```
Future Years Defense Program: Optimistic Estimates Lead To Billions in
Overprogramming (Letter Report, 07/29/94, GAO/NSIAD-94-210).

By overestimating savings and understating costs, the Pentagon has
included in its Future Years Defense Program more programs than spending
plans can support--more than $150 billion in overprogramming from the
fiscal year 1995-99 period, according to GAO estimates.  The Defense
Department's (DOD) current Future Years Defense Program is
overprogrammed by about $20 billion when compared with the
Administration's fiscal year 1995 budget submissions.  GAO found another
$1.5 billion in negative adjustments in the research and development
account.  GAO believes that it is inconsistent with congressional intent
for DOD to use negative adjustments to unspecified programs to balance
Future Years Defense Program funding estimated with those in the
President's budget.  This overprogramming is not new. Since 1984, GAO
has consistently disclosed that DOD employs a systemic bias toward
overly optimistic planning. The use of optimistic planning assumptions
has led to program instability, costly program stretch-outs, and program
terminations.

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

 REPORTNUM:  NSIAD-94-210
     TITLE:  Future Years Defense Program: Optimistic Estimates Lead To 
             Billions in Overprogramming
      DATE:  07/29/94
   SUBJECT:  Defense cost control
             Defense budgets
             Defense economic analysis
             Defense procurement
             Cost overruns
             Future budget projections
             Compliance
             Cost analysis
             Financial management
             Presidential budgets
IDENTIFIER:  DOD Future Years Defense Program
             
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Cover
================================================================ COVER

Report to Congressional Requesters

July 1994

FUTURE YEARS DEFENSE PROGRAM -
OPTIMISTIC ESTIMATES LEAD TO
BILLIONS IN OVERPROGRAMMING

GAO/NSIAD-94-210

Future Years Defense Program

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

  DOD - Department of Defense
  FYDP - Future Years Defense Program
  GAO - General Accounting Office

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

B-238512

July 29, 1994

The Honorable Charles E.  Grassley
United States Senate

The Honorable William V.  Roth, Jr.
United States Senate

The Honorable John Conyers, Jr.
Chairman, Subcommittee on Legislation
 and National Security
Committee on Government Operations
House of Representatives

The Honorable John R.  Kasich
House of Representatives

There is concern in Congress that the fiscal year 1995 Future Years
Defense Program (FYDP) submitted by the Department of Defense (DOD)
is overprogrammed, or contains more programs than the President's
current funding projections will support.  At your request, we (1)
examined major funding assumptions underlying DOD's FYDP and (2)
determined whether the FYDP complies with statutory requirements. 

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

The FYDP is a classified database that provides an official set of
planning assumptions for use throughout DOD.  It is an authoritative
record of current and projected force structure, costs, and personnel
levels approved by the Secretary of Defense.  The projections are far
enough ahead to enable DOD to estimate the future implications of its
current decisions.  In the annual FYDP documents, which by law have
been provided to Congress since 1988, DOD presents its estimated
expenditures and appropriations needs for the budget year for which
funds are being requested, at least the 4 years following it, and the
2 years preceding it. 

FYDP funding projections peaked in 1986 at nearly $2 trillion and
have been declining ever since.  Because of the dramatic changes that
resulted from the end of the cold war and the dissolution of the
Soviet Union, the FYDP fell to about $1.2 trillion for fiscal years
1994 through 1998.  The fiscal year 1995 FYDP (1995-99) represents
DOD's blueprint and supporting cost estimates for the defense
strategy articulated in the Bottom Up Review.  It also has an
estimated cost of about $1.2 trillion over 5 years. 

Congress enacted legislation in 1987 requiring DOD to submit future
years program and budget information consistent with the President's
budget.  This enactment was a response to congressional concern that
DOD's FYDPs have contained more programs than funding projections
would support.  We have been reporting on this problem since the
mid-1980s when DOD funding began to decline.  Our work since that
period has shown that too many development and acquisition programs
were underway--more than could be funded at future funding levels
being proposed by the President.  We have reported that such
overprogramming tends to obscure defense priorities and delay tough
decisions and trade-offs. 

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

Our review of the 1995-99 FYDP revealed a substantial amount of risk
that has resulted in overprogramming.  This overprogramming could be
in excess of $150 billion. 

DOD's current FYDP is overprogrammed by about $20 billion when
compared with the Administration's fiscal year 1995 budget
submission.  The $20 billion is the sum of four negative accounting
entries and is clearly labeled in the FYDP as "undistributed future
adjustments." Our analysis revealed an additional $1.5 billion in
negative adjustments in the research and development account.  We
believe that it is inconsistent with congressional intent for DOD to
use negative adjustments (reflected as negative accounting entries)
to unspecified programs to balance FYDP funding estimates with those
in the President's budget. 

DOD officials said that the $20 billion reflected last minute changes
due to revised inflation indices for which DOD could not adjust its
programs.  However, the Congressional Budget Office concluded that
the $20 billion in future adjustments indicated problems clearly
beyond the question of inflation. 

In addition to the $21.6 billion in unspecified overprogramming, our
current analysis found substantial overestimation of future savings
and underestimation of costs.  For example: 

  The FYDP contains $32 billion in projected savings that may be only
     partially realized.  These are from base closures and Defense
     Management Report initiatives over the planning period. 

  The FYDP also contains about $112 billion in potential cost
     increases for base closures, weapon systems, personnel pay,
     environmental remediation, and peacekeeping operations. 

By overstating savings and understating costs, more programs are
included in the FYDP than spending plans will support.  This
overprogramming is not new.  Since 1984, we have consistently
disclosed that DOD employs a systemic bias toward overly optimistic
planning assumptions.\1 The use of optimistic planning assumptions
has led to program instability, costly program stretch-outs, and
program terminations. 

DOD officials do not agree with our methodology for estimating the
risk in the current FYDP.  We used the most current estimates
available to us in computing the risk in projected savings and costs
and believe that our methodology is sound. 

--------------------
\1 A list of related GAO products is included at the end of this
report. 

   FYDP SUBMISSION IS NOT IN
   ACCORDANCE WITH CONGRESSIONAL
   INTENT
------------------------------------------------------------ Letter :3

Section 221 of Title 10 of the United States Code states "The
Secretary of Defense shall submit to Congress each year, at or about
the time that the President's budget is submitted .  .  .  a
future-years defense program .  .  .  reflecting the estimated
expenditures and proposed appropriations included in that budget."
The provision requires that program and budget information submitted
to Congress by DOD be consistent with the President's budget
submission.  The purpose of this law is to ensure that the Secretary
of Defense make the hard decisions necessary to fit DOD programs
within the budget. 

The fiscal year 1995 FYDP contains a negative $20.1 billion in future
program/budget adjustments.  We identified an additional $1.5 billion
in undistributed future reductions in the research and development
account.  DOD used negative adjustments to offset the overprogramming
and give the FYDP totals the appearance of being consistent with the
President's budget.  According to DOD officials we spoke to, efforts
will be made to eliminate the undistributed future adjustments in
preparation for the fiscal year 1996 budget cycle. 

DOD officials said that the $20.1 billion reflected last minute
changes due to revised inflation indices for which DOD could not
adjust its programs.  The Congressional Budget Office reported in
April 1994 that the future adjustments indicate funding problems
beyond the question of inflation estimates.\2 According to the
Congressional Budget Office, the difference in inflation assumptions
would start out small in 1996 at about $2 billion and grow to about
$7.5 billion in 1999, as the costs of the assumptions of higher
prices cumulate.  By contrast, DOD's future adjustments start at $6.4
billion in 1996 and dwindle to $3.3 billion in 1999. 

The use of negative accounting entries is appropriate in many
instances, such as adjustments for offsetting receipts and foreign
currency fluctuations.  However, we do not believe it is appropriate
for DOD to use negative adjustments as substitutes for resource
decisions necessary to bring programs, projects, and resources in
conformance with the President's budget. 

Table 1 shows how DOD used negative entries to reconcile about $21.6
billion in overprogramming with the Administration's lower fiscal
guidance. 

                                     Table 1
                     
                       Comparison of DOD's Program and the
                          President's Budget Submission

                         (In billions of current dollars)

                                1995    1996    1997    1998    1999       Total
----------------------------  ------  ------  ------  ------  ------  ==========
DOD program                   $252.1  $250.2  $245.9  $252.1  $256.7   $1,257.16
                                   5       0       0       2       9

Less negative entries
--------------------------------------------------------------------------------
Future adjustments                     -6.43   -5.37   -5.02   -3.26      -20.08
Adjustments to research and            -0.33   -0.35   -0.38   -0.41       -1.47
 development
================================================================================
Total negative entries                    $-      $-      $-      $-     $-21.65
                                        6.76    5.72    5.40    3.77
================================================================================
President's budget            $252.1  $243.4  $240.2  $246.7  $253.0   $1,235.56
                                   5       4       3       2       2
--------------------------------------------------------------------------------
Note:  Totals may not add due to rounding. 

Source:  GAO analysis of DOD data. 

We have reported and testified in the past on DOD's tendency to
overestimate the amount of funds available for defense.  We have
referred to this as DOD's plans/reality mismatch.  We believe such
unrealistic planning provides an unclear picture of defense
priorities because tough decisions and trade-offs are avoided. 
Instead, program decisions end up being made on a piecemeal basis to
meet each year's funding realities.  This is not an effective way for
DOD to manage. 

Refinements in section 221 have not adequately improved the integrity
and credibility of DOD planning.  It is clear from the legislative
history of section 221 that Congress intended that DOD provide
updated information in its FYDP to reflect the most recent budget
figures and show in detail how those budget figures would affect "the
out-years of the five year period presented in the [FYDP]" documents. 
DOD's use of negative adjustments in its FYDP to offset
overprogramming is not expressly prohibited by law, but it is
inconsistent with this congressional intent.  Further, we believe
that the use of overly optimistic costs and savings estimates as a
way to include more programs in the FYDP than the President's funding
guidance can support also is inconsistent with congressional intent. 

--------------------
\2 An Analysis of the President's Budgetary Proposals for Fiscal Year
1995 (Congressional Budget Office, Apr.  1994). 

   SAVINGS ESTIMATES OF $32
   BILLION MAY BE OVERSTATED
------------------------------------------------------------ Letter :4

In its 1995-99 FYDP, DOD assumed that about $32 billion in savings
would be realized due to base closures and Defense Management Report
initiatives.  On the basis of past work, we believe that these
savings estimates may be overly optimistic.  If they are not
achieved, DOD will have to reduce programs or ask for a budget
increase.  Moreover, DOD is not tracking the savings due to Defense
Management Report initiatives and will have little basis to know
whether those savings are being achieved.  Table 2 outlines the net
savings that DOD anticipates in the 1995-99 FYDP. 

                                     Table 2
                     
                          DOD's Anticipated Net Savings

                         (In millions of current dollars)

Savings category                1995    1996    1997    1998    1999       Total
----------------------------  ------  ------  ------  ------  ------  ==========
Base closures--rounds 1, 2,    -$310   -$723  $3,461  $1,220  $1,716      $5,364
 and 3
Defense Management Report      7,200   7,200   7,500   2,500   2,500      26,900
================================================================================
Total anticipated savings     $6,890  $6,477  $10,96  $3,720  $4,216     $32,264
                                                   1
--------------------------------------------------------------------------------
Source:  GAO analysis of DOD data. 

      BASE REALIGNMENT AND
      CLOSURES SAVINGS MAY BE TOO
      OPTIMISTIC
---------------------------------------------------------- Letter :4.1

As a result of recommendations by three separate independent
commissions in 1988, 1991, and 1993, Congress approved the closure or
realignment of 247 defense activities (including the closure of 70
major installations).  Once a base is selected for closure, DOD has 2
years to initiate the action and 6 years to complete the closure. 
DOD's current FYDP assumes that about $14 billion in base closure
savings will be realized between 1995 and 1999 at a cost of about $9
billion. 

The $5 billion in net savings may be too optimistic.  To date, DOD
has only completed about 20 percent of base closure actions planned
for the first three rounds, and savings have not been achieved as
early as anticipated.  For example, DOD's total anticipated savings
for base closure rounds one and two is estimated to be about $10
billion, or 23 percent less than DOD's original savings estimate of
about $13 billion.  Depending on future progress, anticipated savings
could be further reduced or delayed. 

      DEFENSE MANAGEMENT REPORT
      SAVINGS ARE OVERLY
      OPTIMISTIC
---------------------------------------------------------- Letter :4.2

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. 
DOD officials told us that $7.2 billion is to be saved in fiscal year
1995, and an additional $19.7 billion from fiscal years 1996 through
1999.  These savings are already deducted from FYDP estimates, even
though actions to achieve these savings have not occurred. 
Therefore, if the future Defense Management Report savings do not
occur, funds may have to come from other budget areas. 

We believe a projection of nearly $27 billion in Defense Management
Report savings over the next 5 years may be significantly overstated. 
In past work on Defense Management Report initiatives, we have
questioned whether the estimated savings could be achieved.\3 For
example, our past work 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 data.  In April 1994, we
reported that a Defense Science Board task force, which was
established to provide independent advice to the Secretary of Defense
and became known as the Odeen panel, reported that, on average, 20
percent of the anticipated savings were not achievable.\4

According to DOD, adjustments were made to rectify the shortfall. 
However, our report also stated 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. 

Officials we interviewed from the DOD Office of Management Systems,
Directorate for Management Improvement, said that they continue to
track the progress of individual management initiatives but no longer
track the associated dollar savings based on a task force
recommendation that continuing to try to track Defense Management
Report dollar savings had become counterproductive.  The task force
concluded in May 1993 that the bookkeeping effort devoted to tracking
Defense Management Report savings had outlived its usefulness and
should be terminated.  The task force determined that, over a period
of time, other changes in the DOD program that were driven by
historic changes in the world security situation have so altered the
original baseline that current estimates of savings are often
hopelessly intertwined with impacts of larger changes.  On August 2,
1993, the Office of the Secretary of Defense issued a memorandum that
effectively terminated the tracking of Defense Management Review
savings. 

--------------------
\3 Defense Management Review (GAO/NSIAD-94-17R, Oct.  7, 1993),
Financial Management:  DOD Has Not Responded Effectively to Serious,
Longstanding 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). 

\4 DOD Budget:  Evaluation of Defense Science Board Report on Funding
Shortfalls (GAO/NSIAD-94-139, Apr.  20, 1994). 

   COST ESTIMATES MAY BE
   UNDERSTATED BY MORE THAN $100
   BILLION
------------------------------------------------------------ Letter :5

There is a substantial amount of cost risk associated with the
1995-99 FYDP.  Our analysis indicates that the cost estimates in the
FYDP for the fourth round of base closures, weapon systems
development and procurement, environmental remediation, pay raises,
and peacekeeping operations may be understated by about $112 billion. 

      COST OF THE 1995 BASE
      CLOSURE ROUND IS
      SIGNIFICANTLY UNDERSTATED
---------------------------------------------------------- Letter :5.1

DOD has significantly understated the costs associated with the
planned fourth round of base closures and realignments scheduled to
begin in 1995.  Round four is expected to close an equivalent number
of defense activities as the three previous rounds combined.  On the
basis of a 1995 round of this size, we estimate potential costs could
be in excess of $8 billion more than shown in the FYDP. 

DOD has maintained that the 1995 round of base closures and
realignments is an important element in its plans to reduce
infrastructure costs to help pay for future programs and operations. 
However, the estimated costs for the 1995 round contained in the FYDP
bear no resemblance to the experience of the three earlier rounds. 
As shown in table 4, round four costs in the FYDP are estimated to be
much less than the costs for rounds
1 through 3 and cover only a 3-year period.  Experience from the
first base closure round indicates it takes 5 to 6 years to close a
base. 

                           Table 3
           
            Comparison of Estimated Costs for the
                First 4 Years of Base Closures

               (In millions of current dollars)

               Year 1  Year 2  Year 3  Year 4      Total
-------------  ------  ------  ------  ------  =============
Rounds 1-3     $1,374  $3,986  $3,995  $1,630     $10,985
Round 4           702     899   1,029       0      2,630
Difference       $672  $3,087  $2,966  $1,630     $8,355
------------------------------------------------------------
Note:  Estimates do not include environmental costs. 

Source:  GAO analysis of DOD data. 

According to the Director of DOD's Base Closure and Utilization
Office, the dollars programmed in the FYDP for the round four
realignment and closures are insufficient.  In order to pay for the
closures, under current fiscal guidance, DOD would have to delay or
terminate other programs.  Hence, because DOD underestimated the
costs of round four closures in the FYDP, it was able to include
billions of dollars in additional programs. 

      WEAPON SYSTEMS COST OVERRUNS
---------------------------------------------------------- Letter :5.2

Program cost increases and schedule delays, two of the most prevalent
acquisition problems, are among the oldest and most visible problems
associated with weapon systems.  Program cost increases of 20 to 40
percent have been common for major weapon programs, with numerous
programs experiencing increases much greater than that.  In August
1992, we reported that the potential total cost for completing
165 ships under construction had increased by 24 percent.\5 In April
1994, we testified that the cost growth being experienced on a number
of current major Navy systems was as much as 100 percent.\6 A recent
RAND study of weapon system cost growth prepared for the Air Force
concluded that there has been no substantial improvement in the
average weapon system cost growth over the last 30 years, despite the
implementation of several initiatives intended to mitigate the
effects of cost risk and the associated cost growth.\7

DOD currently has about $192 billion in planned weapon systems or
weapon-related acquisitions in the procurement pipeline over the next
5 years, and about another $100 billion in research and development. 
Many of these programs are complex modern weapon systems involving
considerable technological risks.  Because of the enormous cost and
complexity of these programs and historical experience, we do not
believe DOD can deliver planned quantities in the time frame and for
the funding proposed in the FYDP.  Appendix I discusses some of DOD's
current weapon systems that we believe are at particular risk for
substantial cost growth. 

On the basis of a conservative growth estimate of 20 percent, we
expect current procurement estimates for weapon systems to rise by at
least $38 billion for the planning period.  Similar cost growth may
also be experienced among development programs.  Programs in
development are on average more technically challenging, involving
higher risk and uncertainty.  Programs currently in the advanced
phases of research and development, such as in engineering and
manufacturing development, may account for at least another $20
billion in unanticipated cost growth over the planning period. 

Given the fiscal environment, it will be difficult for DOD to obtain
nearly $60 billion in additional funding to pay for unplanned costs
growth over the FYDP period.  Therefore, as weapons program plans are
not achieved because of cost increases, programs are likely to be
stretched out, reduced, or terminated after billions of dollars have
been invested. 

--------------------
\5 Navy Contracting:  Cost Growth Continues on Ship Construction
Contracts (GAO/NSIAD-92-218, Aug.  31, 1992). 

\6 Navy Modernization:  Alternatives for Achieving a More Affordable
Force (GAO/T-NSIAD-94-171, Apr.  26, 1994). 

\7 An Analysis of Weapon System Cost Growth (RAND, MR-291-AF, 1993). 

      ENVIRONMENTAL COSTS MAY BE
      SIGNIFICANTLY UNDERSTATED
---------------------------------------------------------- Letter :5.3

At current funding rates, DOD would spend about $28 billion on
environmental costs for fiscal years 1995-99.  In recent testimony
before the Senate Budget Committee, the Secretary of Defense
characterized environmental restoration and pollution prevention as
one of the fastest growing items in the defense budget. 

According to a March 1994 report by the Congressional Budget Office,
DOD's estimates of environmental restoration costs might be
understated by $20 billion, or by about $4 billion annually over the
next 5 years.\8 To the extent that Congressional Budget Office
estimates are correct and DOD does not receive additional funds, DOD
may have to defer environmental remediation programs or adjust other
programs to fund the additional cost of planned remediation programs. 

As an example of escalating environmental costs, Congressional Budget
Office officials testified that the average cleanup costs at military
bases slated for closing are 60 percent higher than initially
projected and that increasingly strict cleanup standards will drive
DOD's costs even higher.  The impending closure of a substantial
number of military bases has raised several difficult environmental
problems.  Under the Comprehensive Environmental Response,
Compensation, and Liability Act, also known as "Superfund," the U.S. 
Government cannot transfer land outside federal ownership until it
warrants that all remedial action necessary to protect human health
and the environment has been taken.  There are serious possibilities
for conflict between the interest of economic development and the
interest of environmental restoration.\9 The communities adjoining
the bases to be closed generally wish to obtain the land quickly, and
the decontamination process that may be necessary to restore the
environment can be time-consuming. 

--------------------
\8 Planning for Defense:  Affordability and Capability of the
Administrations's Program (Congressional Budget Office Memorandum,
Mar.  1994). 

\9 Military Base Closures:  Issues for the 103rd Congress
(Congressional Research Service Issue Brief-IB92113, Mar.  3, 1994). 

      MILITARY AND CIVILIAN PAY
      RAISES
---------------------------------------------------------- Letter :5.4

Last year, the Administration proposed to freeze federal
salaries--both military and civilian--in 1994 and to reduce the
future rates relative to current law.  Congress, however, granted pay
raises and the Administration increased DOD's budget to accommodate
the impact of the raises.  According to the Congressional Budget
Office, a similar risk looms for 1995 through 1999.  The
Administration proposes holding military and civilian pay raises
below those called for under current law and does not distinguish
between an amount for across-the-board pay raises and locality pay
raises.  According to the Congressional Budget Office, if Congress
adheres to current law on across-the-board pay raises only, DOD would
have to pay about $13.9 billion.  Adhering to current law also on
locality pay would add another $12.1 billion.\10

According to DOD, its FYDP is priced with the Administration's
economic assumptions for pay raises, as is the entire Federal Budget. 
Therefore, if the FYDP is underpriced due to increased civilian and
military pay rates in fiscal year 1995, the entire budget is
similarly underpriced.  We acknowledge that DOD's FYDP estimates for
pay raises are based on the Administration's policy.  However to the
extent that Congress approves higher pay raises, DOD must either
receive additional funds for the raises or reduce programs. 

Both the House and Senate versions of the National Defense
Authorization Act for fiscal year 1995 provide a 2.6- percent pay
raise for military personnel.  The FYDP provided for only a
1.6-percent pay raise. 

--------------------
\10 An Analysis of the President's Budgetary Proposals for Fiscal
Year 1995, Congressional Budget Office (Apr.  1994). 

      POTENTIAL COSTS FOR
      PEACEKEEPING OPERATIONS
---------------------------------------------------------- Letter :5.5

According to DOD, the FYDP does not include funds for DOD's
participation in peacekeeping activities.  DOD requested a
supplemental appropriation of $1.2 billion to fund its peacekeeping
operations for fiscal year 1994. 

According to DOD, the fiscal year 1994 budget included a modest
request for peacekeeping and this request was disapproved by all four
Defense oversight committees.  DOD has indicated it may continue to
seek supplemental appropriations to fund peacekeeping operations. 
For example, in testimony before the Senate Budget Committee on March
9, 1994, the Secretary of Defense stated that if there was a peace
settlement in Bosnia, and United States troops were sent as part of
that commitment, DOD would be requesting a supplemental appropriation
for that purpose. 

   GAO HAS REPORTED ON DOD'S
   OPTIMISTIC PLANNING ASSUMPTIONS
   FOR 10 YEARS
------------------------------------------------------------ Letter :6

Regardless of the size of the overall defense program, during the
cold war or post cold war era, there has existed a plans/reality
mismatch between the defense program proposed in the FYDP and the
funds available to execute that program.  We have been reporting on
this mismatch since 1984.  The planning bias most often falls into
one, or more, of three categories:  (1) overestimation of future
savings to be generated from management initiatives, (2)
underestimation of costs, and (3) use of overly optimistic inflation
forecasts (including pay rates). 

We have reported that this planning bias perpetuates an environment
of program instability that manifests itself in cost overruns,
program stretch-outs, and even the cancellation of major weapon
systems after substantial investments have been made in their
development.  This is not an effective way for DOD to manage and it
does not facilitate congressional oversight of the defense budget. 

   MATTER FOR CONGRESSIONAL
   CONSIDERATION
------------------------------------------------------------ Letter :7

Congress may wish to consider enacting legislation that would
explicitly prohibit DOD from using negative adjustments for
unspecified programs as substitutes for resource decisions necessary
to bring programs, projects, and activities in conformance with the
President's budget.  Such a provision need not preclude the use of
legitimate negative accounting adjustments such as offsetting
receipts and foreign currency fluctuations. 

   VIEWS OF AGENCY OFFICIALS AND
   OUR EVALUATION
------------------------------------------------------------ Letter :8

As you requested, we did not obtain written comments from DOD. 
However, we held an exit conference with officials to discuss a draft
of this report.  The officials disagreed with our positions on the
issues.  We have incorporated their views in the report where
appropriate.  The following discusses some of the principal concerns
expressed by the officials. 

The officials said that our matter for congressional consideration,
if enacted into law, may prohibit DOD from using all negative
accounting entries in the FYDP.  We recognize that there are
legitimate negative entries in the FYDP and have clarified this point
in our report.  The officials also said that the $20 billion negative
entries labeled "undistributed future adjustments" reflected last
minute changes in inflation indices by the Office of Management and
Budget for which DOD could not adjust its programs.  Consequently,
DOD decided to show the undistributed adjustments.  The officials
stated that in their opinion it was better for DOD to clearly reflect
these future adjustments rather than "bury them" by arbitrarily
reducing programs.  We agree that DOD should not bury the reductions
or make arbitrary changes.  We also agree with the Congressional
Budget Office's analysis that the $20 billion indicates funding
problems beyond inflation.  DOD must make the hard decisions
necessary to bring its programs, projects, and activities within its
budget projections.  Failing to do so provides an unclear picture of
defense priorities and delays program decisions. 

The officials also disagreed with our methodology for estimating the
risk in projected savings and costs.  They said that our reliance on
historical patterns in such areas as weapon systems and base closures
raises unnecessary doubts and unfounded concerns about DOD's planning
assumptions and related funding levels.  For example, the officials
said that it is unreasonable to apply a 20-percent cost growth to
today's weapon systems because (1) many of those systems are mature
and historically much of cost growth usually occurs early in a weapon
system's development and (2) DOD has new initiatives to better manage
its acquisition programs.  We believe that a 20-percent projected
cost increase is reasonable because of the reasons stated in our
report.  Further, DOD has numerous systems such as the C-17 cargo
aircraft and the F-22 fighter that are not mature and continue to
experience cost growth.  Also, as we state in this report, the
historical cost growth in weapon systems was experienced despite the
implementation of several DOD initiatives intended to mitigate the
effects of cost risk.  The officials also said that it is
unreasonable to use the costs of the first three rounds of base
closures to estimate the cost of round four closures because the
first three rounds required considerably more relocations of forces
and associated infrastructure costs.  We believe that the cost
associated with the first three rounds of base closures represents a
reasonable approximation of the cost of round four closures because
round four is expected to close an equivalent number of defense
activities as the three previous rounds combined.  Moreover,
officials with DOD's Base Closure and Utilization Office told us that
our cost estimating methodology was reasonable.  In summary, we used
the most current estimates available to us in computing the risk in
projected savings and costs and believe that our methodology is
sound. 

   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :9

To evaluate the major planning assumptions underlying DOD's fiscal
year 1995 FYDP, we interviewed officials in the Office of the
Secretary of Defense, DOD Comptroller, DOD Office of Environmental
Security, DOD Office of Economic Security, Base Closure and
Utilization Office, Congressional Budget Office, and Office of
Management and Budget.  We examined a variety of DOD planning and
budget documents, including the FYDP and associated annexes.  We also
reviewed the President's fiscal year 1995 budget submission, prior
GAO reports, and pertinent reports by the Congressional Budget
Office, the Congressional Research Service, and others. 

To determine whether the FYDP submission complies with the law, we
compared its content with the requirements established in section 221
of Title 10 of the United Sates Code.  We also reviewed references to
the reporting requirement in various legislative reports to clarify
congressional intent.  Our work was conducted from March to July 1994
in accordance with generally accepted government auditing standards. 

---------------------------------------------------------- Letter :9.1

We are providing copies of this report to appropriate House and
Senate Committees; the Secretaries of Defense, Air Force, Army, and
Navy; and the Director, Office of Management and Budget.  We will
also provide copies to other interested parties upon request. 

If you have any questions concerning this report, please call me on
(202) 512-3504.  The major contributors to this report are listed in
appendix II. 

Richard Davis
Director, National Security
 Analysis

WEAPON PROGRAMS AT RISK FOR
SUBSTANTIAL FUTURE COST INCREASES
=========================================================== Appendix I

An important factor in the Future Years Defense Program (FYDP)
affordability equation is the effect that unplanned cost increases in
weapon programs has on future funding requirements.  Over the last
several years we have issued a number of reports concerning cost
growth, schedule delays, and quantity reductions among weapon
programs currently in the Department of Defense's (DOD) research and
development or procurement pipeline.  These programs include, but are
not limited to, the FA-18 E/F, C-17 cargo aircraft, F-22 fighter,
V-22 tilt-rotor aircraft, SSN-21 Submarines, and the DDG-51
Destroyers.  On the basis of historical experience, we expect cost
increases to be a continuing problem for these and other weapon
programs. 

      FA-18 E/F FIGHTER
------------------------------------------------------- Appendix I:0.1

DOD plans to procure 1,000 aircraft for the FA-18E/F program.  The
estimated total program cost of this acquisition is $89 billion. 
This represents a total program cost increase of 10 percent in just
the last year.  Although the Navy claims that the FA-18E/F is simply
an upgrade of the current C/D version of the aircraft, some critics
have argued that, given the extensive changes being incorporated into
the new model, the FA-18E/F is essentially a new aircraft.  This
enhances the potential for cost growth and technical problems in the
program. 

      C-17 CARGO AIRCRAFT
------------------------------------------------------- Appendix I:0.2

We are very concerned about the affordability of the C-17 cargo
aircraft.  The C-17 has been a troubled program almost since its
inception and has fallen far short of original cost, schedule, and
performance objectives.  The Air Force originally planned to buy 210
aircraft.  In 1990, the program was reduced to 120 aircraft at a
currently estimated cost of about $43 billion.  This cost exceeds the
last DOD estimate to acquire 210 aircraft by
$1.3 billion.  We do not believe that a cargo aircraft, even one with
the projected sophistication of the C-17, should cost in the area of
$300 million to $350 million each.  By November 1995, DOD will have
invested another
$5 billion in the problem-plagued program, bringing the cost for the
first
40 planes to about $21.3 billion, or about $534 million each.  On the
basis of increasing cost, recent test problems, and slips to the
flight test schedule, we believe cost estimates will increase again
in the near future. 

      F-22 FIGHTER
------------------------------------------------------- Appendix I:0.3

The F-22 program, we believe, is a premature venture to develop an
air superiority fighter with limited versatility for joint service or
multiple use.  From December 1992 to December 1993, DOD changed the
program from the purchase of 648 F-22 fighters at a total program
cost of nearly
$87 billion, to 442 aircraft at $72 billion.  Because of this change,
the cost per aircraft rose from $134 million to $162 million. 

Since the F-22 program entered full-scale development in 1991, the
severity of the projected military threat in terms of quantities and
capabilities has declined.  U.S.  Air Forces are now expected to
confront potential adversary air forces that include few fighters
that have the capability to challenge the F-15--the U.S.  front line
fighter.  The F-15's performance characteristics exceed that of the
most advanced fighter threat system expected to exist in substantial
quantity for many years and can be economically maintained in a
structurally sound condition until 2015 or later. 

      V-22 TILT-ROTOR AIRCRAFT
------------------------------------------------------- Appendix I:0.4

In May 1986, the Navy expected full-scale development of the V-22
tilt-rotor aircraft to be completed in June 1992 and cost about $1.8
billion.  By December 1989 DOD determined that the V-22 would cost
$42 million each and was not affordable when compared with helicopter
alternatives that cost from $16 million to $33 million.  In 1992, the
Navy terminated the basic V-22 full-scale development contract and
concurrently awarded a new contract to develop a V-22 variant.  By
this time the V-22 had been in development for 6 years, and
contractors had spent $2 billion.  The Navy currently estimates the
variant development will take an additional 6 years and cost $2.5
billion.  V-22 unit procurement cost are projected to be between $49
million and $64 million. 

      SSN-21 SUBMARINES
------------------------------------------------------- Appendix I:0.5

Justification for the Seawolf Class nuclear-powered attack submarine
and its concurrent design/construction was based on countering the
former Soviet Union's submarine force.  Almost from the beginning,
however, concerns have been voiced about the program's level of
concurrency and the submarine's affordability.  In August 1993, we
reported that the design cost estimate more than doubled and
construction cost estimates increased by 45 percent for the first
Seawolf submarine (SSN-21).  As of December 1993, the construction
cost was estimated at about $1.1 billion, 59 percent over the
original estimate. 

      DDG-51 DESTROYERS
------------------------------------------------------- Appendix I:0.6

In September 1992, we reported that the cost estimates for the DDG-51
showed that the first three ships cost $1.1 billion, double the
original cost estimates.  The Navy currently plans to build 15
additional ships over the 1995-99 FYDP period. 

MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix II

NATIONAL SECURITY AND
INTERNATIONAL AFFAIRS DIVISION,
WASHINGTON, D.C. 

Robert L.  Pelletier, Assistant Director
William W.  Crocker III, Evaluator-in-Charge
Joseph J.  Faley, Senior Evaluator
Bonita J.  Page, Evaluator
Mae F.  Jones, Editor

RELATED GAO PRODUCTS

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

Transition Series:  National Security Issues (GAO/OCG-93-9TR, Dec. 
1992). 

High Risk Series:  Defense Weapon Systems Acquisition (GAO/HR-93-7,
Dec.  1992). 

Weapons Acquisition:  Implementation of the 1991 DOD Full Funding
Policy (GAO/NSIAD-92-238, Sept.  24, 1992). 

Defense Budget and Program Issues Facing the 102nd Congress
(GAO/T-NSIAD-91-21, Apr.  25, 1991). 

DOD Budget:  Observations on the Future Years Defense Program
(GAO/NSIAD-91-204, Apr.  25, 1991). 

Department of Defense:  Improving Management to Meet the Challenges
of the 1990s (GAO/T-NSIAD-90-57, July 25, 1990). 

DOD Budget:  Comparison of Updated Five-Year Plan With President's
Budget (GAO/NSIAD-90-211BR, June 13, 1990). 

DOD's Budget Status:  Fiscal Years 1990-94 Budget Reduction Decisions
Still Pending (GAO/NSIAD-90-125BR, Feb.  22, 1990). 

Status of Defense Forces and Five Year Defense Planning and Funding
Implications (GAO/T-NSIAD-89-29, May 10, 1989). 

Transition Series:  Defense Issues (GAO/OCG-89-9TR, Nov.  1988). 

Defense Budget and Program Issues:  Fiscal Year 1989 Budget
(GAO/T-NSIAD-88-18, Mar.  14, 1988). 

Underestimation of Funding Requirements in Five Year Procurement
Plans (GAO/NSIAD-84-88, Mar.  12, 1984). 

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