"Cost Overruns Could Threaten Future U.S. Security Funding"

Wednesday, February 12, 2003

Cost Overruns Could Threaten Future Security Funding
TSA Needs To Rein In 'Wasteful' Spending, DOT IG Mead Says
Airport Security Report


Future funding for purchases and installation of security equipment at the
nation's airports could be jeopardized by $3 billion in cost overruns at the
Transportation Security Administration (TSA), warned government and industry
officials during a Feb. 5 hearing of the Senate Aviation Subcommittee. 

A number of TSA contracts have escalated wildly out of control and are now
being scrutinized by federal investigators, said Department of
Transportation (DOT) Inspector General Kenneth M. Mead. Deals with
subcontractors in the previous fiscal year were fraught with overcharging,
he added. 

Mead warned that implementing cost controls and effective contract oversight
needs to be a "high priority item for TSA as it transitions" to the new
Department of Homeland Security. 

Because little infrastructure existed for the TSA when it began operations
in January 2002, the agency had to rely heavily on outside contractors.
Those multi-year contracts totaled about $8.5 billion entering 2003 and
continue to grow, Mead warned. 

For example, NCS Pearson, which processed around 1.6 million applications
for the 62,000 TSA screener positions, saw its initial contract of $104
million grow to an estimated $700 million in 2002, Mead said. The contractor
incurred costs of more than $135 million in July and August combined and
more than $160 million per month in September and October, he said. 

A NCS Pearson subcontractor also is under the watchful eye of DOT after it
was determined that between $6 million and $9 million of its $18 million in
expenses were the result of "wasteful and abusive spending practices," Mead
said. There was a "complete breakdown of management controls" at NCS Pearson
and the unnamed subcontractor failed to exercise reasonable supervision of
equipment and travel expenses, Mead testified. 

The cost overruns led TSA to ask the Defense Contract Audit Agency (DCAA) to
investigate the TSA's major contracts. The DCAA audited private screening
contracts for services performed from Feb. 17 to Nov. 19, 2002, and found
widespread irregularities in contractor reimbursements by questioning $124
million of almost $620 million in reimbursement costs. 

Sen. John McCain (R-Ariz.), who chairs the full Commerce, Science and
Transportation Committee, said it was "disturbing" to read Mead's testimony.
"Nothing hurts you more than wasteful practices," he said. $500 million
missing from airport funding 

Mead's office is now investigating charges from the Airports Council
International-North America (ACI-NA) and the American Association of Airport
Executives (AAAE) that $500 million earmarked by Congress in fiscal year
2002 to reimburse airports for terminal modifications necessary to install
explosive detection systems (EDS) could not be accounted for. 

AAAE President Charles Barclay said that the money earmarked to go directly
to the airport appears instead to have gone to Boeing, the main contractor
for installation of the EDS machines nationwide. 

"It is unclear what portion [of the earmarked funds] has gone to make
terminal modifications. We are struggling to understand how paying for a
significant portion of the Boeing contract with these funds met the
requirement established in the law, since airport costs to accommodate
baggage screening continue to be ignored."

The dispute about the $500 million highlights the growing concern among
airport operators about the TSA and its contractors. Barclay said the TSA is
still not sharing information with them and has returned to simply
regulating airports. 

Barclay questioned whether airports are "a partner or ... an impediment"to
the TSA's plans. While communication between the TSA and airport operators
is better under the new TSA head, Adm. James Loy, the agency "still views
airports with suspicion," he added. 

Sen. Gordon Smith (R-Ore.) seconded this view, saying that rural airports in
his state are "feeling they're being ignored" by the TSA. Funding commitment
for EDS installation uncertain 

Given the cost overruns and lax contractor accounting, Mead said there are
questions about whether Congress will pony up the $3 billion to $5 billion
that will be needed over the next two years to install EDS machines
throughout the nation's airport system. He cautioned that the mini-van-sized
scanning machines cannot be left in airport lobbies where they could impact
passenger flows. 

TSA chief Loy said that his agency will meet the extended Dec. 31, 2003,
deadline to use either EDS or explosives trace detection (ETD) machines at
U.S. commercial airports so that 100 percent of checked baggage can be
screened by these machines by that date. Although not all airports will be
provided with in- line EDS systems, Loy said that about three dozen of the
largest commercial airports will have EDS machines installed into their
existing baggage handling and screening systems this year. 

With all the construction taking place, airport terminals "look like a maze
for laboratory animals," Barclay said. Placing EDS machines into the baggage
conveyor infrastructure, while expensive, is "not for aesthetics, it's for
passenger convenience" and improved security operations, he added. 

"A majority of these machines currently sit in already crowded terminal
areas, where they were dumped in order to meet the [previous] Dec. 31, 2002,
deadline for screening all checked baggage. The longer the existing
'temporary' arrangement persists, the bigger the security threat to waiting
passengers and the more inconvenienced they are as they attempt to check
baggage and board flights," Barclay warned. 

"While it might be easier from a funding perspective to simply ignore these
costs and try to 'get by,' leaving the machinery where it now sits ... would
have serious ramifications on security and passenger flows and processing.
The passengers' difficulties in dealing with today's security mazes remain
extremely important given the current state of the aviation industry and the
need to eliminate the passenger 'hassle factor,' " Barclay said. 

Barclay cited Dallas-Fort Worth International Airport (DFW), Boston Logan
International Airport (BOS) and Seattle-Tacoma International Airport (SEA)
as airports where the costs of construction for in-line EDS screening have
gone well beyond initial expectations. 

Instead of relying on EDS installation experts and a decade worth of
computer modeling, the TSA sent assessment teams to every airport, which
cost the agency and airports precious time and money. It also required
airports to hire outside consultants to perform design and engineering work,
Barclay said. 

"Rather than drawing upon the local knowledge and expertise of airport
officials, who repeatedly offered their assistance, the TSA chose to keep
airports at arm's length as extensive plans for baggage screening
configurations were drafted and re-drafted by government contractors at
great expense and often without airport input," he charged. More money
needed down the road 

DOT's Mead said that additional funding will be needed since completing the
EDS installation at airports will be followed up in the next five years with
systems using more advanced technology for baggage and passenger screening
at security checkpoints. 

"The need to deploy better, more effective equipment to meet current and
future threats will be an ongoing need for years to come. We must continue
to invest in research and development for cheaper, faster, and more
effective equipment for screening passengers, their carry-on and checked
baggage, and air cargo," Mead told the Senate panel. 

Complicating future government appropriations for aviation security is the
relative lack of outside funding to offset the annual $5 billion to $6
billion TSA budget. The passenger security fee of $2.50 per flight on every
commercial ticket will generate $1.7 billion per year in both fiscal year
2003 and 2004, government officials estimated. Additional contributions from
carriers have not been forthcoming. The airlines had previously agreed to
contribute $740 million per year for aviation security measures, but they
only paid $300 million last year, they added. 

TSA's Loy said audits are continuing on the airlines' books in an effort to
gauge their actual security costs. "It's difficult to make sense of what we
received," he added. 

Sen. Ron Wyden (D-Ore.) admonished the airlines for cutting their
contribution. "I think this math is fuzzy ... it's a big gap from what the
airlines are saying they're paying now and the amount they did pay in the
past,"he said. 

The TSA hired nearly 62,000 screeners last year, with a first-year budget
exceeding $5.8 billion, Mead said. Future TSA budgets are expected to be
around $4.8 billion to $5.3 billion. 

Mead estimated that $2 billion per year would be raised from the ticket
security charge and from carriers, leaving a gap of around $3 billion
annually that has to come from the U.S. government's general revenues at a
time when the federal budget is already strained. He warned that tougher
cost controls and contract oversight are needed at TSA. 

"Congress will ultimately have to make a decision about how these costs will
be paid for and the proper mix between airlines, airports, passengers, and
the general fund," Mead said. AIP tapped for additional projects 

The Airport Improvement Program (AIP) was tapped last year at a record-
setting level because no other mechanism was readily available to pay for
aviation security projects. Security-related items escalated in the AIP
budget from $57 million in fiscal year 2001 to more than $560 million in
fiscal year 2002. 

Barclay said that TSA officials have publicly announced their intention to
use AIP funds for security projects in fiscal year 2003. He said AIP funds
are intended for airport and runway improvements and shouldn't be used for
security. He said that airports have delayed or cancelled more than $7
billion in airport expansion projects since Sept. 11, 2001, and draining AIP
funds even more could seriously jeopardize future airport terminal and
runway projects. 

Meanwhile, many security mandates continue to remain unfunded. For example,
Congress appropriated $175 million last year to reimburse airports for the
hiring of additional law enforcement officers (LEOs). But airports submitted
reimbursement requests of $444 million, which meant that airports had to
absorbed the difference, Barclay said. 

For example, law enforcement expenses climbed nearly 70 percent at Jackson
International Airport in Jackson, Miss., forcing the airport to pay almost
$45,000 a month for additional LEOs. To ease the financial burden, the
airport reluctantly increased landing fees for carriers, "a result that
could adversely affect air service for the community," Barclay said. 

One option is to put more fees and taxes on passenger tickets. But Mead said
that around 26 percent of a typical $100 roundtrip passenger ticket already
goes towards taxes and fees. Putting more of a burden upon passengers could
have a dramatic impact on the number of people flying, especially in the
current economic climate, he said. 

Sen. McCain said he did not favor adding more taxes to airline tickets, but
he also didn't think that AIP funds should be drained further. 

Mead proposed a capital revolving fund administered by both public and
private entities that could use a percentage of AIP funds and a percentage
of passenger security fees to fund terminal projects for EDS construction
over the next five years. 

"You will need lots of funding when you go down in the basements of
airports" and start building baggage systems, Mead said. Warnings of mission
creep 

To help with efficiency and financial control, TSA should avoid extending
its responsibilities beyond what the Aviation and Transportation Security
Act (ATSA) requires, Mead said. "However, TSA is now considering extending
federal air marshals' duties to conducting surveillance and patrolling at
airports," he said. 

Mead said he's worried about this expansion of the air marshals' duties,
particularly the TSA's proposed use of them as foot soldiers at airports in
between their assigned flights. 

Loy responded that using air marshals for security roles in between flights
would increase their alertness. But their use inside terminals could lead to
passengers being able to identify them during the boarding process. 

The TSA this year also is expected to increase regulations regarding air
cargo security and the training of pilots to carry firearms, while the
Federal Aviation Administration (FAA) hopes to complete the installation of
hardened cockpit doors inside all commercial aircraft. 

Sen. Kay Bailey Hutchison (R-Texas) recently introduced legislation to
expand and tighten the "impulsive, but correct" rules placed on air cargo
shippers after Sept. 11, 2001. While many stakeholders would like to see
more, if not all, cargo packages screened through x-ray machines, "we simply
do not have the technology to do that right now," Hutchison admitted. 

Wyden said he plans to introduce a bill that would keep oversight powers
with DOT/IG during the TSA's transition to the Department of Homeland
Security, so as to keep an eye on yet another transformation in the agency's
young and tumultuous history. 

"There will be a pent-up demand for [DHS officials] to look good during the
early days of the transition," Loy said. He added that he expects oversight
to be tough on the new cabinet department and that Wyden's proposal was not
necessary. 

Estimated In-line EDS Costs At U.S. Airports (2003-2004)

Airport Estimated Integration Costs

Seattle-Tacoma, Wash. $400 million

San Jose, Calif. $241 million

Newark, NJ $200 million

Las Vegas, Nev. $200 million

Dallas-Fort Worth, Texas $193 million

Boston, Mass. $146 million

Los Angeles, Calif. $135 million

Washington, DC Dulles and Reagan National $125 million

New York LaGuardia $100 million

San Diego, Calif. $90 million

Denver, Colo. $85 million

Kansas City, Mo. $66 million

San Francisco, Calif. $65 million

Phoenix, Ariz. $60 million

Minneapolis-St. Paul, Minn. $40-$50 million

Salt Lake City, Utah $30 million

Nashville, Tenn. $30 million


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