CRS Reports

The Demand for Municipal Bonds: Issues for Congress

Congressional Research Service 7-5700 www.crs.gov R44146 Summary Municipal bonds are debt securities issued by states, cities, counties, and other government-created agencies to finance capital projects, such as highways, airports, sewers, bridges, schools, hospitals, and other public goods for residents. The municipal bond market is large and varied, consisting of more than an estimated 1.5 million bond types and more than an estimated 55,000 issuers borrowing to finance a variety of civic projects. The U.S. municipal bond market had a total of $3.7 trillion outstanding issuances by year end 2014, reflecting a 3.2% decline from its peak in 2010. Meanwhile, the outstanding municipal debt associated with financing of capital projects has risen over the last decade. The distressed financial situation of the Commonwealth of Puerto Rico, while not the primary focus of this report, serves as an example of financial distress attributed to an increase in longer-term liabilities. Rising indebtedness levels may have led some municipal bond issuers to curtail new issuances rather than further increase longer-term liabilities. Various bills that would impact the municipal bond market have been introduced in the 114th Congress. The Move America Act of 2015, S. 1186, would create expanded tax incentives for infrastructure projects. The Municipal Bond Market Support Act of 2015, H.R. 2229, would increase the annual municipal debt limit that could be exempt from $10 million to $30 million on the amount of tax-exempt obligations a small issuer may issue for a bank to purchase. In addition, legislation has been introduced to protect taxpayers at the federal level from municipal bond defaults. The No Taxpayer Bailouts for Unsustainable State and Local Pensions Act, H.R. 1476, for example, would prohibit the Secretary of the Treasury and the Board of Governors of the Federal Reserve System from providing any financial assistance to state and local government pension plan funds. Congress generally has supported policies to encourage credit access for state and local public-sector entities. This report informs Congress about various developments related to the demand for municipal bonds. Beginning with investor holding trends, the household share of municipal bondholders has decreased whereas the share of various financial intermediaries holding municipals, particularly depository banking institutions, has increased. Changes in the composition of investors could be related to several types of financial risks (e.g., interest rate, liquidity, default). Likewise, various regulatory developments also influence the profitability of municipal bonds for different bondholder types, and thus their willingness to hold these securities. This report also presents concerns expressed by the Securities and Exchange Commission (SEC) regarding the need for improved disclosures to inform investors about the financial health of municipal issuers and consistent accounting practices. Contents Introduction 1 Trends in Municipal Bond Holdings Following the 2007-2009 Recession 2 Understanding the Financial Risks Related to Holding Municipal Bonds 4 Asset Market Risk 4 Liquidity Risk 4 Default Risk 5 Systemic Risk 7 Disclosing and Evaluating Municipal Bond Risks 8 Regulatory Actions to Improve Municipal Market Disclosures 10 Congressional Efforts to Improve Transparency 12 Incentives for Depository Bank Holdings of Municipal Bonds 12 Liquidity Requirements for Depositories 14 The Dodd-Frank Wall Street Reform and Consumer Protection Act 15 Figures Figure 1. U.S. Municipal Bond Market: Total Outstanding and Bondholders, by Sector 3 Appendixes Appendix. The Financial Health of Municipal Bond Issuers 17 Contacts Author Contact Information 21 Acknowledgments 21 Introduction A municipal bond is a debt security issued by states, cities, counties, and other government-created entities to pay for capital projects, such as highways, airports, sewers, bridges, schools, hospitals, and other infrastructure expenditures. Municipal bond issuers include state and local municipal governments as well as other municipal entities (e.g., utilities, water districts, hospital authorities), and there are more than 55,000 issuers of municipal bonds. The estimate of more than 1.5 million different types of municipal bonds reflects the wide and diverse range of civic projects that are financed in this market. Municipal bonds are also distinguished from other types of bonds (e.g., corporate, U.S. Treasuries) by the tax treatment for individuals. The interest on municipals is generally exempt from federal taxes. Residents who invest in their state or local municipality bonds may also have the interest on these bonds exempt from state or local taxes. The Municipal Securities Rulemaking Board (MSRB), an independent rulemaking entity established by Congress, provides oversight of the municipal bond markets and participants. The MSRB was created by the Securities Act Amendments of 1975. MSRB is considered to be a self-regulatory organization (SRO), and its rules are approved by the Securities and Exchange Commission (SEC) and enforced primarily by the Financial Industry Regulatory Authority (FINRA), which is another SRO. SROs are subject to SEC oversight and primarily regulate broker-dealers, who earn fees for trading in securities markets. All municipal broker-dealers as well as municipal advisors, who earn fees for advisory services, must register with the MSRB. Generally speaking, the main objective of the MSRB is to promote fairness and transparency in the municipal securities markets. Following the 2007-2009 recession, state and local public-sector entities have encountered rising fiscal gaps as well as rising indebted levels associated with the financing of long-term capital projects, and thus more distressed financial situations. While fiscal gaps may be narrowed by reducing spending and raising taxes, the proceeds generated by municipal bond issuances are typically designated for the funding of longer-term capital projects. All forms of lending, however, are risky, and bondholders face a range of financial risks. Proper disclosure of risk allows investors to determine whether they want to lend and how much of their funds they may be willing to lose in the event the borrower is unable to repay. In addition to the customary risk and return trade-off assessment, financial intermediaries (e.g., banks, credit unions, insurance companies) are also faced with additional regulations affecting the cost and, therefore, the return on municipal bond investments. This report examines various influences on investors’ demand for municipal bonds, with a particular focus on financial institutions; it also discusses policy issues for Congress. The report presents some recent investor holding trends, followed by an overview of various types of financial risks associated with municipal bond investments. In light of the financial risks, it discusses the challenges associated with improved financial disclosures of municipal bonds. Finally, depository banks that choose to hold municipal bonds face added regulatory requirements, which are also discussed given that banks may both lend and facilitate lending in this market. The Appendix provides an overview of the fiscal health of state and local municipal issuers since the 2007-2009 recession. Financial Intermediaries: Institutions and Markets Financial intermediation is the process of matching borrowers with lenders (i.e., savers). Depository intermediaries, such as banks and credit unions, for example, generally acquire funds from lenders (in the form of checking and savings deposits) and subsequently make loans to borrowers. The aggregate returns from lending activities are distributed between the intermediary (that keeps the loans in its asset portfolio) and the savers (that maintain deposits in the lending institution). Alternatively, financial intermediation may be conducted via the bond and asset-backed securities markets. Bonds are conceptually equivalent to loans. Investors assume the role of lenders when they purchase bonds from issuers, who are essentially borrowing the investment funds. Similarly, investors that purchase financial interests in an asset-backed security, which is created by transforming a pool of numerous bonds into tranches (i.e., sets of tiered payment structures prescribing the sequence that investors are to be repaid and associated investment yields), jointly act as lenders to the underlying pool of borrowers. Financial intermediation activities that occur in the financial markets (rather than facilitated by depository institutions) may be referred to as shadow banking activities. All forms of financial intermediation bear the typical risks (e.g., asset market, liquidity, default, systemic) associated with lending. Trends in Municipal Bond Holdings Following the 2007-2009 Recession Figure 1 shows that the outstanding issuances in the municipal bond market, as reported by the Federal Reserve, totaled $3.65 trillion in 2014, down from a $3.77 trillion peak in 2010. The municipal bond market grew in size by 24.9% from 2005 to 2010, but decreased by 3.2% from 2010 to 2014. The largest sector holding municipal bonds are household investors, which includes some nonfinancial businesses (e.g., nonprofit organizations). Household investors reduced their market share of municipal bond holdings from 54% to 43% between 2005 and 2014. Households still hold the largest share of municipals, perhaps as a result of the tax advantages for individual investors. Figure 1. U.S. Municipal Bond Market: Total Outstanding and Bondholders, by Sector 2005-2014 Source: Federal Reserve Flow of Funds. Note: Congressional Research Service (CRS) Computations. Whereas the household share of municipal holdings declined, the share of municipal bonds held by other financial entities increased. Figure 1 shows that depository institutions (i.e., banks and credit unions that maintain federally insured deposits) have more than doubled their share of holdings. Life insurance companies have quadrupled their share of holdings from 1% to 4%. As the share of municipal bonds held via money market deposit accounts fell since 2005, the share held via money market mutual funds rose. More time may be needed to determine whether the observed trends in investor composition reflect temporary or permanent shifts. Understanding the Financial Risks Related to Holding Municipal Bonds The willingness to hold or the demand for municipal bond investments depends upon various factors, including investor appetites for financial risks. This section discusses the different types of financial risks that influence the willingness and therefore the decision to hold municipal bonds. One or more of these types of risks (discussed in no particular order) may influence investors’ decisions to hold municipal bonds. Asset Market Risk Asset market risk with respect to bond holdings may also be referred to as interest rate risk. For example, suppose a lender makes a loan to a borrower at a fixed interest rate. A rise in market interest rates on the following day reduces the present value of the loan made the day before, meaning that the lender could have earned a higher yield by waiting a day. At times when interest rates are expected to rise, the lenders may want to sell the current loan for cash and originate a new loan the next day at the higher interest rate, thus avoiding ownership of the original asset should it decline in value. Increased interest rate risk may cause some investors to sell municipal bond holdings. When current interest rates are expected to rise relative to the agreed-upon note rate of existing bonds, the present value (price) of existing bonds will decrease relative to newly issued bonds with higher rates of return (yields). Given that interest rates have remained at historic lows, some investors may have been anxious about holding existing bonds in their portfolios in anticipation of future increases in interest rates that would reduce current bond values. Liquidity Risk Economists view the concept of liquidity from a variety of perspectives. Liquidity is a term that typically refers to how quickly an asset can be converted to cash. In the context of bond markets, liquidity pertains to how quickly an asset can be bought or sold in the marketplace. Liquidity risk, therefore, can refer to holding assets that cannot quickly be converted into cash to satisfy immediate needs or are traded in thin markets (i.e., low volume of buying and selling). Financial intermediaries typically assume liquidity risk when holding less liquid loans in their asset portfolios. If investors finance less liquid, longer-term assets (e.g. bonds) with more liquid, shorter-term obligations (e.g., demand deposits) they risk having to incur large losses if they need to liquidate some or all of those assets to repay the shorter-term obligations on time. Newly issued municipal bonds tend to be the most actively traded (primary market trading); bond trading after initial issuance, referred to as secondary market trading, declines significantly. The SEC cites studies reporting that one-third of municipals trade only once after initial issuance, the remaining bonds trade only two or three times during their lifetimes, and 5% of all municipals may only trade once every 12 years. Only a small amount of outstanding municipal bonds are purchased or offered for sale on a day-to-day basis, resulting in a thin secondary market for these securities. Hence, municipal bonds trade in small volumes in the over-the-counter market on an irregular basis (in comparison to trading in large volumes on organized exchanges). The thin secondary market is why the municipal bonds are generally characterized as being illiquid (although some municipal bonds may be considered less illiquid relative to others). The thin secondary market trading volume is why the prices of individual municipal securities must be estimated, which increases the probability of incurring a loss (i.e., rising liquidity risk) under circumstances in which investors unexpectedly needed to liquidate their bond holdings. Prices are frequently determined by observing past trades of bonds that arguably share similar characteristics, which has become easier for individual investors in recent years as a result of the MSRB’s Electronic Municipal Market Access website. Consequently, some investors, particularly those anticipating their future cash flow needs, may choose to convert their municipal bonds holdings into assets in which the values do not need to be estimated and, therefore, characterized by lower levels of liquidity risk. Default Risk Default risk refers to the risk that borrowers (or bond issuers) will not repay all principal and interest owed or as scheduled. In light of the thousands of issues, municipal bond defaults are likely to be idiosyncratic or unique to the financial conditions tied to the locality or entity where they were issued. The default rate for municipal bonds tracked by the S&P Municipal Bond Index, for example, was 0.144% in 2012, 0.107% in 2013, and 0.17% in 2014. In light of infrequent default experiences, municipals are considered to be historically safe investments. The Federal Reserve Bank of New York has found that reports by major bond rating agencies about municipal bond defaults only include rated bonds, but inclusion of the unrated portion of the market significantly increases the number of municipal default frequencies. Furthermore, several state and local municipalities experienced financial distress episodes following the 2007-2009 recession. Some municipal bond issuers saw lower tax revenues and higher expenditures. Some municipalities saw their credit ratings downgraded due to growing indebtedness, frequently associated with underfunded pensions. Some general obligations were cut to junk (low grade, high default risk) bond status; since 2008, some issuers have filed for Chapter 9 bankruptcy. When an issuer’s credit rating is low, bond insurance may be purchased to help attract investors. The financial guaranty insurance industry, that is, monoline (bond) insurers, provides insurance against the default risk of municipal bonds and asset-backed bond issuances. After 2007, monoline insurers experienced losses on mortgage-backed securities guarantees resulting in a loss of their AAA ratings. Some investors may be less comfortable holding insured municipal bonds in light of reports about some bond insurers that are still recovering from previous financial losses. In the 114th Congress, the No Taxpayer Bailouts for Unsustainable State and Local Pensions Act (H.R. 1476) was introduced to prohibit the Secretary of the Treasury and the Board of Governors of the Federal Reserve System from providing any financial assistance to state and local government pension plan funds. If the source of financial stress for many municipalities is related to the funding of municipal employee pensions, then this bill would prevent the federal government from acting as the ultimate guarantor for municipal investors. This bill could encourage some municipalities to apply available funds to cover pension liabilities and fund more non-pension liabilities via borrowing, thereby shifting more default risk to non-pension liabilities where it may still be possible to request federal assistance. Systemic Risk Bond markets, as with all financial asset markets, are also vulnerable to systemic risk crises. A systemic risk crisis can occur in the municipal bond market when bondholders suddenly lose confidence (or panic) about the likelihood of repayment and simultaneously rush to sell or liquidate their municipal securities holdings. Given that municipals trade infrequently and their prices are estimated, investors may not be able to obtain timely market information about changes in issuer default risk or changes in overall market perceptions of default risk. Although investors can obtain information about the risks associated with their bond holdings, (e.g., the financial statements of the bond issuers or on-site inspections of the progress of a municipal project), recurring announcements of various municipals’ fiscal problems may influence bondholders’ perceptions of risk exposure. Growing pessimism can suddenly manifest itself in the form of a market retrenchment—often referred to as a systemic risk run or flight-to-quality event—when investors suddenly attempt to liquidate their bond holdings before issuers become insolvent. The Financial Stability Oversight Council (FSOC), established to identify risks to the financial stability of the United States, provided an assessment in its annual report regarding the potential of a systemic risk crisis in the municipal bond market generated specifically by the debt crisis in Puerto Rico. Puerto Rico has outstanding municipal debt totaling more than $70 billion, and the credit rating agencies have downgraded the issuances to junk status. According to the FSOC, evidence of an erosion of investor confidence in the broader municipal bond market stemming from financial challenges idiosyncratic to Puerto Rico has not been observed. As long as investors do not consider the financial distress of one or more municipal issuers to be indicative of the broader financial health of other issuers, then it may be possible to avoid a systemic risk panic in the broader municipal securities market. Disclosing and Evaluating Municipal Bond Risks The Securities Act of 1933 requires full disclosure of material financial information about securities sold and granted in the securities market. The federal government, however, is limited in its ability to regulate the municipal bond market even though it is a national market due to concerns associated with federal-state comity. The Securities Exchange Act of 1934 created the Securities and Exchange Commission (SEC), giving it broad authority over the securities markets with the exception of the municipal securities market. The Securities Acts Amendments of 1975, commonly referred to as the Tower Amendment to the Securities Exchange Act of 1934, prohibits the federal government from requiring any issuer of municipal securities, directly or indirectly through a purchaser or prospective purchaser of securities from the issuer, to file with the [Securities and Exchange] Commission or the [Municipal Securities Rulemaking] Board prior to the sale of such securities by the issuer any application, report, or document in connection with the issuance, sale, or distribution of such securities. Issuers of municipal bonds are not required to register their securities and thus are not subject to SEC disclosure requirements. The SEC does not have the authority to require state and local municipalities to follow the Generally Accepted Accounting Principles (GAAP) for state and local municipalities, established by the Governmental Accounting Standards Board (GASB). Compliance with GASB rules by state and local municipalities is voluntary. Individual states can pass statutes to require compliance with GASB or other preferred accounting methods. For example, the SEC has noted that the state of New Jersey has passed a state law requiring its localities to use statutorily mandated accounting methods as opposed to a nationally recognized accounting standard, such as those issued by the GASB. Because municipal issuers do not have to meet standard SEC disclosure requirements, disclosure practices may vary by jurisdiction, state requirements, and type of security offerings (e.g., general obligation bonds, revenue bonds). Accounting practices are inconsistent across state and local governments. State definitions of budget items may vary considerably, making the ability to compare risks across municipal jurisdictions less effective. Conflicts of interests that may exist between the issuer, underwriter, and other principals may not be sufficiently disclosed at an initial offering. Disclosures at new offerings may lack sufficient information about the existence of bank loans or other municipal obligations owed by the issuer. Investors may also be vulnerable to improper disclosures if municipal bond credit rating changes, particularly in municipal markets that trade infrequently. Such issues suggest that investors are unable to accurately determine how much default risk they would assume when considering municipal bond investments. Complicating matters, bondholders may be unsure whether they rank first or last in payment priority should an issuer become insolvent. In accordance with the Tenth Amendment of the U.S. Constitution, the federal government may not grant a bankruptcy petition for a municipality without permission from the state because bankruptcy is a federal process. Some 26 states allow municipalities to file for bankruptcy. For states that have not enacted laws specifying whether it or its local public-sector entity can declare bankruptcy, bondholders would not know the order of payment priority in case of an asset liquidation episode, possibly prompting some of them to sell their municipal bonds. In cases where state and local courts may favor pension funds over bondholders, it becomes particularly important for bondholders to be fully aware of the repayment risks. Meeting various disclosure standards may be considered burdensome particularly for smaller municipal issuers. For example, issuers pay standardization and transmittal requirements for data. Standardization of the reporting cycle, (i.e., quarterly or monthly) may be expensive if, for example, financial statements were required to be audited and credit ratings had to be updated at each interval. Generally speaking, small financial entities (e.g., community banks, credit unions, small bond issuers) typically lack the volume of transactions commensurate with the compliance costs of various industry regulations compared with their larger competitors. Regulatory Actions to Improve Municipal Market Disclosures The SEC has brought attention to the need to improve disclosure practices of state and local governments in light of alleged omissions of material information that investors may have found necessary to fully understand the risks associated with municipal bond investments. The SEC may still enforce federal securities antifraud provisions against municipal issuers when pertinent financial information is withheld from or misrepresented to investors in violation of SEC Rule 15c2-12. The SEC has suggested recommendations designed to improve transparency and liquidity in the municipal securities markets. Although federal disclosure requirements may not be imposed on municipal issuers, broker-dealers that facilitate the buying and selling of municipal bonds are regulated. The Municipal Securities Rulemaking Board was established as an independent entity in 1975 by the Tower Amendment to issue regulations and rules for the municipal bond broker-dealers. The MSRB has authority to make rules regulating the municipal securities activities of securities firms and banks that underwrite, trade, and sell municipal securities, as well as municipal advisory activities of municipal advisors. Title IX of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) expanded the MSRB’s jurisdiction, which had included broker-dealers (that earn fees for trading municipal securities), to also include the regulation of municipal advisors (that earn fees for advisory services) and establish rules for their activities. On March 10, 2014, the SEC’s Division of Enforcement created the Municipalities Continuing Disclosure Cooperation Initiative (MCDC). The MCDC provides issuers and underwriters the opportunity to self-report any material misstatements in bond offering documents (within the last five years of any primary offerings) as well as to comply with continuing disclosures as required by SEC Rule 15c2-12. The objective of MCDC is to encourage issuers to voluntarily correct misrepresentations rather than wait for them to be detected, thereby increasing transparency in the municipal bond markets. The deadline for self-reporting was September 10, 2014, for underwriters (broker-dealers) and December 1, 2014, for issuers. In addition, the GASB has announced Statement 67 and Statement 68 to further define the requirements for the reporting of accounting and financial information related to municipal pension funding. Statement 67, Financial Reporting for Pension Plans, pertains to disclosures primarily for pension beneficiaries and other stakeholders. Examples of information likely to be of concern to beneficiaries include items such as total (employee and employer) pension contributions, predicted rates of returns, and overall performance trends. Statement 67 amends existing Statement 25 to require greater disclosures about material (“decision-usefulness”) pension fund details in the notes that accompany the financial statements as well as in the required supplementary information. Statement 67 went into effect for fiscal years beginning after June 15, 2013. Statement 68, Accounting and Financial Reporting for Pensions, pertains to disclosures primarily for taxpayers and creditors. Statement 68 amends existing Statement 27 to require that the reporting of pension liabilities occur in the official, accrual based financial statements (rather than mentioned as supplementary information). Statement 68 went into effect for fiscal years beginning after June 15, 2014. This requirement is likely to result in the reporting of larger expenses and liabilities for states and municipalities, arguably providing more complete financial representations. Although greater transparency and more complete disclosures arguably may be more beneficial for investors, investor reactions are difficult to predict. Some municipal investors may be comfortable with the level and types of financial risks held in their portfolios as long as they are made fully aware; others may be less comfortable. Better disclosures may attract some investors but deter others because risk appetites and tolerance levels are diverse, thus making it difficult to predict how credit flows to municipalities would change with greater transparency. Likewise, it is ambiguous whether improved disclosures would decrease or increase the need for possible federal government intervention, perhaps in the form of financial guarantees. Greater transparency theoretically would be expected to reduce bondholder speculation and, therefore, the possibility of a financial panic. In contrast, greater transparency might reduce the demand for municipal securities, and federal government interventions might still be necessary to reassure investors and support the flow of credit to public-sector entities. Congressional Efforts to Improve Transparency The Public Employee Pension Transparency Act (H.R. 1628) and its companion bill of the same name (S. 779) were introduced in the 113th Congress. These bills proposed to foster greater disclosure by encouraging use of reporting requirements specified in the bills for state or local government employee pension benefit plans. The bills would have also removed the federal tax exemption on municipal bond yields during any period in which the issuing locality failed to comply with reporting requirements. In addition, the bills would have exempted the United States from any liabilities associated with shortfalls in any state or local government employee pension plan. These bills may have resulted in increased transparency, but it is unclear whether they would have increased or decreased investor participation in the municipal bond market. Incentives for Depository Bank Holdings of Municipal Bonds When deciding whether to hold municipal bonds, all investors, including financial institutions, typically consider their rates of return (or yields) as well as the various types of risk factors previously discussed. In addition, the total profitability for institutional investors would be affected by the funding costs (i.e., the cost to borrow the funds necessary to purchase municipals), the tax treatment, and the safety and soundness costs to hold municipal securities (as reflected in related capital requirements). Some of the legislative and regulatory factors that influence banks to hold municipal bonds are listed below. Congress passed the Community Reinvestment Act (CRA) of 1977 to encourage federally insured banking institutions to make sufficient credit available in the local areas in which they were chartered and acquiring deposits. Banks have a wide variety of options to serve the credit needs in the geographical area where they acquire deposits. During CRA examinations, banks may receive CRA consideration for holding municipal bonds that promote economic development in their assigned local areas. Although the interest from municipal bond investments is not subject to federal tax when held by individuals, the interest is subject to federal taxes when held by banks. The Tax Equity and Fiscal Responsibility Act of 1982 limited the interest deduction on municipals for banks to 85%; the Deficit Reduction Act of 1984 further reduced the deduction to 80%. The Tax Reform Act of 1986 eliminated the interest deduction on municipals for banks, but exemptions were made for “qualified tax-exempt obligations” up to a $10 million annual limit. Specifically, banks must pay taxes on the interest income earned from municipals, but they may deduct 80% of the costs incurred to fund municipals that satisfy certain regulatory requirements. Under Basel III capital requirements for banks, the dollar amount of municipal bond holdings are multiplied by an assigned risk weight that is subsequently used in the calculation of the required capital reserves a bank must maintain. The current risk weight assigned to a general obligation bond backed by the full faith and credit of the public-sector entity is 20%; the risk weight is 50% for issuances that are expected to be repaid with revenues from a project rather than general tax funds. Should the status of a particular set of municipal securities change to nonperforming, the risk weight applied to the outstanding balance for troubled bank loans increases to 150%, resulting in greater capitalization pres

Aug 14, 2015

Yucca Mountain: Legal Developments Relating to the Designated Nuclear Waste Repository

Congressional Research Service 7-5700 www.crs.gov R44151 Summary Passed in 1982, the Nuclear Waste Policy Act (NWPA) was an effort to establish an explicit statutory basis for the Department of Energy (DOE) to dispose of the nation’s most highly radioactive nuclear waste. The NWPA requires DOE to remove spent nuclear fuel from commercial nuclear power plants, in exchange for a fee, and transport it to a permanent geologic repository or an interim storage facility before permanent disposal. Defense-related high-level waste is to go into the same repository. In order to achieve this goal, and in an effort to mitigate the political difficulties of imposing a federal nuclear waste facility on a single community, Congress attempted to establish an objective, scientifically based, multi-stage statutory process for selecting the eventual site of the nation’s new permanent geologic repository. Congress amended the NWPA’s site selection process in 1987, however, and designated Yucca Mountain, Nevada, as the sole candidate site for the repository by terminating site-specific activities at all other sites. Since 2009, the Obama Administration and DOE have taken a number of steps directed toward terminating the Yucca Mountain project. First, the Administration’s budget proposals have eliminated all funding for the Yucca Mountain project. Second, the President established a Blue Ribbon Commission to consider alternative solutions to the nation’s nuclear waste challenge. Third, and most controversial, DOE attempted to terminate the Nuclear Regulatory Commission’s (NRC’s) Yucca Mountain licensing proceeding by seeking to withdraw its license application, which it had submitted in June 2008. Although DOE’s motion to withdraw the application was denied by the NRC’s Atomic Safety and Licensing Board, the NRC suspended the Yucca Mountain licensing proceeding in 2011, claiming budgetary limitations. In 2013, the U.S. Court of Appeals for the District of Columbia Circuit (D.C. Circuit) directed the NRC to resume its review of DOE’s license application using what remained of previously appropriated funds, although it acknowledged that such funds were insufficient for the NRC to complete the proceeding. Following the D.C. Circuit’s decision, the NRC directed its staff to complete work on the Yucca Mountain Safety Evaluation Report (SER). The last two of the five volumes of the SER were issued in January 2015. The SER concluded that DOE’s license application met regulatory requirements, except for requirements related to ownership of land and certain water rights. DOE had filed applications beginning in 1997 to the Nevada State Engineer for permanent water rights, but the State Engineer denied the applications. DOE challenged the denials in court, and that litigation has been stayed for more than a decade pending resolution of other issues relating to the future of Yucca Mountain, at least some of which have since been resolved. NRC staff has also begun work on a supplement to DOE’s environmental impact statement to address groundwater impacts, which the staff has determined necessary for any future review of DOE’s license application pursuant to the NWPA and the National Environmental Policy Act (NEPA). Meanwhile, various other related nuclear waste issues also have been, or are being, litigated, including safety standards for disposal, continued licensing of nuclear waste-generating facilities, nuclear fund fees, and the federal government’s contract liability for failure to take title to and dispose of nuclear waste. While the result of the ongoing disputes over the Yucca Mountain program remains uncertain, congressional action could have a significant impact on the fate of the Yucca Mountain facility, as well as on the outcomes of ongoing litigation or the fallout from litigation that has concluded. Bills have been introduced that would promote either the Yucca Mountain repository or alternatives, and would modify management and storage of nuclear waste in the meantime. Contents Establishing a Permanent Geologic Repository for High-Level Nuclear Waste and Spent Nuclear Fuel 1 Yucca Mountain and the Obama Administration 4 Yucca Mountain Funding 4 Blue Ribbon Commission on America’s Nuclear Future 4 DOE’s Attempted Withdrawal of Its Construction Authorization License Application 6 Legal Challenges to Attempted Termination or Suspension of License Application Review Process 7 NRC Administrative Adjudications and Suspension of Licensing Proceedings 8 D.C. Circuit Litigation 9 Challenges to DOE Withdrawal and NRC Suspension: In re Aiken County 9 After Aiken County: NRC Safety Evaluation Report and Other Licensing Activities 11 NRC Order on Resumption of Licensing Process 11 Safety Evaluation Report Conclusions 12 Yucca Mountain Water Rights Legal Status 14 Background on State Water Law Framework and Permitting Procedures 14 History and Current Status of DOE Applications for Water Rights 15 Other Related Litigation 17 Challenge to Former NRC Chairman’s Involvement in the Yucca Mountain Licensing Proceedings 17 Challenges to EPA’s and NRC’s Health and Safety Regulations and DOE’s Environmental Review for the Proposed Yucca Mountain Repository 17 Challenge to NRC’s Waste Confidence Determination 20 Challenge to Nuclear Waste Fund Fee 21 Nuclear Power Utility Standard Contract Claims 23 Congressional Action on Yucca Mountain Facility and Nuclear Waste Storage and Disposal 24 Energy and Water Development and Related Agencies Appropriations 24 Blue Ribbon Commission Recommendations 25 Nuclear Waste Reduction and Storage Safety 26 Other Responses to Yucca Mountain and Nuclear Waste-Related Litigation 27 Contacts Author Contact Information 27 Key Takeaways of This Report Amendments in 1987 to the Nuclear Waste Policy Act (NWPA) declared Yucca Mountain, Nevada, to be the sole candidate site for a geologic repository for permanent disposal of the nation’s spent nuclear fuel and high-level nuclear waste. The 1987 amendments retained the NWPA’s requirements (1) that the site be fully characterized by the Department of Energy (DOE); (2) that certain procedures for state, tribal, and congressional participation in siting be completed; and (3) that the Nuclear Regulatory Commission (NRC) would have to approve DOE’s construction authorization application before construction of a nuclear waste repository at Yucca Mountain could begin. In June 2008, DOE submitted to the NRC a detailed application for a license to construct the Yucca Mountain nuclear waste repository. The NWPA requires the NRC to issue a final decision approving or disapproving the issuance of a construction authorization not later than three years after the date of DOE’s submission, after a technical review by NRC’s staff and an adjudicatory hearing before the NRC’s Atomic Safety and Licensing Board (ASLB). This deadline was not met. DOE attempted to withdraw its application in 2010, but after protracted legal battles, in 2013 a court ruled that the NWPA required the NRC to continue processing the application as long as it could, using the approximately $11 million remaining from previously appropriated funds for the task. While the ASLB hearing remains suspended, the NRC is working on environmental analyses that are necessary for further review of DOE’s application. The NRC finished its Safety Evaluation Report in January 2015, finding that DOE’s application met the NRC’s regulations regarding safety and related topics, except that DOE lacked necessary land and water rights. The land is currently under the control of other federal agencies, among other issues, and the water rights have been denied to DOE by the state of Nevada under state water rights law. Litigation over DOE’s application for water rights for construction and operation of a repository at Yucca Mountain is still ongoing. A number of other lawsuits relating to the Yucca Mountain repository and to nuclear waste storage and disposal are also ongoing. This litigation includes the following: challenges to the NRC’s safety regulations; challenges to the NRC’s determination to issue nuclear reactor or storage licenses, given what is argued to be a lack of progress toward a permanent nuclear waste repository; and claims by nuclear power utilities for monetary damages caused by DOE’s breach of its obligation to begin collecting and disposing of the utilities’ nuclear waste by 1998. Nuclear power utilities’ lawsuits challenging DOE’s assessment and collection of Nuclear Waste Fund (NWF) fees concluded in 2013, and DOE ceased collection of the fees in 2014. The Obama Administration has opposed the Yucca Mountain repository and promoted alternative approaches in other ways. DOE established the Blue Ribbon Commission on America’s Nuclear Future, which issued a report in 2012 recommending “consent-based” approaches for selection of nuclear waste disposal and interim storage sites, among other recommendations. DOE adopted most of the Commission’s recommendations in a 2013 report, but interim storage would require new authority from Congress. Establishing a Permanent Geologic Repository for High-Level Nuclear Waste and Spent Nuclear Fuel More than 30 years ago, Congress addressed increasing concerns regarding the management of the nation’s growing stockpile of nuclear waste by calling for the federal collection of spent nuclear fuel (SNF) and high-level nuclear waste (HLW) for safe, permanent disposal. Passed in 1982, the Nuclear Waste Policy Act (NWPA) was intended to establish an explicit statutory basis for the Department of Energy (DOE) to dispose of the nation’s most highly radioactive nuclear waste. The NWPA requires DOE to remove spent nuclear fuel from commercial nuclear power plants, in exchange for a fee, and transport it to a permanent geologic repository or an interim storage facility before permanent disposal. Defense-related high-level waste is to go into the same repository. In order to achieve this goal, and in an effort to mitigate the political difficulties of imposing a federal nuclear waste facility on a single community, Congress attempted to establish an objective, scientifically based, multi-stage statutory process for selecting the eventual site of the nation’s new permanent geologic repository. Although DOE would be responsible for developing the eventual repository and carrying out the disposal program, individual nuclear power providers would fund a large portion of the program through significant annual contributions, or fees, to the newly established Nuclear Waste Fund (NWF). The NWPA created a multi-stage statutory framework—requiring the participation of the President, Congress, the Secretary of Energy, the Department of Energy (DOE), and the Nuclear Regulatory Commission (NRC)—that governs the establishment of a permanent geologic nuclear waste repository. The various phases of the process include site recommendation, site characterization and study, site approval, and construction authorization. At the site recommendation stage, the Secretary of Energy (Secretary) was directed to nominate at least five potentially “suitable” sites for an eventual repository. After identifying and conducting an initial study of these sites, the Secretary was to recommend three sites to the President for characterization as “candidate sites.” Pursuant to these obligations, the Secretary recommended Deaf Smith County, Texas; Hanford, Washington; and Yucca Mountain, Nevada, to the President in 1986. The Secretary’s recommendations were met with significant opposition from the affected states; however, and as a result, Congress amended the NWPA’s site selection process in 1987 and designated Yucca Mountain as the sole candidate site for the repository by terminating “all site specific activities (other than reclamation activities) at all candidate sites, other than the Yucca Mountain site.” The 1987 amendments, did not, however, end the site characterization, approval, and construction authorization phases, which continued as outlined under the original terms of the NWPA. In accordance with the characterization stage of the NWPA framework, Yucca Mountain was extensively inspected and studied in an effort to determine if the site was in compliance with suitability guidelines established by DOE, and public health, safety, and environmental guidelines established by the Environmental Protection Agency. DOE obtained temporary (10-year) water permits from the state of Nevada for use in site characterization in 1992. In 1997, pursuant to state law and to NRC regulations requiring DOE to “have obtained such water rights as may be needed to accomplish the purpose of the geologic repository operations area” before proceeding with licensing, DOE filed five applications to the Nevada State Engineer for permanent water rights at the Yucca Mountain site for performance confirmation studies and eventual construction. The Nevada State Engineer denied DOE’s applications for permanent water rights in 2000, finding that granting the water rights would not be in the public interest. That denial was challenged in litigation, which is still ongoing fifteen years later. Meanwhile, the federal government did not meet its contractual obligation to begin accepting SNF by 1998, leading to litigation by some utilities for contract damages to cover the costs of on-site storage. Following other significant litigation over the proper safety standards to be applied to the Yucca Mountain facility, and notwithstanding charges by the state of Nevada that the site was unsafe, Secretary of Energy Spencer Abraham recommended that the President approve the Yucca Mountain site for the development of a repository in 2002. President George W. Bush approved the Yucca Mountain site the next day, and, pursuant to the terms of the NWPA, recommended the site to Congress. The NWPA, however, provided the state in which the proposed repository would be located with the opportunity to object to the President’s site recommendation by submitting a notice of disapproval to Congress. If a notice of disapproval were submitted, the NWPA stated that the site would be “disapproved” unless both houses of Congress overrode the state’s objection by passing a “resolution of siting approval.” Although Nevada opposed the selection of Yucca Mountain and quickly submitted its notice of disapproval, Congress passed, and the President signed, the necessary approval resolution to override Nevada’s objection. Thus, the approval stage of the NWPA process ended. The fourth stage of the NWPA process commenced in June 2008, when DOE submitted an application for authorization to construct the Yucca Mountain nuclear waste repository (license application) to the NRC. Under the NWPA, “if the President recommends to the Congress the Yucca Mountain site ... and the site designation is permitted to take effect ... the Secretary shall submit to the [NRC] an application for a construction authorization for a repository at such site.” The statute further directed that following submission of the license application, the NRC “shall issue a final decision approving or disapproving the issuance of a construction authorization not later than the expiration of 3 years after the date of the submission of such application.” NRC’s final decision to grant or deny a construction authorization is to be made after completion of the NRC staff’s independent technical review of the license application, an adjudicatory hearing before NRC’s Atomic Safety and Licensing Board, and subsequent review by the Commissioners. The NRC was considering the 8,600 page license application when the Obama Administration began and ushered in a change in policy with respect to the suitability of Yucca Mountain as the future site of the nation’s permanent nuclear waste repository. Yucca Mountain and the Obama Administration President Obama, former Secretary of Energy Steven Chu, and current Secretary of Energy Ernest Moniz have stated that Yucca Mountain does not represent a viable option for the permanent storage of nuclear waste. In accordance with this view, the Administration has taken several important steps directed toward terminating the Yucca Mountain facility. First, with Congress’s cooperation, the Administration has sought to defund the Yucca Mountain project. Second, the President and former Secretary Chu established a Blue Ribbon Commission to consider alternative solutions to the nation’s nuclear waste challenge. Third, and perhaps most controversial, DOE attempted to terminate the NRC’s Yucca Mountain licensing proceeding by seeking withdrawal of its application for a construction authorization (license application) for the Yucca Mountain facility. Yucca Mountain Funding DOE’s recent budget proposals have not requested funding for the Yucca Mountain facility. Moreover, the Administration utilized its FY2011 budget request to recommend the closure of the Office of Civilian Radioactive Waste Management (OCRWM), which had previously been charged with administering the Yucca Mountain project and many of DOE’s obligations under the NWPA. After steady reductions in staff, the OCRWM officially closed on September 30, 2010. The recent budget proposals follow years of steady decreases in funding for the repository: from $572 million in FY2005, to $288 million in FY2009, to only enough funds, approximately $197 million, to finance the ongoing NRC licensing process in FY2010. Consistent with the Administration’s budget requests, Congress, though debating several funding proposals, has not appropriated funds for the Yucca Mountain project since the limited funding included in FY2010. Blue Ribbon Commission on America’s Nuclear Future Shortly before releasing the FY2011 budget proposal, the President asked DOE to establish the Blue Ribbon Commission on America’s Nuclear Future (Commission) to explore, study, and evaluate alternatives to the Yucca Mountain facility for the permanent storage of SNF and HLW. The 15-member Commission, appointed by the Secretary of Energy, consisted of distinguished scientists, academics, industry representatives, labor representatives, and former elected officials. The Commission’s goal was to “provide recommendations for developing a safe, long-term solution to managing the nation’s used nuclear fuel and nuclear waste.” The Commission would not, however, consider specific sites for a future repository. The Commission issued its final report on January 26, 2012. As expected, the report did not make any specific recommendations as to the “suitability” of Yucca Mountain, other than to make clear that the process of selecting and establishing the Yucca Mountain facility has suffered from several flaws and should be replaced by a new “consent-based approach” that provides “incentives” and encourages interested communities to “volunteer” as a potential host site for an eventual repository. While acknowledging that “the future of the Yucca Mountain project remains uncertain,” the Commission did make specific findings that may have significant influence over the future of nuclear waste disposal. Importantly, the Commission concluded that deep geologic disposal “is the most promising and accepted method [of disposal] currently available,” and therefore recommended that the United States “should undertake an integrated nuclear waste management program that leads to the timely development of one or more permanent deep geological facilities for the safe disposal of spent fuel and high-level nuclear waste.” Additionally, the Commission concluded that “new institutional leadership for the nation’s nuclear waste program is clearly needed.” The final report therefore recommended that control over nuclear waste disposal be removed from DOE, and instead vested in a newly established “single-purpose organization” that could “provide the stability, focus, and credibility that are essential to get the waste program back on track.” The Commission found a sufficiently independent “federal corporation chartered by Congress” to be the most promising structure for this new entity. Finally, the Commission reiterated the severe consequences of continued delays and urged Congress and the President to take action to institute the Commission’s recommendations “without further delay.” Recognizing the delays in a permanent disposal solution, the Commission also urged “[p]rompt efforts to develop one or more consolidated storage facilities” to contain SNF temporarily before final disposal. Such interim storage facilities could enable removal of SNF from shutdown reactors and could also allow the federal government to begin meeting its waste acceptance obligations sooner, reducing its liability. However, legal authority for the federal government to provide or arrange for centralized, consolidated storage is lacking under the NWPA; provisions of the NWPA addressing such storage either have expired or are tied to depository-related milestones that have not been met. Currently, nuclear reactors store spent fuel in pools or (after several years of “cooling”) dry casks on- or off-site. DOE responded to the Commission’s recommendations in January 2013 with a new waste strategy that calls for a “consent-based” process to select nuclear waste storage and disposal sites. The strategy calls for geologic repository siting to occur by 2026, after development by the Environmental Protection Agency (EPA) of generic, non-site-specific, repository safety standards; the goal under the strategy is for repository licensing to be completed by 2042, and operations to begin by 2048. The strategy also calls for a pilot interim surface storage facility to open by 2021, and a larger consolidated interim storage facility by 2025, which would require new authority from Congress. On March 24, 2015, President Obama reiterated support for the 2013 strategy and authorized DOE to move forward with planning for a separate repository for high-level radioactive waste resulting from atomic energy defense activities. This authorization reverses the conclusion made under President Reagan in 1985 that separate disposal of defense nuclear waste was not required and that defense and civilian waste could be disposed of together in a dual-purpose repository. DOE’s Attempted Withdrawal of Its Construction Authorization License Application The most controversial action taken by DOE has been the agency’s effort to terminate the NRC licensing proceeding by attempting to withdraw the Yucca Mountain license application. The 8,600 page license application had been submitted in June 2008. At the time of DOE’s decision to withdraw its license application, NRC’s review of the application was proceeding on two tracks: technical review by NRC staff, to be documented in a safety evaluation report, and preliminary phases of adjudication before the NRC’s Atomic Safety and Licensing Board (Board), to resolve challenges by a number of parties to technical and legal aspects of the DOE application. The Board had admitted nearly 300 contentions, or contested issues, for adjudication. DOE formally filed its motion seeking to withdraw the Yucca Mountain license on March 3, 2010. The agency made clear that the decision to withdraw the license application was based on “policy” considerations. Specifically, DOE asserted that scientific and technological advancements since the enactment of the NWPA, such as dry cask storage and advanced recycling, “provide an opportunity to develop better alternatives to Yucca Mountain.” The agency further asserted that it did not “intend ever to refile an application to construct a permanent geologic repository for spent nuclear fuel and high-level radioactive waste at Yucca Mountain.” As discussed in the following section, DOE’s withdrawal motion triggered strong opposition from a number of concerned parties. Legal Challenges to Attempted Termination or Suspension of License Application Review Process Several petitioners filed similar legal claims in two different venues immediately following DOE’s withdrawal motion. These petitioners—Washington; South Carolina; Aiken County, South Carolina; the Prairie Island Indian Community; and the National Association of Regulatory and Utility Commissioners (NARUC)—petitioned to intervene in the NRC licensing proceeding in order to stop the withdrawal. Washington, South Carolina, and Aiken County, along with a group of private plaintiffs from Washington State, also filed statutory claims in the U.S. Court of Appeals for the District of Columbia Circuit (D.C. Circuit) challenging DOE’s authority to withdraw the license application. Most of the aforementioned parties later joined claims in the D.C. Circuit challenging NRC’s authority to terminate its review of DOE’s license application. The legal battle over the Secretary’s authority to withdraw the license application—and the NRC’s obligation to review the license application—hinges on specific statutory language within the NWPA. Section 114 outlines the process for obtaining the necessary site approval and construction authorization for a permanent repository and provides the statutory foundation for the ongoing litigation. The provision states that once the site approval procedures are completed and the site is designated, as was the case with Yucca Mountain, “the Secretary shall submit to the [NRC] an application for a construction authorization for a repository.” Upon submission of the application, the NRC “shall consider” the application “in accordance with the laws applicable to such applications, except that the [NRC] shall issue a final decision approving or disapproving the issuance of a construction authorization not later than the expiration of 3 years after the date of the submission of such application.” NRC Administrative Adjudications and Suspension of Licensing Proceedings At the administrative level, the Board issued a sweeping opinion in June 2010, ruling that Secretary Chu did not have the authority to withdraw the Yucca Mountain license application. In rejecting DOE’s arguments, the Board concluded that the statutory language of the NWPA “mandates progress towards a merits decision,” which DOE could not “single handedly derail” by withdrawing the license application. Beginning with the plain language of Section 114, the Board held that Congress had established a “detailed, specific procedure” that removed control of the license application process from the Secretary by creating a mandatory statutory scheme. In the Board’s view, to allow DOE to withdraw the application as a matter of policy at this stage would be contrary to Congress’s intent that the licensing process be “removed from the political process.” One day after the Board’s decision, and before DOE filed a formal appeal, the NRC released an order inviting the parties to file briefs on whether the Commission should review the Board’s decision. However, before the NRC took further action, the NRC Chairman at the time, Gregory Jaczko, directed NRC staff to use funds appropriated under the FY2011 Continuing Appropriations Act (CR) to close down the agency’s review of the Yucca Mountain license application. In an October 4, 2010, memorandum, NRC staff were instructed to continue their Yucca Mountain activities “in accordance with” the Commission’s FY2011 budget request that had sought only $10 million to “support work related to the orderly closure of the agency’s Yucca Mountain licensing support activities.” The Chairman’s guidance was opposed by two fellow NRC commissioners as inconsistent with principles of appropriations law. Notwithstanding the ongoing budget dispute, the NRC released an order on September 9, 2011, stating that the “Commission finds itself evenly divided on whether to take the affirmative action of overturning or upholding the Board’s decision.” Although not reaching a decision on the license withdrawal, the order, citing “budgetary limitations,” directed the Board to “complete all necessary and appropriate case management activities, including disposal of all matters currently pending before it and comprehensively documenting the full history of the adjudicatory proceeding,” by the end of the fiscal year. On September 30, 2011, the Board officially announced that “because both future appropriated [Nuclear Waste Fund] dollars and [Full-Time Equivalent positions] for this proceeding are uncertain, and consistent with the Commission’s Memorandum and order of September 9, 2011, this proceeding is suspended.” However, the Board made clear that because the Commission remained evenly divided, “the Board’s decision to deny DOE’s motion to withdraw [the license], therefore stands.” D.C. Circuit Litigation Challenges to DOE Withdrawal and NRC Suspension: In re Aiken County In conjunction with opposing DOE’s motion for withdrawal at the administrative level, a number of parties also filed cases in federal court in an attempt to stop the termination of the Yucca Mountain licensing proceeding. Statutory claims filed by South Carolina, Washington, and private plaintiffs were consolidated in the D.C. Circuit. The complaints alleged violations of the NWPA, the National Environmental Policy Act and the Administrative Procedure Act—claims similar to those made before the NRC. In a July 2011 decision entitled In re Aiken County I, the D.C. Circuit dismissed the challenges to the DOE License withdrawal as unripe. However, the court made clear that the plaintiffs may have found greater success had they challenged NRC’s obligation to review the license application, as opposed to DOE’s obligation to submit the application. The parties quickly re-filed, arguing that the NRC had no authority to terminate the licensing process. In In re Aiken County II, issued in August 2012, the court ruled that it would hold the case in abeyance until December 14, 2012, at which point the parties were directed to update the court on the status of FY2013 appropriations, giving Congress the opportunity to provide more clarity regarding the funding issue. On August 13, 2013, in the final In re Aiken County decision, the D.C. Circuit issued a writ of mandamus ordering the NRC to resume processing DOE’s license application. The order stated that since the court’s 2012 order, “Congress has taken no further action on this matter. At this point, the Commission is simply defying a law enacted by Congress, and the Commission is doing so without any legal basis.” The court rejected NRC’s arguments that it lacked funding to complete the Yucca Mountain licensing process: Congress often appropriates money on a step-by-step basis, especially for long-term projects. Federal agencies may not ignore statutory mandates simply because Congress has not yet appropriated all of the money necessary to complete a project.... For present purposes, the key point is this: The Commission is under a legal obligation to continue the licensing process, and it has at least $11.1 million in appropriated funds—a significant amount of money—to do so. The court also noted that despite several years of appropriations for the Yucca Mountain licensing at or near zero, “Congress speaks through the laws it enacts. No law states that the Commission should decline to spend previously appropriated funds on the licensing process.... [C]ourts generally should not infer that Congress has implicitly repealed or suspended statutory mandates based simply on the amount of money Congress has appropriated.” The court concluded: [O]ur decision here does not prejudge the merits of the Commission’s consideration or decision on the Department of Energy’s license application, or the Commission’s consideration or decision on any Department of Energy attempt to withdraw the license application. But unless and until Congress authoritatively says otherwise or there are no appropriated funds remaining, the Nuclear Regulatory Commission must promptly continue with the legally mandated licensing process. The dissent in the case argued that the court should have used its discretion “not to order the doing of a useless act.’” Following the decision granting the writ of mandamus, the state of Nevada sought rehearing en banc, but its petition was denied. Thereafter, certain petitioners moved to recover their attorneys’ fees pursuant to the Equal Access to Justice Act; one such claim was settled and the court denied the remaining petitioners’ claims

Aug 14, 2015

Lobbying Congress with Appropriated Funds: Restrictions on Federal Agencies and Officials

Congressional Research Service 7-5700 www.crs.gov R44154 Summary Congress, under its authority to direct and control the use and expenditure of the funds that it appropriates from the U.S. Treasury, has enacted several specific and express limitations on the expenditure of federal appropriations. Some of these restrictions and prohibitions apply specifically to using federal appropriations for what is generally called “lobbying” of the Congress (or in some cases other government officials). Although these restrictions exist in both federal statutory laws as well as in yearly appropriations riders, because of their precise language and the exceptions to the limitations, and because of recognized countervailing public interests and the necessities of efficient governmental functioning, such restrictions are interpreted in a narrow fashion. The restrictions on the use of federal funds to lobby the Congress have, for example, been consistently interpreted to allow direct communications from federal officers or employees to Congress with respect to legislation or appropriations in order to facilitate an open dialogue between the agencies, departments, and officials in the various branches of government with regard to the public business and public policy options. What may generally be prohibited by these various appropriations restrictions, however, are what are known as “grass roots” lobbying campaigns—where federal appropriations are used by an agency or federal officer to specifically urge the public to write or communicate with Congress to favor or oppose legislation. Although “grass roots” lobbying efforts may come within the appropriations restrictions, such limitations have generally been applied only to efforts which involve an explicit and clear request to contact a Member of Congress on pending legislation. General statements of support, promotion, or arguments in favor of or defending an Administration’s or agency’s policies, positions, and programs have generally been found to be a legitimate expenditure of federal funds and not a prohibited “grass roots” lobbying campaign (when not involving an express or clear solicitation or urging of the public to communicate with Congress on pending legislation). Similarly, an agency may engage in informational activities directed at the public or Congress when there is a reasonable connection with the official duties of the agency, and such activity would not be an unauthorized “publicity and propaganda campaign” when it does not involve excessive “puffing” or self-aggrandizement of an agency’s importance; covert or secret communications to the public where the government as the source of the material is hidden; or purely partisan political messages unconnected to an agency’s official functions. Contents Statutory Restriction: 18 U.S.C. ( 1913 1 Appropriations Restrictions 4 “Grass Roots” Lobbying and “Pending Legislation” 4 “Publicity or Propaganda” Prohibitions 6 Contacts Author Contact Information 9 Congress has the authority, under what is called its “power of the purse,” to regulate and direct the uses to which any funds appropriated from the U.S. Treasury may be put. Under this authority to regulate and direct the use and expenditure of federal appropriations, Congress has enacted specific prohibitions, both in federal statutory law and in yearly appropriations riders, on the use of federal funds by federal agencies and employees to “lobby” the Congress or to engage in “publicity or propaganda” campaigns directed at legislation pending before Congress. Although such restrictions exist, because of exceptions in the statutory prohibition, and in recognition of competing public interests, necessities, and the realities of governmental functioning, such appropriations restrictions have been consistently interpreted to allow agencies and departments in the different branches of the government to speak and communicate with each other, thus allowing direct communications from federal agencies and employees to Congress regarding legislation and appropriations. Rather than applying to direct communications to Congress, the prohibitions have been interpreted to bar “grass roots” types of lobbying campaigns with federal funds—where agencies expressly appeal to the public to write or contact a Member of Congress to influence a Member on an issue. Even though the restrictions have applied to such “grass roots” lobbying campaigns, the propriety of agencies and the Administration to use public funds to promote, to argue for, and to advocate for its policies and programs has been recognized as a legitimate use of federal funds and not necessarily a violation of the “lobbying” or the “publicity or propaganda” restrictions. Statutory Restriction: 18 U.S.C. ( 1913 The principal statutory prohibition on “lobbying” with appropriated funds is currently set out in the federal criminal code at 18 U.S.C. § 1913. That law, as amended in 2002, now prohibits the use of federal appropriations to pay for any “personal services, advertisement, telegram, telephone, letter, printed or written matter ... intended or designed to influence” Members of Congress, or state or local governmental units, on policies, legislation or appropriations. Originally adopted in 1919, the law had applied initially only to officers and employees of the federal government, and then only to lobbying the Congress. The 2002 amendments, while eliminating the criminal penalties and substituting civil penalties (of the so-called “Byrd Amendment”), broadened the substantive prohibition to apparently cover the use of federal appropriations by any recipient, and not merely by federal employees, while also extending the substantive prohibitions beyond merely lobbying the Congress to a prohibition on the use of federal appropriations to lobby or influence all levels of governmental authority. Although the language of the law appears to encompass a broad prohibition on the use of federal funds to influence Members of Congress or other government officials, the statutory language expressly exempts from the prohibition the activities of officers and employees of the federal government “communicating to any such Member or official, at his request,” or to Congress or such official “through the proper official channels, requests for any legislation, law, ratification, policy or appropriations which they deem necessary for the efficient conduct of the public business.... ” This provision of law has thus been consistently interpreted in the past by the Justice Department as permitting direct contacts and communications from federal executive officials and executive agencies to Members of Congress concerning pending or proposed federal legislation. As explained by the Justice Department, “18 U.S.C. § 1913 does not apply to direct communications between Department ... officials and Members of Congress and their staffs ... in support of Administration or Department positions.... ’” Earlier, in an informal opinion, the Assistant Attorney General discussed the right and obligation within our constitutional framework for the President and the executive agencies, and their officers and employees, to communicate directly with Members of Congress to express their views and the Administration’s arguments and positions in favor of or opposition to proposed or pending legislation: Personal contacts with members of Congress by executive officers are both sanctioned and required by Article II, section 3 of the Constitution.... The power to recommend measures to Congress would appear clearly to comprehend and include the power to urge arguments on individual Members of Congress in support of such measures. Even when fairly overt and obvious advocacy activities by Administration officials are directed at the public, such that they are clearly not “direct communications” with Congress and so might arguably be considered in a very general sense a public “lobbying” or “publicity” campaign for particular legislation or programs favored by the Administration, there may not be violations of the restrictions. Interpretations of § 1913 (and similar appropriations prohibitions) recognize that members of the Administration and other executive branch officers and employees are not prohibited from all official public expressions of support or opposition, or expressions for the need for certain legislation or governmental programs. There is, therefore, in the first instance, an apparently accepted distinction between prohibited grass roots “lobbying” with federal funds regarding legislation, as opposed to permissible public “advocacy” for certain Administration programs, favored legislation, or policy. As noted by one congressional commentator concerning an Administration’s public expressions of opinions on policy: “Certainly, any Administration should be expected to use all legal means at its disposal to encourage acceptance of its programs.” In 1981, the Office of Legal Counsel of the Department of Justice explained in broad terms the proper, contemplated relationship and interchange between the executive branch and Congress as well as between the executive branch and the public concerning legislation: The Constitution contemplates that there will be an active interchange between Congress, the Executive Branch, and the public concerning matters of legislative interest. For that reason alone, this Department has traditionally declined to read the criminal statute and the general rider as requiring federal officers and employees to use their own funds and their own time to frame necessary communications to Congress and the public. We have taken the view that the criminal statute and the general rider impose no such requirement. They permit a wide range of contact between the Executive and the Congress and the Executive and the public in the normal and necessary conduct of legislative business. Similarly, in a 1989 opinion, the Office of Legal Counsel of the Department of Justice asserted that general public expressions concerning legislation or other public policy issues by the President or other executive branch officials are allowed under the statute, as the law was not intended to prohibit the President or executive officials “from engaging in a general open dialogue with the public on the Administration’s programs and policies.” The types of conduct that would, in theory, violate the statutory restriction would thus not involve mere exposition, or even advocacy or promotion of policy positions, preferred legislation, or appropriations or regulations that are favored by the Administration or an agency of the government, but rather conduct that involved certain “grass roots” lobbying campaigns—that is, substantial letter-writing or other types of significant propaganda campaigns funded with appropriated monies that are directed at the general public and that specifically urge or exhort the public or individuals to write or contact their congressman on an issue before Congress. This discussion is framed in the context of “theoretical” violations of § 1913 because it appears that no one has ever actually been prosecuted or even indicted under the law since its enactment nearly one hundred years ago. The Department of Justice, Office of Legal Counsel, has noted that prohibited “grass roots” lobbying campaigns with federal appropriations would involve those where the public is expressly asked to contact Members of Congress: The essence of a “grass roots” campaign is the use of “telegrams, letters, and other private forms of communication expressly asking recipients to contact Members of Congress.” The Department of Justice has consistently interpreted the restrictions of 18 U.S.C. § 1913 very narrowly and has explained, for example, that it (1) would not enforce the prohibition against the “lobbying activities of executive branch officials whose positions typically and historically entail an active effort to secure public support for the Administration’s legislative program ... [including] presidential aides, appointees, and their delegees.... ”; (2) would not consider the statutory prohibition applicable to “public speeches” or public writings of federal executive branch officials, but rather only to private writings or communications to members of the public “expressly asking recipients to contact Members of Congress”; and (3) would not consider enforcement except for what the Department of Justice considered as “gross” solicitations of public support, or “significant” or “large scale” expenditures of public funds in these types of prohibited “grass roots” lobbying efforts. Appropriations Restrictions “Grass Roots” Lobbying and “Pending Legislation” In addition to the permanent statutory provision at 18 U.S.C. ( 1913, there is often included in departmental appropriations bills various riders in the form of general restrictions on the use of such funds appropriated in that act for “publicity or propaganda” purposes directed at “legislation pending before Congress.” Similarly, there is usually included in a general appropriations bill a limitation applicable to all federal funds (“appropriated in this or any other Act”) regarding the use of such funds for “publicity or propaganda” material “designed to support or defeat legislation pending before the Congress.” The more recent general appropriations prohibitions on “publicity or propaganda” campaigns directed at “pending legislation,” that is, “lobbying” Congress with federal funds, usually state as follows: No part of any funds appropriated in this or any other Act shall be used by an agency of the executive branch, other than for normal and recognized executive-legislative relationships, for publicity or propaganda purposes, and for the preparation, distribution or use of any kit, pamphlet, booklet, publication, radio, television or film presentation designed to support or defeat legislation pending before the Congress, except in presentation to the Congress itself. As express congressional limitations on appropriations, and thus also on the disbursement authority of the executive branch departments, these provisions of appropriations law have been interpreted and applied by the Government Accountability Office (GAO, formerly the General Accounting Office). Interpreting these types of “publicity or propaganda” restrictions with respect to so-called “lobbying” activities by federal agencies, GAO has explained: In interpreting “publicity and propaganda” provisions ... we have consistently recognized that any agency has a legitimate interest in communicating with the public and with legislators regarding its policies. ... An interpretation of [the anti-lobbying restriction] which strictly prohibited expenditures of public funds for dissemination of views on pending legislation would consequently preclude virtually any comment by officials on administration or agency policy, a result we do not believe was intended. We believe, therefore, that Congress did not intend ... to preclude all expression by agency officials of views on pending legislation. Rather, the prohibition of [the anti-lobbying restriction], in our view, applies primarily to expenditures involving direct appeals addressed to the public suggesting that they contact their elected representatives and indicate their support of or opposition to pending legislation, i.e., appeals to members of the public for them in turn to urge their representatives to vote in a particular manner. This appropriation rider is thus interpreted in a somewhat similar manner as the permanent statutory law with respect to lobbying by federal agencies and employees and would not generally apply to direct communications from or between government officers in the executive and legislative branches of the government, but rather to certain communications to the public that expressly urge or exhort members of the public to contact Congress on a legislative matter. When communications are made to the public concerning public policy matters, even if such communications give arguments for or against specific legislation, programs, or policy, GAO found no violation of the general publicity or propaganda “anti-lobbying” rider when the material was “essentially expository in nature” and did not urge or suggest anyone contact their representative in the legislature. In one example concerning Department of Transportation expenditures for displays, pamphlets, and informational material at the time Congress was considering requiring passive restraint systems (airbags) for cars, GAO noted that: “Considering the timing and location of the displays, one would have to be pretty stupid not to see this as an obvious lobbying ploy, that did not make it illegal since there was no evidence that Transportation urged members of the public to contact their elected representatives.” Even if one could argue that an agency communication to the public had the subjective intent—or even if not intended had the probable result—to influence or spur the public to write or call their Member of Congress, GAO has resisted finding a violation of the appropriations provision without an express, clear, or explicit call to “write your congressman” or to “let Washington know how you feel” about an issue before Congress: GAO has articulated a bright-line rule in determining whether an agency’s communication violates these prohibitions, that is, evidence that the agency made a clear, explicit appeal to the public to contact Members of Congress in support of the agency’s position on legislation pending before Congress. B-304715, April 27, 2005. The rule balances the activity that the prohibitions are intended to address with an agency’s responsibility to communicate with the American people on policy and priorities. Since this appropriations limitation is expressly worded to apply to “legislation pending before the Congress,” it has been found not to prohibit a communication to the public that urges the public to contact Members of Congress when such contacts were not about pending legislation (but rather were about agency regulations), and not to apply to urging the public to participate in communications “addressed to the President solely” (and not to Members of Congress). “Publicity or Propaganda” Prohibitions In addition to the appropriations restriction concerning legislation “pending before Congress,” there have been adopted over the years a few different varieties of “publicity and propaganda” riders in the various appropriations legislation for a particular federal entity, and thus the appropriations language for a specific department, agency, or governmental program should also be examined. There is now also a general restriction on the use of any federal funds for “publicity and propaganda not authorized by Congress,” which may apply to different activities than those covered by the “legislation pending before Congress” provisions. In a similar manner as the “legislation pending” restriction, however, GAO has noted that, under the general “publicity or propaganda” restriction, agencies that have an authorized general informational function may communicate with the public on the programs and policies under their purview and may advocate, promote, or argue for a particular public policy or program without a violation of the restriction. Even without an express statutory directive to disseminate information or to inform the public, GAO has recognized that “agencies have a general responsibility, even in the absence of specific direction, to inform the public of the agency’s policies.” GAO has noted that “public officials ... may expound to the public the policies of those agencies and of the administration of which they are members, and may likewise offer rebuttal to attacks on these policies.” Furthermore, “[t]o the extent ... that policy of an agency or Administration is embodied in pending legislation, discussion by officials of that policy may well necessarily refer to such legislation and be either in support of or against it.” GAO has found, on the other hand, that there are certain types of general publicity or information campaigns funded by federal appropriations that may violate these general propaganda and publicity restrictions, for example, in using federal appropriations for: (1) Self-aggrandizement or “puffery.” GAO has found that “self-aggrandizement” is “publicity of a nature tending to emphasize the importance of the agency or activity in question,”although it has permitted a department to explain the effects that proposed budget reductions would have upon the programs of the department in various communities across the country. (2) Covert propaganda campaigns. These have included agency-produced editorials, videos, reports, advocacy, and argument on public policy and programs that are “misleading as to their origin,” including informational pieces produced by the government but presented as positions of “persons not associated with the Government”: Our decisions have defined covert propaganda as materials such as editorials or other articles prepared by an agency or its contractors at the behest of the agency and circulated as the ostensible position of parties outside the agency. See B-229257, June 10, 1988; B-229069, 66 Comp. Gen. 707 (1987). A critical element of covert propaganda is the concealment of the agency’s role in sponsoring such material. GAO has found video news releases from an agency to be prohibited “covert propaganda” when the videos themselves did not clearly identify the government as the sponsor or producer of the material in a way that viewers could make that identification. GAO noted in that decision: In our case law, findings of propaganda are predicated upon the fact that the target audience could not ascertain the information source. For example, we found government-prepared editorials to be covert propaganda; although the newspapers who would have printed the suggested editorials should have been aware of the source, the reading public would not have been aware of the source. (3) Activities that are purely partisan or political. For an activity to violate the riders under this standard as “purely partisan,” it would have to be found to have been “designed to aid a political party or candidates.” Agencies, as noted above, generally have the authority to disseminate information to the public and to “defend and explain its policies,” and thus GAO has noted that it is “sometimes difficult to differentiate an agency(s” legitimate dissemination of information from activities that are for “purely political” reasons. While certain “information” and arguments forwarded by an agency may comport with the positions or policies of one political party or candidate over another’s, GAO has generally deferred to the agency’s justification for the expenditure of funds when the motives for such activity are not otherwise clear: A standard we apply to resolve this struggle is that the use of appropriated funds is improper only if the activity is “completely devoid of any connection with official functions.” B-147578, November 8, 1962. We do not raise any objection to the use of appropriated funds if an agency can reasonably justify the activity as within its official duties. The Government Accountability Office has also indicated that under this standard an agency publication might properly include what might be considered to be materials that are in a “political context” or that contain “some partisan content,” by providing only arguments that support the Administration’s position on a bill or a public policy matter. GAO found that certain publications and videos by the Forest Service, for example, although presenting only one side of the argument on more aggressive clearing or thinning of national forest lands, were not “purely partisan”: Indeed, these materials discuss the possible positive results without discussing the negative impact that such policy could have on the environment or wildlife habitat. ... The fact that the materials do not present both the negative and positive consequences, however, does not render them purely partisan in violation of the publicity and propaganda prohibition. On the contrary, our recent cases have recognized that restricting all materials that arguably have or are perceived as having some partisan content would hinder the legitimate exercise of the agencies’ authority to inform the public of its policies, and to rebut attacks upon its policies. While GAO has found in this manner and has allowed the agencies significant latitude as to the content and “balance” of their public communications based on the scope of the agency’s official duties and statutory authorization, GAO has not ruled out the possibility that a government-produced document may be so “palpably erroneous,” or so one-sided as to be “misleading or inaccurate,” that it might also constitute propaganda. Author Contact Information Jack Maskell Legislative Attorney [email protected], 7-6972

Aug 13, 2015

Overview of Farm Safety Net Programs

Aug 12, 2015

The Office of Surface Mining’s Proposed Stream Protection Rule: An Overview

Aug 11, 2015

Status of the African Lion and Sport Hunting

Aug 7, 2015

Obergefell v. Hodges: Same-Sex Marriage Legalized

On June 26, 2015, the Supreme Court issued its decision in Obergefell v. Hodges requiring states to issue marriage licenses to same-sex couples and to recognize same-sex marriages that were legally formed in other states. In doing so, the Court resolved a circuit split regarding the constitutionality of state same-sex marriage bans and legalized same-sex marriage throughout the country. The Court’s decision relied on the Fourteenth Amendment’s equal protection and due process guarantees. Under the Fourteenth Amendment’s Equal Protection Clause, state action that classifies groups of individuals may be subject to heightened levels of judicial scrutiny, depending on the type of classification involved or whether the classification interferes with a fundamental right. Additionally, under the Fourteenth Amendment’s substantive due process guarantees, state action that infringes upon a fundamental right—such as the right to marry—is subject to a high level of judicial scrutiny. In striking down state same-sex marriage bans as unconstitutional in Obergefell, the Court rested its decision upon the fundamental right to marry. The Court acknowledged that its precedents have described the fundamental right to marry in terms of opposite-sex relationships. Even so, the Court determined that the reasons why the right to marry is considered fundamental apply equally to same-sex marriages. The Court thus held that the fundamental right to marry extends to same-sex couples, and that state same-sex marriage bans unconstitutionally interfere with this right. Though the Supreme Court’s decision in Obergefell resolved the question of whether or not state same-sex marriage bans are unconstitutional, it raised a number of other questions. These include questions regarding, among other things, Obergefell’s broader impact on the rights of gay individuals; the proper level of judicial scrutiny applicable to classifications based on sexual orientation; what the decision might mean for laws prohibiting plural marriages; the Court’s approach to recognizing fundamental rights moving forward; and the proper level of judicial scrutiny applicable to governmental action interfering with fundamental rights. This report explores these questions.

Aug 7, 2015

FY2016 Appropriations for the Census Bureau and Bureau of Economic Analysis

Aug 7, 2015

China’s “One Belt, One Road”

Aug 6, 2015

Iran Nuclear Agreement: Selected Issues for Congress

The nuclear agreement between Iran and six negotiating powers (“P5+1:” United States, France, Britain, Germany, Russia, and China), finalized on July 14, 2015, raises a wide variety of issues as Congress undertakes a formal review under the Iran Nuclear Agreement Review Act (P.L. 114-17). The Administration submitted the 150+ page text (including annexes) of the “Joint Comprehensive Plan of Action,” (JCPOA) to Congress on July 19, 2015, and the period for congressional review under the act is to conclude on September 17. Should the agreement stand after review processes in Congress and in Iran’s national security and legislative bodies, the JCPOA would enter into force 90 days from July 20, 2015, the date that U.N. Security Council Resolution 2231 was adopted. The Resolution endorsed the JCPOA and called on U.N. member states to assist in its implementation. Broadly, the accord represents an exchange of limitations on Iran’s nuclear program for the lifting or suspension of U.S., U.N., and European Union (EU) sanctions. The text contains relatively complicated provisions for inspections of undeclared Iranian nuclear facilities, processes for adjudicating complaints by any of the parties for nonperformance of commitments, “snap-back” provisions for U.N. sanctions, finite durations for many of Iran’s nuclear commitments, and broad U.N., E.U., and U.S. commitments to suspend or lift most of the numerous sanctions imposed on Iran since 2010. Many of the agreement’s provisions have raised questions about the degree to which the accord can accomplish the P5+1 objectives that were stated when P5+1-Iran negotiations began in 2006. On the other hand, many have asserted that there is a lack of alternatives that could ensure that Iran’s nuclear program is purely peaceful with greater certainty and with fewer risks. The agreement could have significant implications for the Middle East region and for U.S.-Iran relations, the latter of which have been characterized primarily by animosity since Iran’s 1979 Islamic revolution. The agreement also raises questions about the U.S. approach to regional security and the security of key U.S. allies, and the potential for resolving some of the region’s many conflicts, including those generated by the Islamic State organization.

Aug 6, 2015

Presidential Permit Review for Cross-Border Pipelines and Electric Transmission

Executive permission in the form of a Presidential Permit has long been required for the construction, connection, operation, and maintenance of certain facilities that cross the United States borders with Canada and Mexico. The constitutional basis for the President’s cross-border permitting authority is well established, but questions remain about the manner in which this authority is exercised among the agencies to which it has been delegated. In particular, some Members of Congress and affected stakeholders seek greater clarity about how Presidential Permit applications are reviewed for various kinds of cross-border energy projects. Particular attention is paid to the scope of review and perceived differences in the approaches taken by the State Department, the Department of Energy, and the Federal Energy Regulatory Commission. These agencies have jurisdiction over cross-border oil pipelines, electric transmission lines, and natural gas pipelines, respectively. In the past, with few exceptions, the Presidential Permits issued for cross-border pipelines or electric transmission lines involved projects extending a relatively short distance into a U.S. border state before connecting to some existing facility. However, over the last decade, much longer cross-border projects have been approved, including the Keystone and Alberta Clipper pipelines. These projects are hundreds of miles long and cross multiple states. The larger scope of these approved projects, and subsequent permit applications for other large projects—especially the Keystone XL pipeline—have increased national attention to the Presidential Permit process. Analysis of historical Presidential Permit reviews among the three permitting agencies shows that, notwithstanding differences in their permit authorities under the various executive orders, their reviews are driven largely by the National Environmental Policy Act (NEPA)—and the same NEPA requirements apply to all three. Faced with Presidential Permit applications for energy projects of similar physical scope, the agencies appear to perform NEPA reviews of similar proportion. Very short, smaller projects are generally reviewed more narrowly and quickly, whereas multi-state projects of large capacity are subject to more expansive environmental review and tend to face much greater public scrutiny and comment—regardless of which agency has jurisdiction. In response to concerns about delays in the review of the Keystone XL permit application, several legislative proposals in the 114th Congress have sought to change some aspect of the Presidential Permit process. Most notable was the Keystone XL Pipeline Approval Act (S. 1), which was passed in Congress but vetoed by President Obama. Subsequent legislative proposals remain active, including the American Energy Renaissance Act of 2015 (S. 791 and H.R. 1487) and the North American Energy Infrastructure Act (S. 1228). As long as agencies apply NEPA to Presidential Permitting decisions, changes to the delineation of, or jurisdiction over, the border-crossing portion of large projects for permitting purposes may not change the scope of project environmental review. The imposition of decision deadlines on the permitting agencies after NEPA review is complete, either for national interest or public interest determination, could provide greater process certainty to stakeholders. However, the overall project review would still be contingent on the completion of NEPA review. Thus, the effects of legislative proposals to change cross-border infrastructure permitting on the review or approval of future border crossing energy infrastructure projects are open to debate.

Aug 6, 2015

Overtime Provisions in the Fair Labor Standards Act (FLSA): Frequently Asked Questions

The Fair Labor Standards Act (FLSA), enacted in 1938, is the main federal legislation that establishes general wage and hour standards for most, but not all, private and public sector employees. Among other protections, the FLSA establishes that covered nonexempt employees must be compensated at one-and-a-half times their regular rate of pay for each hour worked over 40 hours in a workweek. The FLSA also establishes certain exemptions from its general labor market standards. One of the major exemptions to the overtime provisions in the FLSA is for bona fide executive, administrative, and professional employees (the “EAP” or “white collar” exemptions). The FLSA grants authority to the Secretary of Labor to define and delimit the EAP exemption “from time to time.” Under current regulations (established in 2004), to qualify for this exemption from the FLSA’s overtime pay requirement, an employee must be salaried (the “salary basis” test), must perform specified executive, administrative, or professional duties (the “duties” test), and must earn above a salary level threshold (the “salary level” test), which is currently set at $455 per week. The Secretary of Labor published a Notice of Proposed Rulemaking (NPRM) in July 2015 to make changes to the EAP exemption. The major changes in the NPRM are raising the salary level threshold from the current $455 per week to $970 per week and linking the threshold going forward to a measure of inflation. The NPRM does not propose changing the duties and responsibilities that employees must perform to be exempt. Thus the NPRM would affect EAP employees at salary levels between $455 and $970 per week in 2016. The Department of Labor (DOL) estimates that about 14.7 million workers would be affected, including about 4.7 million EAP employees who would become newly entitled to overtime pay. This report answers frequently asked questions about the overtime provisions of the FLSA, the EAP exemptions, and the NPRM that seeks changes to the EAP exemption.

Aug 5, 2015

The Agency for Healthcare Research and Quality (AHRQ) Budget: Fact Sheet

Aug 4, 2015

Naval Station Guantanamo Bay: History and Legal Issues Regarding Its Lease Agreements

This report briefly outlines the history of the establishment of the U.S. naval station at Guantanamo Bay, Cuba, during the first decade of the twentieth century, its changing relationship to the community around it, and its heightened importance with the onset of military operations in Afghanistan and Iraq. It also explains in detail the legal status of the lease of the land on which the naval station stands, the statutory and treaty authorities granted to the President with regard to any potential closure of the naval station, and the second-order effects on such a closure that current Cuba sanctions laws might have. A short list of additional readings ends the report. At the end of the Spanish-American War in 1898, the Spanish colonies of Cuba, Puerto Rico, Guam, and the Philippines transitioned to administration by the United States. Of these four territories, only Cuba quickly became in independent republic. As a condition of relinquishing administration, though, the Cuban government agreed to lease three parcels of land to the United States for use as naval or coaling stations. Naval Station Guantanamo Bay, Cuba, was the sole installation established under that agreement. The two subsequent lease agreements, one signed in 1903 and a second in 1934, acknowledged Cuban sovereignty, but granted to the United States “complete jurisdiction and control over” the property so long as it remained occupied. Relations between the naval station and its surrounding communities remained stable until the Cuban revolution of the late 1950s. As Cuban-American relations deteriorated in the aftermath of the 1959 Cuban revolution, the naval station found itself more and more isolated. When the Cuban government began shutting off the supply of potable water during the early 1960s, the United States took measures to render the naval station self-sufficient in both water supply and electrical power generation. It has remained so ever since. The prominence of Naval Station Guantanamo Bay rose briefly during the Haitian refugee and Cuban migrant crises of the early 1990s. At one point in late 1994, the migrant population of the naval station approached 45,000. However, by the end of January 1996, the last of these temporary residents had departed. The naval station’s current prominence has arisen due to the establishment of facilities to house a number of wartime detainees captured during military operations in Afghanistan and Iraq. This began in early 2002 with the refurbishment of some of the property formerly used to house refugees. This later expanded to more substantial housing that is operated by Joint Task Force-Guantanamo, a tenant for which the naval station provides logistical support. Additional temporary facilities were eventually constructed on a disused naval station airfield for use by the military commissions created to try detainees. The 1903 lease agreements between the governments of Cuba and the United States are controlled by the language of a 1934 treaty stipulating that the lease can only be modified or abrogated pursuant to an agreement between the United States and Cuba. The territorial limits of the naval station remain as they were in 1934 unless the United States abandons Guantanamo Bay or the two governments reach an agreement to modify its boundaries. While there appears to be no consensus on whether the President can modify the agreement alone, Congress is empowered to alter by statute the effect of the underlying 1934 treaty. There is no current law that would expressly prohibit the negotiation of lease modifications with the existing government of Cuba. As for “abandoning” the naval station, it appears that there are no statutory prohibitions against closing an overseas military installation. Nevertheless, Congress has imposed practical impediments to closing the naval station by, for example, restricting the transfer of detainees from Guantanamo Bay to foreign countries. The existence of various Cuba sanctions laws may also impede a closure of Naval Station Guantanamo Bay by making it difficult to give or sell any property to the government of Cuba. For information on the Guantanamo detention facility, see CRS Legal Sidebar “Senate to Mull Potential Endgame for Guantanamo,” by Jennifer K. Elsea; and CRS Report R40139, Closing the Guantanamo Detention Center: Legal Issues, by Michael John Garcia et al. For background on U.S. policy toward Cuba, see CRS Report R43926, Cuba: Issues for the 114th Congress, by Mark P. Sullivan.

Aug 4, 2015

Federal Support for Reproductive Health Services: Frequently Asked Questions

Aug 4, 2015

Access to Unapproved Drugs: FDA Policies on Compassionate Use and Emergency Use Authorization

The Food and Drug Administration (FDA) regulates the U.S. sale of drugs and biological products, basing approval or licensure on evidence of the safety and effectiveness for a product’s intended uses. Without that approval or licensure, a manufacturer may not distribute the product except for use in the clinical trials that will provide evidence to determine that product’s safety and effectiveness. Under certain circumstances, however, FDA may permit the sponsor to provide an unapproved or unlicensed product to patients outside that standard regulatory framework. Two such mechanisms are expanded access to investigational drugs, commonly referred to as compassionate use, and emergency use authorization. If excluded from a clinical trial because of its enrollment limitations, a person, acting through a physician, may request access to an investigational new drug outside of the trial. FDA may grant expanded access to a patient with a serious disease or condition for which there is no comparable or satisfactory alternative therapy, if, among other requirements, probable risk to the patient from the drug is less than the probable risk from the disease; there is sufficient evidence of safety and effectiveness to support the drug’s use for this person; and providing access “will not interfere with the ... clinical investigations to support marketing approval.” The widespread use of expanded access is limited by an important factor: whether the manufacturer agrees to provide the drug, which—because it is not FDA-approved—cannot be obtained otherwise. The FDA does not have the authority to compel a manufacturer to participate. Manufacturers consider several factors in deciding whether to provide an investigational drug, such as available supply, perceived liability risk, limited staff and facility resources, and need for data to assess safety and effectiveness. Although FDA reports the number of requests it receives, manufacturers do not. In the case of determination of a military, domestic, or public health emergency, the Commissioner of Food and Drugs may issue an emergency use authorization (EUA) to allow temporary use of medical products that FDA has not approved or licensed, or unapproved uses for approved or licensed products. FDA’s assessment of the balance of a drug’s potential risks and benefits—whether for overall market approval or for an individual with a serious disease or a public faced with an unusual and dangerous threat—may vary with the circumstance, such as an individual’s prognosis, threat to the community, alternative available treatments, extent of knowledge of safety and effectiveness in the anticipated use, and informed consent. Although FDA granted over 99% of the expanded access requests it has received since 2010, patients and others point to what they see as FDA-created obstacles to access. In February 2015, FDA released draft guidance and a new form that, when finalized, would reduce the amount of information required from the physician. Since 2014, 20 states have passed so-called right to try laws to bypass FDA permission for access to an investigational drug. Congress and FDA seek to protect the public by balancing ensuring that drugs are safe and effective with getting new products to the market quickly. Complementing expanded access programs in achieving those goals are broader tools including incentives to development, expediting development and review, limited access, and regulatory science.

Aug 4, 2015

Coalition Contributions to Countering the Islamic State

This report discusses the coalition organized as part of a global campaign to counter the Islamic State (ISIL/ISIS), including its military aspects and challenges to its coherence.

Aug 4, 2015

Specialty Drugs: Background and Policy Concerns

Congressional Research Service 7-5700 www.crs.gov R44132 Summary Specialty drugs are one of the fastest-growing areas of health care spending. There is no one set definition of specialty drugs, although insurers and other health care payers often characterize them as prescription products requiring extra handling or administration that are used to treat complex diseases including hepatitis C, multiple sclerosis, and cancer. High cost can trigger a specialty drug designation. Biologics, or drugs derived from living cells, are often but not always deemed to be specialty drugs. Over the past several years, spending for specialty drugs has been growing at a faster rate than spending for other pharmaceuticals. For example, in 2014, U.S. prescription drug spending rose by 13% from the previous year—the fastest pace since 2001—led by a 26.5% increase in spending for specialty drugs (with much of that spending for drugs to treat hepatitis C), according to industry and government data. Specialty medications now account for about one-third of total U.S. prescription drug spending, and some analysts predict they could make up as much as one-half of total drug spending by 2018. Insurers have tried to control spending for specialty drugs, in part, by increasing cost sharing for beneficiaries of their health care plans and taking other steps to limit access under their policies. Consumer advocates say that these efforts have undercut some of the recent gains in prescription drug insurance coverage. During the past decade, Congress has expanded consumer access to prescription drugs by enacting the Medicare Part D prescription drug program, requiring certain health plans to provide prescription drug benefits as part of the Patient Protection and Affordable Care Act (ACA; P.L. 111-148, as amended), and expanding the state-federal Medicaid program. Some lawmakers now are focused on ensuring that private and public health care payers do not structure insurance benefits in such a way that certain enrollees cannot afford to fill prescriptions for high-cost medications. During the 113th Congress, for example, lawmakers introduced legislation to cap out-of-pocket spending by insured consumers for specialty drugs. In recent years, states such as New York and Delaware have enacted laws that limit consumer cost sharing for prescription drugs. Dozens of states also have passed laws that bar insurers from imposing higher out-of-pocket charges for oral specialty cancer drugs than for traditional treatments. Others have debated bills to require insurers to detail drug development costs. Although some of the legislative proposals can reduce consumer out-of-pocket costs, they do not address the overall price of specialty drugs. Congress historically has attempted to improve prescription drug affordability by providing incentives to increase supply and market competition. Lawmakers fund basic drug research through the National Institutes of Health and provide nonrefundable tax credits for qualified research spending. Federal laws including the Orphan Drug Act of 1982 (P.L. 97-414), the Drug Price Competition and Patent Term Restoration Act of 1984 (Hatch-Waxman; P.L. 98-417), and the ACA provide financial incentives for both new, breakthrough drugs and lower-cost substitutes. Those incentives may provide some financial relief in the longer term, but in the short run federal programs and private payers face high up-front prices and spending for new specialty therapies, such as recently introduced treatments for hepatitis C and cancer. This report provides background on specialty drugs. To put specialty drug development, distribution, and spending in context, the report provides information about broader U.S. prescription drug pricing, insurance, and regulatory trends. Contents Introduction 1 U.S. Prescription Drug Market 5 Specialty Drugs 7 Biologics 8 Orphan Drugs 9 Specialty Drug Spending Trends 10 Costs and Benefits of Specialty Drugs 11 Specialty Drug Spending Controls 12 Enrollee Utilization Policies 13 Tiered Formularies 14 Site of Care 17 Specialty Pharmacies 18 Manufacturer-Payer Negotiations 19 Sovaldi as Case Study of Payer Negotiations 20 Outstanding Issues 21 Consumer Insurance Coverage of Specialty Drugs 21 Potential Changes in Drug Payment and Pricing 23 Figures Figure 1. U.S. Prescription Drug Spending 1980-2024 7 Figure 2. Factors Determining Specialty Drug Designation 8 Figure 3. 2014 U.S. Spending for Prescription Drugs by Source 13 Figure 4. Percentage of Insurers Using Strategies for Managing Specialty Drug Use 14 Figure 5. Tiered Formulary 15 Contacts Author Contact Information 24 Introduction Specialty drugs are one of the fastest-growing areas of health care spending. Although there is no commonly accepted definition of specialty drugs, insurers and other health care payers generally characterize them as expensive prescription products requiring extra handling or administration (such as injection or infusion) that are used to treat complex diseases including multiple sclerosis, cancer, and hepatitis C. Biologics—complex drugs derived from living organisms—are often but not always specialty drugs, as are so-called orphan drugs, which are targeted at rare diseases or disorders. U.S. spending for specialty drugs increased by 26.5% in 2014 as new drugs for treating hepatitis C came to the market, according to a broad analysis of pharmaceutical market data. Other, more targeted studies also show rapid growth for specialty products. According to one of the largest U.S. pharmacy benefit managers (PBMs), specialty drugs account for less than 1% of U.S. prescriptions but about one-third of prescription drug spending. Some health care industry analysts and PBMs predict that specialty drugs could account for half of all annual prescription drug spending before the end of the decade. To date, the rapid increases in specialty spending have been driven mainly by price inflation, although utilization is starting to play a larger role as manufacturers bring a wider array of specialty drugs to market, including products with broad applications, such as the treatments for hepatitis C. What Is a Pharmacy Benefit Manager? Pharmacy benefit managers (PBMs) serve as intermediaries between drug manufacturers and health care payers, such as self-insured businesses; insurance companies, including insurers that participate in Medicaid and Medicare; and union-run health plans. PBMs handle prescription billing; negotiate drug prices with drug companies; and create retail pharmacy networks for insurers, including contracting with mail-order pharmacies and negotiating reimbursement rates with them. PBMs also design insurance formularies, which are lists of drugs covered by an insurance plan. PBMs oversee prescription drug benefits for more than 210 million Americans. The largest PBMs include Express Scripts, with 28% market share; CVS Caremark, with 27% market share; UnitedHealth Group, with 10% market share; and Catamaran, with 7 % market share. Other large PBMs include Prime Therapeutics, MedImpact, and Cigna. Consolidation in the PBM industry is ongoing. Drug retailers have merged with PBMs to provide integrated health services. CVS Health is a retail pharmacy chain and a PBM. The Rite Aid drug store chain in 2015 purchased the PBM EnvisionRx. Some insurers operate their own PBMs, such as a group of Blue Cross and Blue Shield plans that owns Prime Therapeutics, and UnitedHealthcare, which owns OptumRx. (Catamaran and OptumRx combined in 2015.) The growing use of specialty drugs poses complex issues for private insurers and government health programs such as Medicare, Medicaid, and the Veterans Health Administration. Specialty drugs can provide marked improvement or a cure for individuals with serious diseases, thereby reducing the need for hospitalizations and other health services. The potential long-term benefits of specialty drugs may not always offset their higher up-front costs, however. In addition, because the U.S. health care system is decentralized and consumers may change insurance providers, one insurer may bear the cost of the drugs while another insurer may reap the benefit of reduced health care spending for an enrollee treated with specialty pharmaceuticals. Insurers and employers, and the PBMs with which they contract, control drug costs in part by negotiating discounts and rebates with manufacturers. Because there are no ready substitutes for many newly introduced specialty drugs, health payers may have less ability to negotiate significant price reductions. To contain spending, many health care payers also control enrollees’ access to specialty drugs under their plans. Insurers may require enrollees to obtain prior authorization for specialty prescriptions (meaning the insurer must review and approve the prescription before paying for it), impose higher cost sharing for the drugs (charge higher out-of-pocket amounts to fill a prescription), or cover the drugs for only the sickest patients. The net result is uneven access to the products for consumers in private insurance plans and some government programs, in terms of both availability and cost. Congress, which plays a major role in the prescription drug market, has attempted to address broad issues regarding prescription drug price and availability by expanding insurance coverage and providing incentives for pharmaceutical manufacturers to increase the supply of drugs. In the past decade, Congress has provided subsidized drug coverage to tens of millions of consumers by implementing the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA; P.L. 108-173), which created the Medicare Part D prescription drug program and the Patient Protection and Affordable Care Act (ACA; P.L. 111-148, as amended), which requires insurers to provide basic prescription drug benefits in qualified-individual and small-group health plans sold on exchanges. In addition, as part of the ACA, Congress expanded Medicaid, which also provides prescription drug benefits. Reflecting the increasing government role, the federal share of U.S. prescription drug spending rose to a projected 41% in 2014 from 25% in 2005—the year before Medicare Part D took full effect. Lawmakers also have provided patent protection and other financial incentives for pharmaceutical manufacturers to develop drugs through the Orphan Drug Act of 1982 (P.L. 97-414); the Drug Price Competition and Patent Term Restoration Act of 1984 (Hatch-Waxman; P.L. 98-417); and the ACA. Lawmakers fund basic research through the National Institutes of Health and provide nonrefundable tax credits to the industry for qualified research spending. Common Insurance Terms Used in This Report Co-payment: A fixed dollar amount that an enrollee in a health care plan pays for a product or service covered by the plan. For example, an insurer may charge a $20 co-payment for a physician visit or a $5 co-payment for a prescription drug. Coinsurance: The percentage share that an enrollee in a health insurance plan pays for a product or service covered by the plan. An insurer may charge 10% coinsurance for a $100 prescription drug, meaning the consumer’s out-of-pocket cost is $10. Deductible: The amount an enrollee is required to pay for health care services or products before his or her insurance plan begins to provide coverage. An enrollee in an insurance plan with a $500 deductible would be responsible for paying for the first $500 in health care services. In some insurance plans, the deductible does not apply to certain services, such as preventive care. Insurance plans vary regarding whether beneficiaries must meet a deductible for prescription drug coverage. Formulary: A list of prescription drugs covered by an insurance plan. In an effort to control costs, insurers are imposing what are known as tight formularies that include a more limited number of drugs. Insurers also are using tiered formularies, under which patients are charged lower co-payments or coinsurance for less expensive generic drugs and certain brand-name drugs that are designated by the plan as preferred drugs because they are lower cost or deemed by an insurer to be safer or more effective. Under these tiered formularies, patients are charged higher co-payments or coinsurance for more expensive drugs or drugs that the plan deems to be less effective. Out-of-Pocket Costs: The total amount an insured consumer pays each year for covered health care services that are not reimbursed by an insurance plan. Out-of-pocket costs can include deductibles, co-payments, and coinsurance. Out-of-Pocket Maximum: The maximum amount an enrollee must pay before his or her health insurance plan covers 100% of health benefits. Certain costs, such as premiums, generally are not counted toward an out-of-pocket cap. Pharmacy Network: A group of retail, mail-order, and specialty pharmacies that contract with health insurers to dispense covered drugs at a set price. Network pharmacies also may provide other services under contract, such as monitoring patient adherence to drugs. Some states require insurance companies to contract with any willing pharmacy that agrees to meet their financial terms. In other states, insurers may contract with a smaller network of preferred pharmacies. Insurers say they have more ability to negotiate price concessions in preferred networks. Premium: The amount an enrollee pays for health insurance coverage. Many plans charge monthly premiums, but premiums also can be assessed on a quarterly or annual basis. Sources: Information from Congressional Research Service (CRS) reports, Healthcare.gov, and other sources. Recently, there has been an increased focus on specialty drugs. During the 114th Congress, lawmakers introduced bills to cap insured consumers’ out-of-pocket spending for high-priced drugs. Some state governments have enacted laws to limit consumer out-of-pocket spending for specialty drugs, and many have prohibited insurers from charging consumers higher cost sharing for certain newer specialty cancer drugs than for existing treatments. In addition, some ACA state health insurance exchanges have moved to limit prescription drug cost sharing in exchange-offered insurance plans. This report provides information about the specialty drug market and insurance coverage. To put specialty drug development, distribution, and spending in context, the report also provides information about broader U.S. prescription drug pricing, insurance, and regulatory trends. U.S. Prescription Drug Market The United States is the world’s largest pharmaceutical market, making up more than one-third of total global drug spending. Roughly 10 cents of every U.S. health care dollar is spent on prescription drugs ($305 billion in 2014). According to federal data, from 1980 through 2007, U.S. prescription drug spending rose by about 11% annually, on average. From 2008 through 2013, the pace of annual drug spending slowed to about 2% on average. (See Figure 1 for annual growth rates.) There were several reasons for the recent slowdown, including the 2007 economic recession, which also helped reduce overall U.S. health care costs; the increasing use of insurer drug-utilization controls; and the introduction of fewer blockbuster, brand-name drugs than in previous years. Rising utilization of lower-cost generic drugs was a major factor in holding down costs, as patents for a number of best-selling brand name drugs expired. Hatch-Waxman Act In 1984, Congress enacted the Hatch-Waxman Act to spur the development of lower-cost generic drugs. Generic drugs are identical to traditional brand-name drugs in dosage, safety, strength, route of administration, quality, performance characteristics, and intended use. The act provided manufacturers of innovative prescription drugs with patent protection and a period of marketing exclusivity; created a generic drug approval process to help companies bring products to the market more quickly once the patent for an original brand-name drug expired; and established procedures for resolving patent disputes arising from applications to market generic drugs. Consumers and health care payers can realize significant savings from generic drugs, which can cost 75%-80% less than an original brand-name drug. The average price of a brand-name drug also may decline after a generic comes to the market. Only 19% of prescriptions were filled with generics when Hatch-Waxman was enacted. The generic market share rose to 86% in 2013 and accounted for 28% of U.S. drug spending. In its latest forecast for national health spending, the Centers for Medicare & Medicaid Services (CMS) projected that U.S. prescription drug spending rose by 12.6% in 2014, due in part to increased specialty drug use, and would average 6.3% annual growth from 2015 through 2024. (See Figure 1.) CMS says ACA implementation is helping drive the higher spending, as millions of Americans become newly insured or obtain more comprehensive coverage, including prescription drug benefits. The improving economy and improved drug adherence are other noted factors, along with the fact that Americans are using more prescription drugs for longer periods of time to treat chronic ailments such as diabetes or heart disease. Some analysts predict that generic drug utilization will level off at about 91%-92% of filled prescriptions in the next several years, meaning generic substitution could play a smaller role in limiting drug spending. In addition to the fact that fewer blockbuster, traditional drugs will lose patent protection than has been the case during the past several years, a greater share of drugs under development are biologics for which there are not many lower-cost substitutes. Manufacturers also have increased prices for a number of existing brand-name and generic drugs. Figure 1. U.S. Prescription Drug Spending 1980-2024 (annual percentage change from previous year) Sources: Centers for Medicare & Medicaid Services (CMS), National Health Expenditure Projections, 2014-2024, Table 11, and CMS Historical Data. Specialty Drugs As previously noted, specialty drugs are broadly described as prescription drugs that are expensive; need special handling or administration, such as drugs that are infused or injected; have limited distribution; are targeted at a narrow group of chronic diseases; or are biologics. (See Figure 2.) Even those general categorizations do not hold across all insurers and government health care programs. In the voluntary Medicare Part D program, for example, price is the main factor used to determine whether an insurer may classify a drug as a specialty product and impose higher cost sharing. Figure 2. Factors Determining Specialty Drug Designation (leading criteria for specialty drug determination cited by managed care plans) Source: EMD Serono Specialty Digest, 10th Edition, p. 10. Notes: Data are based on a survey of 91 Medicare Advantage and commercial managed care health plans representing 124 million covered lives. For those plans that cited high cost as a factor, 86% defined high cost as more than $600 per month. Biologics Many specialty drugs are biologics. Biologics are products derived from a living organism that can be many times the size of a conventional (small-molecule) drug and have a more complex structure. Biologics may be sensitive to heat and contamination, making them more difficult to ship and store. Biologics often must be injected, although a growing number are available in oral form. Examples of biologics include monoclonal antibodies for treating cancer, botox, and shingles and flu vaccines. Pharmaceutical firms are focusing on development of biologic drugs, which accounted for about 22% of sales by the world’s top pharmaceutical companies in 2013, according to research. Congress has provided 12 years of product exclusivity for certain biologic drugs, which limits manufacturers’ initial market competition and increases their pricing power. Lawmakers also have attempted to spur development of lower-cost biosimilar products, similar to earlier efforts to stimulate development of generic products. Congress enacted the Biologics Price Competition and Innovation Act of 2009 (BPCIA) as Title VII of the ACA. The ACA/BPCIA gives the U.S. Food and Drug Administration (FDA) authority to license products shown to be biosimilar to or interchangeable with an FDA-licensed biological product. The Congressional Budget Office (CBO) has estimated that the ACA/BPCIA eventually could reduce insurer and consumer spending for biologics. Orphan Drugs Many orphan drugs (which often are biologics) are classified as specialty drugs by insurers and other payers. An orphan drug is a drug targeted at a rare disease or condition (1) affecting fewer than 200,000 persons in the United States or (2) affecting more than 200,000 persons in the United States but for which there is no reasonable expectation that the sales of the drug will be sufficient to offset the costs. The Orphan Drug Act of 1982 (P.L. 97-142) provides seven years of marketing exclusivity, tax credits, and FDA assistance with the review process as incentives for pharmaceutical firms to develop such drugs. Of the 41 novel new drugs approved by the FDA in calendar year 2014, 41% were orphan drugs, the highest annual total since passage of the Orphan Drug Act. Manufacturers often set high prices for orphan drugs. Pharmaceutical companies point out that they have a narrow patient population from which to recoup development and marketing costs. Some orphan drugs expand beyond their target market if they are effective for treating other conditions that were not part of the original FDA approval process (a situation known as off-label use). Some orphan drugs have reached blockbuster status, meaning they have sales of more than $1 billion per year. Specialty Drug Spending Trends Specialty medications grew from 23% of total U.S. prescription drug spending in 2010 to 33% in 2014 and accounted for about 73% of overall drug spending growth during that period, according to one analysis. PBM data show that specialty drug spending has been growing much faster than spending on traditional drugs. For example, businesses and commercial insurers served by PBM Express Scripts posted a 30.9% increase in specialty drug spending in 2014, compared with a 6.4% rise for traditional drugs. Price inflation has been the main driver of specialty drug spending in recent years, but volume growth played a larger role in 2014 because 161,000 people began treatment with hepatitis C drugs. According to IMS Health, spending for hepatitis C drugs amounted to $12.3 billion in 2014, with $11.3 billion of that total coming from spending on newly introduced hepatitis C drugs. Medicare Part D spent $4.5 billion on new hepatitis C medications in 2014, compared with $286 million that the program spent on earlier-generation hepatitis C drugs in 2013. Specialty drug spending in private and public health plans has been concentrated on a relatively narrow range of therapy areas including oncology, autoimmune diseases, HIV/AIDs, multiple sclerosis, hepatitis C, growth factors, and hormones for red cell production. For many insurers, the comparatively small share of enrollees who use specialty drugs accounts for a disproportionately large share of total prescription drug spending. For example, in Medicare Part D, specialty tier drugs made up 0.25% of prescriptions filled by enrollees in 2013 but more than 11% of total Part D drug spending. In the private sector, PBM Prime Therapeutics estimated that specialty prescriptions made up less than one-half of 1% of commercial insurance claims in 2013 but 20% of pharmacy benefit spending for the Blue Cross and Blue Shield plans it served. According to CVS Caremark, 3.6% of its enrollees in the health plans it served used specialty drugs in 2013, which accounted for 20% of prescription drug spending at retail pharmacies and nearly the same share of pharmacy spending in hospitals and other institutions. Health care payers have been scrambling to adjust to the changing drug marketplace. For example, health care actuaries have been having difficulty projecting future costs for specialty drugs, which in turn affects insurers’ ability to accurately bid to offer prescription drug coverage to consumers. Costs and Benefits of Specialty Drugs Manufacturers justify specialty drug prices based on the cost of bringing a new product to market and the potential benefits of the drugs. Specialty pharmaceuticals may improve a patient’s quality of life or provide a cure, which, in turn, can provide offsetting savings to the health care system by way of fewer hospitalizations and other medical procedures. Although publicly traded pharmaceutical manufacturers release information regarding aggregate company research and development spending, detailed information on the costs of developing specific drugs generally is not readily available. An oft-cited study put the average cost of developing a new prescription drug at about $802 million in 2001. The study was updated in 2014 to a cost of $2.6 billion. There has been considerable debate among researchers about the estimate, with a number of analysts saying that the true cost is likely to be lower. Further, development costs for different drugs vary. Some targeted studies have looked at the costs and benefits of specific biologic and high-cost drugs. For example, a 2008 study found that using biologic drugs to treat rheumatoid arthritis and multiple sclerosis reduced the use of some other types of medical services. In this case, the savings did not offset the full cost of the drugs. A study of biologics used to treat colorectal cancer indicated that the drugs improved outcomes and life expectancy but created large increases in total expenditures and did not substitute for other medical services. A recent study examined the benefit-cost ratio of Sovaldi and another specialty hepatitis C drug, Harvoni. The study, which assumed an 11% average price discount for the drugs across payers, found that the drugs, which can provide a cure, were cost-effective in selected patient groups at a threshold where each additional quality-of-life year was valued at $50,000 and were cost-effective for most patients at a $100,000 threshold. However, the study noted that the resources needed to treat a large number of eligible patients could be “immense and unsustainable.” Recent research indicates that the price of new cancer therapies, many of which are specialty drugs, increased by 10% a year (adjusted for inflation and health benefits) from 1995 to 2013. The authors posit that manufacturers were able to set the prices of new products at or slightly above the prices of existing therapies. Government-required rebates and other discounts may have contributed to higher launch prices as manufacturers tried to make up for the discounts by raising prices in other parts of the market. There are increased efforts to provide research on the possible benefits and costs of specialty drugs. During the next two years, for example, the Institute for Clinical and Economic Review plans to produce 15 to 20 public reports on newly approved FDA high-impact drugs. The reports will analyze the drugs’ comparative effectiveness, cost-effectiveness, and potential budget impact. Specialty Drug Spending Controls Private employers and insurers are the nation’s largest purchasers of prescription drugs, accounting for a projected 43% of annual spending in 2013, followed by the federal and state governments at about 41% and consumer out-of-pocket spending at about 16%. (See Figure 3 for prescription drug spending by source.) The health payers use a variety of strategies to control specialty drug spending. Figure 3. 2014 U.S. Spending for Prescription Drugs by Source (by percentage of total spending) Source: Centers for Medicare & Medicaid Services, Office of the Actuary, National Health Expenditures 2014-2024, Table 11. Notes: The category other health programs includes the state Children’s Health Insurance Program, Department of Defense, and Department of Veterans Affairs. Other third party payers includes worksite health care, other private revenues, Indian Health Service, workers’ compensation, general assistance, maternal and child health, vocational rehabilitation, other federal programs, Substance Abuse and Mental Health Services Administration, other state and local programs, and school health. Enrollee Utilization Policies Health care payers pass on a portion of specialty drug costs to enrollees through plan premiums and annual deductibles. Many payers also use targeted management tools including (1) requiring enrollees to pay higher cost sharing for expensive drugs (tiered formularies); (2) requiring prior authorization before covering certain medications; (3) mandating that enrollees try a less expensive drug before moving to a more expensive prescription product (step therapy); (4) limiting the length of an initial prescription to assess whether a drug works as intended; (5) requiring use of a specialty pharmacy; (6) offering only a limited formulary; (7) moving a drug to a pharmacy (retail) benefit from an institutional (medical) benefit to cut overhead; and (8) requiring closer oversight and monitoring of patients using specialty drugs. (See Figure 4.) This report will look at some of the most commonly used strategies. Figure 4. Percentage of Insurers Using Strategies for Managing Specialty Drug Use (2012 commercial insurance plan data) Source: Walgreens/Pharmacy Benefit Management Institute, 2013 Specialty Drug Benefit Report. Note: Based on survey of insurers and other plan sponsors covering 17.6 million enrollees. Tiered Formularies Payers commonly include tiered pricing to induce enrollees to use drugs that are less expensive or that are considered more effective. Under tiered pricing, a generic or preferred brand-name drug is put on a tier that requires a comparatively low co-payment, and drugs that are more expensive or deemed less effective are put on tiers requiring comparatively higher co-payments or coinsurance. In 2014, 80% of consumers with employer-sponsored insurance were in plans with three or more drug tiers, and 20% were in plans with four or more tiers. Figure 5. Tiered Formulary (example of pricing under a tiered formulary for a drug with a $100 price tag) Source: CRS. Notes: For purposes of this graphic, the preferred generic tier has a $0 co-payment; non-preferred generics have a $5 co-payment, preferred brand names have a $10 co-payment, non-preferred brand names have a $20 co-payment, and specialty drugs have 33% coinsurance. Payers often place specialty drugs on a tier that requires enrollees to pay coinsurance rather than a co-payment, which helps the payer keep pace with price inflation for expensive drugs and discourages use of the drugs in cases where substitutes are available. For example, a payer could impose a flat $20 co-payment for a $100 drug or it could charge 33% coinsurance for the product, which would result in $33 in out-of-pocket spending. Over time, the cost differential between price tiers has widened, imposing a greater burden on enrollees prescribed higher-priced drugs. While many consumers focus on the cost of monthly premiums when deciding whether a health plan is affordable, prescription drug tiers can have a major impact on the total cost of coverage. A recent analysis of non-group health plans sold through ACA insurance exchanges found that 60% of the least-comprehensive Bronze plans imposed co-insurance of 30% or more for drugs on specialty tiers, with 25% requiring coinsurance of 50% or more. About 23% percent of Silver plans, which cover a larger share of the federally required benefits, still had specialty-tier coinsurance of 30% of more, as did 33% of Gold plans and 10% of the most expansive Platinum plans. A few plans concentrated all drugs for treating certain conditions on a specialty tier that imposed coinsurance requirements, including not just the highest-cost drugs but also less expensive drugs used to treat the conditions, raising concerns about possible discrimination against certain classes of enrollees. In addition, the plans may require beneficiaries to meet a deductible before covering prescription drug

Aug 3, 2015

HUD’s Reverse Mortgage Insurance Program: Home Equity Conversion Mortgages

Reverse mortgages allow older homeowners to borrow against the equity in their homes and repay the loans at a later time, after they sell the home or pass away. Reverse mortgages differ from traditional forward mortgages both in the way in which borrowers receive the loan proceeds and the way in which the loans are repaid. Like traditional forward mortgages and home equity lines of credit, borrowers may receive a lump sum payment from the loan or have an available line of credit. However, additional options include monthly payments over a period of time or monthly payments for the life of the borrower, as long as the borrower remains in the home. The Department of Housing and Urban Development (HUD) provides Federal Housing Administration (FHA) insurance for reverse mortgages through the Home Equity Conversion Mortgage (HECM) program. Reverse mortgages need not be insured by HUD; nevertheless, nearly all reverse mortgages are now insured through the HECM program. If homes with HECM loans are sold for less than the amount owed, the program will reimburse lenders up to a maximum claim amount (typically the appraised value of the home at the time the HECM was entered into). HUD has insured approximately 900,000 HECMs since the program’s inception as a demonstration in 1988. It was made permanent in 1998. Homeowners can qualify for HECMs if they are age 62 or older and occupy their home as a principal residence. Potential borrowers are also required to go through a counseling process, and satisfy certain financial criteria to ensure that they will be able to maintain payments toward property taxes and homeowner’s insurance while they live in the home. The loan amount for which borrowers qualify depends on their age, the interest rate, and the value of the home. Borrowers pay both up-front and annual insurance premiums to participate in the HECM program. Recent years have brought uncertainty in the financial stability of the HECM loan portfolio, part of the FHA Mutual Mortgage Insurance (MMI) Fund. One reason for this is an increasing number of borrowers withdrawing the maximum loan amount at loan closing. A high loan amount increases the risk that a loan balance may eventually eclipse the home’s value. This has occurred in particular when borrowers fail to make payments toward property taxes and insurance, and the unpaid amounts are added to the loan balance. HUD, with authorization from Congress (via the Reverse Mortgage Stabilization Act of 2013 (P.L. 113-29)), has taken steps to protect the FHA MMI fund. These include requiring HECM applicants to go through a financial assessment (previously, borrower financial criteria were not taken into account) and reducing the amount that borrowers can draw during the first year of the loan. Another issue HUD has been compelled to address is how non-borrowing spouses are treated when HECM borrowers pass away. A court found that HUD interpreted the statute incorrectly when it required loans to be due and payable on a borrower’s death when a non-borrowing spouse was present in the home. As a result of the court decision, HUD issued mortgagee letters allowing non-borrowing spouses to avoid foreclosure or paying off the loan balance. They may instead remain in the home on the death of a borrower as long as the non-borrowing spouse meets certain conditions. In addition, the age of non-borrowing spouses is now part of the actuarial calculation used to determine loan amounts.

Jul 31, 2015

Consumer and Credit Reporting, Scoring, and Related Policy Issues

The consumer data industry collects and subsequently provides information to firms about the behavior of consumers when they participate in various financial transactions. Firms use consumer information to screen for the risk that consumers will engage in behaviors that are costly for businesses. For example, lenders rely upon credit reports and scores to determine the likelihood that prospective borrowers will repay their loans. Insured depository institutions (i.e., banks and credit unions) rely on consumer data service providers to determine whether to make available checking accounts or loans to individuals. Some insurance companies use consumer data to determine what insurance products to make available and to set policy premiums. Some payday lenders use data regarding the management of checking accounts and payment of telecommunications and utility bills to determine the likelihood of failure to repay small-dollar cash advances. Merchants rely on the consumer data industry to determine whether to approve payment by check or electronic payment card. Employers may use consumer data information to screen prospective employees to determine the likelihood of fraudulent behavior. In short, numerous firms rely upon consumer data to identify and evaluate potential loss risks before entering into financial relationships with new consumers. Congress has shown concern about consumer protection and consumer credit access in light of some challenges facing the credit reporting industry. First, reporting inaccuracies may result in the rejection of consumer credit requests. Second, negative or derogatory information, such as multiple overdrafts, involuntary account closures, loan defaults, and fraud incidents, may stay on consumer reports for several years. Likewise, the exclusion of more positive or updated information, such as the timely repayment of non-credit obligations, may also limit credit access. Differences in billing and collection practices can also adversely affect the consumer reports, an issue of particular concern with medical billing practices. Having a non-existent, insufficient, or a stale credit history may also prevent credit access. The use of alternative or newer versions credit scores, which have been developed in response to these concerns, arguably may increase credit access. It takes time, however, to implement alternative scoring algorithms, and credit scores are only one factor among many that are used in lender underwriting decisions. These issues are discussed in this report after some background information on the consumer data industry as well as a general overview of the current regulatory framework has been provided. Greater reliance by firms on consumer data greatly affects consumer access to financial products or opportunities, prompting congressional concerns about consumer protection. The Facilitating Access to Credit Act of 2015 (H.R. 347) would enhance the ability of consumer reporting firms to correct inaccuracies by clarifying the applicability of existing consumer legal protections. The Medical Debt Relief Act of 2015 (H.R. 2362) would exclude from consumer credit reports certain medical debt that is less than 180 days delinquent or that has been in collections and has been fully paid or settled. The Federal Adjustment in Reporting (FAIR) Student Credit Act of 2015 (H.R. 2363) would allow a consumer to request the removal of a reported default on a qualified education loan if the consumer voluntarily and successfully meets the requirements of a private loan rehabilitation program.

Jul 30, 2015

Mass Murder with Firearms: Incidents and Victims, 1999-2013

In the wake of tragedy in Newtown, CT, Congress defined “mass killings” as “3 or more killings in a single incident” (P.L. 112-265). Any consideration of new or existing gun laws that follows mass shootings is likely to generate requests for comprehensive data on the prevalence and deadliness of these incidents. Despite the pathos of mass shootings, only a handful of researchers and journalists have analyzed the principal source of homicide data in the United States—the Supplementary Homicide Reports (SHR) compiled by the Federal Bureau of Investigation (FBI)—to determine whether those incidents have become more prevalent and deadly. According to the FBI, the term “mass murder” has been defined generally as a multiple homicide incident in which four or more victims are murdered, within one event, and in one or more locations in close geographical proximity. Based on this definition, for the purposes of this report, “mass shooting” is defined as a multiple homicide incident in which four or more victims are murdered with firearms, within one event, and in one or more locations in close proximity. Similarly, a “mass public shooting” is defined to mean a multiple homicide incident in which four or more victims are murdered with firearms, within one event, in at least one or more public locations, such as a workplace, school, restaurant, house of worship, neighborhood, or other public setting. This report analyzes mass shootings for a 15-year period (1999-2013). CRS analysis of the FBI SHR dataset and other research indicates that offenders committed at least 317 mass shootings, murdered 1,554 victims, and nonfatally wounded another 441 victims entirely with firearms during that 15-year period. The prevalence of mass shooting incidents and victim counts fluctuated sporadically from year to year. For the period 2007-2013, the annual averages for both incidents and victim counts were slightly higher than the years from 1999-2007. With data provided by criminologist Grant Duwe, CRS also compiled a 44-year (1970-2013) dataset of firearms-related mass murders that could arguably be characterized as “mass public shootings.” These data show that there were on average: one (1.1) incident per year during the 1970s (5.5 victims murdered, 2.0 wounded per incident), nearly three (2.7) incidents per year during the 1980s (6.1 victims murdered, 5.3 wounded per incident), four (4.0) incidents per year during the 1990s (5.6 victims murdered, 5.5 wounded per incident), four (4.1) incidents per year during the 2000s (6.4 victims murdered, 4.0 wounded per incident), and four (4.5) incidents per year from 2010 through 2013 (7.4 victims murdered, 6.3 wounded per incident). These decade-long averages suggest that the prevalence, if not the deadliness, of “mass public shootings” increased in the 1970s and 1980s, and continued to increase, but not as steeply, during the 1990s, 2000s, and first four years of the 2010s. Mass shootings are arguably one of the worst manifestations of gun violence. As discussed in this report, statute, media outlets, gun control and rights advocates, law enforcement agencies, and researchers often adopt different definitions of “mass killing,” “mass murder,” and “mass shooting,” contributing to a welter of claims and counter-claims about the prevalence and deadliness of mass shootings. With improved data, policymakers would arguably have additional vantage points from which to assess the legislative proposals that are inevitably made in the wake of these tragedies. Toward these ends, Congress could consider directing one or several federal agencies, including but not limited to the FBI and BJS, to improve collection of data on multiple-victim homicides. Congress could also direct federal agencies, possibly the Bureau of Alcohol, Tobacco, Firearms and Explosives, to report annually on firearms-related mass murders, including data on (1) offender acquisition of firearms, (2) types of firearms used, (3) amounts and types of ammunition carried and shots fired, (4) killed and wounded counts, (5) offender histories of mental illness and domestic violence, and (6) victim-offender relationships.

Jul 30, 2015

An Introduction to Child Nutrition Reauthorization

Jul 28, 2015

Appropriations Report Language: Overview of Development, Components, and Issues for Congress

Congressional Research Service 7-5700 www.crs.gov R44124 Summary In general, congressional reports may accompany appropriations measures as part of either the committee stage or the resolving differences stage of the legislative process. Although this language is not considered binding in the same manner as language in the statute, the congressional understanding of an appropriations measure is closely related to its development. There are appropriations-specific components and practices related to report language that have been developed by the House and Senate Appropriations Committees to better enable their oversight of the agencies. There are also components that have come about as a result of chamber rules to provide greater information on appropriations measures in order to facilitate their congressional consideration. The purpose of this report is to provide an overview of appropriations report language. Although appropriations report language is primarily developed by the House and Senate Appropriations Committees, those committees have formal and informal practices that enable input on the language from a variety of sources, including programmatic requests that are submitted to the committees from Members of Congress. When appropriators meet to mark up an appropriations measure, amendments to the draft report may also be offered and considered in committee. While report language cannot be directly amended on the floor, it is sometimes possible to propose amendments to an appropriations bill that have the effect of overriding language in the report. During the resolving differences stage of the legislative process, congressional negotiators also seek to address differences between the relevant House and Senate appropriations report language in the joint explanatory statement or other explanatory text produced as a result of those negotiations. In current practice, report language does not accompany formulaic continuing resolutions (CRs), even if funds are provided in this manner for the remainder of the fiscal year. In current practice, appropriations report language has a number of typical components. The bulk of appropriations report language is devoted to a “section-by-section” analysis of each account and a lengthy table that provides a “comparative statement of new budget authority” in the bill. The report language may also provide general directives to the agencies funded in the bill related to budget preparation and execution, including the form of budget justifications, other reporting guidelines and committee initiatives, “program, project, or activity” (PPA) definitions, and reprogramming. The Congressional Budget Act requires that the House and Senate Appropriations Committee reports for regular and supplemental appropriations measures include a statement comparing levels in the measure to the applicable 302(b) suballocations. House and Senate rules also mandate that committee reports for general appropriations measures provide lists of appropriations not authorized by law. Finally, the House has additional requirements that rescissions and transfers, as well as language changing existing law, be listed in committee reports accompanying general appropriations measures. Appropriations report language raises certain issues for Congress. Each fiscal year, as the Appropriations Committees choose the directives that will be made to agencies, they must decide which of these directives to include in the bill itself and which to include in report language. Over time, as the House and Senate develop rules that govern the content of appropriations report language, each chamber must assess its informational needs as it engages in appropriations decisionmaking. The House and Senate may choose to take similar or differing approaches to its rules relating to appropriations report language, and such rules may be altered as the institutional needs of each chamber evolve. Contents Introduction 1 Appropriations Report Language Development 2 Agency, Public, and Member Input 2 Committee and Initial Floor Consideration 3 Resolving Differences 4 Continuing Resolutions 5 Appropriations Report Language Components 6 Overview of Accounts and Other Directives 6 Comparative Statement of New Budget Authority 8 General Directives Related to Budget Preparation and Budget Execution 9 Form of Budget Justifications 9 Other Reporting Guidelines and Committee Initiatives 10 “Program, Project, or Activity” Definitions 10 Reprogramming Guidelines 12 Comparison with the Budget Resolution 13 Language Changing Existing Law 14 Appropriations Not Authorized by Law 16 Rescissions and Transfers 19 Issues for Congress 20 Congressional Influence over Budgetary Decisionmaking 21 The Congressional Budget Process Context for Appropriations Decisionmaking 22 Figures Figure 1.: Detailed Funds Allocation 8 Figure 2.: Comparison with the Budget Resolution 14 Figure 3.: Changes in the Application of Existing Law 16 Figure 4.: Senate List of Appropriations Not Authorized by Law 17 Figure 5.: Rescissions and Transfers 20 Contacts Author Contact Information 23 Acknowledgments 23 Introduction Since the first Congress, the congressional appropriations process has involved the annual consideration of appropriations measures to fund the activities of most federal government agencies. Over the years, this process has evolved so that it currently assumes the consideration of 12 regular appropriations bills to provide discretionary spending for the upcoming fiscal year. If some or all of the regular appropriations measures are not enacted prior to the beginning of the fiscal year (October 1), one or more continuing resolutions (CRs) might be enacted to provide temporary appropriations until either regular appropriations are enacted or the fiscal year ends. Supplemental appropriations might also be enacted during the fiscal year to provide funds in addition to those in regular appropriations acts or CRs. The congressional process for considering these various types of appropriations measures has developed in the context of institutional considerations that are both internal and external. Internal considerations include long-standing congressional rules that encourage the separation of money and policy decisions (“appropriations” and “authorizations,” respectively), as well as the constraints of previously agreed upon fiscal policies and goals, such as those associated with the budget resolution. Additional external considerations, which largely derive from the relationship between Congress and the agencies funded through the annual appropriations process, include issues such as the level of flexibility that Congress grants to agencies in budget execution. One way that the congressional appropriations process has evolved to address these internal and external considerations has been in the form and content of report language that accompanies appropriations measures. In general, report language is used by House and Senate committees for two broad purposes. First, report language explains the provisions of a measure to the chamber or chambers that will subsequently consider it. Second, report language may also communicate legislative intent to the agencies that will carry out the measure once it becomes law. Although report language itself is not law and therefore not binding in the same manner as language in the statute, agencies usually seek to comply with any directives contained therein. As one congressional scholar has observed, “the criticisms and suggestions carried in the reports accompanying each bill are expected to influence the subsequent behavior of the agency. Committee reports are not the law, but it is expected that they be regarded almost as seriously.” For this reason, congressional interest in the mechanics of the appropriations process is not limited to the procedures and practices for considering measures but also encompasses the report language that accompanies those measures. Typically, report language may be used to supplement the legislative text of a measure at either of two different stages of the legislative process. First, written reports may accompany the version of the bill that is reported by a committee to its parent chamber. The House has required that written reports accompany bills reported from committee since 1880. While Senate rules do not require written reports, measures reported from committee are usually accompanied by or otherwise associated with them. Second, when resolving differences between the House and Senate, a joint explanatory statement (JES), which accompanies a conference report prior to final action by each chamber, is also a form of report language. The JES may be used to reconcile areas of disagreement between the House and Senate committee reports from earlier stages of the legislative process or to provide additional information about the agreement. For measures not reported from committee that receive congressional consideration, including when differences are resolved through an amendment exchange, explanatory text from the committee of jurisdiction is sometimes entered into the Congressional Record and may be regarded similarly to report language for certain purposes. In addition, in some cases, report language in the JES may be enacted by reference in the appropriations law that it accompanies, giving it statutory effect. This CRS report provides an overview of appropriations report language. It generally does not explain those report language components and related practices that are more broadly applicable to all types of legislation, including the House and Senate rules that require congressionally directed spending items, or “earmarks,” to be disclosed in committee reports. The first section of this CRS report explains how appropriations report language is developed. The second section discusses the origins, purposes, and forms of the major report language components that are particular to appropriations measures, with illustrative examples. The third section summarizes appropriations report language issues related to congressional influence over agency budgetary decisionmaking, as well as the institutional dynamics within Congress itself. Appropriations Report Language Development Agency, Public, and Member Input In general, the report language accompanying an appropriations measure is developed by the appropriations committees in each chamber. While it is a committee product, it has significant importance for the congressional consideration of that appropriations measure, as well as agency budget execution once the measure becomes law. When determining the language to be included in the report, the Appropriations Committees engage in certain formal and informal practices through which they may receive input on the language. For example, a review of the agency budget justifications that are submitted after the President’s budget request may inform prospective funding allocations and congressional directives contained in the report. Other committee communications with the agency, both before and after the budget submission, may also help inform the language that is ultimately included. In addition, stakeholders and other interested groups outside of Congress may also choose to communicate their report language and other appropriations preferences to the Appropriations Committees through letters or other modes of communication. Members of the House and Senate may also communicate to the Appropriations Committees their preferences with regard to each of the 12 annual appropriations bills and accompanying report language. While such communications might occur throughout the budget cycle, the committees encourage Members to express their preferences for the upcoming fiscal year through the submission of so-called “programmatic and language requests.” These are requests for specific funding levels or other language to be included in a particular appropriations bill or the accompanying committee report. These requests are usually due to the committees in March or April after the President’s budget request has been presented to Congress. The parameters for these requests for each of the appropriations bills may be specified through Dear Colleague letters or other communications from the committee. In general, both the House and Senate Appropriations Committees have discouraged programmatic requests for congressionally directed spending items (also referred to as “earmarks”). Once programmatic and language requests for a bill are submitted, the committee must decide whether to include the requested language in the bill or accompanying report, include a modified version of it, or not include it at all. In some instances, if language is requested for inclusion in the bill, the committee might decide to include a version of that language in the committee report instead. Committee and Initial Floor Consideration Each appropriations bill that is reported from committee—which, in current practice, includes regular and some supplemental appropriations bills—is usually accompanied by a written committee report. Committee preparation of an appropriations bill for a markup also includes compiling a draft of the committee report that will accompany it. When the Appropriations Committee meets to mark up each appropriations bill, amendments to the draft report may also be offered and considered. In the House, the final version of the committee’s written report is filed when the bill is reported to the chamber. In the Senate, it is typically filed at the same time the bill is reported or soon thereafter. While appropriations measures that are reported from committee typically receive formal committee reports, those regular appropriations measures that are not reported from committee are often associated with draft committee report text that is released in the context of negotiations to resolve differences. Because the written committee report is a product of that committee’s deliberations rather than a legislative measure itself, it is not directly amendable during the subsequent floor consideration of the appropriations measure. However, floor amendments have previously been offered that would have the effect of directly or indirectly overriding the directives or funding allocations in the committee report language. For example, during the 109th Congress, the House Appropriations Committee report for the FY2007 Agriculture appropriations bill contained a provision that allocated “$229,000 for dairy education in Iowa” (H.Rept. 109-463, p. 56). Subsequently, an amendment was offered on the House floor that proposed to insert the provision, “None of the funds made available by this Act may be used to fund dairy education in Iowa.” Had that amendment become law as part of the appropriations act, it would have prevented the $229,000 in funds set aside in the committee report from being spent on that particular activity. Resolving Differences When congressional negotiators resolve differences between the House and Senate versions of an appropriations measure, such negotiators are usually drawn from the House and Senate Appropriations Committees. In addition to producing a final version of the measure, these negotiators also agree to further report language in the form of a JES or other explanatory text. In instances where explanatory text is entered into the Congressional Record, a provision of the measure usually indicates that it is to be treated by the agencies in the same way as a joint explanatory statement. This explanatory text is usually considered to be the most authoritative source of congressional legislative intent with regard to that measure. Once the final version of the legislative text has been agreed to by the House and Senate, there are no further formal opportunities to make changes to the accompanying report language. The explanatory text may be used to reconcile any differences between the House and Senate Appropriations Committee reports. For example, the House and Senate committee report language may address certain issues in ways that are difficult to reconcile harmoniously. In these types of instances, the explanatory text normally seeks to clarify how the affected agency is to proceed. In other cases, one committee might have included language in its report that addresses an issue to which the other committee’s report is silent. If disagreement exists between the committees with regard to this report language, the explanatory statement might clarify what action the agency should take. On the other hand, if the original committee language is ultimately acceptable to both committees, the explanatory statement might be silent due to an expectation that the agency will follow the original directive. As a consequence, in addition to the explanatory text, the committee reports might also provide an important indication of congressional intent even after an appropriations measure has been enacted. Continuing Resolutions In recent years, appropriations measures that provide continuing appropriations based on a formula have typically not been accompanied by report language, even when such appropriations are for an entire fiscal year. For example, for the FY2013 Consolidated and Further Continuing Appropriations Act (P.L. 113-6), which contained both regular and full-year continuing appropriations, detailed explanatory text was provided only for the accounts that received regular appropriations. For full-year CRs, the committee report language from the current fiscal year that accompanies the regular appropriations covered by that CR may provide some indication of congressional intent. However, the extent to which the funding provided via the CR’s formula is difficult to reconcile with the allocations and directives in the relevant committee reports—and the extent to which those committee allocations and directives conflict with one another because there is no relevant explanatory text to resolve such conflicts—may limit the report’s applicability. Appropriations Report Language Components As previously stated, the components of report language that are specific to appropriations measures have evolved in the context of both internal and external congressional needs. In many cases, the components and related practices were developed by the House and Senate Appropriations Committees to better enable their oversight of the agencies. In other cases, the components came about as a result of chamber rules to require information to facilitate congressional consideration of appropriations measures. This has led to the development of certain categories of report language that are used in many or all of the appropriations committee reports each fiscal year and, in some cases, the JES that resolves differences between those reports. This section describes the origin, purposes, and current forms of these report language components. Overview of Accounts and Other Directives The bulk of the House and Senate reports on appropriations bills are devoted to an overview of each account in the bill. This derives from the general practice that reports accompanying legislation summarize each section or title of the measure, which is often referred to as a “section-by-section” (or “title-by-title”) summary. Because appropriations bills are organized by unnumbered headings, with each heading generally corresponding to an account, section-by-section summaries of the appropriations bills are organized by account and also include a short description of other provisions included in the bill that are not part of the appropriations accounts. Such provisions include “administrative provisions” that are specific to particular accounts or agencies, as well as “general provisions” that are more broadly applicable to all funds in the bill (or a specified title of the bill). The account-by-account summary is intended primarily to explain the purpose of the account and what it funds. It is typically framed as a justification of the funding levels proposed for that account compared to those provided the previous fiscal year, as well as those proposed in the President’s budget request. Senate Appropriations Committee reports also compare proposed levels to those that were proposed by the House Appropriations Committee, if applicable. These committee justifications of recommended funding levels can provide helpful context for Members as they evaluate the measure and potential floor amendments. The account summaries in the reports also give the appropriations committees the opportunity to provide additional directives to the agencies funded therein and guidance concerning congressional intent for their use of funds. This guidance varies in intensity—from encouragement or support for a specified action to concerns and requirements for an agency to engage in or refrain from particular actions. Three examples, from the House Appropriations Committee report accompanying the FY2015 Agriculture appropriations bill (H.Rept. 113-468), are illustrative. In the first example, which applies to the Agricultural Programs—Office of Inspector General (OIG) account, the committee indicates support of action that is currently being undertaken: The Committee appreciates OIG’s continued efforts to raise public awareness of successful Federal investigations of fraud. Such efforts are intended to deter participants from engaging in the misuse of taxpayer dollars and to maintain a high level of integrity in all of USDA’s programs. The Committee encourages OIG to continue its efforts to work with all of USDA’s agencies to deter fraud, waste, and abuse in the Department’s programs. (p. 9) In the second example, which applies to the Agricultural Programs—Office of the Under Secretary for Farm and Foreign Agricultural Services account, the committee requires that a specific action be taken: The Committee is concerned about waste, fraud, and abuse in programs administered by the Farm Service Agency (FSA) and the Risk Management Agency (RMA). Therefore, the Secretary is directed to certify that any newly approved payment, loan, grant, subsidy, or insurance claim from a program administered by FSA or RMA does not include individuals or entities that have been permanently debarred from participating in USDA programs. (p. 28) In the third example, which applies to the Agricultural Programs—Office of the Under Secretary for Research, Education, and Economics, the committee directs the agency to refrain from taking an action until certain conditions are met: The Committee is concerned about the Foundation for Food and Agriculture Research created by the 2014 farm bill and reports that the Department intends to obligate $200,000,000 in mandatory funds to the Foundation by the end of the fiscal year but before the Foundation has been established and any matching funds have been received as required by law. The Committee directs USDA not to expend any funds except those related to the appointment of members of the board and the preparation of by-laws, conflict of interest policies, and standards of conduct until the Committee receives and approves these documents. The Committee directs USDA to report to it no later than January 1, 2015. (p. 11) In many instances, additional directives to agencies in report language also include more detail on the allocation of funds than what is provided in the bill itself. For example, the FY2015 Department of Homeland Security appropriations bill included an account for Departmental Management and Operations—Office of the Secretary and Executive Management. In the Senate Appropriations Committee–reported version of the measure (S. 2534), a lump sum of $124,571,000 was provided for the entire account with no further allocation of the funds in the statute (except for a limitation on official reception and representation expenses). However, the accompanying committee report divided the amount in that account into specific allocations for certain purposes: Figure 1.: Detailed Funds Allocation Source: S.Rept. 113-198, p. 12. Even though funding and other directives (such as these additional allocations illustrated above) that are only in report language are not legally binding, the Appropriations Committees expect that the agencies will adhere to them. Comparative Statement of New Budget Authority Tables in appropriations reports that summarize the appropriations in the bill, the budgetary effects of other provisions, and certain additional allocations in the report have been in use for at least the past century. These tables assist with the congressional evaluation of the amounts in the bill, as well as some of the additional allocations of those amounts in the report. In current practice, the specific categories of information displayed and compared in the summary table depend on the chamber and stage of action but may include amounts for: the prior fiscal year, the President’s budget request (or “budget estimate”), the other chamber (“allowance”), and the committee recommendation. The JES will list the final funding levels for the relevant accounts and other activities that were agreed to when differences were resolved on the measure. The example below is from the Senate Appropriations Committee report accompanying the FY2015 Military Construction-Veterans Affairs appropriations bill (S.Rept. 113-174, p. 109). It includes all of the categories of information listed above. Figure 2: Comparative Statement of New Budget Authority Source: S.Rept. 113-174, p. 109. General Directives Related to Budget Preparation and Budget Execution In addition to the instructions that are included in the account summaries, general directives that apply to budget preparation and budget execution are often also included in appropriations report language. Such directives, which typically relate to many or all of the accounts in the bill, are usually in the first pages of the report and may specify the form of budget justifications for future fiscal years, other reporting guidelines and committee initiatives, “program, project, or activity” (PPA) definitions, and reprogramming guidelines. Form of Budget Justifications Congressional budget justifications supplement the President’s budget request with additional information for the appropriations committees. Agencies provide this information to the committees soon after the President’s budget request has been submitted. The description of budgetary accounts in these budget justifications, such as the types of agency activities conducted with funds in the account, is much more detailed than the budget submission. This additional information helps the appropriations committees better evaluate the budgetary resources that have been requested for the upcoming fiscal year. The form of the budget justifications and the information contained therein is generally the result of consultations between the agency and appropriations committees. Instructions from the appropriations committees as to the content of budget justifications for future fiscal years, however, are also often included in report language. These instructions may include the level of detail that should be provided for each account, as well as specific directions for certain programs or activities. In some instances, the agencies funded in the bill may be told how to address certain informational deficiencies in the future, such as by providing more detail about grants or staffing changes. An agency might also be more generally directed to coordinate the content of certain analytical materials with the committee in advance of the submission. For example, the Senate committee report that accompanied the FY2015 State-Foreign Operations appropriations bill included the following directives (S.Rept. 113-195): Timely budget information in the congressional budget justification [CBJ] that is clearly, concisely, and accurately presented must be a priority of the administration. The Committee expects the Department of State, USAID, and other agencies funded by this act to submit CBJs within 4 weeks of the release of the President’s fiscal year 2016 budget request. The Committee also directs the Department of State, USAID, and other agencies to include detailed information on all reimbursable agreements.... The Committee directs that CBJs include estimated savings from any proposed office or mission closing and actual prior year representation expenses for each department and agency that is authorized such expenses. (p. 9) Other Reporting Guidelines and Committee Initiatives Although reporting requirements that are for specific accounts are primarily located in the relevant account summaries, language elsewhere in committee reports may provide general guidance about the timing or form of agency reports to be provided. For example, the Senate Appropriations Committee report that accompanied the FY2015 Agriculture appropriations bill included the following instructions related to agency reports (S.Rept. 113-164): The Committee has, throughout this report, requested agencies to provide studies and reports on various issues. The Committee utilizes these reports to evaluate program performance and make decisions on future appropriations. The Committee directs that all studies and reports be provided to the Committee as electronic documents in an agreed upon format within 120 days after the date of enactment, unless an alternative submission schedule is specifically stated in the report request. (p. 6) “Program, Project, or Activity” Definitions A PPA is an element in a budget account. As was previously mentioned, budget accounts generally correspond to the paragraph headings in appropriations acts. Such accounts generally provide a lump sum for the purposes of the account and may also “set aside” specific amounts within that lump sum for certain purposes. In addition to those statutory set-asides, it has been the practice for a number of decades that specific elements in these budget accounts, including PPAs, have been identified in report language (and also in the congressional budget justifications that correspond to that act). For example, the House Appropriations Committee report accompanying the FY2015 Department of Homeland Security appropriations bill identified four PPAs in the Customs and Border Protection (CBP) Automation Modernization account, which funds information technology support for CBP personnel (H.Rept. 113-481, p. 43): information technology, automated targeting systems, the Automated Commercial Environment/International Trade Data System, and current operations protection and processing support. As with other funding allocations in report language, the PPAs that are identified for each account allow Congress to provide direction as to the amounts to be expended for particular activities in which the agency is engaged. The PPAs are also significant for “reprogramming,” which is discussed further in the report section entitled “Reprogramming Guidelines.” The PPAs that are identified for each account are also significant for the sequestration budget enforcement mechanism under the Balanced Budget and Emergency Deficit Control Act of 1985 (BBEDCA; P.L. 99-177). If such a sequestration is required for a fiscal year, budgetary resources for affected accounts must be reduced on a largely across-the-board basis. The BBEDCA further requires that these reductions must be proportionately implemented by the agencies, within each affected account, at the PPA level. Starting in FY1987, the first full fiscal year after the sequestration mechanism was in effect for discretionary spending, some House Appropriations Committee reports included PPA definitions for the purposes of the BBEDCA. PPA definitions have continued to be included in appropriations reports during the periods since FY1987, during which sequestration could potentially affect discretionary spending. Such report language might be used to clarify what a PPA is for the purposes of the BBEDCA or impose a different definition of PPA than would otherwise be in effect. For example, the Senate Appropriations Committee report accompanying the FY2014 Financial Services and General Government appropriations bill provided the following instructions (S.Rept. 113-80): During fiscal year 2014, for the purposes of the Balanced Budget and Emergency Deficit Control Act of 1

Jul 28, 2015

Expansion of WTO Information Technology Agreement Targets December Conclusion

This report discusses the World Trade Organization (WTO) expansion and agreement to expand the Information Technology Agreement (ITA) and eliminate tariffs on 201 goods not included in the original 1996 ITA.

Jul 28, 2015

VA Accountability Act of 2015 (H.R. 1994), as Reported to the House

This report describes the VA Accountability Act of 2015 (H.R. 1994) as reported to the House by the Committee on Veterans' Affairs on July 23 2015 and compares it to current law where appropriate.

Jul 27, 2015

Land and Water Conservation Fund: Appropriations for “Other Purposes”

The Land and Water Conservation Fund (LWCF) Act of 1965 (P.L. 88-578) created the LWCF in the Treasury as a funding source to implement the outdoor recreation goals set out by the act. The fund is authorized at $900 million annually through September 30, 2015. In general, monies in the fund are available for outdoor recreation purposes only if appropriated by Congress. The level of annual appropriations has varied widely since the origin of the fund. The LWCF Act outlines uses of the fund for federal and state purposes. It lists the federal purposes for which the President is to allot LWCF funds “unless otherwise allotted in the appropriation Act making them available.” These purposes primarily relate to acquisition of lands and waters (and interests therein) by the federal government. With regard to state purposes, the act authorizes a matching grant program to states for recreation planning, acquisition of lands and waters (and interests therein), and development. Throughout the LWCF’s history, appropriations acts have provided funds for land acquisition and recreational grants to states. Beginning in FY1998, appropriations also have been provided each year (except FY1999) to fund other purposes related to natural resources. Presidents have sought LWCF funds for a variety of purposes. Congress chooses which if any of these requests to fund, and it may choose other programs not suggested by the President. Appropriations have been provided for facility maintenance of the land management agencies, ecosystem restoration, the Historic Preservation Fund, the Payments in Lieu of Taxes program, the Forest Legacy program, State and Tribal Wildlife Grants under the Fish and Wildlife Service (FWS), the Cooperative Endangered Species Conservation Fund, U.S. Geological Survey science and cooperative programs, and Bureau of Indian Affairs Indian Land and Water Claim Settlements, among other programs. Since FY1998, a total of $2.4 billion has been appropriated for other purposes, of a total LWCF appropriation of $17.1 billion over the history of the fund (since FY1965). FWS and the Forest Service (FS) have received the largest shares of the total appropriations for other purposes, about $1.3 billion (56%) and $0.8 billion (34%), respectively, from FY1998 to FY2015. Several agencies shared the remaining $0.2 billion (10%) of the appropriations. Both the dollar amounts and the percentages of annual LWCF appropriations for other purposes have varied widely since FY1998. The dollar amounts have ranged from $0 in FY1999 to $456.0 million in FY2001, with an average of $131.2 million annually. The highest percentage of annual funds provided for other purposes occurred in FY2006 and FY2007 (59% in both years). In some years, the appropriation for other purposes was significantly less than the Administration requested. For instance, in FY2008 the George W. Bush Administration sought $313.1 million for other purposes, or 83% of the total request. The FY2008 appropriation for other purposes was $101.3 million, or 40% of the LWCF total. In earlier years, several other purposes typically were funded each year from LWCF. Since FY2008, funds have been appropriated annually only for grants under two programs: Forest Legacy and Cooperative Endangered Species Conservation Fund. These two programs and a third grant program funded in the past from LWCF—FWS State and Tribal Wildlife Grants—have received about three-quarters ($1.8 billion, 76%) of the total appropriation for other purposes since FY1998.

Jul 24, 2015

Charter-Time Warner Cable-Bright House Networks Mergers: Overview and Issues

In May 2015, Charter Communications, Inc. announced that it reached agreements with Time Warner Cable Inc. (TWC) to merge the two companies in a deal valued at $78.7 billion, including the assumption of debt, and with Advance/Newhouse Partnership to acquire Bright House Networks (BHN) for $10.4 billion. The combination of Charter, TWC, and BHN would create a single entity providing cable television and broadband access service to 23.9 million customers in 41 states, making it the nation’s second-largest cable television operator and broadband access provider. The proposed merger raises a number of potential concerns, reflecting the complex structure of the television industry and substantial changes in the way consumers choose to receive video programming. The many firms involved in content ownership, aggregation and packaging, and distribution of video programming often must cooperate with one another at the same time they are competing. Companies in the television industry are in frequent negotiation with one another for the right to transmit programming, and the merger of three players into a very large one could change the relative bargaining power of other parties. At the same time, growing numbers of consumers are now viewing programs online at a time of their choosing rather than subscribing to traditional cable or satellite services or watching based on a broadcaster’s schedule. The proposed Charter transactions have the potential to affect the development of this relatively new online video distribution industry by inhibiting distributors’ access to programming or their ability to send programs to customers over the Internet. At the federal level, both the U.S. Department of Justice (DOJ) and the Federal Communication Commission (FCC) must approve Charter’s transactions before they can close. The DOJ will investigate whether the proposed transactions would reduce competition. The FCC will investigate whether the proposed transactions would, on balance, be in the public interest. As regulatory authorities begin their review of Charter’s proposed transactions, three key issues related to television industry competition may merit analysis: 1) whether the presence of members of Charter’s board of directors on the boards of several companies that create television programming, including the cable networks Discovery and Starz and film and television studio Lions Gate, might impede competition in the distribution of television programming; 2) whether the fact that a major investor in Charter, John Malone, also controls some shares of a competitor to Charter, DIRECTV (whose proposed sale to AT&T has met federal regulatory approval), could reduce competition among video distributors to acquire programming from creators and to sell programming to consumers; and 3) whether Charter’s assumption of TWC’s various joint ventures and partnerships with Comcast Corporation, the largest cable television and broadband access provider in the United States, would reduce competition to acquire programming from creators and disadvantage online video distributors. In addition, the agencies may evaluate whether Charter’s proposed commitments regarding service quality and availability would be sufficient to mitigate potential harms. To obtain FCC approval, Charter is likely to make a number of commitments regarding service quality and availability. However, the company would assume more than $24 billion of debt through the transactions, and the FCC may be concerned that this debt could compromise Charter’s ability to fulfil commitments to provide sufficient capacity to deliver online video and other services to its broadband subscribers.

Jul 24, 2015

Sanctuary Jurisdictions and Criminal Aliens: In Brief

This report examines the interplay between the federal government -- i.e., Immigration and Customs Enforcement (ICE) -- and state and local jurisdictions in enforcing immigration law, with a specific focus on noncitizens who have been convicted of a crime. It briefly outlines the evolution of the cooperation among law enforcement agencies, then discusses current administrative efforts to involve state and local law enforcement, and explores major programs and federal resources available to those agencies that cooperate with ICE to enforce immigration law.

Jul 24, 2015

Balance Billing in Private Health Insurance Plans

Jul 23, 2015

U.S. Agricultural Trade with Cuba: Current Limitations and Future Prospects

This report reviews the current state of agricultural trade between the United States and Cuba. It identifies key impediments to expanding bilateral trade in agricultural products and key provisions in the law to which these obstacles are anchored, and also considers the potential consequences for trade in agricultural goods if bilateral trade were returned to a more normal footing. It also summarizes several of the bills introduced in the 114th Congress that propose to remove specific restrictions that impede trade in agricultural goods or that seek to lift the embargo on Cuba entirely.

Jul 23, 2015

Medicare, Observation Care, and the Two-Midnight Rule

Jul 23, 2015

FY2016 National Defense Authorization Act: Selected Military Personnel Issues

This report provides a brief synopsis of sections in H.R. 1735 that pertain to selected personnel policy. These include major military retirement reforms, end strengths, compensation, health care, and sexual assault, as well as less prominent issues that nonetheless generate significant public interest. This report focuses exclusively on the annual defense authorization process.

Jul 22, 2015

Department of Defense Contractor and Troop Levels in Iraq and Afghanistan: 2007-2014

This report provides background information for Congress on troop and contractor levels in the Department of Defense (DOD) in support of military operations in Iraq and Afghanistan.

Jul 22, 2015

A Primer on WIC: The Special Supplemental Nutrition Program for Women, Infants, and Children

The Special Supplemental Nutrition Program for Women, Infants, and Children (WIC) provides nutrition-rich foods, nutrition education (including breastfeeding promotion and support), and health care and social services referrals to eligible low-income women, infants, and children. In FY2014, approximately 8.3 million people participated in WIC each month. WIC is authorized by the Child Nutrition Act, as is the related WIC Farmers’ Market Nutrition Program (WIC FMNP). WIC, WIC FMNP, school meals, and the other child nutrition programs are typically reauthorized together; these programs were last reauthorized in the Healthy, Hunger-Free Kids Act of 2010 (P.L. 111-296). WIC’s funding is discretionary, and the bulk of program funds are allocated via formula grant to state agencies for food costs and “Nutrition Services and Administration.” In FY2014, there were 90 state agencies (50 states, District of Columbia, 5 U.S. territories, and 34 Indian Tribal Organizations). These agencies operate the program through local WIC agencies and clinics. The program obligated over $7 billion in federal funds in FY2014. WIC has a number of federal and state eligibility rules, including categorical, financial, and nutritional risk. Participants must fall into one of WIC’s participant categories: pregnant, post-partum, and breastfeeding women; infants; or children (under five years of age). Financial eligibility is met if (1) a household has income at or below 185% of the federal poverty level, or (2) applicants receive benefits through Temporary Assistance for Needy Families (TANF), the Supplemental Nutrition Assistance Program (SNAP), Medicaid, or certain state programs. Households also must meet nutritional risk criteria and reside in the state of application. WIC provides participants with monthly benefits redeemable for specified foods to supplement their diets, as well as related nutrition and health services. WIC-eligible foods are laid out in federal regulation, and state agencies develop their own approved food lists within this framework. At the WIC clinic, participants are provided the benefits to redeem specific foods (food package) for the participant’s category and individual nutritional needs. Major changes to the federal WIC food package regulations have been made in recent years; for some participant categories, the food package now includes a cash-value voucher redeemable for fruits and vegetables. One way that state agencies control WIC costs is through their approved foods lists. These lists usually include one brand of infant formula, as state agencies are required to control infant formula costs through competitive bidding for infant formula rebate contracts. In addition to providing food benefits, states are required to ensure that nutrition education, including breastfeeding promotion and drug abuse education, is available to all pregnant, post-partum, and breastfeeding participants in the program. Agencies also work to refer WIC participants to health services and other public programs, particularly Medicaid. Nearly all states administer their programs through a retail food delivery system, in which participants purchase foods at authorized retailers (vendors). Accordingly, many WIC policies at the federal and state levels pertain to vendor authorization and oversight as well as benefit redemption. Currently, most states distribute checks or vouchers for participants to purchase WIC foods at vendors; however, state agencies are increasingly transitioning to electronic benefit transfer (EBT), in part because the 2010 reauthorization law requires this transition by October 1, 2020. States authorize vendors for the program, considering factors like a vendor’s inventory and capacity and geographic distribution of vendors. States also consider and monitor WIC vendors’ pricing, as required by federal law, to help contain program costs.

Jul 21, 2015

U.S. Foreign Assistance to Latin America and the Caribbean: Recent Trends and FY2016 Appropriations

This report discusses the United States economic assistance to the nations of Latin America and the Caribbean. Current U.S. policy is designed to promote economic and social opportunity, ensure the safety of the region's citizens, strengthen effective democratic institutions, and secure a clean energy future.

Jul 21, 2015

Update on the Highly-Pathogenic Avian Influenza Outbreak of 2014-2015

The U.S. poultry industry is experiencing a severe outbreak of highly-pathogenic avian influenza (HPAI). The U.S. Department of Agriculture’s (USDA’s) Animal and Plant Health Inspection Service (APHIS) has reported 223 cases of HPAI in domestic flocks in 15 states. With the start of summer, the finding of new cases slowed. The last reported new case was in Iowa on June 17, 2015. More than 48 million chickens, turkeys, and other poultry have been euthanized to stem the spread of the disease. Cases have been caused by several highly pathogenic H5 avian influenza (AI) strains that result in substantial mortality in domestic poultry. Turkey and egg-laying hen farms in Minnesota and Iowa have been hardest hit. Commercial broiler farms have not been affected to date. According to the Centers for Disease Control and Prevention (CDC), no infections in humans have been associated with the HPAI outbreak, and the public health risk is low. Under the Animal Health Protection Act (AHPA; 7 U.S.C. §8301 et seq.), APHIS, in cooperation with state and local animal health officials, has the authority to take extraordinary measures, such as seizing, restricting movement, or euthanizing animals to protect the health of animals. During the current outbreak, APHIS has paid to euthanize poultry, clean and disinfect poultry premises and equipment, and then test for the AI virus to ensure poultry farms can be safely repopulated. USDA has indemnified poultry owners for euthanized poultry. USDA has received approval to use nearly $700 million in additional funds from the Commodity Credit Corporation (CCC) to address HPAI. As of July 7, 2015, APHIS has committed over $500 million of the $700 million to help producers control the spread of HPAI, including $190 million for indemnity payments. The agency is committed to covering cleaning and disinfecting costs on affected farms. The cost of the HPAI outbreak to the poultry industry is high. The value of turkey and laying hen losses is estimated at nearly $1.6 billion. Economy-wide losses are estimated at $3.3 billion. Since the HPAI outbreak in December 2014, 18 U.S. trading partners have imposed bans on all shipments of U.S. poultry and products, and 38 trading partners have imposed partial, or regional, bans on shipments from states or parts of states with HPAI cases. China, Russia, and South Korea, 3 of the top 10 destinations for U.S. poultry meat in 2014, have banned all imports of U.S. poultry. It is believed that an HPAI outbreak is likely to occur again in the fall when wild birds begin their migrations through the four flyways. This may result in more spread of AI, possibly in the poultry-producing eastern and southeastern regions untouched by the current outbreak. APHIS and the poultry industry are taking lessons from the current outbreak to prepare for the fall. USDA is developing a vaccine to be available for manufacture if the agency decides to adopt a vaccination policy to manage any future outbreak. APHIS and the poultry industry are reassessing biosecurity, indemnity payment formulas, and other measures that aim to improve the containment and elimination process.

Jul 20, 2015

Europe’s Migration Crisis

Jul 17, 2015

Cyber Intrusion into U.S. Office of Personnel Management: In Brief

On June 4, 2015, the U.S. Office of Personnel Management (OPM) revealed that a cyber intrusion had impacted its information technology systems and data, potentially compromising the personal information of about 4.2 million former and current federal employees. Later that month, OPM reported a separate cyber incident targeting OPM’s databases housing background investigation records. This breach is estimated to have compromised sensitive information of 21.5 million individuals. Amid criticisms of how the agency managed its response to the intrusions and secured its information systems, Katherine Archuleta has stepped down as the director of OPM, and Beth Cobert has taken on the role of acting director. In addition, OPM’s Electronic Questionnaires for Investigations Processing (e-QIP) application, the system designed to help process forms used in conducting background investigations, has been taken offline for security improvements. Officials are still investigating the actors behind the breaches and what the motivations might have been. Theft of personally identifiable information (PII) may be used for identity theft and financially motivated cybercrime, such as credit card fraud. Many have speculated that the OPM data were taken for espionage rather than for criminal purposes, however, and some have cited China as the source of the breaches. It remains unclear how the data from the OPM breaches might be used if they are indeed now in the hands of the Chinese government. Some suspect that the Chinese government may build a database of U.S. government employees that could help identify U.S. officials and their roles or that could help target individuals to gain access to additional systems or information. National security concerns include whether hackers could have obtained information that could help them identify clandestine and covert officers and operations. The cybersecurity of most federal information systems is governed by the Federal Information Security Management Act (FISMA, 44 U.S.C. §3551 et seq.). Questions for policymakers include whether existing provisions of law give agencies the legislative authority and resources they need to adequately address the risks of future intrusions. In addition, effective sharing of cybersecurity information has been considered an important tool for protecting information systems from unauthorized intrusions and exfiltration of data. The 114th Congress is considering legislation to reduce perceived barriers to information sharing among private-sector entities and between them and federal agencies.

Jul 17, 2015

Economic Development Administration: FY2016 Appropriations

The Economic Development Administration (EDA) was created pursuant to the enactment of the Public Works and Economic Development Act of 1965, with the objective of fostering growth in economically distressed areas characterized by high levels of unemployment and low per-capita income levels. EDA, an agency within the Department of Commerce, is the primary federal agency charged with implementing and coordinating federal economic development policy. For FY2016, the Obama Administration requested significant increases in funding for EDA activities and salaries and expenses. Under the Administration’s proposal, EDA funding would increase by 9.2%, from $250 million to $273 million over the last fiscal year, including significant increases in funding for the following: salaries and expenses, from $37 million to $45.5 million; regional Innovation Program grants, from $10 million to $25 million; economic Adjustment Assistance, from $45 million to $53 million; and Planning Grants, from $30 million to $39.5 million. On June 3, 2015, the House approved its version of the Departments of Commerce, Justice, Science, and Related Agencies (CJS) Appropriations Act for FY2016, H.R. 2578. The bill rejects the Administration’s proposed funding increases. Instead, the bill would freeze total funding at the FY2015 level of $250 million. The bill recommends a $5 million increase in funding for coal mining communities (above the amount set aside under the Economic Adjustment Assistance) while recommending eliminating $4 million in funding for Innovative Manufacturing. On June 16, 2015, the Senate Appropriations Committee reported its version of H.R. 2578. This bill also rejects the Administration’s proposed increases in funding and, like its House counterpart, would freeze total funding for EDA at the FY2015 level of $250 million. It would shift funding priorities, eliminating $4 million in funding for Innovative Manufacturing, transferring $10 million in Assistance to Coal Mining Communities from a set-aside under the Economic Adjustment Assistance program to a stand-alone program, and increase funding for Economic Adjustment Assistance by $3 million, from $45 million in FY2015 to $48 million for FY2016. This report will be updated as events warrant.

Jul 16, 2015

The Islamic State’s Acolytes and the Challenges They Pose to U.S. Law Enforcement: In Brief

Analysis of U.S. counterterrorism investigations since September 11, 2001 (9/11), suggests that the Islamic State (IS) and its acolytes may present broad challenges for domestic law enforcement. These challenges involve understanding and responding to a variety of terrorist actors who can be placed into five categories: The Departed—Americans, often described as foreign fighters, who plan to leave or have left the United States to fight for the Islamic State. The Returned—American foreign fighters who trained with or fought in the ranks of the Islamic State and come back to the United States, where they can potentially plan and execute attacks at home. The Inspired—Americans lured—in part—by IS propaganda to participate in terrorist plots within the United States. The Others—Foreign IS adherents who radicalize in and originate from places outside of the United States or non-American foreign fighters active in the ranks of the Islamic State. These persons could try to enter the United States when done fighting abroad. In this conceptualization, the departed, the returned, the inspired, and the others are known or suspected by law enforcement as terrorists. This suggests an additional category: The Lost—Unknown Americans who fight in the ranks of the Islamic State but do not plot terrorist attacks against the United States. Such individuals may come home after fighting abroad and remain unknown to U.S. law enforcement. Additionally, some American IS fighters will never book a trip back to the United States. Finally, some American IS supporters will perish abroad. Federal law enforcement has numerous approaches to go after each of these categories of terrorist actors. These include the following: The federal counterterrorism watchlisting regimen. The regimen effectively attempts to shrink the “the lost” category described above. Efforts geared toward preemption of terrorist activity. These can be broadly described in terms of interdiction (stopping a suspected terrorist from entering the United States, for example), law enforcement investigation, and government activities aimed at keeping radicalized individuals from morphing into terrorists.

Jul 16, 2015

Cybersecurity: Legislation, Hearings, and Executive Branch Documents

This report provides links to cybersecurity-related committee hearings in the 112th and 113th Congresses. It also provides a list of executive orders and presidential directives pertaining to information and computer security.

Jul 15, 2015

U.S. Command and Control and Intelligence, Surveillance, and Reconnaissance Aircraft

The fleet of manned aircraft accomplishing the Department of Defense’s (DOD’s) Command and Control (C2) and Intelligence, Surveillance, and Reconnaissance (ISR) missions for the joint military community (E-8, E-3, RC-135, WC-135, OC-135, and E-6) is primarily based on Boeing 707 aircraft procured from the 1960s to the early 1990s. As the age of these legacy C2ISR aircraft increases, understanding the Air Force and Navy modernization and recapitalization plans is likely important for Congress. This report examines the Air Force’s and Navy’s current sustainment, modernization, and recapitalization efforts for these Boeing 707-based aircraft, and issues Congress may take into account when considering appropriating funds for continued sustainment and modernization of these aircraft versus funding for recapitalization of these missions to new aircraft. This report addresses potential congressional oversight and appropriations concerns for the sustainment, modernization, and recapitalization of the DOD’s Boeing 707-based legacy C2ISR aircraft fleet. It does not address options for recapitalization currently being offered by industry to other countries. Congress has the authority to approve, reject, or modify Air Force and Navy funding requests for C2ISR aircraft sustainment, modernization, and recapitalization, as well as oversight of the nation’s C2ISR requirements and capabilities. Congress’s decisions on appropriations for the C2ISR force could impact the nation’s C2ISR capabilities and have additional consequences for the U.S. aerospace industry. The starting point for Congress’s debate on legacy C2ISR sustainment, modernization, and recapitalization is the existing Boeing 707-based C2ISR fleet consisting of 89 operational aircraft, which includes 16 E-8C Joint Surveillance Targeting Attack Radar System (JSTARS) aircraft providing airborne battle management, command and control, intelligence, surveillance, and reconnaissance; 31 E-3 Sentry Airborne Warning and Control (AWACS) aircraft with integrated command and control battle management (C2BM), surveillance, target detection, and tracking; 17 RC-135V/W RIVET JOINT aircraft supporting theater and national level forces with near real time on-scene intelligence collection, analysis, and dissemination capabilities; 2 RC-135U COMBAT SENT aircraft that locate and identify foreign military land, naval, and airborne radar signals to determine detailed operating characteristics and capabilities of those systems; 3 RC-135S COBRA BALL aircraft that collect optical and electronic data on ballistic missile targets; 2 WC-135 Constant Phoenix atmospheric collection aircraft that collect particulate and gaseous effluents and debris from accessible regions of the atmosphere supporting the Limited Nuclear Test Ban Treaty of 1963; 2 OC-135B Open Skies aircraft that perform unarmed observation flights over participating parties of the Open Skies Treaty, and 16 E-6B Mercury communications relay and strategic airborne command post aircraft. Potential congressional oversight and appropriations concerns for the sustainment, modernization, and/or recapitalization of the DOD’s Boeing 707-based legacy C2ISR aircraft fleet include a potential shortfall in C2ISR capabilities if there is a funding gap for sustainment and upgrades that would keep the weapon systems viable until they are recapitalized; ascertaining DOD, Air Force, and Navy priorities for sustainment, modernization, and recapitalization; determining if modernization efforts allow for delayed recapitalization efforts; consideration of shifting some of the legacy C2ISR missions to remotely piloted aircraft; the potential implications of reduced legacy C2ISR aircraft sustainment and modernization, and subsequent diminishing numbers of airframes on any future rounds of base realignment and closure efforts; and the ability of the nation’s industrial base to sustain the legacy C2ISR aircraft force.

Jul 15, 2015

The Dominican Republic: Tensions with Haiti over Citizenship and Migration Issues

This report discusses the dispute between the Dominican Republic and Haiti regarding the citizenship status of some 200,000 Dominicans of Haitian descent, as well as undocumented migrants in the Dominican Republic, which threatens to exacerbate tensions between the two neighbors.

Jul 15, 2015

U.S.-Taiwan Trade Relations

This report discusses the U.S. - Taiwan relations. U.S. trade data indicate that in 2014, Taiwan was the United States’ 10th largest merchandise trading partner (at $67.4 billion), 14th largest export market ($26.8 billion), and 12th largest source of imports ($40.6 billion).

Jul 14, 2015

Deepwater Horizon Oil Spill: Gulf Coast Restoration Efforts In Brief

Jul 14, 2015

Federal Power over Local Law Enforcement Reform: Legal Issues

Several protests around the country regarding police use of force and a perceived lack of accountability for law enforcement officers have sparked a discussion about local law enforcement and judicial practices. In response, several Members of Congress have formulated a number of proposals designed to promote accountability and deter discrimination at the state and local levels. However, because the enforcement of criminal law is primarily the responsibility of state and local governments, the imposition of federal restrictions on such entities raises important constitutional issues: namely, the extent to which the Constitution permits the federal government to regulate the actions of state and local officers. Proposals include imposing restrictions on the receipt of federal funds as well as banning certain practices independently of a tether to federal money. The federal government possesses limited powers. Current proposals to address local law enforcement issues at the federal level must be enacted consistent with a constitutionally enumerated power or powers supplemented by the Necessary and Proper Clause; otherwise such authority is reserved to the states. At least three constitutional provisions are often invoked to regulate state and local government under current federal laws and are likely to be relied upon by some of the current proposals. Legislation that ties conditions to the receipt of federal funds, such as H.R. 1680, H.R. 429, and S. 1056, would likely be supported by Congress’s power under the Spending Clause to provide for the general welfare. Pursuant to this authority, Congress may disperse funds to states contingent on compliance with specific conditions. These can include the adoption of policies that Congress could not otherwise directly impose on states. Conditions attached to the receipt of federal funds that regulate state and local governments must be unambiguous; relate to the federal interest in particular programs; not be barred by another constitutional provision; and not be so coercive as to compel states into participation. In contrast, federal proposals that impose restrictions on state and local governments without a connection to federal money, such as H.R. 1933 and H.R. 2052, might be supported pursuant to the Commerce Clause or under Section 5 of the Fourteenth Amendment. Congress possesses the power to regulate foreign and interstate commerce. This includes the regulation of the channels and instrumentalities of interstate commerce, as well as activities that have a substantial relation to interstate commerce. Congressional proposals to regulate local governments passed pursuant to this power must likely be directed at economic activity that has a substantial relation to interstate commerce or be limited in application to regulating the channels or instrumentalities of interstate commerce. Congress also possesses power to enforce the provisions of the Fourteenth Amendment and may enact “prophylactic legislation” intended to deter violations by proscribing a broader scope of conduct than barred by the Constitution. However, such legislation must be congruent and proportional to the injury to be remedied. In order to support legislation imposing restrictions on local law enforcement under this authority, Congress must likely show a widespread history of violations of the constitutional right to be protected.

Jul 13, 2015

Display of the Confederate Flag at Federal Cemeteries

This report discusses policies regarding the display of the Confederate Flag at national cemeteries. If a state observes a Confederate Memorial Day, NPS cemeteries in the state may permit a sponsoring group to decorate the graves of Confederate veterans with small Confederate flags. Additionally, according to the National Park Service (NPS) reference manual, such flags may also be displayed on the nationally observed Memorial Day, to accompany the U.S. flag on the graves of Confederate veterans.

Jul 10, 2015

Use of the Annual Appropriations Process to Block Implementation of the Affordable Care Act (FY2011-FY2016)

Jul 8, 2015

The Post-2015 Global Development Agenda

Jul 8, 2015

Dark Web

Congressional Research Service 7-5700 www.crs.gov R44101 Summary The layers of the Internet go far beyond the surface content that many can easily access in their daily searches. The other content is that of the Deep Web, content that has not been indexed by traditional search engines such as Google. The furthest corners of the Deep Web, segments known as the Dark Web, contain content that has been intentionally concealed. The Dark Web may be used for legitimate purposes as well as to conceal criminal or otherwise malicious activities. It is the exploitation of the Dark Web for illegal practices that has garnered the interest of officials and policy makers. Individuals can access the Dark Web by using special software such as Tor (short for The Onion Router). Tor relies upon a network of volunteer computers to route users’ web traffic through a series of other users’ computers such that the traffic cannot be traced to the original user. Some developers have created tools—such as Tor2web—that may allow individuals access to Tor-hosted content without downloading and installing the Tor software, though accessing the Dark Web through these means does not anonymize activity. Once on the Dark Web, users often navigate it through directories such as the “Hidden Wiki,” which organizes sites by category, similar to Wikipedia. Individuals can also search the Dark Web with search engines, which may be broad, searching across the Deep Web, or more specific, searching for contraband like illicit drugs, guns, or counterfeit money. While on the Dark Web, individuals may communicate through means such as secure email, web chats, or personal messaging hosted on Tor. Though tools such as Tor aim to anonymize content and activity, researchers and security experts are constantly developing means by which certain hidden services or individuals could be identified or “deanonymized.” Anonymizing services such as Tor have been used for legal and illegal activities ranging from maintaining privacy to selling illegal goods—mainly purchased with Bitcoin or other digital currencies. They may be used to circumvent censorship, access blocked content, or maintain the privacy of sensitive communications or business plans. However, a range of malicious actors, from criminals to terrorists to state-sponsored spies, can also leverage cyberspace and the Dark Web can serve as a forum for conversation, coordination, and action. It is unclear how much of the Dark Web is dedicated to serving a particular illicit market at any one time, and, because of the anonymity of services such as Tor, it is even further unclear how much traffic is actually flowing to any given site. Just as criminals can rely upon the anonymity of the Dark Web, so too can the law enforcement, military, and intelligence communities. They may, for example, use it to conduct online surveillance and sting operations and to maintain anonymous tip lines. Anonymity in the Dark Web can be used to shield officials from identification and hacking by adversaries. It can also be used to conduct a clandestine or covert computer network operation such as taking down a website or a denial of service attack, or to intercept communications. Reportedly, officials are continuously working on expanding techniques to deanonymize activity on the Dark Web and identify malicious actors online. Contents Layers of the Internet 2 Accessing and Navigating the Dark Web 3 Communicating On (and About) the Dark Web 4 Navigating the Deep Web and Dark Web 5 Is the Dark Web Anonymous? 6 Why Anonymize Activity? 7 Online Privacy 7 Illegal Activity and the Dark Web 8 Payment on the Dark Web 11 Government Use of the Dark Web 11 Law Enforcement 12 Military and Intelligence 13 Going Forward 14 Figures Figure 1. Layers of the Internet 3 Contacts Author Contact Information 14 Acknowledgments 14 Beyond the Internet content that many can easily access online lies another layer—indeed a much larger layer—of material that is not accessed through a traditional online search. As experts have noted, “[s]earching on the Internet today can be compared to dragging a net across the surface of the ocean. While a great deal may be caught in the net, there is still a wealth of information that is deep, and therefore, missed.” This deep area of the Internet, or the Deep Web, is characterized by the unknown—unknown breadth, depth, content, and users. / 2011 Silk Road reportedly launched by Ross William Ulbricht, who was known online as the “Dread Pirate Roberts.” SEP 2013 Federal agents seized the Silk Road site. OCT 2013 the Federal Bureau of Investigation (FBI) arrested Ulbricht. May 2015 Ulbricht sentenced to life in prison for his role in operating the Silk Road. Ulbricht received over $13 million in commissions from sales on the Silk Road. While the Silk Road was primarily used to sell illegal drugs, it also offered digital goods, including malicious software and pirated media; forgeries, including fake passports and Social Security cards; and services, such as computer hacking. The furthest corners of the Deep Web, known as the Dark Web, contain content that has been intentionally concealed. The Dark Web may be accessed both for legitimate purposes and to conceal criminal or otherwise malicious activities. It is the exploitation of the Dark Web for illegal practices that has garnered the interest of officials and policy makers. Take for instance the Silk Road—one of the most notorious sites formerly located on the Dark Web. The Silk Road was an online global bazaar for illicit services and contraband, mainly drugs. Vendors of these illegal substances were located in more than 10 countries around the world, and contraband goods and services were provided to more than 100,000 buyers. It has been estimated that the Silk Road generated about $1.2 billion in sales between January 2011 and September 2013, after which it was dismantled by federal agents. The use of the Internet, and in particular the Dark Web, for malicious activities has led policy makers to question whether law enforcement and other officials have sufficient tools to combat the illicit activities that might flow through this underworld. This report illuminates information on the various layers of the Internet, with a particular focus on the Dark Web. It discusses both legitimate and illicit uses of the Dark Web, including how the government may rely upon it. Throughout, the report raises issues that policy makers may consider as they explore means to curb malicious activity online. Layers of the Internet Many may consider the Internet and World Wide Web (web) to be synonymous; they are not. Rather, the web is one portion of the Internet, and a medium through which information may be accessed. In conceptualizing the web, some may view it as consisting solely of the websites accessible through a traditional search engine such as Google. However, this content—known as the “Surface Web”—is only one portion of the web. The Deep Web refers to “a class of content on the Internet that, for various technical reasons, is not indexed by search engines,” and thus would not be accessible through a traditional search engine. Information on the Deep Web includes content on private intranets (internal networks such as those at corporations, government agencies, or universities), commercial databases like Lexis Nexis or Westlaw, or sites that produce content via search queries or forms. Going even further into the web, the Dark Web is the segment of the Deep Web that has been intentionally hidden. The Dark Web is a general term that describes hidden Internet sites that users cannot access without using special software. Users access the Dark Web with the expectation of being able to share information and/or files with little risk of detection. In 2005, the number of Internet users reached 1 billion worldwide. This number surpassed 2 billion in 2010 and crested over 3 billion in 2014. As of June 2015, more than 40% of the world population was connected to the Internet. While data exist on the number of Internet users, data on the number of users accessing the various layers of the web and on the breadth of these layers are less clear. Surface Web. The magnitude of the web is growing. In the United States alone, about 100,000 new web domains are reportedly registered every day. Simultaneously, it is estimated that 40,000–70,000 web domains go offline each day. If these estimates are accurate, there are at least 30,000 web domains added daily. Deep Web. The Deep Web, as noted, cannot be accessed by traditional search engines because the content in this layer of the web is not indexed. Information here is not “static and linked to other pages” as is information on the Surface Web. As researchers have noted, “[i]t’s almost impossible to measure the size of the Deep Web. While some early estimates put the size of the Deep Web at 4,000–5,000 times larger than the surface web, the changing dynamic of how information is accessed and presented means that the Deep Web is growing exponentially and at a rate that defies quantification.” Dark Web. Within the Deep Web, the Dark Web is also growing as new tools make it easier to navigate. Because individuals may access the Dark Web assuming little risk of detection, they may use this arena for a variety of legal and illegal activities. It is unclear, however, how much of the Deep Web is taken up by Dark Web content and how much of the Dark Web is used for legal or illegal activities. Figure 1. Layers of the Internet / Source: Congressional Research Service (CRS). Notes: Proportions in the figure may not be to scale. Accessing and Navigating the Dark Web The Dark Web can be reached through decentralized, anonymized nodes on a number of networks including Tor (short for The Onion Router) or I2P (Invisible Internet Project). Tor, which was initially released as The Onion Routing project in 2002, was originally created by the U.S. Naval Research Laboratory as a tool for anonymously communicating online. Tor “refers both to the software that you install on your computer to run Tor and the network of computers that manages Tor connections.” Tor’s users connect to websites “through a series of virtual tunnels rather than making a direct connection, thus allowing both organizations and individuals to share information over public networks without compromising their privacy.” Users route their web traffic through other users’ computers such that the traffic cannot be traced to the original user. Tor essentially establishes layers (like layers of an onion) and routes traffic through those layers to conceal users’ identities. To get from layer to layer, Tor has established “relays” on computers around the world through which information passes. Information is encrypted between relays, and “all Tor traffic passes through at least three relays before it reaches its destination.” The final relay is called the “exit relay,” and the IP address of this relay is viewed as the source of the Tor traffic. When using Tor software, users’ IP addresses remain hidden. As such, it appears that the connection to any given website “is coming from the IP address of a Tor exit relay, which can be anywhere in the world.” While data on the magnitude of the Deep Web and Dark Web and how they relate to the Surface Web are not clear, data on Tor users do exist. According to metrics from the Tor Project, the mean number of daily Tor users in the United States across the first three months of 2015 was 360,775—or 16.56% of total mean daily Tor users. The United States has the largest number of mean daily Tor users, followed by Germany (over 9%) and Russia (nearly 8%). Communicating On (and About) the Dark Web There are several different ways to communicate about the Dark Web. One of the first places individuals may turn is Reddit. There are several subreddits pertaining to the Dark Web, such as DarkNetMarkets, Onions, or Tor. These forums often provide links to sites within the Dark Web. Reddit provides a public platform for Dark Web users to discuss different aspects of the Tor. It is not encrypted or anonymous, as users who wish to engage in forum discussion must create an account. Individuals who wish to use a more secure form of communication may choose to utilize email, web chats, or personal messaging hosted on Tor: Email service providers, for instance, typically only require users to input a username and password to sign up. In addition, email service providers generally offer anonymous messaging and encrypted storage. A number of anonymous, real-time chat rooms such as The Hub and OnionChat are hosted on Tor. Feeds are organized by topic. While some sites do not require any information from users before participating in chats, others require a user to register with an email address. Personal messaging is another option for Tor users who wish to communicate with an added layer of anonymity. Bitmessage is a popular messaging system which offers encryption and strong authentication. Secure Messaging System for Tor allows a user to write a message and generates a unique link for that message. The messages are encrypted and self-destruct after the link is used once. Specific vendor sites may host private messaging as well. Navigating the Deep Web and Dark Web Traditional search engines often use “web crawlers” to access websites on the Surface Web. This process of crawling searches the web and gathers websites that the search engines can then catalog and index. Content on the Deep (and Dark) Web, however, may not be caught by web crawlers (and subsequently indexed by traditional search engines) for a number of reasons, including that it may be unstructured, unlinked, or temporary content. As such, there are different mechanisms for navigating the Deep Web than there are for the Surface Web. Users often navigate Dark Web sites through directories such as the “Hidden Wiki,” which organizes sites by category, similar to Wikipedia. In addition to the wikis, individuals can also search the Dark Web with search engines. These search engines may be broad, searching across the Deep Web, or they may be more specific. For instance, Ahmia, an example of a broader search engine, is one “that indexes, searches and catalogs content published on Tor Hidden Services.” In contrast, Grams is a more specific search engine “patterned after Google” where users can find illicit drugs, guns, counterfeit money, and other contraband. When using Tor, website URLs change formats. Instead of websites ending in .com, .org, .net, etc., domains usually end with an “onion” suffix, identifying a “hidden service.” Notably, when searching the web using Tor, an onion icon displays in the Tor browser. Tor is notoriously slow, and this has been cited as one drawback to using the service. This is because all Tor traffic is routed through at least three relays, and there can be delays anywhere along its path. In addition, speed is reduced when more users are simultaneously on the Tor network. On the other hand, increasing the number of users who agree to use their computers as relays can increase the speed on Tor. Tor and similar networks are not the only means to reach hidden content on the web. Other developers have created tools—such as Tor2web—that may allow individuals access to Tor-hosted content without downloading and installing the Tor software. Using bridges such as Tor2web, however, does not provide users with the same anonymity that Tor offers. As such, if users of Tor2web or other bridges access sites containing illegal content—for instance, those that host child pornography—they could more easily be detected by law enforcement than individuals who use anonymizing software such as Tor. Is the Dark Web Anonymous? Guaranteed anonymity is not foolproof. While tools such as Tor aim to anonymize content and activity, researchers and security experts are constantly developing means by which certain hidden services or individuals could be identified or “deanonymized.” For example, in October 2011 the “hacktivist” collective Anonymous, through its Operation Darknet, crashed a website hosting service called Freedom Hosting—operating on the Tor network—which was reportedly home to more than 40 child pornography websites. Among these websites was Lolita City, cited as one of the largest child pornography sites with over 100GB of data. Anonymous had “matched the digital fingerprints of links on [Lolita City] to Freedom Hosting” and then launched a Distributed Denial of Service (DDoS) attack against Freedom Hosting. In addition, through Operation Darknet, Anonymous leaked the user database—including username, membership time, and number of images uploaded—for over 1,500 Lolita City members. In 2013, the Federal Bureau of Investigation (FBI), reportedly took control of Freedom Hosting and infected it with “custom malware designed to identify visitors.” Since 2002, the FBI has supposedly been using some form of a “computer and internet protocol address verifier”—consistent with the malware in the Freedom Hosting takeover—to “identify suspects who are disguising their location using proxy servers or anonymity services, like Tor.” Why Anonymize Activity? A number of reasons have been cited why individuals might use services such as Tor to anonymize online activity. Anonymizing services have been used for legal and illegal activities ranging from keeping sensitive communications private to selling illegal drugs. Of note, while a wide range of legitimate uses of Tor exist, much of the research on and concern surrounding anonymizing services involves their use for illegal activities. As such, the bulk of this section focuses on the illegal activities. Online Privacy Tor is used to secure the privacy of activities and communications in a number of realms. Privacy advocates generally promote the use of Tor and similar software to maintain free speech, privacy, and anonymity. There are several examples of how it might be used for these purposes: Anti-Censorship and Political Activism. Tor may be used as a “censorship circumvention tool, allowing its users to reach otherwise blocked destinations or content.” Because individuals may rely upon Tor to access content that may be blocked in certain parts of the world, some governments have reportedly suggested tightening regulations around using Tor. Some have purportedly blocked access to it. Political dissidents may also use Tor to secure and anonymize their communications and locations, as they have reportedly done in dissident movements in Iran and Egypt. Sensitive Communication. Tor may also be used by individuals who want to access chat rooms and other forums for sensitive communications—both for personal and business uses. Individuals may seek out a safe haven for discussing private issues such as victimization or physical or mental illnesses. They may also use Tor to protect their children online by concealing the IP addresses of children’s activities. Businesses may use it to protect their projects and help prevent spies from gaining a competitive advantage. Leaked Information. Journalists may use Tor for communicating “more safely with whistleblowers and dissidents.” The New Yorker’s Strongbox, for instance, is accessible through Tor and allows individuals to communicate and share documents anonymously with the publication. In addition, Edward Snowden reportedly used Tails (an “operating system optimized for anonymity”)—which automatically runs Tor—to communicate with journalists and leak classified information on U.S. mass surveillance programs. Among the documents leaked by Snowden was a top-secret presentation outlining National Security Agency (NSA) efforts to exploit the Tor browser and de-anonymize users. Illegal Activity and the Dark Web Just as nefarious activity can occur through the Surface Web, it can also occur on the Deep Web and Dark Web. A range of malicious actors leverage cyberspace, from criminals to terrorists to state-sponsored spies. The web can serve as a forum for conversation, coordination, and action. Specifically, they may rely upon the Dark Web to help carry out their activities with reduced risk of detection. While this section focuses on criminals operating in cyberspace, the issues raised are certainly applicable to other categories of malicious actors. Twenty-first century criminals increasingly rely on the Internet and advanced technologies to further their criminal operations. For instance, criminals can easily leverage the Internet to carry out traditional crimes such as distributing illicit drugs and sex trafficking. In addition, they exploit the digital world to facilitate crimes that are often technology driven, including identity theft, payment card fraud, and intellectual property theft. The FBI considers high-tech crimes to be the most significant crimes confronting the United States. The Dark Web has been cited as facilitating a wide variety of crimes. Illicit goods such as drugs, weapons, exotic animals, and stolen goods and information are all sold for profit. There are gambling sites, thieves and assassins for hire, and troves of child pornography. Data on the prevalence of these Dark Web sites, however, are lacking. Tor estimates that only about 1.5% of Tor users visit hidden services/Dark Web pages. The actual percentage of these that serve a particular illicit market at any one time is unclear, and it is even less clear how much Tor traffic is going to any given site. One study from the University of Portsmouth examined Tor traffic to hidden services. Researchers “ran 40 relay’ computers in the Tor network ... which allowed them to assemble an unprecedented collection of data about the total number of Tor hidden services online—about 45,000 at any given time—and how much traffic flowed to them.” While about 2% of the Tor hidden service websites identified were sites that researchers deemed related to child abuse, 83% of the visits to hidden services sites were to these child abuse sites—“just a small number of pedophilia sites account for the majority of Dark Web http traffic.” As has been noted, however, there are a number of variables that may have influenced the results. The Dark Web can play a number of roles in malicious activity. As noted, it can serve as a forum—through chat rooms and communication services—for planning and coordinating crimes. For instance, there have been reports that some of those engaged in tax-refund fraud discussed techniques on the Dark Web. The Dark Web can also provide a platform for criminals to sell illegal or stolen goods. Take the role of the Dark Web in data breaches, for example: Malware used in large-scale data breaches to capture unencrypted credit and debit card information has been purchased on the Dark Web. One form of malware, RAM scrapers, can be purchased and remotely installed on point-of-sale systems, as was done in the 2013 Target breach, among others. Thieves can sell stolen information for profit on the Dark Web. For instance, within weeks of the Target breach, the underground black markets were reportedly “flooded” with the stolen credit and debit card account information, “selling in batches of one million cards and going for anywhere from $20 to more than $100 per card.” Such “card shops” are just one example of the specialty markets on the Dark Web. Not only can data be stolen and sold through the Dark Web, it can happen quickly. In a recent experiment by a security vendor, BitGlass, researchers created a treasure trove of fake “stolen” data including over 1,500 names, social security numbers, credit card numbers, and more. They then planted these data on DropBox and seven well-known black market sites. Within 12 days, the data had been viewed nearly 1,100 times across 22 countries. Cybercriminals can victimize individuals and organizations alike, and they can do so without regard for borders. How criminals exploit borders is a perennial challenge for law enforcement, particularly as the concept of borders and boundaries has evolved. Physical Borders. For law enforcement purposes, jurisdictional boundaries have been drawn between nations, states, and other localities. Within these territories, various enforcement agencies are designated authority to administer justice. When crimes cross boundaries, a given entity may no longer have sole responsibility for criminal enforcement, and the laws across jurisdictions may not be consistent. Criminals have long understood these phenomena—and exploited them. Physical–Cyber Borders. The relatively clear borders within the physical world are not always replicated in the virtual realm. High-speed Internet communication has not only facilitated the growth of legitimate business, but it has bolstered criminals’ abilities to operate in an environment where they can broaden their pool of potential targets and rapidly exploit their victims. Frauds and schemes that were once conducted face-to-face can now be carried out remotely from across the country or even across the world. For instance, criminals can rely upon botnets to target victims across the globe without crossing a single border themselves. Cyber Borders. While cyberspace crosses physical borders, boundaries within cyberspace—both jurisdictional and technological—still exist. Some web addresses, for instance, are country-specific, and the administration of those websites is controlled by particular nations. Another barrier in cyberspace involves the lines between the Surface Web and the Deep Web. Crossing these boundaries may involve subscriptions or fee-based access to particular website content. Certain businesses—news sites, journals, file-sharing sites, and others—may require paid access. Other sites may only be accessed through an invitation. Do malicious actors need, or benefit from, the Dark Web to carry out their activities? Researchers have pointed to pros and cons of relying upon the anonymity of the Dark Web. Criminals selling illicit goods may benefit from the Dark Web’s added protection of anonymity by being better able to evade law enforcement. However, they may have more trouble getting business. Trend Micro’s 2013 study of the Dark Web notes that on it, “[s]ellers suffer from lack of reputation caused by increased anonymity. Being untraceable can present drawbacks for a seller who cannot easily establish a trust relationship with customers unless the marketplace allows for it.” In other words, anonymity can be a barrier online if one is trying to sell goods and has not been otherwise vetted. Payment on the Dark Web Bitcoin is the currency often used in transactions on the Dark Web. It is a decentralized digital currency that uses anonymous, peer-to-peer transactions. Individuals generally obtain bitcoins by accepting them as payment, exchanging them for traditional currency, or “mining” them. When a bitcoin is used in a financial transaction, the transaction is recorded in a public ledger, called the block chain. The information recorded in the block chain is the bitcoin addresses of the sender and recipient. An address does not uniquely identify any particular bitcoin; rather, the address merely identifies a particular transaction. Users’ addresses are associated with and stored in a wallet. The wallet contains an individual’s private key, which is a secret number that allows that individual to spend bitcoins from the corresponding wallet, similar to a password. The address for a transaction and a cryptographic signature are used to verify transactions. The wallet and private key are not recorded in the public ledger; this is where Bitcoin usage has heightened privacy. Wallets may be hosted on the web, by software for a desktop or mobile device, or on a hardware device. Government Use of the Dark Web Because of the anonymity provided by Tor and other software such as I2P, the Dark Web can be a playground for nefarious actors online. As noted, however, there are a number of areas in which the study and use of the Dark Web may provide benefits. This is true not only for citizens and businesses seeking online privacy, but also for certain government sectors—namely the law enforcement, military, and intelligence communities. Law Enforcement Just as criminals can leverage the anonymity of the Dark Web, so too can law enforcement. It may use this to conduct online surveillance and sting operations and to maintain anonymous tip lines. While individuals may anonymize activities, some have speculated about means by which law enforcement can still track malicious activity. As noted, the FBI has put resources into developing malware that can compromise servers in an attempt to identify certain users of Tor. Since 2002, the FBI has reportedly used a “computer and internet protocol address verifier” (CIPAV) to “identify suspects who are disguising their location using proxy servers or anonymity services, like Tor.” It has been using this program to target “hackers, online sexual predators, extortionists, and others.” In addition to developing technology to infiltrate and deanonymize services such as Tor, law enforcement may rely upon more traditional crime fighting techniques; some have suggested that law enforcement can still rely upon mistakes by criminals or flaws in technology to target nefarious actors. For instance, in 2013 the FBI took down the Silk Road, then the “cyber-underworld’s largest black market.” Reportedly, “missteps” by the site’s operator led to its demise; some speculate that “federal agents found weaknesses in the computer code used to operate the Silk Road website and exploited those weaknesses to hack the servers and force them to reveal their unique identifying addresses. Federal investigators could then locate the servers and ask law enforcement in those locations to seize them.” Less than one month after federal agents disbanded the Silk Road, another site (Silk Road 2.0) came online. After discovering that the site’s proprietor made critical errors, such as using his personal email address to register the servers, federal agents seized the servers and shut down the site. While law enforcement may aim to defeat criminals operating in the Dark Web technologically, some of their strongest tools may be traditional law enforcement crime-fighting means. For example, law enforcement can still request information from entities that collect identifying information on users. In March 2015, federal investigators “sent a subpoena to Reddit demanding that the site turn over a collection of personal data about five users of the r/darknetmarkets forum [a subreddit where users discussed anonymous online sales of drugs, weapons, stolen financial data, and other contraband].” Though, as some have suggested, such law enforcement actions could drive these conversations and activities to anonymous forums such as those on Tor. Military and Intelligence Anonymity in the Dark Web can be used to shield military command and control systems in the field from identification and hacking by adversaries. The military may use the Dark Web to study the environment in which it is operating as well as to discover activities that present an operational risk to troops. For instance, evidence suggests that the Islamic State (IS) and supporting groups seek to use the Dark Web’s anonymity for activities beyond information sharing, recruitment, and propaganda dissemination, using Bitcoin to raise money for their operations. In its battle against IS, the Department of Defense (DOD) can monitor these activities and employ a variety of tactics to foil terrorist plots. Tor software can be used by the military to conduct a clandestine or covert computer network operation such as taking down a website or a denial of service attack, or to intercept and inhibit enemy communications. Another use could be a military deception or psychological operation, where the military uses the Dark Web to plant disinformation about troop movements and targets, for counterintelligence, or to spread information to discredit the insurgents’ narrative. These activities may be conducted either in support of an ongoing military operation or on a stand-alone basis. DOD’s Defense Advanced Research Projects Agency (DARPA) is conducting a research project, called Memex, to develop a new search engine that can uncover patterns and relationships in online data to help law e

Jul 7, 2015