However, the act limited the  agencies’ initial penalty adjustments to 10 percent of the penalty amounts. Objectives, Scope, and Methodology

The objectives of this report are to determine (1) whether, as of June 30,  2002, agencies with penalties covered by the Inflation Adjustment Act had  made the required penalty adjustments and (2) whether provisions in the  act have prevented agencies from keeping their penalties in pace with  inflation. As of June 2002, 16 of 80 federal agencies with  civil penalties covered by the act had not adjusted any of their penalties for  inflation. Also, 19 of the 64  agencies that made initial adjustments had not made required subsequent  adjustments for eligible penalties, and several other agencies made the  adjustments incorrectly. When the Inflation Adjustment Act was enacted in 1996, Congress did not  give any federal agency the authority or responsibility to monitor agencies’  compliance with the act or to provide guidance to agencies on how the act  should be implemented. The resultant “inflation gap” cannot  be corrected under this statutory authority through subsequent  adjustments and, in fact, grows with each adjustment. Also, the act’s  requirements on how the penalty adjustments should be calculated and  rounded prevents agencies from capturing all of the inflation that occurs  between adjustments, and can prevent agencies from increasing certain  penalties until inflation increases by 45 percent or more. CPI Lag Reduces Amount of Inflation That Can Be Considered

When determining whether adjustments to their penalties are permitted,  the Inflation Adjustment Act requires agencies to compare the CPI from  June of the year preceding the adjustment with the CPI in June of the year  in which the penalty was “last set or adjusted pursuant to law.”  Therefore,  if an agency made its first round of penalty adjustments in October 1996  and examined those penalties in October 2000 to determine if further  adjustments were warranted, the agency would have to compare the CPI  for June 1996 with the CPI for June 1999—not the most current CPI data  available or even the most recent June CPI data. Conclusions

Civil monetary penalties are an important element of regulatory  enforcement. Suitably severe maximum penalties allow agencies to punish  willful and egregious violators appropriately and serve as a deterrent to  future violations. Therefore, at recent rates of inflation,  agencies may not be able to readjust their penalties for 15 years or more  after their initial adjustments. More  than 100 of these exempted penalties have declined in value by 50  percent or more since Congress last set them.
Why GAO Did This Study

Civil penalties are an important element of regulatory enforcement, allowing agencies to punish violators appropriately and to serve as a deterrent to future violations. In 1996, Congress enacted the Inflation Adjustment Act to require agencies to adjust certain penalties for inflation. GAO assessed federal agencies' compliance with the act and whether provisions in the act have prevented agencies from keeping their penalties in pace with inflation.

What GAO Found

As of June 2002, 16 of 80 federal agencies with civil penalties covered by the Inflation Adjustment Act had not made the required initial adjustments to their penalties. Nineteen other agencies had not made required subsequent adjustments, and several other agencies had made incorrect adjustments. The act does not give any agency the authority to monitor compliance or to provide guidance to agencies. More important, several provisions of the act have prevented some agencies from fully adjusting their penalties for inflation. One provision limited the agencies' first adjustments to 10 percent of the penalty amounts, even if the penalties were decades old and hundreds of percent behind inflation. The resultant "inflation gap" can never be corrected under the statute and grows with each subsequent adjustment. Also, the act's calculation and rounding procedures require agencies to lose a year of inflation each time they adjust their penalties, and can prevent some agencies from making adjustments until inflation increases by 45 percent or more (i.e., 15 years or more at recent rates of inflation). Finally, the act exempts penalties under certain statutes from its requirements entirely. Consequently, more than 100 exempted penalties have declined in value by 50 percent or more since Congress last set them.