```
DOD Budget: Evaluation of Defense Science Board Report on Funding
Shortfalls (Letter Report, 04/20/94, GAO/NSIAD-94-139).

In February 1993, the Secretary of Defense convened a Defense Science
Board task force to review the fiscal years 1994-99 Future Years Defense
Program (FYDP) that the Pentagon had prepared in late 1992 and to
determine the validity of the plan's funding assumptions.  The task
force was asked to assess the (1) savings from the Defense Management
Review Decisions; (2) development and acquisition costs for weapon
systems under development, including any potential procurement "bow
wave" beyond fiscal year 1999; (3) operation and maintenance funding
levels to support the planned force structure and projected personnel
levels; (4) environmental cleanup and compliance costs; and (5) defense
health care costs. Overall, the task force estimated a shortfall for the
1994-99 FYDP in the range of $20 billion to $26.5 billion.  This report
evaluated the reasonableness of the task force's findings and
recommendations.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  NSIAD-94-139
     TITLE:  DOD Budget: Evaluation of Defense Science Board Report on 
             Funding Shortfalls
      DATE:  04/20/94
   SUBJECT:  Defense cost control
             Defense procurement
             Defense budgets
             Future budget projections
             Defense economic analysis
             Defense contingency planning
             Combat readiness
             Mission budgeting
             Program evaluation
             Defense operations
IDENTIFIER:  DOD Future Years Defense Program
             DOD Defense Management Review
             CIM
             DOD Corporate Information Management Initiative
             B-1B Aircraft
             JSTARS
             Titan IV Rocket
             F-16 Aircraft
             F/A-18 Aircraft
             C-17 Aircraft
             Joint Surveillance Target Attack Radar System
             
**************************************************************************
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Cover
================================================================ COVER

Report to the Honorable
Charles E.  Grassley, U.S.  Senate

April 1994

DOD BUDGET - EVALUATION OF DEFENSE
SCIENCE BOARD REPORT ON FUNDING
SHORTFALLS

GAO/NSIAD-94-139

DOD Budget

Abbreviations
=============================================================== ABBREV

  CAIG - Cost Analysis Improvement Group
  CIM - Corporate Information Management
  DMRD - Defense Management Review Decisions
  DOD - Department of Defense
  FYDP - Future Years Defense Program
  O&M - operation and maintenance
  OSD - Office of the Secretary of Defense
  DOD - Department of Defense
  GAO - General Accounting Office

Letter
=============================================================== LETTER

B-238512

April 20, 1994

The Honorable Charles E.  Grassley
United States Senate

Dear Senator Grassley: 

This report responds to your February 23, 1993, request that we
evaluate the reasonableness of the findings and recommendations of
the Defense Science Board Task Force on the fiscal years 1994-99
Future Years Defense Program (FYDP).  You also requested that we
assess the Department of Defense's (DOD) FYDP for fiscal year 1994,
and we issued a report to you in August 1993 on our assessment.\1

--------------------
\1 DOD Budget:  Future Years Defense Program Needs Details Based on
Comprehensive Review (GAO/NSIAD-93-250, Aug.  20, 1993). 

   BACKGROUND
------------------------------------------------------------ Letter :1

In February 1993, the Secretary of Defense convened a Defense Science
Board task force, which became known as the Odeen panel,\2 to review
the fiscal years 1994-99 FYDP that DOD prepared in late 1992 and
determine the validity of funding assumptions made in this plan.  The
task force was asked to assess the (1) savings from the Defense
Management Review Decisions (DMRD); (2) development and acquisition
costs for the weapons, sensors, and other major systems now in
development, including any potential procurement "bow wave"\3 beyond
fiscal year 1999; (3) operation and maintenance (O&M) funding levels
to support the planned force structure and projected personnel
levels; (4) environmental cleanup and compliance costs; and (5)
defense health care costs. 

The task force issued its initial report on May 3, 1993, and a second
report on June 29, 1993.  The task force's assessment was based on
staff papers prepared for each issue, briefings by Office of the
Secretary of Defense (OSD) staff members and the military
departments, meetings with various parties, and audit reports and
other relevant material.  The task force did not attempt to
independently evaluate the accuracy of the data, but it did attempt
to cross check the data as best it could in the limited time it had
to complete its assessment. 

The task force concluded that there could be a $12.6 billion to $16.7
billion shortfall between the defense budgets and FYDPs prepared by
DOD in late 1992 for fiscal years 1994-97 and the DOD costs the task
force projected for those years.  The task force also projected
additional potential budget shortfalls of $7.4 billion to $9.8
billion in fiscal years 1998 and 1999.  Overall, the task force's
estimated shortfall for the 1994-99 FYDP could be between $20 billion
and $26.5 billion.  The task force also concluded that a shortfall in
O&M funding existed but did not provide an estimate.  Rather, it
concluded that, with intensive management, the services and defense
agencies should be able to absorb any shortfall without degrading the
readiness of military forces. 

Since the defense budget was amended in early 1993, in anticipation
of a $10 billion shortfall for fiscal years 1994-97, the task force
determined that a net $2 billion to $5 billion shortfall should be
expected.\4 On the basis of the task force's estimate, the Secretary
of Defense decided to add $5 billion to the defense budget
projections for fiscal years 1995-97. 

--------------------
\2 The panel was chaired by Philip A.  Odeen and included Edward C. 
Aldridge and Jeffrey H.  Smith. 

\3 The "bow wave" describes future procurement costs that would
accrue if all weapon systems currently planned are bought. 

\4 The task force issued a subsequent report identifying an
additional potential shortfall of over $1 billion in DOD health care
funding for the 1994-97 period.  No further revision of funding was
made. 

   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

Our analysis showed that the task force's estimated overall shortfall
generally was on the low side but within the range of potential
shortfalls presented to it by DOD officials.  Table 1 shows the task
force's shortfall estimates for fiscal years 1994-99 and the
potential shortfall we identified based on the data that was
presented to the task force.  External studies and reports by us and
other audit agencies suggest that the budget shortfall could be
significantly greater than the amounts estimated by the task force. 

                           Table 1
           
              Potential Defense Budget Shortfall

                    (Dollars in billions)

Source of
shortfall           1994-97    1998-99      Total    1994-99
----------------  ---------  ---------  ---------  ---------
DMRDs                 $9.0-       $5.0     $14.0-   $0-$32.2
                      $11.0                 $16.0
Acquisition         2.0-3.0    1.0-2.0    3.0-5.0   2.5-46.4
 costs
Environmental       1.0-1.5    1.0-2.0    2.0-3.5    5.1-8.8
 costs
Defense health      0.6-1.2    0.4-0.8    1.0-2.0      0-0.7
 care costs
============================================================
Total                $12.6-      $7.4-     $20.0-      $7.6-
                      $16.7       $9.8      $26.5      $88.1
------------------------------------------------------------
\a We compiled this range of estimated shortfalls based on the data
in the briefings presented to the task force. 

In addition, the task force was presented with information that
showed a potential shortfall risk for O&M funding ranging from $68.5
billion to $241.4 billion.  The task force did not estimate the
shortfall in O&M funding in the fiscal years 1994-99 FYDP.  However,
it did conclude that a shortfall existed and appeared to affect
funding for base and facilities support, but not operational
readiness.  The task force stated that any shortfall in O&M funding
could be absorbed by the services and defense agencies without
degrading the readiness of military forces.  To avoid degrading
readiness, the task force felt that the services would have to
undertake an aggressive effort to reduce their base and support
structure and other overhead costs.  The services and defense
agencies have expressed concerns about the impact of the shortfall. 
Our work indicates that the services and defense agencies can absorb
some reductions in O&M funding without affecting readiness. 

The task force's report and information presented to the task force
indicated that in a number of instances, such as failure to achieve
DMRD savings, funding shortfalls would have to be absorbed by the
services.  This would result in de facto budget cuts as programs were
scaled back to offset higher costs. 

The Chairman of the task force stated that our report was a fair
evaluation of the task force's study, and in most cases where he did
not agree, he felt our perspective was a legitimate one.  (See app. 
I.) DOD agreed with much of the information in the report but noted
that there were several areas where correction and/or clarification
was required.  These areas included shortfalls for DMRDs; weapons
system acquisition; and O&M, which DOD did not believe would ever
approach the higher ranges forecast by the officials who briefed the
task force.  (See app.  II.) We included these higher ranges in this
report to show the complete range of potential shortfalls that the
task force addressed.  We have, however, revised the report as
appropriate to reflect the Chairman's and DOD's comments. 

   DEFENSE MANAGEMENT REPORT
   DECISIONS
------------------------------------------------------------ Letter :3

The 1989 Defense Management Report proposed a series of
consolidations and management improvements that were estimated to
save tens of billions of dollars in support and overhead programs. 
The report resulted in 250 decisions to implement consolidations,
improve information systems, enhance management, and employ better
business practices.  The projected savings from individual DMRDs
range from a few million dollars to over $10 billion; some of the
actions are one-time savings, and others are recurring savings. 
Total DMRD savings estimates for the 1991-97 period have ranged as
high as $71.1 billion, but because of program and force reductions,
the savings estimates presented to the task force were revised to
$62.8 billion. 

The task force concluded that DOD overstated the savings that could
realistically be expected from the DMRDs during fiscal years 1994-97
by $9 billion to $11 billion.  The task force further estimated an
added annual shortfall of $2.5 billion for fiscal years 1998 and 1999
based on its extrapolation of estimated 1997 DMRD savings. 

Regarding the 1994-97 shortfall, the task force used three
independent methods to establish a range of shortfalls, since it did
not have the personnel and time needed to review all 250 DMRDs. 
First, the task force conducted a detailed review of 10 of the larger
DMRDs and found 25 percent of the anticipated savings at risk.  It
applied this percentage to the total OSD Comptroller's expected DMRD
savings for 1994-97 of $46 billion to come up with a shortfall of
about $11 billion for this period. 

Second, the task force focused on the OSD Comptroller's savings
estimates.  The task force grouped the estimates into three
categories and assigned a probability of success for each category. 
For example, the task force found that service initiatives comprised
$16 billion of the OSD Comptroller's estimate, and it believed the
probability for achieving the projected savings was 90 percent.  When
the estimates and probabilities for success for all three categories
were determined, the task force concluded that a shortfall of $10.6
billion would result. 

Last, the services presented briefings to the task force estimating
the proportion of DMRD savings that were not achievable.  The task
force report stated that the services believed that, on average,
about 20 percent of the DMRD savings were not achievable.  The task
force applied this 20-percent figure to the $46 billion savings
estimate for fiscal years 1994-97 to yield a $9.2 billion shortfall
estimate. 

      OUR EVALUATION
---------------------------------------------------------- Letter :3.1

On the basis of our analysis of prior DMRD-related reports and
briefing information presented to the task force, the task force
report's $9 billion to $11 billion shortfall estimate is within the
range to be expected, but it is low compared with the worst-case
estimates projected by the briefing officials.  The OSD Comptroller's
office expressed confidence that $32.6 billion would be achieved
during fiscal years 1991-97 because of actions already started.  It
further estimated that as much as $30.2 billion was not yet achieved
because other management initiatives had not been fully implemented. 
After deducting the amounts attributable to fiscal years before 1994
and adding the amounts for fiscal years 1998 and 1999, we believe
that unrealized anticipated savings may be as high as $32.2 billion
for fiscal years 1994-99. 

Even though the task force report stated that, on average, 20 percent
of the anticipated savings were not achievable, the Air Force and the
Army presented much higher estimates of potential shortfalls.  The
worst-case expectations involved Army and Air Force concerns that
they were only able to validate about half of their anticipated
savings.  The Navy reported that it expected to achieve 80 percent of
its savings. 

The services cited several reasons why some DMRD savings might not
accrue during fiscal years 1994-97, including delays in developing
implementation plans and their belief that some savings estimates
were not reasonable.  On the other hand, the services and defense
agencies did not rule out the possibility of realizing all of the
projected DMRD savings plus some additional unscheduled savings. 

In past work on DMRDs, we have also questioned whether all of the
estimated DMRD savings could be achieved.\5 Our past work on specific
initiatives found that up to 82 percent of the planned savings were
based solely on management judgment and were not always supported by
historical facts or empirical cost data. 

Our work in one major area indicates the difficulty in achieving the
DMRD savings.  This area, the Corporate Information Management (CIM)
initiative,\6 affects 28 other DMRD initiatives that comprise a major
portion of DMRD savings expected by 1997.  DOD began this initiative
nearly 4 years ago but has yet to demonstrate any discernable
progress toward its goal of achieving substantial savings.\7

Moreover, DOD has neither an implementation plan or schedule for CIM
nor a cost-benefit analysis.  This suggests that the potential DMRD
savings shortfall may be far greater than the information presented
to the task force indicated. 

The task force noted that DMRD savings are projected for the outyears
and are deducted from current budget requests.  Actual appropriations
are reduced by the projected savings, even if actions to achieve
these savings have not occurred.  If these savings do not occur,
readiness may be degraded or funds may have to come from other budget
areas.  The task force also found that DMRD savings were now
intertwined with larger changes in total program funding and force
structure and suggested that the DMRD savings tracking system be
terminated.\8

--------------------
\5 Defense Management Review (GAO/NSIAD-94-17R, Oct.  7, 1993),
Financial Management:  DOD Has Not Responded Effectively to Serious,
Long-standing Problems (GAO/T-AIMD-93-1, July 1, 1993), Defense
Business Fund (GAO/AFMD-93-52R, Mar.  1, 1993), National Security
Issues (GAO/OGC-93-9TR, Dec.  1992), and Defense ADP:  Corporate
Information Management Savings Are Not Supported (GAO/IMTEC-91-18,
Feb.  22, 1991). 

\6 The CIM initiative entails a major effort to improve defense
operations and administrative support by streamlining business
processes, upgrading information systems, and improving data
administration and other technical areas. 

\7 Defense IRM:  Management Commitment Needed to Achieve Defense Data
Administration Goals (GAO/AIMD-94-14, Jan.  21, 1994) and Defense
ADP:  Corporate Information Management Must Overcome Major Problems
(GAO/IMTEC-92-77, Sept.  14, 1992). 

\8 On August 2, 1993, OSD issued a memorandum that effectively
terminated the tracking of DMRD savings.  DOD officials said that
they were continuing to keep track of actions to implement the
savings. 

   WEAPON SYSTEMS ACQUISITION
------------------------------------------------------------ Letter :4

The task force determined that the weapon systems cost estimates for
selected major acquisition programs in the 1994-99 FYDP seemed, for
the most part, to be realistic and therefore projected only a $2
billion to $3 billion shortfall through fiscal year 1997 and a $1
billion to $2 billion shortfall in fiscal years 1998 and 1999.  The
task force attributed about half of the shortfall to the Titan IV
program, which it believed was underfunded by $1 billion to $2
billion.  Other programs that the task force found to be underfunded
(by unspecified amounts) included the Navy's shipbuilding program,
several Air Force programs (including JSTARS and the B-1B bomber),
and smaller Army programs.  In addition, the task force was concerned
about technical and cost problems that could not be foreseen at the
time of its assessment and recommended future hedge funding to cover
any unanticipated problems, but it did not specify the amount needed. 

The task force also predicted that DOD faced a procurement bow wave
of approximately $5 billion a year by the early 2000s.  The task
force concluded that currently planned tactical aircraft programs and
the Navy's shipbuilding program should be reassessed because it
believed that the current programs would probably not be affordable
after fiscal year 1999. 

Subsequent to the task force's report and as a result of the
Bottom-Up Review, the Secretary of Defense canceled the Air Force's
multi-role fighter program and the Navy's attack/fighter aircraft
program.  The Secretary also made plans to terminate the Air Force's
F-16 program in 1994 and the Navy's F/A-18C/D program after 1997.  We
have not evaluated the effect of these decisions on the bow wave. 

      OUR EVALUATION
---------------------------------------------------------- Letter :4.1

Our analysis of the information presented to the task force suggests
that the task force report's estimate of probable shortfall is low. 
Historically, DOD has experienced cost overruns in its acquisition
programs and has undertaken initiatives to control costs.  The task
force's estimate appears to endorse these DOD efforts and is
optimistic that DOD's acquisition process will be able to prevent
future cost overruns.  Some studies presented to the task force
suggest otherwise, as does our work on the procurement of major
weapon systems. 

We found that the task force was presented with information that
showed the risk for acquisition shortfalls could range from $2.5
billion to over $46.4 billion.  Of nine formal acquisition briefings
presented to the task force by DOD components, three briefings by
DOD's Cost Analysis Improvement Group (CAIG) focused on acquisition
cost issues. 

One of the CAIG's cost briefings presented information on several
major defense acquisition programs currently under contract, such as
the B-1B bomber and M1A2 tank, that showed shortfalls for 18 of the
programs could range from $2.5 billion to $9 billion for the FYDP
period.  The shortfalls included about $2.5 billion for items it
identified as current liabilities or "must pay" items, such as
ongoing engineering changes or program modifications.  It also
identified about $6.5 billion in "must fix" estimates for the 18
programs.  These costs were for identified, but not immediate,
problems, such as engineering changes that could be mitigated by
future events or other cost savings initiatives.  The task force's
report does not explain why the task force did not include these
projected shortfalls, although it appears that these costs will
almost certainly have to be paid. 

A second CAIG briefing addressed the risk for potential acquisition
shortfalls for 116 major defense acquisition programs valued at $221
billion.  The CAIG estimated FYDP acquisition shortfalls at less than
5 percent of the $221 billion--$9 billion.  CAIG officials said this
shortfall could be mitigated by future cost savings projected for the
FYDP period as a result of DMRDs calling for improved acquisition
management and oversight, a streamlined process, use of off-the-shelf
technologies, and other such initiatives. 

A third CAIG briefing indicated that, on the basis of comprehensive
longitudinal studies commissioned by OSD's Office of Program Analysis
and Evaluation, higher potential acquisition shortfalls were
possible.  These studies, which were based on historical studies of
197 major weapon systems conducted by the RAND Corporation and the
services' cost centers, found historical acquisition cost growth of
about 21 percent.  Applying the 21-percent cost growth estimate to
the 116 major defense acquisition programs that account for $221
billion in defense acquisition costs,\9

yields a potential shortfall of over $46.4 billion.  Even though this
shortfall amount does not recognize any savings associated with
subsequent program reductions or cancellations, it also does not
include any cost growth for the smaller defense acquisition programs
not included in the $221 billion. 

Past studies by the DOD Inspector General and others have continually
identified problems with underestimates in weapon system costs. 
Since March 1971, our work has resulted in over 900 reports and
testimonies on almost all aspects of weapon systems acquisitions.  We
have found that program cost increases of 20 to 40 percent have been
common on major weapon programs and that some programs have
experienced even greater increases.\10 Our reviews of ongoing weapon
programs have shown that major programs continue to incur cost
increases and overruns.  For example, in March 1993, we testified
that costs were continuing to increase on the Air Force's C-17
aircraft program,\11 and in August 1993, we reported that costs were
continuing to increase on the Navy's SSN-21 submarine program.\12

Notwithstanding past cost overruns, DOD officials said that cost
estimation had become much more accurate and that past practices of
underestimating costs had all but been eliminated.  However, if cost
increases persist, we believe that weapon systems acquisition
shortfalls could total substantially more than the task force
projected. 

In commenting on a draft of this report the Chairman of the task
force noted that, in response to the Secretary of Defense's and other
senior leaders' concerns, the task force focused on the handful of
new systems that are in the outyear program.  The Chairman further
noted that the task force pointed out that there was a great deal of
uncertainty about all weapons costs because of the rapid decline in
the defense business base of many companies; that there were few
reserves in most of the major programs to absorb unexpected problems;
and that a serious effort had been made to fully fund projected
costs.  We have noted that the task force examined selected, rather
than all, acquisition programs and that it was briefed on a broader
range of programs, which we included in our analysis. 

--------------------
\9 These cost increases were based on the fiscal year 1993 budget
request and FYDP. 

\10 Weapons Acquisitions:  A Rare Opportunity for Lasting Change
(GAO/NSIAD-93-15, Dec.  1992). 

\11 Military Airlift:  Status of the C-17 Development Program
(GAO/T-NSIAD-93-6, Mar.  10, 1993). 

\12 Navy Ships:  Problems Continue to Plague the Seawolf Submarine
Program (GAO/NSIAD-93-171, Aug.  4, 1993). 

   ENVIRONMENTAL CLEANUP AND
   COMPLIANCE
------------------------------------------------------------ Letter :5

The task force projected a shortfall of $1 billion to $1.5 billion in
funding for environmental costs for fiscal years 1994-97 and $1
billion to $2 billion from fiscal years 1998 to 1999.  Between fiscal
years 1994 and 1997, DOD plans to spend approximately $18.6 billion
on environmental costs.  These costs are split almost equally between
cleanup program funds, which are used to fix problems at active or
closed bases that are not included under the Base Realignment and
Closure list or on ships, and compliance program funds, which are
used to resolve pollution problems and comply with current state and
federal regulations.  The services believed that compliance costs
would begin to decline during this period because of corrective
actions underway. 

The task force did not accept DOD's view that funding for compliance
activities would decline and believed that funding for these
activities from fiscal years 1994 to 1997 was unrealistic, since new
problems would very likely be discovered and more stringent
regulations would be enacted. 

The task force found that funding for base cleanup activities for
bases on the Base Realignment and Closure list and for existing and
old bases was probably adequate.  However, it cautioned that costs
might rise as the services actually begin to cleanup the bases.  In
addition, the task force recommended that DOD pursue any new
technology that would help reduce the cost of future cleanup or
compliance activities. 

      OUR EVALUATION
---------------------------------------------------------- Letter :5.1

Our analysis of information presented to the task force, as well as
past defense environmental studies, indicated that DOD's
environmentally related shortfalls could range from about $5.1
billion to about $8.8 billion for fiscal years 1994-99.  The task
force's report concluded that the shortfall would total between $2
billion to $3.5 billion for the same period.  These amounts are
considerably less than the low end of the range of potential
shortfalls DOD presented to the task force. 

The range DOD presented to the task force represented a high and low
estimate of the potential shortfall.  The major factors that
contributed to the shortfall included inadequate funding for known
environmental compliance and Navy and Air Force environmental
restoration, as well as concerns about the ability to achieve
environmentally related DMRD savings. 

DOD officials identified a number of factors that could further
increase environmental costs but did not quantify them.  These
factors included increases in future environmental costs if research
and development efforts do not result in cost savings technologies
and the effect of potentially unmet allied burdensharing commitments
on cleanup of overseas military bases. 

We have issued several reports on environmental cleanup and
compliance issues indicating that total environmental costs could be
higher than DOD estimates.\13 Even though DOD estimates its future
cleanup costs at about $25 billion, we reported that the actual cost
could not be determined because not all sites have been identified,
contamination studies have not been completed, additional work is
required at some installations, and the longer cleanup activities
take the more expensive they will be.  DOD's estimates for compliance
costs also do not include all expenses.  Although DOD estimates that
its compliance costs will decline between fiscal years 1993 and 1999,
we believe they are likely to increase because new requirements
cannot always be predicted and DOD has generally underestimated costs
to comply with environmental regulations.  For example, the Clean Air
Act will drive future environmental costs upward.  Because of
amendments to the act, DOD will need to track almost 200 pollutants
rather than the 8 major pollutants that it was previously required to
track. 

Estimates for reimbursements to contractors may also represent
substantial environmental costs, but DOD has not taken steps to
estimate these costs to assist managers in developing program budgets
and to provide Congress with an idea of future funding liabilities. 
For example, officials of the 15 largest defense contractors have
estimated their combined defense and non-defense cleanup costs would
total $2.1 billion.  Because DOD does not routinely collect
information on its projected costs from contractors, we found it
cannot properly budget for future cleanup costs.\14

In commenting on a draft of this report, the Chairman of the task
force noted that with regard to the remediation of existing
environmental problems, the issue is how long you are willing to take
and at what pace you are willing to clean up existing sites.  The
Chairman further noted that if you want to clean up faster, you can
spend more, but the task force did not think this was prudent given
the declining defense budget.  The material presented to the task
force and our work on environmental cleanup and compliance issues
suggests that spending on both cleanup and compliance could exceed
the task force's estimate. 

--------------------
\13 Environmental Compliance:  Guidance Needed in Programming Defense
Construction Projects (GAO/NSIAD-94-22, Nov.  26, 1993), DOD
Environmental Cleanup:  Information on Contractor Cleanup Costs and
DOD Reimbursements (GAO/NSIAD-92-253FS, June 26, 1992), and Hazardous
Waste:  DOD Estimates for Cleaning Up Contaminated Sites Improved but
Still Constrained (GAO/NSIAD-92-37, Oct.  29, 1991). 

\14 Environmental Cleanup:  Unresolved Issues in Reimbursement to DOD
Contractors (GAO/T-NSIAD-93-12, May 20, 1993). 

   DEFENSE HEALTH CARE
------------------------------------------------------------ Letter :6

The task force found that funding for DOD health care programs was
underestimated by about $600 million to $1.2 billion for fiscal years
1995-97 and an additional $400 million to $800 million between fiscal
years 1998 and 1999.  The report does not detail the methodology used
to derive this estimate.  To mitigate the shortfall, the task force
reported that DOD could (1) reduce delivery costs by cutting the
number of staff and using improved information systems and
procurement practices, (2) end costly special programs that provide
benefits that exceed many private plans, (3) discourage unnecessary
use of medical services by increasing deductibles and copayments for
active and retired participants, and (4) bill Medicare for costs
incurred by eligible recipients who use the military medical system. 

The task force also noted several factors that could drive up future
health care costs.  First, the same factors that are driving up
health care costs in the U.S.  economy also affect DOD's health care
system.  Second, Congress has added new benefits or mandated more
generous benefits and refused to permit cuts in the number of medical
personnel.  Last, as medical costs for military retirees and their
dependents increase under private plans, more retirees will opt to
use DOD's health care services.  About 50 percent of those eligible
now use DOD's health care system.  If DOD's health care system is not
properly funded to accommodate these increased costs, the shortfall
reported by the task force could increase. 

The task force also stated that DOD should consider the results of
OSD's review of DOD's health care system for ideas on how it can
manage the system in a more effective manner.  (The review was not
complete when the task force was conducting its assessment.) In
addition, the task force indicated that DOD should be aware of
potentially costly repercussions from the health care reform being
considered by the White House. 

      OUR EVALUATION
---------------------------------------------------------- Letter :6.1

Our analysis of the information presented to the task force suggested
that the task force's estimate might have been pessimistic.  The task
force received conflicting information, and it is unclear what method
the task force used in the report to determine the shortfall.  We
found that the information presented indicated that a total shortfall
of up to $712 million for fiscal years 1994-99 may occur. 

The DOD Comptroller's office told the task force that it anticipated
defense health to realize savings in the future from cost-cutting
initiatives.  Alternatively, in briefing the task force, DOD's Office
of Health Affairs indicated that a $712 million shortfall in funding
for health care programs could occur.  Our previous work on DOD
health care has not focused on potential shortfalls. 

   OPERATION AND MAINTENANCE
------------------------------------------------------------ Letter :7

The task force did not estimate the precise shortfall in O&M funding
in the fiscal years 1994-99 FYDP.  However, it did conclude that a
shortfall existed and appeared to affect funding for base and
facilities support but not operational readiness.  The task force
noted the services stated that they had adequately funded the
programs to ensure readiness of their forces.  The task force noted
that existing O&M funding might be adequate if enough military bases
and facilities are closed. 

      OUR EVALUATION
---------------------------------------------------------- Letter :7.1

Our analysis of information presented to the task force suggests that
the O&M funding shortfall may be much greater than any of the other
categories addressed by the task force.  We have not determined
whether O&M shortfalls of the magnitude presented to the task force
would impact readiness.  In commenting on a draft of this report, the
Chairman of the task force noted that the task force made it clear
that if the services were going to live within the FYDP O&M funds
without degrading readiness, an aggressive effort to reduce the base
and support structure and other overhead costs was essential. 

We calculated that the task force was presented with information that
showed that DOD will have a potential shortfall in O&M funding of at
least $68.5 billion and as much as $241.4 billion during fiscal years
1994-99.  The officials briefing the task force were concerned about
a gap they believed existed between requirements and funding for many
O&M activities, such as plant replacement, maintenance backlogs, and
base closures.  Our higher estimate is a compilation of shortfalls
that would occur if the most pessimistic of all the services'
projections materialize and if the services do not receive all of
their expected O&M account reimbursements. 

The briefings indicated that readiness would remain a priority and
that funding reductions would occur through a decline in the force
structure and in non-readiness expenditures, such as housekeeping
items and low-priority maintenance.  However, the services argued
that these less urgent unfunded requirements and any shortfalls would
eventually have to be filled (e.g., fixing the roofs of buildings
before they collapse). 

The task force's contention that the services could absorb O&M
funding shortfalls is partially supported by our recent work.  We
reported that the services and defense agencies could absorb a $6.7
billion reduction in 1994 O&M budget requests.\15 We identified 20
O&M program categories that could absorb budget reductions or
rescissions.  For example, excesses existed in spare and repair parts
inventories in all three services and budget reserves existed in the
Navy and the Air Force.  Our work did not show if potential
reductions in future years would be feasible, but we plan to review
DOD infrastructure issues. 

--------------------
\15 1994 DOD Budget:  Potential Reductions to the Operation and
Maintenance Programs (GAO/NSIAD-93-295BR, Sept.  16, 1993). 

   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :8

We reviewed the two published reports of the Defense Science Board
Task Force.  We also examined briefings and documentation provided to
the task force by the services and defense agencies and discussed
this information with officials of the Office of the Assistant
Secretary of Defense for Program Analysis and Evaluation. 
Additionally, we examined our and other audit agencies' studies and
reports on DMRDs, major weapon system acquisition programs,
environmental cleanup, defense health, and O&M programs. 

We conducted our work between June and December 1993 in accordance
with generally accepted government auditing standards. 

---------------------------------------------------------- Letter :8.1

We are sending copies of this report to the Secretary of Defense,
appropriate congressional committees, and other interested parties. 
We will also make copies available to others on request. 

Please contact me at (202) 512-3504 if you or your staff have any
questions concerning this report.  Major contributors to this report
are listed in appendix III. 

Sincerely yours,

Richard Davis
Director, National Security Analysis

(See figure in printed edition.)Appendix I
COMMENTS FROM THE CHAIRMAN,
DEFENSE SCIENCE BOARD TASK FORCE
============================================================== Letter 

(See figure in printed edition.)

(See figure in printed edition.)

(See figure in printed edition.)Appendix II
COMMENTS FROM THE DEPARTMENT OF
DEFENSE
============================================================== Letter 

(See figure in printed edition.)

(See figure in printed edition.)

The following are GAO's comments on the Department of Defense's (DOD)
letter dated March 24, 1994. 

   GAO COMMENTS
------------------------------------------------------------ Letter :9

1.  We have revised the report to recognize that the DOD
Comptroller's office told the task force that $30.2 billion was yet
to be achieved because initiatives had not been implemented.  We have
also lowered the upper end of our estimated range from $37.3 billion
to $32.2 billion based on further analysis of the material provided
the task force.  DOD also noted that the worst case might occur or
that more savings might be achieved than estimated.  We concluded
that the task force report's shortfall estimate was within the range
to be expected but that it was low compared with the worst-case
estimates projected by the briefing officials. 

2.  The Corporate Information Management initiative is a top-down
effort to simplify and improve functional processes and thereby
streamline operations and manage resources more efficiently.  As
such, it affects several Defense Management Review Decisions (DMRD),
and delays in its implementation will adversely affect the
realization of DMRD savings.  We have, however, deleted the reference
to the $36 billion savings that a DOD official initially attributed
to the CIM initiative. 

3.  DOD stated that much of the increase in previous program costs
resulted from decisions to upgrade systems already in production to
reflect changes in the threat or take advantage of technological
change, which is not what is ordinarily meant by cost growth.  DOD
further noted that the 21-percent figure reflected average growth in
program costs from the beginning of engineering and manufacturing
development through the end of the program, adjusted for inflation
and the total quantity procured; cost growth tended to occur in the
early portions of engineering and manufacturing development; and cost
growth would tend to be less when the mix of systems is more heavily
weighted toward those in production rather than those under
development. 

The RAND study stated that it examined many possible factors
affecting cost growth and found few strong relationships that would
help explain the cost growth outcomes observed.  The study further
stated that the substantial program-to-program variation suggested
that there was no dominant explanatory variable.  Even though DOD
stated that the study's cost growth figure reflected average growth
in program costs adjusted for inflation and the total quantity
procured, the study stated that it adjusted its calculations to
remove the effect of inflation and quantity changes.  Regarding the
mix of programs, although we agree that a number of acquisition
programs are nearing completion, a number of new and expensive
programs are in early stages of development or are included in the
current budget proposal.  These include the C-17, F-22, F/A 18-E/F,
and V-22 aircraft; the proposed new attack submarine; the CVN-76
aircraft carrier; and the Comanche helicopter.  Since major aircraft,
submarine, and other systems are still being developed and because
our recent work has shown that major programs continue to experience
cost growth, we believe that significant cost growth could occur in
the future. 

4.  We have revised the range of potential shortfalls for defense
health care based on clarification of the information provided to the
task force. 

5.  We did not estimate the potential shortfall in operations and
maintenance funding.  We totaled the estimates provided by the
services and defense agencies and added the amount of reimbursements
that are due to DOD's operation and maintenance (O&M) accounts from
other sources to reflect the shortages that would accrue if DOD did
not receive these reimbursements.  We agree that it is unlikely that
the shortfall will ever approach this amount.  This report recognizes
that the task force noted that existing O&M funding might be adequate
if enough military bases and facilities are closed. 

6.  We agree that a number of changes have occurred since the task
force's report was issued and that these changes have the potential
to affect potential shortfalls.  We state in the report that
subsequent to the task force's report and as a result of the
Bottom-Up Review, the Secretary of Defense canceled the Air Force's
multi-role fighter program and the Navy's attack/fighter aircraft
program and made plans to terminate the Air Force's F-16 program in
1994 and the Navy's F/A-18C/D program after 1997. 

MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix III

   NATIONAL SECURITY AND
   INTERNATIONAL AFFAIRS DIVISION,
   WASHINGTON, D.C. 
------------------------------------------------------- Appendix III:1

Jess T.  Ford, Associate Director
Steven H.  Sternlieb, Assistant Director
Paul J.  O'Brien, Evaluator-in-Charge
Ricardo A.  Aguilera, Evaluator
James B.  Dowd, Evaluator
Karen S.  Blum, Reports Analyst

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