ABOUT THIS REPORT

The Department of Transportation’s (DOT) Performance and Accountability Report (PAR) for Fiscal Year 2005 (Report) provides performance and financial information that enables Congress, the President, and the public to assess the performance of the Department relative to its mission and stewardship of the resources entrusted to it. This Report satisfies the reporting requirements of the following major legislation.

• Reports Consolidation Act of 2000
• Government Performance and Results Act of 1993
• Chief Financial Officers Act of 1990
• Government Management Reform Act of 1994

Under the Reports Consolidation Act of 2000, agencies are permitted to submit combined reports in implementing statutory requirements for financial and performance management reporting to improve the efficiency of executive branch performance.

These reports are combined in the PAR, which consists of the Annual Performance Report—required by the Government Performance and Results Act of 1993—with annual financial statements—required under the CFO Act, as amended by the Government Management Reform Act of 1994—and other reports, such as assurances on internal control, accountability reports by agency heads, and Inspector General assessments of an agency’s management challenges.

Additional copies of the Department of Transportation’s Fiscal Year 2005 Performance and Accountability Report are available by writing to

U.S. Department of Transportation
Office of the Chief Financial Officer
400 7th Street S.W., Room 10101
Washington, DC 20590

You may also view this Report online at http://www.dot.gov

HOW THIS REPORT IS ORGANIZED

Management’s Discussion and Analysis (MD&A)

The Management’s Discussion and Analysis (MD&A) section provides a summary of the entire Report. It includes an organizational overview; a summary of the most important performance results and challenges for FY 2005; a brief analysis of financial performance; a brief description of systems, controls, and legal compliance; and information on the Department's progress in implementing the President's Management Agenda. The MD&A also addresses the management challenges identified by the Department’s Inspector General and a summary of the Inspector General’s audit report.

The Performance Report

The Performance Report section contains the annual program performance information required by the Government Performance and Results Act of 1993 (GPRA), and includes all of the required elements of an annual program performance report as specified in OMB Circular A-11, Preparing, Submitting and Executing the Budget. The results are presented by Strategic Objective.

The Financial Report

The Financial Report section contains the Department's financial statements, notes, required supplementary information, supplementary information pertaining to the Department's stewardship of Federal assets, related Inspector General’s audit report, and other accompanying information.

DOT MISSION AND VALUES

MISSION

To develop and administer policies and programs that contribute to providing fast, safe, efficient, and convenient transportation at the lowest cost consistent with the National objectives of general welfare, economic growth and stability, the National security, and the efficient use and conservation of the resources of the United States.

VALUES

PROFESSIONALISM

As accountable public servants, we exemplify the highest standards of excellence, integrity, courtesy and respect in the work environment.

TEAMWORK

We support each other, respect differences in people and ideas, and work together in ONE DOT fashion.

CUSTOMER FOCUS

We strive to understand and meet the needs of our customers through service, innovation, and creativity. We are dedicated to delivering results that matter to the American people.

ORGANIZATION

HISTORY

Established in 1967, DOT sets Federal transportation policy and works with State, local, and private sector partners to promote a safe, secure, efficient, and interconnected National transportation system of roads, railways, pipelines, airways, and seaways. DOT’s overall objective of creating a safer, simpler, and smarter transportation program is the guiding principle as we move forward to achieve specific goals.

HOW WE ARE ORGANZIED

DOT employs almost 60,000 people across the country, in the Office of the Secretary of Transportation (OST) and through twelve Operating Administrations (OAs) and bureaus, each with its own management and organizational structure.

The Office of the Secretary of Transportation provides overall leadership and management direction, administers aviation economic programs, and provides administrative support. The Office of Inspector General (OIG) and the Surface Transportation Board (STB), while formally part of DOT, are independent by law.

OVERVIEW OF LEGISLATIVE AUTHORITIES

The DOT strategic plan summarizes the legislative authorities of each Operating Administration. To provide a context for the reader, the highlights of the responsibilities of each OA are listed below.

Office of the Secretary. The Office of the Secretary (OST) oversees the formulation of National transportation policy and promotes intermodal transportation. Other responsibilities range from negotiation and implementation of international transportation agreements, assuring the fitness of U.S. airlines, enforcing airline consumer protection regulations, issuance of regulations to prevent alcohol and illegal drug misuse in transportation systems and preparing transportation legislation.

Federal Aviation Administration. The Federal Aviation Administration's (FAA) mission is to promote aviation safety and mobility by building, maintaining, and operating the Nation's air traffic control system; overseeing commercial and general aviation safety through regulation and inspection; and providing assistance to improve the capacity and safety of our airports.

Federal Highway Administration. The mission of the Federal Highway Administration (FHWA) is to enhance mobility through innovation, leadership, and public service.

Federal Motor Carrier Safety Administration. The Federal Motor Carrier Safety Administration's (FMCSA) primary mission is to prevent commercial motor vehicle-related fatalities and injuries.

Federal Railroad Administration. The Federal Railroad Administration's (FRA) mission is to ensure that our Nation has safe, secure, and efficient rail transportation that enhances the quality of life for all.

Federal Transit Administration. The Federal Transit Administration (FTA) provides leadership, technical assistance, and financial resources for safe, technologically advanced public transportation that enhances mobility and accessibility, improves America's communities, preserves the natural environment, advances economic growth, and ensures that transit systems are prepared to function during and after criminal or terrorist attack.

Maritime Administration. The Maritime Administration's (MARAD) mission is to promote the development and maintenance of an adequate, well-balanced U.S. merchant marine that is sufficient to carry the Nation's domestic waterborne commerce and a substantial portion of its waterborne foreign commerce, and to serve as a naval and military auxiliary in time of war or National emergency.

National Highway Traffic Safety Administration. The National Highway Traffic Safety Administration’s (NHTSA) mission is to save lives, prevent injuries and reduce economic costs due to road traffic crashes through education, research, safety standards, and enforcement activity. The agency conducts critical behavioral and vehicular programs, and provides grants to the States for the administration of highway traffic safety programs.

Office of Inspector General. The Inspector General Act of 1978, as amended, established the Office of Inspector General (OIG) as an independent and objective organization within the DOT. The OIG’s mission is to promote economy, effectiveness, and efficiency and to prevent and detect fraud, waste, and abuse in DOT operations and programs by conducting and supervising independent and objective audits and investigations.

Pipeline and Hazardous Materials Safety Administration. The Pipeline and Hazardous Materials Safety Administration (PHMSA) is dedicated to safety and security by working toward the elimination of transportation-related deaths and injuries in hazardous materials and pipeline transportation, and by promoting transportation solutions that enhance communities and protect the natural environment.

Research and Innovative Technology Administration. The Research and Innovative Technology Administration (RITA) is dedicated solely to the advancement of DOT priorities for innovation and research in transportation technologies and concepts. Innovations that will improve our mobility, promote economic growth, and ultimately deliver a better integrated transportation system.

Saint Lawrence Seaway Development Corporation. The U.S. Saint Lawrence Seaway Development Corporation (SLSDC), a wholly owned government corporation and an OA of DOT, is responsible for the operations and maintenance of the U.S. portion of the St. Lawrence Seaway between Montreal and Lake Erie.

Surface Transportation Board. The Surface Transportation Board (STB) is charged with promoting substantive and procedural regulatory reform in the economic regulation of surface transportation, and with providing an efficient and effective forum for the resolution of disputes and the facilitation of appropriate business transactions.

PERFORMANCE HIGHLIGHTS

Secretary Norman Y. Mineta is committed to ensuring that our transportation system remains safe, secure, and efficient and that it serves as the engine that drives our Nation's economy. Because economic activity and global trade are increasing our roads, railways, pipelines, public transit systems, airways, and waterways are experiencing unprecedented growth in demand.

This Administration is working to ensure that our transportation system has the capacity to accommodate the needs of a growing and prosperous America. Below we present the highlights of our Fiscal Year (FY) 2005 results in our five strategic areas: safety, mobility, global connectivity, environmental stewardship, and security. We also present our internal organizational achievements that enhance DOT's performance as a results-driven Federal agency.

SAFETY

Transportation makes possible the movement of people and goods fueling our economy and improving our quality of life. At the same time, transportation exposes us to the risk of harm. While we have made progress in making all modes of transportation safer, the Department's top priority and central focus remains improving safety. All modes of transportation have a share in achieving our strategic safety objective: Enhance public health and safety by working toward the elimination of transportation-related deaths and injuries.

Although we have more work to do to meet our aggressive performance targets, we can report results in several areas this year that are the best since record keeping began. The highway fatality rate reported in FY 2005 was the lowest in 30 years. The early estimate of the fatality rate per 100 million vehicle-miles traveled shows a decline to an estimated value of 1.43, below 1.50 for the third consecutive year. The total number of fatalities also declined, reversing a six-year trend, to 42,643 fatalities. The number of crash related injuries dropped to a historic low. The early estimates for the large truck-involved fatality rate show a slight increase over last year’s due to the increase in number of miles traveled and number of large trucks on the road. Safety belt use reached a historic high of 82% in 2005. In addition, all 50 States, the District of Columbia, and Puerto Rico have contributed to highway safety by lowering the legal threshold for impaired driving to 0.08 blood alcohol concentration, contributing to a 2.4% decrease in the alcohol-related fatality rate.

In aviation, DOT achieved the lowest airline fatal accident rate in the history of aviation and has improved trends in reducing general aviation accidents. The FAA is currently exceeding its FY 2005 goal of reducing the airline fatal accident rate to a three-year rolling average rate of 0.023 per 100,000 departures. The actual figure of 0.017 fatal accidents per 100,000 departures translates to about one fatal accident per 5.9 million departures.

For the third year in a row, runway incursions are down. A runway incursion is “any occurrence in the airport runway environment involving an aircraft, vehicle, person, or object on the ground that creates a collision hazard, or results in a loss of required separation with an aircraft taking off, intending to take off, landing, or intending to land.” (“Loss of required separation” refers to the loss of minimum safe distances between aircraft and other objects on the runway surface.)

Total rail-related accidents/incidents declined for the fourth consecutive year. Based on preliminary estimates, DOT expects to exceed the FY 2005 target of 17.14 accidents/incidents per million train miles, limiting accidents/incidents to 16.79 per million train miles. Total rail-related casualties (fatalities and injuries) fell 8.4% for the 10 month period of October 2004 to July 2005.

Transit safety continued to exceed expectations although there was a slight increase in the number of fatalities in FY 2005. FY 2005, transit fatalities increased from 0.359 to 0.492 per 100 million passenger miles traveled. Through capital investment programs, older bus and rail vehicles were replaced with newer, safer vehicles and improvements were made in track and transit facility conditions.

The leading cause of pipeline incidents is excavation damage and PHMSA promotes damage prevention in communities across the U.S. to reduce these failures. Programs in Connecticut, Georgia, Massachusetts, Minnesota, and Virginia contributed to a 30% reduction in damages following the implementation of enforcement in those States.

DOT's impressive safety performance results from targeting unsafe practices for improvement, partnering with an ever-widening group of stakeholders to leverage our resources, and fostering the use of Web-enabled and other technologies to achieve safer transportation.

MOBILITY

Historically, the mobility that transportation provides has helped define us as a people and as a Nation. Our ability to travel from place to place allows us to connect with other people, work, school, and marketplaces throughout the United States and around the world. In partnerships with the States and private transportation providers, we have made continuous improvements in mobility as stated in our strategic objective: Advance accessible, efficient, intermodal transportation for the movement of people and goods. Highlights of our results are presented below.

Recent forecasts indicate that commercial aviation is rebounding. By FY 2007, air carrier, commuter, and air taxi operations are anticipated to increase approximately 12% from 2004. To manage increased air traffic, FAA continued to focus on easing congestion in eight metropolitan areas; improving overall capacity at the Nation's top 35 airports; building new runways; enhancing access to reliever airports for general aviation operations; and increasing traffic coordination and communication by using new technologies.

Mobility and accessible transportation go hand-in-hand. For our aging population and for persons with disabilities, we must be proactive to ensure their mobility and access to transportation, now and in the future. For FY 2005, DOT has met both of its performance targets measuring compliance with the Americans with Disabilities Act (ADA). An estimated 97% of bus fleets are now ADA compliant either being lift-equipped or having low floors to accommodate wheelchairs and people with limited mobility. Approximately 91% of rail stations are also ADA compliant increasing transportation access for all of our citizens.

DOT exceeded the performance target for employment sites made accessible by Job Access and Reverse Commute (JARC) transportation services. This program successfully meets the transportation needs of low-income individuals seeking transportation to jobs and community services. JARC transportation services have reached over 82,000 employment sites, making jobs, employers, job training, and child care accessible for those citizens utilizing the program's services.

To improve the capability of the Nation's transportation system to move current and future levels of freight traffic safely and efficiently, DOT began to implement the Safe, Accountable, Flexible, and Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU) legislation. Among the goals outlined in the legislation are; upgrading our nation's network of roads, bridges and mass transit systems; establishing a safety belt incentive program; providing financing for needed road improvements; and aiming to ease traffic congestion.

Work continued to improve the pavement condition on the Nation's highways. The performance measure that DOT uses to assess pavement condition has been revised to measure pavements with “good” rated ride quality, which is a more stringent standard than previously used. The results from this year show that 54.6% of our roads meet this higher standard, meeting the target for FY 2005. DOT adopted a more ambitious standard because our previous measurement of “acceptable” rated ride quality was consistently in the 90th percentile.

The percent of travel nationwide that is under congested conditions is estimated to be 32.1% in calendar year 2005 which meets this year’s target. Although the congestion levels continue their upward trend, DOT’s efforts have contributed to slowing the rate of the increase. Based on the current state of the highway system, DOT expects that the congestion levels will continue to rise if there is no significant change in transportation system capacity or existing operating practices.

GLOBAL CONNECTIVITY

Transportation systems within and among nations are lifelines to economic growth, to freer trade, and greater cultural exchange. A domestic and international intermodal approach is central to DOT’s role in promoting global connectivity. Our strategies to address transportation in the global economy have two prongs. One is directed toward opening international transportation markets and the other is directed toward the improvement of essential, intermodal transportation linkages.

Supporting economic growth is a fundamental purpose of our transportation network. Transportation facilitates distribution of goods and creates economic value for the producer. Our strategic objective: Facilitate a more efficient domestic and global transportation system that enables economic growth and development, concerns the efficiency of transportation, an important part of our competitive edge in global trade.

In an effort to open more international transportation markets, the Department continues to negotiate “open skies” agreements with other countries. An open skies agreement is another term for a bilateral agreement that lets passenger demand and market conditions, not government regulations, determine landing and departure schedules. In FY 2005, DOT conducted 25 rounds of negotiations, some of which resulted in new open skies agreements with the following six countries: Ethiopia, India, Maldives, Paraguay, Thailand, and Uruguay. Through FY 2005, DOT has negotiated bilateral open skies agreements with 69 countries.

As a result of open skies agreements, more people from around the world have access to better quality, lower priced, more competitive air service. With the new agreements negotiated this year, DOT exceeded its target by providing 2.97 billion potential air transportation consumers the opportunity to travel between the United States and countries with open skies agreements.

Since 1997, the St. Lawrence Seaway Development Corporation (SLSDC) has joined with its Canadian counterpart, the St. Lawrence Seaway Management Corporation, as well as the U.S. and Canadian Coast Guards, to institute a joint boarding program for the foreign vessels that use the Seaway. In FY 2005, the SLSDC continued this program by inspecting 100% of all ocean vessels in Montreal. This improved inspection regime has saved vessels, on average, four hours per transit and ensured that any safety, security, or environmental issues are addressed prior to entering U.S. waters.

SLSDC met its performance target to have the U.S. portion of the Seaway available 99% of the time during the shipping season (frozen rivers and lake conditions prevent shipping during parts of the winter). As a result, delays were reduced and ocean carriers using the Seaway saved more than $500,000 in operating costs during FY 2005.

ENVIRONMENTAL STEWARDSHIP

While transportation ties us together as a Nation, it can also produce unwanted side effects such as air and water pollution, the loss of ecosystems and disruption of communities. Americans want solutions to transportation problems that are consistent with sound environmental planning. DOT is committed to avoiding or mitigating the adverse environmental effects that can accompany transportation as stated in our strategic objective: Promote transportation solutions that enhance communities and protect the natural and built environment. Highlights of our results follow.

Once again, DOT exceeded its target of creating/replacing at least 1.5 acres of wetlands for every acre affected by Federal-aid Highway projects, achieving a ratio of 2.4 to 1 in FY 2005. Federal-aid projects nationwide provided 1,814 acres of compensatory mitigation. A leader in expanding the use of wetland banking and sponsoring wetland research, DOT is proud of its eight year track record of exceeding the target. In a demonstration of commitment to environmental stewardship and ecosystem conservation, DOT recognized eight new Exemplary Ecosystem Initiatives (EEIs), exceeding its target of designating two additional projects in the year. EEIs are reducing habitat fragmentation and barriers to animal movement, encouraging the development of more sustainable mitigation sites, stimulating early ecosystem planning, and fostering ecosystem-based research.

The Maritime Administration (MARAD) has more than 100 obsolete and deteriorating ships awaiting disposal that pose potentially costly environmental threats to the waterways near where they are stored. Due to legal, financial, and regulatory factors that have complicated the disposal effort, MARAD is behind the congressionally mandated disposal schedule. However, in FY 2005, MARAD removed 18 obsolete ships that posed potential environmental hazards at its three fleet sites and dismantled 13 additional ships.

SECURITY

Our transportation system must remain a vital link for mobilizing our armed forces for military contingencies and for supporting civilian emergency response. Examples of our achievements under our strategic objective: Balance homeland and National security transportation requirements with the mobility needs of the Nation for personal travel and commerce, are described below.

DOT provided sealift capacity to the Department of Defense (DoD) in support of Operation Iraqi Freedom during the redeployment phase of the war using 58 Ready Reserve Force vessels, an increase of 37 vessels over FY 2004.

DoD, in conjunction with the DOT’s Maritime Administration negotiates an agreement with each strategic port specifying which facilities will be needed to conduct a military deployment. DOT met a performance target by achieving 95% shipping capacity within mobilization timelines. However, we did not meet our 93% availability target due to commercial congestion at two of the strategic ports. The ports are expected to make their facilities available to the military within 48 hours of notification.

ORGANIZATIONAL EXCELLENCE

Secretary Mineta understands that a culture of foresight and continuous improvement is essential to achieving our strategic objectives. We have put this into practice as evidenced by DOT's achieving the Office of Management and Budget’s “green” rating for four of the five government-wide President's Management Agenda (PMA) initiatives.

DOT's Inspector General released the annual report on the Department's consolidated financial statements, for which we were issued an unqualified audit opinion for the fifth consecutive year. Consolidated financial statements show how the Department is accountable for budgetary resources, provided by American, taxpayers for Federal transportation activities. Individual audits were also conducted for the Aviation and Highway Trust Funds, which both received unqualified opinions.

DOT continues its stewardship of taxpayer monies through its management of large transportation projects (over $1 billion in total cost). Project financial plans are approved at the Department-level and reviewed yearly to track any significant cost and schedule deviations. Areas of program risk are identified earlier so that managers can implement the necessary changes in a timely fashion. Last year, FTA’s New Starts transit program began using a quantitative risk assessment tool to incorporate risk factors into program management planning, thus enhancing our ability to ensure that transit projects meet cost, schedule, and transportation benefit expectations. This year, with implementation of the risk assessment tool, all large transit projects are within 10% of cost estimates. The tool has provided improved project execution trend assessments and helped managers track the impact of their mitigation efforts.

To ensure a secure infrastructure, DOT has certified and accredited 85% of its information technology (IT) systems. This provides management with an acceptable level of assurance that all systems either meet a minimum level of baseline requirements or have plans of action and milestones to mitigate any remaining risks. A continuous vulnerability scanning program has been implemented Department-wide.

RESPONDING TO NATURAL DISASTERS

The National Response Plan (NRP) designates DOT as the lead support agency to the Department of Homeland Security/Federal Emergency Management Agency (FEMA) for transportation-related emergency support and recovery efforts from damage due to an event like Hurricane Katrina. In the aftermath of Hurricane Katrina, DOT oversees Federal infrastructure programs which support the rebuilding of highway, bridge, and airport assets. The FHWA and FAA administer our largest relief programs, the Emergency Relief program, which provides reimbursement to States for expenses related to highway infrastructure damage, and the Airport Improvement Program (AIP), which helps rebuild airport infrastructure. Specifically, DOT provided $5 million in immediate relief funds to begin repairs to the I-10 Twin Span Bridge which connects New Orleans and Slidell, Louisiana. DOT released $5 million in immediate emergency relief funds to the Mississippi Department of Transportation to reimburse the State for repairs to U.S. 90, I-10, and other Federally funded roads and bridges. DOT announced a grant of $15.2 million to repair and rebuild airfield lighting, fencing, and other security systems damaged at Louis Armstrong New Orleans International Airport. DOT has issued a $1.6 million grant for terminal repairs and airfield lighting at Gulfport-Biloxi International Airport.

The Department has also worked closely with the two largest transit agencies affected by Katrina—in New Orleans and Baton Rouge—to secure $47 million in FEMA Public Assistance Funds for emergency transit services. These funds will give evacuees in Baton Rouge access to vital social services, jobs, and medical care, and help returning residents of New Orleans reclaim their city.

In response to Hurricane Katrina, we have provided 11,377 trucks to FEMA in order to move 14,097 truckloads of goods. Over 1,350 buses and 15 helicopters were mobilized to support the evacuation and to assist in the response. We have delivered over 19 million meals ready-to-eat, 25 million liters of water, 13 million pounds of ice, 11,000 power units, and 2,000 mobile homes.

FINANCIAL HIGHLIGHTS

Preparing these statements is part of the Department’s goal to improve financial management and to provide accurate and reliable information that is useful for assessing financial performance and allocating resources. Departmental management is responsible for the integrity and objectivity of the financial information presented in the financial statements.

The financial statements and financial data presented in this Report have been prepared from the accounting records of DOT in conformity with generally accepted accounting principles (GAAP). GAAP for Federal entities are the standards prescribed by the Federal Accounting Standards Advisory Board (FASAB).

OVERVIEW OF FINANCIAL POSITION

Assets

The Consolidated Balance Sheet shows the Department had total assets of $66 billion at the end of FY 2005. This represents a decrease of $2.3 billion (-3.4%) over the previous year’s total assets of $68.3 billion. The decrease is primarily the result of decreases of $1.6 billion in Investments and $581 million in Fund Balance with Treasury. The decrease in Fund Balance with Treasury primarily resulted from a decrease in obligated balances not yet disbursed. The Department’s assets reflected in the Consolidated Balance Sheet are summarized in the following table.

Liabilities

The Department had total liabilities of $12.9 billion at the end of FY 2005. This represents a decrease of $535.6 million (-4.0%) over the previous year’s total liabilities of $13.4 billion, which is reported on the Consolidated Balance Sheet and summarized in the following table.

Of the total liabilities, $3.5 billion were not covered by budgetary resources. The $3.5 billion is primarily comprised of the $477 million liabilities to other Federal agencies (intragovernmental), $1.0 billion liability to Federal Employees’ and Veterans’ Benefits Payable, $1.0 billion of environmental and disposal liabilities, and $1.0 billion other liabilities with the public.

Net Position

The Department’s Net Position at the end of FY 2005 on the Consolidated Balance Sheet and the Consolidated Statement of Changes in Net Position is $53.1 billion, a $1.8 billion (-3.3%) decrease from the previous fiscal year, principally due to an increase in net cost of operations. Net Position is the sum of the Unexpended Appropriations and Cumulative Results of Operations.

Results of Operations

The results of operations are reported in the Consolidated Statement of Net Cost and the Consolidated Statement of Changes in Net Position.

Program Costs

The Department’s total net cost of operations for FY 2005, after intra-departmental eliminations, was $56.9 billion.

Surface and air costs represent 99% of the Department’s net cost of operations. Surface transportation program costs represent the largest investment for the Department at 74.3% of the Department’s net cost of operations; Air transportation is the next largest investment for the Department at 24.7% of the Department’s net cost of operations.

RESOURCES

Budgetary Resources

The Combined Statement of Budgetary Resources provides information on how budgetary resources were made available to the Department for the year and their status at fiscal year-end. For the 2005 fiscal year, the Department had total budgetary resources of $114 billion, an increase of 6.5% from FY 2004 levels of $107 billion.

Budget Authority of $113.2 billion—which consists of $61.5 billion of appropriations received and $50.7 billion of borrowing and contract authority plus net transfers—comprise 99.1% of the total budgetary resources. The Department incurred obligations of $69.8 billion for the 2005 fiscal year, a 3.75% increase over the $67.2 billion of obligations incurred during 2004. Outlays reflect the actual cash disbursed against the Department’s obligations.

FINANCING

The Consolidated Statement of Financing reconciles the resources available to the Department to finance operations with the net costs of operating the Department’s programs.

LIMITATIONS OF THE FINANCIAL STATEMENTS

The principal financial statements have been prepared to report the financial position and results of operations of the Department of Transportation, pursuant to the requirements of 31 U.S.C. 3515 (b).

While the statements have been prepared from the books and records of the Department of Transportation in accordance with generally accepted accounting principles (GAAP) for Federal entities and the formats prescribed by OMB, the statements are in addition to the financial reports used to monitor and control budgetary resources which are prepared from the same books and records.

The statements should be read with the realization that they are for a component of the U.S. Government, a sovereign entity.

MANAGEMENT CONTROLS, FINANCIAL MANAGEMENT SYSTEMS, AND COMPLIANCE WITH LAWS AND REGULATIONS

FEDERAL MANAGERS’ FINANCIAL INTEGRITY ACT

The Federal Managers’ Financial Integrity Act (FMFIA) requires agencies to conduct an annual evaluation of its management controls and financial systems and report the results to the President and Congress. The Secretary of Transportation then prepares an annual Statement of Assurance based on these internal evaluations.

The Secretary of Transportation’s qualified Statement of Assurance for FY 2005 is included in the Message from the Secretary located at the beginning of this Report. The Department evaluated its management control systems and financial management systems for the fiscal year ending September 30, 2005. This evaluation formed the basis of the Secretary’s Statement of Assurance for FY 2005.

FMFIA Annual Assurance Process

The FMFIA review is an agency self-assessment of the adequacy of financial controls in all areas of the Department’s operations —program, administrative, and financial management.

Managers within the Department, being in the best position to know and understand the nature of the problems they face, establish appropriate control mechanisms to ensure Departmental resources are sufficiently protected from fraud, waste, and abuse, and to meet the intent and requirements of the FMFIA.

The head of each Operating Administration and Departmental office submits an annual statement of assurance representing the overall adequacy and effectiveness of management controls within the organization to the Department’s Office of Financial Management. FMFIA material weakness and material nonconformances are also reported, citing milestones and/or accomplishments. Specific guidance for completing the end of fiscal year assurance statement and reporting on material deficiencies is issued annually by the Department’s Office of Financial Management.

Criteria for Reporting Weaknesses and Nonconformances

A material weakness under FMFIA must fall into one or more of the categories below plus merit the attention of the Executive Office of the President and/or the relevant Congressional oversight committees.

A material nonconformance under FMFIA must fall into one or more of the categories below plus merit the attention of the Executive Office of the President or the relevant Congressional oversight committees.

SUMMARY OF FY 2005 FMFIA MATERIAL WEAKNESSES

Status of Internal Controls—FMFIA, Section 2

DOT has three material weaknesses. Two of the material weaknesses—HTF financial reporting and Highway grants management—were carryovers from FY 2004. FAA financial reporting is a new material weakness. The three material weaknesses are:

HTF Agencies’ Financial Management and Reporting Activities. Since the audit of the FY 2003 HTF financial statements, we reported that material deficiencies existed in internal controls over financial management and reporting activities in the HTF agencies. While FHWA began making organizational and procedural improvements during FY 2005, many of the improvements were initiated too late in the year and were not in effect for sufficient time to overcome the accounting problems that existed in prior years. In addition, extraordinary efforts were again needed to prepare the HTF financial statements during the year and at September 30, 2005. The remaining deficiencies to be overcome include (1) financial statement preparation and analysis, (2) resolving reconciliation differences during the year, (3) implementing managerial cost accounting, (4) tracking intragovernmental transactions, and (5) linking the FACTS II reporting to the financial statement preparation process.

Financial Oversight of Highway Grants. Last year we reported that FHWA and the FTA needed to establish stronger financial and cost controls to better ensure that grant funds are protected from fraud, waste, and abuse. FHWA and FTA have both implemented improved procedures and controls over grants during FY 2005. For example, FHWA initiated the Financial Integrity Review and Evaluation (FIRE) program in March 2005, and FTA instituted sufficient improvements in its oversight of transit grants to not be included in the material weakness this year. However, FHWA needs to continue to improve its financial oversight of highway grants.

Processing of FAA Transactions and Reconciliation of Accounts. Last year, FAA faced problems implementing Delphi and a new procurement system. During FY 2005, the problems became more severe and adversely affected FAA’s ability to process transactions and reconcile accounting balances in a timely manner. FAA needs to improve processes and controls to ensure that property plant and equipment is consistently and accurately capitalized, obligations are recorded in a timely manner, reconciliations of Fund balances with Treasury and suspense accounts are timely, abnormal balances in budgetary to proprietary account relationships are investigated, and subsidiary systems and supporting documentation are reconciled to general ledger balances. Consequently, FAA’s interim financial statements were not reliable and FAA needed to make adjustments totaling $2.1 billion to the draft FY 2005 financial statements in order to make them reliable. FAA is committed to correcting the problems in early FY 2006.

The following table shows the Department’s progress during the past five years with correcting and closing material weaknesses.

DEPARTMENT OF TRANSPORTATION
STATISTICAL SUMMARY OF PERFORMANCE
SECTION 2, INTERNAL CONTROLS

NUMBER OF MATERIAL WEAKNESSES

 Of the total number corrected, how many were corrected in 2005: 2;  (R) - Repeat

STATUS OF FINANCIAL MANAGEMENT SYSTEMS FMFIA, SECTION 4

One material nonconformance from FY 2004—financial system controls—was downgraded to a reportable condition in FY 2005. DOT reported again this year that the Department was not in substantial compliance with OMB Circular A-127. For FY 2005 this noncompliance consists of three issues: Preparation of financial statements; Use of a Standard General Ledger (credit reform/loans); and Federal Accounting Standards (cost accounting).

DEPARTMENT OF TRANSPORTATION
STATISTICAL SUMMARY OF PERFORMANCE
SECTION 4, FINANCIAL MANAGEMENT SYSTEMS

Of the total number corrected, how many were corrected in 2005: 1;  (R) - Repeat

FEDERAL FINANCIAL MANAGEMENT IMPROVEMENT ACT

The Federal Financial Management Improvement Act of 1996 (FFMIA) requires that agencies’ financial management systems provide reliable financial data in accordance with generally accepted accounting principles and standards. Under FFMIA, financial management systems must substantially comply with three requirements: Federal financial management system requirements; applicable Federal accounting standards; and the U.S. Government Standard General Ledger (SGL). In addition, agencies must determine annually whether their systems meet these requirements. This determination is to be made no later than 120 days after the earlier of (a) the date of receipt of the agency-wide audited financial statement, or (b) the last day of the fiscal year following the year covered by such statement.

To assess conformance with FFMIA, the Department uses OMB Circular A-127 survey results, FFMIA implementation guidance issued by OMB, results of OIG and GAO audit reports, annual financial statement audits, the Department’s annual Federal Information Security Management Act (FISMA) Report, and other relevant information. The Department’s assessment also relies a great deal upon evaluations and assurances under the FMFIA, with particular importance attached to any reported material weaknesses and material nonconformances.

FFMIA of 1996 Noncompliance Issues

In FY 2005, DOT reported that the Department was not in compliance with FFMIA. For FY 2005, this noncompliance consists of three issues: preparation of financial statements, use of Standard General Ledger, and Federal Accounting Standards (cost accounting).

Preparation of Financial Statements. The process used by FHWA and FAA, including utilization of the Delphi accounting system, was not adequate to prepare reliable and timely financial statements during the year or at September 30, 2005. Several adjustments were made to correct system processing errors, record activities not recorded at the transaction level, and correct discrepancies with the data reflected in subsidiary systems. FAA system conversion issues contributed to problems in recording all Delphi transactions, which interfered with FAA’s ability to produce accurate and complete financial and budgetary reports.

FFMIA requires agencies to produce auditable financial statements based on data from it financial systems on a timely basis.

Use of Standard General Ledger. HTF Agencies have not consistently used Delphi for routine accounting events at the transaction level to meet OMB and Treasury reporting requirements.

Federal Accounting Standards. HTF Agencies were not in full compliance with the SFFAS No. 4 Managerial Cost Accounting Concepts and Standards for the Federal Government and the related provisions of the Government Performance and Results Act (GPRA). The FY 2005 financial statements did not properly reflect full costs or measure the effectiveness of the Agencies’ programs.

FEDERAL INFORMATION SECURITY MANAGEMENT ACT

FISMA requires Federal agencies to identify and provide security protections commensurate with the risk and magnitude of harm resulting from the loss of, misuse of, unauthorized access to, or modification of information collected or maintained by or on behalf of the agency. DOT maintains one of the largest portfolios of information technology (IT) systems among Federal civilian agencies; it is therefore essential that the Department protect these systems, along with their sensitive data. In FY 2005, DOT’s IT budget totaled about $2.7 billion.

For FISMA, the Inspector General’s office tested a representative subset of DOT systems, including contractor-operated or -maintained systems that had undergone systems security certification reviews in order to determine whether DOT had complied with Government standards for (1) assessing system risks, (2) identifying security requirements, (3) testing security controls, and (4) accrediting systems as able to support business operations.

The IG identified that DOT needs to better manage corrections of system security deficiencies and that FAA needs to take aggressive actions to enhance the air traffic control systems security. In FY 2005, the Government Accountability Office (GAO) identified the need to enhance computer security protection in air traffic control systems and physical security protection at air traffic control facilities. In April 2005, FAA started to initiate aggressive actions to correct previously identified air traffic control security deficiencies.

SAS-70 REVIEW ON DOT’S FINANCIAL MANAGEMENT SYSTEM

An annual external review was conducted for cross-servicing functions within the Department as required by the Office of Management and Budget (OMB) guidance. The OMB requires Centers of Excellence to provide Federal agencies with an independent audit report in accordance with the American Institute of Certified Public Accountants’ (AICPA) Statement of Auditing Standards (SAS) 70.

The Department’s report summarizes the results of a review of system security controls over the DOT Enterprise Service Center’s (service center) Delphi Financial Management System. The Delphi Financial Management System performs accounting and financial management functions for DOT and other Federal agencies. It is maintained by Federal Aviation Administration employees at the Mike Monroney Aeronautical Center in Oklahoma City, Oklahoma, under the direction of the departmental Chief Financial Officer.

The service center is one of four Centers of Excellence designated by the OMB to provide financial management information system services to other Federal agencies. To date, the service center supports one other Federal agency, the National Endowment for the Arts.

Clifton Gunderson, LLP, an independent auditor, of Calverton, Maryland, completed the review. The OIG performed a quality control review of Gunderson’s audit work to ensure that it complied with applicable auditing standards Generally Accepted Government Auditing Standards and the AICPA’s SAS-70.

The Gunderson audit report concluded that management’s description of controls for the Delphi Financial Management System presents fairly, in all material respects, the controls that had been placed in operation as of June 30, 2005. In addition, Gunderson concluded that controls, as described, are suitably designed to provide reasonable assurance that 8 of the 10 specified control objectives would be achieved, if these controls were complied satisfactorily. Gunderson’s testing found that controls were operating effectively to provide reasonable assurance that 7 of the 10 control objectives were achieved during the period from October 1, 2004 to May 31, 2005.

Since September 2003, DOT management implemented more disciplined security administration and oversight of Delphi operations, strengthened controls over access to the General Ledger module to ensure the integrity of financial statement compilation in Delphi, and installed an enclosed area in the computer center to better protect Delphi servers. In addition, management enhanced controls over changes to Delphi production programs and tested the contingency plan to ensure continuity of Delphi operations in case of emergency.

IMPROPER PAYMENTS PROGRAM FOR FY 2005 AND PLANS FOR FUTURE YEARS

In FY 2005, the Department engaged AOC Solutions, Inc. to conduct an improper payments review of FY 2004 payments in ten programs for compliance with the Improper Payments Information Act of 2002 (IPIA). The objectives of this review were to (1) assess the amount and causes of improper payments, (2) identify programs with significant improper payments, and (3) identify action plans for reducing improper payments in programs identified as high risk.

The following programs were reviewed by AOC Solutions, Inc.

* Identified in Section 57 of OMB A-11

During the review, AOC Solutions, Inc. found no significant improper payments which would result in a program exceeding 2.5% and $10 million of the total expenditures for the fiscal year. In total, eight improper payments were found, resulting in a projected amount of improper payment to be $ 8,125.

Additionally, the Department was able to improve its processes over last year. In the previous PAR it was reported that FAA was not able to provide sufficient data or answers to many outstanding questions. During the review this year, FAA was able to provide sufficient information for all questions, and had no questionable payments.

As noted in last year’s PAR, another constraint was the limited amount grant data available. During our review this year, test procedures applied covered payments made by DOT to grantee entities. However, test procedures did not address subsequent flow down payments made by grantees to vendors. States and other non-Federal entities administer these grant programs and, accordingly, much of the activity subject to testing for improper payments is accounted for at these entities.

To address the limitation, DOT devised an innovative research and development (R&D) strategy that was implemented at the Federal Highway Administration’s Highway and Construction grant program. The R&D project strategy; was to develop and test a methodology for implementing the IPIA requirements at the grantee level.

The development phase of this study involved meeting with State transportation and audit officials to document the processes used in administering the Federal Highway Planning and Construction Program. This resulted in a comprehensive document that described the planning and construction phases of projects and a methodology for determining whether goods and services received were in accordance with contractual terms and conditions, including Federal requirements. Payments for goods and services that did not comply with contractual terms and conditions represented an improper payment.

For testing, two project sites were selected to test the methodology. The tests involved a sample value of $21,269,706 from a population value of $26,056,918 for the first project and a sample value of $6,741,482 from a population value of $8,450,999 for the second project.

The tests disclosed three underpayments, one of which (from project one) was statistically insignificant and an extrapolation of the other two to the population of payments for the project (project two) in which they occurred resulted in an improper payment estimate of $ 111,671.

DOT completed the project successfully in the summer of 2005 and is in the process of extending the methodology nationwide.

In 2006 and 2007 the Department has several goals for the improper payments program. First, the Department will continue its recovery audit work, which has been conducted since 2002. While there have been no significant findings, the Department has found it to be very beneficial.

Secondly, DOT will continue to expand the methodology from the R&D project. Work has begun to develop a similar methodology in the Department’s remaining OMB A-11, Section 57 grant programs. To help facilitate the expansion of this methodology the Department has put together the following plans.

In 2006, the Department will begin testing the four Section 57 grant programs for improper payments in a concentrated area. DOT has spent millions of dollars on relief efforts to repair damage from Hurricanes Katrina and Rita. Depending on supplemental appropriations, DOT expects to spend billions of dollars to rebuild the transportation infrastructure in Alabama, Louisiana, Texas, and Mississippi.

By testing for improper payments in this region, DOT will be able to focus on inherently high risk projects, based on the dollar amount and the speed at which money is being spent. This will allow for further refining of our improper payment methodology and contribute to the oversight of these regions. As a result of the testing, DOT will be able to test and establish new controls for emergency projects.

Concurrently, DOT will work with the FAA, FTA, and FHWA grant programs to implement the methodology into their normal grant processes. By having the improper payment methodology worked into the normal grant procedures, the Department will have nationwide testing beginning in FY 2007.

SCORECARD ON THE PRESIDENT’S MANAGEMENT AGENDA

HUMAN CAPITAL INITIATIVE

Develop a Department-wide human capital workforce strategy to address future workforce gaps, eliminate skill gaps in critical occupations, develop performance-based incentives for the workforce, ensure citizen-centered, delayered, and mission-focused organizations; strengthen leadership skills, and ensure a robust leadership pipeline; improve the measurement and evaluation of human capital strategies; and integrate E-Government and Competitive Sourcing strategies.

FY 2005 Status: GREEN

Progress: GREEN

HOW DOT IS MEETING PMA CHALLENGES. DOT’s Human Capital Plan is aligned with the President's Management Agenda and the OPM/OMB Standards for Success. During this fiscal year, the Department:

COMPETITIVE SOURCING INITIATIVE

Improved consistency for defining commercial and inherently governmental inventories across the Department. Identified commercial compatible activities, provided strategic direction for competitive sourcing and human capital initiatives, and developed and shared high-quality intellectual capital with staffs at OPM and OMB.

FY 2005 Status: GREEN

Progress: GREEN

HOW DOT IS MEETING PMA CHALLENGES. In FY 2005, DOT maintained its green status on the President's Management Agenda scorecard for competitive sourcing.

During 2005, DOT completed one standard and six streamlined competitions including the largest and most complex competition conducted to date under OMB Circular A-76 for FAA's automated flight service stations. To date, DOT has completed 20 competitions for over 2,889 full time equivalent positions with anticipated savings of over $2.0 billion over the performance periods.

DOT initiated an Executive Steering Committee for competitive sourcing which evaluates the opportunity for cross organizational competitions throughout the Department and brings more consistency to DOT's competitive sourcing efforts.

DOT requires OAs develop their competitive sourcing plans in conjunction with their workforce planning efforts to ensure human capital solution strategies include public-private competition.

E-GOVERNMENT INITIATIVE

Better justify and track costs and performance of information technology projects, as well as participate in government-wide initiatives that automate and simplify how the public deals with the government and reduce redundancies and increase efficiencies government-wide.

FY 2005 Status: GREEN

Progress: GREEN

HOW DOT IS MEETING PMA CHALLENGES: Capital Planning. Participation in capital planning process expanded across all Operating Administrations. DOT Departmental Investment Review Board (IRB) reviewed and approved the FY 2007 IT portfolio in support of the budget and Department mission and goals. IRB conducted quarterly reviews of high risk major projects. Updated Capital Planning and Investment Control and Enterprise Architecture (EA) policy and governance structure to ensure alignment between the two areas. Achieved 100% acceptable business cases for the FY 2006 budget.

IT Security. DOT has certified and accredited 85% of all IT systems. DOT continues to conduct weekly vulnerability scanning of all public facing and e-Government Web servers. Expanded the vulnerability scanning to internal servers as well as part of a quarterly compliance review process.

Enterprise Architecture (EA). Released an updated iteration of DOT’s Modernization Blueprint including As-Is and To-Be architecture for the DOT common IT infrastructure. The EA Framework and Reference Models are aligned with the OMB Federal Enterprise Architecture Program Management Office Framework. OAs continue to make progress maturing their EAs for their unique business/mission areas.

Government-wide Initiatives. DOT participates in 24 e-Government initiatives that span all four categories. The e-Government project managers work closely with Managing Partners in the implementation of these initiatives. The Office of the Chief Information Officer monitors initiative progress against milestones in the OMB approved e-Gov Implementation Plan. Major schedule and performance issues are brought to the IRB for review and action. DOT completed the migration to a new payroll provider except for FAA who will migrate in October 2005. DOT completed the implementation of a Department-wide Learning Management System except for OIG who will migrate in the first quarter of FY 2006. DOT will complete the implementation of e-Authentication for the SAFER system in October 2005.

BUDGET AND PERFORMANCE INTEGRATION INITIATIVE

Better integrate budget and performance functions by integrating respective staff work; developing plans and budget with outcome goals, output targets, and resources requested in the context of past results; charging full budgetary costs of programs; and documenting program effectiveness.

FY 2005 Status: GREEN

Progress: GREEN

HOW DOT IS MEETING PMA CHALLENGES. In FY 2005, DOT achieved its goals in this area and earned a green score on the scorecard by completing the following:

DOT Performance Plan and Reports. DOT's Performance and Accountability Report has consistently garnered a high standing from George Mason University's Mercatus Center, scoring within the top three across government for the fifth year in a row.

IMPROVED FINANCIAL MANAGEMENT INITIATIVE

Develop financial management systems capable of producing more timely and accurate information, and maintain a record of unqualified opinions on our financial statements.

FY 2005 Status: RED

Progress: GREEN

HOW DOT IS MEETING PMA CHALLENGES

RESEARCH AND DEVELOPMENT INITIATIVE

Apply the Research and Development (R&D) Investment Criteria of relevance, quality, and performance and continuously improve management of research programs.

FY 2005 Status: GREEN

Progress: GREEN

HOW DOT IS MEETING PMA CHALLENGES. In FY 2005, DOT achieved its goals in this area and earned a green score on the scorecard by completing the following:

REAL PROPERTY ASSET MANAGEMENT INITIATIVE

Uses sound real property management of real property resources for diverse transportation missions, maintaining the quality of real property assets managed, and disposing of no longer required assets.

FY 2005 Status: RED

Progress: GREEN

HOW DOT IS MEETING PMA CHALLENGES. DOT continues to make progress under this initiative. The 2005 status of the PMA initiative is RED due to the amount of work required to create an accurate inventory of all real property assets throughout the Department. However, OMB rated the Department GREEN in progress in recognition of the significant advances made in the fourth quarter of FY 2005 in accomplishing the goals set forth in this PMA initiative.

The Federal Aviation Administration owns approximately 69,500 of the roughly 70,000 assets in the Department and has continued to lead in managing the inventory databases and applications.

DOT is aggressively pursuing a status upgrade to yellow in the first quarter of FY 2006:

DOT’s two chartered committees will establish decision making guidelines for acquisition, disposition, capital funding, and a three year timeline of initiatives.

IMPROPER PAYMENTS INITIATIVE

Develop financial management systems capable of producing more timely and accurate information, and maintain a record of unqualified opinions on our financial statements.

FY 2005 Status: RED

Progress: GREEN

HOW DOT IS MEETING PMA CHALLENGES. In FY 2005, the Department took several steps towards eliminating improper payments.

POSSIBLE FUTURE EFFECTS OF EXISTING
EVENTS AND CONDITIONS

HURRICANE RECOVERY EFFORTS

In support of the Federal response to hurricane relief efforts, DOT is requiring all of its Operating Administrations to report their obligations and expenditures hurricane-related costs. DOT is coordinating all parties involved in the transportation related response and relief efforts. Federal, State, and local governments are working side-by-side to deliver relief to the areas physically damaged by Hurricane Katrina and to communities across the South that have been affected by the storm. Efforts and resources are focused on proving transport and logistics to support long-term recovery. The Department has made available the latest information from its agencies on the operational status of airports, roads and highways, rail lines, transit systems, ports and pipelines in the tri-state area affected by Hurricane Katrina.

COORDINATION WITH DEPARTMENT OF HOMELAND SECURITY (DHS)

DOT is coordinating with the Department of Homeland Security (DHS) on transportation security related matters. This year, DOT is working with DHS’ emergency response staff on the hurricane relief efforts. Numerous DOT offices have ongoing projects related to the Patriot Act compliance for HAZMAT endorsement background checks, and HAZMAT tracking projects. DOT and DHS have an advanced traveler systems work for helping mobility and the flow of traffic during rush hours. FTA has a transit security training project with DHS. The lessons learned from recent National disasters such as Hurricane Katrina and Hurricane Rita are guiding the Department's responses to future natural and man-made disasters.

OTHER MANAGEMENT INFORMATION, INITIATIVES, AND ISSUES

FIVE-YEAR FINANCIAL MANAGEMENT PLAN: PROGRESS REPORT TO MEET DOT’S FINANCIAL MANAGEMENT GOALS

GOALS OF FINANCIAL MANGEMENT PLAN:

Produce Accurate and Timely Financial Information.
Management's Use of the Information to Drive Decisions and Results.

DOT continually seeks to expand the use of financial and performance information to ensure that DOT program managers have all the information they need to drive results in their organizations. Through enhanced decision making, the Department can more effectively and efficiently manage tax payers’ dollars.

At the forefront of our efforts is the Federal Aviation Administration’s Air Traffic Organization (ATO), which has developed key cost metrics for each of its major functions. With accurate financial information, tied with ATO performance information, ATO is increasingly able to make better informed decisions on how to improve the ATO Line of Business. Several other OAs are making similar progress for their program managers.

DOT is expanding our support for providing information to managers through our Delphi DASHboard project. On May 16, 2005, DOT moved its first Delphi DASHboard pilot into production. Using Oracle’s Web Portal and Balanced Scorecard tools, DOT managers are using the Delphi DASHboard to track their progress on OMB’s Financial Performance Metrics and the DOT’s own CFO Internal Scorecard, as well as to check the status of the funds under their control.

IMPLEMENT A PLAN TO EXPAND THE SCOPE OF ROUTINE DATA USE TO INFORM MANAGEMENT.

Piloting the Delphi DASHboard has been a valuable learning experience for the Department. Through this effort, DOT is identifying more and more of the Department’s data needs and is also identifying the Department’s data strengths, i.e., data sources that are already available. The OAs have a wealth of financial and program data for many of their programs and projects. Our DASHboard pilot proved that a Web-enabled dashboard is the best way to present and continue to expand the use of data to make management decisions.

Additionally, DOT will continue working to improve internal controls and overall financial management of the Department’s programs and operations, including the centralization of accounting functions at the DOT Financial Management Center of Excellence in Oklahoma City. DOT will also work to improve on the CFO Council’s Performance Metrics.

With all this data readily available, the DOT will be reviewing the most efficient and cost effective way to combine and clearly present financial and performance information. For the Fall of FY 2006, DOT has committed to re-examine its methods and tools for meeting its DASHboard and business intelligence needs. Oracle’s Balanced Scorecard has proved to be a useful tool, but some of the OAs see value in other solutions. Using input and expertise from the OAs and from our Financial Management Center of Excellence, DOT will determine the most efficient and cost effective Web-enabled solution for flexibly presenting financial and performance data to DOT managers.

RECEIVE AN UNQUALIFIED AUDIT OPINION.

Since early in 2005, DOT has been working hard to receive an unqualified audit opinion on its FY 2005 financial statements. DOT earned an unqualified audit opinion for each of the previous four years.

MEET FINANCIAL STATEMENT REPORTING DEADLINES.

In 2004 the Department met the accelerated November 15 reporting deadline by working closely with each of DOT’s financial statement auditors. With upgrades to DOT’s Delphi financial system, we are now delivering monthly and year-end financial statements for each OA overnight. This new capability will save us precious time, especially at year-end; previously preparing statements took several days.

SYSTEMS ARE IN COMPLIANCE WITH THE FEDERAL FINANCIAL MANAGEMENT IMPROVEMENT ACT (FFMIA).

With the conversion of the FAA to Delphi on November 10, 2003, DOT completed converting all its OAs to a state-of-the-art, COTS-based, JFMIP-certified, Standard General Ledger (SGL) compliant financial management system. DOT is the first cabinet-level agency to complete this conversion and have all its operating elements in production on a cost-effective single instance of the Oracle Federal Financials application software. To take advantage of all new system capabilities as they become available, we upgraded Delphi to release 11.5.9 in May 2004 and to the 9i Oracle database technology in August 2004. The next upgrade is scheduled for the Winter of FY 2006. DOT is continuing centralization of accounting operations at the DOT Financial Management Center of Excellence in Oklahoma City.

DOT has been working diligently with our OAs to resolve all material internal control weaknesses reported by our auditors in previous years or at least sufficiently addressed for them to be downgraded to a reportable condition. DOT has made significant progress in this area and will continue to be vigilant in FY 2006 to ensure that we have no material auditor-reported internal control weaknesses.

DOT has also been working closely with our Operating Administrations to ensure that we have no material noncompliance with laws or regulations and will continue these efforts in FY 2006.

DOT has been working closely with each Operating Administration to correct all material weaknesses and nonconformances reported under Section 2 and Section 4 of the Federal Managers’ Financial Integrity Act that impact the agency’s internal control over financial reporting or financial systems. We will continue these efforts throughout FY 2006.

IMPLEMENTING A-123

APPENDIX A

During FY 2005, DOT moved aggressively to address the requirements of Appendix A, beginning with the establishment of an distinct organizational structure to oversee the implementation of this initiative. An Internal Controls Senior Advisory Team (ICSAT), headed by the CFO, was established with senior-level representation from each of DOT’s Operating Administrations. The ICSAT meets on a monthly basis to review progress and to actively engage in all decisions relating to approach and the prioritization of issues. A working group consisting of representatives was also established to complement the ICSAT and to carry out the decisions at the working level across the Department. DOT has also engaged the services of a contractor to participate in both the planning and testing phases of this initiative.

DOT’s plan for approaching Appendix A was submitted to OMB in August and received favorable feedback. Since then, considerable progress has been made in implementing this plan, including the identification and documentation of key business processes and controls, determination of materiality, and the establishment of a testing approach. The DOT ICSAT recognizes that the implementation of all aspects of Appendix A will require a multi-year approach. During FY 2006, initial testing will be based upon assessment of risk and availability of resources. A similar approach will be applied to addressing follow-on work in FY 2007 and 2008.

APPENDIX B

In anticipation of the issuance of Appendix B, DOT proactively worked these new requirements into the re-competition of our task orders with our bank providers. As a result, DOT is well-positioned to implement these requirements in FY 2006 with minimal cost and disruption of resources.

On the travel card side, for example, DOT arranged for the creditworthiness requirement to be managed by the vendor at no cost to the Government. We have also established a salary offset program in the FAA which covers the vast majority of DOT credit card holders. Preliminary technical work has also been initiated to implement split disbursement for the reimbursement of travel expenses. We have been coordinating the introduction of split pay with our e-Travel provider and will work with them to introduce this enhancement to our travelers in FY 2006.

MANAGERIAL COST ACCOUNTING

Managerial cost accounting identifies, tracks, and analyzes the total cost attributable to a particular task, job, or program. The purpose of managerial cost accounting is to provide program managers the cost information required to accurately report program efficiency and development of a program’s future budget. DOT policy requires that OAs accumulate, distribute, monitor, and evaluate cost information during each accounting period.

All DOT OAs have implemented the Department’s financial management system, Delphi, but it will be several years before cost-accounting data systems are fully mature and include historical data that will allow DOT managers to integrate performance and accounting data. In the meantime, DOT must be able to tie resources to results.

DOT, therefore, has decided to focus during the FY 2007 budget cycle on the linkage between funding and agency level outcomes and outputs and draw a comparison between the marginal benefits and the marginal cost associated with additional funds or reduced funding as recommended in section 51.2 of OMB Circular A-11. To accomplish this, the DOT OAs will be requested to provide the following in their FY 2007 budgets for at least one performance measure.

This will be an interim step in tying resources to results until cost accounting data is more widely available throughout the Department. This approach does the following:

INSPECTOR GENERAL’S TOP MANAGEMENT CHALLENGES REPORTED FROM FY 2002–FY 2005

The Department recognizes that Management Challenges are not issues that are easily solved. In many cases they require investments or upgrades to technology or substantial changes in long-standing procedures or program activities. As a result, to completely address a Management Challenge may take more than one fiscal year. In an effort to provide some context to the Management Challenges, we have listed information on the year that the challenge was first reported. DOT hopes to begin to collect information to that will supply perspective overtime on the Department’s progress towards resolving the challenges.

1. CHALLENGE: AVIATION SAFETY

The U.S. aviation industry continues to be the safest in the world. However, FAA must adjust its safety oversight to emerging trends in the aviation industry and changing economic conditions. While air carriers have turned increasingly to outside, contracted repair stations, FAA continues to focus its inspection resources on air carriers’ in-house maintenance work. The IG recommended that FAA strengthen its oversight procedures of foreign aviation authorities conducting inspections on its behalf. Since the OIG’s Report was released, there was real progress on runway incursions (potential collisions on the ground), but operational errors (when air traffic controllers allow planes to come too close together in the air) continue to increase. Corrective actions are imperative to address this ongoing safety problem.

REPORTED: FY 2002

RESOLVED: This item is has not been resolved.

FAA ACTIONS TAKEN TO RESOLVE CHALLENGE:

Adjust Safety Oversight to Address Increased Maintenance Outsourcing.

To address challenges at air carrier repair stations, FAA formed a Risk Assessment work group, which is developing a repair station prototype program. This program will bring together a team representing all the areas of expertise to oversee aviation certificate holders of large repair stations or companies that own multiple repair stations and satellite repair stations.

The work group is developing guidance materials for inspectors and information databases to improve FAA oversight of repair stations. The work group has also developed a comprehensive surveillance program, which requires repair stations to use elements of a system-safety approach such as risk assessment and risk management tools. FAA has revised its guidance and anticipates training for the inspector workforce to begin in November 2005.

Finally, FAA is negotiating a BASA/MIP with the European Union that will be used to continuously verify European member states conducting surveillance/certification activities on behalf of the FAA. FAA hopes to finish negotiations and implement the agreement by 2008.

Reduce Operational Errors and Runway Incursions as Traffic Rebounds.

Reducing operational errors and runway incursions as traffic continues to increase is a shared responsibility among pilots, air traffic controllers, and vehicle drivers. To address this challenge, the FAA focused on outreach, awareness, improved procedures and infrastructure, and technology.

Progress was made in reducing the severity, number and rate of pilot deviations—the most common type of runway incursion. To enhance pilot situational awareness, the FAA released a new pilot guide and DVD that highlighted communication procedures for safe surface operations. In collaboration with industry, the FAA also created an online course that educates general aviation pilots on runway safety.

To enhance air traffic supervisor and controller discussion of serious events during team briefings, the FAA developed a safety awareness campaign designed to help controllers visualize an event that actually happened and aid the development of strategies based on intuitive and experiential expertise for use in similar situations. Additionally, the agency has developed an operational error database to support identification of trends from which error reduction initiatives will be developed.

Improve Operational Error Reporting From Tower and Terminal Radar Approach Control (TRACON) Facilities.

In July 2005, the FAA issued a general notice (GENOT) instructing all air traffic control facilities to establish a facility audit process by September 1, 2005. This audit process allows for random reviews of Air Traffic Services using playback tools to identify operational errors and operational deviations, and provides greater assurance that operational errors and operational deviations are being reported.

In addition to the facility audit process conducted each month, the agency identified select facilities based on trends, analysis, intelligence, complaints and statistics, and required them to review data. The FAA reviewed the same data from these select facilities and addressed the issue by training or decertifying controllers, as appropriate. The agency’s findings and supporting data are retained at the headquarters’ level for two and one half years.

2. CHALLENGE: MOTOR VEHICLE SAFETY

In its 2005 update on DOT’s management challenges, the IG made four findings related to motor vehicle safety: (1) Overcoming obstacles to increasing safety belt usage; (2) Addressing SUV rollover issues; (3) Pursuing laws to discourage alcohol-impaired driving; and (4) Spotting vehicle defects.

REPORTED: FY 2002

RESOLVED: FY 2004.

RE-REPORTED IN FY 2005

ACTIONS TAKEN TO RESOLVE CHALLENGE:

To improve defect investigations, the routine submission of additional manufacturer data, pursuant to the requirements of the Transportation Recall Enhancement, Accountability and Documentation (TREAD) Act, allows NHTSA access to a substantially increased amount of early-warning data that can be analyzed to determine whether a potential safety-related problem exists, giving the agency the ability to report any defects to the public in a more-timely manner.

SAFETY BELT USE—Safety belt use in 2005 increased to 82%, an all-time high. NHTSA is continuing to implement strategies from its 2003 integrated project team (IPT) report on increasing safety belt usage, to include an added emphasis on high-risk groups such as minorities, younger drivers, rural populations, pick-up truck occupants, 8–15 year-old passengers, part-time safety belt users, and motor vehicle occupants in States with secondary safety belt use laws. In addition to an occupant protection IPT, NHTSA also had an IPT on vehicle rollover. The agency is continuing to implement strategies and activities from the report to include necessary safety standard requirements to reduce rollover events and minimize injuries when such events occur.

DRUG-IMPAIRED DRIVING—To reduce alcohol-impaired driving, NHTSA made available more than $29.9 million in alcohol-impaired driving countermeasure incentive grants to 34 States having alcohol-impaired driving laws such as open container and repeat offender laws.

3. CHALLENGE: THE FUTURE OF INTERCITY PASSENGER RAIL

DOT should continue to work with the Congress to break the cycle of appropriations without authorization for Amtrak and to realign the size, operations, and governance of the intercity passenger rail system to match the levels of funding available from all sources.

REPORTED: FY 2002

RESOLVED: This item has not been resolved.

ACTIONS TAKEN TO RESOLVE CHALLENGE:

FRA, together with the Office of the Secretary, has been heavily engaged in promoting a reauthorization of Amtrak that would address many issues surrounding intercity passenger rail. These issues include but are not limited to size, operations and governance of the Nation's passenger rail systems. Through the annual grants to Amtrak, in particular the capital grant, and the Department's presence on the Amtrak Board of Directors, FRA has been able to assure that capital investments address the company's highest priorities, and are consistent with the funding available. FRA recognizes that the need for work in this area is ongoing, particularly in addressing Amtrak's operating accounts and the services it provides such as food and beverage and first class services.

4. CHALLENGE: INFORMATION TECHNOLOGY MANAGEMENT

DOT has one of the largest IT investment portfolios among the civilian agencies. DOT IT systems support air traffic control and distribute billions of dollars in Federal grants for transportation improvements. Security breaches against these systems could have far-reaching effects on the Nation’s transportation system and economy.

DOT enhanced its defense against Internet intrusions and developed a more reliable inventory of systems. DOT, however, must further protect critical IT systems (especially air traffic control systems) against attack and enhance contingency planning to ensure business continuity in an emergency.

REPORTED: FY 2002

RESOLVED: This item has not been resolved.

ACTIONS TAKEN TO RESOLVE CHALLENGE:

In FY 2005, DOT revised its Departmental Information Resources Management Manual (DIRMM), and updated policies and practices specific to Information Technology Capital Planning, IT Security, and Enterprise Architecture. This will ensure that:

DOT revised its Capital Planning and Investment Control Guide clearly defining, through detailed criteria, how DOT will identify high-risk agency IT projects for review. The revised guidance also includes process changes specific to earned value management, which DOT will use to identify high risk projects that exceed established variance levels.

DOT issued new, specific guidance on reporting project cost, schedule, and performance variance. Project reports are provided to the CIO on a quarterly basis, but include monthly data.

FAA Securing Critical Computer Systems:

Because FAA’s IT portfolio constitutes a significant portion of the entire DOT portfolio, it was critical to the Departmental effort that FAA also takes specific steps to strengthen its oversight of IT investment. Accordingly, in FY 2005, FAA:

The Department's Transportation Cyber Incident Response Center (TCIRC) serves as the focal point for monitoring and protecting the Department's critical IT assets. Using a wide variety of tools, the TCIRC continuously monitors and scans the Department's IT infrastructure and looks for vulnerabilities. The Office of the CIO has also established a robust continuity of operations plan that provides for the quick reconstitution of critical IT services in the event of a prolonged disruption.

The FAA made significant progress toward improving information systems security for all FAA systems in FY 2005 and increased monitoring of its information systems through additional intrusion detection systems. The FAA Computer Security Incident Response Center also monitors the DOT system after normal working hours and on weekends and holidays thus providing DOT continual coverage.

INVESTMENTS: In FY 2005, DOT continued to expand and enhance the role of the Departmental Investment Review Board (IRB). The IRB, which is chaired by the Deputy Secretary, and consists of the CIO, Chief Financial Officer, General Counsel, Under Secretary for Policy, Assistant Secretary for Administration, and four Operating Administrators, has the authority to approve, modify, or terminate major IT investments. To ensure that the IRB can improve the cost-effectiveness of DOT’s $2.6 billion annual IT investment, it needs to:

Disadvantaged Business Enterprise (DBE) Program

FAA took a number of actions in FY 2005 to strengthen oversight of the DBE program. The agency conducted limited reviews of basic DBE compliance activities at airports and developed a standard methodology for conducting DBE self-assessments and compliance reviews. FAA developed a Web-based system for airports to report their DBE accomplishments. This system will enable the agency to conduct trend analyses of the data received. The agency issued a revised regulation for airport concessions, which contains items to assist in the prevention of DBE fraud, such as a personal net worth cap, required eligibility reviews, and increased emphasis on monitoring and compliance by airports.

6. CHALLENGE: IMPROVED FISCAL DISCIPLINES AT FAA

As FAA increasingly turns to the General Fund to make up for revenue shortfalls in the Aviation Trust Fund, the agency will be competing with other critical Federal programs for funds during a period of fixed budgets.

Compounding the budget challenges it faces, FAA estimates that nearly half the controller workforce will leave the FAA between FY 2005 and FY 2012. To hire and train that many controllers within a severely constrained operating budget, FAA must identify ways to make every stage of its process for hiring, placing, and training new controllers more efficient and cost effective.

FAA also faces significant challenges with respect to its major acquisition programs. The Agency will need to gain control of existing projects, determine what the Agency’s priorities are, and improve the overall management of its major acquisitions in a constrained budget environment.

REPORTED: FY 2002

RESOLVED: This item has not been resolved.

FAA ACTIONS TAKEN TO RESOLVE CHALLENGE:

In June 2005, an FAA/DOT team drafted an alternative financing options report on the aviation trust fund as part of a broader effort that will take place on developing a reauthorization proposal for FAA programs. This options report will continue to be updated through the end of FY 2005 and into FY 2006 to reflect the final recommendations from FAA and DOT officials and will provide the basis for reauthorization legislation.

On December 21, 2004, the FAA announced its 10-year Air Traffic Controller Staffing Plan. Over the next 10 years, the agency will hire and train 12,500 controllers to backfill projected total retirement and non-retirement controller losses. The Air Traffic Controller Staffing Plan is currently being updated, with the second version to be released in December 2005.

FAA is making significant strides in improving its capital investment acquisition and procurement oversight:

7. CHALLENGE: IMPROVING AVIATION SYSTEM CAPACITY

After a few years of relative reprieve from aviation congestion, traffic and delays are once again returning. The Department of Transportation’s challenge is determining how and where traffic is likely to grow over the next decade and planning for adequate investment in facilities, technology and operational improvements to address both long-range and short-term needs.

REPORTED: FY 2002

RESOLVED: This item has not been resolved.

ACTIONS TAKEN TO RESOLVE CHALLENGE:

DETERMINE HOW AND WHERE TRAFFIC IS LIKELY TO GROW OVER THE NEXT DECADE. In FY 2004, FAA completed a study analyzing system capacity, taking into account the socioeconomic and demographic trends expected to occur in the United States through 2020. This study expanded the focus of the 35 major airports and evaluated nearly 300 commercial service airports nationwide. The study identified the airports that need additional capacity and the constraints to enhancing capacity. In FY 2005, FAA began a second phase of this study that will take a more detailed look at airports other than those in major metropolitan areas and will begin to identify possible solutions to increase long-term capacity.

In the meantime, FAA is increasing short-term capacity by working with airports and local communities to build new runways. While there are no new runways opening in FY 2005, six runways are under construction with four of the runways opening in FY 2006. This will provide the potential to accommodate an additional 665,000 annual operations. Two additional projects, a runway extension and a runway/taxiway relocation, are expected to begin construction in FY 2006. In addition, there are 9 projects, including 3 new airports, in the planning or environmental assessment stages that could provide significant capacity benefits through FY 2015.

NEW RUNWAYS AND AIRSPACE REDESIGN INITIATIVES. Improving the efficiency of existing airport capacity by redesigning airspace is critical for taking full advantage of new runways and enhancing the flow of air travel around existing runways and airports.

The New York/New Jersey/Philadelphia Airspace Redesign project is on schedule to publish a draft Environmental Impact Statement in Fall 2005. This is a critical step in moving to a final decision, after which airspace redesign may begin.

Chicago’s O’Hare airport is one of the busiest in the Nation; capacity problems at this airport can quickly cascade throughout the NAS. To address this critical hub in the aviation system, FAA is engaged in two separate, but related activities: the Chicago O’Hare Modernization Project and the Midwest Airspace Enhancement project. These projects will add and modify sectors and routes to increase traffic flow efficiencies in the Midwest by FY 2007.

Along the west coast, a series of advanced navigation routes was implemented in FY 2005 to reduce the miles flown between Seattle and San Francisco or Los Angeles. The routes utilize the navigational capabilities of advances avionics aboard the aircraft, permitting operations along the shortest path between the airports rather than flying over ground-based navigation aids.

POTENTIAL MARKET-BASED INITIATIVES TO MORE EFFICIENTLY ALLOCATE EXISTING CAPACITY. FAA has conducted detailed simulation exercises in the last year to examine the effects of market-based alternatives like congestion pricing and slot auctions (of arrivals and departures) on airlines and airport operations. These simulations have provided stakeholders an opportunity to comment on these potential tools for managing congestion. FAA is committed to continue working toward a market-based solution for congested airports and is investigating these options for potential use at New York’s LaGuardia Airport.

8. CHALLENGE: GETTING THE MOST VALUE FROM INVESTMENTS IN HIGHWAY AND TRANSIT INFRASTRUCTURE PROJECTS

With fewer resources to fund transportation projects, it is important to ensure that infrastructure improvements are delivered on time and within budgets. In addition, the Department needs to ensure that taxpayer investments yield the greatest benefits for the given costs.

REPORTED: FY 2003

RESOLVED: This item has not been resolved.

ACTIONS TAKEN TO RESOLVE CHALLENGE:

In a 2003 Report to Congress, the FHWA outlined its efforts to develop a more multi-disciplinary approach towards project management and oversight activities. During the past two years, the Agency has addressed four key areas outlined in the Report:

In FY 2005, the FHWA continued a program to transition Agency employees from the traditional role of reviewing and approving highway engineering project level actions to a new role of ensuring the effectiveness of state department of transportation processes in areas that are major project drivers, such as financing, controlling project level costs, schedule performance, transportation planning, maintaining funds accountability, and providing greater oversight of higher level management and financial issues. The majority of the positions filled in the Agency’s Professional Development Program were by individuals from disciplines other than civil engineering, which is the traditional background. A series of multidisciplinary workshops were held for headquarters and field supervisors and managers. The FHWA implemented training that focused on the development of project oversight and financial management, delivered over 30 sessions of a workshop that focuses on process review procedures, and delivered Web conference seminars in the financial management area.

The responsibility for oversight includes monitoring and tracking the cost and schedule elements of a project, as defined in the environmental process, from the design phase to construction completion. The FHWA began monitoring project cost and schedules on projects exceeding $1 billion in costs, called Major projects, in 2000. FHWA is presently monitoring 12 projects that have reached the Initial Financial Plan milestone. As of June 2005, 9 of the projects were within the established budget variance, ranging from 8.24 percent above the base cost estimate to 16.2 percent below. All 10 of the projects are expected to be finished within the variance range of the estimated completion date.

Beginning in 2002, the FHWA began monitoring total cost growth on all large projects, exceeding $10 million in size. Data has been accumulated on projects authorized from FY 2000 through FY 2004. The data indicates that construction projects are generally awarded at a level below the Engineer’s Estimate and show a relatively small increase as the projects move to completion. It is not anticipated that the total growth for all projects in this category will increase much beyond 5 percent. The projects authorized in FY 2000 have been underway for 4 to 5 construction seasons; most costs are known by this point. In fact, the growth for projects initiated between FY 2000 and FY 2002 has only risen about 2 percent.

Early in 2005, both the Government Accountability Office (GAO) and the Office of the Inspector General (OIG) raised additional concerns about the Federal Highway Administration (FHWA) oversight of cost and schedule issues on projects funded with Federal-aid resources. [See GAO Report, Federal-Aid Highways: FHWA Needs a Comprehensive Approach to Improving Project Oversight, GAO-05-173, January 2005; and the OIG Report, FHWA Needs to Capture Basic Aggregate Cost and Schedule Data to Improve Its Oversight of Federal-Aid Funds, No. MH-2005-0046, February 2005.] While FHWA did agree, in part, with some of the recommendations, the Agency did not agree with the recommendation to convert its Fiscal Management Information System (FMIS) into a Project Management Tracking System. The FMIS is used to track obligations and expenditures on projects or project phases when a State Transportation Agency (STA) elects to use Federal funds as part of the funding package.

To address some of these continuing concerns and take advantage of existing STA project systems, FHWA initiated an effort in June 2005 to develop a more formal, documented approach to Project Delivery Oversight. Each Division Office was directed to survey their respective data systems that contain the project cost and schedule management elements. In particular, the Division Offices will assess whether the STA have the needed information for the Agency to perform periodic projects reviews and evaluations on these areas. The results will give FHWA the assurance that future program reviews can access the appropriate project information to effectively monitor project elements using Federal funds.

The FHWA’s stewardship and oversight role is strengthened in SAFETEA-LU. The Transportation Secretary is required to establish an oversight program to monitor the effective and efficient use of Federal aid funds. The legislation requires the FHWA conduct an annual review of the State department of transportation financial management systems and project delivery systems, develop minimum standards for estimating project costs and periodically evaluate State practices in these areas. It also places requirements for a Project Management Plan and Financial Plan on all Major projects of $500 million or more, and requires each State to provide a value engineering analysis on each Federal aid project with a total cost of $25 million or more, a bridge project of $20 million or more, and other designated projects.

9. CHALLENGE: OVERSIGHT OF THE MARAD TITLE XI LOAN GUARANTEE PROGRAM

The Maritime Administration (MARAD) needs to continue work on implementing the recommendations made on how to best minimize potential financial loss to the $3.8 billion Title XI Loan Guarantee Program.

REPORTED: FY 2003

RESOLVED: This item resolved in FY 2005.

MARAD ACTIONS TAKEN TO RESOLVE CHALLENGE:

MARAD and IG staffs have worked closely together to address the issues raised in the audit. These activities have included the development of procedures to monitor the financial condition of borrowers and the assets they finance under the Title XI program. For example, MARAD has developed a Credit Watch Report to more closely monitor and report on the financial condition of Title XI companies that may experience financial difficulties. MARAD has also obligated $2 million for the development of a computer based portfolio monitoring system. Due to these and other efforts undertaken by MARAD, the IG staff has indicated that the recommendations in their audit have been resolved.

10. CHALLENGE: STRENGTHENING FINANCIAL MANAGEMENT AND ACCOUNTABILITY

While a lot of work has been accomplished to strengthen financial management, there are still several key areas that the Department needs to continue to improve. Particularly: freeing up dollars in idle funds to be used more productively on active projects, exercising greater stewardship over the $35 billion awarded annually on highway and transit projects, consolidating or replacing fragmented financial systems, and implementing cost accounting systems to help improve operations.

FAA has pledged to have a fully operational cost accounting system and labor distribution system in place by the end of Calendar Year 2005. The agency, however, faces several challenges in reaching that goal: it must revamp the system to account for recent significant organizational changes; deploy the system to new business units; begin associating actual labor costs and other unassigned service costs to specific facilities and activities; and implement financial and performance measures for activities, which are critical to achieving performance efficiencies and cost savings.

REPORTED: FY 2003: This item has not been resolved.

ACTIONS TAKEN TO RESOLVE CHALLENGE:

The fiscal year 2004 audit of the Highway Trust Fund (HTF) identified grants financial management oversight as a material weakness. It had previously been reported as a reportable condition in the FY 2003 audit. FHWA’s current Financial Management Improvement Program requires division offices to identify areas needing improvement and then work with the States to make the improvements. The HTF audit stated that the required financial management risk assessment and associated reviews of grantees were not performed in 41 of 45 projects sampled.

In response to the FY 2004 audit findings, the FHWA introduced the Financial Integrity Review and Evaluation (FIRE) Program in April. This program consolidates current financial oversight responsibilities of the Federal-aid division offices into a single directive. It incorporates current requirements to perform a financial management process review, review inactive projects, follow up on audit findings, assure compliance with the Single Audit Act (see below), and assess the accounting and internal controls relating to administrative funds. It also includes new requirements to review a sample of Federal-aid billing transactions and administrative transactions. As a result, Division offices performed the required reviews and analyses, identify areas needing improvements, implement the improvements, report the results annually to the Administrator, and maintain sufficient documentation to support the division office’s conclusions and actions taken. Based on the results of the FIRE requirements, the Division Administrator will certify the results