United States General Accounting Office

GAO Testimony

Before the Subcommittees on Military Procurement and

Research and Development, Committee on National

Security, House of Representatives

For Release on Delivery

Expected at

11:00 a.m., EDT

Thursday,

October 8, 1998

DOD BUDGET

Substantial Risks in

Weapons Modernization

Plans

Statement of Richard Davis, Director, National Security

Analysis, National Security and International Affairs

Division

GAO/T-NSIAD-99-20

Messrs. Chairmen and Members of the Subcommittees:

We are pleased to be here today to discuss our work on the Department of

Defense’s (DOD) budgetary plans to modernize its forces. You requested

that we discuss our recent analysis of DOD’s Future Years Defense Program

(FYDP). Specifically, we will discuss (1) DOD’s experience over the last few

years in trying to shift funds from nonmission or infrastructure programs

to acquisition programs, (2) the risks in DOD’s ability to execute its FYDP for

fiscal years 1999 through 2003, and (3) the implications of current

procurement trends for DOD’s future modernization.

Summary Although DOD has reduced military and civilian personnel, force structure,

and facilities over several years, it has been unable to follow through with

planned funding increases for modern weapon systems. This has occurred,

in part, because DOD has not shifted funds from infrastructure to

modernization. In 1997, infrastructure spending was 59 percent of DOD’s

total budget, the same percentage that was reported in the bottom-up

review report for 1994. Consequently, DOD has repeatedly shifted planned

funding increases for modern weapon systems further into the future with

each succeeding FYDP. DOD acknowledged in its 1997 Quadrennial Defense

Review (QDR) report that it has had to postpone procurement plans

because funds were redirected to pay for underestimated operating costs

and new program demands, and projected savings from outsourcing and

other initiatives had not materialized.

Although DOD made adjustments in the 1999 FYDP to decrease the risk that

funds would migrate from procurement to unplanned operating expenses,

the 1999-2003 program, like previous programs, is based on optimistic

assumptions about savings and procurement plans. For example,

considerable risk remains in the services’ plans to cut 175,000 military and

civilian personnel and save $3.7 billion annually by 2003. Specifically,

plans for some cuts were incomplete or were based on optimistic

assumptions about the potential to achieve savings through outsourcing

and reengineering. A further indication of risk can be found in DOD’s

procurement plans. Specifically, the rise and fall of DOD’s procurement

spending over the last 33 years has followed the movement in the total

budget. However, DOD projects that procurement funding will rise in real

terms during 1998-2003 by approximately 29 percent while the total DOD

budget will remain relatively flat.

Page 1 GAO/T-NSIAD-99-20
DOD’s current procurement trends have longer term implications. As DOD

reduced programmed procurement in successive FYDPs, it has

reprogrammed some procurement to the years beyond the FYDP to create a

“bow wave” of demand for procurement funds. This bow wave, according

to DOD, tends to disrupt planned modernization programs unless additional

funds are made available.

We have reported that DOD employs overly optimistic planning

assumptions in its budget formulation, which leads to far too many

programs for the available dollars. Optimistic planning provides an unclear

picture of defense priorities because tough decisions and trade-offs are

avoided. In order for DOD to have an efficient and effective program and

for Congress to properly exercise its oversight responsibilities, it is critical

that DOD present realistic assumptions and plans in its future budgets.

Background Since the mid-1980s, we have reported that DOD employs a systemic bias

toward overly optimistic planning assumptions in its budget formulation.

We have said that this results in too many programs for the available

dollars—plans/funding mismatch. This, in turn, leads to program

instability, costly program stretch-outs, and program terminations. In

essence, DOD’s budgets have been unrealistic.

In 1994, we reported that the 1995 FYDP for fiscal years 1995-99, the FYDP

that reflected the budgetary decisions from the bottom-up review, revealed

a substantial amount of risk resulting in overprogramming that could be in

excess of $150 billion.1

 In 1995, we reported that DOD’s total program for

fiscal years 1996-99 had increased by about $12.6 billion; approximately

$27 billion in planned weapon system modernization programs for these

4 years had been eliminated, reduced, or deferred to the year 2000 and

beyond; and military personnel, operation and maintenance (O&M), and

family housing accounts had increased by over $21 billion. The net effect

was a more costly program, despite substantial reductions in DOD’s

weapons modernization program between 1996 and 1999.2

 In October

1997, we reported that DOD’s 1998 FYDP for fiscal years 1998-2001 had

substantial risk that programs would not be executed as planned.3

1

Future Years Defense Program: Optimistic Estimates Lead to Billions in Overprogramming

(GAO/NSIAD-94-210, July 29, 1994).

2

Future Years Defense Program: 1996 Program Is Considerably Different From the 1995 Program

(GAO/NSIAD-95-213, Sept. 15, 1995).

3

Future Years Defense Program: DOD’s 1998 Plan Has Substantial Risk in Execution

(GAO/NSIAD-98-26, Oct. 23, 1997).

Page 2 GAO/T-NSIAD-99-20
Specifically, we said that although DOD projected billions of dollars in

savings due to management initiatives, it did not have details on how all

the savings would be achieved. Also, although DOD projected no real

growth in the cost of the Defense Health Program during 1998-2001, O&M

funds in DOD’s health program had increased 73 percent in real terms

during 1985-96. DOD acknowledged in its May 1997 QDR report that the 1998

FYDP included substantial financial risk. It stated that, compared to the

1998 FYDP, the QDR proposed a more balanced, modern, and capable

defense program that can be achieved within currently proposed budgets.

DOD’s Modernization

Goals Have Not Been

Achieved

Since 1989 and the fall of the Berlin Wall, DOD has reduced the number of

men and women in uniform by 33 percent and removed a significant

number of Army divisions, Air Force wings, and Navy ships from the active

forces. In addition, DOD decided to realign and close numerous major

domestic military installations and smaller installations and to realign

many others. During the same period, the defense budget has declined

from $374 billion to $262 billion in constant 1999 dollars—a reduction of

30 percent. The procurement accounts have led the decline with a

combined reduction of over 50 percent, whereas the research,

development, test, and evaluation accounts have declined by some

20 percent.

In the early years of the procurement decline, DOD said that it could afford

to delay weapons procurement because as forces were reduced, the

remaining units could be equipped with modern systems already fielded.

But in the mid-1990s, DOD believed that the delay had to end. For example,

the Secretary of Defense testified in February 1995 that a new phase of

modernization had to begin immediately to sustain the quality of the force

over the long term. According to the Secretary, funding for modernization

would come from out-year real budget growth, reduced infrastructure

costs, and acquisition reform savings.

Primarily as a result of congressional actions, DOD received increased

funding earlier than planned by the administration. The 1996 FYDP

projected total funding for fiscal years 1996-98 of $738.5 billion. However,

Congress actually appropriated $767.3 billion—an increase of almost

$30 billion.

Our analysis of DOD’s programs and infrastructure activities over the past

several years showed that the infrastructure portion of DOD’s budget had

Page 3 GAO/T-NSIAD-99-20
not decreased as DOD planned.4

 In 1997, infrastructure spending was

59 percent of DOD’s total budget, the same percentage that was reported in

DOD’s bottom-up review report for 1994. We have stated in prior reports

that DOD must reduce its military personnel and O&M costs if it is to reduce

its infrastructure because 80 percent of DOD’s infrastructure activities are

funded from these appropriation accounts.

Planned funding increases for modern weapon systems have repeatedly

been shifted further into the future with each succeeding FYDP. For

example, since 1995, DOD has lowered the estimated funding for 1998

procurement from about $57 billion in the 1995 FYDP to about $43 billion in

the 1998 FYDP. Moreover, in the 1995 FYDP, DOD planned to achieve a

$60-billion annual funding level for procurement by fiscal year 1999. One

year later in the 1996 FYDP, DOD projected that it would achieve that

funding level in fiscal year 2000. In the 1997 FYDP, the $60-billion level had

slipped again to 2001. The following table compares DOD’s procurement

plans for the last five FYDPs.

Table 1: Comparison of DOD’s Procurement Plans

Planned procurement funding

Dollars in billions

FYDP 1995 1996 1997 1998 1999 2000 2001 2002 2003 Average

1995 $43.3 $48.4 $49.8 $57.1 $60.1

1996 39.4 43.5 51.4 54.2 $62.3 $67.3

1997 38.9 45.5 50.5 57.7 60.1

1998 42.6 50.7 57.0 60.7 $68.3 $68.0

1999 48.7 54.1 61.3 60.7 63.5

Unrealized procurement –$9.0 –$10.9 –$14.5 –$11.4 –$8.2 –$6.0 –$7.6 –$4.5 –$9.0

Source: DOD’s FYDPs.

In the QDR, DOD acknowledges that it has a historic, serious problem—the

postponement of procurement modernization plans to pay for current

operating and support costs. DOD refers to this as migration of funds.

According to DOD, the chronic erosion of procurement funding has three

general sources: underestimated day-to-day operating costs, unrealized

savings from initiatives such as outsourcing or business process

reengineering, and new program demands. The QDR concluded that as

4

Future Years Defense Program: Lower Inflation Outlook Was Most Significant Change From 1996 to

1997 Program (GAO/NSIAD-97-36, Dec. 12, 1996); Defense Infrastructure: Costs Projected to Increase

Between 1997 and 2001 (GAO/NSIAD-96-174, May 31, 1996); and Future Years Defense Program: 1996

Program Is Considerably Different From the 1995 Program.

Page 4 GAO/T-NSIAD-99-20
much as $10 billion to $12 billion per year in future procurement funding

could be redirected as a result of these three general sources. The QDR also

identified other areas of significant future cost risks.

To address this financial instability, the QDR recommended cuts in some

force structure and personnel, the elimination of additional excess

facilities through more base closures and realignments, the streamlining of

the infrastructure, and reduced quantities of some weapon systems. By

taking these actions, the Secretary of Defense intended that the 1999

budget and FYDP would be fiscally executable, modernization targets

would be met, the overall defense program would be rebalanced, and the

program would become more stable.

Substantial Risks

Remain in DOD’s

1999-2003 Program

Despite Changes to

Reduce Risks

Identified in the QDR

The 1999 FYDP reflects the budget blueprint outlined in the balanced

budget agreement. Within the agreed to budgets, DOD made program

additions and cuts to reduce risks identified in the QDR. For example, DOD

• increased planned funding for the Defense Health Program, which had

been significantly underbudgeted in prior FYDPs;

• created an acquisition program stability reserve to address unforeseeable

cost growth that can result from technical risk and uncertainty associated

with developing advanced technology for weapon systems; and

• reduced planned quantities of some weapon systems such as the Joint

Surveillance Target Attack Radar Systems’ aircraft, F-22 fighters, and

F/A-18E/F fighters.

Despite the adjustments to decrease the risk that funds would migrate

from procurement to unplanned operating expenses, there are substantial

risks that DOD’s program may not be executable as planned.

Some Personnel Cuts and

Associated Savings May

Not Be Achieved

DOD’s decision to reduce personnel as part of the QDR was driven largely by

the objective of identifying dollar savings that could be used to increase

modernization funding. We reported in April 1998 that considerable risk

remains in some of the services’ plans to cut 175,000 personnel and save

$3.7 billion annually by 2003.5

The 1999 FYDP does not include all the personnel cuts directed by the QDR.

With the exception of the Air Force, the services had plans that should

5

Quadrennial Defense Review: All Personnel Cuts and Associated Savings May Not Be Achieved

(GAO/NSIAD-98-100, Apr. 30, 1998).

Page 5 GAO/T-NSIAD-99-20
enable them to achieve the majority of their active military cuts by the end

of 1999. The Office of the Secretary of Defense (OSD) determined that some

of the Air Force’s active military cuts announced in May 1997 to

restructure fighter squadrons and consolidate bomber squadrons should

not be included in the 1999 FYDP because the plans were not executable at

that time.

Plans for some cuts included in the 1999 FYDP were incomplete or based on

optimistic assumptions. For example, the Army has not decided how

25,000 of the 45,000 reserve cuts will be allocated. This decision will not be

made before the next force structure review. Moreover, plans to achieve

savings through outsourcing and reengineering may not be implemented

by 2003 as originally anticipated. For example, the Army planned to

compete 48,000 positions to achieve the majority of its civilian reductions.

However, according to a senior Army official, those reductions cannot be

completed by 2003. Although the Army had announced studies covering

about 14,000 positions, it had not identified the specific functions or

locations of the remaining positions to be studied. In addition, the Army’s

plan to eliminate about 5,300 civilian personnel in the Army Materiel

Command through reengineering efforts involved risk because the

Command did not have specific plans to achieve these reductions.6

Although outsourcing is only a small part of the Navy’s QDR cuts, the Navy

had an aggressive outsourcing program that involved risk. Specifically, the

Navy programmed savings of $2.5 billion in the 1999 FYDP based on plans

to study 80,500 positions—10,000 military and 70,500 civilian—by 2003.

Moreover, the Navy had not identified the majority of the specific

functions to be studied to achieve the expected savings. According to a

senior Navy acquisition official, the Navy’s ambitious projected

outsourcing savings may not materialize, thereby jeopardizing its

long-term O&M and procurement plans.

OSD recognizes that personnel cuts and the planned savings from those

cuts have not always been achieved, which contribute to the migration of

procurement funding. Therefore, OSD has established two principal

mechanisms for monitoring the services’ progress to reduce personnel

positions. First, it expects to review the services’ plans to reduce

personnel positions during annual reviews of the services’ budgets.

Second, the Defense Management Council is expected to monitor the

services’ progress in meeting outsourcing goals.7

6

The Army now plans to eliminate 7,410 personnel.

7

The council, chaired by the Deputy Secretary of Defense, was charged by the Secretary to ensure

implementation of DOD’s initiative to streamline and improve infrastructure and support activities.

Page 6 GAO/T-NSIAD-99-20
Unprogrammed Bills Could

Lead to Higher O&M Costs

The QDR reported that unprogrammed expenses arise that displace funding

previously planned for procurement. According to DOD, the most

predictable of these expenses are underestimated costs in day-to-day

operations, especially for depot maintenance, real property maintenance,

and medical care. The least predictable are unplanned deployments and

smaller scale contingencies.

Depot Maintenance The services and the defense agencies plan to obligate $73 billion for

depot maintenance between 1999 and 2003. While we have noted that DOD

tends to adjust maintenance requirements as it moves closer to obligating

funds, the $73-billion estimate does not allow the defense agencies and the

services to achieve OSD’s goal of funding 85 percent of their maintenance

requirements during 1999-2003. For example, the Army is projected to

meet only 68 percent of its depot maintenance requirements in 1999 and

79 percent by 2003.

Real Property Maintenance Despite four base realignment and closure rounds, DOD still has excess,

aging facilities and has not programmed sufficient funds for maintenance,

repair, and upgrades. Each service has risk in its real property

maintenance program to the extent that validated real property needs are

not met. For example, in the 1999 President’s budget, the Air Force plans

to fund real property maintenance at the preventive maintenance level in

1999, which allows for day-to-day recurring maintenance. This results in

risk because the physical plant is degraded and the backlog of

maintenance and repair requirements increases. Also, while the Marine

Corps added funds during 1999-2003, the Commandant of the Marine

Corps determined that the planned funding would merely minimize

deterioration of its facilities. Furthermore, although the Army added

approximately $1 billion for real property maintenance in the 1999 FYDP, it

was not projected to meet its funding goal until 2002.

DOD Health Program According to a Defense Health Affairs official, the cumulative O&M funding

increase of $1.6 billion over the 1998 FYDP adequately funds the core

medical mission, which is comprised of two parts, direct care and

managed care contracts. However, the 1999 FYDP funding is contingent on

several assumptions that contain risk. First, the Defense Health Program

assumes program-related personnel reductions due to outsourcing and

privatization initiatives. Savings for these efforts are estimated to be

$131 million by 2003. Second, the program assumes a 1-percent savings

from utilization management, such as reducing the length of hospital stays

from 4 days to 3 days. Third, population adjustments due to force structure

reductions play a pivotal role. The projected program assumes that the

Page 7 GAO/T-NSIAD-99-20
active military force will be reduced by 61,700 personnel who will be a mix

of retirees and nonretirees. If a higher percentage of the end-strength

reduction stems from retirements than originally planned, the program

will experience higher costs because retirees and their dependents will

remain part of the beneficiary population. According to a senior Defense

Health Affairs official, the funded program does not include an allowance

for the impact of advances in medical technology and the intensity of

treatment that was identified in our previous report as a risk factor.8

Our recent work raises questions about whether cost savings and

efficiencies in defense health care will materialize. In August 1997,9

 we

reported that a key cost-saving initiative of TRICARE, DOD’s new managed

health care system, was returning substantially less savings than

anticipated and the situation was not likely to improve. In our

February 1998 testimony to Congress,10 we stated that implementation of

TRICARE was proving complicated and difficult and that delays had

occurred and may continue.

Contingency Operations Notwithstanding the historical costs of several, often overlapping

contingency operations, the 1999 FYDP provides funds for the projected

“steady state” costs of Southwest Asia operations—$800 million in 1999.

According to OSD officials, by design, the FYDP does not include funds for

(1) the sustainment of increased operations in the Persian Gulf to counter

Iraq’s intransigence on U.N. inspections, (2) the President’s extension of

the mission in Bosnia, or (3) unknown contingency operations. DOD’s

position is that costs for the Bosnia mission should be financed separately

from planned DOD funding for 1999-2003. Further, the QDR concluded that

contingency operations will likely occur frequently over the next 15 to 20

years and may require significant forces, given the national security

strategy of engagement and the probable future international environment.

Thus, it is likely that DOD will continue to have unplanned expenses to

meet contingency operations.

Risk in Meeting

Procurement Goals

We reported in October 1997 that, since 1965, O&M spending has increased

consistently with increases in procurement spending. However, in its 1998

8

Defense Health Program: Future Costs Are Likely to Be Greater Than Estimated

(GAO/NSIAD-97-83BR, Feb. 21, 1997).

9

Defense Health Care: TRICARE Resource Sharing Program Failing to Achieve Expected Savings

(GAO/HEHS-97-130, Aug. 22, 1997).

10Defense Health Care: Operational Difficulties and System Uncertainties Pose Continuing Challenges

to TRICARE (GAO/T-HEHS-98-100, Feb. 26, 1998).

Page 8 GAO/T-NSIAD-99-20
FYDP, DOD deviated from this historical pattern and projected increases in

procurement together with decreases in O&M. In the 1999 FYDP, DOD takes a

more moderate position, projecting that O&M spending in real terms will

remain relatively flat while procurement increases at a moderate rate.

We reported that DOD’s plans for procurement spending also run counter to

another historical trend. Specifically, DOD’s procurement spending rises

and falls with its total budget. However, in the 1998 FYDP, DOD projected an

increase in procurement of about 43 percent, but a relatively flat total DOD

budget. The 1999 FYDP procurement projections continue to run counter to

the historical trend, although DOD has moderated its position. Specifically,

DOD projects that procurement funding will rise in real terms during

1998-2003 by approximately 29 percent, while the total DOD budget will

remain relatively flat.

Program Demands and

Cost Growth

The QDR report cited cost growth of complex, technologically advanced

programs and new program demands as two areas contributing to the

migration of funds from procurement. For years, we have reported on the

impact of cost growth in weapon systems and other programs such as

environmental restoration. Specifically, we reported in July 1994 that

program cost increases of 20 to 40 percent have been common for major

weapon programs and that numerous programs experienced increases

much greater than that. We continue to find programs with optimistic cost

projections. For example, we reported in June 1997 that it was doubtful

that the Air Force could achieve planned production cost reductions of

$13 billion in its F-22 fighter aircraft program.11

Other DOD programs have also experienced cost growth. For example, DOD

estimated in December 1997 that the projected life-cycle cost of the

Chemical Demilitarization Program had increased by 27 percent over the

previous year’s estimate.12 As stated earlier, DOD has established a reserve

fund that can be used to help alleviate disruptions caused by cost growth

in weapon systems and other programs due to technological problems.

However, it remains to be seen whether the need will exceed available

reserve funds.

11Tactical Aircraft: Restructuring of the Air Force F-22 Fighter Program (GAO/NSIAD-97-156, June 4,

1997).

12The program was established by the Department of Defense Authorization Act, 1986 (P.L. 99-145).

DOD is required to destroy the complete chemical stockpile by April 29, 2007.

Page 9 GAO/T-NSIAD-99-20
Policy decisions and new program demands can also cause perturbations

in DOD’s funding plans, according to the QDR report. DOD has programmed

$1.4 billion more for the National Missile Defense System in the 1999 FYDP

than the 1998 FYDP. Despite the increase, considerable risk remains with

the system’s funding. For example, technical and schedule risks are very

high, according to the QDR, our analysis,13 and an independent panel.14

The panel noted that based on its experience, high technical risk is likely

to cause increased costs and program delays and could cause program

failure. In addition to the technical and schedule risks, the 1999 FYDP does

not include funds to procure the missile system. If the decision in 2000 is

made to deploy an initial missile system by 2003, billions of dollars of

procurement funds would be required to augment the currently

programmed research and development funds.

As another example, the 1999 FYDP was predicated on the United States

shifting to a Strategic Arms Reduction Treaty (START) II nuclear force

posture. START II calls for further reductions in aggregate force levels, the

elimination of multiple warhead intercontinental ballistic missile

launchers and heavy intercontinental ballistic missiles, and a limit on the

number of submarine-launched ballistic missile warheads. START II was

approved by the U.S. Senate in January 1996, but its enforcement is

pending until ratification by Russia’s parliament. In the absence of 

START II enforcement, the United States may decide to sustain the option of

continuing START I force levels. According to the Secretary of Defense’s

1998 Annual Report to the President and the Congress, the 1999 budget

request includes an additional $57 million beyond what otherwise would

have been requested to sustain the START I level. However, maintaining this

force beyond 1999 will result in additional unplanned costs.

Implications for

DOD’s Future

Modernization

In its QDR report, DOD recognized that current procurement trends have

long-term implications. Specifically, “As successive FYDPs reduced the

amount of procurement programmed in the six-year planning period, some

of these reductions have accumulated into long-term projections, creating

a so-called ‘bow wave’ of demand for procurement funding in the middle

of the next decade.” The QDR report concludes that “this bow wave would

tend to disrupt planned modernization programs unless additional

investment resources are made available in future years.”

13National Missile Defense: Schedule and Technical Risks Represent Significant Development

Challenges (GAO/NSIAD-98-28, Dec. 12, 1997).

14Report of the Panel on Reducing Risk in Ballistic Missile Defense Flight Test Programs (Feb. 27,

1998).

Page 10 GAO/T-NSIAD-99-20
The bow wave is particularly evident when considering DOD’s aircraft

modernization plans. In September 1997, we reported that DOD planned to

buy or significantly modify at least 8,500 aircraft in 17 aircraft programs at

a total procurement cost of $334.8 billion (in 1997 dollars) through the

aircrafts’ planned completions.15 DOD’s planned funding for these aircraft

programs exceeds in all but 1 year, between fiscal year 2000 and 2015, the

long-term historical average percentage of the budget devoted to aircraft

purchases. Compounding these funding difficulties is the fact that these

projections are conservative. The projections do not allow for real

program cost growth, which historically has averaged at least 20 percent,

or for the procurement of additional systems. However, as a result of the

QDR, the 1999 FYDP service aircraft procurement accounts have been

moderated. Compared with the 1998 FYDP, the 1999 FYDP reduces projected

aircraft funding by $3.9 billion, or 4 percent.

Observations As the Chairman of the Joint Chiefs of Staff testified last week, DOD

continues to face difficult funding decisions in trying to balance current

readiness against modernization, infrastructure, and quality of life issues.16

DOD has and will continue to face difficult decisions in an effort to balance

its program within projected budgets. Optimistic planning provides an

unclear picture of defense priorities because tough decisions and

trade-offs are avoided. In order for DOD to have an efficient and effective

program and for Congress to properly exercise its oversight

responsibilities, it is critical that DOD present realistic assumptions and

plans in its future budgets.

Messrs. Chairmen, this concludes our prepared statement. We will be glad

to answer any questions you or members of the Subcommittees may have.

(701151)

15Aircraft Acquisition: Affordability of DOD’s Investment Strategy (GAO/NSIAD-97-88, Sept. 8, 1997).

16Statement of General Henry H. Shelton, Chairman of the Joint Chiefs of Staff, before the Committee

on Armed Services, United States Senate (Sept. 29, 1998).

Page 11 GAO/T-NSIAD-99-20
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