59

Figure 4. Disposition by Reported Acquisition Value, FY 1992-96

Dollars in FY 1992 FY 1993/ FY 1994 FY 1995 FY 1996
milions

Reutilization 1,600 7% 1,770 5% 2,146 8% 2.295 9% 2,848 12%
Transfers 540 2% 532 2% 5320 2% 575 2% 465 2%
Donations 302 3% BO Cars 8
Sales 5100 22% | 9,100 26%] 8722 34%| 9,189 36% | 6450 35%
FMS % <1 18 <1% oa t% a <te| 133%
Scrap 9,882 43% 14,553 42% 13,587 53% 11,372 48% 11,099 47%
Other® 5,744 24% 7.878 23% 3440 1% He 1% WS 1%
Total W3.a67 100% | 34,461 100% | 26,083 100% | 24,342 100%] 23,901 100%

DOD is seeking to improve its disposal process by using more commercial practices and
making greater use of the private sector in disposing of property. While we have not
done recent work in this area, our 1994 report stated that, while not always directly

“According to DRMS personnel, the "other" category was significantly larger in fiscal
years 1992 and 1993 than in subsequent years because it was used as a “catch all"
category.

‘Fiscal year 1993 disposals were larger than other years because of DOD base closures
and drawdowns (force reductions).


weneer
Ere?

123

DEFENSE LOGISTICS AGENCY
HEADQUARTERS
8725 JOHN J. KINGMAN ROAD, SUITE 2533
FT. BELVOIR, VIRGINIA 22060-6221

m1 CAAR

Andrea Miller

House of Representatives

‘Committee on Government Reform and Oversight
Subcommittee on Government Management,
Information, and Technology
‘Washington, DC 20515

Dear Ms, Miller:

This is in further response to your November 6, 1997, memorandum requesting us to review
the transcript of the testimony presented at the subcommittee’s 12 September 1997, hearing,
“Oversight of Defense Surplus Equipment and the Activities of the Defense Reutilization and
Marketing Service.” As per your request, Mr. Jeff Jones, Principal Executive Director for
‘Materiel Management, Defense Logistics Agency, and Colonel Robert Mansfield, USAF,
Commander, Defense Reutiization and Marketing Service (DRMS), have reviewed the transcript
of their testimony. An annotated copy of that transcript was forwarded to you last month,

In response to Chairman Hom's question (transcript lines 2467- 2404) searing personel
costs associated with on-line screening of property, DRMS provides the

Costs of full-time personnel devoted to the Web site and the On-Line Screening system
located on the Web:

2 full-time Government personnel (GS-12) 101,896 (total per aromum)
2 full-time contractor personnel $188,114 (total per anmum)
Total Web Cost for DRMS $290,010 (per anmem)

‘We trust this information satisfies Chairman Hom’s request. Please do not hesitate to
contact Mr. Thomas Gelli of my staff at (703) 767-6175 if you need additional information.

Sincerely,

‘STAFF DIRECTOR
CONGRESSIONAL/PUBLIC AFFAIRS

reve nary nn Li Pet tr te


25

might have a little different way of approaching it or a different
kind of access?

Mr. Situ. Well, that’s a good point, because the States sort of
have a double advantage, if they have the additional salaries and
wages going into their States because of the location of DRMO’s or
salvage areas, with all of that Federal payroll going in, they not
only fave the advantage of some of that Federal payroll being
spent in their State, but they also have the advantage of access,
getting there first, getting items with the lowest transportation
costs into their States. So something needs to be done at least to
make it more equitable to all States.

Mr. Davis of Illinois. I understand that there is a fair and equi-
table rule that agencies must follow in distributing Federal prop-
erty. Are we suggesting that maybe this rule is not being adhered
to as stringently?

Mr. SMITH. Mr. Davis, I don’t understand how that rule is being
adhered to, if it is being adhered to.

Mr. Davis of Illinois. Let me just ask one other question. You in-
dicate that there is no donation program in foreign countries for
foreign countries. Would it perhaps make sense to look at a dona-
tion program with some of those nations that could, for example,
make great use of things like road-building equipment and other
kinds of nonmilitary items that could be very beneficial as a sort
of in-kind contribution that goes beyond the appropriate process
that we currently use for foreign aid?

Mr. SiTH. Well, it is my understanding that the equipment is
sold at a very small fraction of its value now, depending on what
that particular country or buyers within that country want to offer
as a bid. And your question, should government start picking out
deserving countries for free donations rather than selling the pro-
gram? I would be wary or reluctant to start having a giveaway pro-
gram in other countries, because I think it would result in the
same thing that we have here. As long as merchandize is free, peo-
ple take everything available that was free with the prospect that
it might be useful sometime in the future. So I am a strong advo-
cate of having some market forces to equitably distribute what
Property is salvaged and reusable.

ir. DAvis of Illinois. I certainly appreciate your interest in this
area. .

And I have no further questions, Mr. Chairman.

Mr. SmiTH. Thank you.

Mr. Chairman, thank you.

Mr. Davis of Illinois. Mr. Chairman, could I just ask that the
statement of Representative Maloney be entered into the record?

Mr. Horn. Without objection, it will be placed after the two open-
ing statements of Mr. Davis and myself.

you very much.

We will now proceed with the witnesses from the Department of
Defense. Mr. Lieberman, the assistant inspector general for audit-
ing; and also the Director of Defense Management Issues from the
U.S. General Accounting Office will be on panel two, Mr. David
Warren.

I think, gentlemen, you know the routine here. We do swear you
all in, if you would raise your right hand.


154

Over the past few years it has been our experience that RT&D—
those operations have not been given very much credit, and that
all the credit has gone toward the sale of property. All the focus
has been to get the property out for sale and no credit back as far
as reutilization, transfer, and donation. It was almost at a point in
time, in particular in the donation program, that it seems that we
didn’t exist. We addressed this on a number of occasions.

We used to have a relationship with the DRMO folks in that
when there was property available, that they would help us out,
they would let us know, and they worked with us. Then, this em-
phasis came on sales. At that point we were like the Huns—I mean
they hated to see us come, because now we were taking away the
property that they were going to sell.

ey took the most experienced people in the reutilization trans-
fer and donation side of it and put them in sales, and then these
people were given grand and glorious awards and things of that
sort for doing that and nothing for the reutilization and transfer
and donation portion of it. That was the way we saw it.

Mr. Horn. Well, do you feel that Colonel Mansfield was correct
When, he said he turned that around practically the first month in
office?

Mr. Frost. I wouldn’t say it has been totally turned around, but
I see an effort in that area. I think there is still a lot of pressure
on sales, but I do believe that Colonel Mansfield is making an ef-
fort in the other arena.

Jack, I don’t know if you wanted to add anything.

Mr. Liuzza. Mr. Chairman, I think they are moving in the right
direction, although I consider it very, very, very slow. I have some
real doubts as to whether he did that the first year, he was in
there a year ago, but I think they are moving in that direction.

General McINERNEY. Mr. Chairman, may I? Because this is an
issue that will be more contentious. When we were 7 percent of the
GDP of this country, the Defense Department had an excess of dol-
lars. Today, we are at 3.2 percent and we are going down. The
question is, does it benefit the taxpayer? Clearly, the defense dol-
lars being cranked back into defense is benefiting the tax dollars,
whether you sell it and the dollars come back, whether they come
back to the Treasury, or you give it to the universities. I mean tax-
payers are benefiting.

‘he real question is going to become, because with a $20 billion
shortfall in defense and acquisition, and we are talking about a
hollow force very quickly in which the Nation will come to you and
say add $20 billion more a year soon. I mean, it is a lot sooner than
we thought, which is sad. But the fact is, the taxpayer benefits if
this is done efficiently. The question is, do universities and do the
States benefit as much as the taxpayer in general?

I think as more scrutiny is put on this, that is one of the issues,
Mr. Chairman, that you and other Members will have to look at.
But with total asset visibility coming in, there are clearly going to
be less resources available to access.

To give you an example: At the height of the cold war we had
$102 billion in inventory. Today we have $72 billion. We probably
need $32 billion. So this is going to come, and it is going to come
over the next 5 to 8 years as we move from an industrial age sup-


149

Users and Scresners Association - Federal Excess Personal Property recognizes the
outstanding efforts of DRMS in the past to facilitate the reutilization, transfer, and
donation of both Federal excess and surplus property to DoD activities, to other
Federal agencies and to the states.

Users and Screeners Association - Federal Excess Personal Property proposes the
following recommendations and observations:

+ Supports the DRMS initiative to on-line screening and requisitioning of
property at base depots with consideration being given to expansion of the
Federal Stock Classification codes currently existing to include a broader
‘spectrum of property. However, to completely ellminate on-site screening
should never occur. Regardless of the scope of the property description,
‘some property should be visually evaluated to ensure economically feasible
acquisition.

» Recommends that incentives from RTD be considered in addition to sales in
evaluating the performance and efficiency of the DRMO activities.

+ Recognizes and supports the DRMS initiative to close those DRMO’s which
have historically proven to be a liability to the operating costs of DRMS with a
corresponding need to down-size the personnel to meet this initiative.

+ Recommends that DRMS reallocate some the savings realized from
closing inefficient DRMO’s to providing more efficient service to those
DRMO’s that have demonstrated the capability and ability to provide services
required by their customers. This would insure that the hours of operation for
the remaining DRMO's would be, for example, commensurate with the
decrease in time to 14 days now allocated for the removal of property
approved for RTD as outlined in DoD 4160.21M,Defense Materiel Disposition
Manual. In addition, these installations could be open five days per week for
both screening and removal of property instead of the one of two day which
currently exists at some locations. Providing additional resources to those
DRMO's would also allow more adequately and
technically trained personne! to assist in implementing these initiatives.

+ Opposes the privatization of the DRMO operations, based on current
information available. The DRMO's do an outstanding job of RTD and sales.
A shift from sales to RTD incentives by DRMS, the reallocation of a portion of
the dollars saved through closing inefficient DRMO’s and time to implement
New procedures and operations, the “business aspect" of the DRMO
‘operation could become a very proftable facet of DRMS.


COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT
DAN BURTON, Indiana, Chairman

BENJAMIN A. GILMAN, New York HENRY A. WAXMAN, California

J. DENNIS HASTERT, Illinois TOM LANTOS, California

CONSTANCE A. MORELLA, Maryland ROBERT E. WISE, Jn., West Virginia

CHRISTOPHER SHAYS, Connecticut MAJOR R. OWENS; New York

STEVEN SCHIFF, New Mexico EDOLPHUS TOWNS, New York

CHRISTOPHER COX, California PAUL E. KANJORSKI, Pennsylvania

ILEANA ROS-LEHTINEN, Florida GARY A. CONDIT, California

JOHN M. McHUGH, New York CAROLYN B. MALONEY, New York

STEPHEN HORN, California THOMAS M. BARRETT, Wisconsin

JOHN L. MICA, Florida ELEANOR HOLMES NORTON, Washington,

THOMAS M. DAVIS, Virginia DC

DAVID M. McINTOSH, Indiana CHAKA FATTAH, Pennsylvania

MARK E. SOUDER, Indiana ELIJAH E. CUMMINGS, Maryland

JOE SCARBOROUGH, Florida DENNIS J. KUCINICH, Ohio

JOHN B. SHADEGG, Arizona ROD R. BLAGOJEVICH, Illinois

STEVEN C. LATOURETTE, Ohio DANNY K. DAVIS, Illinois

MARSHALL “MARK” SANFORD, South JOHN F. TIERNEY, Massachusetts
Carolina JIM TURNER, Texas

JOHN E. SUNUNU, New Hampehire THOMAS H. ALLEN, Maine

PETE SESSIONS, Texas HAROLD E. FORD, Jn., Tennessee

MICHAEL PAPPAS, New Jersey —

VINCE SNOWBARGER, Kansas BERNARD SANDERS, Vermont

BOB BARR, Georgia (Independent)

ROB PORTMAN, Ohio
Kevin BINGER, Staff Director
Danie. R. MOLL, Deputy Staff Director
Wiutam MoscHenta, Deputy Counsel and Parliamentarian
dupitH McCoy, Chief Clerk
Pum ScHILIRO, Minority Staff Director

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT, INFORMATION, AND TECHNOLOGY
STEPHEN HORN, California, Chairman

PETE SESSIONS, Texas CAROLYN B. MALONEY, New York
THOMAS M. DAVIS, Virginia PAUL E. KANJORSKI, Pennsylvania
JOE SCARBOROUGH, Florida MAJOR R. OWENS, New York
SHALL “MARK” SANFORD, South ROD R. BLAGOJEVICH, Ilinois
Carolina DANNY K. DAVIS, Illinois

JOHN E. SUNUNU, New Hampshire
ROB PORTMAN, Ohio

EX OFFICIO

DAN BURTON, Indiana HENRY A. WAXMAN, California
J. RUSSELL GEORGE, Staff Director and Chief Counsel
MaRK BRASHER, Senior Policy Director
JOHN Hynes, Professional Staff Member
ANDREA MILLER, Clerk
MARK STEPHENSON, Minority Professional Staff Member

a


119

then we take a look at our cost if sales, the cost if had we sold it
ourselves, the revenue stream; and at this point, it’s a net benefit.

Mr. Horn. Can you give us an idea of how many vendors have
bid on this particular type of concept?

Colonel MANSFIELD. Not many. We had three. We divided the
country into six regions and we got bids on four. So we continue
to do two, which we’re using as a sample of comparison of perform-
ance. Two of the contractors have asked to get out of the contract.
They have bit off a little more than they can chew. We said, all
right. This is a pilot. We're running it for 6 months to look and see
how it worked.

The final one, who took two regions, is doing very, very well and
is producing famously. And we're looking at them very carefully,
asking: what about this pilot worked for them and didn’t work
these other two.

Mr. Horn. Does it mean that you’re more likely, based on this
limited experience, to focus on the region as the unit of sale rather
than trying to get somebody to take on the whole Nation?

Colonel MANSFIELD. We wanted to look at it regionally from the
standpoint of getting as much competition as we could. There are
some variations because of the location of installations of hospitals
and what have you. It may work out that there’s one private com-
pany that does the whole country. We wanted to see what kind of
competition we got.

Tl add that, even though there are only four or three successful
bidders for four of the regions, our initial one, over 160 folks
showed up at our initial industry meeting. There was a fair amount
of interest.

Mr. Horn. Yeah?

Colonel MANSFIELD. I also chose specifically this medical-dental-
vet, because I felt it might have less impact on the overall surplus
system that we’re drawing down our hospitals. There’s less and
less. Most of the materiel that is withdrawn is not in tiptop shape
because it’s taken in other areas early. And as we change our logis-
tics business for medical with more leasing of materiel and equip-
ment and more direct vendor delivery, we're just going to have less
and less. So it seemed like a fairly safe one to try as its impact on
the overall system.

Mr. Horn. I had mentioned for the record a little while ago the
1 percent on foreign military sales. Do we know, based on just
maybe observing or hearsay—I suspect you don’t require a report
on it—the number of your equipment, and a lot of which has noth-
ing to do with backing up a military force. You can have a lot of
civilian uses. How much ultimately goes from the people that pay
you for it to meet your cost structure? How much ultimately goes
overseas? Do we have any sort of idea of that?

Colonel MANSFIELD. I have none.

Mr. Horn. And are they getting into areas—I go to foreign coun-
tries, and some of their hospitals; they're where we were in the
thirties, forties, and fifties, for example, in terms of equipment.
And I just wonder if some of that is then resold for overseas mar-
kets. I don’t say necessarily military markets, but just to whoever
is running the hospitals in the country.

Colonel MANSFIELD. I do not know, sir.


68

Mr. Horn. That could take years, couldn’t it, trying to get all the
signatures around the Pentagon?

Mr. LIEBERMAN. Well, that has happened on occasion, and I
wouldn’t want to predict that it won’t happen, but in this case the
kinds of actions we are talking about should not take that long. We
should be talking weeks or, at the most, a few months, but cer-
tainly in—a year from now, or even 6 months from now, if we
found lack of action, we would be reporting that to the Secretary
and making a major issue of it.

Mr. Horn. Well, I think in about 3 months this subcommittee
ought to be asking him, what have you done in terms of implemen-
tation of these recommendations, because we, as you know, are in
the process, under the law 5 years ago, of getting proposals on re-
sults-oriented government, and it seems to me, in this niche of the
Pentagon, there should be some very careful looking at how we
measure results, and certainly safety should be a part of it.

I would like to yield to the gentleman from Illinois, Mr. Davis,
for questioning.

Mr. Davis of Illinois. Thank you, Mr. Chairman.

Mr. Lieberman, I have come to the conclusion that downsizing,
reorganizing, and the adoption of commercial practices at DRMS
may have a disruptive effect on that organization—it may not, but
then, it may, there is a possibility—and actually make it more dif-
ficult for them to control what they are doing and really account
for the actions of the agency.

Do you have any recommendations that would help prevent that
from happening or to address that problem should further
downsizing occur?

Mr. LIEBERMAN. Well, I share your concern. I think it is a com-
monly accepted fact that any organization that is in a state of tur-
bulence, adapting new practices, restructuring, or changing the
outsourcing and in-house mix of its work, is subject to higher risks
than ones that are in a more stable state.

We, hopefully, have learned how to transform organizations and
processes without really falling down on the mission, because we
have been doing that reengineering throughout the Department for
the last few years. Virtually every part of the Department of De-
fense has been going through business process reengineering, a lot
more outsourcing than before and what-have-you.

I would say the key is to decide what the game plan is and then
stick to it; that is, a stable plan that does not change all the time.
For that to happen, the Department and the Congress need to work
together. If the employees know what the game plan is, you are
going to have a lot fewer morale problems and confusion and things
like that.

The worst thing that can happen is, 1 year we decide we are
going to compete half of the functions in the organization, and then
the next year it is everything, and then we go back to something
less. So we need stability in the plan.

Then I think it needs to be explained that when you compete,
when you have a public-private competition under the OMB Cir-
cular A-76 rules, it is an above-the-board process. In fact, I am
committed to help the Defense Logistics Agency make sure that
any A-76 competitions they run in DRMS or anywhere else are


152

Much more descriptive, accurate information given regarding the
condition of that property would certainly help. Also, a more accu-
rate condition code that is applied to that property would certainly
assist. But I think the key here is to have one system and not three
or four or five.

Mr. Horn. General, how would that work a privatization,
outsourcing basis?

General MCINERNEY. I would probably say, Mr. Chairman, that
privatized operations could do it as quickly and as effectively as
anybody. None of the issues they bring up would be impacted by
outsourcing DRMS.

Mr. Horn. Any other comments? Mr. Liuzza.

Mr. Liuzza. Mr. Chairman, let me address this just a little bit.
Contrary to what DRMS has indicated in the past, here and else-
where, these States, the majority, do not want to screen for sales.
It costs us to haul stuff to Louisiana, it cost us to inventory it, it
costs us to move it, and it costs us to report it back to the Govern-
ment, because it does not belong to the State of Louisiana. It is
Federal property until such time as all the restrictions are met.

So in order for us to try not to haul stuff in that we can use, we
need a real description and in a lot of cases we need to really look
at it, kick the tires and look at it, because we don’t want to call
it in just to call GSA 6 months, a year later and say we can’t do-
nate this, we want to sell it. This is not our program. We are not
a sales program.

Mr. Horn. General, you mentioned when you were Director of
the Defense Performances Review, you recommended outsourcing
Defense Reutilization and Marketing Service. What do you see as
the primary factor explaining why we still haven't outsourced that
agency 4 years after your original proposal?

General MCINERNEY. Well, I think, Mr. Chairman, what hap-
pened was that when they looked at it closely, they never told me,
but I was—they were getting, as I say, about $150 million, and it
may be even higher, I don’t want to speculate, but there is clear
evidence that it could be higher. If DLA was getting at least $150
million from the services and in the DBOF account, and in over 10
years that is over $1 billion, that is $1.5 billion, and that is not
small cash. It certainly appears that it was a good source of reve-
nue for DLA, and otherwise I am not sure, because I say they are
the ones that nominated it to us. And then I think when they real-
ly looked at it and saw, this is just around the time that we are
switching to the DBOF account, they all of a sudden saw the dol-
lars available. In the past DLA used to take that out of their O&M
account, and now with the DBOF account, they were getting paid
to do it. So it was in this switchover period that I think they then
became aware that it was a significant revenue stream.

Mr. Horn. Do you think it had something to do with the loss of
jobs in various parts of the country?

General MCINERNEY. I think there was certainly the political fac-
tor of the loss of jobs, but clearly, a number of the contractors were
looking at it, Mr. Chairman, and they said that they would take
the People over one-for-one and then retrain them and do other
things. They had a broader marketplace that DRMS was looking
at, and by tying their customs operations and this together, and


19

DEFENSE ‘Accalerte innovative efforts outros sles rented
LOGISTICS functions.
AGENCY ‘With u global workforce of approximately 3,700 employees,
DRMS receives excess material from the milhery services and makes
it wvailable for revtilieation within other agencies. What remains after
redistribuion, is sold to the public. Last fiscel your DRMS arranged
; for the reuse, transfer and doustion of more than $4 billioa of materiel
NEWS| and generated 5191 million in revenue from the snle of whut reesained,
DLA considers these changers an esscatial part of downsizing
RELEASE the Dopertareat of Defvase and taking edvantage of improved business
‘processes. Altbough some eenployees will be displaced, dhe Agency is
‘commited to providing all possible assistance during the transition.
30.

Pusuc
AFFAIRS

OFFICE
(703) 767-6200

(728 Jove mci Roa
‘sore 2303



15

Mr. Horn. I thank the gentleman.

Now we will go to our colleague, the third person in town this
Friday, Mr. Nick Smith, a member of the Budget Committee, who
has been one of the great producers of sensible plans to get on our
deficit and get rid of the national debt. So it is a pleasure to intro-
duce the gentleman from Michigan, Mr. Smith.

STATEMENT OF HON. NICK SMITH, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF MICHIGAN

Mr. SmiTH. Mr. Chairman, my speaking ability probably is insuf-
ficient to convey my respect both Por you, Mr. Chairman, and you,
Mr. Davis. I would hope that my efforts will have an influence on
your minds with what I have to say this morning.

The headquarters for DRMS is in Battle Creek, MI, in my dis-
trict. Since I was elected in 1993, I have been very interested in
increasing the efficiency of DRMS, increasing the privatization, and
somehow dealing with the unfairness of the DRMS donation pro-
grams for States, municipalities, and some charities.

Fiscal year 1996 became sort of a new year for DRMS. DRMS
had been operating at a cost to taxpayers. In 1996, operating ex-
penses for DRMS were $277 million. In that same year, the DRMS
realized $191 million from sales and another $136 million from re-
source recovery. In other words, they operated at a profit.

DRMS has, I think, come a long way under the current leader-
ship. I am convinced that DRMS can and must continue to improve
its performance. However, we should remind ourselves that, unlike
the private sector, a primary goal for DRMS is to reuse the equip-
ment that goes through DRMS. They reuse it in the military and
then they reuse it in other branches of Government.

You, Mr. Chairman, mentioned the magnitude of the operations.
There are actually 13 million items now under catalog, 13 million
items, roughly 6.5 million items active and another 6.5 million
items inactive. So the volume of merchandise and the kinds of mer-
chandise are almost unimaginable.

Because property is offered for reutilization, transfer, or dona-
tion, the best property, with the most current cash value property,
is taken before it can be sold. The property remaining after the
cycle tends to have limited commercial application or requires de-
militarization. For example, DOD surplus aircraft parts are not
certified by the Federal Aviation Administration for commercial
aircraft, and that severely limits the ability to sell those parts.

So some of my concerns, Mr. Chairman, are: How do we do the
job more efficiently? And one of your concerns, as I understand
from your opening comments, is: How do we do a better job making
sure that we do an appropriate job of demilitarization and that we
don’t make mistakes selling what might otherwise be classified in-
formation?

Items that require demilitarization are typically high-dollar
items but lose much of their original value once the demilitariza-
tion takes place. The property that remains after reutilization and
transfer is available for donation by law. With your permission, I
just want to go on to donation, because it is one of my interests.

Entities eligible for donation include the State and municipalities
within that State, and certain nonprofit charitable organizations. I


128

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184

cheaper and better by private contractors, outsourcing, not re-engineering, ought
to be the preferred option.

Public Private Competition

A second proposal for DRMS suggests that the Pentagon undertake a
study under the authority of OMB Circular A-76 to determine whether public or
private sources can best perform this activity. As you know, the A-76 process
prescribes a process by which government employees compete with outside
firms to perform work that has been done in-house but could be outsourced.
We believe that this suggestion will simply delay needed reforms.

The average A-76 analysis takes several years. At the end of this period,
the Pentagon will still need to make a fundamental decision about the status of
DRMS. In the meantime, we will have expended significant amounts of OKM
funding for a function that remains outside the core business of defense.

DoD has already determined that DRMS is a non-core function. The
Defense Performance Review, the National Performance Review, and the
‘Commission on Roles and Missions all called for immediate outsourcing of
DRMS. In addition, this year’s defense authorization includes provisions for the
immediate outsourcing of this work. We have studied this problem for years:
further study is recipe for doing nothing.

Immediate Outsourcing

My recommendation for DRMS isa simple one. Let’s do what we
recommended four years ago. We should stop studying the problem and act
now to outsource this function.

Immediate outsourcing offers many benefits. We expect that this step can
save up to $150 million per year for DoD. These funds can then be used for other
purposes such as investing in new equipment or supporting training and
readiness.

Second, outsourcing should significantly expand the amount of personal
property transferred from DoD. This increase brings benefits to DoD by
increasing revenues from property sales. At the same time, it also helps ensure
that more excess property is provided to people and organizations that need it.
After all, one of DRMS’ primary jobs is to ensure that excess items are put to
good use. An outsourced DRMS will provide better service to both DoD and its
customers.


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32

Disposal of Munitions List Items and Munitions Scrap

Between June 1996 and April 1997, we issued five reports with numerous
findings from an audit of controls over disposal of munitions list items. The audit was
requested by the Defense Logistics Agency because a former Director was concerned
about the risk of inadequately demilitarized equipment or substances being released to
the public. Munitions list items (MLI) are defined as military articles that require
special handling at disposal to prevent unauthorized use by domestic or foreign
purchasers. Special handling instructions are provided by assigning a demilitarization
code when an item is introduced into the DoD inventory.

‘Two of the five reports dealt with problems related to MLI coding. In Report
No, 97-130, Coding Munitions List Items, we reported chronic noncompliance with
DoD policies for coding MLI items which by DoD policy is a responsibility of the
inventory control points of the Services and Defense Logistics Agency. A random
statistical sample showed that 52 percent of items sampled from DoD supply inven-
tories had inaccurate demilitarization codes. To compound the situation, inventory
control points were nonresponsive when DRMS challenged suspicious coding. These
problems need to be addressed vigorously so that the DoD does not incur unnecessary
demilitarization costs or inadvertently sell sensitive items. The risk of either of those
undesirable consequences occurring is high when the coding is wrong. In one instance,
about 10,000 tools had been coded as requiring demilitarization, which would have cost


103

rational business case. The CORM accepted this position and did not mandate any
action for wholesalt DRMS privatization. The CORM also recognized, “Outsourcing
is not a remedy....and the Government must retain certain core functions to protect,

the public interest.”

DRMS has worked diligently to establish a viable privatization strategy consistent
with the recommendations outlined in the CORM report. DRMS has engaged well
known business consultants to aid them in designing an executable strategy based on

entrepreneurial principles, funding, and management practices.

DRMS privatization strategy is based on the following principles:
© Continue to provide improved support to the customer;
‘© Retain a minimal set of governmental core competencies, but organize them in the
most efficient structure;
© Offer the Government workforce a chance to compete for providing other services;

© Use private sector capabilities that have a performance edge;
© Avoid establishing new Defense-unique businesses; in other words, our objective
would be to capture best existing commercial practice.

* Bottom line: outsource wherever it makes business sense.

believe it important to emphasize that DLA recognized DRMS was an
organization in need of dramatic change in its business processes and that the private
sector could provide assistance. However, itis not appropriate to follow an “all or
none” model. Of the outsourcing alternatives reviewed by DLA, wholesale
privatization failed to recognize the complexity of DRMS operations; the inherent
conflict between reutilization functions and profit-making sales; that some functions

are cost centers and others profit centers with very different business appeal.

Wholesale privatization would ignore the carefully drawn market-based

distinctions between DRMS's functions. It would require DLA to relinquish control


1

apparent need and without sufficient safeguards. The uncataloged items stood little
chance of being reutilized where they were and no chance of being reutilized at other
DoD activities, who had no way of knowing of their existence. Based on our audit and
a similar Naval Audit Service effort, we estimate that well over $1 billion (acquisition
value) of uncataloged and generally uncontrolled excess property was stored at the

13 research, development, test, and evaluation facilities that were audited. There are
73 other similar installations and it is reasonable to assume that most of them have had
similar practices. The material is not reflected on official accounting records and
security is often minimal, It needs to be inventoried and screened for reutilization or

disposal.

Management comments on the report were generally responsive. We will work
through the DoD audit followup process to resolve any open items, but it appears there

are corrective measures under way.

Report No. 97-202, Financial Reporting of Government Property in the Custody
‘of Contractors, is part of our extensive body of work related to implementing the Chief
Financial Officers Act of 1990 and the Government Management Reform Act of 1994.
One of the major barriers to favorable audit opinions on DoD financial statements is
‘uncertainty about the amounts reported as assets. Government-owned property in the
possession of contractors, whose acquisition value is roughly $92 billion, has been a
particular problem.


64

Mr. Horn. Well, I thank you very much for the thorough studies
that GAO has done in this area and that the inspector general has
done in this area.

Let me ask a few general questions here. I remember years ago,
a fairly powerful Pennsylvania Congressman got the NATO forces
and the U.S. Supreme Command there to buy a tremendous
amount of coal, which was shipped to Europe and every year or so
dumped into the Atlantic Ocean, so the next wave of coal could
come from Pennsylvania.

How many cases have we run into where they are selling out of
one door surplus parts and we still have contracts where various
plants around the country are manufacturing the same parts to
meet service needs? Have we, do you think, caught up with trying
to find this anomaly where we are still paying for new parts and
they are selling the old parts, which aren’t even used, out the back
door? What do you think?

Mr. LIEBERMAN. Well, I think we are doing better than we used

Mr. Horn. Do you mean the Pennsylvania Congressman either
died or retired?

Mr. LIEBERMAN. I am not sure whether we are still taking coal
to Newcastle or not, but we are shipping bottled water across the
ocean to the PX’s in Europe and things like that.

But the problem of asset management in the Department is a
very, very difficult one. We are not there yet in achieving what the
logistics community calls total asset visibility, so we know what
materiel we have before we buy any more.

However, as I said, a lot of attention has been paid to that, actu-
ally ever since Desert Storm, when it was really brought home to
us that we didn’t know what we were sending over to the gulf in
the tens of thousands of containers that we sent.

So a lot of money has been put into automated systems. Comput-
ers are really the tools that should enable us to overcome that
problem. We are still finding incidences where bad disposal deci-
sions are being made, yes, and sometimes some of the criminal
cases we have relate to people manipulating the system to dispose
of items in order to create illicit profits for someone.

Mr. Horn. Well, on those criminal cases, is there a pattern here
where the criminal activity is operated out of the local offices and
depots? Has somebody put the touch on some of the staff involved
to get a good deal, which they can sell at what would be very high
prices if you get it at a very low price?

Mr. LIEBERMAN. Some of them certainly involve collusion by Gov-
ernment personnel or bribery. I don’t know what the breakdown is.
We would be happy to provide that kind of analysis to you. It is
a mixed bag.

Mr. Horn. If you would, without objection, put it at this point
in the record, I think we would like to take a look at that. I think
we have all had a lot of lessons, whether it be spies or people deal-
ing with equipment, that we sometimes aren't scrutinizing their
IRS filings enough, if they are filing, and I would like to know if
those criminal cases revealed that part of it was an income tax
problem when they finally got into it.

Mr. LIEBERMAN. OK.



148

ss

3509 Connecticut Avenue NW « Sulte 1400
Washington, DC 20008-2470

Testimony Presented to the
‘Subcommittee on Goverment
‘Management, information and Technology
of the House Committee

on
Government Reform and Oversight
September 12, 1997

The Users and Screeners Association-Federal Excess Personal Property is a
consortium consisting of members from over 40 Federal Agencies and over 75
Universities, including the 1862 Land Grant, the 1890 Historically Black Colleges and
Universities, the 1994 Hispanic Colleges and Universities and the Native American
Indians, Federal contractors and other Federal cooperatives who advocate and
practice the use of Federal excess personal property as the first source of supply.
This organization endorses the fair and equitable distribution of both excess and
surplus Federal property to maximize the use of the property acquired through U.S tax
dollars.

if it were not for excess property programs at various participating universities
throughout the country, important educational, research and extension programs
could not exist

Programs participating under the U.S. Department of Agriculture and the U.S. Forest
Service are the two largest customers DRMS has for the transfer of Federal excess
personal property.

The following are the past years transfer totals:

Forest Service Land Grant Universities
FY9S $112 millon $28 million
FY96 $146 million $37 million
FYS7 $200 million” $29 million

* current estimate - exact figure not avaliable


‘not considering the continued need for many components on a patrol aircraft that it
intended to transfer to the Smithsonian Institution. The transfer was canceled as a
result of the audit.

Between January 1991 and June 1995, the Army Aviation and Troop Command
transferred 170 helicopters to the Army Center for Military History for exchange pur-
poses, The Center for Military History exchanged 86 of the helicopters for historic
Property or related contractor services. The helicopters that were exchanged were not
properly valued, and the transactions were not reported to the Internal Revenue Service
as required. The Army also transferred about $1.8 billion in excess helicopter parts to
DRMS during that period. About $153.1 million of parts carried incorrect
demilitarization codes and $37.5 million of flight-safety-critical parts were sold without
safety inspections, due to incorrect Army instructions to DRMS.

‘The U.S. Army Center for Military History also did not properly manage its
exchange-for-services agreement with Southeasiem Equipment Company, Incorporated.
The Center paid for, but did not make use of, outdoor storage areas; paid for, but did
not fully use, 3 warehouses; allowed Southeastern Equipment to store contractor-owned
Property in 2 of the warehouses; exchanged 16 helicopters for less than reasonable,
objective values; and subsidized the operations of Southeastern Equipment by paying
transportation costs on exchanges. As a result, we estimated that the Center overstated
its liability to the contractor by at least $1.1 million and undervalued the helicopters it


67

cation process really isn’t working very well, that people like truck
drivers are certifying that ammunition is inert, and they have no
idea what they are doing. People are turning in the right form, but
sometimes the signature is illegible or blank, and that is being ac-

cepted.

, again, we have good controls on paper, but the execution
leaves a lot to be desired. Those sorts of mundane problems cumu-
latively led us to the conclusion in our report that the Department
just needs to put a whole lot more emphasis across the board on
this whole disposal process, especially the demilitarization aspects.

Mr. Horn. On that very point, is the service inspector general in
the Army or Navy or Air Force or Marines—are they looking at
those processes and not just the DOD inspectors general? It seems
to me an ordinary part of their work when they get down to small
local commands is to look at whether the military's processes are
being adhered to.

Mr. LIEBERMAN. I agree, and I would have to say that they have
not been as active in this particular area as we would like them
to be. It is a matter of emphasis. Because we are talking about
local installation level decisions, you are absolutely right that this
is a very difficult process to oversee centrally. So since we have in-
spectors general throughout the military apparatus at all organiza-
tional levels, we would want to push down that responsibility and
make it a continuing thing at every installation and base world-
wide.

Mr. Horn. You are absolutely right.

Now, how do we get our hands on that in terms of communica-
tion with the Secretary of the Army or the Chief of Staff and say,
why isn’t this looked at? Surplus, potential surplus property, or
surplus property; why haven’t we looked at the processing by every
installation we visit? They visit Reserve Forces and they visit the
Active Forces. It seems to me that should be part of the routine
when you go to a base and see what kind of an organization the
commander is running at that base, fort, camp, air base, whatever
it is.

Mr. LIEBERMAN. Well, I would like to think that this body of re-
ports that we have put out will generate that kind of activity.

Certainly, Secretary Cohen himself was very upset about the
fatal accident in California, and when he requested us and every-
body else to go look at this, it was a clear signal to the Department
that at the very highest levels the safety issues were considered of
paramount importance.

So normally the system reacts well when they see what a new
boss is interested in, and I think the fact that we have had fatali-
ties really brought home that we have a problem.

Mr. Horn. Well, have any orders been issued yet based on your
reports?

Mr. LIEBERMAN. Yes. We have made, cumulatively, probably
about 40 recommendations, and I would say nearly all of those are
being implemented.

Mr. Horn. And at what level are they being implemented?

Mr. LIEBERMAN. Well, they are a mixed bag. In many cases they
require centralized guidance to be formulated, so—


104

over sensitive functions such as demilitarization and end-use monitoring, the control of
munitions list andiwerategic list items, and it would likely involve the sudden
displacement of more than 3,06C DoD employees-an action high in costs, risk, and
human ramifications. To the extent that outsourcing is the answer—and to a
considerable extent we believe it isthe proper course of action is through a deliberate
process that balances cost and risk and seeks the best value source of performance
through competition: to obtain the best, most innovative solutions from the public
and private sectors. This is a lesson proved time and again at State and local
government level, in Indianapolis, for example: competition is the key to reducing the
cost of public services. It is the essence of DLA's strategy.

DLA Approach

DLA has undertaken an approach of selective privatization, which takes into
account DRMS's core functions and leverages the abilities of various sectors of the
business community. As said above, it does 40 in a way that minimizes needless risk to
the mission. DRMS has also undertaken significant enhancement in the use of
technology to replace the costly physical movement of materiel with the movement of
information about the materiel. In determining where the highest potential for
outsourcing DRMS functions lies, we have identified DRMS's core functions as:

1. Oversight of business operations: ¢.g.,
command and control,
© fiduciary responsibility, and
© regulatory enforcement.
2. Centralized supervision of functions such as
© international sales;
© Reutilization, transfer, demilitarization, and other regulatory functions.


126

BENG TU-10-T00TH

COMMISSION
MILITARY ADVISORY BOARD

ADM STANLEY ARTHUR, USN (Ret.)
former Vice Chief of Naval Operations

GEN AL GRAY, USMC (Ret.)
former Commandant,
United States Marine Corps

ADM WESLEY MACDONALD, USN (Ret.)
former Commander in Chief
Atlantic, Atlantic Fleet, and Supreme
Allied Commander Atlantic

GEN MERRILL MCPEAK, USAF (Ret.)
former Chief of Staff,
United States Air Force

GEN THOMAS MOORMAN, USAF (Ret.)
former Vice Chief of Staff,
United States Air Force

ADM WILLIAM D. SMITH, USN (Ret.)
former US Representative to
NATO Military Committee

GEN GORDON SULLIVAN, USA (Ret.),
former Chief of Staff, United States Army

GEN JOHN VESSEY, USA (Ret.)
former Chairman of the
Joint Chiefs of Staff



45

aq

The intrinsic nature of the material being processed through DoD disposal
channels, plus the difficulty in maintaining strong controls at every storage or disposal
site, make this a high risk area in terms of criminal threat. The following examples of
recent cases give a good indication of the kinds of criminal schemes that the DRMS and
the Defense Criminal Investigative Service frequently encounter.

Operation Breechblock

In May 1995, the Defense Criminal Investigative Service received information
from a confidential source. As 2 result of that information, the Defense Criminal
Investigative Service and the Federal Bureau of Investigation undertook an undercover
investigation of the illegal diversion of military items from military installations,
Defense Reutilization and Marketing Offices, and the Army Center for Military
History.

An undercover agent represented himself to subjects of this investigation as a
consultant for small businesses who are attempting to secure Government contracts.
Additionally, the agent claimed that he had several clients who were military vehicle
and arms collectors. At the request of subjects of the investigations, the agent prepared
official looking paperwork to create the appearance that some of the subjects’ intended


87

Mr. WARREN. We have not done much recent work with regard
to looking at the bad apple problems, so I would have to defer to
Bob on that one.

Mr. Horn. Well—

Mr. WarREN. Yes.

Mr. Horn. Pardon.

Mr. WaRREN. I was going to go on. The incentive system, obvi-
ously again, as Bob said, we need to focus on reutilization first.
Then, once you get into the sales, it seems that if, in fact, those
items are going to be sold, that we should do prudent things to cre-
ate incentives to generate as many sales as we can, training people
properly and creating some type of incentive to reward people for

having properly in terms of disposing of the items.

We noted when we did our work that the sales revenues, for ex-
ample, don’t go back to a particular DRMO that behaves well. And
if there were some way that there could be kind of this cause and
effect, because this is a very decentralized system, that would re-
ward, in fact, good behavior with regard to how things are disposed.
of and the disposition.

Then obviously on the other side, as you said, taking appropriate
action where the inappropriate cases occur. The difficulty now is
we kind of have this system that’s pretty much neutral regardless
of what the behavior is. So if there were some things that could be
done along that line to reward the champions, so to speak, that are
really implementing the system and are benefiting the Government
the most, that would be an area that we would explore to see if
there would be some processes we can put in.

Mr. Horn. Well, I appreciate that. I've been suggesting for a year
now, and we're working on it, the identification of a procurement
corps where we could have incentives to have long-term career
service remain in the Government, and not just when they’re very
good at it being bought off by the private sector. Certainly, this as-
pect ought to be part of that procurement corps, where we're talk-
ing about acquisition and disposal meeting, because those do re-
quire certain skills; and we ought to appropriately recognize that
in the civil service methods that we now have. What we're thinking
about is trying to improve them and start there.

Mr. WarRREN. If I could add one additional thought in that area,
it’s been pointed out that really this is not just a disposal problem;
it’s a logistics system problem. But I think for DRMS, in fairness,
in terms of priority of operating the defense supply chain or logis-
tics system, the disposal portion of it has traditionally received a
very low priority; and the emphasis, the high priority, has gone to-
ward bringing materials into the system, getting the necessary dol-
lars to procure the items you need, and then storing and mainte-
nance as they’re used.

But then once that part of the system stops, and it moves into
disposal, all of a sudden there’s this major dropoff in terms of prior-
ity. And if there would be something that we could do to balance—
get that into better balance and say, as the private sector is, that
the entire supply chain is important to kind of the economic well-
being of this company and we can’t afford to have any one segment
of that not operating properly, 1 think that would be good, as well.


8

I also want to thank
our distinguished
witnesses for taking
time to share with us
their expertise as it
relates to this issue.

This hearing focuses
on the process used to
dispose of federal
surplus property as


OVERSIGHT OF DEFENSE SURPLUS EQUIP-
MENT AND THE ACTIVITIES OF THE DE-
FENSE REUTILIZATION AND MARKETING
SERVICE

FRIDAY, SEPTEMBER 12, 1997

HOUvSE OF REPRESENTATIVES,
SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
INFORMATION, AND TECHNOLOGY,
COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT,
Washington, DC.

The subcommittee met, pursuant to notice, at 9:30 a.m., in room
2154, Rayburn House Office Building, Hon. Stephen Horn (chair-
man of the subcommittee) presiding.

Present: Representatives Horn and Davis of Illinois.

Staff present: J. Russell George, staff director and chief counsel;
Mark Brasher, senior policy director; John Hynes, professional staff
member; Andrea Miller, clerk; and Mark Stephenson, minority pro-
fessional staff member.

Mr. Horn. The Subcommittee on Government Management, In-
formation, and Technology will come to order.

Today we will examine the excess and surplus property programs
of the Department of Defense. These programs are conducted by
the Defense Reutilization and Marketing Service, a branch of the
Defense Logistics Agency.

The function of the Defense Reutilization and Marketing Service
is to receive property no longer needed by a defense organization,
to render militarized property safe, and then either to transfer or
sell the usable property to other Federal agencies and private sec-
tor organizations eligible to receive Federal property.

The Defense Reutilization and Marketing Service operates under
a delegation of authority from the General Services Administration.
The Committee on Government Reform and Oversight has jurisdic-
tion over this authority and the applicable law that governs the De-
fense Reutilization and Marketing Service.

A number of recent press reports have brought into public view
problems that have long been evident to everyone reading from
many critical reports on the Defense Reutilization and Marketing
Service by the inspector general with the Department of Defense
and the General Accounting Office. These problems include inad-
equate demilitarization of property, inadequate screening of prop-
erty for use by other agencies, and inadequate financial practices.

Unneeded equipment with military potential is sold without
being properly demilitarized. According to the Bureau of Customs

(i)


150

Mr. Horn. Mr. Sodek, Frank Sodek is past president of the
Users and Screeners Association. Is there anything you would like
to add to what you've heard?

Mr. Sopek. Mr. Chairman, I would just like to say that the
Users and Screeners Association was basically developed or in-
spired by a need to have a unified voice for the Federal community.

As Mr. Hundle pointed out, we represent many different Federal
agencies, we feel that we can speak to these concerns where others
in the Federal community maybe cannot speak to those concerns.
That’s basically what I wanted to reiterate here. This organization
is here representing the Federal community and is expressing our
concerns, but also supporting the DRMS initiatives.

We think they’re doing an outstanding job. They’re one, of course,
of only 17 disposal agencies within the Federal community, and
just recently, of course, they've assumed responsibility for the dis-
posal of NASA property, the Department of Energy property, and
also the Corps of Engineers. So they have assumed a role here and
taken the initiative in trying to be very efficient in the disposal
process, and we would just like to say that we appreciate those ini-
tiatives.

Thank you.

Mr. Horn. Well, thank you. Let’s start with your association. I
notice in your presentation you mentioned the 75 universities, in-
cluding the 1862 land grants and the 1890 historically black col-
leges, and then in 1994 the Hispanic colleges and universities and
the native American Indians.

Now, there are 375 public universities I can think of, that in-
clude maybe all of the historically black colleges, most of the His-
panic colleges, and the native American Indian colleges, and that
is the membership of the American Association of State Colleges
and Universities, AASCU.

Are they not eligible for Federal materiel, or do the land grants
have some historic monopoly on it?

Mr. HUNDLE. These figures that we have represent the current
people that we have participating in our organization, in our asso-
ciation. These groups, as well as the Federal agencies, they are——

Mr. Horn. To what extent do you know, we will get it for the
record, that universities are eligible for this?

Mr. Sopexk. Mr. Chairman, if I might answer that, or attempt to.
Public Law 94-519 and Public Law 97-98 basically stipulate that
those universities, those land-grant universities only that are asso-
ciated with USDA-approved research projects and extension pro-
grams are eligible for this excess property program. But not all
public universities are eligible for the excess property program.

Mr. Horn. Mr. Liuzza.

Mr. Lruzza. He is speaking of access. All of the universities that
you listed are eligible for the surplus property program.

Mr. Horn. In other words, at the State level, public universities
are subsidized by the State?

Mr. Liuzza. It has nothing to do with USDA grants and all that.
They are an educational institution in their own State, so they
would have an avenue to acquire Federal properties through their
local State agencies.


42
14

— There were inconsistencies in estimating costs for purposes of cost
benefit analysis, reporting, and reimbursements. As a result, decisionmakers within the
Military Departments and the Defense Logistics Agency did not have sufficient
information to ensure the accurate calculation of net proceeds and net benefits at
installations, and to decide whether to permit their organizations to expand the direct
sale of recyclable materials. In addition, installation officials did not have adequate
cost information to decide on the most cost-effective methods for conducting direct
sales.

— Officials at 10 installations had not considered the option to outsource
‘Qualified Recycling Program functions to recycling contractors. As a result, the
installation officials could not always demonstrate that the best value for the
Government had been obtained by performing Qualified Recycling Program functions
in-house. Further, the 10 sites assumed sales and accounting responsibilities and costs
that could have been transferred to a contractor.

The DoD Pollution Prevention Committee, a Defense Environmental Security
Council Committee, recently took steps to improve the guidance and oversight on
direct sales. It formed a working group on recycling on which a member of the
Inspector General, DoD, serves. The working group is developing a Combined
Services Qualified Recycling Program guide that includes specific information on the


161

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FAX

Date: Thursday, Septomber 11, 1997
—

Time: 2.49:25 PM 8 Pages

To: Rep. Hom
U.S. House

Fax: (202) 226-1012
Volos: +1 (202) 228-6676

From: Rich Peternel, DRMS VP
DLA Couneil of AFGE Locaile(#189)

Fax: (616) 961-4712/5470//965-7363,
‘Volee: (616) 961-7063/5471//968-1834

Seam eeepan

Comments:
Dear Honorable Hor:

‘Subj: Hearing on the DRMS, 12 Sep 97

Unfortunately | have neither been invited to your subcommittee
hearing nor am | able te attend. Howsver, | do wish to read
into the record the enclosed Press Release which | previously
Prepared. As the sanior AFGE Union representative tor the
more than 2500 DRMS Bargairting Union employees, | believe
my words should have some bearing on your recommendations,

Vary respecttuily,

Rich Petemel


[INAACS) in nvr sce conmigo

P.O. BOX 3683, BAN ANTONIO, TEXAS. 78211
‘TELEPHONE: (210) 824-8861 - PAX (210) 824-4001

‘Written Statement of the National Association of
Aircraft & Communication Suppliers

Presented by John J. Fausti
NAACS Counsel — September 10, 1997

For submission and inctusion as part of the
official record and transcript from the bearing held
‘on Sepia 12,1997, before fh House Goverumant Management,
‘Subcomminee

‘The Defense Reutilization & Marketing Service (‘DRMS")

Pursuant to my letter of September 10, 1997, and on behalf of the National Association of
Aircraft & Communication Suppliers CONAACS", we hereby submit the NAACS' comments
‘These

‘Subcommittee staff, will be one of the topics concerning the Defense Reutilization & Marketing Service
(CDRMS") which will be addressed curing the Subcommittee's September 12* hearings.

‘The NAACS contends — and the evidence supports our view-- that far too many parts and
surplus items are being needlessly demilitarized and destroyed. As suggested by a number of
Government witnesses at a recent Senate subcommittee hearing, to the extent that surplus items are
being released improperly, the problem is not with the DRMS surplus sales program! The problem
is actually with DoD's transfer, reutilization and donation programs. One Government witness, DoD
Demilitarization Program Manager Jack Blackway, even suggested that the sales program already had
security controls in place which should be copied and applied to DoD's property donation
‘Another witness pointed to security problems inherent in DoD's Foreign Military Sales (“FMS")
program and the fact that the original equipment mamufacturers ("OEMs") operate without adequate
security restrictions in their own plants when they are manufacturing militarily-critical items.

To the extent that property is being illegally diverted overseas, we respectfully suggest that the
House Government Management, Information and Technology Subcommittee should direct its efforts

"The Senate hearings were held on July 8. 1997, before the Senate Judiciary Subcommittee on
versighe andthe Cours with regard to the tpi of Oversight of the Adminsrsive
for Dis of Go ‘Surplus Parts and Equi



OVERSIGHT OF DEFENSE SURPLUS EQUIPMENT
AND THE ACTIVITIES OF THE DEFENSE REUTILI-
ZATION AND MARKETING SERVICE

HEARING

BEFORE THE

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
INFORMATION, AND TECHNOLOGY

OF THE

COMMITTEE ON
GOVERNMENT REFORM
AND OVERSIGHT
HOUSE OF REPRESENTATIVES

ONE HUNDRED FIFTH CONGRESS
FIRST SESSION

SEPTEMBER 12, 1997

Serial No. 105-91

Printed for the use of the Committee on Government Reform and Oversight

a?

U.S. GOVERNMENT PRINTING OFFICE
7-216 WASHINGTON : 1998

For sal by the U.S. Government Printing Office
‘Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
ISBN 0-16-056483-2



108

Colonel MANSFIELD. This is already, for the most part, heavily
used. There are items that are turned in that have been—Clyde’s
gone—but are surplus. Most of the new, particularly medical-den-
tal-vet is moved by donees, transfers within the Federal Govern-
ment. And then humanitarian assistance programs take a lot of the
new items. So these are pretty well-used items.

Mr. Jones. Mr. Chairman, if I can just add to that briefly, one
of the theories behind this optimal marketing initiative, as it’s
called, is that the companies who trade in this kind of merchan-
dise, who know the markets for medical and dental and veterinary
equipment, basically have the ability to assess the value of used
equipment. They are willing to spend some of their own money in
some cases to upgrade it and bring it into serviceable condition and
resell it. That process that they add value to is one that we can’t
add value to. That’s where we would be in conflict with the private
sector.

So they’re basically doing a rehabilitation in some cases. They’re
finding then the buyers of that property that we would have to
search for on our own and providing a value added service, and I
think that probably keeps us well outside the realm of conflict.

Mr. Horn. Now, does the Defense Reutilization and Marketing
Service have any role in foreign sales?

Colonel MANSFIELD. Yes, sir. We do do some foreign military
sales of surplus. We have FMS cases, and we work that out with
the Defense Security Agency.

Mr. Horn. I read about some in relation to Latin America a few
months ago. I mean, you would be involved, then, in transferring
that equipment to the Navy or the military of a foreign nation?

Colonel MANSFIELD. If it’s an approved FMS case, yes, sir.

Mr. Horn. Yeah. Where is that decision made in the Department
of Defense, that we should supply those nations with whatever it
is we're supplying?

Colonel MANSFIELD. I believe that’s done in the Defense Security
Assistance Agency, sir.

Mr. Horn. Is that the Assistant Secretary for International Secu-
rity Affairs?

Mr. JONES. Well, he would be the policy authority that would say
yes or no. But the DSAA, or Defense Security Assistance Agency,
is more or less independently chartered under the Secretary of De-
fense to handle the mechanics of that process.

Mr. Horn. And do they essentially get first dibs at the equip-
ment before you get it? Is it relatively new equipment that they're
transferring?

Mr. JONES. It could be relatively new equipment. It depends on
the case. It really does, generally speaking, it’s going to be items
that pertain to weapons systems that were common at one time be-
tween our and another’s military that no longer are: F-4 parts and
things like that. So, in a sense, getting first dibs on it doesn’t con-
flict with any public interest. It’s primarily military equipment that
would be shared with an ally. And that would supposedly be in our
national interest.

Mr. Horn. What percent of your sales, if you will, are foreign,
be they allies or neutrals or whoever?


131

The Defense Tail-to-Tooth Problem

DRMS represents a small part of a larger problem—the imbalance
between spending on war-fighting capabilities (or “tooth”) and the
administrative capacity needed to support the war-fighter (or."tail”). Eight
years after the end of the Cold War, the proportion of our defense budget
devoted to administration and support functions is approaching 70 percent,
while only 30 percent goes toward military readiness and force modernization.

When the Cold War ended, the U.S. military downsized, cutting troops
and weapons to achieve a force structure appropriate for the post-Cold War era.
However, similar cuts did not occur in the support side of the Pentagon.

We must begin to rationalize our defense support structure. The only
way to undertake the needed modernization of our fighting forces without
increasing the defense budget is to cut administrative and support costs and
reinvest the savings in procurement.

As we move down this path, we are not covering new ground. The
Pentagon simply needs to follow the lead of American business, which began in
the late 1980s to take full advantage of the revolution in information technologies
and the possibilities of total quality control. American companies consolidated,
restructured, downsized, outsourced, and eliminated excess overhead, and re-
established their dominance in the world.

‘The Pentagon can achieve similar reforms through outsourcing,
privatization, and re-engineering. This effort can yield up to $30 billion in
annual savings. We at BENS feel so strongly about this issue that we have
organized the BENS Tail-to-Tooth Commission, chaired by former Senator
Warren Rudman and Josh Weston, Chairman of ADP, Inc. The BENS Tail-to-
Tooth Commission will assist the Congress, the Pentagon, and the White House
by highlighting how best business practices can be applied to the world’s largest
enterprise: the Department of Defense. With your permission, I would like to
submit the Commission's prospectus for the record.

The Operations of DRMS

Mr. Chairman, I am strong supporter of aggressive outsourcing and
privatization at the Department of Defense. While I recognize that there are
legitimate questions about this process and the nature of functions to be
privatized, these differences do not apply to DRMS. Nearly everyone who
examines its operations agrees that DRMS ought to be outsourced. In 1993, we


159

Mr. Davis of Illinois. So you think that if they are there, they
are there, but they can be overcome, they can be worked out?

Mr. HUNDLE. Yes, I feel that they can be.

Mr. Davis of Illinois. And my last question, Mr. Frost, is you in-
dicate that there seemed to be a shift from maximizing reutiliza-
tion to trying to make as much of a profit as we can. Would you
again maybe share with us the importance of the donation program
to the American public?

Mr. Frost. We deal in the donation program with a number of
organizations, obviously. We deal with the State agencies, we deal
with colleges and universities. The donation program also encom-
passes things like the Boy Scouts, Girl Scouts, the historic black
colleges, Hispanic universities, and such. We deal with many home-
less organizations. We deal with fire districts, as well as does the
USA group. We deal with a number of organizations like that,
small organizations in rural areas that would not be able to func-
tion and provide the services if it were not for that property, of
which they get for a fraction of what its worth. I mean, basically
they handle the transportation of it.

Like I said, there are a number of those organizations that would
not be able to function. We get blankets for the homeless, we get
tents, we get food, all of those sorts of things. So yes, it is very im-
portant to the American taxpayer that those services, those types
of services, like law enforcement, like fire and so on and so forth,
carry out those functions, and many times they would not be able
to if it weren’t for this.

Mr. Davis. Let me just thank all of you very much. In response
to your last comment, I visited just 2 weeks ago one of the land-
grant colleges, as well as a number of places in rural America, and
I left with the feeling that the need in many of those instances is
so great that there is no way that those individuals and institu-
tions would be able to generate the resources that the program
benefits them by any other way, and so I think that there is a
strong need to continue along that line, and that we get far more
value in terms of the bottom line than we would get with resale
or any other approach. So I thank you very much and I really ap-
preciate your taking all of your day to be here with us as well.

Mr. HUNDLE. Thank you.

Mr. Frost. Thank you, Mr. Davis.

Mr. Horn. I want to thank the gentleman from Illinois for his
interest in this subject and the fine job he has done. He is a de-
voted member of this subcommittee, and I appreciate his work, and
he is not enjoying the wonderful weather of Chicago by staying
here in Washington to look at some of these hotter issues.

I am going to put in the record at this point without objection
what we are calling the hybrid contracting history of the Defense
Reutilization and Marketing Service, and we will give them the
chance to respond to some of these contract situations where they
go out and there is a difficulty in just not seeming to ever close
some of them. We are just going to ask them at the staff level to
respond to that and put it in the record at this point.

{The information referred to follows:]}


Iv

Letters, statements, etc., submitted for the record by—Continued
Warren, David R., Director, Defense Management Issues, U.S. General
‘Accounting Office, prepared statement of .

52


109

Mr. JONES. Well, there are two kinds of foreign sales. There are
sales that are just sales that are made overseas, and that can be
excess property. For example, in Bosnia, as our forces are over
there, we generate excess; and a lot of that materiel ends up get-
ting disposed of overseas because of the cost of bringing it back.
That’s one kind of excess.

The FMS numbers, I don’t have offhand.

Colonel MANSFIELD. Last year, it was about $3.5 million in sales.

Mr. Horn. $3.5 million?

Colonel MANSFIELD. It’s mostly grant-in-aid through the military
assistance program.

Mr. Horn. Now, with three new nations being likely to come into
NATO, is there anything you have in your warehouses that would
be relevant to equip those nations? And has anybody looked at
that? Because my worry is we’re going to be stuck with the tab of
equipping these three nations, which I think is just completely
wrong, and there’s more about that as the fight goes on down the
ine.

But I'm just curious. What kind of materiel, if any, would help
bring them up to the standard of other NATO forces? And we’re ap-
parently engaged in more of that down the line.

Mr. Jones. Well, Mr. Chairman, I could really only guess. I
would have to say that the primary issue, as I understand it, with
equipping those nations would be with major items of equipment,

jor end items, and so forth, of which we don’t handle that many.

e primary business of DRMS is basically in spare parts. To the
extent that they have a weapons system or obtain a weapons sys-
tem from us, and we have spares that are no longer needed, those
would be available to them. The terms of the transfer and the cost
of actually doing the transfer might be pretty minimal. It might be
on their ticket. And so it would really depend on a lot of cir-
cumstances that, if I gave you a guess, it would be, for sure, wrong.

Mr. Horn. Yeah, but you do have a role in it.

Mr. Jones. We could have a role in it; that’s correct.

Mr. Horn. Very good. I gather here there’s a chart in this GAO
report, Federal Property Disposal, Information on DOD’s Personal
Property disposal process. And it’s on 13 of that GAO report,
which I want to include in the record at this point.

[The information referred to follows:]


Given those challenges, it is highly appropriate that the disposal process be
given a proportionate degree of DoD and congressional oversight. We in the Office of
the Inspector General are pleased to be able to report that our working relationships
with key organizations in the DoD materiel management community are excellent. The
Office of the Deputy Under Secretary of Defense (Logistics), the Defense Logistics
Agency, the Defense Reutilization and Marketing Service, and the Joint Logistics
‘Commanders, among others, provide a nearly continuous flow of audit suggestions and
investigative leads to us. We are hopeful that this close coordination will continue and
will bear fruit in terms of definitively identifying the major problems and opportunities
for improvement that should be addressed, and then assisting and monitoring the
corrective actions needed to minimize the risk of fraud, waste, and abuse.

Overall Assessment

Like most other aspects of DoD logistics, numerous problems in the disposal
area need to be addressed. This is not to say, however, that the Defense Reutilization
and Marketing Service (DRMS) is not fulfilling its mission or is a flawed concept.
Indeed, the DRMS cannot be expected to unilaterally solve most of the management
problems that we have identified; many problems lie partially (or in a few cases
entirely) within the spheres of responsibility of the Office of the Secretary of Defense,
the Military Departments, or other Government agencies.


89

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esodsiq
sueg ae
Apres wt snopreze}y

payyiesup,
pur dens

Jeg ul ssavoig [esodsiq SWC



‘needed to select the appropriane code.

‘The 1G found that one DoD depot contimed to assign discontimed and obsolete demilitarization codes,
‘even after its personne! bad atended a demil training course. The report also found in many instances,
DoD personne! relied upon the OEM, who manufactures the part, to assign deuil codes. This ia highly
improper. The OEMs have an interest in assigning codes that require parts to be destroyed after they
Pesce sarees bocmam Ge OEMs have Gonna incentive In prevecting excess parts fom being ed
by DI

__ The IG's report recammended that DoD should establish one centralized office for the purpose

recommendation,
‘as we have stated on many occasions to various officials at DRMS, DLA, DoD and now Congress,
fo many par ry being neodiessy desoyed. ‘Tt would be remiss of me to not point out that the IG
also studied whether or not there was a sizeable or substantial number of parts that were not on the
demi list but should be. The IG reviewed a sampling of parts not slated for demilitarization and

‘same manner that the IG projected the results of his findings concerning the pool-sampling of demil-
required materials.

‘We respectfully request that this Subcommite take no actions reganting to the DRMS sales
‘program which would adversely impact the members of the NAACS who rely on the asles program

4s their source of supply. Our members buy and use spare and replacement parts for military surplus
aircraft. Parts obtained from DRMS serve a variety of uses and needs. Some of our members operate

market for these parts. In fact, the NAACS was instrumensal last year in the Federal Aviarion
‘Administration's ("FAA") issuance of Advisory Circular 20-62D in May of 1996 which confirmed that
military surplus parts are eligible candidates for installation in commercial aircraft. Clearly, if the
FAA, who works wo maintain the safety of our airways, can see the valve in the use of these parts,
‘great efforts should be made to stop their senseless destruction.

It should also be noted that the military surptus industry offers DoD a safety net that affords
DoD a greater margin of error in down-sizing the military than would normally be available. The
‘sheer size of DoD makes it impossible to be 100 percent accurate in the disposal of surplus items. The
sailitary wurplos industry bas many parts available in its inventories for immediate delivery. This
inventory can be utilieed to support emergency military that require short delivery schedules that the
‘OEMs cannot meet. In the face of military down-sizing, it is critical that our members continue oo
taect the role of DoD's back-up warehouse for spare part.

‘Thank you for your time. Please fee! free to contact me at (202) 387-2615 should you have
‘any questions regarding my statement.


12

It is my hope that this
hearing will clarify
some of the problems
related to DRMS and
provide some
suggestions as to how
we can better dispose
of surplus federal
property. Therefore, I
look forward to
hearing from our


54

rate of return by dividing the proceeds from the sale of usable items by the reported
acquisition value of usable property sold. DRMS' overall rate of retum is based on all
usable items sold (excludes scrap).

‘The rates of return on property disposal at overseas DRMOs are higher than in the
continental United States. For example, in fiscal year 1996, the rate of return for DRMOs
in Europe was 6.98 percent, whereas the rate in the Pacific region was 2.88 percent. The
higher rates of return at overseas DRMOs are primarily due to better items being
available for sale because of fewer overseas transfer and donation customers. The lower
rates in the Pacific region, as compared to Europe, are due to (1) bilateral agreements
that give the host country “first right of refusal" (ie., first opportunity to buy the items),
(2) a smaller customer base, and (3) higher shipping costs incurred by customers due to
longer distances.


96

Mr. Horn. So without objection ——

Mr. JONES. Thank you very much. I wanted to use this chart
only because I thought it would be useful to spend a few minutes
discussing the process again so that we understand the complexity
of what is going on.

Before I do that, I want to make sure that I properly introduce
Col. Robert Mansfield here on my left, the commander of DRMS,
who is largely responsible for the tone of the previous witnesses as
far as change and positive change of this organization. And he will
be able to speak with you as we go on here.

What I want to do is just mention that one of the last things that
Mr. Lieberman said, the logistics system, is off the left of the chart.
And what you're looking at here on this chart is strictly what goes
on in the disposal process. With respect to those parts of the proc-
ess which we have looked at in privatization, if you look at the sec-
ond block from the left called receipt processing demil and segrega-
tion, that particular block right there is where most of the crunch
comes in the decision process where all of the problems begin that
often become parts of news media presentations and so forth.

It’s the decisions that end up in materials being scrapped so that
their full sale value can’t be realized fully. A lot of the materiel has
to go through precious metals recovery. These processes, all the
way up through to the reutilization, transfer, and donation blocks
on this chart, have no commercial equivalent. And it’s the scrap
sales and the sales of usable items part of that chart which are not
insignificant by any means. Those are the primary parts of the
business that are of commercial interest and that we are, in fact,
proposing and continuing to work commercial solutions. We're
working them in other places as well, but I just wanted to illus-
trate the number of processes that are not commercial processes.

The next chart shows something that I think we all need to real-
ize is a fact of life in the disposal business. The chart on the upper
left shows the relative value of materiel turned into the disposal
system over time.

And the projection is that that business, unless there’s a massive
resizing of the forces again, is a diminishing business, so that
there’s less materiel available than there was. Next year, there will
be less, and the year after and so forth.

The upper right chart shows that, as budgets have come down,
particularly in the Department of Defense, more and more materiel
is being reutilized. And one of the questions you asked the earlier
witnesses was how to incentivize reutilization. I can’t tell you that
we're asking for less money in our budget. But the fact that there
is less money is a great driving factor in the use of the system.

Third, down at the bottom chart, shows that we are planning as
a result of our obligation to the Secretary and the Department to
reduce the cost of the infrastructure and operations, to make a dra-
matic reduction in the cost of what our contribution to that infra-
structure is.

The next chart. I wanted to go through one concept with you very
briefly, and it’s been alluded to by previous witnesses. But our
plan—and there is a plan that we have briefed through the Depart-
ment of Defense, ‘and it has received approval at fairly high levels
of the Department—is based on the concept that there are some


DLA Council of AFGE Locals

Wah Paferrsal Phone 6106147 12/7eccp-vun 1SSz~ DIN P22 47A/POSS/IAS B1-D41 TOIT

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DED ating DOM Coke [ots mano To

Dan er-sane Daw sores Dev ante Beware

DRMS ENTERPRISE MANAGEMENT

INFRASTRUCTURE REDUCTIONS
For immediate Release

Paternal
DLA Counell of AFGE Locels
(16) 984-7083

Battle Creek, MI 49016 (April 11, 1997) The American Federation of Government
Ey (AFGE) Unton ip tn the Defers ation amd ing
Service

‘Corporate Management, re!
announces that the DRMS Corporate structure in the Continental United States
(CONUS) will be severely dewmsised.

The AFGE is an international Union of United States Federal Employess. The Defense
Logistics Agency (DLA) Cowncil of AFGE Locals represents some 45,000 federal
employees within the Department of Defense (DoD). The DRMS Vice President for the
AFGE Council represents some 3100 Bargaining Unit amplayeas in DRMS.

DROS, as erence nthe DLA Pres Rates of 10 Api! 97 (oe encase wl be
ixing its CONUS: workforce to 100 charing the reext

{several years — both at the Battle Crack, MI Headqworters, aed dsnepoe ie CONUS

field offices — the Defense Rautilization and Marksting Offices (DRMOs). Tha

‘CONUS DRMOs will be restructured and raeunutoad So sat 4760 by to end of Placa

Year (FY) 1999 (30 Sep 1999).

Fain
Pant compe Vigan PROOTINE WPE,
“TODO POR ALL THAT WHICH HONE CAM DO FOR OMEREL


exchanged with the company by approximately $1 million. Financial records are
seriously deficient and we are working with the Army to definitize any remaining
contractual liability.

The Army did not completely agree with our conclusions, but actions are being
taken to improve management at the Center for Military History. It is especially
important not to repeat mistakes in planning for the prudent disposal of helicopters and
their parts, because the Army needs to dispose of more than 1,900 additional

helicopters by FY 2000.

Our most recent report related to the disposal of sensitive material was issued
last week. Report No. 97-213, Evaluation of the Disposal of Munitions Items, resulted
from a review requested by the Office of the Secretary of Defense. In March 1997,
there was a fatal accident when a purportedly inert artillery shell exploded in a com-
mercial scrap yard in California. It had been purchased from the Defense Reutilization
and Marketing Office in Barstow, California. A criminal investigation of that incident
by the Defense Criminal Investigative Service is still in progress. As a separate effort,
we reviewed disposal practices for ammunition, explosives, and other dangerous
articles (AEDA) at 16 military installations. We feel confident that our findings are
indicative of the situations at most other bases. We found the following problems:


20

conspiracy and payment of a gratuity. Oseby, who was convicted by jury trial in
February 1997, was sentenced to 20 months of confinement, 4 years of probation, and
to pay $50,000 in restitution and a $100 special assessment fee.

‘The sentence is the result of an investigation concerning the illegal acquisition
and sale of Federal excess property obtained by Oseby and others from Defense
Reutilization and Marketing Offices throughout the United States. Oseby and others
were authorized screeners of Federal excess property for use by various tribal Indian
reservations. Over a period of approximately 3 years, Oseby and others conspired to
divert more than $80 million in Federal excess property for their own use and sale.
Most of the property acquired never made it to an Indian reservation.

Summary

Property disposal is an important, but often overlooked, facet of DoD logistics.
‘We welcome the Subcommittee’s interest in our work on the subject and ! should note
that all of the audit reports that I have discussed have been provided to the various
Congressional Oversight Committees for Defense, as is our routine practice. They are
all releasable to the public.


117

was to put DRMS under the microscope and look at outsourcing,
as much of it as we could. And as we looked at the process, as we
developed the enterprise management model, that was the first
real analytical insight we had that said, you know, some of the
things you do in this organization are different from the private
sector. We knew that, of course. But it was a matter of having a
good model to use that says, you cannot necessarily apply the same
logic to this part of the business, the reutilization part of the busi-
ness, the transfer and disposal part, as you can to the sales part.

And it’s at that point that we began to develop the strategy that
said, here’s how we’re going to outsource sales. We're going to try
auctioneering. We're going to try optimal marketing. We're going to
try joint venture. And eventually we will work our way through all
of the options that the business consultants that have helped us
have told us will make market sense for the sales portion.

Mr. Horn. On that point, in the role of auctioning—one of your
options—does the agency leadership have a feeling as to what is
the most helpful to raise the return of the revenue? Is it auction-
ing? Is it turning it over to the private sector? What is it? How do
you look at that?

Mr. Jones. What we found from the experience so far is that
auctioning is not the answer, that we're actually as good or better
at conducting auctions than those we’ve been able to hire to do it.

What we think is the best answer is the optimal marketing ini-
tiative, which, as we talked earlier, is the case where experts in the
commodity areas themselves, who know the business, work with us
in market—and market that property, if it involves bringing up the
condition of it from used to like-new condit.on and so forth. We
know that that’s going to produce more revenue.

We have results already that show our income return from those
kinds of processes under optimal marketing are far better than
they would have been if we had just gone out and sold the materiel
used. We don’t have the —

Mr. Horn. Is that partly splitting the profits?

Mr. JONES. That’s correct.

Mr. Horn. Would it pay to have people develop that expertise on
your own staff—

Mr. Jones. No, we did not.

Mr. Horn [continuing]. And keep all the profits? I mean, do we
know what type of services—and I grant you, knowing the market,
knowing the people, having the experience and all of that, let’s face
it, that might take years, and it’s worth doing exactly as you're say-
ing. But I'm just curious about what you've looked at to see who
gets the most out of it.

In other words, here’s this organization, 3,000-plus people, tre-
mendous experience behind it in the disposal decision. Hopefully,
they'll take into account some of the purchase decisions at the
same time that the disposal is going on, and I realize there’s a
problem in flooding the market with things at a point in time—but
what I’m interested in is where can we get the most for the Federal
Government and the Defense treasury, however we arrange the
law in that, that’s down the line.


53

process, particularly in the sales of surplus property, to improve its rate of return and
become more business-like in its operations. In addition, aspects of DOD's disposal
process that are deemed to be not inherently governmental functions may be outsourcing
candidates-an aim we supported in recent legislative proposals.

BACKGROUND

‘The Federal Property and Administrative Services Act of 1949 (P.L. 81-152), as amended,
placed responsibility for the disposition of government real and personal property within
the General Services Administration (GSA). GSA delegated the responsibility for disposal
of DOD personal property to the Secretary of Defense, who in turn delegated it to the
Defense Logistics Agency (DLA). DLA established the Defense Reutilization and
Marketing Service (DRMS) to carry out the disposal function. Although DRMS disposes
of the majority of items generated by DOD activities, certain categories of items, such as
nuclear devices and cryptographic equipment, are disposed of by other means.

In fiscal year 1996, DRMS had about 170 Defense Reutilization and Marketing Offices
(DRMO) worldwide that receive and dispose of personal property for DOD activities. It
also employed about 3,700 people and disposed of millions of items with a reported
acquisition value of almost $24 billion.

With a few exceptions, historical data indicates that DRMS has experienced operating
losses in recent years and low rates of return on disposed items. For example, DRMS
reported net operating losses in three of the four years from fiscal year 1993 through
1996. ‘These losses ranged from a low of $84 million in fiscal year 1996 to a high of $153
million in fiscal year 1995. DRMS' overall rate of return on the reported acquisition value
of all usable surplus property it sold in fiscal year 1996 was 1.97 percent. For fiscal years
1995 and 1994, the rates were 2.28 and 1.83 percent, respectively. DRMS calculates the

2


138

First is the DRMS Internet web site. This Windows-driven site
provides basic information concerning property availability in an
easy-to-use format. This tool is useful when determining if a par-
ticular item or items are available. It does not, in our estimation,
provide enough data to make informed screening decisions.

The second method involves using the General Services Adminis-
tration’s FEDS Systems. This system receives data from DRMS
and presents it in a searchable data base. It also allows for the
generation of automatic freezes or requests and automatically gen-
erates the request documents.

Unfortunately, it appears that the DRMS system and FEDS sys-
tem have a number of communications problems. We're working
with both GSA and DRMS to resolve these.

From our perspective, the major issue with FEDS is that it uses
older style mainframe-driven commands and screens. It is very
cumbersome and time consuming for the average customer to use.
GSA has made a number of improvements to the system; however,
resource restraints appear to prevent them from establishing a
more modern Windows-driven system. The FEDS system offers
more options for searching and selecting property than the DRMS
system. However, in its present configuration, user acceptance is
very low.

It is our recommendation that one system be established for elec-
tronically reviewing property availability. It is our hope that this
system would provide the necessary search options in an easy-to-
use format.

Where this system would reside and who would control it, we feel
is outside of our area of expertise to recommend. However, since
GSA provides services to all agencies within the Federal Govern-
ment, it may be prudent to see it reside with GSA. However, GSA’s
current funding level for support of FEDS would be, in our esti-
mation, woefully inadequate.

DRMS has informed the association that in an effort to reduce
its operating costs, a significant number of DRMO’s within the con-
tinental United States, are scheduled for closure. In their place,
DRMS is suggesting a number of alternatives led by the next gen-
eration of RCP. This version, touted as retail RCP, goes beyond
RCP’s current scope, encompassing all property in DOD custody.

In our perception, it will be impossible to prudently determine
the description and condition of used furniture, vehicles, machin-
ery, and the like, based on disposal condition codes and generic de-
scriptions; therefore, physical access to the property will still have
to be provided.

Logistically, we believe this concept will prove very cumbersome,
as all customers will be forced to poke around in every corner of
a military reservation to screen and remove property. We can envi-
sion hundreds of folks rambling around a military base attempting
to review property held at dozens of individual sites within the in-
stallation.

DRMS’s ongoing responsibility for the management and over-
sight of DOD's hazardous waste disposal program at an estimated
cost of $60 million per year, coupled with DRMS's resolve to cut its
budget by some $100 million per year, in our estimation, has a se-
rious and negative impact on its ability to maximize the redistribu-


49

Mr. Horn. Thank you very much. Let’s proceed with the other
witnesses, and we will question all of you singularly or jointly, as
the case may be.

‘We now have Mr. David Warren, the Director of Defense Man-
agement Issues, U.S. General Accounting Office.

Mr. Warren.

Mr. WaRREN. Thank you, Mr. Chairman.

I would like to also ask that my full statement be included for
the record.

Mr. Horn. They will ultimately be included in the record. All
witness’ remarks are put in right after we introduce them.

Mr. WarrEN. I will summarize my remarks.

I will just echo what the other witnesses have said: This is big
business; $24 billion in acquisition value is a lot of money. When
you think about that, that is twice the size of NASA’s budget, for
example; so there is a substantial amount of money here.

I would like to focus on three areas today. The first area relates
to how the disposal process works and how it differs from the pri-
vate sector disposal system. DOD’s process is governed by numer-
ous laws and regulations that require surplus property to be avail-
able to many organizations. As has been mentioned, these are con-
tained and outlined in the Federal Property Act.

I would like to look at the first chart here, if you would, and that
gives an overview of what has been discussed in terms of how this
process works. The first two sections—Ken, if you would point
out—deal with the excess property portion, and then the second
section that gets into the surplus property and deals with what
some of Mr. Smith was talking about in detail—and that is where
the donation process starts—and then you get finally into the last
area, the sales process, and this again—as I said—is laid out legis-
latively, the framework in which the disposal process works.

As you can see, the first priority is given to DOD activities, Fed-
eral agencies, and other entities such as law enforcement organiza-
tions and humanitarian relief activities. Second priority goes to
those approved donee organizations such as State and local govern-
ment and the Boy Scouts and Girl Scouts of America. As has been
mentioned, the items that are left then are sold.

Usually the most attractive items are taken through the dona-
tion and transfer process—Mr. Smith mentioned this—leaving the
lower value items bor sale. I think this is interesting, though. None-
theless, a substantial portion of the items are, in fact, disposed of
through the sales process.

Ken, if you could point again.

Fully some 80-some percent actually go through the sales proc-
ess. About 20 percent or less are actually donated or transferred.
In terms of DLA’s priorities, the DRMS priorities are, reutilization
and transfer. So you have kind of an anomaly that is occurring
here. The highest priority area, in fact, results in—at least from a
volume standpoint, line item and dollars, in the lowest amount of
activity, if you will.

In contrast, the disposal system of the private sector companies
that we talked with—and this was particularly in the commercial
airline industry where we did our work—are much different from
the DOD system, and I would like to put up a chart to display that


DEFENSE
LOGISTICS
AGENCY

NEWS|
RELEASE

78

OR IMMEDIATE RELEASE APRIL 10, 1997

DLA ANNOUNCES STRATEGY FOR STREAMLINING AND
CONSOLIDATING DOD'S REUTILIZATION, MARKETING,
AND DISPOSAL MISSION

‘The Defense Logistics Agency (DLA), headquartered at Fort
Belvoir, Va. today announces its strategy for dramativally reducing the
cont of reuilizing, transferring, donsting (RTD) and selling excess military
‘equipment,

‘The Defense Reueilization and Marketing Service (DRMS), «DLA
‘Geld activity, performs the RTD mission sod sales operations from its
Battle Creek, Micb,, beadquaners. Digposal is managed through three
regions. Within the regions are 148 Defense Reutilization and Marketing
Offices (DRMOs) in the continental U.B., and 19 DRMOs everseas.

DLAs mategy calls for setions which, when completed, will
result in w significantly reduced total workforce snd fewer DRMOs. These
actions ar¢ expected to translate into 2.36 percent cost reduction to the
military servicex aver six years,

‘Actions are specifically designed to:

+ Reduce DRMS headquarters by 25 pereent over two years;
+ Eliminate the: offices in Col Obie

@9 personnel) and Ogden, Utah (43 personnel):

Increase use of electronic inventory visibility to reduce
‘bepdling and transportation costs; and

swore


88

And 1 think that’s a business process change that would need to
made.

Mr. Horn. I think that’s an excellent suggestion, that perhaps if
we're going to have an identifiable part of a career service, that we
would have them rotated through both areas there, so they under-
stand the total process. I think that makes a lot of sense as well.

Well, gentlemen, we appreciate all your help on this and the fine
work you and your staffs are doing over the years. Thank you for
sharing that experience with us this morning. It’s appreciated.

you.

Mr. LIEBERMAN. Thank you.

Mr. Horn. Thank you, Mr. Lieberman. Thank you, Mr. Warren,
and thank you, Mr. Morrison.

We will now go to panel III, Jeff Jones, Principal Executive Di-
rector for Materiel Management, Defense Logistics Agency; and
Col. Robert Mansfield, Commander, Defense Reutilization and
Marketing Service, Department of Defense.

OK. Stand and raise your right hand.

[Witnesses sworn.]

Mr. Horn. Thank you. The witnesses have affirmed.

We will begin with Mr. Jones.

STATEMENTS OF JEFF JONES, PRINCIPAL EXECUTIVE DIREC-
TOR FOR MATERIEL MANAGEMENT, DEFENSE LOGISTICS
AGENCY, DEPARTMENT OF DEFENSE; AND COL. ROBERT
MANSFIELD, COMMANDER, DEFENSE REUTILIZATION AND
MARKETING SERVICE, DEPARTMENT OF DEFENSE

Mr. JONES. Thank you, Mr. Chairman. I appreciate that this is
Friday, and that this is a serious subject for you and for Mr. Davis.

Mr. Horn. Let me just ask you, Mr. Jones, the staff received this
DRMS disposal process in brief?

Mr. JONES. Yes.

Mr. Horn. We'll put it in the record at this point.

Mr. JONES. All right.

[The information referred to follows:]


15

military installations’ direct sale of recyclable material. It is scheduled to be issued in
September 1997. This is a growing program that will be a more significant component
of the disposal picture in the future.

Defense Reutilization and Marketing Service Financial Issues

‘The Defense Reutilization and Marketing Service is financed as a working
capital fund, formerly part of the Defense Business Operations Fund and now the
Defense Agencies Working Capital Fund. The DoD accounting systems were not
designed to produce auditable financial statements and numerous system and control
problems are being addressed across the spectrum of working capital funds. Therefore,
the criticisms of DRMS financial reporting in several previous audit reports should be
viewed in that overall context.

As indicated in Report No. 95-220, Financial Statements of the Defense
Logistics Agency Reutilization and Marketing Service Business Area of the Defense
Business Operations Fund for FY 1994, both the DRMS statement of operations and
statement of financial position for FY 1994 were unreliable. The reported profit of
‘$98.9 million was overstated by $82.3 million because the Military Departments had
een taxed (“component level billings”) by the DoD to make up for DRMS cash
shortages. Accounting for public sales proceeds and the hazardous waste disposal
program was inadequate. More needed to be done to reduce the number of buyer


129

General McCINERNEY. Yes, sir. I have those, and the reason we're
strong supporters of a; ssive outsourcing, we were not alone, the
Defense Performance Review, the Corps, and the Commission on
Roles Missions was there. Roles and Missions also supported it, but
if we can’t outsource DRMS, what can we do to save these dollars
to move them over into acquisition with the $20 billion shortfall?
So we think this is an important target.

We also think—and I enjoyed the conversation with Mr. Davis
that you had with them—it is extremely important how we handle
the people shifting. It is very important how we do that and to use
it as a role model. We would rather see those numbers come down
quicker and those people move into the private sector.

Our conversations with private sector companies that are inter-
ested in this business says they'll take these people. And the im-
portant way we retrain them is very critical in this process. So we
strongly endorse that. We feel that the private sector can do it be-
cause, right now, they're doing it for the U.S. Customs Service. And
they’re very successful in the U.S. Customs Service; it has been one
of the major success stories. You should certainly look at that.

Energy and II

Mr. Horn. I might add, we’re trying to hold a hearing on their
resources in the October break. So we're going to get into that.

General McINERNEY. I commend you to benchmark right there
on what they have done.

Mr. Horn, Right.

General MCINERNEY. Now, I don’t want to get caught up on dol-
lars, but the fact is, when I was the Assistant Vice Chief of Staff
of the Air Force, I was spending about $50 million to give to DRMS
and, it turned out, so were the other services. So it’s about $150
million a year for the services that they're paying to DRMS to do
this. That money could easily go into the warfighting side if, in
fact, we had very good management. And if you look at the Cus-
toms Service and see how they’re recovering dollars, I think that’s
the kind of ideas we’re talking about, shifting dollars from the tail
into the warfighter.

Now, I think that I would like to say that for those that don’t
think a Fortune 500 company can do this, they haven’t seen the
tremendous revolution that has gone on in the private sector. We
have been sitting for quite some time at an unemployment rate of
5 percent, plus or minus. We are short people in the private sector.
And if we do this Properly, we can move these people into the pri-
vate sector, protect their jobs, and still make them contributing;
and we, the Federal Government, get a much more efficient organi-
zation.

So I would like to stop there, sir, and give the other members
an opportunity to discuss the issues.

Mr. Horn. Well, we thank you for that opening.

{The prepared statement of Lt. General McInerney follows:]



113

concept. Those came out of enterprise management. They weren’t
originally part of the basic plan.

Mr. Davis of Illinois. Did I understand that we're projecting, you
know—I don’t recall the period of time, but that we're actually
going to be able to reduce the personnel by two-thirds over a period
of time?

Mr. Jones. That's correct.

Colonel MANSFIELD. That is the plan, sir.

Mr. Davis of Illinois. Do we have any idea how many of these
individuals might have reached retirement—or age, I mean—and
actually will be phasing out of their own volition in terms of just
having reached the time to go, as opposed to individuals who will
have to go out into the marketplace and seek other opportunities?

Colonel MANSFIELD. Mr. Davis, that’s a very large concern, not
only professionally but personally with me. What happens to these
truly dedicated people, a small number, who handle billions and
billions of dollars of surplus? Part of the design of the timeline is
to give our employees the opportunity to make the changes in their
personal lives and see what’s happening and make those personal
decisions.

Our work force is relatively old. It averages about 47 years old
and 16 years’ service. We have quite a number of people that are
eligible to retire. We intend to provide as much as the law allows,
all of the VSIP, VERA’s, early retirements we can.

We have placed in our budget money for retraining that we can
offer the employees in these locations the opportunities for training
and jobs that would target or—professions or skills that would tar-
get them for jobs in their local communities. We're fortunate that,
while we have over 150 locations, most of our sites are relatively
small, average somewhere between 12 to 15 people. We have large
ones at the depots of 100 or so, but that’s only about 24 out of the
entire system. It is the smaller ones that we need to reduce as
they—we have 66 DRMS’s just to give you an idea of the 138 with-
in the continental United States that only do 15 percent of the
work now as the military is restructured.

So we phase this in and offer all we can to make sure people are
all taken care of. As we hear that we may be diverted from our
plan, on the personnel side of it, it causes us a little bit of concern,
because we have spent a lot of time explaining this to our employ-
ees. I will say that, for the most part, in my travels to the DRMO’s
around the world, that they understand what we’re doing. They
may not like it individually, but they understand that we have ex-
cess capacity and we have to become more efficient.

Mr. JONES. Let me add something to that, because you, Mr.
Davis, asked that question earlier. It reminded me of a problem
that we have also in our distribution business, because we also in
DLA run 23 warehouses in the United States, warehouse com-
plexes in the United States with a total employment of 15,000, and
we have to essentially cut that in half over the same period, a
much more dramatic impact.

What we found is—and again an aging work force, 47 to 49—
what we found is that, if the private sector actually competes for
the work, an efficient company is efficient because it doesn’t have


122

As Mr. Jones said, we've done that in the DLA depots, and it’s
paying off.

Mr. Horn. Now, the General Services Administration is also in
a similar type of business. Is there any thought of combining both
of these? Or do you feel the markets are so different that it
wouldn’t make much sense?

Colonel MANSFIELD. We have held discussions with the GSA
about this and how to integrate the data exchange and to come
to—particularly as far as the donees are concerned, the State agen-
cies that GSA has some allocation authority over—to come to a sin-
gle system so there’s visibility for everybody at the right time as
it moves through the cycle. Once it’s to the donees’ cycle, then that
would come up, and it greatly simplifies things for donees, GSA,
and for us.

We're actively pursuing that. As a matter of fact, sir, on the 16th
of this month, GSA representatives will be at my headquarters in
Battle Creek to discuss that very thing.

Mr. Horn. Well, that’s good. If you don’t mind, if it isn’t too
much trouble, just since you brought up the Internet, which I’m a
strong supporter of, that approach, if you could file for the record
the costs of the full-time equivalent personnel that’s devoted to the
web site and on-line screening system and what the costs are, I
think that could be a model for a lot of other agencies in somewhat
related adventures.

There will be questions that both the majority staff and the mi-
nority staff might get together and send you gentlemen and other
witnesses. And if you wouldn’t mind answering them, we'll just put
them at this point in the record.

(The information referred to follows:]


127

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151

Mr. Horn. Now, in Pennsylvania you have a unique concept, not
only a series of public universities but also largely or partially pub-
lic-supported universities, such as Pittsburgh, and I believe-—

Mr. Liuzza. The same in Louisiana, Mr. Chairman, like Tulane
University, Xavier, which is a predominantly black Catholic univer-
sity, and a couple more.

Mr. Horn. So they have access.

Mr. Liuzza. They have access. As long as they will sign the civil
rights compliance of 1964 and follow all Federal guidelines, they
can acquire property through us, not through the FEDS, system,
through us.

Mr. Horn. Well, I wanted to clarify the record on that and I ap-
preciate your response there.

Let me ask you now, this came up in Mr. Frost’s testimony: in
committee record of the State agencies’ technology committee in
August, I believe, on the inadequacies of GSA’s FEDS system, and
also on the Defense Reutilization and Marketing Service web site
for electronic disposal. 1 want to include in the record at this point,
without objection, this document shared with the two agencies,
which we will, if they haven’t already seen it, and ask them to de-
velop a workable system that is customer friendly.

As I gathered from your testimony, Mr. Frost, what you would
like to see through the modern means of communication is a really
very good perhaps photo of all parts—or tape running, a video—of
all parts of the particular piece of equipment so you know what you
are in for, or do you feel that personal inspection is the only way
to solve this problem?

Mr. Frost. I think that having pictures or video on the Internet
helps and will reduce some of that need, but I still think there are
items that still require physical inspection to see if there are en-
gines in vehicles or what have you, because obviously it is very dif-
ficult to get all of that, all sides of different things and the working
components and such. So I think there will still be some need for
physical inspection.

Mr. Horn. Right. Any other comments any of you have on that
issue of how GSA and how the Defense Reutilization and Market-
ing Service ought to communicate with modern technology, to at
least let the outside world that is eligible know of availability? And
then you have to check it out after that. Mr. Sodek.

Mr. SoDEK. Mr. Chairman, I would like to speak to that issue.
We, the Users and Screeners Association, also support the need for
a unified computer system that would allow a particular search,
rather than having to go to two or three or four different systems
to find out about this property.

In terms of providing visual images, that helps but certainly does
not solve the problems that we are faced with. You may have a line
item that consists of 15 widgets and we see a picture of the best
widget in the lot, and that is what you have to go on. So you may
acquire these based on this one individual photograph, where in
fact that is the only one in the whole batch that really looks that
way. When you go, you finally realize what you have. Like Mr.
Frost pointed out, you have a pig in a poke sometimes. So having
a visual image helps, but it does not answer the entire problem
that we face.


155

port structure, infrastructure, if you will, into the information age,
just like the Wal-Marts and everybody else has done. So this will
become a greater issue for you all to be concerned with.

Mr. Horn. Well, those are very helpful figures. The $102 billion
cold war and now $72 billion, and you think we ought to maybe get
down to $32 billion.

Now, part of getting down to that, it seems to me, and part of
privatization would be to what degree do we have the warehouse
capacity now. If it’s privatized, fine, let them worry about it. But
obviously the States also have warehouse capacity; and I guess if
Mr. Frost and anyone else wants to answer, I would ask you: The
State agencies have that warehouse capacity, and as that infra-
structure costs within the Defense Reutilization Marketing Service
are reduced, would anything prevent them from contracting with
State agencies for disposal, the storage functions? We all know
about the Japanese inventory system that increasingly American
industry finally woke up and adopted, that you get that flow mov-
ing into your factory line and you don’t have to sit around with
hundreds of acres of storage on your own overhead,

So Mr. Frost, is that State capacity in warehousing available?

Mr. Frost. I think you would have to look at it on a State-by-
State basis, and it definitely could be beneficial in some cases. I
think as an overall program, it could be a portion of that. There
are some States who have a number of DRMO facilities, and as
well they may not have the warehouse space to handle all of that,
but on a case-by-case basis, and maybe within particular DRMO lo-
cations and things of that sort, I think it could fe

Mr. Horn. It seems to me you have prison industries at the Fed-
eral level, you have it at the State level as well, that a lot of that
equipment would be good to be worked on and brought up to speed
by le that are trying to learn a trade and get an education
while they are in prison.

Mr. Liuzza. Mr. Chairman, we are doing a certain amount of this
with outside Federal agencies at this time. If they are pressed to
move out of an office, or they need to move property, we haul it
to our warehouse and hold it for them.

Mr. Horn. Mr. Frost, I don’t know if you are familiar with this,
but the Defense Reutilization Marketing Service office in El Toro
apparently has had a unique working relationship with the State
agencies.

Do you want to describe it for the record?

Mr. Frost. In the past, El Toro has been a big bone of contention
for us, particularly in the State of Arizona, and also for the State
of California. When the push came to get the property out to, you
know, for sales for the profitability, El Toro went into a number of
unique things that they were trying to do. But the bottom line,
what it boiled down to, is that property was being hidden. We
would find property that was supposed to have gone through the
RTD process that would end up in the sales process, and there
would be property put aside that we weren't allowed to look at.

There are a number of things, I don’t have all of the particular
instances, but they have been brought up in the past. I know that
the California State agency as well as the GSA regional office met
with the DRMO chief, they have met with others in DRMS. The


CONTENTS

Hearing held on September 12, 1997 ...
Statement of:
Jones, Jeff, principal Executive Director for Materiel Management, De:
fense tics Agency, D ent of Defense; and Colonel Robert
Mansfield, Commander, Defense Reutilization and Marketing Service,

Lieberman, Robert J., Assistant Inspector General for Auditing, Depart-
ment of Defense; and David R. Warren, Director, Defense Management
Issues, U.S. General Accounting Office, accompanied by Earl Morris,
senior analyst, General Accounting Office .

McInerney, Lt. Gen. Thomas, (USAF-Retired), president and chief execu-
tive officer, Business Executives for National Security; Randy Frost,
president, National Association of State Agencies for Surplus Property,
accompanied by Jack Liuzza, director, Louisiana State Agency for Sur-
plus erty; and James Hundle, president, ‘Users and Sereeners As-
sociation, accompanied by Frank Sodek, past president, Users and
Screeners Association ..

Smith, Hon. Nick, a Representative in Congress from the State of Michi-

gan :
Letters, statements, ete., submitted for the record b;

Davis, Hon. Danny K., a Representative in Congress from the State

of Illinois, prepared statement of

Frost, Randy, president, National Association of State Agencies for Sur-

plus Property, prepared statement of ..

Horn, Hon. Stephen, a Representative in

Californii

Bisposition by Reported Acquiaition Value’ FY 1888268
sition by Reported Acquisition Vaiue,
DRMS Disposal Process in Brief
Hybrid contracting history
NAACF document
Prepared statement of .
Hundle, James, president,
statement of
Jones, Jeff, principal Executive Director for Materiel
fense Logistics Agency, Department of Defense, pre
of ..
Lieberman,
ment of Defense:
Information concerning the Defense Criminal Investigative Service

Congress from the State of

ment, De-
statement

of FTE personnel
Mclnerney, Lt. Gen. ,
tive officer, Business Executives for National Security
Prepared statement of
Prospectous on a BENS nm
Sessions, Hon. Pete, a Representative in Congress from the State of
Texas, prepared statement of ...
Smith, Hon. Nick, a Representative in Congress from the State of Mich:
gan, prepared statement of ....

di

124
15

Ba

4

123

130

22
18


145

BIOGRAPHY

Jack V. Liuzza
Director - Louisiana Federal Property
State Coordinator - 1033 Program

Jack was born on June 28, 1938 in Amite City, Louisiana. He graduated from Amite High
School in 1956 and attended Southeastern Louisiana University until 1958. He worked in a family-
owned business until beginning his employment with Louisiana Federal Property in 1972 as a
screener. In 1977 he was promoted to Assistant Director and in 1995 was appointed Acting
Director

Jack is now the Director of the Louisiana Federal Property Agency and has been very active
in the National Association of State Agencies for Surplus Property (NASASP) activities. In 1996,
Jack was elected Area Vice-President of NASASP and in 1997, he was elected Area President. He
has also served on the NASASP Legislative Committee for the past two years


106

Review and, I believe, represents the best value solution for DRMS's customers and the
taxpayers of Amegica.
Mr. Chairman, that concludes my prepared statement, I will be pleased to

answer any questions you may have.


66

probably 10 to 15 years and is still not there. If there were one
thing I think that you could do to improve the entire economy and
efficiency of the logistics system would be to make and get that
process in place as quickly as possible.

Mr. Horn. Let me move to who should demilitarize dangerous
pieces of equipment. Where is that burden now, on the military or
on the disposal service and its experts in either warehousing or
wherever? How do we handle that?

Mr. LIEBERMAN. Well, the decisions on what needs to be demili-
tarized and to what extent are made by Government personnel.
The actual disposal—the mechanics of the demilitarization, as put-
ting a torch to a gun barrel or whatever, is often contracted out.
Some of it would be in house.

Mr. Horn. Well, what I am trying to get at here is, let’s take mu-
nitions. I mean, aren’t the military the best le in the field to
know whether this is a live piece or not? And, if so, do they have
the capacity to do something about it in demilitarizing it, let’s
say—unless there is a better word for it—in the field, before it is
ever sent from either the warehouse, where we often have them
stacked high, and no sergeant or private or captain has ever gotten
their hands on it. They are just sitting there, and sometimes we
don’t even know they are sitting there, and that bothers me.

But where is the point in the organization where somebody will
technically know whether that is live or not live? From the demili-
tarized sense, it could be a hazard to someone.

Mr. WaRREN. Again, if I could use the chart to my left, imagine
that those are the military personnel that are making the decision
about whether or not an item should be put into the disposal proc.
ess, and they would also do the coding with regard to the condition
of the item and whether it needs to be demilitarized. Then, when
it comes into the disposal process, that actual activity would take
place.

Mr. Horn. Weil——

Mr. WarREN. So it is a handoff.

Mr. Horn. OK. In the cases that did occur, did we trace it back
to find out where the error was made?

Mr. WARREN. Our data have shown that it has happened on both
sides. Sometimes it is poor coding from the military members as
they move it in; sometimes it is poor screening. DLA does go
through a screening process when they receive the items, and poor
screening occurs.

Mr. Horn. Well, when we say poor coding, are we talking about
a judgment call and the wrong number is in this column, or are
we talking about somebody that is semi-illiterate and you can’t
read their handwriting —not that you have to be semi-illiterate.

Mr. LIEBERMAN. Well, actually, we are really talking about illegi-
ble signatures.

If you read our report on munitions items, there is a certification
process. When the military installation turns over fireshells, for ex-
ample, to the Defense Reutilization Marketing Office, they are sup-
posed to certify that that materiel is no longer hazardous, it is
inert, and it is not dangerous. And there is a nice control on paper
which includes certification that a technically qualified person has
inspected the materiel. But we found in our review that this certifi-


52

Mr. Chairman and Members of the Subcommittee:

We are pleased to be here to discuss the Department of Defense's (DOD) process for
disposing of surplus personal property. Surplus personal property can be any items other
than real property, which is land and buildings and items permanently attached to them.
Personal property includes items such as aircraft parts, computers, furniture, and
clothing. DOD maintains a complex disposal system that is characterized by massive
volumes of excess property. In fiscal year 1996, for example, DOD disposed of millions
of items with a reported acquisition value (the amount originally paid for the items or
most recently paid for similar items) of almost $24 billion. Our testimony today will
focus on (1) an overview of how the disposal process works and how it differs from
Private sector disposal systems, (2) the means used to dispose of personal property, (3)
efforts to improve the efficiency and effectiveness of the current disposal operation, and
(4) opportunities to improve aspects of the disposal function through competitive
outsourcing.

‘SUMMARY

DOD's disposal process is governed by numerous laws and regulations that require DOD's
surplus property be made available to many organizations. Thus, the best items are taken
through the transfer and donation process leaving the least marketable items available for
sale, This and other factors contribute to DOD's low rates of return. Although the
private sector obtains higher rates of return than DOD for comparable items, it does not
handle the quantities, types, and conditions of items that DOD does. Thus, the private
sector is able to develop disposal expertise and tailor its disposal strategies so that it
obtains higher rates of return,

DOD recognizes that it needs to improve its management of property disposal and has
adopted or is planning to adopt a number of commercial practices that should help.
improve its operations. DOD is also involving the private sector in certain aspects of the


101

property generated by the military services is transported to a DRMO for processing
through reutilizatidn to other DoD activities, transfer to other federal agencies,
donation to state agencies, or public sale. Throughout this process DRMS follows
special processes for property identification to determine whether it requires additional
controls, including end-use certifications by buyers, hazardous materials destruction,
precious metals recovery, all the way to complete destruction (DEMIL). These special
processes are designed to limit adverse impacts on national security, public safety, and
the environment, The disposal program is highly visible and has multiple

constituencies, many with conflicting interests.

Interestingly, just as it is DRMS's responsibility to ensure sensitive military
equipment or potentially hazardous items are not inadvertently released to the public,
there are major markets for these materials. ‘Thus. unlike a true business, DRMS, on
occasion, must reduce to scrap some of the items that, in an open market, would

receive the highest return on investment.

DRMOs are located in 45 states, 2 overseas territories, and 13 foreign nations.
Items found in DRMO inventories inchide most types of property found within the
Department of Defense, ranging from clothing and hand tools to aircraft and tanks.
“The magnitude of the DRMS program is enormous, as is its overall benefit to the
taxpayers, In fiscal year 1996, reutilization to DoD activities and others authorized by
law totaled $2.8 billion, transfers to federal agencies totaled $465 million, and issues to
state agencies exceeded $590 million, Almost $8.5 billion worth of property was sold

to the general public.
DRMS Services: Should DoD Make or Buy Them?

During the 1970s through today, DRMS has executed its mission. It has:
+ Recycled billions of dollars worth of property within DoD;


26

{Witnesses sworn.]

Mr. Horn. Mr. Warren, if you would introduce the gentleman ac-
companying you.

Mr. WARREN. Mr. Morris, who is one of our senior evaluators and
has worked very closely on these issues.

Mr. Horn. What is Mr. Morris’s first name?

Mr. Warren. Earl Morris, sir.

Mr. Horn. What is his title in your organization?

Mr. WarrEN. Mr. Morris is a senior evaluator with GAO.

STATEMENTS OF ROBERT J. LIEBERMAN, ASSISTANT INSPEC-
TOR GENERAL FOR AUDITING, DEPARTMENT OF DEFENSE;
AND DAVID R. WARREN, DIRECTOR, DEFENSE MANAGEMENT
ISSUES, U.S. GENERAL ACCOUNTING OFFICE, ACCOMPANIED
BY EARL MORRIS, SENIOR ANALYST, GENERAL ACCOUNTING
OFFICE

Mr. LIEBERMAN. Thank you, Mr. Chairman. I appreciate the op-
portunity to be here today.

In order to comply with the subcommittee’s rules, I am just going
to briefly make a few comments about my statement, with the pro-
vision that it be included in the record.

Disposal is an often overlooked but vitally important phase of the
logistics process. I think it is highly appropriate that the Congress
provides oversight to this area. After all, we are talking about an
enormous amount of materiel. At acquisition cost, roughly $24 bil-
lion worth of materiel is processed annually by the Defense Reutili-
zation Marketing Service.

I think it is equally important to recognize that there are many
players other than DRMS itself in this process. We need to review
the disposal issues as part of the overall logistics picture. There are
decisions being made by item managers on what to buy and put
into inventory in the first place that will ultimately affect DRMS.
We should not be buying more than we need.

I know that the Congress has focused a lot of attention on inven-
tory management in the Department. The military departments de-
cide what to put into the disposal process. We want to make sure
that we are disposing of the right materiel; that is, we are not dis-
posing of things that either the Department of Defense or other
Government agencies still need. On the other hand, we do not want
to be stocking things that ought to be disposed of, so that we have
to carry excess storage and handling costs.

We have a very large body of work, some of which is summarized
in my statement, related to property management and the disposal
or nondisposal of defense materiel. Over the past 3 years, my office
has published 16 audit reports and we have closed 233 criminal in-
vestigations related to the disposal process.

The point should be made that there is that much auditing and
investigative activity largely because DOD management, the De-
fense Logistics Agency, DRMS, and the rest of the logistics commu-
nity, is a very active user of IG audit and investigative resources.
That is, we get a lot of audit suggestions from them, and you will
notice that many of the reports that I mentioned in my statement
were requested by logistics officials in the Department.


22

CONGRESSMAN

PETE SESSIONS
News

1318 Longworth House Office Building + 202-225-2231 + Contact. Pam Amida

‘Statement of the Honorable Pete Sessions (R-TX)
Subcommittee on Government Management, Information and Technology
“Defense Surplus Property and the Activities of the
Defense Reutilization and Marketing Service”

September 12, 1997

| want to applaud your leadership inthe area of government management, especially as it pertains
‘to inventory management and the disposal of surplus property. Once again, you demonstrate your
foresight in government reform by calling to the table the best experts and the responsible
‘managers to address the important issues surrounding surplus property at the Department of
Defense

‘As you know, Mr. Chairman, Ihave taken an interest in the area of Defense inventory
‘management as part of the Results Caucus. In one analysis of secondary defense inventory
valued at $67 billion, $41.2 billion of the inventory was not needed.' Because of these and
other Defense inventory problems, a portion of the Department of Defense's annual
expenditure of approximately $15 billion for additional inventory is likely to be spent for
‘unneeded inventory. 7 Under current tight budgetary constraints this is unacceptable.

‘The Results Caucus, which has the able assistance of Majority Leader Dick Armey, represents 2
‘coalition of reform-minded members of Congress who share the common goal of realizing a
smaller, smarter, common-sense government. The Caucus has decided to target for reform
several areas ripe with waste, fraud, and error. And defense inventory management is one of
‘those issues we hope to address in the coming months.

‘Mr. Chairman, what we have learned in preparation for this important hearing, and what is likely
‘to be confirmed here today, isthe fact that another element of the Department of Defense's
[Property management is in disarray. According to a recent report by U.S. News and World

' General Accounting Office, Defense Logistics: Much of the Inventory Exceeds
Current Needs, Letter Report, GAO/NSIAD-97-71, February 28, 1997.

7 General Accounting Office, High-Risk Program: Information on Selected High-
[Risk Areas, Information for House Majority Leader Richard Armey and Representative Pete
‘Sessions, GAO/HR-97-30, May 1997,


105

3. Management presence at sites collocated with DLA distribution facilities. This
presence ensurgs appropriate control over demilitarization operations at sites that

generate most of the property requiring demilitarization.

‘The future of DRMS will be characterized by ever greater reliance on moving
information. DRMS has been marketing surplus property on the World Wide Web
for about three years. They are increasing the _ -erage of their Web products and
services to reach the appropriate customer bases. We have begun to implement a new
automated disposal process already in place at seven of our distribution depots.

At the same time, DRMS is undertaking an infrastructure reduction which will reduce
the headquarters level by 25% and the United States DRMO operating costs by 30%;
reducing the number of DRMOs in the Untied States from 140 to approximately 65-70
over the next two years. Outsourcing opportunities are currently offered in the
DRMS marketing and sales programs and we have current contracts in place with an
additional major outsourcing opportunity currently in the bidding process. After the
downsizing of the physical DRMO infrastructure is approved, DLA will initiate a
program for public-private competition of DRMO operations on a regional basis. We
anticipate this effort can begin mid to late FYS8, but completion will be regulated by
the processes imposed by OMB Circular A-76, Commercial Activities.

Summary

DLA and DoD strongly support a combination of options for DRMS that
includes both public-private competition and direct outsourcing for many of the
processes in our disposal business area. We do not believe wholesale privatization of
DRMS is in the best interest of the DoD or the taxpayers; and we feel an abrupt move
would create undue and unacceptable risk. We have embarked on a major effort to
reshape the DRMS organization, its business processes and its business partners over
the next several years, This is the approach approved by the Defense Performance


162

Mr. Horn. If any of you have some good thoughts when you are
driving the freeways or in the plane, feel free to write us a letter
and we will put it in the record at this point. You are all still under
oath as long as you answer those questions.

The staff, both majority and minority, might have some addi-
tional questions for all of the panels and we will keep the record
open on that for a week or so.

So we thank you very much for taking the time to come up here.
I think you have all had an interesting perspective that is very
good to educate us about, and we will keep on this subject and get
into the broader subject of the nonmilitary surplus and how that
is handled, the European experience and so forth. So we would wel-
come any of your thoughts, privately or publicly. Just let us know.

Now, let me thank the people that prey d this hearing. They
did a marvelous job. Our st director and chief counsel, J. Russell
George, for the Subcommittee on Government Management. On my
immediate left, your right, the person principally responsible for
the hearing, Mark Brasher, senior Policy director, and John Hynes,
professional staff member has also helped on the majority side. An-
drea Miller, the able clerk, and we are going to unfortunately be
losing her services shortly. But we thank you, Andrea, for all you
have done for us, and a young man who is one of our interns who
has done an excellent job, James Hall, and we thank him.

On the minority side, we have their faithful, well-organized bat-
talions over there to take on any regiment we have on this side.
Mark Stephenson, professional staff member, and of course Jean
Gosa, clerk of the minority. Jean, thank you very much.

And our two reporters, who are Julie Bryan and Vicky
Stallsworth. We thank you all. We know it is tough, the way we
run these things. Only 4 hours, no rest. Thank you very much, all
of you. We are adjourned.

{Whereupon, at 1:05 p.m., the subcommittee was adjourned.]

1e)


assigned because the items are not entering the DoD supply system. This can also be
the case when raw material or subassemblies are provided to prime contractors by
subcontractors. The lack of sufficient training for DoD property administrators at
contractor facilities was also a factor. Management agreed with the findings and is

taking corrective action.

‘The other three reports on MLI disposal related to the transfer or exchange of

purportedly excess military property by the Army or Navy in return for historically

‘significant items for museums or related services. The reports were:

No, 96-143, Transfer and Exchange of Navy P-3A Aircraft

No. 96-229, Distribution of Excess Army Helicopters and
Flight Safety-Critical Helicopter Parts

No. 97-211, Management of the U.S. Army Center for Military History
Exchange-for-Services Agreement.

In all three cases, questionably prudent exchanges or transfers were being made
to enhance museum collections. We found a variety of problems, including the Navy


115

extent that we don’t cause any more difficulty than is absolutely
necessary.

Mr. JONES. Absolutely. I couldn’t agree more. And just as a note,
we've, you know, in all of our outsourcing initiatives, require that
any contractor who comes in to do work, our employees have a
right of first refusal for employment. So that’s not an option. Our
contracts know that when they come in. So we do everything we
can to make sure that there’s as small as possible impact.

Mr. Davis of Illinois. Thank you very much, Mr. Chairman. And
I have no other questions.

Mr. Horn. Well, we thank you for that interesting line of ques-
tioning.

Let me mention a couple of things here. They'll come up later in
the hearing, but this particular issue is rather intriguing.

It appears the Navy Public Works Center and the Navy
prepositioned war readiness materiel stock are selling vehicles,
some of which have never been used, without reporting them for
further Federal reuse. In fact, a sale is scheduled for tomorrow.
The Navy is claiming that the sales of such property have been ac-
complished pursuant to the exchange sale authority of the Federal
Property Act, in other words, use it as a trade-in.

ere are two problems with this. The Navy does not have an
exchange sale authority, as I understand it, under the De) ment.
of Defense regulations. Apparently, the Navy has not pure d re-
placement equipment with the funds, which is the ostensible pur-
pose of the exchange sale proceeds.

This, to me, is a very troubling case which we would like to pur-
sue with the Department of Defense and the Navy. Do either of you
gentlemen have any information on this?

Mr. JONES. Mr. Chairman, as you may have discovered in look-
ing through the paperwork, my name appears on a lot of paper-
work associated with this case. And I have to say that, unfortu-
nately, we do not have a good answer. The case rests with the Of-
fice of the Secretary of Defense at the moment to try to resolve it.
And I think it’s simply going to have to be the lawyers getting to-
gether to resolve this.

I certainly understand your concern. I share the concern. I can’t
answer the question on the merits, because I really don’t under-
stand at this point the legal issues in the kind of detail that I
would need to give you a definitive answer. All I can say is that
we are taking it seriously, and will come to a resolution of it,

Mr. Horn. Well, has anybody ordered the sale canceled?

Mr. JONES. Well, we can’t do that. But I will check with the Of-
fice of the Secretary of Defense and see whether or not they have
entertained that.

Mr. Horn. It seems to me that ought to resolve the policy issues
involved, but they let that sale go forward.

Mr. Jones. I—

Mr. Horn. And if they had known about it a long time, how long
does it take to say yes or no?

Mr. JONES. In this case, I’m not sure, Mr. Chairman, if that par-
ticular sale was well known in advance by anybody in the Penta-
gon. But I will check to see what they do know and what their in-
tentions are.


136

Business Executives for National Security (BENS) has not received any federal
grants or contracts in the current fiscal year or either of the two previous fiscal
years. Asa matter of organizational policy, BENS does not accept government
funding.


DOD's primary disposal objective is to maximize the reuse of surplus property within the
military services, various levels of government, and authorized organizations before
offering the property for sale to the general public. Despite this goal, DOD actually sells

most of its surplus property to the general public either through sales efforts or as scrap,
as shown in figures 3 and 4.

Figure 3. Average Dispositions, FY 1992-96

oo _
0m 1%
45%
5%
on
52%
10%
159%
20%
457%
By reported acquisition value.

By tine item
1D Reutiization'C 1/0. BI Sales I Scrap Il Other

“Includes personal property (1) transferred (2.1%) to other federal agencies or
organizations given priority equal to the federal government, (2) donated (2.196) to eligible
organizations, and (3) sold (.3%) to foreign military sales customers-the system through
which governmento-government sales of military equipment are made.

Note: Totals for the line item dispositions do not add due to rounding.
7


2

the, well, what kind of activity will I call it—some of the chicanery
that has been uncovered; but these were normal management proc-
esses adopted by the agency, simply seeking to streamline it and
make it more effective?

Mr. JONES. Mr. Davis, the reengineering of DRMS is really inde-
pendent. As Mr. Lieberman said, the diversion of materiel, the
criminal activity, the demilitarization problems are 25 years old
and older. I will not sit here and say that we have not responded
to the public reaction and the congressional reaction to these latest
cases. We have in fact, developed additional plans. We have—as I
said earlier, a fairly comprehensive plan under development now in
the explosives area that we're putting in place. We had all the
right policies. It’s the enforcement issue.

We also had a major increase in emphasis on property account-
ability last year, in which developed a much improved plan for con-
trolling the physical property moving through the system. So we
have taken responsive actions. We worked a great deal of demili-
tarization actions.

As you probably have seen from the written testimony, we do
have a Defense Science Board investigation of the whole demili-
tarization issue beginning very quickly here, hopefully to be fin-
ished by some time around April or May of next year with broad
policy recommendations on the framework for that particular piece
of the problem, which will not go away, privatization or no privat-
ization. That’s a separate issue and needs to be resolved that way.

Mr. Davis of Illinois. OK. GAO testified that DRMS is planning
to implement the enterprise management concept. Could you share
with me some of what that actually is?

Mr. JONES. Yes, I'll do a little bit, and then I'll ask Colonel Mans-
field to kick me under the table when I make a mistake.

Enterprise management was basically a model developed in the
private sector. And, just as the title implies, what it does is, it
takes an enterprise view of the entire operation, in this case
DRMS, and divides it into its components, its natural business en-
tities. So that enterprise management, for example, consists of
leadership functions which you might call inherently governmental
functions, which would be policymaking and that type of thing;
marketplace functions, which would be those that have equivalents
or analogs in the private sector; and then utility functions, which
are simply things like property handling, bookkeeping, which are
both government and private and have some opportunity for com-
petition.

The basic model served as a way of analyzing the DRMS busi-
nesses that they do. In breaking them into pieces, they then could
be examined in terms of market application, what is the correct
analog out there, what company does things like this, and how
could we take a process that fits into that market function and find
a resource that might do that better on the outside. That was the
basis of enterprise management.

Now, it’s led to some specific implementation, such as the opti-
mal marketing initiative and joint venture, where there’s actually
a shared interest in property. We have investors, as in the case of
the liquidation of some of the savings and loan property, a similar


6

wr 6! FE

We, in the Union ranks of DRMS, have been involved in the planning with the DRMS

Corporate Leadership led by tha current Commander, Colonel Robert Mansfield to mest

the needs of today and the future under the concept of Enterprise Mc

‘erproe Managemant i concep develope bythe DLA /DRMS Reimoenion ond
teams. And, this Enterprise Management initiative is by

‘mapired ane ven By Vice President Gore's "Reinventing Gevernment” theme to

‘make the Federal Government more efficient.

Unfortunately, because of the severe DoD budget reductions caused by a downsized
military and the desire of the American Taxpayer for a smaller and more efficient
Federal Government, our DRMS employees will be forced into transferring out, retiring,
resigning, retraining for different jobs ~ or be FIRED outright!

We, in the AFGE, want the American Taxpayer to knaw that we support their desire to
“do the right thing." And for our DRMS workforce employees, we will work hard to save
‘and reinvent your JOBS ~- secure early ratiramant or “buy-out” benefits — or find you
new JOBS ~ 20 that you can continue to provide for yourselves, your femilies, Your
‘communities - and maintain a goad standard of living.

~10~

Page 2 “Rempe Viptande RDO TIME. WwrA,
"70 DO FOR ALL THAT WHICH NONE CAN DO FOR ONESELF


28

So whether we talk about DRMS—and I realize a lot of the focus
is on the end state; that is, what DRMS will look like 2 or 3 years
from now—I would urge that while economics are a very important
consideration, we must make sure that the demilitarization and
control aspects of the operation are carefully considered and pre-
served in whatever the ultimate solution is.

We have been critical of DRMS internal financial and program
management practices, and a couple of our reports were mentioned
in the chairman’s opening statement. Like nearly every other DOD
defense agency, or military department, DRMS has not been able
to produce financial statements that can get favorable audit opin-
ions. The fundamental cause of this is that DOD accounting sys-
tems were never designed to produce financial statements,
auditable financial statements, and the Department is working
across the board to try to fix that.

At the present time, the only major fund in the entire Depart-
ment of Defense that can get a favorable audit opinion is the Mili-
tary Retirement Trust Fund. All of the others, the large general
funds and working capital funds, are getting disclaimers of audit
opinions on an annual basis in the Chief Financial Officer Act au-
dits, so this is an across-the-board problem. This is not an excuse,
but I want to make sure that DRMS’s problems are kept in the
proper context.

Now, we were very critical of a lot of the accounting practices re-
lated to DRMS. Nearly all of the criticisms that we made have
been addressed, and I would say that DRMS, like the rest of the
De ent of Defense, is making progress in improving the reli-
ability of its financial reporting.

I have to say, though, that there is a lingering problem which
has not yet been fixed in terms of the rather odd fii i
ment for DRMS. That is, it receives part of its revenues from sales
and part through money from its customers in the Department.
The mili departments have been rather arbitrarily taxed in
most years for amounts that bear no relationship to the cost of the
services that they are getting from DRMS in order to make up for
cash sho from year to year. This is not untypical, unfortu-
nately, in the working capital fund environment in Defense. We
have a lot of these anomalies that don’t make a lot of sense. Prices
charged are not related very closely to actual costs for services.

Congress has mandated an across-the-board look at all of the
working capital fund arrangements, which were formerly called the
Defense Business Operating Fund, or DBOF, and that is an ongo-
ing review. The De] ent owes a report back to the Congress
this year, and hopefully some of the solutions that the Department
will suggest and work out with the Congress to apply DBOF-wide
will help DRMS also in determining how it will be financed in the
future. Those are questions that need to be addressed, whether or
not DRMS’s functions are done in-house or contracted out.

With that, I would like to conclude, Mr. Chairman. I would be
happy to take any questions.

(The prepared statement of Mr. Lieberman follows:]


94

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9

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83

‘towards fixing the problems with the DoD property donation program, the FMS program and the lax
security at OEM manufacturing facilities.

My firm provides counse! to the NAACS, an organization of over one hundred sonall businesses
throughout the United States who buy and sell military surplus aircraft parts from DRMS. Chief
among their concerns is the availability of surplus parts from DRMS so that their businesses can
contioue to survive (some have been in business over fifty years). Therefore, there exists among the
members of our association a keen amount of concern and awareness with respect to the
demilitarization of these parts.

For quite some time now, many of our members have complained to us about watching the total
and improper destruction of an item because the DoD employee actually destroying the item in the
demil yards is not clear on what is to be destroyed. For example, a particular aircraft engine may
possess a single component that needs to be removed and destroyed. However, the person doing the
‘actual demil will instead of removing that component and destroying it, destroy the entire engine
‘instead. This is wrong. That is the reason for the demil codes in the first place because there in n0
‘need for the Government to waste time, energy and money destroying items that do not need to be
destroyed. It is not lost on us thar these are also taxpayer-owned assets which creates the responsibility
on behalf of DoD and DRMS to manage these items correctly.

According to a recent DoD Inspector General (1G") Audit Report, DoD and DRMS are
needlessly destroying far too muich property, Sex DoD Inspector General's Office, ‘Audit Report on
Coding Munitions List Items,” Report No. 97-130, dated April 16, 1997). ‘The results of the audit
report bear out our position — too many surplus parts are being needlessly destroyed by DRMS
personnel. In this report, the Inspector General reviewed the demilitarization codes assigned to 2,658
randomly selected items, all of which bad been assigned codes requiring their destruction. The IG
‘ound that the codes assigned to 52 percent of these 2,658 items were incorrect. The IG found that 38
percent of these items required no demilitarization whatsoever and that 21 percent of these items were
not even oumitions list items. Yet, all of these items had been marked for destruction by DoD
personnel.

Af the errors found by the IG are projected over DoD's entire inventory, the results and the
‘extent of the waste would be staggering. According to the IG, 20 percent of DoD's entire inventory
of close to 12 million different line items are marked 2s munitions list items requiring some level of
demilitarization or control.

‘The IG report identified 4 mumber of significant problems inherent in DoD's demilitarization
practices, Most notably, the IG found that DoD’s demilitarization process is inconsistent and overly
‘decentralized. The IG stated:

Inaccurate demilitarization coding cccurs becmuse the coding process is too
decentralized, making it difficult to train personel... DLA estimated that more than
3,000 personnel were involved in some aspect of assigning demilitrization codes DoD-
‘wide. All the personne! involved ... had not received the specialized training weeded
to ensure compliance... In addition, personnel... did not have access to information

2


In 1996, the Department of Defense Inspector General reported that due to inadequate
screening, some segments of the Department of Defense were purchasing new equipment even as
the Defense Reutlizaion and Marketing Service was selling identical items. New computer
systems used to screen property are unreliable, and agency managers have minimal incentives to
focus on the reutilization of property, which is the most economical method of disposal.

In 1995, the Defense Inspector General issued a stinging report that stated the Inspector
General was “unable to render an opinion on the financial statement of the Defense Reutilization

‘jen he Buel year 1995 Gaga thon for Defense Recon snd Marketing Service.

In sum, the problems at the Defense Reutilization and Marketing Service are serious,
pervasive and ongoing. Understanding that the sheer volume of equipment and the multiple
challenges facing the Defense Reutilization and Marketing Service are staggering, the question is:
How do we improve this situation?

‘There are several logialative proposals under discussion. One, included in the House-passed
‘gion of the Departnant of Defias Ambani Ad, woul wl ech Deine Resztcn sed
Marketing Service office. Another proposal would give the Departwnent of Defense a longer time
frame to devise its own solution tothe problem. A third possibility solution is performance
‘contrecting — requiring contractors to meet certain operational targets before they are paid.

‘The agency itself has initited several major reforms. It is downsizing to rationalize the

ie screening |
for both the Federal Government and the ultimate recipient of the property.

_We look forward to today’s testimony as we examine the condition of the Defense
il ‘and Marketing Service and the best manner to effect positive change and focus on the
‘core mission.

‘With thet, we welcome our very able witnesses. We are delighted to be joined by one of the

most energetic and bantworking members of Congress, Representative Nick Smith of Michigan.

‘We will then hear from the people who have been very belpful and effective in uncovering the

pseas we dung ney: te Depts of Dee Ie Gor tthe
General Accounting Office.

‘Next, representatives from the Department of Defense will tatify and then finally we will
{px the perepective of private sector consumers ~ the people who buy murphus property when the
‘Department of Defense no longer needa it.

‘Thank you all for coming. We look forward to your testimony.


lll

Mr. Horn. Foreign materiel sales are consistently at about 1 per-
cent of your inventory, I gather.

Mr. JONES. That——

Colonel MANSFIELD. Acquisition value.

Mr. JONES. That’s acquisition value, right.

Mr. Horn. I understand that the chairman of our National Secu-
rity Subcommittee visited the Tinker Air Force Base and found
$1.5 billion in extra inventory. Now, how do we get that property
to ew’ Are they selling it on their own?

ir. JONES. Selling it on their own. This is an interesting ques-
tion, and I’m not familiar with that incident. The way the system
works is that each supply manager every quarter does a require-
ments projection. And if they have assets on hand that, through
that Projection, will outlast the requirement to have any of those
assets, eyre supposed to turn them in. It’s an automatic process
al .

So that materiel then would be turned in to DRMS at the local
site, no doubt. And in the case of the Air Force, we now have an
automated interface. So it would be done electronically rather than
physically. And the records at Tinker would become Colonel Mans-

id’s materiel, and we would basically start the process that the
GAO chart showed up there.

Mr. Horn. Well, could we ask you, Colonel Mansfield, maybe a
status report on where the $1.5 billion in surplus is, if that is true.

Colonel MANSFIELD. All right, sir. .

Mr. Horn. Mr. Davis, the tleman from Illinois.

Mr. Davis of Illinois. you very much, Mr. Chairman.

Colonel you indicated that by going to the private ac-
tivity, there is going to be a tremendous increase in sales. Is there
alo going to be a sa that we can realize in personnel?

Co! MANSFIELD. Yes, sir. We believe there clearly will be, if
we are successful, and this makes business sense and, in effect, net
benefit to us, that those individuals that we have doing sales will
no longer be needed; and we'll try to redeploy them to other parts
of the o1 ization or take a net decrease in our personnel

. you saw some of those in the chart, and those are
factored in.

Mr. Davis of Illinois. Do you have any idea how much that sav-

i might be or——

Colonel MANSFIELD. Not right off the top of my head, sir, but I
can certainly Ret you the data of our projection.

Mr. Jones. We have a total 7-year projection of going from 3,500
to about 900. That's the total reduction. The part of that that’s at-
tributable to the sales function would probably be less than a third
of that would be my guess. The rest of it would be in infrastruc-
ture, the rest of the physical plant.

Colonel MANSFIELD. e of the reductions also would come from
being out some of the materiel handling aspects toward the end of
the sales, so we included some of that in our sales contract. So
there’s not only sales writers and contracting officials, but also ma-
teriel handlers.

Mr. Davis of Illinois. And, Mr. Jones, could I detect that much
of your presentation suggests that these are management activities
that are taking place and were not necessarily precipitated by—


81
[The NAACF document referred to follows:]

‘THe Law Ormces oF

JOHN J. FAUSTI

1894 serene Somer, NW. ‘TELEPHONE (202) 387-2615
FacsiMILe (202) 387-2620

September 10. 1997

House Government Management, Information

and Technology Subcommittee
B.373 Reyburn House Office Building
‘Washington, D.C. 20515

Re: Sete 7 horney concent the
Defense Reutiization & Marketing Service (DRMS)

Dear Mr. Brasher:

Purruant to our discussion of yesterday, enclosed please find « copy of the comments of the
National Association of Aircraft & Communication (‘NAACS") in connection with this Friday's
‘subcommittee hearings concerning DRMS. As you explained, you anticipate that this Friday's hearing will
simply be the start of two to three days of live-hearings concerning DRMS. Although the NAACS wilt
‘ot be able to testify chs Friday, I am delighted that you indicated thar an NAACS representative will be
able to testify atthe follow-up or continuation on the second or third day of these hearings.

‘As I mentioned, the NAACS it an organization of over one hundred small businesses who regularly
purchase surplus DoD property from DRMS. Although our organization is nation-wide. over half of our
‘members are from Souther California and, ax such, their contimed viability is important to the Southern
California economy. Incidentally, a nuraber of NAACS representatives will be traveling from California
to Washington for a series of meetings during the week of September 22 and we would welcome the
‘opportunity to mect with you at that time. I will call you in the next few days to hopefully try to arrange
such a meeting. Thank you again for your time.

Very truly yours,

Ss

1
Enclosure

cc: Mr, David Bartel (w/encl.)
Office of Congresaman Steve Horn
(Mr. Jeff Jones (wienct.)
Defense Logistics Agency
Mr. Bd Wilk (w/encl.)
NAACS President


107

Mr. Horn. All right, Mr. Mansfield, would you like to make some
comments on this?

Colonel MANSFIELD. Yes, sir. I would like also to say that it’s
really a pleasure to be here and to be able to bring DRMS to the
committee. We are committed in DRMS to improving our perform-
ance, to reducing our costs, and in conjunction with that, to pri-
vatize wherever it makes business sense to the agency to do that.
We are actively pursuing that.

We are beyond the stages of studying and into the implementing
pilots to see how well these privatization plans will work. And I,
likewise, am here to be able to answer your questions, sir.
ead Horn. How would that privatization work, as you envision
it?
Colonel MANSFIELD. Through selective, deliberate looks at our
business areas.

The first area we're looking at is in the sales area. We have sev-
eral pilots up and running in those to test whether we get a better
return and reduce our costs overall.

Mr. Horn. Well, let’s take the sales area, then. How do you envi-
sion that? What does it mean? What’s the difference if, on one day,
we move toward privatization, what will that mean in terms of that
part of your responsibility?

Colonel MANSFIELD. It should mean that we reduce the numbers
of people we have doing the sales work, because we no longer need
them. We would move them to the private sector.

Mt Horn. Well, would that be primarily going to auctioning
en or——

Colonel MANSFIELD. No, sir; we are entering into sales contracts.
Our two candidates that we put forward as prototypes, one with
medical-dental-vet equipment. We have released a contract with
three separate contractors, actually, to sell those items to them,
and they resell them. We get 75 percent of our acquisition, our his-
torical rate of return. We have negotiated with them a sharing of
the net proceeds. At this point, we've had that in operation about
4 months now. The net benefit to the Government looks like some-
where around $180,000. It’s very small. It’s about 1 percent of our
total sales volume.

We have another, which we call a joint venture, but is a sales
contract, as well, competed, that we hope at the end of September
to be able to relieve the RFP for that. That one puts out about 30
percent of our overall sales volume. And we would expect, based
upon the economic analysis, to see an improvement in sales reve-
nue between $25 and $50 million, depending on how much materiel
comes through, because we can only estimate that.

Mr. Horn. Now, this first sale area, you said what type of equip-
ment is in there?

Colonel MANSFIELD. Medical-dental-veterinary equipment.

Mr. Horn. Would that include hospital equipment?

Colonel MANSFIELD. Yes, sir.

Mr. Horn. To what degree in the law—and I just haven’t had a
chance to look at it—does it have a problem with, say, the competi-
tion with the private sector? Is yours relatively new, or is this pri-
marily already heavily used equipment?


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comparable to DOD, the commercial airlines’ system for selling surplus aircraft parts
reflects the profit incentive! The airlines we interviewed expect to obtain reasonable
rates of return on the surplus aircraft parts they sell. Officials from one airline told us
they often receive as much as 50 percent of the manufacturer's list price (the price of the
parts brand new) from the sale of their surplus aircraft parts.

Commercial companies use marketing techniques that substantially enhance the visibility
and marketability of their parts, including (1) identifying highly marketable commercial-
type parts, (2) selling the parts as Federal Aviation Administration certified, (3) arranging
parts into sales groupings that meet buyer needs, and (4) actively marketing the parts to a
full spectrum of civil aviation buyers. Even though it may not be practicable for DOD to
duplicate commercial marketing techniques because of competing priorities, DOD could
‘substantially increase its proceeds by adopting some basic marketing practices that have
worked successfully in the private sector. Critical to the success of such practices,
however, will be the establishment or realignment of incentives.

Compared with the private sector's rates of return for similar items, DRMS rates are low.
As noted earlier, airline companies report receiving as much as 50 percent of the
manufacturer's list price for aircraft parts. One reason for DRMS' lower rates of return is
that many of the aircraft parts it disposes of have only military application, and those
parts with commercial application are not certified by the Federal Aviation
Administration, a requirement for commercial use. Another factor for the lower DRMS
rate of return is that the best items are reutilized, transferred, or donated, leaving the
least marketable items available for sale. The volume and types of items DRMS disposes
of annually (about 4 million line items) also make it difficult for DRMS to develop
expertise or tailor disposal strategies for individual items, as the private sector does.
Moreover, the quantities, constant influx of items, and time limits on the various phases

Aircraft Parts (GAO/NSIAD-04-189, Sept.23, 1994).
9


56

humanitarian relief agencies, among others. Second priority goes to approved donee
organizations, such as state and local governments, museums, and Boy and Girl Scouts.
Within these priorities, items are dispensed on a first-come, first-served basis. Customers
have 14 days to requisition and 14 days to remove items, unless otherwise agreed with the
DRMO. Items that are tagged but are not removed within the prescribed time frames are
available for use by other qualified organizations during a 3-day period known as the "blue
light special."

Items that still remain after this part of the process has been completed are sold to the
general public through three types of sales-international, local, and retail. International
sales are used for items with global appeal, such as machine tools, or property that
requires additional controls, such as hazardous materials. After several hundred items are
accumulated, a catalog is published, and sealed bids are solicited. The high bidder for
items requiring extra controls or demilitarization undergoes a clearance process before
the award. The DRMOs use local sales for items that do not have global appeal and
either publish a catalog or hold an auction at the DRMO. Sealed bids are solicited for
the catalog sales, and on-the-spot bids are made at the auctions. Items with commercial
appeal, such as computers, furniture, and clothing are sold at retail stores at 40 DRMOs.
Retail sales are made on a cash and carry basis.

‘Disposal Systems In The Private Sector

‘The disposal systems of private sector companies, particularly the commercial airlines,
are much different than DOD's system, which is based on statutory requirements. For
example, the airlines we interviewed place special emphasis on selling surplus property
and create incentives for employees to maximize the return on sales. These companies
expect to obtain reasonable proceeds from the surplus aircraft parts they sell and are less
concemed than DOD with how quickly the property moves off the warehouse shelves. To
maximize sales proceeds, staff are trained to understand aircraft parts terminology and
the applications that exist for various parts, This training and experience make it more

5


18

Testimony of Rep. Nick Smith (R-MI)

Before the House Subcommittee on
Government Management, Information, and Technology.

September 12, 1997

J appreciate the opportunity to be here today to voice my concems and share
my opinions regarding this issue.

In FY 1996, operating expenses for DRMS were $277 million. DRMS
reutilized, transferred or donated property that had a purchase value of over $4
billion. On these operations, it realized $191 million from sales and another $136
million from resource recovery. DRMS has come a long way to improve its
efficiency and serve the taxpayer under the energetic leadership of Col. Mansfield
and his predecessors.

T’m convinced that DRMS can and must continue to improve its performance.
However we should remind ourselves that unlike the private sector, a primary goal
for DRMS is to reuse property in the military or in other branches of the federal
government. Because property is offered for reutilization, transfer or donation, the
best property is taken before it can be sold. The property remaining after the RTD
cycle tends to have limited commercial application or requires demilitarization. For
example, DOD surplus aircraft parts are not certified by the Federal Aviation
Administration for commercial aircraft, severely limiting their re-sale potential.
Items that require demilitarization are typically high dollar items but lose much of
their original value in the demilitarization process.

The property that remains after reutilization and transfer is available for
donation by law. Entities eligible for donation include state and local governments
as well as certain non-profit organizations. I’m disappointed that there is not an
estimate of cash value for property donated. I have asked DRMS to develop
estimates of the market value so that Congress can have a better assessment of the
dollar value donated. The loss resulting from the donation requirement is certainly
evident if we look at the higher rate of retum from overseas during FY 1996. In the
continental U.S., DRMS had a 1.77% rate of return compared to the acquisition
value, In Europe, DRMS had a 6.9% rate of return. In other words, the rate of


at

19

Foress, Chief of Police, Forsyth Township Police Department, Gwinn, Michigan, had
fraudulently obtained DoD excess property from the Defense Reutilization and
Marketing Office, K.I. Sawyer Air Force Base. The excess property was received
under the auspices of the DoD Regional Logistics Support Office (RLSO) Program.

‘The Forsyth Township Police Department was a participant in the RLSO
Program, which facilitates the transfer of excess DoD property to law enforcement
agencies involved in counter drug activities. Foress, acting on behalf of the Forsyth
Township Police Department and under the auspices of the RLSO Program, was
authorized to screen and receive property at K.I. Sawyer AFB. An investigation
determined that Foress converted to his personal use a Case tractor originally valued at
‘$4,669 and two trailers originally valued at $2,084 each, which were obtained from the
DRMO at K.I. Sawyer AFB for the Forsyth Township Police Department.

On August 11, 1997, Foress resigned his position as Police Chief and pled nolo
contendere, in Marquette County Court, to a misdemeanor charge of embezzlement by
‘a public official. As part of the plea agreement, Foress was sentenced to a $100 fine,
‘$65 in court costs, and ordered to attend counseling.

Oseby Case

On July 21, 1997, Francis Butch Oseby was sentenced in U.S. District Court
for the District of South Dakota, Northern Division, Sioux Falls, for charges of


51

Our work does show that there are some impediments to accom-
plishing that. However, it also indicates that they can be overcome.

The impediments relate to the size and scope of the disposal op-
erations and the lack of a demonstrated commercial capacity out
there to take on this huge volume of disposal activities that has
been described. However, in discussions with industry, government
officials, and DLA officials, they understand these impediments are
there but believe, in fact, through a case-by-case analysis that
outsourcing opportunities do exist.

Overall, our work, not directly in DRMS but with other Federal
activities and within the Department of Defense, has shown that
whenever you put in this public-private type competition, the result
is that the ultimate cost to the taxpayer is driven down, whether
the winner comes from the public sector or from the private sector.
So we think there is a lot of merit to looking at the opportunities
for accomplishing that type of a process within DRMS.

Mr. Chairman, that summarizes the key remarks in our state-
ment, and we would also be happy to answer questions.

[The prepared statement of Mr. Warren follows:]


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142

It is our recommendation that one system be established for electronically reviewing
property availability. It is our hope that this system would provide the necessary search
‘options in a easy to use format. Where this system would reside and who would control it
we feel is outside our area of expertise to recommend, however since GSA provides
services to all federal agencies it may be prudent to see it reside with GSA. However,
GSA’s current funding level for the support of FEDS would then be, in our estimation,
woefully inadequate.

DRMS Cost Cutting Measures

In an effort to further reduce costs, DRMS has informed the association that a significant
number of DRMO’s within the continental United States are scheduled for closure. In
their place DRMS is suggesting a number of alternatives led by the next generation of
RCP. This version touted as “Retail RCP” goes beyond RCP’s current scope,
encompassing all property in DOD custody. In our perception it will be impossible to
prudently determine the description and condition of used furniture, vehicles, machinery
and the like, based only on disposal condition codes and generic descriptions. Therefore,
physical access will have to be provided.

Logistically this concept will prove very cumbersome as all customers will be forced to
poke into every comer of a military reservation to screen and remove property. We can
envision hundreds of folks rambling around a military base attempting to review property,
held at dozens of individual sites within the installation.

This is not good public policy. It forces us back in time to the “bad old days” prior to the
McClellan report in 1972 and the subsequent action by Congress which created the
current disposal structure. Prior to DRMS each service was responsible for the disposal of
its no longer needed items. The current trend proposed by DRMS takes us back down that
dark path to an era in which duplication of effort was common and the potential for
waste, fraud and abuse was heightened

DRMS" ongoing responsibility for the management and oversight of DOD's Hazardous
Waste disposal program at a estimated cost of 60 Million dollars per year, coupled with
DRMS’ resolve to cut its budget by some 100 million dollars per year, will in our
estimation have a serious negative impact on its ability to maximize the redistribution of
DOD property. It is interesting to note that the utilization and donation functions within
GSA are funded through an appropriations mechanism while GSA's sales function is
funded through a revolving fund. We would support a similar mechanism for DOD's
redistribution and sales functions.

In its efforts to achieve the 100 million dollar cut, we believe DRMS will attempt to
utilize private contractors in a number of areas. The use of privatization to attain cost
savings should be tied to both sales performance and RTD goals. We believe that
contracting opportunities should be performance based, with measurable RTD goals.
Without these goals a contractor will not have any motivation, to maximize RTD efforts.



135

Opponents of outsourcing will claim that no contractor can undertake
DRMS' mission. This contention is simply untrue. Other federal agencies, such
as the Internal Revenue Service, the Customs Services, and the Department of
Energy, have moved to outsource excess property disposal.

DRMS officials also claim that their operation is simply too large to permit
outsourcing to a single contractor. I believe that a number of contractors are
capable of assuming all of DRMS' responsibilities. The GAO reached a similar
conclusion when it investigated this issue in 1995. Fortune 500 companies with
complex operations around the globe should certainly be able to manage a
business with that operates approximately 150 disposal yards and brokers a
handful of commodities. However, if concerns about the scope of these tasks
persist, we should consider outsourcing to a team of contractors who jointly
undertake this mission.

Conclusion

Mr. Chairman, let me conclude by returning to a more general point.
Congress, the White House, and the Defense Department have talked about
privatization and outsourcing for many years. Nearly everyone agrees that this
concept makes sense, and DoD already outsources many of its activities.
‘However, while we continue to talk about privatization, very little actual
privatization has occurred. Now is the time to take definitive action.

I can think of no organization that serves as a better candidate for
outsourcing than DRMS. In the case of DRMS, we have an organization that:

© Has suffered from years of poor performance and management,
«Supports a function far removed from the core business of defense,
* Performs a job that can be undertaken by a number of private contractors.

DRMS is a prime example of how the support tail of the Department of
Defense has grown since the end of the Cold War to consume a disproportionate
share of scarce defense dollars. As we face an impending $20 billion
procurement shortfall by 2002, we cannot continue to waste money subsidizing
an inefficient government monopoly. Outsourcing the resale of surplus defense
equipment will increase efficiency, generating some of the savings needed to
afford the advanced military systems of tomorrow required to ensure American
military pre-eminence. I look forward to working with Subcommittee as you
undertake this important work.


13

distinguished panel of
witnesses.

Again, thank you Mr.
Chairman for this
opportunity.


137

Mr. Horn. Mr. Frost, Randy Frost, is president of the National
Association of State Agencies for Surplus Property.

And I was fascinated to learn a lot about your group last year
when you all testified. You might want to gre us an opening for
the others as to how that works and how it developed.

Mr. Frost. How the-——

Mr. Horn. I think none of us realized last year until you all
came in that we had one of these surplus disposal agencies in every
State in the Union and quite an active group. So I learn a lot at
these hearings. And you might just want to tell us briefly about
your organization and what it does.

Mr. Frost. OK. We are, again, the National Association of State

encies for Si urplus Property. The Federal Government operates

t is called a 2 Federal donation program whereby property, once
it has g ne through reutilization and transfer, it is made available
to the States. The national association is made up of agents within
each State, who redistributes that property to the needy organiza-
tions. And that’s basically what our function is.

Mr. Chairman, on behalf of those over 66,000 agencies nation-
wide, which participate in the Federal donation program, we wish
to thank you for your continuing support of the program and for
this opportunity to speak today.

For over 50 years, the NASASP has worked in full partnership
with General Services Administration and the Department of De-
fense to facilitate the transfer of Federal surplus property to eligi-
ble agencies across America. As I’m sure this committee is aware
of the many benefits of the donation program, I'll be addressing my
comments to the interaction the program has with the defense uti-
lization and marketing service and more specifically with proposed
changes within DRMS.

Over the past years, we’ve seen great change in DRMS. Some of
these changes resulted in increased customer service. However,
since DRMS was designated a Defense Business Operating Fund,
or DBOF, it appears to us, the customer, that DRMS focus has
shifted from maximizing reutilization of the taxpayer dollar to
maximizing revenues.

DRMS, in an effort to reduce costs, has recently come out with
proposals to move information, not property, which translates to
electronic screening. This idea, on the surface, may appear sound;
however, upon reflection, we, the customers, have some concerns.

The wholesale recycling control point, RCP, process currently in
operation is a case in point. This concept, by which Property no
longer needed by DOD is retained in a defense depot and electroni-
cally selected, prevents the customer, both redistribution and sales,

ym. om physically inspecting the property.

ike the average American consumer who would not buy a
used car, sight unseen, the DRMS customer is forced to expend re-
sources to select, transport, and warehouse a virtual pi Oke.
This inability to "visually verify a description and condition © of new
and used depot property causes some concern.

Both GSA and DRMS have created systems that allow a cus-
tomer to check property availability. Both of these systems have
Limitations and advantages, and neither is comprehensive or com-
plete.



Figure 1 shows a general overview of the personal property disposal process.

Figure 1: The Personal Property Disposal Process

oan)

‘The disposal process, which is governed by numerous laws and regulations, starts when
DOD activities tum in items to the DRMOs for disposal. Upon arrival, the items are
inspected, condition and demilitarization (Le. rendering an item militarily unusable) codes
are verified, the type of sale is determined, and items requiring special handling such as
hazardous material and precious metals are identified in order to apply extra controls.
Items are accumulated for 2 to 4 weeks and then processed together. At anytime during
the process, all customers may screen items and attach tags, indicating a desire to have
them, but the items may only be issued and removed in accordance with established
Priorities. First priority is given to DOD activities, federal agencies, and other entities
with legislative priority equal to DOD, such as certain law enforcement organizations and

not needed by DOD activities is considered to be excess and is available for
reutilization by other DOD activities, transfer to other federal agencies, and transfer to
organizations that have been given priority equal to that of the federal government for the
purpose of obtaining excess personal property.

“Property not needed by the federal government or organizations with equal priority is
considered surplus and is available for donation to eligible organizations or for sale.

4


2

and the Department of Defense report issued a decade ago, then
Deputy Secretary of Defense William Taft wrote that, “the defense
disposal System is a source of supply for arms traffickers”.

.S. News and World Report” recently reported that machine-
guns, grenade launchers, attack helicopters, and other equipment
were purchased by citizens after inadequate demilitarization. In
addition, one scrap dealer died after a Supposedly safe antitank
round he was moving around exploded in his face.

In 1996, the Department of Defense inspector general reported
that due to inadequate screening, some segments of the Depart-
ment of Defense were purchasing new equipment at the same time
as the Defense Reutilization and Marketing Service was selling the
very same identical items. New computer systems used to screen
property have been found to be unreliable. Agency managers have
minimal incentives to focus on the reutilization of property. That
would be the most economical method of disposal.

Even a year earlier, in 1995, in a stinging report, the Defense in-
spector general concluded that the inspector general was “unable to
render an opinion on the financial statement of the Defense Re-
utilization and Marketing Service because account balances were
based on unreliable financial data.” In addition, profits were found
to be “significantly overstated” and “performance measures were
misleading.” Incredibly, this report recommended that the Depart-
ment of Defense comptroller suspend the fiscal year 1995 budget
authority for the Defense Reutilization and Marketing Service.

In sum, the problems at the Defense Reutilization and Marketing
Service are serious, pervasive, and ongoing. We understand that
the sheer volume of equipment and the multiple challenges facing
the Defense Reutilization and Marketing Service are staggering.
The question is, how do we improve this situation?

There are several legislative proposals under discussion. One, in-
cluded in the House-passed version of the Defense Authorization
Act, would be to sell each office of the Defense Reutilization and
Marketing Service. Another proposal would give the Department of
Defense a longer timeframe to devise its own solution to the prob-
lem. A third suggestion is performance contracting, requiring con-
tractors to meet certain operational targets before they are paid.

The agency itself has initiated several major reforms. It is
downsizing to rationalize the structure of its offices nationwide.
This is a long overdue step in reducing the agency’s cost structure.

Another reform under way is enterprise management. This ap-
proach is designed to create market incentives in public bureauc-
racies.

Last, the Defense Reutilization Service is trying new methods of
doing business, especially electronic screening by computer, which
seeks to reduce and simplify the process for both the Federal Gov-
ernment and the ultimate recipient of the property.

We look forward to today’s testimony as we examine the condi-
tion of this agency, and we want to learn more how to effect posi-
tive change in the Defense Reutilization and Marketing Service.

With that, we welcome our witnesses. We are delighted to be
joined by one of the most energetic and hard-working Members of
Congress, Representative Nick Smith of Michigan. We will then
hear from people who have been very helpful and effective in un-


72

likelihood, that would result in some impact on personnel who are
currently performing some of those functions.

But I wouldn’t want to prejudge that activities of DRMS couldn’t
very well go in, reengineer, and, again, through the use of tech-
nology as an enabler, come up with a more efficient operation than
they have today that is highly competitive with what you would see
in the private sector.

Mr. Davis of Illinois. Thank you very much.

I have no further questions, Mr. Chairman.

I thank both of you gentlemen for your responses.

Mr. Horn. I thank the gentleman.

With reference to the question that Mr. Davis raised, I am going
to ask to insert in the record at this point two documents. One is
the document from the American Federation of Government Em-
ployees relative to this, and the other is a document of the National
Association of Aircraft and Communication Flyers, which is also
relevant to this. So, without objection, this will be inserted in the
record following Mr. Davis's comments.

{The AFGE document referred to follows:]


27

I would like to call your attention to those half-dozen audit re-
ports that are mentioned in the beginning of the statement that
have to do with the disposal of munitions list items and munitions
scrap. The reason I would like to highlight them is because they
deal with safety and national security issues that are indeed
unique to DRMS, and there really is no equivalent in private sector
scrap operations.

There have been quite a few incidents of live munitions or dan-
porous articles being inadvertently sold to the public, most having

een processed through DRMS, some having been processed
through a few of the other disposal channels that are authorized
by law, such as the recycling programs by the military installa-
tions.

There have been more of these incidents reported recently than
had been the case in the past, 27 of them in the first half of fiscal
year 1997 alone, and this is certainly a matter of concern to us.

‘here was a fatal accident in California in March 1997 which
prompted the Secretary of Defense to ask the IG, along with the
military departments and the Defense Logistics Agency, to review
controls over the disposal of munitions and dangerous items. One
of the reports that is summarized in my statement does conclude
that controls in this area are deficient.

Virtually everybody who handles munitions has a piece of the ac-
tion here, and the problems are endemic throughout the system.
DRMS has some control problems, but so do the military depart-
ments themselves and the installation commanders.

We also have issued two reports dealing with demilitarization
codes on munitions list items. Demilitarization codes are instruc-
tions that are put on any item that enters the Department of De-
fense’s inventory that will ultimately dictate whether the item can
be sold without any changes made to it or has to be demilitarized
in some fashion, in some cases completely destroyed and in other
cases just modified.

We found a lot of problems throughout this whole process. For
example, 52 percent of the demilitarization codes that were put
into the system for items sampled during the period of our audit
were wrong. This leads to wasting money by demilitarizing items
that don’t need that kind of treatment. It also leads to releasing
items to the public that should be demilitarized and are not. So
those front-end problems need attention.

Those decisions are not made by DRMS. They are made by the
inventory control points of the military departments and the De-
fense Logistics Agency. DRMS tries to safeguard the process by
challenging demil codes on items that look wrong to them under
what they call a challenge program, and we have found that 93
percent of their challenges were just being ignored by the invento:
managers. This is a very troubling situation that needs to be fixed,
and the logistics community as well as defense share our concerns
and are taking action to fix it.

A similar problem exists with materiel in contractor plants. We
looked at 1,820 items, physically turned over in plant clearance op-
erations by contractors, and we found that 1,400 of them had not
been screened to determine whether they were even munitions list
items, let alone what kind of demil was appropriate for those items.


70

and what isn’t; challenges in maintaining the security of these
items and other things like that. It is a high-risk area and always
will be, no matter who is doing the actual processing.

Mr. Davis of Illinois. Would careful scrutiny of the system—that
is, having a system. in place, scrutinizing it carefully, coupled with
effective prosecution—do you think this would significantly de-
crease the problem?

Mr. LIEBERMAN. I think that we will find criminals trying to at-
tack this process forever, as long as there is this volume of materiel
out there. It is just too tempting.

As I said, we have had what we regard as a pretty successful in-
vestigative program in this area, and I think DRMS deserves a lot
of credit for being very cooperative, because they share your con-
cern completely, and they have been very helpful to us in doing
things like organizing undercover operations and things like that.

Just the intrinsic nature of this process is such that, just like
banks, the disposal offices are always going to be under a criminal
TISK.

Mr. Davis of Illinois. We continue to hear, I guess, suggestions
that it might be time to privatize DRMS. Is that a good idea? Are
there alternative ideas? Is this the best way to get at what we are
trying to accomplish? Do you have any thoughts about that?

Mr. LIEBERMAN. Well, I would prefer not to get too deeply into
that, because I do have to do that work I referred to earlier in
terms of independent reviews of their outsourcing studies, so I
don’t want to indicate a bias one way or the other.

But I would say, in general, the inspector general supports the
idea of public-private competition whenever we are not talking
about intrinsically governmental functions, and there are certainly
parts of DRMS that are clearly not intrinsically governmental func-
tions, certainly the actual sales area itself.

Mr. Davis of Illinois. Thank you very much.

Mr. Warren, I gleaned from your testimony suggestions that
would, or possibly could, cause one to think or feel that you are
suggesting that DRMS is a good candidate for outsourcing or pri-
vatization. If that is the case, could you share with us why you
think so?

Mr. WARREN. Yes. We believe it would be a good candidate, be-
cause the types of things that DRMS is doing, there is currently
a market out there that would serve as a competitive base to take
over these functions and then hopefully drive down costs.

Now, as I said in my opening statement, we are not advocating
just a wholesale privatization to the private sector. What we have
found is that when you take and put public activities in competi-
tion with the private sector, that, overall, that generates a reduc-
tion in cost to the taxpayer, whether the private sector wins or
whether the Public sector wins.

But one of the key triggers in making that positive result occur
is that there has to be a very competitive market out there. What
you don’t want to do, for example, is to enter into an outsourcing
or a competitive strategy where you only have one or two competi-
tors and so, as a result, you are moving almost into a sole-source
type of situation, so you are not going to get that competitive dy-
namic that helps to drive it down.


146

Mr. Horn. Well, thank you very much. I was going to ask Mr.
Liuzza, if you want to comment on anything, in addition, right
now, feel free to do so.

Mr. Liuzza. Mr. Chairman, the only thing I would have to say
is to clear up some things that the Honorable Congressman from
Michigan made in his opening statements. He was talking about
the people closest to the depots and all having an unfair advantage.
Public Law 94-519 passed by Congress addresses that, and no one
has proprietary right to property regardless of geographical loca-
tion.

That responsibility lies with GSA. They’re to assure Congress of
fair and equitable distribution among the States. The States are to
report to Congress a fair and equitable distribution within the
States. And he is talking about the laws passed. by Pennsylvania
has nothing to do with the donation program. That’s a DOD func-
tion. It has nothing to do with the donation program. That’s all.
Thank you, sir.

Mr. Horn. OK. Mr. James Hundle, president of the Users and
Screeners Association, accompanied today with Frank Sodek, past
president of the Users and Screeners Association.

Mr. Hunde, tell us how that works and proceed.

Mr. HUNDLE. Thank you, Mr. Chairman and members of the
committee. We appreciate the opportunity to appear here today and
present our testimony.

The Users and Screeners Association for Federal Excess Personal
Property is an organization of individuals that currently represents
over 40 Federal agencies and over 75 universities, including the
1862 land grants, the 1890 historically black universities and col-
leges, and the 1994 Hispanic colleges and universities, and all the
native American Indians, as well as Federal contractors and other
Federal cooperatives who advocate and practice the use of Federal
excess personal property as the first source of supply.

This organization endorses the fair and equitable distribution of
both excess and surplus Federal property to maximize the use of
the property acquired through U.S. tax dollars. Thank you for mak-
ing these programs possible. If it were not for these programs,
these excess property programs at various participating univer-
sities throughout the country, important educational research and
outreach programs could not be as effective, supported through pro-
grams such as the U.S. Department of Agriculture, the Department
of Energy, the National Science Foundation, and the list goes on.

In addition to these programs, the U.S. Forest Service supports
rural fire districts with Federal excess property. In an increasingly
urban society, rural fire districts are the first and sometimes only
line of defense. The U.S. Forest Service and U.S. Department of
Agriculture are the two largest customers of DRMS, respectively,
for transfer.

I cannot stress enough how important these programs are and
how beneficial to us.

Today I come before you to share our concerns and views of the
operations of DRMS. We, as an organization, have seen many
changes take place over the years, such as the implementation of
the single-cycle processing system as it was demonstrated earlier,
which has proven to work well for our fellow screeners. We have


63

Mr. Chairman, this concludes our statement. We would be happy to answer any questions
you or the members of the Subcommittee may have.

(709301)


20

We have an obligation to obtain the highest possible return to taxpayers. We
also have an obligation to protect national security. I’m pleased that this hearing is
taking place; it shows a commitment by Congress to take these issues seriously. 1
am confident that with the cooperation of Congress, we will see a continuation of
the success that DRMS has had in the past. I look forward to working with the
committee in the future.


© Controls for the disposal of AEDA residue by the Military Departments were
ineffective. As a result, the public was sold or had access to either discarded
live AEDA or AEDA residue that had not been properly inspected and certified

as inert.

© Management controls at the Defense Reutilization Marketing Service to prevent
the sale of live AEDA to the public also were not fully effective. As a conse-
quence in several instances, Defense Reutilization and Marketing Offices
received and sold uncertified or improperly certified AEDA residue to the
public.

© DoD policies and procedures for AEDA disposal contracts, Direct Sales
Programs as part of the Qualified Recycling Programs, reporting and investiga
ting AEDA incidents, and demilitarization were inadequate. As a result, AEDA
disposal service and sales contracts varied by installations and provided for
disparme levels of safety and oversight.

‘The report contains numerous references to incidents that illustrate the need for
concerted action to address these disquieting findings. I refer you, for example, to the
picture on page 27 of the report of a live MK20 Rockeye bomb that was inadvertently
sold in a load of scrap containers from Crane Army Ammunition Activity in July 1996.
Cumulatively, the DoD fires or otherwise disposes of 200,000 tons of ordnance


157

f Mr. Horn. I see. Has that been brought up with Colonel Mans-
lela?

Mr. HUNDLE. Those are some concerns that we intend to address,
but not from our organization.

Mr. Horn. I just wondered, with your organizations here, is
there a regular relationship with the commanding officer of the
agency? It seems to me it would be good if everybody was talking
to each other and some of these things don’t have to percolate for

years.

Mr. HUNDLE. Sure. And we are moving toward that. We were
happy to have them represented at our meeting, at our annual
meeting just this past August, and that was our first—so we are
working together closely.

Mr. Horn. Good.

Mr. Frost. I would also like to add from the national association
standpoint, we also as well hold an annual meeting in which
DRMS is invited and they do speak and we do address these con-
cerns with them.

Mr. Horn. But I assume you pick up the phone when you hear
something screwy going on and deal with it, I would hope.

Mr. Frost. Right. We do.

Mr. Horn. Mr. Davis will have the rest of the time for question-
ing. Don’t go beyond midnight.

Mr. Davis of Illinois. I assure you on my solemn oath.

General McInerney, it goes without saying that you make a
strong case for outsourcing and privatizing. In your position, it is
a little different than that of the DOD authorization bill that we
just passed. It requires competition between DRMS and other Fed-
eral agencies, as well as the private sector.

Could you share the differences in that approach and perhaps
your approach and why?

General McINERNEY. Mr. Davis, it is an issue that has clearly
different viewpoints by reasonable people. What we are pushing
for, based on the experience in the private sector, what U.S. indus-
try has done, is to take these functions that are noncore and to
quickly move them into the private sector.

Now, the reason we have a problem with public competing
against private is, I assure you, the private can never beat the pub-
lic. If, not—and the way it works because you can’t track the public
sector costs, and that is what we are seeing. Let’s say the public
sector wins, it looks like it is a level playing field, but in fact, if
they are not able to deliver, who ends up paying? The public sector,
the taxpayer pays, if there are cost overruns, if they are not man-
aging it right.

And as recently as the latest decision on the C5’s at Kelly Field,
when I talked to the leadership, I said, fine, it was an innovative
proposal, but say they don’t make it, then what is going to happen
is what has happened this year in which a service, and I won't
mention it, but it is occurring in all services, because the DBOF ac-
count overruns, and they are then taxed with $1 billion per service.
Nobody asks why, where the money came from, because the tax-
payer, quote, ends up paying for it, and what you do is you have
a reduced military effectiveness such as is going to be—it is moving
to where it is a crucial stage.


57

likely that highly marketable parts will be identified and marketed appropriately. Further,
the staff often specialize in selling a specific category of part, such as engine parts, to
promote a better understanding of the parts and the markets to which they sell.

In addition, progressive commercial companies provide employees with the resources to
effectively sell surplus property. Marketing staff are provided a wide range of sales tools
and techniques and are held accountable for the property they intend to sell. At one
airline, sales personnel are responsible for the sale of the surplus property and are rated
on how well they maximize sales proceeds. Figure 2 compares the differences between

DOD's and the private sector's disposal processes.

Figure 2: Comparison of DOD and Private Sector Disposal Processes

*DOD
+ Emphasizes moving items quickly and
complying with laws

‘+ Handles huge quantities, types, and
conditions of items

* Cannot develop disposal expertise for 7
million active line items

* Has rigid disposal system defined by
laws and regulations; all items treated the
same

« Best items are taken through transfers
and donations

* Sells items that are usually not new

« Private sector
+ Emphasizes maximizing return

+ Handles few quantities, types, and
conditions of items.

* Can develop disposal expertise for fewer
items

+ Can tailor disposal strategy on an
individual item basis.

* Best items are not taken through
transfers and donations

« Sells items that often were over bought
oF did not sell well (ie., new items)



23

Repor, “TW]eapons and parts that should have been rendered militarily harmless before sale were
not, where weapons that should have been designated for destruction were not and have been
prevented from reaching foreign buyers were not.”? Just like secondary defense inventory, and
Just lke property in the hands of government contractors that is unaccounted for, the Department
‘of Defense seems unable to get x handle on the billions and billions of dollars worth of property it
‘manages on behalf of the American people.

‘Unlike other area, it seems that property is being disposed of that is dangerous, and it’s getting
into the hands of Americans who don’t know how to handle itor foreign entities that do. Both
situations are improper, and reckless. This situation rises above the simple problem of waste, and
puts the American people at risk.

‘Asa member of the Results Caucus, and a proud member in this busy and effective committee, I

applaud you, and I know you will work diligently to safeguard the financial interests of the
‘American taxpayer.

> Peter Cary with Douglas Pasternak and Penny Loeb, “Weapons bazaar: This
Cobra Attack Helicopter was Build from Surplus Parts. The Pentagon Sells Millions of Them «
‘Year. Many Fall into the Wrong Hands,” U.S. News & World Report, December 9, 1996.


144

BIOGRAPHY

John "Randy" Frost

President - National Associ:

ion of State Agencies for Surplus Property

Director — Arizona State Agency for Surplus Property

Randy was born in Washington DC on April 28, 1961. He graduated in 1979 from high
school in Glendale Arizona where he was member of the football and track teams and was active in
the Future Farmers of America where he served as Chapter Secretary. After high school he attended
Glendale Community College and the University of Arizona where his major course of study was
Agri-Business.

Randy first came to work at the Arizona State Agency for Surplus Property in 1987 and
became its Director in January 1991. His previous government experience includes 4 years with the
Arizona Department of Administration as an Intern, Printing Estimator, Printing Production
Coordinator and Customer Services Manager. His experience in the private sector includes working
on family owned farms and mining properties.

Randy has been an active participant in the NASASP, having served as Area President,
Secretary/ Treasurer, and Vice President and chaired several committees. At the Age of 36, Randy
is the youngest person to be elected to President of the NASASP.

He has been married 16 years to Deborah Anne Hewitt and has a 16-year-old son, Justin
and a 12-year-old daughter, Carrie, Randy is very active in his sons Boy Scout Troop and his
daughters Junior Olympic Softball Team,


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16

defaults, which ranged up to 29 percent. Although the FY 1995 DoD budget included
$208.3 million from additional component level billings for DRMS, there was no
underlying fee structure based on costs of individual services provided to customers.

As a result of the audit, the $208.3 million was not provided to DRMS. The
fundamental underlying issue is that the combination of sales revenues and component

level billing is an unstable financing mechanism for DRMS operations.

Report No. 96-216, Evaluation of FY 1995 Defense Reutilization and
Marketing Service Financial Data, also took DRMS to task for reporting unreliable
reverue and expense data. The same accounting deficiencies that caused us to disclaim
our audit opinion on DRMS FY 1994 financial statements were still prevalent in
FY 1995. We also found poor controls over the use of expedited processing for dis-
posal and sale of DRMS inventory during FY 1995. ‘That resulted in DRMS process-
ing approximately $2 billion (acquisition value) of property that was not authorized for
expedited processing, with a significant reduction in the usual reutilization rate,

Management agreed with our findings, most of our recommendations, and took
several actions, including automated system changes to improve property screening.
‘The ongoing, congressionally directed, DoD review of cash management and other
issues that involve all formerly Defense Business Operations Fund activities, including
DRMS, likely will deal with many of the same kinds of issues that we have identified.


85

Mr. Horn. Now, let me ask you now a couple of questions that
relate to what we said earlier in the opening statement. One of
them related to the question of the goals that motivate the agency,
and I think some of your past audit work, Mr. Lieberman, has
pointed to the overstatement by the Defense Reutilization Mate-
riels Service of its sales revenues and profits. And in that “U.S.
‘News and World Report” article that I quoted in my opening com-
ments, a senior military official asserted that, “Work priorities at
your sites are: One, profit; two, profit; three, profit; four, profit;
five, profit.” Six was accountability; seven was rendering lethal
weapons harmless. It seems to me seven perhaps should be No. 1.

Do these priorities comport with the law? Is this what you found
when you visited—you and your staff visited various installations?
And have the performance ratings of the agency managers ever
been based on their profits? And what kind of work has the inspec-
tor general done in this area?

Mr. LIEBERMAN. I think it is fair to say that DRMS has put tre-
mendous emphasis on its profitability. About 3 years ago, this was
particularly evident, and I am not sure that this wasn’t seen as a
way to avoid some of the outsourcing pressure that was being ap-
plied, starting to be applied throughout the Department in general
and to DRMS specifically at that point.

We found plenty of indications that sales were being pushed very
hard. In one of our reviews, we found $2 billion worth of materiel
that was processed under what is called an expedited processin;
arrangement, where these times that are shown in GAO’s Teft-hand
chart here are all telescoped together and materiel is pushed
through the process very quickly. This really cuts down on the
amount of reutilization that is possible.

Of this $2 billion, only about 12 percent was reutilized, because
most item managers didn’t get a chance to—either didn’t know that
the materiel was about to be disposed of or didn’t get a chance to
survey their holdings and make decisions about whether they
wanted to tell DRMS that they still needed it. So only 12 percent
was reutilized as opposed to 28 percent of the items that were not
processed in that manner.

So we attributed those kinds of things, and we found a few other
problems of that type: perhaps, too excessive emphasis on sales, as
opposed to reutilization. Only one-sixth of the materiel going
through DRMS is reutilized from year to year. And we have to re-
member that we are never going to get more than a few cents on
the dollar back from selling most of this stuff, but when we reuti-
lize it, we save the whole acquisition cost of buying a brand-new
item.

Mr. Horn. I quite agree with you.

Let me ask this on the issue of incentives. If they aren’t profits,
does the Defense Reutilization and Marketing Service use sales
proceeds to fund its operations?

Mr. LIEBERMAN. In part, yes.

Mr. Horn. In part. How is that differentiated? What part can
use it and what can’t?

Mr. LIEBERMAN. In some cases they are allowed to cover the op-
erating expenses—the costs of sales themselves. They are not al-
lowed to keep profits in excess of their sales costs.


62

option to reducing costs, streamlining operations, and improving performance. The intent
of competitive outsourcing is not to automatically give work to the private sector, but to
determine, on a case-by-case basis, just how competitive the marketplace is and to take
advantage of outsourcing if there are efficiencies to be gained through this means.

Legislative proposals have been introduced this year in Congress specifically related to
the competitive procurement of services in connection with the disposal of surplus
property at DRMS' locations. In particular, section 1402 of H.R. 1119 (the National
Defense Authorization Act of 1998) requires that the Secretary of Defense establish
procedures to conduct competitions among private sector sources and DRMS, and other
interested Federal agencies, for the performance of all such services at a particular site.
Since DOD has identified DRMS as not an inherently governmental function, and,
therefore, a candidate for outsourcing, we agreed with the aim of this legislation.”

In August 1995, we reported that DLA cited several impediments it believed would limit
them from fully outsourcing the DRMS operation and would need to be carefully
considered before an outsourcing decision was made. Some of the impediments related
to the size and the scope of DRMS' operations; the lack of a demonstrated, comparable
infrastructure in:the commercial marketplace to manage the DOD disposal function; how
a contractor would or should operate to ensure DRMS' mission is given the required level
‘of emphasis; time and resource constraints with Office of Management and Budget.
Circular A-76 procedures; and difficulties in preparing and administering contracts.
Generally, the government and private sector officials we interviewed did not believe
these impediments to be significant. DLA officials, while concerned with these
impediments, indicated that DLA supports the outsourcing of functions or operations, on
a case-by-case basis, where there is demonstrated competence in the private sector that
will provide equal or better disposal services.

(GAO/T-NSIAD-97-187, June 17, 1997).


86

Mr. Horn. Let us define that. The sales cost is based on what?
Is it what—when transferred from the military to them to dispose,
or is it original acquisition cost. Or is it simply their cost of han-
dling the materiel?

Mr. LIEBERMAN. It is simply the handling cost and the expense
of hiring someone to run an auction and processing the items.

Mr. Horn. Should we have a different basis for sale? I mean,
why shouldn’t we make a profit?

Mr. LIEBERMAN. Oh, I think it is great to make a profit. Among
other things, we certainly should spare no efforts to drive down the
cost of the operation, and to the extent we can get better prices
than we are getting, that’s great, if we can look at demil require-
ments and make sure that we are not ruining items unnecessarily
and therefore not getting a good price for them.

All of those sorts of things absolutely need to be done and are
part of what DRMS is trying to do. But reutilization really should
come first. We absolutely have to make sure we are not disposing
of something that we still need.

Mr. Horn. And I take it the safety aspect would be somewhere
up as 1 or 2 or l(b).

Mr. LIEBERMAN. Yes; that’s true, too.

Mr. Horn. It seems to me if that——

Mr. LIEBERMAN. I guess that has to come first, because safety al-
ways has to come over economics.

Mr. Horn. Yes, it should.

Now, let me move back to that criminal situation which bothered
me. As I looked at your summary of some of these cases, which
don’t seem very much punishment to me, and maybe that’s the
U.S. attorney’s problem, and maybe it’s the judge’s problem, but do
you have the right as inspector General to check the income tax fil-
ings of employees in this particular agency or anywhere in the Pen-
fagon. Or do you need them to give you a waiver to access their
filings?

Mr. LIEBERMAN. The investigators say no.

Mr. Horn. You don’t?

Mr. LIEBERMAN. We don’t have that authority.

Mr. Horn. Well, we ought to take a look at that, because it
seems to me inspectors general ought to have the right to review
those filings. If the CIA would have been awake, we would have
caught Mr. Ames, just go look at his bank accounts and his housing
and all the rest of it and ask a few questions. Because this is an
area, let’s face it, that’s rife for payoffs, rife for deals, and all the
rest.

Now, hopefully, that doesn’t occur too much. But as far as I’m
concerned, one bad apple is enough bad apples. I don’t need a bar-
re] to convince me. I just want to get at it. If you need that author-
ity, it seems to me we should be talking with the Ways and Means
Committee. Since this is the oversight committee for inspectors
general, we ought to be looking at it across the board.

But I’d welcome your thoughts and the thoughts of the inspector
general particularly in this. Does GAO have any comments on what
we're talking about, the priorities of incentives as they look at the
agency and also on how we find the bad apples?


121

not have some of the direct links and can go to the Internet to find
things. And we do make Internet sales to our own units.

I think the main transition that Battle Creek is trying to go
through is to move toward information management. And the bet-
ter they move toward information, the more likely it is the more
people will have access to the material they need when they need
it. And that’s our primary emphasis.

Mr. Horn. Well, as I understand it here, your managers who
sold more property, got better performance ratings and better per-
formance bonuses. Now, if we're trying to get donations first to gov-
ernment at all levels, is that the reward system we ought to have;
or do we put equal emphasis on those that are pushing the dona-
tion to various governmental levels?

Mr. Jones. Absolutely not, Mr. Chairman. That’s been corrected.
And Colonel Mansfield will speak to what’s been done.

Mr. Horn. OK.

Colonel MANSFIELD. Sir, that, I stopped almost immediately upon
assuming command. That was the wrong incentive.

Mr. Horn. So it’s a dead duck as of 1 year ago?

Colonel MANSFIELD. Yes, sir.

Mr. Horn. OK.

Colonel MANSFIELD. The incentive is to have a business plan, to
set the target as we see them, as we see the disposal for the year
and the year in advance, to build our budget against those, and
then track to it. Those managers that are successful will get better
ratings, and those that are not, you know, will not get the highest
ratings.

We sat in with the GPRA targets for this so there’s oversight, so
we aren't doing this blind, and so managers of DOD can look and
see we have set these targets. And what I demand is that the man-
agers know why they're off target or why they’re over it.

Now, if we're off, we're off. Let’s understand that. But recognize
that my first mission as a uniformed officer and supply officer in
the Air Force first and foremost is that. It used to break my heart
to go over to the DRMO and see F-4 or, you know, F-15 parts
going out to the DRMO when it looked like we could use them.

So we are aggressively moving forward with the information
technology to make it easier for every camp, post and station, to
take a look at what’s in the DRMO, not just their DRMO—what’s
in their backyard—but around the world, what inventory we have.
And I hope within the next 2 years, we'll be extremely successful
in doing that, and we'll see the rates of reutilization go up very
much in the Department.

Mr. Horn. How many different computer systems do we have
that tell the potential user, or reuser, both within the services and
within various levels of government, as to what's available?

Colonel MANSFIELD. I have no idea how many there are. We have
four, and we're integrating those into the World Wide Web. We
have a program which is an information modernization program, or
information technology. We're in the second year, and its a 4-year

rogram to get us into one. And by using the one, we think we will
Fave one front end where anybody can look at this and then feed
us their requirements.


124

Mr. Horn. But I think we've hit a lot of the high points, and I
realize that we can’t hit everything. But we thank you for coming.

Does Mr. Davis have any more questions in this area?

Mr. Davis of Illinois. No.

Mr. Horn. OK. Thank you very much for coming. It’s been very
helpful to educate us on this matter. We're just sort of moving into
it slowly.

Colonel MANSFIELD. Our pleasure.

Mr. Horn. Thank you.

Mr. Jones. Thank you, Mr. Chairman.

Mr. Horn. We now have the last panel, panel IV. And that is the
general, Thomas McInerney, U.S. Air Force, Ret., who is now presi-
dent and chief executive officer, Business Executives for National
Security, otherwise known as BENS, a very fine organization I’ve
found, that provides the Congress and the public with a lot of
worthwhile information to get a better understanding of our na-
tional security operations.

And we also have on this panel Randy Frost, president of the Na-
tional Association of State Agencies for Surplus Property. And he’s
accompanied by Jack Liuzza, director for Louisiana State Agency
for Surplus Property.

In addition, we have James Hundle, president of Users and
Screeners Association, who is accompanied by Frank Sodek, the
past president of Users and Screeners Association.

So, gentlemen, if you would rise and take the oath.

[Witnesses sworn.]

Mr. Horn. All five witnesses have affirmed.

We'll go down, General McInerney, from the beginning; we'll
start with you and just move down the list.

Again, he’s president and chief executive officer, Business Execu-
tives for National Security.

STATEMENTS OF LT. GEN. THOMAS McINERNEY (USAF-RE-
TIRED), PRESIDENT AND CHIEF EXECUTIVE OFFICER, BUSI-
NESS EXECUTIVES FOR NATIONAL SECURITY; RANDY
FROST, PRESIDENT, NATIONAL ASSOCIATION OF STATE
AGENCIES FOR SURPLUS PROPERTY, ACCOMPANIED BY
JACK LIUZZA, DIRECTOR, LOUISIANA STATE AGENCY FOR
SURPLUS PROPERTY; AND JAMES HUNDLE, PRESIDENT,
USERS AND SCREENERS ASSOCIATION, ACCOMPANIED BY
FRANK SODEK, PAST PRESIDENT, USERS AND SCREENERS
ASSOCIATION

General McINERNEY. Thank you, Mr. Chairman, Mr. Davis, for
letting me appear before you today.

During my tenure as the director of the Defense Performance Re-
view, I was personally involved with the efforts to outsource
DRMS. DRMS and D! as Mr. Jones pointed out, nominated
DRMS to be outsourced as low hanging fruit.

TI think all of us can understand that from a war fighting point
of view, the 3,000-plus people there have nothing to do with war
fighting. There are no trigger-pullers. They’re nothing in terms of
war fighting. It’s a business function. People can have different
views on whether it’s unique business or not, but the fact is it’s a


31

Over the past few years, issues related to property disposal have been high audit

and investigative priorities. In the past 3 years, we have issued 16 audit reports and

closed 233 criminal investigations related to this area. At the present time, we have

‘one ongoing evaluation, which has just started, and 111 open investigations by the

Defense Criminal Investigative Service, the criminal investigative arm of the Office of

the Inspector General...

Our completed work in this area falls into these general categories:

— Disposal of munitions list items and munitions scrap

+ Recycling programs

~ Property disposal decisions

— Defense Reutilization and Marketing Service financial issues.

I will discuss the 12 most significant audit reports in those categories and then

three closed criminal cases that are representative.


156

situations were supposed to have been resolved, and they contin-
ued. That was under the previous commander, before Colonel
Mansfield.

Since then, 1 am not aware of any real articular major problems
at El Toro. From my situation in the State, we have had some
change of personnel screeners and stuff, so we haven't screened
there as much, so I don’t know if it is still a major problem, but
I am not hearing the problems that I heard before, so I am assum-
ing that some of that is changing. But it has been a real big prob-
lem in the past.

Mr. Horn. Well, do we know why they were hiding some of the
choice items? Did they have a few private deals going? Was this
“Kelly’s heroes,” if you have ever seen the movie? I happened to see
it last week and I am up on free enterprise in the military.

Mr. Frost. I don’t know if they had any private deals going on
or not, but they have had a lot of different things going on. They
would have sales where they would have all kinds of people out
there with bands and they apt in a new system and they had
clowns and all kinds of stuff going on to bring people out to get
more people in to sell the property, obviously. But it just was a—
during that period of time, we found it very difficult. We had a
hard time getting in there. There were just a lot of different things
going on.

I might add, it was pointed out many times, even in open forums
with DRMS at the time, and basically one time I was told, I got
into a confrontation with the previous commander, and was basi-
cally told that he was tired of hearing about El Toro and that I
should get off of it and forget about it and move on. So that is kind
of and there are instances at other bases where things of that sort
took place.

Mr. Horn. Thank you. Staff will follow up with that with Colonel
Mansfield to see just where we are and does the inspector general
need to get into it.

My last question, and then Mr. Davis has all the rest of the time,
is can you elaborate on the concern in your testimony about the
limited hours of the Defense Reutilization and Marketing Service?
lam not quite clear on what you mean, Mr. Hundle.

Mr. HUNDLE. Mr. Chairman, my comment on that was that not
all DRMO’s operate on the same hour basis. Some shut down at
certain times, and we understand the need for training and various
other things, as well as the days that you are able to pick up and
screeners are limited in some areas. These are at various DRMO’s,
select ones, that they are not all even. We have screeners that trav-
el in a circuit through different DRMO’s and they work to try to
accommodate those schedules, but sometimes they wind up having
to stay over, incur extra expenses and stuff because of the hours
and such does not—you know, were not consistent. The pickup
days may be limited. it is a problem.

Mr. Horn. So it wasn’t just a time zone problem that you have
run into?

Mr. HUNDLE. No, not a time zone.

Mr. Horn. It is just simply there are other business training
problems?

Mr. HUNDLE. They choose to set the hours differently.


(Danny K.Nlens

STATEMENT OF DANNY K. DAVIS (IL)

“The Government Reform and Oversight Subcommittee on Government
Management Information, and Technology”

Thank you Mr.
Chairman for
convening this
hearing regarding
“Oversight of Defense
Surplus Equipment
and the Activities of
the Defense
Reutilization and
Marketing Service.”


139

tion of property. In its effort to achieve the cut, we believe DRMS
will attempt to use private contractors in a number of areas. The
use of privatization to obtain cost savings should be tied to both
sales performance and RTD goals. We believe that contracting op.
portunities should be performance based with measurable 'D
goals. Without these goals, a contractor will have no motivation to
maximize the RTD efforts.

It is our belief that DRMS has been presented with an impossible
task of maximizing profits in order to be self-sufficient and maxi-
mizing RTD; they are in direct conflict. The steps DRMS has taken
toward electronically screening will, I believe, bear this out.

In summation, the National Association of State Agencies for
Surplus Property supports a single system for electronically review-
ing property and does not support any effort to restrict access or
physical inspection of property.

We support revisiting the impact of establishing DRMS as a
DBOF system and its associated funding mechanisms. We further
support measurable RTD performance goals to be included and any
contracting for service attempts by DRMS.

And, Mr. Chairman, I also would like to add that, in the area of
demilitarization, which has been talked about today as well, there
are maybe some organizations out there that the committee might
want to speak to in the future, such as the National Association
of Aircraft Suppliers and others, and that we also be allowed to
submit testimony later on, as well.

But again I wish to thank the members of the committee for the
continued support of the Federal surplus property donation pro-
gram. This concludes our prepared remarks, and myself and Mr.
Liuzza from Louisiana will be happy to answer any questions the
committee may have. Thank you.

{The prepared statement of Mr. Frost follows:]


147

seen increased use of technology, allowing quicker processing of
items. We have also seen property tracked more efficiently, thus al-
lowing for better distribution, more equitably and fairly amongst
the many programs and users.

We do, however, have concerns regarding the operations and fu-
ture processes that may affect our abilities to accurately and effi-
ciently secure property. The Users and Screeners Association for
Federal Excess Personal Property recognizes the outstanding ef-
forts of DRMS in the past to facilitate the reutilization, transfer
and donation of both Federal excess and surplus property to DOD
activities, other Federal agencies, and to the States.

Federal property, passing through RTD to sales, provides expo-
nentially less return to the U.S. taxpayer. Yet, sales proceeds seem
to be the standard by which the DRMO's performance is appraised.
However, as Mr. Jones indicated, this is changing.

Users and Screeners Association for Federal Excess Personal
Property recommends the incentives from RTD be considered above
sales in evaluating the performance and efficiency of the DRMO ac-
tivities.

Based on information that we have seen, we, the Users and
Screeners Association for Federal Excess Personal Property, oppose
the privatization, outsourcing, of the DRMO-RTD operations. We
feel that the DRMO’s are doing the best they can with the re-
sources currently available to them.

We recognize and support the DRMS initiatives to reorganize to
better serve their customers, and with the use of the savings from
reorganization to build an even more efficient operation, providing
additional resources to those efficiently operated DRMO’s would en-
hance the customer service tremendously as well as allow more
adequately and technically trained personnel.

We support the DRMS initiative for on-line screening and req-
uisitioning of property, but oppose the elimination of onsite screen-
ing. As Mr. Frost previously indicated, there are problems of such
actions.

Regardless of the description, some property should be visually
evaluated to ensure economically feasible acquisition. In closing, we
the Users and Screeners Association for Federal Excess Personal
Property, feel DRMS is doing the best with what is available to it
and with the potential to do even better if given the proper re-
sources.

Mr. Chairman, members of the committee, thank you again. I'll
be available for further questions.

Mr. Horn. Well, we thank you, Mr. Hundle for your help on this.

[The prepared statement of Mr. Hundle follows:}


153

the other 17 operations going on in the Federal Government, a pri-
vate contractor could see a growth industry there, and use these

ople.

Petr. Horn. Your testimony seems to criticize what we are calling
enterprise management. Do you feel there is a problem in introduc-
ing commercial practices in the agency?

General McCINERNEY, Well, I think enterprise management has
been a way to delay. We are talking 4 years later.

Mr. Horn. Right.

General MCINERNEY. This is the way that skilled bureaucracies
delay change.

Mr. Horn. In other words, they agree in principle?

General MCINERNEY. They agree in principle and if you look at
what they are going to do, they in fact are going to do it, but it
will take 10 years to do it.

Mr. Horn. We will all be on Medicare by that time.

General McINERNEY. That is correct, and we will have spent
probably about $1 billion over a 10-year period and we could have
gotten at it a lot quicker. If, in fact, they are using those terms,
if they are going to enterprise management to run it like a busi-
ness, why don’t you let a business do it?

Mr. Horn. That’s a good point.

Earlier panels, Mr. Frost, discussed the incentive to sell prop-
erty. Have your organizations also looked at this problem as to
what the incentives ought to be to sell property? As a receiver, do
you see any effect on the ple you deal with in the Defense Re-
utilization and Marketing Service?

In other words, should their emphasis be on profits? Should their
emphasis be on getting released materiel from the Department of
Defense over to people that can use it so they don’t have to use the
taxpayers’ money to buy related materiel? How do you look at that
agency? You might not be as outspoken as you might be privately.

Mr. Frost. Are you referring to exchange sale?

Mr. Horn. I am referring to all relations with the agency. In par-
ticular, I cited that bit earlier where an officer was quoted as say-
ing profits, profits, profits are what we are after. Well, that sounds

to some of the business-oriented types.

On the other hand, we felt the major thrust, and I think that
was agreed by the previous panel, ought to be that we have saved
both Federal, State, and local public agencies having to buy this
materiel. And hopefully we would have enough initiative so that
somebody in the Pentagon, and that is the broad term for the De-
partment of Defense, might say: “Hey, wait a minute, we still have
a flow of spare parts coming in here. What are we doing surplusing
these spare parts?”

So I am just curious what you see from your perspective, at the
grassroots level.

Mr. Frost. Well, we believe, and hopefully, this will answer your
question—if not, stop me—but we believe that obviously the first
source of supply for the Federal agencies should be reutilization
and transfer. Those should take place, and then donation going on
is a further benefit to the taxpayers, because it is the taxpayers
that bought this, that paid for this property, and it is for their ben-
efit.


46
18

diversions of military equipment were proper and legal. During the week of June 12,
1995, the agent purchased and took possession of a “like new M901 Tow Missile
Carrier with a fully operational launcher” and an M151A1 Jeep for his clients.

On June 11, 1996, seven search warrants were executed at various locations.
About $13 million of illegally diverted property was found and recovered. On October
3, 1996, a Federal grand jury in Madison, Wisconsin, retumed a 17-count indictment
against Donald Crandall and Dennis Lambert, two civilian employees of Fort McCoy;
individuals named Anthony Piatz, Grant Kruger, and Lloyd Pilgrim; and two other
persons. On February 11, 1997, Crandall pled guilty and is awaiting sentencing. On
March 11, 1997, Piatz was found guilty of 11 counts including conspiracy, bribery,
and unlawful conversion of Government property. Piatz was sentenced on July 23,
1997 to 97 months incarceration, 36 months of supervised probation, and a $600
special assessment. On June 13, 1997, Dennis Lambert, Grant Kruger, and Lloyd
Pilgrim were found guilty to 10 counts of conspiracy and unlawful conversion of
Government property. Sentencing is scheduled for September 1997. The other two
individuals were found not guilty.

Forsyth Township Case

‘This investigation was initiated based on information provided by the Federal
Bureau of Investigation, Marquette, Michigan. ‘This information alleged that Perry


6

Mr. Horn. I am delighted to introduce a good friend and one of
the ablest—I am sorry. Mr. Davis is the ranking member this
morning.

Do you have an opening statement that the gentleman would like
to make?

Mr. Davis of Illinois. Yes, sir; thank you very much, Mr. Chair-
man.

Let me first of all thank you for convening this hearing regarding
oversight of defense surplus equipment and the activities of the De-
fense Reutilization and Marketing Service. As you were introducing
one of the witnesses, you talked about the hard work and energy,
and I would also like to point out that one must have a good, solid
work ethic in order to serve on this committee and to do it effec-
tively. I think that you are the hardest working chairman that I

OW.
Mr. Horn. Well, we are grateful to you for being with us this
morning. I know everybody else has taken planes to go home but
you and me. So thank you.

Mr. Davis of Illinois. I also want to thank our distinguished wit-
nesses for taking the time to share with us their expertise as it re-
lates to this issue.

This hearing focuses on the process used to dispose of Federal
surplus pro rty as well as the management of the Defense Reutili-
zation Marketing Service. It is important that we ensure that the
process used to determine disposal of surplus Government property
is fiscally and practically sound. As you know, the DOD inspector
general has issued a number of reports highlighting some of the

problems with the Defense Reutilization and Marketing Service

For example, the IG has found that DRMS’s financial informa-
tion is unreliable and that the DRMS has not properly demili-
tarized certain property, including ammunition, explosives, and
other dangerous articles. It is my hope that this hearing will clarify
some of the problems related to DRMS and provide some sugges-
tions as to how we can better dispose of surplus Federal property.
Therefore, I look forward to hearing from our distinguished panel
of witnesses, and again, Mr. Chairman, I certainly commend you
for delving into this problem and helping to find the resolution.

Thank you very much.

{The prepared statements of Hon. Danny K. Davis and Hon.
Carolyn B. Maloney follow:]


12

In our report, we noted that the Contract Property Management System simply
does not meet minimal requirements for financial statement reporting. It also contains
an unacceptably high number of errors ($963 million in a sample of $12.0 billion).
More fundamentally, it is time for the Department to reexamine its 44 year old practice
of taking tile to large amounts of tooling, test equipment and general purpose items
whose reutilization potential may be minimal. The Deputy Secretary of Defense and
the DoD acquisition community have been examining the current policies over the past
few months and we anticipate significant changes to the current practices. It is likely
that much of the currently stocked material will be sent to disposal. The problems
related to the accounting treatment and control of the remaining items still must be
addressed, however, and we anticipate working closely with the Department on those

issues.

In Report No. 97-168, Disposal of Serviceable Reparable Assets, we discussed
the fact that the Army had not corrected problems identified in previous audit reports
‘on the Army credit retum program. In August 1993, the Army tried to promote supply
inventory reduction by relying on automated disposal decision processes and omitting
item managers from the loop. Due to the program logic used, however, Army field
units were frequently directed to dispose of serviceable assets and retain unserviceable
assets for the same National Stock Numbers. The previous audits identified

$44 million of serviceable assets that were sent to disposal in 1994 and $8 million of


120

Mr. Horn. OK. Do you have any thoughts on that, Mr. Jones?

Mr. JoNnES. No, Mr. Chairman, I really don’t. I don’t know how
we'd find that outright, offhand.

Mr. Horn. I’m not asking you to do a survey or anything. I’m
just curious. Obviously, the point is, are we missing a market? And
maybe the private sector is the best way to do it.

Mr. JONES. I think—sorry.

Mr. Horn. On the other hand, maybe you could do it.

Mr. Jones. I think the advantage of using the specialized market
mediator in the middle is that they're very familiar with the inter-
national demand. If there’s an international dimension to the de-
mand, it will be used. That’s why we have to also be careful what
we put into that stream.

Mr. Horn. Very good. There will probably be some questions we
will be sending to you, but I have only three left, and I'll work
through them.

As I understand it, one of the most valuable functions of the De-
fense Reutilization and Marketing Service is not the sales function
but, as you said in your recent comment, it’s to get that property
reused by government agencies, both Federal and State, and saving
us taxpayer dollars. Now, what incentive is there for you to pro-
mote that type of reutilization transfer and donation as opposed to
moving to the sales side? Are you under great pressure by your
own guideline to really get that out for sale and the heck with do-
nations to other governmental bodies? What’s your read on the
grounds of that?

Mr. JoNES. Absolutely. We have, first of all—and let me just
comment on the individual who is so widely quoted as saying, “your
first three priorities are profits and your next three priorities are
profits.” That gentleman has long since departed, and so has the
person to whom he reported. That problem has been corrected.

Colonel Mansfield developed an annual business plan, and it’s
based on an anticipated volume of business in each of the areas
that he’s responsible for: hazardous materials, reutilization, sales,
and so forth. His incentive is primarily to remain within his busi-
ness plan, and to the extent that he can’t, we work with him to try
to adjust that.

As far as reutilization goes, there are several things that are
going on to try to improve that. One of them, as Mr. Lieberman
mentioned, is total asset visibility. There is a rehosting of the main
system that DRMS uses at Battle Creek, which is going to have
much better interfaces with the standard supply system than has
been the case in the past. That will cause much more materiel to
be visible to the buyers at the time they're making the buy deci-
sions.

Right now something like 50,000 requisitions per day are passed
to DRMS from our own DLA buyers before anything goes into the
buying practice. And that’s something fairly new. So a lot of that
is being done. DRMS has been extremely aggressive.

As a matter of fact, they've won awards for their World Wide
Web marketing. The advantage with the Web marketing is that it
gets to everybody. Anybody with a computer and Web access can
see what’s there; and that taeludes our own military people who do



19

retum in Europe, where there is no donation, was nearly four times the continental
rate. I will soon introduce legislation to phase out the donation program.

The donation program is unfair because states and municipalities do not
benefit equally. States that have DRMOs which are located in close proximity to
maintenance depots benefit more from the DRMS disposal process. I understand
that States often stockpile machinery, equipment and other salvageable goods that
they think would be of value in the future. As you might guess, such items as fire
trucks, road scrapers and construction equipment disappear very quickly. In fact
Pennsylvania was successful in putting language into Federal Law that gave that
State an advantage in acquiring equipment under the DRMS donation program. At
the very least, to make sure that there is a real need, the merchandise that is now
donated should be sold at a percentage of the current cash value.

It should be mentioned that DRMS has made excellent progress in privatizing
some functions. DRMS is making increasing use of private contractors. Since the
1993 National Performance Review and the Defense Performance Review, DRMS
has pursued and analyzed privatization of many services. Currently, DRMS relies
on the private sector for numerous functions. 100% of hazardous waste disposal
services are provided by private sector companies. 50% of precious metals
recovery programs are performed by the private sector. 60% of demilitarization
activities are performed by sales contractors and 50% of both national and local
advertising is performed through a private sector company. We need to continue to
make use of private sector services where appropriate to reduce the cost to
taxpayers and improve the efficiency of the property disposal system. While the
concept of introducing public-private competition to the disposal process is one that
DRMS is actively pursuing, the target date, set by H.R. 1119, for fully implementing
the concept, should be extended from October 1998 to October of 1999.

Clearly, DRMS does a very difficult and important job. DRMS processes
literally every type of property that DOD uses from bones, fats and meat trimmings
to aircraft carriers. Even the largest private salvage companies in the United States
handle only a small percentage of the salvage operations being conducted by
DRMS. No other agency or company deals with the wide variety of items, time
limits and rigid disposal system required of DRMS. In addition, DRMS has to deal
with important issues of protecting U.S. military technology and making sure that all
equipment is fully demilitarized.


4

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Hon. Carolyn B. Maloney -Opening Statement

Defense Surplus Equipment and the
Activities of the Defense Reutization and Marketing Service

‘September 12, 1997

‘Thank you Mr. Chairman for holding this hearing on surphis property at the Depastment
of Defense and the Defense Reutiization and Marketing Service (DRMS). As you know, this
‘Committee has jurisdiction over surplus property generally and DRMS because of the
‘Administrator of General Services delegation of authority to the Secretary of Defense for DOD's
surplus property. This hearing is e good counterpart to ones which Rep. Hastert, Chairman of the
Subcommittee on National Security, International Affairs and Criminal Justice, has held on

billion. This hearing will focus on the way in which DOD disposes of that part ofits inventory it
no longer needs, a process governed by numerous laws and regulations,

DRMS operates close to 170 Defense Reutlization and Marketing Offices worldwide. In
FY 1996, those offices disposed of goods with an original acquisition value of almost $26 billion.
Much of that property is donated for public purposes such as law enforcement or education, of to
state and local governments after it is determined that other federal agencies have no need for it.
One concer I have is the low rate of return DOD gets on the property it actualy sels — less than
2% of the original acquisition cost. While this low rate may be explained to some degree by the
donation policy, it does seem exceptionally tow, especially when one considers that some
companies in the private sector get a return rate as high as 50%.

Lam also particularly concemed about the demilitarization process in place at the DRMS.
‘The DOD Inspector General has found serious problems in this area, from improper coding of

‘explosives and other highly dangerous materials. The sefety of the American public is paramount,
and we must do all we can to ensure that it is not endangered in this process.


3

covering the problems we are discussing today: the representatives
of the efense Inspector General’s Office and the General Account-
in, ice.
jext, representatives from the Department of Defense will tes-

tify, and then, finally, we will get the perspective of private sector
consumers, the people who buy the surplus property after the De-
partment of Defense has determined that it is no longer needed for
the military’s use.

Thank you all for coming. We look forward to all of your testi-
mony.
[The prepared statement of Hon. Stephen Horn follows:]


132

reached this conclusion in the Defense Performance Review, but we were not
alone. The National Performance Review and the Commission on Roles and
Missions also called for outsourcing of DRMS. Even the Defense Logistics
Agency itself has supported outsourcing of this work and originally presented
DRMS as an outsourcing candidate in 1993. In addition, nearly every
government audit of DRMS has soundly criticized the service's operations.

DRMS has been subject to a host of criticisms that will be covered by other
witnesses in this hearing. These problem areas include poor inventory controls,
unreliable sales reporting, poor marketing efforts, and shoddy financial
management. DRMS has lost money in 23 of the 25 years it has been in
existence. Think about that: It costs this bureaucracy more money to process the
sale of merchandise than it receives from the sale itself. This type of work ought
to generate revenue for the taxpayer, not require additional outlays.

In fiscal year 1996, DRMS property sales yielded only 1.9 percent of the
original acquisition costs for sold items. By comparison, the General Services
Administration obtains about 6% of the original cost for items sold from civilian
government agencies.

The General Accounting Office (GAO), the Pentagon’s Inspector General,
and other investigators have made a convincing case for poor management at
DRMS. Moreover, DRMS’ customers, including the National Association of State
Agencies for Surplus Property (NASASP) are among the service's harshest
critics.

Nevertheless, poor management doesn’t necessarily mean that a
government function should be outsourced. The primary rationale for
outsourcing is the nature of DRMS’ mission. Excess property disposal is not a
core government function, let alone a core defense function. Even if DRMS
worked well, the Defense Department should not be in this business.

The core mission of the Defense Department is to deter potential
adversaries and to prepare to fight and win wars if deterrence fails. As you
move farther away from this core function, the case for outsourcing becomes
stronger. While we should not outsource combat operations, many of DoD’s
business operations could be performed by private contractors. Just as America’s
leading private corporations have outsourced non-core operations to world-class
suppliers to receive better services for less money, so too should the Pentagon
outsource functions that are not part of its core competency.

At the beginning of the Cold War, DoD was often forced to do work in-
house because there were no private contractors capable of performing many


110

Gao __ Disposition by Reported Acquisition
Value, FY 1992-96

— —_ — ——
br FY 1992 FY 1993" FY 1994 FY 1996 FY 1996
Reutiization 1,600 7% ‘1770 5% 2146 8% 226 OK) 2848 1K
‘Transters S40 2% | ‘S32 sm sh 5
Donations: 2 10 2% “a st ‘a2
‘Sales B10 2% | 8100 28%| 67e2 aan] 0160 som] 8A50 Sam
rus 8 <1% 18 <1%| Ie a ie 1 1%
‘Scrap OBB2 43% 14553 42% 13557 SOR] 113972 46%] 11.000 47%
Other® ‘5,744 24% 7878 2% We 1% 318 1% 5 1%
Total ZBAGT 100% | 34,481 100%] 26,003 100% | 24,942 100K] 25901 100%

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‘ramconna (ore reauctors)



69

done fairly and that the numbers that they end up comparing are
correct, and we will do that.

So there will be controls in that process, and I think a little bit—
well, a lot—of forethought is necessary. If we are going to
outsource, we need to make sure that we know how to write con-
tracts that make sense and get the job done, we provide adequate
controls, and we have the in-house expertise in place to oversee
those contracts.

It is quite different overseeing a contractor than running an in-
house operation, and we want to make sure that we train people
Properly so that we have proper contracting procedures in place.

ir. Davis of Illinois. you are saying that a solid planning
process with a firm commitment in terms of what you are trying
to do and what you are planning to do, and the active involvement
of the employees or the work force who are involved in that situa-
tion, will probably be, net, the most, or the best results?

Mr. LIEBERMAN. Yes, sir.

Mr. Davis of Illinois. Do you have any estimates of the amount
of money that is lost to the Federal Government as a result of im-
Properly demilitarized equipment?

ir, LIEBERMAN. No, I don’t.

Mr. Davis of Illinois. Any assumptions? I mean, are we losing,
in all probability, a great deal, or do we just know that the system
isn’t working and that all of these shenanigans that we are hearing
about are taking place?

Mr. LIEBERMAN. Well, we do have lots of specific incidents. It is
difficult to know what we don’t know, and it is a very tough prob-
lem to get a handle on overall. I can’t give you a good estimate,
for instance, of how much money have we spent demilitarizing
items unnecessarily; I don’t know.

We found specific instances. In one example we found 10,000
tools at one contractor’s plant—I believe it was a McDonnell Doug-
las plant—that had been earmarked for full demilitarization. They
were old tools, obsolete. We went back to, in this case, the Navy
and asked them whether they really wanted to pay for the demil
costs, which in this case would have been $9.5 million, and they
said certainly not. They had just taken over that plant from the Air
Force in terms of plant cognizance. They didn’t know anything
about it. They hadn’t been part of the decision. They said only
about one-fifth of the tools needed to be demilitarized.

So, fortunately, we were able to stop that before it happened, but
how much it has happened over the years, we really don’t know.

Mr. Davis of Illinois. Could not some of these be characterized
as criminal acts of subterfuge?

Mr. LIEBERMAN. There is a lot of criminal activity going on in
this area, yes. At the present time, we have 111 open cases. This
is a large part of our investigative workload. The good news is that
we are identifying a lot of these schemes and successfully prosecut-
ing the offenders, and the bad news is, we don’t know how much
activity is going on that is not detected.

By the very nature of this process, all of these items out there
that are spread all over the world—literally; a tremendous volume
of things going through the process. Heavy reliance on low-level
personnel to make decisions about what is going to be disposed of


24

Mr. Horn. Now I would like to ask you one question and then
yield to the ranking minority member.

In your testimony, you noted that there is no cash estimate of
the dollar value of Property donated to State and local govern-
mental agencies. In the last year, we passed the Single Audit Act.
And there is no reason why anybody should know this, but is an
estimate made of the cash value of these donations made of the
Single Audit Act, which applies to nonprofit groups and others who
are eligible over the $300,000 mark in terms of their annual
amount. We tried to simplify numerous audits from every other
Federal agency you can think of, and it might not be exact, but you
might want to ask the agency to use this figure, which should be
easily available, which is an estimated figure. I don’t know if it will
help us that much in the point you are making, but it is a figure
that is really new and newly arrived at.

Mr. SMITH. I would hope, Mr. Chairman, that you might ask that
question to the people that are testifying from DLA, if it will im-
pact from accomplishing that audit requirement.

Mr. Horw. I now yield to the gentleman from Illinois, Mr. Davis.

Mr. Davis of Illinois. Thank you very much, Mr. Chairman.

Representative Smith, you point out a number of issues and con-
cerns with the donation program in terms of the unfairness, the in-
ability of the program to make sure that all States, for example,
might have equal access, even though this unfairness, as you point
out, might exist.

Do you think that there is ample opportunity to correct the pro-
gram, or is it necessary to actually get rid of the donation part of
it in order to make sure that there is equity?

Mr. SiTH. It seems like in many aspects of trying to bring the
marketplace into—have a bearing on what actually happens,
maybe at least in some kind of transition, if you could put a mini-
mum price on a percentage of cash value so that there was some-
how a financial stake or a greater interest in deciding whether that
particular State or municipality or charity really wanted that par-
ticular merchandise. So even though it wasn’t full cash value, if
there was some outlay, it might help guide the donation program
to go where there was a real interest, rather than having the stock-

iling that now exists with some States that say: “As long as it is
free, maybe sometime in the future we could use it.”

I think in our effort at frugality at the Federal level, it is reason-
able to consider the possibility of having some charge for these
items. Sometimes they are almost-new firetrucks or new machinery
or new equipment that has never been used and they go to the
State that gets there first. And as I mentioned, Federal law actu-
ally gives Pennsylvania a preference on some of this heavy machin-
ery I think needs to be surveyed and reviewed.

Mr. Davis of Illinois. Could we possibly look at a system—I
mean, we know that there are some States that are different than
other States. There are some States, for example, that have less in
the way of resources. I used to live in a State that was noted as
being one of the poorest States in the Nation, and it just simply
did not have the same resources that other States had.

Is there any way of perhaps looking at this from the basis of try-
ing to make sure that those States that have the greatest need


143

It is our belief that DRMS has been presented with an impossible task. Maximizing profits
in order to be self sufficient via DBOF and maximizing reutilization are in direct conflict.
The steps DRMS has taken towards electronically screening we believe will bear this out.

Summation

In summation the national association of state agencies for surplus property supports a
single system for electronically reviewing of property and does not support any effort to
restrict access and physical inspection of said property. We support revisiting the impact
of establishing DRMS as a DBOF system and its associated funding mechanisms. We
further support measurable RTD performance goals to be included in any contracting for
service attempts by DRMS.


10

As you know, the
DOD Inspector
General has issued a
number of reports
highlighting some of
the problems with the
Defense Reutilization
and Marketing
Service (DRMS).

For example, the IG
has found that DRMS


141

The Wholesale Recycling Control Point (RCP) process currently in operation is a case in
point. This concept by which property no longer needed by the DOD is retained at a
Defense Depot and electronically selected prevents the customer both redistribution and
sales from physically inspecting the property. Unlike the average American consumer who
would not buy a used car sight unseen, the DRMS customer, is forced to expend
resources to select, transport, and warehouse a virtual “pig in a poke”. The inability of
customers to visually verify description and condition of new and used depot property
causes a great deal of concern.

We recognize that the DOD is downsizing and shifting away from major depot storage of
parts and end items, instead utilizing commercial “just in time” inventory practices.
Further, DLA is exploring utilizing industry standards for common items and the

ing of said items rather that military specifications or “Mil Specs”. This trend will
lead to more local purchases which will make identification of these items via electronic
means, down the road, even more difficult.

Electronic Review of Property Availability

Currently there are two methods of electronically checking what DOD has declared
excess. Both GSA and DRMS have created systems from which a customer can review
property availability. Both of these systems have limitations and advantages, neither is
comprehensive or complete.

First is the DRMS Internet Web site. This windows driven site provides basic information
concerning what is theoretically available at a particular DRMO or DRMS system wide by
stock number in an easy to use format. This tool is usefull when determining if a particular
item or items are available. It enables an agency to plan screening trips and is a useful
reference tool. It does not provide enough data to make informed screening decisions. Our
screeners report the information presented is marginally accurate, that items will have
been issued and not removed from inventory in a timely manner.

The second method involves using the General Services Administration’s FEDS system.
This system receives data from DRMS and presents it in a searchable data base. It also
allows for the generation of automatic “freezes” or requests and automatically generates
the request documents. Unfortunately, it appears that the DRMS system and the FEDS
system have a number of communications problems, which we are working with both
GSA and DRMS to resolve. From our perspective, the major issue with FEDS is that it
utilizes older style main frame driven commands and screens. It is very cumbersome and
time consuming for the average customer to utilize. GSA has made a number of
improvements to the system, however resource restraints appear to prevent them from
establishing a more modern windows driven system. The FEDS system offers more
options for searching and selecting property than the DRMS system, however in its
present configuration, user acceptance appears to be very low.


29

‘Mr. Chairman and Members of the Subcommittee:

| appreciate the opportunity to be here this morning to discuss the disposal phase
of the life cycle for military materiel. Although more attention tends to be given to
other aspects of Defense inventory management, the challenges related to efficient
Teutilization, transfer, donation, demilitarization, and sale of ¢3 or surplus military

equipment and supplies are formidable in their own right.

‘To protect the taxpayers’ interest, the disposal programs need to maintain a
difficult balance between maximizing the sales of surplus material to recoup as much of
its residual value as possible, but at the same time avoid selling items that are still
needed for Defense or other Government purposes, or endangering public safety by not
properly demilitarizing potentially dangerous material before it is sold or exchanged.
Among the many factors at play are: the sheer volume of materiel moving through the
disposal process; the necessarily widespread dispersion of disposal offices; the highly
pilferable and/or potentially dangerous nature of much of the material; the multiplicity
of military organizations, Federal, state, and local government agencies, nonprofit
potential outsourcing; shortfalls in the reliability of automated management informa-
tion systems; and the usual shakedown problems encountered when introducing new
business processes, as the Defense Logistics Agency is trying to do.


98

the committee to do so. I don’t want to really go through all of
those here, because I'll take up too much time.

We are implementing activity-based costing, one of the first parts
of the Department of Defense to do that, implementing commercial
cost accounting structures. We do intend to have a fully redefined
Defense Reutilization and Marketing System within 5 years.

That’s essentially the opening remarks I wish to make. We have
some additional information we could provide the committee based
on some questioning of the previous witnesses, particularly with re-
par to the dangerous articles. There is a plan to work that issue.

[t’s a very serious plan. There are time lines. And we are deeply
involved in that, as you might expect.

So with that, I'll conclude my opening remarks and be pleased
to take any questions you may have.

(The prepared statement of} Mr. Jones follows:]


140

NATIONAL ASSOCIATION OF STATE AGENCIES FOR SURPLUS PROPERTY

Statement to the Subcommittee on Government Management,
Information and Technology

September 12, 1997

Mr. Chairman, Members of the Subcommittee, my name is Randy Frost and I am the
President of the National Association of State Agencies for Surplus Property. I have with
me today a member of our legislative committee, Mr. Jack Liuzza of Louisiana. On behalf
of the over 66,000 agencies nationwide which participate in the Federal Donation
Program, we wish to thank you for your continued support of the program and for this
opportunity to speak with you today.

My comments have been broken down into general areas of interest and concem, The
first area addresses a general discussion of our relationship with the interested parties. The
second discusses RCP electronic screening. The third addresses electronic review of
property availability. The fourth addresses DRMS’ cost cutting measures and funding
mechanisms. The fifth provides a brief summation.

General Discussion

For over 50 years NASASP has worked in full partnership with the General Services
Administration (GSA) and the Department of Defense (DOD) to facilitate the transfer of
Federal surplus property to eligible agencies across America. As I am sure that this
committee is aware of the many benefits the donation program provides to the nation, I
will be addressing my comments to the interaction the program has with the Defense
Reutilization Marketing Service (DRMS) and more specifically with the proposed changes
within DRMS.

Over the past few years we have seen great change in DRMS. Some of these changes have
resulted in increased customer service, however since DRMS was designated a Defense
Business Operating Fund (DEBOF) it appears to us, the customer, that DRMS" focus has
shifted from maximizing reutilization of the taxpayers dollar to maximizing “profits”

RCP. ni

DRMS in an effort to reduce costs has recently come out with proposals to “move
information not property” which translates to electronic screening, This idea on the
surface may appear sound. However upon reflection, we as DRMS customers, have
concems


91

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financial information
is unreliable and that
DRMS has not
properly demilitarized
certain property,
including
ammunition,
explosives and other
dangerous articles.


97

core functions that have to be performed whether we hire people
to do the work or not. There are functions of oversight, fiduciary
responsibility, and regulatory enforcement that can’t be given
away. Those are inherently governmental, and, unfortunately, no
amount of privatization will ever change that.

Similarly, where we have major distribution depots and mainte-
nance facilities, the opportunity for things to go wrong in the de-
militarization area is high. We consider that a high enough risk
that we feel we need a presence at those sites, a command pres-
ence, to make sure that the process is as well conducted as possible
no matter who actually does the handling of the materiel. It could
be private; it could be public. But that kind of control, govern-
mental control, I believe, is ultimately going to fallback on our
shoulders regardless of what tack we take. And so our plan is to
make that our starting point.

What I'd like to show you next, then, is kind of our bottom line
and where we're headed. Right now, we have over 3,000 people in
the Defense Reutilization and Marketing System, most of them in
the field. And if we are able to continue and complete our infra-
structure reduction plan by the end of fiscal year 2005, we will be
below 1,000 people: one of the more dramatic reductions in the size
of an organization in DOD. We’re going to do that by a combination
of closing sites, and then doing the reengineering and the A-76
type of contracting process that Mr. Lieberman spoke about.

The next chart shows again the cost reduction plan that goes
with that. And you can see that, to the extent that we’re able to
complete our reduction in infrastructure in our business re-
engineering processes, we expect to go from a cost basis right now
in the $380 million range down to $100 million less, a significant
change in the relationship between what we are producing today
in terms of results and into the future.

The last two charts are kind of an eye test. I apologize for the
way these came out. But this is basically just to acquaint you with
the fact that the reengineering process is a serious process. It con-
sists of many steps.

It began in 1993. In fact, General McInerney and I were just dis-
cussing a few minutes ago the briefing that DLA gave to him in
his capacity as the NPR/DPR chief when this whole thing began.

And what we actually started with at that time was a concept
of enterprise management, breaking DRMS into those logical busi-
ness categories that would allow us to map them to the market.
Not everything, as we have said, that DRMS does can be
outsourced in a wholesale fashion; but different pieces of it
matched different segments of the market. So by proper segmenta-
tion, it would be possible to do a better job of matching the mar-
ket’s capability to absorb business with the business that it needs
to absorb.

In addition to that, we have—privatization efforts too that are
continuing. Hazardous waste is almost—is 100 percent outsourced
today. Precious metals recovery is almost 100 percent outsourced.
For local sales, we’ve tried auctioneering contractors. We have local
and national advertising. And we can speak more about the joint
venture and optimal marketing initiatives, if it’s in the interest of


102

© Provided hundreds of millions of dollars in precious metals recovered for reuse in
the productiongpf government products;

‘© Managed the complex DEMIL and hazardous property programs for DoD;

‘* Increased its use of technology to “move information instead of materiel.”

Yer, despite these actions, DRMS has, except for one year, consistently incurred
higher costs than revenues. Deficits incurred by DRMS during these years required
military service funding to cover the operating costs. In addition, particularly in recent
years, reduced government spending as well as legislative changes resulted in larger
amounts of property being reutilized, transferred, and donated. Asa result, less
surplus property of lower quality remained available for sale, with an accordant
decrease in DRMS sales revenue.

In 1992, DLA directed DRMS to become self-financing. In response, DRMS began
actively reengineering its processes and considering privatization alternatives. The
following year, DLA nominated DRMS as a potential outsourcing candidate under the
Defense Performance Review (DPR). The DPR pointed out that certain non-core
government functions might be better performed by the private sector. The
underlying rationale for this nomination was the potential for enhanced operations at
lower cost, increased sales revenue, and reduced manpower requirements. The
fundamental principle underlying the DRMS strategy, then and now, is that, there are
some inherently governmental functions, primarily related to command, control,
oversight, finance, and regulation, that cannot be divested. However, in all cases
where the private sector has the capacity to perform DRMS work, the make or buy
decision is fundamentally a “best value” business decision. After presenting this
approach to the Defense Performance Review, DRMS pursued a policy of selective

privatization, streamlining and reengineering of many of its processes

In 1995, the agency proposed to the DoD Commission on Roles and Missions
(CORM) that DLA supported leveraged privatization, recognizing each case needed to
be looked at individually and that privatization decisions should be supported by a


118

Mr. JONES. Well, let me answer that question first, because I
think the answer was given by Mr. Lieberman as well, and that is
the best value for the taxpayers is to reuse the equipment.

Mr. Horn. Right.

Mr. JONES. So to the—

Mr. Horn. We agree.

Mr. JONES. So to the extent we can reuse it, we get best value.
And that trend shows up in the actual figures of what’s going on.

The second best is that we can get materiel that is not in service-
able condition marketed as serviceable property, which requires the
investment of someone to make that happen. Rather than develop
that in-house capability as we’re trying to downsize, we’ve looked
at the private sector to do that for us; and that’s where we think
things like joint venture and optimal marketing will add the most
value, because they will increase the value of the property, by defi-
nition, and make it worth more to the markets that are willing to
pay for it.

So those two right there, I think, are the best answers I can give
you as to how to make the most money out of the property that
survives the demilitarization and other screening processes, dona-
tion and so forth.

Bob, you may want to add to that.

Colonel MANSFIELD. Just from the standpoint of part of our proc-
ess of determining which route to go, take a look, does the exper-
tise exist in the private sector? If it does, it seems best to us not
to try to duplicate it because of the training costs and the competi-
tion that we might be saying, we’re having the Government com-
pete with the private sector.

What we really wanted to do was to take a look where Govern-
ment does things the best, where private sector has a proven capa-
bility, and then write contracts, in this case sales contracts, with
them, and then let them do the aftermarketing. It might be tradi-
tional buyers buying directly from us or rehabilitation, as Mr.
Jones says, and selling in a different market. So we don’t have to
build a large sales and marketing infrastructure. That’s been an
approach, sir.

Mr. Horn. To what extent is taking a percentage of the private
sector sale to either the private sector, or other people that might
have an interest in that; and be eligible? Do you feel a percent of
that ultimate figure that the private sector is trying to sell for you
is the best way to get the highest return for the taxpayer?

Colonel MANSFIELD. Well, we think there’s probably some fairly
good competition at that point, because the way we set up our first
one to test this is that we have years of history in medical-dental-
vet equipment, for instance, that say we receive this rate of return.
We put out to the marketplace and say we would like to get, up
front of that sales contract, 75 percent of that based on the acquisi-
tion value, and then negotiate individually with folks who came
back to us the best deal we could get as far as a share of the net

pI .

We think that 27 or 33 percent of the net is probably better than
we would ever do when we have only been in medical-dental-vet,
traditionally making a little over 3 percent. So it looks to us—and


65

[The information referred to follows:]

A review of the investigations conducted by the Defense Criminal Investigative
Service (DCIS) for the last 2-year period disclosed that 185 investigations involved
the Defense Reutilization and Marketing Service (DRMS). To date, sixty-six of these
cases have resulted in criminal, civil or administrative action including 35 arrests,
97 indictments, 65 convictions, 3 civil charges and convictions, $1.2 million in recov-
eries and $78.5 million in seizures.

In these cases, there were 130 subjects (individuals or companies) for which some
type of action was taken. Twenty-three of these subjects were Government employ-
ees, All of the criminal charges involving the Government employees were inves-
tigated as violations of Title 18 United States Code, Section 641 (theft of Govern-
ment property) or Section 371 (conspiracy). None were charged with tax code viola-

ions.

No formal program is in place for the Internal Revenue Service (IRS) to review
these cases for either criminal or civil adjudication. On a case by case basis, how-
ever, DCIS investigators may refer cases to the IRS for its review. During the last
2-year period, there have been no referrals to the IRS of theft cases involving the

Mr. WarreEN. If I could just also add, we also have work that
would indicate that there are still problems in terms of this issue
of total asset visibility, and item managers are, in fact, going out
and purchasing items that, as part of this process. One of the
things that can happen in here is that if an item manager has sent
something into the disposal process but then, for whatever reason,
determines or finds that, hey, I need that back, they can go back
and dip in and get priority.

We have some work under way that indicates now that, because
of the lack of good asset visibility, that is not happening as often
as it should and, in fact, some items continue to be purchased
while that same item is moving through the disposal process.

Mr. Horn. Well, on that very point, are items that are submitted
as surplus—is that a signoff from the buyer that has bought and
might still be buying those that this is no longer needed?

Mr. WarREN. Yes, sir, that would be correct. That’s the process.

Mr. Horn. They do have the process.

Mr. WarRREN. The process is there, but the difficulty for them, as
I understand it, is the visibility to be able to go back into the dis-
posal process to determine where that item is and to be able to pull
it back when they need it, so that, as Bob said, I think, improve-
ments have been made, but I don’t think it would be appro riate
to leave you thinking that that problem has been totally cleared

Mr. Horn. Well, I realize that military turn over a lot of these
jobs every 2 years, for experience sake, and that’s a difficulty. But
is there any coding or tying in where you have the buying arm and
the disposal arm that have to come together, and what do we find
are the problems there when that doesn’t happen?

Mr. WARREN. There is a process, but I think, again, where the
breakdown is is the timely and accurate exchange of information
within that process.

Mr. Horn. Well, are you satisfied with it and is the inspector
general satisfied with it?

Mr. WARREN. Well, from where I sit, I think we will be rec-
ommending that there be improvements made to that process.

I can’t emphasize enough the point that Bob made about total
asset visibility and that this is a total logistics problem. The De-
partment has been working on achieving total asset visibility for


71

The experience has been, again, where there are companies that
are performing like functions, that the opportunity is greatest there
to have an effective competition that drives costs down. You see
this happen, for example, a lot on your military bases and some of
your support activities such as taking care of the maintenance of
the grounds, in terms of taking care of laundry functions and in
terms of taking care of road maintenance functions.

All of those are types of things that are very transferable to ac-
tivities that are occurring in the private sector, so that when you
go out to compete, you can really have a good, solid competition
and the costs can be driven down. So that is why we see this as
a likely candidate to move into that process.

The other part of that is, under the A~76 process, it requires for
the > public sector to identify their most efficient organization. We
think that is extremely important. Many segments of the Depart-
ment of Defense business activities need to desperately reengineer
their activities to come closer to current modern business practice,
particularly as it relates to the use of technology to substitute tech-
nology for capital investment in labor and other activities. So those
are the key reasons why we see this as a likely candidate,

Mr. Davis of Illinois. Do you have any dollar figures or estimates
or Percentages of how much DRMS is already contracting out or
what part of its total operation?

Mr. WarREN. I do not have that. I do know they have entered
into some contracting relationships, but I do not have a dollar
number with me today; no, sir.

Mr. Davis of Illinois. And, finally, I know that we try to think
and plan as comprehensively as possible. In your thinking, do we
give much consideration to what happens with the work force
should we move to the point of greater privatization and
outsourcing?

Mr. WarREN. I think there is always a great deal of thought
given to that. I think the real issue that underlies that: Is that
going to be satisfactory to everyone? In other words, what the ulti-
mate outcome will be.

Typically, what we have seen in the outsourcing and, let’s say,
when the private sector wins, or even when the public sector wins,
but more so the general trend is, there are lower salaries and fewer
employees performing that function. In the public sector, what hap-
pens is that there are fewer employees performing that function.

As I have looked at this outsourcing issue over the last couple
of years, I think one of the things that the Department and the
Congress needs to put a lot of attention and focus on is, how do
we create this transition from the existing work force that we have
today into the work force that we are projecting for the future in
such a way that everybody feels that it is equitable and a fair proc-
ess has occurred as we achieve a more effective and efficient gov-
ernment? And that is probably the most difficult thing out there.

Mr. Davis of Illinois. And you just don’t think that we can shape
the civilian operation to the point that it can be competitive in this
instance perhaps?

Mr. WARREN. Well, no; I think there is an opportunity that very
well could be shaped to be competitive in this situation, but, in all


16

am disappointed that there is not an estimate of cash value of
property donated. So all we have now is the original acquisition
value, so we have no idea of what the cash value is.

I have asked DRMS to develop estimates of the market value so
that Congress can have a better assessment of the dollar value of
the items that they are now reutilizing and disseminating and do-
nating. When you sell it, we are in a situation now where even one
bid can sometimes buy that property without an accurate estimate
of its current cash value.

The loss resulting from donation requirement is certainly evident
if we look at the higher rate of return overseas. So when you sell
something overseas, there is no donation or very limited donation,
because the State would have to pay for the transport from Europe
back to the United States if they are going to claim their donation
privileges for overseas reutilization.

If you look at the higher rate of return from overseas during
1996, in the continental United States, DRMS had a 1.77-percent
rate of return; that is compared with the acquisition value. In Eu-
rope, DRMS had a 6.9-percent rate of return. In other words, the
rate of return in Europe, where there is little or no donation, was
nearly four times the continental rate.

The donation program is unfair, I think, because States and mu-
nicipalities do not benefit equally. States that have DRMS which
are located in close proximity to maintenance depots benefit more
from the disposal process than other States. States often stockpile
what looks like it might be valuable later on. It is all free—they
only have to pay for the transportation—so some States now stock-
pile machinery, equipment, or other salvageable goods that they
think would be of value in the future.

As you might guess, such items as firetrucks, road scrapers, con-
struction equipment disappear very quickly. In fact, relating to the
unfairness aspect, Pennsylvania was successful in putting language
into the Federal law that gave that State an advantage or first pri-
ority in getting construction equipment.

At the very least, to make sure that there is a real need, the
merchandise that is now donated should be sold at a percentage of
the current cash value, if not by auction. This would make sure
that the giveaway, the donation program, does not become so huge
that the Federal Government is simply giving away equipment that
States would be delighted to pay some level of monetary reimburse-
ment for.

I think it should be mentioned that DRMS has made excellent
progress in privatizing some of the functions, some of the things
that I have m pushing for. DRMS is making increasing use of
private contractors. I think these statistics will be of interest to the
committee. Since 1993, the 1993 National Performance Review and
Defense Performance Review, DRMS has pursued and analyzed
privatization of many services.

Let me just briefly run through a couple of statistics. DRMS re-
lies on the private sector for numerous functions. One hundred per-
cent of hazardous waste disposal services are provided by the pri-
vate sector companies, 50 percent of precious metals recovery pro-
grams are performed by the private sector, 60 percent of the de-
militarization activities are performed by sales contractors, and 50


160

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99

Statement of

Mr. Jeffrey A. Jones

Principal Executive Director for Materiel Management
Defense Logistics Agency
Before the House Committee on Government Reform and Oversight
Subcommittee on Government Management, Information, and

Technology

September 12, 1997

Introduction

Mr. Chairman and members of the Subcommittee, I appreciate this opportunity
to appear before you to discuss the role of the Defense Logistics Agency (DLA) in the
disposal of Excess and Surplus Personal Property.

The Defense Logistics Agency (DLA) was assigned the responsibility for
management of the DoD Materiel Disposal Program by the Secretary of Defense in
1972 in part to centralize and standardize processes previously discharged by the
ind’
made DLA the Department's administrator and implementer of property disposal
policies of the Department under Federal Regulations issued by GSA. Over time DLA
acquired additional responsibilities, including the Executive Agency for specialized

jal Components of the Department. The decision to centralize these functions

programs, such as the DoD demilitarization program.

Since 1972, the Defense Reutilization and Marketing Service, or DRMS, which
performs day to day operation of the DoD disposal system, has taken steps to improve
how it does business, Fundamentally DRMS has many customers to satisfy with

divergent interests:


21

Mr. Horn. Well, I thank the gentleman.

At this point, I would like to put in the record the opening state-
ment of the Honorable Pete Sessions, who is vice chairman of the
committee, the gentleman from Texas. Without objection, it is so
ordered.

(The prepared statement of Hon. Pete Sessions follows:]


5U

as well, and I think it gives some helpful insights as to why the
two systems are different.

I think it is important to point out—and I don’t want to leave
the impression with the members that these two systems should be
directly comparable—the point that I would like to make here is
that they are, in fact, different and that is why you see much dif-
ferent rates of returns. And if that dynamic is to be changed, then
I think, in fact, there would have to be some policy changes along
the lines of the first discussion with the initial witness.

As you can see, the airline companies place special emphasis on
selling surplus property and creating incentives for employees to
maximize return on sales. When we talked with these folks, basi-
cally what they said is, we just see this as another line of our busi-
ness activity; we try to set this up in such a way that when our
items get to the end of their life within our supply system, we are
going to reap a benefit or a profit or a return on investment from
those items. The staff are trained to understand aircraft parts tech-
nology and the application of those parts to existing systems that
are out there in the market for sale.

As I have mentioned—and this is a key difference—there is no
donation or transfer process within the private sector, so obviously
the best items do, in fact, become available for sale. What we found
in many cases is that, in fact, new items that had not been used
at all and could be then put on the marketplace and, in some cases,
sold back to the original equipment manufacturer, who could in
turn resell those to new customers.

Now, what is the net effect of this? DRMS reports in the air-
line—I am sorry—in the aircraft part area, that they get less than
1 percent return on investment against the acquisition value. The
private sector companies we talked with said that they were get-
ting between 40 and 50 percent return. So there is a substantial
opportunity, but at the same time, again, I want to leave you with
this, they are not directly comparable.

The second area that I want to address is DOD's actions to im-
prove the management of property disposal process. To its credit,
DOD recognizes that it needs to improve the process and has
adopted or is planning a number of actions in that regard. For ex-
ample, DOD is employing or considering key initiatives such as
contracting with auctioneering companies to conduct sales; they are
using the Internet to advertise available property; and, as you
mentioned in your opening statement, they are working on an en-
terprise management plan to make DRMS, in essence, look and op-
erate more like a private sector company. I would say that we see
all of hese as positive steps toward improving the management of

Last, and this has also been touched on a little bit, but I want
to address outsourcing. There have been several reviews that have
been made of DOD’s business operations, such as the Defense
Science Board, the Commission on Roles and Missions, and others,
and they have recommended that many DOD business activities be
outsourced.

Also, there has been a recent legislative proposal out of the
House that would, in essence, require that all DRMS activities be
competitively outsourced. We agree with the aim of this legislation.


95

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$9.5 million. We found that 80 percent of the items did not require demilitarization.
‘We attributed the problems to a general lack of training on how to interpret and use the
codes, compounded by the dependence on hundreds of widely dispersed item managers
to make coding determinations on their own without central guidance or control. The
Deputy Under Secretary of Defense (Logistics) shared our concerns and is working to
find solutions. The Defense Science Board is also currently studying demilitarization
issues, although we are not sure when their input will be available. In addition, the
House National Security Committee is requiring the Department to report on its

corrective actions by December 31, 1997.

In Report No. 97-134, Disposal of Munitions List Items in the Possession of
Defense Contractors, we found similar coding problems at 15 contractors holding DoD
property. Of 1,820 items that we judgmentally sampled, 1,400 were not reviewed at
all to ascertain whether they were munitions list items. It was accepted practice to
dispose of such property without due attention to potential demilitarization require-
ments. On the other hand, we found 155 items that had been identified as munitions
list items, but were sold anyway without consideration of demilitarization or trade
security policy requirements. Part of the problem was a Catch 22 situation in which
DoD procedures relied on the assignment of a National Stock Number to a new
inventory item as the first step in identifying MLI materiel and assigning demilitari-
zation codes. If items are purchased by contractors in very small quantities or as part
ofa contractor logistics life cycle support package, no National Stock Number is


183

tasks. For instance, there were no private companies that performed
specialized aircraft maintenance or delivery of spare parts. Today, there are
hundreds of contractors who are ready, willing, and able to bid on defense
support contracts. Several large contractors are fully capable of competing for
the work of DRMS.

In the case of DRMS, we know that the private sector can do this job
better. DRMS consistently loses money, requiring reimbursement from the
military services’ operations and maintenance (O&M) accounts. O&M funds
should support training and readiness, not surplus property disposal.

My claim that the private sector can do it better is not hypothetical. It’s
based on real life experience of the Treasury Department, which outsourced the
disposal of property seized by the U.S. Customs Service. Since 1990, sales of
excess property have generated more than $218 million for the government,
providing one of the major sources of income for the Treasury Department's
Forfeiture Fund.

Options

As you know, a host of options have been presented for fixing DRMS.
These proposals include enterprise management, public-private competition, and
complete outsourcing. Let me address each of these in turn.

Enterprise Management

Enterprise management is the Defense Logistics Agency’s plan to reinvent
and re-engineer DRMS. | Under this proposal, DRMS would introduce
commercial practices in an attempt to improve customer service and reduce
costs.

While we applaud this initiative from DRMS (as we support any reform
that reduces costs and improves services), even a fully reinvented DRMS will
remain in a monopoly position. Because of this monopoly power, incentives to
reduce costs and improve service will be minimal. Political pressure, not
market competition, explains DRMS’ current interest in re-engineering. When
these political pressures subside, the commitment to change may also erode.

Enterprise Management simply represents another approach that avoids
real change. When a process is considered to be a core government function,
reengineering makes sense. When a process is non-core and can be performed


17

percent of both national and local advertising is performed through
a private sector company.

We need to continue to make use of the private sector services,
where appropriate, to reduce the cost to taxpayers and improve the
efficiency of the property disposal system. While the concept of in-
troducing public-private competition to the disposal process is one
that D! g is actively pursuing, one of the target dates in the re-
cently passed authorization bill, H.R. 1119, for fully implementing
this concept, probably has a date that is too early. And I just put
that into the record. The 1998 date is probably someplace between
8 and 12 months early. The date should be changed to efficiently
additionally privatize and put out for bids.

I think it is important to point out that no other agency or com-
pany that would like to take over some of the salvage operations
nearly comes close to the amount of merchandise that DRMS now
reutilizes or salvages or gives away. In addition, DRMS has to deal
with important issues of protecting important U.S. military tech-
nology and making sure that all equipment is fully demilitarized.

In conclusion, Mr. Chairman, we have an obligation to obtain the
highest possible return to taxpayers. We also have an obligation to
protect national security and certainly not make the mistakes that
can cause physical injury.

I am pleased that this hearing is taking place. It shows a com-
mitment by you, Mr. Chairman, and Congress to take these issues
seriously, and I am confident, with the cooperation of Congress, we
will see a continuation of success that DRMS has had in the past,
and I look forward to working with you, Mr. Chairman, and this
committee to move this process forward.

[The prepared statement of Hon. Nick Smith follows:]


61

of the process drive DRMS’ emphasis on moving items through the process quickly to
make room for incoming items.

DOD Initiatives

In response to the recommendations made in our report and by others, DOD has.
developed several initiatives, changed some of its business processes, and adopted best
Practices to improve its property disposal operation. For example, DOD is employing or
considering key initiatives, such as contracting with private auctioneering companies to
conduct property sales, using the Internet to advertise available property, selling the
property to private contractors that will dispose of it and share the proceeds with DOD,
and allowing property located at the depots to remain there rather than shipping it to the
DRMOs to save labor and other costs. DRMS has also hired a financial advisor to assist
in developing proposals for joint venture arrangements with the private sector.

In addition, DRMS plans on restructuring its organization, under a concept known as
Enterprise Management, to operate and compete similar to a private enterprise by
reorganizing into (1) a corporate and leadership unit, which will be staffed by government
employees to handle inherently governmental functions, such as senior management and
legal functions; (2) a utility function, which will handle the reutilization, transfer, and
donation functions with the help of private firms, and (3) a marketplace function, which
will contract with the private sector to handle sales and disposal of hazardous wastes.
DOD activities will be able to choose whether they want to use DRMS' services for a fee
or sell the property themselves.

Several recent reviews of DOD military forces, such as the Report of the Defense Science
Board, the Commission on Roles and Missions, the Quadrennial Defense Review, and the
Bottom-Up Review have recommended that competitive outsourcing be considered as an

10


130

Mr. Chairman, Members of the Subcommittee, thank you for inviting me
to appear before you today. I am Thomas G. McInerney, President and CEO of
Business Executives for National Security, BENS.

BENS is a national, non-partisan organization of business and professional
leaders dedicated to the idea that national security is everyone’s business. BENS
members apply their experience and commitment to help our nation’s policy-
makers build a strong, effective, affordable defense, and to find practical ways to
prevent the use of even one nuclear, chemical, or biological weapon. We work
with the Congress, the Pentagon and the White House to ensure the changes we
recornmend are put into practice. That is why I am here today.

Before joining BENS, I was Vice President of Command and Control for
Loral Defense Systems-Eagan. Before that, I spent 35 years as a pilot,
commander, and strategic planner in the U.S. Air Force. In my last assignment
on active military duty, I was the Assistant Vice Chief of Staff of the Air Force,
and for most of that tour of duty, | served as Director of the Defense Performance
Review, the Pentagon’s counterpart to Vice President Gore's National
Performance Review. | led the Defense Department's “Reinventing
Government” effort, visiting more than 100 leading-edge commercial companies
to learn how they re-engineered their operations to become better and more
efficient.

During my time with the Defense Performance Review, I was personally
involved in efforts to outsource the Defense Reutilization and Marketing Service
(DRMS). At that time, | felt it was important for DoD to focus on privatizing
and outsourcing functions least linked to war-fighting needs. By picking the
“low-hanging fruit,” we could build on our outsourcing successes one step at a
time.

I considered DRMS to be the lowest of the low-hanging fruit. The work
of DRMS has little to do with DoD‘s core business, and there are many private
contractors who could do DRMS' job cheaper and better. Nonetheless, we were
unable to effect major change in the organization. As a result, I am appearing,
before you four years later, and we're still talking about how to fix DRMS. I
remain hopeful that the Subcommittee’s work will finally break this logjam and
help foster major reforms in DRMS’ operations.


114

armies of people standing around in the wings waiting to take over
a business, they’re going to hire our people.

We found that, for example, right now, in San Antonio Air logis-
tics center, we’re in the process of contracting out our distribution
depot there. And that appears to be the case. We have been able
to place a third of the people already on priority placement, and
we've had quite a few that are getting indications of job offers, be-
cause a company that will be doing that work simply doesn’t have
anybody else that knows the system.

As Mr. Lieberman, I believe it was, said, or it may have been
Dave Warren, there will be reductions. There’s no question that a
private operation will save money, because it can operate with
fewer people. Because of the structure, it doesn’t have to follow
some of the governmental ways.

Mr. Davis of Illinois. Well, I mean, let me just say that I’m
pleased to know that this kind of reengineering, this kind of think-
ing, this kind of awareness of the impact and is actually taking
place where we are considering what may happen.

I just happen to be looking at, I guess, a little script that one of
the labor groups sent around that shows a young fellow coming
home, talking to his wife and three children; and he says, Well, you
know, I’m out of a job again. She says, What? This is the third or
fourth time.

He says, well, you know, they had to downsize. And they’re
outsourcing, and they're privatizing, he says, but at least I've got
you and the kids for comfort. She said, well, you know, we've de-
cided that we’re going to downsize also. And we're going to reduce
the household by one.

4 And he says, what? She says, yeah, we’re sorry, but we've got to
jo it.

And so, I appreciate the consideration of what happens to the
employees who will, in fact, be affected.

Mr. Jones. It’s much easier to build a business than it is to take
it down, much easier.

Colonel MANSFIELD. I would just like to add, too, if I could, sir,
just one, maybe, footnote to that.

I believe that, given the opportunity to continue our reengineer-
ing efforts, that while there will be fewer government employees,
that they will have the capabilities to compete, and we will be able
to see very clearly whether or not the Government employee or the
private sector provides the best business case or the best value to
the taxpayer and to the Department of Defense in the disposal
issues, and that we continue to improve our control of DEMIL and
AEDA and those other type activities. I think that will happen.

Mr. Davis of Illinois. And I certainly agree with that. I have no
difficulty—as a matter of fact, I am probably one of the most frugal
persons that I've ever encountered. I mean, people kind of chatter
about the fact that I walk every day to work, that I—you know, my
wife and I go through these things.

I just think it’s unfortunate that, in some instances, we allow
systems to develop and approaches to take place that now put peo-
ple at a level of risk that we hope they would not have to experi-
ence. And I just hope that we can work our way out of this to the


116

Mr. Horn. I appreciate it.

Colonel, do you have any comments on it?

Colonel MANSFIELD. No, sir. I only became aware of that several
weeks ago. No further details.

Mr. Horn. Let me ask you on that very point. I realize able offi-
cers have various career experiences as they go up the ladder.
What has generally been the number of years in your particular po-
sition? Is it about a 2-year term of service?

Colonel MANSFIELD. It’s a 3-year tour, sir. I assumed command
on July 8 of last year. I have a little experience, I think, of where
we're going. I was the chief of depot reengineering at Warner Rob-
bins Air Logistics Center 2 years prior to taking this job. I have
some knowledge of the process redesign and how to downsize, I
think, humanely and smartly, and to build an organization to com-
pete and let the chips fall where they may.

Mr. Horn. Well, I got that view from your testimony. You sound
like a person that has compassion as well as a desire for efficiency,
and I think that’s important.

A later witness, General McInerney notes in his testimony that
in 1993 the Defense Logistics figency supported the outsourcing of
the Defense Reutilization and Marketing Service function. Can you
explain, Mr. Jones, why the change of heart, and how important a
part of the Defense Logistics Agency is your agency’s revenue
stream?

Mr. Jones. Yes. I'd be happy to comment on that.

As I mentioned earlier, eral McInerney and I were actually
at the same meeting where this discussion occurred in 1993. The
recommendation that went forward to the National Performance
Review was that the DRMS be a candidate. Now, there’s a dif-
ference between a candidate where you nominate an organization
for being an outsourcing candidate and then the plan that actually
gets you there.

What we found was, as we began to look at the functions of
DRMS and—and let me say that, at the time, I was in the Office
of the Secretary of Defense—we took the position that, to the ex-
tent that any part of the logistics system is on the margin of mili-
tary readiness, disposal is on the margin.

flow, it turns out that disposal travels with the troops when they
go out to war as well. So there is a piece of it that is directly readi-
ness-related. But we agreed from the Secretary of Defense’s point
of view back then that this is a good place to start. We really need-
ed to look at this hard to see what we can do.

Well, then these steps up here [on the chart] are the ones that
we went through from that time. You can see 1993 is the beginning
of the process. Those are the steps that we went through to actu-
ally pet words into practice. What we found was that every time
we thought we had a solution, we only had a partial solution. We
could contract out this particular function. We couldn’t contract out
the regulatory aspect. Things were——

Mr. Horn. On that very point, was that a problem of the Con-
gress not giving you the authority, or how did you lack authority
in_some of these areas that you wanted to do that?

Mr. JONES. Well, no, it was not, Mr. Chairman. Congress is not
at fault at all here. I think what we're saying is that our intention


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“Defense Surplus Property and the Activities of the Defense Reutilization
and Marketing Service”

September 12, 1997

‘OPENING STATEMENT
REPRESENTATIVE STEPHEN HORN (R-CA)

(Chainnan, Subcommittee on Government Management,
Information, and Technology

Today we will examine the Excess and Surplus Property Programs of the Department of
Defense. These programs are conducted by the Defense Reutlization and Marketing Service, a
branch of the Defense Logistics Agency. The function of the Defense Reutlization and Marketing,
‘Service is to receive property no longer needed by a defense organization, render militarized
Property safe, and then either transfer or sell the usable property to other Federal agencies and
private sector organizations eligible to receive Federal property.

‘The Defense Reutilization and Marketing Service operates under a delegation of authority
from the General Services Administration. The Committee on Government Reform and Oversight
has juriediction over this authority and the applicable law that governs the Defense Reutilization nd
Marketing Service.

property for use at other agencies, and inadequate financial practices.

Unnceded equipment with military potential is sold without being property demilitarized.
‘Ten years ago, William Taf, then deputy secretary of defense, wrote that “the defense disposal
system is » source of supply for arms traffickers,” according to a Customs-Pentagon report. U.S.
‘News and World Report recently reported that machine guna, grenade launchers, attack helicopters
and otber equipment waa by citizens after inadequate demuilitarization. In addition, one
scrap dealer died after a supposodly safe anti-tank round he was moving exploded.

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38

10

annually, so there are extensive safety and environmental ramifications in AEDA
disposal. We have been advised that responsive action is being taken to implement our
numerous recommendations or acceptable alternatives, as well as measures stemming
from separate Military Department and Defense Logistics Agency reviews, which were
also directed by the Secretary of Defense.

Dis Decisions

Earlier I referred to the fact that DRMS cannot solve all disposal management
problems by itself. The DoD material managers who decide what to put into the
isposal process and what can be reutilized actually have more impact on the volume
and economic impact of DoD disposal operations than does DRMS. Therefore, we
have put considerable audit emphasis on identifying problems in determining what
should be disposed of or retained in inventory, especially in settings other than the
supply depots.

Report No. 97-183, Uncataloged Material at Research, Development, Test, and
Evaluation Installations, discussed how the Military Departments unnecessarily stored
uncataloged material purchased for research, development, test, and evaluation work.
‘The six installations we reviewed kept uncataloged material on hand dating from
‘2 years to more than 30 years after projects were completed. The installations did not
fully consume the material in fabrication and testing, and retained it without any


158

That is my problem with private and public competition, because
if the private sector doesn’t do it, it is not an accounting problem
or anything, you know what you are paying that contractor. There
are no ifs, ands, or buts, and if he doesn’t make it, then his profits
go down and it shows in how they are running it. So it is a much
easier way to handle it.

We are very concerned about how we handle the people, and that
is one of the things that BENS has been looking at. As we move
this number of people—you know, we have taken almost 1 million
people out of uniform since the Berlin Wall came down, since 1985,
the height of the Reagan buildup when we were up to 7-plus per-
cent of GDP. We have taken almost 1 million, 900,000-plus out of
uniform. We have taken 1.3 million people out of defense indus-
tries. We have taken about 200,000 government civilians out of de-
fense, and the issue is how we move these people quicker, these
800,000 we now have, into the private sector being creative, be-
cause we have a job shortage in this Nation. We are sitting at 5
percent, 4.8 to 5.1 percent unemployment, and people wonder how
we have been able to keep it so low.

What has happened, a lot of students are working, a lot of people
have come out of retirement, but the fact is, we have created a lot
of jobs. That is a great success to this Nation; it is a great success
to the Congress. But we need to move these people that are not
nearly as efficiently employed.

So, getting back to your question, my perception, eventually in
10 years they will have done what we wanted to do 5 years or 4
years ago. And so the private sector does it quicker. You have a
much better handle on the accountability.

Mr. Davis of Illinois. The bottom line, you are really saying that
trying to put, or talking about being able to compete private versus
public, that it is like trying to put, I guess, a round ball into a
square peg.

General MCINERNEY. Yes, sir.

Mr. Davis of Hlinois. We can forget that, because that is likely
not to happen.

Thank you very much.

Mr. Hundle, your organization obviously is interested in fair, eq-
uitable distribution. Representative Smith suggested that there
was favoritism. Of course, Mr. Liuzza has already given us his po-
sition or his feeling relative to that.

What is your position relative to the notion of unfairness in the
process that Representative Smith talked about?

Mr. HUNDLE. We have seen problems of the same sort, but be-
cause of the different types of technological advances we feel that
some of that stuff can get straightened out. We feel that there are
some areas that are improving, and that we try to advocate for
that.

We pulled our membership together on a yearly basis for a con-
ference and we discussed some of these issues and how they are
affecting members. We have implemented regional directors in
each of the GSA regions that coincide with the GSA regions and
we want to know those types of inequities and keeping an eye out
for them. That is how we are trying to serve this area for fair and
equitable distribution.


125

business function, and it has nothing to do with the war fighting
portion.

That’s what gets us into the problem; and why we at BENS are
so aggressively pursuing its outsourcing is because, as you know
today, 70 percent of the defense dollars are going into its support.
Only 30 percent are going into the war fighting portion.

And we have to free up $20 billion. This is an area that we think
is the lowest portion, most vulnerable that should be privatized.

Mr. Horn. Let me just ask a question at this point_——

General MCINERNEY. Yes.

Mr. Horn [continuing]. Because I was really intrigued by that
30/70, and glad to have an update.

I remember 40 years ago, I was told that, in the Second World
War, we had essentially nine people behind the line, one on. The
Soviet Union had one person behind the line and nine on. And I
take it we’ve made some improvements then in our own ratio of
support in relation to the war fighting function.

General McINERNEY. Well, actually, during the cold war and the
history since the end of World War II, we sat at about 50/50. We
got up to almost 60 percent war fighters, 40 percent support under
Reagan, but that’s because he increased the Poree structure signifi-
cantly. I was part of the group that brought defense down to 30
percent. I'll just be frank with you—when I was the chairman of
the Air Force Council Net—I could see no way to take down War-
ner Robbins, Tinker, or Kelly, but I could take another fighter wing
to meet my cost, bogie, and it was $100 million, and I take it out.

The political process to get through to take down this infrastruc-
ture has been much too difficult. And what I would like to provide
for you, Mr. Chairman, is we have a prospectus on a BENS Tail
to Tooth Commission that is cochaired is Senator Warren Rudman
and Mr. Josh Weston, the chairman of ADP, Senator Sam Nunn is
a member of it, in which we're trying to do this using best business
practices, how we can still have a better defense, yet cost less
money. If I could introduce that to the record.

Mr. Horn. It is introduced in the record at this point. And if
you'll give me a few copies, I'll spread them around.

{The information referred to follows:]


100

First and foremost, DRMS is responsible for property reutilization, transfer and
donation undeFederal and DoD regulations. Every year about 1/6 of the
property turned in to DRMS is reused by another DoD organization, transferred to
another Federal, Law Enforcement or similar recipient, or donated to authorized
recipients of such property.

© Second, once DRMS accomplishes its reutilization, transfer, and donation mission,
it is responsible for conducting sales of remaining property to generate revenues to
cover some portion of its operating costs.

‘© Third, DRMS provides a number of services, including the contracting for removal
and proper disposal of hazardous waste. Although military customers are
required to use DRMS for this service, most choose to do so because it is a service
they do not need to staff themselves.

«Last, DRMS provides executive management and oversight of the DoD

demilitarization program, a program often criticized for lapses in allowing sensitive

military equipment to leave the DoD inventory fo. unauthorized purposes.

I will return to this issue later because understanding the DEMIL issue and
challenge is directly relevant to how the DoD is approaching the proper sourcing of
DRMS services. Much of the attention placed on the disposal program in recent years
has found fault with DEMIL controls. The remainder of the public focus has been on
the commercial-type operations characteristic of much of DRMS's operation, with the
general theme of “why not outsource these functions?” The question is a good one

that deserves a thoughtful and careful answer, which I hope to be able to deliver today.

Operation of the DRMS

‘The DRMS, through its 155 Defense Reutilization and Marketing Offices
(DRMO}), receives, screens, and otherwise disposes of nearly all DoD’s disposal
property, about $24 billion worth last year, valued at acquisition cost. With some

obvious exceptions, such as watercraft, ships, and some large armored vehicles, excess


41

23

unserviceable assets returned to the depots for credit. By November 1996, we found
the disposals of serviceable items totaled $104 million and retumed unserviceable items
totaled $191 million for the Aviation and Troop Command alone. ‘This time, the Army
took responsive action and the problem was corrected.

Recycling

Report No. 97-087, Direct Sales of Recyclable Material, summarizes our
evaluation of the direct sale of recyclable material by DoD installations under the
provisions of 10 U.S.C. 2577; Executive Order 12873, Federal Acquisition, Recyeling,
and Waste Prevention; and implementing DoD regulations. We reviewed 16 of the
‘94 installations authorized as of March 1996 to conduct direct sales, with proceeds
scoruing to their morale, welfare, and recreation activities. We found that those bases
generally followed prescribed policy for their $1.5 million FY 1995 sales; however, we

had three concems:

— Improved guidance was needed to ensure that financial records were
accurate and sales were properly conducted. Installation officials did not have accurate
financial information concerning the revenues for direct sales on which to make pro-
gram decisions. Additionally, they could not verify that awarded sales were based on
competitive bids, or that a fair market price was received for recycled materials sold
directly.