United States General Accounting Office

GAO Report to Congressional Requesters

December 1996 FUTURE YEARS

DEFENSE PROGRAM

Lower Inflation

Outlook Was Most

Significant Change

From 1996 to 1997

Program

G O A

years

1921 - 1996

GAO/NSIAD-97-36

GAO United States

General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-275478 

December 12, 1996

The Honorable John R. Kasich

Chairman, Committee on the Budget

House of Representatives

The Honorable Charles E. Grassley

The Honorable William V. Roth, Jr.

United States Senate

At your request, we compared the Department of Defense’s (DOD) fiscal

year 1997 Future Years Defense Program (FYDP) with the FYDP for fiscal

year 1996. Specifically, we determined (1) the impact of the reduction in

the inflation rate on DOD’s 1997 FYDP, (2) the major program adjustments

from the 1996 FYDP to the 1997 FYDP, and (3) the implications of these

changes for the future.

Background In 1995, we compared the 4 common years (1996-99) in DOD’s 1995 and

1996 FYDPs and reported that DOD projected substantial shifts in funding

priorities.1

 Specifically, about $27 billion in planned weapon system

modernization programs had been eliminated, reduced, or deferred to 2000

or later. Also, the military personnel, operation and maintenance, and

family housing accounts had increased by over $21 billion and were

projected to continue to increase to 2001 to support DOD’s emphasis on

readiness and quality-of-life programs. Moreover, the total DOD program

was projected to increase by about $12.6 billion.

The Secretary of Defense wants to reform the acquisition process and

reduce and streamline infrastructure to help pay the billions of dollars that

DOD projects it will need to modernize the force. In our September 1995

report, we said that although DOD anticipated reducing infrastructure to

achieve substantial savings, our analysis of the 1996 FYDP showed that

savings accrued or expected to accrue from base closures and a smaller

force appeared to be offset by increased funding for other infrastructure

priorities, such as base operations and management headquarters. In

May 1996, we analyzed the infrastructure portion of DOD’s 1997 FYDP and

1

Future Years Defense Program: 1996 Program Is Considerably Different From the 1995 Program

(GAO/NSIAD-95-213, Sept. 15, 1995).

Page 1 GAO/NSIAD-97-36 Future Years Defense Program
B-275478 

reported that infrastructure costs are projected to increase by about

$9 billion, from $146 billion in 1997 to $155 billion in 2001.2

The FYDP includes anticipated future inflation. Therefore, changes in

anticipated inflation affect the projected cost of the FYDP. The Secretary of

Defense testified in March 1996 that the 1997 FYDP, which covers fiscal

years 1997-2001, includes the funds to buy all of the programs in the 1996

FYDP plus billions of dollars in additional programs at less cost overall.

According to DOD, the increase in programs at lower projected costs

results because inflation estimates were substantially reduced for future

DOD purchases, from 3 percent to about 2.2 percent for fiscal years

1997-2001.

Results in Brief As a result of projecting significantly lower inflation rates, DOD calculated

that its future purchases of goods and services in its 1997 FYDP would cost

about $34.7 billion less than planned 1 year ago in its 1996 FYDP. According

to DOD, the assumed increased purchasing power that resulted from using

the lower inflation rates (1) allowed DOD to include about $19.5 billion in

additional programs in fiscal years 1997-2001 than it had projected in the

1996 FYDP and (2) permitted the executive branch to reduce DOD’s

projected funding over the 1997-2001 period by about $15.2 billion.

The price measure the executive branch used in its inflation projections

for future purchases in the 1997 FYDP had inherent limitations and has

since been improved. If the executive branch decides to use the improved

price measure to price its 1998 budget, DOD may need to adjust its program

as a result of that transition. Office of Management and Budget (OMB)

officials told us they have not decided what price measure they will use to

forecast inflation for the 1998 FYDP. Using projected inflation rates based

on a different price measure from that used by the executive branch, the

Congressional Budget Office (CBO) estimated that the future cost of DOD’s

purchases through 2001 would decline by only about $10.3 billion, or

$24.4 billion less than DOD’s estimate.

Resource allocations in the 1997 FYDP vary considerably from the 1996 FYDP

as a result of the lower inflation projections, program transfers, and

program changes. For example, (1) the procurement accounts decreased

about $26 billion from the 1996 FYDP to the 1997 FYDP—including about

$15.3 billion due to lower projected inflation rates and about $10.4 billion

2

Defense Infrastructure: Costs Projected to Increase Between 1997 and 2001 (GAO/NSIAD-96-174,

May 31, 1996).

Page 2 GAO/NSIAD-97-36 Future Years Defense Program
B-275478 

from program transfers to research, development, test, and evaluation

accounts; (2) the operation and maintenance accounts decreased by about

$10 billion due to lower projected inflation rates; and (3) the research,

development, test, and evaluation accounts increased by $11 billion

primarily due to transfers from the procurement accounts and program

changes.

The projected savings from the latest round of base closures and

realignments changed considerably from the 1996 FYDP to the 1997 FYDP. In

the 1996 FYDP, DOD estimated savings of $4 billion from base closures;

however, the 1997 FYDP projects savings of only $0.6 billion. This is

because (1) the 1996 FYDP projected savings based on interim base closing

plans that subsequently changed and (2) military construction costs

related to environmental cleanup of closed bases are projected to be

$2.5 billion higher than anticipated in the 1996 FYDP.

A comparison of the 1996 and 1997 FYDPs also shows that DOD plans to

reduce active duty force levels. The smaller force planned for fiscal years

1998-2001 would bring force levels below the minimum numbers

established by law. If DOD is precluded from carrying out its plan to

achieve a smaller force, it will have to make other adjustments to its

program.

1997 FYDP Reflects

Increased Purchasing

Power Due to Lower

Projected Inflation

The executive branch substantially reduced its forecast of the inflation

rate for fiscal years 1997 through 2002, resulting in a decline in the

estimated costs of DOD’s purchases of about $45.7 billion, including about

$34.7 billion over the 1997-2001 FYDP period.3

 However, the price measure

used in the executive branch’s projections had inherent limitations and

has since been improved. Using a different price measure, CBO projected a

much smaller drop in inflation and estimated that the future cost of DOD’s

purchases would be reduced by only about $10.3 billion over the 1997-2001

period.

Lowered Inflation Forecast

Yields Projected $35 Billion

Increase in Purchasing

Power in 1997 FYDP

The executive branch reduced its inflation forecasts from 3 percent per

year for the period 1997-2001 to 2.2 percent per year, or 8/10 of 1 percent.4

As a result, DOD projected that the cost of defense purchases would decline

by $34.7 billion for the 1997-2001 period and an additional $11 billion for

3

DOD’s nonpay and nonfuel purchases subject to this lower inflation rate range from about $138 billion

to about $166 billion for fiscal years 1997-2001, over 50 percent of DOD’s budget.

4

Inflation was forecast at 2.2 percent for all years except 1999, for which the forecast was 2.3 percent.

Page 3 GAO/NSIAD-97-36 Future Years Defense Program
B-275478 

2002. Based on these projected cost reductions, the executive branch

reduced DOD’s projected budgets for fiscal years 1997-2001 by about

$15.2 billion. The executive branch allowed DOD to retain about

$19.5 billion of the projected increase in purchasing power. The

distribution of this assumed additional purchasing power was $4.3 billion

in 1997, $3.9 billion in 1998, $4.6 billion in 1999, $3.8 billion in 2000, and

$2.9 billion in 2001.

According to DOD, about $6 billion of the $19.5 billion was applied to the

military personnel and operation and maintenance accounts for must-pay

bills such as for the military retired pay accrual and ongoing contingency

operations. The remaining $13 billion was applied primarily to DOD’s

modernization priorities. Funding was allocated to purchase trucks and

other support equipment, accelerate the acquisition of next generation

systems, upgrade existing systems, and fund Army base closure costs. A

detailed list of these planned purchases is provided in appendix I.

Change to Inflation

Forecasting Has

Implications for 1998

FYDP

For more than a decade, OMB has used projections of the Commerce

Department’s Bureau of Economic Analysis’ (BEA) implicit price deflator

for gross domestic product (GDP) based on a “fixed-weighted”

methodology to adjust the future costs of defense nonpay purchases other

than fuel. According to OMB officials, anecdotal information for recent

years suggests that changes in this measure have been an accurate gauge

of inflation in DOD purchases. The fixed-weighted methodology was used

to prepare the President’s fiscal years 1996 and 1997 budgets.

Economists within the government and in private organizations generally

recognize that the implicit price deflator based on a fixed-weighted

methodology has inherent limitations, in part because it is derived from

the values of goods and services based on a fixed base year such as 1987.

This fixed-weighted methodology has in recent years tended to overstate

economic growth and understate inflation as time progressed beyond the

base year. Because of the limitations in the fixed-weighted methodology,

BEA switched to a new “chain-weighted” inflation methodology, just after

the President’s fiscal year 1997 budget had been prepared in January 1996.

The “chain-weighted” methodology, which is continuously updated by

using weights for 2 adjacent years, ensures that differences in relative

prices, such as the drop in computer prices, will not distort overall GDP

statistics. Economists have maintained that this methodology is superior

to the fixed-weighted methodology. According to BEA officials, the

improved methodology gives a more accurate measure of inflation

Page 4 GAO/NSIAD-97-36 Future Years Defense Program
B-275478 

because it eliminates the potential for cumulative errors under the old

(fixed-weighted) methodology.5

 For the 1997-2001 period, the executive

branch projected an annual inflation rate of 2.2 percent as measured by

the fixed-weighted methodology and 2.7 percent as measured by the

chain-weighted methodology.

In discussing the transition from the GDP implicit price deflator based on

fixed weights to the chain-weighted GDP price deflator, OMB officials stated

that the two differing numerical measures represent the same inflation, in

the same economy, at the same time. According to the officials, the

difference is “precisely analogous” to measuring the same temperature on

Celsius or Fahrenheit scales. The only difference between the two

measures is the methodology used. However, as a practical matter, OMB

provides DOD a specific numerical index of inflation, and DOD applies this

index to estimate future funding requirements. Therefore, the index used

has a direct impact on DOD’s estimated future funding requirements. For

example, our analysis shows that had DOD applied the new chain-weighted

inflation assumption of 2.7 percent to develop its 1997-2001 FYDP rather

than the fixed-weighted assumption of 2.2 percent, DOD’s increased

purchasing power would be only about $12.7 billion, not $34.7 billion.

OMB officials told us they have not decided what methodology they will use

to project inflation for the next FYDP, which will encompass the 1998-2003

defense program. However, in commenting on a draft of this report, DOD

said that OMB has indicated its intention to adopt the chain-weighted

methodology for budgeting beginning with the fiscal year 1998 submission.

In addition, the President’s budget for fiscal year 1997 emphasized the

limitations of the fixed-weighted methodology and featured the improved

chain-weighted methodology in presenting economic assumptions for the

future. If OMB uses the improved chain-weighted methodology to provide

inflation guidance to DOD, DOD’s funding estimates for fiscal years 1998 and

beyond could be affected. For example, on a chain-weighted basis, two

major private forecasting firms currently project an inflation rate of about

2.5 percent per year over the next 5 years, which is a decline from the

2.7 percent chain-weighted inflation assumption that appears in the fiscal

year 1997 budget. If OMB gives DOD an inflation projection of 2.5 percent per

year for the 1998-2003 period, a question arises as to whether such a factor

will be interpreted as an increase (from the 2.2 percent as measured by the

fixed-weighted methodology) or a decrease (from the 2.7 percent as

5

For a more complete discussion of the transition from the fixed-weighted methodology to the

chain-weighted methodology, see the Budget of the United States Government, Analytical Perspectives

for Fiscal Year 1997, page 6. For a more precise definition of these terms, see The Economic and

Budget Outlook: An Update (The Congressional Budget Office, Aug. 1996).

Page 5 GAO/NSIAD-97-36 Future Years Defense Program
B-275478 

measured using the chain-weighted methodology.) Without further

guidance, DOD may increase its estimates of future funding requirements

for inflation when inflation is projected to be lower than the earlier

forecast.

CBO Forecasted an

Increase in DOD

Purchasing Power of $10.3

Billion in the 1997 FYDP

During consideration of the fiscal year 1997 defense budget, the Chairman

of the Senate Committee on the Budget requested that CBO estimate the

adjustments that should be made to DOD’s budget estimates through 2002

that would keep its purchasing power constant given lower inflation rates.

CBO chose not to use the implicit price deflator for GDP based on the

fixed-weighted methodology that OMB had used to calculate inflation

because it had been replaced by the new chain-weighted methodology.

Instead, CBO based its inflation forecast on the Consumer Price Index,

which measures changes in the average cost of a fixed market basket of

consumer goods and services because that measure had not been revised.

Neither the executive branch’s nor CBO’s estimate presumes any ability to

forecast prices of goods and services purchased by DOD. Instead, the two

estimates calculate the change in a general index of inflation and assume

that prices of defense goods and services would change by the same

amount.

Using the Consumer Price Index, CBO projected a much smaller decrease

in inflation between the 2 budget years than the executive branch did.

Whereas the executive branch projected an 8/10 of 1 percent drop in

inflation, CBO projected that inflation would drop only 2/10 of 1 percent. As

a result, CBO projected that DOD’s purchasing power would increase by only

about $10.3 billion for the 1997-2001 period. This estimate is about

$24.4 billion less than DOD’s estimated $34.7 billion increase. Further,

because the executive branch reduced DOD’s estimated 1997-2001 FYDP by

about $15.2 billion, CBO’s estimate indicates that DOD’s real purchasing

power was reduced by about $5 billion. In action on the fiscal year 1997

budget resolution, the Senate adjusted defense totals downward to reflect

CBO’s more conservative estimate. The House did not make any

adjustments for lower inflation. The conference agreement on the budget

resolution recommended the Senate level for fiscal year 1997 and levels

somewhat closer to the House amounts in later years.

Major Resource Shifts

From the 1996 FYDP

to the 1997 FYDP

Our analysis shows that resource allocations in the 1997 FYDP vary

considerably from the 1996 FYDP. These resource adjustments result

primarily from inflation adjustments and transfers between accounts.

Page 6 GAO/NSIAD-97-36 Future Years Defense Program
B-275478 

Table 1 shows a year-to-year comparison of DOD’s 1996 and 1997 FYDPs by

primary accounts.

Table 1: Comparison of DOD’s 1996 and 1997 FYDPs by Primary Accounts

Fiscal year

Dollars in billions

Account FYDP 1997 1998 1999 2000 2001 Total

Military personnel FY 1996 $67.5 $68.2 $69.6 $70.9 $72.3 $348.5

FY 1997 69.8 69.2 70.0 71.1 73.1 353.2

Increase 2.3 1.0 0.4 0.2 0.8 4.7

Operation and maintenance FY 1996 90.6 89.9 92.7 94.8 98.1 466.1

FY 1997 89.1 88.6 90.1 92.3 95.9 456.0

Decrease –1.5 –1.3 –2.6 –2.5 –2.2 –10.1

Procurement FY 1996 43.5 51.4 54.2 62.3 67.3 278.7

FY 1997 38.9 45.5 50.5 57.7 60.1 252.7

Decrease –4.6 –5.9 –3.7 –4.6 –7.2 –26.0

Research, development, FY 1996 32.7 31.7 30.9 30.2 30.6 156.1

test, and evaluation FY 1997 34.7 35.0 33.7 31.9 31.7 167.0

Increase 2.0 3.3 2.8 1.7 1.1 10.9

Military construction FY 1996 5.1 4.6 4.4 3.8 3.9 21.8

FY 1997 5.5 4.8 4.7 4.1 4.2 23.3

Increase 0.4 0.2 0.3 0.3 0.3 1.5

Family housing FY 1996 4.5 4.1 4.4 4.5 4.6 22.1

FY 1997 4.0 3.8 4.1 4.1 4.1 20.1

Decrease –0.5 –0.3 –0.3 –0.4 –0.5 –2.0

Revolving funds and FY 1996 0.6 0.9 1.0 0.6 0.8 3.9

undistributed contingencies FY 1997 1.9 2.1 1.9 1.5 1.5 8.9

Increase 1.3 1.2 0.9 0.9 0.7 5.0

Total FY 1996 $244.4 $250.8 $257.3 $267.1 $277.5 $1,297.1

FY 1997 $244.0 $249.0 $255.1 $262.5 $270.4 $1,281.0

Decrease –$0.4 –$1.8 –$2.2 –$4.6 –$7.1 –$16.1

Note: Program estimates in DOD’s FYDP are expressed in total obligational authority (TOA). TOA

is the sum of new budget authority provided for a given fiscal year and any other amounts

authorized to be credited to a specific fund or account during that year, including transfers

between funds or accounts. TOA may not reflect exactly the budget authority adjustments made

in the President’s budget. Table totals may not add due to rounding.

Source: Fiscal years 1996 and 1997 FYDPs.

Page 7 GAO/NSIAD-97-36 Future Years Defense Program
B-275478 

The following sections discuss some of the more significant changes in

each of the primary accounts.

Military Personnel Overall, funding for military personnel accounts increased by $4.7 billion

for the 1997-2001 period, although DOD plans to reduce the number of

military personnel below the levels reflected in last year’s FYDP. The

increase primarily reflects (1) higher pay raises for fiscal years 2000 and

2001 than were included in the 1996 FYDP and (2) the transfer of U.S.

Transportation Command costs from a revolving fund supported mainly by

operation and maintenance accounts to the military personnel accounts.

Programs that are expected to receive the largest funding increases are

Army divisions ($1.5 billion) and Army force-related training ($1.6 billion).

Other programs are projected to be reduced. Some of the largest declines

are projected for Army National Guard support forces ($2.6 billion), Army

Reserve readiness support ($1.6 billion), and Air Force permanent

change-of-station travel ($650 million).

The 1997 FYDP shows that DOD plans to lower active duty force levels in

fiscal years 1998-2001. The planned smaller force would bring force levels

below the permanent end strength levels set forth in the National Defense

Authorization Act for fiscal year 1996 (P.L. 104-106). Table 2 shows the

minimum force levels in the law and DOD’s planned reductions.

Table 2: Required Force Levels and

DOD Planned Reductions

Service Required levels

Planned FY 2001

force levels

Planned reductions

1998-2001

Army 495,000 475,000 –20,000

Navy 395,000 394,000 –1,000

Marine Corps 174,000 174,000 0

Air Force 381,000 375,000 –6,000

Total 1,445,000 1,418,000 –27,000

Source: National Defense Authorization Act for fiscal year 1996 and the 1997 FYDP.

The Commission on Roles and Missions recommended that DOD perform a

quadrennial review to assess DOD’s active and reserve force structure,

modernization plans, infrastructure, and other elements of the defense

program and policies to help determine the defense strategy through 2005.

The National Defense Authorization Act for fiscal year 1997 directed the

Secretary of Defense to conduct the review in fiscal year 1997. Congress

Page 8 GAO/NSIAD-97-36 Future Years Defense Program
B-275478 

will have an opportunity to examine the assessment and recommendations

of the review. The act also requires the Secretary of Defense to include in

the annual budget request funding sufficient to maintain its prescribed

permanent active end strengths.6

 If DOD is precluded from implementing its

planned personnel reductions, it will have to make other compensating

adjustments to its overall program.

Operation and

Maintenance

The operation and maintenance accounts are projected to decrease by

about $10.1 billion during the 1997-2001 period due to lower inflation rates.

In addition, there were a number of funding reallocations among operation

and maintenance programs from the 1996 FYDP to the 1997 FYDP. Programs

that are projected to receive the largest gains include Army real property

services ($3.9 billion), real property services training ($1.1 billion), and

Navy administrative management headquarters ($1.5 billion). Programs

that are projected to decrease the most include Navy servicewide support

($2.1 billion); defense health programs, including medical centers, station

hospitals, and medical clinics in the United States ($2.3 billion); Army

National Guard reserve readiness support ($1.4 billion); Army base

operations ($4.2 billion); DOD environmental restoration activities

($1.3 billion); and DOD’s Washington headquarters services ($1 billion).

Projected savings from the latest round of base closures are also less than

were anticipated in the 1996 FYDP. The 1996 FYDP projected savings of

$4 billion during 1997-2001 from the fourth round of base closures

beginning in fiscal year 1996. The 1997 FYDP projects total savings of

$0.6 billion, $3.4 billion less than the 1996 FYDP projection. The decrease in

savings is primarily due to higher than anticipated base closure-related

military construction costs for environmental cleanup activities in fiscal

year 1997.

Typically, the planned costs to conduct contingency operations have not

been included in DOD’s budget submission. However, given that forces are

deployed in Bosnia and Southwest Asia and these known expenses will

continue into fiscal year 1997, DOD included $542 million for the Bosnian

operations and $590 million for Southwest Asian operations in the

President’s fiscal year 1997 budget. The Bosnian estimate was later revised

to $725 million, and DOD has informally advised the Senate and House

Committees on Appropriations of this increase. Most of these funds are in

operation and maintenance accounts.

6

The 1996 act authorized a 0.5-percent flexibility in meeting permanent end strength levels. This was

increased to 1 percent in fiscal year 1997.

Page 9 GAO/NSIAD-97-36 Future Years Defense Program
B-275478 

Procurement The procurement accounts are projected to decrease by about $26 billion

during the 1997-2001 period. About $15.3 billion of the reduction can be

attributed to the use of the lower inflation rate. A comparison of the 1996

and 1997 FYDPs indicates that about $10.4 billion of the $26 billion

reduction is due to a transfer of intelligence and classified program

funding from the procurement accounts to classified research,

development, test, and evaluation accounts. According to DOD officials, the

programs are more accurately classified as research, development, test,

and evaluation than procurement. The comparison also shows that DOD

eliminated a $5.4-billion program in the procurement accounts that was

called “modernization reserve” in the 1996 FYDP. According to DOD officials,

this funding was redistributed among procurement programs.

The 1997 FYDP continues the downward adjustments in the procurement

accounts, which we first identified in our September 1995 report on the

fiscal years 1995 and 1996 FYDPs. We reported that the fiscal year 1995

FYDP, which was the first FYDP to reflect the bottom-up review strategy,

reflected relatively high funding levels for procurement of weapon systems

and other military equipment. The funding level for procurement was

estimated to be $60 billion by fiscal year 1999. Since the 1995 FYDP, DOD has

steadily reduced programmed funding levels for procurement in favor of

short-term readiness, quality-of-life improvements, research and

development, and infrastructure activities. DOD now projects that the

procurement account will not contain $60 billion until 2001. Table 3 shows

DOD’s planned procurement reductions.

Table 3: Reductions in Planned Procurement Programs Since the 1995 FYDP

Fiscal year

Dollars in billions

FYDP 1995 1996 1997 1998 1999 2000 2001 Total

FY 1995 $43.3 $48.4 $49.8 $57.1 $60.1 a a

FY 1996 44.8 39.4 43.5 51.4 54.2 $62.3 $67.3

Change 1.5 –9.0 –6.3 –5.7 –5.9 a a

FY 1997 43.2 43.4 38.9 45.5 50.5 57.7 60.1

Change –1.6 4.0 –4.6 –5.9 –3.7 –4.6 –7.2

Cumulative

reduction –$0.1 –$5.0 –$10.9 –$11.6 –$9.6 –$4.6 –$7.2 –$49.0

aNot available.

Source: Fiscal years 1995, 1996, and 1997 FYDPs.

Page 10 GAO/NSIAD-97-36 Future Years Defense Program
B-275478 

In addition to the $10-billion transfer of intelligence and classified

programs, significant planned decreases in funding and quantities of items

include $2 billion for 1 Navy amphibious assault ship (LHD-1) and

$1.1 billion for 240 theater high-altitude area defense systems. Funding

levels for some programs were increased in the 1997 FYDP over last year’s

plan. For example, $1.5 billion was added in the 1997 FYDP for 172 Army

UH-60 Blackhawk helicopters, and $4 billion for 2 new SSN submarines.

The National Defense Authorization Act for fiscal year 1997 authorized the

addition of about $6.3 billion more than the President’s budget request for

procurement. Programs receiving significant increases include the new

SSN submarine; DDG-51 destroyer; the E-8B, C-130, V-22, and Kiowa

warrior aircraft; and the Ballistic Missile Defense Program. The report also

authorized $234 million for F/A-18 C/D fighter jets that was not included in

the President’s budget.

Research, Development,

Test, and Evaluation

The research, development, test, and evaluation accounts are projected to

increase by about $10.9 billion during the 1997-2001 period. Additionally,

increased purchasing power in these accounts due to the use of the lower

inflation rate is projected at about $6.5 billion. As mentioned earlier, about

$10.4 billion was transferred from the procurement accounts. As a result

of the transfer in programs and other adjustments, intelligence and

classified programs experienced the most growth. Our analysis shows that

the largest increase is in advance development activities, which increased

about $3 billion per year over 1996 FYDP projections.

The National Defense Authorization Act for fiscal year 1997 authorized the

addition of about $2.6 billion more than the President’s budget for

research, development, test, and evaluation. The largest portions of the

increase went to missile defense programs.

Military Construction The 1997 FYDP projects that funding for military construction will increase

by about $1.5 billion over the 1997-2001 period compared to the 1996 FYDP.

One reason for the increase is that the 1996 FYDP projected savings based

on interim base closing plans that subsequently changed, and actual

closing costs were higher. Specifically, compared to the 1996 FYDP, the

1997 FYDP reflects spending increases in military construction

expenditures of about $2.7 billion. The increase also reflects the transfer

of some environmental restoration funds to the military construction

account for cleanup at specific bases scheduled for closing.

Page 11 GAO/NSIAD-97-36 Future Years Defense Program
B-275478 

Family Housing DOD considers family housing a priority. Nonetheless, when compared to

the 1996 FYDP, the 1997 FYDP shows that the family housing accounts will

decrease by about $1.8 billion. Improvements and other new construction

are projected to decrease by about $1.3 billion during 1997-2001. Current

family housing plans include improvements to 4,100 housing units,

construction or replacement of 2,300 units and 13 support facilities, and

the provision of $20 million for private sector housing ventures.

Agency Comments

and Our Evaluation

We received comments on this report from OMB and DOD. DOD generally

agreed with our report and offered some points of clarification, which we

have incorporated where appropriate. OMB indicated that the change in

inflation is important in forecasting the cost of the FYDP, not the level of

inflation. Our review indicated, however, the level of inflation was also

important because DOD makes its cost projections based on OMB guidance

that specifies a level of inflation, not the rate of change. OMB and DOD

comments are published in their entirety as appendixes II and III,

respectively.

Scope and

Methodology

To evaluate the major program adjustments in DOD’s fiscal year 1997 FYDP,

we interviewed officials in the Office of Under Secretary of Defense

(Comptroller); the Office of Program Analysis and Evaluation; the Army,

Navy, and Air Force budget offices; CBO; OMB; and BEA. We examined a

variety of DOD planning and budget documents, including the 1996 and

1997 FYDPs and associated annexes. We also reviewed the President’s fiscal

year 1997 budget submission; our prior reports; and pertinent reports by

CBO, the Congressional Research Service, and others.

To determine the implications of program changes and underlying

planning assumptions, we discussed the changes with DOD, CBO, OMB, and

BEA officials. To verify the estimated increased purchasing power in major

DOD accounts due to revised estimates of future inflation, we calculated

the annual estimated costs for each 1996 FYDP account using inflation

indexes used by DOD from the National Defense Budget Estimates for fiscal

years 1996 and 1997. The increased purchasing power was the difference

between these calculated costs estimates and the reported 1996 FYDP

account costs.

Our work was conducted from April through November 1996 in

accordance with generally accepted government auditing standards.

Page 12 GAO/NSIAD-97-36 Future Years Defense Program
B-275478 

We are providing copies of this report to other appropriate Senate and

House Committees; the Secretaries of Defense, the Air Force, the Army,

and the Navy; and the Director, Office of Management and Budget. We will

also provide copies to others upon request.

If you have any questions concerning this report, please call me on

(202) 512-3504. Major contributors to this report are listed in appendix IV.

Richard Davis

Director, National Security

 Analysis

Page 13 GAO/NSIAD-97-36 Future Years Defense Program
Contents

Letter 1

Appendix I 

DOD’s Planned Use of

Increased Purchasing

Power by Service

16

Appendix II 

Comments From the

Office of Management

and Budget

17

Appendix III 

Comments From the

Department of

Defense

20

Appendix IV 

Major Contributors to

This Report

22

Related GAO Products 24

Tables Table 1: Comparison of DOD’s 1996 and 1997 FYDPs by Primary

Accounts

7

Table 2: Required Force Levels and DOD Planned Reductions 8

Table 3: Reductions in Planned Procurement Programs Since the

1995 FYDP

10

Page 14 GAO/NSIAD-97-36 Future Years Defense Program
Contents

Abbreviations

BEA Bureau of Economic Analysis

CBO Congressional Budget Office

DOD Department of Defense

FYDP Future Years Defense Program

GDP gross domestic product

OMB Office of Management and Budget

TOA total obligational authority

Page 15 GAO/NSIAD-97-36 Future Years Defense Program
Appendix I 

DOD’s Planned Use of Increased Purchasing

Power by Service

Fiscal year

Dollars in millions

Service/procurement item 1997 1998 1999 2000 2001 1997-2001

Army

Base realignment and closure activities $438 $348 $145 $931

Combat support equipment 425 440 450 1,315

M1A2 tank upgrade $49 $68 89 91 93 390

M2A3 tank upgrade 156 413 481 1,050

Apache Longbow System 12 123 135

Javelin medium anti-tank weapon 196 413 384 993

Hellfire missiles 94 93 99 103 110 499

UH-60 Blackhawk 87 133 129 128 100 577

Wheeled vehicles 45 227 212 212 696

Paladin howitzer upgrade 109 109

Other programs 45 17 21 13 2 98

Subtotal $429 $311 $1,780 $2,173 $2,100 $6,793

Navy and Marine Corps

Amphibious transport (LPD) 880 880

Overhaul carrier 1,700 1,700

Guided missile destroyer (DDG-51) 100 100

F/A-18 E/F 100 480 580

USMC ground upgrade 100 100 200 160 560

Enhanced modular signal processor 4 4

AV-8B procurement acceleration 28 28

EA6B aircraft 72 72 144

Cooperative engagement 89 89

Precision-guided munitions 100 200 203 503

Subtotal $193 $100 $1,208 $2,652 $435 $4,588

Air Force

Expendable launch vehicles 133 228 134 495

F-22 advanced tactical fighter 50 88 194 332

Precision-guided munitions 24 52 66 142

F-15/16 274 274

Tactical aircraft modifications 250 260 250 760

Subtotal $274 0 $457 $628 $644 $2,003

Total $896 $411 $3,445 $5,453 $3,179 $13,384

Source: Department of Defense.

Page 16 GAO/NSIAD-97-36 Future Years Defense Program
Appendix II 

Comments From the Office of Management

and Budget

Note: GAO comments

supplementing those in the

report text appear at the

end of this appendix.

Now on pp. 2 and 4.

See comment 1.

Now on p. 4.

See comment 2.

Now on p. 4.

See comment 2.

Now on p. 5.

See comment 3.

Now on p. 5.

See comment 4.

Page 17 GAO/NSIAD-97-36 Future Years Defense Program
Appendix II 

Comments From the Office of Management

and Budget

Now on p. 5.

See comment 2.

See comment 5.

Page 18 GAO/NSIAD-97-36 Future Years Defense Program
Appendix II 

Comments From the Office of Management

and Budget

The following are GAO’s comments on the Office of Management and

Budget’s (OMB) letter dated November 8, 1996.

GAO Comments 1. We agree with OMB that estimates of the Future Years Defense Program

(FYDP) in any given year include anticipated future inflation and that

changes in anticipated inflation affect the projected cost of the FYDP. We

have made this more explicit in our report. However, the levels of

forecasted inflation are also important to project future costs. As we

explain in this report, the Department of Defense (DOD) projects costs

based on OMB guidance that specifies an annual level of inflation for the

FYDP period, not the changes in forecasted inflation.

2. The report was amended to reflect this comment.

3. As explained in comment 1, DOD projects costs based on the forecasted

inflation rates it receives from OMB. Therefore, we believe the forecasted

inflation rates have a direct impact on DOD’s estimated future funding

requirements.

4. Our example is meant to show how application of a specific inflation

rate to the FYDP can affect assumed purchasing power. As we explained

previously, we believe the projected costs of the FYDP are affected not only

by the change in inflation rates but also by the level of inflation. OMB

asserts that under its forecast, the two inflation measures declined by the

same amount. However, the Analytical Perspectives of the Budget for

Fiscal Year 1997 shows a smaller decrease in inflation under the

chain-weighted methodology—5/10 of 1 percent compared to 8/10 of

1 percent under the fixed-weighted methodology. Therefore, use of the

changes in either methodology consistently would not have yielded the

same change in the price of the FYDP.

5. The sentence was deleted from the final report.

Page 19 GAO/NSIAD-97-36 Future Years Defense Program
Appendix III 

Comments From the Department of Defense

Page 20 GAO/NSIAD-97-36 Future Years Defense Program
Appendix III 

Comments From the Department of Defense

Page 21 GAO/NSIAD-97-36 Future Years Defense Program
Appendix IV 

Major Contributors to This Report

National Security and

International Affairs

Division, Washington,

D.C.

Robert Pelletier

William Crocker

Margaret Morgan

Scott Hornung

Charles Perdue

Bruce Kutnick

Nancy Ragsdale

Office of the Chief

Economist

Richard Kraschevski

Page 22 GAO/NSIAD-97-36 Future Years Defense Program
Page 23 GAO/NSIAD-97-36 Future Years Defense Program
Related GAO Products

Defense Infrastructure: Costs Projected to Increase Between 1997 and

2001 (GAO/NSIAD-96-174, May 31, 1996).

Defense Infrastructure: Budget Estimates for 1996-2001 Offer Little

Savings for Modernization (GAO/NSIAD-96-131, Apr. 4, 1996).

Future Years Defense Program: 1996 Program Is Considerably Different

From the 1995 Program (GAO/NSIAD-95-213, Sept. 15, 1995).

DOD Budget: Selected Categories of Planned Funding for Fiscal Years

1995-99 (GAO/NSIAD-95-92, Feb. 17, 1995).

Future Years Defense Program: Optimistic Estimates Lead to Billions in

Overprogramming (GAO/NSIAD-94-210, July 29, 1994).

DOD Budget: Future Years Defense Program Needs Details Based on

Comprehensive Review (GAO/NSIAD-93-250, Aug. 20, 1993).

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

(701090) Page 24 GAO/NSIAD-97-36 Future Years Defense Program
Ordering Information

The first copy of each GAO report and testimony is free.

Additional copies are $2 each. Orders should be sent to the

following address, accompanied by a check or money order

made out to the Superintendent of Documents, when

necessary. VISA and MasterCard credit cards are accepted, also.

Orders for 100 or more copies to be mailed to a single address

are discounted 25 percent.

Orders by mail:

U.S. General Accounting Office

P.O. Box 6015

Gaithersburg, MD 20884-6015

or visit:

Room 1100

700 4th St. NW (corner of 4th and G Sts. NW)

U.S. General Accounting Office

Washington, DC

Orders may also be placed by calling (202) 512-6000 

or by using fax number (301) 258-4066, or TDD (301) 413-0006.

Each day, GAO issues a list of newly available reports and

testimony. To receive facsimile copies of the daily list or any

list from the past 30 days, please call (202) 512-6000 using a

touchtone phone. A recorded menu will provide information on

how to obtain these lists.

For information on how to access GAO reports on the INTERNET,

send an e-mail message with "info" in the body to:

info@www.gao.gov

or visit GAO’s World Wide Web Home Page at:

http://www.gao.gov

PRINTED ON RECYCLED PAPER
United States

General Accounting Office

Washington, D.C. 20548-0001

Official Business

Penalty for Private Use $300

Address Correction Requested

Bulk Rate

Postage & Fees Paid

GAO

Permit No. G100