PAR 2007 - 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. 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 the DOT in conformity with generally accepted accounting principles (GAAP). For Federal entities, these GAAP standards are 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 $61.8 billion at the end of FY 2007. This represents a 3.6 percent decrease over the previous year's total assets of $64.1 billion (restated). The Department's assets reflected in the Consolidated Balance Sheet are summarized in the following table.

Liabilities

The Department had total liabilities of $14.1 billion at the end of FY 2007. This represents a 7.4 percent increase from the previous year's total liabilities of $13.1 billion (restated), which is reported on the Consolidated Balance Sheet and summarized in the following table.

Net Position

The Department's Net Position at the end of FY 2007 on the Consolidated Balance Sheet and the Consolidated Statement of Changes in Net Position is $47.8 billion, a 6.4 percent decrease from the previous fiscal year. 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.

Net Costs

Surface and air costs represent 98.5 percent of the Department's net cost of operations. Surface transportation program costs represent the largest investment for the Department at 75.1 percent of the Department's net cost of operations. Air transportation is the next largest investment for the Department at 23.5 percent 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 2007 fiscal year, the Department had total budgetary resources of $122.7 billion, compared to the FY 2006 levels of $112.5 billion.

Budget Authority of $118.7 billion - which primarily consists of $62.6 billion of appropriations received and $56.1 billion of borrowing and contract authority - comprise 96.7 percent of the total budgetary resources. The Department incurred obligations of $75.8 billion for the 2007 fiscal year, a 15.5 percent increase over the $65.6 billion of obligations incurred during 2006. Outlays reflect the actual cash disbursed against the Department's obligations.

HERITAGE ASSETS AND STEWARDSHIP LAND INFORMATION

Heritage assets are property, plant and equipment that are unique for one or more of the following reasons: historical or natural significance; cultural, educational, or artistic importance; or significant architectural characteristics.

Stewardship Land is land and land rights owned by the Federal Government but not acquired for or in connection with items of general property, plant and equipment.

The Department's Heritage assets consist of artifacts, museum and other collections, and buildings and structures. The artifacts and museum and other collections are those of the Maritime Administration. Buildings and structures include Union Station (rail station) in Washington, D.C., which is titled to the Federal Railroad Administration.

The Department holds transportation investments (Stewardship Land) through grant programs such as the Federal Aid Highways, mass transit capital investment assistance, and project grants for airport planning and development.

Financial information for Heritage assets and Stewardship Land is presented in the Financial Section of this Report under the Financial Statements and Required Supplementary Information.

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).

These 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.

SYSTEMS, CONTROLS, AND LEGAL COMPLIANCE

FEDERAL MANAGERS' FINANCIAL INTEGRITY ACT (FMFIA)

The FMFIA requires agencies to conduct an annual evaluation of their 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.

As a subset of the FMFIA Statement of Assurance, DOT is required to report on the effectiveness of internal control over financial reporting, which includes safeguarding of assets and compliance with applicable laws and regulations, in accordance with the requirements of Appendix A of OMB Circular A-123. A separate discussion on Appendix A is located at the end of this section.

The Secretary of Transportation has issued a qualified Statement of Assurance for FY 2007. A copy of the Statement of Assurance is included in this section under Management Assurances. The Department evaluated its management control systems and financial management systems for the fiscal year ending September 30, 2007. This evaluation provided reasonable assurance and formed the basis of the Secretary's Statement of Assurance that the objectives of the FMFIA were achieved in FY 2007.

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 Assistant Secretary for Budget and Programs/Chief Financial Officer (CFO). FMFIA material weaknesses and material nonconformances are also reported along with remediation plans to correct the material weakness or nonconformance. 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 MATERIAL 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 2007 FMFIA Material Weaknesses

Status of Internal Controls (FMFIA Section 2)

DOT has two material weaknesses under Section 2 - Timely Processing of Transactions and Accounting for Property, Plant and Equipment (PP&E), including the Construction in Progress (CIP) Account at the Federal Aviation Administration (FAA) and Weaknesses in the Stewardship and Oversight of Federal-Aid Projects Administered by Local Program Agencies (LPA). The Timely Processing of Transactions and Accounting for PP&E, including the CIP Account material weakness is a repeat material weakness from last year and has been updated to include issues surrounding PP&E. The Weaknesses in Stewardship and Oversight of Federal-aid Projects Administered by LPAs is a new material weakness identified by the Federal Highway Administration (FHWA). During FY 2007, the Department resolved the Financial Management, Reporting, and Oversight at the Highway Trust Fund (HTF) which was reported last year.

ASSETS BY TYPE (DOLLARS IN THOUSANDS)	2007	%	2006 Restated	%
Fund Balance with Treasury	$23,392,470	37.8	$27,692,908	42.2
Investments	21,218,168	34.3	19,824,151	30.9
General Property, Plant & Equipment	14,683,890	23.7	14,501,762	22.6
Inventory and Related Property, Net	785,760	1.3	897,494	1.4
Direct Loans and Guarantees, Net	889,885	1.4	618,179	1.0
Accounts Receivable	623,810	1.0	315,987	0.5
Cash and Other Assets	237,855	0.4	261,091	0.4
Total Assets	$61,831,838	100.0	$64,111,572	100.0

LIABILITIES BY TYPE (DOLLARS IN THOUSANDS)	2007	%	Restated 2006	%
Grant Accrual	$5,526,288	39.3	$4,975,556	37.9
Other Liabilities	4,727,489	33.6	4,622,073	35.3
Accounts Payable	1,591,693	11.3	1,375,459	10.5
Environmental and Disposal Liabilities	852,366	6.1	953,635	7.3
Debt	1,040,761	7.4	839,357	6.4
Loan Guarantees	336,626	2.3	345,864	2.6
Total Liabilities	$14,075,223	100.0	$13,111,944	100.0

NET COSTS (DOLLARS IN THOUSANDS)
2007	%	2006 Restated	%
Surface Transportation	$47,385,306	75.05	$45,955,838	75.59
Air Transportation	14,814,454	23.46	14,135,417	22.97
Maritime Transportation	570,727	0.90	457,525	0.74
Costs Not Assigned to Programs	388,392	0.62	390,463	0.63
Less Earned Revenues Not Attributed to Programs	30,295	0.05	30,985	0.05
Cross-Cutting Programs	11,448	0.02	7,355	0.01
Net Cost of Operations	$63,140,032	100.0	$60,915,613	100.00

Timely Processing of Transactions and Accounting for PP&E, including the CIP Account. Last year we reported that the FAA did not have effective policies and procedures in place over CIP accounting, including maintaining supporting documentation for the capitalization of fixed assets. During FY 2007, the FAA executed an extensive corrective action plan, involving a complete review of the CIP balance reported by the FAA at September 30, 2006.

For FY 2007, we are updating the material weakness to include issues surrounding PP&E. FAA has not fully complied with standardized policies and procedures, including policies on unit costs, overhead burden calculations and allocation, and procedures for entry of transactions in the fixed asset subsidiary ledger, to ensure that CIP and related PP&E balances are accurate, complete, and recorded timely throughout the year. In addition, the FAA has not completed the design and full implementation of internal controls around the standardized policies and procedures that will allow management to provide reasonable assurance that internal controls over the CIP and related processes are properly designed and operating effectively.

Weaknesses in Stewardship and Oversight of Federal-Aid Projects Administered by LPAs. During FY 2006 and FY 2007, FHWA assembled an LPA Review Team to review 39 projects administered by 35 different local agencies. The findings revealed that current oversight activities, as a whole, may be inconsistent from State to State and ineffective for ensuring that Federal-aid requirements are met on LPA-administered projects. There were no indications of fraud, waste, or abuse; however, the review identified program weaknesses that allow shortcomings in the eligibility determinations in compliance with established Federal laws and regulations.

Status of Financial Management Systems (FMFIA Section 4)

DOT reported again this year that the Department was not in substantial compliance with OMB Circular A-127. During FY 2006, we reported that the FAA was not in compliance with Federal accounting standards due to their inability to provide representation that the CIP balance and activity was fairly stated and in accordance with applicable accounting standards, as of and for the year ended, September 30, 2006. The non-compliance with Federal accounting standards still exists for FY 2007 due to the FAA's inability to account for transactions and present balances in its periodic financial statements in accordance with applicable accounting standards, as of and for the year ended, September 30, 2007.

Corrective Action Plans addressing material weaknesses and nonconformances are located in the Other Accompanying Information section.

Appendix A, Internal Controls Over Financial Reporting

Appendix A of OMB Circular A-123 emphasizes management's responsibility for establishing and maintaining effective internal control over financial reporting. Appendix A requires agencies to maintain documentation of the controls in place and of the assessment process and methodology management used to support its assertion as to the effectiveness of internal control over financial reporting. Agencies are also required to test the controls in place as part of the overall FMFIA assessment process. The assurance statement related to the assessment performed under Appendix A acts as a subset of the overall Statement of Assurance reported pursuant to Section 2 of the FMFIA legislation. Management's assurance statement as it relates to Appendix A is based on the controls in place as of June 30. The assurance statement is located in the following section of this Report.

During FY 2006, DOT began an OMB-approved two-year implementation of Appendix A and identified 12 key business processes that are material to financial reporting. Of these 12 processes, six were documented and tested in FY 2006. During FY 2007, the Department added an additional business process to document and test. The remaining seven key business processes were documented and tested during FY 2007. DOT is reporting a limitation of scope for its assurance statement on internal controls over financial reporting due to its two-year implementation of Appendix A.

Based on the results of this evaluation, DOT is reporting one material weakness in its internal control over financial reporting as of June 30, 2007. The material weakness is the Timely Processing of Transactions and Accounting for PP&E, including the CIP Account.

Management Assurances - OMB Circular A-123

	THE SECRETARY OF TRANSPORTATION WASHINGTON, D.C. 205900
	November 9, 2007

The President
The White House
Washington, DC 20500

Dear Mr. President:

I am pleased to report on the effectiveness of the internal controls and financial systems for the U.S. Department of Transportation (DOT) during Fiscal Year (FY) 2007. This report is based on our successful implementation of Office of Management and Budget (OMB) Circular A-123, Management's Responsibility for Internal Control, which provides guidance for meeting the requirements of the Federal Managers' Financial Integrity Act of 1982 (FMFIA).

The FMFIA holds Federal managers responsible for establishing and maintaining effective internal controls and financial systems. All DOT organizations are subject to Sections 2 and 4 of the FMFIA except the Saint Lawrence Seaway Development Corporation, which reports separately under the Government Corporations Control Act.

The DOT is able to provide a qualified statement of assurance that the internal controls and financial management systems meet the objectives of FMFIA, with the exception of two material weaknesses reported under Section 2 and one non-conformance reported under Section 4.

During FY 2007, DOT conducted its assessment of internal controls and compliance with applicable laws and regulations in accordance with OMB Circular A-123. Based on this evaluation, DOT identified two material weaknesses and one “non-compliance” with laws and regulations as of September 30, 2007. Other than the exceptions noted below, DOT's internal controls were operating effectively and no other material weaknesses were found in the design or operation of the internal controls.

The Department is pleased to report that the second Section 2 material weakness reported in FY 2006, Financial Management, Reporting, and Oversight of the Highway Trust Fund (HTF), was resolved during FY 2007.

Section 2. Material weaknesses are defined as deficiencies in the design or operation of internal controls that do not reduce to a relatively low level the risk that significant errors, fraud, or noncompliance could occur and not be detected by employees in the normal course of performing their duties. We are reporting two material weaknesses:
1. Timely Processing of Transactions and Accounting for PP&E, including the CIP Account. Last year we reported that the Federal Aviation Administration (FAA) did not have effective policies and procedures in place over CIP accounting, including maintaining supporting documentation for the capitalization of fixed assets. During FY 2007 the FAA completed extensive corrective actions including an in-depth project by project review of the CIP balance reported at September 30, 2006.

For FY 2007 we are updating this material weakness to include not fully complying with standardized PP&E policies on unit costs, overhead burden calculations and allocations, as well as procedures for entering transactions to ensure that CIP and PP&E balances are accurate, complete and recorded promptly. We are in the process of completing the implementation of enhanced internal controls for CIP that will enable management to provide reasonable assurance that internal controls over CIP are properly designed and operating effectively.

2. Weaknesses in the Stewardship and Oversight of Federal-Aid Projects Administered by Local Program Agencies (LPAs). During FY 2006 and FY 2007, the Federal Highway Administration (FHWA) assembled a review team to review 39 projects administered by 35 different local agencies. While there were no indications of waste, fraud or abuse, the review identified inconsistent oversight activities among the States. LPA oversight needs to be enhanced to ensure that LPA-administered projects meet all Federal-aid requirements.

The FHWA has taken immediate measures to address this material weakness, including designating Local Project Oversight Coordinators to provide increased oversight and focus, to evaluate State DOT LPA processes and procedures, to analyze whether additional process reviews are necessary, and to enhance LPA project oversight with the State DOTs. During FY 2008, FHWA will be implementing additional corrective actions to improve LPA project oversight and to resolve the control weaknesses identified during the review.

Section 4. Nonconformances in internal controls represent deficiencies in the design or operation of internal controls that could adversely affect the DOT consolidated financial statements. We are reporting one material nonconformance:

1. Compliance with the Federal Financial Management Improvement Act (FFMIA) of 1996. During FY 2006, we reported that the FAA was not in compliance with Federal accounting standards because their CIP balance was not fairly stated in accordance with applicable accounting standards. This noncompliance still existed for FY 2007 because the FAA has not yet completed implementing their Corrective Action Plan.

OMB Circular A-123, Appendix A. During FY 2007, DOT conducted an assessment of the effectiveness of internal controls over financial reporting, including safeguarding assets and complying with applicable laws and regulations. DOT has identified 13 key business processes that are material to financial reporting and documented and tested seven of them in FY 2007; the remaining processes were tested in FY 2006. Due to the two-year implementation of Appendix A as approved by OMB, DOT is reporting a scope limitation for its assurance statement on internal control over financial reporting. Based on the results of this evaluation, DOT is reporting one material weakness in its internal control over financial reporting as of June 20, 2007: the Timely Processing of Transactions and Accounting for PP&E, including the CIP Account.

DOT has made substantial progress in enhancing its internal controls and financial management program. Additional enhancements are planned and underway in FY 2008.

Respectfully,
Signature of Secretary of Transportation, Mary E. Peters.
Mary E. Petters

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 2007, DOT reported that the Department was not in compliance with FFMIA due to the FAA not complying with Federal accounting standards because their Construction in Progress balance was not fairly stated in accordance with applicable accounting standards. FAA management was unable to provide representation that the balances in the financial statements were in accordance with applicable accounting standards.

FFMIA of 1996 Financial Management Systems Strategy

DOT uses Oracle Federal Financials software as its agency-wide financial management and accounting system of record (called Delphi). DOT was the first - and remains the only - cabinet agency to migrate all of its Operating Administrations (OAs) to a Financial Systems Integration Office-certified, commercial-off-the-shelf based financial system running on a cost-effective single production instance of the software. Using the DOT developed Financial Statement Solution enhancement, the Department is able to produce regulatory Financial Statements overnight from the core accounting system. This improves accuracy, effectiveness, efficiency and enables DOT to meet OMB, Treasury and other Federal reporting requirements on schedule.

In FY 2007, DOT moved to a more standardized quarterly release schedule for installing Delphi patches, enhancements and upgrades. The Office of Financial Management (OFM) Financial Systems Team and the Enterprise Services Center (ESC) Delphi Team worked with customers to identify, develop, test and coordinate five separate release deliverables. This standard release schedule assured more complete testing of patches and enhancements and greatly improved communication and understanding of changes made to the system. Communication was facilitated with timely and effective “Go To” on-line web-based meetings between the OAs, ESC and OFM.

In December 2006, DOT upgraded the Delphi database to Oracle Release 9.2.0.7. In May 2007, DOT successfully upgraded its Oracle Applications software to version 11.5.10. This upgrade was quite significant: 197 patches were applied, approximately 170,000 jobs were executed and nearly 200 resources at the Enterprise Services Center were involved. Although the complexity of the Delphi 11.5.10 upgrade required extra effort on the part of the many, including the Delphi Security team, this was the most efficient and effective upgrade to Delphi in the system's seven year history. System down time and impact to customers was significantly reduced from previous upgrades.

These upgrades offer assurance that the Delphi Financial Application Software Modules are maintained at a level that ensures supportability by Oracle. The upgrade also adds some increased functionality for the Delphi support staff, reduces risks associated with technical enhancements, resolves some outstanding customer requests, provides customers with additional secure processing tools and allows Delphi to move toward future enhancements.

DOT has implemented our FFMIA corrective action plan through several initiatives. First, DOT has taken great strides in consolidating and eliminating redundant financial systems including FedWire, the Federal Reserve payment system used for FHWA grants. The Department now processes payments on daily basis through our Delphi system directly to the Treasury. Second, DOT is sunsetting the Volpe Center's labor distribution system and replacing it with web-enabled CASTLE Time & Attendance and labor distribution system. Third, DOT prepared and implemented a written policy to address monthly journal voucher processing, budgetary and proprietary reconciliation problems and inadequate analysis of abnormal account balances.

FEDERAL INFORMATION SECURITY MANAGEMENT ACT

The Federal Information Security Management Act (FISMA) requires Federal agencies to identify and provide security protection commensurate with the risk and magnitude of harm resulting from the loss of, misuse of, unauthorized access to, disclosure of, disruption to, or modification of information collected or maintained by or on behalf of an agency. The Department 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 2007, the departmental IT budget totaled approximately $2.6 billion.

During FY 2007, all Operating Administrations except the Federal Aviation Administration (FAA), the Federal Railroad Administration (FRA), and the Surface Transportation Board were relocated to a new Headquarters. As part of the Headquarters relocation, the Department consolidated individual Operating Administrations' network infrastructures (e-mail, desktop computing, and local area networks) into a common IT infrastructure-one of the IT consolidation target projects identified by the Department in FY 2003.

For FY 2007, the Department is reporting a total of 429 computer systems-3 more than last year, of which 60 percent are FAA systems. Among the systems the Department maintains and operates is the air traffic control system, which the President has designated part of the critical national infrastructure. Other systems owned by the Department include safety-sensitive surface transportation systems and financial systems that are used to manage and disburse over $50 billion in Federal funds each year.

FY 2007 was a particularly challenging year for the Department in managing its IT resources. In addition to establishing a common IT infrastructure for the new Headquarters building, we had to review, test, and certify security protection in more than half of its information systems to meet the recertification requirements. The Department completed most of the scheduled security recertification reviews. However, the overall effectiveness of its information security program declined this year because management had to divert resources and attention to resolving Headquarters move-related issues. Specifically, management did not meet Government security standards to protect information systems and did not take sufficient action to correct identified security deficiencies. In addition, commercial software products used in departmental systems were not configured in accordance with security standards and security incidents were incompletely and/or inaccurately reported.

In the FY 2006 FISMA report, the OIG stated that the Department faced several challenges in implementing and monitoring security controls to meet Government standards. This year, we found continued deficiencies in risk categorization of sensitive systems and implementation of security upgrades required to meet Government standards. In addition, security recertification review of the expanded IT infrastructure at the new Headquarters has not been completed. As a result, management has no assurance that application systems are operating securely on this infrastructure.

SAS-70 REPORT ON DOT'S FINANCIAL MANAGEMENT SYSTEM

The SAS-70 report summarizes the results of a review of system security controls over the DOT Enterprise Services Center's (ESC) Delphi Financial Management System. This is the third year that a SAS-70 audit has been conducted on DOT's Delphi financial system. The ESC provides accounting and financial management systems and services for DOT and other Federal agencies. Delphi is hosted, operated and maintained by Federal Aviation Administration employees at the Mike Monroney Aeronautical Center in Oklahoma City, Oklahoma, under the overall direction of the Departmental Chief Financial Officer.

ESC is one of four Federal Shared Service Providers designated by the Office of Management and Budget to provide financial management systems and services to other government agencies. ESC supports other Federal entities, including the National Endowment for the Arts, the Commodity Futures Trading Commission, the Institute of Museum and Library Services, and the Government Accountability Office. The Office of Management and Budget requires Shared Service Providers to provide client agencies with an independent audit report in accordance with the American Institute of Certified Public Accountants' (AICPA) Statement of Auditing Standards (SAS) 70.

This year's SAS-70 audit of Delphi was conducted by Clifton Gunderson, LLP, of Calverton, Maryland. The DOT Office of Inspector General performed a Quality Control Review of the SAS-70 audit work to ensure that it complied with applicable standards.

The Clifton Gunderson SAS-70 audit report dated June 28, 2007 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 May 31, 2007. Clifton Gunderson recommended several enhancements to strengthen Delphi controls further; DOT has already implemented many of these recommendations and is implementing the remaining corrective actions. The operational environment enabled auditors to rely on Delphi system controls in conducting this year's financial statement audits.

Follow-Up Review

Since the issuance of its June 28, 2007 report, Clifton Gunderson completed a follow-up review covering the period from June 1, 2007 through September 30, 2007 fiscal year end. The purpose of this follow-up review was to determine whether any significant changes had been made to Delphi's operating environment. The follow-up review documented the corrective actions that have been implemented to strengthen Delphi controls in accordance with the SAS-70 recommendations. The full OIG report can be found on their web site at www.oig.dot.gov.

IMPROPER PAYMENTS INFORMATION ACT OF 2002

In FY 2007, the Department continued implementing the Improper Payments Information Act of 2002 (IPIA), which requires that agencies: (1) review programs and identify those susceptible to significant improper payments; (2) report to Congress on the amount and causes of improper payments; and, (3) develop approaches for reducing such payments.

In FY 2007, the Department successfully completed its review of the Federal Highway Administration (FHWA) Federal-aid Highway Program, Federal Aviation Administration (FAA) Airport Improvement Program, and the Federal Transit Administration (FTA) Formula Grants Program. In addition, the Department developed and tested a model for determining the amount of improper payments in the FTA, Capital Investment Grant Program.

In FY 2007, the Department re-engaged AOC Solutions, Inc. to develop the nationwide sampling plan, collect the results from the application of test procedures, and provide a nationwide estimate of improper payments for Federal-aid Highway Program, Airport Improvement Program, and Formula Grants Program. With respect to the Formula Grants Program, the sampling plan, test procedures, and test results only apply to approximately one-third of Formula Grantee grantees covered by the FTA's Formula Grant Triennial Review Program. Statute 49 U.S.C. 5307 prescribes a triennial review of all Formula Grant grantees. OMB Circular A-123, Attachment C, paragraph F provides for alternative approaches, including determining the amount of improper payments for components, such as those addressed in the foregoing statute.

In addition, AOC developed and tested a model for determining the amount of improper payments in the FTA Capital Investment Grant Program. The Department will apply the model on a nationwide basis to the Capital Investment Program in FY 2008.

The samples designed to execute the model are of sufficient size to yield an estimate with a 90 percent confidence interval within +/- 2.5 percent points around the estimate of the percentage of erroneous payments, as prescribed by OMB. The results of these efforts are discussed below.

FHWA Federal-aid Highway Program

The Department developed and executed a sampling plan to test project payments and estimate the amount of improper payments nationwide. The FHWA executed the nationwide testing program using personnel from the FHWA division offices and covered Federal payments to grantees over the twelve-month period March 1, 2006 through February 28, 2007.

The sampling plan involved a multi-staged statistical approach that included the selection of 53 Federal payments, 40 state payments, and then 230 testable line items from those payments for testing. The 2007 sample size is significantly less than the 2006 sample size because of a change in objectives. In 2006, the Department wanted to ensure all 50 states and two territories received sample items for testing. This required a substantially larger sample that would have been required had the Department not required that all states and territories receive sample items. In 2007, the sample was designed to support a nationwide estimate of improper payments and was not designed to provide sample items to all States and territories. The States that did not appear in the IPIA sample received sample items for Financial Integrity Review and Evaluation (FIRE) program testing.

The test procedures applied to the line items were designed to test a range of administrative and contractual elements. Tests of administrative elements included determining whether payments were properly approved, billed at the correct Federal participation rate, and whether billings and payments were mathematically accurate. Tests of contractual elements included determining whether payments were in accordance with contract rates/prices for specified materials and whether material quality tests indicated that materials met contractual requirements.

Improper payments totaling $45,568 were found in the sample of 230 tested items. The projection of this result to the population of program payments for the twelve-month period results in an improper payment estimate of $55.2 million +/- $0.5 million. This projection does not meet OMB's definition of significant improper payments ($10 million and 2.5 percent of total program payments).

The improper payments reported resulted from factors such as unallowable charges, insufficient supporting documentation, incorrect calculations, and duplicate payments. The FHWA has implemented its FIRE Program to monitor State and territory payments and provide a mechanism for assisting these entities with effectively addressing operational issues that result or could result in improper payments.

FTA Formula Grants Program

FY 2007 was the first year of nationwide coverage of the FTA Formula Grants Program. In FY 2006, the FTA developed and tested a model used for use in IPIA testing in 2007. The FTA developed and executed a sampling plan to determine the amount and cause of improper payments in the Formula Grants Program and to assist FTA in incorporating the IPIA test procedures in its statutorily required Triennial Review Program.

FTA executed the nationwide testing program for grantees covered by the 2007 Triennial Review Program using contractor personnel. The review covered the twelve-month period March 1, 2006 through February 28, 2007.

The sampling plan involved a multi-staged statistical approach that included the selection of 60 Federal payments, 30 transportation authorities' payments, and then 169 testable line items from those payments for testing. The test procedures applied to the line items were designed to test a range of administrative and contractual elements. Tests of administrative elements included determining whether payments were properly approved, billed at the correct federal participation rate, and whether billings and payments were mathematically accurate. Tests of contractual elements included determining whether payments were in accordance with contract rates/prices for specified materials and whether material quality tests indicated that materials met contractual requirements.

Improper payments totaling $2,326.16 were found in the sample of 169 tested items. The projection of this result to the population of program payments for the twelve-month period results in an improper payment estimate of $4.32 million +/- $0.09 million. This projection does not meet OMB's definition of significant improper payments ($10 million and 2.5 percent of total program payments).

The improper payments reported resulted from factors such as miscalculated federal participation share and lack of supporting documentation.

FTA Capital Investment Grants Program

In FY 2007, FTA developed and tested an improper payment test model at one recipient of Capital Investment Grants Program funding. The FTA patterned the model on the model developed for the FTA Formula Grants Program in 2006.

The test model involved developing test workbooks with test criteria and procedures. The sampling plan involved a multi-staged statistical approach that included the selection of 17 Federal payments, 49 grantee payments, and then 83 testable line items from those payments for testing. The test procedures applied to the line items were designed to test a range of administrative elements and contractual elements. Tests of administrative elements included determining whether payments were properly approved, billed at the correct federal participation rate, and whether billings and payments were mathematically accurate. Tests of contractual elements included determining whether payments were in accordance with contract rates/prices for specified materials and whether material quality tests indicated that materials met contractual requirements.

Improper payments totaling $361,691.73 were found in the sample of 83 tested items. The projection of this result to the population of program payments for the twelve-month period results in an improper payment estimate of $0.55 million +/- $0.39 million. This projection applies only to the single grantee and does not apply nationwide. The improper payments reported resulted from draw-downs in excess of Federal participation share.

The FTA will apply the model on a nationwide basis in FY 2008 in order to meet the requirements of the IPIA

FAA Airport Improvement Program (AIP)

The FAA developed and executed a sampling plan to determine the amount and cause of improper payments in the Airport Improvement Program. The FAA review covered the twelve-month period March 1, 2006 through February 28, 2007.

The sampling plan involved a multi-staged statistical approach that included the selection of 50 Federal payments, 30 sponsor payments, and then 95 testable line items from those payments for testing. The test procedures applied to the line items were designed to test a range of administrative and contractual elements. Tests of administrative elements included determining whether payments were properly approved, billed at the correct federal participation rate, and whether billings and payments were mathematically accurate. Tests of contractual elements included determining whether payments were in accordance with contract rates/prices for specified materials and whether material quality tests indicated that materials met contractual requirements. The review found administrative and contractual compliance as addressed in the test model and no improper payments.

SCORECARD ON THE PRESIDENT'S MANAGEMENT AGENDA

Human Capital Initiative

GOAL: 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.

HOW DOT IS MEETING PMA CHALLENGES: DOT's Human Capital Plan focuses on long-term management of the DOT workforce and is aligned with the Office of Personnel Management (OPM)/Office of Management and Budget (OMB) Standards for Success. DOT accomplishments in FY 2007 included the following:

Competitive Sourcing Initiative

GOAL: Improve the consistency for defining commercial and inherently governmental inventories across the Department. Identified compatible activities, provided strategic direction for competitive sourcing and human capital initiatives, and developed and shared high-quality intellectual capital within the Department and other agencies.

HOW DOT IS MEETING PMA CHALLENGES: In FY 2007, DOT was rated “yellow” for competitive sourcing. DOT accomplishments in FY 2007 included the following:

DOT's drop to yellow in status and progress was mainly due to limited competitions planned for fiscal years 2008-2009.

Improved Financial Management Initiative

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

HOW DOT IS MEETING PMA CHALLENGES: During FY 2007, DOT accomplished the following work, which has enhanced the timeliness, quality, efficiency and effectiveness of our financial reporting and accounting and financial operations.

E-Government Initiative

GOAL: To 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 across the Federal government.

HOW DOT IS MEETING PMA CHALLENGES: During FY 2007, the Department's efforts in the E-Government initiative resulted in several important successes in that DOT met established requirements and milestones and made further improvements in enterprise architecture (EA), privacy, capital planning and security as follows:

Performance Improvement Initiative

GOAL: To 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.

HOW DOT IS MEETING PMA CHALLENGES: In FY 2007, DOT achieved its goals in this area and maintained a green score by completing the following:

Eliminating Improper Payments Initiative

GOAL: Develop financial management systems capable of producing more timely and accurate information, and eliminating improper payments to DOT vendors/customers.

HOW DOT IS MEETING PMA CHALLENGES: During FY 2007, DOT took significant additional steps towards implementing the Improper Payments Information Act of 2002. DOT's efforts this year focused on four program areas in three of our largest Operating Administrations: FHWA Highway Planning and Construction Program, FTA Formula Grants, FTA Capital Investment Grants Program and FAA Airport Improvement Program. Efforts included:

Real Property Initiative

GOAL: Use sound real property management of real property resources for diverse transportation missions, maintaining the quality of real property assets managed, and disposing of assets that are no longer required.

HOW DOT IS MEETING PMA CHALLENGES: DOT continues to make strong progress under this initiative. The Real Estate Management System used by DOT is a single-point inventory, contains the required performance metrics, and is compatible with the government-wide real property database. To date, we have:

OTHER MANAGEMENT INFORMATION, INITIATIVES, AND ISSUES

MANAGERIAL COST ACCOUNTING (MCA)

Managerial cost accounting (MCA) identifies, tracks, and analyzes the total costs attributable to a particular task, job, or program. The purpose of managerial cost accounting is to provide program managers with cost information required to accurately report program efficiency and to develop a program's future budget. DOT OAs are working aggressively to implement or enhance existing managerial cost accounting systems in order to provide their managers with cost information to make better-informed decisions.

DOT initiated MCA with the Federal Aviation Administration (FAA), which was directed to develop a cost system in order to establish both unit costs of services and as a means of sustaining defensible charges for reimbursable services. FAA has four lines of business and has implemented MCA across all four. Through an executive dashboard, it links costs to performance goals. Costs are tracked through three systems that interact: Delphi (DOT's financial and accounting system of record) FAA's Cost Accounting System (a People Soft System implemented largely to track projects and tasks) and DOT's Consolidated Automated System for Time and Labor Entry (CASTLE which is both a time and attendance and labor distribution reporting system).

The Federal Highway Administration (FHWA), Federal Transit Administration (FTA) and Federal Railroad Administration (FRA) have each developed an internal system for taking labor distribution files from CASTLE and costs from Delphi for rolling up cost information. FTA and FHWA have utilized a third party, activity based costing system. FRA has utilized Budget Program Activity Codes to track costs related to projects and draws reports from Delphi.

The Maritime Administration (MARAD) and Pipeline and Hazardous Materials Safety Administration (PHMSA) have begun developing systems utilizing the Delphi Projects Module. One unique issue faced by MARAD is a substantial reimbursable effort with its Reserve Fleet. Being able to track reimbursable activities and connect them with the correct interagency agreement has not been possible to date except through bookkeeping adjustments. DOT has begun developing a strategy to rewrite its payroll interface for posting salary and benefit costs to its accounting system, which will enhance both payroll posting and tracking interagency costs and payments.

As we gear up for a major system upgrade to Delphi and as we implement the OMB-mandated Common Government-wide Accounting Code structure, we expect to re-engineer many DOT business processes including standardized use of the accounting string. These efforts as well as the work we will be doing as part of the Financial Management Business Transformation Initiative will facilitate a standardized approach to MCA across DOT and enhanced integration with our performance measurement program.

DOT'S FINANCIAL MANAGEMENT BUSINESS TRANSFORMATION INITIATIVE

The DOT financial management community faces considerable challenges in the next five to seven years. External mandates from the Office of Management and Budget and the Department of Treasury, coupled with a significant upgrade planned for the Department's accounting system, are factors driving DOT to alter significantly the way we conduct financial management practices. We look at these external drivers as an opportunity to improve our way of conducting business. For example, different Operating Administrations (OAs) use different processes to conduct similar business. OAs use various reporting tools to communicate similar financial information, and use the Department's standard Accounting Code Structure (ACS) slightly differently to meet their program management needs. As a result, we are unable to take full advantage of the economies of scale available through the consolidated accounting operations at the Enterprise Services Center. Additionally, it is not always easy to roll up financial program information Department-wide.

In order to meet the external challenges of the future while further improving our internal financial management operations, the Office of Financial Management is sponsoring a Department-wide Financial Management Business Transformation (FMBT) effort. The purpose of the FMBT is to improve information sharing, standardize and streamline business processes, and implement OMB's Common Government Accounting Code structure upon receiving guidance from OMB. We are committed to managing our internal improvement efforts in an organized and structured manner, allowing adequate time for planning and resource allocation and focusing on communication with our stakeholder community. The FMBT will be managed by a governance structure comprised of representatives from all stakeholder communities, and the work required to achieve this vision will be executed using standard project management principles. Our vision is to be the government leader in Financial Management utilizing quality people, processes and technology in delivering a single integrated solution to support DOT's mission by incorporating streamlined business processes while ensuring financial integrity.

INSPECTOR GENERAL'S FY 2007 TOP MANAGEMENT CHALLENGES

DEPARTMENT OF TRANSPORTATION
OFFICE OF INSPECTOR GENERAL APPROACH

The Office of Inspector General (OIG) issues its annual report on DOT's top management challenges to provide a forward-looking assessment for the coming fiscal year. The purpose of the report is to aid DOT's agencies in focusing attention on and mapping work strategies for the most serious management and performance issues facing the Department.

In selecting the challenges for each year's list, the OIG continually focuses on the Department's key strategic goals to improve transportation safety, capacity, and efficiency. In addition to the OIG's vigilant oversight of DOT programs, budgetary issues, and progress milestones, it also draws from several dynamic factors to identify key challenges. These include new departmental initiatives, cooperative goals with other Federal departments, recent changes in the Nation's transportation environment and industry, as well as global issues that could have implications for the United States' traveling public. As such, the challenges included on the OIG's list vary each year to reflect the most relevant issues and provide the most useful and effective oversight to DOT agencies.

As required by OMB Circular A-136, the OIG's report briefly assesses DOT's progress in addressing the challenges identified. To track management challenges identified from year to year, the OIG provides an exhibit to the report that compares the current list of management challenges with the list published the previous fiscal year. In addition, the OIG may refine the scope of the management challenge from year to year based on program developments, external factors, or other information that becomes available.

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. To completely address a Management Challenge may take more than one fiscal year. Since the OIG may refine the scope of the management challenge based on information that may become available during the year; it can be difficult to provide a context showing how far along the Department is in resolving a particular challenge. To provide perspective on the Department's progress, we have provided a self assessment showing the achievements toward resolving the challenge as currently defined. The result is displayed via the Progress Meter icon. DOT hopes that this approach will provide perspective toward gauging the Department's progress in resolving a management challenge.

1. Management Challenge: Defining, Developing, And Implementing Strategies To Improve Congested Conditions On The Nation's Highways, Ports, Airways, And Borders.

The current surface transportation policy and funding model has proven incapable of adequately reducing highway congestion. While highway spending at all levels of government has increased 100 percent since 1980, the hours of delay during peak travel periods has increased almost 200 percent over the same time period.

The Department currently has little inherent ability to counteract our nation's mushrooming urban congestion problem. The massive explosion of earmarks and special interest programs (over forty separate highway programs in SAFETEA-LU, the governing surface transportation legislation) and stovepiped highway and transit programs greatly limits the Department's discretion to invest in performance-based congestion reduction strategies.

In an effort to change the existing paradigm, the Secretary of Transportation introduced a new Congestion Initiative designed to illustrate to stakeholders that there are viable alternatives to the current model that focus less on process and more on results. As a result, under the 2007 Urban Partnership competition, 29 metropolitan areas submitted comprehensive congestion reduction plans that included transit, tolling, technology and telework elements. Five of these cities-New York, San Francisco, Seattle, Miami and Minneapolis-were awarded in excess of $800 million in highway, transit and ITS grants to expeditiously implement their plans. New York City's submission includes the nation's first substantive city-wide congestion pricing proposal.

The greatest lesson learned to date is that properly focused discretionary Federal resources can provide extremely powerful incentives for State and local leaders to confront congestion challenges in a different way. In the aftermath of the 2007 Urban Partnership announcements, other major cities such as Los Angeles and Washington have demonstrated a greater interest in implementing pricing strategies. To the extent it receives future additional discretionary resources; the Department intends to maintain its focus on a small number of large-scale congestion reducing demonstration projects.

The Department's senior leadership continues to meet regularly with opinion leaders and State and local elected officials to explain our policies. The Department has sponsored two major outreach sessions with State legislators that focused on innovative financing for new operational and technology opportunities. At the staff level, the Department has hosted a series of technical workshops around the country for State and local officials interested in congestion pricing and the proper utilization of cost-benefit analysis in the project selection process. As a result, a national consensus is incrementally building towards innovative financing and better prioritization of spending and moving away from the status quo approach to surface transportation funding.

The close collaboration of the various modes under the Urban Partnership Program is a very positive early signal of how Operating Administrations can break down stovepipes in the administration of diverse discretionary programs. That collaboration also spilled over to the State and local level where highway authorities and transit authorities were forced to coordinate - at an unprecedented level in some cases - in their applications for Federal funding. The model developed to facilitate the Department's Congestion Initiative should be used to inform programmatic changes in the next reauthorization legislation.

With respect to funding future infrastructure needs, the country is at a clear crossroads. At the same time that the constraints on Federal resources have increased, opportunities to access alternative financing have never been greater. A significant volume of private capital is now available specifically to fund American infrastructure, and technology has advanced to the point that charging systems that do not rely on indirect taxes are administratively feasible and available for deployment. The Department will continue to promote the concept of private investment in infrastructure and endorse the direct pricing of roads in order to maximize available transportation funds.

The aviation system's financial structure is similarly challenged, and the Administration submitted a comprehensive reform proposal to Congress in Spring 2007. The proposal would shift dependence away from ticket taxes and move toward a true user fee system in which the charges levied on users approximate the true costs of providing various air traffic control services. This proposal would supply greater incentives to improve the efficient utilization of the existing system and provide a sustainable funding mechanism to transition to the next generation air traffic control system. It is clear that without major financial reforms, the US aviation system will not perform as well as international counterparts that have embraced such reforms.

- Proposals for Market-Based Solutions to Better Utilize Existing Capacity Raise Important Policy Issues

The Department's two highest policy priorities for 2007-the FAA Reauthorization proposal and the Congestion Initiative's Urban Partnership program-are both based on the concept of value pricing. Promotion of these policy priorities through public and stakeholder outreach has focused on the inherent benefits of direct user fees and the intrinsic liabilities associated with the current, indirect funding mechanisms.

In February 2007, the Administration submitted to Congress the Next Generation Air Transportation System Financing Reform Act of 2007 and the Administration is currently working with Congress to ensure timely passage of legislation to reauthorize FAA programs and revenue sources. An important part of FAA's reauthorization proposal includes a new financing system. FAA's reauthorization legislation contains proposals designed to reduce congestion, accelerate the transition to the Next Generation Air Transportation System (NextGen), and otherwise improve the efficiency and oversight of the system. Under the proposal, equity and efficiency will be enhanced.

This new system will tie payments that National Air Space (NAS) users make for air traffic control services more closely to the costs they impose on the NAS. By tying costs to the benefits and services, there will be incentives for more efficient use of the air traffic control system. The Administration's proposal also includes language to permit the use of market-based mechanisms at New York's LaGuardia Airport, as well as other congested airports when certain conditions are met.

One illustration of FAA using market-based solutions to better use capacity is at LaGuardia Airport. In August 2006, FAA issued a Notice of Proposed Rulemaking (NPRM), subject to Congressional approval, that anticipates the use of market-based mechanisms at LaGuardia in the future. Additionally, under the reauthorization proposal, if the Secretary of Transportation and FAA Administrator determine that market-based mechanisms, such as auctions or congestion pricing, are appropriate to promote the efficient movement of traffic at LaGuardia, then the Port Authority of New York and New Jersey may implement market measures at the airport. If the Port Authority does not implement such actions within one year of the Secretary's determination, the Secretary may implement market measures at LaGuardia.

To address traffic congestion in cities willing to pursue comprehensive, bold, and innovative congestion pricing strategies, the FHWA assisted in formulating Urban Partnerships. The Agency embarked on implementing a comprehensive agenda to capture lessons learned from the Urban Partners and facilitate peer exchange in order to ensure the eventual widespread deployment of congestion pricing applications. For example, the FHWA initiated an effort to identify High Occupancy Vehicle (HOV) facilities that are appropriate for conversion to High Occupancy Toll (HOT) lanes, of which there are currently five in operation nationwide. HOT lanes combine HOV and pricing strategies by allowing single occupancy vehicles to gain access to HOV lanes by paying a toll. The lanes are “managed” through pricing to maintain free flow conditions even during the height of rush hours.

As these new pricing strategies are implemented, the Department recognizes the need to educate the public on the rationale and benefits of such strategies. FAA will continue to lead a public outreach campaign to educate stakeholders on pricing strategies, such as congestion pricing and auctions. In support of FAA's efforts, the National Center for Excellence for Aviations Operations Research organized a public workshop in June 2007 to discuss the next steps in the consideration of the use of market-based mechanisms at LaGuardia airport. FHWA developed a program for educating transportation professionals, elected officials, and the public on the broad array of issues associated with road pricing. The program includes pricing workshops that were given at locations around the country; webinars on select topics; published materials ranging from articles to a Primer on Congestion Pricing; assistance to jurisdictions in obtaining tolling authority; research activities that address the costs and benefits, as well as opportunities for mitigating the costs of congestion pricing; and making available a cadre of in-house experts on subjects ranging from the economics of congestion pricing to the technology required for congestion pricing.

The Department is also committed to monitoring the effects of new regulations, as well as their potential impact on market-based pricing strategies on constituents. For example, the NPRM for LaGuardia encourages the continuation of air service to small communities and proposes a fixed number of operating authorizations for service to smaller airports. FAA envisions these small community allocations would remain in place, even if FAA were granted authority to conduct a market-based mechanism at LaGuardia.

- Keeping Short- and Long-Term Aviation Capacity Enhancing Initiatives On Schedule to Relieve Congestion and Delays

The Next Generation Air Transportation System (NextGen) is a wide ranging, multi-agency initiative to transform the National Airspace System (NAS) to meet future demands and avoid gridlock in the sky and in the airports. The Operational Evolution Partnership (OEP), OEP Version 1.0, is FAA's plan for implementing NextGen.

The FAA published the new OEP Version 1.0 in June 2007. It is an expansion of the original OEP established in 2001. The forecasted and actual benefits of the plan's activities are measured annually, and a team chaired by FAA's Deputy Administrator, ensure each program is implemented on schedule. Through the OEP, FAA along with its aviation partners, committed to increasing the capacity of the NAS by 30 percent. Analysis shows that the OEP will achieve its original goal by 2013.

As FAA's NextGen implementation plan, the OEP will also focus on producing more than 60 new operational capabilities between today and 2025. These new capabilities will transform our current air transportation system from ground-based surveillance and navigation to new and more dynamic satellite-based systems. Technologies and activities that support this transformation are currently part of the FAA's investment portfolio and represent a step beyond our legacy modernization programs. These new capabilities and the highly interdependent technologies that support them will change the way the system operates, reduce congestion, and improve the passenger experience.

The 35 airports included in the OEP account for about 75 percent of all passenger enplanements. Much of the current delay to air traffic can be traced to inadequate throughput-measured as arrival and departure rates-at these airports. The construction of new airfield infrastructure such as new runways and taxiways and major runway extensions are currently the most effective method of increasing throughput. Since FY 2000, 13 new runways have opened at the 35 OEP airports. This translates into a capacity to accommodate 1.6 million more operations every year.

Currently, eight OEP airports have ten airfield projects under construction-three new runways, two airfield reconfigurations, one runway extension, one end-around taxiways, and one center field taxiway. These 10 projects are core OEP airports projects that will be commissioned through 2010. The two new taxiways will provide a means to improve safety and decrease delays at busy airports. When commissioned, these ten projects will have the potential to accommodate about 400,000 more annual operations and will improve the safety and efficiency of eight airports.

2. MANAGEMENT CHALLENGE: FAA Reauthorization - Reaching Consensus On A Financing Mechanism To Fund FAA And Establishing Funding Requirements

- Deciding on a Financing Mechanism that Promotes a More Efficient Use of the Air Traffic Control System and is Considered Equitable by All Users

In February 2007, the Administration submitted to Congress the Next Generation Air Transportation System Financing Reform Act of 2007. The Administration is working with Congress to ensure timely passage of legislation to reauthorize FAA programs and revenue sources.

In developing the proposal, the Administration conducted extensive reviews of FAA costs and activities, including analyses of cost drivers in order to allocate costs to user groups appropriately. This enabled the Administration to propose a set of user fees for commercial operators and fuel taxes for general aviation that more accurately reflect their respective use of the aviation system. The Administration's proposal reflects expected spending requirements in the outyears and ties the rates of taxes and fees to those forecasts, based on cost allocation.

The combination of funding sources in the Administration's reauthorization proposal will help improve the stability, fairness, and rationality of FAA funding without imposing a “one size fits all” solution. Both the user fees that commercial users would pay and the fuel taxes for general aviation are based on each user group's share of the air traffic control costs.

The proposal provides incentives to use resources efficiently, reduces cross-subsidization among user groups, and can adjust to account for the investment costs of the Next Generation Air Transportation System (NextGen) in the near-term and the efficiencies that NextGen will generate in the long-term. The reauthorization proposal achieves these benefits through a hybrid financing structure that is cost-based, yet allows each user group to pay through its preferred funding mechanism.

- Determining the Next Generation Air Transportation System's (NextGen) Funding Requirements, Quantifying Expected Benefits, and Developing a Roadmap for Industry to Follow

The current national airspace system (NAS) is reaching its limits and is increasingly unable to effectively respond to the ever-growing demand for increased capacity. NextGen is our Nation's response to the challenges faced by the aviation community. An undertaking as substantial and long-term as NextGen requires a highly deliberate and integrated planning process that, in the near-term, results in products that inform the architectural design, policy, and investment decision-making required to launch and implement NextGen.

The Joint Planning and Development Office (JPDO) made progress in 2007 to develop and mature foundational products with cooperation and collaboration across government. The JPDO delivered the NextGen Concept of Operations (ConOps), Version 2.0 and the NextGen Enterprise Architecture Version 1.0, in June 2007. Together, both products detail the operational and technical performance requirements critical to the planning and implementation of NextGen. A third complementary product, the NextGen Integrated Work Plan (IWP) was released in July 2007. The IWP lays out the initial plan for transitioning from the current state to NextGen, considering policy, research and development, and investment needs and illustrates when NextGen operational improvements will need to be achieved to deliver critical NextGen capabilities. The IWP's comprehensive nature contains implications for both government and industry. Accordingly, stakeholders have been involved in its review and have engaged with the JPDO from both planning and implementation perspectives.

One of the JPDO's primary responsibilities is to inform policy makers on the resources necessary to realize NextGen. These resources include research and development (R&D) and capital investments, as well as the funding to support and sustain NextGen. To that effect, the NextGen R&D Plan (FY 2009-13) was released at the end of FY 2007. It highlights the NextGen R&D requirements and associated partner agency and stakeholder responsibilities for executing the R&D activities specified in the Plan. Research and development activities are important for mid- and long-term NextGen operational capabilities.

The JPDO also developed a NextGen Exhibit 300 that focuses on the portfolio of investments that are critical to initiating NextGen in the near-term so that cross-cutting capabilities and benefits can be realized in the mid-term. The NextGen ConOps and Enterprise Architecture set the context for the NextGen requirements and inform investment analysis and decision-making.

The JPDO has started to understand and project the costs and benefits of NextGen. An estimated $4.6 billion will be required to fund NextGen research, development, and implementation activities through 2012. Current NextGen spending estimates for the mid- and long-term range from $8 - $10 billion through 2017, and $15 - $22 billion through 2025. Cost estimates for equipping aircraft with NextGen technologies range between $14 - $20 billion through 2025. Estimates vary depending on the bundling of the technologies and the pace at which the current aircraft fleet is replaced. Next year, the JPDO plans on developing life-cycle costs for the required infrastructure beyond the initial five year period.

- Continuing Efforts to Address the Expected Surge in Air Traffic Controller Attrition

The FAA developed the 2006 Controller Workforce Plan to guide its activities as the agency hires an estimated 15,000 Air Traffic Controllers through the year 2016. After reviewing the 2006 plan, the OIG expressed concern that the plan did not account for staffing needs by location or the costs associated with training new controllers.

To address this challenge, FAA updated its comprehensive workforce plan in March 2007. The 2007 Controller Workforce Plan now provides staffing ranges for each of FAA's 314 facilities. The ranges take into account not just the staffing standards generated from industrial engineering techniques, but also historical productivity, peer performance, and service and field unit input. Current staffing levels are dynamic and can be impacted by airport construction, controller training, and other issues. Future staffing levels are a function of traffic forecasts, hours of operation, attrition forecasts, and other variables. The FAA continues to pay close attention to staffing at each facility and adjusts staffing levels accordingly.

The OIG also expressed concern that the 2006 Controller Workforce Plan did not identify the annual developmental training costs associated with the hiring of new controllers. The 2007 Controller Workforce Plan includes an estimate for total salary, premium pay, and benefit costs annually for all developmental controllers. Since developmental controllers in training perform actual controller work as they become certified, these salaries are included in the personnel costs of FAA's budget request.

The FAA's Cost Accounting System (CAS) is an accounting system designed to report the total cost of delivering FAA products and services. CAS calculates all FAA costs by projects and tasks. In 2007 FAA made a concerted effort and significant progress in improving the reliability of its cost data and in allocating those costs to NAS users.

FAA requires employees, managers, and supervisors ensure accurate, consistent and complete entry of labor distribution reporting data in accordance with the Labor Distribution Reporting (LDR) Policy, FAA Order 2700.37. Per this order, FAA managers and supervisors are primarily responsible for ensuring the compliance and integrity of LDR data entry. In addition, LDR quality assurance resources and timekeepers help by providing added focus, guidance and support for ensuring data integrity. The Order states, in part, “The FAA will collect paid hours worked by each employee, manager, and executive against identified projects and activities. No manager may excuse employees from compliance with this LDR policy.”

In FY 2007, FAA targeted 92.5 percent of labor hours to be charged to valid projects and activities. Corporately, FAA achieved a final rate of 95 percent. Further, FAA's Air Traffic Organization made a significant effort to record its labor and achieved a rate of 97 percent. This labor distribution compliance rate is routinely reported on a monthly basis in an executive scorecard to the Administrator. Also, as part of the monthly executive scorecard, FAA introduced a new reporting requirement where each line of business must report back to the Chief Financial Officer within 90 days on how cost accounting data are being used to manage costs. In FY 2008, the corporate goal will be 95 percent and FAA is well-positioned to meet this goal.

To ensure cost data are current, FAA now establishes new project codes when there is a management need to track the cost of a project or activity. This is an ongoing activity to better understand the cost of FAA operations. Customers are routinely consulted to incorporate system change requests into future CAS releases and improve its managerial cost reporting.

Improving the accuracy and timeliness of capitalization costs was a major effort in 2007. This has a direct impact on the reliability and timely recording of operating cost data because all agency expenditures are either classified as operating or capital. The FAA conducted an intensive review of its Construction in Progress (CIP) balance and introduced policy/procedural changes, along with training, to ensure the agency keeps capitalization efforts current. In addition, FAA instituted several metrics to keep management informed on the status of its capitalization workload. The agency continues to implement financial metrics to ensure improved overall financial performance.

3. MANAGEMENT CHALLENGE: Responding To Natural Disasters And Emergencies - Assisting Citizens And Facilitating Transportation Infrastructure Reconstruction

Under the National Response Plan, DOT is the lead agency for coordinating transportation support (Emergency Support Function-1) following a disaster. DOT also serves as a support agency for 11 other critical functions. For example, DOT works with state and local transportation departments and industry partners after disasters to assess transportation infrastructure damage and analyze associated impacts on transportation operations, nationally and regionally, and to report changes as they occur. DOT also has statutory roles related to preparedness for, response to, and recovery from emergencies, such as through the Federal Highway Administration's Emergency Relief program.

DOT has worked very closely with Department of Homeland Security (DHS) to clarify respective roles and responsibilities. The clarifications will be included in revisions to the National Response Plan, the Federal Emergency Management Agency (FEMA) Hurricane Contingency Plan, and other operating practices and procedures.

Some of the clarification has been the result of the reassignment of responsibilities related to disasters and other emergencies. DOT has taken a more active role working with State and local transportation officials in planning for disasters. We are collaboratively assessing transportation infrastructures and systems for vulnerabilities and identifying critical elements. DOT is also working with State and local officials in identifying response options to local transportation failures. This includes developing alternatives in response to situations such as the bridge collapses in Oakland, California and Minneapolis, Minnesota, and in planning for alternatives in response to other potential disruptions to the transportation system such as hurricanes, earthquakes, and terrorist attacks.

While we have taken on a more significant pre-disaster and post-disaster planning role, the role of procuring and managing transport services is being transferred from DOT to FEMA via a Memorandum of Understanding (MOU). DHS views the acquisition and management of transport services as key to FEMA's Logistics Management capability and is integrating it into its overall Logistics function. The transition between the two Departments is taking place in two phases: transportation services for evacuation of the general population transitioned June 1, 2007; transportation services for responders, equipment, and goods transfer effective January 1, 2008.

DOT is assisting FEMA in creating this new functionality through providing materials, training, and advice. The MOU contains language that requires DOT and DHS to work to actively and rapidly communicate the role transition to their own field offices and to stakeholders nationwide. DOT has already assisted DHS by briefing DOT field personnel in detail, and by briefing key leaders and staff of FEMA's field offices. While the role transition will reduce the number of locations that DOT is likely to be tasked to provide staffing, DOT has continued to develop, through training, exercises, and practical experience a cadre of response personnel sufficient to carry out the Department's requirements following any disaster. The changed role should also result in more clearly defined missions and chains of command, and lines of communication for effective intra- and inter-agency coordination.

- Ensuring Continued Vigilance in Protecting Taxpayer Funds Spent for Relief and Recovery Efforts

Since the 2005 Gulf Coast hurricanes, the Department continues to be proactive in ensuring that funding for future recovery efforts are spent wisely and in accordance with the law. Two years after the hurricanes struck the Gulf Coast, the Department continues to have bi-monthly meetings with the Chief Financial Officers of each Operating Administration to discuss procurement and financial management procedures related to emergency response.

DOT has also worked to comply with every recommendation made by the OIG and by the GAO that relates to disaster response/recovery fiscal and procurement matters managed by DOT. One of the most visible of these has been acquisition of funding from FEMA for a closeout audit by the Defense Contract Audit Agency of the $800 million Landstar Express America emergency transportation services contract administered by Federal Aviation Administration.

4. MANAGEMENT CHALLENGE: Strengthening Efforts To Save Lives By Improving Surface Safety Programs

- Promoting Improved Performance Measures and Enhanced State Accountability to Maximize Efforts to Reduce Fatalities Caused by Impaired Driving

Analysis of NHTSA's efforts to counter alcohol-impaired driving found that NHTSA must ensure that States establish and report better performance measures to assess implementation of key strategies for effectively using funding to counter impaired driving. State performance plans generally contain measures on activities, such as the number of sobriety checkpoints conducted, or the overall performance goal of reducing the alcohol-impaired fatality rate. However, the plans usually do not address performance of key strategies, such as sustained enforcement of laws, effective prosecution, and full application of available sanctions. Better information is needed on the degree to which States are implementing these key strategies. For example, NHTSA communicated to the States one possible way to quantify sustained enforcement, but none of the States included this measure in their annual plans or performance reports to NHTSA.

In continuing to combat impaired driving, NHTSA made $125 million available in FY 2007 to the 50 States, the District of Columbia and Puerto Rico for alcohol-impaired driving countermeasure laws or programs, such as administrative license revocation laws and graduated licensing programs, or to meet certain performance criteria based on their alcohol-related fatality rates. Within this program, the ten States with the highest impaired driving fatality rates received extra funding. NHTSA worked closely with these ten States to facilitate implementation of effective programs, including periodic and sustained high-visibility enforcement efforts and media campaigns. NHTSA implemented the new national advertising campaign delivering the message “Drunk Driving: Over the Limit: Under Arrest.” As part of this campaign, States conduct impaired driving enforcement crackdowns during the Labor Day and December holiday seasons. In FY 2007, NHTSA also further enhanced its impaired driving program, with continued emphasis on assisting high-risk populations (e.g., underage drinkers, 21 to 34 year-olds, individuals with high blood alcohol levels and repeat offenders).

- Building on Successful Efforts to Better Enforce Motor Carrier Safety Regulations

FMCSA recognizes that improvement needs to be made concerning imposing maximum fines on motor carriers that chronically violate serious safety regulations. FMCSA has worked with OIG and the Government Accountability Office concerning recommendations made during FY 2007 emphasizing the requirements of Section 222 of the Motor Carrier Safety Improvement Act of 1999. FMCSA will publish a proposed rulemaking and internal policies in FY 2008 updating these procedures for handling repeated and patterned violators.

Fundamental ground work is being laid to correct problems associated with the data quality of FMCSA's Motor Carrier Management Information System census file and the Agency is considering a number of initiatives to encourage the motor carriers to update their registration data. Each census record contains the following information:

Specifically, an inventory of data quality issues related to the census file has been identified. A working group of business and technical experts has been assembled to address data quality problems and will provide recommendations to improve the census file and its quality. Some preliminary findings suggest that recommendations may include: changes to the existing registration processes, the development of improved instructions and training materials to carriers, an outreach program to carriers on the importance of updating and ramifications of not updating their census data, the redesign of the technical data collection and management systems, and modification to Federal regulations and enforcement policies.

There has been a significant level of effort in the form of training and technical assistance provided to States to improve the quality of crash data reported by the State to FMCSA. Specifically, State police crash reports in 32 States have been re-evaluated and recommendations have been made to the States to improve these forms with respect to data required by FMCSA. Training for the collection of commercial motor vehicle crash data has been conducted in 10 States. This training has been tailored to accommodate State specific needs such as the inclusion of instructions on how to collect the data in the States electronic data collection system. Training materials developed for the electronic data collection disclosed weaknesses in the electronic capture systems and FMCSA has made recommendations on how to improve the electronic system to allow for more complete and accurate data collection as well. Specialized train-the-trainer materials have been developed and incorporated into State training academies. In California alone over 600 officers have been trained through the FMCSA-developed train-the-trainer program.

- Ensuring the Integrity and Future Modernization of the Commercial Driver's License Program

FMCSA pursued several approaches to prevent fraud in State Commercial Driver's License (CDL) programs. During FY 2007, the Agency completed comprehensive compliance reviews of 15 State CDL programs. These reviews are conducted to ensure that States have the proper statutes and administrative procedures to manage their CDL programs and that State computer systems and licensing procedures are being implemented in compliance with the Federal requirements. Findings and recommendations from the compliance reviews have been provided to the States so they can make the necessary improvements to driver licensing testing and issuance procedures in order to reduce their susceptibility to fraud.

FMCSA has completed a demonstration test of a software application intended for detecting and deterring fraud perpetrated by third-party and State motor vehicle administration examiners. The testing of prototype software, called the Commercial Drivers CDL Skills Test Information Management System, was completed in partnership with the American Association of Motor Vehicle Administrators (AAMVA), and the States of Alaska, Arizona, New Mexico, and South Dakota.

FMCSA awarded $22.7 million in grants to States in FY 2007 to support improvements in State CDL programs and address deficiencies identified in compliance reviews and Inspector General and Government Accountability Office audits. These grants also went to improving the accuracy, speed and completeness of driver history information exchanged among the various components of the system - including law enforcement, prosecutors, the courts, employers and State driver licensing agencies - both within the States and between States.

FMCSA has also awarded a Commercial Drivers License Information System (CDLIS) Modernization Grant to the AAMVA for $7 million to facilitate the modernization of CDLIS to ensure that it: 1) complies with Federal information technology security standards; 2) provides for electronic exchange of all data including posting convictions; 3) contains self-auditing features to ensure data quality; and 4) integrates the CDL and medical certificate. The CDLIS modernization grant supports improvements to the CDLIS central facility and assists the States in upgrading their CDL computer systems to be compatible with the new central site.

FMCSA is in the process of completing efforts related to the SAFETEA-LU mandated CDL task force consisting of State motor vehicle administrators, and representatives from the motor carrier industry, labor organizations, judicial system and safety advocacy organizations. The task force met four times in FY 2007 and discussed issues and problems affecting their respective constituencies. The task force members agreed that the existing CDL program is a highly effective highway safety program that needs incremental improvements rather than major modifications or restructuring. The task force will issue a report to Congress in early FY 2008.

- Enhancing Railroad Safety Through Improved Oversight of Grade-Crossing Reporting and Better Identification of Trends.

As reported previously to the Office of Inspector General (OIG), FRA has routinely validated the completeness and accuracy of its grade crossing collision database against the National Response Center (NRC) data since the late 1990s. Between 2004 and 2006, our monthly NRC audit process identified a single instance where a crossing collision was reported to the NRC but not to the FRA. This audit process compares the NRC rail data against approximately 3,000 FRA crossing collision reports. The offending railroad attributed the oversight to an administrative error and submitted a late report after they were notified by FRA. The matter was also referred to the appropriate FRA region for enforcement.

FRA established a reconciliation process to ensure that fatal grade crossing collisions are promptly reported to the NRC. This “reverse” audit process was instituted in 2004, and since that time, the number of initial discrepancies (potential failures to provide telephonic notification to the NRC) has reduced drastically from 61 cases in 2004 to 16 in 2006. This is a clear indication that the reconciliation process has had a positive impact on railroads' compliance with applicable regulations.

FRA has completed the comparison of information on grade crossing collisions provided by the railroads to the information provided by local law enforcement and State regulatory agencies. The report is in the final stages of review within FRA and it is expected that the report will be released before the end of 2007.

Although FRA is still completing the report of that pilot study, the following tentative conclusions have been reached:

To facilitate the targeting of resources, in October 2005, FRA began to phase in the implementation of its National Inspection Plan (NIP). The Plan is intended to make better use of data and direct safety inspectors to high-risk areas. FRA implemented the NIP for three inspection disciplines (Operating Practices, Track, and Motive Power and Equipment) at the beginning of FY 2006. Full implementation was achieved in March 2006, when two more disciplines (Hazmat and Signal and Train Control) were added to the plan.

The NIP complements the aggressive and ambitious National Rail Safety Action Plan (NRSAP), originally introduced in 2005. The NRSAP involves five strategic initiatives, including the improvement of hazmat safety and emergency response capability, and the reduction of human factor accidents-which are still the leading cause of train accidents, accounting for 36 percent of the total in 2006.

5. MANAGEMENT CHALLENGE: Aviation Safety - Performing Oversight That Effectively Utilizes Inspection Resources And Maintaining Aviation System Safety

The FAA continues to improve its risk-based oversight system. A fully usable manual risk assessment/risk-based oversight system for repair stations was implemented in September 2005. This oversight system, which was automated in FY 2006, provides for continuous assessment and prioritization of each repair station and non-certificated repair facility. In October 2006, the bulletin “Air Carriers Outsource Maintenance Provider Oversight Responsibilities” was issued providing guidance to principal inspectors assigned to 14 CFR Parts 121 and 135 air carriers who outsource some or all of their maintenance to other persons including non-certificated repair facilities. These instructions were for additional oversight of each air carrier's outsourced maintenance arrangements and were issued in conjunction with a new guidance Order 8300.10, Airworthiness Inspector's Handbook.

The FAA is on schedule to have all of the current 120 air carriers, regulated by 14 CFR Part 121, transitioned to the Air Transportation Oversight System (ATOS) by the end of 2007. ATOS improves the Certification and Surveillance processes for air carriers and it assesses the safety of air carrier operating systems using system safety principles, safety attributes, risk management, and structured system engineering practices.

ATOS has been redesigned to provide the flexibility necessary to manage the multitude of tasks necessary to evaluate the operations of small and large air carriers and their diverse operating environments. The redesign allows inspectors to identify risks in each air carrier's operation and, on that basis, target resources to stay abreast of the rapid changes occurring in the industry. The new process and software has been tested at three key sites - United Airlines, Colgan Air, and Aerodynamics - and is now being adopted throughout the system. The FAA offices are also being staffed and reconfigured to efficiently use inspector resources in conjunction with these conversions. All ATOS users will receive training on the new process and software.

In April 2007, Notice 8000.362 became effective, requiring principal inspectors to evaluate the air carrier's outsourced maintenance programs to ensure work performed by certificated and non-certificated repair facilities is accomplished within the scope of the contract and in compliance with the air carrier's maintenance instruction for continued airworthiness. The notice also requires evaluation of the air carrier's oversight, authorization and training procedures for non-certificate repair facilities.

The FAA is currently revising Operations Specification D-91, requiring air carriers to list all certificated and non-certificated repair facilities performing outsourced maintenance and will publish the final rule by the mandated date of August 16, 2008. Redesigning ATOS, implementing a risk-based oversight system, and publishing additional guidance in 2006 and 2007 allow for effective oversight without limiting the work done at non-certificated repair facilities.

The FAA is developing short and long-term strategies to address safety workforce staffing. In May 2007, FAA's Aviation Safety Organization (AVS) provided to Congress a 10-year Aviation Safety Workforce Plan. This plan ensures an adequate safety staff is maintained to address oversight needs and addresses inspector attrition and anticipated changes in the aviation industry. The workforce plans also address the competencies and skills required for staying abreast of new technologies and to successfully perform in a Safety Management System (SMS) work environment.

The FAA closely monitors retirements and takes steps to hire the next generation of safety inspectors. We also evaluate inspector staffing levels to ensure the Flight Standards Service and Aircraft Certification Service can sustain sufficient oversight as a result of potential attrition within the workforce.

In January 2007 FAA received a copy of the Aviation Safety Inspector Staffing Standards Study prepared by the National Research Council of the National Academies of Science. In response to the recommendations in this study, FAA tasked an independent contractor to conduct a phased approach to the design, development, and implementation of a new automated, demand-driven, staffing model. The contractor will conduct a baseline analysis of the aviation safety inspector workforce and identify productivity measures. Specifically, the contractor will develop a staffing model that will have the capability to perform “what if” scenarios that build on customer demands and changing employee skill sets and can support an evolving safety management system culture of the future. The project design, development and training are estimated to be completed in the next 24 months.

By the end of 2007, increased inspector resources will allow the FAA to transition all Part 121 air carriers to the Air Transportation Oversight System. This risk-based, commercial aviation safety oversight system is increasing the effectiveness of the FAA safety oversight efforts by developing safety surveillance plans for air carriers based on data analysis. The FY 2008 President's Budget would provide an additional 241 new safety positions in AVS, including 90 new inspectors for increased oversight and surveillance activities.

Currently, the most significant impact on the workforce is the evolution of the risk-based system and increased oversight of designees. While these challenges do not demand significantly more or fewer inspectors, they do demand a different skill set. The overall management strategy to meet future oversight requirements focuses on three areas - train current AVS inspectors to help manage the transition to a SMS; change the AVS culture to accept the transition to an SMS; and hire the right people with the right skills to work in the future aviation environment.

The FAA has also established recruitment plans to fill our most critical occupations. The agency is working with technical schools to fill entry-level positions. It has ongoing efforts with minority- and women-focused technical publications and associations to ensure positive publicity for FAA and AVS, as well as to enhance recruiting opportunities. By the end of 2007, increased inspector resources will allow FAA to transition all Part 121 air carriers to the ATOS. This risk-based, commercial aviation safety oversight system is increasing the effectiveness of the FAA safety oversight efforts by developing safety surveillance plans for air carriers based on data analysis. We currently have a large pool of qualified aviation safety inspectors available for recruiting. We anticipate that even with the new skill set requirements there will be enough candidates to select the needed inspectors in the future.

Runway incursions occur in the airport runway environment when an aircraft, vehicle, or person on the ground creates a loss of required separation with an aircraft. Runway incursions present a serious risk to aviation and have resulted in collisions and fatalities. Reducing the risks of runway collisions and incursions is a top priority of the Federal Aviation Administration (FAA). In order to reduce the severity, number, and rate of runway incursions, the FAA continues to mitigate the errors that contribute to collision risks. The agency has been aggressively addressing the issue and has made progress reducing the most serious incidents, particularly those involving commercial aircraft. In FY 2007, the estimated rate of runway incursions was 0.302 per million operations. The number of serious runway incursions has been reduced by more than 50 percent within the last five years.

The FAA continues to conduct Runway Safety Action Team (RSAT) meetings, pilot seminars, flight instructor refresher courses, commercial flight instructor and designated pilot examiner refresher courses and airport safety meetings. The purpose of an RSAT meeting is to emphasize the importance of runway safety and communication among users. Preventative measures to reduce runway incursions include: training on airport infrastructure for new controllers, runway training on airport signage and markings, adherence to proper phraseology, read-back/ hear-back requirements for controllers and pilots to ensure understanding of directions, review of hot spots, quality assurance reviews and the review and audit of tapes.

In FY 2007, FAA installed ASDE-X at Louisville International Airport and Charlotte Douglas Airport. Ongoing activities to reduce the risk of runway incursions included improvements to air traffic controller, pilot and vehicle driver awareness, as well as to airport infrastructure and technology enhancements.

In August 2007, in response to a recent rise in runway incidents, the agency sponsored a high-level meeting with 40 aviation industry leaders to brainstorm remedies for reducing runway incursions. The meeting focused on identifying short-term steps that could be implemented within 30-60 days. The recommendations center on improved procedures, increased training for airline personnel, and more rapid deployment of technology that could reduce runway incursions.

In the longer term, the agency will be looking towards technological solutions, including the deployment of runway status lights in conjunction with ASDE-X. The agency will also be taking a close look at the performance of two lower-cost ground surveillance systems currently being tested and evaluated in Spokane. Both systems provide cost effective alternatives to ASDE-X and can be installed in less than a week. While not as sophisticated as ASDE-X, they provide incremental situational awareness for controllers.

Separation in the air, whether it is from other aircraft, terrain, obstructions, or restricted airspace, is a critical aspect of air safety. Air traffic controllers employ rules and procedures that define separation standards for this environment. An operational error (OE) occurs when there is a loss of separation between aircraft or aircraft and other objects. Reducing the risk of operational errors is one of FAA's top priorities as traffic continues to increase.

The FAA's Air Traffic Organization (ATO) is developing and implementing an automated software application that will depict Air Traffic Control (ATC) separation conformance in both the terminal and en-route environments nationwide. The Traffic Analysis and Review Program (TARP) will apply separation logic to targets; identify where applicable separation standards are not being maintained; and highlight incidents for further investigation. This will be accomplished by utilizing TARP replay features to review radar and voice data to analyze potential operational errors.

In June 2007, ATO completed its Automated Safety Initial Performance Implementation Plan for all applicable en-route and terminal facilities. The development of a next generation safety performance measurement tool for the en-route environment was completed in 2007. This course of action will ensure FAA has a meaningful baseline of operational errors and allow consistent reporting of operational errors.

The FAA has historically tried to understand and mitigate the incidence of OEs, focusing on the critical component of the system-the closest person to the air traffic situation and the last point of prevention-the air traffic controller. We focused attention on implementing a coordinated system of investigations to identify causal factors, fielding automation to identify and re-create events, developing metrics to categorize OE severity, and sponsoring unique performance enhancement programs.

Specifically, during FY 2007, FAA improved how the severity of operational errors is calculated. We began implementation of a new system to classify OEs and instituted a 10 percent performance tolerance on separation minima to better understand and measure our safety performance. These changes allow us to take full advantage of advances in technology that now permit for separation measurements to a hundredth of a mile (60 feet) and allow us to capture more events that approach the edges of the separation standards.

The new measurement process, referred to as the Separation Conformance (SC), measures the severity of the outcome of the OE as a result of the percent of required separation that was maintained. When the SC is measured in combination with the number of operations, it creates a reliable rate-based measure of safety.

Further, the new measurement system minimizes the number of criteria used to determine OE severity, minimizes subjectivity, and allows for better analysis of same category events-all of which enhance safety conclusions. With these changes, we now measure the proximity between two aircraft which better characterizes the actual risk of collision. The FAA is currently testing the new severity tool which will be implemented in FY 2008.

Also in 2007, FAA modified the evaluation process by which it audits and performs assessments of ATC facilities in order to reduce operational errors and focus on system risks. The FAA reviews radar and voice data tools as

FINANCIAL HIGHLIGHTS