversight of Medicaid Beneficiary Enrollment Take immediate steps to assess and improve the data available for Medicaid program oversight, including, but not limited to, the Transformed Medicaid Statistical Information System (T-MSIS). Such steps could include (1) refining the overall data priority areas in T- MSIS to better identify those variables that are most critical for reducing improper payments, and (2) expediting efforts to assess and ensure the quality of these T-MSIS data. (GAO-17-173) Recommendation implemented; no action needed. Take additional steps to expedite the use of data for program oversight. Such steps should include, but are not limited to, efforts to (1) obtain complete information from all states on unreported T-MSIS data elements and their plans to report applicable data elements; (2) identify and share information across states on known T-MSIS data limitations to improve data comparability; and (3) implement mechanisms, such as the Learning Collaborative, by which states can collaborate on an ongoing basis to improve the completeness, comparability, and utility of T-MSIS data. (GAO-18-70) Status of recommendation; actions needed to implement recommendations Not fully implemented. Continue taking steps to make T-MSIS data usable for Medicaid program oversight, such as (1) obtaining information on the completeness and comparability of T-MSIS data, (2) notifying states of their compliance status and obtaining corrective action plans, and (3) establishing mechanisms for ongoing feedback and collaboration across states. Articulate a specific plan and associated time frames for using T-MSIS data for oversight. (GAO-18-70) Not fully implemented. Outline a specific plan and associate time frames for using T- MSIS data for oversight. GAO, Medicaid: Additional Efforts Needed to Ensure that State Spending is Appropriately Matched with Federal Funds, GAO-16-53 (Washington, D.C.: Oct. 16, 2015). GAO, Medicaid: Further Action Needed to Expedite Use of National Data for Program Oversight, GAO-18-70 (Washington, D.C.: Dec. 8, 2017). Related GAO Reports Medicaid: CMS Has Taken Steps to Address Program Risks but Further Actions Needed to Strengthen Program Integrity. GAO-18-687T. Washington, D.C.: August 21, 2018. Medicaid: CMS Needs to Better Target Risks to Improve Oversight of Expenditures. GAO-18-564. Washington, D.C.: August 6, 2018. Medicaid: Actions Needed to Mitigate Billions in Improper Payments and Program Integrity Risks. GAO-18-598T. Washington, D.C.: June 27, 2018. Medicaid: Opportunities for Improving Program Oversight. GAO-18-444T. Washington, D.C.: April 12, 2018. Federal Health-Insurance Marketplace: Analysis of Plan Year 2015 Application, Enrollment, and Eligibility-Verification Process. GAO-18-169. Washington, D.C.: December 21, 2017. Medicaid: Further Action Needed to Expedite Use of National Data for Program Oversight. GAO-18-70. Washington, D.C.: December 8, 2017. Improper Payments: Improvements Needed in CMS and IRS Controls over Health Insurance Premium Tax Credit. GAO-17-467. Washington, D.C.: July 13, 2017. Medicaid: Program Oversight Hampered by Data Challenges, Underscoring Need for Continued Improvements. GAO-17-173. Washington, D.C.: January 6, 2017. Patient Protection and Affordable Care Act: Results of Enrollment Testing for the 2016 Special Enrollment Period. GAO-17-78. Washington, D.C.: November 17, 2016. Health Care: Results of Recent Undercover Testing for Patient Protection and Affordable Care Act Coverage, and Review of Market Concentration in the Private Insurance Markets. GAO-16-882T. Washington, D.C.: September 14, 2016. Patient Protection and Affordable Care Act: Results of Undercover Enrollment Testing for the Federal Marketplace and a Selected State Marketplace for the 2016 Coverage Year. GAO-16-784. Washington, D.C.: September 12, 2016. Patient Protection and Affordable Care Act: Final Results of Undercover Testing of the Federal Marketplace and Selected State Marketplaces for Coverage Year 2015. GAO-16-792. Washington, D.C.: September 9, 2016. Patient Protection and Affordable Care Act: CMS Should Act to Strengthen Enrollment Controls and Manage Fraud Risk. GAO-16-29. Washington, D.C.: February 23, 2016. Medicaid: Additional Efforts Needed to Ensure that State Spending is Appropriately Matched with Federal Funds. GAO-16-53. Washington, D.C.: October 16, 2015. Medicaid: Additional Actions Needed to Help Improve Provider and Beneficiary Fraud Controls. GAO-15-313. Washington, D.C.: May 14, 2015. 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.


Background At VA, and indeed at all federal agencies, strategic human capital management plays a critical role in maximizing the government’s performance and assuring its accountability to Congress and the nation as a whole. As we have long reported, there is a direct link between the effectiveness of an agency’s personnel management efforts and its ability to carry out its mission. Addressing challenges in areas such as disaster response, homeland security, economic stability, and numerous other complex and evolving issues requires a skilled federal workforce able to work seamlessly with other agencies, levels of government, and nongovernmental entities. In our March 2019 report, we identified key trends in agency operations and attitudes toward work that are affecting how federal work is done and, consequently the skills and competencies that workers will need to accomplish agency missions. Agencies will need to apply appropriate talent management strategies that are adapted to these trends to recruit, develop, and retain a high-performing workforce and better meet their missions (see fig. 1). Staffing Challenges at VA Are Systemic, Long-Standing, and Undermining Its Mission Over the past two decades, we and others have expressed concern about certain human capital practices at VA and its components. For example, in November 2018, VA’s Office of Inspector General identified leadership and workforce investment as a major management challenge. The Inspector General noted that the root cause for many of the issues it identified at VA was poor and unstable leadership as well as staffing shortages. Similarly, in May 2019, we reported that leadership turnover impeded VA’s ability to address a number of management challenges we identified such as managing acquisitions, managing risk, and improving veterans’ health care. At VHA, we found that serious human capital shortfalls are undermining its ability to meet the health care needs of veterans. Key examples from our prior work include the following: In March 2019, we reported that VHA’s 172 medical centers have large staffing shortages, including physicians, registered nurses, physician assistants, psychologists, and physical therapists, as well as HR specialists and assistants. As of December 2018, VA reported an overall vacancy rate of 11 percent at VHA medical facilities, including vacancies of over 24,000 medical and dental positions and around 900 HR positions. In July 2016, we found that losses in VHA’s five clinical occupations with the largest staffing shortages, including physicians, registered nurses, and psychologists, increased from about 5,900 employees in fiscal year 2011 to about 7,700 in fiscal year 2015. Voluntary resignations and retirements were the primary drivers. VHA’s exit survey indicated that advancement issues or dissatisfaction with certain aspects of the work, such as concerns about management and obstacles to getting the work done, were commonly cited as the primary reasons people left. In December 2016, we found that several problems combined to impede VHA’s ability to improve delivery of health care services to veterans. These problems include high attrition (often involving transfers to other federal agencies), increased workload, and burnout among VHA’s HR staff. Another issue is a lack of effective internal control practices to support HR operations such as information systems that meet operational needs (see fig. 2). In our preliminary findings in a forthcoming report on the extent to which succession planning policies and procedures at VA and its components are consistent with key leading practices, we have identified several concerns. For example, according to VA officials, the agency has not produced a department-wide succession plan since 2009 due to leadership turnover. Department-wide, around 30 percent of VA employees on board as of September 30, 2017, will become eligible to retire in the next 5 years. Effective succession planning can help VA ensure it has a pipeline of talent to meet current and future mission requirements. In our prior work, we noted that effective succession planning is more than filling existing vacancies with people that have the same occupational skills and competencies. Rather, succession planning focuses on current and future needs and develops pools of high-potential staff to meet the organization’s mission over the long term. Continued Leadership Attention to Implementing Our Prior Recommendations and Other Talent Management Strategies Could Help VA Better Serve Veterans We have designated 40 of our prior recommendations to VA as priority recommendations because, upon implementation, they may have an especially significant impact on VA’s operations. Twelve of these priority recommendations are aimed at strengthening VA’s human capital management efforts and will help address VA’s challenges in such areas as recruiting and retaining doctors and nurses, performance management, and employee misconduct. To date, VA has implemented six of these priority recommendations, but needs to take additional action on the other six. While VA agreed or partially agreed with and is taking steps to implement five of these remaining priority recommendations, it disagreed with one related to developing a process to accurately count all physicians at each VA medical center because it does not believe this affects its ability to assess workload. Nevertheless, we continue to believe that VHA needs a systematic process to identify all physicians working at VA medical centers as part of the agency’s efforts to monitor and assess workload. The six unimplemented priority recommendations are for VA to 1. develop a process to accurately count all physicians providing care at each VA medical center (recommended in 2017), 2. develop a modern and effective performance management system in which VA managers make meaningful distinctions in employees’ performance ratings (recommended in 2016), 3. ensure that ratings-based performance awards are administered in a manner that is consistent with leading practices (recommended in 2016), 4. develop a plan to implement a modern information technology system to support employee performance management processes (recommended in 2016), 5. collect complete and reliable misconduct and associated disciplinary action data (recommended in 2018), and 6. ensure that employees who report wrongdoing are treated fairly and protected against retaliation (recommended in 2018). We will continue to monitor VA’s progress in implementing these and our other open recommendations. Beyond these specific recommendations, VA and other agencies can use talent management strategies to better compete for critical positions in a tight labor market and to help meet agency missions. In our prior work we noted that while these strategies are not an exhaustive list, collectively they suggest basic steps that agencies can take within existing authorities to address the demographic and technological trends affecting work that are discussed earlier in this statement. These strategies include: Align human capital strategy with current and future mission requirements. With shifting attitudes toward work, technological advances, and increased reliance on nonfederal partners, agencies need to identify the knowledge and skills necessary to respond to current and future demands. Key practices include identifying and assessing existing skills, competencies, and skills gaps. Acquire and assign talent. To ensure agencies have the talent capacity to address evolving mission requirements and negative perceptions of federal work (e.g., that it is too bureaucratic), agencies can cultivate a diverse talent pipeline, highlight their respective missions, recruit early in the school year, support rotations, and assign talent where needed. Incentivize and compensate employees. While federal agencies may struggle to offer competitive pay in certain labor markets, they can leverage existing incentives that appeal to workers’ desire for schedules and locations that provide work-life balance. Engage employees. Engaged employees are more productive and less likely to leave. Agencies can better ensure their workforces are engaged by managing employee performance, involving employees in decisions, and developing employees. Strategic Human Capital Management Is at Risk Government-wide and Is Impacting Agencies’ Missions A number of the staffing challenges facing VA are actually part of a broader set of human capital issues affecting government as a whole. As we noted in our March 2019 update of government high-risk areas, the federal government faces long-standing challenges in strategically managing its workforce. We first added strategic human capital management to our list of high-risk government programs and operations in 2001. Although Congress, OPM, and individual agencies have made improvements since then, strategic human capital management remains a high-risk area because mission-critical skills gaps within the federal workforce pose a high risk to the nation. Of the 34 other high-risk areas on our 2019 High-Risk List, skills gaps played a significant role in 16 of the areas, including information technology management and acquisitions, strengthening management functions at the Department of Homeland Security, and, as noted above, veterans’ health care at VA. While causes for these skills gaps related to high-risk areas vary, they often occur because of a shortfall in talent management activities such as robust workforce planning or training. Additionally, the changing nature of federal work and the high percentage of employees eligible for retirement have the potential to produce gaps in leadership and institutional knowledge and could threaten to aggravate the problems created from existing skills gaps. For example, 31.6 percent of permanent federal employees who were on board as of September 30, 2017 will be eligible to retire in the next 5 years, with some agencies having particularly high levels of employees eligible to retire. High-performing organizations have found that the full life cycle of human capital management activities needs to be fully aligned and focused on the cost-effective achievement of an organization’s mission. These activities include workforce planning, recruitment, on-boarding, compensation, engagement, succession planning, and retirement programs. Further, adding to agencies’ staffing challenges is the fact that much has changed since the Civil Service Reform Act of 1978 and the Classification Act of 1949 laid the foundation of much of today’s federal personnel system. Agencies’ missions have evolved and employees’ expectations of work and the workplace are changing. As a result, the extent to which the current and future workforce finds the government’s employment policies and practices relevant is an open question. We and others have identified several structural challenges within the federal human capital system that impede the ability of agencies to recruit, retain, and develop workers, both today and in the future. For example: Classification system. The General Schedule classification system—which defines and organizes federal positions primarily to assign rates of pay—has not kept pace with the government’s evolving requirements. Recruiting and hiring. Federal agencies need a hiring process that is applicant friendly and flexible while also meeting policy requirements. Pay system. Employees are compensated through an outmoded system that (1) rewards length of service rather than individual performance and contributions, and (2) automatically provides across- the-board annual pay increases, even for poor performance. Performance management. Federal agencies have faced long- standing challenges developing modern, credible, and effective employee performance management systems and dealing with poor performers. Going forward, to help agencies effectively carry out their missions, OPM and federal agencies must take some important steps to address ongoing human capital problems. These actions include continuing to develop the capacity to measure and address existing mission-critical skills gaps and using workforce analytics to predict and mitigate future gaps. Chairman Takano, Ranking Member Roe, and Members of the Committee, this completes my prepared statement. I would be pleased to respond to any questions you may have at this time. If you or your staff have any questions about this testimony, please contact Robert Goldenkoff, Director, Strategic Issues, at (202) 512-2757 or GoldenkoffR@gao.gov. 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 testimony are Shirley Hwang (Assistant Director), Alexander Ray (Analyst-In-Charge), Sarah Green, Allison Gunn, and Shelby Kain. 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.


Background The federal government faces long-standing challenges in strategically managing its workforce. As shown in table 1, in addition to strategic human capital management, skills gaps played a role in 16 of the 34 other high-risk areas on our 2019 High-Risk List, including information technology management and acquisitions, and veterans’ health care. We have also designated as priority 29 of our prior recommendations to OPM because, upon implementation, they may have an especially significant impact on OPM’s operations. Twenty-one of these priority recommendations are aimed at addressing government-wide human capital challenges, including some of the ones discussed above. OPM agreed or partially agreed with most of these recommendations. OPM has implemented 10 of these priority recommendations to date, but needs to take additional action on the other 11. For example, OPM should continue to streamline hiring authorities to strengthen the government’s ability to compete in the labor market for top talent and improve the federal hiring process. We will continue to monitor OPM’s progress in implementing our recommendations. Federal Human Capital Management Challenges are Long- Standing and Systemic The government’s system of current employment policies was designed generations ago for a workforce and types of work that largely no longer exist. Much has changed since the Civil Service Reform Act of 1978 and the Classification Act of 1949 laid the foundation of today’s federal personnel system. We have identified several structural challenges within the federal human capital system that impede the ability of agencies to recruit, retain, and develop employees, both today and in the future. For example: Classification system. The General Schedule classification system—which defines and organizes federal positions, primarily to assign rates of pay—has not kept pace with the government’s evolving requirements. Recruiting and hiring. Federal agencies need a hiring process that is applicant friendly and flexible, and meets policy requirements. Pay system. Employees are compensated through an outmoded system that (1) rewards length of service rather than individual performance and contributions, and (2) automatically provides across- the-board annual pay increases, even to poor performers. Performance management. Federal agencies have faced long- standing challenges developing modern, credible, and effective employee performance management systems and dealing with poor performers. Additionally, the changing nature of federal work and high percentage of employees eligible for retirement could produce gaps in leadership and institutional knowledge. It could also threaten to aggravate the problems created from existing skills gaps. For example, 31.6 percent of permanent federal employees who were on board as of September 30, 2017 will be eligible to retire in the next five years, with some agencies, such as the Department of Housing and Urban Development and the Environmental Protection Agency, having particularly high levels of employees eligible to retire. In March 2019, we identified key trends in agency operations and attitudes toward work that are affecting how federal work is done and consequently, the skills and competencies that workers will need to accomplish agency missions (see fig. 1). Agencies will need to apply talent management strategies that are adapted to these trends to recruit, develop, and retain a high-performing workforce and better meet their missions. Key Talent Management Strategies Can Help Agencies Be More Competitive in a Tight Labor Market In light of trends and other challenges facing the government’s human capital management efforts, our prior work has identified actionable strategies that agencies may be able to use to effectively manage the future federal workforce in key talent management areas (see table 2). We noted that while these strategies are not an exhaustive list, collectively they suggest basic steps that agencies can take within existing authorities to position themselves to meet their talent needs. These practices are based on our review of related reports, group interviews with federal Chief Human Capital Officers (CHCO), and interviews with selected private organizations and foreign governments. For each strategy, we highlight examples of the challenges agencies face, actions OPM can take to implement related recommendations from our prior work, and practices that may help agencies implement the strategy. Align human capital strategy with current and future mission requirements. With shifting attitudes toward work, technological advances, and increased reliance on nonfederal partners, agencies need to identify the knowledge and skills necessary to respond to current and future demands. Key practices include identifying and assessing existing skills, competencies, and skills gaps. In May 2014, we reported that agencies should be aware of existing skills and competencies in their workforce to help inform workforce planning. As one example, the Department of the Treasury CHCO told us that, following the Puerto Rico debt crisis—where it needed to be able to identify the necessary skills to manage the crisis—the agency decided to implement an Integrated Talent Management System to facilitate workforce and succession planning as well as learning and performance management. Acquire and assign talent. To ensure agencies have the talent capacity to address evolving mission requirements and negative perceptions by some of federal work (e.g., that it is too bureaucratic), agencies can cultivate a diverse talent pipeline through strategic partnerships with academic and other institutions, highlight their respective missions, recruit early in the school year, support rotations, and assign talent where needed. As one example, consulting firm representatives that we interviewed for our prior work stated that their internship programs are among their most successful practices for cultivating a talent pipeline because the firms can offer full-time positions to rising seniors during the internship. A representative from one consulting firm said that, after experiencing challenges in recruiting on college campuses, the firm built a competitive internship program to promote the firm’s brand and reputation. Participants in the firm’s 10-week program are paid and assigned challenging projects, and successful participants are given job offers upon completion. According to the representative, approximately a quarter of the firm’s workforce is former interns. Similarly, CHCOs and federal employee and management group representatives we interviewed noted that internships are important for establishing a pipeline for recruitment. The federal government’s Pathways Programs, which consist of the Internship Program, the Recent Graduates Program, and the Presidential Management Fellows Program, were designed to promote employment opportunities for students and recent graduates by providing distinct paths to federal internships and potential careers in government. The Internship Program provides paid opportunities for students (high school, vocational, technical, undergraduate, and graduate) to work in agencies and explore federal careers while still in school. Students who successfully complete academic and program requirements may be eligible for non-competitive conversion to a term or permanent position in the civil service. In our prior work, we have also reported on the importance of cultivating a diverse talent pipeline through active campus recruiting which includes developing long-term institutional relationships with faculty, administrators and students, and by building a “brand” on campus. Other strategies to expand a talent pool include developing strategic partnerships with such entities as trade schools, apprentice programs, and affinity organizations from across the country. Another strategy for attracting strong candidates is for agencies to highlight their missions and innovative work, which, according to our expert and CHCO interviews, can help counter negative perceptions of federal employment. For example, the Department of Homeland Security (DHS) provides “Day in the Life” information on its work to promote public awareness of how its everyday tasks tie in with its mission of protecting the United States, according to the DHS CHCO. The DHS CHCO stated that promoting agency mission can be done while cultivating a talent pipeline and assessing applicants’ abilities. The department holds recruitment events where potential candidates can participate in law enforcement-related activities such as fitness testing. The CHCO noted that these events both promote homeland security careers and help prospective candidates determine if a position is a good fit for them. Incentivize and compensate employees. While federal agencies may struggle to offer competitive pay in certain labor markets, they can leverage existing incentives that appeal to workers’ desire to set a schedule and to work in locations that provide work-life balance. However, agencies do not always promote these benefits and incentives as part of a total compensation package, in part because managers are not always aware of the importance of doing so. Some agencies are addressing this issue by advertising and helping employees use available benefits, work-life balance programs, and other resources. For example, the National Science Foundation offers employees many opportunities to learn about existing benefits, according to the foundation’s CHCO. These opportunities include triannual retirement seminars where employees receive personalized retirement estimates, quarterly financial planning seminars where employees receive a free 1-hour consultation, and annual benefit fairs where employees can learn about various health care providers, the work-life programs, and the employee assistance program. Our prior analysis of CHCO and expert interviews also found that employees may value different benefits and incentives depending on their stage in life. By better understanding the desires of the workforce at various life stages, agencies can better tailor benefits packages and incentives to their employees. For example, the Social Security Administration’s CHCO said that the agency’s younger workers value work-life and wellness programs, so the agency implemented a health- tracking program and a fitness discount program for all employees. CHCOs also suggested identifying and incorporating the benefits that would be most useful to various groups of employees, such as sabbaticals for midlevel employees or paid parental leave for employees starting families. One CHCO found that her cybersecurity workforce values subsidies for training and additional certifications more than bonus pay. Further, OPM’s 2018 Federal Work-Life Survey Governmentwide Report found that the number of respondents who anticipate adult dependent care responsibilities in the next 5 years (31 percent) is double the number of respondents with current adult dependent care needs (15 percent). OPM officials stated in light of this change, agencies may need to provide greater workplace flexibilities and other support services to retain talent. Some CHCOs we interviewed for prior work said that they believe that paid parental leave could be a powerful retention tool for federal workers. Representatives from consulting firms that we interviewed said that they have observed positive impacts from these types of benefit programs. For example, representatives from one firm said that providing employees with peace of mind when managing life events helps them feel more committed to the organization. Engage employees. Engaged employees are more productive and less likely to leave, according to OPM. Agencies can better ensure their workforces are engaged by managing employee performance, involving employees in decisions, and developing employees. Experts we interviewed for prior work said that employees desire an environment where they can collaborate with their peers and feel a sense of comradery. In contrast, even a small number of poor performers can negatively affect employee morale and agencies’ capacity to meet their mission, according to CHCOs and our previous work. In the 2017 Federal Employee Viewpoint Survey (FEVS), 64 percent of federal employee respondents agreed that their supervisor provides them with constructive suggestions to improve job performance and 31 percent agreed that steps are taken to deal with poor performers. Without effective performance management, agencies risk not only losing the skills of top talent, they also risk missing the opportunity to effectively address increasingly complex and evolving mission challenges. Agencies can make performance management more effective by improving the selection and training of supervisors and managers, creating a “line of sight” between individual performance and organizational results, and implementing meaningful reward programs. Our prior analysis found that employees seek autonomy in the workplace, meaningful work, and opportunities to achieve results by developing creative and innovative solutions. Also, experts noted that in some cases, connecting federal employees to a sense of inclusion and meaning can compensate for the opportunity to make higher salaries in other sectors. Creating an inclusive work environment is one practice that can help increase employee involvement in decisions. CHCOs and federal employee and management group representatives said that more can be done to prioritize training, even in an era of resource constraints. In 2017, only 55 percent of FEVS respondents were satisfied with training. As an example of an agency prioritizing training efforts, the Social Security Administration has national and regional development programs that offer 12 to 18 months of training and rotations for entry-, mid-, and senior-level employees to strengthen foundational, technical, and leadership knowledge and skills, according to the agency’s CHCO. For example, its Leadership Development Program assigns selected GS-9 through GS-12 employees to developmental assignments in new areas of work, and provides leadership training that broadens their perspective of the agency’s mission. Chairman Connolly, Ranking Member Meadows, and Members of the Subcommittee, this completes my prepared statement. I would be pleased to respond to any questions you may have at this time. If you or your staff have any questions about this testimony, please contact Robert Goldenkoff, Director, Strategic Issues, at (202) 512-2757 or GoldenkoffR@gao.gov. 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 testimony are Shirley Hwang (Assistant Director), Shelby Kain (Analyst-In-Charge), Sarah Green, Allison Gunn, and Alexander Ray. 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.


Background The federal government has long recognized the need to protect itself by ensuring contractors have appropriately allocated costs on cost-based contracts. In terms of what is potentially covered by CAS, cost-based contracts include cost-type contracts and certain fixed-price contracts where the contractor’s estimated or actual costs play a role in determining the amount the government pays. The total amount obligated annually by the government on these types of contracts is significant. For example, in fiscal year 2018, the federal government obligated approximately $172 billion on cost-type contracts alone, according to our analysis of Federal Procurement Data System information. Need for Uniform Cost Accounting Standards In 1968, the House Banking and Currency Committee held hearings to determine whether to renew the Defense Production Act of 1950. A witness at the hearings, U.S. Navy Admiral Hyman G. Rickover, testified that defense suppliers could make excessive profits and disguise them as overhead costs or hide them in other ways in the absence of a set of uniform cost accounting standards. Witnesses at the time testified that it was difficult to compare costs among prospective contractors’ cost estimates or even to assess costs incurred on contracts with the same contractor without a set of uniform and consistent standards. Congress subsequently directed us to study the feasibility of establishing such standards. In January 1970, we reported one of many examples of mischarges involving a contractor that had charged the government for costs above the allowed cost ceiling by moving them under a separate contract cost category. We concluded that then-existing financial reporting standards were neither created nor adequate for contract cost purposes. In addition, we concluded that it was feasible to create a set of cost accounting standards and recommended doing so. Creation of Board and Cost Accounting Standards In August 1970, Congress created the Board as an independent board within the legislative branch. The Board was initially chaired by the Comptroller General, who appointed four other members. The Board was authorized to promulgate standards designed to achieve uniformity and consistency in cost accounting practices used by federal contractors on defense contracts in excess of $100,000. The Board issued 19 cost accounting standards that went into effect between 1972 and 1980 for applicable DOD contracts. These standards covered areas such as consistency between how actual and estimated costs are calculated and reported, and ensuring that costs are not double- counted. The standards were intended to ensure that incurred costs were appropriately allocated to government contracts. Generally Accepted Accounting Principles In contrast, GAAP is a set of U.S. accounting standards, conventions, and rules focused on measuring companies’ financial performance. GAAP is meant to establish and improve financial accounting and reporting to provide useful information to investors and other users of financial reports, including measurement and recognition of costs in financial statements. Federal endorsement of generally accepted accounting practices or principles dates back to the Securities Act of 1933. Then, the Securities Exchange Act of 1934 created the Securities and Exchange Commission and gave it authority to oversee accounting and auditing methods for publicly traded companies. Subsequently, various professional accounting groups, with oversight by the Securities and Exchange Commission, began working to establish standards and practices for consistent and accurate financial reporting, which became known as GAAP. In 1973, the Securities and Exchange Commission recognized the Financial Accounting Standards Board (FASB) as the designated accounting standard setter for public companies in the United States, and FASB is responsible for GAAP. History of the Cost Accounting Standards Board In fiscal year 1981, Congress stopped funding the Board. However, after a number of disputes arose as to how to interpret various standards, Congress reestablished the Board in 1988. Congress placed the Board under OFPP, which is part of the Office of Management and Budget (OMB) within the executive branch. Congress also broadened the Board’s authority by applying CAS to all federal contracts—they were previously applicable only to defense contracts. Table 1 provides more information on the differences between CAS and GAAP. The Board met intermittently to address issues associated with interpretations of the standards after it was reestablished in 1988. In the late 2000s, the Board revised two of the standards related to pension contributions by government contractors for their employees. Effective in 2008, Congress changed the minimum contributions required to fund pension plans. This change caused pension contributions to greatly exceed CAS pension costs reflected in contract prices. The Board updated the CAS effective in 2012 to harmonize CAS pension costs with statutory changes to the pension funding requirements. However, the Board’s changes did not address how costs were settled when pension plans were curtailed. In January 2013, we recommended that the Board set a schedule to revise parts of the CAS dealing with settlement of pension plan curtailments. Citing our recommendation, the Board began efforts to resolve this issue in July 2013 and the work is on-going. While Board staff have been working to resolve these pension issues, the Board went several years without holding official meetings of the full board. Figure 1 illustrates the Board’s activities over time. The current Board is comprised of five members. The Administrator of OFFP is a member and serves as Board Chair. The other members include representatives from DOD, the General Services Administration, industry, and another private sector representative with cost accounting expertise. According to OFPP officials, the Board is also assisted by two OFPP staff—one on a full-time basis and one on a part-time basis—and a detailee from DCAA. In addition, OFPP officials said that the Board forms interagency working groups to address specific issues, such as pension harmonization. The Board receives its funding from OMB and does not have a separate funding source. According to OFPP officials, the Board’s main expenses were salary reimbursement for the non-government employees who serve on the Board and publication costs for Federal Register notices. Other federal agencies also have responsibilities to help administer the standards. For example, according to OFPP officials, most CAS-covered contracts are defense related. As such, DCAA reviews federal contractors’ disclosure statements for adequacy and compliance—that is, whether the statements are current, accurate, and complete. Disclosure statements describe the company’s actual or proposed cost accounting practices, including how they distinguish between costs, and how costs are allocated to contracts. DCAA also conducts audits to ensure contractors comply with CAS and with the contractors’ disclosed and established cost accounting practices and procedures. In addition, DCMA monitors contractor performance and the contractor’s business management systems, among other things, to ensure that the contractor is consistently following its cost accounting practices for contracts that are subject to CAS. There is no definitive list of the companies, business segments or units, or contracts that are subject to CAS. Whether a contractor’s business segment is required to comply with the standards on a particular contract depends largely on the value of the government contracts it is awarded during the year that are cost-based. Once a contractor’s business segment exceeds a certain dollar threshold of these “CAS-covered contracts,” the business segment is required to comply with either (1) all 19 standards (termed “full CAS-coverage”) or (2) four standards (termed “modified CAS-coverage”). Full coverage applies to business segments with CAS-covered contracts with a combined value of $50 million or more. Modified coverage may apply to business segments with a single CAS- covered contract of $7.5 million or more, and combined CAS-covered contracts valued at less than $50 million. Table 2 below lists all 19 CAS required under full coverage and the four CAS required under modified coverage. Prior GAO Reports and Recent Studies Related to the Board and Cost Accounting Standards We and congressionally established review panels have previously studied the potential impact of CAS on industry as well as possible changes to the CAS and the Board. For example: In April 1994, we reported that seven of eight companies we reviewed either kept their government contracting work separate from their commercial contracting or assigned additional staff to their government contracting segments due to the increased demands of government contracting, citing, among other things, CAS as a factor in that decision. In January 1997, we reported on DOD’s efforts to address acquisition cost drivers based, in part, on a prior DOD-directed study that identified CAS as one of the 10 largest cost drivers on DOD contracts. In that report, a DCMA official noted that, in his opinion, while the annual cost of maintaining a CAS-compliant system is relatively small, the cost to establish a CAS-compliant system may be significant. Congress asked us to lead a panel of experts to assess the future role of the Board. In April 1999, we issued the panel’s report focused on the Board and CAS in light of acquisition reforms and the evolution of GAAP. The panel concluded that, among other things, the Board should review CAS and its attendant requirements to determine whether standards could be streamlined to reduce unnecessary burden on affected contractors. In addition, the panel made several recommendations, including moving the Board out of OFPP to ensure autonomy. Congress did not act on this recommendation. The panel also recommended reviewing contract applicability and full-coverage thresholds for CAS. Congress subsequently set the modified coverage ceiling at $7.5 million in October 1999. In July 2017, most of the 12 companies we spoke with that had not done business with DOD told us they chose not to do so because it might trigger a large number of contract terms and conditions that would be expensive to implement. One reason provided by the companies for not competing for certain types of DOD contracts was the requirement to establish a government-unique cost accounting system and to disclose and follow cost accounting practices consistently. In June 2018, the Section 809 Panel—having been established to advise Congress on streamlining defense acquisition regulations— released the second of three volumes of its report. In its report, the panel made two recommendations related to CAS, which largely reiterated what the GAO-led panel recommended in 1999. In this regard, the Section 809 panel recommended that the Board should be relocated to the General Services Administration as an independent board with a budget sufficient to support at least three full-time, permanent staff. The panel also recommended raising CAS applicability threshold levels again to further reduce burden on contractors. Subsequently, in 2019, OMB submitted a legislative proposal on raising the CAS applicability threshold from $2 million to $15 million. OMB officials also indicated that they would continue analyzing the effects of additional threshold changes. Congress had not enacted the proposal into law at the time of this report. Board Efforts Generally Comply with Recent Legislative Requirements The CAS Board generally has complied or is in the process of complying with the administrative and reporting requirements prescribed by Section 820 of the National Defense Authorization Act for Fiscal Year 2017, including initial efforts to assess the extent to which CAS can be conformed with GAAP. To do so, the Board is taking steps to follow its statutorily prescribed four-step rulemaking process. The Board’s initial efforts focus on the extent to which two of the 19 standards might be modified or eliminated; however, Board members indicated that these efforts may take several more years to complete. CAS Board Has Generally Complied with Administrative and Reporting Requirements The Board has generally complied with the administrative requirements prescribed under Section 820 thus far, including meeting regularly, generally publishing notices and agendas in advance of meetings, and reviewing disputes involving cost accounting-related matters. According to officials from the Office of Federal Procurement Policy, the Board is working on the first of its annual reports on its efforts, including those associated with efforts to conform the standards with GAAP where practicable. Table 3 highlights the steps the Board is taking to address some of the administrative and reporting requirements mandated by Section 820. Board Has Undertaken Initial Efforts to Assess How CAS Can Be Conformed with GAAP The Board has also taken initial steps to address Section 820’s requirement that the Board review the standards and conform them to GAAP, where practicable (see table 4). In carrying out this work, the Board is taking steps to follow a statutorily prescribed four-step rulemaking process for promulgating CAS or interpretations. Figure 2 below outlines these requirements. In line with this process, between March and November 2018, the Board discussed the opportunities and methods available for conforming CAS to GAAP. The Board held informal discussions with its staff, industry representatives, and government agencies, such as DCAA. One of the messages coming from the feedback was for the Board to focus first on those standards that offered the greatest potential for change. By the end of 2018, the Board had completed development of the staff discussion paper. The Board expected to release this document in the Federal Register for public comment in January 2019; however, a partial shutdown of the federal government due to lapsed funding delayed its release until March 2019. The March 2019 staff discussion paper (1) outlined a set of five guiding principles that the Board would use to assess whether proposed CAS changes are necessary and whether those changes would reduce the burden on contractors while protecting the government’s interests, (2) identified a roadmap that prioritized the Board’s proposed review of standards, and 3) included a preliminary comparison of two standards to GAAP. Guiding Principles. The guiding principles outlined in the staff discussion paper describe the elements the Board will consider when determining whether changes to the CAS will reduce burden on contractors while continuing to protect the interests of the federal government. As stated in the staff discussion paper, the Board will: 1) reduce CAS requirements where practicable; 2) consider whether the proposed action would reduce burden on 3) consider whether other CAS or federal rules would protect the government’s interests in case of any gaps created by relying on GAAP; 4) monitor future changes to GAAP and the Federal Acquisition Regulation (FAR) to identify and evaluate their impact on CAS and revise CAS, as necessary; and 5) monitor future significant disputes related to the conformance to GAAP and evaluate whether the Board should address them through clarifying guidance or rulemaking. Prioritization. The Board grouped the 19 CAS into four categories based on the Board’s assessment of which standards are most likely to have overlap with GAAP (see figure 3). The Board plans to focus its initial efforts on the seven standards in the first group, which focus on cost measurement and assigning costs to accounting periods. According to its staff discussion paper, the Board’s proposed approach is to assess the standards by developing side-by-side comparisons of CAS requirements to corresponding GAAP requirements and identifying any gaps between the two. The Board will then evaluate the potential risk of any gaps identified, taking into account coverage by other CAS requirements and related regulations; for example, the FAR. The Board will also assess whether there is a history of compliance issues for those standards. According to OFPP officials, such assessments will help the Board determine whether they need to update guidance related to a particular CAS. Lastly, the Board plans to assess changes that have occurred in GAAP relative to CAS and to evaluate the need to conform CAS to the updated GAAP. For example, the Board has identified two recent changes in GAAP that it states may not align with CAS. Comparison. The Board has begun this effort by looking at two standards focused on measuring and assigning costs (CAS 408 and CAS 409), since it believes that GAAP potentially provided additional coverage compared to when the two CAS were established in 1975. OFPP officials stated that these two standards provided a good opportunity to modify and potentially eliminate duplicative coverage while testing the soundness of the Board’s approach to conform CAS to GAAP where practicable. Public Response to the Board’s Approach Has Been Mixed The Board received seven separate comment letters on the staff discussion paper from five industry organizations, one commercial business, and one private individual. Our review of the comments found that they were largely supportive of the Board’s guiding principles, but some commenters raised concerns regarding the Board’s approach to its conformance effort and questioned whether it would ease the burden on contractors. For example, four respondents commented that the Board should not limit its focus to only revising or eliminating particular CAS when it was clear that GAAP provided adequate coverage. Instead, these industry groups stated that each CAS should be eliminated unless proven to be absolutely necessary due to the barriers to contractors that these groups believe the CAS create. The Board members we met with stated that all options for refining CAS requirements were on the table. However, they also stated that GAAP and CAS are focused on two separate goals—the former on a business’s high-level financial statement, the latter on individual contract costs. Board members, as well as DCAA and DCMA officials, noted that eliminating CAS requirements to rely purely on GAAP standards would limit the government’s ability to compare contract proposals, assess actual costs to avoid overcharges by contractors, and protect its interests. For example, DCMA officials stated that the government has $3.1 billion in pending litigation for identified CAS noncompliances. Recovery of increased costs is accomplished in part through contract clauses that entitle the government to recover specific cost increases on affected CAS-covered contracts. Were CAS and the associated contract clauses eliminated, DCAA and DCMA officials noted that the government’s ability to recover these costs would be greatly reduced. In addition, the Board is concerned that in modifying or perhaps even eliminating certain CAS requirements, and instead using GAAP, there is the risk that future GAAP changes would no longer cover the areas of CAS concern. This would leave the government vulnerable to the issues that the modified or eliminated CAS were originally created to address. Members of the Board and staff we spoke with indicated that the Board is reviewing and assessing the public comments on the staff discussion paper to determine whether the Board needs to make changes to the paper’s guiding principles or methodology going forward. According to the Board members, the Board will issue a Federal Register notice explaining any changes resulting from public input and its own additional deliberations. Additionally, they said the Board will consult with the Financial Accounting Standards Board—which is responsible for GAAP— to answer technical questions and ensure that the Board has an accurate understanding of GAAP coverage as they continue to perform side-by- side comparisons of CAS and GAAP. Further, the Board stated that it will publish a notice to address public comments on CAS to GAAP conformance projects and that additional staff discussion papers and associated notices will be published in the Federal Register for public comment as they are completed. In addition to streamlining or eliminating CAS standards, some of the comments in response to the staff discussion paper pointed to other areas that the Board may want to consider to reduce the burden on government contractors. For example, some comments encouraged the Board to consider increasing CAS full-compliance dollar thresholds. Reassessing the CAS full-compliance threshold aligns with findings from congressionally established panel reports from 1999 and 2018. According to both panels’ findings, increasing compliance thresholds is a way to decrease burden on many government contractors while still protecting the bulk of the government’s contracting dollars. As previously noted, OMB recently submitted a legislative proposal to raise the threshold from $2 million to $15 million. OMB also indicated that it intends to continue studying available data to understand the costs and benefits of CAS threshold changes and whether additional changes to the threshold need to be made. Agency Comments We provided a draft of this report to DOD, the Office of Management and Budget, and the Cost Accounting Standards Board for their review and comment. DOD had no comments on the report. The Office of Management and Budget and the Board provided technical comments, which we incorporated where appropriate. We are sending copies of this report to the appropriate congressional committees, the Secretary of Defense; the Director, Defense Procurement and Contracting; the Director, Defense Contract Audit Agency; the Director, Defense Contract Management Agency; the Director, Office of Management and Budget; and the Administrator, Office of Federal Procurement Policy. In addition, this report will be available at no charge on the GAO website at https://www.gao.gov. If you or your staff have any questions concerning this report, please contact me at (202) 512-4841 or by e-mail at dinapolit@gao.gov. Contact points for our Office of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. Appendix I: Description of the 19 Cost Accounting Standards and Their Purpose Appendix II: Cost Accounting Standards Applicability, Exemptions, and Compliance Cost Accounting Standards Applicability. In general, a business segment is not subject to Cost Accounting Standards (CAS) until it receives a non-exempt contract of $7.5 million or more from the federal government. Generally, a non-exempt contract is a contract that does not meet any of the exemptions listed below. Typically, once a business segment receives a non-exempt contract of $7.5 million or more, all of its prospective non-exempt contracts or subcontracts over $2 million are considered CAS-covered. Summary of Exemptions. The following categories of contracts and subcontracts are exempt from all CAS requirements: Sealed bid contracts; Negotiated contracts and subcontracts not in excess of the Truth in Negotiations Act (TINA) threshold, as adjusted for inflation (41 U.S.C. 1908 and 41 U.S.C. 1502(b)(1)(B)). For purposes of this exemption, an order issued by one segment to another segment shall be treated as a subcontract; Contracts and subcontracts with small businesses (Federal Acquisition Regulation (FAR) Subpart 19.3 addresses determination of status as a small business.); Contracts and subcontracts with foreign governments or their agents or instrumentalities or, insofar as the requirements of CAS other than CAS 401 and CAS 402 are concerned, any contract or subcontract awarded to a foreign concern; A contract or subcontract where the price is set by law or regulation; A contract or subcontract authorized in FAR § 12.207 for the acquisition of a commercial item; A contract or subcontract with a value of less than $7,500,000 if, at the time of award, the business segment of the contractor or subcontractor that will perform the work has not been awarded at least one contract or subcontract with a value of $7,500,000 or more that is covered by the standards. Subcontracts under the North Atlantic Treaty Organization’s Patrol Missile Hydrofoil Ship programs to be performed outside of the United States by a foreign concern; A firm-fixed price contract or subcontract awarded on the basis of adequate price competition without submission of certified cost or pricing data. In addition, in cases where the prime contract is exempt from CAS under any of the exemptions at 48 C.F.R. § 9903.201-1 any subcontract under that prime is always exempt from CAS. Also, Title 41 of the U.S. Code was amended effective in 2018 to allow executive agency heads can waive CAS requirements for a contract or subcontract with a value of less than $100 million if the business segment is primarily engaged in commercial work and would not otherwise be subject to CAS, or for exceptional circumstances where waiving CAS is necessary to meet agency needs. Compliance. There are two levels of CAS coverage—full and modified. Full coverage applies to business segments with CAS-covered contracts valued at $50 million or more; those business segments must comply with all 19 standards. Modified coverage may apply to business segments with CAS-covered contracts valued less than $50 million. Business segments that have contracts awarded with modified coverage must comply with four of the standards. Business segments with full CAS-covered contracts are also required to submit disclosure statements describing the company’s actual or proposed cost accounting practices and procedures, including how they distinguish direct costs from indirect costs and the basis used for allocating indirect costs. The Defense Contract Audit Agency (DCAA) reviews disclosure statements for adequacy and compliance—that is, whether the statement is current, accurate, and complete—prior to contract award and during contract performance. DCAA may also complete CAS compliance audits at the request of the cognizant federal agency official after contract award. In some circumstances, the Defense Contract Management Agency (DCMA) will review disclosure statements that are not audited by DCAA. According to officials, both DCAA and DCMA provide audit findings to the cognizant federal agency official, who then disposes the audit findings by making the final determination of adequacy and compliance. The purpose of disclosure statement audits is to determine whether the contractor’s disclosed or established practices are in compliance with CAS rules, regulations, and standards, as well as appropriate acquisition regulations. A CAS-related noncompliance may be found if a contractor with a CAS-covered contract proposes a practice that will violate CAS or a government acquisition regulations cost principle, or if the contractor’s actual practices are either inconsistent with their own disclosure statement or noncompliant with the cost standards or principles. For example, in 1970, we, along with DCAA auditors, found instances where contractors charged costs as both direct and indirect costs to the same contract, resulting in the contractors recovering the same charge twice. If an auditor discovers a noncompliance issue, the auditor will submit an advisory report to the cognizant federal agency official who makes the final determination. The consequences of a CAS noncompliance can range from a contract adjustment to litigation. According to the DCMA’s Contract Dispute Resolution Center, there were 15 judicial decisions issued in CAS-related board and court cases in the last five years. Appendix III: GAO Contact and Staff Acknowledgments GAO Contact Staff Acknowledgments In addition to the contact named above, Bruce H. Thomas, Assistant Director; Peter Anderson; Jennifer Baker; Miranda Riemer; Jenny Shinn; Ryan Stott; and Roxanna T. Sun made key contributions to this report.