Defense Science Board Task Force Report

FY 1994-99 FUTURE YEARS DEFENSE PLAN

MAY 1993

OFFICE OF THE SECRETARY OF DEFENSE

WASHINGTON, DC 20301-3140
This report is a product of the Defense Science Board (DSB). The DSB is a

Federal Advisory Committee established to provide independent advice to the

Secretary of Defense. Statements, opinions, conclusions and recommendations

in this report do not necessarily represent the official position of the

Department of Defense.

This document is UNCLASSIFIED.

Security review completed 04 May 1993 by OASD (Public Affairs) directorate for

Freedom of Information and Security Review Case number 93-S-1576
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DEFENSE SCIENCE

BOARD

OFFICE

-.

OF THE SECRETARY OF DEFENSE

WASHINGTON, D.C. 20301-3140

MEMORANDUM FOR SECRETARY OF DEFENSE

SUBJECT: Report of the Defense Science Board Task Force on

FY 1994-99 Future Years Defense Plan

I am pleased to forward the attached report of the Defense

Science Board Task Force on FY 1994-99 Future Years Defense Plan.

The Task Force was chaired by Mr. Philip Odeen, and also included

Mr. Jeffrey H. Smith and Mr. E.C. "Pete" Aldridge, Jr., as

participating members in the effort.

As the Task Force Chairman points out in his covering

memorandum, the attached document represents the initial report

of the Task Force and covers DMRD, weapons systems, and

environmental cost issues, plus the procurement "bow-ware"

question. Analysis of the other issues contained in the Task

Force Terms of Reference are in the final stages of completion

and conclusions will be provided shortly.

I recommend that you review the findings and recommendations

contained in the report and approve the report for publication.

Jo& S. Foster, Jr.

Chairman

Attachment
OFFICE OF THE SECRETARY OF DEFENSE

WASHINGTON, D.C. 20301-3140

May 3, 1993

DEFENSE SCIENCE

BOARD

Memorandum for the Secretary of Defense

Subject: Evaluation of the Validity of the FY94-99 Bush FYDP

On February 4, 1993, you asked us to serve on a Special Task Force of the

Defense Science Board to review the FY94-99 Bush Future Years Defense Program

(FYDP). The Panel was specifically tasked to address four areas: (1) the

Defense Management Report Decision (DMRD) savings; (2) the realism of major

weapons cost projections; (3) adequacy of O&M funding in the FYDP to support

planned Defense forces and weapons programs; and (4) the adequacy of funding for

Defense health care and environmental programs. The Panel was also tasked to

identify any significant procurement "bow-wave" beyond the FYDP period.

The initial report of the Task Force, which is attached, covers DMRD,

weapons systems, and environmental cost issues, plus the procurement "bow-wave"

question. These issues tie to the $10 billion adjustment made to the Bush FYDP

in President Clinton's initial budget over the FY94-97 period. We are completing

our analyses of the other issues in our tasking and will provide you with our

conclusions shortly. The attached report outlines our approach, findings, and

recommendations in some detail. This memorandum serves as an Executive Summary

and provides selected comments and suggestions related to our task.

Specific Findings and Recommendations

FYDP Funding Issues

As detailed in the report, our findings with respect to the FYDP funding

issues are:

l The Defense Management Report is generating significant savings in the

overhead and support areas.-

FY97 period,

$40 to 50 billion over the FY91 through

However, the Bush FYDP overstates the savings that can

be realistically expected by about $9-11 billion over the FY94-97

period.

- re

s, but we believe that weapon sy

realistic than in many past

stem costs could escalate $2 to 3

billion through FY97. The tighter budgets of the past few years have

led to the elimination of most reserves for deveiopment uncertainties.

As a result, there is little flexibility to cover unforeseen cost

increases.

- Costs related to environmental compliance and restoration could add $1

to 1.5 billion to the Bush FYDP through FY97. The risk is primarily

in the area of compliance programs.

1
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_

0 We estimate that the total funding deficiency in the current FYDP

through FY97 is $12 to 15 billion, or about 1 to 1.5 percent of the

total Defense funding in the period, and somewhat higherthan the $10

billion adjustment made in the Clinton program.

With regard to the actions you and DOD management should take regarding the

funding shortfalls, we recommend that you restore these funds to the FYDP. We

recognize that the Military Departments will have to offset the increases with

cuts in other areas, creating a risk that they will reduce readiness or force

structure to the detriment of our overall military capability. We would thus be

increasing spending primarily for headquarters and overhead and reducing our

global military capability -- clearly the wrong direction. To avoid this, you

could direct specifically that the reductions to offset the DMRD savings come

from the overhead and support areas. The Military Departments would thus retain

the responsibility, authority, and incentives to find cost reductions, but the

reductions would be focused in the overhead and support areas. We recommend this

course of action because we are confident added savings can be found in these

areas.

Procurement "Bow-wave"

We believe there is a potential procurement "bow-wave" that will start to

occur at the end of FYDP years. This "bow-wave" problem will be considerably

larger in the period beyond the FYDP and should be addressed soon. Unless the

procurement accounts are increased, or programs canceled or deferred, the "bowwave" problem could reach $5 billion per year by the early 2000s. In particular,

without significant offsets, the aircraft programs now under development will not

be affordable at the funding levels projected for the rest of this decade.

Why Firm Judgments are Difficult

Many areas of uncertainty in the years ahead make firm judgments on the

adequacy of funding for DOD programs very difficult. Several are discussed in

the report, and they include the following:

l The rapid loss of defense business base is likely to lead to

significant increases in the overhead and G&A rates of defense

suppliers. As demonstrated in the F-22 program last year, this could

lead to unexpected and largely unavoidable cost increases in existing

programs and elimination of a significant percentage of the cost

savings that would ordinarily result from program terminations.

- The current national health care reform efforts could result in less

generous benefits or more costly private sector programs and drive

retired military personnel, eligible for DOD health care, back into the Defense system. This will be discussed in our follow-on report.

2
The Critical Need for Predictable Funding

The Panel believes it essential that DOD be permitted to reduce its forces,

programs, and budgets at a managed and predictable pace over a period of years.

Clearly, the most pressing reasons are to ensure that we do not undermine the

effectiveness of our outstanding military establishment and that we treat DOD

civilian and military personnel fairly.

We have made a series of extensive budget reductions and program changes

over the past few years, and the planning system risks "overload." This could

lead to "sloppy" budget estimating and planning, reductions in support lagging

reductions in force structure, and the inability to manage efficiently the rapid

changes in programs across all the military services. The Administration and

Congress need to establish a pace of budget and program reductions that is

consistent with the efficient, effective, and balanced utilization of Defense

resources.

To this end, we believe it is critically important to establish a new

procedure under which Congress would approve the top-line of the Defense Budget

for several years in advance, providing greater stability and predictability.

The defense buildup of the last fifteen years - which was started near the end

of the Carter Administration and widely supported by Presidents Reagan and Bush

and a bipartisan consensus in the Congress

capable and sophisticated military force.

- has created an extraordinarily

This capability is fragile, however,

and sudden, unpredictable drops in defense spending will send shock waves

throughout the Armed Services and defense industry.

Thus, we suggest that after you complete the "bottom-up" strategic review

now underway and develop a new FYDP, the Administration should seek agreement

with the Congressional leadership on what the Defense top-line will be over the

next three fiscal years, i.e., FY94, FY95, and FY96. This agreement could be incorporated in the budget resolution or some other appropriate legislative

vehicle. The form is not important. The fact of the agreement, however, is

extremely important.

We further suggest that this approach be made part of the annual budget

process so that there is a "rolling" three year agreed-upon top-line. This would

mean that each year the Budget Resolution would approve the top-line for the 050

function for that year plus the next two fiscal years.

As you well know,

appropriations process.

Congress has been unwilling to modify the annual

We understand and support Congress' role and

responsibility for the oversight of the Armed Services. However, this annual

authorization and appropriation process makes it difficult, if not impossible,

to engage in long-term planning and multi-year financing. Although we see the

value of the two year authorization cycle, the annual appropriation process remains a source of uncertainty and instability.

A rolling agreement on a three year top-line would ensure greater stability

and predictability, permit long-range planning, and encourage efficiencies.

3
Suggestion _ - __ __ -__ .-_ . - .____

. -.

Congress could make annual adjustments, but within the top-line1. The level

could always be raised or lowered by a subsequent vote, but there would be a

political and procedural presumption against change.

Without the above actions, the Military Departments cannot realistically

address the proper funding of the remaining programs and support structure.

While important, such things as DMRD savings,

environmental and health care requirements,

weapon system cost estimates,

and the procurement "bow-wave" are

secondary concerns relative to the critical issues of the FYDP top-line and

strategy and mission guidance.

Other Suggestions

(1)

(2)

(3)

Within the approved funding levels, OSD should give explicit guidance to

the Military Departments regarding what missions must be accomplished and

what missions can be eliminated. This is needed to guard against the

natural tendency to protect force structure at the expense of operational

readiness and the upkeep of bases and facilities. Management must also

press for decisions early in the FYDP years to avoid wasting resources

inherent in maintaining programs that will ultimately be eliminated. We

understand that this is a fundamental purpose of the "Strategy Review" to

be completed later this year.

The "centralization" issue is also cause for concern. Many of the larger

DMRD programs and resulting savings are based on the assumption that

centralization of support functions would result in reductions in overhead

and more efficient management of common functions across the Military

Departments. In some situations, this will indeed be the result, and some

productive centralization programs are underway. In other situations,

centralizing functions under DOD agencies and removing the management

responsibility from the Military Departments could be counterproductive.

When the Military Departments have these responsibilities, they have strong

incentives to cut the costs of overhead functions to retain military

capability--incentives that should be encouraged. There are no such

incentives when such functions are given to a Defense Agency or OSD. This

effect needs to be considered as remaining DMRD actions are implemented and

new cost saving programs are developed.

We note that DOD is devoting considerable effort to track the actual

savings resulting from the DMRDs. Since the DMRDs were implemented, there

have been so many changes in the DOD baseline program that the DMRD savings

are now hopelessly intertwined with larger changes in total program funding

and force structure. Furthermore, management attention is being diverted

from effectively planning, managing, and funding the current program to

tracking savings back to an obsolete baseline program. We believe that the

DMRD tracking system has outlived its usefulness, is ineffective in the new

program environment, and should be terminated.

1While the Congress would make changes to the program within this agreed

top-line, we encourage you to work with them to find ways to minimize the

disruptions caused by the annual adjustment of thousands of individual programs.

4
Special interest programs and legislative intervention continue to plague

the Military Services and reduce their flexibility to resolve critical

problems. Congress plays a vital role in its oversight, authorizing, and

appropriating functions. There are times when Congress, for whatever

reason, approves unnecessary spending or excessive restrictions. The

imbalance between Active and Guard and Reserve forces, unrealistic

assumptions regarding burden-sharing funds, limiting competition for depot

maintenance and costly new health care benefits are just some examples. We

encourage you and the President to work with the Congressional leadership

to reduce and hopefully eliminate such impediments to the efficient use of

our tax dollars.

* * * * *

This completes the primary effort we have been asked to accomplish. We hope

that our observations and recommendations will be useful in establishing budgets

and programs that will support a credible and effective U.S. military force

structure capable of defending our national security interests far into the

future.

We would like to thank David McNicol and numerous other military and

civilian officials in OSD and the Military Departments for their assistance in

conducting this review. Their comments and input were candid and constructive,

and they were responsive to our many requests for assistance. The Panel greatly

appreciates their cooperation and support.

Philip Odeen, Chairman
DEFENSE SCIENCE BOARD

REVIEW OF THE DEFENSE FYDP

TABLE OF CONTENTS

I. INTRODUCTION

A. Purpose of the Review

B. Tasks Assigned the Review Group

II. APPROACH AND METHODOLOGY 2

A. Our Approach

B. Guiding Principles Which Should Underlie the Defense

Program

III. OBSERVATIONS, FINDINGS, AND RECOMMENDATIONS

A. Overview Observations

B. DMRD Savings

c. Weapon Systems Costs

D. DOD Environmental Costs

E. Summary Recomnmendations

IV. CONCLUDING REMARKS 18

APPENDICES

A. Terms of Reference

B. Task Force Members

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5

11

15

17

A-l

B-1
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May 3, 1993

FINAL REPORT

DEFENSE SCIENCE BOARD DEFENSE PROGRAM REVIEW

I. INTRODUCTION

A . Purpose of the Review

Secretary of Defense Aspin chartered the DSB Panel on February 4, 1993,

to review the Bush Administration's FY94-99 Defense Program. The purpose of our

review was to assess the funding realism of the Bush Program and, if shortfalls

in funding were found, estimate their rough order of magnitude. The three member

Panel, Philip Odeen (Chairman), Edward (Pete) Aldridge, and Jeffrey H. Smith,

were assisted by staff from OSD, the Services, and the Joint Staff1. Numerous

other elements of DOD also provided input. While the timeframe was short (two

months), the efforts of the staff and the cooperation of all parties gave the

Panel a good basis for its assessments. We hope these observations will be

helpful to DOD as it undertakes a thorough review of our national security needs

and develops a new "bottom-up" FYDP.

B . Tasks Assiqned the Review Group

The Panel was specifically tasked to review four areas: (1) the Defense

Management Report Decision (DMRD) savings; (2) the realism of major weapons cost

projections; (3) adequacy of O&M funding in the Bush Program to support planned

Defense forces and weapons programs; and (4) the adequacy of funding for Defense

health care and environmental programs. The Panel was also tasked to identify

any significant procurement "bow-wave" beyond the FYDP period. This report

discusses the DMRD savings and weapon systems cost issues, the DOD environmental

program, plus the procurement "bow-wave' question. It also provides some

selected comments and suggestions on related areas. We are completing our

analyses of the other issues and will submit our conclusions shortly.

1Philip A. Odeen is President and CEO of BDM International and a former

Defense and NSC official. Edward C. (Pete) Aldridge is President of Aerospace

Corporation and a former Secretary of the Air Force. Jeffrey H. Smith, Esquire,

is a partner with the law firm of Arnold & Porter and was the head of the Clinton

DOD Transition Team.
 . 

II. APPROACH AND METHODOLOGY

A . Our Approach

The assessment was based on staff papers prepared for each issue area,

detailed briefings by the relevant OSD staff element with formal comment

briefings by the Military Departments, numerous small meetings with the various

parties, and an examination of audit reports, staff papers, and other relevant

material. Formal briefing sessions consumed over 40 hours of the Panel's time.

We also invited agencies within DOD to give their input to us directly, and we

met privately with senior representatives of each of the Military Departments,

so they could give us their views candidly and "off-the-record." Every

reasonable effort was made to get as many responsible but differing views and

inputs as possible within the available time.

The Panel did not attempt to evaluate independently the accuracy of the

data we were provided. Although we assumed that the information we were provided

was accurate, we did seek to "cross check" it as best we could in the time

available for example, by having OSD assess Service figures.

B . Guidins Principles Which Should Underlie the Defense Proqram

The issues were evaluated using certain guiding principles that the

Panel believes reflect sound business practice as well as the policies of the

Clinton Administration and Secretary Aspin. They are:

1. The Defense FYDP should provide all the funding required to

support the approved Defense acquisition, personnel, operations, and support

activities over the next six years. No known costs should be omitted, and all

costs should be the best estimate of those actually required.
- - ._ -

-. - -

2 . In addition, the FYDP should follow these principles:

l The readiness of the revised baseline force structure should remain

high.

l The facilities supporting these forces should be sized and maintained

to support the property and equipment and sustain a high quality of

life for the personnel living and working in these facilities.

l Counting on lower future costs for specific support activities as a

result of efficiency and effectiveness improvements is an appropriate

management technique as long as reasonable and realistic actions or

policy changes are identified that will generate future savings.

3 . Although FYDP cost estimates should be realistic, this does not

mean that hedges to cover all possible risks should be included. It should be

expected that management will take appropriate action to adjust plans as routine

problems arise or requirements change. The annual budget review process will

identify savings that can be used to handle some degree of uncertainty and risk.
 

- .- 

III. OBSERVATIONS. FINDINGS, AND RECOMMENDATIONS

A . Overview Observations

1 . Since its inception as a planning and budgeting tool 30 years ago,

there have been chronic problems with the realism of the out-years of the FYDP.

It was common to project total out-year funding growth that was most unlikely to

be realized. Weapons costs were routinely underestimated because of optimistic

assumptions on development progress, production rates, and Congressional funding

support. Program "efficiencies" were planned that were unrealistic or at least

unlikely. While the Panel has a number of issues related to the Bush FY94-99

FYDP2, we recognize that it is more realistic than most FYDPs have been in the

past. Indeed, the current FYDP projects steady reductions in funding over the

FY94-97 period, a more realistic approach than frequently occurred in the past.

2 . With the significant reductions in Defense spending which have

occurred and are projected to continue, the Military Services are much more

vulnerable to unplanned needs for funds than ever before. In the peak spending

years of the mid-1980s, the Military Departments could absorb modest cost

increases in weapon systems development and acquisition, legislative

restrictions, and contingency operations because there was ample money available

for reprogramming. As the Defense budget shrinks, the Military Departments have

largely lost this flexibility.

3 . During the course of the review, many instances were noted where

Congressional actions or special interest focus greatly complicated DOD's

management efforts and led to significant cost growth or poor resource

allocations. Examples include making unrealistic assumptions on burden-sharing,

2This report discusses the Bush FY94-99 FYDP. Technically, a new FYDP was

not prepared in January of 1993. However, the FYDP prepared in FY91 was updated

to reflect program and budget changes made by the Bush Administration in late

1992. This updated program is referred to as the Bush FYDP.

4
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. .^ _

limiting competition in depot maintenance, and adding costly new health care

benefits. The Congress must recognize that the impact of such actions will be

magnified in the years ahead given the scope of ongoing budget reductions and the

reduced flexibility the Services have to absorb unplanned costs.

B . DMRD Savings

1. Background

The 1989 Defense Management Report (DMR) proposed a series of

consolidations and management improvements that were estimated to save $39

billion in support and overhead programs over the FY91-95 period in a then

growing FYDP. Later decisions increased the total and extended the timeframe

through FY97 - to a new savings total of $71 billion. However, subsequent

significant changes to the FYDP, force reductions, base closures, etc., have

reduced the estimate to about $63 billion (before the recent Clinton budget

reductions). While these numbers are large, they only accounted for a small

share (about 16 percent) of the total cuts made to the Defense program by the

Bush Administration.

The bulk of the DMRD savings through FY97 are in the supply area

($27 billion); other major areas are equipment maintenance ($10 billion) and data

automation ($7 billion). Since the program began in FY91, the management changes

that have been implemented should result in about half of the savings ($32.6

billion) being achieved by the end of FY97. About $30 billion in added savings

are projected for the FY94-97 period to result from management changes that have

not yet been fully implemented. Most of the issues over the realism of savings

estimates relate to this latter total. Despite these challenges, the DMR process

has been a success. About $17 billion in savings will have been achieved by the

end of the current fiscal year and roughly double that amount should be saved

over the FY94-97 period. In total, the DMRD process should generate $40 to 50

billion in overhead and support savings over the FY91-97 period.

5
2. Findings

There is broad support for the DMR concept, given the need to

reduce overhead and support costs as force structure and program cuts are made.

The Service representatives frequently commented that DMR forced them to focus

attention on support and overhead, areas that are difficult to manage and often

escape top level attention. The objections relate primarily to some of the

specifics of the decisions (DMRDs).

The DMRD process was driven by the Deputy Secretary and elements

of the OSD staff. It encompassed a broad range of actions, including

consolidations, improved information systems, management enhancements, and better

business practices. In many cases, solid actions are underway that if successful

will generate very large savings. Some actions, primarily in the supply area,

are one-time savings reflecting the drawdown of inventories based on smaller

forces and improved supply management. Others are recurring savings resulting

from doing work with fewer people, combining facilities, etc. The quality of

analysis and the specificity of the proposals varied widely. As a result, some

savings seem assured while others are problematic at best.

Closely related to DMRDs are the Corporate Information Management

(CIM) and the Defense Business Operating Fund (DBOF) initiatives. Both

initiatives have considerable support at the conceptual level, but like DMRDs,

there are numerous concerns about their implementation.

CIM is designed to redefine the way DOD uses information

technology to manage its wide-ranging personnel, financial, and support systems.

CIM is an umbrella term that encompasses both earlier initiatives to require

commonality in systems developed on a decentralized basis and a more recent

initiative to centralize systems development responsibility under a defense

agency (DISA). Following a series of studies on the way DOD manages its numerous
information systems, decisions were made and implemented via DMRDs. A major

drive is underway to force the Services to design and develop common systems such

as payroll and supply, and many functions are being centralized. The Services

strongly object to areas where they feel centralization has gone too far.

Moreover, there are concerns in OSD and the Services that the transfer of systems

development responsibility to the Defense Information Systems Agency (together

with the people that were previously under Service control) will sever important

links between the developers and the users of the systems and that DISA as an

organization is not up to the demanding tasks it is inheriting. Others are

concerned that the absolute size of DISA (expected to grow to at least 40,000

people) makes it unlikely it will be an efficient or responsive organization.

It now has fewer than 5,000 people.

The DBOF concept is intended to encourage efficiencies by

strengthening the buyer-seller relationship between operating forces and the

support structure and giving decision makers visibility of the true costs of

their actions. The DBOF consolidates all Service stock and industrial funds ($80

billion per year) and requires military organizations to buy services and

products from support activities at prices that are supposed to cover all costs.

Most of the concerns about DBOF relate to complexity and the speed of

implementation. The principal criticisms are that cost accounting systems are

very weak and the MIS systems are inadequate to measure performance. Moreover,

DBOF is very complex and not widely understood.

The projected savings from the DMRDs, including those related to

early CIM initiatives, have been removed from the FYDP as well as the amounts

related to the DBOF cash that is scheduled to transfer to Service O&M accounts.

To the extent that these savings are not realized or the cash not generated, the

defense program will be underfunded. The impact will primarily fall in the O&M

accounts, compounding the perennial problem of tight funding. Unless funding
Tevels are increased, DOD will then have to do some combination of the following:

(1) accept a degradation of readiness, which is a very unattractive option;

(2) make further cuts in procurement programs or force structure, also an

unattractive outcome; or (3) find additional ways to reduce infrastructure costs.

Questions about some DMRDs should not allow us to overlook the

importance of the third option - cutting more from "tail" before cutting "teeth"

any further. Information presented to the Panel indicates that, despite the

efforts involved in the DMRD process, DOD's infrastructure costs have not fallen

in proportion to the drop in overall DOD resources. This alone suggests that

there are further savings in infrastructure costs to be made.

3. Recommendations

It is our judgment that the projected out-year savings resulting

from the current DMRD reforms that have been cut from the Bush FYDP are

overstated by $9 to 11 billion over the FY94-97 period. This is approximately

20 percent of the projected savings for this period. While we are comfortable

with this figure, we do not claim it is precise. There are 250 DMRDs, with

projected savings ranging in size from a few million to over $10 billion. A

detailed review of them all would take far more time and manpower than we had

available. However, we assessed the estimates from several perspectives before

making a judgment.

- The staff reviewed ten of the larger DMRDs in some detail. Based on

that review, they felt that at least three-quarters of the savings for

these DMRDs will be achieved. Extrapolating this assessment to the

full set of DMRDs gave us a potential shortfall of 25 percent or

slightly over $11 billion over the FY94-97 period.
- The latest OSD/comptroller's savings estimates for FY94-97 are $46

billion. We broke them into three categories, each with a different

probability of success based on our review: 1) Service initiatives -

$16 billion at 90 percent; 2) Logistics initiatives - $24 billion at

80 percent; and 3) Other OSD initiatives - $6 billion at 50 percent.

The resulting shortfall is $10.6 billion.

- We received detailed briefings from the Services on their view of the

DMRD process. On average they testified that they felt that about 20

percent of the projected future savings were unachievable. Applying

this percentage against the $46 billion projected for the FY94-97

period yields an overstatement of $9.2 billion.

The Panel proposes that $9 to 11 billion be added to the Services'

existing FY94-97 O&M programs prior to making the further explicit out-year

adjustments associated with the Clinton Administration's goals. However, the

Services should be directed to find at least equivalent savings in the overhead

and support areas and not take the funds from force structure or modernization.

We propose this solution because of our strong belief that it is

critical that the DOD overhead and support structure be reduced in parallel with

reductions in forces and major programs. The focus must be on reducing the

"tai 1 " at least as fast as "teeth." In our meetings with senior Service

officials, it was clear that they agree with this philosophy and are determined

to reduce their overhead and support structure first, not cut readiness or the

forces if at all possible.

The DMRD savings forecasts were only made for the period ending

in FY97. No estimates were made for FY98-99. Assuming that the projected FY97

savings of $12 billion are extended into FY98 and FY99, and a twenty percent

9
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shortfall estimate is roughly right, the added shortfall would be about $2.5

billion per year in FY98 and FY99.

The DOD has devoted considerable effort to establishing procedures

to track progress in achieving the DMRD savings resulting from the many

postulated management changes. In our view, this bookkeeping effort devoted to

tracking DMRD savings has outlived its usefulness and should be terminated.

Despite the good intentions of this effort, over a period of time "other" changes

in the DOD program that were driven by the historic changes in the world security

situation have so altered the original "baseline" that current estimates of

"savings" are often hopelessly intertwined with the impacts of the larger

changes. Management attention is being diverted from the more fundamental

responsibility of ensuring that currently planned programs are properly managed

to the lesser issue of tracking savings back to old program plans. Moreover, the

Department should not be developing its new FYDP as a delta to old and

questionable plans, but instead should be developing the new FYDP in a direct

"bottom-up" way that ensures that the newly planned forces will be properly

equipped, trained, and supported.

l

Other Panel recommendations related to the DMRD issues are:

The CIM program initiative implementation plans need more senior

management visibility and a careful review to ensure that the

consolidation related investments are funded and planned

implementations will in fact yield the projected savings. As new

management information systems are adopted, care must be taken to

ensure they are responsive to the needs of the users. The CIM

consolidations and standardizations will fundamentally impact

DOD's way of doing business, so it is essential that all elements

of DOD management be working toward common goals regarding the

10
.-

-

effective use of information technology. Unless the Services and

the people involved are committed to the success of this effort,

its chances of success are slim.

DOD should defer further DBOF expansion until adequate financial

and management systems are in place to allocate costs properly

and provide visibility to the effects on force readiness. Total

cost visibility and the buy-sell concept are useful management

tools but, until adequate support systems are in place, full

implementation will pose risks. In addition, changes in DBOF

prices are complicating the ability of DOD executives to plan and

account for their programs or functions. Given the complexity of

the program and the impact of deep budget cuts and force

structure changes, the time and attention of senior management

demanded by further expansion of DBOF may not be justified.

c. Weapon Systems Costs

1. Background

Weapons system costing is much better understood and has better

analytical tools available than do the support activities covered by the DMRDs.

The Panel reviewed the amounts included in the FYDP for major weapons systems and

was briefed by various elements of OSD as well as the Military Departments. The

absolute sums being devoted to procurement are down sharply from the levels of

the 1980s. Also, the number of major systems being developed and procured is

significantly lower. Thus the potential for overruns is reduced.

2 . Findings

With some exceptions, the amounts budgeted seemed in line with

realistic cost estimates, and in a few cases, provision for program growth was

11
provided. Although most of the specific weapons systems cost estimates were seen

as realistic, there are two developments which cause us concern.

l The amount of risk funding is very limited, and based on past

experience, technical or cost problems will surely develop which

cannot be specifically foreseen at this time. When the amount of risk

funding is less than required, program disruptions and cost growth

often occur.

l The reduction or cancellation of many major Defense production

programs is dramatically reducing the workload of manufacturers. This

in turn is driving up overhead and G&A rates as the "fixed" costs are

spread over a smaller base. This has already impacted some major

programs (e.g. F-22) and will likely be a serious problem for others

even if aggressive actions are undertaken to cut overhead. In some

cases, making adequate cuts may be impossible (e.g. where large

contractor-owned facilities are involved) and overhead cuts tend to

lag behind the reduction of orders.

We did not review the weapons development and production schedules

and costs in the years beyond the FYDP in great detail or review the technical

problems associated with these programs. We are, however, concerned over the

out-year affordability of the various major aircraft developments underway in the

Navy and Air Force. For example, the need for the Services to cooperate in the

development of future systems (e.g. MRF and F/AX) should be evaluated. Based on

present projections, DOD could face a serious funding problem in the early 2000s

- as the F-22 and FA 18/E&F buys are at a peak and the next generation fighters

enter a costly development phase.

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i

The Navy could face a problem in its shipbuilding account if it

continues to build nuclear submarines and aircraft carriers in any number. The

long-term (15 year) program projections include SSNs and CVNs which consume much

of the likely Shipbuilding Construction-Navy (SCN) funding. Moreover, the Navy

faces a near term nuclear submarine industrial base issue which is currently

being addressed. Regardless of the solution, added funds may be required and

some alternatives will be very costly.

3 . Recommendations

Our review of the major systems in full scale development or

production during the course of the Bush FYDP indicated a few areas where funds

are almost certainly inadequate, given current schedules and projected

quantities. A minimum of $2 billion more is needed to fund the Bush FY94-97

FYDP, and the shortfall could be $3 billion. An added shortfall of $1 to 2

billion will occur during the FY98-99 period. The specific areas of concern are

discussed briefly below:

- TITAN IV - This program is clearly underfunded by $1 to 2 billion

over the FYDP period. Senior DOD officials point out that it

plays a critical role in numerous important programs, and a

solution to this problem must be found.

- Shipbuilding - Navy ships which take years to build usually end

up costing more than planned and budgeted, thereby requiring

reprogramming via an annual shipbuilding program adjustment. In

the past that usually involved dropping a ship out of the program

to free up the needed funds. The planned shipbuilding program

contains so few ships that the old process will be less viable in

the future. Therefore, a special effort will be required to

ensure that the ships in the Clinton FYDP are priced at their

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-I---.

_-- __

"most likely" cost despite the length of the construction

process. It is also essential that the submarine industrial base

issue be addressed in the near future. Depending on the

solution, significant added SCN funding may be needed.

0 Other Systems - There are funding problems with several Air Force

programs including JSTARS and B-1B, and smaller Army programs.

The Army did not fund its Abrams upgrade program ($1.7 billion)

in the Bush FYDP, so it was not an issue for our review.

However, the Army sees it as a high priority. This decision

reflects the Army's strong view that it could not support the

"Base Force" as directed in the Bush FYDP and also adequately

fund its priority acquisition programs. Thus, it reflects the

fact that the current Army program is out of balance.

In addition to the above specific issues, we believe that

inadequate risk funding is provided to cover unanticipated problems that

inevitably occur prior to full production of a new system. We are unable to

specify an amount, but to avoid destabilizing other programs, we urge DOD

leadership to provide some future hedge funding or management reserve for

development programs when they develop a new FYDP later this year.

The issue of a procurement "bow-wave" in the years beyond the FYDP

is real, suggesting that it must be addressed soon. Unless the procurement

accounts are increased, or programs canceled or deferred, the "bow-wave" could

reach $5 billion or more per year by the early 2000s. The Panel has the

following specific conclusions.

- The ongoing tactical aircraft study should carefully review the

currently planned programs to assess their affordability.

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- ._ . 

-

Barring a major shift in allocations of funds to the mission

area, a program cancellation, or significant slippage, the 

current programs will probably not be affordable in the post-FYDP

period.

The Navy shipbuilding program should be reassessed during the

Defense Strategy review this summer. If the Bush "Base Force"

carrier and submarine goals are pursued, the Navy will have an

out-year funding problem. If fewer SSNs or CVNs are needed, the

funding could be adequate. Failure to address the SSN/CVN issue

makes it very likely that the Navy's SCN funds will not be

adequate to support the Department's needs for other surface and

support ships.

D . DOD Environmental Costs

1. Background

DOD currently spends $4 to 5 billion per year on environmental

matters. Costs are split roughly equally between cleaning up past problems and

complying with current federal or state regulations. The costs can be grouped

in four categories ($ billions):

FY93 FY94 FY95 FY96 FY97

BRAC 88 & 91 Clean-up .4 .5 .5 .3 .3

Clean-up Programs 1.2 2.4 2.0 2.2 1.9

Compliance Programs 2.1 2.5 2.4 1.9 1.7

R&D (SERDP) A2 A A A A

Total $3.9 $5.5 $4.8 $4.4 $3.9

1 5
 

- _ _- --

2 . Findinqs

Funds to clean up bases included under BRAC are provided as part

of each closure program. (There are some funds in the Bush FYDP budget for BRAC

93.) The clean-up program funds are used for other active or closed bases and

to fix problems on ships. They are centrally funded and allocated by OSD. The

Services fund and manage compliance activities required to resolve pollution

problems and comply with state or federal regulations (e.g. build sewage

treatment facilities). As the chart above suggests, the Services believe

compliance costs will decline in the out-years as they remedy most of the current

problems. It is likely, however, that new sites will be found and unforeseen

problems arise, thus creating added costs. New, more stringent regulations are

also likely to entail new compliance spending. In past years the Services have

consistently underestimated future compliance costs and have had to reprogram

funds to meet urgent needs. Moreover, reviews of the bases on the 1993 BRAC list

reveal many gaps in knowledge of the environmental problems. The studies alone

needed to specify the problems and remedial actions will not be complete for two

years. The SERDP technology program was added by Congress in FY93 and 94. Some

other R&D work is buried in the Services' RDT&E programs. These programs could

well lead to new, more cost effective approaches which will enable DOD to reduce

future clean-up and compliance costs and deserve support.

3 . Recommendations

All predictions about future environmental costs are risky, but

the Panel feels that it can make several broad judgments:

l Funding for clean-up of bases covered by BRAC is generally

adequate, with shortfalls in the "noise" levels (a few hundred

million over the FY94-97 period).

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e Funding for the clean-up of existing and old (non-BRAC) bases is

probably adequate to meet priority needs and make reasonable

progress over the next decade in remediating known problems.

Nonetheless, we suspect that costs will rise as the Services go

beyond the study phase and get into the actual restoration

process. This will require added funds or extend the time

horizon of the remediation effort.

- Funding for compliance with State and Federal regulations is

projected to decline over the course of the FYDP. We feel this

is unrealistic as new problems will almost certainly be uncovered

and more stringent regulations will be promulgated which will

force DOD to continue funding compliance activities at about

today's levels. This suggests a shortfall of about $1 to 1.5

billion over the FY94-97 period. (Projecting the shortfall over

FY98-99 would add another $1 to 2 billion.)

- DOD should aggressively pursue new technology to help remediate

its problems. This approach holds the promise of reducing the

cost of future remediation efforts.

E. Summary Recommendations

Based on our assessments, we believe the FY94-97 Bush Defense program

is underfunded by about $12 to 15 billion. While these numbers are large, they

only amount to 1 to 1 l/2 percent of the FYDP. Nonetheless, unless corrected

during the upcoming development of the new Defense program by the development of

additional savings or other actions (e.g. further base closures), they will

impact future Service readiness or force deeper personnel/force structure or

modernization reductions. Since the Clinton budget assumed underfunding of $10

billion, our recommendations only involve add-backs of $2 to 5 billion to the

Defense program total for FY94-97.

17
 

 

v. CONCLUDING REMARKS

In the course of the review, a number of issues arose which were unrelated

to the primary focus of the study. The Panel felt that certain of the issues

should be brought to the attention of the Secretary and his staff. These issues

are summarized below:

* Predictability of the DOD top-line is a fundamental prerequisite to

sound planning and programming. An agreed on multi-year budget would

clearly save money and improve program management. Nothing would

contribute more to rational defense planning and avoiding the

"hollowing out" of our forces, than agreeing on a predictable "glide

path" over a period of years. If the Executive and Legislative

branches would establish an agreed DOD top-line for three to four

years, Defense execution of the ongoing major drawdown and

restructuring of forces and programs would be greatly facilitated and

the impact on industry and local communities cou d be far more

effectively managed.

- DOD, with support from the White House and Congress, should make an

aggressive effort to minimize funding problems and cost increases that

occur because of actions beyond DOD's control. This would include

unrealistic assumptions regarding the receipt of burden-sharing funds,

legislative restrictions on fund transfers, delayed appropriations of

disaster and other contingency funds, and other unexpected or unfunded

"bills" which occur between the development of the budget and

execution. The newly proposed FY94 fund for peacekeeping and disaster

relief operations is an important step to solve this problem.

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L Active forces have been reduced more rapidly than Reserve/Guard forces

because Congress has limited the pace of reductions. Steps should be

taken to bring the Active and Reserve forces more in balance. A

reduction of Reserve and Guard forces would not have as severe an

impact on unemployment as an Active force reduction since most Guard

and Reserve personnel have other employment.

DOD should continue to give priority to advanced technology. We have

the luxury of time to "leap forward" to surpass any perceived future

adversary with a future generation of forces. We should take

advantage of this environment by initiating advanced technology

projects that will have a high payoff in the future. Included are

actions to inject new technology into existing platforms to enhance

their effectiveness at a modest cost and to exploit civilian

technology, more effectively. Furthermore, advanced technology

projects are a sound way to preserve the industrial base for

relatively low cost.

DOD faces an extremely difficult period as it is forced to cut broadly

supported weapons programs, reduce force structure and personnel levels, and

realign its support and base structure. Accomplishing this daunting task without

"hollowing" our forces, treating people unfairly, or undermining future

technology programs will take both leadership and skill. If this effort is to

be done successfully, it will require the support of the White House, Congress,

and the public. We recognize that the current "bottom-up" review will lead to

a new long-term force structure, supporting programs, and FYDP. We hope the

observations in the report will be useful to the Secretary of Defense, his staff,

and other key DOD leaders as this process proceeds.

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DIRECTOR OF DEFENSE RESEARCH AND ENGINEERING

WASHINGTON, DC 20301-3010

MEMORANDUM FOR CHAIRMAN, DEFENSE SCIENCE BOARD

SUBJECT: Terms of Reference--Defense Science Board Task Force on

FY 1994-99 Future Years Defense Plan

You are requested to organize a Defense Science Board (DSB)

Task Force to provide an independent assessment of the management

and financial plans of the Department of Defense. The Task Force

should review the overall health of the FY 1994-99 Future Years

Defense Plan (FYDP) that was prepared by the Bush Administration.

It should identify any major management challenges or serious

underfunding problems. A final report is requested by March 12.

The DSB Task Force should address the following questions:

0 How accurate are the savings estimates flowing from the

Defense Management Review?

0 Are the current estimates of development and

acquisition costs for the weapons, sensors and other

major systems now in development too low, as has been

true historically?

0 What is the size of the potential programmatic overhang

(program content in excess of anticipated funding

levels) beyond the FY 1994-99 FYDP?

0 Are the FY 1994-99 FYDP funding levels sufficient to

support the Base Force and are the projected manpower

levels sufficient to man and operate the force?

0 What procedures should the DOD follow to assess the

potential for unanticipated liabilities,

in the areas of environmental cleanup and

particularly

health care?

A-l
The office of Program Analysis and Evaluation (PA&E)

sponsor this task force. Mr. Philip A. Odeen will serve as

will

Chairman of the Task Force. Mr. David L. McNicol of PA&E will

serve as Executive Secretary and Mr. John V. Ello will serve as

the Defense Science Board Secretariat representative. The office

of PA&E will provide funding and other support as may be

necessary. It is not anticipated that this Task Force will need

to go into any "particular matters"

208 of Title 18, U.S. Code, nor will

within the meaning of Section

it cause any member to be

placed in the position of acting as a procurement official.

A-2
DSB TASK FORCE ON "FY 1994-99 FUTURE YEARS DEFENSE PLAN"

CHAIRMAN

Mr. Philip A Odeen

BDM International, Inc.

MEMBERS

Edward C. "Pete" Aldridge

The Aerospace Corporation

Jeffrey H. Smith

Arnold & Porter

EXECUTIVE SECRETARY

Mr. David L. McNicol

DSB SECRETARIAT

Mr. John V. Ello

B-l