```
1995 Budget: Potential Reductions to the Operation and Maintenance
Programs (Briefing Report, 09/06/94, GAO/NSIAD-94-246BR).

This briefing report evaluates the Pentagon's fiscal year 1995 operation
and maintenance budget, which funds everything from pilot training to
spare parts. GAO reviewed selected operation and maintenance accounts
for U.S. Army, Europe; U.S. Forces Command; U.S. Air Forces, Europe; Air
Combat Command; Air Material Command; and the Atlantic and Pacific
Fleets. GAO also reviewed selected accounts at the headquarters, Army,
Navy, Air Force, and Defense activities. GAO concludes that the
operation and maintenance request for fiscal year 1995 could be cut by
$4.5 billion without affecting military readiness.

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

 REPORTNUM:  NSIAD-94-246BR
     TITLE:  1995 Budget: Potential Reductions to the Operation and 
             Maintenance Programs
      DATE:  09/06/94
   SUBJECT:  Inventory control systems
             Defense appropriations
             Equipment maintenance
             Appropriation accounts
             Future budget projections
             Unobligated budget balances
             Budget authority rescission
             Budget cuts
             Defense operations
             Maintenance costs
IDENTIFIER:  C-17 Aircraft
             Germany
             Morale, Welfare, and Recreation Fund
             Defense Business Operations Fund
             DOD Military-to-Military Contact Program
             
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Cover
================================================================ COVER

Briefing Report to Congressional Committees

September 1994

1995 BUDGET - POTENTIAL REDUCTIONS
TO THE OPERATION AND MAINTENANCE
PROGRAMS

GAO/NSIAD-94-246BR

Fiscal Year 1995 O&M Budget Review

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

  AAFES - Army-Air Force Exchange Service
  CINC - Commander-in-Chief
  DOD - Department of Defense
  FORSCOM - U.S.  Forces Command
  LCAC - Landing Craft Air Cushion
  MWR - Morale, Welfare, and Recreation
  O&M - Operation and Maintenance
  OPTEMPO - Operating Tempos
  ROTC - Reserve Officers' Training Corps
  SFDLR - Stock Funding of Depot Level Reparables
  USAREUR - U.S.  Army, Europe

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

B-249828

September 6, 1994

The Honorable Daniel K.  Inouye
Chairman, Subcommittee on Defense
Committee on Appropriations
United States Senate

The Honorable John Glenn
Chairman, Subcommittee on Military Readiness
 and Defense Infrastructure
Committee on Armed Services
United States Senate

The Honorable John P.  Murtha
Chairman, Subcommittee on Defense
Committee on Appropriations
House of Representatives

The Honorable Earl Hutto
Chairman, Subcommittee on Readiness
Committee on Armed Services
House of Representatives

The Honorable John R.  Kasich
Ranking Minority Member
Committee on the Budget
House of Representatives

This report evaluates the military services' operation and
maintenance (O&M) requests for fiscal year 1995.  Our objective was
to determine whether the O&M accounts should be funded in the amounts
requested.  We reviewed selected O&M accounts for U.S.  Army, Europe
(USAREUR); U.S.  Forces Command (FORSCOM); U.S.  Air Forces, Europe;
Air Combat Command; Air Materiel Command; and the Atlantic and
Pacific Fleets.  We also reviewed selected accounts at the
headquarters, Army, Navy, Air Force, and Defense activities. 

As shown in table 1, we identified potential reductions of about $4.5
billion to the services' and Defense activities' fiscal year 1995 O&M
budget requests. 

                           Table 1
           
           Potential Reductions to the Fiscal Year
             1995 O&M Budget Requests by Program
                           Category

                    (Dollars in millions)

                                 Air  Defens
Category          Army  Navy   Force       e      Total
--------------  ------  ----  ------  ------  ==============
Inventory       $140.9  $67.  $305.7              $513.6
                           0
Maintenance             64.6   398.0    $5.1      467.7
Commissaries                           403.5      403.5
Flying hours      48.2          10.5               58.7
Ground           538.0                            538.0
 operating
 tempo
Burden sharing   156.0                            156.0
Residual value   118.2           4.1              122.3
Equipment          9.5                             9.5
 maintenance
 for allies
Real property     49.0                             49.0
 maintenance
Civilian         387.0  17.0   123.0    54.0      581.0
 personnel
Morale,            2.8   0.8     1.5   191.7      196.8
 welfare, and
 recreation
Unobligated      255.0  114.   155.0              524.0
 balances                  0
Reserve            1.5   0.1     3.2               4.8
 Officers'
 Training
 Corps
Pilot training                 149.0              149.0
Budget           228.9                            228.9
 withhold
Stock funding    201.0                            201.0
 depot level
 reparables
Surplus ships            4.9                       4.9
Overstated       129.0                            129.0
 request for
 appropriation
 s
Travel funds     143.0                            143.0
Second                          10.2               10.2
 destination
 transportatio
 n
Equipment                5.3                       5.3
 (deferrals,
 cancellations
 , etc.)
Military-to-                            36.3       36.3
 military
 program
============================================================
Total           $2,408  $273  $1,160  $690.6     $4,532.5
                    .0    .7      .2
Special                                $14.0      $14.0
 events\a
------------------------------------------------------------
\a The amount shown for this issue is a restriction on the use of
unobligated funds.  It is not a proposed budget reduction and is not
included in the totals. 

In April and May 1994, we provided your staff with the preliminary
results of our work.  This report summarizes and updates that
information.  The following sections briefly discuss each of the
potential reductions. 

   BETTER MANAGEMENT OF SPARE AND
   REPAIR PARTS INVENTORIES COULD
   RESULT IN SIGNIFICANT SAVINGS
------------------------------------------------------------ Letter :1

The Army's, Navy's, and Air Force's O&M budget requests for spare and
repair parts could be reduced $513.6 million if the services improved
the management of these inventories.  The Army's request could be
reduced $140.9 million for the following reasons: 

  Retail supply activities had inventories that could be reduced $108
     million because they maintain items that have no or few demands. 
     These items represent an unnecessary inventory investment and as
     these items are issued or returned to the wholesale supply
     system, they should not be repurchased using O&M funds. 

  The wholesale level was not canceling procurement commitments\1 for
     items no longer needed because of reduced requirements for the
     items.  At one buying command, we estimated that $21.5 million
     of unneeded procurements could have been avoided if the
     requirements system's recommended commitment cutbacks had been
     acted upon. 

  Because of reduced stock levels for prepositioned materiel in
     Europe, the budget request to acquire spare parts was overstated
     $11.4 million. 

The Navy's O&M budget request could be reduced about $67 million
because materiel ordered for ship overhauls was not used and was not
returned to the supply system for use on other overhauls.  The unused
items represent an unnecessary cost to shipyard customers that paid
for these items with O&M funds.  Returning the unneeded items to the
supply system would result in reduced costs to the O&M customers. 

The Air Force's request could be reduced $305.7 million for the
following reasons. 

  Invalid backorders for inventory no longer needed, valued at about
     $70.7 million, at 17 retail activities were canceled after we
     brought the matter to the attention of responsible officials. 
     The canceled backorders allow the units to use the funds for
     other purposes and therefore reduces the need for future years'
     funds. 

An Air Force official said that the Air Force cannot determine in
advance what backorders may become invalid due to reduced
requirements after the order was placed.  Therefore, the Air Force
could not reduce the amount of orders it places.  The official views
the matter as a "cost of doing business."

  Because of reduced spare parts requirements at the unit level, the
     Air Force wholesale supply system is able to terminate an
     average of $200 million of unneeded procurements annually.  The
     procurements were to satisfy the requirements of the units that
     use O&M funds to buy the items from the wholesale level.  The
     magnitude of the procurement terminations is an indication that
     more O&M funds are being appropriated for spare parts than may
     be needed. 

  Retail supply activities are maintaining inventories that are not
     needed or that could be more economically provided by the
     wholesale supply activity at the base level.  We found over $70
     million of such items.  If the retail activities turned the
     items in to the wholesale level and received a 50-percent
     credit, they would increase their O&M buying power about $35
     million.  This could then be used to reduce the amount of O&M
     funds being requested. 

--------------------
\1 The procurement phase before a contract is awarded. 

   IMPROVED MAINTENANCE PRACTICES
   COULD RESULT IN MORE EFFICIENT
   OPERATIONS
------------------------------------------------------------ Letter :2

The services' fiscal year 1995 O&M requests for maintenance funds can
be reduced $467.7 million if the services adopt improved maintenance
practices that would make their operations more efficient. 

  Navy O&M customers pay labor costs for work performed in the
     shipyards based on estimated rather than actual costs.  A review
     of the labor rates charged for work performed on six ships
     showed that the estimated labor costs averaged 11 percent higher
     than the actual costs.  This resulted in the O&M customers
     paying about $40 million more in labor charges than was actually
     incurred. 

A Navy official said that the fact that the labor actually incurred
was less than the estimated amount should result in lower labor rates
in future years.  Our review, however, did not show that future
years' labor rates were adjusted to reflect that fewer labor hours
were used than were charged to O&M customers. 

  The Navy has requested $24.6 million for advance planning of
     nonrefueling overhauls of three nuclear powered ballistic
     missile submarines.  The overhauls are based on a 12-year
     operating cycle.  Recently, the Navy increased the operating
     cycle to 14 years.  In addition, the Navy is evaluating the need
     for nonrefueling overhaul of these submarines.  In view of the
     ongoing study and the increase in the operating cycle, the need
     for advance planning funds for fiscal year 1995 is questionable. 

  The Air Force's depot workload carryover from one fiscal year to
     the next keeps increasing (from about $800 million in fiscal
     year 1987 to about $1.7 billion at the end of fiscal year
     1993).\2 While some carryover is necessary to ensure a
     continuous and efficient flow of work from one year to the next,
     the amount of carryover at the end of fiscal year 1993 was about
     $398 million more than was needed.  Congress has repeatedly
     expressed concerns about providing funds for maintenance work
     that cannot be completed in the fiscal year for which the funds
     are appropriated. 

  A 1993 Department of Defense (DOD) Inspector General report pointed
     out that maintenance costs for computer tomography scanners were
     excessive because restrictive contract maintenance
     specifications resulted in the award of sole-source contracts. 
     The report also noted that cost-benefit analyses had not been
     performed to determine if the maintenance should be performed
     in-house or by contract.  The Inspector General estimated that
     corrective actions to address these issues would result in DOD
     health program O&M savings of $5.1 million in fiscal year 1995. 

--------------------
\2 Workload carryover is defined as depot maintenance work that has
been paid for by the Air Force O&M customers, but has not been
completed. 

   APPROPRIATED FUND SUPPORT TO
   COMMISSARIES CAN BE REDUCED
   SIGNIFICANTLY
------------------------------------------------------------ Letter :3

The Defense Commissary Agency identified various management
initiatives to improve the operating efficiencies of military
commissaries and exchanges.  The proposed initiatives and actions,
plus others that we identified, could result in reduced appropriated
fund support totaling about $403.5 million in fiscal year 1995.  The
following are the major initiatives and actions and resultant
savings. 

  Reducing and streamlining organizational structure, contracting out
     certain operations, and reducing or eliminating general and
     administrative costs would save about $100.9 million a year. 

  Closing 20 commissaries that have annual sales of $15 million or
     less and are within 20 miles of another commissary would save
     about $11 million annually. 

  Combining operations of commissaries and exchanges at 72 locations
     would reduce staff redundancy and save about $243.6 million
     annually of appropriated fund support. 

  Using cash surpluses generated by the commissary surcharges to pay
     commissary costs now paid by appropriated funds would reduce the
     need for appropriated fund support by about $48 million a year. 

Unless timely actions are taken, it may not be possible to achieve
the full extent of the above savings in fiscal year 1995.  Service
officials said that the issue of reducing appropriated fund support
for commissaries and exchanges was a very emotional and political
issue and that they had no additional comments to offer. 

   ARMY FLYING HOURS EXCEED
   REQUIREMENTS
------------------------------------------------------------ Letter :4

The flying hour programs for fiscal year 1995 at FORSCOM and USAREUR
are overstated by $38 million and $10.2 million, respectively. 
FORSCOM's budget execution plans showed that the command transferred
$28 million out of the flying hour program to perform maintenance on
aircraft that are being rotated among FORSCOM units and $10 million
to the counternarcotic program.  At USAREUR, based on the command's
experience in executing its flying hour program over the past 5 years
and the number of aircraft in theater, we estimate that the command's
flying hour requirements are $7 million less than the amount included
in the budget request.  In addition, the command included about $3.2
million in its flying hour requirements to prepare aircraft for
transfer to other units--the same type situation that occurred at
FORSCOM. 

USAREUR officials did not agree with our findings concerning
potential reductions to their flying hour program.  They said that
using historical experience as a basis for projecting funding needs
is unfair to the command because of funding decisions that the Army
and the command may have made concerning the execution of prior
years' requirements.  The officials also said that reducing the
flying hour requirements does not give consideration to operational
mission requirements and the costs associated with preparing the
aircraft for transfer to other units.  These type costs are not
budgeted for. 

In our opinion, the fact that USAREUR has not been able to execute
its flying hour program in previous years is a good indication that
the amount of funds included in the budget may be excessive to need. 
We agree that the budget does not include funding for operational
missions.  Furthermore, it should not.  If funds are used to perform
mission-related requirements, the command can request additional
funding during its mid-year review and the Army can, if necessary,
request a supplemental appropriation.  With regard to the costs
associated with preparing aircraft for transfer, these costs are not
normally paid out of the flying hour program, which is to maintain
pilot proficiency and equipment readiness. 

An Army official said that the costs associated with preparing
aircraft for transfer to other units probably should not have been
shown in the flying hour requirements and that the costs should have
been shown separately. 

   AIR FORCE FLYING HOURS FOR C-17
   AIRCRAFT MAY NOT BE ACHIEVED
------------------------------------------------------------ Letter :5

The Air Mobility Command estimates the C-17 aircraft flying hour
program for fiscal year 1995 at 130 hours a month for each
operational aircraft, for a total of about 19,000 hours at a cost of
about $76.3 million.  Of the total hours and costs, 6,005 hours
costing $20.6 million relate to pilot training funded with O&M funds
and 12,991 hours costing $55.7 million relate to hours reimbursed by
customers for cargo hauling.  We reported in 1992\3 that the C-17's
planned flying hour program of 90 hours per month for each aircraft
was optimistic.  Based on continuing problems with the aircraft, plus
the fact that the aircraft are being upgraded at the depots, the
current plan to fly 130 hours a month may not be realistic. 

The C-17 is currently averaging about 51 hours a month per aircraft. 
Assuming a 25-percent increase in its flying hours in fiscal year
1995, the aircraft will still only fly an average of about 64 hours a
month--a total of 9,216 flying hours--rather than the 130 hours a
month shown in the budget.  If the ratio of pilot training hours to
cargo hauling hours remains the same, about 32 percent, then 2,949
O&M-funded flying hours would be needed for pilot training. 
Therefore, 3,056 flying hours, costing about $10.5 million, could be
reduced from the Air Force's fiscal year 1995 O&M request. 

--------------------
\3 1993 Air Force Budget:  Potential Reduction for C-17 Initial
Spares (GAO/NSIAD-92-293, Sept.  18, 1992). 

   FUNDS REQUESTED FOR GROUND
   OPERATING TEMPO ARE NOT USED
   FOR TRAINING PURPOSES
------------------------------------------------------------ Letter :6

In prior years, Congress fully funded the Army's request for ground
operating tempo (OPTEMPO) requirements on the basis that the funds
were needed in order to attain and maintain a ready Army.  For
example, the Army requested $2.436 billion for ground OPTEMPO in
fiscal year 1994 and Congress appropriated $2.560 billion.  However,
the Army plans to spend only about $2.136 billion for OPTEMPO in
fiscal year 1994.  The remaining $424 million has been transferred to
other O&M activities. 

The amount appropriated in fiscal year 1994 was more than the Army
requested and was more than sufficient to enable the Army to achieve
its prescribed readiness levels based on a 800-mile training rate. 
For fiscal year 1995, the Army requested $2.428 billion for ground
OPTEMPO--$292 million more than it plans to spend in fiscal year
1994. 

If the Army trains at the same level in fiscal year 1995 that it
plans to train in fiscal year 1994 (620 miles), the amount of OPTEMPO
funding the Army would need in fiscal year 1995 would be about $1.89
billion--$538 million less than the amount included in the fiscal
year 1995 budget request.  An Army official said that regardless of
the actions taken by the commands to adjust their proposed OPTEMPO
spending level in fiscal year 1995, the Army's position is that it
will train at the 800-mile level. 

   ARMY'S BUDGET REQUEST DOES NOT
   REFLECT BURDEN SHARING
   CONTRIBUTIONS FROM GERMANY
------------------------------------------------------------ Letter :7

According to Army officials, the fiscal year 1994 budget assumed
German burden sharing, but the Army does not expect to receive any
burden sharing funds from Germany.  As a result, there is a $127
million shortfall in the fiscal year 1994 budget.  In an effort to
forestall this problem in the future, the Army requested funds in its
fiscal year 1995 budget to compensate for "faulty assumptions" about
receiving burden sharing from Germany.  We estimate that the amount
of funds included in the fiscal year 1995 budget request to
compensate for the anticipated shortfall that would occur if Germany
does not provide burden sharing funds is about $156 million.\4

The lack of a budget offset for anticipated burden sharing
contributions from Germany could be construed to mean the United
States does not expect Germany to contribute to the cost of
maintaining U.S.  forces overseas.  Congress may want to avoid this
perception by reducing the Army's O&M request by $156 million.  If
the burden sharing funds are not received by the time of the mid-year
budget review, the affected commands could request additional funds
from the Army to compensate for the anticipated shortfall. 

Army and Air Force officials said that based on past experiences,
Germany will not pay for burden sharing in fiscal year 1995 and that
if the services' budgets are reduced, the services will have to make
up the shortfall by reducing other programs.  They said that because
the decision as to what the host countries pay is the responsibility
of the Department of State's Ambassador for Burden Sharing, it would
be more appropriate to reduce their budget as an incentive to
encourage a more aggressive pursuit of the burden sharing issue with
Germany. 

--------------------
\4 The anticipated shortfall in fiscal year 1994 adjusted for the
dollar Deutsche Mark exchange rate. 

   RESIDUAL VALUE PAYMENTS ARE NOT
   FULLY REFLECTED IN THE BUDGET
   REQUESTS
------------------------------------------------------------ Letter :8

The Army's fiscal year 1995 O&M budget request could be reduced by
$114 million because the Army did not totally offset its budget
request for anticipated residual value payments from host
countries.\5

In the early 1990s, the Army reduced its future year budget estimates
in anticipation of receiving residual value payments.  For fiscal
year 1995, the amount of residual payments anticipated was $232
million.  However, according to Army officials, the Army has never
received residual value payments equal to the reductions made to the
budgets and, as a result, has been forced to reduce other programs to
cover the funding shortfalls. 

Because the Army does not expect to receive all of the $232 million
in fiscal year 1995, its budget includes $114 million to compensate
for the anticipated shortfall.  Like the burden sharing issue, this
could be construed to mean the United States does not expect a host
country to compensate the United States for improvements to the
property being returned. 

In a related issue, the Defense activities' O&M request for fiscal
year 1995 could be reduced $8.3 million.  When the United States
receives residual value payments, the funds are placed in the DOD
Overseas Military Facility Investment Recovery Account.  The funds
can then be distributed to the services by the Secretary of Defense
after the funds are appropriated by Congress. 

There is about $8.3 million in the account that the Secretary of
Defense could distribute to the services--$4.2 million to the Army
and $4.1 million to the Air Force if Congress appropriated the funds. 
This would allow the services to reduce their budget requests by a
like amount. 

--------------------
\5 Residual value is a negotiated amount between the United States
and a host country to reimburse the United States for investment in
facilities that are being returned to the host country. 

   PAYMENT FOR MAINTAINING
   EQUIPMENT BOUGHT FOR GERMAN
   RESERVE FORCES
------------------------------------------------------------ Letter :9

As part of a 1986 agreement with the German government, the United
States agreed to provide and pay to maintain certain types of combat
support and combat-service support equipment bought for the German
Reserves.  This equipment would be used to support U.S.  forces in
time of crisis or war if the German Reserves mobilized. 

According to USAREUR officials, the United States will pay about $9.5
million in fiscal year 1995 to maintain the equipment that has been
provided to the German Reserves. 

An Army Audit Agency report dated December 29, 1993,\6 pointed out
that USAREUR cannot count on support from the German Reserve units
unless Germany is directly threatened.  For example, during Operation
Desert Storm, the German Reserves were not mobilized and USAREUR
experienced a shortfall in transportation capability. 

The report questioned why the United States should pay to maintain
equipment for the German Reserves if U.S.  forces receive limited
benefits from the equipment.  If Congress agrees, it may wish to
reduce the Army's request for O&M funds by at least $9.5 million. 

An Army official said that the Army is negotiating with the Germans
to terminate the program, but that there will be a 1-year lag between
the time negotiations are completed and the program can be
terminated. 

--------------------
\6 Wartime Host Nation Support Agreement, U.S.  Army, Europe and
Seventh Army, Report NR 94-4, Dec.  29, 1993. 

   FORSCOM PLANS TO SPEND LESS ON
   REAL PROPERTY MAINTENANCE THAN
   ALLOCATED BY THE ARMY
----------------------------------------------------------- Letter :10

The Army allocated $247 million to FORSCOM for real property
maintenance in fiscal year 1995--an increase of $34 million over the
fiscal year 1994 funding level.  Nevertheless, FORSCOM's plan for
executing the fiscal year 1995 budget shows that $49 million was
transferred from the real property maintenance account to other O&M
accounts.  The Army has testified that years of funding shortfalls
have caused deterioration of its infrastructure.  However, the
situation at FORSCOM is somewhat different.  The command's backlog of
maintenance and repair has remained relatively stable since 1983 and
actually declined from 1991 to 1993. 

As evidenced by the fact that FORSCOM plans to spend $49 million less
on real property maintenance than it was allocated, the command's
budget request can be reduced by the same amount. 

   CIVILIAN PERSONNEL REQUIREMENTS
   ARE OVERSTATED
----------------------------------------------------------- Letter :11

Civilian personnel requirements for fiscal year 1995 were determined
based on the budgeted end strength for fiscal year 1994, which were
adjusted for program changes that are expected to occur during fiscal
year 1995.  If fiscal year 1994 actual end strength is less than what
was budgeted, the beginning point for determining the fiscal year
1995 requirement is overstated. 

As of April 1994, the on-board personnel levels were already below
their fiscal year 1994 end strength by 8,776 personnel positions in
the Army, 2,692 in the Air Force, and 2,415 in the Defense
activities.  As a result, the beginning and ending points for
determining fiscal year 1995 requirements were overstated by a like
amount.  These overstatements equate to $387 million in the Army,
$123 million in the Air Force, and $54 million in the Defense
activities. 

In addition, the Navy's request for civilian personnel was overstated
$17 million.  The budget request included $3.1 billion; however,
documentation supporting the request showed a requirement for $3.06
billion--a $94-million difference.  Navy officials explained that at
the time the budget request was prepared, $77 million of pay benefits
was included in the civilian personnel section of the budget
presentation.  It was later determined that these costs should be in
the budget section dealing with purchases from the industrial fund. 
Therefore, the supporting documentation for civilian personnel did
not include this amount.  With regard to the remaining $17 million,
Navy officials said that it was an overstatement of their civilian
personnel requirements. 

Army, Navy, and Air Force officials commented that even though the
amounts requested in the budgets may be overstated, it should be
recognized that the services will have to pay costs such as locality
pay, personnel transition costs, and so forth, that were not budgeted
for.  Therefore, the overstatement is not as great as it might
appear. 

   UNNEEDED APPROPRIATED FUND
   SUPPORT TO THE MILITARY
   EXCHANGES
----------------------------------------------------------- Letter :12

Profits earned on sales at the military exchanges are provided to the
services' Morale, Welfare, and Recreation (MWR) fund to provide
services to uniformed service members.  At the same time, the
exchanges--which are operated by the Army-Air Force Exchange Service
(AAFES)--receive appropriated fund support.  In fiscal year 1994,
AAFES received about $199 million in appropriated funds and it plans
to contribute about $191.7 million to MWR activities. 

The availability of appropriated fund support makes it possible for
AAFES to make these contributions.  Reducing the appropriated fund
support to AAFES by the amount that it contributes to MWR activities
($191.7 million) would not impair the service provided by AAFES to
its military customers.  However, user fees charged to military
personnel for MWR activities might have to be increased to offset the
appropriated fund support currently received by the activities. 

   PROCEEDS FROM SALE OF
   UNAUTHORIZED RECYCLED MATERIALS
   ARE BEING TRANSFERRED TO MWR
   ACTIVITIES
----------------------------------------------------------- Letter :13

Installation commanders are permitted to use proceeds from the sale
of recycled goods to supplement MWR activities.  In fiscal year 1992,
cash receipts from selling recycled materials totaled $37 million. 

In December 1993, we reported\7 widespread abuse in DOD's recycling
program.  Military installations received millions of dollars each
year from the sale of materials that were not authorized by DOD for
sale under the recycling program and the sale proceeds were
transferred to MWR activities. 

Funds obtained from the sale of unauthorized items should either be
used to offset the need for additional appropriated funds or be
returned to the Treasury.  In view of the fact that the services sold
recycled materials that are specifically prohibited under DOD
regulations--$2.8 million in the Army, $0.8 million in the Navy, and
$1.5 million in the Air Force--Congress may wish to reduce the
services' O&M budget requests by these amounts. 

--------------------
\7 Department of Defense:  Widespread Abuse in Recycling Program
Increases Funds for Recreation Activities (GAO/NSIAD-94-40, Dec.  10,
1993). 

   UNOBLIGATED BALANCES FROM PRIOR
   YEARS' O&M APPROPRIATIONS ARE
   LARGER THAN NEEDED
----------------------------------------------------------- Letter :14

Unobligated balances from prior years' O&M appropriations are
generally not available for new obligations and may only be used for
adjustment to existing obligations for the specific fiscal year of
the appropriation. 

As of September 1993, the Army, the Navy, and the Air Force had
unobligated balances from prior years' appropriations totaling $1.866
billion.  The services claim that unobligated balances are needed to
satisfy upward adjustments to obligations incurred in that fiscal
year which have not yet been liquidated.  However, our analysis shows
that unobligated balances have been increasing because as prior
years' obligations are liquidated, the amount of the liquidations is
generally less than the amount initially obligated. 

The average annual increases in the unobligated balances accounts are
$255 million for the Army, $114 million for the Navy, and $155
million for the Air Force.  This overall trend indicates that the
services' estimates of O&M funds needed for obligational authority
are overstated and the services' budget requests can be reduced
accordingly. 

Army officials said that because they cannot determine in advance
what obligations may be liquidated in an amount less than initially
obligated, they consider the fact that unobligated balances from
prior years' appropriations keep increasing as a "cost of doing
business."

   SOME RESERVE OFFICERS' TRAINING
   CORPS UNITS DO NOT MEET
   ENROLLMENT CRITERIA
----------------------------------------------------------- Letter :15

The Reserve Officers' Training Corps (ROTC) program consists of 532
ROTC units at the college level.  At the end of fiscal year 1993,
there were 111 ROTC units that did not meet the congressional
criteria for minimum efficient enrollment--a minimum of 17 juniors in
any one of the previous 4 years.\8 The fiscal year 1993 O&M costs for
these units were $4.8 million ($1.5 million in the Army, $0.1 million
in the Navy, and $3.2 million in the Air Force), not including
scholarships, stipends, travel, or costs of uniforms. 

Fiscal year 1994 O&M costs were not readily available.  However, we
found nothing in our review to indicate that these costs have
decreased.  Therefore, Congress may want to reduce the services'
fiscal year 1995 O&M requests by the above amounts as an incentive
for the services to comply with previous congressional direction. 

Army officials said that they plan to close 25 unproductive ROTC
units in fiscal year 1995. 

--------------------
\8 Officer Commissioning Programs:  More Oversight and Coordination
Needed (GAO/NSIAD-93-37, Nov.  6, 1992) and Reserve Officers'
Training Corps:  Less Need for Officers Provides Opportunity for
Significant Savings (GAO/NSIAD-91-102, May 6, 1991). 

   AIR FORCE MAY BE TRAINING MORE
   PILOTS THAN THEY HAVE FLYING
   POSITIONS FOR
----------------------------------------------------------- Letter :16

By fiscal year 1995, the Air Force estimates that it will need 15,300
pilots.  This represents a reduction from the 22,300 pilot
requirement in fiscal year 1989. 

According to our 1993 report,\9 the Air Force was training more
pilots than it needed and, as a result, about half of the pilots
completing the program were assigned to non-flying positions (or
"banked") for up to 3 years before entering weapon system training. 
To eliminate the "bank" and ensure that cockpit spaces were
available, the Air Force took a number of management actions such as
overmanning fighter units, initiating an early release pilot program,
and adding a third pilot to tanker aircraft. 

Air Combat Command officials said that Air Staff did not provide
enough flying hours to adequately train the number of pilots on hand
in fiscal year 1994 and that the command had to reprogram money from
other programs to supplement the flying hour program. 

In fiscal year 1995, the Air Combat Command expects to receive an
additional 51 pilots of which 40 are former banked pilots.  Command
officials said that in the absence of additional flying hours,
operational unit training will be reduced two to three sorties per
month per pilot.  This decrease is a result of overmanning bomber and
fighter squadrons.  The Air Force decided to overman these type units
to reduce the number of banked pilots and, according to the Commander
of Air Combat Command, the reduction in sorties will have an adverse
effect on readiness. 

The Air Force plans to admit 500 pilot candidates into undergraduate
pilot training in fiscal year 1995 at a cost of about $298 million. 
We recognize that there is a need to maintain the program; however,
it is questionable whether the Air Force should send 500 candidates
to training in fiscal year 1995 in view of the fact that the total
number of pilots in the Air Force is being reduced. 

As a beginning for reducing the number of pilots entering pilot
training until it can ensure that there are sufficient cockpit spaces
available, the Air Force could reduce the number of pilot candidates
to 250 in fiscal year 1995.  Over time, this would reduce the number
of pilots assigned to non-flying positions.  If Congress agrees, it
could reduce the Air Force's pilot training budget for fiscal year
1995 by about $149 million. 

An Air Force official commented that the more experienced pilots may
have to fly less in order to make flying hours available for the
banked pilots to train.  However, in his opinion, the units would
still be able to meet their proficiency goals within the planned
flying hour program. 

--------------------
\9 Air Force Training:  Delaying Pilot Training Could Avert
Unnecessary Costs (GAO/NSIAD-94-38, Nov.  3, 1993). 

   FORSCOM'S BUDGET CONTAINS A
   RESERVE FOR CONGRESSIONAL
   REDUCTIONS
----------------------------------------------------------- Letter :17

FORSCOM's fiscal year 1995 O&M budget allocation from the Army is
$3.27 billion for its operating forces.  In its guidance to its
installations, FORSCOM advised that it was withholding 7 percent of
the $3.27 billion ($228.9 million) in anticipation of congressional
reductions.  Therefore, the installations were expected to develop
their fiscal year 1995 execution plans in accordance with the reduced
amount. 

In view of the fact that FORSCOM plans to execute its fiscal year
1995 budget at a level significantly less than the amount allocated
by the Army, Congress may want to reduce the Army's O&M request by
$228.9 million. 

   ARMY'S CREDIT POLICY FOR ITEMS
   RETURNED TO THE RETAIL STOCK
   FUND INCREASES O&M BUYING POWER
----------------------------------------------------------- Letter :18

In April 1992, the Army implemented stock funding of depot level
reparables (SFDLR).  Under SFDLR, Army units use O&M funds to
purchase items from the wholesale supply system whereas these items
were previously provided at no cost to the units. 

The Army's SFDLR implementation plan provided that when units turned
in items that they no longer needed, they would only receive
credit\10 from the retail stock fund equal to what the retail stock
fund would receive from the wholesale stock fund.  However, as we
reported in May 1994,\11 the credit process is not working the way it
was intended.  In fiscal year 1993, the retail stock fund gave
credits totaling $1.251 billion to the units but received credits
totaling $1.050 billion from the wholesale stock fund--a $201-million
deficit.  This deficit has caused a cash drain on the wholesale
system, which is part of the Defense Business Operating Fund.  The
reason for this situation is that the retail stock fund grants the
credits regardless of whether it will receive credit from the
wholesale stock fund.  In many cases, because the item turned in by
the unit is not needed at the wholesale level, the retail stock fund
does not receive any credit. 

Army units are also spending O&M funds to unnecessarily repair items
that are in a long-supply, ready-for-issue condition at the wholesale
level.  Table 3 shows examples of items in long supply at the
wholesale level that were being repaired at Fort Hood, Texas,--one of
the locations included in our review. 

                           Table 3
           
            Items Being Repaired at Fort Hood That
             Were in Long Supply at the Wholesale
                            Level

                                                   Number of
                                  Total repair      items in
Item                      Number          cost   long supply
------------------------  ------  ------------  ------------
M-88 engine                   39      $735,250            45
CUCV transfer                 35        12,023         1,731
 transmission
CUCV fuel pump                63        15,134         3,013
M-109 transmission             7        21,151           638
Steering gear kit             13        12,115           907
------------------------------------------------------------
Source:  Army Materiel Command Budget Stratification Reports and Fort
Hood Directorate of Logistics repair data

In view of the fact that Army units have been able to increase their
O&M purchasing power by $201 million by converting stock funds to O&M
funds and are using O&M funds to repair items at the local level that
are in long supply at the wholesale level, Congress may want to
reduce the Army's request for O&M funds by at least $201 million. 

An Army official said that the Army is (1) reducing the credit rate
for the amount of credit that units receive when they turn in
unneeded items and (2) offering items in long supply at a reduced
rate to the units so that they will not make uneconomical repairs at
the local level.  He said that these actions should address the
problems cited in our report. 

--------------------
\10 The credit translates into increased O&M funding, which the unit
can use to buy other spare parts or for any other O&M purpose. 

\11 Army Inventory:  Changes to Stock Funding Reparables Would Save
Operations and Maintenance Funds (GAO/NSIAD-94-131, May 31, 1994). 

   DISPOSAL OF EXCESS NAVY SHIPS
   WOULD SAVE MONEY
----------------------------------------------------------- Letter :19

Reduction in the size of the Navy's surface combatant force has
resulted in hundreds of ships and service craft that are no longer
needed.  The number of surplus ships has been increasing for some
time.  In fiscal years 1994 and 1995, the Navy expects to pay $1.84
million and $1.86 million, respectively, to the Maritime
Administration for the preservation and safekeeping of about 100
ships that the Navy no longer needs.  The Navy also spends about $12
million a year to operate its four inactive fleet storage sites. 
Disposing of the unneeded ships would allow the Navy to reduce the
number of its own storage sites from four to three and save about $3
million annually in O&M funds.  In view of the above, Congress may
want to reduce the Navy's fiscal year 1995 O&M request by $4.9
million as an incentive to expedite the disposal of the unneeded
ships. 

   ARMY'S REQUEST FOR DIRECT
   APPROPRIATIONS IS OVERSTATED
----------------------------------------------------------- Letter :20

For fiscal year 1995, the Army requested O&M obligation authority of
$22.534 billion and direct appropriations of $17.821 billion.  The
remaining $4.713 billion consists of reimbursements from the other
services and agencies. 

After the President's budget was submitted to Congress, the Army
increased the amount of reimbursements it expects to receive to
$4.842 billion, an increase of $129 million.  However, the amount of
its requested obligation authority remained the same.  Therefore, the
Army's request for direct appropriations is overstated by $129
million, and its budget request can be reduced by a like amount. 

An Army official said that the Army inadvertently forgot to increase
the request for obligation authority when the amount of estimated
reimbursements was increased. 

   ARMY CONTINUES TO OVERCHARGE
   FOR TRANSIENT HOUSING
----------------------------------------------------------- Letter :21

Army lodging facilities--referred to as transient housing--are
largely supported with O&M funds paid by personnel in a travel
status.  In a 1990 report,\12 we reported that some Army
installations overcharged travellers an estimated $70 million for
transient housing and used the excess charges to subsidize MWR
activities.  We recommended, and the House Committee on Armed
Services agreed, that the Army should return the excess funds to the
O&M accounts or to the U.S.  Treasury.  The Army continues to ignore
congressional guidance and has not repaid any of the accumulated
funds.  As of October 1992, the amount of overcharges had increased
to $157 million. 

In response to our earlier report, the Army stopped transferring the
excess funds to MWR accounts and instead transferred $34 million to a
separate non-appropriated account--referred to as a "single account."

Last year,\13 we recommended that housing officials reduce the
lodging fee.  Army housing officials told us that if a more
reasonable fee was charged, O&M funds needed for travel could be
reduced about $20 million a year.  In total, the Army's O&M request
for fiscal year 1995 can be reduced about $143 million ($123 million
of unpaid overcharges from prior years and $20 million for fiscal
year 1995).  One alternative to repaying the O&M account would be to
put the $143 million in the single account and use the funds for a
specific purpose, such as remodeling barracks. 

--------------------
\12 Army Housing:  Overcharges and Inefficient Use of On-Base Lodging
Divert Training Funds (GAO/NSIAD-90-241, Sept.  28, 1990). 

\13 1994 DOD Budget:  Potential Reductions to the Operation and
Maintenance Programs (GAO/NSIAD-93-295BR, Sept.  16, 1993). 

   AIR FORCE'S SECOND DESTINATION
   TRANSPORTATION ACCOUNT CAN BE
   REDUCED
----------------------------------------------------------- Letter :22

The Air Force's fiscal year 1995 budget request includes $164.8
million for second destination transportation.  Our analysis showed
that the Air Force's current estimate for second destination
transportation in fiscal year 1995 is $154.6 million.  Therefore, the
Air Force's transportation budget request can be reduced $10.2
million. 

   NAVY PLANS TO OPERATE FEWER
   LANDING CRAFT AIR CUSHION THAN
   BUDGETED FOR
----------------------------------------------------------- Letter :23

The Navy's fiscal year 1995 request for maintenance funds included
funds to operate and maintain 80 landing craft air cushion (LCAC)--8
of which are in a reduced operating status.  According to an official
in the LCAC program office, the Navy has now reduced the number of
LCACs it plans to operate and maintain in fiscal year 1995 to 72. 
Thus, the request can be reduced $5.3 million in the following areas: 

  $3.4 million for reduced LCAC crew training and OPTEMPO;

  $0.6 million for maintenance planning for the fiscal year 1996
     depot maintenance program; and

  $1.3 million for fuel, parts, and preventive maintenance. 

   INCREASES TO THE
   MILITARY-TO-MILITARY CONTACT
   PROGRAM ARE QUESTIONABLE
----------------------------------------------------------- Letter :24

In 1992, the European Command started the Military-to-Military
Contact Program to support and further the development of democratic
governments, civil-military relations, and defense-oriented
militaries in the countries of Central and Eastern Europe.  Funding
for the program from the Commander in Chief (CINC) Initiative Fund
amounted to $512,000 in fiscal year 1992 and $6 million in fiscal
year 1993. 

For fiscal year 1994, Congress appropriated $10 million to the Joint
Chiefs of Staff's O&M account for the program.  For fiscal year 1995,
DOD has requested $46.3 million to expand the geographical scope of
the program to a global basis. 

Our analysis of the proposed program shows that DOD has not justified
the need for the expanded program.  The Office of the Secretary of
Defense asked the Joint Chiefs of Staff to determine how the Unified
Commanders planned to spend the amount requested in the fiscal year
1995 budget.  Joint Chiefs of Staff officials could not explain why
this type of program is needed in other areas of the world where the
U.S.  military has already established relations with foreign
militaries. 

Our analysis also showed that the expansion of the program would
result in a new bureaucracy without any apparent increase in program
efficiency.  The Office of the Secretary of Defense recently created
the Office of Foreign Civil-Military Relations whose primary
responsibility is to provide policy guidance for the program. 
However, the program would not consolidate all DOD-funded
military-to-military activities.  Funding for these activities are
being requested separately under the CINC Initiative Fund, service
O&M accounts, and the Military-to-Military Contact Program. 
According to Joint Chiefs of Staff officials, Unified Commanders
would use the proposed program as an additional source of funding for
traditional military-to-military activities because service O&M
accounts have been declining. 

In view of the questions raised about the proposed program, Congress
may wish to reduce the defense-wide fiscal year 1995 O&M request by
$36.3 million, the amount of the program increase. 

   DOD SUPPORT FOR SPECIAL EVENTS
   IS NOT REIMBURSED BY EVENT
   ORGANIZERS
----------------------------------------------------------- Letter :25

The DOD Office of Special Events is responsible for managing all
Defense support to international special events.  Office officials
view their primary role as a supporter of local law enforcement
agencies because security requirements for major international events
usually exceed the community's capabilities.  In this regard, DOD
provides event organizers with security-related assets such as
communications and physical security equipment and various types of
training.  Under existing policy and regulations, event organizers
are to certify that the requested goods or services cannot be
obtained through other public and private resources and that DOD is
the source of last resort. 

Our review of requests for DOD support from law enforcement agencies
showed that from 1992 through 1994 DOD paid for nonfederal officials
to attend events in places like Barcelona, Spain, and Lillehammer,
Norway, to gain a firsthand knowledge of the security preparations
that go into planning for an Olympics.  For example, the group
responsible for providing security at the 1996 Olympics requested and
received approval from the Office to send two nonfederal executives
to Lillehammer from February 10 through March 2, 1994, to study
Olympic security operations.  This was in addition to the cost of
travel paid by the Office to send 29 persons to Barcelona in 1992 to
"experience firsthand the security planning and operations of the
Summer Olympics...". 

In total, the Office has spent or committed about $15 million since
the beginning of fiscal year 1993 on the World University Games,
World Cup, and 1996 Olympics.  Of this total, about $3.3 million was
for training, travel, and transportation.  As of March 14, 1994, $14
million remained in the DOD account for the World University Games,
World Cup, and 1996 Olympics. 

The intent of the special events program is directed at those cases
where DOD may have a unique capability or equipment that would not
otherwise be available to the event sponsors and organizers. 
However, for DOD to pay travel expenses for nonfederal personnel to
observe security measures at other sporting events seems more attuned
to supplementing financial resources rather than providing needed
services or equipment.  If Congress agrees, it may want to require
that event organizers reimburse DOD for the support it provides. 

--------------------------------------------------------- Letter :25.1

We discussed the aforementioned issues with responsible program
officials during the course of our review and included their comments
where appropriate.  Our scope and methodology are described in
appendix I. 

We are sending copies of this report to the Secretaries of Defense,
the Army, the Navy, and the Air Force; the Director of the Office of
Management and Budget; the Chairmen and ranking Minority Members of
the House and Senate Committees on Appropriations and on Armed
Services; and other interested congressional committees.  Copies will
be made available to others upon request. 

This report was prepared under the direction of Mark E.  Gebicke,
Director, Military Operations and Capabilities Issues, who may be
reached on (202) 512-5140 if you or your staff have any questions. 
Other major contributors to this report are listed in appendix II. 

Frank C.  Conahan
Assistant Comptroller General

SCOPE AND METHODOLOGY
=========================================================== Appendix I

This review is one of a series that examines Department of Defense
(DOD) budget issues.  Our review approach consisted of interviews
with program and budget officials responsible for managing the
programs and/or preparing the budget requests; reviews and analyses
of financial, budget support, and program documents related to the
operations and maintenance (O&M) issue being reviewed; an analysis of
prior year funding levels and expenditures to identify trends; and
reviews of our recently issued reports and ongoing assignments to
identify O&M issues that could affect the fiscal year 1995 budget
requests. 

Our review was performed at Army, Navy, Air Force, and DOD
headquarters; U.S.  Forces Command; U.S.  Army, Europe; Atlantic
Fleet; Pacific Fleet; U.S.  Air Forces, Europe; Air Combat Command;
Oklahoma City Air Logistics Center; and Air Force Materiel Command. 
The specific commands included in our review were selected because
they were the larger recipients of O&M funds. 

We performed our review from January to July 1994 in accordance with
generally accepted government auditing standards. 

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

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

Norman J.  Rabkin
Robert J.  Lane
Carole F.  Coffey
Merrie C.  Nichols-Dixon
Joseph P.  Walsh
Judith A.  McCloskey
Todd M.  Appel

ATLANTA REGIONAL OFFICE

Leo B.  Sullivan, Jr.
Kenneth A.  Davis

CINCINNATI REGIONAL OFFICE

Bruce D.  Fairbairn
Leonard L.  Benson
Myra A.  Watts

DALLAS REGIONAL OFFICE

Charnel F.  Harlow
Kerry A.  O'Brien
Hugh F.  Reynolds

EUROPEAN OFFICE

Elliott C.  Smith
Bettye J.  Cayton
Barry J.  DeWeese
Donna M.  Rogers
John C.  Wren

KANSAS CITY REGIONAL OFFICE

Richard E.  Burrell
Denise M.  Wempe
Gary L.  Nelson
Michael W.  Buell

LOS ANGELES REGIONAL OFFICE

James D.  Nolan

NORFOLK REGIONAL OFFICE

Thomas A.  Pantelides
Jeffrey L.  Overton, Jr.
Robert C.  Mandigo, Jr.
Henry Arzadon
Raul S.  Cajulis
Robert W.  Wagner
Julie C.  Chapman

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