Foreign Military Sales: DOD Should Take Additional Steps to Streamline Process for Assessing Potential Recovery of Certain Acquisition Costs

Under the Arms Export Control Act and its implementing regulations, DOD is required to recover nonrecurring costs—unique one-time program-wide expenditures—for certain major defense equipment sold under the FMS program. These costs include research, development, and one-time production costs, such as expenses for testing equipment. The Act also permits those costs to be waived under certain circumstances, such as to standardize equipment with select allies or to avoid a loss of sale.

GAO was asked to review DOD's use of nonrecurring cost waivers. This report addresses the (1) nonrecurring cost waivers approved by DOD from fiscal years 2012 through 2017, (2) factors DOD considers when reviewing waivers, and (3) efficiency of the waiver review process.

To conduct this work, GAO analyzed DOD data of nonrecurring cost waivers for fiscal years 2012 through 2017, the most recent and complete data, to identify the value of waivers. GAO then reviewed a non-generalizable sample of 24 of these waivers that included a mix of justifications and geographic regions. GAO reviewed relevant DOD policy and interviewed DOD officials about the process to assess these waivers.

In the past 6 years, the Department of Defense (DOD) approved waivers valued at nearly $16 billion that it might otherwise have collected from foreign governments as part of its sales of major defense equipment through the Foreign Military Sales (FMS) program. The Arms Export Control Act, as delegated, authorizes the Defense Security Cooperation Agency (DSCA) within DOD to waive nonrecurring costs under certain circumstances, such as to standardize equipment with allies. From fiscal years 2012 through 2017, DSCA reviewed 813 waivers and denied 3, resulting in an approval rate of 99 percent. As shown in the figure below, the value of approved waivers significantly increased to nearly $6 billion last year, which is due to 2 waivers totaling nearly $3.5 billion for sales of missiles and related support systems.

Total Value of Approved Foreign Military Sales Nonrecurring Cost Waivers from Fiscal Years 2012 through 2017

When reviewing waivers, DSCA considers foreign policy and national security factors, such as interoperability with allies, and economic factors, such as support for the U.S. defense industrial base. Agency officials stated that approving waivers helps ensure sales go through and such broader benefits are realized. DSCA's practice to approve waivers is consistent with the authority it has been delegated under the Arms Export Control Act and is influenced by these benefits.

The process DOD has established to consider waivers is, at times, inefficient and repetitive. DSCA has final approval authority; however, multiple DOD offices must review and provide input on each waiver, with some offices reviewing waivers for the same purpose. Federal standards for internal control call for agencies to allocate resources and assign responsibilities to achieve efficiency and effectiveness. DOD has already taken steps to improve the efficiency of the waiver review process; for example, by reducing the time a few offices take to review the waivers. Nonrecurring cost waivers are one part of the larger FMS process, and continuing to streamline the waiver review process would better position DSCA and the military departments to identify opportunities to maximize efficiencies.

DSCA should continue to identify opportunities to streamline the waiver review process. DSCA concurred with GAO's recommendation.

The Department of Defense (DOD) invests billions of dollars to research,  develop, and produce defense equipment for weapons programs. Part of  DOD’s investment typically includes nonrecurring research, development,  test, evaluation, and production costs, such as DOD expenditures for  testing equipment. In cases where major defense equipment, which has  nonrecurring research and development costs greater than $50 million or  total production costs greater than $200 million, is sold to foreign  governments and international organizations through the Foreign Military  Sales (FMS) program, DOD is required under the Arms Export Control  Act and its implementing regulations to recover nonrecurring costs. For  fiscal years 2012 through 2017, DOD reported sales under the FMS  program totaling over $250 billion. These sales, which include major  defense equipment, create the potential for DOD to charge and recover  billions of dollars of nonrecurring costs from foreign governments. The  Arms Export Control Act, as delegated, also authorizes DOD to waive  collection of nonrecurring costs based on one of three primary  justifications: (1) to standardize U.S. military equipment with the North  Atlantic Treaty Organization (NATO) and select U.S. allies, (2) to achieve  cost savings for the U.S. government, or (3) to avoid a loss of sale.

Within DOD, the Defense Security Cooperation Agency (DSCA) is  principally responsible for overseeing and administering the FMS  program. In recent years, we have made recommendations to address  concerns about timeliness and other program management functions  within the FMS program. In light of these recommendations and ongoing  congressional oversight, DSCA has undertaken a number of initiatives  aimed at enhancing the FMS program. For example, DSCA adopted  digital signatures to help improve timeliness after examining its process  for reviewing requests from foreign governments to waive nonrecurring  costs.

You asked us to review DOD’s use of its authority to waive nonrecurring  costs. This report addresses the (1) nonrecurring cost waivers approved  by DOD from fiscal years 2012 through 2017, (2) factors DOD considers  when reviewing waivers, and (3) efficiency of the waiver review process.

To address our objectives, we reviewed DSCA data on FMS nonrecurring  cost waivers requested by foreign governments from fiscal years 2012  through 2017, the years for which data are the most complete. To  determine the nonrecurring cost waivers approved by DOD during this  time frame, we analyzed the data to determine the number and dollar  value of waivers requested and approved by fiscal year and geographic  region. We also analyzed the data to determine the number of waivers  that were denied. Due to certain data limitations, we were unable to  determine the percentage of all eligible sales that included a waiver  request and the total amount of nonrecurring costs that DOD actually  waived after the waiver was approved and the sale was finalized. To  assess the reliability of the data, we compared them to waiver  documentation we obtained from DSCA and interviewed DSCA officials  responsible for the data. Based on these steps, we determined the data  were sufficiently reliable for the purposes of our reporting objectives.

To determine the factors that DOD considers when reviewing waiver  requests, we selected a non-generalizable sample of 24 waiver requests  to identify the information the foreign government submitted as part of the  request. The sample included a mix of waiver justifications and  geographic regions. After reviewing the waiver requests, we interviewed  officials from the military departments—Air Force, Army, and Navy—to  discuss them. We also interviewed officials from DSCA, the Office of the  Undersecretary of Defense (OUSD) Comptroller, OUSD for Policy, and  OUSD for Acquisition, Technology, and Logistics (AT&L) to discuss the  factors they consider when reviewing nonrecurring cost waiver requests.

To determine the efficiency of the waiver review process, we identified  offices that review waiver requests for the same or similar information and  reviewed the 24 waiver requests to identify the steps taken by these  offices during the review. In addition, we reviewed relevant DOD policy  and interviewed officials from all of the offices involved in the waiver  process to discuss the steps they take during their review. We compared  these offices’ practices for reviewing the waivers with the Standards for  Internal Control in the Federal Government, which calls for agencies to  assign and delegate responsibilities in a manner that maximizes  efficiency and effectiveness. Appendix I contains additional detail on our  objectives, scope, and methodology.

We conducted this performance audit from March 2017 to January 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.

The Arms Export Control Act of 1976 gives the President authority to sell  defense articles and services to eligible foreign governments and  international organizations. This Act is the basis of the FMS program,  which the U.S. government considers to be an integral component of U.S.  national security and foreign policy. Under the FMS program, foreign  governments pay the U.S. government to administer the acquisition of  defense articles and services on their behalf. Typically, defense  equipment made available for transfer or sale to foreign governments falls  under an acquisition program managed by one or more of the U.S.  military departments. Generally, this equipment has gone through  operational testing and has entered or is entering full-rate production.

Multiple federal entities have a role in the FMS program, including DOD  and the Department of State (State). Within DOD, DSCA and the military  departments play an extensive role in administering the program and  managing FMS acquisitions, respectively. DSCA carries out key  administrative functions, such as coordinating the development and  execution of sales through the FMS program and conducting negotiations  with foreign governments. The military departments are involved early in  the development of the potential sale when the foreign government  identifies the defense equipment it needs to buy to achieve a desired  capability. Congressional oversight of the FMS program has resulted in  amendments to the Arms Export Control Act and other relevant legislation  to improve the FMS program.

The first phase of the FMS process generally involves a foreign  government submitting a request, usually to State or DOD, to express  interest in purchasing defense articles or services. Depending on the size  and complexity of the items being purchased and the foreign  government’s available budget, the process to finalize the terms of a sale  can take from a few days to years. In response to concerns that the FMS  process is slow and burdensome, Congress has increased oversight of  the program and recently passed legislation intended to improve the  timeliness of the FMS process. For example, in the National Defense  Authorization Act for Fiscal Year 2017, Congress required DOD to revise  its acquisition regulations to place new requirements on FMS contracting  and to establish a pilot program to seek ways to accelerate contracting  and pricing processes for FMS.

According to DSCA officials, foreign governments interested in having  nonrecurring costs waived must request a waiver before DOD develops  and sends the sales agreement to the foreign government for acceptance  and signature. The sales agreement—formally referred to as a letter of  offer and acceptance—details the specific items, quantities, and total  estimated costs, among other things. The sales agreement, once signed,  is commonly referred to as a FMS case. For a given FMS case, DSCA’s  decision regarding whether or not to waive nonrecurring costs would also  be articulated in the agreement.

Consistent with the Arms Export Control Act and DOD policy, foreign  governments may request that nonrecurring costs be waived based on  one of three justifications:

To achieve equipment standardization with NATO and select allies  (Australia, Israel, Japan, Jordan, New Zealand, and the Republic of  Korea). In addition to NATO itself, there are currently 34 countries that  qualify for the equipment standardization waiver justification, as  shown in figure 1.

To avoid a potential loss of sale that could likely result from imposing  nonrecurring costs.

To obtain cost savings through economies of scale on major defense  equipment also procured for the U.S. military that substantially offsets  the revenue that will be lost if the nonrecurring costs are waived.

The Code of Federal Regulations states that all waiver requests should  originate with the foreign government and must specify the reasons or  justifications for the requests. A foreign government generally initiates the  process by submitting a written request to waive the nonrecurring costs  for the major defense equipment it plans to purchase. For example, a  NATO member country planning to purchase P-8A patrol aircraft would  submit a request to waive nonrecurring costs for that equipment to the  Navy, stating that the purchase would promote equipment  standardization.

The letter of offer and acceptance the military department sends to the  foreign government states the estimated costs and the quantity of major  defense equipment for which nonrecurring costs will be waived. Once the  letter of offer and acceptance has been signed by the foreign  government, any increase in the quantity of items requires that the foreign  government submit a request to waive nonrecurring costs for the  additional equipment. If equipment quantities are reduced after the waiver  is approved, the total amount of nonrecurring costs waived will be less  than the value at the time the waiver was approved. For example, in  2013, DSCA approved a waiver for up to $799 million in nonrecurring  costs for 768 Patriot missiles. However, the foreign government reduced  its planned procurement to 248 missiles. As of December 2017, DSCA  estimated that the amount of nonrecurring costs that will be waived  decreased to $258 million—about two-thirds less than was originally  approved.

Congressional and DOD Actions Regarding Nonrecurring Costs

The laws, regulations, and policies regarding nonrecurring costs have  been revised several times over the past 50 years. DOD has had a  process in place to recover nonrecurring research and development and  production costs on sales of major defense equipment to foreign  governments and international organizations since 1967. The requirement  to recover a proportionate amount of these costs was codified in the Arms  Export Control Act of 1976, which authorizes arms sales in furtherance of  U.S. security objectives. Significant legal, regulatory, and policy changes  regarding the justifications that can be used to waive nonrecurring costs  are summarized in figure 2.

Determining Nonrecurring Costs for Sales of Major Defense Equipment under the FMS Program

The Arms Export Control Act requires recovery of a proportionate amount  of nonrecurring research, development, and production costs for foreign  sales of major defense equipment. For example, in the F-35 Joint Strike  Fighter program, costs for production testing and tooling equipment are  considered nonrecurring costs. The military departments, as delegated  under the Code of Federal Regulations, are responsible for determining  the per-unit nonrecurring cost for each type of major defense  equipment. In practice, DOD components submit requests to establish  nonrecurring costs to DSCA, which—if approved by DSCA—are made  publicly available on the agency’s website.

In practice, determining what nonrecurring costs will be charged entails  the following steps:  1.  Charges are calculated by dividing total program nonrecurring costs  by the total number of planned production units. For example, the Air  Force determined that the nonrecurring costs for a sensor program  were $660 million and estimated that a total of 250,000 units would be  procured by DOD and from sales under the FMS program. Based on  these estimates, the Air Force calculated a nonrecurring cost charge  of $2,640 per unit.  2.  For each individual FMS case that includes major defense equipment,  the military department calculates the amount of nonrecurring costs  for the sale by multiplying the quantity of items by the per-unit  nonrecurring cost charge. For instance, in the example described  above, if a foreign government wants to purchase 10 sensors, a  nonrecurring cost charge of $26,400 would be added as part of the  sale.

Roles and Responsibilities of DOD Offices in Reviewing Nonrecurring Cost Waiver Requests

DOD policy requires that waivers also be reviewed on a case-by-case  basis and tied to a specific sale that defines the quantities of each item to  be procured. This policy prohibits blanket waivers, those that would waive  nonrecurring costs on all sales to a particular country or all sales  pertaining to specific equipment. For example, DSCA cannot grant a  blanket waiver for the Patriot missile that would automatically waive  nonrecurring costs on all subsequent sales of that missile.

Within DOD, the Director of DSCA has been delegated authority to waive  nonrecurring costs for sales of major defense equipment to foreign  governments and international organizations. While DSCA has primary  responsibility for determining whether waiver requests meet all legal and  regulatory criteria, we observed that multiple DOD offices are involved in  the waiver review process, as illustrated in figure 3.

In practice, the military departments receive waiver requests from a  foreign government or international organization and ensure that all  required information is submitted, including the equipment type and  quantity, as well as the justification for the waiver. Based on this  information, the military department determines whether or not to endorse  the waiver request. The military department then compiles a package of  relevant documentation, including calculation of the estimated total  amount of nonrecurring costs to be waived, the original waiver request,  and a memo documenting its decision regarding the waiver request. In  the course of our work, we found that, within each military department,  the offices involved in the waiver review process include:

The U.S. Army Security Assistance Command, which initially reviews  the waiver request, and the Office of the Deputy Assistant Secretary  of the Army for Defense Exports and Cooperation, which provides the  Army’s decision whether to endorse the waiver request;

The Navy International Program Office, which reviews the waiver  request and provides the Navy’s decision whether to endorse the  waiver request; and

The Air Force Security Assistance and Cooperation Directorate, which  initially reviews the waiver request, and the Office of the Secretary of  the Air Force, International Affairs, which provides the Air Force’s  decision whether to endorse the waiver request.

Apart from DSCA, all waiver requests are reviewed by the OUSD (AT&L)  and OUSD (Comptroller), while the OUSD for Policy only reviews waivers  that cite the loss of sale justification.

DOD Approved Nonrecurring Cost Waivers Valued at Billions of Dollars over the Past 6 Years

From fiscal years 2012 through 2017, DOD approved nonrecurring cost  waivers valued at nearly $16 billion that it might otherwise have collected  from foreign governments as part of its major defense equipment sales.  Over this period, DSCA approved 810 of the 813 waiver requests it  received, resulting in an approval rate of more than 99 percent. However,  the dollar value of the approved waivers does not, in all instances, reflect  the total amount that will ultimately be waived once sales are finalized.  Rather, it reflects a ceiling for the nonrecurring costs that DOD could  waive. During this time frame, DSCA collected $106 million in  nonrecurring costs; however, this amount may be associated with FMS  cases prior to fiscal year 2012. We were not able to determine the exact  amount actually waived once sales agreements were finalized due to data  limitations.

DOD Approved Nearly All Requested Nonrecurring Cost Waivers

From fiscal years 2012 through 2017, DOD approved 99 percent of the  813 nonrecurring cost waiver requests for major defense equipment sold  through the FMS program. In our analysis of DSCA’s data on waivers  requested for the 6-year period, we found that:

DOD approved all 471 waiver requests that cited equipment  standardization submitted by 25 countries and NATO, totaling  approximately $6.7 billion.

DOD approved all but 2 of the 340 waiver requests that cited loss of sale submitted by 34 countries, totaling almost $9.2 billion.

DOD also approved a waiver of $460,000 for one of the two cost savings waiver requests it received.

In total, these approved nonrecurring cost waivers amounted to nearly  $16 billion over the past 6 years. The value of approved waivers  increased more in fiscal year 2017 than in prior years, as shown in figure  4. The increase is primarily due to 2 approved waivers totaling nearly $3.5 billion for sales of missiles and related support systems.

From fiscal years 2012 through 2017, approximately 93 percent of  nonrecurring cost waivers were approved for countries in Europe, the  Middle East, and the Pacific region. Based on our review of data obtained  from DSCA, we found that countries eligible for equipment  standardization waivers always cited this justification in their waiver  requests, with one exception. We found that only eligible countries  received a waiver for equipment standardization. All other countries that  did not qualify for equipment standardization submitted waiver requests  for loss of sale, except for 2 waiver requests that cited cost savings to the  U.S. government. As shown in figure 5, all countries that utilized the  equipment standardization justification are located in Europe and the  Pacific region, and nearly all the $9.2 billion approved loss of sale waivers  were for countries in the Middle East.

Various Factors Limit Insight about the Extent of Total Nonrecurring Costs DOD Waived and Collected

Currently, DSCA uses the Defense Security Assistance Management  System (DSAMS) to maintain records on FMS case initiation and  execution, but an official stated the system was not designed to track  nonrecurring cost data, such as data on waivers requested or actual costs  waived, for each individual FMS case. DSCA uses separate methods for  tracking data on approved waivers and the equipment that was  purchased as part of an individual FMS case. DSCA officials stated that  to calculate the amount of nonrecurring costs actually waived for each  approved waiver, they manually review DSAMS records for individual  FMS cases to identify the planned quantity of items to be purchased.  While DSCA provided data on actual costs waived, we were unable to  independently verify these calculations and, as a result, are unable to  report on the actual costs waived for waivers that were approved for fiscal  years 2012 through 2017. Other complexities make it difficult to  conclusively determine how much has been waived, including:

Approved waivers do not have expiration dates but are tied to a  specific sale. DSCA officials stated that waivers are generally used  within 5 years, which coincides with the expiration date of the sales  agreement.

The lag time between when a waiver is approved and when the  amount of equipment is finalized can take years.

According to DSCA officials, nearly all nonrecurring costs are waived  rather than collected. Officials also noted that DSCA has collected  approximately $106 million in nonrecurring costs for fiscal years 2012  through 2017; however; this amount may include costs collected from  FMS cases that were finalized prior to our time frame. DSCA officials  could not confirm whether the 813 waiver requests that they received  during fiscal years 2012 through 2017 represented the universe of all  sales eligible for waivers under the FMS program, as DSAMS does not  consistently track whether an individual FMS case includes major defense  equipment and therefore would be eligible for a waiver or subject to the  collection of nonrecurring costs. According to DSCA officials, foreign  governments rarely forego submitting waiver requests and, invariably,  submission of these requests is considered a standard practice. As a  result, with few exceptions, DSCA officials said that DOD waives nearly  all nonrecurring costs associated with eligible sales in the FMS program.

We have previously reported that DSCA has efforts underway to develop  a new system, the Security Cooperation Enterprise Solution, which is  expected to address longstanding information management challenges.  The new system is being developed with the goal of aggregating data  from multiple information management systems in order to provide  increased insight into the acquisition process, among other things. During  our current review, DSCA officials noted that the new system will include  requirements to incorporate nonrecurring cost data, but it is unclear  whether the system will automate reporting of nonrecurring costs actually  waived. We previously reported that the deployment schedule for the new  system has been delayed and is being revised. DSCA officials were  uncertain of a new deployment date as system requirements are currently  being re-validated and expected to continue through 2020.

DOD Considers Foreign Policy, National Security, and Economic Factors When Reviewing Waiver Requests

Our review found that DOD considers a variety of factors when reviewing  nonrecurring cost waiver requests, but, ultimately, the department wants  to ensure that sales are not jeopardized. Individually and collectively,  these sales complement various foreign policy, national security, and  economic objectives. The ability to waive nonrecurring costs assists in  keeping FMS competitive and ensuring sales are not jeopardized,  according to DSCA and other DOD officials.

While there is a decades-old requirement to recover the U.S.  government’s investment in the nonrecurring costs of major defense  equipment it develops and later sells to foreign governments, DOD is  authorized to waive collection of these costs, which it implements through  DSCA. Under the Arms Export Control Act and its implementing  regulations, DSCA has considerable latitude to approve all waivers that  meet the criteria for each justification. DSCA’s approval of nearly all  waivers is in accordance with statutory requirements. When reviewing  nonrecurring cost waiver requests, DSCA, consistent with DOD guidance,  factors the legal requirements for the justification cited for a waiver  request, in addition to broader benefits to achieve foreign policy, national  security, and economic objectives, which are interrelated. DOD offices  that play a role in reviewing and deciding on waiver requests may also  consider these factors.

Foreign policy and national security benefits: DSCA and other DOD  officials weigh the effect of equipment sales under the FMS program on  foreign policy and national security objectives. DSCA officials stated that  avoiding a potential lost sale is paramount and outweighs the benefits of  collecting nonrecurring costs, which may only be a small fraction of the  overall sale. DSCA officials added that if a waiver request is not  approved, U.S. relations with the foreign government could become  strained or otherwise be negatively affected. DSCA officials indicated that  one of the goals of the FMS program is to facilitate building and  maintaining international relationships. Further, officials added that  nonrecurring cost waivers help achieve that goal by making the FMS  program competitive.

The precedent for waiving nonrecurring costs has existed for decades,  and foreign governments know to request waivers and expect they will be  approved, according to DOD officials. In addition, Air Force officials stated  that foreign governments seek to negotiate the price when purchasing  U.S. defense equipment. DSCA officials stated that foreign governments  view the nonrecurring cost waivers as a way to realize some form of cost  savings when purchasing defense equipment under the FMS program.  DSCA officials stated that, regardless of the amount, waiving  nonrecurring costs can be viewed as significant because it gives the  appearance of the foreign government achieving some cost savings.

The U.S. National Military Strategy prioritizes increasing U.S.  interoperability with coalition partners. Sales of defense equipment to  U.S. allies are a means to achieve these interoperability goals. Equipment  standardization with NATO member countries and other select allies is  one of the available justifications for which a waiver can be requested and  approved. Interoperability helps strengthen relationships with allies and  advances U.S. and allied security interests in these regions. Navy officials  stated that increasing the capabilities available to U.S. allies through FMS  reduces the need to locate U.S. military forces and equipment in proximity  to these allies.

Economic benefits: Sales through the FMS program can result in cost  savings for the U.S. government, which is also one of the permissible  justifications in the Arms Export Control Act for foregoing collection of  nonrecurring costs. Both the U.S. and foreign governments can benefit  from economies of scale where increasing the volume of defense  equipment purchased decreases the cost per unit. Navy officials also  explained that they always consider the possibility of cost savings in sales  through the FMS program, and added that they coordinate their own  procurement plans with FMS purchases to achieve cost savings.  However, DSCA officials stated that the efforts to obtain required data  and conduct analysis to quantify the amount of cost savings are  extensive. As a result, this analysis is generally only performed when  required to justify cost savings waiver requests.

In addition to the potential for lower unit prices, the FMS program helps to  sustain the U.S. defense industrial base and allows it to remain globally  competitive. This level of competition has increased as NATO allies also  sell their military equipment. Navy officials stated there are always  competing items, since foreign governments can purchase more  equipment with less capability at a lower price from another country,  which can expand the foreign government’s buying power relative to what  it can afford when buying from the United States. In addition to competing  offers, budget constraints may pose a challenge for some foreign  governments seeking to purchase U.S. defense equipment and the added  expense of paying nonrecurring costs could threaten a potential sale.  DOD officials stated that risking a lost sale if a waiver is not approved  could have potentially negative effects for the U.S. companies that  manufacture defense equipment sold under the FMS program.  Specifically, DOD officials indicated that if the sale is lost, U.S. jobs and  economic viability could be affected, particularly because some FMS  cases can be valued at billions of dollars in equipment purchases.

DOD Could Take Steps to Enhance Efficiency of Waiver Review Process

DOD’s waiver review process is, at times, inefficient, includes repetitive  steps, and does not account for the value of the waiver request. Waiver  justifications are broadly defined in the Arms Export Control Act, which— as delegated—gives DSCA flexibility to determine how to review requests  and grant waivers. DSCA has implemented a review process that  involves up to 12 offices including the military departments, DSCA, and  various OUSD offices. In some cases, these offices are reviewing waivers  to verify similar information, at times leading to repetitive reviews. The  same process is applied despite the amount of nonrecurring costs  requested to be waived, complexity of the case, or ease (or difficulty) in  assessing the validity of the justification cited in the waiver request. DOD  has taken steps to reduce the time for a few offices to review waivers, but  we found there are opportunities for additional efficiencies to be realized.

For 23 of the 24 waiver requests we reviewed, on average, the military  departments determined whether to endorse requested waivers around  270 days after they were submitted by the foreign government. DSCA  then, on average, took less than 60 days to decide whether to approve  the waiver, which is consistent with its policy to respond to waiver  requests within 60 days of receipt. There is no policy regarding the time  frame for military departments to review a waiver request, as military  officials stated the review time can vary depending on whether additional  information must be obtained from the foreign government. However,  recognizing an opportunity to streamline the review process, DSCA has  worked with the Air Force to identify one office that did not add value,  reducing the Air Force review process from three offices to two. Officials  stated this action decreased the amount of time required for review.  DSCA officials also stated that they have improved their review times by  using digital signatures when concurring on waiver decisions. Our prior  work has indicated that concerns have been raised about the timeliness  of the FMS program, and a DSCA official stated that these efforts were  part of a DSCA initiative to increase efficiencies in the overall FMS  process.

Further, we found repetitive steps in the process for assessing potential  U.S. foreign policy and national security benefits from a sale where  equipment standardization is cited as the justification for the requested  waiver. These benefits are already assessed for certain FMS cases by an  in-country team that is comprised of officials from State and the relevant  DOD combatant command that manages military operations in  designated areas of responsibility. Once the waiver is requested by the  foreign government, DSCA and OUSD (AT&L) officials review the waiver  request to assess these benefits, even though military officials stated an  assessment has already been conducted to determine how the proposed  sale will advance U.S. national security objectives within the region. In  addition, DSCA officials stated that since foreign governments are  procuring equipment also used by the U.S. military, by default, purchasing  the equipment would result in standardization. After a potential sale has  received a favorable country team assessment, the only additional  requirement is to determine whether the customer is NATO or among the  34 countries eligible for the standardization waiver. Yet while this  requirement is easily confirmed, the waiver request may still be reviewed  by as many as 11 offices within the military department and DSCA, as  well as at the OUSD level.

However, we found, for example, DSCA did not adjust its review process  based on the value of the nonrecurring costs to be waived. In one case,  for a cost savings waiver request with estimated nonrecurring costs just  under $12,000, the Air Force took 112 days to coordinate its review and  endorsement of the waiver before submitting it to DSCA. DSCA then took  47 days to coordinate input from various OUSD offices to reach a final  decision on the requested waiver. Similarly, in another instance where the  value of the requested loss of sale waiver was substantially higher—$337  million—it took the Army 160 days to coordinate its review before passing  it on to DSCA, which took 29 days to finalize its decision. Other than  OUSD Policy’s review of the loss of sale waiver, both of these waiver  requests required the same review process despite the substantial  difference in costs.

For waiver requests that cite the loss of sale justification, DSCA and  military department officials told us that it is difficult to prove or disprove a  foreign government’s claim that not waiving nonrecurring costs will likely  lead to a loss of sale. DOD guidance states these waiver requests should  include information on competing items and their cost, if available;  however, the guidance does not specify the type of information or level of  detail that should be provided. DSCA officials stated that they interpret  this guidance to mean this information is optional and therefore not  required. According to DOD officials, a foreign government’s budget  constraints could limit its ability to pay nonrecurring costs. Of the 18 loss  of sale waiver requests that we reviewed, none included any additional  information on competing offers or spending limits, beyond the basic loss  of sale statement. Even if DOD received this type of information from the  foreign government, DSCA officials told us that corroborating this  information would be difficult. Therefore, DOD officials stated that they do  not assess the likelihood of loss of sale beyond the minimum criteria.  Although this assessment requires no additional analysis, loss of sale  waiver requests are subject to the same review process, but with OUSD  Policy as another required layer of review, bringing the possible total up  to 12 offices. DSCA and OUSD Policy officials were unsure of the origin  of the requirement for OUSD Policy to weigh in on waiver requests that  cite loss of sale. Further, OUSD Policy officials stated that they review  waiver requests for similar elements as other DOD entities, such as  whether the sale will support security objectives in the region.

DSCA officials have acknowledged that identifying further opportunities to  streamline waiver reviews through a risk-based approach could enhance  efficiencies in the FMS program. Federal standards for internal controls  state that agencies should assign and delegate responsibilities in a  manner that maximizes efficiency and effectiveness. In light of the  significant growth in the FMS program in recent years, as well as the  resulting workload for DSCA and other cognizant DOD components,  continuing to streamline the waiver review process would better position  DSCA and the military departments in maximizing efficiencies in the FMS  process.

The FMS program is a central component of U.S. foreign policy. Our work  has shown it enhances the capabilities of our allies, fosters  interoperability with foreign militaries, helps sustain our defense industrial  base, and serves our national security interests. In 1976, Congress  codified the requirement for DOD to recoup nonrecurring costs on sales  of major defense equipment to help ensure that FMS customers pay their  share of the full cost of this equipment. At the same time, Congress  provided for waiving nonrecurring costs for specified reasons. Over the  past 6 years, DOD has prioritized the benefits of the FMS program and  has typically waived rather than collected nonrecurring costs under these  specified reasons.

Within DOD, there are opportunities to consider streamlining the waiver  review process to eliminate efforts that are potentially repetitive or  inefficient. The review process for waiver requests requires that multiple  offices review all waiver requests, regardless of the amount of  nonrecurring costs to be waived or the complexity of the specific  circumstances. The FMS program has been criticized for being slow and  burdensome. To create efficiencies in the overall FMS program, DOD  could take additional steps to streamline the FMS waivers review  process.

We are making the following recommendation to DSCA:  The DSCA Director should continue to identify opportunities to streamline  the review process for nonrecurring cost waiver requests.  (Recommendation 1)

We provided a draft of this report to DOD for comment. In its comments,  reproduced in appendix II, DOD concurred with our recommendation.  DOD also provided technical comments, which we incorporated, as  appropriate.

We are sending copies of this report to the appropriate congressional  committees and the Secretary of Defense. 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) 512-4841 or MakM@gao.gov. 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 III.

Appendix I: Objectives, Scope and Methodology

In this report, we addressed the (1) nonrecurring cost waivers approved  by the Department of Defense (DOD) from fiscal years 2012 through  2017, (2) factors DOD considers when reviewing waivers, and (3)  efficiency of the waiver review process.

To address all objectives, we analyzed data from the Defense Security  Cooperation Agency (DSCA) on requests made by foreign governments  to waive nonrecurring costs on purchases of major defense equipment  under the Foreign Military Sales (FMS) program. We reviewed data for  fiscal years 2012 through 2017, as these years provided the most  complete data available to facilitate our analysis and gain insights about  the waivers requested based on the three allowable justifications within  the scope of our review—equipment standardization, loss of sale  avoidance, and cost savings to the U.S. government. DSCA uses the  Defense Security Assistance Management System (DSAMS) to maintain  records on FMS case data from the time the case is initiated; however,  the system does not track nonrecurring cost data, such as data on  waivers requested or costs waived, for each individual FMS case.  Instead, DSCA provided a dataset on waivers requested that is  maintained in a spreadsheet. To assess the reliability of DSCA’s data, we  tested for missing data, inconsistent coding, and compared data on  selected waiver requests to waiver documentation we obtained from  DSCA. In reviewing the documentation relative to the dataset we  obtained, we found a small amount of data that were incorrectly coded,  but these miscodings had minimal potential to affect our analysis. DSCA  corrected these miscodings when we brought the errors to their attention.  Overall, we found that the documentation for the selected waiver requests  generally matched the data DSCA provided. We interviewed DSCA  officials responsible for the data to identify the quality controls in place to  ensure the data are accurate and reliable. Based on these steps, we  determined the data were sufficiently reliable to identify the extent to  which DOD approved nonrecurring cost waivers and to select a sample of  waiver requests to review.

To identify the extent to which DOD approved nonrecurring cost waivers  for fiscal years 2012 through 2017, we analyzed data on nonrecurring  cost waiver requests, which included: the country requesting the waiver,  the justification under which the waiver was requested, the requested  amount of the waiver, whether or not the waiver was approved, the  approved value of the waiver, and the military department responsible for  managing the procurement of the major defense equipment associated  with the requested waiver. We analyzed the data to determine the  number and dollar value of waivers requested for each waiver justification  in total and by fiscal year. We also analyzed the data to determine the  value of nonrecurring cost waivers approved by geographic region.

DSCA has various information management systems and methods to  track data related to FMS cases. However, these systems are not  integrated and data limitations precluded certain analysis:

A DSCA official stated that DSCA does not track which FMS cases  include major defense equipment, which impeded our ability to  conclusively report on the total universe of all eligible FMS cases  during fiscal years 2012 through 2017 for which a nonrecurring cost  waiver could have been requested, and the percentage of cases  represented by the 813 requested waivers. DSCA processes  thousands of FMS cases each year; however, not all FMS cases meet  the threshold for collecting or waiving nonrecurring costs as this  requirement only applies to FMS cases where major defense  equipment is being purchased. We interviewed DSCA officials to  obtain information on how major defense equipment is recorded in  DSAMS and the process they use to determine whether a FMS case  includes major defense equipment. To identify the universe of eligible  FMS cases would have required a manual review of thousands of  cases to match the nonrecurring cost waiver data that DSCA  maintains in a separate spreadsheet with the case data captured in  DSAMS that itemizes the equipment purchased for each individual  FMS case. Because a FMS case can have multiple waivers, there is  an added challenge to accurately match the waiver with the  corresponding case.

While DSCA maintains internal records that track the extent to which  waivers are used to their fullest value, we were unable to fully validate  certain data elements on equipment quantities. This precluded our  ability to report on the amount of total costs waived relative to the  value of the approved waiver. DSCA officials stated that when DSCA  grants a waiver there is a ceiling on the value of the waiver, which  functions similar to a coupon in that it cannot be used to waive  nonrecurring costs that exceed the value of the approved waiver.  DSCA maintains information on the equipment quantities for each  FMS case in DSAMS. However, in order to estimate the costs waived,  DSCA officials stated that they manually review each FMS case  associated with a waiver to identify the quantities purchased, which  may change through amendments to the FMS case. DSCA provided a  dataset that compares approved waivers to costs waived; however,  we could not verify equipment quantities from DSAMS. We also  interviewed DSCA officials to gain insight about their quality control  process to ensure the data are reliable. Our ability to verify equipment  quantities made it difficult to report on actual costs waived.

To determine the factors DOD considers when reviewing waiver requests,  we selected a non-generalizable sample of 24 waiver requests and the  related documentation and files to identify the information the foreign  government submitted as part of the request, including any information on  competing items, and how these waivers are considered as part of the  overall FMS program. We selected the sample from the dataset provided  by DSCA on the total waiver requests from fiscal years 2012 through April  2017. The sample included waiver requests citing each of the three  justifications and represented different geographical regions. To enhance  our understanding of how anomaly waivers are processed, we selected 5  waiver requests to include in our sample because of their unique  characteristics:

The only 2 waiver requests that cited cost savings to the U.S.

The only 2 loss of sale waiver requests that were denied.

One waiver request from a foreign government that would have been  eligible to use the equipment standardization justification but cited the  loss of sale justification in its waiver request.

To select the remaining 19 waivers, we set a threshold for waivers  approved where the value of the nonrecurring cost was over $20 million  to capture high-value waivers, as these waivers represented 80 percent  of the total value of approved waivers within our time frame for our  sample selection. Next, we selected at least 2 waiver requests from each  fiscal year for the 6-year period included in our review and ensured a mix  of waivers requested by various foreign governments, including those that  had the highest value of waivers approved. We also ensured that the  waivers reflected a mix of FMS cases to be managed by the Air Force,  Army, and Navy, which also review and provide input to DSCA on the  waiver requests. Our sample includes a higher number of loss of sale  justifications to provide greater insight about how DOD considers these  requests given the minimal requirements and that these requests  represent the majority of costs requested to be waived. While our findings  are based on a non-generalizable sample and cannot be used to make  inferences about all FMS nonrecurring cost waivers requested, the  sample provides insight on the specific circumstances of waiver requests  and DSCA’s decision in these cases.

We recorded the information obtained from our review of the waiver  request files in a data collection instrument. One analyst entered  information in the data collection instrument and another analyst  independently reviewed the information to ensure accuracy. After  reviewing the waiver requests, we interviewed officials from military  departments associated with the waiver request files that we reviewed to  obtain clarifying information about specific waiver requests.

To determine the efficiency of the waiver review process, we reviewed  documentation for the 24 selected waiver requests to identify the offices  involved in the review process, and the length of time taken to review and  decide on the waiver request from the time of submission. We used the  same data collection instrument to record this information as part of the  two analysts’ reviews. We compared these offices’ practices to review the  waivers with the Standards for Internal Control in the Federal  Government, which calls for agencies to assign and delegate  responsibilities in a manner that maximizes efficiency and effectiveness.  In addition, we reviewed relevant DOD policy and interviewed officials  from the military departments, DSCA, the Office of the Undersecretary of  Defense (OUSD) Comptroller, OUSD for Policy, and OUSD for  Acquisition, Technology, and Logistics (AT&L) to discuss their roles in  reviewing nonrecurring cost waiver requests and the steps they take  during their review.

In addition to the contact named above, Candice Wright (Assistant  Director), Jessica Karnis (Analyst-in-Charge), Emily Bond, Lorraine  Ettaro, Cale Jones, William Lamping, Miranda Riemer, and Roxanna Sun  made key contributions to this report.

Foreign governments buy billions of dollars of defense equipment through the Department of Defense's foreign military sales program. They are required to reimburse DOD for certain research, development, and other one-time costs related to the equipment.

However, governments may ask DOD to waive those costs. DOD has granted $16 billion in waivers over the last 6 years to help these sales go through.

We found that DOD has prioritized the benefits of making sales over recouping costs, and that it serves U.S. interests to do so. We also found that the waiver review process can be repetitive, so we made a recommendation to address that.


Railroad Retirement Board: Actions Needed to Improve the Effectiveness and Oversight of Continuing Disability Reviews

RRB is an independent agency that administers disability benefits for railroad workers. In fiscal year 2016, about 31,000 railroad workers with disabilities received $1.1 billion in disability benefits. RRB is generally required to periodically assess beneficiaries' medical condition or earnings through continuing disability reviews (CDRs) to verify that they remain eligible for disability benefits.

This report examines the extent to which RRB (1) conducts medical and earnings CDRs to ensure the continued eligibility of disability beneficiaries, and (2) oversees the CDR program. GAO analyzed data provided by RRB for CDRs completed in fiscal years 2014-2016, the only years for which complete data were available. GAO also reviewed RRB's policies and procedures, a nongeneralizable random sample of 14 CDR cases that were completed in fiscal year 2016, and relevant federal laws and regulations; and interviewed RRB officials.

In fiscal years 2014-2016, the Railroad Retirement Board (RRB) completed continuing disability reviews (CDRs) of various types for 427 beneficiaries (see figure below), covering slightly more than 1 percent of the railroad workers who received disability benefits during that period. These reviews included:

Scheduled Medical Reviews –These are scheduled at different intervals depending on the likelihood of medical improvement. RRB data suggest that most beneficiaries are not subject to these CDRs because they are older than 54½, which RRB defines as the age at which they are unlikely to return to work. Of 43 medical CDRs that were scheduled, RRB identified 3 ineligible beneficiaries and 1 overpayment of about $28,000.

High-Risk Reviews – In fiscal year 2015, RRB began conducting medical CDRs on cases it considered to be at high risk for fraud. It completed 166 of these reviews in fiscal years 2015 and 2016, but none identified any ineligible beneficiaries or overpayments.

Earnings Reviews – During fiscal years 2014-2016, 163 earnings CDRs identified 47 ineligible beneficiaries and at least $970,550 in overpayments. However, RRB uses earnings information that can be up to 2 years old, thereby delaying the detection of ineligible beneficiaries and increasing the potential for lost federal dollars. Other federal agencies have access to a national federal database with more recent earnings data. Providing RRB access to these data would enable it to identify overpayments sooner.

Medical + Earnings Reviews – In some cases, RRB conducts both a medical and earnings CDR. RRB's data do not allow GAO to attribute the outcome to either type of CDR.

RRB oversight has primarily been limited to conducting two internal reviews of high-risk medical CDRs, one of which concluded, consistent with the above results, that these CDRs demonstrated no return on investment. Nevertheless, RRB continues to do them. RRB does not routinely compile and analyze data for all of the CDRs it conducts, which limits its ability to identify potential gaps in oversight and to monitor program performance. For example, RRB lacks data that would help it determine how many medical CDRs it should expect to conduct. RRB officials said compiling data can be challenging because it uses multiple data systems. However, by more efficiently collecting and compiling key CDR data, RRB could enhance its capability to routinely assess program performance.

Congress should consider giving RRB access to the National Directory of New Hires, a national database of wage and employment information that would enable it to identify potential overpayments sooner. GAO is also making three recommendations to RRB, including that it reconsider the purpose and value of high-risk CDRs, and routinely compile and analyze CDR data to improve oversight. RRB agreed with these recommendations.

The U.S. Railroad Retirement Board (RRB) is responsible for  administering retirement, disability, and survivor benefits for the nation’s  railroad workers and their families under the Railroad Retirement Act of  1974, as amended. RRB’s disability program provides financial benefits to  workers who are unable to perform their railroad jobs. In fiscal year 2016,  about 31,000 railroad workers with disabilities received $1.1 billion in  disability benefits from RRB.

To ensure ongoing eligibility for benefits, RRB conducts continuing  disability reviews (CDR). These reviews assess the extent to which a  beneficiary’s medical condition has improved, or the extent to which a  beneficiary is earning above program limits, either of which could make  them ineligible for disability benefits. While recent reviews by our office  and RRB’s Office of Inspector General (OIG), as well as an investigation  by the Department of Justice, have examined RRB’s oversight and  administration of its disability program, GAO has not previously focused  on the role of CDRs in RRB’s internal controls of its disability program.

You asked us to examine the RRB’s CDR processes for its disability  program. This report examines the extent to which RRB (1) conducts  medical and earnings CDRs to ensure the continued eligibility of disability  beneficiaries, and (2) oversees the CDR program.

To address the first objective, we obtained and analyzed data from RRB  for the universe of CDRs completed for railroad workers during fiscal  years 2014-2016, the most recent data available, to determine the  number, types, and outcomes of CDRs completed. RRB also uses CDRs  to target certain disability beneficiaries whom they consider to be at high  risk of potential fraud based on several characteristics. A subset of the  CDR universe, we analyzed these high-risk CDRs to assess RRB’s ability  to determine a recipient’s continued eligibility for benefits and to identify  potential instances of fraud. To obtain more detail about the CDRs RRB  conducted, we analyzed CDR records for reviews completed in fiscal year  2016 from a nongeneralizable sample of 14 randomly selected case files.

We assessed the reliability of the CDR data provided by RRB for fiscal  years 2014-2016 by reviewing existing information about the data and the  systems that produced them, interviewing knowledgeable agency  officials, performing basic electronic data testing for missing data, outliers,  or obvious errors, and tracing information for selected variables to source  documents for the nongeneralizable random sample of 14 case files. We  determined that the data were sufficiently reliable for purposes of this  report, and we describe certain limitations with the data in the report, as  applicable.

To address the second objective, we reviewed management strategies  and tools used to oversee CDR processes and assessed them against  federal internal control standards. We also analyzed medical  improvement category data provided by RRB. We describe certain  limitations with these data in the report.

To address both objectives, we examined prior relevant reviews by RRB,  GAO, and RRB’s Office of Inspector General, and interviewed managers  and staff in RRB headquarters. We also reviewed relevant federal laws,  regulations, and guidance as well as agency policies and procedures for  conducting CDRs. To provide information on RRB’s finances, we  examined detailed internal financial records of RRB revenues and  expenditures from fiscal years 2007 to 2016.

We conducted our work from May 2016 to February 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.

RRB administers retirement, survivor, disability, unemployment, and  sickness benefits for railroad workers and their families under the  provisions of the Railroad Retirement Act of 1974, as amended (RRA)  and the Railroad Unemployment Insurance Act of 1938, as amended  (RUIA). Individuals who work for railroads engaged in interstate commerce, for railroad associations, and for railroad labor organizations  are among those covered by RRB’s benefits system instead of Social  Security or the federal-state unemployment insurance system. During  fiscal year 2016, RRB received approximately $12 billion in funding, about  half of which came from payroll taxes levied on railroad workers and their  employers. Almost all of the funding was used to pay benefits, including  unemployment benefits. In addition, RRB administers Medicare coverage  for railroad workers.

The railroad retirement system and Social Security system are separate  but linked with regard to benefit payments and taxes. Railroad workers  and their employers pay the same payroll taxes as other workers covered  by Social Security for comparable retirement, disability, unemployment  insurance, and Medicare benefits. RRB also collects taxes to cover  additional benefits. A financial interchange between the two systems  allows funds to be transferred between RRB and Social Security accounts  based on the amount of Social Security benefits that workers would have  received if they were covered by Social Security, as well as the payroll  taxes that would have been collected if the railroad workers were covered  by Social Security instead of their own system. According to RRB data,  the railroad retirement, survivor, and disability system is projected to  remain solvent over at least the next 25 years.

Railroad Retirement Act Disability Benefits

Under the RRA, RRB provides two distinct disability benefits for railroad  workers—total and permanent (T&P) disability and occupational disability.  For T&P disability, RRB makes determinations about railroad workers’  disability claims independent of but using the same general criteria that  the Social Security Administration (SSA) uses to administer its Disability  Insurance program. That is, a worker must have a medically determinable  physical or mental impairment that (1) has lasted (or is expected to last)  at least 1 year or is expected to result in death, and (2) prevents them  from engaging in substantial gainful activity, defined as work activity that  involves significant physical or mental activities performed for pay or  profit. In other words, these workers are essentially deemed unable to  engage in any regular employment. According to RRB’s 2017 Annual  Report, at the end of fiscal year 2016, the agency was paying 10,300 T&P  disability beneficiaries an average of $1,911 each per month for a total of  about $236 million annually. In fiscal year 2016, data provided by RRB  indicate that the agency approved about 78 percent of the 843  applications for T&P disability benefits it received.

Occupational disability is a unique benefit for railroad workers. RRB  provides these benefits to workers who have physical or mental  impairments that prevent them from performing their specific railroad job,  even though they may be able to perform other kinds of work. For  example, a railroad engineer who cannot frequently climb, bend, or reach,  as required by the job, may be found to be occupationally disabled. To be  eligible for occupational disability benefits, workers must meet certain  labor- and management-negotiated disability criteria as well as certain  age and service requirements. Railroad workers age 60 and older with at  least 10 years of service are eligible to apply, as well as workers of any  age with at least 20 years of service. Workers determined to be eligible  for occupational disability benefits may be able to return to the workforce,  but generally not to their original occupation. According to RRB, at the  end of fiscal year 2016, the agency was paying 21,000 occupational  disability beneficiaries an average of $3,053 each per month for a total of  about $769 million annually. In fiscal year 2016, data provided by RRB  indicate that the agency approved about 98 percent of the 984  applications for occupational disability benefits it received.

Federal law generally requires RRB to conduct CDRs to determine if  beneficiaries continue to meet the disability requirements of the law.  RRB conducts two overall types of CDRs: medical and earnings. In a  medical CDR, disability examiners review a beneficiary’s medical records  and may order additional examinations to determine whether the  individual’s medical condition has improved to the point where it is no  longer considered disabling. In an earnings CDR, disability examiners  review earnings to determine whether beneficiaries are earning income  that exceeds program limits, which could make them ineligible for  benefits. If the agency, while conducting an earnings review, obtains  information that indicates the beneficiary’s medical condition has  improved, RRB can initiate a medical CDR as well. Similarly, if RRB  discovers earnings above program limits while developing evidence for a  medical review, the agency may initiate an earnings CDR.

RRB generally conducts medical reviews with a frequency determined by  the beneficiary’s likelihood of medical improvement, which may fall into  one of three categories: medical improvement expected (MIE)—when a beneficiary’s  impairment demonstrates medical improvement, when improvement is  unpredictable, or when medical intervention may change the  impairment’s severity, among other reasons; medical improvement possible (MIP)—when a beneficiary’s disability  may improve, or the likelihood of medical improvement within 3 years  is not probable; or medical improvement not expected (MINE)—when a beneficiary’s  impairment meets certain listings such as blindness or hearing loss  and generally when a beneficiary has attained 54 ½ years of age.

If a beneficiary’s disability is classified as MIE, RRB generally reviews the  beneficiary’s continuing eligibility for disability benefits at intervals from 6  months to 18 months. For MIP cases, RRB mails a questionnaire at least  once every 3 years that asks a beneficiary to update medical and  earnings information. If the self-reported information indicates medical  improvement or a return to work, RRB may conduct a CDR. For MINE  cases, RRB’s regulations state that it will not routinely review the  beneficiary’s continuing eligibility. (See fig. 1.) According to RRB’s  guidance, factors such as age and work experience may also affect how  and when RRB classifies a beneficiary as MINE, or whether it should  schedule (or “diary”) a CDR. RRB maintains a list of scheduled CDRs in  its CDR Call-Up program. It uses this program to both identify CDRs that  require completion and to schedule CDRs based on the likelihood of  medical improvement.

RRB also started conducting CDRs in 2015 that target cases at high risk  of potential fraud and which officials said could result in the termination of  benefits.

In addition to medical reviews, RRB conducts earnings CDRs for  beneficiaries detected with earnings that exceed disability program  limits. Most earnings CDRs are triggered by unreported earnings  detected through RRB’s policing operation. Policing for earnings involves  an annual data match by SSA in which it uses RRB’s disability beneficiary  database and Internal Revenue Service (IRS) earnings data to detect  unreported earnings. (See fig. 2.) In this process, RRB provides SSA with  a record of all disability beneficiaries, and SSA matches these  beneficiaries against IRS earnings data. For those cases in which  earnings are identified, RRB has an earnings reconciliation process to  determine which beneficiaries may be excluded from an earnings CDR  and which should receive one. For example, RRB considers whether a  beneficiary has any disability-related work expenses, such as the cost of  special transportation or medication, which are deducted from any  earnings, or if the beneficiary has reached full retirement age. (See fig.  2.) In addition, a beneficiary who returns to work or has earnings from  employment is required to report that information to RRB, and the agency  may initiate a CDR depending on the circumstances. If a potential  overpayment is identified as a result of a CDR, the Disability Benefits  Division refers the case to another division within RRB to calculate the  overpayment amount.

Most Beneficiaries Are Not Subject to Medical CDRs, and Data Used to Identify Unreported Earnings and Potential Overpayments Are Outdated

RRB Completed CDRs for Slightly More Than 1 Percent of Disability Beneficiaries in Fiscal Years 2014-2016

Over the 3 years for which RRB was able to provide us with complete  data, the agency completed 427 CDRs. This number represents CDRs  for slightly more than 1 percent of the railroad workers who received  disability benefits during that period, an average of about 35,000,  including both occupational and T&P beneficiaries. Most of the reviews it  completed from fiscal years 2014 through 2016 were medical CDRs, but  earnings CDRs identified most of the ineligible beneficiaries and  overpayments. Of the 427 CDRs completed, 209 were medical CDRs and  163 were earnings CDRs. In 55 cases, both a medical and an earnings  CDR were completed.

Forty-three of the scheduled medical CDRs completed were based on  medical improvement criteria. Another 166 of the medical CDRs  completed were based on “high-risk” selection criteria that were  developed after fraudulent activities came to light among Long Island Rail  Road (LIRR) beneficiaries in the late 1990s through 2008. RRB uses the  high-risk selection criteria to target occupational disability beneficiaries  who share certain characteristics that are common to the employees who  participated in the LIRR fraud scheme. Overall, RRB determined that  about 86 percent of beneficiaries remained eligible for benefits as a result  of all of the CDRs completed in fiscal years 2014-2016. (See fig. 3.)

Medical CDRs Identified Few Ineligible Beneficiaries and Overpayments

During fiscal years 2014-2016, RRB completed a total of 43 medical  CDRs for beneficiaries–about 0.1 percent of disability beneficiaries–that  were scheduled based on beneficiaries’ medical improvement category.  Our analysis of RRB’s data and policies suggests that RRB completes  few medical CDRs relative to the total number of disability beneficiaries  because it has a high percentage of older disability beneficiaries who may  not be subject to a medical CDR. According to the data provided by RRB,  about 90 percent of individuals who received a disability payment in fiscal  year 2016 were age 55 or older (see fig. 4), and RRB’s Disability Claims  Manual states that at age 54½, a combination of medical and vocational  factors, such as medical condition, age, and work experience, may  preclude a return to work. More specifically, the manual instructs  disability examiners to classify beneficiaries over age 54½ as “medical  improvement not expected” because of the remote likelihood that they will  be able to engage in medium or heavy work.

Scheduled medical CDRs resulted in few terminations and identified few  overpayments. Data provided by RRB indicate that of the 43 medical  CDRs completed during fiscal years 2014-2016, 3 ineligible beneficiaries  were identified and 1 overpayment of $28,000 was identified and  calculated. RRB determined that 40 of the 43 beneficiaries (93 percent)  continued to meet the appropriate disability criteria for occupational or  T&P disability, as applicable, and qualify for benefits (see sidebar). These  results largely mirror RRB’s initial approval rates for disability benefits. In  fiscal year 2016, 89 percent of all disability applicants were approved for  benefits.

RRB Developed Criteria for Conducting Additional Medical CDRs to Target Cases at Risk for Fraud, but These CDRs Identified No Ineligible Beneficiaries in Two Years

In fiscal year 2015, RRB expanded the use of medical CDRs to include  certain high-risk occupational disability cases that would previously only  have been selected for a CDR if RRB received a report of medical  recovery or identified earnings that could affect entitlement to benefits. As  part of its Disability Program Improvement Plan, RRB developed selection  criteria to target cases at high risk for potential fraud that could result in  termination of benefits. According to RRB officials, the criteria for  targeting these cases are based on characteristics common to the  employees who participated in the LIRR fraud scheme. In order to fall  within the high-risk group, a beneficiary must (1) have an occupational  disability, (2) have an orthopedic or psychological impairment, (3) be  under age 55, and (4) not have a disability freeze.

Despite these targeted criteria, the 166 high-risk CDRs completed in  fiscal years 2015 and 2016 identified no ineligible beneficiaries and no  overpayments. According to a senior RRB official, the agency is not yet  ready to abandon its high-risk CDR effort, and it continues to consider  these reviews as potentially effective. However, high-risk CDR outcomes  raise questions about the value and benefit of RRB dedicating resources  to conduct these additional reviews.

Earnings CDRs Identified the Greatest Number of Ineligible Beneficiaries and Overpayments, but Outdated Earnings Information Limits Their Effectiveness

Earnings CDRs resulted in a higher percentage of terminations and  identified more overpayments than scheduled and high-risk medical  CDRs combined. During fiscal years 2014-2016, RRB completed 163  earnings CDRs. Most of these earnings CDRs (127) were initiated as a  result of RRB’s annual earnings policing effort, in which RRB’s beneficiary  database is matched against Internal Revenue Service earnings data.  Other CDRs were initiated as a result of self-reported earnings  information from beneficiaries. Over this 3-year period, earnings CDRs  identified 47 ineligible beneficiaries and terminated their benefits. During  this same time period, earnings CDRs identified at least $970,550 in  overpayments that had been calculated for CDRs completed during fiscal  years 2014-2016.

However, earnings CDRs that were conducted may identify additional  overpayments but RRB is slow to calculate overpayments. We  determined that the overpayment data RRB provided for CDRs completed  during 2014-2016 were incomplete. For example, a case file review of six  randomly selected earnings CDRs completed in fiscal year 2016 found  that in three of the cases, the Retirement and Survivor Benefits Division (RSBD), the office responsible for calculating overpayments, had not  calculated the overpayments identified by those 2016 reviews as of July  2017. RRB officials acknowledged delays of a year or more in calculating  overpayments for disability beneficiaries identified by CDRs, and that  RRB lacks a standard time frame for doing so. The officials attributed the  delays to competing priorities and staffing shortages within RSBD. RRB  has no plans to establish a standard time frame for processing  overpayments identified through CDRs.

Identifying and calculating overpayments in a timely manner are important  to RRB’s long-term performance goal related to payment accuracy, as  outlined in its strategic plan. Further, federal internal control standards  state that transactions should be recorded promptly to maintain their  relevance and value to management in controlling operations.

In addition, although RRB’s annual earnings policing effort has identified  numerous beneficiaries with earnings over program limits as well as  overpayments, the data RRB uses for its policing effort can be up to 2  years old. The data RRB uses to identify unreported earnings and  determine whether it should initiate a CDR are based on outdated IRS  earnings information. For example, income earned in calendar year 2014  that is filed with the IRS in 2015 would not become available for earnings  policing until 2016.

Further, the earnings discovered during the course of a CDR may be  even older than 2 years. Our review of the six earnings CDRs completed  in fiscal year 2016 found the earned income in question ranged from 2011  through 2013. RRB officials acknowledged that the data it currently uses  for its policing effort cause delays in identifying earnings. When  overpayments are not identified in a timely manner, RRB’s ability to  detect when a beneficiary is not eligible for benefits is hindered, thereby  increasing the potential for lost federal dollars. In addition, the delay may  also cause larger overpayments since undetected overpayments can  accrue over several years.

We previously recommended that RRB explore options to obtain more  timely earnings data for use in making disability benefit eligibility  determinations, which includes CDRs. In response, RRB officials said  one step they have recently taken is to use The Work Number, which  includes payroll data from over 5,500 employers nationwide, on a case- by-case basis for CDRs to obtain more recent earnings information from  employers for a specific beneficiary. In addition, RRB contacts  employers directly to obtain earnings information needed for CDRs.  However, according to a RRB official, IRS earnings data are currently the  only source to which RRB has access for earnings policing that includes  all of its disability beneficiaries.

RRB has considered conducting earnings policing using the Department  of Health and Human Services’ quarterly earnings data from the National  Directory of New Hires, which includes the most recent eight quarters of  wages reported from all states. In its budget submissions for fiscal years  2017-2019, RRB included a legislative proposal seeking access to these  quarterly earnings data, since access is limited by statute. Several federal  agencies, including the Departments of the Treasury, Education, Housing  and Urban Development, and the Social Security Administration, are  currently authorized by law to use data from the National Directory of New  Hires to verify program eligibility and detect and prevent overpayments.  Providing RRB with similar access to more recent earnings data would  enable it to identify potential overpayments sooner than is currently  possible.

SSA has legal authority to access quarterly wage data from the National  Directory of New Hires for the purpose of making disability benefit  eligibility determinations, which includes CDRs. In March 2017, SSA  implemented the Quarterly Earnings Project in which it matched certain  Social Security Disability Insurance beneficiaries against these earnings  data with the goal of reducing overpayments. According to SSA officials,  the project identified beneficiaries with substantial earnings, on average,  1 year earlier when using quarterly wage data instead of earnings data  from the IRS—the data RRB currently uses to conduct its annual earnings  match. SSA officials project that the Quarterly Earnings Project will  achieve an estimated $10.3 million in savings and benefit terminations in  22 percent of the roughly 10,000 cases selected for review in fiscal year  2017.

RRB’s Oversight of Its CDR Program Has Focused on High- Risk Reviews Rather Than Overall Program Data

RRB Has Reviewed High- Risk CDRs, but Outcomes Call This Effort into Question

RRB’s Program Evaluation and Management Services (PEMS), which is  tasked with conducting reviews to ensure efficient program performance,  has conducted two internal reviews of the high-risk medical CDRs since  they were first implemented in 2015. PEMS concluded in its 2016 report  that conducting high-risk CDRs based solely on the likelihood of medical  improvement demonstrated no return on investment. PEMS officials  recommended that the Disability Benefits Division focus its resources on  investigating non-reported work and earnings rather than on developing  medical evidence; however, RRB continues to dedicate resources to  developing medical evidence for high-risk CDRs, and a senior RRB  official said the agency is not ready to abandon its high-risk CDR effort.  RRB officials said they plan to track certain annual measures for high-risk  CDRs, such as the number of cases referred to the OIG for potential  fraud, CDR outcomes (continuances, suspensions, and terminations),  and any overpayments identified.

Our findings and PEMS’s 2016 conclusions indicate that these high-risk  medical CDRs have not been effective in identifying ineligible  beneficiaries, or identifying potential fraud. High initial approval rates for  occupational disability benefits—over 96 percent for fiscal years 2008- 2016—may be an indication that high-risk CDRs for occupational  beneficiaries would result in most beneficiaries continuing to qualify for  benefits, since the same disability criteria are used to evaluate medical  condition for initial decisions and CDRs. By continuing to conduct high- risk CDRs, RRB may be expending resources that could be used for  other purposes that are more effective in identifying ineligible  beneficiaries.

RRB Does Not Routinely Compile and Analyze CDR Program Data for All CDRs

Aside from RRB’s efforts to oversee its high-risk medical reviews, it does  not routinely analyze program data for its CDR operations as a whole.  The lack of routine data collection and analysis limits its ability to identify  potential gaps in oversight and monitor program performance. RRB  officials said compiling comprehensive information for the CDR program  can be challenging because CDR data are housed in multiple systems,  some of which use outdated software and are not compatible with each  other. For example, information related to CDR overpayments is housed  in at least three separate systems. Further, according to RRB officials,  some case information is only available in paper files.

RRB has taken some steps to improve its ability to access information,  such as converting its paper files to electronic images, but the information  in the images cannot easily be analyzed. RRB was able to compile data  for fiscal years 2014-2016 for our review that made it possible for us to  analyze different aspects of the CDR program, such as the number of  medical and earnings CDRs completed each year, the amount of  overpayments identified as a result of CDRs, and CDR outcomes.  However, RRB was unable to provide complete historical data for CDRs  completed before fiscal year 2014. If RRB routinely compiled and  analyzed these data for its own purposes, it could better monitor CDR  program performance. This would be consistent with federal internal  control standards, which state that management should use program data  for effective program monitoring.

Routinely compiling and analyzing CDR program data would also allow  RRB to identify potential gaps in oversight. For example, our analysis of  the data provided by RRB indicated that 10 percent of the 427 cases for  which it completed a CDR during fiscal years 2014-2016 lacked a valid  initial medical improvement category—medical improvement expected,  possible, or not expected—which is assigned when beneficiaries are first  awarded benefits. Since RRB schedules medical CDRs based on medical  improvement category information, and we found that medical  improvement category data are incomplete for 10 percent of the CDRs  completed during fiscal years 2014-2016, this raises questions as to  whether RRB is scheduling and conducting medical CDRs for everyone it  should be. RRB officials said the only way to verify a beneficiary’s  medical improvement category is to perform an individual query in the  CDR Call-Up program or check the paper files, which could be very time- consuming and labor-intensive to do for all beneficiaries.

RRB also lacks data on the total number of beneficiaries currently in each  medical improvement category. Without these data, RRB cannot  anticipate how many medical CDRs it should expect to conduct and  when. Federal internal control standards state that management should  use quality information to make informed decisions, and that quality  information is current, complete, and accurate.

RRB’s ability to monitor the performance of its CDR program is also  limited because it does not track all costs or benefits of conducting CDRs.  For example, RRB officials told us they do not analyze certain program  data, such as administrative costs and recovered overpayments for  CDRs. Analyzing these program data would enable RRB to compare any  savings produced by CDRs against the cost of administering them. RRB’s  strategic plan states that the agency measures the efficiency of its  agency-wide program integrity efforts by comparing any savings they  produce against the cost of administering the activities. According to the  plan, program integrity efforts that can identify savings include computer  matching to prevent payments to deceased beneficiaries and referring  suspected fraud to the OIG. In its fiscal year 2017 Performance and  Accountability Report, RRB reported a return on investment of $4.18 for  each dollar spent on combined program integrity efforts in fiscal year  2016. However, we do not know how CDRs contributed to this return on  investment or the savings resulting from CDRs specifically.

As a steward of tax dollars, it is important that RRB take all necessary  steps to operate and manage its disability program effectively and  efficiently, while minimizing overpayments. RRB’s continued reliance on  outdated earnings information to identify beneficiaries who, at the time a  CDR is conducted, may no longer be eligible for benefits, increases the  likelihood of making improper benefit payments and having to try to  recover the money in the future. In addition, even for those overpayments  that RRB identifies, it lacks a standard for processing them in a timely  manner, which increases the potential loss of federal dollars.  Furthermore, despite a RRB report that high-risk medical CDRs have not  been effective, the agency expends resources on these reviews that  could be used for other purposes that are more effective in identifying  ineligible beneficiaries.

RRB’s lack of routine data collection and analysis hampers its ability to  monitor program performance and determine what changes, if any,  should be made to improve the CDR program, including determining the  number of beneficiaries in each medical improvement category and the  costs and benefits of conducting the various types of reviews. While  paper files and disparate data systems present challenges to collecting  and analyzing program data and may hinder oversight efforts, RRB could  be doing more with the data it has to identify potential gaps in oversight.

To improve RRB’s ability to make accurate disability benefit eligibility  determinations, including CDRs, and to decrease the potential for making  improper payments, Congress should consider granting RRB access to  the Department of Health and Human Services’ quarterly earnings  information from the National Directory of New Hires database. (Matter for  Consideration 1)

To enhance RRB’s ability to manage and oversee its CDR program, we  are making the following three recommendations to the Railroad  Retirement Board:  RRB should develop a standard for the timely processing of disability  program overpayments identified through CDRs. (Recommendation 1)

RRB should consider whether to reallocate resources used for high-risk  CDRs to other CDR efforts that produce more effective outcomes.  (Recommendation 2)

RRB should routinely compile and analyze CDR program data, such as  the number of cases selected for review, the number of beneficiaries in  each medical improvement category, outcomes, and the costs and  benefits of conducting CDRs, to improve program oversight.  (Recommendation 3)

We provided a draft of this report to RRB for review and comment. RRB  provided written comments, which are reproduced in appendix II. The  agency also provided additional technical comments, which have been  incorporated as appropriate. RRB agreed with all three of the  recommendations and noted that it has already taken initial steps to  implement them.

We are sending copies of this report to the appropriate congressional  committees, the Railroad Retirement Board, and other interested parties.  In addition, the report will be 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) 512-7215 or curdae@gao.gov. 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 III.

Appendix I: Railroad Retirement Board Funding and Expenditures, Fiscal Years 2007 Through 2016

In fiscal years 2007 through 2016, RRB received, on average,  approximately $11.6 billion annually from multiple sources to fund its  programs. RRB’s budget in fiscal year 2016, the most recent year for  which data are available, was $12.4 billion. (See table 1.)

Railroad retirement, survivor, disability, unemployment, and sickness  benefit payroll taxes are the primary funding source for RRB and totaled  $5.9 billion in fiscal year 2016. In fiscal years 2007-2016, these taxes  averaged $5.2 billion annually. Railroad employers and employees pay  Tier I taxes, which are the same as taxes levied on Social Security- covered employers and workers. The taxes fund benefits similar to Social  Security retirement and disability. Employers and employees also pay  Tier II taxes to finance additional railroad retirement benefits. According to  RRB data, Tier I and Tier II taxes for fiscal year 2016 amounted to $2.8  billion and $3.1 billion, respectively. Railroad employers also paid  approximately $117.2 million in unemployment insurance taxes in fiscal  year 2016.

The second major source of RRB funding consists of transfers from the  Social Security trust funds under a financial interchange between the two  systems. The financial interchange is intended to place the Social  Security Old-Age and Survivors Insurance Trust Fund and the federal  Hospital Insurance Trust Fund in the same condition they would have  been in had railroad employees been covered by the Social Security Act  and Federal Insurance Contributions Act, and the Railroad Retirement Act  had not been enacted. The financial interchange calculation involves  computing the amount of Social Security taxes that would have been  collected on railroad employment and computing the amount of benefits  which Social Security would have paid to railroad retirement beneficiaries  during the same fiscal year. When benefit reimbursements exceed payroll  taxes, the difference, with an allowance for interest and administrative  expenses, is transferred from the Social Security Trust Funds to RRB. If  taxes exceed benefit reimbursements, which has not happened since  1951, a transfer would be made in favor of the Social Security Trust  Funds. According to RRB data, the net financial transfer to the Social  Security Equivalent Benefit Account during fiscal year 2016 amounted to  about $4.1 billion; in fiscal years 2007-2016, these transfers averaged  $4.0 billion annually.

The third major source of RRB funding is transfers from the National  Railroad Retirement Investment Trust, the trust fund that holds assets to  help pay a portion of RRB benefits. The Trust was established pursuant  to Section 105 of the Railroad Retirement and Survivors’ Improvement  Act of 2001, and is the vehicle for investing RRB retirement benefit  assets in non-government securities. Under the Trust’s investment  guidelines, assets are invested in both government securities and private  equities, unlike the Social Security Trust Funds, which are only invested  in government securities. The Trust also provided for the transfer of  excess RRB retirement, survivor, and disability benefit payroll taxes that  are not needed to pay benefits to the Trust for investment, and for  transfers from the Trust to the Treasury to assist the RRB in meeting its  benefit obligations. The Trust has not received transfers from the RRB  since the end of fiscal year 2004. During fiscal year 2016, however, the  Trust transferred a total of $1.4 billion to the Treasury for payment of RRB  benefit obligations; for fiscal years 2007-2016, these transfers averaged  $1.6 billion annually. According to RRB data, the value of Trust-managed  assets at the end of fiscal year 2016 was $25.1 billion.

The fourth major source of RRB funding is appropriations. According to  RRB officials, most of these appropriations are derived from the taxation  of railroad retiree benefits and primarily fund benefit payments. These  appropriations also fund specific efforts such as administrative costs. In  fiscal year 2016, RRB received $790.6 million in federal appropriations;  for fiscal years 2007-2016, RRB’s annual appropriation averaged $655.4  million.

In fiscal years 2007-2016, RRB expended, on average, approximately  $11.6 billion annually to fund its programs. (See table 2.)

RRB’s expenditures in fiscal year 2016, the most recent year for which  data are available, were $12.8 billion, which included approximately $12.5  billion for benefit payments, $156.0 million for salaries and expenses, and  $98.0 million for interest expenses due to borrowing from Treasury for the  financial interchange.

By law, RRB is required to prepare an annual report to the President and  Congress containing a 5-year projection on revenues to and payments  from the Railroad Retirement Account (RRA). In its June 2017 report,  RRB projected that cash flow problems would not occur during the 25- year projection period (calendar years 2017-2041). The report also  recommended no change in employer and employee tax rates and no  diversion of taxes from the RRA to the Railroad Unemployment Insurance  Account (RUIA).

Appendix II: Comments from the Railroad Retirement Board

Appendix III: GAO Contact and Staff Acknowledgments

In addition to the contact named above, Mark Glickman (Assistant  Director), Arthur T. Merriam Jr. (Analyst-In-Charge), Meredith Moore, and  Jill Yost made significant contributions to this report. Also contributing to  this report were Daniel Concepcion, Erin Godtland, Joel Green, Nicole  Jarvis, David Lehrer, Emei Li, Olivia Lopez, Sheila McCoy, Phillip  McIntyre, Jean McSween, Mimi Nguyen, James Rebbe, Anjali  Tekchandani, Frank Todisco, and Kathleen van Gelder.

Social Security Disability: SSA Could Increase Savings by Refining Its  Selection of Cases for Disability Review. GAO-16-250. Washington, D.C.:  February 11, 2016.

Railroad Retirement Board: Actions Needed to Reduce Continued Risk of  Fraud and Improper Payments. GAO-15-535T. Washington, D.C.: May 1,  2015.

Railroad Retirement Board: Total and Permanent Disability Program at  Risk of Improper Payments. GAO-14-418. Washington, D.C.: June 26,  2014.

Use of the Railroad Retirement Board Occupational Disability Program  across the Rail Industry. GAO-10-351R. Washington, D.C.: February 4,  2010.

Railroad Retirement Board: Review of Commuter Railroad Occupational  Disability Claims Reveals Potential Program Vulnerabilities.  GAO-09-821R. Washington, D.C.: September 9, 2009.