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Testimony: 

Before the Subcommittee on Immigration, Citizenship, Refugees, Border 
Security, and International Law, Committee on the Judiciary, U.S. 
House of Representatives: 

United States Government Accountability Office: 
GAO: 

For Release on Delivery: 
Expected at 2:00 p.m. EDT:
Tuesday, March 23, 2010: 

Federal User Fees: 

Fee Design Characteristics and Trade-Offs Illustrated by USCIS's 
Immigration and Naturalization Fees: 

Statement of Susan J. Irving, Director: 
Federal Budget Analysis:
Strategic Issues: 

GAO-10-560T: 

GAO Highlights: 

Highlights of GAO-10-560T, a testimony before the Subcommittee on 
Immigration, Citizenship, Refugees, Border Security, and International 
Law, Committee on the Judiciary, U.S. House of Representatives. 

Why GAO Did This Study: 

In light of increasing congressional interest in user fee financing, 
GAO developed a framework for examining user fee design 
characteristics that may influence the effectiveness of user fees. 
Specifically, we examined how the four key characteristics of user 
fees—how fees are set, collected, used, and reviewed—may affect the 
economic efficiency, equity, revenue adequacy, and administrative 
burden of cost-based fees. United States Citizenship and Immigration 
Services (USCIS) is responsible for granting or denying the millions 
of immigration and naturalization applications each year and charges 
fees to recover all processing costs. In 2007, USCIS completed a fee 
review to determine the level at which fees should be set to recover 
the full cost of its services and increased application fees by an 
average of 86 percent. 

USCIS is preparing its first fee review since the 2007 fee increase. 
It is critical that USCIS and the Congress have the best possible 
information when overseeing these fees and the operations they fund. 
This testimony focuses on (1) user fee design and implementation 
characteristics and criteria, (2) cost assignment and trade-offs 
identified in USCIS’s 2007 fee review, and (3) additional 
considerations for fee-funded agencies. It is based on past GAO 
reports, which included recommendations to the Secretary of Homeland 
Security (DHS). DHS agreed to consider these recommendations in their 
next fee review. 

What GAO Found: 

There are four key design and implementation characteristics of user 
fees—how fees are set, collected, used, and reviewed. Each design and 
implementation characteristics presents its own set of decisions to 
consider and embodies trade-offs among the four criteria that are 
often used to assess user fees: equity, efficiency, revenue adequacy, 
and administrative burden. 

Equity: Equity means that everyone pays his/her fair share, but there 
is more than one way to think about fair share. Under the beneficiary-
pays principle, the beneficiaries of a service pay for the cost of 
providing the service from which they benefit. Under the ability-to-
pay principle, those who are more capable of bearing the burden of 
fees should pay more for the service than those with less ability to 
pay. 

Efficiency: By requiring identifiable beneficiaries to pay for the 
costs of services, user fees can simultaneously constrain demand and 
reveal the value that beneficiaries place on the service. If those 
benefiting from a service do not bear the full social cost of the 
service, they may seek to have the government provide more of the 
service than is economically efficient. 

Revenue adequacy: Revenue adequacy is the extent to which the fee 
collections cover the intended share of costs. It encompasses the 
extent to which collections may change over time relative to the cost 
of the program and the concept of revenue stability, or the degree to 
which short-term fluctuations in economic activity and other factors 
affect the level of fee collections. 

Administrative burden: This is the cost of administering the fee, 
including the cost of collection and enforcement, as well as the 
compliance burden. 

Setting the fee is perhaps is the most challenging of the fee design 
decisions because determining the cost of the service is often quite 
complex and requires considering a range of issues. One of the biggest 
issues in fee setting is how to define and apply the equity criterion, 
such as determining the overlap between beneficiaries and users, 
whether to employ a beneficiary pays or ability to pay equity 
principle, how to address fee exemptions and waivers, and finally, how 
to assign costs among users. Many of these design choices described in 
USCIS’s 2007 fee review provide transparent analysis and identify 
deliberate trade-offs. However, USCIS did not conduct the analysis 
necessary to fully inform either congressional decision making or 
USCIS’s internal deliberations on key areas such as the cost of 
activities funded by statutorily-set fees that led to unknown cross-
subsidizations. 

When fees are supposed to cover all or a set portion of the costs of 
an agency or activity the criterion of “revenue adequacy” may be 
especially important to consider. For example, a reserve is important 
for fully fee-funded programs because it provides a cushion if program 
costs would not drop proportionally with a drop in fee collections. A 
reserve could also help support preparation for any anticipated surge 
in users, especially if fee collections would come after the 
expenditures to prepare for the surge. 

View [hyperlink, http://www.gao.gov/products/GAO-10-560T] or key 
components. For more information, contact Susan J. Irving at (202) 512-
6806 or irvings@gao.gov. 

[End of section] 

Chairwoman Lofgren, Mr. King, Members of the Subcommittee: 

It is a pleasure to join you today as you think about issues related 
to the U.S. Citizenship and Immigration Services' (USCIS) user fees. 
User fees can be designed to reduce the burden on taxpayers by 
financing the portions of activities that provide benefits to 
identifiable users above and beyond what is normally provided to the 
public. By charging the costs of programs or activities to 
identifiable beneficiaries, user fees can promote economic efficiency 
and equity just as prices for goods and services can do in a free and 
competitive market. However, to achieve these goals, user fees must be 
well designed. 

In light of recent increased congressional interest in user fee 
financing, we at GAO developed a normative framework for examining 
user fee design characteristics that may influence the effectiveness 
of user fees. Specifically, our federal user fee design guide examined 
how the four key design and implementation characteristics of user 
fees--how fees are set, collected, used, and reviewed--may affect the 
economic efficiency, equity, revenue adequacy, and administrative 
burden of cost-based fees.[Footnote 1] Since 2007, we have examined a 
variety of federal user fees--including those at USCIS--in the context 
of this framework. I am pleased to be here today to talk about 
effective user fee design in general and USCIS fees in particular. 

As this subcommittee knows, USCIS is responsible for granting or 
denying the millions of immigration and naturalization applications it 
receives each year and charges fees to recover all processing costs. 
[Footnote 2] In February 2007, USCIS completed a fee review to 
determine the level at which fees should be set to recover the full 
cost of its services. USCIS's most recent fee schedule, which became 
effective July 30, 2007, increased application fees by an average of 
86 percent.[Footnote 3] The fee schedule was widely questioned, in 
part because of the magnitude of the increases and in part because of 
the agency's failure to foresee and manage the surge in applications 
received immediately before the effective date of the fee increases. 

USCIS is preparing its first fee review since the 2007 fee increase. 
The time is ripe for analyzing and understanding the elements and 
trade-offs in designing a fee structure so that both USCIS and the 
Congress have the best possible information available to them when 
overseeing these fees and the critical operations they fund. Further, 
because USCIS's operations are mostly funded by user fees, it is 
critical that fee collections and operating costs remain aligned to 
ensure collections are sufficient such that applicants may enjoy 
continued access to the timely, high-quality services they deserve. 

As agreed with this Subcommittee, my testimony today focuses on: 

1. user fee design and implementation characteristics and criteria, 

2. cost assignment and trade-offs identified in USCIS's 2007 fee 
review, and: 

3. additional considerations for fee-funded agencies. 

Before doing that, however, I would like to step back and talk a bit 
about some important considerations for the practical application of 
any normative framework. 

Any user fee design embodies trade-offs among the four dimensions of 
equity, efficiency, revenue adequacy, and administrative burden. While 
there are purely analytic aspects to each of these criteria, the trade-
offs depend on policy and value decisions. No single design will 
satisfy everyone on all dimensions--every fee design will have pluses 
and minuses--and the weight that different policymakers place on 
different criteria will vary depending on how they value different 
attributes. As a general rule, the design of a fee should be viewed in 
its entirety. Focusing only on the pros and cons of any single design 
element can obscure how the pieces fit together and could make it 
difficult to achieve consensus on a fee's design. Instead, 
policymakers will ultimately need to balance the relative importance 
they place on each of these criteria and focus on the overall fee 
design. Moreover, there will undoubtedly be cases in which policy 
considerations outweigh normative design principles. 

My testimony today is based on GAO reports and testimonies issued from 
May 2008 through January 2009 on the principles of effective user fee 
design in general and on USCIS's user fees and fee review 
specifically. In developing the design guide, we reviewed economic and 
policy literature on federal and nonfederal user fees, including our 
prior work on user fees. To review USCIS's fee structure, we reviewed 
legislation and agency documentation, such as the proposed and final 
Federal Register notices regarding the 2007 fee schedule and USCIS's 
February 2007 fee review analysis. We conducted the work for both of 
those reports according to generally accepted government auditing 
standards. Those standards require that we plan and perform the audit 
to obtain sufficient, appropriate evidence to provide a reasonable 
basis for our findings and conclusions based on our audit objectives. 
We believe that the evidence obtained provides a reasonable basis for 
our findings and conclusions based on our audit objectives. 

Fee Design and Implementation Characteristics and Criteria: 

Each of the four design and implementation characteristics presents 
its own set of decisions to consider. In this statement I touch 
briefly on the main considerations at each stage; a summary of key 
questions to consider is included in appendix I. 

Setting user fees: For cost-based fees, the extent to which a program 
provides benefits to the general public versus to identifiable users, 
and the cost of providing those benefits should, in the abstract, 
guide how much of total program costs are paid for by user fees and 
the amount each user pays. 

Collecting user fees: The primary challenge of determining when and 
how to collect a fee is striking a balance between ensuring compliance 
and minimizing administrative costs. In some cases, the collection 
systems of another agency or a nonfederal entity, such as a private 
sector enterprise, may be leveraged, as when the airlines collect 
passenger inspection fees. 

Using user fees: Determining how fees will be used is a balancing act 
between Congressional oversight and agency flexibility. Congress gives 
agencies various degrees of access to collected fees. For example, 
fees may be dedicated to the related program or may instead be 
deposited to the general fund of the U.S. Treasury and not used 
specifically for the related program or agency. In addition, fee 
collections may be subject to appropriation or obligation limits, 
which increase opportunity for oversight but may limit agencies' 
ability to quickly respond to changing conditions. 

Reviewing user fees: Agencies must substantively review their fees on 
a regular basis to ensure that they, the Congress, and stakeholders 
have complete information. Reviews provide information on whether the 
fee rates and authorized activities are aligned with actual program 
costs and activities, may provide opportunities for stakeholder input, 
and can help promote understanding and acceptance of the fee. 

Criteria for Assessing Design: 

Our May 2008 user Fee Design Guide discusses four criteria that are 
often used to assess user fees and taxes: (1) equity, (2) efficiency, 
(3) revenue adequacy and (4) administrative burden on the agency and 
payers of the fees. As I noted, these criteria interact and are often 
in conflict with each other; as such, there are trade-offs to consider 
among the criteria when designing a fee. Further, the design 
characteristics are interrelated: how you set the fees can influence 
the activities for which they are used, and how often they are 
reviewed can influence the level at which the fee is set. To 
understand the implications of any fee design, it is important to 
understand the options and trade-offs between these criteria. 

Equity: Equity means that everyone pays his/her fair share, but there 
is more than one way to think about fair share. Under the beneficiary- 
pays principle, the beneficiaries of a service pay for the cost of 
providing the service from which they benefit, but even this can be 
complicated when beneficiaries and users differ. Under the ability-to- 
pay principle, those who are more capable of bearing the burden of 
fees should pay more for the service than those with less ability-to-
pay. 

Efficiency: By requiring identifiable beneficiaries to pay for the 
costs of services, user fees can simultaneously constrain demand and 
reveal the value that beneficiaries place on the service. If those 
benefiting from a service do not bear the full social cost of the 
service, they may seek to have the government provide more of the 
service than is economically efficient. 

Revenue adequacy: Revenue adequacy is the extent to which the fee 
collections cover the intended share of costs. It encompasses the 
degree to which collections may change over time relative to the cost 
of the program. Revenue adequacy also incorporates the concept of 
revenue stability, which generally refers to the degree to which short-
term fluctuations in economic activity and other factors affect the 
level of fee collections. 

Administrative burden: This is the cost of administering the fee, 
including the cost of collection and enforcement, as well as the 
compliance burden (the administrative costs imposed on the payers of 
the fee). 

USCIS's 2007 Fee Design Reflects Trade-Offs among Some Key Fee Design 
Principles and Provides a Foundation for Further Improvements in the 
2010 Fee Design: 

Today I will spend most of my time discussing the issues involved in 
setting a user fee. It perhaps is the most challenging of the fee 
design decisions because determining the cost of the service is often 
quite complex and requires considering a range of issues. One of the 
biggest issues in fee setting is how to define and apply the equity 
criterion, such as determining the overlap between beneficiaries and 
users, whether to employ a beneficiary-pays or ability-to-pay equity 
principle, how to address fee exemptions and waivers, and finally, how 
to assign costs among users. Many of these design choices described in 
USCIS's 2007 fee review provide transparent analysis and identify 
deliberate trade-offs. However, USCIS did not conduct the analysis 
necessary to fully inform either congressional decision making or 
USCIS's internal deliberations on key areas such as the cost of 
activities funded by statutorily set fees. As a result, the amount 
being cross-subsidized was unknown. 

According to the beneficiary-pays principle, the extent to which a 
program is funded by user fees should generally be guided by who 
primarily benefits from the program. Under this principle, if a 
program primarily benefits the general public (e.g., national 
defense), it should be supported by general revenue, not user fees; if 
a program primarily benefits identifiable users, such as customers of 
the U.S. Postal Service, it should be funded by fees; and if a program 
benefits both the general public and users, it should be funded in 
part by fees and in part by general revenues[Footnote 4] (see figure 
1). 

Figure 1: Simplified, Hypothetical Example of Assigning Costs to 
Beneficiaries: 

[Refer to PDF for image: pie-chart and associated data] 

Types of beneficiaries of a federal program: 

Public beneficiaries (general public): 60% (Services paid with general 
revenue); 
Identified beneficiaries (users): 40% (Services paid with user fees): 
User A – 8% (payer); 
User B – 12% (payer); 
User C – 20% (payer); 
The amount of the fee reflects the cost of providing the service, 
which differs among the three users. In this example, no users are 
exempt from the fee, so all “users” of the service are also “payers” 
of the fee. 

Source: GAO. 

Note: Though not shown in this example, fees may include exemptions, 
so that some "users" of the program are not "payers" of the fee. The 
cost of providing the service to exempt users may be paid for with 
general revenues or by the fees of other users. 

[End of figure] 

Although the beneficiary-pays principle is a useful guideline for 
assigning costs, determining a program's beneficiaries and the extent 
to which a program benefits users, the general public, or both is not 
usually clear cut. For example, in prior work we found that National 
Park Service staff reported that they did not want to raise federal 
grazing fees assessed on ranchers, even though these fees were lower 
than fees charged by other government agencies and private landowners, 
in part because grazing not only benefits ranchers but also benefits 
parks--for example, by controlling vegetation.[Footnote 5] In another 
example, United States Department of Agriculture (USDA) food safety 
inspections benefit the meat and poultry industries as well as the 
general public: inspections improve consumer confidence in the safety 
of those food products and the companies can advertise their products 
as USDA-inspected, which may enhance the perceived quality. The 
inspections also benefit the general public by preventing the spread 
of communicable diseases carried by meat and poultry products, but it 
is difficult to quantify that public health benefit and consequently 
the extent to which the program should be covered by user fees versus 
general revenues. Secondary beneficiaries of a program generally are 
not considered in this examination. For example, consumers of new 
prescription drugs are secondary beneficiaries of prescription drug 
reviews, which provide a primary benefit to the drug sponsors. 
[Footnote 6] Similarly, fees should be charged to the direct user, 
even if that payer then passes the cost of the fee on to others. 

Strictly following the beneficiary-pays principle is not always 
desirable or practical. The government may wish to charge some users a 
lower fee or no fee to encourage certain activities. For example, 
potential profits from the development of "orphan" drugs--those that 
treat rare diseases--are limited by the small size of their market, 
and therefore drug companies may be reluctant to invest in them; such 
drugs are exempt from the Food and Drug Administration (FDA) 
prescription drug application fee to encourage their development. 

Beneficiary-Pays Versus Ability-to-Pay: 

While the beneficiary-pays principle may promote one aspect of equity, 
it may run contrary to another--the ability-to-pay principle. Fees 
that are proportionally more burdensome for low-income than high-
income individuals are said to be regressive. To address this concern, 
the design of a fee may consider the ability of a user to pay, by for 
example, exempting low-income users or scaling fees by some measure of 
ability-to-pay. When those who are more capable of bearing the burden 
of fees pay more for the service than those with less ability-to-pay, 
the ability-to-pay definition of equity is employed, creating conflict 
with the beneficiary-pays definition of equity and causing cross- 
subsidization among applicants. 

USCIS demonstrated the ability-to-pay principle of equity by limiting 
the 2007 increase in the fees charged for some low-volume 
applications, such as the Form I-360, Petition for Amerasian Widow(er) 
or Special Immigrant. This avoided what, in some cases, would have 
been a 250 percent fee increase or greater, levied on a population 
unlikely to be able to pay. Instead USCIS only increased the fees by 
the total average increase across all applications. The unrecovered 
processing costs for these form types were distributed across other 
form types and thus distributed among other fee-paying applicants. 

USCIS demonstrated the beneficiary-pays principle of equity by not 
limiting a second set of fees, for which the population would likely 
be able to pay the large fee increase. For example, by not adjusting 
fees for the Form I-829, Petition by Entrepreneur to Remove 
Conditions--a form for which the applicants are entrepreneurs with 
$500,000 to invest--USCIS closely aligned these fees with the cost of 
providing the services to these users. 

Both ability-to-pay and beneficiary-pays are valid applications of the 
equity principle. Choosing between them depends on the policy goal to 
be achieved. 

Exemptions and Waivers: 

Fees can also include provisions for exemptions and waivers to promote 
certain policy goals and these provisions affect how program costs are 
allocated among users. The cost of providing services to fee-exempted 
or fee-waived users is commonly funded by general revenues or by the 
fees of other users. Fee exemptions and waivers may also increase an 
agency's administrative burden--the cost of administering the fee-- 
since the agency must carefully track when fees are due and from whom 
rather than simply charging every applicant. Fee-paying applicants 
also bear an administrative burden in terms of compliance costs 
associated with waiver and exemption policies. 

USCIS's user fee design allows fee exemptions for certain form types 
and fee waivers for some applicants, and USCIS funds these activities 
through a surcharge added to fee-paying applicants. By law, USCIS's 
immigration and naturalization fees "may be set at a level that will 
ensure recovery of the full costs of providing all [adjudication and 
immigration] such services, including the costs of similar services 
provided without charge to asylum applicants or other immigrants. Such 
fees may also be set at a level that will recover any additional costs 
associated with the administration of the fees collected."[Footnote 7] 
As a result, certain form types are fee-exempt, such as for refugees 
and applicants seeking asylum, and fee waivers are granted on a case- 
by-case basis for applicants who demonstrate an inability to pay by 
meeting certain need-based criteria.[Footnote 8] The cost of fee 
exemptions and waivers is allocated to the fee-based applications as a 
flat-rate surcharge. 

Reliably accounting for the costs and benefits associated with such 
provisions is important in order to ensure that these provisions are 
achieving the intended results. In fully fee-funded programs, if some 
users are exempt from paying fees, total fee collections cannot cover 
total program costs unless other users pay a higher fee to cover the 
costs of the exempted users. For example, commercial and private 
vessels are both subject to Agricultural Quarantine Inspections (AQI), 
but private vessels are exempt from the AQI fees. In prior work we 
found that the costs of these private vessel inspections are included 
in the AQI fee charged to commercial vessels.[Footnote 9] Thus 
commercial vessels are paying for the cost of inspecting private 
vessels. An alternative to cross-subsidization would be to pay for the 
costs of providing services to exempt entities through general 
revenues. USCIS received an appropriation for asylum, refugee, and 
humanitarian parole activities, and military naturalizations beginning 
in fiscal year 2010[Footnote 10]. In this way the policy goal is 
attained and the general public, rather than other users, make up the 
cost of exempt users or discounted fees. 

Finally, fee exemptions and caps can increase an agency's 
administrative costs because it must carefully track when fees are due 
and from whom rather than simply charging everyone. The U.S. Customs 
and Border Protection (CBP) generally assesses a $437 customs 
inspection fee on commercial vessel operators when they arrive at 
port, but the fee is capped at $5,955 per calendar year. This is 
approximately 13.6 payments. This means that CBP has to calculate the 
point at which the vessel has reached the cap and is no longer subject 
to the fee. We recently reported that the cap increases CBP's 
administrative costs and the potential for errors.[Footnote 11] This 
issue was particularly problematic in 2007 because a fee increase took 
effect on April 1, 2007, so vessels arriving before and after that 
date paid two different rates. Since the fee cap applies to payments 
received within a calendar year, it was even more difficult for CBP to 
calculate the total amount paid and determine if a vessel had reached 
the cap. 

Assigning Costs among Users: 

Assigning costs among fee-payers requires determining (1) total 
program costs and (2) how to assign these costs among different 
payers. The beneficiary-pays principle can be useful in guiding 
decisions about cost allocation among users. That is, basing fees on 
the cost of providing the program or service to various groups of 
users enhances equity as each user pays for the cost of services 
actually used. 

When the cost of providing a service varies for different types of 
users, the fee may vary (i.e., a user-specific fee), or be set at an 
average rate (i.e., a systemwide fee). All other things being equal, 
user-specific fees promote equity and economic efficiency because the 
amount of the fee is more closely aligned with the cost of the 
service.[Footnote 12] In contrast, systemwide fees may be higher or 
lower than the actual cost of providing a service to certain types of 
users and may result in cross-subsidies across users. For example, we 
previously reported that the Federal Aviation Administration's (FAA) 
funding structure had raised concerns about equity and efficiency 
because users paid more or less than the costs of the air traffic 
control services they receive and therefore may lack incentives to use 
the national airspace system as efficiently as possible.[Footnote 13] 
However, because user-specific fees require agencies to track the 
costs of providing service to different users, these fees are often 
more costly to administer than systemwide fees. In managing the trade-
offs between the benefits and drawbacks of user-specific versus 
systemwide fees, several factors may be important to consider, such as 
the purpose of the program, the amount of the fee and the amount of 
cost variation among users when assigning costs. 

Program purpose. In general, national systems are often best supported 
by a systemwide fee whereas a user-specific fee may be the better 
choice to support individual entities or locations or when maximizing 
economic efficiency outweighs the desire for a national system. 

Amount of the fee. If the fee is small relative to other costs that a 
user faces, it may be less important to have a user-specific fee with 
different rates. 

Cost variation among users. Lastly, if there are numerous different 
groups of users and a small cost variation among them, the efficiency 
gains of a user-specific fee may be overwhelmed by the added 
administrative costs. Conversely, if a program has a relatively small 
number of user groups and the cost of providing the service to those 
groups differs significantly, then user-specific fees might be both 
beneficial and feasible. 

Whether fee rates will be set using average cost or marginal cost is 
also an important consideration when setting fees. Setting a fee at a 
rate equal to the marginal cost of providing the service or product to 
the specific user maximizes economic efficiency, but is often not easy 
to do. In part because it is often difficult to measure marginal cost, 
fee rates are sometimes set based on average cost.[Footnote 14] For 
example, while international arriving airline passengers all pay a fee 
for AQIs at the airport, it is difficult to know at the time the fee 
is assessed which passenger will require which level of inspection. 
The AQI fees are intended to cover total program costs; to set these 
fees, the Animal and Plant Health Inspection Service (APHIS) projects 
program costs for different inspection types (e.g., air passenger, 
commercial aircraft, and commercial vessels) and divides each by the 
total projected number of each type of payer. That is, each airline 
pays the same fee per arrival to cover the costs related to inspecting 
aircraft. 

Even when marginal costs are measurable, setting the fee equal to 
marginal cost could be problematic. When marginal costs are measurable 
but are low relative to the fixed costs of the program, setting the 
fee at marginal cost will lead to collections less than total costs. 
In such a situation either a program may be funded in part through 
general revenues or--if an agency, program or activity is completely 
fee-funded--users would have to be charged more than marginal costs. 
[Footnote 15] A third approach might be to create a two-part fee 
consisting of (1) a flat fee to cover fixed costs and (2) a usage-
based fee to cover marginal costs. For example, the marginal cost of 
providing electricity (i.e., operating power plants and maintaining 
transmission lines) is small compared with the costs of building power 
plants and transmission lines; thus, electricity consumers could be 
charged a flat monthly charge to cover fixed costs plus a charge that 
would vary based on their consumption. 

In its last fee review USCIS determined its fee rates by assigning 
different costs to various fee-paying users in different ways. First, 
USCIS identified the costs for adjudicating each form type, referred 
to as the "make determination" costs. As I noted before, user-specific 
fees promote equity and economic efficiency because the amount of the 
fee is closely aligned with the cost of the service.[Footnote 16] 
USCIS's make-determination costs, which comprise 49 percent of its 
total costs, vary by form type and are assigned accordingly; as such, 
this portion of the costs are aligned with the associated fees. Next, 
USCIS allocated $732 million in overhead costs, including payroll, 
accounting, and legal services, in proportion to full-time 
equivalents. Such systemwide fees minimize administrative burden 
because they do not require identifying and charging specific costs to 
each user.[Footnote 17] Lastly, all fee-paying applicants pay a flat-
rate $72 surcharge to recover the costs associated with asylum and 
refugee services and fee-waived and fee-exempt applications. However, 
in fiscal year 2010, USCIS received an appropriation for asylum, 
refugee, and humanitarian parole activities, and military 
naturalizations.[Footnote 18] Both methods achieve the policy goal but 
these decisions illustrate two approaches to covering the cost of 
exempt users--distribute the costs among other users or have the cost 
made up by the general public. 

Unknown Costs Create Unknown Cross-Subsidizations: 

As this Subcommittee knows, some of USCIS' fees are set in statute. In 
our work, we reported that at the time of the 2007 fee review USCIS 
did not know the relationship between those statutorily set fees and 
the costs of the activities associated with them. Because USCIS cannot 
change these fee rates through the regulatory process, USCIS officials 
told us that they had not identified the costs associated with 
statutorily set fees and that doing so was not a priority for them. 
This means that decision makers lack this key information; in 
addition, it raises the possibility that processing costs for these 
services are being partially borne by other fee-paying applicants. 
Absent information on the cost of these services, however, the amount 
of cross-subsidization is unknown. 

The most notable of the statutorily set fees is the $1,000 fee for the 
premium-processing service, which was USCIS's fifth largest single 
generator of funds in fiscal year 2007.[Footnote 19] In December 2000, 
the Congress authorized the collection of a premium processing fee for 
employment-based applications, to be paid in addition to the regular 
application fees.[Footnote 20] The Congress set the amount of the 
premium processing fee at $1,000; pursuant to this authority and as 
established in regulations, USCIS guarantees that certain employment 
based applications will be processed within 15 calendar days of 
receipt.[Footnote 21] 

Although the premium processing fees are not--unlike most of USCIS's 
application fees--cost-based, information on the cost of the services 
for which the fee is charged should be determined. We have previously 
reported that reliable information on the costs of federal programs 
and activities is crucial for agencies and the Congress to ensure 
effective management of government operations, which includes setting 
user fees.[Footnote 22] 

The cross-subsidization issue for premium processing fees is 
complicated by the statutory provision that premium processing fees be 
available for two activities: (1) certain premium processing services 
for business customers and (2) infrastructure improvements associated 
with adjudications and customer-service.[Footnote 23] In its 2007 fee 
review, USCIS stated that the agency's intent was to use all premium- 
processing collections to fund planned infrastructure improvements, 
which are a significant component of USCIS's Transformation Program. 
[Footnote 24] As a result, the cost of premium processing is borne by 
other fee payers (see figure 2 below). Funding the Transformation 
Program with premium-processing activities is consistent with report 
language accompanying the fiscal years 2008-2010 Department of 
Homeland Security appropriations bills, which direct USCIS[Footnote 
25] to allocate all premium-processing fee collections to information 
technology and business-system transformation. It is worth noting that 
if the agency (a) is directed to use all its premium processing fee 
revenue for infrastructure improvements, (b) provides premium 
processing services, and (c) is an entirely fee funded agency, it can 
only cover the costs of premium processing activities by imposing them 
on other fee payers. 

While the Congress continues to support this use of premium processing 
collections, we note that it does raise several issues. First, as 
noted above and shown in figure 2, the cost of premium processing is 
being borne by other fee payers. Second, premium processing applicants 
are bearing an uneven amount of the costs of the Transformation 
Program--an initiative that will ultimately benefit all types of 
future applicants. Spreading the transformation costs among all 
application fees would distribute the burden across all fee-paying 
applicants, but it could be seen as creating inequities across time 
because today's applicants would be paying for improvements likely to 
benefit future applicants. 

Figure 2: The Flow of Premium Processing Collections and Usage: 

[Refer to PDF for image: illustration] 

Non-premium processing: 
Fees go toward: 
- Premium processing activities; 
- Non-premium processing activities. 

Premium processing: 
Fees go toward:
- Infrastructure improvements. 

Source: GAO analysis of USCIS data. 

[End of figure] 

Additional Considerations for Fee-Funded Agencies: 

The criterion of "revenue adequacy" may be especially important when 
fees are supposed to cover all or a set portion of the costs of an 
agency, program or activity. As noted, revenue adequacy is the extent 
to which the fee collections cover the intended share of costs. Let me 
touch on two aspects of revenue adequacy: (1) the extent to which 
collections may change over time relative to the cost of the program 
and (2) the degree to which short-term fluctuations in economic 
activity and other factors affect the level of fee collections. 

Program costs change over time. This means that fees intended to cover 
all or a set share of the costs of an agency, program, or activity 
must be not only set but also adjusted---even between formal reviews--
to cover those costs. This in turn requires agencies to project and 
consider future program costs--even if they conduct periodic fee 
reviews. For example, USDA's Food Safety and Inspection Service did 
this in 2006 when it set fee rates through fiscal year 2008 for 
overtime inspection services for meat, poultry, and egg products. The 
fee rates for each year included adjustments for inflation and 
employee pay raises, so that future fee collections were projected to 
grow with program costs.[Footnote 26] 

If an agency or program is fully fee-funded, a reserve is important 
because it provides a cushion if program costs would not drop 
proportionally with a drop in fee collections. A reserve could also 
help support preparation for any anticipated surge in users, 
especially if fee collections would come after the expenditures to 
prepare for the surge. For example, the AQI fee statute gives APHIS 
permanent authority to use the collected fees. APHIS maintains a 
reserve in case of emergency. For example, following the September 11, 
2001 attacks, there was a significant drop in international passenger 
travel, which led to a significant drop in certain AQI user fee 
collections. In order for APHIS to continue the AQI programs through 
that uncertain time, APHIS relied heavily on its 25-percent reserve. 
Without a sufficient reserve balance in place, experienced full-time 
personnel would have been furloughed and services reduced. We have 
previously reported, however, that while a reserve is necessary, it is 
also possible that the provision of permanent spending authority may 
mean agencies have less incentive to limit total collections to total 
costs. 

We found that in its 2007 fee review, USCIS did not conduct the 
analysis needed to establish a target level of carryover balance, or 
"reserve," that would allow for the continuity of operations funded by 
the Immigration Examinations Fee Account (IFEA) in the event of a 
decrease in application volume. As a result we determined that USCIS 
did not fully consider issues related to revenue adequacy. Without 
analyzing its contractual and operating costs to determine an 
appropriate target carryover balance, USCIS is at risk of reducing or 
disrupting services if collections decrease. Further, absent analysis, 
it is unclear for how long and at what service level USCIS could 
operate with its current carryover balance. USCIS officials did say, 
however, that an appropriate level of carryover should reflect: (1) 
USCIS's first-quarter obligations, which includes the full contract 
value for the whole fiscal year;[Footnote 27] (2) deferred revenue 
equal to the amount of its outstanding workload,[Footnote 28] and (3) 
the operating "tempo" of the organization. 

While regular fee reviews should be done for all fees, they may be 
especially important where fees represent a significant source of 
support for an agency or program.[Footnote 29] Absent timely review, 
the agency lacks up-to-date knowledge about the cost of fee-funded 
activities and the relationship of those costs to the fees charged. 
Where either the level of the fee or the activities covered by it are 
set in statute, lack of timely analysis means the agency cannot 
provide the Congress with the information it needs to make informed 
decisions about any changes.[Footnote 30] Most of USCIS's user fees 
are cost-based fees set through the regulatory process and deposited 
into the Immigration Examinations Fee Account. Prior to 2007, USCIS's 
last comprehensive fee review was in Fiscal Year 1997. As I noted, the 
lack of timely, comprehensive fee reviews in the years between 1997 
and 2007 contributed to the size of the fee increase. 

Abrupt imposition of new or substantially increased user fees could 
have unintended consequences on workload. For example, prior to the 
2007 fee increases large numbers of applicants filed for benefits 
before the increase took effect, which contributed to a surge that 
exacerbated USCIS's backlog of applications. In cases like this, 
transitional measures such as grandfather clauses or phasing in 
increases might help address concerns about the adverse effects of the 
abrupt imposition of a fee, while implementing the beneficiary-pays 
principle gradually. However, as is the case with exemptions, the 
benefits of transitional measures must be balanced with the likelihood 
of reduced efficiency and equity gains and increased administrative 
costs. Furthermore, delaying a fee increase may also have adverse 
effects on an agency's operations. 

Concluding Observations: 

The transparency and quality of USCIS's user fee design depends on 
complete, reliable information on which to base informed trade-offs 
that support the goals of USCIS. Analyzing and understanding the costs 
of providing these services are important so that both USCIS and the 
Congress have the best possible information available to them when 
designing, reviewing, and overseeing these fees. To this end, USCIS 
took an important step forward with its 2007 fee review. In the next 
review it should build on this by including the full costs of its 
services regardless of whether the fee is set through the regulatory 
or statutory process. Fee reviews are critical for any agency, but 
especially for agencies--like USCIS--that are mostly or solely fee 
funded. 

We at GAO do not take a position on whether an agency should be 
partially or fully fee-funded, or whether the costs of exemptions and 
waivers should be distributed across other fee payers or funded 
through general revenues. These are policy questions appropriately 
decided by policymakers. With the design guide we have tried to 
provide a kind of "road map" for policymakers that lays out the 
questions and issues to consider--the decisions that must be made--in 
the design of any fee. In our analyses of various fees we have sought 
to illustrate the application of this design guide and assist the 
Congress in its review of existing fees and consideration of possible 
new fees. 

Any user fee design embodies trade-offs among equity, efficiency, 
revenue adequacy, and administrative burden. Focusing only on the pros 
and cons of any single design element could make it difficult to 
achieve consensus on a fee's design. Instead, policymakers will 
ultimately need to balance the relative importance they place on each 
of these criteria and focus on the overall fee design. 

Chairwoman, this completes my prepared statement. I would be happy to 
respond to any questions you or other Members of the Subcommittee may 
have at this time. 

Contacts and Acknowledgments: 

For further information on this testimony, please contact Susan J. 
Irving at (202) 512-6806 or by e-mail at irvings@gao.gov. Contact 
points for our Offices of Congressional Relations and Public Affairs 
may be found on the last page of this statement. 

In addition to the contact named above, Jacqueline M. Nowicki, 
Assistant Director; Chelsa Gurkin; Lauren Gilbertson; Barbara 
Lancaster; and Michael Dino, Assistant Director made key contributions 
to this statement. 

[End of section] 

Appendix I: Key User Fee Design Questions: 

We note that some of these questions may overlap. 

Section I: Setting User Fees: 

1. To what extent does the program benefit the general public and 
identifiable users? 

a. Does use of the program by certain users, or for certain types of 
uses, provide a public benefit, for example, by advancing a public 
policy goal? 

b. What is the users' ability to pay? 

c. To the extent that the fees are used to replace funding by general 
revenues, what is the impact on the distribution of the burden of 
financing the program? 

d. What would be the impact of a fee on users' competitiveness with 
others that would not be subject to the fee? 

e. Is a similar service provided by the private sector? If so: 

- Will private producers be subject to unfair competition if the fee 
is not set to recover the full costs of the service? 

- Should their charges be a reference point in setting fees? 

f. For programs that have not been paid for by fees in the past, has 
the value of the program been capitalized into private assets? If so: 

- Could transitional measures be used to address these concerns? 

2. How will the fee be linked to the cost? 

a. Does the agency have timely and reliable cost data to link the fee 
to program costs? 

b. Will the fee recover full or partial costs? 

c. Will the fee structure include exemptions or reduced fees? 

d. Will the fee be set as a percentage rate or as a fixed dollar 
amount? 

e. If the fee varies, will fee minimum amount, maximum amount, or both 
be set? 

f. Will the fee structure be user-specific or systemwide? 

- Is the amount of the fee small or large relative to other costs that 
the user faces? 

- Are there numerous different groups of users? 

- Is the cost variation among the different groups of users large or 
small? 

g. Does the program have high fixed costs? 

- Is a two-part fee structure, with a flat rate plus a fee based on 
usage, appropriate? 

3. How will the fee be structured to cover the intended share of 
program costs over time? 

a. Are fee collections projected to change over time in relation to 
the cost of the program due, for example, to inflation? 

b. To what degree will short-term fluctuations in economic activity 
and other factors affect the level of fee collections? 

c. Will the fee design include a maintenance-of-effort requirement? 

Section II: Collecting User Fees: 

1. What mechanisms are available to ensure payment and compliance with 
requirements while minimizing administrative costs? 

a. To what extent do payment and compliance mechanisms impose 
administrative costs on the agency, the payers, or both? 

b. Do rewards and penalties for compliance correspond to performance? 

2. Is there an agency or other entity that already collects or audits 
fees from the users? 

a. How will compatible policies and procedures and regular 
communication be established? 

b. How does coordination affect the administrative costs of fee 
collection for the agency and payers? 

c. Will collection by another entity affect compliance with fees? 

Section III: Using User Fees: 

1. What degree of access will the agency have to collected fees? 

a. Will the fees directly support the related program or agency or be 
deposited to the general fund of the U.S. Treasury? 

b. Will agency access to fees be subject to congressional 
appropriation? 

c. Will the budget execution of fee collections be through 
reimbursement, or will the agency receive fee collections directly? 

d. Will the amount of spending be tied to the amount of collections? 

e. Will the fee be categorized as mandatory or discretionary? 

2. How broadly or narrowly will the activities for which fee 
collections can be used be defined? 

Section IV: Reviewing User Fees: 

1. Will the fee be updated through legislation or by agency regulation? 

2. How frequently will fees be reviewed and updated? 

a. Will legislation include a sunset provision to trigger fee updates? 

b. Will legislation direct the agency to submit regular fee reviews to 
the Congress, different from the biennial fee review required by the 
Chief Financial Officers Act of 1990? 

3. What mechanisms will be used to gather stakeholder input? 

a. Will the agency establish an advisory committee? 

b. Will proposed changes to the fees be published for comment in the 
Federal Register? 

c. What safeguards will be used to prevent the agency from becoming 
beholden to fee payers/stakeholders? 

[End of section] 

Appendix II: GAO Homeland Security User Fee Related Products: 

Federal User Fees: A Design Guide. [hyperlink, 
http://www.gao.gov/products/GAO-08-386SP]. Washington, D.C.: May 29, 
2008. 

Federal User Fees: Additional Analyses and Timely Reviews Could 
Improve Immigration and Naturalization User Fee Design and USCIS 
Operations. [hyperlink, http://www.gao.gov/products/GAO-09-180]. 
Washington, D.C.: January 23, 2009. 

Immigration Application Fees: Costing Methodology Improvements Would 
Provide More Reliable Basis for Setting Fees. [hyperlink, 
http://www.gao.gov/products/GAO-09-70]. Washington, D.C.: January 23, 
2009. 

Federal User Fees: Improvements Could Be Made to Performance Standards 
and Penalties in USCIS's Service Center Contracts. [hyperlink, 
http://www.gao.gov/products/GAO-08-1170R]. Washington, D.C.: September 
25, 2008. 

Federal User Fees: Substantive Reviews Needed to Align Port-Related 
Fees and the Programs They Support. [hyperlink, 
http://www.gao.gov/products/GAO-08-321]. Washington, D.C.: February 
22, 2008. 

Federal User Fees: Key Aspects of International Air Passengers Should 
Be Addressed Regardless of Whether Fees Are Consolidated. [hyperlink, 
http://www.gao.gov/products/GAO-07-1131]. Washington, D.C.: September 
24, 2007. 

[End of section] 

Footnotes: 

[1] See GAO, Federal User Fees: A Design Guide, [hyperlink, 
http://www.gao.gov/products/GAO-08-386SP] (Washington, D.C.: May 29, 
2008). 

[2] For the purposes of this testimony, the term "application" refers 
to both applications and petitions. 

[3] USCIS's 2007 user fee review was issued prior to the issuance of 
GAO-08-386SP, however the comparison of USCIS's review to the user fee 
design principles is important to identifying opportunities for future 
improvements. 

[4] Programs that primarily benefit the general public are generally 
nonexcludable, that is, there is no practical way of preventing 
someone from benefiting from the program, and nonrival, that is, once 
the program is in operation, there is no additional cost of providing 
it to more people. 

[5] See GAO, Livestock Grazing: Federal Expenditures and Receipts 
Vary, Depending on the Agency and the Purpose of the Fee Charged, 
[hyperlink, http://www.gao.gov/products/GAO-05-869] (Washington, D.C.: 
Sept. 30, 2005), and National Park Service: Opportunities Exist to 
Clarify and Strengthen Special Uses Permit Guidance on Setting Grazing 
Fees and Cost-Recovery, [hyperlink, 
http://www.gao.gov/products/GAO-06-355R] (Washington, D.C.: Feb. 9, 
2006). 

[6] A drug sponsor is the person or entity who assumes responsibility 
for the marketing of a new drug, including responsibility for 
complying with applicable provisions of laws, such as the Federal 
Food, Drug, and Cosmetic Act and related regulations. The sponsor is 
usually an individual, partnership, corporation, government agency, 
manufacturer, or scientific institution. 

[7] 8 U.S.C. § 1356 (m). 

[8] In determining inability-to-pay, USCIS considers the totality of 
all factors, circumstances, and evidence the applicant supplies 
including age, disability, household income, and qualification within 
the past 180 days for a federal means tested benefit, as well as other 
factors associated with each specific case. More information about fee 
waiver guidance can be found at [hyperlink, 
http://www.uscis.gov/feewaiver]. 

[9] [hyperlink, http://www.gao.gov/products/GAO-08-386SP]. 

[10] For fiscal year 2010, Congress appropriated $50 million to USCIS 
for the processing of applications for asylum or refugee states; of 
which $5 million was for the processing of military naturalization 
applications. Department of Homeland Security Appropriations Act of 
2010, Pub. L. No. 111-83, 123 Stat. 2142, 2164 (Oct. 28, 2009). 
However, the act restricted USCIS from obligating any of these funds 
for processing applications for asylum or refugee status until the 
agency "has published a final rule updating part 103 of title 8, Code 
of Federal Regulations, to discontinue the asylum/refugee surcharge." 

[11] See [hyperlink, http://www.gao.gov/products/GAO-08-321]. 

[12] Unless fees are perfectly user specific, some users will pay a 
higher proportion of the costs they impose and some users will pay a 
lower proportion of their costs. In the case of a fee that is not user 
specific and recovers full program costs (i.e., does not use general 
revenue funding), some users will pay more than the costs they impose, 
essentially cross-subsidizing other users, who will pay less. For more 
information about funding options for the FAA see National Airspace 
System Modernization: Observations on Potential Funding Options for 
FAA and the Next General Airspace System, [hyperlink, 
http://www.gao.gov/products/GAO-06-1114T] (Washington, D.C.: September 
27, 2006). 

[13] See Aviation Finance: Observations on the Current FAA Funding 
Structure's Support for Aviation Activities, Issues Affecting Future 
Costs, and Proposed Funding Changes, [hyperlink, 
http://www.gao.gov/products/GAO-07-1163T] (Washington, D.C.: August 1, 
2007). 

[14] Marginal cost is equal to the cost of providing an additional 
unit of the good or service. 

[15] There will be some loss of economic efficiency in either case: 
user fees set above marginal cost and taxes--that is, general 
revenues--both result in some loss of economic efficiency. See 
[hyperlink, http://www.gao.gov/products/GAO-05-1009SP]. 

[16] In USCIS's case, this would be a form-specific fee as all fee- 
paying applicants for a certain form type would pay the same amount 
regardless of how much their individual application cost to process. 

[17] However, we raise concerns about the lack of justification and 
support for USCIS's allocation of remaining costs in our related 
report, including how USCIS allocated certain overhead costs and 
whether alternate assignment methods may offer greater precision. See 
[hyperlink, http://www.gao.gov/products/GAO-09-70]. 

[18] For fiscal year 2010, Congress appropriated $50 million to USCIS 
for the processing of applications for asylum or refugee states; of 
which $5 million was for the processing of military naturalization 
applications. Department of Homeland Security Appropriations Act of 
2010, Pub. L. No. 111-83, 123 Stat. 2142, 2164 (Oct. 28, 2009). 
However, the act restricted USCIS from obligating any of these funds 
for processing applications for asylum or refugee status until the 
agency "has published a final rule updating part 103 of title 8, Code 
of Federal Regulations, to discontinue the asylum/refugee surcharge." 

[19] In addition to the premium processing fee, USCIS did not know the 
relationship between the cost of processing the H-1B applications and 
its statutorily-set fee imposed on employers and therefore did not 
know the amount being subsidized by other fee-paying applicants. 

[20] Pub.L.No. 106-553, App. B, Title I, § 112, 114 Stat. 2762, 2762A- 
68 (Dec. 21, 2000), codified at 8 U.S.C. § 1356 (u). 

[21] 8 C.F.R. § 103.2(f). USCIS may designate the employment-based 
applications that are eligible for premium services pursuant to public 
notice in the Federal Register. 

[22] [hyperlink, http://www.gao.gov/products/GAO-07-1131].  

[23] 8 U.S.C. §1356(u). 

[24] USCIS is embarking on an agencywide Transformation Program that 
is intended to transform USCIS's current paper-based data systems into 
a modern, digital processing resource that will enhance customer 
service and better prevent future backlogs. The transformation program 
was not included in the agency's definition of overhead costs for 
purposes of the 2007 review. 

[25] H.Rep. No. 110-181, at 114 (2007); H. Rep. No. 110-862, at 131 
(2008); H. Rep. No. 111-298, at 115 (2009). 

[26] Agencies must use realistic inflationary indicators if they want 
to reasonably estimate future program costs and better align future 
collections with those costs. OMB Circular No. A-94, which provides 
guidance to agencies on benefit-cost analysis for federal programs, 
notes that future inflation is highly uncertain and recommends that 
when a general inflation assumption is needed, agencies use the rate 
of increase in the gross domestic product deflator from the 
administration's economic assumptions for the period of the analysis. 

[27] USCIS enters into yearlong contracts at the start of the year and 
therefore must have collections equal to the full contract value 
available for obligation at the start of the year. 

[28] USCIS's deferred revenue are fee collections received by the 
agency for applications for which the adjudications have not been 
completed. 

[29] OMB Circular A-25 recommends, and the Chief Financial Officers 
(CFO) Act of 1990 requires agency CFOs to review their user fees 
biennially. 

[30] [hyperlink, http://www.gao.gov/products/GAO-07-1131], [hyperlink, 
http://www.gao.gov/products/GAO-08-321]. 

[End of section] 

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