FISCAL YEAR 2008
 

AGENCY FINANCIAL REPORT
 

Department of Defense
 November 17, 2008 
 

Department of Defense Agency Financial Report 2008 

Table of Contents 

Message From The Deputy Secretary Of Defense...............................................................iii
 

Overview...................................................................................................................................1
 

Year In Review ........................................................................................................1
 

Section 1: Management’s Discussion and Analysis ............................................................3
 

Mission and Organizational Structure .....................................................................3 

Analysis of Financial Statements ............................................................................6 

Performance Objectives, Goals, and Results........................................................11 

Analysis of Systems, Controls, and Legal Compliance .........................................16 

Annual Assurance Statement................................................................................17 

Other Management Information, Initiatives, and Issues ........................................18 

Section 2: Financial Information ..........................................................................................20
 

Message From The Acting Chief Financial Officer................................................20 

Independent Auditor’s Report................................................................................21 

Principal Financial Statements and Notes.............................................................33 

Required Supplementary Stewardship Information...............................................96 

Required Supplementary Information....................................................................98 

Section 3: Other Accompanying Information....................................................................105
 

Inspector General’s Summary of Management and Performance Challenges, 

and Management’s Response to Inspector General’s Challenges .....................105 

Summary of Management Assurances and Financial Statement Audit ..............127 

Improper Payments Information Act Reporting ...................................................133 

Appendixes...........................................................................................................................138
 

Glossary of Terms ...............................................................................................138 

Useful Web Sites for Relevant Information .........................................................140 

Table of Contents 

i 
 

 

 

Department of Defense Agency Financial Report 2008 

List of Figures 

Figure 1-1. Department of Defense Organizational Structure ...............................................3 

Figure 1-2. Geographic Combatant Commands....................................................................5 

Figure 1-3. Staffing for FY 2008 ............................................................................................6 

Figure 1-4. Projected Audit Opinions.....................................................................................6 

Figure 1-5. FY 2008 Appropriations Received ......................................................................7 

Figure 1-6. FY 2008 Obligations Incurred .............................................................................7 

Figure 1-7. Net Cost of Operations........................................................................................7 

Figure 1-8. Total Assets and Total Liabilities.........................................................................8 

Figure 1-9. Unfunded Liabilities.............................................................................................9 

Figure 1-10. Three Pronged Strategy For Transformation ......................................................9 

Figure 1-11. Department of Defense Performance Budget Hierarchy...................................11 

Figure 1-12. 2006 QDR Strategic Goals................................................................................11 

Figure 2-1. Four Principal Financial Statements .................................................................33 

Figure 3-1. Reducing Internal Management Control Weaknesses....................................131 

Figure 3-2. FY 2008 Estimated Improper Payments .........................................................133 

Figure 3-3. Improper Payment (IP) Reduction Outlook .....................................................135 

Figure 3-4. Recovery Audit Activity ...................................................................................136 

List of Tables 

Table 1a. Summary of Management Assurances ...........................................................128 

Table 1b. Summary of Management Assurances ...........................................................130 

Table 1c. Summary of Management Assurances ...........................................................131 

Table 2. Summary of Financial Statement Audit...........................................................132 

Table 3. Compliance with Federal Financial Management Improvement Act ...............132 

Table of Contents 

ii 
 

 

Department of Defense Agency Financial Report 2008 

MESSAGE FROM THE DEPUTY SECRETARY OF DEFENSE 

Message from the Deputy Secretary of Defense 

iii 

 

 

–

Department of Defense Agency Financial Report 2008 

Overview 

The Department of Defense (DoD) Fiscal 

Year (FY) 2008 Agency Financial Report 

(AFR) provides the President, Congress, 

other federal departments and agencies, and 

the American public an overview of the 

Department’s financial condition. This report 

compares to the private sector’s annual report 

to stockholders. 

The Department is producing the AFR as an 

alternative to the consolidated Performance 

and Accountability Report (PAR) under the 

Office of Management and Budget (OMB) 

Pilot Program for Alternative Approaches to 

Performance and Accountability Reporting. 

This approach is intended to improve 

performance reporting by presenting it in a 

more accessible and informative format, and 

provide more complete performance 

information given the additional time to collect 

actual year-end performance data. 

The pilot consists of three required 

components: 

Agency Financial Report: The AFR consists 

of the Deputy Secretary of Defense Message, 

Management’s Discussion and Analysis, 

Financial Statements and Notes, the Audit 

Report, Major Management Challenges, and 

Other Accompanying Information. 

Annual Performance Report: The FY 2008 

Annual Performance Report (APR) will be 

available by the due date of 

January 15, 2009. The APR is required by the 

Government Performance and Results Act 

(GPRA) and contains details of the 

Department’s performance and progress in 

achieving its strategic goals. 

Citizen’s Report: The Citizen’s Report will be 

available by the due date of January 15, 2009. 

The Citizen’s Report is a 25 page summary of 

the Department’s mission, key goals, budget 

allocation, and progress on key performance 

goals linking to the strategic goals. 

Additionally, the FY 2010 Annual 

Performance Plan (APP) will be included with 

our Congressional Budget Justification (CBJ). 

GPRA requires an APP that links the general 

goals and objectives to the strategic plans 

and performance goals. The CBJ includes the 

APR and APP with detailed descriptions of 

the Department’s activities and proposals at 

the program, project, and activity level. 

These reports and information on related 

topics are available on the DoD Comptroller 

Web site. (See Appendix B.) 

Year In Review 

Since September 11, 2001, the primary 

mission of the Department of Defense and 

America’s Armed Forces has been to confront 

and defeat the threat posed by radical Islamic 

fundamentalism to the Nation and the world, 

and to work with our allies and partners to 

prevail in the ongoing struggle against global 

terrorism. 

In Iraq, the buildup of U.S. forces known as 

the “Surge” and the leadership of U.S. Army 

General David Petraeus have contributed to 

increased success over coalition enemies. 

Overall, violence was significantly reduced; 

13 of Iraq’s 18 provinces, including Anbar 

province, were turned over to Iraqi control, 

and incremental but significant political 

progress has been achieved. 

As a result of this success, and Iraq’s 

increased capacity to provide for its own 

security, the five Army brigade combat teams, 

two Marine battalions, and one Marine 

expeditionary unit sent to Iraq as part of the 

Surge, have already returned to the United 

States. A Marine battalion stationed in Anbar 

U.S. Marines from Foxtrot Company, 2nd Battalion, 

7th Marine Regiment communicate with their command 

operation center during a raid on a Taliban DoD photo by 

headquarters in Afghanistan. Sgt. Freddy G. Cantu August 2008 

Overview 

1 
Department of Defense Agency Financial Report 2008 

province will return in November, and from The Sections of the AFR 

September 2008 through January 2009, 

another 3,400 noncombat forces—including 

aviation personnel, explosive ordnance 

teams, combat and construction engineers, 

military police, and logistics support teams— 

will be withdrawn. By February 2009, another 

8,000 U.S. forces will return from Iraq without 

being replaced. 

In addition, many of Iraq’s neighbors, 

including Bahrain, Jordan, Kuwait, and the 

United Arab Emirates, have shown an 

increasing willingness to engage with and 

help stabilize Iraq. 

In Afghanistan, U.S. and Coalition forces 

continued to work to counter a revived 

extremist insurgency. U.S. forces in 

Afghanistan increased from fewer than 

21,000 two years ago to nearly 31,000 in 

2008. Coalition forces also increased from 

about 20,000 to 31,000. Meanwhile, in 

addition to some 75,000 Afghan National 

Police, the Afghan National Army is now more 

than 65,000 strong and still growing. 

In 2008, the international community also 

increased resources devoted to non-military 

efforts, pledging more than $20 billion in 

assistance to Afghanistan at the Paris 

Donors’ Conference in June. 

While the situations in Iraq and Afghanistan 

are still fragile, the forces of freedom made 

great strides over the forces of fear in 2008. 

As always, the Department is cognizant of the 

responsibilities inherent in managing nearly 

18 percent of the Federal budget and over 

3 percent of the gross domestic product, and 

even more so of the precious resources 

loaned to us by a caring Nation—including the 

nearly 3 million active duty, guard, and 

reserve members of the U.S. Armed Forces, 

and the civilian workforce. With the support of 

Congress and, most importantly, the 

American people, DoD will continue to 

accomplish its mission in the years to come. 

The Department of Defense Agency Financial 

Report 2008 covers the 12-month period 

ending September 30, 2008, in the following 

sections: 

Management’s Discussion and Analysis:

Includes executive-level information on the 

Department’s mission, organization, key 

strategic goals and objectives, analysis of 

financial statements, systems, controls, legal 

compliance, and other challenges facing DoD. 

Financial Information: Includes a Message 

from the Chief Financial Officer, the DoD 

Inspector General Auditor’s Report and 

opinion, the Department’s principal financial 

statements and notes, required 

supplementary stewardship information, and 

required supplementary information. 

Other Accompanying Information: Includes 

the Inspector General’s Summary of 

Management and Performance Challenges 

and Management’s Responses, Summary of 

the Financial Statement Audit and 

Management Assurances, and Improper 

Payment Information Act Reporting Details. 

Appendixes include a glossary and a list of 

Internet links for more detailed information 

about topics discussed in this report. 

We welcome your 

feedback regarding the 

content of this report.

To comment or to request 

copies of the report, please e-mail

us at DoDAFR@osd.mil,

or write to:
 

U.S. Department of Defense
 

Office of the Under Secretary of Defense (OUSD)
 

(Comptroller)
 

1100 Defense Pentagon
 

Washington, DC 20301-1100
 

This document also is available at: 

http://www.defenselink.mil/comptroller/afr 453-14

Overview 

2 
 

 

Secretary of Defense

Deputy Secretary of Defense

Department 

of the Army

Secretary 

of the Army

Department 

of the Air Force

Secretary

of the Air Force

Inspector 

General

Department 

of the Navy

Secretary 

of the Navy

Joint Chiefs

of Staff

Chairman JCS

The Joint Staff

Office of the 

Secretary of 

Defense

Under 

Secretaries,

Assistant 

Secretaries

of Defense

and Equivalents

Combatant Commanders

Defense 

Agencies

DoD Field 

Activities

Air Force

Major 

Commands

& Agencies

Marine Corps 

Major 

Commands

& Agencies

Navy

Major 

Commands

& Agencies

Army

Major 

Commands

& Agencies • Africa Command

• Central Command

• European Command

• Joint Forces Command

• Northern Command

• Pacific Command

• Southern Command

• Special Operations Command

• Strategic Command

• Transportation Command

Department of Defense Agency Financial Report 2008 

Section 1: Management’s 

Discussion and Analysis 

MISSION AND ORGANIZATIONAL 

STRUCTURE 

Mission 

The mission of the United States Armed 

Forces is to: 

•	 Defend the United States. 

•	 Deter aggression and coercion in critical 

regions. 

•	 Swiftly defeat aggression in overlapping 

major conflicts while preserving for the 

President the option to call for a decisive 

victory in one of those conflicts, including 

the possibility of regime change or 

occupation. 

•	 Conduct a limited number of smaller-scale 

contingency operations. 

Organization 

The Department of Defense is America’s 

oldest, largest, most complex, and most 

successful organization. Since the creation of 

America’s first army in 1775, DoD has evolved 

to become a global presence of nearly 

3 million individuals, in more than 146 

countries, and dedicated to defending the 

United States by deterring and defeating 

aggression and coercion in critical regions. 

The DoD works for America’s Chief Executive 

Officer, the President; the Board of Directors, 

Congress; and the Nation’s shareholders, the 

American people. As do all successful 

organizations, DoD embraces the core values 

of leadership, professionalism, and technical 

knowledge. Its employees are dedicated to 

duty, integrity, ethics, honor, courage, and 

loyalty. 

Figure 1-1 shows how the Department is 

structured. 

Figure 1-1. Department of Defense Organizational Structure 

453-2 

Secretary of Defense 

Deputy Secretary of Defense 

Department

of the Army 

Secretary

of the Army 

Under 

Secretary

and 

Assistant 

Secretaries 

of the 

Army 

Chief 

of 

Staff 

Army 

Department

of the Air Force 

Secretary

of the Air Force 

Under 

Secretary

and 

Assistant 

Secretaries 

of the 

Air Force 

Chief 

of 

Staff 

Air Force 

Inspector

General 

Department

of the Navy 

Secretary

of the Navy 

Under 

Secretary

and 

Assistant 

Secretaries 

of the 

Navy 

Chief 

of 

Naval 

Operations 

Commandant 

of 

Marine 

Corps 

Joint Chiefs 

of Staff 

Chairman JCS 

The Joint Staff 

• Vice Chairman JCS 

• Chief of Staff Army 

• Chief of Naval 

Operations 

• Chief of Staff 

Air Force 

• Commandant of the 

Marine Corps 

Office of the 

Secretary of

Defense 

Under 

Secretaries, 

Assistant 

Secretaries 

of Defense 

and Equivalents 

Combatant Commanders 

Defense 

Agencies 

DoD Field 

Activities 

Air Force 

Major

Commands 

& Agencies 

Marine Corps 

Major 

Commands 

& Agencies 

Navy

Major 

Commands 

& Agencies 

Army

Major 

Commands 

& Agencies • Africa Command 

• Central Command 

• European Command

• Joint Forces Command 

• Northern Command 

• Pacific Command 

• Southern Command 

• Special Operations Command 

• Strategic Command

• Transportation Command 

Section 1	 Management’s Discussion and Analysis 

3 
 

 

 

 

–

Department of Defense Agency Financial Report 2008 

The Secretary of Defense and the Office of 

the Secretary 

The Secretary of Defense and the Office of the 

Secretary of Defense are responsible for the 

formulation and oversight of defense strategy 

and policy. The Office of the Secretary of 

Defense supports the Secretary in policy 

development, planning, resource management, 

and fiscal and program evaluation. 

Military Departments 

The Military Departments consist of the Army, 

Navy (of which the Marine Corps is a 

component), and the Air Force. In wartime, 

the U.S. Coast Guard becomes a special 

component of the Navy. Otherwise, it is a 

bureau of the Department of Homeland 

Security. The Military Departments organize, 

staff, train, equip, and sustain America’s 

military forces. When the President and 

Secretary of Defense determine that military 

action is required, these trained and ready 

forces are assigned to a Combatant 

Command responsible for conducting the 

military operations. 

The Military Departments include Active Duty, 

Reserve, and National Guard forces. Active 

Duty forces are full-time duty military service 

members. The Reserves, when ordered to 

active duty by Congress, support the active 

forces. They are an extension of the active 

duty personnel and perform similarly when 

called into service. The Reserves are also 

relied upon to conduct counter-drug 

operations, provide disaster aid, and perform 

other peacekeeping missions. The National 

Guard has a unique dual mission, with both 

federal and state responsibilities. In peacetime, 

the Guard is commanded by the Governor of 

each respective state or territory, who can call 

the Guard into action during local or statewide 

emergencies, such as storms, drought, or civil 

disturbances. When ordered to active duty for 

mobilization or called into federal service for 

emergencies, units of the Guard are under the 

control of the appropriate DoD Military 

Department. The Guard and Reserve are 

recognized as indispensable and integral parts 

of the Nation's defense from the earliest days 

of a conflict. 

U.S. service 

members 

exit a C-130 

Hercules 

aircraft at Ali 

Air Base in 

Iraq. The 

aircraft 

transports 

personnel

and cargo

throughout

the theater. 

U.S. Air Force photo 

by Tech. Sgt. 

Sabrina Johnson 

May 2008 

Chairman of the Joint Chiefs of Staff 

The Chairman of the Joint Chiefs of Staff is 

the principal military advisor to the President, 

the National Security Council, and the 

Secretary of Defense. The Chairman assists 

the President and the Secretary in providing 

for the strategic direction of the Armed 

Forces, including operations conducted by the 

Commanders of the Combatant Commands. 

As part of this responsibility, the Chairman 

also assists in the preparation of strategic 

plans and helps to ensure that plans conform 

to available resource levels projected by the 

Secretary of Defense. 

Combatant Commands 

The 10 Combatant Commands are 

responsible for conducting DoD missions 

around the world (Figure 1-2). The Army, 

Navy, Air Force, and Marine Corps supply 

forces to these Commands. 

The 10th Combatant Command, U.S. Africa 

Command (USAFRICOM), officially established 

in October 2008, assumed responsibility from 

three existing Combatant Commands to cover 

all of Africa, with the exception of Egypt. The 

focuses of USAFRICOM’s missions are 

diplomatic, economic, and humanitarian aid, 

aimed at prevention of conflict, rather than at 

military intervention. 

Section 1 Management’s Discussion and Analysis 

4 
 

 

Department of Defense Agency Financial Report 2008 

Figure 1-2. Geographic Combatant Commands 

USNORTHCOM 

USEUCOM 

USPACOM 

USSOUTHCOM 

Six of these Commands have specific mission 

objectives for their geographic areas of 

responsibility: 

•	 U.S. European Command (USEUCOM) is 

responsible for activities in Europe, 

Greenland, and Russia. 

•	 U.S. Central Command (USCENTCOM) is 

responsible for the Middle East, several of 

the former Soviet republics, and Egypt. 

This Command is primarily responsible for 

conducting Operation Enduring Freedom in 

Afghanistan and Operation Iraqi Freedom. 

•	 U.S. Pacific Command (USPACOM) is 

responsible for Northeast, South, and 

Southeast Asia, as well as Oceania. 

•	 U.S. Southern Command (USSOUTHCOM) 

is responsible for Central and South 

America, and the Caribbean. 

•	 U.S. Northern Command (USNORTHCOM) 

is responsible for North America, including 

Canada and Mexico. 

•	 U.S. Africa Command (USAFRICOM) is 

responsible for all of Africa, with the 

exception of Egypt. 

Four Commands have worldwide mission 

responsibilities, each focused on a particular 

function: 

USPACOM 

USCENTCOM 

USAFRICOM 

•	 U.S. Strategic Command is responsible 

for providing global deterrence capabilities 

and synchronizing DoD efforts to combat 

weapons of mass destruction worldwide. 

•	 U.S. Special Operations Command is 

responsible for leading, planning, 

synchronizing and, as directed, executing 

global operations against terrorist networks. 

•	 U.S. Transportation Command is 

responsible for moving military equipment, 

supplies, and personnel around the world 

in support of operations. 

•	 U.S. Joint Forces Command is 

responsible for developing future concepts 

for joint warfighting. 

Elementary school children in Damerdjog, pose for 

U.S. Marines with the 8th Provisional Security Company

deployed to Camp Lemonier, Djibouti, conduct a civil 

affairs visit to their school. U.S. Air Force photo by Staff Sgt. Samuel Rogers – September 2008 

Section 1	 Management’s Discussion and Analysis 

5 

453-3 
 

 

 

 

 

 

 

DoD Reporting Entity Audit Opinions

 

Department of Defense Agency Financial Report 2008 

Defense Agencies and Defense Field 

Activities 

Defense Agencies and DoD Field Activities 

provide support services commonly used 

throughout the Department. For example, the 

Defense Finance and Accounting Service 

provides accounting services, contractor and 

vendor payments, and payroll services; and 

the Defense Logistics Agency provides 

logistics support and supplies to all DoD 

activities. 

Resources 

Nearly half of the Department’s workforce 

comprises men and women on active duty. To 

provide Americans with the highest level of 

national security, the Department employs 

1,401,757 men and women on active duty, 

and 838,278 in the Reserve and National 

Guard, and 754,876 civilians (Figure 1-3). 

The Department’s worldwide infrastructure 

includes nearly 545,000 facilities (buildings, 

structures, and utilities) located at more than 

5,400 sites around the world, on more than 29 

million acres. To protect the security of the 

United States, the Department uses 

approximately 11,532 aircraft, and 639 ships. 

Figure 1-3. Staffing for FY 2008 

453-4 

As of September 30, 2008 

Reserve 

370,248 

12% Active Duty

1,401,757 

47% 

Civilian 

754,876 

25% 

National 

Guard 

468,030 

16% 

ANALYSIS OF FINANCIAL 

STATEMENTS 

Financial Analysis 

The Department’s financial statements are 

presented in Section 2: Financial Information. 

Preparing these statements is part of the 

Department’s goal to improve financial 

management and provide information to 

assess performance and allocate resources. 

The Department’s management is responsible 

for the integrity of the financial information 

presented in these financial statements. 

The financial statements have been prepared 

to report the financial position and results of 

operations. These statements were prepared 

from the books and records of the 

Department in accordance with U.S. generally 

accepted accounting principles (USGAAP) to 

the extent possible, the Office of Management 

and Budget (OMB) Circular No. A-136, 

“Financial Reporting Requirements,” and the 

“DoD Financial Management Regulation.” 

For FY 2008, 5 of the 33 reporting entities are 

projected to receive unqualified audit opinions. 

Additionally, Medicare-Eligible Retiree Health 

Care Fund and U.S. Army Corps of Engineers 

are projected to receive a qualified opinion in 

FY 2008. The Components are listed in 

Figure 1-4. At the Departmentwide level, 

favorable reviews were received for the fourth 

consecutive year on three financial statement 

line items in FY 2008: (1) Investments, (2) 

Federal Employees’ Compensation Act 

Liabilities, and (3) Appropriations Received. 

Budgetary Resources. The Statement of 

Budgetary Resources presents total 

resources of $1.1 trillion that was available to 

the Department during FY 2008 and the 

Figure 1-4. Projected Audit Opinions 

453-18 

U.S. Army Corps of Engineers Qualified (1)

Qualified Medicare-Eligible Retiree Health

Care Fund

Office of the Inspector General Unqualified

Military Retirement Fund Unqualified

Unqualified Defense Finance and 

Accounting Service

Defense Contract Audit Agency Unqualified

Defense Commissary Agency Unqualified

U.S. Army Corps of Engineers Qualified (1)

Qualified Medicare-Eligible Retiree Health

Care Fund 

Office of the Inspector General Unqualified

Military Retirement Fund Unqualified

Unqualified Defense Finance and 

Accounting Service 

Defense Contract Audit Agency Unqualified

Defense Commissary Agency Unqualified

DoD Reporting Entity Audit Opinions

(1) Out-of-cycle audit opinion 

Section 1 Management’s Discussion and Analysis 

6 
 

 

 

 

$ in Millions

Total 835,411

243,001 

427,001 

19,859 

145,550 

Discretionary Funding

Department of Defense Agency Financial Report 2008 

status at the end of the period. It presents 

the relationship between budget authority 

and outlays, and reconciles obligations to 

total outlays. 

The Department’s total resources primarily 

consist of carried forward budget authority of 

$112.0 billion for unfilled commitments from 

FY 2007 and received additional appropriations 

of $736.4 billion in FY 2008 to support the 

Global War on Terror (GWOT), train and 

equip our warfighters, and ensure broad 

national security priorities are met. Figure 1-5 

displays appropriations received by program. 

Most ($1.0 trillion or 91%) of the total 

budgetary resources for FY 2008 were spent 

or reserved for specific purposes. The 

remaining resources relate to receipt of 

multi-year appropriations and supplemental 

funding that were received late in the fiscal 

year with insufficient time to fully obligate 

and outlay. The Department’s total FY 2008 

obligations incurred are in support of present 

and future initiatives such as establishing the 

Africa Command (AFRICOM), building 

partnership capacity with foreign partners, 

realigning the ballistic missile defense sites 

in Europe, and strengthening cyberspace 

security. Obligations incurred presented in 

Figure 1-6 are shown separate between 

mandatory and discretionary funding. 

Figure 1-5. FY 2008 Appropriations 

Received 

Civil Works 

& Cemeterial 

$8.1 

1% 

Strategic

Modernization 

$175.5 

24% 

Family Housing

& Facilities 

$20.2 

3% 

Military Pay

& Benefits 

$129.2 

18% 

GWOT 

186.8 

25% 

Operations,

Readiness & 

Support

$143.4 

19% 

Military

Retirement 

Benefits 

$73.1 

10% 

$ in Billions 

$736.3B 

Amounts include DoD direct appropriations and funds 453-18

appropriated for military retiree health and pension benefits. 

Figure 1-6. FY 2008 Obligations Incurred 

453-18 

Strategic Modernization

Operations, Readiness & Support

Family Housing & Facilities

Military Pay & Benefits

Total 835,411

Strategic Modernization 243,001

Operations, Readiness & Support 427,001

Family Housing & Facilities 19,859

Military Pay & Benefits 145,550

Discretionary Funding 

USACE 

Civil Work 

$20,680 

Other 

$91,972 

Discretionary

Funding

$835,411 

9% 5% 

84% 

2% 

Military

Retirement 

Benefits 

$53,435 

Net Cost of Operations. The Statement of 

Net Cost presents the net cost of operations 

which represents the difference between the 

costs incurred less earned revenue. This is 

essentially equivalent to outlays displayed on 

the Statement of Budgetary Resources less 

capitalized asset purchases plus accrued 

liabilities and accounts payable. Differences 

between budgetary resources and net cost 

generally arise from timing of cost recognition. 

The majority of funding used to cover cost is 

received through congressional appropriations 

and reimbursement for the provision of goods 

or services to other federal agencies. The 

Department’s net cost of operations during 

FY 2008 totaled $676.0 billion. This represents 

an increase of $74.6 billion, or 12 percent from 

last year (Figure 1-7). 

Figure 1-7. Net Cost of Operations 

$ in Millions 

720,000
 

680,000
 

640,000
 

600,000
 

560,000
 

520,000
 

581,3861 

634,880 

605,365 601,411 

676,047 

2004 2005 2006 2007 2008 

1 Security Assistance Program is not included 

Section 1 Management’s Discussion and Analysis 

7 

453-18 
 

 

 

Department of Defense Agency Financial Report 2008 

The Military Retirement Benefits accounted 

for the majority of the FY 2008 increase in 

cost. This increase is due largely to the 

growth in actuarial liabilities that resulted from 

a reduction in the interest rate assumption 

that affects the value of investments available 

to pay benefits. 

Also contributing to the increase in net cost are 

the operation and maintenance costs for base 

operations support related to troop readiness 

and increased requirements of GWOT. 

Balance Sheet. The consolidated Balance 

Sheet presents a status of our financial 

condition as of September 30, 2008, and 

displays assets, liabilities and the resulting 

net position. Figure 1-8 displays asset and 

liability trends with the difference depicting the 

Department’s net position. 

Assets of $1.7 trillion represent amounts that 

the Department owns and manages. Assets 

increased $185.9 billion at the end of 

FY 2008, or 13 percent. This increase is 

largely attributable to increases in Fund 

Balance with Treasury (FBWT), Investments, 

and Military Equipment. 

The increase in Fund Balance with Treasury 

was due to a $73.8 billion increase in 

appropriated funds primarily in support of the 

GWOT. The Department was given these 

appropriations late in the fiscal year with 

insufficient time to fully obligate and outlay. 

The net increase in investments of 

$60.8 billion is related to expected normal 

Figure 1-8. Total Assets and Total Liabilities 

0 

500,000 

1,000,000 

1,500,000 

2,000,000 

2,500,000 

2004 2005 2006 2007 2008 

Assets Liabilities 

$ in Millions 

453-18 

growth to cover unfunded portions of future 

military retirement and health benefits. Funds 

not needed to pay current benefits are held in 

separate trust and special funds and invested 

in U.S. Treasury securities. 

Military Equipment increased $34.0 billion 

reflecting the receipt of combat vehicles such 

as Mine Resistant Ambush Protected (MRAP) 

vehicles, tanks, personnel carriers, other 

armored vehicles, and trucks, as well as ships 

and F-22 and C-17 aircraft. 

In contrast, the Department has significant 

unfunded liabilities consisting primarily of 

actuarial liabilities related to military 

retirement pension and health care benefits. 

While the liability presents the Department 

with a negative financial position, the majority 

of the unfunded portion will come from annual 

appropriations outside the Department’s 

budget. The FY 2008 actuarial liability 

estimate totaled $2.0 trillion of which 

$1.3 trillion will come from the U.S. Treasury 

to cover liabilities existing at inception of the 

programs. Approximately $378.9 billion is 

currently covered with invested U.S. Treasury 

securities. Due to the significant growth in 

liability in recent years, the Board of Actuaries 

accelerated the liquidation of the initial 

unfunded liabilities by reducing the 

amortization period thus increasing the 

annual contribution amounts from the U.S. 

Treasury. Figure 1-9 identifies the unfunded 

portions of liabilities requiring future 

resources. 

Limitations of the Financial Statements 

The principal financial statements have been 

prepared to report the financial position and 

results of operations of the Department of 

Defense, pursuant to the requirements of 

31 U.S.C. 3515(b). The statements are 

prepared from accounting records of the 

Department in accordance with OMB Circular 

No. A-136 and, to the extent possible, U.S. 

generally accepted accounting principles 

(USGAAP). The statements, in addition to the 

financial reports, are used to monitor and 

control budgetary resources, which are 

prepared from the same records. The 

statements should be read with the realization 

Section 1 Management’s Discussion and Analysis 

8 
 

 

Best Business Practices

Ente

rise

Transition Plan

Audit Strategy

(FIAR Plan)

Department of Defense Agency Financial Report 2008 

Figure 1-9. Unfunded Liabilities 

Liabilities Covered by $ in Millions

Budgetary Resources

$441,040

21% 

79% 

Liabilities 

Not Covered by

Budgetary Resources

$1,693,959 

Liabilities Covered by

Budgetary Resources

$441,040 

Unfunded Military Retirement and Health

Benefits funded by Treasury

$1,272,047 (75%) 

DoD Unfunded Military Retirement and

Health Benefits $327,354 (19%) 

Unfunded Environmental Liabilities $66,870 (4%) 

All Other Unfunded Liabilities $27,688 (2%) 

453-18 

that they are for a Component of the U.S. 

Government, a sovereign entity. 

The Deputy Secretary of Defense has made 

financial management improvement and 

business transformation a priority. He chairs 

the Defense Business Systems Management 

Committee, chartered to oversee business 

transformation, and requires Component 

heads to demonstrate specific involvement 

and responsibility by signing their quarterly 

financial statements. The comprehensive 

Financial Improvement and Audit Readiness 

Plan and the Business Transformation 

Agency’s Enterprise Transition Plan drive 

these improvements. 

Financial Improvement and Audit Readiness 

The Department initiated the Financial 

Improvement and Audit Readiness (FIAR) 

Plan in 2005 to set the course for improving 

both financial information and audit readiness. 

The FIAR Plan has three primary goals: 

•	 Improve decision making by providing 

relevant, accurate, reliable, and timely 

financial information. 

•	 Sustain improvements through a process of 

annual assessments and internal control. 

•	 Achieve unqualified audit opinions on DoD 

annual financial statements. 

The first FIAR Plan identified financial 

management improvement priorities, 

established standard business rules for 

financial management improvement efforts, 

and aligned itself with other business 

transformation efforts (Figure 1-10). This 

approach has not changed, although the 

framework upon which the Department 

structures, plans, and monitors financial 

management improvement efforts is today 

more complete. The FIAR Plan structures 

improvement efforts into incremental and 

prioritized areas (such as the U.S. Marine 

Corps). The OUSD(C) plays an active role in 

overseeing, managing, and monitoring 

Component improvement efforts through the 

FIAR Plan. 

The Department has made significant 

progress in achieving the FIAR goals as 

evidenced by: 

•	 $1.4 trillion, or 37 percent of $3.8 trillion, 

of the Department’s assets and liabilities 

has received an unqualified audit opinion, 

Figure 1-10. Three Pronged Strategy

For Transformation 

453-16 

Structured 

approach for 

measuring 

auditability 

progress 

Modernization 

of DoD 

business 

and financial 

systems 

Shape the FIAR strategy 

rp

Best Business Practices 

Enterprise 

Transition Plan

Audit Strategy 

(FIAR Plan) 

Section 1	 Management’s Discussion and Analysis 

9 
 

 '

'

–

Department of Defense Agency Financial Report 2008 

•	 The TRICARE Management Activity 

Contract Resource Management 

organization’s $247 billion (7 percent) in 

assets and liabilities have been validated 

as audit ready, 

•	 Favorable audit opinions on five reporting 

entities’ FY 2008 financial statements, 

•	 Favorable reviews on three DoD financial 

statement line items, and 

•	 Audit readiness at the Defense Information 

Systems Agency, whose FY 2007 financial 

statements are presently under audit. 

In addition, to the above achievements, the 

Navy, Air Force and Defense Logistics 

Agency have asserted audit readiness and 

are sustaining it until their entire financial 

statements are ready for audit. 

Business Transformation Agency 

The Department of Defense is fully engaged 

in business transformation efforts to 

modernize its processes, systems, and 

information flows to support 21st century 

national security requirements. To help guide 

this undertaking, the Department established 

the Defense Business Transformation Agency 

(BTA) and released its first Business 

Enterprise Architecture (BEA) and Enterprise 

Transition Plan (ETP) in 2005. Over the past 

3 years, the Department has made significant 

progress, not only in the improvements to 

business capabilities, but also in the 

fundamental ways in which it thinks about 

business operations and the methods to 

achieve transformation. 

Business Enterprise Architecture 

The Business Enterprise Architecture (BEA) 

guides Defense business transformation by 

providing a common reference for target 

systems and initiatives. The BEA blueprints 

business transformation and includes 

activities, processes, data standards, business 

rules, system functionality, and technical 

standards. Six business enterprise priorities 

define the scope and allow the BEA to evolve 

in a controlled and consistent fashion: 

•	 Personnel visibility 

•	 Acquisition visibility 

•	 Common supplier engagement 

•	 Materiel visibility 

•	 Real property accountability 

•	 Financial visibility 

Enterprise Transition Plan 

The Enterprise Transition Plan is the 

Department’s comprehensive plan for 

implementing the business enterprise 

architecture. The Department issues a new 

ETP each September and reports progress 

each March. The FY 2008 ETP, like the 

preceding plans, contains milestones and 

measures for the programs and initiatives that 

support achievement of the business 

enterprise priorities. The ETP describes the 

Department’s system initiatives and status of 

Enterprise Resource Planning (ERP) and 

other system implementations throughout the 

Army, Navy, Air Force, and Defense 

Agencies. This year’s ETP also contains 

performance measures for achieving the 

business capabilities and their supporting 

operational activities. This set of performance 

measures permits the opportunity to baseline 

performance growth. The Enterprise 

Transition Plan has become part of the 

business operations culture of DoD, and is 

the framework that integrates capabilities 

across the Department. 

Members of Defense Logistics Agency s (DLA) Defense

Distribution Deployable Center prepare to load tarps into

trucks at FEMA s Hurricane Ike disaster relief staging

area on Fort Sam Houston, Texas.

DoD photo by SPC Sean Harp September 2008 

Section 1	 Management’s Discussion and Analysis 

10 
 

 

- 

- 

National 

Defense 

Strategy

National 

Security 

Strategy

National 

Military 

Strategy

Goal 2

Goal 4

Goal 3 

Goal 1

Goal 5

Department of Defense Agency Financial Report 2008 

PERFORMANCE OBJECTIVES, 

GOALS, AND RESULTS 

DoD Key Performance Outcomes 

The President’s Management Agenda (PMA) 

Budget and Performance Integration Initiative, 

subsequently renamed Performance 

Improvement Initiative (PII), is focused on reemphasizing and implementing all statutory 

provisions of the Government Performance 

and Results Act (GPRA) of 1993. The PII calls 

for a Government that is results-oriented, and 

guided by performance, not process. Since 

the first quarter of FY 2003, the Department 

has maintained a “yellow,” or satisfactory, 

rating for overall status of this initiative. 

DoD Performance Budget Hierarchy 

The Department’s performance budget 

hierarchy is depicted in Figure 1-11. This 

hierarchy indicates that every level of DoD is 

accountable for measuring performance and 

delivering results at multiple tiers of the 

organization. The DoD investments in 

systems and other initiatives are aggregated 

to support

enterprise-level. 

strategic objectives at the 

The DoD 

performance 

strategic 

targets 

objectives 

(measures 

and 

and 

milestones) are subject to annual refinement 

based on changes in missions and priorities. 

Such changes reflect the evolutionary nature 

of DoD’s performance budget and the 

Department’s ensuing efforts to link resource 

allocation to identifiable and measurable 

strategic outcomes. 

DoD Strategic Plan 

The Quadrennial Defense Review (QDR) 

constitutes DoD’s strategic plan. On 

February 3, 2006, the Department unveiled its 

most recent QDR, charting the way ahead for 

the next 20 years. The QDR report 

acknowledges that the Department has been 

and is transforming along a continuum that 

shifts emphasis from the 20th century to the 

21st century. The 2006 QDR was founded on 

the National Military Strategy, published in 

May 2004, and the National Defense 

Strategy, published in March 2005. 

Figure 1-11. Department of Defense 

Performance Budget Hierarchy 

453-7 

Mission 

Individual Personnel Performance Targets 

Program Level 

Performance Targets 

DoD Component Level 

Performance Targets 

OSD Enterprise-Level 

Performance Targets 

Strategic 

Objectives 

Strategic 

Goals 

National 

Defense 

Strategy 

National 

Security 

Strategy 

National 

Military 

Strategy 

Mission 

Drivers 

The QDR acknowledges that everything done 

in the Department must contribute to joint 

warfighting capability. Its purpose is to 

provide the U.S. with strong, sound, and 

effective warfighting capabilities. 

The 2006 QDR was the first contemporary 

defense review to coincide with an ongoing 

major conflict. Consequently, (Figure 1-12) 

Strategic Goal 1 focuses on the ongoing 

Figure 1-12. 2006 QDR Strategic Goals 

453-8 

Fight the Long War 

on Terror 

Reorient Capabilities Goal 2 and Forces

Achieve Unity

of Effort 

Reshape the

Defense Enterprise 

Goal 4 

Goal 3 

Develop a 21st 

Century Total Force 

Goals 3 & 4 

are Supporting

Goals 

Goal 1 

Goal 5 

Section 1 Management’s Discussion and Analysis 

11 
 

Department of Defense Agency Financial Report 2008 

major conflict and extended stabilization 

campaigns in Iraq and Afghanistan. At the 

same time, the 2006 QDR recognized that the 

Department needed to recast its view of 

future warfare through the lens of a long 

duration and globally-distributed conflict. 

Therefore, Strategic Goal 2 focuses on 

reorienting the Armed Forces to deter and 

defend against transnational terrorists around 

the world. Strategic Goal 5 recognizes that 

DoD cannot meet today’s complex challenges 

alone. This goal recognizes integrated 

security cooperation and strategic 

communication as additional tool sets the 

Combatant Commanders may use to fight 

wars. Together, these three goals encompass 

the Department’s warfighting missions. 

Strategic Goals 3 and 4 focus on developing 

a Total Force and reshaping the defense 

infrastructure, respectively, in ways that better 

support the warfighter. These supporting goals 

enable accomplishment of the Department’s 

primary goals, Strategic Goals 1, 2, and 5. 

FY 2008 Performance Plan 

The Department also established a task force 

and Senior Review Group (SRG) in January 

2007 to develop a limited number of strategic 

objectives and performance targets at the 

joint- or enterprise-level. The task force and 

SRG included representatives from each OSD 

Principal Staff, the Joint Staff, and the Military 

Departments. As a result of their efforts, 

17 supporting strategic objectives and 

51 enterprise-level performance targets were 

developed for FY 2008. 

FY 2008 Key Performance Outcomes: 

The following tables show key, unclassified 

strategic objectives and performance 

measures, and targeted results for FY 2008. 

The tables are organized by QDR Strategic 

Goal, and Strategic Objective. Performance 

Measures are also provided for each strategic 

objective and are numbered respectively. 

The DoD expects to meet or exceed most of 

its key outcomes for FY 2008. Actual yearend results for these same key outcomes will 

be addressed in the Department’s FY 2008 

Citizen’s Report. 

Strategic Goal 1: Fight the Long War on 

Terror 

Since 2001, the Department has been 

engaged in developing the forces and 

capabilities of Iraq and Afghanistan in fighting 

the long war on terror. Two key outcomes 

focused on training Iraqi and Afghan Security 

Forces and were identified as primary 

indicators for transitioning the security of 

these two nations to the Iraqi and Afghan 

governments. By the end of FY 2008, the 

Department expects to have trained 529,000 

Iraqi Security Forces (ISF) and 152,000 

Afghan National Security Forces (ANSF). 

STRATEGIC GOAL 1: FIGHT THE LONG WAR ON TERROR 

Strategic Objective 1.1: Conduct a large-scale, potentially long-duration irregular warfare campaign 

that includes counterinsurgency, security stability, transition, and 

reconstruction operations. 

Annual Performance Targets/Results 

Performance Measures Strategic Plan Long-term 

Performance Targets FY 2007 

Target 

FY 2007 

Results 

FY 2008 

Target 

1.1-1a: Cumulative number of 

Iraqi Security Forces (ISF) 

trained. 

1.1-1a: By FY 2009, DoD will 

train 588,000 Iraqi Security 

Forces (ISF). 

365,000 439,700 529,000 

1.1-1b: Cumulative number of 

Afghan National Security Forces 

(ANSF) trained. 

1.1-1b: By FY 2009, DoD will 

train 162,000 Afghan National 

Security Forces (ANSF). 

112,000 124,700 152,000 

Section 1 Management’s Discussion and Analysis 

12 
 

Strategic Goal 2: Reorient Capabilities and 

Forces 

Four key performance outcomes are most 

reflective of the Department’s goal to reorient 

its capabilities and forces. Two outcomes 

reflect new DoD capabilities that have been 

established to assist in mitigating attacks on 

the U.S. personnel, facilities, and key assets. 

Two other outcomes focus on converting 

Army force structure to modular designs, as 

primary indicators for the most significant 

transformation of the Army in a generation. 

STRATEGIC GOAL 2: REORIENT CAPABILITIES AND FORCES 

Strategic Objective 2.1: Deter or defeat direct attacks to the U.S. homeland and its territories and 

contribute toward the nation’s response to the management of Weapons of 

Mass Destruction (WMD) or catastrophic event; Improve ability to respond to 

Chemical, Biological, Radiological, Nuclear, and Explosive (CBRNE) attacks 

and improve the capability of interagency partners to contribute to our 

nation’s security. 

Annual Performance Targets/Results 

Performance Measures Strategic Plan Long-term 

Performance Targets FY 2007 

Target 

FY 2007 

Results 

FY 2008 

Target 

Department of Defense Agency Financial Report 2008 

2.1-1: Number of National 2.1-1: By FY 2007, 55 National 

Guard Weapons of Mass Guard Weapons of Mass 

Destruction –Civil Support Destruction-Civil Support Teams 55 55 55

Teams (WMD-CSTs) certified. (WMD-CSTs) will be certified. 

2.1-2: Number of National 2.1-2: By FY 2008, 17 National 

Guard Chemical, Biological, Guard Chemical, Biological, 

Radiological, Nuclear, and Radiological, Nuclear, and HighHigh-Yield Explosive (CBRNE) Yield Explosive (CBRNE) 12 12 17 Enhanced Response Force Enhanced Response Force 

Packages (CERFPs) trained. Packages (CERFPs) will be 

trained for WMD or other 

catastrophic responses. 

Strategic Objective 2.2: Deter and defend against transnational terrorists attacks and globally 

distributed aggressors and shape the choices of countries at strategic 

crossroads, while postured for a second, nearly simultaneous campaign. 

2.2-4a: Number of Army 2.2-4a: By FY 2013, 76 modular 

Brigades Combat Teams Army Brigade Combat Teams 

(BCTs) converted to a modular 35 35 38 

design and available to meet 

(BCTs) will be available to meet 

military operational demands. 

military operational demands. 

2.2-4b: Number of Army Multi- 2.2-4b: By FY 2013, 227 

functional and Functional modular Army Multi-functional 

Support (MFF) brigades and Functional Support (MFF) 144 144 187 converted to a modular design brigades will be available to 

and available to meet military meet military operational 

operational demands. demands. 

Section 1 Management’s Discussion and Analysis 

13 
 

 

 

 

 

Department of Defense Agency Financial Report 2008 

Strategic Goal 3: Reshape the Defense 

Enterprise 

Five key performance outcomes are identified 

as representative samples of the 

Department’s reshaping goal. The first 

outcome, average customer wait time, has 

been used by the DoD logistics community to 

improve joint warfighting support. The second 

key outcome under this goal reflects a 

reduction in the number of inadequate military 

family housing units in the continental United 

States in order to improve the quality of life for 

service members and their families. The third 

and fourth outcomes demonstrate an increase 

in DoD’s financial audit readiness—a 

significant step in improving financial 

stewardship to the American taxpayer. The 

final performance outcome shows how the 

Department‘s inventory of information 

technology systems are faring against 

information assurance standards. 

STRATEGIC GOAL 3: RESHAPE THE DEFENSE ENTERPRISE 

Strategic Objective 3.3: Implement improved logistics operations to support joint warfighting 

priorities. 

Performance Measures 

3.3-1: Average customer wait 

time. 

Strategic Plan Long-term 

Performance Targets 

Annual Performance Targets/Results 

FY 2007 

Target 

FY 2007 

Results 

FY 2008 

Target 

3.3-1: Beginning in FY 2007, 

DoD will reduce average 

customer wait time to 15 days. 

15 17 15 

Strategic Objective 3-4: Maintain capable, efficient, and cost-effective installations to support the DoD 

workforce. 

3.4-4a: Number of inadequate 

family housing units in CONUS. 

3.4-4a: By FY 2009, DoD will 

eliminate all inadequate family 

housing in the continental 

United States (CONUS). 

0 13,242 2,959 

Strategic Objective 3.5: Improve financial management and budget and performance integration to 

support strategic decisions and provide financial stewardship to the 

taxpayer. 

3.5-1a: Percent of audit-ready 

assets. 

3.5-1a: By 2017, DoD will 

demonstrate that 100 percent of 

assets have achieved audit 

readiness. 

18% 15% 23% 

3.5-1b: Percent of audit-ready 

liabilities. 

3.5-1b: By 2017, DoD will 

demonstrate that 100 percent of 

liabilities have achieved audit 

readiness. 

49% 50% 51% 

Strategic Objective 3.6: Make information available on a network that people depend on and trust. 

3.6-2: Percent of applicable 

information technology (IT) and 

National Security Systems 

(NSS) programs that are 

FISMA-compliant. 

3.6-2: By FY 2013, 95 percent 

of applicable information 

technology (IT) and National 

Security Systems (NSS) 

programs in the IT Repository 

will be FISMA-compliant. 

90% or > 87.1% 90% or > 

Section 1 Management’s Discussion and Analysis 

14 
 

 

Department of Defense Agency Financial Report 2008 

Strategic Goal 4: Develop a 21st Century 

Total Force 

Four key performance outcomes are focused 

on sustaining the capacity of the All-Volunteer 

Force to prevail in the Global War on Terror. 

Two outcomes assess DoD active and 

reserve component end-strength at levels not 

less than those prescribed by the Secretary of 

Defense for mission accomplishment. A third 

outcome measures how well the Military 

Health Service identifies significant medical 

conditions that would affect the availability of 

Service members to deploy. This goal’s final 

key outcome measures the Department’s 

ability to support the Combatant Commanders 

across the full spectrum of operations by 

providing combat units trained in joint 

warfighting doctrine. 

STRATEGIC GOAL 4: DEVELOP A 21ST CENTURY TOTAL FORCE 

Strategic Objective 4.1: Ensure an “All Volunteer” military force is available to meet the steady-state 

and surge activities of the DoD. 

Performance Measures 

4.1-1a: Percent variance in 

Active component end 

strength. 

Strategic Plan Long-term 

Performance Targets FY 2007 

Target 

FY 2007 

Results 

FY 2008 

Target 

Annual Performance Targets/Results 

4.1-1a: For each fiscal year, the 

DoD Active component end 

strength must not be less than 

(NLT) and not to exceed (NTE) 

three percent above the 

SECDEF prescribed end 

strength for that fiscal year. 

NLT 

authorized 

/NTE +3% 

above 

SECDEF 

prescribed 

end strength 

+.9% above 

SECDEF 

prescribed 

end strength 

NLT 

authorized/ 

NTE +3% 

above 

SECDEF 

prescribed 

end strength 

4.1-1b: Percent variance in 

Reserve component end 

strength. 

4.1-1b: For each fiscal year, the 

DoD Reserve component end 

strength will not vary by more 

than two percent from the 

SECDEF prescribed end 

strength for that fiscal year. 

+/-2% from 

SECDEF 

prescribed 

end strength 

-1.7% below 

SECDEF 

prescribed 

end strength 

+/-2% from 

SECDEF 

prescribed 

end strength 

4.1-2: Percent of deployable 

Armed Forces without any 

deployment- limiting medical 

condition. 

4.1-2: By FY 2010, DoD will 

sustain the percent of 

deployable Armed Forces 

without any deployment-limiting 

medical condition to equal to or 

greater than 92 percent. 

>87% of 

deployable 

Armed 

Forces 

85% of 

deployable 

Armed 

Forces 

>90% of 

deployable 

Armed Forces 

Strategic Objective 4.4: Improve workforce skills to meet mission requirements. 

4.4-2: Percent of deployed 

combat units receiving joint 

training in Joint National 

Training Center (JNTC) -

accredited programs prior to 

arriving in theater. 

4.4-2: By FY 2012, 80 percent 

of deployed combat units will 

participate in joint training at 

JNTC-accredited programs prior 

to arriving in theater. 

Not 

available 

70% of units 

trained 

72% or 

greater of 

units trained 

Section 1 Management’s Discussion and Analysis 

15 
 

Department of Defense Agency Financial Report 2008 

Strategic Goal 5: Achieve Unity of Effort 

This goal focuses on building the capacity of 

international partners in fighting the Global 

War on Terror by improving access to 

equipment, technology, and training. A single 

key outcome provides for an increase in the 

number of various technological and security 

reviews of goods and services proposed for 

transfer to international partners. 

STRATEGIC GOAL 5: ACHIEVE UNITY OF EFFORT 

Strategic Objective 5.1: Build capacity of international partners in fighting the war on terror. 

Performance Measures 

5.1-1: Annual number of 

Technology Security Actions 

(TSAs) processed. 

Strategic Plan Long-term 

Performance Targets 

Annual Performance Targets/Results 

FY 2007 

Target 

FY 2007 

Results 

FY 2008 

Target 

5.1-1: Beginning in FY 2007, 

DoD will increase the number of 

reviews of relevant technologies 

involving transfers to 

international partners by 

two percent per year. 

102,059 116,017 118,337 

ANALYSIS OF SYSTEMS, CONTROLS, 

AND LEGAL COMPLIANCE 

Management Assurances 

The Department’s management is committed 

to addressing DoD weaknesses, as identified 

in evaluations and assessments of its 

management systems, controls, and 

processes. The DoD’s overall goal is to 

improve its operations by focusing on 

ensuring effective internal controls, systems 

conformance with federal requirements, and 

the ability to produce accurate, timely, and 

reliable financial and performance data for 

reporting. 

Federal Managers’ Financial Integrity Act 

The Federal Managers’ Financial Integrity Act 

(FMFIA) of 1982 requires agencies to establish 

internal controls and financial systems that 

ensure the integrity and protection of federal 

programs and operations. In addition, FMFIA 

requires the head of each agency to provide 

an annual assurance statement outlining what 

the agency has done to meet this requirement, 

including details of remaining material 

weaknesses. OMB Circular A-123, 

“Management’s Responsibility for Internal 

Control” provides specific requirements to 

agencies for conducting management’s 

assessments of internal controls. For FMFIA 

reporting results, see Section 3: Other 

Accompanying Information. 

Section 1 Management’s Discussion and Analysis 

16 
 

Department of Defense Agency Financial Report 2008 

ANNUAL ASSURANCE STATEMENT 

SECTION 1 Management’s Discussion and Analysis 

17 

 

 

 

 –

Department of Defense Agency Financial Report 2008 

Federal Financial Management Improvement 

Act of 1996 

The Federal Financial Management 

Improvement Act (FFMIA) requires certain 

federal agencies, including DoD, to report on 

conformance with Federal Financial 

Management System Requirements, Federal 

Accounting Standards, and the U.S. Standard 

General Ledger at the transaction level. 

The Department’s Inspector General and the 

audit agencies within the Military Services 

have reported on the Department’s 

noncompliance with the Act’s requirements. 

The Department’s non-compliance is largely 

due to the legacy financial management 

systems in use by the Department’s 

Components. These systems, for the most 

part, do not comply with the wide range of 

requirements for systems compliance and, 

therefore, do not provide the necessary 

assurances to rely on information contained 

either in the core financial system or in the 

mixed systems that provide source 

transactional information. The Business 

Enterprise Architecture is the Department’s 

blueprint providing the business rules and 

controls for complying with the Act’s 

requirements. The Financial Improvement and 

Audit Readiness Plan and the Enterprise 

Transition Plan provide the approach and 

plan for reaching unqualified audit opinions 

and FFMIA compliance. 

Improper Payments Information Act 

Reporting 

The Improper Payments Information Act 

(IPIA) of 2002, as implemented by OMB 

Circular A-123, Appendix C, “Requirements 

for Effective Measurement and Remediation 

of Improper Payments,” requires federal 

agencies to review their programs and 

activities, and identify those susceptible to 

significant improper payments. The National 

Defense Authorization Act (PL 107-107) 

established the requirement for government 

agencies to carry out cost-effective programs 

for identifying and recovering overpayments 

made to contractors, also known as “recovery 

auditing.” The OMB established specific 

Shiite pilgrims walk across Sarafiyah Bridge on their

way to the Kadhamiyah shrine in Baghdad, Iraq. The

bridge was destroyed last year by insurgents and

reopened to traffic in early 2008
 

DoD photo by Staff Sgt. Lorie Jewell, U.S. Army July 2008 

reporting requirements for agencies with 

programs that possess a significant risk of 

improper payments and for reporting on the 

results of recovery auditing activities. For 

FY 2008 IPIA reporting results, see Section 3: 

Other Accompanying Information. 

OTHER MANAGEMENT INFORMATION, 

INITIATIVES, AND ISSUES 

Looking Forward: Challenges for 2008 and 

Beyond 

The 2006 Quadrennial Defense Review 

(QDR) provided new direction for accelerating 

the transformation of the Department to focus 

more on the needs of Combatant 

Commanders and to better develop joint 

capabilities rather than individual, parallel 

programs. The QDR was designed to serve 

as a catalyst to spur the Department’s 

continuing adaptation and reorientation to a 

joint force that is more agile, more rapidly 

deployable, and more capable against the 

wider range of threats. 

The essence of capabilities-based planning is 

to identify capabilities that adversaries could 

employ and capabilities that could be 

available to the United States, then evaluate 

their interaction, rather than over-optimize the 

joint force for a limited set of threat scenarios. 

SECTION 1 Management’s Discussion and Analysis 

18 
 

 

Department of Defense Agency Financial Report 2008 

The goal is to manage the Department 

increasingly through the use of joint capability 

portfolios. Doing so should improve the 

Department’s ability to meet the needs of the 

President and Combatant Commanders. 

Moving toward a more “demand-driven” 

approach reduces program redundancy, 

improves joint interoperability, and 

streamlines acquisition and budgeting 

processes. The Department is continuing to 

shift from stovepiped vertical programs to 

more transparent and horizontally-integrated 

programs. Just as the U.S. forces operate 

jointly, DoD recognized that horizontal 

integration must become an organizing 

principle for the Department’s investment and 

enterprisewide functions. These reforms will 

not occur overnight, and care must be taken 

not to weaken what works effectively during 

the transition to a more cross-cutting 

approach. However, the complex strategic 

environment of the 21st century demands 

greater integration of forces, organizations 

and processes, and closer synchronization of 

actions. 

Aligning Authority and Accountability 

through Joint Capability Portfolios 

Most of the Department’s resources are 

provided through the Military Services. This 

arrangement can lead to both gaps and 

redundancies within capability areas as each 

Service attempts to supply a complete 

warfighting package rather than organize to 

depend on capabilities provided by other 

Military Departments. To optimize capabilities 

for the joint warfighter, the Department is 

working to reorient its processes around joint 

capability portfolios. In the acquisition realm, 

the Department has already instituted several 

joint capability reviews. These reviews look 

across major force programs to assess 

needed investments in specific capability 

portfolio areas, such as integrated air and 

missile defense, land attack weapons and 

electronic warfare. 

The QDR used such a portfolio approach to 

evaluate surveillance capabilities. The 

Department began by accounting for all of its 

current and planned surveillance capabilities 

and programs. This included a transparent 

review of capabilities at all levels of 

classification. Viewing capabilities across the 

entire portfolio of assets enabled decisionmakers to make informed choices about how 

to reallocate resources among previously 

stovepiped programs, to deliver needed 

capabilities to the joint force more rapidly and 

efficiently. 

The Department is building on these initial 

efforts to integrate tasks, people, 

relationships, technologies, and associated 

resources more effectively across the 

Department’s many activities. By shifting the 

focus from Service-specific programs to joint 

capabilities, the Department should be better 

positioned to understand the implications of 

investment and resource trade-offs among 

competing priorities. As a first step, the 

Department will manage four capability areas 

using a capability portfolio concept: Joint 

Command and Control, Joint Net-Centric 

Operations, Joint Logistics, and Battlespace 

Awareness. As lessons are learned, the 

Department will expand this approach to other 

capability areas. 

Summary 

Reshaping the Defense enterprise is a difficult 

task. The structures and processes 

developed over the past half-century were 

forged during the Cold War and are 

strengthened by success. However, the 

strategic landscape of the 21st century 

demands excellence across a broader set of 

national security challenges. With change 

comes turmoil, and achieving a desired vision 

requires determination and perseverance 

within the Department and, more importantly, 

in cooperation with Congress. As the 

Department emphasizes agility, flexibility, 

responsiveness, and effectiveness in the 

operational forces, the Department’s 

organizations, processes, and practices must 

change to embody these characteristics and 

maximize support to the joint warfighter and 

the Commander in Chief. 

SECTION 1 Management’s Discussion and Analysis 

19 
Department of Defense Agency Financial Report 2008 

Section 2: Financial Information 

MESSAGE FROM THE ACTING CHIEF FINANCIAL OFFICER 

SECTION 2 Financial Information 

20 

Department of Defense Agency Financial Report 2008 

INDEPENDENT AUDITOR’S REPORT 

SECTION 2 Financial Information 

21 
Department of Defense Agency Financial Report 2008 

SECTION 2 Financial Information 

22 
Department of Defense Agency Financial Report 2008 

SECTION 2 Financial Information 

23 
Department of Defense Agency Financial Report 2008 

SECTION 2 Financial Information 

24 
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Department of Defense Agency Financial Report 2008 

PRINCIPAL FINANCIAL STATEMENTS both the proprietary (federal accounting 

AND NOTES standards) and budgetary resources of the 

Department. The Department’s financial The financial statements of the Department management environment is large and include four principal statements listed in complex, includes an asset base of $1.7 trillion, Figure 2-1. and more than 3 million military and civilian 

The statements, presented in Section 2, employees on installations in every state and 

Financial Information, reflect the aggregate around the world. 

financial posture of the Department and include 

Figure 2-1. Four Principal Financial Statements 

Statement What Information It Provides 

Balance Sheet Reflects the Department’s financial position as of the statement date (September 30, 2008). The 

assets are the amount of future economic benefits owned or managed by the Department. The 

liabilities are amounts owed by the Department. The net position is the difference between the 

assets and liabilities. 

Statement of Net Cost Shows separately the components of the net cost of the Department’s operations for the period. Net 

cost is equal to the gross cost incurred by the Department less any exchange revenue earned from 

its activities. 

Statement of Changes 

in Net Position 

Presents the sum of the cumulative results of operations since inception and unexpended 

appropriations provided to the Department that remain unused at the end of the fiscal year. The 

statement focuses on how the net cost of operations is financed. The resulting financial position 

represents the difference between assets and liabilities as shown on the consolidated balance sheet. 

Statement of 

Budgetary Resources 

Provides information about how budgetary resources were made available as well as their status at 

the end of the period. It is the only financial statement exclusively derived from the Department’s 

budgetary general ledger in accordance with budgetary accounting rules. 

SECTION 2 Financial Information 

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Department of Defense Agency Financial Report 2008 

Department of Defense Consolidated Balance Sheet 

Agency Wide Dollars in Millions 

2008 

Consolidated 

Restated 2007 

Consolidated 

ASSETS (Note 2) 

Intragovernmental: 

 Fund Balance with Treasury (Note 3) $ 468,396.9 $ 396,530.7

 Investments (Note 4) 394,508.5 333,711.0

 Accounts Receivable (Note 5) 1,326.2 1,412.9

 Other Assets (Note 6) 1,282.9 1,212.5

 Total Intragovernmental Assets $ 865,514.5 $ 732,867.1

 Cash and Other Monetary Assets (Note 7) 2,804.8 2,591.1

 Accounts Receivable, Net (Note 5) 7,784.5 7,451.4

 Loans Receivable (Note 8) 236.0 212.2

 Inventory and Related Property, Net (Note 9) 236,027.7 224,948.7

 General Property, Plant and Equipment, Net (Note 10) 514,876.3 474,530.5

 Investments (Note 4) 1,861.5 1,412.3

 Other Assets (Note 6) 29,005.0 28,166.9 

Stewardship Property, Plant & Equipment (Note 10) 

 TOTAL ASSETS $ 1,658,110.3 $ 1,472,180.2

 LIABILITIES (Note 11) 

Intragovernmental: 

 Accounts Payable (Note 12) 1,687.4 1,911.5

 Debt (Note 13) 262.6 307.0

 Other Liabilities (Note 15) 11,709.8 11,420.8 

Total Intragovernmental Liabilities $ 13,659.8 $ 13,639.3

 Accounts Payable (Note 12) 32,095.2 28,695.5

 Military Retirement and Other Federal Employment Benefits 

(Note 17) 1,984,605.4 1,874,679.5

 Environmental and Disposal Liabilities (Note 14) 70,505.9 72,489.9

 Loan Guarantee Liability (Note 8) 24.5 25.0

 Other Liabilities (Note 15) 34,107.6 29,286.4 

Commitments & Contingencies (Note 16)

 TOTAL LIABILITIES $ 2,134,998.4 $ 2,018,815.6

 NET POSITION 

 Unexpended Appropriations - Earmarked Funds (Note 23) 4.9 8.1

 Unexpended Appropriations - Other Funds 446,864.3 378,190.7

 Cumulative Results of Operations - Earmarked Funds (1,345,925.0) (1,280,107.2)

 Cumulative Results of Operations - Other Funds 422,167.7 355,273.0

 TOTAL NET POSITION $ (476,888.1) $ (546,635.4)

 TOTAL LIABILITIES AND NET POSITION $ 1,658,110.3 $ 1,472,180.2 

The accompanying notes are an integral part of these financial statements. 

SECTION 2 Financial Information 

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Department of Defense Agency Financial Report 2008 

Department of Defense Consolidated Statement of N

Agency Wide 

et Cost 

Dollars in Millions 

2008 

Consolidated 

Restated 2007 

Consolidated 

Program Costs 

 Gross Costs $ 732,319.4 $ 646,987.0

 (Less: Earned Revenue) (56,272.5) (45,575.6)

 Net Program Costs $ 676,046.9 $ 601,411.4

 Net Cost of Operations $ 676,046.9 $ 601,411.4 

The accompanying notes are an integral part of these financial statements. 

SECTION 2 Financial Information 

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Department of Defense Agency Financial Report 2008 

Department of Defense Consolidated Statement of Changes in Net Position Agency Wide For Periods ended September 30, 2008 and 2007 2008 Earmarked Funds 2008 All Other Funds 2008 Eliminations 2008 Consolidated Res

2

Earmar

Cumulative Results Of Operations Beginning Balances $ (1,211,821.2) $ 285,681.6 $ 0 $ (926,139.6) $ (1,2Adjustments: Changes in accounting principles 0 0 0 0  Corrections of errors 0 1,305.4 0 1,305.4 Beginning balances, as adjusted $ (1,211,821..2) $ 286,987.0 $ 0 $ (924,834.2) $ (1,2Budgetary Financing Sources:  Appropriations used 3.2 662,422.0 0 662,425.2  Nonexchange revenue 3,634.8 84.6 0 3,719.4  Donations and forfeitures of cash and cash equivalents 34.1 0 0 34.1  Transfers(in/out without reimbursement) (718.6) 877.6 0 159.0 Other 

0 (1.0) 0 (1.0) 

Other Financing Sources (Non-Exchange)  Donations and forfeitures of property 0 1.5 0 1.5  Transfers(in/out without reimbursement ) (436.1) 384.9 0 (51.2) 

Imputed financing 0 16,098.1 11,923.2 4,174.9 

Other 

(12.1) 6,674.0 0 6,661.9 

Total Financing Sources $ 2,505.3 $ 686,541.7 $ 11,923.2 $ 677,123.8 $ Net Cost of Operations 50,377.1 637,593.0 11,923.2 676,046.9 Net Change $ (47,871.8) $ 48,948.7 $ 0 $ 1,076.9 $ (5Cumulative Results of Operations $ (1,259,693.0) $ 335,935.7 $ 0 $ (923,757.3) $ (1,2Unexpended Appropriations Beginning Balances 8.1 378,190.7 0 378,198.8 Adjustments: Changes in accounting principles 0 0 0 0 Beginning balances, as adjusted $ 8.1 $ 378,190.7 $ 0 $ 378,198.8 $ Budgetary Financing Sources:  Appropriations received 0 742,587.3 0 742,587.3  Appropriations transferred (in/out) 0 (434.4) 0 (434.4)  Other adjustments 0 (11,057.3) 0 (11,057.3)  Appropriations used (3.2) (662,422.0) 0 (662,425.2) Total Budgetary Financing Sources $ (3.2) $ 68,673.6 $ 0 $ 68,670.4 $ Unexpended Appropriations $ 4.9 $ 446,864.3 $ 0 $ 446,869.2 $ Net Position $ (1,259,688.1) $ 782,800.0 $ 0 $ (476,888.1) $ (1,2

The accompanying notes are an integral part of these financial statements. SECTION 2 

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Department of Defense Agency Financial Report 2008 

Department of Defense Combined 

Statement Of Budgetary Resources 

Agency Wide 

Dollars in Millions 

Budgetary

Financing Accounts 

Nonbudgetary 

Financing Accounts 

2008 

Combined 

Restated 

2007 

Combined 

2008 

Combined 

Restated 

2007 

Combined 

Budgetary Resources 

Unobligated balance, brought forward, 

October 1 $ 111,980.6 $ 85,778.0 $ 25.5 $ 31.5 

Recoveries of prior year unpaid obligations 49,744.1 44,862.5 0 0 

Budget authority

 Appropriation 859,403.8 741,888.3 0 0

 Borrowing authority 0 0 130 371.4

 Contract authority 78,927.8 68,668.0 0 0 

Spending authority from offsetting 

collections 

Earned: 

Collected 174,493.0 164,627.1 53.9 13.6 

Change in receivables from federal sources 791.8 (1,277.6) 0 0 

Change in unfilled customer orders: 

Advance received 753.2 448.9 0 0

 Without advance from federal sources 5,679.1 5,994.0 12.6 53.5

 Expenditure transfers from trust funds 766 0 0 0

 Subtotal $ 1,120,814.7 $ 980,348.7 $ 196.5 $ 438.5 

Nonexpenditure transfers, net, anticipated 

and actual (264.1) (111.3) 0 0 

Temporarily not available pursuant to 

Public Law (59,949.4) (33,819.5) 0 0 

Permanently not available (85,156.8) (74,763.9) (27.6) (1.8) 

Total Budgetary Resources $ 1,137,169.1 $ 1,002,294.5 $ 194.4 $ 468.2 

Status of Budgetary Resources 

Obligations incurred: 

Direct 811,662.0 719,463.4 168.1 442.7 

Reimbursable 189,837.4 170,850.3 0 0 

Subtotal $ 1,001,499.4 $ 890,313.7 $ 168.1 $ 442.7 

Unobligated balance: 

Apportioned 120,047.8 98,585.7 0.3 0.2 

Exempt from apportionment 1,060.7 1,050.5 0 0 

Subtotal $ 121,108.5 $ 99,636.2 $ 0.3 $ 0.2 

Unobligated balance not available 14,561.2 12,344.6 26.0 25.3 

Total status of budgetary resources $ 1,137,169.1 $ 1,002,294.5 $ 194.4 $ 468.2 

The accompanying notes are an integral part of these financial statements. 

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Department of Defense Agency Financial Report 2008 

Budgetary

Financing Accounts 

Nonbudgetary 

Financing Accounts Department of Defense Combined 

Statement of Budgetary Resources 

Agency Wide 

Dollars in Millions 

2008 

Combined 

Restated 

2007 

Combined 

2008 

Combined 

Restated 

2007 

Combined 

Change in Obligated Balance: 

Obligated balance, net 

Unpaid obligations, brought forward, 

October 1 372,558.6 321,809.1 768.0 378.5 

Less: Uncollected customer payments from 

federal sources, brought forward, October 1 (60,131.3) (55,414.9) (130.4) (76.9) 

Total unpaid obligated balance $ 312,427.3 $ 266,394.2 $ 637.6 $ 301.6 

Obligations incurred net 1,001,499.4 890,313.7 168.1 442.7 

Less: Gross outlays (892,195.4) (794,701.2) (63.2) (53.1) 

Less: Recoveries of prior year unpaid 

obligations, actual (49,744.1) (44,862.5) 0 0 

Change in uncollected customer payments 

from federal sources (6,470.9) (4,716.4) (12.6) (53.5) 

Obligated balance, net, end of period 

Unpaid obligations 432,118.5 372,559.1 872.9 768.1 

Less: Uncollected customer payments 

(+/-) from federal sources (66,602.2) (60,131.3 (143.0) (130.4) 

Total, unpaid obligated balance, net, 

end of period $ 365,516.3 $ 312,427.8 $ 729.9 $ 637.7 

Net Outlays 

Net Outlays: 

Gross outlays 892,195.4 794,701.2 63.2 53.1 

Less: Offsetting collections (176,012.2) (165,076.0) (53.9) (13.6) 

Less: Distributed offsetting receipts (70,247.6) (48,272.0) 0 0 

Net Outlays $ 645,935.6 $ 581,353.2 $ 9.3 $ 39.5 

The accompanying notes are an integral part of these financial statements. 

SECTION 2 Financial Information 

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Department of Defense Agency Financial Report 2008 

Note 1. Significant Accounting Policies 

1.A. Basis of Presentation 

These financial statements have been prepared to report the financial position and results of 

operations of the Department of Defense, as required by the Chief Financial Officers Act of 

1990, expanded by the Government Management Reform Act of 1994, and other appropriate 

legislation. The financial statements have been prepared from the books and records of the 

Department in accordance with, and to the extent possible, U.S. generally accepted accounting 

principles (USGAAP) promulgated by the Federal Accounting Standards Advisory Board 

(FASAB), OMB Circular No. A-136, "Financial Reporting Requirements," and the "DoD Financial 

Management Regulation.” The accompanying financial statements account for all resources for 

which the Department is responsible unless otherwise noted. Information relative to classified 

assets, programs, and operations is excluded from the statements or otherwise aggregated and 

reported in such a manner that it is not discernable. 

The Department is unable to fully implement all elements of USGAAP and OMB Circular No. 

A-136 due to limitations of financial and nonfinancial management processes and systems 

that support the financial statements. The Department derives reported values and information 

for major asset and liability categories largely from nonfinancial systems, such as inventory 

and logistics systems. These systems were designed to support reporting requirements for 

maintaining accountability over assets and reporting the status of federal appropriations rather 

than preparing financial statements in accordance with USGAAP. The Department continues 

to implement process and system improvements addressing these limitations. 

The Office of Management and Budget requires financial statements of the following Department 

reporting activities to undergo audits: Army General Fund, Army Working Capital Fund, Navy 

General Fund, Navy Working Capital Fund, Air Force General Fund, Air Force Working Capital 

Fund, Military Retirement Fund, and U.S. Army Corps of Engineers (Civil Works). 

In addition, the Department requires the Medicare-Eligible Retiree Health Care Fund, Marine 

Corps General and Working Capital Funds, and the following Defense Agencies to prepare 

internal stand-alone auditable financial statements: Defense Logistics Agency, Defense Finance 

and Accounting Service, Defense Information Systems Agency, Defense Contract Audit 

Agency, Defense Commissary Agency, Defense Security Service, Defense Threat Reduction 

Agency, Defense Advanced Research Projects Agency, Chemical and Biological Defense 

Program, Missile Defense Agency, Services Medical Activity, TRICARE Management Activity, 

and U.S. Special Operations Command. 

The Department has 13 auditor-identified material weaknesses: (1) Accounts Payable, (2) 

Accounting Entries, (3) Environmental Liabilities, (4) Government Property and Materiel in 

Possession of Contractors, (5) Intragovernmental Eliminations, (6) Operating Materiel and 

Supplies, (7) Reconciliation of Net Cost of Operations to Budget (formerly Statement of 

Financing), (8) Statement of Net Cost, (9) Financial Management Systems, (10) Fund Balance 

with Treasury, (11) General Property, Plant, and Equipment, (12) Inventory, and (13) Accounts 

Receivable. Refer to Section 3: Other Accompanying Information for additional details relative to 

the Department’s challenges and recognized weaknesses. 

SECTION 2 Financial Information 

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Department of Defense Agency Financial Report 2008 

1.B. Mission of the Reporting Entity 

The Department of Defense was established by the National Security Act of 1947. The 

Department provides the military forces needed to deter war and protect the security of our 

country. Since the creation of America’s first army in 1775, the Department and predecessor 

organizations have evolved into a global presence with a worldwide infrastructure dedicated to 

defending the United States by deterring and defeating aggression and coercion in critical regions. 

The Department of Defense includes the Military Departments and the Defense Agencies. The 

Military Departments consist of the Army, the Navy (of which the Marine Corps is a component), 

and the Air Force. The Defense Agencies provide support services commonly used throughout 

the Department. 

1.C. Appropriations and Funds 

The Department receives appropriations and funds as general, working capital (revolving), trust, 

special, and deposit funds. The Department uses these appropriations and funds to execute 

missions and subsequently report on resource usage. 

General Funds are used for financial transactions funded by congressional appropriations, 

including personnel, operation and maintenance, research and development, procurement, and 

military construction. 

Working Capital Funds (WCF) received funding to establish an initial corpus through an 

appropriation or a transfer of resources from existing appropriations or funds. The corpus 

finances operations and transactions that flow through the fund. The WCF resources the goods 

and services sold to customers on a reimbursable basis and maintains the corpus. 

Reimbursable receipts fund future operations and generally are available in their entirety for use 

without further congressional action. At various times, Congress provides additional 

appropriations to supplement the WCF as an infusion of cash when revenues are inadequate to 

cover costs within the corpus. 

Trust funds contain receipts and expenditures of funds held in trust by the government for use in 

carrying out specific purposes or programs in accordance with the terms of the donor, trust 

agreement, or statute. Special fund accounts are used to record government receipts reserved 

for a specific purpose. Certain trust and special funds may be designated as earmarked funds. 

Earmarked funds are financed by specifically identified revenues, required by statute to be used 

for designated activities, benefits or purposes, and remain available over time. The Department 

is required to separately account for and report on the receipt, use and retention of revenues 

and other financing sources for earmarked funds. 

Deposit funds are used to record amounts held temporarily until paid to the appropriate 

government or public entity. They are not Department funds, and as such, are not available for 

the Department’s operations. The Department is acting as an agent or custodian for funds 

awaiting distribution. 

The Department is a party to allocation transfers with other federal entities as a transferring 

(parent) or receiving (child) entity. Allocation transfers are an entities’ legal delegation of 

authority to obligate budget authority and outlay funds to another entity. Generally, all financial 

activity related to allocation transfers (e.g., budget authority, obligations, outlays) is reported in 

the financial statements of the parent entity. Exceptions to this general rule apply to specific 

funds for which OMB has directed that all activity be reported in the financial statements of the 

child entity. These exceptions include U.S. Treasury-Managed Trust Funds, Executive Office of 

the President (EOP), and all other funds specifically designated by OMB. Based on an 

agreement with OMB, funds for Security Assistance programs are reported separately from the 

Department's financial statements and notes beginning in the 3rd Quarter, FY 2008. 

SECTION 2 Financial Information 

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Department of Defense Agency Financial Report 2008 

The Department receives allocation transfers from the following agencies: Departments of 

Agriculture, Interior, Energy, and Transportation; the Appalachian Regional Commission; and 

the Federal Highway Administration. 

Additionally, the Department receives allocation transfers from certain funds meeting the OMB 

exception and all related activity is included in the Department’s financial statements. The 

exceptions reported by the Department include South Dakota Terrestrial Wildlife Habitat 

Restoration, Inland Waterways and Harbor Maintenance, and the EOP other than funds 

executed by Defense Security Cooperation Agency (DSCA) for Security Assistance. 

As the parent, the Department allocates funds to the Departments of Transportation and 

Agriculture, and reports related activity in these financial statements. 

1.D. Basis of Accounting 

For FY 2008, the Department’s financial management systems are unable to meet all full 

accrual accounting requirements. Many of the Department’s financial and nonfinancial feeder 

systems and processes were designed and implemented prior to the issuance of USGAAP. 

These systems were not designed to collect and record financial information on the full accrual 

accounting basis as required by USGAAP. Most of the Department’s financial and nonfinancial 

legacy systems were designed to record information on a budgetary basis. 

The Department is determining the actions required to bring financial and nonfinancial feeder 

systems and processes into compliance with USGAAP. One such action is the current revision 

of accounting systems to record transactions based on the U.S. Standard General Ledger 

(USSGL). Until all Department financial and nonfinancial feeder systems and processes are 

able to collect and report financial information as required by USGAAP, the Department’s 

financial data will be derived from budgetary transactions (obligations, disbursements, and 

collections), from nonfinancial feeder systems, and accruals made for major items such as 

payroll expenses, accounts payable, and environmental liabilities. 

1.E. Revenues and Other Financing Sources 

The Department receives congressional appropriations as financing sources for general funds 

that expire annually, on a multiyear basis, or do not expire. When authorized by legislation, 

these appropriations are supplemented by revenues generated by sales of goods or services. 

The Department recognizes revenue as a result of costs incurred for goods and services 

provided to other federal agencies and the public. Full-cost pricing is the Department’s standard 

policy for services provided as required by OMB Circular A-25, "User Charges." The 

Department recognizes revenue when earned within the constraints of its current system 

capabilities. In some instances, revenue is recognized when bills are issued. 

Depot Maintenance and Ordnance WCF activities recognize revenue according to the 

percentage of completion method. Supply Management WCF activities recognize revenue from 

the sale of inventory items. 

The Department does not include nonmonetary support provided by U.S. allies for common 

defense and mutual security in amounts reported in the Statement of Net Cost and Note 21, 

“Reconciliation of Net Cost of Operations to Budget.” The U.S. has cost sharing agreements 

with countries having a mutual or reciprocal defense agreement, where U.S. troops are 

stationed, or where the U.S. Fleet is in a port. 

SECTION 2 Financial Information 

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Department of Defense Agency Financial Report 2008 

1.F. Recognition of Expenses 

For financial reporting purposes, the Department’s policy requires the recognition of operating 

expenses in the period incurred. Current financial and nonfinancial feeder systems were not 

designed to collect and record financial information on the full accrual accounting basis. 

Estimates are made for major items such as payroll expenses, accounts payable, environmental 

liabilities, and unbilled revenue. In the case of Operating Materiel and Supplies (OM&S), 

operating expenses are generally recognized when the items are purchased. Efforts are 

underway to transition to the consumption method for recognizing OM&S expenses. Under the 

consumption method, OM&S would be reported in expenses when consumed. Due to system 

limitations, in some instances expenditures for capital and other long-term assets may be 

recognized as operating expenses. The Department continues to implement process and 

system improvements to address these limitations. 

1.G. Accounting for Intragovernmental Activities 

Accounting standards require that an entity eliminates intraentity activity and balances from 

consolidated financial statements in order to prevent overstatement for business with itself. 

However, the Department cannot accurately identify intragovernmental transactions by 

customer because the Department’s systems do not track buyer and seller data at the 

transaction level. Generally, seller entities within the Department provide summary seller-side 

balances for revenue, accounts receivable, and unearned revenue to the buyer-side internal 

Department accounting offices. In most cases, the buyer-side records are adjusted to agree with 

the Department’s seller-side balances and are then eliminated. The volume of 

intragovernmental transactions is so large that reconciliations cannot be accomplished 

effectively. The Department is developing long-term system improvements to ensure accurate 

intragovernmental information, including developing sufficient up-front edits and controls, 

eliminating the need for reconciliations. 

The U.S. Treasury’s “Federal Intragovernmental Transactions Accounting Policies Guide” and 

Treasury Financial Manual Part 2 – Chapter 4700, “Agency Reporting Requirements for the 

Financial Report of the United States Government,” provide guidance for reporting and 

reconciling intragovernmental balances. While the Department is unable to fully reconcile 

intragovernmental transactions with all federal agencies, the Department is able to reconcile 

balances pertaining to investments in federal securities, borrowings from the U.S. Treasury and 

the Federal Financing Bank, Federal Employees’ Compensation Act transactions with the 

Department of Labor, and benefit program transactions with the Office of Personnel 

Management. 

The Department’s proportionate share of public debt and related expenses of the Federal 

government is not included. The Federal government does not apportion debt and related costs 

to federal agencies. The Department’s financial statements do not report any public debt, 

interest, or source of public financing, whether from issuance of debt or tax revenues. Generally, 

financing for the construction of the Department’s facilities is obtained through appropriations. 

To the extent this financing ultimately may have been obtained through the issuance of public 

debt, interest costs have not been capitalized since the U.S. Treasury does not allocate such 

costs to the Department. 

SECTION 2 Financial Information 

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Department of Defense Agency Financial Report 2008 

1.H. Transactions with Foreign Governments and International Organizations 

Each year, the Department sells defense articles and services to foreign governments and 

international organizations under the provisions of the Arms Export Control Act of 1976. Under 

the provisions of this Act, the Department has authority to sell defense articles and services to 

foreign countries and international organizations generally at no profit or loss to the Federal 

government. Payment in U.S. dollars is required in advance. 

1.I. Funds with the U.S. Treasury 

The Department’s monetary resources are maintained in U.S. Treasury accounts. The 

disbursing offices of Defense Finance and Accounting Service, the Military Departments, the 

U.S. Army Corps of Engineers, and the Department of State’s financial service centers process 

the majority of the Department’s cash collections, disbursements, and adjustments worldwide. 

Each disbursing station prepares monthly reports to the U.S. Treasury of checks issued, 

electronic fund transfers, interagency transfers, and deposits. 

In addition, DFAS sites and USACE Finance Center submit reports to the U.S. Treasury by 

appropriation on interagency transfers, collections received, and disbursements issued. The 

U.S. Treasury records these transactions to the applicable Fund Balance with Treasury (FBWT) 

account. On a monthly basis, the Department's FBWT is adjusted to agree with the 

U.S. Treasury's accounts. 

1.J. Foreign Currency 

Cash is the total of cash resources under the control of the Department, which includes coin, 

paper currency, negotiable instruments, and amounts held for deposit in banks and other 

financial institutions. Foreign currency consists of the total U.S. dollar equivalent of both 

purchased and nonpurchased foreign currencies held in foreign currency fund accounts. 

Foreign currency is valued using the U.S. Treasury prevailing rate of exchange. 

The majority of cash and all foreign currency is classified as “nonentity” and is restricted. 

Amounts reported consist primarily of cash and foreign currency held by disbursing officers to 

carry out their paying, collecting, and foreign currency accommodation exchange missions. 

Cash seized during Operation Iraqi Freedom is restricted to assist the Iraqi people and support 

the restoration of Iraq. 

The Department conducts a significant portion of operations overseas. Congress established a 

special account to handle the gains and losses from foreign currency transactions for five 

general fund appropriations: operation and maintenance, military personnel, military 

construction, family housing operation and maintenance, and family housing construction. The 

gains and losses are calculated as the variance between the exchange rate current at the date 

of payment and a budget rate established at the beginning of each fiscal year. Foreign currency 

fluctuations related to other appropriations require adjustments to the original obligation amount 

at the time of payment. The Department does not separately identify foreign currency fluctuation 

transactions. 

SECTION 2 Financial Information 

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Department of Defense Agency Financial Report 2008 

1.K. Accounts Receivable 

Accounts receivable from other federal entities or the public include: accounts receivable, 

claims receivable, and refunds receivable. Allowances for uncollectible accounts due from the 

public are based upon an analysis of collection experience by fund type. The Department does 

not recognize an allowance for estimated uncollectible amounts from other federal agencies. 

Claims against other federal agencies are to be resolved between the agencies in accordance 

with dispute resolution procedures defined in the Intragovernmental Business Rules published 

in the Treasury Financial Manual at http://www.fms.treas.gov/tfm/vol1/07-03.pdf. 

1.L. Direct Loans and Loan Guarantees 

The Department operates a direct loan and loan guarantee program authorized by the National 

Defense Authorization Act for FY 1996 (Public Law (PL) 104-106, Section 2801). The Act 

includes a series of authorities that allow the Department to work with the private sector to 

renovate military housing. The Department’s goals are to obtain private capital to leverage 

government dollars, make efficient use of limited resources, and use a variety of private sector 

approaches to build and renovate military housing faster and at a lower cost to the American 

taxpayers. 

The Act also provides the Department with a variety of authorities to obtain private sector 

financing and expertise to improve military housing. The Department uses these authorities 

individually or in combination. They include guarantees (both loan and rental), 

conveyance/leasing of existing property and facilities, differential lease payments, investments 

(both limited partnerships and stock/bond ownership), and direct loans. 

The National Defense Authorization Act for FY 2005 (PL 108-375, Section 2805) provided 

permanent authorities to the Military Housing Privatization Initiative (MHPI). 

The Department operates the Armament Retooling and Manufacturing Support Initiative under 

Title 10 United States Code 4551-4555. This loan guarantee program is designed to encourage 

commercial use of inactive government facilities. The revenue generated from property rental 

offsets the cost of maintaining these facilities. 

The Department administers the Foreign Military Financing program on behalf of the EOP. This 

program is authorized by sections 23 and 24 of the Arms Export Control Act of 1976, as 

amended, PL 90-629, as amended, and section 503(a). This program provides loans to help 

countries purchase U.S. produced weapons, defense equipment, services, or military training. 

The direct loans and loan guarantees related to Foreign Military Sales are not included in these 

financial statements as of the 3rd Quarter, FY 2008, per the Department’s agreement with OMB. 

The Federal Credit Reform Act of 1990 governs all amended direct loan obligations and loan 

guarantee commitments made after FY 1991. 

1.M. Inventories and Related Property 

The Department values approximately 65 percent of resale inventory using the moving average 

cost method. An additional 15 percent (fuel inventory) is reported using the first-in-first-out 

method. The Department reports the remaining 20 percent of resale inventories at an 

approximation of historical cost using latest acquisition cost adjusted for holding gains and 

losses. The latest acquisition cost method is used because legacy inventory systems were 

designed for materiel management rather than accounting. Although these systems provide 

visibility and accountability over inventory items, they do not maintain historical cost data 

necessary to comply with SFFAS No. 3, “Accounting for Inventory and Related Property.” 

Additionally, these systems cannot produce financial transactions using the USSGL, as required 

SECTION 2 Financial Information 

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Department of Defense Agency Financial Report 2008 

by the Federal Financial Management Improvement Act of 1996 (PL 104-208). The Department 

is continuing to transition the balance of the inventories to the moving average cost method 

through the use of new inventory systems. Most transitioned balances were not baselined to 

auditable historical cost and remain noncompliant with SFFAS No. 3. 

The Department manages only military or government-specific materiel under normal conditions. 

Materiel is a unique term that relates to military force management, and includes items such as 

ships, tanks, self-propelled weapons, aircraft, etc., and related spares, repair parts, and support 

equipment. Items commonly used in and available from the commercial sector are not managed 

in the Department’s materiel management activities. Operational cycles are irregular, and the 

military risks associated with stock-out positions have no commercial parallel. The Department 

holds materiel based on military need and support for contingencies. The Department does not 

attempt to account separately for “inventory held for sale” and “inventory held in reserve for future 

sale” based on SFFAS No. 3 definitions, unless otherwise noted. 

Related property includes OM&S and stockpile materiel. OM&S, including munitions not held for 

sale, are valued at standard purchase price. The Department uses both the consumption 

method and the purchase method of accounting for OM&S. Items that are centrally managed 

and stored, such as ammunition and engines, are generally recorded using the consumption 

method and are reported on the Balance Sheet as OM&S. When current systems cannot fully 

support the consumption method, the Department uses the purchase method. Under this 

method, materiel and supplies are expensed when purchased. During FY 2008, the Department 

expensed significant amounts using the purchase method because the systems could not 

support the consumption method or management deemed that the item was in the hands of the 

end user. This is a material weakness for the Department and long-term system corrections are 

in process. Once the proper systems are in place, these items will be accounted for under the 

consumption method of accounting. 

The Department determined that the recurring high dollar-value of OM&S in need of repair is 

material to the financial statements and requires a separate reporting category. Many highdollar items, such as aircraft engines, are categorized as OM&S rather than military equipment. 

The Department recognizes condemned materiel as “excess, obsolete, and unserviceable.” 

The cost of disposal is greater than the potential scrap value, therefore, the net value of 

condemned materiel is zero. Potentially redistributable materiel, classified in previous years as 

“excess, obsolete, and unserviceable,” is included in the “held for use” or “held for repair” 

categories. 

Inventory available and purchased for resale includes consumable spare and repair parts, and 

repairable items owned and managed by the Department. This inventory is retained to support 

military or national contingencies. Inventory held for repair is damaged inventory that requires 

repair to make it suitable for sale. Often, it is more economical to repair these items rather than 

to procure them. The Department often relies on weapon systems and machinery no longer in 

production. As a result, the Department supports a process that encourages the repair and 

rebuilding of certain items. This repair cycle is essential to maintaining a ready, mobile, and 

armed military force. Work in process balances include: (1) costs related to the production or 

servicing of items, including direct material, labor, and applied overhead; (2) the value of 

finished products or completed services that are yet to be placed in service; and (3) munitions in 

production and depot maintenance work with associated costs incurred in the delivery of 

maintenance services. 

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Department of Defense Agency Financial Report 2008 

1.N. Investments in U.S. Treasury Securities 

The Department reports investments in U.S. Treasury securities at cost, net of amortized 

premiums or discounts. Premiums or discounts are amortized over the term of the investments 

using the effective interest rate method or another method that yields similar results. The 

Department’s intent is to hold investments to maturity unless they are needed to finance claims 

or otherwise sustain operations. Consequently, a provision is not made for unrealized gains or 

losses on these securities. 

The Department invests in nonmarketable market-based U.S. Treasury securities. These 

securities are issued by the Treasury’s Bureau of Public Debt to federal agencies. They are not 

traded on any securities exchange but mirror the prices of particular U.S. Treasury securities 

traded in the government securities market. 

The Department’s net investments are held by various trust and special funds. These funds 

include the Military Retirement Fund; Medicare-Eligible Retiree Health Care Fund; Other 

Defense Organizations General Fund trust and special funds; donations (gift funds); and the 

United States Army Corps of Engineers (USACE) South Dakota Terrestrial Habitat Restoration, 

Inland Waterways, and Harbor Maintenance Trust Fund accounts. 

Other investments represent joint ventures with private developers constructing or improving 

military housing on behalf of the Department under the authority of the MHPI, authorized by 

PL 104-106, Section 2801. These investments do not require market value disclosure. The 

Department’s potential losses on these ventures are limited to the amounts invested. 

1.O. General Property, Plant and Equipment 

The Department uses the estimated historical cost for valuing military equipment. The 

Department identified the universe of military equipment by accumulating information relating to 

program funding and associated military equipment, equipment useful life, program acquisitions, 

and disposals to establish a baseline. The military equipment baseline is updated using 

expenditure, acquisition, and disposal information. 

The Department’s General Property, Plant, and Equipment (General (PP&E)) capitalization 

threshold is $100 thousand except for real property, which is $20 thousand. The Department 

has not fully implemented the threshold for real property. Therefore, the Department is primarily 

using the capitalization threshold of $100 thousand for General PP&E and most real property. 

With the exception of USACE Civil Works and WCF, General PP&E assets are capitalized at 

historical acquisition cost when an asset has a useful life of two or more years and when the 

acquisition cost equals or exceeds the Department’s capitalization threshold. The Department 

also requires the capitalization of improvements to existing General PP&E assets if the 

improvements equal or exceed the Department’s capitalization threshold and extend the useful 

life or increase the size, efficiency, or capacity of the asset. The Department depreciates all 

General PP&E, other than land, on a straight-line basis. 

The WCF capitalizes all General PP&E used in the performance of the mission, whether or not 

the assets meet the definition of any other General PP&E category. 

The USACE Civil Works General PP&E is capitalized at historical acquisition cost plus 

capitalized improvements when an asset has a useful life of two or more years and the 

acquisition cost exceeds $25 thousand. The exception is buildings and structures related to 

hydropower projects which are capitalized regardless of cost. 

When it is in the best interest of the government, the Department provides government property 

to contractors to complete contract work. The Department either owns or leases such property, 

SECTION 2 Financial Information 

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Department of Defense Agency Financial Report 2008 

or it is purchased directly by the contractor for the government based on contract terms. When 

the value of contractor-procured General PP&E meets or exceeds the Department’s 

capitalization threshold, federal accounting standards require that it be reported on the 

Department’s Balance Sheet. 

The Department developed policy and a reporting process for contractors with government 

furnished equipment that provides appropriate General PP&E information for financial statement 

reporting. The Department requires that entities maintain, in their property systems, information 

on all property furnished to contractors. These actions are structured to capture and report the 

information necessary for compliance with federal accounting standards. 

1.P. Advances and Prepayments 

When advances are permitted by law, legislative action, or presidential authorization, the 

Department’s policy is to record advances or prepayments in accordance with USGAAP. As 

such, payments made in advance of the receipt of goods and services should be reported as an 

asset on the Balance Sheet. The Department’s policy is to expense and/or properly classify 

assets when the related goods and services are received. The Department has not fully 

implemented this policy primarily due to system limitations. 

1.Q. Leases 

Lease payments for the rental of equipment and operating facilities are classified as either 

capital or operating leases. When a lease is essentially equivalent to an installment purchase of 

property (a capital lease), and the value equals or exceeds the current capitalization threshold, 

the Department records the applicable asset as though purchased, with an offsetting liability, 

and depreciates it. The Department records the asset and liability at the lesser of the present 

value of the rental and other lease payments during the lease term (excluding portions 

representing executory costs paid to the lessor) or the asset’s fair market value. The discount 

rate for the present value calculation is either the lessor’s implicit interest rate or the 

government’s incremental borrowing rate at the inception of the lease. The Department, as the 

lessee, receives the use and possession of leased property, for example real estate or 

equipment, from a lessor in exchange for a payment of funds. An operating lease does not 

substantially transfer all the benefits and risks of ownership. Payments for operating leases are 

expensed over the lease term as they become payable. 

Office space and leases entered into by the Department in support of contingency operations 

are the largest component of operating leases based on costs gathered from existing leases, 

General Services Administration bills, and interservice support agreements. Future year 

projections use the consumer price index. 

1.R. Other Assets 

Other assets include those assets, such as military and civil service employee pay advances, 

travel advances, and certain contract financing payments that are not reported elsewhere on the 

Department’s Balance Sheet. 

The Department conducts business with commercial contractors under two primary types of 

contracts: fixed price and cost reimbursable. To alleviate the potential financial burden on the 

contractor that long-term contracts can cause, the Department may provide financing payments. 

Contract financing payments are defined in the Federal Acquisition Regulation, Part 32, as 

authorized disbursements to a contractor prior to acceptance of supplies or services by the 

government. Contract financing payment clauses are incorporated in the contract terms and 

conditions and may include advance payments, performance-based payments, commercial 

advances and interim payments, progress payments based on cost, and interim payments 

under certain cost reimbursement contracts. It is the Department’s policy to record certain 

contract financing payments as other assets. 

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Department of Defense Agency Financial Report 2008 

Contract financing payments do not include invoice payments, payments for partial deliveries, 

lease and rental payments, or progress payments based on a percentage or stage of 

completion. The Defense Federal Acquisition Regulation Supplement authorizes progress 

payments based on a percentage or stage of completion only for construction of real property, 

shipbuilding and ship conversion, alteration, or repair. Progress payments for real property and 

ships are reported as construction-in-progress. 

1.S. Contingencies and Other Liabilities 

The SFFAS No. 5, “Accounting for Liabilities of the Federal Government,” as amended by 

SFFAS No. 12, “Recognition of Contingent Liabilities Arising from Litigation,” defines a 

contingency as an existing condition, situation, or set of circumstances that involves an 

uncertainty as to possible gain or loss. The uncertainty will be resolved when one or more future 

events occur or fail to occur. The Department recognizes contingent liabilities when past events 

or exchange transactions occur, a future loss is probable, and the loss amount can be 

reasonably estimated. 

Financial statement reporting is limited to disclosure when conditions for liability recognition do 

not exist, but there is at least a reasonable possibility of incurring a loss or additional losses. 

Examples of loss contingencies include the collectibility of receivables, pending or threatened 

litigation, and possible claims and assessments. The Department’s risk of loss and resultant 

contingent liabilities arise from pending or threatened litigation or claims and assessments due 

to events such as aircraft, ship and vehicle accidents; medical malpractice; property or 

environmental damages; and contract disputes. 

Other liabilities arise as a result of anticipated disposal costs for the Department’s assets. This 

type of liability has two components: nonenvironmental and environmental. Consistent with 

SFFAS No. 6, “Accounting for Property, Plant, and Equipment,” recognition of an anticipated 

environmental disposal liability begins when the asset is placed into service. Based on the 

Department’s policy, which is consistent with SFFAS No. 5, “Accounting for Liabilities of the 

Federal Government,” nonenvironmental disposal liabilities are recognized when management 

decides to dispose of an asset. The Department recognizes nonenvironmental disposal 

liabilities for military equipment nuclear-powered assets when placed into service. These 

amounts are not easily distinguishable and are developed in conjunction with environmental 

disposal costs. 

1.T. Accrued Leave 

The Department reports liabilities for military leave and accrued compensatory and annual leave 

for civilians. Sick leave for civilians is expensed when taken. The liability is based on current pay 

rates. 

1.U. Net Position 

Net position consists of unexpended appropriations and cumulative results of operations. 

Unexpended appropriations represents amounts of budget authority that are unobligated and 

have not been rescinded or withdrawn. Unexpended appropriations also represent amounts 

obligated for which legal liabilities for payments have not been incurred. 

Cumulative results of operations represent the net difference between expenses and losses, 

and financing sources (including appropriations, revenue, and gains), since inception. Beginning 

with FY 1998, cumulative results of operations also include donations and transfers in and out of 

assets that were not reimbursed. 

SECTION 2 Financial Information 

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Department of Defense Agency Financial Report 2008 

1.V. Treaties for Use of Foreign Bases 

The Department has the use of land, buildings, and other overseas facilities that are obtained 

through various international treaties and agreements negotiated by the Department of State. 

The Department purchases capital assets overseas with appropriated funds, however, the host 

country retains title to the land and capital improvements. Treaty terms generally allow the 

Department continued use of these properties until the treaties expire. In the event treaties or 

other agreements are terminated, use of the foreign bases is prohibited and losses are recorded 

for the value of any nonretrievable capital assets. The settlement due to the U.S. or host nation 

is negotiated and takes into account the value of capital investments and may be offset by the 

cost of environmental cleanup. 

1.W. Comparative Data 

The Department’s financial statements and notes are presented on a comparative basis. 

1.X. Unexpended Obligations 

The Department obligates funds to provide goods and services for outstanding orders not yet 

delivered. Unless title has passed, the financial statements do not reflect a liability for the 

payment of goods and services not yet delivered. Unexpended obligations includes both 

obligations for which goods and services have been delivered (title passed) and a liability 

recognized, and obligations for which no delivery has occurred and no liability recognized. The 

balance of unexpended obligations appears immediately before net outlays in the Statement of 

Budgetary Resources, and is referred to as “Total, unpaid obligated balances, net, end of 

period.” 

1.Y. Undistributed Disbursements and Collections 

Undistributed disbursements and collections represent the difference between disbursements 

and collections matched at the transaction level to specific obligations, payables, or receivables 

in the source systems and those reported by the U.S. Treasury. 

Supported disbursements and collections are evidenced by collaborating documentation. 

Unsupported disbursements and collections do not have supporting documentation for the 

transaction and most likely would not meet audit scrutiny. 

The Department’s policy is to allocate supported undistributed disbursements and collections 

between federal and nonfederal categories based on the percentage of distributed federal and 

nonfederal accounts payable and accounts receivable. Unsupported, undistributed 

disbursements are recorded in accounts payable. Unsupported, undistributed collections are 

recorded in other liabilities. 

SECTION 2 Financial Information 

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Department of Defense Agency Financial Report 2008 

Note 2. Nonentity Assets 

Nonentity Assets Dollars in Millions 

As of September 30 2008 

Restated 

2007 

Intragovernmental Assets 

Fund Balance with Treasury $ 1,170.2 $ 1,399.5 

 Accounts Receivable 0.1 0.9 

Total Intragovernmental Assets $ 1,170.3 $ 1,400.4 

Nonfederal Assets 

Cash and Other Monetary Assets $ 2,681.8 $ 2,442.7 

 Accounts Receivable 5,054.6 5,144.9 

 Other Assets 183.4 186.0 

Total Nonfederal Assets $ 7,919.8 $ 7,773.6 

Total Nonentity Assets $ 9,090.1 $ 9,174.0 

Total Entity Assets 1,649,020.2 1,463,006.2 

Total Assets $ 1,658,110.3 $ 1,472,180.2 

Nonentity assets are assets for which the Department maintains stewardship accountability and 

reporting responsibility but are not available for the Department’s normal operations. 

Intragovernmental Fund Balance with Treasury (FBWT) consists of deposit funds, seized Iraqi 

cash, and the Development Fund for Iraq (DFI). Deposit funds are generally used to record 

amounts held temporarily until paid to the appropriate party. Humanitarian relief and 

reconstruction deposit funds are funds held for expenditures on behalf of the Iraqi people. 

Seized Iraqi cash is former Iraqi regime monies confiscated by coalition forces and restricted for 

support of the Iraqi people. The DFI consists of proceeds from Iraqi oil sales, repatriated assets 

from the United States and other nations, and deposits from unencumbered oil-for-food 

proceeds. DFI funds are restricted for Iraqi infrastructure and other Iraqi support needs. 

Nonfederal Cash and Other Monetary Assets primarily consists of cash held by Disbursing 

Officers to carry out payment, collection, and foreign currency accommodation exchange 

missions. 

Nonfederal Accounts Receivable consists of amounts due for canceled year appropriations; and 

interest, fines and penalties due on debt. Generally, the Department cannot use the collections 

and must distribute them to the U.S. Treasury. The Department has specific statutory authority 

to retain collections from certain canceled year accounts receivable as entity assets. 

Nonfederal Other Assets primarily consists of an Advance Payment Pool Agreement with a 

nonprofit educational institution to finance research and development projects. 

SECTION 2 Financial Information 

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Department of Defense Agency Financial Report 2008 

Note 3. Fund Balance with Treasury 

Fund Balance with Treasury Dollars in Millions 

As of September 30 2008 Restated 

2007 

Fund Balance 

Appropriated Funds $ 455,876.7 $ 382,107.3 

Revolving Funds 8,978.8 11,021.1 

Trust Funds 1,818.5 1,019.0 

Special Funds 436.4 396.5 

Other Fund Types 1,286.5 1,986.8 

Total Fund Balance $ 468,396.9 $ 396,530.7 

Fund Balance Per Treasury Versus Agency 

Fund Balance per Treasury $ 473,736.8 $ 399,862.9 

Fund Balance per Agency 468,396.9 396,530.7 

Reconciling Amount $ 5,339.9 $ 3,332.2 

The Department restated the FY 2007 balance in appropriated funds by $1.3 billion. On 

September 30, 2007, the military payroll due for disbursement on October 1st was processed 

one day early. The payroll was not actually paid to the soldiers until October 1st even though it 

appeared as disbursed in the Department’s system. Since the processing of the payroll and the 

actual outlays for the payroll crossed over two fiscal years, the outlays in both fiscals years were 

incorrectly stated (overstated in FY 2007 and understated in FY 2008) and required correction. 

The restated amount of $1.3 billion impacted the Balance Sheet and Statement of Budgetary 

Resources. 

Other Fund Types primarily consist of deposit funds, receipt accounts, clearing accounts, and 

Development Fund for Iraq. 

The Department shows a reconciling net difference of $5.3 billion with the U.S. Treasury. This 

includes $5.1 billion in canceled appropriations, $268.4 million in unavailable receipt accounts, 

and ($29.2) million in allocation transfers. 

Status of Fund Balance with Treasury Dollars in Millions 

As of September 30 2008 Restated 

2007 

Unobligated Balances 

Appropriated Funds $ 121,096.4 $ 99,165.6 

Revolving Funds 401,136.6 338,321.9 

Obligated Balance not yet Disbursed 432,553.3 373,327.3 

Nonbudgetary FBWT 1,060.8 1,359.6 

NonFBWT Budgetary Accounts (487,450.2) (415,643.7) 

Total Fund Balance $ 468,396.9 $ 396,530.7 

SECTION 2 Financial Information 

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Department of Defense Agency Financial Report 2008 

The Status of Fund Balance with Treasury is the reconciliation between budgetary and 

proprietary accounts at Treasury. It consists of unobligated and obligated balances. The 

balances reflect the budgetary authority remaining for disbursement against current or future 

obligations. 

Unobligated Balance is classified as available or unavailable and represents the cumulative 

amount of budgetary authority that has not been set aside to cover outstanding obligations. The 

unavailable balance consists primarily of funds invested in U.S. Treasury securities that are 

temporarily precluded from obligation by law. Certain unobligated balances are restricted for 

future use and are not apportioned for current use. Unobligated balances for trust fund accounts 

are restricted for use by the public law that established the funds. 

Obligated Balance not yet Disbursed represents funds that have been obligated for goods and 

services not received, and those received but not paid. 

Nonbudgetary FBWT includes accounts that do not have budgetary authority, such as deposit 

funds, receipt accounts, clearing accounts, and nonentity FBWT. 

NonFBWT Budgetary Accounts reduces the Status of FBWT and consists of investments in 

U.S. Treasury securities, unfilled customer orders without advance, contract and borrowing 

authority, and receivables. 

Note 4. Investments and Related Interest 

Investments and Related Interest 

 As of September 30 

Cost 

Intragovernmental Securities 

Amortization 

Method 

Dollars in Millions 

2008 

Amortized 

(Premium) / 

Discount 

Investments, 

Net 

Market Value 

Disclosure 

Nonmarketable, 

Market-Based 

Military Retirement Fund $ 255,722.1 See Below $ (5,423.8) $ 250,298.3 $ 240,912.7

 Medicare-Eligible Retiree 

Health Care Fund 135,483.4 See Below (2,683.7) 132,799.7 127,002.4 

US Army Corps of 

Engineers 4,790.4 See Below (26.0) 4,764.4 4,909.9 

Other Funds 2,382.0 See Below (19.6) 2,362.4 2,391.2 

Total Nonmarketable, 

Market-Based $ 398,377.9 $ (8,153.1) $ 390,224.8 $ 375,216.2 

Accrued Interest 4,283.7 4,283.7 4,283.7 

Total Intragovernmental 

Securities $ 402,661.6 $ (8,153.1) $ 394,508.5 $ 379,499.9 

Other Investments 

Total Other Investments $ 1,861.5 $ 0.0 $ 1,861.5 N/A 

Amortization Method Used: Effective Interest 

SECTION 2 Financial Information 

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Nonmarketable, 

Market-Based 

Military Retirement Fund $ 222,030.5 See Below $ (6,666.2) $ 215,364.3 $ 212,242.6

 Medicare-Eligible 

Retiree Health Care Fund 110,206.3 See Below (1,762.9) 108,443.4 106,692.8 

US Army Corps of 

Engineers 4,058.5 See Below (44.1) 4,014.4 4,043.1 

Other Funds 2,039.0 See Below (11.5) 2,027.5 2,040.2 

Total Nonmarketable, 

Market-Based $ 338,334.3 $ (8,484.7) $ 329,849.6 $ 325,018.7

 Accrued Interest 3,861.4 3,861.4 3,861.4 

Total Intragovernmental 

Securities $ 342,195.7 $ (8,484.7) $ 333,711.0 $ 328,880.1 

Other Investments 

Total Other Investments $ 1,412.3 $ 0.0 $ 1,412.3 N/A

Investments and Related Interest Dollars in Millions 

2007 

Department of Defense Agency Financial Report 2008 

Amortized Amortization Investments, Market Value Cost (Premium) / Method Net Disclosure As of September 30 Discount 

Intragovernmental Securities 

 Amortization Method Used: Effective Interest 

Most of the Department’s earmarked funds are invested in non-marketable, market-based 

securities that fluctuate in tandem with the current selling price of the equivalent marketable 

security on the open market. These securities are purchased with the intent to hold until 

maturity, thus balances are not adjusted to market value. 

The Federal government does not set aside assets to pay future benefits and expenditures 

associated with earmarked funds. The cash generated from earmarked funds is deposited in the 

U.S. Treasury, which uses the cash for general government purposes. The U.S. Treasury 

securities are issued to the earmarked funds as evidence of earmarked fund receipts and are an 

asset to the Department and a liability to the U.S. Treasury. Because the Department of 

Defense and the U.S. Treasury are both part of the Federal government, these assets and 

liabilities offset each other from the standpoint of the Federal government as a whole. 

Therefore, they do not represent an asset or a liability in the U.S. Governmentwide financial 

statements. 

The U.S. Treasury securities provide the Department with authority to draw upon the U.S. 

Treasury to make future benefit payments or other expenditures. When the Department requires 

redemption of these securities, the Federal government finances the securities out of 

accumulated cash balances by raising taxes or other receipts, borrowing from the public or 

repaying less debt, or curtailing other expenditures. The Federal government uses the same 

method to finance all other expenditures. 

Other Funds primarily consists of $1.7 billion in investments of the DoD Education Benefits 

Trust Fund and $511.6 million in investments of the Voluntary Separation Incentive Trust Fund. 

SECTION 2 Financial Information 

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Department of Defense Agency Financial Report 2008 

Note 5. Accounts Receivable 

Accounts Receivable Dollars in Millions 

2008 Restated 

2007 

As of September 30 

Gross 

Amount Due 

Allowance 

For Estimated 

Uncollectibles 

Accounts 

Receivable, 

Net 

Accounts 

Receivable, 

Net 

Intragovernmental 

Receivables $ 1,326.2 N/A $ 1,326.2 $ 1,412.9 

Nonfederal Receivables 

(From the Public) 8,170.8 (386.3) 7,784.5 7,451.4 

Total Accounts Receivable $ 9,497.0 $ (386.3) $ 9,110.7 $ 8,864.3 

Accounts receivable represent the Department’s claim for payment from other entities. The 

Department only recognizes an allowance for uncollectible amounts from the public. Claims with 

other federal agencies are resolved in accordance with the Intragovernmental Business Rules. 

Note 6. Other Assets 

Other Assets Dollars in Millions 

As of September 30 2008 Restated 

2007 

Intragovernmental Other Assets 

Advances and Prepayments $ 1,158.0 $ 1,087.6 

Other Assets 124.9 124.9 

Total Intragovernmental Other Assets $ 1,282.9 $ 1,212.5 

Nonfederal Other Assets 

Outstanding Contract Financing Payments 27,312.1 26,152.0 

Advances and Prepayments 1,282.8 1,549.6 

Other Assets (With the Public) 410.1 465.3 

Total Nonfederal Other Assets $ 29,005.0 $ 28,166.9 

Total Other Assets $ 30,287.9 $ 29,379.4 

The Department restated the FY 2007 balance in Nonfederal Other Assets by $1.3 billion. The 

Department incorrectly reported $1.3 billion of contract financing payments as expenses rather 

than assets in FY 2007. Refer to Note 25, Restatements, for additional details. 

Intragovernmental Other Assets represents the Department’s right to approximately 6 million 

barrels of crude oil held by the Department of Energy. 

The balance of outstanding contract financing payments includes $25.9 billion in contract 

financing payments and an additional $1.4 billion in estimated future payments to the contractor 

upon delivery and government acceptance of a satisfactory product. 

SECTION 2 Financial Information 

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Department of Defense Agency Financial Report 2008 

Contract terms and conditions for certain types of contract financing payments convey rights to 

the Department that protect the contract work from state or local taxation, liens or attachment by 

the contractor's creditors, transfer of property, or disposition in bankruptcy. However, these 

rights should not be misconstrued to mean that ownership of the contractor’s work has 

transferred to the Federal government. The Federal government does not have the right to take 

the work, except as provided for in contract clauses related to termination or acceptance, and 

the Department is not obligated to make payment to the contractor until delivery and 

acceptance. 

The balance in Other Assets (With the Public) includes $183.1 million for an Advance Payment 

Pool Agreement with nonprofit institutions and $182 million for inventory returned to vendors 

pending credit. 

Note 7. Cash and Other Monetary Assets 

Cash and Other Monetary Assets Dollars in Millions 

As of September 30 2008 Restated 

2007 

Cash $ 1,421.3 $ 1,470.1 

Foreign Currency 1,383.5 1,121.0 

Total Cash, Foreign Currency, and Other Monetary Assets $ 2,804.8 $ 2,591.1 

Cash (except for $123.1 million in undeposited collections) and Foreign Currency represent 

nonentity assets, and are restricted and unavailable for use in the Department's mission. 

Note 8. Direct Loan and Loan Guarantees 

Direct Loan and Loan Guarantee Programs 

The Department operates the following direct loan and loan guarantee programs: 

•	 Military Housing Privatization Initiative (MHPI). 

•	 Armament Retooling and Manufacturing Support Initiative (ARMS). 

The Federal Credit Reform Act of 1990 governs all amended direct loan obligations and loan
 

guarantee commitments made after FY 1991. 

Direct loans are reported at the net present value of the following projected cash flows: 

•	 Loan disbursements. 

•	 Repayments of principal. 

•	 Payments of interest and other payments over the life of the loan after adjusting for 

estimated defaults, prepayments, fees, penalties, and other recoveries. 

Loan guarantee liabilities are reported at their net present value. The cost of loan guarantees is 

the net present value of the following estimated projected cash flows: 

•	 Payments by the Department to cover defaults and delinquencies, interest subsidies, or 

other payments; offset by 

•	 Payments to the Department including origination and other fees, penalties, and recoveries. 

SECTION 2	 Financial Information 

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Department of Defense Agency Financial Report 2008 

Military Housing Privatization Initiative 

The MHPI includes both direct loan and loan guarantee programs. The loan guarantee program 

is authorized by the National Defense Authorization Act for FY 1996 (PL 104-106, Section 2801) 

and includes a series of authorities that allow the Department to work with the private sector to 

renovate and build military family housing. The MHPI accelerates the construction of new 

housing, built to market standards, and leverages private sector capital. The Department 

provides protection to the private sector partner against specific risks, such as base closure or 

member deployment. One of the goals of the Department is to obtain private sector capital to 

leverage government dollars. The Department provides protection to the private sector partner 

against specific risks, such as base closure or member deployment. 

Armament Retooling and Manufacturing Support Initiative 

The ARMS Initiative, authorized by Title 10 United States Code 4551-4555, is a loan guarantee 

program designed to encourage commercial use of the Army's inactive ammunition plants 

through incentives for businesses willing to locate to a government ammunition production 

facility. The production capacity of these facilities is greater than current military requirements, 

however, this capacity may be needed by the military in the future. Revenues from property 

rentals are used to help offset the overhead costs for the operation, maintenance, and 

environmental cleanup at the facilities. 

In an effort to preclude any additional loan liability, the Army instituted an ARMS loan guarantee 

moratorium in FY 2004. The Army continues to operate under the moratorium and does not 

anticipate new loans. 

Summary of Direct Loans and Loan Guarantees Dollars in Millions 

As of September 30, 2008 and 2007 2008 Restated 

2007 

Loans Receivable 

Direct Loans: 

 Military Housing Privatization Initiative $ 236.0 $ 212.1

 Total Direct Loans $ 236.0 $ 212.1 

Defaulted Loan Guarantees: 

 Armament Retooling & Manufacturing

 Support Initiative 0.0 0.1

 Total Default Loan Guarantees $ 0.0 $ 0.1 

Total Loans Receivable $ 236.0 $ 212.2 

Summary of Direct Loans and Loan Guarantees Dollars in Millions 

As of September 30, 2008 and 2007 2008 Restated 

2007 

Loan Guarantee Liability

 Military Housing Privatization Initiative $ 22.2 $ 24.7

 Armament Retooling & Manufacturing

 Support Initiative 2.3 0.3

 Total Loan Guarantee Liability $ 24.5 $ 25.0 

SECTION 2 Financial Information 

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Department of Defense Agency Financial Report 2008 

Direct Loans Obligated Dollars in Millions 

As of September 30, 2008 and 2007 2008 

Restated 

2007 

Direct Loans Obligated After FY 1991 

(Present Value Method): 

Military Housing Privatization Initiative 

Loans Receivable Gross $ 339.6 $ 308.0 

Allowance for Subsidy Cost (Present Value) (103.6) (95.9) 

Value of Assets Related to Direct Loans 236.0 212.1 

Total Direct Loans Receivable $ 236.0 $ 212.1 

Loans receivable, net, or value of assets related to loans, is not the same as the proceeds the 

Department would expect to receive from selling the loans. 

Total Amount of Direct Loans Disbursed Dollars in Millions 

As of September 30, 2008 and 2007 2008 

Restated 

2007 

Direct Loan Programs 

Military Housing Privatization Initiative $ 31.7 $ 11.9 

Total Direct Loans Disbursed $ 31.7 $ 11.9

 Subsidy Expense for Direct Loan by Program 

 As of September 30, 2008 and 2007 Dollars in Millions 

2008 Interest 

Differential Defaults Fees Other Total 

New Direct Loans Disbursed: 

 Military Housing Privatization 

 Initiative $ 12.6 $ 3.0 $ 0.0 $ 0.0 $ 15.6 

2007 Restated Interest 

Differential Defaults Fees Other Total 

New Direct Loans Disbursed: 

 Military Housing Privatization 

 Initiative $ 2.1 $ 1.3 $ 0.0 $ 0.0 $ 3.4 

SECTION 2 Financial Information 

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-

 

-

 

 

 

 

 

 

 

 

2008 

 Subsidy Expense for Direct Loan by Program 

 As of September 30, 2008 and 2007 

Department of Defense Agency Financial Report 2008 

Dollars in Millions 

Interest Modifica Technical Total Rate Total tions Reestimates Reestimates Reestimates 

Direct Loan Modifications and Reestimates:

 Military Housing Privatization $ 0.0 $ (0.8) $ (2.2) $ ( 3.0) $ ( 3.0) Initiative 

Interest Modifica Technical Total 2007 Restated Rate Total tions Reestimates Reestimates Reestimates 

Direct Loan Modifications and Reestimates:

 Military Housing Privatization $ 0.0 $ (7.3) $ (8.2) $ ( 15.5) $ ( 15.5) Initiative 

Restated 2008 2007 

Total Direct Loan Subsidy Expense:

 Military Housing Privatization $ 12.6 $ ( 12.1) Initiative 

Subsidy Rate for Direct Loans by Program 

As of September 30, 2008 and 2007 Interest 

Differential 

Budget Subsidy Rates for Direct Loans 

Defaults 

Fees and 

other 

Collections 

Dollars in Millions 

Other Total 

 Military Housing Privatization Initiative 25.25% 18.25% 0.00% 0.00% 43.50% 

Subsidy rates pertain to the loan agreements contracted during the current fiscal year. These 

rates cannot be applied to the direct loans disbursed during the current reporting year to yield 

the subsidy expense. The subsidy expense for new loans disbursed in the current year could 

result from disbursement of loans from both current and prior year loan agreements. The 

subsidy expense reported in the current year also includes reestimates. 

Schedule for Reconciling Subsidy Cost Allowance Balances 

for Post FY1991 Direct Loans Dollars in Millions 

As of September 30, 2008 and 2007 2008 Restated 2007 

Beginning Balance, Changes, and Ending Balance: 

Beginning Balance of the Subsidy Cost Allowance $ 95.9 $ 104.6 

Add: Subsidy Expense for Direct Loans Disbursed during the Reporting Years by Component 

Interest Rate Differential Costs 12.6 2.1 

 Default Costs (Net of Recoveries) 3.0 1.3 

Total of the above Subsidy Expense Components $ 15.6 $ 3.4 

SECTION 2 Financial Information 

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Department of Defense Agency Financial Report 2008 

Schedule for Reconciling Subsidy Cost Allo

for Post FY1991 Direct Loans 

wance Balances 

Dollars in Millions 

As of September 30, 2008 2008 Restated 

2007 

Adjustments

 Subsidy Allowance Amortization (4.9) (3.6) 

Other 0.0 7.0 

Total of the above Adjustment Components 

Ending Balance of the Subsidy Cost Allowance 

before Reestimate 

Add or Subtract Subsidy Reestimate by Component 

$ 

$ 

(4.9) 

106.6 

$ 

$ 

3.4 

111.4 

Interest Rate Reestimate (0.8) (7.3) 

Technical/Default Reestimate (2.2) (8.2) 

 Total of the above Reestimate Components 

Ending Balance of the Subsidy Cost Allowance $ 

(3.0) 

103.6 $ 

(15.5) 

95.9 

Defaulted Guaranteed Loans Dollars in Millions 

As of September 30, 2008 2008 2007 

Defaulted Guaranteed Loans from Post-FY 1991 Guarantees (Present Value Method): 

Armament Retooling & Manufacturing Support Initiative 

Defaulted Guaranteed Loans Receivable, Gross $ 15.1 $ 14.4 

Allowance for Subsidy Cost (Present Value) (15.1) (14.3) 

Total Value of Assets Related to Defaulted 

Guaranteed Loans Receivable $ 0.0 $ 0.1 

Guaranteed Loans Outstanding Dollars in Millions 

As of September 30, 2008 

Outstanding Principal

of Guaranteed Loans, 

Face Value 

Amount of Outstanding 

Principal Guaranteed 

Guaranteed Loans Outstanding 

Military Housing Privatization Initiative $ 499.1 

Armament Retooling & Manufacturing 

Support Initiative 3.1 

Total Guaranteed Loans Outstanding $ 502.2 $ 501.7 

$ 499.1 

SECTION 2 Financial Information 

59 

2.6 
 

 

 

 

 

 

- 

 

 

 

-

 

 

 

 

 

 

 

Department of Defense Agency Financial Report 2008 

Liabilities for Loan Guarantees 

As of September 30, 2008 and 2007 2008 

Dollars in Millions 

2007 

Liabilities for Loan Guarantee from Post FY 1991 

(Present Value): 

 Military Housing Privatization Initiative $ 22.2 $ 24.7

 Armament Retooling & Manufacturing Support Initiative 2.3 0.3

 Total Loan Guarantee Liability $ 24.5 $ 25.0

 Subsidy Expense for Loan Guarantees by Program Dollars in Millions 

 As of September 30, 2008 and 2007 

2008 Modifica 

tions 

Interest 

Rate 

Reestimates 

Technical 

Reestimates 

Total 

Reestimates Total 

Modifications and Reestimate: 

Military Housing Privatization

Initiative $ 0.0 $ (0.9) $ (2.9) $ ( 3.8) $ ( 3.8) 

 Armament Retooling & 

 Manufacturing Support Initiative 0.0 0.4 1.7 2.1 2.1 

Total $ 0.0 $ ( 0.5) $ ( 1.2) $ ( 1.7) $ ( 1.7) 

2007 Modifica 

tions 

Interest 

Rate 

Reestimates 

Technical 

Reestimates 

Total 

Reestimates Total 

Modifications and Reestimate: 

Military Housing Privatization

Initiative $ 0.0 $ 0.0 $ (0.2) $ ( 0.2) $ ( 0.2)

 Armament Retooling & 

 Manufacturing Support Initiative 0.0 2.1 (1.1) 1.0 1.0 

Total $ 0.0 $ 2.1 $ ( 1.3) $ 0.8 $ 0.8 

2008 2007 

Total Loan Guarantee Subsidy Expense: 

Military Housing Privatization

Initiative $ ( 3.8) $ ( 0.2)

 Armament Retooling & 

 Manufacturing Support Initiative 2.1 1.0

 Total $ ( 1.7) $ 0.8 

There are no new loan guarantees in FY 2008. 

SECTION 2 Financial Information 

60 
 

 

 

 

 

 

 

 

 

 

Department of Defense Agency Financial Report 2008 

Schedule for Reconciling Loan Guarantee Liability Balances 

for Post-FY 1991 Loan Guarantees Dollars in Millions 

As of September 30, 2008 2008 2007 

Beginning Balance, Changes, and Ending Balance: 

Beginning Balance of the Loan Guarantee Liability $ 25.0 $ 36.8 

Adjustments

 Foreclosed Property and Loans Acquired 0.7 2.3

 Claim Payments to Lenders (0.8) (15.3) 

Interest Accumulation on the Liability Balance 1.3 0.6

 Other 0.0 (0.2) 

Total of the above Adjustments $ 1.2 $ (12.6) 

Ending Balance of the Loan Guarantee Liability

before Reestimates $ 26.2 $ 24.2 

Add or Subtract Subsidy Reestimates by Component

 Interest Rate Reestimate (0.5) 2.1

 Technical/Default Reestimate (1.2) (1.3) 

 Total of the above Reestimate Components $ (1.7) $ 0.8 

Ending Balance of the Loan Guarantee Liability $ 24.5 $ 25.0 

Administrative Expenses 

Administrative Expenses are limited to separately identified expenses for administrating preFY 1992 and post-FY 1991 direct loans and loan guarantee programs. The Department does 

not maintain a separate program to capture the expenses related to direct loans and loan 

guarantees for MHPI. Administrative expenses for ARMS represent a fee paid to U.S. 

Department of Agriculture, Rural Business Cooperative. 

Note 9. Inventory and Related Property 

Inventory and Related Property 

As of September 30 2008 

Dollars in Millions 

2007 

Inventory, Net $ 86,600.1 $ 84,191.0 

Operating Materiel & Supplies, Net 148,663.6 139,871.2 

Stockpile Materiel, Net 764.0 886.5 

Total Inventory and Related Property $ 236,027.7 $ 224,948.7 

SECTION 2 Financial Information 

61 
 

 

Department of Defense Agency Financial Report 2008 

 Inventory, Net Dollars in Millions 

2008 2007 

As of September 30 

Inventory,

Gross 

Value 

Revaluation 

Allowance 

Inventory,

Net 

Inventory,

Net 

Valuation 

Method

 Inventory Categories 

Available and Purchased 

for Resale $ 101,121.2 $ (30,735.0) $ 70,386.2 $ 61,080.7 LAC,MAC

 Held for Repair 25,684.0 (10,195.2) 15,488.8 22,473.9 LAC,MAC 

Excess, Obsolete, and 

Unserviceable 7,761.3 (7,761.3) 0.0 0.0 NRV 

Raw Materiel 103.5 0.0 103.5 100.1 MAC,SP,LAC 

Work in Process 621.6 0.0 621.6 536.3 AC 

Total Inventory, Net $ 135,291.6 $ (48,691.5) $ 86,600.1 $ 84,191.0 

Legend for Valuation Methods: 

Adjusted LAC = Latest Acquisition Cost, adjusted for holding gains and losses 

SP = Standard Price 

AC = Actual Cost 

NRV = Net Realizable Value 

MAC = Moving Average Cost 

Restrictions 

There are few restrictions on the use, sale, or disposition of inventory. However, some 

restrictions do exist, and they include the following: 

• War reserve materiel valued at $2.3 billion; 

• Commissary items valued at $386.4 million held for purchase by authorized patrons; and 

• Dispositions pending litigation or negotiation valued at $5.4 million. 

There are no known restrictions on inventory disposition as related to environmental or other 

liabilities. 

General Composition of Inventory 

Inventory includes spare and repair parts, clothing and textiles, and fuels held for sale by the 

Defense Working Capital Funds. Inventory is tangible personal property that is: 

• Held for sale, or held for repair and eventual sale; 

• In the process of production for sale; or 

• To be consumed in the production of goods for sale or in the provision of service for a fee. 

The Department assigns inventory items to a category based upon the type and condition of the 

asset. 

SECTION 2 Financial Information 

62 
 

 

 

 

 Stockpile Materiel, Net Dollars in Millions 

2008 2007 

As of September 30 

Stockpile,

Materiel 

Amount 

Allowance 

for Gains 

(Losses) 

Stockpile

Materiel, 

Net 

Stockpile

Materiel, 

Net 

Valuation 

Method

Department of Defense Agency Financial Report 2008 

 Operating Materiel and Supplies, Net Dollars in Millions 

2008 2007 

As of September 30 

OM&S, 

Gross 

Value 

Revaluation 

Allowance OM&S, Net OM&S, Net 

Valuation 

Method 

OM&S Categories 

Held for Use $ 131,648.7 $ (0.0) $ 131,648.7 $ 123,958.0 SP, LAC, MAC

 Held for Repair 18,374.0 (1,359.1) 17,014.9 15,913.2 SP, LAC, MAC 

Excess, Obsolete, and 

Unserviceable 3,598.6 (3,598.6) 0.0 0.0 NRV 

Total OM&S $ 153,621.3 $ (4,957.7) $ 148,663.6 $ 139,871.2 

Legend for Valuation Methods: 

Adjusted LAC = Latest Acquisition Cost, adjusted for holding gains and losses 

SP = Standard Price 

NRV = Net Realizable Value 

MAC = Moving Average Cost 

Restrictions 

Some munitions included in Operating Materiel and Supplies (OM&S) are restricted due to 

condition. Restricted munitions are considered obsolete or unserviceable when they cannot be 

expected to meet performance requirements. Obsolete and unserviceable OM&S may be used 

in emergency combat situations in which no other suitable munitions are immediately available. 

General Composition of OM&S 

The OM&S includes spare and repair parts, ammunition, tactical missiles, aircraft configuration 

pods, and centrally-managed aircraft engines held for consumption. The Department assigns 

OM&S items into a category based upon the type and condition of the asset. 

 Stockpile Material Categories 

Held for Sale $ 734.6 $ 0.0 $ 734.6 $ 857.2 AC, LCM 

Held in Reserve for 29.4 0.0 29.4 29.3 AC, LCM Future Sale 

Total Stockpile Material $ 764.0 $ 0.0 $ 764.0 $ 886.5 

Legend for Valuation Methods: 

AC = Actual Cost LCM = Lower of Cost or Market 

Restrictions 

Materiel held by the National Defense Stockpile (NDS) is restricted until relieved by 

Congressional action and made available for sale on the open market. Stockpile materiel may 

not be disposed except for: (1) necessary upgrading, refining, or processing; (2) necessary 

rotation to prevent deterioration; (3) determination as excess with potential financial loss if 

retained; or (4) authorization by law. 

Since 1994, the NDS has voluntarily suspended mercury sales. The suspension was in 

response to concerns raised by the U.S. Environmental Protection Agency regarding the 

SECTION 2 Financial Information 

63 
 

Department of Defense Agency Financial Report 2008 

accumulation of mercury in the global environment. The Requirements Report to Congress 

proposes additional restrictions on the use of beryllium metal and quartz. 

Before selling any materiel, Congress must enact specific enabling legislation (e.g., the National 

Defense Authorization Act). When authorized to offer materiel for sale, NDS removes the 

materiel from Materiel Held in Reserve and reclassifies these items as Materiel Held for Sale. 

The estimated market price of the stockpile materiel held for sale as of 4th Quarter, FY 2008, is 

$1.6 billion. 

General Composition of Stockpile Materiel 

The Department holds strategic and critical stockpile materiel due to statutory requirements for 

use in national defense, conservation, or national emergencies. 

Note 10. General PP&E, Net 

General PP&E, Net Dollars in Millions 

As of September 30 

Depreciation/

Amortization 

Method 

Service 

Life 

Acquisition 

Value 

(Accumulated

Depreciation/

Amortization) 

Net Book 

Value 

Prior 

FY Net 

Book Value 

Major Asset Classes 

Land N/A N/A $ 10,522.3 N/A $ 10,522.3 $ 10,509.6 

Buildings, 

Structures, and 

Facilities 

S/L 20 or 40 180,196.7 (105,262.3) 74,934.4 71,844.0 

Leasehold 

Improvements S/L Lease 

term 587.1 (391.5) 195.6 228.4 

Software S/L 2-5 or 10 8,894.9 (5,529.0) 3,365.9 3,512.3 

General Equipment S/L 5 or 10 75,324.1 (52,835.1) 22,489.0 22,094.3 

Military Equipment S/L Various 714,246.2 (333,900.0) 380,346.2 346,321.2 

Assets Under 

Capital Lease1 S/L Lease term 953.5 (536.0) 417.5 481.3 

Construction-inProgress N/A N/A 22,548.9 N/A 22,548.9 19,480.5 

Other 57.7 (1.2) 56.5 58.9 

Total 

General PP&E $ 1,013,331.4 $ (498,455.1) $514,876.3 $474,530.5 

1 Note 15 for additional information on Capital Leases 

Legend for Valuation Methods: S/L = Straight Line N/A = Not Applicable 

Heritage Assets and Stewardship Land 

The Federal Accounting Standards Advisory Board’s SFFAS No. 29, “Heritage Assets and 

Stewardship Land,” requires note disclosures for these types of assets. The Department’s policy 

is to preserve its heritage assets, which are items of historical, cultural, educational, or artistic 

importance. 

Heritage assets within the Department consist of buildings and structures, archeological sites, 

and museum collections. The Department defines these as: 

SECTION 2 Financial Information 

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Department of Defense Agency Financial Report 2008 

•	 Buildings and Structures. Buildings and structures that are listed on, or eligible for listing on, 

the National Register of Historic Places, including Multi-Use Heritage Assets. 

•	 Archeological Sites. Sites that have been identified, evaluated, and determined to be eligible 

for or are listed on the National Register of Historic Places in accordance with Section 110 

National Historical Preservation Act. 

•	 Museum Collection Items. Items which are unique for one or more of the following reasons: 

historical or natural significance; cultural, educational, or artistic importance; or significant 

technical or architectural characteristics. 

The Department holds the following quantities of heritage assets at September 30, 2008. 

Categories Measure Quantity As of 9/30/08 

Buildings and Structures Each 22,108 

Archeological Sites Site 27,158 

Museum Collection Items 

(Objects, not including fine art) Each 117,196 

Museum Collection Items (Objects, fine art) Each 10,550 

In FY 2008, the Department acquired 111 fine art objects and 4,009 other museum collection 

items through donation. 

The Department’s Stewardship Land consists mainly of mission-essential land acquired by 

donation or devise. Stewardship Land data for FY 2008 is not yet available due to limitations of 

the Department’s financial and nonfinancial management processes and systems that feed into 

the financial statements. The Department held the following acres of land as of 

September 30, 2007. 

Facility

Code Predominant Land Use Categories As of 9/30/07 

(Acres in Thousands) 

9110 Government Owned Land 8,068.8 

9111 State Owned Land (Stewardship Land) 142.0 

9120 Withdrawn Public Land (Stewardship Land) 16,137.5 

9130 Licensed and Permitted Land 2,818.8 

9140 Public Land (Stewardship Land) 705.7 

9210 Land Easement 496.1 

9220 In-leased Land 819.9 

9230 Foreign Land 613.7 

Grand Total 29,802.5 

Total – All Other Lands 12,817.3 

Total – Stewardship Lands 16,985.2 

The mission of the Department is to provide the military forces necessary to deter war and 

protect the security of the United States. In that mission, the Department, with minor 

exceptions, uses most of the buildings and stewardship land in its daily activities and includes 

the buildings on the Balance Sheet as multi-use heritage assets (capitalized and depreciated). 

SECTION 2	 Financial Information 

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Department of Defense Agency Financial Report 2008 

Other Disclosures 

The Department has use of overseas land, buildings, and other facilities obtained through 

international treaties and agreements negotiated by the Department of State. Treaty covenants 

restrict the Department’s use and disposal of real property (land and buildings) located outside 

the United States. 

The Department does not have the acquisition value for all General PP&E and uses several 

cost methodologies to provide General PP&E values for financial statement reporting purposes. 

Other primarily consists of assets awaiting disposal and the projected FY 2009 forest product 

sales. 

Assets Under Capital Lease Dollars in Millions 

As of September 30 2008 2007 

Entity as Lessee, Assets Under Capital Lease 

Land and Buildings $ 654.9 $ 719.5 

Equipment 298.6 263.2 

Accumulated Amortization (536.0) (501.4) 

Total Capital Leases $ 417.5 $ 481.3 

Note 11. Liabilities Not Covered by Budgetary Resources 

Liabilities Not Covered by Budgetary Resources Dollars in Millions 

As of September 30 2008 Restated 

2007 

Intragovernmental Liabilities 

Accounts Payable $ 0.7 $ 3.3 

Debt 12.1 12.7 

Other 9,751.2 6,986.1 

Total Intragovernmental Liabilities $ 9,764.0 $ 7,002.1 

Nonfederal Liabilities 

Accounts Payable 670.4 461.8 

Military Retirement and Other Federal Employment 

Benefits 1,599,400.6 1,547,796.2 

Environmental Liabilities 66,870.0 68,718.8 

Other Liabilities 17,253.7 13,904.4 

Total Nonfederal Liabilities $ 1,684,194.7 $ 1,630,881.2 

Total Liabilities Not Covered by Budgetary Resources $ 1,693,958.7 $ 1,637,883.3 

Total Liabilities Covered by Budgetary Resources $ 441,039.7 $ 380,932.3 

Total Liabilities $ 2,134,998.4 $ 2,018,815.6 

Liabilities Not Covered by Budgetary Resources includes liabilities for which congressional 

action is needed before budgetary resources can be provided. 

Intragovernmental Accounts Payable and Nonfederal Accounts Payable primarily represent 

liabilities in canceled appropriations that, if paid, will be disbursed using funds current in the 

year of disbursement. 

SECTION 2 Financial Information 

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Department of Defense Agency Financial Report 2008 

Debt consists primarily of borrowing from the U.S. Treasury for capital improvements to the 

Washington Aqueduct Project. Arlington County and Falls Church, Virginia, will complete 

reimbursement to the Department by 2023. 

Intragovernmental Liabilities Other primarily consists of $8.0 billion in custodial liabilities for 

nonentity assets. The amounts collected cannot be used by the Department and must be 

returned to the U.S. Treasury. Intragovernmental Liabilities Other also includes $1.4 billion in 

unfunded Federal Employees Compensation Act liabilities not due during FY 2008. 

Military Retirement and Other Federal Employment Benefits consists of various employee 

actuarial liabilities not due and payable during the current fiscal year. These liabilities primarily 

consists of $903.8 billion in pension liabilities and $686.2 billion in health benefit liabilities. Refer 

to Note 17, Military Retirement and Other Federal Employment Benefits, for additional details 

and disclosures. 

Environmental Liabilities represents the Department’s liability for existing and anticipated 

environmental cleanup and disposal. 

Nonfederal Liabilities Other primarily consists of $8.9 billion in unfunded annual leave, 

$5.2 billion in contingent liabilities, and $2.0 billion in expected expenditures for disposal of 

conventional munitions. 

Note 12. Accounts Payable 

Dollars in Millions 

2008 Restated 

2007 

Accounts Payable 

As of September 30 

Accounts 

Payable 

Interest, 

Penalties, and 

Administrative 

Fees 

Total Total 

Intragovernmental Payables $ 1,687.4 N/A $ 1,687.4 $ 1,911.5 

Nonfederal Payables 

(To the Public) 32,094.0 1.2 32,095.2 28,695.5 

Total Accounts Payable $ 33,781.4 $ 1.2 $ 33,782.6 $ 30,607.0 

Accounts Payable include amounts owed to federal and nonfederal entities for goods and 

services received by the Department. The Department’s systems do not track intragovernmental 

transactions by customer at the transaction level. Therefore, buyer-side balances are adjusted 

to agree with internal seller-side accounts receivable. Accounts Payable was adjusted by 

reclassifying amounts between federal and nonfederal entities. Intradepartmental reciprocal 

balances were then eliminated. 

In FY 2007, the Department recognized accounts payable balances of the Mechanization of 

Contract Administration Services system at gross value without reduction for partial and 

progress payments and non-accounts payable records, thus overstating nonfederal accounts 

payable. The overstated balance for FY 2007 was undeterminable due to system limitations, 

therefore, no correction was made. The FY 2008 ending balance is properly reported net of 

partial and progress payments and non-accounts payable records of $923.9 million. 

SECTION 2 Financial Information 

67 
 

 

 

 

 Environmental Liabilities and Disposal Liabilities Dollars in Millions 

2007 

Total Total 

Department of Defense Agency Financial Report 2008 

Note 13. Debt 

Debt Dollars in Millions 

2008 Restated 

2007 

As of September 30 

Beginning 

Balance 

Net 

Borrowing 

Ending 

Balance 

Net 

Borrowing 

Ending 

Balance 

Agency Debt 

(Intragovernmental) 

Debt to the Treasury $ 236.3 $ 9.4 $ 245.7 $ 27.4 $ 236.3 

Debt to the Federal 

Financing Bank 70.7 (53.8) 16.9 (102.5) 70.7 

Total Debt $ 307.0 $ (44.4) $ 262.6 $ ( 75.1) $ 307.0 

The Department’s debt consists of interest and principal payments due to the U.S. Treasury and 

the Federal Financing Bank. The Department borrows funds for the Washington Aqueduct 

Project, the U.S. Navy Afloat Prepositioning Force Program, the Military Housing Privatization 

Initiative, and the Armament Retooling and Manufacturing Support Program. 

The Department must pay the debt on direct loans if borrowers (e.g. county or city 

governments, ship owners, or housing builders) default. For loan guarantees, the 

Department must pay the amount of outstanding principal guaranteed. 

Note 14. Environmental Liabilities and Disposal Liabilities 

2008 

Current Noncurrent 

As of September 30 Liability Liability 

Environmental Liabilities–Nonfederal 

Accrued Environmental Restoration 

Liabilities 

Active Installations—Installation 

Restoration Program (IRP) and 

Building Demolition and Debris 

Removal (BD/DR) $ 1,184.2 $ 7,689.3 $ 

Active Installations—Military Munitions 

Response Program (MMRP) 117.3 4,917.8 

Formerly Used Defense Sites-IRP & 

BD/DR 169.0 3,064.2 

Formerly Used Defense Sites--MMRP 100.9 14,758.1 

Other Accrued Environmental 

Liabilities—Non-BRAC 

 Environmental Corrective Action 89.2 723.6 

 Environmental Closure Requirements 25.6 1,842.5 

Environmental Response at 

Operational Ranges 19.3 185.4 

 Asbestos 7.1 421.5 

Non-Military Equipment 1.6 87.6 

Other 43.7 1,074.5 

8,873.5 $ 9,137.8 

5,035.1 5,404.7 

3,233.2 3,814.0 

14,859.0 14,696.8 

812.8 918.4 

1,868.1 1,024.8 

204.7 209.6 

428.6 0.0 

89.2 0.0 

1,118.2 742.9 

SECTION 2 Financial Information 

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Department of Defense Agency Financial Report 2008 

Environmental Liabilities and Disposal Liabilities Dollars in Millions 

2008 2007 

As of September 30 

Current 

Liability 

Noncurrent 

Liability Total Total 

Base Realignment and Closure 

Installations 

Installation Restoration Program 657.1 3,115.5 3,772.6 3,952.2 

Military Munitions Response Program 73.7 1,001.3 1,075.0 1,028.7 

Environmental Corrective Action / 

Closure Requirements 30.5 342.3 372.8 163.3 

Environmental Disposal for Military

Equipment / Weapons Programs 

Nuclear Powered Military Equipment / 

Spent Nuclear Fuel 164.2 12,091.5 12,255.7 12,883.0 

Non-Nuclear Powered Military 

Equipment 0.2 38.9 39.1 0.0 

Other National Defense Weapons 

Systems 1.5 195.9 197.4 205.1 

Chemical Weapons Disposal 

Program 

Chemical Agents and Munitions 

Destruction (CAMD) 1,242.6 9,394.1 10,636.7 18,308.6 

CAMD Assembled Chemical 

Weapons Assessment (ACWA) 509.3 5,124.9 5,634.2 0.0 

Total Environmental Liabilities $ 4,437.0 $ 66,068.9 $ 70,505.9 $ 72,489.9 

The above note schedule was recategorized in FY 2008 for clarity. 

Other Accrued Environmental Liabilities, Non-BRAC, Other primarily consists of remediation 

related to Formerly Utilized Sites Remedial Action Program (FUSRAP). The USACE is 

responsible for FUSRAP, which remediates radiological contamination from the Department of 

Energy’s U.S. Atomic Energy and Weapons Program. 

Environmental Disclosures 

As of September 30 2008 

Dollars in Millions 

2007 

Intragovernmental Liabilities 

The unrecognized portion of the estimated total cleanup 

costs associated with general property, plant, and 

equipment. 

$ 1,953.9 $ 1,589.1 

Changes in total cleanup costs due to changes in laws, 

regulations, and/or technology. 223.3 (12.7) 

Portion of the changes in estimated costs due to 

changes in laws and technology that is related to prior 

periods. 

(35.0) (4.4) 

The table provides additional environmental disclosures required by SFFAS No. 5, “Accounting 

for Liabilities of the Federal Government.” Not all Components of the Department are able to 

compile the necessary information for the disclosures above, thus the amounts reported may 

not accurately reflect the Department’s total unrecognized costs associated with general plant, 

property, and equipment; and cleanup costs associated with changes in laws, regulations and 

technology. The Department is implementing procedures to address these deficiencies. 

SECTION 2 Financial Information 

69 
Department of Defense Agency Financial Report 2008 

Other Disclosures 

Types of Environmental Liabilities and Disposal Liabilities Identified 

The Department has cleanup requirements for DERP sites at active installations, BRAC 

installations, Formerly Used Defense Sites, sites at active installations that are not covered by 

DERP, weapons systems programs, and chemical weapons disposal programs. The weapons 

systems programs consist of chemical weapons disposal, nuclear-powered aircraft carriers, 

nuclear-powered submarines, and other nuclear ships. All cleanup is done in coordination with 

regulatory agencies, other responsible parties, and current property owners. 

Applicable Laws and Regulations for Cleanup Requirements 

The Department is required to clean up contamination resulting from past waste disposal 

practices, leaks, spills, and other past activity that created a public health or environmental risk. 

The Department accomplishes this effort in coordination with regulatory agencies and, if 

applicable, other responsible parties and current property owners. The Department is also 

required to recognize closure and post-closure costs for its General PP&E and environmental 

corrective action costs for current operations. Each of the Department’s major reporting entities 

is responsible for tracking and reporting all required environmental information related to 

environmental restoration costs, other accrued environmental costs, disposal costs of weapons 

systems, and environmental costs related to BRAC actions that have taken place. 

The Department follows the Comprehensive Environmental Response, Compensation, and 

Liability Act (CERCLA) and the Superfund Amendment and Reauthorization Act to clean up 

DERP-eligible contamination. Contamination cleanup that is not eligible for DERP is performed 

in accordance with the Resource Conservation and Recovery Act (RCRA) or other applicable 

federal or state laws. The CERCLA and RCRA require the Department to clean up 

contamination in coordination with regulatory agencies, current owners of property damaged by 

the Department, and third parties that have a partial responsibility for the environmental 

restoration. Failure to comply with agreements and legal mandates puts the Department at risk 

of incurring fines and penalties. 

The cleanup requirements for nuclear-powered aircraft carriers, submarines, and other nuclear 

ships are based on laws that affect the Department’s conduct of environmental policy and 

regulations. The Atomic Energy Act of 1954, as amended, assures the proper management of 

source, special nuclear, and byproduct materiel. As in all cases with nuclear power, the 

Department coordinates actions with the Department of Energy. The Nuclear Waste Policy Act 

of 1982 requires all owners and generators of high-level nuclear waste and spent nuclear fuel to 

pay their respective shares of the full cost of the program. Finally, the Low-Level Radioactive 

Waste Policy Amendments Act of 1986 provides for the safe and efficient management of lowlevel radioactive waste. 

The Chemical Weapons Disposal Program is based on FY 1986 National Defense Authorization 

Act (PL 99-145, as amended) that directed the Department to destroy the unitary chemical 

stockpile in accordance with the requirements of the Chemical Weapons Convention Treaty. 

The Army, as Executive Agent within the Department, provides policy, direction, and oversight 

for both the Chemical Stockpile Program and the Nonstockpile Chemical Materiel Project. As 

such, the Army is responsible for the safe and economical disposal of the U.S. stockpile of lethal 

and incapacitating chemical warfare agents and munitions. 

SECTION 2 Financial Information 

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Department of Defense Agency Financial Report 2008 

Methods for Assigning Total Cleanup Costs to Current Operating Periods 

The Department uses engineering estimates and independently validates models to estimate 

environmental costs. The models are contained within the Remedial Action Cost Engineering 

Requirements and the Normalization of Data System. The Department validates the models in 

accordance with DoD Instruction 5000.61 and primarily uses the models to estimate the 

liabilities based on data received during a preliminary assessment and initial site investigation. 

The Department primarily uses engineering estimates after obtaining extensive data during the 

remedial investigation/feasibility phase of the environmental project. 

Once the environmental cost estimates are complete, the Department complies with accounting 

standards to assign costs to current operating periods. The Department has already expensed 

the costs for cleanup associated with General PP&E placed into service before October 1, 1997, 

unless the costs are intended to be recovered through user charges. If the costs are to be 

recovered through user charges, the Department expenses cleanup costs associated with that 

portion of the asset life that has passed since the General PP&E was placed into service. The 

Department systematically recognizes the remaining cost over the remaining life of the asset. 

For General PP&E placed into service after September 30, 1997, the Department expenses 

associated environmental costs systematically over the life of the asset using two methods: 

physical capacity for operating landfills, and life expectancy in years for all other assets. The 

Department expenses the full cost to clean up contamination for Stewardship PP&E at the time 

the asset is placed into service. 

Nature of Estimates and the Disclosure of Information Regarding Possible Changes Due 

to Inflation, Deflation, Technology, or Applicable Laws and Regulations 

The Department had changes in estimates resulting from overlooked or previously unknown 

contaminants, reestimation based on different assumptions, and lessons learned. 

Environmental liabilities may change in the future due to changes in laws and regulation, 

changes in agreements with regulatory agencies, and advances in technology. 

Uncertainty Regarding the Accounting Estimates Used to Calculate the Reported 

Environmental Liabilities 

The environmental liabilities for the Department are based on accounting estimates, which 

require certain judgments and assumptions that are reasonable based upon information 

available at the time the estimates are calculated. The actual results may materially vary from 

the accounting estimates if agreements with regulatory agencies require remediation to a 

different degree than anticipated when calculating the estimates. Liabilities can be further 

affected if investigation of the environmental sites reveals contamination levels that differ from 

the estimate parameters. 

The Army has a liability to take environmental restoration and corrective action for buried 

chemical munitions and agents, however, it is unable to estimate at this time because the extent 

of the buried chemical munitions and agents is unknown. The Department is also unable to 

provide a complete estimate for FUSRAP. The Department has ongoing studies and will update 

its estimate as additional liabilities are identified. In addition, not all Components of the 

Department recognize environmental liabilities associated with General PP&E due to process 

and system limitations. 

The Department is in the process of determining the extent of the liabilities at installations that 

are realigning or closing as a result of BRAC requirements, in particular those liabilities 

associated with unexploded ordnance on training ranges. In addition, the Department has the 

potential to incur costs for restoration initiatives in conjunction with returning overseas Defense 

facilities to host nations. The Department is unable to provide a reasonable estimate at this time 

because the extent of required restoration is unknown. 

SECTION 2 Financial Information 

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Note 15. Other Liabilities 

 Other Liabilities 

As of September 30 

Intragovernmental 

Advances from Others 

Deposit Funds and Suspense Account 

Liabilities 

Disbursing Officer Cash 

Judgment Fund Liabilities 

FECA Reimbursement to the 

Department of Labor 

Custodial Liabilities 

Employer Contribution and 

Payroll Taxes Payable 

Other Liabilities 

Total Intragovernmental Other 

Liabilities 

Nonfederal 

Accrued Funded Payroll and Benefits 

Advances from Others 

Deposit Funds and Suspense Accounts 

Nonenvironmental Disposal Liabilities 

Military Equipment (Nonnuclear) 

 Excess/Obsolete Structures 

 Conventional Munitions Disposal 

Accrued Unfunded Annual Leave 

Capital Lease Liability 

Contract Holdbacks 

Employer Contribution and Payroll 

Taxes Payable 

Contingent Liabilities 

Other Liabilities 

Total Nonfederal Other Liabilities 

Total Other Liabilities 

Department of Defense Agency Financial Report 2008 

Current 

Liability
 

$ 736.9 

829.2 

2,856.0 

167.7 

548.0 

3,513.8 

377.7 

213.9 

$ 9,243.2 

8,143.1 

3,144.4 

325.2 

7.7 

116.2 

0.0 

9,025.9 

3.8 

558.9 

1,844.1 

1,216.5 

695.4 

$ 25,081.2 

$ 34,324.4 

2008 

Noncurrent
 

Liability
 

$ 0.0 

0.0 

0.0 

0.1 

847.1 

1,619.4 

0.0 

0.0 

$ 2,466.6 

0.0 

0.0 

0.0 

244.5 

616.6 

2,043.0 

0.0 

142.5 

11.3 

0.0 

5,968.0 

0.5 

$ 9,026.4 

$ 11,493.0 

Dollars in Millions 

Restated 

2007 

Total Total 

$ 736.9 $ 308.9 

829.2 1,181.6 

2,856.0 2,619.7 

167.8 167.5 

1,395.1 1,387.6 

5,133.2 5,236.6 

377.7 281.8 

213.9 237.1 

$ 11,709.8 $ 11,402.8 

8,143.1 7,478.9 

3,144.4 2,426.3 

325.2 59.9 

252.2 271.2 

732.8 663.0 

2,043.0 1,284.1 

9,025.9 8,708.1 

146.3 183.5 

570.2 812.9 

1,844.1 1,565.9 

7,184.5 5,050.6 

695.9 782.0 

$ 34,107.6 $ 29,286.4 

$ 45,817.4 $ 40,707.2 

SECTION 2 Financial Information 

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Department of Defense Agency Financial Report 2008 

The Department restated the FY 2007 balance in accrued funded payroll and benefits by $1.3 

billion. On September 30, 2007, the military payroll due for disbursement on October 1st was 

processed one day early. The payroll was not actually paid to the soldiers until October 1st even 

though it appeared as disbursed in the Department’s system. Since the processing of the payroll 

and the actual outlays for the payroll crossed over two fiscal years, the outlays in both fiscals 

years were incorrectly stated (overstated in FY 2007 and understated in FY 2008) and required 

correction. The restated amount of $1.3 billion impacted the Balance Sheet and Statement of 

Budgetary Resources. 

Intragovernmental Other Liabilities primarily consists of unemployment compensation liabilities. 

Contingent Liabilities includes $1.4 billion in estimated future contract financing payments. In 

accordance with contract terms, specific rights to the contractors’ work vests with the Federal 

government when a specific type of contract financing payment is made. This action protects 

taxpayer funds in the event of contract nonperformance. These rights should not be 

misconstrued as rights of ownership. The Department is under no obligation to pay contractors 

for amounts greater than the amounts authorized in contracts until delivery and government 

acceptance. Due to the probability the contractors will complete their efforts and deliver 

satisfactory products, and because the amount of potential future payments are estimable, the 

Department has recognized a contingent liability for estimated future payments that are 

conditional pending delivery and government acceptance. 

Nonfederal Other Liabilities primarily consists of accrued estimates for repairs and cargo 

expenses. 

Capital Lease Liability Dollars in Millions 

2008 — Asset Category 2007 

As of September 30 

Land and 

Buildings Equipment Other Total Total 

Future Payments Due 

2008 $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 50.9 

2009 43.9 1.5 0.0 45.4 45.4 

2010 43.9 0.0 0.0 43.9 43.9 

2011 41.3 0.0 0.0 41.3 41.3 

2012 15.5 0.0 0.0 15.5 15.5 

2013 11.1 0.0 0.0 11.1 0.0 

After 5 Years 17.3 0.0 0.0 17.3 28.6 

Total Future Lease 

Payments Due $ 173.0 $ 1.5 $ 0.0 $ 174.5 $ 225.6 

Less: Imputed Interest 

Executory Costs 28.2 0.0 0.0 28.2 42.1 

Net Capital Lease Liability $ 144.8 $ 1.5 $ 0.0 $ 146.3 $ 183.5 

Capital Lease Liabilities Covered by Budgetary Resources 123.9 150.8 

Capital Lease Liabilities Not Covered by Budgetary Resources 22.4 32.7 

SECTION 2 Financial Information 

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Department of Defense Agency Financial Report 2008 

Note 16. Commitments and Contingencies 

Legal Contingencies 

The Department is a party in various administrative proceedings and legal actions related to 

claims for environmental damage, equal opportunity matters, and contractual bid protests. The 

Department has accrued contingent liabilities for legal actions where the Office of General 

Counsel (OGC) considers an adverse decision probable and the amount of loss is measurable. 

In the event of an adverse judgment against the Government, some of the liabilities may be 

payable from the U.S. Treasury Judgment Fund. The Department records Judgment Fund 

liabilities in Note 12, Accounts Payable, and in Note 15, Other Liabilities. 

In FY 2008, the Department reported 55 legal actions with individual claims greater than the 

Department's FY 2008 materiality threshold of $114.4 million. The total of these 55 actions is 

approximately $2.6 trillion. Of this amount, the OGC determined that claims totaling 

approximately $21.9 billion are classified "reasonably possible," $13.4 billion are classified 

"remote," and $2.5 trillion are classified "unable to determine the probability of loss." The 

Department also had a number of potential claims that individually did not meet the 

Department's materiality threshold but did meet the individual Components’ thresholds. These 

claims are disclosed in the Components’ financial statements. 

Other Commitments and Contingencies 

Undelivered orders for open (unfilled or unreconciled) contracts citing cancelled appropriations, 

for which the Department may incur a contractual commitment for payment, total $978.3 million. 

The Department is a party in numerous individual contracts that contain clauses, such as price 

escalation, award fee payments, or dispute resolution, that may result in a future outflow of 

expenditures. Currently, the Department has limited automated system processes by which it 

captures or assesses these potential contingent liabilities, therefore, the amounts reported may 

not fairly present the Department’s contingent liabilities. 

Contingencies considered both measurable and probable have been recognized as liabilities. 

Refer to Note 15, Other Liabilities, for further details. 

Note 17. Military Retirement and Other Federal Employment Benefits 

Military Retirement and Other Federal Employment Benefits Dollars in Millions 

2008 Restated 

2007 

As of September 30 

Liabilities 

Assumed 

Interest 

Rate (%) 

(Less: Assets 

Available to 

Pay Benefits) 

Unfunded 

Liabilities Liabilities 

Pension and Health 

Actuarial Benefits 

Military Retirement

Pensions $ 1,150,748.8 5.75 $ (246,956.7) $ 903,792.1 $ 1,025,320.6 

Military Retirement Health

Benefits 317,967.9 5.75 0.0 317,967.9 317,332.8 

Military Medicare-Eligible

Retiree Benefits 500,195.7 5.75 (131,941.1) 368,254.6 516,479.2 

Total Pension and Health 

Actuarial Benefits $ 1,968,912.4 $ (378,897.8) $ 1,590,014.6 $ 1,859,132.6 

SECTION 2 Financial Information 

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Department of Defense Agency Financial Report 2008 

Military Retirement and Other Federal Employment Benefits Dollars in Millions 

2008 Restated 

2007 

As of September 30 

Liabilities 

Assumed 

Interest Rate 

(%) 

(Less: Assets 

Available to 

Pay Benefits) 

Unfunded 

Liabilities Liabilities 

Other Actuarial Benefits 

FECA 6,862.2 4.4 0.0 6,862.2 6,830.1 

Voluntary Separation 

Incentive Programs 1,146.0 4.5 (501.5) 644.5 1,250.5 

DoD Education Benefits 

Fund 1,959.2 4.5 (1,817.3) 141.9 1,858.2 

Total Other Actuarial 

Benefits $ 9,967.4 $ (2,318.8 ) $ 7,648.6 $ 9,938.8 

Other Federal Employment 

Benefits $ 5,725.6 $ (3,988.2) $ 1,737.4 $ 5,608.1 

Total Military Retirement 

and Other Federal 

Employment Benefits 

$ 1,984,605.4 $ (385,204.8) $ 1,599,400.6 $ 1,874,679.5 

Actuarial Cost Method Used: Aggregate Entry-Age Method 

Assumptions: See Below 

Market Value of Investments in Market-based and Marketable Securities: $374.5 billion 

Military Retirement Pensions 

The Military Retirement Fund (MRF) is a defined benefit plan authorized by PL 98-94 to provide 

funds used to pay annuities and pensions to retired military personnel and their survivors. The 

Department of Defense Retirement Board of Actuaries approves the long-term economic 

assumptions for inflation, salary, and interest. The actuaries calculate the actuarial liabilities 

annually using economic assumptions and actual experience (e.g., mortality and retirement 

rates). Due to reporting deadlines, the current year actuarial present value of projected plan 

benefits rolls forward from the prior year’s valuation results. The actuaries used the following 

assumptions to calculate the FY 2008 roll-forward amount: 

Military Retirement Pensions Inflation Salary Interest 

Fiscal Year 2008 2.3% (actual) 3.5% (actual) 5.75% 

Fiscal Year 2009 6.2% (estimated) 3.9% (estimated) 5.75% 

Long Term 3.0% 3.75% 5.75% 

Historically, the initial unfunded liability of the program was amortized over a 50-year period. 

Effective FY 2008, the initial unfunded liability will be paid over a 42-year period to ensure the 

annual payments cover the interest on the unfunded actuarial liablity, with the last payment 

expected to be made October 1, 2025. All subsequent gains and losses experienced are 

amortized over a 30-year period. 

SECTION 2 Financial Information 

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Department of Defense Agency Financial Report 2008 

Change in MRF Actuarial Liability Dollars in Billions 

Actuarial Liability as of September 30, 2007 $ 1,025.3 

Expected Normal Cost for FY 2008 18.9 

Plan Amendment Liability 8.1 

Assumption Change Liability 60.1 

Expected Benefit Payments for FY 2008 (45.7) 

Interest Cost for FY 2008 60.7 

Actuarial (gains)/losses due to changes in trend assumptions 23.3 

Actuarial Liability as of September 30, 2008 $ 1,150.7 

Change in Actuarial Liability $ 125.4 

Actuarial Cost Method Used: Aggregate Entry-Age Normal Method 

Market Value of Investments in Market-Based and Marketable Securities: $243.7 

Assumed Interest Rate: 5.75% 

Military Retirement Health Benefits (MRHB) 

The MRHB are post-retirement benefits the Department provides to non-Medicare-eligible 

military retirees and other eligible beneficiaries through private sector health care providers and 

Department Medical Treatment Facilities. The actuaries calculate the actuarial liabilities 

annually using assumptions and actual experience. For the FY 2008 actuarial liability 

calculation, the actuaries used the following assumptions: 

Military Retirement Health Benefits 

(MRHB) Medical Trend 

FY 2007 – 

FY 2008 

Ultimate Rate 

FY 2032 

Medicare Inpatient (Direct Care) 5.65% 6.25% 

Medicare Outpatient (Direct Care) 3.33% 6.25% 

Medicare Prescriptions (Direct Care) 3.00% 6.25% 

Medicare Inpatient (Purchased Care) 6.65% 6.25% 

Medicare Outpatient (Purchased Care) 4.33% 6.25% 

Medicare Prescriptions (Purchased Care) 8.55% 6.25% 

Non-Medicare Inpatient (Direct Care) 4.00% 6.25% 

Non-Medicare Outpatient (Direct Care) 4.00% 6.25% 

Non-Medicare Prescriptions (Direct Care) 4.00% 6.25% 

Non-Medicare Inpatient (Purchased Care) 5.34% 6.25% 

Non-Medicare Outpatient (Purchased Care) 10.45% 6.25% 

Non-Medicare Prescriptions (Purchased Care) 7.43% 6.25% 

U.S. Family Health Plan (USFHP) (Purchased Care) 10.00% 6.25% 

SECTION 2 Financial Information 

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Department of Defense Agency Financial Report 2008 

Change in MHRB Actuarial Liability Dollars in Billions 

Actuarial Liability as of September 30, 2007 (Department preMedicare + 

all Uniformed Services Medicare cost-benefit effect) $ 317.3 

Expected Normal Cost for FY 2008 10.5 

Expected Benefit Payments for FY 2008 (10.2) 

Interest Cost for FY 2008 19.4 

Actuarial (gains)/losses due to other factors (4.8) 

Actuarial (gains)/losses due to changes in trend assumptions 

Actuarial Liability as of September 30, 2008 (Department 

preMedicare + all Uniformed Services Medicare cost-benefit effect) 

Change in Actuarial Liability 

$ 

$ 

(14.2) 

318.0 

0.7 

Actuarial Cost Method Used: Aggregate Entry-Age Normal Method 

Assumed Interest Rate: 5.75% 

Medicare-Eligible Retiree Health Care Fund (MERHCF) Benefits 

In accordance with PL 106-398, MERHCF accumulates funds to finance the health care 

program liabilities of Medicare-eligible retirees for all the Uniformed Services and specific 

Medicare-eligible beneficiaries. The DoD MERHCF Board of Actuaries approves the long-term 

assumptions for medical trends and interest. The actuaries calculate the actuarial liabilities 

annually using actual experience (e.g., mortality and retirement rates, direct care costs, 

purchased care). Due to reporting deadlines, the current year actuarial present value of 

projected plan benefits rolls forward from the prior year’s results. The actuaries used the 

following assumptions to calculate the FY 2008 roll-forward amount: 

Medicare-Eligible Retiree Health Care Fund 

(MERHCF) Benefits — Medical Trend 

FY 2007 – 

FY 2008 

Ultimate Rate 

FY 2032 

Medicare Inpatient (Direct Care) 5.65% 6.25% 

Medicare Inpatient (Purchased Care) 6.65% 6.25% 

Medicare Outpatient (Direct Care) 3.33% 6.25% 

Medicare Outpatient (Purchased Care) 4.33% 6.25% 

Medicare Prescriptions (Direct Care) 3.00% 6.25% 

Medicare Prescriptions (Purchased Care) 8.55% 6.25% 

USFHP (Purchased Care) 10.00% 6.25% 

Change in MERHCF Actuarial Liability Dollars in Billions 

Actuarial Liability as of September 30, 2007 

(all Uniformed Services Medicare) $ 516.5 

Expected Normal Cost for FY 2008 10.1 

Expected Benefit Payments for FY 2008 (8.5) 

Interest Cost for FY 2008 31.3 

Actuarial (gains)/losses due to other factors (5.3) 

Actuarial (gains)/losses due to changes in trend assumptions (43.9) 

Actuarial Liability as of September 30, 2008 

(all Uniformed Services Medicare) $ 500.2 

Change in Actuarial Liability $ (16.3) 

Actuarial Cost Method Used: Aggregate Entry-Age Normal Method 

Market Value of Investments in Market-Based and Marketable Securities: $128.5 billion 

Assumed Interest Rate: 5.75% 

SECTION 2 Financial Information 

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Department of Defense Agency Financial Report 2008 

The MERHCF liability includes Medicare liabilities for all Uniformed Services. The $500.2 billion 

liability includes $489.0 billion for the Department, $10.0 billion for the Coast Guard, $1.1 billion 

for the Public Health Service and $71.0 million for National Oceanic and Atmospheric 

Association (NOAA). The FY 2008 contributions from each of the Uniformed Services were 

$11.2 billion from the Department, $272.1 million from the Coast Guard, $36.6 million from the 

Public Health Service, and $1.8 million from NOAA. 

Federal Employees Compensation Act (FECA) 

The Department of Labor (DOL) annually determines the liability for future workers’ 

compensation benefits, which includes the expected liability for death, disability, medical, and 

miscellaneous costs for approved compensation cases, plus a component for incurred-but-notreported claims. The liability is determined using historical benefit payment patterns related to a 

specific incurred period to predict the final payment related to that period. Consistent with past 

practice, these projected annual benefit payments have been discounted to present value using 

the Office of Management and Budget’s economic assumptions for 10-year U.S. Treasury notes 

and bonds. A 4.37 percent interest rate was assumed for year one and 4.77 percent was 

assumed for year two and thereafter. 

The DOL calculates this liability using wage inflation factors (cost of living adjustments or 

COLAs) and medical inflation factors (consumer price index medical or CPIM). The actual rates 

for these factors for charge back year (CBY) 2008 were also used to adjust the methodology’s 

historical payments to current year constant dollars. The compensation COLAs and CPIMs used 

in the projections for various charge back years were as follows: 

CBY 

Federal Employees — Compensation Act (FECA) 

COLA CPIM 

2008 3.03% 4.71% 

2009 3.87% 4.01% 

2010 2.73% 3.86% 

2011 2.20% 3.87% 

2012 2.23% 3.93% 

2013+ 2.30% 3.93% 

The model’s resulting projections were analyzed by DOL to ensure the estimates were reliable. 

The analysis was based on four tests: (1) a sensitivity analysis of the model of economic 

assumptions, (2) a comparison of the percentage change in the liability amount by agency to the 

percentage change in the actual incremental payments, (3) a comparison of the incremental 

paid losses (the medical component in particular) in CBY 2008 (by injury cohort) to the average 

pattern observed during the prior three charge back years, and (4) a comparison of the 

estimated liability per case in the 2008 projection to the average pattern for the projections for 

the most recent three years. 

Voluntary Separation Incentive (VSI) Program 

PL 102-190 established the VSI Program to reduce the number of military personnel on active 

duty. The VSI Board of Actuaries approved the assumed annual interest rate of 4.5 percent 

used to calculate the actuarial liability. Since the VSI Program is no longer offered, the actuarial 

liability calculated annually is expected to continue to decrease with benefit outlays and 

increase with interest cost. Market Value of Investments in Market-based and Marketable 

Securities: $545.0 million 

SECTION 2 Financial Information 

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Department of Defense Agency Financial Report 2008 

DoD Education Benefits Fund (EBF) 

PL 98-525 established the EBF program to recruit and retain military members and aid in the 

readjustment of military members to civilian life. The actuaries calculate the actuarial liability 

annually based on the assumed interest rate of 4.5 percent that was approved by the EBF 

Board of Actuaries. Market Value of Investments in Market-based and Marketable Securities: 

$1.8 billion 

Other Federal Employment Benefits 

Other Federal Employment Benefits primarily consists of accrued pensions and annuities, and 

an estimated liability for incurred-but-not-reported medical claims not processed prior to fiscal 

year end. 

Note 18. General Disclosures Related to the Statement of Net Cost 

General Disclosures Related to the Statement of Net Cost Dollars in Millions 

As of September 30 2008 

Restated 

2007 

Intragovernmental Costs $ 26,771.0 $ 27,060.9 

Public Costs 705,548.4 619,926.1 

Total Costs $ 732,319.4 $ 646,987.0 

Intragovernmental Earned Revenue (29,652.6) (20,450.0) 

Public Earned Revenue (26,619.9) (25,125.6) 

Total Earned Revenue $ (56,272.5) $ (45,575.6) 

Net Cost of Operations $ 676,046.9 $ 601,411.4 

The Statement of Net Cost (SNC) represents the net cost of programs and organizations of the 

Federal government supported by appropriations or other means. The intent of the SNC is to 

provide gross and net cost information related to the amount of output or outcome for a given 

program or organization administered by a responsible reporting entity. The Department’s 

current processes and systems do not capture and report accumulated costs for major 

programs based upon performance measures as required by the Government Performance and 

Results Act. The Department is reviewing available data and developing a cost reporting 

methodology as required by the Statement of Federal Financial Accounting Standards (SFFAS) 

No. 4, “Managerial Cost Accounting Concepts and Standards for the Federal Government.” 

Intragovernmental costs and revenues represent transactions made between two reporting 

entities within the Federal government. Public costs and revenues are exchange transactions 

made between the reporting entity and a nonfederal entity. 

The Department’s systems do not track intragovernmental transactions by customer at the 

transaction level. Buyer-side expenses are adjusted to agree with internal seller-side revenues. 

Expenses are generally adjusted by reclassifying amounts between federal and nonfederal 

expenses. Intradepartmental reciprocal balances are then eliminated. 

The SNC presents information based on budgetary obligation, disbursement, and collection 

transactions, as well as data from nonfinancial feeder systems. Amounts are adjusted for 

accruals such as payroll expenses, accounts payable, and environmental liabilities. The General 

Fund data is generally derived from budgetary transactions (obligations, disbursements, and 

collections), data from nonfinancial feeder systems, and accruals made for major items. While 

Working Capital Funds generally record transactions on an accrual basis, the systems do not 

always capture actual costs in a timely manner. 

SECTION 2 Financial Information 

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Department of Defense Agency Financial Report 2008 

Imputed costs totaling $4.2 billion equal imputed financing. The imputed costs are included 

within Gross Costs. 

The majority of the Department’s accounting systems do not capture information relative to 

heritage assets separately and distinctly from normal operations. However, the Department was 

able to identify $31.4 thousand in FY 2008 costs for acquiring, constructing, improving, 

reconstructing or renovating heritage assets. 

The Department recognized a prior period adjustment of $1.3 billion and restated net cost of 

operations. During FY 2007, the Department incorrectly reported $1.3 billion of contract 

financing payments as expenses rather than assets. Refer to Note 25, Restatements, for 

additional details. 

Note 19. Disclosures Related to the Statement of Changes in Net Position 

The Department recognized a prior period adjustment, which impacted the Statement of 

Changes in Net Position. During FY 2007, the Department incorrectly recognized $1.3 billion of 

contract financing payments as expenses rather than assets. The prior period adjustment 

reduced the net cost of operations by $1.3 billion, and increased the cumulative results of 

operations by the same amount. The resulting impact is as if the contract financing payments 

had been properly capitalized and not expensed in FY 2007. Refer to Note 25, Restatements, 

for further details. 

Other Financing Sources, Other consists primarily of adjustments to reconcile budgetary and 

proprietary trial balances. Due to financial system limitations, the Department adjusts for these 

unreconciled differences. In the SCNP, offsetting balances for intradepartmental activity 

between Earmarked Funds and All Other Funds are reported on the same lines. The 

Eliminations column contains all appropriate elimination entries, which net to zero within each 

respective line, except for intraentity imputed financing costs. 

Earmarked Cumulative Results of Operations ending balance on the SCNP does not agree with 

the Earmarked Cumulative Results reported on the Balance Sheet because the cumulative 

results on the Balance Sheet are presented net of eliminations. 

The Appropriations Received on the SCNP do not match the Appropriations on the Statement of 

Budgetary Resources due to trust fund appropriations and special fund receipts. The difference 

of $116.8 billion is primarily related to the Military Retirement Fund and the Medicare-Eligible 

Retiree Health Care Fund appropriations. In order to preserve visibility with the President’s 

Budget, these appropriations are effectively reported twice on the SBR; they are reported once 

by the Military Departments and Defense Agencies as appropriated and once by the individual 

trust funds as receipts. Refer to Note 20, Disclosures Related to the Statement of Budgetary 

Resources, for further details. 

SECTION 2 Financial Information 

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Department of Defense Agency Financial Report 2008 

Note 20. Disclosures Related to the Statement of Budgetary Resources 

Disclosures Related to the Statement of Budgetary Resources Dollars in Millions 

As of September 30, 2008 2008 Restated 

2007 

Net Amount of Budgetary Resources Obligated for Undelivered 

Orders at the End of the Period. $ 407,362.0 $ 349,757.7 

Restatements and adjustments to beginning balance of budgetary resources 

The Department restated the balance in gross outlays by $1.3 billion to correct a timing 

difference. On September 30, 2007, the military payroll due for disbursement on October 1st 

was processed one day early. The payroll was not actually paid to the soldiers until October 1st 

even though it appeared as disbursed in the Department’s system. Since the processing of the 

payroll and the actual outlays for the payroll crossed over two fiscal years, the outlays in both 

fiscals years were incorrectly stated (overstated in FY 2007 and understated in FY 2008) and 

required correction. The restated amount of $1.3 billion impacted the Balance Sheet and 

Statement of Budgetary Resources. 

Also, in FY 2007 the Department presented a combined report of the DoD financial statements 

and the financial statements of certain programs of the Executive Office of the President (EOP). 

In FY 2008, it was determined that DoD would report on EOP programs administered by DoD 

separately from the DoD financial statements. This change in reporting resulted in a 

restatement of the Department’s prior year balances. Refer to Note 25, Restatements, for 

further details. 

Reconciliation Differences 

Appropriations Received on the Statement of Budgetary Resources (SBR) exceeds 

Appropriations Received on the Statement of Changes in Net Position by $116.8 billion. This 

difference represents trust and special fund receipts reported as exchange revenue on the 

Statement of Net Cost and included in appropriations on the SBR. In accordance with Office of 

Management and Budget guidance, $90.0 billion of General Fund appropriations received by 

the Department are also recognized on the SBR as appropriations received for trust and special 

funds. 

The Statement of Budgetary Resources comparative column (FY 2007) includes $83.4 million 

more in budget authority than reported in the actual FY 2007 column of the President’s Budget 

for FY 2009. The difference is primarily due to the Treasury’s amortized payments for the 

unfunded actuarial liabilities of the Medicare-Eligible Retiree Health Care Fund and the Military 

Retirement Fund. The President’s Budget does not include these payments. Also, the 

payments are reported twice in the Department’s SBR as described above. 

The Statement of Budgetary Resources comparative column (FY 2007) also includes $634 

million less in obligations than reported in the actual FY 2007 column of the President’s Budget 

for FY 2009. The Department of the Navy corrected the understatement of obligations in 

FY 2007 prior to completion of input for the President’s Budget, however, the SBR was not 

corrected until FY 2008. This correction also created a difference in available funds. 

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Department of Defense Agency Financial Report 2008 

Permanent Indefinite Appropriations 

The Department of Defense received the following permanent indefinite appropriations: 

•	 Department of the Army General Gift Fund (10 USC 2601(b)(1)) 

•	 Department of the Navy General Gift Fund (10 USC 2601(b)(2)) 

•	 Department of the Air Force General Gift Fund (10 USC 2601 (b)(3)) 

•	 Foreign National Employees Separation Pay Account, Defense (10 USC 1581) 

•	 United States Naval Academy Gift and Museum Fund (10 USC 6973-4) 

•	 Ship Stores Profits, Navy (10 USC 7220, 31 USC 1321) 

•	 Midshipmen’s Store (10 USC 6971B) 

•	 Burdensharing Contributions Account (10 USC 2350j) 

•	 Forest Program (10 USC 2665) 

•	 DoD Base Closure Account (10 USC 2687) 

•	 Medicare-Eligible Retiree Health Care Fund (MERHCF) (10 USC 1111) 

•	 Military Retirement Fund (MRF) (10 USC 1461) 

•	 Education Benefits Fund (10 USC 2006) 

•	 Host Nation Support for U.S. Relocation Activities (10 USC 2350k) 

•	 National Defense Sealift Fund (10 USC 2218) 

•	 Environmental Restoration, Navy (10 USC 2702) 

•	 Hydraulic Mining Debris Reservoir (33 USC 683) 

•	 Maintenance and Operation of Dams and Other Improvements of Navigable Waters (16 

USC 810(a)) 

•	 Payments to States (33 USC 701c-3) 

•	 Wildlife Conservation (16 USC 670-670(f)) 

•	 Ainsworth Bequest (31 USC 1321) 

•	 DoD Family Housing Improvement Fund (10 USC 2883 (a)) 

•	 DoD Military Unaccompanied Housing Improvement Fund (10 USC 2883 (a)) 

•	 Voluntary Separation Incentive Fund (10 USC 1175(h)) 

•	 Rivers & Harbors Contributed Funds (33 USC 560, 701h) 

The above permanent indefinite appropriations cover a wide variety of purposes to help the 

Department accomplish its missions. These purposes include: (1) military retirees health care 

benefits, retirement and survivor pay, and education benefits for veterans; (2) environmental, 

coastal, and wildlife habitat restoration, and water resources maintenance; (3) costs associated 

with the closure or realignment of military installations; (4) relocation of armed forces to a host 

nation; (5) separation payments for foreign nationals; (6) the construction, purchase, alteration, 

and conversion of sealift vessels; and (7) upkeep of libraries and museums. 

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Department of Defense Agency Financial Report 2008 

Apportionment Categories for Obligations incurred 

The Department reported the following amounts of direct obligations: (1) $604.2 billion in 

category A; (2) $161.9 billion in category B; and (3) $45.7 billion in exempt from 

apportionment. The Department reported the following amounts of reimbursable obligations: 

(1) $38.6 billion in category A; (2) $151.1 billion in category B; and (3) $141.0 million in 

exempt from apportionment. Category A relates to appropriations for a specific period of time 

(e.g., Military Personnel appropriation), and category B relates to appropriations for a specific 

project (e.g., Military Construction appropriation). 

Legal Arrangements Affecting the Use of Unobligated Balances 

A portion of the Department’s unobligated balances represent trust fund receipts collected in the 

current fiscal year that exceed the amount needed to pay benefits or other valid obligations. 

These receipts are temporarily precluded from obligation by law due to a benefit formula or 

other limitation. The receipts, however, are assets of the funds and are available for obligation 

as needed in the future. The Department operates within the constraints of fiscal law and has 

no additional legal arrangements affecting the use of unobligated balances. 

Other Disclosures 

Effective FY 2007, OMB Circular No. A-136 “Financial Reporting Requirements” required 

entities to report programs administered on behalf of the Executive Office of the President. 

Based upon additional guidance from OMB, effective 3rd Quarter, FY 2008, the Department 

reports the Foreign Military Sales program separately from the basic financial statements. The 

effect reduced Obligated Balances Brought Forward by $65.0 billion, Unobligated Balances 

Brought Forward by $43.9 million, Net Amount of Budgetary Resources Obligated for 

Undelivered Orders at the End of the Period by $2.3 billion, and Available Borrowing and 

Contract Authority at the End of the Period by $32.2 billion. 

The President’s budget for FY 2010 has not yet been published. The budget is expected to be 

published in February 2009, and will be available at: 

http://www.defenselink.mil/comptroller/defbudget. 

The SBR includes intraentity transactions because the statements are presented as combined. 

The Department utilizes borrowing authority for the Military Housing Privatization Initiative and 

the Armament Retooling and Manufacturing Support Initiative. Borrowing authority is used in 

accordance with OMB Circular A-129, “Managing Federal Credit Programs.” 

The Department received additional funding of $190.5 billion to cover obligations incurred above 

baseline operations primarily in support of the Global War on Terror and disaster relief. 

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Department of Defense Agency Financial Report 2008 

Note 21. Reconciliation of Net Cost of Operations to Budget 

Reconciliation of Net Cost of Operations to Budget Dollars in Millions 

As of September 30, 2008 and 2007 2008 

Restated 

2007 

Resources Used to Finance Activities 

Budgetary Resources Obligated: 

Obligations incurred $ 1,001,667.5 $ 890,756.4 

Less: Spending authority from offsetting collections and 

recoveries (-) (232,293.7) (214,722.0) 

Obligations net of offsetting collections and recoveries $ 769,373.8 $ 676,034.4 

Less: Offsetting receipts (-) (70,247.6) (48,272.0) 

Net Budgetary Resources Obligated $ 699,126.2 $ 627,762.4 

Other Resources: 

Donations and forfeitures of property 1.5 13.8 

Transfers in/out without reimbursement (+/-) (51.2) 12.8 

Imputed financing from costs absorbed by others 4,174.9 4,421.3 

Other (+/-) 6,661.9 (8,036.6) 

Net other resources used to finance activities $ 10,787.1 $ (3,588.7) 

Total resources used to finance activities $ 709,913.3 $ 624,173.7 

Resources Used to Finance Items not Part of the Net Cost of 

Operations 

Change in budgetary resources obligated for goods, 

services and benefits ordered but not yet provided: 

Undelivered Orders (-) (57,575.7) (51,370.2) 

Unfilled Customer Orders 6,444.9 6,496.4 

Resources that fund expenses recognized in prior 

Periods (-) (29,958.6) (34,595.5) 

Budgetary offsetting collections and receipts that do not affect 

Net Cost of Operations 2,562.6 1,976.2 

Resources that finance the acquisition of assets (-) (139,518.3) (92,336.0) 

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Department of Defense Agency Financial Report 2008 

Reconciliation of Net Cost of Operations to Budget Dollars in Millions 

As of September 30, 2008 and 2007 2008 

Restated 

2007 

Other resources or adjustments to net obligated resources 

that do not affect Net Cost of Operations: 

Less: Trust or Special Fund Receipts Related to exchange 

in the Entity’s Budget (-) (10.0) (10.0) 

Other (+/-) (5,306.6) 8,010.1 

Total resources used to finance items not part of the Net 

Cost of Operations $ (223,361.7) $ (161,829.0) 

Total resources used to finance the Net Cost of Operations $ 486,551.6 $ 462,344.7 

Components of the Net Cost of Operations that will not 

Require or Generate Resources in the Current Period 

Components Requiring or Generating Resources in Future 

Period: 

Increase in annual leave liability 646.0 1,866.1 

Increase in environmental and disposal liability 1,813.2 2,615.0 

Upward/Downward reestimates of credit subsidy 

expense (+/-) 

(1.7) (4.1) 

Increase in exchange revenue receivable from the public (-) (24.7) (23.3) 

Other (+/-) 139,220.3 91,873.1 

Total components of Net Cost of Operations that will 

Require or Generate Resources in future periods 

$ 141,653.1 $ 96,326.8 

Components not Requiring or Generating Resources: 

Depreciation and amortization 37,690.3 27,287.0 

Revaluation of assets or liabilities (+/-) 8,154.5 6,073.3 

Other (+/-) 

Trust Fund Exchange Revenue (46,429.9) (39,246.6) 

Cost of Goods Sold 64,716.5 56,125.0 

Operating Material and Supplies Used 25,695.8 30,590.5 

Other (41,985.0) (38,089.3) 

Total Components of Net Cost of Operations that will not 

Require or Generate Resources 

$ 47,842.2 $ 42,739.9 

Total components of Net Cost of Operations that will not 

Require or Generate Resources in the current period 

$ 189,495.3 $ 139,066.7 

Net Cost of Operations $ 676,046.9 $ 601,411.4 

Due to the Department’s financial system limitations, budgetary data do not agree with 

proprietary expenses and capitalized assets. The difference between budgetary and proprietary 

data is a previously identified deficiency. The following adjustments (absolute value) were made 

to balance the Reconciliation of Net Cost of Operations to the Statement of Net Cost: 

(Amounts in millions) 

Resources that Finance the Acquisition of Assets $4,258.8 

Revaluation of Assets or Liabilities 2,530.0 

Total Amount $6,788.8 

The following Reconciliation of Net Cost of Operations to Budget lines are presented as combined 

instead of consolidated due to intraagency budgetary transactions not being eliminated: 

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Department of Defense Agency Financial Report 2008 

• Obligations Incurred 

• Less: Spending Authority from Offsetting Collections and Recoveries 

• Obligations Net of Offsetting Collections and Recoveries 

• Less: Offsetting Receipts 

• Net Obligations 

• Undelivered Orders 

• Unfilled Customer Orders 

Other Resources, Other and Other Resources or Adjustments to Net Obligated Resources that 

Do Not Affect Net Cost of Operations, Other primarily consist of nonexchange gains and losses 

necessary to reconcile the proprietary and budgetary accounts and losses on disposition of 

assets. Other Resources or Adjustments to Net Obligated Resources that Do Not Affect Net 

Cost of Operations, Other also consists of $1.3 billion in prior period adjustments to correct 

costs expensed that should have been capitalized as other assets in FY 2007. Refer to Note 

25, Restatements, for further details. 

Components Requiring or Generating Resources in Future Period, Other primarily consists of 

future funded expenses for the current year change in actuarial liabilities of $135.3 billion. Refer 

to Note 17, Military Retirement and Other Federal Employment Benefits, for additional 

disclosures. 

Components not Requiring or Generating Resources, Other primarily consists of other 

expenses not requiring budgetary resources, cost capitalization offsets, and applied overhead. 

Note 22. Disclosures Related to Incidental Custodial Collections 

The Department collected $4.3 million of incidental custodial revenues generated primarily from 

the collection of fines, penalties, and forfeitures. These funds are not available for use by the 

Department. At the end of each fiscal year, the accounts are closed and the balances rendered 

to the U.S. Treasury. 

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- 

 

 

 

 

 

Earmarked Funds Dollars in Millions 

2008 

 As of September 30 

Military 

Retirement 

Fund 

Medicare 

Eligible 

Retiree 

Health Care 

Fund 

Other 

Earmarked 

Funds 

Eliminations Total 

Balance Sheet 

Assets 

Fund balance with 

Treasury $ 17.5 $ 5.0 $ 2,237.7 $ 0.0 $ 2,260.2

 Investments 253,046.7 134,291.6 7,170.2 0.0 394,508.5 

Accounts and Interest 

Receivable 24.5 12.5 551.2 (5.8) 582.4 

 Other Assets 0.0 0.0 1,999.5 0.0 1,999.5 

Total Assets $ 253,088.7 $ 134,309.1 $ 11,958.6 $ (5.8) $ 399,350.6 

Liabilities and Net Position 

Military Retirement Benefits 

and Other Federal 

Employment Benefits 

1,154,108.1 500,819.2 3,105.3 0.0 1,658,032.6 

Other Liabilities 1.8 199.8 810.3 (85.7) 926.2 

Total Liabilities $1,154,109.9 $ 501,019.0 $ 3,915.6 $ (85.7) $1,658,958.8 

Unexpended 

Appropriations 0.0 0.0 4.9 0.0 4.9 

Cumulative Results of 

Operations (901,021.2) (366,709.9) 8,038.1 (86,232.0) (1,345,925.0) 

Total Liabilities and Net 

Position $ 253,088.7 $ 134,309.1 $ 11,958.6 $ (86,317.7) $ 313,038.7 

Department of Defense Agency Financial Report 2008 

Note 23. Earmarked Funds 

Statement of Net Cost

 Program Costs 171,077.5 (8,429.7) 2,252.9 (2,524.3) 162,376.4 

 Less Earned Revenue (80,659.5) (32,657.2) (1,206.9) 89,991.0 (24,532.6) 

 Net Program Costs 90,418.0 (41,086.9) 1,046.0 87,466.7 137,843.8 

Net Cost of Operations $ 90,418.0 $ (41,086.9) $ 1,046.0 $ 87,466.7 $ 137,843.8 

Statement of Changes in Net Position 

Net Position Beginning of (810,603.2) (407,796.8) 6,586.9 0.0 (1,211,813.1) the Period 

Net Cost of Operations 90,418.0 (41,086.9) 1,046.0 87,466.7 137,843.8

 Budgetary Financing 0.0 0.0 2,950.3 1,229.6 4,179.9 Sources 

Other Financing Sources 0.0 0.0 (448.2) 5.1 ( 443.1) 

Change in Net Position $ (90,418.0) $ 41,086.9 $ 1,456.1 $ (86,232.0) $ (134,107.0) 

Net Position End of Period $ (901,021.2) $ (366,709.9) $ 8,043.0 $ (86,232.0) $(1,345,920.1) 

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- 

 

 

 

 

Department of Defense Agency Financial Report 2008 

Earmarked Funds Dollars in Millions 

2007 

 As of September 30 

Military 

Retirement 

Fund 

Medicare 

Eligible 

Retiree 

Health Care 

Fund 

Other 

Earmarked 

Funds 

Eliminations Total 

Balance Sheet 

Assets 

Fund balance with Treasury $ 20.4 $ 5.0 $ 1,961.4 $ 0.0 $ 1,986.8

 Investments 218,085.0 109,549.1 6,076.8 0.0 333,710.9 

Accounts and Interest 

Receivable 143.1 10.3 515.2 (151.8) 516.8

 Other Assets 0.0 0.0 2,214.8 0.0 2,214.8 

Total Assets $ 218,248.5 $ 109,564.4 $ 10,768.2 $ (151.8) $ 338,429.3 

Liabilities and Net Position 

Military Retirement Benefits 

and Other Federal 

Employment Benefits 

1,028,850.7 517,104.6 3,108.7 0.0 1,549,064.0 

Other Liabilities 1.0 256.6 1,072.6 (133.8) 1,196.4 

Total Liabilities $1,028,851.7 $ 517,361.2 $ 4,181.3 $ (133.8) $1,550,260.4 

Unexpended Appropriations 0.0 0.0 8.1 0.0 8.1 

Cumulative Results of 

Operations (810,603.2) (407,796.8) 6,578.8 (68,286.0) (1,280,107.2) 

Total Liabilities and Net 

Position $ 218,248.5 $ 109,564.4 $ 10,768.2 $ (68,419.8) $ 270,161.3 

Statement of Net Cost

 Program Costs 105,253.0 (13,945.8) 3,175.1 (2,542.8) 91,939.5 

 Less Earned Revenue (53,311.2) (31,539.3) (1,014.3) 70,427.7 (15,437.1) 

 Net Program Costs 51,941.8 (45,485.1) 2,160.8 67,884.9 76,502.4 

Net Cost of Operations $ 51,941.8 $ (45,485.1) $ 2,160.8 $ 67,884.9 $ 76,502.4 

Statement of Changes in Net Position 

Net Position Beginning of the 

Period (758,661.4) (453,467.9) 5,371.4 0.0 (1,206,757.9) 

Net Cost of Operations 51,941.8 (45,485.1) 2,160.8 67,884.9 76,502.4 

Budgetary Financing Sources 0.0 186.0 3,154.8 (414.2) 2,926.6 

Other Financing Sources 0.0 0.0 221.5 13.1 234.6 

Change in Net Position $ (51,941.8) $ 45,671.1 $ 1,215.5 $ (68,286.0) $ (73,341.2) 

Net Position End of Period $ (810,603.2) $ (407,796.8) $ 6,586.9 $ (68,286.0) $(1,280,099.1) 

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Department of Defense Agency Financial Report 2008 

Abnormal Balances 

The abnormal balance of $8.4 billion in program costs for the Medicare-Eligible Retiree Health 

Care Fund (MERHCF) is due to a $16.3 billion decrease in MERHCF actuarial liability, which 

was updated September 30, 2008. This decrease was caused by changes in the actuarial 

assumptions, new assumptions, experience, and assumed discount rate. This decrease is offset 

by $7.9 billion in normal benefit expenses. 

Other Disclosures 

The Statement of Federal Financial Accounting Standards (SFFAS) No. 27, “Identifying and 

Reporting Earmarked Funds,” requires the disclosure of Earmarked Funds separate from All 

Other Funds on the Statement of Changes in Net Position (SCNP) and Balance Sheet. Funds 

must meet three criteria to be classified as earmarked: (1) a statute committing use of 

specifically-identified revenues for designated purposes, (2) explicit authority to retain the 

revenues, and (3) a requirement to account and report on the revenues. The Department’s 

earmarked funds are either special or trust funds and use both receipt and expenditure 

accounts to report activity to the U.S. Treasury. There have been no changes in legislation that 

significantly changed the purposes of the funds. 

The Total column is shown as consolidated and relates only to Earmarked Funds. The 

Eliminations column includes eliminations associated with Earmarked Funds and excludes the 

offsetting eliminations from All Other Funds. This exclusion causes assets to not equal liabilities 

and net position in the note. However, the amounts in the Total column equal the amounts 

reported for Earmarked Funds on the Balance Sheet. 

The SFFAS No. 27 requires the presentation of gross amounts of Earmarked Funds separate 

from All Other (nonearmarked) Funds. Cumulative Results of Operations ending balances for 

Earmarked Funds on the SCNP do not agree with the Cumulative Results of Operations for 

Earmarked Funds reported on the Balance Sheet because the Cumulative Results of 

Operations on the Balance Sheet are presented net of eliminations, whereas the SCNP 

presents Cumulative Results of Operations gross. 

Military Retirement Fund, 10 United States Code (USC) 1461. The MRF accumulates funds in 

order to finance, on an actuarially sound basis, the liabilities of the Department’s military 

retirement and survivor benefit programs. Financing sources for the MRF are interest earnings on 

Fund assets, monthly Department contributions, and annual contributions from the U.S. Treasury. 

The monthly Department contributions are calculated as a percentage of basic pay. The 

contribution from the U.S. Treasury represents the amortization of the unfunded liability for service 

performed prior to October 1, 1984, plus the amortization of actuarial gains and losses that have 

arisen since then. The U.S. Treasury annual contribution also includes the normal cost amount for 

the concurrent receipt provisions of the FY 2004 National Defense Authorization Act. 

Medicare-Eligible Retiree Health Care Fund, 10 USC 1111. The MERHCF accumulates funds 

to finance, on an actuarially sound basis, liabilities of the Department and the uniformed 

services health care programs for qualified Medicare-eligible beneficiaries. Financing sources 

for MERHCF are provided primarily through an annual actuarial liability payment from the U.S. 

Treasury, annual contributions from each Uniformed Service (Army, Navy, Air Force, Marine 

Corps, U.S. Coast Guard, National Oceanic and Atmospheric Administration, and U.S. Public 

Health Service) and interest earned from the Fund's investments. 

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Department of Defense Agency Financial Report 2008 

Other Earmarked Funds 

Special Recreation Use Fees, 16 USC 4061-6a note. The United States Army Corps of 

Engineers (USACE) is granted the authority to charge and collect fair and equitable Special 

Recreation Use Fees at campgrounds located at lakes or reservoirs that are under the 

jurisdiction of USACE. Types of allowable fees include daily use fees, admission fees, 

recreational fees, annual pass fees, and other permit type fees. The receipts are used for the 

operation and maintenance of the recreational sites. 

Hydraulic Mining in California, Debris, 33 USC 683. Operators of hydraulic mines through 

which debris flows in part or in whole to a body restrained by a dam or other work erected by the 

California Debris Commission are required to pay an annual tax as determined by the 

Commission. Taxes imposed under this code are collected and expended under the supervision 

of USACE and the direction of the Department of the Army. The funds are used for repayment 

of funds advanced by the Federal government or other agencies for construction, restraining 

works, settling reservoirs, and maintenance. 

Payments to States, Flood Control Act of 1954, 33 USC 701c-3. Seventy-five percent of all 

funds received and deposited from the leasing of lands acquired by the United States for flood 

control, navigation, and allied purposes (including the development of hydroelectric power) are 

returned to the state in which the property is located. USACE collects lease receipts into a 

receipt account. Funds are appropriated for the amount of receipts the following fiscal year. The 

funds may be expended by the states for the benefit of public schools and public roads of the 

counties in which such property is situated, or for defraying any of the expenses of county 

government. 

Maintenance and Operation of Dams and Other Improvements of Navigable Waters, 16 

USC 803(f) and 810. When a reservoir or other improvement is constructed by the U.S., the 

Federal Energy Regulatory Commission (FERC) assesses charges against licensees directly 

benefited. The statute requires all proceeds from any Indian reservation be placed to the credit of 

the Indians of the reservation. All other charges arising from licenses, except those charges 

established by the FERC for administrative reimbursement, are paid to the U.S. Treasury and 

allocated for specific uses. The Army is allocated 50 percent of charges from all licenses, except 

licenses for the occupancy and use of public lands and national forests. These funds are 

deposited in a special fund and used for maintenance, operation, and improvement of dams and 

other navigation structures that are owned by the United States, or in construction, maintenance, 

or operation of headwater, or other improvements to navigable waters of the United States. 

Fund for NonFederal Use of Disposal Facilities (for dredged material), 33 USC 2326. Any 

dredged material disposal facility under the jurisdiction of, or managed by, the Secretary of the 

Army may be used by a nonfederal interest if the Secretary determines that such use will not 

reduce the availability of the facility for project purposes. Fees may be imposed to recover 

capital, operation, and maintenance costs associated with such use. Any monies received 

through collection of fees under this law shall be available to, and used by, the Secretary of the 

Army for the operation and maintenance of the disposal facility from which the fees were 

collected. 

South Dakota Terrestrial Wildlife Habitat Restoration Trust Fund, Public Law 106-53 Sec. 

603. Yearly transfers are made from the General Fund of the U.S. Treasury to the Trust Fund 

for investment purposes. Investment activity is managed by the Bureau of the Public Debt 

(BPD). The BPD purchases and redeems nonmarketable market-based securities. Investments 

include one-day certificates, bonds, and notes. When the fund reaches the aggregate amount of 

$108 million, withdrawals may be made by USACE for payment to the State of South Dakota. 

The state uses the payments to fund annually-scheduled work for wildlife habitat restoration. 

SECTION 2 Financial Information 

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Department of Defense Agency Financial Report 2008 

Coastal Wetlands Restoration Trust Fund and Coastal Wetlands Planning, Protection, 

and Restoration Act, 16 USC 3951-3956. USACE (along with the Environmental Protection 

Agency, and the Fish and Wildlife Service) is granted the authority to work with the State of 

Louisiana to develop, review, evaluate, and approve a plan to achieve a goal of "no net loss of 

wetlands" in coastal Louisiana. USACE is also responsible for allocating funds among the 

named task force members. Federal contributions are established at 75 percent of project costs 

or 85 percent if the state has an approved Coastal Wetlands Conservation Plan. 

Rivers and Harbors Contributed and Advance Funds, 33 USC 701h, 702f, and 703. 

Whenever any state or political subdivision offers to advance funds for a flood control project 

duly adopted and authorized by law, the Secretary of the Army may, in his discretion, receive 

such funds and expend them in the immediate prosecution of such work. The funding may be 

used to construct, improve, and maintain levees, water outlets, flood control, debris removal, 

rectification and enlargement of river channels, etc. in the course of flood control and river and 

harbor maintenance. 

Inland Waterways Trust Fund, 26 USC 9506. This law made the Inland Waterways Trust Fund 

available for USACE expenditures for navigation, construction, and rehabilitation projects on 

inland waterways. Collections for excise taxes from the public are made into the Trust Fund. 

The collections are invested and investment activity is managed by the BPD. The BPD 

purchases and redeems nonmarketable market-based securities. Investments include one-day 

certificates, bonds, and notes. 

Harbor Maintenance Trust Fund, 26 USC 9505. The USACE Civil Works mission is funded by 

the Energy and Water Development Appropriations Act. The Water Resources Development Act 

of 1986 covers a portion of USACE operations and maintenance costs for deep draft navigation. 

The Harbor Maintenance Trust Fund is available for making expenditures to carry out the 

functions specified in the Act and for the payment of all expenses of administration incurred by 

the U.S. Treasury, USACE, and the Department of Commerce. Collections are made into the 

Trust Fund from taxes collected from imports, domestics, passengers, and foreign trade. The 

collections are invested and investment activity is managed by the Bureau of Public Debt. 

Foreign National Employees Separation Pay Account Trust Fund, 10 USC 1581. This fund 

makes payments from amounts obligated by the Secretary of Defense that remain unexpended 

for separation pay for foreign national employees of the Department. The foreign national 

employees’ separation pay funded by Foreign Military Sales administrative funds is maintained 

as a separate fund. 

Defense Commissary Agency Surcharge Trust Fund, 10 USC 2685. This fund was 

established as the repository for the surcharge on sales of commissary goods paid for by 

authorized patrons to finance certain operating expenses and capital purchases of the 

Commissary System, which are precluded by law from being paid with appropriated funds. Most 

Surcharge revenue is generated by the 5 percent surcharge applied to each sale. These funds 

may be used to pay for commissary store-related information technology investments, to 

purchase commissary equipment, to finance advance design modifications to prior year 

projects, for both minor and major construction projects, and to maintain and repair commissary 

facilities and equipment. 

Education Benefit Fund, 10 USC 2006. This fund was established to finance, on an actuarially 

sound basis, the liabilities of the Department’s education benefit programs for current and 

former active duty, guard, and reserve members of the armed forces, and members of the 

Coast Guard. Financing sources for the Education Benefit Fund are interest earnings on Fund 

assets and monthly Department contributions. 

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Department of Defense Agency Financial Report 2008 

Voluntary Separation Incentive Fund, 10 USC 1175. This fund was established to finance, on 

an actuarially sound basis, the liabilities of the Department’s incentive program for early 

separation from military service. Financing sources for the Voluntary Separation Incentive Fund 

are interest earnings on Fund assets and annual Department contributions. 

Military Housing Privatization Initiative, Public Law 104-106, Section 2801. The Military 

Housing Privatization Initiative (MHPI) includes both direct loan and loan guarantee programs, is 

authorized by the National Defense Authorization Act for FY 1996, and includes a series of 

authorities that allow the Department to work with the private sector to renovate and build 

military family housing. The MHPI accelerates the construction of new housing built to market 

standard and leverages private sector capital with government dollars. The Department 

provides protection to the private sector partner against specific risks, such as base closure or 

member deployment. 

Armament Retooling and Manufacturing Support Initiative, 10 USC 4551-4555. The 

Armament Retooling and Manufacturing Support Initiative is a loan guarantee program designed 

to incentivize commercial use of the Army's inactive ammunition plants for businesses willing to 

locate to a government ammunition production facility. The production capacity of these facilities 

is greater than current military requirements, however, this capacity may be needed in the 

future. Revenue from property rentals are used to pay for the operation, maintenance and 

environmental cleanup at the facilities. 

Note 24. Other Disclosures 

Other Disclosures Dollars in Millions 

 As of September 30 

Land and 

Buildings 

2008 — Asset Category

Equipment Other Total 

Entity as Lessee – Operating Leases 

Future Payments Due 

Fiscal Year 2009 $ 309.6 $ 38.5 $ 174.8 $ 522.9 

Fiscal Year 2010 291.8 35.3 178.7 505.8 

Fiscal Year 2011 274.2 36.0 186.2 496.4 

Fiscal Year 2012 244.7 19.9 194.1 458.7 

Fiscal Year 2013 223.2 5.3 126.0 354.5 

After 5 Years 364.5 0.0 131.9 496.4 

Total Future Lease 

Payments Due $ 1,708.0 $ 135.0 $ 991.7 $ 2,834.7 

Operating leases are leases that do not transfer all the benefits and risk of ownership of capital 

leases. Payments are charged as expenses over the lease term. Office space is the largest 

component of land and building leases. Other leases are generally one-year leases that are not 

building or equipment leases. Future year cost projections use the Consumer Price Index. 

Subsequent Event 

On October 16, 2008 the Cost of Living Adjustment index of 5.8% was issued for the benefits 

payments beginning January 1, 2009. The actuarial valuation model used to develop the 

actuarial liability included on the balance sheet used the 6.2% projected index at the time the 

liability was calculated. The Office of the Actuary estimates the impact of the reduction in the 

index caused an overstatement to the actuarial liability of $3.0 billion. This overstatement is 

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Department of Defense Agency Financial Report 2008 

included in the actuarial liability in the accompanying Balance Sheet and Statement of Net Cost 

at September 20, 2008. 

Note 25. Restatements 

During the reporting period, the Department identified material errors and report presentation 

changes. As a result, the Department made prior year changes in accordance with generally 

accepted accounting principles. 

Corrections Due to Accounting Errors 

As a result of ongoing audit readiness efforts, the Department discovered $1.3 billion of contract 

financing payments classified as expenses rather than assets due to legacy system 

deficiencies. This error impacted other assets, expenses, unexpended appropriations, 

cumulative results of operations, and net position. It impacted the Department’s Balance Sheet, 

Statement of Net Cost, and Statement of Changes in Net Position. Refer to Note 6, Other 

Assets, for additional details and disclosures. 

On September 30, 2007, the military payroll due for disbursement on October 1st was 

processed one day early. The payroll was not actually paid to the soldiers until October 1st even 

though it appeared as disbursed in the Department’s system. Since the processing of the payroll 

and the actual outlays for the payroll crossed over two fiscal years, the outlays in both fiscals 

years were incorrectly stated (overstated in FY 2007 and understated in FY 2008) and required 

correction. The restated amount of $1.3 billion impacted the Balance Sheet and Statement of 

Budgetary Resources. 

REPORT PRESENTATION CHANGE 

At FY 2007, the Department presented a combined report of the DoD financial statements and 

the financial statements of certain programs of the Executive Office of the President (EOP). 

After consultation and guidance from the Office of Management and Budget (OMB), it was 

determined that DoD would report on EOP programs administered by DoD separately from the 

DoD financial statements. Based on the OMB Circular No. A-136 "Financial Reporting 

Requirements,” it was further determined that only EOP activity resulting from allocation 

transfers should be reported within the DoD financial statements. As a result, DoD changed its 

financial report presentation to separately report the EOP reporting activity not resulting from 

allocation transfers. The DoD continues to report activity resulting from EOP allocation transfers 

within the DoD financial statements; and, effective FY 2008, reports other activity executed on 

behalf of EOP in a separate report. Refer to the Defense Security Cooperation Agency 

Unaudited Financial Statements available on the Comptroller Web site. (See Appendix B.) 

Effect on Comparative Balances 

The following chart reflects the cumulative effect on the Department’s balances reported in the 

comparative period: 

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Department of Defense Agency Financial Report 2008 

FY 2007 Balance Sheet Dollars in Billions 

Fund Balance with Treasury $ (10.6) 

Cash and Other Monetary Assets (12.5) 

Loans Receivable (3.0) 

Other Assets (8.0) 

Total Assets $ (34.1) 

Debt (2.9) 

Other Liabilities (28.9) 

Total Liabilities $ (31.8) 

Net Position $ (2.3) 

FY 2007 Statement of Net Cost Dollars in Billions 

Gross Costs (21.1) 

Less: Earned Revenue 0.1 

Net Cost of Operations $ (21.0) 

FY 2007 Statement of Changes in Net Position Dollars in Billions 

Cumulative Results of Operations 

Budgetary Financing Sources: 

Appropriations used (4.4) 

Nonexchange revenue (16.6) 

Other Financing Sources: 

Transfers–in/out without reimbursement .1 

Total Financing Sources $ (20.9) 

Net cost of Operations $ (21.0) 

Net Change $ .1 

Unexpended Appropriations 

Beginning Balances $ (1.8) 

Budgetary Financing Sources: 

Appropriations Received (5.0) 

Appropriation used 4.4 

Total Budgetary Financing Sources $ (.6) 

Unexpended Appropriations $ (2.4) 

Net Position $ (2.3) 

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Department of Defense Agency Financial Report 2008 

FY 2007 Statement of Budgetary Resources Dollars in Billions 

Comparative Year Effect for FY 2007 

Appropriation $ (20.8) 

Contract Authority (48.0) 

Spending authority from offsetting collections 

Earned 

 Collected (0.9) 

Permanently Not Available 16.6 

Total Budgetary Resources $ (53.1) 

Obligations (53.1) 

Total Status of Budgetary Resources $ (53.1) 

Gross Outlays (20.3) 

Less: Offsetting Collections 16.7 

Net Outlays $ (3.6) 

The following chart reflects the cumulative effect on the Department’s balances reported in the 

current period: 

FY 2008 Statement of Changes in Net Position Dollars in Billions 

Beginning Balance Change for FY 2008 

Cumulative Results of Operations 

Beginning Balances $ (1.3) 

FY 2008 Statement of Budgetary Resources Dollars in Billions 

Beginning Balance Change for FY 2008 

Unpaid Obligations, Brought Forward $ (63.8) 

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Department of Defense Agency Financial Report 2008 

REQUIRED SUPPLEMENTARY STEWARDSHIP INFORMATION 

Federal financial reporting requires DoD to report on its stewardship over certain resources that 

cannot be measured in traditional financial reports. These resources do not meet the criteria for 

assets and liabilities required to be reported in the financial statements but are important to 

understanding the operations and financial condition of DoD at the date of the financial 

statements and in subsequent periods. 

The Department’s stewardship investments comprise, and are measured in terms of, expense 

incurred for: 1) federally-financed but not federally-owned physical property (Nonfederal 

Physical Property); and 2) federally-financed research and development (Research and 

Development). Information on additional reporting requirements for Nonfederal Physical 

Property and Research and Development follows. 

Nonfederal Physical Property 

The Nonfederal Physical Property investments support the purchase, construction, or major 

renovation of physical property owned by state and local governments. In addition, Nonfederal 

Physical Property Investments include federally-owned physical property transferred to state 

and local governments. 

The Department continued transitioning to a new methodology for reporting Nonfederal Physical 

Property during 2008. Investment values included in this report are based on Nonfederal Physical 

Property outlays (expenditures). Outlays are used because current Department accounting 

systems are unable to capture and summarize costs in accordance with federal accounting 

standards. 

Investments in Research and Development 

Investment values included in this report are based on Research and Development outlays 

(expenditures). Outlays are used because current Department accounting systems are unable to 

capture and summarize costs in accordance with federal accounting standards. The Department 

continues to improve its methodology for reporting this information. Research and Development 

(R&D) programs are classified in the following categories: Basic Research, Applied Research and 

Development. Therefore, the amounts reported in the Investments in R&D table show outlays 

from FY 2006 – FY 2008 for all DoD Components. The definition for each type of Research and 

Development Category and Subcategories are explained below. 

Basic Research is the systematic study to gain knowledge or understanding of the fundamental 

aspects of phenomena and of observable facts without specific applications, processes, or 

products in mind. Basic Research involves the gathering of a fuller knowledge or understanding 

of the subject under study. Major outputs are scientific studies and research papers. 

Nonfederal Physical Property 

Department of Defense Consolidated — Nonfederal Physical Property 

Yearly Investments in State and Local Governments 

For Fiscal Years 2008 through 2004 Dollars in Millions 

Categories 2008 2007 FY 2006 FY 2005 FY 2004 

Transferred Assets: 

National Defense Mission Related $ 1,169.2 $ 1,051.0 $ 1,295.5 $ 1,394.7 $ 4,483.7 

Funded Assets: 

National Defense Mission Related 19.6 2.8 8.5 8.3 18.3 

Total $ 1,188.8 $ 1,053.8 $ 1,304.0 $ 1403.0 $ 4,502.0 

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Department of Defense Agency Financial Report 2008 

Applied Research is the systematic study to gain knowledge or understanding necessary for 

determining the means by which a recognized and specific need may be met. It is the practical 

application of such knowledge or understanding for the purpose of meeting a recognized need. 

This research points toward specific military needs with a view toward developing and 

evaluating the feasibility and practicability of proposed solutions and determining their 

parameters. Major outputs are scientific studies, investigations, and research papers, hardware 

components, software codes, and limited construction of, or part of, a weapon system to include 

non-system-specific development efforts. 

Development takes what has been discovered or learned from basic and applied research and 

uses it to establish technological feasibility, assessment of operability, and production capability. 

Development consists of the five stages defined in the Investments is R&D table. 

Advanced Technology Development is the systematic use of the knowledge or understanding 

gained from research and directed toward proof of technological feasibility and assessment of 

operational and productibility rather than directed toward the development of hardware for 

service use. It employs demonstration activities intended to prove or test a technology or 

method. 

Advanced Component Development and Prototypes evaluates integrated technologies in as 

realistic an operating environment as possible to assess the performance or cost reduction 

potential of advanced technology. Programs in this phase are generally system specific. Major 

outputs of Advanced Component Development and Prototypes are hardware and software 

components, or complete weapon systems, ready for operational and developmental testing 

and field use. 

Investments in Research and Development (R&D) 

Department of Defense Consolidated 

Yearly Investments in Research and Development 

For the Current and Four Preceding Fiscal Years Dollars in Millions 

Categories 2008 2007 FY 2006 FY 2005 (1) FY 2004 (1) 

Basic Research $ 1,526.4 $ 1,331.2 $ 1,086.8 $ 1,107.2 $ 1,037.7 

Applied Research 3,169.7 4,462.0 3,787.0 3,757.5 3,461.3 

Development 

Advanced Technology 

Development 5,977.9 6,019.7 5,737.4 5,795.2 5,057.0 

Advanced Component 

Development and 

Prototypes 

15,410.6 14,109.6 11,906.9 12,793.3 10,944.6 

System Development 

and Demonstration 18,052.9 16,737.8 13,209.8 12,253.1 10,834.8 

Research, 

Development, Test 

and Evaluation 

Management Support 

5,471.0 4,705.4 3,736.0 3,590.6 3,405.6 

Operational Systems 

Development 20,246.7 13,535.1 5,509.8 5,334.6 5,134.1 

Totals: $69,855.2 $60,900.8 $44,973.7 $44,631.5 $39,875.1 

(1) Total amount available for obligations 

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Department of Defense Agency Financial Report 2008 

System Development and Demonstration concludes the program or project and prepares it for 

production. It consists primarily of preproduction efforts, such as logistics and repair studies. 

Major outputs are weapons systems finalized for complete operational and developmental 

testing. 

Research, Development, Test, and Evaluation Management Support is support for installations 

and operations for general research and development use. This category includes costs 

associated with test ranges, military construction maintenance support for laboratories, 

operation and maintenance of test aircraft and ships, and studies and analyses in support of the 

Research and Development program. 

Operational Systems Development is concerned with development projects in support of 

programs or upgrades still in engineering and manufacturing development, which have received 

approval for production, and for which production funds have been budgeted in subsequent 

fiscal years. 

REQUIRED SUPPLEMENTARY INFORMATION 

Heritage Assets 

Heritage Assets 

2008 

 For Fiscal Year Ended 

 September 30, 2008 

Measure 

Quantity 

As of 

10/1/2007 Additions Deletions As of 9/30/2008 

Categories 

Buildings and Structures Each 17,117 6,675 1,684 22,108 

Archeological Sites Each 27,955 1,411 2,208 27,158 

Museum Collection Items 

(Objects, Not Including Fine Art) Each 113,269 4,012 85 117,196 

Museum Collection Items 

(Fine Art) Each 10,446 206 102 10,550 

Heritage Assets are items of historical, natural, and cultural, educational, or artistic significance 

(e.g. aesthetic) or items with significant architectural characteristics. Heritage Assets are 

expected to be preserved indefinitely. FY 2008 categories are as follows: 

Buildings and Structures. Buildings and structures that are listed on, or eligible for listing on, 

the National Register of Historic Places, including Multi-Use Heritage Assets. 

Archeological Sites. Sites that have been identified, evaluated, and determined to be eligible 

for or are listed on the National Register of Historic Places. 

Museums Collection Items. Items which are unique for one or more of the following reasons: 

historical or natural significance; cultural, educational or artistic importance; or significant 

technical or architectural characteristics. Museum collection items are divided into two 

subcategories: fine art and objects. Fine art includes paintings, sculptures, and other threedimensional art. Objects are current use, excess, obsolete, or condemned materiel; war 

trophies; and personal property, such as uniforms, medals, or diaries, and military equipment. 

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Department of Defense Agency Financial Report 2008 

Stewardship Land 

Stewardship Land 

For Fiscal Year Ended September 30, 2007 (Acres in Thousands) 

Facility 

Code Facility Title As of 10/1/2006 Additions Deletions As of 9/30/2007 

9110 Government Owned Land 7,925.0 144.0 8,069.0 

9111 State Owned Land 141.5 0.5 142.0 

9120 Withdrawn Public land 16,064.0 73.5 16,137.5 

9130 Licensed and Permitted Land 4,095.3 (1,276.5) 2,818.8 

9140 Public Land 701.9 3.8 705.7 

9210 Land Easement 498.4 (2.2) 496.1 

9220 In-leased Land 2,329.7 (1,509.8) 819.9 

9230 Foreign Land 652.3 (38.6) 613.7 

Grand Total 29,802.5 

TOTAL - All Other Lands 12,817.3 

TOTAL – Stewardship Lands 16,985.2 

Narrative Statement: 

The fiscal year ended September 30, 2008 stewardship land data will not be available until 

December 15, 2008 due to limitations of the Department’s financial and nonfinancial management processes and systems that 

feed into the financial statements. 

Stewardship Land is land and land rights owned by the Department but not acquired for, or in 

connection with, items of General Property, Plant, and Equipment. All land provided to the 

Department from the public domain or at no cost, regardless of its use, is classified as 

Stewardship Land. 

Stewardship Land is presented in context of all categories of DoD lands and reported in acres 

based on the predominant use of the land. The three categories of Stewardship Land held in 

public trust are: State-Owned Land, Withdrawn Public-Land, and Public Land. 

Real Property Deferred Maintenance 

Real Property Deferred Maintenance 

For Fiscal Year Ended September 30, 2008 (Dollars in Millions) 

Current Fiscal Year (CFY) 

Property Type Plant Replacement 

Value 

Required Work 

(deferred maintenance) Percentage 

Category 1 $555,787 $62,810 11% 

Category 2 $52,190 $7,854 15% 

Category 3 $37,913 $6,239 16% 

The deferred maintenance amount is based upon facility Q-ratings found in the Department’s real 

property inventory. Q-ratings represent work needed to bring a facility to a fully serviceable 

condition with no repair needs. The reported deferred maintenance is the difference between the 

facility Q rating and the target Q rating that represents the acceptable operating condition 

established by each Component within the Department. The percentage column reflects the 

percent of total plant replacement value for each category represented by deferred maintenance. 

Facility Categories are as follows: 

• Category 1: Buildings, Structures, and Utilities that are enduring and required to support an 

ongoing mission, including multi-use Heritage Assets. 

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Department of Defense Agency Financial Report 2008 

•	 Category 2: Buildings, Structures, and Utilities that are excess to requirements or planned 

for replacement or disposal, including multi-use Heritage Assets. 

•	 Category 3: Buildings, Structures, and Utilities that are Heritage Assets. 

Military Equipment Deferred Maintenance 

Depot maintenance requirements for military equipment are developed during the annual 

budget process. The table below shows the deferred unfunded requirements for the depot 

maintenance program. The Department Components’ FY 2008 Budget Estimates contain 

detailed information on each program. 

Military Equipment Deferred Maintenance 

For Fiscal Year Ended September 30, 2008 

Major Categories (Dollars in Millions) 

1. Aircraft $762.0 

2. Automotive Equipment $1.0 

3. Combat Vehicles $266.0 

4. Construction Equipment $19.0 

5. Electronics and Communications Systems $456.2 

6. Missiles $215.6 

7. Ships $35.9 

8. Ordnance Weapons and Munitions $50.6 

9. General Purpose Equipment $48.0 

10. All Other Items Not Identified to Above Categories $1,339.6 

Total $3,193.9 

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Department of Defense Agency Financial Report 2008 

2008 

Statement Of Disaggregated Budgetary Resources For the Years Ended September 30, 2008 and 2007 Dollars in Millions 

Military 

Retirement 

Fund 

Medicare 

Eligible 

Retiree 

Health Care 

Fund 

Research, 

Development, 

Test and 

Evaluation 

Civil 

Works 

Operation 

and 

Maintenance Procurement 

Military 

Personnel 

Budgetary Resources Unobligated balance, brought forward, October 1 $ 0.0 $

 0.0 

$ 13,823.8 $ 9,648.2 $ 9,812.4 $ 46,367.8 $ 882.8 

Recoveries of prior year unpaid obligations 0.0 0.0 4,325.7 580.1 19,430.7 11,862.6 8,289.8 Budget authority  Appropriation 80,751.0 32,270.8 75,538.3 9,566.6 251,295.1 147,536.8 135,615.4  Borrowing authority 0.0 0.0 0.0 0.0 0.0 0.0 0.0  Contract authority 0.0 0.0 0.0 0.0 0.0 0.0 0.0  Spending authority from offsetting collections Earned Collected 0.0 0.0 9,631.0 9,841.0 25,972.4 3,160.0 1,029.5 

 Change in receivables from Federal sources 0.0 0.0 (82.1) (195.3) (38.0) 99.9 (43.2) 

 Change in unfilled customer orders 

Advance received 

0.0 0.0 (195.9) 522.0 309.2 (70.5) 0.0 

 Without advance from Federal sources 0.0 0.0 (81.9) 1,477.1 1,186.9 749.9 (17.9) 

 Expenditure transfers from trust funds 0.0 0.0 0.0 766.0 0.0 0.0 0.0 

Subtotal 80,751.0 32,270.8 84,809.4 21,977.4 278,725.6 151,476.1 136,583.8 

Nonexpenditure transfers, net, anticipated and actual 0.0 0.0 1,480.2 182.8 6,025.2 16,731.0 1,011.4 Temporarily not available pursuant to Public Law (35,102.2) (24,484.9) 0.0 (10.0) 0.0 0.0 0.0 Permanently not available 0.0 0.0 (1,533.1) (5.5) (3,980.0) (4,805.9) (398.3) Total Budgetary Resources $ 45,648.8 $ 7,785.9 $ 102,906.0 $ 32,373.0 $ 310,013.9 $ 221,631.6 $ 146,369.5 

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2008 

Status Of Budgetary Resources For the Years Ended September 30, 2008 and 2007 Dollars in Millions 

Military 

Retirement 

Fund 

Medicare 

Eligible 

Retiree 

Health Care 

Fund 

Research, 

Development, 

Test and 

Evaluation Civil Works 

Operation 

and 

Maintenance Procurement 

Military 

Personnel 

Obligations incurred: 

Direct $ 45,648.8 $ 7,785.9 $ 76,279.6 $ 9,125.3 $ 271,478.9 $ 152,984.3 $ 144,550.1 Reimbursable 0.0 0.0 10,121.4 11,555.0 27,906.2 3,616.2 999.9 

Subtotal 45,648.8 7,785.9 86,401.0 20,680.3 299,385.1 156,600.5 145,550.0 Unobligated balance: 

Apportioned 0.0 0.0 15,194.3 10,694.6 2,310.8 63,641.3 58.7 Exempt from apportionment 0.0 0.0 0.0 998.1 0.0 0.0 0.0 

 Subtotal 0.0 0.0 15,194.3 11,692.7 2,310.8 63,641.3 58.7 Unobligated balance not available 0.0 0.0 1,310.7 0.0 8,318.0 1,389.8 760.8 Total status of budgetary resources $ 45,648.8 $ 7,785.9 $ 102,906.0 $ 32,373.0 $ 310,013.9 $ 221,631.6 $ 146,369.5 Change in Obligated Balance: Obligated balance, net 

Unpaid obligations, brought forward, October 1 $ 3,530.2 $ 368.8 $ 39,037.5 $ 6,045.6 $ 107,560.1 $ 120,652.8 $ 8,593.0 Less: Uncollected customer payments from Federal sources, brought forward, October 1 0.0 0.0 (5,637.0) (4,136.3) (11,872.3) (2,753.3) (22.4) Total unpaid obligated balance $ 3,530.2 $ 368.8 $ 33,400.5 $ 1,909.3 $ 95,687.8 $ 117,899.5 $ 8,570.6 

Obligations incurred net 45,648.8 7,785.9 86,401.0 20,680.3 299,385.1 156,600.5 145,550.0 Less: Gross outlays (45,819.7) (7,914.6) (80,805.9) (16,752.9) (265,407.4) (117,023.7) (137,194.5) Obligated balance transferred, net 

Actual transfers, unpaid obligations (+/-) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Actual transfers, uncollected customer payments from Federal sources 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total Unpaid obligated balance transferred, net 0.0 0.0 0.0 0.0 0.0 0.0 0.0 

Less: Recoveries of prior year unpaid obligations, actual 0.0 0.0 (4,325.7) (580.1) (19,430.7) (11,862.6) (8,289.8) Change in uncollected customer payments from Federal sources 0.0 0.0 164.0 (1,281.8) (1,148.9) (849.8) 61.0 Obligated balance, net, end of period 

Unpaid obligations 3,359.3 240.1 40,306.9 9,392.9 122,107.1 148,367.0 8,658.7 Less: Uncollected customer payments (+/-) from Federal sources 0.0 0.0 (5,473.0) (5,418.1) (13,021.2) (3,603.1) 38.6 Total, unpaid obligated balance, net, end of period $ 3,359.3 $ 240.1 $ 34,833.9 $ 3,974.8 $ 109,085.9 $ 144,763.9 $ 8,697.3 

Net Net Outlays: 

Gross outlays $ 45,819.7 $ 7,914.6 $ 80,805.9 $ 16,752.9 $ 265,407.4 $ 117,023.7 $ 137,194.5 Less: Offsetting collections 0.0 0.0 (9,435.1) (11,129.0) (26,281.6) (3,089.6) (1,029.5) Less: Distributed Offsetting receipts (46,187.0) (20,774.9) 0.0 (638.9) 0.0 0.0 0.0 Net Outlays $ (367.3) $ (12,860.3) $ 71,370.8 $ 4,985.0 $ 239,125.8 $ 113,934.1 $ 136,165.0 

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Department of Defense Agency Financial Report 2008 

 Combined Statement Of Budgetary Resources Budgetary  For the Years Ended September 30, 2008 and 2007  Dollars in Millions Other 2008 Combined 2007 Combined 

Budgetary Financing Accounts 

Budgetary Resources Unobligated balance, brought forward, October 1 $ 15,839.2 $ 111,980.6 $ 85,778.0 Recoveries of prior year unpaid obligations 1,975.9 49,744.1 85,778.0 Budget authority  Appropriation 108,909.4 859,403.8 741,888.3  Borrowing authority 0.0 0.0 0.0  Contract authority (0.1) 78,927.8 68,668.0  Spending authority from offsetting collections Earned Collected 1,536.9 174,493.0 164,627.1 

 Change in receivables from Federal sources 104.1 791.8 (1,277.6) 

 Change in unfilled customer orders 

Advance received 

52.1 753.2 448.9 

 Without advance from Federal sources (2.5) 5,679.1 5,994.0 

 Expenditure transfers from trust funds 0.0 766.0 0.0 Subtotal 110,599.9 1,120,814.7 980,348.7 

Nonexpenditure transfers, net, anticipated and actual (23,760.0) (264.1) (111.3) Temporarily not available pursuant to Public Law (352.3) (59,949.4) (33,819.5) Permanently not available (136.2) (85,156.8) (74,763.9) Total Budgetary Resources $ 104,166.5 $ 1,137,169.1 $ 1,002,294.5 

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Department of Defense Agency Financial Report 2008 

Statement of Disaggregated Budgetary Resources Budgetary For the Years Ended September 30, 2008 and 2007 Dollars in Millions Other 2008 Combined 2007 Combined Budgetary Financing Accounts 

Obligations incurred: 

Direct $ 90,666.8 $ 811,662.0 $ 719,463.4 Reimbursable 1,305.4 189,837.4 170,850.3 

Subtotal 91,972.2 1,001,499.4 890,313.7 Unobligated balance: 

Apportioned 9,679.2 120,047.8 98,585.7 Exempt from apportionment 18.2 1,060.7 1,050.5 

Subtotal 9,697.4 121,108.5 99,636.2 Unobligated balance not available 2,496.9 14,561.2 12,344.6 Total status of budgetary resources 104,166.5 1,137,169.1 1,002,294.5 Change in Obligated Balance: Obligated balance, net 

Unpaid obligations, brought forward, October 1 16,284.5 372,558.6 321,809.1 Less: Uncollected customer payments from Federal sources, brought forward, October 1 (21.0) (60,131.3) (55,414.9) Total unpaid obligated balance 16,263.5 312,427.3 266,394.2 

Obligations incurred net 91,972.2 1,001,499.4 890,313.7 Less: Gross outlays (86,563.3) (892,195.4) (794,701.2) Obligated balance transferred, net 

Actual transfers, unpaid obligations (+/-) 0.0 0.0 0.0 Actual transfers, uncollected customer payments from Federal sources 0.0 0.0 0.0 Total Unpaid obligated balance transferred ,net 0.0 0.0 0.0 

Less: Recoveries of prior year unpaid obligations, actual (1,975.9) (49,744.1) (44,862.5) Change in uncollected customer payments from Federal sources (101.5) (6,470.9) (4,716.4) Obligated balance, net, end of period 

Unpaid obligations 19,717.5 432,118.5 372,559.1 Less: Uncollected customer payments (+/-) from Federal sources (122.5) (66,602.2) (60,131.3) Total, unpaid obligated balance, net, end of period 19,595.0 365,516.3 312,427.8 

Net Net Outlays: 

Gross outlays 86,563.3 892,195.4 794,701.2 Less: Offsetting collections (1,588.9) (176,012.2) (165,076.0) Less: Distributed Offsetting receipts (2,647.0) (70,247.8) (48,272.0) Net Outlays $ 82,327.4 $ 645,935.4 $ 581,353.2 

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Section 3: Other Accompanying Information 

This section contains the DoD Inspector General’s summary of the most significant 

management and performance challenges facing the Department, and the Department’s 

response to the Inspector General’s assessment. This section also includes a summary of the 

financial statement audit and management assurances, as well as a detailed report of the 

Improper Payments Information Act of 2002. 

The FY 2008 financial statements for programs of the Executive Office of the President (EOP) 

are included in the “Defense Security Cooperation Agency Unaudited Financial Statements and 

Notes” available on the DoD Comptroller Web site. (See Appendix B.) In FY 2007, DoD 

financial statements included certain programs of EOP. Revised guidance from the Office of 

Management and Budget (OMB) declared that these programs be reported separately from the 

DoD financial statements. All other activities resulting from EOP allocation transfers are 

reported within the DoD financial statements. 

INSPECTOR GENERAL’S SUMMARY OF MANAGEMENT AND PERFORMANCE 

CHALLENGES, AND MANAGEMENT’S RESPONSE TO INSPECTOR GENERAL’S 

CHALLENGES 

The Reports Consolidation Act of 2000 requires that the Agency Financial Report include a 

statement prepared by the Agency’s Inspector General (IG) summarizing what the IG considers 

the most serious management and performance challenges facing the Agency and briefly 

assessing the progress in addressing those challenges. The DoD Inspector General identified the 

following seven management and performance challenges facing the Department of Defense for 

FY 2008: 

1. Financial Management 

2. Acquisition Processes and Contract Management 

3. Joint Warfighting and Readiness 

4. Information Assurance, Security, and Privacy 

5. Health Care 

6. Equipping and Training Iraqi and Afghan Security Forces 

7. Nuclear Enterprise 

The following table outlines these challenges and includes both the IG’s and DoD 

management’s assessments of the Department’s progress in addressing these issues. Columns 

A and B were prepared by the IG; Column C was prepared by the Department. 

1. FINANCIAL MANAGEMENT 

FINANCIAL STATEMENTS A. IG Summary of Challenge 

The Department continues to face financial management challenges that adversely affect DoD’s ability to provide 

reliable, timely, and useful financial and managerial data needed to support operating, budgeting, and policy 

decisions. Since 1995, the Government Accountability Office has identified DoD’s Financial Management as a 

high-risk area. The DoD’s financial management problems are so significant, they constitute the single largest 

and most challenging impediment to the U.S. Government’s ability to obtain an opinion on its consolidated 

financial statements. 

In the FY 2007 audit opinion on DoD’s consolidated financial statements, the IG reported the same 12 material 

internal control weaknesses as the previous year, and added one additional material weakness. These pervasive 

and longstanding financial management issues directly affect the Department’s ability to obtain an unqualified 

opinion on its financial statements. These weaknesses affect the safeguarding of assets and proper use of funds, 

and impair the prevention and identification of fraud, waste, and abuse. 

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FINANCIAL STATEMENTS B. IG Assessment of Progress 

One significant measure of the ongoing progress in the area of financial management would be the Department’s 

ability to obtain an unqualified opinion on its financial statements. The U.S. Army Corps of Engineers received a 

qualified opinion on its FY 2007 financial statements. While some agencies maintained their audit opinions, other 

agencies had their audit opinions downgraded. Specifically, the Defense Commissary Agency, Defense Contract 

Audit Agency, Defense Finance and Accounting Service, Military Retirement Fund, and Defense Office of the 

Inspector General all continued to receive unqualified opinions while the Medicare-Eligible Health Care Fund 

continued to receive a qualified audit opinion. However, the Defense Threat Reduction Agency received a 

qualified opinion from an independent public accounting firm, which the IG would not endorse because the 

problems identified were pervasive, and a disclaimer of opinion was more appropriate under these circumstances. 

In addition, the Chemical and Biological Defense Program received a disclaimer of opinion. 

Although DoD is far from reaching an unqualified opinion, the Department has demonstrated improvement. 

FINANCIAL STATEMENTS C. Management’s Assessment 

The Department appreciates the opportunity to address the improvements in financial management being made 

throughout DoD. Our financial management challenges are pervasive and well documented. The Department’s 

goals are to correct its financial material weaknesses, improve financial information for decision-makers, and 

accomplish an unqualified audit opinion on the Department’s consolidated financial statements. The Department’s 

corrective action plan is provided in the Financial Improvement and Audit Readiness (FIAR) Plan, described in 

more detail in the next section. 

Significant progress in improving financial statements and achieving unqualified opinions has been made. In 

FY 2007, seven reporting entities received an audit opinion on their financial statements: 

• Defense Commissary Agency (Unqualified) 

• Defense Contract Audit Agency (Unqualified) 

• Defense Finance and Accounting Service (Unqualified) 

• Military Retirement Fund (Unqualified) 

• Office of the Inspector General (Unqualified) 

• Medicare-Eligible Retiree Health Care Fund (Qualified) 

• U.S. Army Corps of Engineers (Qualified) 

For the fourth consecutive year, the Department has received favorable audit reviews on the following 

Departmentwide financial statement line items: 

• Investments 

• Federal Employees’ Compensation Act Liabilities 

• Appropriations Received 

The Department is making substantial progress in achieving audit readiness. For example, USACE has been 

audited for the first time and received a qualified opinion. Audit readiness accomplishments in FY 2008 represent 

approximately $49 billion in assets and $241 billion in liabilities, as follows: 

• USACE received a qualified audit opinion on its FY 2007 and FY 2006 financial statements. This represents 

$44.6 billion in assets and $4.4 billion in liabilities. 

• An (Independent Public Auditor) IPA completed its examination of the TRICARE Management Activity’s 

(TMA) Contract Resource Management (CRM) ($1.3 billion in assets and $236.0 billion in liabilities), and 

validated the TMA’s assertion on audit readiness for the CRM Balance Sheet. 

• The TMA recently submitted two segment assertion packages: 1) the CRM Statement of Net Cost 

($8.9 billion), Statement of Changes in Net Position (-$232.9 billion), and Statement of Budgetary Resources 

($11.8 billion); and 2) the Uniformed Services University of the Health Sciences (USUHS) Statement of 

Budgetary Resources ($160.3 million). 

• The TMA recently awarded a contract for an IPA to perform an examination on the USUHS Balance Sheet 

($151.6 million in assets and $10.3 million in liabilities), Statement of Net Cost ($158.3 million), and 

Statement of Changes in Net Position ($141.2 million). 

• The Defense Information Systems Agency’s (DISA) General and Working Fund Balance Sheets 

($2.9 billion in assets and $1.1 billion in liabilities) are undergoing financial statement audit. 

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IMPROVING FINANCIAL STATEMENTS A. IG Summary of Challenge 

The following elements and actions continue to be key to improving the Department’s financial management: 

• Creating an environment that fully supports clean financial reporting. The financial managers need buy-in 

from senior management and personnel in the field offices to successfully implement the corrective action 

plans. 

• Fully implementing and maintaining an effective internal review and monitoring process to identify all 

material financial management and reporting deficiencies, internal control weaknesses, and quality of data 

issues. 

• Developing corrective action plans that will adequately correct the deficiencies and result in financial 

reporting in accordance with generally accepted accounting principles. 

• Implementing corrective action plans that address the systems, control, reporting, or quality of data 

weakness. 

IMPROVING FINANCIAL STATEMENTS B. IG Assessment of Progress 

The Department’s ongoing initiatives in the area of financial management improvement indicate DoD 

management is responding to the significant and pervasive financial management issues and is positioning itself 

to leverage planned systems and business improvements to achieve sustainable and long-term solutions. One 

initiative is the Financial Improvement and Audit Readiness (FIAR) Plan. 

As discussed in the March 2008 update to the FIAR Plan, the Department has refined the FIAR Plan’s audit 

strategy to validate and sustain financial improvements and audit readiness not across individual line items as 

previously done, but across segments of the business environment. 

Also new to this FIAR plan update is a clearer focus on a comprehensive business process framework as defined 

in the Department’s Business Enterprise Architecture. Implementation of the framework has begun across the 

following areas: 

• Acquire to Retire for Military Equipment (obtain, manage, and dispose of accountable property and capital 

assets). 

• Acquire to Retire for Real Property (obtain, manage, and dispose of accountable property and capital 

assets). 

• Hire to Retire (plan for, hire, develop, assign, sustain, and separate personnel resources). 

• Procure to Pay (obtain and pay for goods and services). 

DoD is tracking and reporting through Progress and Status Reports on each of the completed, ongoing and 

planned improvements in these areas. 

The IG considers the following DoD financial management efforts to be limited successes: 

• Implementation of integrated organizational structures and processes to address financial management 

improvement. 

• Assignment of accountability to DoD managers. 

• DoD improvement initiatives at the entity and line item level. 

Although the IG anticipates that DoD will need to make improvements in these areas, the IG considers these to 

be the critical steps for establishing a culture and ingrained structure that will enable DoD managers to identify 

internal control weaknesses and plan effectively for resolution of those weaknesses. This culture and structure 

also will hold DoD managers accountable for improving internal controls over financial reporting. Further, these 

steps should result in a financial management structure that can provide accurate, relevant, and timely financial 

management information for decision-making. 

Additionally, an overall shortage of qualified auditors and accountants continues to hinder progress on the 

challenges outlined above. Continual turnover of qualified staff who conduct audits at DoD Agencies and 

independent public accounting firms, and also turnover of qualified accounting staff to support financial functions 

and audits, is a formidable obstacle to the effective and efficient execution of those audits. The Department needs 

improved recruiting and retention practices, as well as robust training and continuity of operations planning to 

alleviate the problem. 

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IMPROVING FINANCIAL STATEMENTS C. Management’s Assessment 

The Department initiated the FIAR Plan in 2005 to accomplish three primary goals: 1) improve decision making by 

providing relevant, accurate, reliable, and timely financial information; 2) sustain improvements through a process 

of annual assessments and internal controls; and 3) achieve unqualified audit opinions on DoD annual financial 

statements. To accomplish these goals, DoD employs a strategy that unites financial management improvement 

with business transformation by integrating the FIAR Plan with the DoD Enterprise Transition Plan and Business 

Best Practices. 

When the FIAR effort began, DoD had to first establish cross-functional “buy in” to the goal of achieving 

auditability and develop in its functional workforce a basic familiarity with audit requirements. As the functional 

communities better understood audit requirements, and the financial community embraced long-term change, the 

FIAR Plan approach was expanded to focus financial improvement efforts within the business processes (e.g., 

Acquire to Retire, Hire to Retire, Procure to Pay) that generate financial transactions. 

The FIAR approach: 

• Applies OMB Circular No. A-123, Appendix A, to confirm continued audit readiness. 

• Requires Component-level Financial Improvement Plans detailing the tasks and timelines for remediating 

business process issues negatively impacting auditability. 

• Structures improvement efforts and ensures consistency through the mandatory use of Business Rules. 

• Drives incremental progress through prioritized improvement objectives and segments. 

• Focuses improvement work on four essential elements of financial improvement (Policies, Processes & 

Controls,Systems & Data, and Audit Evidence). 

The Department has taken steps to ensure FIAR progress continues and to increase accountability and oversight of 

the accuracy of its financial statements and the plans to improve them by requiring the Secretaries of the Military 

Departments to certify to their accuracy and to report FIAR progress quarterly to the Deputy Secretary of Defense. 

The Department has been aggressively working to retain and hire highly qualified accountants and financial 

personnel, and is taking steps to improve the knowledge and competency of its financial community. During 2008, 

the Department, in partnership with the CFO Council, created the CFO Academy as part of the National Defense 

University. 

Note: The FIAR Plan and Enterprise Transition Plan provide details about the Department’s goals and 

accomplishments and are available on the DoD Comptroller Web site. (See Appendix B.) 

2. Acquisition Processes and Contract Management 

ACQUISITION WORKFORCE A. IG Summary of Challenge 

Since 1990 and 1992, respectively, Government Accounting Office (GAO) has designated DoD Weapon Systems 

Acquisition and Contract Management as high-risk areas. Acquisition initiatives that began in the 1990s led to 

reductions in acquisition oversight assets and when the spending trend dramatically reversed after September 

11th, the Department was not able to quickly react to the need for more contract and oversight support. The 

emphasis on urgency to support the war effort, especially for contracting in an expeditionary environment, has 

only served to increase the challenges. In FY 2008, the Defense budget with war funding will approach 

$650 billion. This total is more than double the last DoD budget preceding September 11, 2001. Keeping pace 

with this spending would be a difficult proposition if acquisition and oversight assets were increasing at a 

proportional rate. But, from 1990 until the end of FY 1999, total personnel included in the DoD acquisition 

workforce decreased about 50 percent, from 460,516 to 230,556 personnel. 

As of May 2008, there were approximately 25,000 contracting officers to handle over $315 billion in procurements 

of goods and services. Other organizations, such as the Defense Contract Management Agency, which is 

responsible for much of the administration and surveillance of DoD contracts, decreased its staff levels by similar 

amounts during the same time frame. Even within the Inspector General’s office, we reported in our March 31, 

2008, growth plan that our auditors are unable to keep pace with the ballooning Defense budget and this growth 

“leaves the Department increasingly more vulnerable to fraud, waste and abuse.” 

ACQUISITION WORKFORCE B. IG Assessment of Progress 

Progress in training and equipping more contract officials within DoD to handle the increased workload will take 

time. However, a number of initiatives are underway that are addressing the challenges, both within the 

Department and from proposed legislation, that should lead to improvement and better meet these challenges. A 

commission, headed by Dr. Jacques Gansler, evaluated the Army Expeditionary Contracting and recommended 

urgent reform. As a result, the U.S. Army Materiel Command activated the Army Contracting Command, which 

will oversee more than $85 billion in contracts annually and focus on maintaining and improving the Army's ability 

to respond globally in support of warfighters' needs. 

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ACQUISITION WORKFORCE C. Management’s Assessment 

DoD had a number of acquisition excellence initiatives in process that addressed contracting and contract 

management issues prior to the Gansler Commission Report issued recommendations for improvements to Army 

Expeditionary Contracting. The DoD has integrated and aligned the appropriate recommendations from the 

Commission with the existing Departmentwide initiatives to ensure an integrated Departmentwide strategy for 

improving the acquisition workforce. The DoD Human Capital Strategic Plan will provide the necessary focus for 

these initiatives. The DoD Task Force for Contracting and Contract Management in Expeditionary Operations, 

created by the Under Secretary of Defense Acquisition, Technology and Logistics (USD(AT&L)) to evaluate the 

Commission recommendations, was integral in developing the long-term, enterprisewide solutions for contracting 

and contract management in expeditionary operations. They will continue to monitor the accomplishment of the 

various initiatives milestones over time, with oversight provided by the Senior Leaders Steering Committee 

established by the DUSD Acquisition and Technology (A&T). 

DoD initiatives to improve contingency contracting that predate or are independent of the Commission 

recommendations include: The increase in staffing in Defense Procurement and Acquisition Policy (DPAP) 

dedicated specifically to contracting in expeditionary operations. The DPAP development of the first-ever Joint 

Contingency Contracting Handbook, which provides essential tools and training for contingency contracting 

officers, and will be updated yearly. Draft Expeditionary Contracting Policy has also been developed, which forms 

a foundation for the handbook; DPAP coordinated the internal review and staffing of legislative proposals to 

provide solutions in areas where DoD lacked the authority to respond to Commission recommendations regarding 

additional general officer billets, increases in the number of contracting personnel and incentives for civilian 

personnel to pre-volunteer for expeditionary operations, and prepositioning of waivers of small business, U.S. 

labor, Buy American, Berry Amendment, and Specialty Metals provisions. The DoD has also established a 

business system team to leverage existing resources and knowledge to quickly provide electronic solutions for intheater problems experienced in requirements generation, contract writing, invoicing, and the use of the 

Government Purchase Card. 

In addition to these initiatives, DoD has conducted a contracting competency assessment of all military and 

civilian members of the Departmentwide contracting workforce. Results of the contracting competency 

assessment will be finalized during the first quarter of FY 2009. These results will provide a complete inventory of 

competencies that exist in the Departmentwide contracting workforce, identify current and projected competency 

gaps, and support workforce development in ways best fitting the strengths and weaknesses of the workforce and 

the needs of the contracting mission. By using key data provided from the contracting workforce assessment and 

from the Components, and by linking this data to drive workforce planning solutions, the Departmentwide 

contracting community can better meet future requirements and respond to its stakeholders. 

DoD’s commitment to a long-range vision for improving the contracting and contract management process and 

the continued accomplishment of near-term initiatives should ensure both immediate and long-term improvements 

in contracting and contract management in expeditionary operations. 

In response to the FY 2008 NDAA, the Department established the DoD Acquisition Workforce Development 

Fund, which will be used for the recruitment, training, and retention of acquisition personnel for DoD. The fund 

ensures DoD’s acquisition workforce has the capacity, in both personnel and skills, to properly perform the 

acquisition mission, oversee contractor performance, and ensure the Department and taxpayer receives the best 

value for investment dollars. 

MAJOR WEAPON ACQUISITION A. IG Summary of Challenge 

Challenges also continued with major acquisition programs. Many large weapons systems acquisitions are 

receiving Congressional scrutiny because of continued cost, schedule, and control problems. GAO reported 

between FY 2000 and FY 2007, the number of DoD major defense acquisition programs increased from 75 to 95, 

total planned commitments grew from $790 billion to $1.6 trillion, while the average schedule delay in delivering 

initial capabilities increased from 16 to 21 months. 

MAJOR WEAPON ACQUISITION B. IG Assessment of Progress 

DoD also outlined a series of initiatives to the House Oversight Committee on acquisition improvements. Three 

recent studies produced 55 recommendations for improving acquisition processes. Of these, 48 have been fully 

or partially implemented. These initiatives include early and competitive prototyping, continuous improvement 

through use of process review tools, stability in program management tenure, use of capital funding and 

configuration steering boards, and a capital funding pilot program. Another proposed initiative to improve major 

acquisition programs would require all new efforts to move through a “material development decision” milestone 

and would shift the crucial Milestone B decision to later in the process. 

DoD continues to make limited progress in controlling cost and schedule of major acquisition programs and will 

have to make critical decisions about which systems should continue or be cut based on competing resources. 

The DDG 1000 is one recent example of a major system that succumbed to cost and schedule pressures. 

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MAJOR WEAPON ACQUISITION C. Management’s Assessment 

The Department is pursuing a number of key initiatives designed to enhance the effectiveness of the DoD 

acquisition business process, and, consequently, improve cost, schedule, and performance outcomes. 

Examples follow: 

On September 19, 2007, the USD(AT&L) issued a policy memo requiring pending and future programs to 

implement a competitive prototyping approach. The policy is intended to reduce risk, validate designs, improve 

cost estimates, evaluate manufacturing processes and refine requirements. 

On July 30, 2007, the USD(AT&L) issued policy establishing Configuration Steering Boards (CSBs) for all current 

and future major defense acquisition programs. The purpose of a CSB is to review all requirements changes that 

have the potential to impact program cost and schedule; assess them; and accept, reject, or defer them to future 

increments of capability. 

The USD(AT&L) and the Director, Operational Test and Evaluation issued a policy memorandum on December 

22, 2007, emphasizing the integration of developmental and operational testing to maximize Test and Evaluation 

process efficiency. 

These policies are being institutionalized via the ongoing update to DoD Acquisition Policy [DoDI 5000.02]. In 

addition, a number of new policies are being considered via the update. These include the requirement for a 

formal acquisition process entry point, the Materiel Development Decision, and the requirement for preliminary 

designs prior to Milestone B, system development. 

CONTRACTING AND THE IMPACT ON 

DECISION MAKING A. IG Summary of Challenge 

Dealing with the decreasing acquisition workforce has created a myriad of other challenges. 

The Department has increasingly relied on interagency contracting and use of contractors to fill the gap from the 

reduced acquisition and oversight workforce, bordering on inherently governmental functions, thereby potentially 

taking on decision-making roles. Key areas where use of contractor support has bordered on inherently 

government functions impacting decision making include: strategic planning within programs and organizations; 

acquisition planning for specific acquisitions; source selection assistance and source selection decision making; 

contract administration and surveillance; and contractor testing of systems and weapons in which they participate 

in the development. 

Our recent audit coverage has found a number of problems with use of interagency contracting, including lack of 

competition, inadequate price reasonableness determinations, and insufficient surveillance. In addition, the use of 

contractors has raised concerns about contractor ethics requirements and conflicts of interest. 

Distorted use of acquisition initiatives such as commercial item procurements to achieve speed and reduce 

oversight in procurements continues to challenge contracting officials and the oversight community. Use of 

commercial items is beneficial when there is an established market to allow contracting officials to use the 

marketplace to establish price reasonableness for the items we buy. It also reduces the need for Government 

quality assurance when the Department can rely on a well-established commercial quality assurance program. 

However, the broad definition of commercial items that includes items that are not commercial items, but are “of a 

type” or have not been in the marketplace, such as items offered to the public or items that will be available in 

time to meet the Government’s needs, cause significant challenges to ensure reasonable prices and sufficient 

quality assurance practices. 

CONTRACTING AND THE IMPACT ON 

DECISION MAKING B. IG Assessment of Progress 

The Under Secretary of Defense for Acquisition, Technology and Logistics, and the Under Secretary of Defense 

(Comptroller)/Chief Financial Officer (USD[C]/CFO) have taken a series of corrective actions to improve systemic 

problems that our audits disclosed on interagency contracting. Each Under Secretary issues policy memoranda to 

implement actions based on our recommendations, and the USD (C)/CFO formed a task force to review the 

potential Antideficiency Act Violations we reported. 

In addition, Section 813 of the John Warner National Defense Authorization Act (NDAA) for FY 2007 directed the 

Department of Defense to establish a Panel on Contracting Integrity. The panel consisting of senior leaders is 

focused on eliminating areas of vulnerability in contracting that allow fraud, waste, and abuse. The committee has 

established subcommittees in the areas of sustained senior leadership, capable contracting workforce, adequate 

pricing, appropriate contracting approaches, and techniques, sufficient contract surveillance, contracting integrity 

in a contingent environment, procurement fraud indicators, and contractor employee conflicts of interest. Initially, 

the Panel has developed 21 recommendations and is working on actions to improve the contracting process. 

House and Senate proposed bills also address defining inherently governmental functions, tightening 

requirements on conflict of interest by contractor personnel disclosures, increasing contractor accountability, and 

curbing commercial item authorities. 

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CONTRACTING AND THE IMPACT ON 

DECISION MAKING C. Management’s Assessment 

The Department has issued several policies regarding the use of interagency acquisition. Included in the policy 

guidance were specific process requirements addressing identified deficiencies in the interagency acquisition 

process. These included: 

• Eliminating the use of advance payments (March 1, 2007). 

• Requiring contracting officer review of nonEconomy Act transactions in excess of $500,000 (October 16, 

2006, and January 18, 2008). 

In addition, the Department provided the following tools to the acquisition workforce in this area: 

• Assisted the OMB Office of Federal Procurement Policy in the development and issuance of an Interagency 

Acquisition Guide, entitled “Improving the Management and Use of Interagency Acquisitions (June 8, 2008).” 

• The Department developed and fielded a continuous learning module (February 1, 2008). 

Additionally, in accordance with Section 811 of the 2006 National Defense Authorization Act, the Department took 

specific action to review each transaction in excess of $100,000 that was to be issued on behalf of DoD by the 

Department of the Interior’s acquisition office in Herndon, Virginia. This limitation was subsequently rescinded, 

except for one minor exception. 

The Panel continues to make good progress, with five implemented actions and more than half of the actions in 

coordination. Nine additional actions were identified on May 22, 2008. To date, the panel has implemented 

policies on senior contracting leadership positions and succession plans; coordinated contract policy execution 

review plans to address many issues noted in audits; leveraged other training to improve Army training in 

contingency contracting; issued a Contingency Contracting Training handbook; incorporated procurement fraud 

indicator training and Contracting Officer’s Representative (COR) training in Contingency Contracting; developed 

a new DAU Contingency Contracting Class; and completed several measures to improve Competition Advocacy 

and Fair Opportunity. Three legislative proposals and one proposed DFARs clause are pending other actions, but 

the Panel fully expects to implement the other actions during this calendar year. Highlights will include DoD COR 

certification standards and a COR policy memorandum, significant documentation to improve the contracting 

workforce, an interagency acquisition policy memorandum, and a memorandum regarding separation of duties. 

The Panel will address tightening requirements on conflict of interest through the use of contractor personnel 

disclosures, increasing contractor accountability, and mitigating risks of personal services contracts. 

3. JOINT WARFIGHTING AND READINESS 

JOINT WARFIGHTING AND READINESS A. IG Summary of Challenge 

The challenge of Joint Warfighting and Readiness is to provide the right force, the right personnel, and the right 

equipment and supplies in the right place, at the right time, and in the right quantity, across the full range of 

military operations. This challenge is compounded by the strain on resources as a result of Operation Iraqi 

Freedom and Operation Enduring Freedom. Furthermore, this challenge encompasses the need for the services 

and allies to be interoperable, communicate with each other effectively, share data when necessary, and train 

together when possible. It also, encompasses the need to ensure that basic services continue uninterrupted for 

the members of the armed forces and their families. The other management challenges encompass areas that 

support the ability of the United States to conduct joint warfighting and readiness issues. The synergy of those 

other management challenges will shape the United States’ ability to achieve its national objectives through joint 

operations. 

JOINT WARFIGHTING AND READINESS B. IG Assessment of Progress 

The Department is making progress on the issue of Joint Warfighting and Readiness, but that progress must be 

monitored to ensure it continues. The Department cannot afford to ignore new, and in some cases recurring, 

situations that will require its attention. For example, the ongoing efforts to relocate service members to Guam 

and other locations around the globe will enable the armed forces to better shape and focus their force structure 

in a way that will provide greater flexibility in responding to threats. However, some challenges facing the 

Department were evident during reviews pertaining to the reset of Army equipment returning from Operation Iraqi 

Freedom (OIF) and the training of DoD ground forces supporting OIF. 

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JOINT WARFIGHTING AND READINESS C. Management’s Assessment 

The Department’s main focus remains on achieving success in ongoing operations. To accomplish this, a number 

of initiatives over the past few years continue to reap dividends. Our Global Force Management (GFM) processes 

allow us to effectively meet current operational demands with mission-ready forces. Recognizing the current 

operational demands stresses particular skill sets, GFM processes aid us in identifying and then training in-lieu-of 

forces to great effect thereby mitigating the strain on the overall force. Also, the emerging Defense Readiness 

Reporting System will provide access to more comprehensive readiness data in greater detail, and promises to 

improve support to our operational decision-making capability. Furthermore, we know the Department recruits 

individuals but retains the family, therefore high priority is given to those services that support our soldiers, 

sailors, airmen, Marines and their families. 

ALIGNMENT OF RESOURCES A. IG Summary of Challenge 

While U.S. forces continue to operate around the world, changes are underway to better align the resources of 

the Department to benefit the warfighters, wherever they are. Those changes have taken a variety of forms, not 

the least of which is the improvement of the tools used to fight the enemies of the United States. The 

Department’s available resources are finite and require constant monitoring of our abilities and of the world 

situation to enable the Department to successfully operate on a global scale. The combination of these various 

factors continues to challenge the Department. 

ALIGNMENT OF RESOURCES B. IG Assessment of Progress 

During our review of the Army’s technical inspection process for the reset of unit equipment returning from OIF, 

we concluded that the process was generally effective. However, inconsistencies occurred among redeploying 

units in the conduct of technical inspections, the granting of exemptions from automatic reset induction, and the 

reporting of reset equipment. As a result, units returning from OIF in the coming years will not use a standard 

method for initiating repair or replacement. Items needing reset may be delayed in entering the national-level 

reset pool. Exempting equipment reduces availability and creates difficulties in the redistribution of equipment to 

higher priority units. Additionally, reset status reporting may not provide decision makers with complete and 

consistent information. The Army continues to address issues and risks regarding the reset of equipment. 

ALIGNMENT OF RESOURCES C. Management’s Assessment 

Reset is a critical component of joint force readiness. Understanding the health of our weapon systems and the 

effect resourcing has on that health can be enhanced by taking a view across the Services through logistics portfolio 

management. Capability area managers are beginning to assess resourcing strategies and risk mitigation across the 

enterprise to improve our understanding of the appropriate alignment of resources to maximize readiness. 

TRANSFORMING THE ARMED SERVICES A. IG Summary of Challenge 

The demands placed on the Armed Forces over the past few years have been extensive, but our military is 

unwavering in its focus on, and resolve and dedication to, peace and freedom. With the Congress’ continued 

strong support, the military will continue to effectively combat terrorism, counter the proliferation of weapons of 

mass destruction, help Iraq and Afghanistan build a stable and secure future, improve joint warfighting 

capabilities, and transform the Armed Forces to meet future threats. 

Pre-deployment training of individual Augmentees for mentoring missions in Afghanistan and Iraq calls for a new 

approach to provide specialized preparation for these nontraditional missions. Combined and coalition operations 

require improved coordination of training priorities with our Coalition or International Security Assistance Force 

(ISAF) partners. 

TRANSFORMING THE ARMED SERVICES B. IG Assessment of Progress 

In the last 3 years, the Army has been transforming its traditionally division-centric force to a more flexible, agile 

force. Part of this transition has included a restructuring of the Operations Groups, specifically Observer/ 

Controllers, at Army Maneuver Combat Training Centers. While Army Maneuver Combat Training Centers 

(MCTC) have successfully trained U.S. ground forces to deploy in support of OIF, future training of U.S. ground 

forces could be negatively impacted due to planned restructuring of Army MCTC Operations Groups. This is 

because current Army manning guidance will not support future changes to staffing of Observer/Controllers at 

Army MCTCs. As a result, U.S. ground forces training to deploy in support of OIF may not receive the most 

realistic training and may not receive feedback that could be critical to the success of their mission. The Army 

recognizes this risk and is currently reviewing the Active Component Manning Guidance. 

The Services have incorporated 14 theater-specific areas into their pre-deployment and annual training 

requirements. In addition, the Services effectively collected information from a variety of sources and regularly 

updated pre-deployment training. As a result, the Services generally provided realistic, theater-inspired training for 

units deploying in support of OIF. However, predeployment training for logistics and medical mentoring missions 

in Afghanistan and Iraq has not received the appropriate attention from the Geographic Combatant Commander 

or the Services. 

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TRANSFORMING THE ARMED SERVICES C. Management’s Assessment 

Our Armed forces continue to transform effectively to meet today's dynamic and volatile environment. Concurrent 

with transformation, the Services train and certify their forces prior to deployment to any contingency area. Despite 

changes in U.S. ground force combat structure, the Army's Maneuver Combat Training Centers (MCTC) have 

adapted well to meet the demand for maneuver units. However, training of specialized support units and security 

assistance mission units has been more challenging. To overcome these shortcomings, the MCTCs and other 

Service training centers are evolving to incorporate lessons learned from theater. Feedback obtained from all 

Services and the Combatant Commands is shared through the Joint Lessons Learned Information Systems (JLLIS). 

The Department continues to adapt its training transformation initiatives for the benefit of the Services and Joint 

Forces. The Joint Warfare Fighting Center (JWFC) of the Joint Forces Command (JFCOM) supports individual 

augmentees (IAs) with a number of distance learning courses available through the Joint Knowledge 

Development Distribution Capability (JKDDC). Additionally, JWFC assists combatant commanders in certifying 

Joint Task Force Headquarters (JTF) in emerging missions through the Joint National Training Capabilities 

(JNTC) and Joint Headquarters exercises. These efforts continue as we transform forces while adapting to the 

dynamic environment in which they fight. 

TRANSFORMING LOGISTIC CAPABILITIES A. IG Summary of Challenge 

Transformation of logistics capabilities poses a significant challenge to the Department. The Department’s 

transformed logistics capabilities must support future joint forces that are fully integrated, expeditionary, 

networked, decentralized, adaptable, capable of decision superiority, and increasingly lethal. Additionally, 

transformed logistics capabilities must support future joint force operations that are continuous and distributed 

across the full range of military operations. Supply chain management is a challenge for the Department. Since 

1990, GAO has identified supply chain management as a high-risk area because of weaknesses uncovered in 

key aspects, such as distribution, inventory management, and asset visibility. It has reported on numerous 

problems associated with supply chain management such as shortages of items caused by inaccurate or 

inadequately funded war reserve requirements and DoD’s lack of visibility and control over the supplies and spare 

parts it owns. 

TRANSFORMING LOGISTIC CAPABILITIES B. IG Assessment of Progress 

The Department has made progress toward meeting its goal of transforming logistics through numerous 

initiatives. However, that progress is tempered by the sheer magnitude of logistics operations that will continue to 

make it a long-term challenge. 

The Assistant Secretary of the Army for Acquisition, Logistics, and Technology activated the Program Executive 

Office Soldier (PEO Soldier) in April 2002 to develop, acquire, field, and sustain everything the soldier wears, 

carries, and operates to increase combat effectiveness. The Army viewed the soldier as a system and began 

taking a more strategic approach to designing, producing, and fielding clothing and individual equipment. PEO 

Soldier requested and used emergency supplemental Operational and Maintenance funds in FY 2006 of 

$221 million and $177 million in FY 2007 to provide Rapid Fielding Initiative items to soldiers who did not and 

were not scheduled to deploy in support of contingency operations. Army Officials took these actions because its 

managers believed that Rapid Fielding Initiative items qualified for emergency supplemental funds. 

As a result, PEO Soldier used about $221 million in emergency supplemental funds during FY 2006 to provide 

RFI items to about 125,000 soldiers who had not deployed and were not scheduled to deploy in support of 

contingency operations. Additionally, PEO Soldier’s records as of October 2006 showed that during the first 5 

months of FY 2007 the Program Office planned to provide these items to about 100,000 soldiers who were not 

scheduled to deploy at a cost of about $177 million. 

TRANSFORMING LOGISTIC CAPABILITIES C. Management’s Assessment 

The Department continues to improve supply chain management. In July 2005, the Department developed the 

DoD Supply Chain Management High Risk Improvement Plan, which was endorsed as a template for use by 

other high-risk area owners in developing their plans. The Department’s goals are to ensure continuous 

improvement in the area of Supply Chain Management by implementing the DoD Supply Chain Management 

High Risk Improvement Plan initiatives; publishing a roadmap for use in developing future improvement 

recommendations; monitoring supply chain management improvement; and implementing Supply & Storage Base 

Realignment and Closure. 

The Department also continues to improve its management of the logistics process with many projects to improve 

asset visibility throughout the worldwide supply chain. For example, The Joint Supply Chain Architecture (JSCA) 

project crosses Service organizational and funding boundaries to improve supply chain effectiveness and 

efficiency. It employs an enterprisewide, end-to-end perspective to achieve or improve logistics readiness across 

DoD. The project outlines the Joint supply chain; develops supply chain terms of reference (lexicon); delivers 

supply chain process architecture using industry’s Supply Chain Operations Reference (SCOR) Model; and 

develops supply chain metrics. Ultimately, the JSCA could realize improved readiness and cost savings. 

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An example of a Logistics transformation initiative is the Defense Transportation Coordination Initiative (DTCI). 

The Department is implementing DTCI with a world class coordinator of transportation management services in 

the Continental United States. The DTCI incorporates best commercial practices to improve the reliability, 

predictability, and efficiency of DoD materiel movement. The Department anticipates cost avoidances estimated 

at $40 to 60 million beginning in FY 2009, as more sites implement DTCI. 

4. INFORMATION ASSURANCE, SECURITY AND PRIVACY 

RISK MANAGEMENT A. IG Summary of Challenge 

Ensuring that a robust risk management, security, and information assurance program is in place is a significant 

on-going challenge to the Department. Such a program includes periodic risk assessments; physical and 

information security awareness training; security policies, procedures, and practices, as well as tests of their 

effectiveness; procedures for addressing deficiencies and for detecting, reporting, and responding to security 

incidents and privacy data breaches; and ensuring the continuity of operations. 

The Department also faces the challenge of ensuring that security and privacy protections are not compromised 

by advances in technology, while also taking advantage of those advances to enhance collaboration and sharing 

of time-sensitive information. 

RISK MANAGEMENT B. IG Assessment of Progress 

The Department made little improvement during the course of FY 2008 in its information assurance and security 

posture. Previous issues have been exacerbated by ongoing losses of government data, to include privacy and 

sensitive but unclassified data, and the lack of clear DoD policy regarding protection of such data and the 

reporting of incidents regarding its compromise. Of particular concern is protection of DoD information in the 

hands of contractors, to include all members of the Defense Industrial Base, and other nonDoD entities such as 

foreign, state, local and tribal governmental entities. 

RISK MANAGEMENT C. Management’s Assessment 

The Department has made significant advances in FY 2008 to improve information assurance (IA) and security 

posture. These include: 

• Expanding enterprise rollout of vulnerability scanning and remediation tools to reduce system and network 

vulnerabilities. 

• Increasing enterprisewide deployment of the Host-Based Security System. 

• Awarding an enterprise contract for an insider threat focused tool to permit detailed analysis of user activities. 

• Establishing BPAs for data at rest encryption products to facilitate the protection of sensitive data, both 

through disk encryption and file encryption. 

• Making progress in certifying 40 percent of the IA workforce by the end of 2008 to ensure the Department 

has personnel with proven knowledge in securing the systems. 

• Completing the security redesign of the public facing internet firewalls to limit internet access into DoD networks. 

The Department has recently issued policies specifically addressing the protection of sensitive data, including 

personally identifiable information (PII) and controlled unclassified information (CUI). Given the lag time between 

issuance of a DoD policy and evidence of quantifiable effects, the impact of these policies started to become 

apparent during FY 2008. Policies addressing the protection of sensitive data include: 

• DoD Chief Information Officer (CIO) policy memorandum, “Guidance on Protecting Personally Identifiable 

Information,” August 18, 2006. 

• Secretary of Defense memorandum, “Information Security/Website Alert,” August 6, 2006. 

• DoD Senior Privacy Official policy memorandum, “Safeguarding Personally Identifiable Information,” June 15, 

2006. 

• DoD CIO policy memorandum, “Encryption of Sensitive Unclassified Data at Rest on Mobile Computing 

Devices and Removable Storage Media,” July 3, 2007. 

• Numerous Security Technical Implementation Guides addressing insecure technologies and mitigation of 

vulnerabilities. 

The OMB Memorandum M-06-19 and guidance at www.us-cert.gov requires agencies to report to the U.S. 

Computer Emergency Readiness Team (US CERT) within one hour of receiving the notification of PII loss. The 

Defense senior privacy official requires organizations to report within 24 hours to the DoD Component Privacy 

Office/Point of Contact (POC) and within 48 hours to the DoD Privacy Office. 

The Department is also responding to the challenges of ensuring security and privacy protections by continuing to 

work closely with the commercial sector. We expect to evaluate and adopt for use sophisticated “controlled 

sharing” capabilities emerging from the commercial sector. 

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PROTECTING DOD INFORMATION A. IG Summary of Challenge 

One of the major challenges identified last year was protection of DoD information in the hands of contractors and 

the appropriate response to data breaches involving both privacy-protected data, such as personally-identifiable 

information, and sensitive but unclassified information, such as contractor proprietary information. This challenge 

continues and is amplified by challenges associated with continued critical inaccuracies in the DoD database 

used for oversight of the DoD information system inventory. Further, DoD has made very limited progress in 

developing a Homeland Security Presidential Directive-12 compliant Personal Identity Verification credential, 

thereby failing to take advantage of possible enhancements to the DoD physical and logical access security 

programs. 

PROTECTING DOD INFORMATION B. IG Assessment of Progress 

Longstanding issues impeding improved security of DoD operations have not been addressed. The Department 

continues to lack an accurate, authoritative data repository for information regarding DoD systems, and does not 

have a requirement for an inventory of systems containing DoD information operated by contractors and other 

nonDoD entities. This fundamental inadequacy renders nearly all metrics regarding DoD information security 

meaningless as there is no possibility of meaningful management oversight and verification of reported data. This 

inadequacy applies to all information assurance programs, as well as all privacy programs. Further, DoD has yet 

to develop a Homeland Security Presidential Directive-12 compliant Personal Identity Verification credential, thus 

failing to achieve the possible benefits of utilizing such a credential for logical and physical access envisioned by 

the 2004 Presidential Directive. In addition, internal controls over card stock for existing DoD identification 

credentials are inadequate. 

PROTECTING DOD INFORMATION C. Management’s Assessment 

Contractor systems that are under DoD control, i.e., those operated on behalf of the Department, are treated the 

same as DoD-owned systems and are subject to all DoD IA policies and requirements. However, it is not feasible 

nor practical to require contractor systems that are not operating on behalf of the Department but may contain 

some DoD information because of a business relationship with the Department to comply with all DoD IA policies. 

By the IG’s own estimate, there are some 46,000 such systems in the commercial sector. The Department does 

recognize a need for more definitive guidance in this challenging area and is in the final stages of formal 

coordination of a DoD CIO policy memorandum specifying steps that must be taken to ensure greater and more 

consistent protection of DoD information in the possession of contractors doing business with the Department. 

The Department is breaking new ground with this policy, as we know of no other government policy or guidance 

that addresses this issue. 

The Department is leading an extensive effort to implement automated application controls which prevent the 

introduction of inconsistent data into the DoD Information Technology Portfolio Repository (DITPR) and performs 

periodic scans of DITPR to ensure accuracy. Additional user guidance to clarify the business rules and simplify 

use has been developed. The annual FISMA Reporting Guidance also directs Components to include the total 

number of operational systems that are Contractor Owned and Contractor Operated (COCO) on behalf of DoD 

and Contractor Owned and Government (DoD) Operated (COGO). As a part of the overall IA compliance 

program, the Department has ongoing programs to assess and verify the accuracy and completeness of reports 

by the Components. 

As outlined in the OMB-approved DoD HSPD-12 Implementation Plans, OMB recognized that the Department’s 

requirement to transition to HSPD-12 from an already deployed operational program is different from deploying a 

new system. Over 600,000 DoD Common Access Card (CAC) Personal Identity Verification (PIV) transitional 

credentials have been issued. These are in addition to the 3.5 million nonPIV cards that the Department uses 

daily to access unclassified networks, secure Web sites, and bases/installations around the world. This is the 

reason Federal Information Processing Standard (FIPS) 201 allows for a transitional card, as well as the reason 

OMB approved the DoD HSPD-12 Implementation Plan. The Department’s plan is focused on minimizing any 

adverse effects to the Department’s 3.5 million daily users and minimizing the disruption of services during and 

after the transition. The Department will conduct General Services Administration (GSA)-approved conformance 

testing by the end of calendar year 2008 as it migrates from PIV transitional implementation to PIV end-state. 

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5. HEALTH CARE 

IMPROVED HEALTH CARE A. IG Summary of Challenge 

The DoD Military Health System must provide quality care for approximately 9.2 million eligible beneficiaries 

within fiscal parameters while facing growth pressures, legislative imperatives, and inflation that make cost control 

difficult in both the public and private sectors. The DoD’s challenge is magnified because the Military Health 

System provides health care support for the full range of military operations. The increased frequency and 

duration of military deployment further stresses the Military Health System in both the Active and Reserve 

Components. Part of the challenge in delivering health care is combating fraud. Health care fraud is among the 

top 5 categories of criminal investigations; currently representing approximately 7 percent of the 1,646 open 

cases of the Defense Criminal Investigative Service. 

IMPROVED HEALTH CARE B. IG Assessment of Progress 

The DoD Military Health System has been moving forward on improving health care while attempting to control 

costs. Although the transition to the new TRICARE contracts has been delayed until FY 2009, the Military Health 

System has made progress in defining the requirements and issuing the request for proposal for the new 

TRICARE contracts. The current contracts provide incentives for customer satisfaction and include the managed 

care support contractors as partners in support of medical readiness. The Military Health System continues to 

work with the contractors to ensure performance under the contracts with the ultimate goal of improving readiness 

and the quality of care. Lessons learned from all prior solicitations, as well as senior Departmental leadership and 

industry comments, will be incorporated into the next set of TRICARE contracts. 

IMPROVED HEALTH CARE C. Management’s Assessment 

TRICARE Management concurs with the IG’s Summary of Challenge and Assessment of Progress. 

OVERSIGHT OF COSTS A. IG Summary of Challenge 

A major challenge to the Department is sufficient oversight of the growing cost of health care for its beneficiaries. 

During a recent hearing with the Senate Appropriations Subcommittee on Defense, the Secretary of Defense 

stated the cost of health care is a concern that must be controlled. The DoD budget for health care costs was 

approximately $42 billion in 2008, a 35 percent increase since FY 2005 ($31 billion). Congress provided an 

additional $1.4 billion via the Supplemental Appropriations Act of 2008. Increasing health care benefits provides 

additional pressure to manage and contain costs. One of the Department's challenges is to effectively transition to 

the next generation of TRICARE contracts. 

OVERSIGHT OF COSTS B. IG Assessment of Progress 

DoD obtained authority to use federal ceiling prices for pharmaceuticals, and is in the process of issuing a 

proposed rule. The DoD is also making headway in economizing on pharmacy costs by implementing use of 

generic drugs and promoting use of the TRICARE Mail Order Pharmacy system. Additionally, the MHS has 

adopted an approach to cost control that will simultaneously improve quality and reduce cost by focusing on the 

elimination of unnecessary care, test and procedures. 

OVERSIGHT OF COSTS C. Management’s Assessment 

TRICARE Management concurs with the IG’s Summary of Challenge and Assessment of Progress. 

MEDICAL READINESS A. IG Summary of Challenge 

The ability to support and develop the people in the Military Health System continues to be a challenge. 

Maintaining medical readiness of the medical staff and units includes ensuring that medical staff can perform at all 

echelons of operation, and that the units have the right mix of skills, equipment sets, logistics support, and 

evacuation and support capabilities. The challenge of keeping reservists medically ready to deploy continues 

because of the frequency and duration of Reserve deployments. 

MEDICAL READINESS B. IG Assessment of Progress 

The MHS Human Capital Strategic Plan for 2008 to 2013 has been published, and the Department established a 

Military Health System Human Capital Strategic Support Office. The Medical Readiness Review was completed 

and efforts are underway to institutionalize the analytic process for determining operational medical personnel 

needs. The Military Health System has continued to meet all mission requirements despite very high operational 

tempo. Data from the Joint Theater Trauma Registry reveal unprecedented outcomes, including died of wounds 

rates of 5 percent and the lowest ever disease nonbattle injury rates. 

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MEDICAL READINESS C. Management’s Assessment 

TRICARE Management concurs with the IG’s Summary of Challenge and Assessment of Progress. 

TRANSITION OF CARE A. IG Summary of Challenge 

Strengthening medical care from accession through active service to rehabilitation and transition to VA care is a 

major challenge for the Department. The number of wounded warriors associated with Southwest Asia and other 

such conflicts significantly impact the health care resources within the Department, and can result in issues such 

as the conditions that were raised at Walter Reed Army Medical Center. Another related challenge to medical 

readiness is the issues inherent in providing efficient processes for post-deployment health care and benefits to 

severely injured and ill service members. Transitioning wounded, ill, or injured service members to postdeployment care will continue to grow as a challenge while the Global War on Terror, Operation Iraqi Freedom, 

and Operation Enduring Freedom continue. The Department needs to improve the medical care and benefits 

transition program to achieve a streamlined, transparent process as wounded warriors move from the DoD 

system to the Department of Veterans Affairs’ system. 

Increased numbers of returning service members with mental health complaints, along with a shortage of 

uniformed and civilian mental health workers, will require examination of automated screening tools and improved 

diagnostics to provide earlier detection and intervention. 

TRANSITION OF CARE B. IG Assessment of Progress 

The revised MHS strategic plan recognizes continuum of care as a strategic priority. As stated last year, 

disparities in the transition of health care and benefits are easily identified, yet actionable solutions are difficult to 

implement and streamline. 

The opening of the Center for the Intrepid in San Antonio, Texas, in 2007 provides the MHS with a technologically 

advanced rehabilitation center for amputees and burn victims. 

In addition, DoD’s response to Traumatic Brain Injury (TBI) and psychological health, including Post Traumatic 

Stress Disorder (PTSD), is showing promise with the creation of the Defense Centers of Excellence for 

Psychological Health and TBI. 

This year, the Department established the Senior Oversight Council (SOC) to ensure that all aspects of care, 

rehabilitation and reintegration for wounded warriors was accomplished. One focus of the SOC is to overhaul the 

disability processing system and implement improved case management for recovering warriors. 

The Armed Forces Health Surveillance Center was established to ensure tracking and ongoing surveillance of the 

health of service members would be accomplished in a joint manner and coordinated with Veterans Affairs. 

TRANSITION OF CARE C. Management’s Assessment 

TRICARE Management concurs with the IG’s Summary of Challenge and Assessment of Progress. 

SHARING OF INFORMATION A. IG Summary of Challenge 

Providing information to the right people so they can make more informed decisions continues to be a challenge 

in the health care community. Along with the benefits of expanding automation efforts comes the increased risk to 

security and privacy of information. The transition from paper to electronic patient records increases the exposure 

of sensitive patient information to inadvertent or intentional compromise. Maintaining information operations that 

ensure the protection and privacy of data will continue to grow as a challenge. 

SHARING OF INFORMATION B. IG Assessment of Progress 

The organizational goal to deliver information that aids in better decision-making was added to the Military Health 

System strategic plan. Specific milestones were established to implement a personal health record prototype, and 

to expand bidirectional sharing of health information between DoD and the Department of Veterans Affairs. In 

addition, a deadline was established to define the Military Health System strategic plan for implementing a 

paperless electronic health record. The DoD continues to progress in sharing electronic medical records with the 

Department of Veterans Affairs. The DoD and VA executive leadership initiated a joint assessment project to 

determine the best approach for sharing inpatient electronic health records. The final report on the assessment 

project recommends the Departments pursue a common-services approach, which will allow DoD and VA to build 

upon their already extensive information sharing capabilities. It also will set the stage for the appropriate level of 

interoperability with other government and private sector organizations. 

SHARING OF INFORMATION C. Management’s Assessment 

TRICARE Management concurs with the IG’s Summary of Challenge and Assessment of Progress. 

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IMPLEMENTING BRAC A. IG Summary of Challenge 

Implementing recommendations resulting from the 2005 Base Realignment and Closure process will continue to 

be a challenge. In addition to improving the readiness and cost efficiency associated with realigning base 

structure, a primary objective of the process was to examine and implement opportunities for greater joint activity 

among the Military Departments. Recapitalization of the physical infrastructure is a challenge. Military treatment 

facilities are aging and in need of replacement. 

IMPLEMENTING BRAC B. IG Assessment of Progress 

The base realignment and closure process addresses part of the aging infrastructure, but to fully address the 

challenge, better standardized data on the condition of facilities is needed. The Military Health System has begun 

the multiyear transition and acquisition process of improving capability and access to care in two major and 

several minor markets. Groundbreaking for the new Walter Reed National Military Medical Center at Bethesda 

occurred July 3, 2008. 

Additionally, the Military Health System is following a roadmap for changes in governance that should result in 

increased unity of purpose and functional integration. The road map should yield improvements in quality, 

efficiency, and patient satisfaction consistent with the MHS Strategic Plan. Each of the elements of the plan 

should contribute to the achievement of stability and uniformity of healthcare processes and resource acquisition. 

By establishing more unity of command in each of the major markets, the market leaders should be able to 

distribute resources across hospitals and clinics within a market to meet the needs of the entire population of 

eligible beneficiaries. In addition, the increased span of control will enable improved continuity of care and 

coordination of safety and quality programs. In the National Capital Region, the Secretary of Defense established 

the Joint Task Force National Capital Region Medical to clarify command and control. 

Through the establishment of joint governance for the Joint Medical Education and Training Center, the MHS 

should improve the quality and consistency of training for all enlisted, contributing to a culture of jointness and 

interoperability. 

The combination of all medical research and development assets under joint governance should foster better 

coordination of research activities, eliminate redundant efforts, and focus resources on developing solutions for 

both the warfighter and the clinician. 

Co-locating of the headquarters functions of Health Affairs, the TRICARE Management Activity, the Army Medical 

Command, the Navy Bureau of Medicine and the Air Force Medical Service should enhance efforts to achieve 

unity of purpose for MHS policy, strategy, and financial programming and yield greater consistency across the 

Services in program execution. 

IMPLEMENTING BRAC C. Management’s Assessment 

TRICARE Management concurs with the IG’s Summary of Challenge and Assessment of Progress. 

HUMANITARIAN ASSISTANCE A. IG Summary of Challenge 

The Department’s expanded role in providing humanitarian assistance and disaster relief to support U.S. strategic 

objectives and promote human dignity through better health will provide financial and organizational challenges. 

One of the first challenges will be developing plans and budgets to support the expanded role. 

HUMANITARIAN ASSISTANCE B. IG Assessment of Progress 

Building a bridge to peace through humanitarian assistance and disaster relief is a goal under the Military Health 

System strategic plan. The Summer 2008 Military Health System Strategic Plan recognizes many of these 

challenges and includes a set of performance metrics to measure mission success. This clearly defined roadmap 

is progress toward meeting the challenges. 

HUMANITARIAN ASSISTANCE C. Management’s Assessment 

TRICARE Management concurs with the IG’s Summary of Challenge and Assessment of Progress. 

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6. EQUIPPING AND TRAINING IRAQI AND AFGHAN SECURITY FORCES 

IRAQI SECURITY FORCES A. IG Summary of Challenge 

The Iraqi Security Forces (ISF) are comprised of the military and police forces. The Iraqi government continues to 

pursue significant expansions of ISF authorized end-strength, currently at 488,000 personnel with 445,500 on the 

payroll. This expansion will require addressing an already existing leadership shortage within the officer and 

noncommissioned officer ranks. 

Coalition efforts to build the capability of the Iraqi Ministries of Defense (MoD) and Interior (MoI) and their 

respective forces continue to focus on four major areas: developing ministerial capability; improving the 

proficiency of military and police forces through the assistance of embedded advisors and partnership unit 

relationships; building the logistic, sustainment, and training capability of the MoD and MoI; and supporting the 

expansion of the army and police. 

IRAQI SECURITY FORCES B. IG Assessment of Progress 

The existing Iraqi-run training centers continue to operate at full capacity to achieve ISF personnel goals. 

Efforts are ongoing to build the capability of the security forces and the MoD and MoI to sustain themselves, 

without Coalition logistical support, and for the forces to be able to operate independently without the full range of 

Coalition combat enablers, such as: air and ground transport of troops, equipment, and supplies; tactical air 

support; communication (signal) capabilities; and artillery. 

IRAQI SECURITY FORCES C. Management’s Assessment 

As of July 31, 2008, the current Iraqi Security Force (ISF) overall assigned strength is approximately 588,000. 

One hundred fifty-nine Iraqi Army (IA) battalions are in the fight, and 105 of those are in the lead for operations. 

Twenty-eight more are in force-generation. Though the MoDs, leader-to-led ratios are improving, the shortage of 

key leaders in the ISF is a challenge that will take years to overcome. Officer training and development are 

improving, but much work remains. The four Military Academies are graduating enough cadets for the needs of 

the Iraqi Joint Forces, but facilities remain rudimentary and tactical training is limited. The NCO corps has grown 

in the last couple of years, but most significantly in the last year—mostly at the junior ranks. The Iraqis understand 

they need an NCO Corps and have developed an NCO education system, starting with corporals to sergeants to 

platoon sergeants. The top 10 percent of the graduates from basic training attend the corporal’s course. From 

January 1 to July 31, 2008, the training base graduated 6,772 NCOs. Additionally, as of June 30, 2008, 13,077 

total NCOs have entered the IA since June 2007; 8,362 of those NCOs have accessed since January 1, 2008. 

The NCO ranks are at almost 70 percent fill in the aggregate. Some measures to address this issue are occurring 

now such as the rehiring of former NCOs and officers into the ISF. From January 1 to May 30, 2008, the MoD 

successfully vetted 2,177 officers from the former regime and allowed them to “rejoin” the IA. 

In all operations, the ISF continued to rely on Coalition enablers. Overall, the ISF continues to improve, but relies 

on Coalition forces (CF) for close air support, fire support, intelligence, surveillance and reconnaissance, logistics, 

sustainment and communications. The IA units must also improve in their ability to specify command 

relationships. Operations in Diyala and Amarah demonstrated a gradual improvement in the command and 

support relationships of attached brigades from other IA divisions. 

Logistics unit development is progressing. By the end of 2008, the IA will grow one division headquarters, five 

brigade headquarters, eight infantry battalions, five additional location commands, two motor transport regiments, 

one general transport regiment, one logistics battalion, and an Army ammunition depot. Each of the additional 

logistics units will be dedicated to support specific IA divisions and each is essential for the IA to achieve selfsufficiency. 

Dependency on CF to move supplies from the central depots will be reduced by accelerating the fielding of motor 

transport regiments. The IA has fielded ten motor transportation regiments and will field two additional transport 

regiments in 2008. The donation of a number of German transport trucks, and the purchase of medium and heavy 

cargo vehicles has accelerated the generation of a general transportation regiment, with projected Initial 

Operating Capability (IOC) by November 2008. 

IRAQI NATIONAL ARMY A. IG Summary of Challenge 

The Iraqi Army continues to experience shortfalls in generating officer and noncommissioned officer personnel to 

meet the requirements of an expanding army, and the challenge of high attrition rates. 

The Iraqi Army also continues to experience shortfalls in self-sustaining logistics. While the initiatives to develop 

the Iraqi Army logistics base are significant, success may be hampered by shortages in formally trained Iraqi 

logistics personnel and lack of information connectivity. 

The Iraqis still have concerns about the responsiveness of Foreign Military Sales (FMS) to a country generating 

forces in the midst of ongoing combat operations and hostilities. On-the-ground U.S. commanders responsible for 

training, equipping, and supporting ISF have voices similar concerns. 

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IRAQI NATIONAL ARMY B. IG Assessment of Progress 

The Iraqi Army is taking several steps to mitigate leader shortage, such as actively recruiting prior service officers 

and noncommissioned officers, using mobile recruiting teams, and exploring accelerated promotions of personnel 

currently in the Army. However, it is unclear whether sufficient candidates can be recruited to offset increased 

force requirements. 

Multinational Security Transition Command-Iraq and Multinational Corps-Iraq are making significant strides in 

assisting the Iraqi Army to develop an Iraqi logistics sustainment base, but much work remains to be done. 

Through the efforts of the Iraqi Logistics Development Committee, specific logistics advisory, training, and 

partnering relationships have been established throughout Iraq to assist the Iraqi Army build its logistics system 

using an Iraqi model. 

Thirteen regional Iraqi logistics Location Commands are projected to be in full operation by the end of 2008. U.S. 

Logistics Management Advisory Teams will be assigned to each Location Command. In addition, U.S. Logistics 

Training and Assistance Teams, formed from in-country U.S. logistics sustainment brigades, are refocusing their 

efforts to provide more intense interaction with Iraqi Army units including the regional Location Commands to the 

line units, division and below. 

Development is underway of a robust FMS program to assist with Iraqi Government force expansion by procuring 

U.S. standard equipment. Progress has been made regarding MoD and MoI willingness to use the U.S. FMS 

system as a source of supply. However, the timeliness of equipment deliveries has not been satisfactory. 

IRAQI NATIONAL ARMY C. Management’s Assessment 

The IA, as with the other services, remain understaffed in the officer and NCO ranks, but is taking steps to 

mitigate these challenges. MOD is developing a strong NCO Educational System that has produced nearly 

14,000 NCOs including re-joining former army leaders from key courses. The MOD is also training former militia 

members mandated by the transition and reintegration program. The Government of Iraq (GOI) has also begun 

taking over control of the Sons of Iraq (SoI) program, intending to integrate 20% of the 100,000 SoI into the ISF. 

Once complete, the National Reconciliation Program will allow former soldiers the option to re-join the ISF, and 

should yield a moderate increase in the number of mid-grade officers and NCOs within the IA. 

The MOD is developing a national supply and distribution network, including location commands in support of 

each IA division with the Taji National Depot as the centerpiece. Accelerated fielding of the last motor transport 

regiments and the fielding of the general transportation regiment will reduce, but not eliminate ISF dependency on 

CF to move supplies. 

Since the advent of the FMS task force, the average time required to process FMS cases has improved 

significantly, and the delivery of equipment has improved substantially. 

IRAQI NATIONAL POLICE A. IG Summary of Challenge 

Because the training effort of the past four years has focused on generating policemen, and because of the time it 

takes to grow professional junior officers, there have been inadequate numbers of officer-rank police entering at 

junior levels. The resulting low officer manning has affected command and control, planning functions, street-level 

supervision, morale, retention, and ethical conduct. 

IRAQI NATIONAL POLICE B. IG Assessment of Progress 

Although progress has been made, some National Police units lack personnel, individual equipment, and reliable 

vehicles to conduct operations without Coalition support. 

The Iraqi Police Service and the National Police use various methods to acquire officers. Both of the police 

services are actively seeking to increase officers through four methods: a 3-year officer course, a 9-month officer 

course, a 6-month police commissioner’s course, and a 3-week officer transition program for previously trained 

police officers. The police services have difficulty attracting officer candidates because they compete with the Iraqi 

Army for the same pool of personnel. 

IRAQI NATIONAL POLICE C. Management’s Assessment 

Coalition advisors report continued improvement in the MoI’s ability to perform key ministerial functions. Such 

functions include force management, personnel management, acquisition, training, logistics and sustainment, and 

the development and implementation of plans and policies. 

The MoI is improving its ability to provide life support (e.g., food, water, fuel, and most maintenance) for its forces. 

The Ministry has instituted a self-reliance policy. All life support, at both the Central Ministry and at the provincial 

level, is now contracted through the MoI contracting process. 

The MoI has expanded to a total of 18 training facilities. The Iraqi instructor cadre at the Baghdad Police College 

conducts all basic officer and enlisted recruit training and continues to increase the proportion of the specialized 

and advanced course loads. The Multi-National Security Transition Command–Iraq (MNSTC-I) advisors and 

international police advisors assist by providing advice, oversight, and quality control at all training institutions. 

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The MoI training base is capable of training 67,170 enlisted police and 2,330 officers per year and operates at a 

total student capacity of 24,810 at any given time. For 2008, the MoI expects to train a total of approximately 

42,235 basic policemen for the Iraqi Police Service (IPS), 14,435 for the National Police (NP), and 10,500 for the 

Department of Border Enforcement (DBE). With the MoI training base expansion plan through mid-2009, seat 

capacity will increase annual throughput to 117,100 enlisted and 5,472 officer seats. 

Overcoming the MoI training backlog continues to be a significant challenge. In the past, deteriorating security 

conditions necessitated rapid MoI growth in basic security skills. This rapid expansion was accomplished through 

a truncated 80-hour training course, which provided police officers with basic operational skills; however, this 

course fell short of the full training requirement to be an effective police officer. As a result, the current IPS 

training backlog is approximately 88,000 personnel. The MoI’s goal is to train all IPS personnel with the full 400-

hour course, as the security situation and training capacity allows. MNSTC-I is working with the MoI to shorten 

duration of the full 400-hour course to 240-hours by extending the length of the training day and eliminating low 

priority training to reduce its training backlog to approximately 56,000 by July 2009. 

As of July 31, 2008, there are 31 NP battalions in the fight, with 10 of them in the lead for security. Thirteen more 

are in force-generation. 

The MoI is executing a four-phased plan to improve the professionalism of the NP, with all phases executed 

simultaneously. This has involved significant changes in senior leadership from division through battalion level to 

reduce sectarian behavior and achieve a balance of the sects representative of the makeup of Iraq. The MOI 

completed collective training for every brigade in the fall of 2007 and, situations permitting, these brigades 

undergo continuous sustainment training. Furthermore, leadership training conducted by the Carabinieri has been 

successful. The fourth class of Italian Carabinieri-led NATO Training Mission-Iraq (NTM-I) training concluded on 

June 21, 2008, with 422 graduates. The MNSTC-I and NTM-I are laying the foundation to double the throughput, 

accelerating professionalism of the NP. Finally, plans are in place to regionalize the NP by generating a third NP 

division. This will enable the NP to be regionally focused and postured to reinforce the IPS and allow the MOD to 

focus on external defense. 

The MoI continues to receive large shipments of FMS purchases. Deliveries on a $96.3 million contract for 

ammunition and light weapons, brokered independently with China, demonstrate that the ministry is improving the 

capability to direct contract for goods. 

ISF HEALTH CARE SYSTEM A. IG Summary of Challenge 

The Iraqi Security Forces depend on the development of supporting capability within the civilian sector for medical 

support. 

Strong collaborative planning interactions are necessary between the Iraqi Ministries of Defense and Health for 

infrastructure development, training, and medical logistics, so sustainable, independent health care for the 

security forces can be developed. 

ISF HEALTH CARE SYSTEM B. IG Assessment of Progress 

The partnerships between these Ministries for planning are just developing, and will need to be facilitated by 

Multinational Security Transition Command-Iraq and Multinational Forces-Iraq in order to be effective. 

ISF HEALTH CARE SYSTEM C. Management’s Assessment 

The Coalition Forces (CF) continue in their efforts to help the ISF design, recruit providers, train and provide initial 

medical infrastructure and medical supplies for the ISF to develop medical capability. These efforts include 

assisting MOI and MOD developing the capability to identify requirements, budget, commit, monitor and execute 

funds to procure medical equipment, supplies, and personnel; improving supply chain management to enhance 

the efficiency and effectiveness of the medical logistics system; and developing medical personnel training 

progression. CF are also supporting continued development of internal programs by the Ministries of Health and 

Higher Education to broaden ISF medical capability. FMS have included field hospitals, ambulances, mortuary 

vehicles, and medical supplies. 

AFGHAN SECURITY FORCES A. IG Summary of Challenge 

The Afghan National Security Forces (ANSF) are comprised of the military and police forces. Their effectiveness 

is being tested by increased Taliban attacks, including in heretofore safe areas of the country. 

Coalition efforts to build the capability of the Afghan Ministries of Defense (MoD) and Interior (MoI) and their 

respective forces continue to focus on four major areas: developing ministerial capability; improving the 

proficiency of military and police forces through the assistance of embedded advisors and partnership unit 

relationships; building the logistic, sustainment, medical, and training capability of the MoD and MoI; and 

supporting the expansion of the army and police, and their ability to operate on an independent basis. 

The Afghan government continues to pursue significant expansion of the ANSF. The MoD has requested an 

increase in the end-strength of the Afghan National Army (ANA), in particular, to 134,000 – an increase that is 

favorably endorsed by the U.S. Government. 

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AFGHAN SECURITY FORCES B. IG Assessment of Progress 

The ANA as an institution is generally highly regarded by the populace, although only a minority of its units are 

yet capable of operating without significant Coalition support. 

Progress in building the capability effectiveness of the Afghan National Police (ANP), which is often viewed with 

mistrust, lags that of the ANA, arguably as much as several years. 

AFGHAN SECURITY FORCES C. Management’s Assessment 

We agree with the IG’s assessment of progress made by the ANSF. The ANA is one of the most trusted and 

respected institutions within Afghanistan. As of Sept 2008, the ANA has grown to a force size of approximately 

67,000. Over the last year they have made great progress and since March 2008, 13 ANA units have reached 

Capability Milestone-1 which indicates they are fully operationally capable. The ANA is increasingly capable of 

taking a lead role in planning and conducting operations, which is another sign of increased capacity and 

capability. 

In September 2008, the Government of Afghanistan and the international community agreed to increase the end 

strength of the ANA to 134,000 personnel by 2014, thus allowing for increased combat support and capability. 

The decision to increase the size of the ANA is consistent with the Government of Afghanistan’s and the 

International Community’s goal that Afghan Security Forces are eventually able to assume security functions 

within Afghanistan. 

As stated, the ANP currently lags behind the ANA in development but much progress has been made. The ANP 

is at a force level of 77,000 and growing towards 82,000. 31 Districts have completed FDD training and, as of 

Sept 2008, and six of these districts were validated at Capability Milestone 1, indicating that district ANP forces 

were capable of independent operations. 

The Combined Security Transition Command-Afghanistan (CSTC-A) is also implementing a training program for 

Afghan Border Police (ABP) along the eastern Pakistan border. Focused Border Development (FBD) provides 

additional survivability and interdiction skills for ABP Companies who will partner with JTF-101 units once they 

complete the training. The FBD training begins in late October 2008. 

AFGHAN NATIONAL ARMY A. IG Summary of Challenge 

Developing an effective Afghan National Army (ANA) force is a significant challenge in the midst of a war. 

The Afghan Army logistics system within the ANA is progressing, but is in its infancy and continues to experience 

shortfalls in having a self-sustaining logistics capability. While the initiatives to develop the Afghan Army logistics 

base are significant, success may be hampered by shortages in formally trained Afghan logistics personnel and 

lack of information connectivity. In addition, one of the problems in establishing logistics sustainment within the 

Afghan Army has been the lack of a systems approach. The Afghans have been accustomed to working in 

stovepipes with little coordination. The result of this is that important nodes in the logistics system were lacking 

visibility of the Afghan Army logistics capability, and senior leaders were unable to make informed decisions about 

logistics requirements. 

U.S. commanders have noted that progress has been made in improving Foreign Military Sales (FMS) program 

responsiveness. However, successful execution of the $7.4 billion FMS program in Afghanistan requires support 

beyond the norm for rapid ANSF force generation, replacement of combat losses, and force modernization. 

Similar concerns have been voiced by U.S. commanders on the ground, responsible for training, equipping, and 

supporting the ANA. 

AFGHAN NATIONAL ARMY B. IG Assessment of Progress 

Progress has been made in developing a capable Afghan National Army, but significant work still needs to be done. 

A continually improving national logistics infrastructure exists and is already supporting the Afghan Army. A series 

of national and forward support depots currently provide the bulk of Afghan Army needs. Brigade-level logistics 

structures and systems continue to develop. However, there is a gap in the linkage from the brigade level to the 

national level. This gap will require development of a corps-level logistics structure that will be addressed with the 

increase of 10,000 ANA personnel beginning in 2009. Plans for 2009 lay the groundwork for making currentlycontracted logistics an Afghan Army core responsibility. 

The MoD recently requested that Combined Security Transition Command-Afghanistan (CSTC-A) assist in the 

development of a systems approach to logistics. The CSTC-A conceived the Logistics Readiness Assessment 

Tool, which was to have been implemented in May 2008 as an initial effort to gain visibility over the Afghan Army 

logistics system. 

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AFGHAN NATIONAL ARMY C. Management’s Assessment 

As stated above, the ANA has made great progress over the past year. As the ANA grows to 134,000, it is 

increasingly improving in capability and in building logistics capacity 

While we agree with the need for more robust ANA logistics processes, it should be noted that Afghanistan poses 

unique issues in terms of implementing an integrated nation wide logistics system. Many areas within 

Afghanistan lack reliable power and communications capacity and do not allow for a networked logistics system. 

Additionally, the issue is made even more challenging because of low literacy rates among the populace and the 

lack of trained personnel with a logistics background. 

The DoD is focused on improving logistics within the ANA. One of the objectives of the CSTC-A Campaign Plan 

is to develop an efficient logistics system that is capable of acquiring and distributing resources to the ANA. The 

CSTC-A is developing a unified ANA logistics strategy which will ensure standardized logistics mentoring within 

the ANA. A robust Ministerial Development program is in place which focuses on building logistics capabilities 

within the MOD and the General Staff Headquarters. 

AFGHAN NATIONAL ARMY HEALTH CARE SYSTEM A. IG Summary of Challenge 

Development of medical support for the ANA depends on a strong collaborative relationship with the civilian 

Ministries of Public Health and Higher Education. ANA capacity development must therefore include 

commensurate strengthening of the authority and ability of these ministries to support the ANA. 

AFGHAN NATIONAL ARMY HEALTH CARE SYSTEM B. IG Assessment of Progress 

Little progress has been made in developing strong civil – military relationships within the medical community in 

Afghanistan, largely due to limited resources, and lack of a clear policy commitment with a corresponding multiyear strategic plan for training, mentoring, and infrastructure development. 

AFGHAN NATIONAL ARMY HEALTH CARE SYSTEM C. Management’s Assessment 

The DoD has provided mentorship and training to improve the Afghan Army health care system through the 

CSTC-A Command Surgeon’s office. 

We concur with the need to build better Civil-Military cooperation and to better collaborate with the Afghan 

Ministry of Public Health and other international players. The DoD has coordinated policies with NATO and other 

international partners as well as the Ministry of Public Health but the scope of this challenge is beyond DOD’s 

ability to influence. Fully developing the Civil-Military relationship will require assistance from other 

U.S. Government agencies, and international partners, as well as the Government of the Islamic Republic of 

Afghan. 

AFGHAN NATIONAL POLICE A. IG Summary of Challenge 

The National Police are the face of the government to most Afghan people. Unfortunately, in the past, this has 

often been the face of corruption and unprofessionalism. 

The Afghan MoI and National Police logistics system continues to experience shortfalls in self-sustaining logistics. 

While the initiatives to develop the Afghan Police logistics base are significant, success may be hampered by 

shortages in formally trained Afghan logistics personnel. 

Logistics sustainment for the MoI and the Afghan Police significantly lags that of Afghan Army. Supplying 

regional, district, and provincial police units is a vastly different problem than providing support for an army corps, 

brigade, or battalion. The MoI is behind in establishing needed logistics policies and procedures and in obtaining 

the requisite training for their logistics personnel. The U.S. Police Mentoring Teams have been under-resourced 

for personnel, requiring CSTC-A to fill the gap by using U.S. military personnel who had previously been assigned 

to train the Afghan Army. The shortage of qualified logistics trainers for the Police Mentoring Teams is and has 

been a continuing problem in advancing the logistics capability of the Afghan Police. 

AFGHAN NATIONAL POLICE B. IG Assessment of Progress 

A program of focused district development has been created to break the cycle of corruption and provide 

Afghanistan a professional, well-led, and well-trained police force. The program involves an eight-week formal 

police training course and reflects a strategy of reforming the way policing is done at the district and community 

levels, and reinforcing the government’s counterinsurgency capability at the interface with the populace. 

For the Afghan Police, logistics development is currently focused on verification and accountability. Regional, 

provincial, and district level gaps in Afghan Police logistics stem in part from still-developing MoI logistics policies 

and procedures and lack of logistics officer skills. The MoI is working to close these gaps through regional, 

provincial, and district level logistics officer training. 

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AFGHAN NATIONAL POLICE C. Management’s Assessment 

The ANP have made great progress over the last year as a result of the implementation of the Focused District 

Development (FDD) program. We concur with the comments made regarding the issues being addressed within 

the MoI. 

The FDD has attempted to improve the logistic capabilities of ANP districts by ensuring equipment is properly 

issued and accounted for. The FDD training program that the district police attend also teaches ANP officers 

about logistics and equipment accountability. Logistics officers within police units are provided additional training 

in these areas. 

The CSTC-A has a robust program that is focusing on ministerial-level logistics development within the MoI. 

AFGHAN NATIONAL POLICE 

HEALTH CARE SYSTEM A. IG Summary of Challenge 

The Afghan Police do not have effective medical support. The general lack of Afghan Police resources and 

dispersed nature of much of the force in remote areas calls for an integrated health care approach between MoI 

and MoD and with the civilian Ministry of Public Health. 

AFGHAN NATIONAL POLICE 

HEALTH CARE SYSTEM B. IG Assessment of Progress 

Although the Afghan Police do not have effective medical support, they are reluctant to integrate with the Afghan 

Army due to institutional mistrust. 

Effective partnering with the Afghan Army and the civilian Ministry of Public Health is needed, but little progress 

has been made, largely due to limited resources and lack of a clear policy commitment on a way forward with a 

corresponding multi-year strategic plan for training, mentoring, and integration. 

AFGHAN NATIONAL POLICE 

HEALTH CARE SYSTEM C. Management’s Assessment 

The ANP has made progress in their health system and CSTC-A continues to mentor them in this area. 

We agree that a coordinated ANSF health care system is desirable but as noted, we cannot accomplish this 

without support from the Afghan Government. The International Community and other areas of the U.S. 

Government outside of DoD will need to be involved in this effort as well. 

7. NUCLEAR ENTERPRISE 

A. IG Summary of Challenge B. IG Assessment of Progress C. Management’s Assessment 

DECLINE OF FOCUS ON THE 

NUCLEAR ENTERPRISE A. IG Summary of Challenge 

The Department faces complex and long standing nuclear enterprise management challenges that affect the 

Department’s ability to provide public assurance that it can meet its nuclear operational and surety 

responsibilities. A recent Defense Science Board report stated that since the end of the Cold War, there has been 

a marked but gradual decline in the level and intensity of focus on the nuclear enterprise and the nuclear mission. 

When comparing the current level of focus to that of 1990, the aggregate change is dramatic. The decline is 

characterized by: 

• Embedding nuclear mission forces in nonnuclear organizations. 

• Markedly reducing levels of leadership whose daily focus is on nuclear enterprise. 

• Generally devaluing the nuclear mission and those who perform the mission. 

Numerous reports and studies issued over the past decade have documented the decline. From 1991 to 2008, 

the IG identified and reported on aspects of this decline in a series of classified audit reports related to the 

security of nuclear systems. Although specific report details are classified; the weaknesses identified in each of 

those reports are a direct result of the decline in emphasis of the nuclear enterprise and mission. 

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DECLINE OF FOCUS ON THE 

NUCLEAR ENTERPRISE B. IG Assessment of Progress 

The Department has begun to address and reverse the nuclear enterprise decline. 

For example, in February 2008, the Air Force issued its report on the “Air Force Blue Ribbon Review of Nuclear 

Weapons Policies and Procedures.” The report contained 36 observations and recommendations, as well as the 

following general conclusions: 

• Air Force Nuclear Surety is sound but needs strengthening. 

• Air Force focus on nuclear mission has diminished since 1991. 

• Nuclear enterprise in the Air Force works, despite being fragmented. 

• Declining Air Force nuclear experience has led to waning expertise. 

• Air Force nuclear surety inspection programs need standardization. 

The Air Force is in the process of implementing the report recommendations. 

Other studies and task forces have been initiated as described below. However, it is critical that DoD leadership 

recognize the consequences of failure to ensure the security of its nuclear forces and to implement as quickly as 

possible, viable recommendations to stop and reverse the decline focus on the nuclear enterprise. 

DECLINE OF FOCUS ON THE 

NUCLEAR ENTERPRISE C. Management’s Assessment 

The Department agrees there has been a decline in the level and intensity of focus on the nuclear enterprise and 

the nuclear mission. The Department continues to address and reverse the nuclear enterprise decline. Actions to 

address the findings and recommendations from various reports and studies are overseen by the DoD Senior 

National Security Presidential Directive-28 Oversight Committee (Senior NOC), and the joint DoD/DOE Nuclear 

Weapons Council (NWC), both chaired by the USD(AT&L); as well as the Interagency Nuclear Command and 

Control System Committee of Principals (NCCS CoP), chaired by the Deputy Secretary of Defense. The Military 

Departments are aggressively implementing changes to organizational structure, processes, and procedures to 

improve the security of nuclear forces and senior leaders' focus on the nuclear mission. 

INCIDENTS INDICATE SYSTEMIC PROBLEMS A. IG Summary of Challenge 

Over the past year, the Department experienced series of incidents that indicated significant problems with 

nuclear enterprise management. Failure to follow prescribed verification procedures resulted in nuclear warheads 

being inadvertently transferred from Minot AFB to Barksdale AFB. Sensitive missile components were 

erroneously shipped to Taiwan. The 2nd Bomb Wing at Barksdale AFB failed a nuclear surety inspection and had 

to be re-inspected to a satisfactory rating. The recent series of limited nuclear surety inspections conducted as a 

result of the Minot transfer incident exposed potential problems related to operational readiness. 

INCIDENTS INDICATE SYSTEMIC PROBLEMS B. IG Assessment of Progress 

In response to the Minot transfer incident, the Secretary of the Air Force conducted a Commander-Directed 

Investigation of the incident, decertified a portion of the 5th Bomb Wing at Minot, and executed a series of limited 

nuclear surety inspections. However, the 5th Bomb Wing failed the May 2008 Defense Nuclear Surety Inspection 

and was re-inspected. 

In response to a February 2008 request from the Under Secretary of Defense (Acquisition, Technology, and 

Logistics), the Defense Science Board Permanent Task Force issued its “Report on the Unauthorized Movement 

of Nuclear Weapons.” The report identified the root and systemic causes of the Minot transfer incident and 

provided 12 recommendations to strengthen nuclear surety programs and practices. The Department is 

implementing the recommendations. Recently, the Under Secretary tasked the Defense Science Board to review 

the nuclear inspection regime and make recommendations for improvement. 

In March 2008, the Secretary of Defense appointed Admiral Donald, USN, to conduct an investigation into the 

facts and circumstances surrounding the accountability for, and shipment of, sensitive missile components to 

Taiwan in 2006. The investigation concluded that the specific cause was the Air Force and Defense Logistic 

Agency’s “sole reliance on, and lack of compliance with,” existing supply system procedures to provide positive 

control of the components. The investigation identified 7 findings, and 3 systemic problems, and contained 13 

recommendations for corrective action. The report makes clear that the problems and mistakes have their roots in 

decisions made over a period of at least 10 years. 

SECTION 3 Other Accompanying Information 

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INCIDENTS INDICATE SYSTEMIC PROBLEMS C. Management’s Assessment 

The Department is applying the highest levels of accountability and control to the stewardship of nuclear 

weapons. The Department has reviewed and is enhancing logistics processes for the nuclear weapons enterprise 

that identifies, manages, and accounts for all nuclear weapons and sensitive nuclear weapons-related material. 

These improvements will be incorporated into DoD directives and Service/Agency-level policies. The USD(AT&L) 

staff will monitor processes through full implementation. 

KEYS TO IMPROVEMENT A. IG Summary of Challenge 

To reverse this trend, the Department needs to refocus on the nuclear enterprise. The following elements are key 

to improvement: 

• Create an environment that emphasizes the nuclear mission and that a reliable, safe, secure, and credible 

nuclear deterrent is essential to national security and is a high DoD priority. 

• Conduct detailed reviews and studies of all critical elements of the nuclear enterprise to identify key 

deficiencies and methods for improvement. 

• Develop corrective action plans that correct the deficiencies and provide adequate funding and leadership to 

ensure implementation. 

• Implement the corrective actions and conduct follow-up reviews to ensure that the action plans are 

correcting the deficiencies. 

As stated in the Defense Science Board report, the series of nuclear related incidents that occurred over the past 

year “can be a just-in-time rescue if lasting corrective actions are implemented now.” 

KEYS TO IMPROVEMENT B. IG Assessment of Progress 

The Department initiated additional reviews to address critical aspects of the nuclear enterprise. In June 2008, the 

Secretary of Defense tasked the Under Secretary of Defense for Policy, in coordination with the Director of 

Administration and Management, to establish the Task Force on Nuclear Weapons Management as a 

subcommittee of the Defense Policy Board. The task force will have two phases. The first phase, to be completed 

within 60 days, will make recommendations on organizational, procedural, and policy matters involving the Air 

Force. The second phase, to be completed within 120 days, will examine management and oversight of nuclear 

weapons and related materials and systems across the entire Department. 

Additionally, the Secretary directed that a Nuclear Command and Control System Comprehensive Review (NCR) 

be conducted. This review will examine and make recommendations on the full range of nuclear command and 

control (NCCS) policies, procedures, responsibilities, functions, capabilities, management and oversight 

necessary to meet national and Department policy and guidance, and maintain the highest standards required for 

planning, directing, and controlling nuclear weapons, weapon systems, and associated operations. The 

Department will also be conducting a Nuclear Posture Review intended to examine the New Triad and its 

relationship to Defense policy goals, command and control planning and intelligence, and sizing of the nuclear 

force. 

We fully support these efforts and believe they are a necessary first step in reversing the decline. However, in the 

past, similar types of reviews were conducted that resulted in good, solid recommendations, which were never 

implemented. Fixing the problems will require commitment, effort, and resources. The IG will monitor the 

Department’s progress in implementing the various report and study recommendations. 

KEYS TO IMPROVEMENT C. Management’s Assessment 

The Department fully supports these efforts and agrees they are the first step in reversing the decline in the 

emphasis of the nuclear enterprise and mission. The Department's focus will be on determining and correcting the 

root and systemic causes of the decline. The Senior NOC, NWC, and NCCS CoP will continue to oversee actions 

to ensure the proper level of leadership, commitment, effort, and resources are applied to correct the problems 

and refocus the nuclear enterprise. 

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Department of Defense Agency Financial Report 2008 

SUMMARY OF MANAGEMENT 

ASSURANCES AND FINANCIAL 

STATEMENT AUDIT 

Department leadership is resolute in its 

determination to continuously establish and 

maintain effective internal management 

controls for all mission-essential processes. In 

June 2008, the Public Relations Society of 

America awarded the Department’s Check It 

campaign its prestigious Silver Anvil Award for 

the best internal communications campaign. 

Check It, with the tagline “What gets checked, 

Gets done,” reminds the workforce to double 

check their work and helps ensure effective 

internal management controls. 

The Check It campaign also sponsors a 

competition to report best process 

improvements. In two rounds of competition, 

40 improvements from 24 Components were 

submitted to the Deputy Secretary of 

Defense. Submissions reported a total of 

$3 billion worth of savings due to improving 

internal management controls. 

DoD Managers’ Internal Control Program 

The Department conducts self-assessments 

of internal management controls throughout 

the Department in accordance with the 

Federal Managers’ Financial Integrity Act 

(FMFIA), formally designated as the 

Department’s Managers’ Internal Control 

U.S. Deputy

Secretary of

Defense Gordon 

England at the DoD

Check It 

Campaign’s Most

Improved Process

Ceremony.

Secretary England

recognizes DoD

Components for

the most improved

processes totaling

$3 billion worth of 

savings due to

improving internal 

management

controls through

the Check It 

Campaign. 

DoD photo – March 2008 

Program. These internal management 

controls are the checks and balances that 

assist program and financial managers to 

achieve results, and safeguard the integrity of 

the programs. As prescribed by OMB Circular 

No. A-123, the Department’s internal 

management control program assesses both 

the effectiveness of nonfinancial functions 

and processes, and the management controls 

as prescribed by Appendix A for financial 

reporting. A description of each self-assessed 

category with weaknesses and the 

corresponding results follow: 

453-17 

SECTION 3 Other Accompanying Information 

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Department of Defense Agency Financial Report 2008 

1. FMFIA Section 2 Financial Reporting Material Weaknesses. 

The DoD is using a phased-in approach for the FMFIA Section 2 Financial Reporting, and the 

areas that were tested in the FY 2008 are listed below. 

• Fund Balance with Treasury 

• Investments 

• Military Equipment 

• Real Property 

• Medicare-Eligible Retiree Health Care Fund 

• Federal Employees Compensation Act Liabilities 

• Environmental Liabilities 

• Appropriations Received 

• Accounts Receivable 

• Inventory 

• Accounts Payable 

• Operating Materials and Supplies 

• Other Assets 

• Other Liabilities 

• General Property and Equipment (Defense Organizations only) 

• Compilation of financial reports 

• Internal Use Software (Intelligence Community only) 

Table 1a identifies the resulting weaknesses. The column entitled “Ref Table 2” crosswalks the
 

reported FMFIA manager-identified weaknesses to similar auditor-identified weaknesses in 

Table 2. 

Table 1a. Summary of Management Assurances 

Effectiveness of Internal Control over Financial Reporting (FMFIA Section 2) 

Statement of Assurance No Assurance 

Material Weaknesses 

(information deemed 

necessary for clarification) 

Ref 

Table 2 

Beginning 

Balance New Resolved Consolidated Reassessed Ending 

Balance 

1) Valuation of Property Plant 

and Equipment - Military 

Equipment 

11 1 1 

2) Real Property Assets 11 1 1 

3) Environmental Liabilities 3 1 1 

4) Health Care 

(Medicare-Eligible Retiree Health Care 

Liability in military departments direct 

care operations) 

1 1 

5) Fund Balance with 

Treasury 10 1 1 

6) Accounts Receivable 13 1 1 

7) Inventory Valuation 12 1 1 

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Department of Defense Agency Financial Report 2008 

Table 1a. Summary of Management Assurances - continued 

Effectiveness of Internal Control over Financial Reporting (FMFIA Section 2) 

Statement of Assurance No Assurance 

Material Weaknesses 

(information deemed 

necessary for clarification) 

Ref 

Table 2 

Beginning 

Balance New Resolved Consolidated Reassessed Ending 

Balance 

8) Operating Materials and 

Supplies 6 1 1 

9) Accounts Payable 1 1 1 

10) Personal Property -General 

Personal Property 

(Includes reported problems with the 

cost of DoD property and materiel in the 

possession of contractors. Reassessed 

and moved from Overall Nonfinancial 

Operations #3 to DoD Financial 

Reporting Material Weakness #10) 

11 & 4 1 1 

11) Financial Reporting 

Compilation 

(Includes Statement of Net Cost, 

Statement of Budgetary Resources, 

Statement of Net Position, and 

Accounting Adjustments) 

2, 7, & 8 1 1 

12) Financial Reporting of 

Intragovernmental 

Eliminations 

(Includes Anti-Deficiency Act Violations) 

5 1 1 

Total Financial Reporting 

Material Weaknesses 9 3 0 0 0 12 

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129 
 

 

 

 

 

 

 

 

Department of Defense Agency Financial Report 2008 

2. FMFIA Section 2 Overall (Nonfinancial) Operations Material Weaknesses. The 

Department’s 34 Component heads follow a robust, programmatic approach to establish and 

assess internal management controls for their respective nonfinancial, mission-essential 

operations. Table 1b shows the resulting weaknesses for this assessment. 

Table 1b. Summary of Management Assurances 

Effectiveness of Internal Control over Overall (Nonfinancial) Operations (FMFIA Section 2) 

Statement of Assurance Qualified 

Overall Material Weaknesses 

(information deemed 

necessary for clarification) 

Ref 

Table 2 

Beginning 

Balance New Resolved Consolidated Reassessed Ending 

Balance 

1) Department of Defense 

Financial Management 

Systems and Processes 

(Reassessed as a consolidation into 

Conformance with Financial 

Management System Requirement 

FMFIA Section 4, Material Weakness 

#1, Table 1c.) 

1 1 

2) Management of Information 

Technology and Assurance 1 1 

3) Personal Property 

(Reassessed as new financial 

weakness #10, Table 1a.)

 1 1 

4) Personnel Security 

Investigations 1 1 

5) Real Property Infrastructure 1 1 

6) Government Card Program 1 1 

7) Contracting 1 1 

8) Procurement Data 1 1 

9) Interagency Acquisition and 

Potential Anti-Deficiency 

Act Violations 

1 1 

10) Certain Audits Do Not Meet 

Professional Standards 1 1 

Total Material Weaknesses 

for Overall Operations 9 1 4 0 2 4 

SECTION 3 Other Accompanying Information 

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Department of Defense Agency Financial Report 2008 

3. FMFIA Section 4 Financial System Nonconformance Weaknesses: The Department 

considers financial system conformance with governmentwide requirements and reports one 

weakness that covers the wide range of pervasive problems identified during the assessment. 

Table 1c shows the resulting weakness. 

Table 1c. Summary of Management Assurances 

Conformance with Financial Management System Requirements (FMFIA Section 4) 

Statement of Assurance No Assurance 

System Nonconformance 

(information deemed 

necessary for clarification) 

Ref 

Table 2 

Beginning 

Balance New Resolved Consolidated Reassessed Ending 

Balance 

1) Department of Defense 

Financial Management 

Systems and Processes 

9 1 1 

Total System Conformance 

Material Weaknesses 1 1 

Total FMFIA Weaknesses 19 4 4 0 2 17 

Improvement Results 

Since FY 2001, the Department has reduced the 

number of outstanding management-identified 

material weaknesses by 85 percent—from 116 

material weaknesses to 17 (Figure 3-1). From 

FY 2003 to FY 2007, the total number 

decreased 59 percent, from 41 to 19. And in the 

last year, the Department further reduced the 

self-identified weaknesses from 19 to 17 by 

correcting four, reassessing two, and identifying 

four new weaknesses. 

Financial Statement Audit 

In addition to the management-identified 

weaknesses described in the categories above, 

the Department of Defense Inspector General 

identified material weaknesses in financial 

statement reporting as shown in Table 2. 

Figure 3-1. Reducing Internal Management

 Control Weaknesses 

453-09 

19 17

34 35

47 

41 

71 

116 

0 

20 

40 

60 

80 

100 

120 

2001 2002 2003 2004 2005 2006 2007 2008 

Weaknesses 

Source: FY 2001-2007 DoD Performance and 

Accountability Reports 

85% 

Improvement 

SECTION 3 Other Accompanying Information 

131 
 

Department of Defense Agency Financial Report 2008 

Table 2. Summary of Financial Statement Audit 

Audit Opinion 

Restatement 

Disclaimer 

Yes 

Material Weakness Beginning 

Balance New Resolved Consolidated Ending 

Balance 

1 Accounts Payable 1 1 

2 Accounting Entries 1 1 

3 Environmental Liabilities 1 1 

4 Government Property in Possession of 

Contractors 

1 1 

5 Intragovernmental Elimination 1 1 

6 Operating Materiels and Supplies 1 1 

7 Reconciliation of Net Cost of 

Operations to Budget 

1 1 

8 Statement of Net Cost 1 1 

9 Financial Management Systems 1 1 

10 Fund Balance with Treasury 1 1 

11 General Property, Plant & Equipment 1 1 

12 Inventory 1 1 

13 Accounts Receivable 1 1 

Total Material Weaknesses 13 0 0 0 13 

Compliance with Federal Financial Management Improvement Act 

Table 3 shows the Department’s compliance with the Federal Financial Management 

Improvement Act. The Department is committed to implementing the FIAR Plan and the ETP to 

achieve significant progress toward financial management improvement. 

Table 3. Compliance with Federal Financial Management Improvement Act 

Agency Auditor 

Overall Substantial Compliance No No 

1. System Requirements No No 

2. Accounting Standards No No 

3. U.S. Standard General Ledger at Transaction Level No No 

Good News Results 

The Department has improved its financial management by focusing its efforts on fixing material 

weaknesses and strengthening internal controls. This approach has yielded positive results 

providing a more complete depiction of the Department’s financial health and improved 

operational processes. The Department remains committed to transformational efforts to 

continue reducing material weaknesses. 

SECTION 3 Other Accompanying Information 

132 
 

 

Program Estimated $ Estimated %

Department of Defense Agency Financial Report 2008 

IMPROPER PAYMENTS INFORMATION Figure 3-2. FY 2008 Estimated 

ACT REPORTING Improper Payments 

The Improper Payments Information Act (IPIA) 

of 2002, as implemented by the OMB Circular 

No. A-123, Appendix C, “Requirements for 

Effective Measurement and Remediation of 

Improper Payments,” requires federal agencies 

to review all programs and activities annually, 

and identify those that may be susceptible to 

significant erroneous payments. The 

Department strengthened financial 

management controls and improved processes 

used to detect and prevent improper 

payments. Eliminating improper payments 

ensures that taxpayer dollars are spent wisely 

and efficiently. The Department’s FY 2008 

review did not identify any programs at risk of 

significant erroneous payments in accordance 

with OMB criteria (programs with erroneous 

payments exceeding both $10 million and 

2.5 percent of program payments). All DoD 

improper payment estimates for FY 2008 are 

at or below 2 percent for all programs. 

However, based on the large volume of 

transactions and/or high dollar amounts, DoD 

is required to report on all programs regardless 

of threshold criteria. The five programs are: 

• Military Health Benefits 

• Military Pay 

• Civilian Pay 

• Military Retirement 

• Travel Pay 

Improper payment estimates for these 

programs are presented in Figure 3-2. 

Commercial pay information is included in the 

Recovery Audit Reporting section of this 

report. Additional information regarding DoD’s 

IPIA program and statistical sampling 

methodology is available on the Comptroller 

Web site. (See Appendix B.) 

Risk Assessment 

The Department’s risk assessments for each 

of the programs identified above addressed 

the effectiveness of internal controls for 

preventing improper payments (such as 

prepayment reviews), and system weaknesses 

453-10 

Travel Pay $103.0M 2.00 %

Military Retirement $ 44.0M 0.12 %

Civilian Pay $ 73.9M 0.28 %

Military Pay $ 434.6M 0.60 %

Military Health Benefits $ 178.0M 2.00 %

Travel Pay $103.0M 2.00 %

Military Retirement $ 44.0M 0.12 %

Civilian Pay $ 73.9M 0.28 %

Military Pay $ 434.6M 0.60 %

Military Health Benefits $ 178.0M 2.00 %

Program Estimated $ Estimated %

identified internally or by outside audit 

activities. While the Department’s improper 

payment percentages are low, numerous preand post-payment controls further minimize or 

eliminate improper payments. The following 

paragraphs summarize the processes in place 

and the results of survey assessment reviews. 

Statistical Sampling Process 

The Department of Defense uses random 

sampling methods designed to meet or 

exceed the OMB requirement of annual 

estimates of improper payments with a 

90 percent confidence interval (plus or minus 

2.5 percent). 

Corrective Action Plans 

Military Health Benefits 

The Department’s contracts have had 

payment performance standards for military 

health benefit claims processing in place for 

many years. The estimate of 2 percent is 

based on the contract performance standard, 

SECTION 3 Other Accompanying Information 

133 
 

–

Department of Defense Agency Financial Report 2008 

however, actual results have been 

consistently less than 2 percent. The FY 2007 

results reflect an improper payment rate of 

0.93 percent. Overpayments found in the 

annual audit process are projected to the 

audit universe, and the managed care support 

contractor is liable for the total amount. This 

contractual design, combined with numerous 

prepayment and post-payment controls, 

effectively minimizes improper payments and 

ensures the Government’s risk for improper 

payments in military health benefits is 

minimized. 

Military Pay 

Reviews of military pay accounts for FY 2008 

resulted in projected improper payments of an 

estimated $435 million (0.6 percent of 

approximately $72 billion in total military net 

pay). Most of these improper payments were 

due to inaccurate or untimely reporting of 

entitlement data to the automated pay system. 

The Department has worked closely with the 

Active Duty Components to develop metrics 

and track timeliness and accuracy of pay 

entitlements. Senior leaders participate in 

quarterly Personnel and Pay Council 

meetings to discuss problem areas and seek 

solutions to mitigate discrepancies causing 

improper payments. This partnership with the 

Active Duty Components has improved pay 

entitlement timeliness and accuracy. The 

Department continues to develop Reserve 

and Guard performance metrics and goals to 

improve accuracy and timeliness, which 

should further reduce improper payments. 

Civilian Pay 

Reviews of civilian payments resulted in an 

improper payment estimate of $73.9 million 

(0.28% of approximately $26.4 billion). Efforts 

to identify and reduce actions contributing to 

net pay errors continue. Improper payments 

that resulted in collection actions are primarily 

attributed to untimely and inaccurate reporting 

of time and attendance (60 percent of total 

collections), and personnel actions and pay 

allowances (40 percent of total collections). 

The Personnel and Pay Council continues to 

serve as a forum for senior leadership to 

address civilian pay problem areas and seek 

methods to mitigate risks and reduce 

improper payments. Civilian pay metrics, 

corresponding accuracy and timeliness goals, 

and corrective action plans have been 

developed at the component level. 

Military Retirement 

Payments to deceased retirees continue to be 

the highest risk for improper payments in 

military retired pay. Based on FY 2008 

reviews, the Department projected 

approximately $44 million in improper 

payments for this program, with almost the 

entire amount paid to deceased retirees. This 

represents an overpayment rate of 

0.12 percent of the estimated $36 billion in 

annual military retirement payments. In 

certain situations, payment to deceased 

retirees is unavoidable due to payment cycle 

dates and the fact that notifying a payroll 

activity is not likely to be the first action for 

next-of-kin at the time of a retiree’s passing. A 

review of confirmed payments to deceased 

retirees in FY 2008 indicated that the 

Department recovered 96 percent of the 

overpayment amounts within 60 days, 

demonstrating the effectiveness of controls 

within the retired pay system once a retiree’s 

death confirmation is received and processed 

for final disposition. 

Secretary of Defense Robert M. Gates, left, presented 

then Chairman of the Joint Chiefs of Staff Marine Gen. 

Peter Pace with his certificate of retirement during an 

armed forces hail and farewell ceremony at Ft. Myer, Va.

Pace retired after 40 years of active-duty military service.

DoD photo by Cherie A. Thurlby October 2007 

SECTION 3 Other Accompanying Information 

134 
 

$ 8.6 0.95 $ 82.4 $ 8.5 0.90 $ 76.5 $ 8.3 0.88 $ 72.3

$41.3 0.12 $ 51.4 $ 42.9 0.12 $ 54.2 $ 44.5 0.12 $ 52.3

$31.3 0.24 $ 73 $ 32.3 0.23 $ 72.3 $ 32.3 0.22 $ 72.2

$68.4 0.53 $ 362.5 $ 69.7 0.52 $362.4 $ 71 0.51 $ 362.1

$10.8 2.00 $ 216 $ 10.5 2.00 $ 211 $ 10.8 2.00 $ 216 

IP

($ M)

IP

(%)

Outlays

($ B)

IP

($ M)

IP

(%)

Outlays

($ B)

IP

($ M)

IP

(%)

Outlays

($ B)

IP

($ M)

IP

(%)

Outlays

($ B)

IP

($ M)

IP

(%)

Outlays

($ B) Program

FY 2007 FY 2008 FY 2009 Estimated FY 2010 Estimated FY 2011 Estimated

Department of Defense Agency Financial Report 2008 

The Department’s control processes to 

prevent, identify, and reduce overpayments to 

deceased retirees include a series of periodic 

eligibility notifications, early detection data 

mining efforts, and partnerships with other 

Federal and state entities. The Department 

routinely compares retired and annuity payroll 

master file databases to Social Security 

Administration deceased records and 

periodically compares records with the Office 

of Personnel Management’s deceased files. 

File comparisons are also conducted with the 

Department of Veterans Affairs’ cemetery 

database and with individual states with 

sizable retiree and annuitant populations 

(e.g., Texas, California, and Florida). Retirees 

identified as deceased in these comparisons 

must validate their continued eligibility, or the 

accounts are suspended. 

Travel Pay 

The Department performs monthly random 

post-pay reviews of travel vouchers 

processed through the Defense Travel 

System (DTS) and the Windows Integrated 

Automated Travel System (WinIATS), as well 

as permanent change of station (PCS) 

vouchers, and regularly reports the results to 

management. Estimates of travel 

overpayments are projected based on 

random reviews of WinIATS temporary duty 

(TDY) and military PCS vouchers that were 

not included in last year’s AFR. The 

Department implemented a sampling and 

review process for Army IATS in FY 2008 that 

meets the improper payment reporting 

requirements. Reports to management 

address accuracy rate trends, over- and 

underpayment dollar amounts, reasons for 

errors, and recommendations for corrective 

actions to alleviate similar errors in the future. 

The DTS is targeted to be the single, online 

travel system used by the Department. Until 

DTS is fully implemented, Components will 

continue to use other travel systems, such as 

IATS and Reserve Travel System, to settle 

travel vouchers. Summary results for the 

Department during FY 2008 revealed an 

estimated $103 million (2 percent) in improper 

payments out of a total of $5.2 billion in travel 

voucher reimbursements. 

Improper Payment Program Reporting 

Figure 3-3 summarizes the Department’s 

improper payment reduction outlook and total 

program outlays (payments) from FY 2007 

through FY 2011. Detailed information 

regarding DoD’s IPIA program and notes 

relating to Figure 3-3 are available on the 

Comptroller Web site. (See Appendix B.) 

Figure 3-3. Improper Payment (IP) Reduction Outlook 

IP 

($ M) 

IP 

(%) 

Outlays 

($ B) 

IP 

($ M) 

IP 

(%) 

Outlays 

($ B) 

IP 

($ M) 

IP 

(%) 

Outlays 

($ B) Program 

FY 2007 FY 2008 FY 2009 Estimated

IP 

($ M) 

IP 

(%) 

Outlays 

($ B) 

IP 

($ M) 

IP 

(%) 

Outlays 

($ B) 

FY 2010 Estimated FY 2011 Estimated

Military 

Health 

Benefits 

$ 9.5 0.93 $88.6 $ 8.9 2.00 $178.0 $10.8 2.00 $ 216 $ 10.5 2.00 $ 211 $ 10.8 2.00 $ 216 

Military 

Pay $72.9 0.57 $ 416.4 $ 72.1 0.60 $434.6 $68.4 0.53 $ 362.5 $ 69.7 0.52 $362.4 $ 71 0.51 $ 362.1 

Civilian 

Pay $29.6 0.25 $ 74.6 $ 26.4 0.28 $ 73.9 $31.3 0.24 $ 73 $ 32.3 0.23 $ 72.3 $ 32.3 0.22 $ 72.2 

Military 

Retirement $37.1 0.13 $48.7 $ 35.6 0.12 $ 44.0 $41.3 0.12 $ 51.4 $ 42.9 0.12 $ 54.2 $ 44.5 0.12 $ 52.3 

Travel Pay $ 5.8 1.00 $43.6 $ 5.2 2.00 $103.0 $ 8.6 0.95 $ 82.4 $ 8.5 0.90 $ 76.5 $ 8.3 0.88 $ 72.3 

IP – Improper Payments, B – Billions, M – Millions 453-11 

SECTION 3 Other Accompanying Information 

135 
 

 

Departmental 

Recovery 

Audit Totals

Recovery Audit Activity

(Amounts in millions)

 

Department of Defense Agency Financial Report 2008 

Recovery Auditing Reporting 

The Department uses a number of different 

mechanisms to prevent, identify, and collect 

improper payments, including recovery and 

contract auditing for all commercial payments. 

Recovery Auditing 

The Department maintains an extensive postpayment review process for identifying 

improper payments in the commercial pay 

arena. This process uses post-payment 

reviews performed both internally and by 

recovery auditing contractors paid from the 

recovered proceeds. Departmentwide 

commercial payments constitute a large 

volume of transactions with high dollar values, 

and DoD is vigilant about ensuring payment 

accuracy. In addition to the post-payment 

reviews, DoD also prevents over- and underpayments through various manual and 

automated prepayment initiatives. 

Commercial pay overpayments identified for 

recovery result from internal recovery audit 

efforts and contract reconciliation. Selected 

high dollar value payments are reviewed 

manually, and periodic independent reviews 

of commercial payments improve improper 

payment detection, correction, and prevention 

efforts. 

The Department’s Mechanization of Contract 

Administration Services (MOCAS) system 

Cumulative amounts reflect totals from 

FY 2006 and 2007 since detailed information 

on collections by type, excluding voluntary 

repayments, is not readily available prior to 

FY 2006. In addition to the success of DFAS, 

the Department is continuing to separate 

voluntary from involuntary refunds until all 

DoD Components achieve this capability. 

Components reported an additional 

$26.7 billion in commercial payments that 

were processed independently from DFAS in 

FY 2008. Recovery audit statistics for this 

amount includes voluntary refunds and, 

therefore, was excluded from the Recovery 

Audit Activity table. Additional recovery audit 

activity that includes voluntary refunds is 

available on the Comptroller Web site. (See 

Appendix B.) 

Contract Auditing 

The Defense Contract Audit Agency (DCAA) 

routinely performs billing system audits at 

major contractors to determine the adequacy 

of the contractor’s billing system, internal 

controls, and compliance with those controls. 

Such audits assure the Department that the 

contract payment billings are based on costs 

incurred and on approved provisional billing 

rates. The DCAA also performs paid voucher 

reviews at major contractors, and special 

Figure 3-4. Recovery Audit Activity 

processed 57 percent of the $331 billion in 

DFAS commercial pay disbursements made 

in FY 2008. Reviews of this system accounted 

for 67 percent ($203.9 million) of the total 

$303.7 million in improper commercial 

payments identified by DFAS in FY 2008. 

Over two-thirds of this total represented 

underpayments (Figure 3-4). 

Recovery Audit Activity Table 

The $331.2 billion represents the total dollar 

value of disbursements (payments) in 

MOCAS and vendor pay systems. In 

accordance with IG recommendations, the 

recoveries identified do not include unsolicited 

refunds of overpayments from vendors. The 

DFAS successfully separated voluntary and 

involuntary refunds for FY 2008 reporting. 

Recovery Audit Activity 

(Amounts in millions) 

Departmental 

Recovery 

Audit Totals 

Amount Subject to Review for FY 

2008 Reporting $331,192 

Actual Amount Reviewed and 

Reported (FY 2008) $331,192 

Overpayment Amounts Identified 

for Recovery (FY 2008) $53.3 

Amounts Recovered (FY 2008) $41.7 

Overpayment Amounts Identified 

for Recovery (Prior Y(Prior Years) $66.0 

Amounts Recovered 

(Prior Years) $60.0 

Cumulative Amounts Identified 

for Recovery (FY 2008 and Prior) $119.3 

Cumulative Amounts Recovered 

(FY 2008 and Prior) $101.7 

SECTION 3 Other Accompanying Information 

136 

453-12 
Department of Defense Agency Financial Report 2008 

U.S. Sailors set the aircraft training barricade on the

flight of the Nimitz-class aircraft carrier USS Ronald

Reagan (CVN 76) while under way in the Gulf of Oman, 

during flight deck drills. 

U.S. Navy photo by Specialist 3rd Class Chelsea Kennedy – September 2008 

purpose audits at contractor locations, when 

an improper payment risk factor is identified 

and neither a billing system review nor a test 

of paid vouchers is planned. 

Accountability 

Certifying officer legislation holds certifying 

and disbursing officers accountable for 

government funds. In accordance with section 

2773a of title 10, United States Code, 

pecuniary liability attaches automatically 

when there is a fiscal irregularity, i.e., 1) a 

physical loss of cash, vouchers, negotiable 

instruments, or supporting documents, or 

2) an improper payment. Efforts to recover 

payments from a recipient must be 

undertaken in accordance with debt collection 

procedures in the DoD Financial Management 

Regulation. 

Infrastructure 

The Department has the information and 

infrastructure needed to reduce improper 

payments in each of the Improper Payment 

Program areas. The Department began 

implementing a Business Activity Monitoring 

(BAM) toolset in FY 2008, which will employ 

the latest technology to increase the 

efficiency and effectiveness of commercial 

pay improper payment detection and 

prevention procedures. The BAM toolset is 

expected to reach full functionality for 

improper payments in FY 2009. 

Barriers 

Military retirement is the only program area 

facing statutory or regulatory barriers limiting 

corrective actions. Barriers include the Retired 

and Annuitant Pay service contract and the 

Federal Acquisition Regulation. 

In January 2002, DFAS awarded Retired and 

Annuitant Pay service operations to a 

contractor. Although most functions remained 

unchanged from when the Government 

performed these functions, there are now 

contractual limits to the Government’s 

involvement in the day-to-day operations of 

Retired and Annuitant Pay. The Continuing 

Government Activity Office was formed to 

oversee this contract. However, the 

Government can no longer direct how the 

work is accomplished. To bring about an 

operational change, both the Government and 

the contractor must agree on how to effect 

and fund the change and modify the contract 

accordingly. 

SECTION 3 Other Accompanying Information 

137 

 

Department of Defense Agency Financial Report 2008 

Appendixes 

GLOSSARY OF TERMS 

Acronym Definition 

AFB Air Force Base 

AFR Agency Financial Report or Annual 

Financial Report 

ANA Afghan National Army 

ANCOP Afghan National Civil Order Police 

ANP Afghan National Policy 

ANSF The Afghan National Security Forces 

A&T Acquisition and Technology 

AT&L Acquisition, Technology, and Logistics 

BAM Business Activity Monitoring 

BCT Brigades Combat Team 

BEA Business Enterprise Architecture 

BPA Blanket Purchase Agreement 

BTA Business Transformation Agency 

CAC Common Access Card 

CBRNE Chemical, Biological, Radiological, 

Nuclear, and High-Yield Explosive 

CBJ Congressional Budget Justification 

CERFP Enhanced Response Force Package 

CF Coalition Forces 

CFO Chief Financial Officer 

CM Capability Milestone 

COCO Contractor Owned and Contractor 

Operated 

COGO Contractor Owned and Government 

(DoD) Operated 

CONUS Continental United States 

COR Contracting Officer’s Representative 

CRM Contract Resource Management 

CSB Configuration Steering Board 

CSTC-A Combined Security Transition CommandAfghanistan 

CUI Controlled unclassified information 

DBE Department of Border Enforcement 

DCAA Defense Contract Audit Agency 

DFAS Defense Finance and Accounting Service 

DISA Defense Information Systems Agency 

DoD Department of Defense 

DOE Department of Energy 

DPAP Defense Procurement Acquisition Policy 

DTS Defense Travel System 

DUSD Deputy Under Secretary of Defense 

ETP Enterprise Transition Plan 

FDD Focused District Development 

FFMIA Federal Financial Management 

Acronym Definition 

Improvement Act 

FIAR Financial Improvement and Audit 

Readiness 

FIPS Federal Information Processing Standard 

FISMA Federal Information Security 

Management Act 

FMFIA Federal Managers’ Financial Integrity Act 

FMS U.S. Foreign Military Sales 

FY Fiscal Year 

GAAP Generally accepted accounting principles 

GAO General Accounting Office 

GFM Global Force Management 

GPRA Government Performance and Results 

Act 

HSPD Homeland Security Presidential Directive 

IA Iraqi Army 

IA Individual Augmentee 

IATS Integrated Automated Travel System 

IG Inspector General 

IGT Intragovernmental Transactions 

IOC Initial operational capability 

IPA Independent Public Accountant 

IPA International Police Advisor 

IPIA Improper Payment Information Act 

ISAF International Security Assistance Force 

ISF Iraqi Security Forces 

ISR Intelligence, surveillance, and 

reconnaissance 

IT Information Technology 

IVAN Intragovernmental Value-Added Network 

JCS Joint Chiefs of Staff 

JFCOM Joint Forces Command 

JLLIS Joint Lessons and Learned Information 

Systems 

JKDDC Joint Knowledgeable Development 

Distribution Capability 

JNTC Joint National Training Center 

JSCA Joint Supply Chain Architecture 

JTF Joint Task Force 

JWFC Joint Warfare Fighting Center 

MCTC Army Maneuver Combat Training 

Centers 

MFF Multi-Functional and Functional Support 

MHS Military Health System 

MNSTC-1 Multinational Security Transition 

Command in Iraq 

APPENDIX A Glossary 

138 
Department of Defense Agency Financial Report 2008 

Acronym Definition 

MOCAS Mechanization of Contract Administration 

Services 

MoD Ministry of Defense 

MoI Ministry of Interior 

NATO North Atlantic Treaty Organization 

NCCS CoP Interagency Nuclear Command and 

Control System Committee of Principals 

NCO Non-Commissioned Officer 

NCR Nuclear Command and Control System 

Comprehensive Review 

NDAA John Warner National Defense 

Authorization Act 

NLT Not less than 

NP Nonproliferation 

NSS National Security System 

NTE Not to exceed 

NTM-I NATO Training Mission – Iraq 

NWC Nuclear Weapons Council 

OIF Operation Iraqi Freedom 

OMB Office of Management and Budget 

PCS Permanent Change of Station 

PEO Soldier Program Execution Office Soldier 

PII Performance Improvement Initiative 

(formerly the PMA Budget and 

Performance Integration Initiative) 

PII Personally Identifiable Information 

PIV Personal Identity Verification 

PMA President’s Management Agenda 

PMT Police Mentor Team 

POC Point of Contact 

QDR Quadrennial Defense Review 

PTSD Post Traumatic Stress Disorder 

Acronym Definition 

RTS Reserve Travel System 

SCOR Supply Chain Operations Reference 

SecDef Secretary of Defense 

Senior NOC DoD Senior National Security 

Presidential Directive-28 Oversight 

Committee 

SRG Senior Review Group 

SOC Senior Oversight Council 

TBI Traumatic Brain Injury 

TDY Temporary Duty 

TMA TRICARE Management Activity 

TSA Technology Security Action 

USACE U.S. Army Corps of Engineers 

USAFRICOM U.S. African Command 

USCENTCOM U.S. Central Command 

US CERT U.S. Computer Emergency Readiness 

Team 

USD(AT&L) Under Secretary of Defense for 

Acquisition, Technology, and Logistics 

USD(C) Under Secretary of Defense 

(Comptroller) 

USEUCOM U.S. European Command 

USNORTHCOM U.S. Northern Command 

USPACOM U.S. Pacific Command 

USSOUTHCOM U.S. Southern Command 

USUHS Uniformed Services University of the 

Health Sciences 

WinIATS Windows Integrated Automated Travel 

System 

WMD Weapon of Mass Destruction 

WMD-CST Weapons of Mass Destruction—Civil 

Support Team 

APPENDIX A Glossary 

139 
Department of Defense Agency Financial Report 2008 

USEFUL WEB SITES FOR RELEVANT INFORMATION 

Web Address and Report Description 

www.defenselink.mil 

• Main DoD Web site, and links to other DoD Web sites. 

www.defenselink.mil/comptroller 

The DoD Comptroller Web site includes: 

• Agency Financial Report 

Provides the President, Congress, Federal departments and the American public 

with an overview of the Department’s financial condition. This report is the annual 

centerpiece for reporting the Department's financial execution, plans, and 

accomplishments. 

• Annual Performance Plan 

Describes the Department’s strategic goals and objectives, and the respective 

performance measures and targets that are used to assess progress. 

• Annual Performance Report 

Contains details of the Department’s performance results and progress in 

achieving its strategic goals, and is required by the Government Performance and 

Results Act (GPRA). 

• Citizen’s Report 

Summarizes the Department’s mission, key goals, budget allocation, and progress 

on key performance goals linking to the strategic goals. 

• Congressional Budget Justification 

The Department of Defense’s budget request to Congress. 

• Financial Improvement and Audit Readiness Plan 

Describes the Department's strategy for improving financial management and 

reports progress in achieving financial statement audit readiness. 

www.defenselink.mil/dbt 

The DoD’s Business Transformation Agency Web site includes: 

• Business Enterprise Architecture 

Blueprints DoD standard processes, data, data standards, business rules, 

operating requirements, and information exchanges for the Department’s business 

and financial management activities. 

• Enterprise Transition Plan 

Sets the defense business systems modernization strategy and defines the target 

systems environment. 

www.defenselink.mil/qdr/report/Report20060203.pdf 

• Quadrennial Defense Review 

Dated February 6, 2006, this is the Department’s strategic plan. 

APPENDIX B Useful Web Sites for Relevant Information 

140 
Contributors to the 

Fiscal Year 2008 Agency Financial Report

In addition to the significant contributions of the 

individuals listed below, hundreds of individuals in 

the Office of the Secretary of Defense and the 

Military Services contributed to the development of 

this Agency Financial Report

Anitra Akanbi

CPT Jay Aldridge

Becky Allen 

Crystal Allen

Alaleh Amiri

Christina Anctil

Sandra Anderson

Iman Aquil

John Argodale

Imtiaz Badar

Charlotte Beacham

Therese Beatty

Sally Beecroft

Douglas Brook

Preston Brown

Thadd Buzan

Melissa Carandang

Chun-I Chiang

Audrey Clark

Arlillian Coleman

Pamela Conklin

Jocelyn Conway

Carmen Covey

Donna Cox

Barbara Crawford

Gerald Davenport

Audrey Davis

Katherine Day

Jonnathan Diaz-Olivo

Thomas Dixon

Cynthia Dooley

Joseph Doyle

LTC Kevin Dunlop

Mark Easton

Nicole Elliott

Eric Engelbrektsson

Maryla Engelking

Dorothy Ferguson

David Fisher

Jodie Fisher

Virginia Fortune

Wendalyn Frederick

Mekeisha French

Kyle Fugate

Kevin Gade

Greg Galusha

Scott Gentry

Ellen Gibson

Linda Gileau

Kathryn Gillis

Wayne Goff

David Gross

Kathy Hammer

Denizejoice Hammond

Leslie Hammond

Colleen Hartman

Christine Hickman

Jerry Hinton

Elizabeth Hoffman

Amanda Illg

Jacqueline Jenkins

Thomas Jester

Lori Johns

Peggy Johnson

Edmund Kertulis

Tammy Kicas

Edna Knight

Mary Kohlmeier

Jack Koller

Ryan Layton 

Bob Leach

William Lehr

Linda Leuck

Elwood Lewis

Terri Lukach

Ava Lun

Jerome Macken

Joy Marcou

David Martin

Robert McNamara

Jason Monday

Mindy Montgomery

CDR James Morgan

Lydia Moschkin

Robert Moss 

Karen Nakama

Cara Negrette

Elise Newton

Karen Opie-Toler

Col Michael Peel

Stewart Petchenick

Marianne Petty

Michael Ponti

Victoria Post

Joseph Quinn

David Ramseyer

Alice Rice

Samuel Richardson

Elizabeth Ridge

Joie Ritchie

Terry Roberts

CAPT David Robertson

Heidi Robinson

Dan Roell

Helen Rosen

John Ruoff

Meagan Russell

Kevin Scheid

Andre Sekowski

Kathy Sherrill

Melissa Sikora

Joel Sitrin

Alfonza Smith

Dave Smith

Jason Smith

Jennifer Smith

Robert F. Smith

Wanda Smith

Timothy Soltis

Theresa Sorenson

Bruce Stahmer

Sandra Stockel

Kathy Street

David Thomas

Ron Tollefson

Michael Walsh

Michael Weber

Linda Yansky

Jammie Young

Karen Zent

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