Depot Maintenance: Key Financial Issues for Consolidations at Pearl Harbor and Elsewhere Are Still Unresolved
Published: 2001-01-22T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In 1998, the Navy consolidated the Pearl Harbor Naval Shipyard and the Naval Intermediate Maintenance Facility in Hawaii. Because of concerns about some aspects of the consolidation, the Navy began a test project, commonly called the Pearl Harbor pilot, to determine if integrating the management, operations, and funding of the shipyard and the intermediate maintenance facility can result in greater efficiency and lower overall ship maintenance costs. In September 1999, GAO reported that the preliminary results of the ongoing Pearl Harbor pilot were mixed and recommended that the Department of Defense (DOD) and the Navy address unresolved issues related to the financial management of the consolidation as the Navy proceeds with similar consolidations in other locations. This report updates GAO's earlier report and discusses whether (1) the Navy has provided adequate cost visibility and accountability over the consolidation, (2) DOD and the Navy have resolved other issues related to the financial structure for consolidations at Pearl Harbor and elsewhere, and (3) the consolidation has generated greater efficiency and lower costs for ship maintenance at Pearl Harbor.
section_title: What GAO Found
paragraphs: GAO found that the Navy still has not provided adequate cost visibility and accountability over ship maintenance following the consolidation. DOD and the Navy have made little progress in resolving other issues related to the financial structure for the consolidation. GAO is unable to determine whether the consolidations have produced greater efficiency and lower costs for ship maintenance.

section_title: Letter
paragraphs: In 1998, the Navy consolidated the Pearl Harbor Naval Shipyard and the Naval Intermediate  Maintenance Facility in Hawaii. Because of concerns raised about certain aspects of the  consolidation, the Navy implemented a test project, commonly called the Pearl Harbor pilot, to  determine if integrating the management, operations, and funding of the shipyard and the  intermediate maintenance facility can result in greater efficiency and lower overall ship maintenance  costs. In September 1999, we reported that the preliminary results of the ongoing Pearl Harbor pilot  were mixed and recommended that the Departments of Defense and the Navy address unresolved  issues related to the financial management of the consolidation as the Navy proceeds with similar  consolidations in other locations. As agreed with your office, we updated our prior assessment to  determine whether (1) the Navy has provided adequate cost visibility and accountability over  consolidated ship maintenance activities at Pearl Harbor, (2) the Departments of Defense and the  Navy have resolved other issues related to the financial structure for consolidations at Pearl Harbor  and elsewhere, and (3) the consolidation has generated greater efficiency and lower costs for ship  maintenance at Pearl Harbor.
This report includes recommendations to the Secretary of Defense to address key factors affecting  the consolidation of ship maintenance activities. In addition, we have added matters for congressional  consideration to have the Navy to report its strategy and time frame for providing total cost visibility  on an ongoing basis and identifying depot and intermediate work of consolidated ship maintenance  activities, and to have the Office of the Secretary of Defense and the Navy to report their strategy and  time frame for addressing unresolved issues related to the financial management for consolidations at  Pearl Harbor and elsewhere.
We are sending copies of this report to the Chairmen and Ranking Minority Members of the Senate  Committee on Armed Services; the Subcommittee on Defense, Senate Committee on Appropriations;  the House Committee on Armed Services; and the Subcommittee on National Security, House  Committee on Appropriations. We are also sending copies of this report to the Secretaries of Defense  and the Navy, the Under Secretary of Defense (Comptroller/Chief Financial Officer), and the Director  of the Office of Management and Budget. Copies will also be made available to others upon request.
GAO contacts and key contributors to this report are listed in appendix III.
subsections: section_title: Introduction
paragraphs: During 1998, the Navy consolidated the Pearl Harbor Naval Shipyard and  the Naval Intermediate Maintenance Facility in Hawaii. Because of  concerns raised about certain aspects of the consolidation, the Navy  implemented a test project, commonly called the Pearl Harbor pilot, to  determine if integrating the management, operations, and funding of the  shipyard and the intermediate maintenance facility can result in greater  efficiency and lower overall ship maintenance costs. In September 1999, we  reported the Pearl Harbor pilot was not yet complete and preliminary  results were mixed, and we recommended that the Navy take steps to  address unresolved issues related to financial management of the  consolidated facility.
subsections: section_title: Navy Ship Maintenance Process
paragraphs: The Navy accomplishes maintenance on its surface ships and submarines  at three levels: organizational, intermediate, and depot. Organizational- level maintenance includes all maintenance actions that can be  accomplished by a ship’s crew. For example, the ship’s crew may replace or  fix a cracked gasket or leaks around a hatch or doorway aboard ship.  Traditionally, intermediate-level maintenance is accomplished by Navy  intermediate maintenance activities for work that is beyond the capability  or capacity of a ship’s crew. An intermediate maintenance activity tests,  calibrates, and repairs ship systems and equipment, which the ship’s crew  may not have the tools or capability to do. On the other hand, depot work  includes all maintenance actions that require skills or facilities beyond  those of the organizational and intermediate levels. Shipyards with  extensive shop facilities, specialized equipment, and highly skilled  personnel accomplish major repairs, overhauls, and modifications.  Figure 1 shows where the Navy’s ship maintenance activities are located.
section_title: Pearl Harbor Pilot Is a Part of the Navy’s Regional Maintenance Program
paragraphs: In March 1994, the Chief of Naval Operations announced a regional  maintenance program to streamline the Navy ship repair and maintenance  processes, reduce infrastructure and costs, and maximize outputs. The  plan was to (1) optimize intermediate-level maintenance through  consolidation of intermediate activities, (2) integrate intermediate and  depot activities to be managed by fleet commanders, and (3) conduct fleet  maintenance using an integrated maintenance process supported by  common business and maintenance procedures. The first phase,  consolidation of intermediate-level maintenance, nears completion. For the  second phase of the program, the Navy has implemented the Pearl Harbor  pilot and may consolidate the operations of the Puget Sound Naval  Shipyard and the Intermediate Maintenance Facility, Northwest (formerly  the Trident Refit Center, Bangor, and the Ship Intermediate Maintenance  Facility, Everett). The third phase, using a single maintenance process for  fleet maintenance, is to be completed in fiscal year 2001.
Prior to the consolidation, the Pearl Harbor Naval Shipyard and the Naval  Intermediate Maintenance Facility were individual commands with  individual physical plants, organizational infrastructures, and  administrative support services. The shipyard was managed by the Naval  Sea Systems Command and funded through the Navy Working Capital  Fund, while the intermediate maintenance facility was managed by the  Pacific Fleet and financed through direct appropriations. Navy officials  recognized that these different financial and organizational structures  required them to use cumbersome, work-around procedures to share  workloads and resources between the shipyard and the intermediate  maintenance facility. The private ship repair facilities in Hawaii also  complete a small amount of maintenance work for the Navy.
On April 30, 1998, the Navy consolidated the operations of the Pearl Harbor  Naval Shipyard and the Naval Intermediate Maintenance Facility, including  overhead functions such as engineering, quality assurance, occupational  safety, and administration. Similarly, maintenance shops, crane operations,  and calibration laboratories were also consolidated. Further, the Pacific  Fleet assumed ownership and overall management and financial  responsibility for the consolidated facility, and the Naval Sea Systems  Command continued to be the technical and operating authority. The Navy  named the consolidated facility the Pearl Harbor Naval Shipyard and  Intermediate Maintenance Facility. This consolidation is the Navy’s first  attempt at the full-scale, total merger of two maintenance activities  operating under separate command structures and financial systems.
To achieve a fully integrated organization, the Navy decided the  consolidated facility should use a single financial structure and selected  direct appropriations instead of the working capital fund during the pilot  period. This decision was based on several factors, including the belief that  the pilot goals could more readily be achieved by using direct  appropriations. The Pacific Fleet was the largest customer of ship  maintenance activities in Hawaii, and most Fleet maintenance activities  (ship repair facilities, shore intermediate maintenance activities, trident  refit centers, and aviation intermediate maintenance departments) were  funded with direct appropriations. Thus, they expected fewer financial  issues using direct appropriations because the Fleet could integrate the  consolidated facility into its financial structure and would not need to  establish another system. Several Navy officials also believed that the  working capital fund included fees and charges that overstate ship  maintenance costs compared to direct appropriations, under which some  overhead is not directly assigned to the cost of operations. On the other  hand, the working capital fund accounts for these costs in an attempt to  identify the full cost of ship maintenance operations. While the level of  resources required to carry out ship maintenance activities is likely to be  similar regardless of whether financed using direct appropriations or the  working capital fund, using the working capital fund a customer is more  likely to be directly responsible for a larger portion of those costs. Use of a  working capital fund better enables Department of Defense (DOD)  components to fully account for their share of the program costs. If Navy  officials decide that direct appropriations are the most appropriate  financial structure at Pearl Harbor after the completion of the pilot, the  consolidated facility would then be permanently transferred from the  working capital fund.
section_title: Development of the Pilot Test Plan and Performance Metrics
paragraphs: The Deputy Secretary of Defense required the Navy to develop a test plan  to determine whether the Pearl Harbor consolidation had resulted in an  increased use of personnel and lower overall unit costs than separate  facilities. A panel comprised of officials from the Office of the Secretary of  Defense (OSD) and the Navy selected nine test metrics that represent a  variety of issues and performance indicators for the consolidated facility  (see table 2).
The Navy used fiscal year 1997 as the baseline for measuring success or  failure of the consolidated facility because this was the last full year the  former Pearl Harbor shipyard and the intermediate maintenance facility  operated as independent activities. The baseline is compared with data for  fiscal year 1999. Fiscal year 1998 was eliminated because of the operational  turbulence expected by the consolidation of activities during the year.
section_title: Congressional Requirements for the Pearl Harbor Pilot
paragraphs: The Conference Report for the Department of Defense Appropriations Act  for Fiscal Year 1998 concluded that it would take at least 2 years before the  Navy could determine whether the consolidation of maintenance activities  for the pilot was effective and should be made permanent or expanded to  other locations. The report directed the Navy to report its findings from the  pilot to the Committees on Appropriations on or after April 1, 1999, and not  to expand the pilot until 6 months after it had made its report. The  conferees also directed the Navy not to make any permanent changes to  the workforce in terms of total number of employees or any other  permanent changes until the pilot was completed. Navy officials expect to  issue the report in fiscal year 2001.
section_title: Our Prior Concerns About the Pearl Harbor Pilot
paragraphs: At the time of our 1999 report, we noted that while the consolidation of  shipyard and intermediate maintenance activities offered clear benefits,  the close proximity of the facilities and the larger portion of Fleet-funded  work in Hawaii may favorably affect the pilot’s results; this may not be the  case at other locations. Consequently, we concluded the Pearl Harbor pilot  provided only a general indication that future consolidations would result  in efficiencies largely because of unique aspects of Pearl Harbor ship  maintenance activities and financial management issues. Further, we  reported that OSD and Navy officials had different opinions over the  potential impact of using direct appropriations on the following issues.
Cost visibility and accountability for consolidated ship maintenance  operations. The Congress established working capital funds to, among  other purposes, provide a flexible funding mechanism that would allow  defense industrial and service activities to operate on the same basis as  the private sector, including the use of standard cost accounting  practices and techniques. According to OSD officials, applying these  practices and techniques has made shipyard costs more visible and  improved the efficiency of operations.
Naval shipyards and activities remaining in the working capital fund.
OSD officials were concerned that the Navy had not adequately  addressed the impact of removing all naval shipyards from the working  capital fund. They believed that if the Navy removed the shipyards from  the fund, the Navy would have to request direct appropriations to pay  the cost of the shipyards to transfer from the working capital fund or  other activities in the fund would need to absorb a larger share of costs.
Ship maintenance activities during periods without appropriations. A  working capital fund is not directly subject to the annual appropriations  cycle and can continue operations without interruption between fiscal  years. Consequently, the former Pearl Harbor shipyard operators were  freed from reprogramming limitations and restrictions applicable to  regular appropriations and were allowed to incur costs without waiting  for enactment of an appropriation. Because this financial flexibility is  considered critical to shipyard operations, OSD officials were  concerned that the Navy had not addressed how eliminating this  flexibility would affect Pearl Harbor operations or future  consolidations.
Capital improvement program for consolidated ship maintenance  activities. According to OSD officials, an important aspect of a working  capital fund is its capital improvement program. In the case of the  former Pearl Harbor shipyard, it depreciated its capital assets and  collected this expense through the reimbursable rate charged to its  customers. Therefore, the fund had a ready reserve to finance capital  improvements for the shipyard. However, OSD officials were concerned  that future funding levels may be insufficient because of uncertainties in  the appropriation process.
We concluded that while the consolidation of shipyard and intermediate  maintenance activities offered clear benefits, financial management issues  existed that needed to be resolved for future operations at Pearl Harbor  and in considering other consolidations. OSD concurred with the intent of  our recommendations to resolve financial management issues related to  the consolidation at Pearl Harbor and indicated that the Departments of  Defense and the Navy would correct them. This report discusses the extent  to which these issues have been addressed by the Departments.
section_title: Navy Does Not Provide Adequate Cost Visibility and Accountability of Consolidated Ship Maintenance Activities at Pearl Harbor
paragraphs: The Navy has not provided adequate cost visibility and accountability over  ship maintenance activities at Pearl Harbor following the consolidation  because it has not implemented a method to routinely and systematically  accumulate and account for the full cost of operations or distinguish  between depot and intermediate work performed by consolidated ship  maintenance facilities. The consolidated facility’s management and  financial systems do not readily identify and report the full cost of ship  maintenance operations. Federal accounting standards require that the  systems account for the full cost of operations, including the depreciation  of facilities and equipment, centrally managed financial and technical  support services, selected base operating support, maintenance shops  overhead, military personnel, and borrowed workers. Consequently, OSD  and Navy officials have not had complete, reliable data needed for making  fully informed decisions related to the management of ship maintenance  activities and for establishing goals and measuring performance.  Specifically, at the time of our review, they did not have reliable data on an  ongoing basis to determine the total cost of delivering a direct labor hour of  ship maintenance work—a key metric for evaluating the consolidated  facility’s productivity and performance. Furthermore, the facility’s systems  do not distinguish between depot and intermediate work, even though 10 U.S.C. 2466 limits the funds that may be used for contractor  performance of depot maintenance work and requires DOD to report on  the allocation of depot-level workloads between public and private sectors.  Additionally, OSD and Navy comptroller officials question the reliability of  Pearl Harbor’s data that are used to show compliance with the Chief  Financial Officers Act (P.L. 101-576) and the Government Performance and  Results Act (P.L. 103-62).
subsections: section_title: Cost Visibility and Accountability Varied Prior to the Consolidation
paragraphs: Prior to the consolidation, the former Pearl Harbor shipyard and  intermediate maintenance facility operated their own management and  financial systems. The former shipyard was funded through the working  capital fund and used the Shipyard Management Information System (an  intricate network of interfacing systems intended to support planning,  timekeeping, payroll, material, and cost accounting) to provide  management information for the shipyard. The former intermediate  maintenance facility was funded through direct appropriations and used  the Standard Accounting and Reporting System and the Maintenance  Resource Management System. The Standard Accounting and Reporting  System was relied on to track, monitor, and report on appropriations,  obligations, and expenditures for the intermediate facility such as materials  and civilian personnel. The Maintenance Resource Management System  was used to schedule work, set priorities, procure materials, and establish  time frames. Neither system was designed to provide information on the  full costs of the intermediate facility’s operations.
section_title: Management and Financial Systems Do Not Account for All Ship Maintenance Costs at Pearl Harbor
paragraphs: Even though federal accounting standards require federal agencies to  determine the full cost of operations, the Pearl Harbor’s management and  financial systems do not account for the cost of the depreciation of  facilities and equipment, centrally managed financial and technical support  services, overhead costs by maintenance shop, selected base operating  support, military personnel, and borrowed workers. This has inhibited the  Navy’s ability to produce reliable cost data that are essential for making  informed decisions related to the management of ship maintenance  activities and for the establishment of strategic goals and the measurement  of accomplishments and performance against established goals. While this  lack of adequate cost visibility and accountability may not directly affect  those managers and workers performing ship maintenance and repairs at  Pearl Harbor, it has generated significant concern among officials at higher  organizational levels outside the consolidated facility. For example, senior  OSD and Navy officials have been concerned about the Navy’s ability to  provide adequate cost visibility and accountability for ship maintenance  operations at Pearl Harbor and about the reliability of ship maintenance  data for Pearl Harbor used to show compliance with relevant statutes and  regulations.
The Statement of Federal Financial Accounting Standards No. 4 requires  federal agencies to accumulate the full cost of outputs through appropriate  costing methodologies or “cost finding” techniques. The full cost of an  output is the sum of the (1) cost of resources consumed that directly or  indirectly contribute to the output and (2) cost of identifiable supporting  services provided by other entities. As such, the financial structure used to  fund federal activities has no bearing on determining the full cost of an  output. Compliance with these standards is intended to provide managers  relevant and reliable data for making resource allocations, program  modifications, and performance evaluations; comparing costs to outputs;  and generating financial and performance reports.
Our review of the consolidated facility’s management and financial systems  showed that the facility did not routinely and systematically identify and  accumulate data on the full cost of its ship maintenance operations in  accordance with Statement of Federal Financial Accounting Standards  No. 4. Contrary to the standards to identify the full cost of operations, the  consolidated facility’s systems did not recognize costs if they are paid by  other Navy activities. Pacific Fleet and Pearl Harbor officials stated that  their focus is to manage the consolidated facility’s appropriations and  obligations and to execute the allocated funding within budget authority. In  addition, they stated their belief that their systems and processes are not  required to identify and accumulate data on any costs not paid from the  appropriated funding provided to the consolidated facility. Specifically, at  the time of our review, the categories of costs associated with consolidated  ship maintenance operations that the facility’s systems did not routinely  and systematically identify and accumulate include:  Facilities and equipment depreciation. Depreciation costs are no longer  accumulated because the former Pearl Harbor shipyard and all of its  facilities and equipment are now Pacific Fleet assets that will be  recapitalized through direct appropriations. Prior to consolidation,  depreciation costs, reported to be $10.6 million in fiscal year 1997, were  considered in developing the former shipyard’s reimbursable rate used  to collect the costs of its maintenance operations from its customers.  Centrally managed financial and technical support services. Support  services costs were a reported $1.9 million for the former Pearl Harbor  shipyard in fiscal year 1999, but these costs are no longer accumulated  at the consolidated facility because they are not included in its  reimbursable rate. For example, Defense Finance and Accounting  Service support costs are not accumulated; instead, the Pacific Fleet  assumed responsibility for the costs and their payment. In another  example, the Naval Sea Systems Command’s centrally managed  technical support costs (automated data processing, depot maintenance  report preparation, and shipyard management support) are no longer  accumulated because the Command assumed responsibility for the  costs and their payment.
Selected base operating support costs. The costs for security, utilities,  water, steam, sewage, and recurring maintenance (infrastructure)  activities are no longer accumulated by the consolidated facility. Prior to  consolidation, the costs were accumulated and allocated to jobs as  overhead costs and recovered through the former shipyard’s  reimbursable rate. Now, the Navy Regional Commander is responsible  for these costs, estimated at $13.7 million and $20.6 million in fiscal  years 1999 and 2000, respectively.
Overhead costs by maintenance shop and work item. Pacific Fleet and  Pearl Harbor officials believe there is no longer a need to determine  overhead costs by maintenance shop and work item because there is no  longer a need to accumulate such costs for the purposes of developing  cost data to be factored into the consolidated facility’s reimbursable  rate. Currently, overhead costs are funded with direct appropriations,  accounted for by cost category, and monitored to ensure that  expenditures do not exceed allocations. Previously, the former shipyard  accounted for overhead costs by individual maintenance shops and  work items.
Military personnel costs. Pacific Fleet and Pearl Harbor officials believe  there is no longer a need to account for military personnel costs because  they are managed by the Navy’s Bureau of Naval Personnel and funded  by the Bureau with direct appropriations. These costs are no longer  considered reimbursable and are not accumulated by the consolidated  facility. Prior to the consolidation, the former shipyard accounted for  these costs as overhead in its reimbursable rate and paid the Bureau of  Naval Personnel for its military personnel with proceeds collected from  its customers.
Borrowed labor costs. The Navy uses borrowed workers to balance total  resources with workload among its shipyards, but these costs are no  longer accumulated by maintenance project and work item in Hawaii.  They are funded with direct appropriations, included in the material  cost category, and monitored to ensure that expenditures do not exceed  allocations. Prior to consolidation, the former shipyard accounted for  the costs by maintenance project and work item and paid other naval  shipyards for the borrowed labor with proceeds collected from its  customers.
Because the Navy does not routinely and systematically accumulate and  account for the full cost of operations for the consolidated facility, OSD and  Navy officials have not had complete, reliable data needed for making fully  informed decisions related to the management of ship maintenance  activities and for establishing goals and measuring performance. For  example, at the time of our review, officials did not have data to determine  on an ongoing basis whether their ship maintenance operations were  costing less or more to provide a direct maintenance hour—a key metric  for evaluating the consolidated facility’s productivity and performance.  Pearl Harbor officials attempted to generate this information during fiscal  year 2000 but were unsuccessful because of difficulties in reconciling cost  data between the consolidated facility’s management and financial systems  and in duplicating the Naval Audit Service’s method for developing the  metric value. Concerns about the adequacy of data had led the Chief of  Naval Operations and the Commander, Naval Sea Systems Command, to  ask the Naval Audit Service to develop the fiscal year 1997 baseline value,  validate the data, and develop values for the metric for fiscal years 1998  and 1999. According to Navy officials, there is no decision on whether the  metric will be used to measure the performance of the combined facility in  fiscal year 2000.
section_title: Management and Financial Systems Do Not Distinguish Between Depot and Intermediate Work
paragraphs: Pacific Fleet and Pearl Harbor officials maintain that all work is considered  the same in the consolidated facility. Consequently, the Navy cannot readily  identify the cost expended by the consolidated facility for depot-level work  to show compliance with (1) the 10 U.S.C. 2466 depot maintenance  allocation limits and associated reporting requirements for DOD  departments and agencies and (2) DOD financial regulations that  implement the depot maintenance reporting requirements.
Section 2466 of title 10 requires that not more than 50 percent of funds  allocated in a fiscal year for depot work can be used for contractor- performed work and requires the Secretary of Defense to report to the  Congress on depot-level workloads during the proceeding two fiscal years.  Section 2460 of title 10 requires that depot-level maintenance includes all  workloads, regardless of its funding source and work location.  Furthermore, DOD financial management regulations (vol. 6, ch. 14)  require all depot maintenance activities, regardless of their funding source,  to uniformly record, accumulate, and report costs incurred in their depot  maintenance operations and require these activities to maintain systems to  collect the data. Each activity is required to collect data on direct labor  hours and costs, material costs, and other direct costs; operations  overhead costs; general and administrative costs; total maintenance costs;  and cost per direct labor hour. OSD officials use these data to analyze  historical cost trends, evaluate and oversee resources and budgets, develop  direction and guidance, estimate depot maintenance requirements,  examine cost drivers, and comply with the 10 U.S.C. 2466 depot  maintenance allocation and reporting requirements.
Prior to consolidation, the Navy’s determination of depot and intermediate  maintenance work was based on which facility performed it: the former  Pearl Harbor shipyard performed depot work, and the former intermediate  maintenance facility performed intermediate work. However, because  Pacific Fleet and Pearl Harbor officials maintain that all work is considered  and classified the same at the consolidated facility, the management and  financial systems do not differentiate between depot and intermediate  categories of work. Consequently, the Navy cannot readily identify the cost  associated with the depot-level workload completed by the consolidated  facility to show compliance with the 10 U.S.C. 2466 depot maintenance  allocation and reporting requirements and with DOD financial regulations  that implement these requirements.
section_title: Inadequate Cost Data Used to Show Compliance With Applicable Statutes
paragraphs: Because of inadequate cost visibility and accountability, DOD and Navy  comptroller officials question the reliability of Pearl Harbor’s data that are  used to show compliance with the Chief Financial Officers Act (P.L. 101- 576) and establish and measure performance against goals under the  Government Performance and Results Act (P.L. 103-62). In some instances,  officials have used rough estimates to comply with the acts.
The Chief Financial Officers Act requires federal agencies to develop and  report cost information and periodic performance measurements. Cost  information is necessary for establishing strategic goals, measuring service  efforts and accomplishments, and reporting actual performance against  established goals and is essential for assessing governmental  accountability. In addition, the Government Performance and Results Act,  which mandates performance measurements by federal agencies, requires  each agency to establish performance indicators for each program and  measure or assess relevant outputs, service levels, and outcomes of each  program as a basis for comparing results with established goals.
According to OSD and Navy comptroller officials, the reliability of the data  provided by the Pacific Fleet and Pearl Harbor officials to show  compliance with the Chief Financial Officers Act and the Government  Performance and Results Act was questionable. For example, Pacific Fleet  and Pearl Harbor officials developed rough estimates of the overhead cost  rates for maintenance shops for incorporation with other cost data to show  compliance with the acts. As discussed previously, overhead rates were  allocated to maintenance shops prior to consolidation so that the total cost  of operations would be captured through the reimbursable rates the former  shipyard charged to its customers. Pacific Fleet and Pearl Harbor officials  believe there is no longer a need to determine overhead costs by  maintenance shop because such costs are no longer accumulated for the  purposes of developing data to be factored into the consolidated facility’s  reimbursable rate. Although Pacific Fleet and Pearl Harbor officials  developed rough estimates of these overhead rates for the facility in fiscal  year 1999, OSD and Navy comptroller officials said that they were  imprecise at best. Pacific Fleet and Pearl Harbor officials acknowledged  that they have had difficulties providing data that are timely and reliable  and that can be used to meet the requirements of applicable statutes.
section_title: Issues Related to the Financial Structure for Consolidations of Ship Maintenance Activities at Pearl Harbor and Elsewhere Are Still Not Resolved
paragraphs: As we discussed in our prior report, OSD and Navy officials differ still over  three key issues related to the financial structure for the consolidation of  ship maintenance activities at Pearl Harbor and other locations. First, OSD  officials believe the Navy should reimburse the working capital fund for  undepreciated capital assets (assets financed through the working capital  fund whose value has not yet been recovered) and assets under  development (assets purchased but not delivered) when a naval shipyard is  transferred to direct appropriations. However, some Navy officials believe  they do not need to refinance these items because they have already been  financed with funds provided by shipyard customers. Second, officials  differ about whether consolidated facilities funded with direct  appropriations will be able, as are naval shipyards operating under the  working capital fund, to continue routine maintenance operations if  potential funding gaps occur at the beginning of fiscal years or when  expected maintenance costs exceed annual appropriations. A working  capital fund is not directly subject to the annual appropriation cycle, which  means shipyard operators can incur some costs without waiting for  enactment of an appropriation and operators are free of reprogramming  limitations and restrictions applicable to direct appropriations. Third,  officials differ about whether funding levels under direct appropriations  will be sufficient to maintain an adequate capital improvement program for  the consolidated facilities funded with direct appropriations because of  uncertainties in competing with other Navy programs and priorities for  funding during the budgeting and appropriation processes.
subsections: section_title: Buyout Costs for Transferring to Direct Appropriations Not Yet Agreed Upon
paragraphs: When the Pearl Harbor pilot was implemented, OSD officials determined  that the Navy would need to make the working capital fund financially  whole if it decided to permanently transfer the former Pearl Harbor  shipyard to direct appropriations. According to OSD officials, the costs of  such transfers, collectively called buyout costs, include liabilities,  accumulated operating results (or net financial position), accrued  employee leave, and undepreciated capital assets. Because DOD financial  management regulations (vol. 11B, ch. 51) include only general procedures  governing the transfer of working capital fund activities to direct  appropriations, DOD’s processes and procedures for such transfers are  open to interpretation and some Navy officials are disputing the transfer  costs determined by OSD. The financial management regulations primarily  address accounting procedures for transferring functions and do not  specifically address processes and procedures for identifying all the  categories (types) of costs and amounts that should be paid when a fund  activity transfers to direct appropriations. Several OSD and Navy officials  involved in the transfer believe that without more specific guidance the  Navy will continue to dispute OSD’s determination of buyout costs as the  Navy considers transferring other shipyards to direct appropriations.
OSD and Navy officials differ on whether the Navy should reimburse the  working capital fund for the value of the former shipyard’s undepreciated  capital assets and assets under development, and the Navy has requested a  waiver for the accrued leave liability. If the former Pearl Harbor shipyard is  formally transferred from the working capital fund, OSD officials believe  the Navy should pay the fund an estimated $101.4 million for undepreciated  capital assets and $9 million for assets under development. However, some  Navy officials believe that the former shipyard’s customers have already  paid for these assets and that they do not need to request or allocate  appropriations to pay them. Additionally in May 1998, the Navy requested a  waiver from the Office of Management and Budget on paying the former  shipyard’s accrued leave liability, reported to be $14.3 million by OSD.  However, the Office of Management and Budget rejected the Navy’s  request. Should the Navy decide to permanently transfer all naval shipyards  from the fund, the Navy could be required to pay more than $553 million  based on OSD and Navy data for these items: $390 million for  undepreciated assets, $76 million for assets under development, and  $87 million for accrued leave liability.
In fiscal year 1999, the Navy paid the working capital fund $18.4 million for  the former Pearl Harbor shipyard’s accumulated operating results,  obligations not yet paid, work items in inventory, and receivables less  payables. These selected buyout costs were derived through a series of  lengthy meetings with OSD and Navy officials.
section_title: Less Flexibility to Continue Maintenance Operations During Potential Funding Gaps and Shortfalls Is a Concern
paragraphs: OSD and Navy officials differ about whether the consolidated facility will  be able, as are naval shipyards financed under the working capital fund, to  continue routine ship maintenance operations if potential funding gaps  occur at the beginning of fiscal years or expected maintenance costs  exceed annual appropriations. Because a working capital fund is not  directly subject to the annual appropriation cycle, the fund allows former  shipyard operators to incur some costs without waiting for enactment of an  appropriation and provides them freedom from reprogramming limitations  and restrictions applicable to regular appropriations.
subsections: section_title: Continuation of Routine Maintenance Operations Through Potential Funding Gaps at the Beginning of Fiscal Years Is a Concern
paragraphs: OSD officials are concerned that the consolidated facility will not be able to  continue routine ship maintenance operations at the beginning of fiscal  years if a funding gap occurs. A funding gap would occur if neither  appropriations nor continuing resolutions were enacted before the start of  a fiscal year. Operating under the working capital fund, former shipyard  operators were allowed to incur some costs without waiting for enactment  of an appropriation. However, some Pacific Fleet and Naval Sea Systems  Command officials said that the flexibility provided by the fund for  activities to continue maintenance operations during periods without  appropriations or continuing resolutions would extend only a few weeks.  According to these officials, this limited flexibility was considered a minor  factor compared with the overall benefits of using direct appropriations to  fund the consolidated facility. However, OSD officials are still concerned  about eliminating this flexibility on ship maintenance activities, and they  note that shipyards using the working capital fund are able to continue ship  maintenance projects from one fiscal year to another.
section_title: Continuation of Routine Maintenance Operations If Expected Costs Exceed Appropriations Is a Concern
paragraphs: OSD officials have concerns about whether the consolidated facility will be  able, as are naval shipyards operating under the working capital fund, to  continue routine ship maintenance operations when expected maintenance  costs exceed annual appropriations. As discussed previously, activities  operating under the working capital fund are not directly subject to the  annual appropriation cycle and can continue operations through the end of  fiscal years without being concerned about reprogramming limitations and  restrictions applicable to direct appropriations.
In fiscal year 1999, the Pacific Fleet transferred $30.8 million to alleviate  the funding shortfall for the consolidated facility (see table 3). According to  Pearl Harbor officials, a funding shortfall made it difficult to execute  planned work on schedule because of uncertainties about whether the  necessary funds would be obtained from another source in sufficient time  to meet schedules.
As shown in table 3, the Pacific Fleet moved a reported $30.8 million in  budget authority, mostly in the last 2 months of fiscal year 1999, to meet the  funding shortfall the consolidated facility experienced in fiscal year 1999.  The Pacific Fleet allocated a reported $244.9 million in ship depot  operations support funds to the consolidated facility in fiscal year 1999,  $9 million less than originally requested. The Fleet later allocated the  consolidated facility an additional $300,000 in depot operations support  funds and an additional $30.5 million in ship depot maintenance funds.  According to Navy officials, the Fleet obtained most of the $30.8 million  from other fleet-funded commands and activities.
According to Pacific Fleet and Pearl Harbor officials, the funding shortfall  resulted because the budgeting process for the consolidated facility in  fiscal year 1999 did not adequately accommodate changes inherent in the  transfer from working capital fund to direct appropriations. They note that  even after the transfer to direct appropriations, the Navy funded the  consolidated facility at less than its projected workload for fiscal year 1999.  Consequently, the budgeted amount was insufficient to fund the overtime  and borrowed workers needed to accomplish the workload in fiscal year  1999 and they had to transfer and reprogram funds originally allocated to  other activities to meet the funding shortfall. Additionally, some  maintenance work was postponed to another time.
section_title: Uncertainties in the Capital Improvement Program
paragraphs: Because of uncertainties in competing with other Navy programs and  priorities for funding during the budgeting and appropriations processes,  OSD and Navy officials differ about whether funding levels under direct  appropriations will be sufficient to maintain an adequate capital  improvement program for the consolidated facility. In the management  agreement for the consolidation of the former Pearl Harbor Naval Shipyard  and Naval Intermediate Maintenance Facility, the Naval Sea System  Command is identified as responsible for requirements determination,  planning, programming, budgeting, and acquisition cost of plant property  and industrial plant equipment. Following the Command’s approval and the  Pacific Fleet’s concurrence, capital improvement requirements are  forwarded to the Chief of Naval Operations, where the requirements must  compete against other Navy programs and priorities for limited  appropriated funds. The former Pearl Harbor shipyard depreciated its  capital assets and collected this expense through its reimbursable rate  charged to customers and received a reported $56 million for capital  improvements during fiscal years 1993-98.
Senior OSD officials have concerns whether adequate funding will  materialize in the future because the consolidated facility must compete for  scarce funds under direct appropriations with other Navy programs and  priorities. Recently, the Navy allocated $7.5 million in fiscal year 1999  appropriations and $5.7 million in fiscal year 2000 appropriations for  capital improvement items at Pearl Harbor. Fiscal year 2001 funding totals  $18.6 million, which includes a $17-million congressional add-on for the  consolidated facility. However, according to senior OSD and Navy officials,  the Navy has budgeted less than 5 percent of the identified program  requirements for the consolidated facility for fiscal years 2003-07.
section_title: Consolidation Has Provided Some Important Benefits, Although Overall Results of the Test Metrics Are Inconclusive
paragraphs: The consolidation of the shipyard and intermediate ship maintenance  activities at Pearl Harbor has improved and streamlined maintenance  operations by making more effective use of workers and facilities, but  overall results of the test metrics are inconclusive. The consolidation has  increased overall flexibility of ship maintenance activities in Hawaii by  establishing a single workforce from two work centers and reducing the  maintenance infrastructure. Further, data for two of the nine metrics  indicate improvements since the consolidation: the cost to provide a direct  maintenance hour was less in fiscal year 1999 and the labor hours  expended to deliver a direct maintenance hour were fewer in fiscal year  1999 and half of fiscal year 2000. However, because the consolidated  facility did not routinely and systematically collect and report the full cost  of operations, the cost to provide a direct maintenance hour during fiscal  year 2000 was not available on an ongoing basis. The results for the seven  other metrics are less conclusive of the consolidation’s accomplishments  because factors unrelated to the consolidation affected the data, the  change in the overall performance was insignificant, or the data indicated  both positive and negative results. However, lessons learned from the  metrics used in evaluating the Pearl Harbor consolidation should be useful  in framing evaluation plans for future consolidations at other naval  locations. Although the Navy is working to improve its performance, the  consolidated facility continues to experience difficulties in completing  long-term, complex ship maintenance projects on schedule, as did the  former Pearl Harbor shipyard. Other potential benefits of the consolidation  have not been fully realized because the planned number of overhead  workers has not been moved to direct maintenance positions and  equipment has not been entirely consolidated to increase productivity.
subsections: section_title: Benefits Have Been Achieved
paragraphs: As the Navy envisioned, the consolidation has integrated workers from two  work centers into a single workforce and reduced the maintenance  infrastructure in Hawaii. As planned, the Navy has integrated  approximately 4,000 workers from two separate work centers into a  common pool, thereby increasing management flexibility in assigning  workers to maintenance projects. Prior to the consolidation, it was difficult  to shift work or personnel between maintenance activities due to multiple  independent organizational and financial structures. Accordingly, when  administrative and financial requirements restricted the movement of  workers, shipyard maintenance personnel not working on a specific  maintenance project were sent to the excess labor shop to wait for an  assignment and perform non-ship work such as facility maintenance or  grounds-keeping. Between 100 and 200 workers were assigned daily to this  shop. By integrating the two workforces, maintenance shops now have  more flexibility in assigning excess workers to other projects, including  projects historically completed by the former intermediate maintenance  facility. In our 1999 report, we noted that the number of workers assigned  daily to the excess labor shop had dropped to below 10 after the  consolidation. Although Pearl Harbor officials told us during this review  that the number of workers assigned daily to the excess labor shop  continued to drop, we could not verify the statement because the  consolidated facility had revised its process for assigning the workforce  and no longer identifies excess workers.
Because of the consolidation, the Navy has reduced the maintenance  infrastructure at Pearl Harbor. For example, 13 (125,782 square feet) of the  27 buildings previously used by the former Naval Intermediate  Maintenance Facility were turned over to the Commander, Navy Region  Hawaii. While the consolidated facility will retain 6 of the remaining 14  intermediate maintenance buildings, Pacific Fleet and Pearl Harbor  officials plan to vacate another six (20,074 square feet) and is reviewing the  disposition of two (16,996 square feet) buildings. As of May 2000, the  Commander, Navy Region Hawaii, had demolished or had plans to  demolish three former intermediate maintenance buildings and was able to  demolish two of its buildings after tenants moved into vacated intermediate  maintenance buildings. The demolition cost for all five buildings and a  portion of an additional building is estimated at $1.8 million, with a  projected annual cost avoidance of $312,000 or a payback period of a little  less than 6 years.
section_title: Data for Two of the Nine Test Metrics Indicate Improvements
paragraphs: Data for the following two key metrics indicate improvements in  performance. It is important to note that the Naval Audit Service expended  significant resources to develop and validate the data for these two  metrics, which are the most reliable metrics for making pre- and post- consolidation comparisons.
subsections: section_title: Total Cost of a Maintenance Shop Direct Labor Hour of Work Delivered Is Less
paragraphs: Fiscal year 1999 data for this metric indicate that the cost of delivering one  direct maintenance hour is less since the consolidation. The Naval Audit  Service determined that it cost $138.99 to deliver a maintenance shop  direct labor hour in fiscal year 1999, compared with the adjusted baseline  cost of $144.51 in fiscal year 1997.
Pearl Harbor officials were unsuccessful in their attempts to determine the  total cost to provide a direct maintenance hour during fiscal year 2000  because of difficulties in reconciling cost data between the consolidated  facility’s systems and in duplicating the Naval Audit Service’s methodology  for developing the metric. As discussed in chapter 2, the consolidated  facility’s management and financial systems do not routinely and  systematically accumulate the cost data to generate the metric. Because of  concerns about the adequacy of data before the consolidation, the Chief of  Naval Operations and the Commander, Naval Sea Systems Command,  asked the Naval Audit Service to determine the cost of operations for the  former shipyard and the intermediate maintenance facility in fiscal year  1997. The Audit Service was later tasked to determine the fiscal year 1999  post-consolidation cost of operating the consolidated facility, compute the  cost of a maintenance shop direct labor hour, and compare the fiscal year  1999 results with the fiscal year 1997 baseline. To develop the metric, the  Audit Service collected cost and maintenance data from the consolidated  facility and other activities. Navy officials said there is no decision on  whether the metric value will be developed and used to measure the  performance of the consolidated facility in fiscal year 2000.
section_title: Total Labor Hours Expended to Deliver a Maintenance Shop Direct Labor Hour Are Less
paragraphs: Data for this metric indicate that delivering one direct maintenance hour in  fiscal years 1999 and 2000 has taken fewer labor hours since the  consolidation. For example, the Navy estimates that delivering a  maintenance shop direct labor hour took 3.15 activity labor hours  (overhead and direct maintenance hours) in fiscal year 1997, 3.03 hours in  fiscal year 1999, and 3.06 hours through the middle of fiscal year 2000.
section_title: Results for the Seven Other Metrics Are Inconclusive
paragraphs: The results of the following metrics are inconclusive because decisions and  circumstances external to the consolidation have driven the results, the  change in the overall performance was insignificant, or the data indicated  both positive and negative results.
subsections: section_title: Total Current Ship Maintenance Program Work Items Completed
paragraphs: Although fewer Current Ship Maintenance Program work items were  completed following the consolidation, the results of this metric are  inconclusive because they were influenced by the decrease in the number  of military personnel since the consolidation, the increased use of  borrowed workers since the consolidation, and other factors unrelated to  the consolidation. Furthermore, several Navy officials are concerned about  using work items from the Current Ship Maintenance Program to measure  the consolidation’s success or failure because the work items vary in terms  of labor hours and skills required repairing them. For example, work  ranges from simple jobs (such as replacing a label or light bulb on a control  panel) to complex jobs (such as overhauling a pump or nuclear valve).  Additionally, the requirements to overhaul one pump differ from other  overhauls depending on the problem and the type of pump. Prior to the  consolidation, 19,777 work items were completed in fiscal year 1997  compared to 11,501 work items completed by the consolidated facility in  fiscal year 1999. As of August, the completion rate for fiscal year 2000 was  lower than in preceding years.
Although the consolidated facility was expected to maintain the same  completion rate, several Navy officials believed this expectation was  unreasonable because the number of military enlisted personnel decreased  from 1,275 in October 1996 to 616 in April 1999. On the other hand, the  increased use of borrowed workers from other naval shipyards since the  consolidation has had a positive influence on the metric results. For  example, the consolidated facility expended 82,785 borrowed labor hours  more in fiscal year 1999 (a total of 129,293 borrowed labor hours) than in  the baseline fiscal year 1997 (a total of 46,508 borrowed labor hours) before  the consolidation. Furthermore, as of the end of May 2000, the consolidated  facility had already expended 188,344 borrowed labor hours, far exceeding  its fiscal years 1997 and 1999 use of borrowed workers. Although the Navy  uses borrowed workers to balance total resources with workload among its  shipyards, their addition to the workforce provided managers more  flexibility in assigning personnel to work on the items and had a positive  influence on the metric results.
According to Navy officials, because the consolidated facility was  overloaded with work during fiscal year 1999, the facility had to ensure that  at least the critical work was completed. Consequently, some Current Ship  Maintenance Program work was designated as low priority and not  accomplished, thereby impacting negatively on the results for this metric.
section_title: Total Current Ship Maintenance Program Work Items in the Backlog
paragraphs: Although the Current Ship Maintenance Program backlog was reduced  following the consolidation, the results of this metric are inconclusive  because of many of the same reasons discussed in the previous section.  Historically, Navy officials have measured the material condition of their  ships based on the number of backlogged Current Ship Maintenance  Program work items: fewer backlogged items imply the ships are in better  condition. Following the consolidation, the fiscal year 1997 backlog of  17,733 work items was reduced to 15,791 work items in fiscal year 1999 and  to 14,279 work items at the end of July 2000. However, the Current Ship  Maintenance Program backlog has been affected by the decrease in the  number of military personnel and the increased use of borrowed workers  since the consolidation. Furthermore, the following factors outside the  direct influence of the consolidation affected the backlog:  Decommissions of ships homeported at Pearl Harbor decreased the  backlog by the number of work items recorded for the ships.
Maintenance inspections increased the backlog by the number of  unrecorded work items identified by the inspection team.
Procedural changes in identifying and recording work items may  increase or decrease the backlog depending on whether the changes  weaken or strengthen the process.
section_title: Schedule Adherence of Chief of Naval Operations Maintenance Projects
paragraphs: Although the data for this metric indicate improvement following the  consolidation, the results are inconclusive because the facility’s ability to  adhere to the work schedules established for Chief of Naval Operations  maintenance projects was improved by the increased use of borrowed  workers since the consolidation. Following the consolidation, the  11.4 percent late schedule adherence index achieved during fiscal year 1997 decreased to 8.6 percent late in fiscal year 1999—the lower  percentile indicates that Chief of Naval Operations projects are being  completed closer to their scheduled completion dates. However, because  of the increased use of borrowed workers, it is possible to assign more  workers to Chief of Naval Operations maintenance projects, which should  result in more work completed and quicker completion of maintenance  projects. In essence, this increase in the maintenance workforce had a  positive influence on the results for this metric.
As did the former Pearl Harbor shipyard, the consolidated facility has  difficulties in completing long-term, complex Chief of Naval Operations  ship maintenance projects (Depot Modernization Period) on schedule. For  example, Pearl Harbor experienced a 9-month delay in completing a Chief  of Naval Operations maintenance project (Depot Modernization Period) for  the U.S.S. Chicago. This delay caused slippages in the completion of other  long-term Chief of Naval Operations projects because employees originally  scheduled to work on succeeding projects were still committed to the  U.S.S. Chicago. In addition, since the consolidation, Chief of Naval  Operations projects must compete for workers with other Pacific Fleet  maintenance priorities in Hawaii. Short-term Fleet maintenance projects  and emergent repairs are given a higher priority in staffing decisions than  longer, more complex maintenance projects. Approximately 25 percent of  the consolidated facility’s workload involve short-term Fleet maintenance  projects or emergent repairs to operational surface ships and submarines.  Prior to the consolidation, Chief of Naval Operations projects were  completed by the former Pearl Harbor shipyard and did not compete for  workers with short-term Fleet maintenance projects or emergent repairs,  because they were performed by the former intermediate maintenance  facility’s workforce. According to Pearl Harbor officials, they are trying to  improve their performance on long-term Chief of Naval Operations projects  through better resource allocation procedures, process improvements, and  resource sharing with other naval shipyards and, consequently, have  reduced the time frame to complete recent long-term projects for the  U.S.S. Key West and the U.S.S. Pasadena.
section_title: Rework Index for Chief of Naval Operations Maintenance Projects
paragraphs: Although the data for this metric show a slight degradation in rework  quality from 0.76 percent in fiscal year 1997 to 1.08 percent in fiscal year  1999, these results are inconclusive because the quality of work did not  deteriorate significantly as a result of the consolidation. According to the  Navy, the purpose of this metric was to ensure that depot-level work  completed by the consolidated facility did not deteriorate from the former  shipyard’s historical level of work quality. In its comments on a draft of this  report, DOD stated that “successful performance” is indicated when there  is no change in value of the metric between fiscal years. According to the  Navy’s contractors, no specific conclusions can be drawn from comparing  fiscal year 1997 and fiscal year 1999 rework indexes because the change in  the overall performance was insignificant. The Navy has not yet generated  the rework figures for fiscal year 2000.
section_title: Activity Work Schedule Integrity Index
paragraphs: Although data for this metric indicate a slight improvement in  performance, overall results are inconclusive because the data  (1) indicated both positive and negative results depending on the type of  maintenance work and (2) depended significantly on the reliability of time  (labor hours) estimated to complete the work. The stated objective of this  metric is to measure the consolidated facility’s schedule integrity by  comparing budgeted work scheduled (labor hours) with the actual amount  of work performed (labor hours). The index decreased from 1.23 in fiscal  year 1997 to 1.16 in fiscal year 1999, indicating a slight improvement in  overall performance following the consolidation in fiscal year 1999.  Additionally, the fiscal year 1999 data indicated improvement in two of the  three types of maintenance projects analyzed. The index increased to 1.2  during the first 3 months of fiscal year 2000, indicating a slight degradation  in overall performance since fiscal year 1999 but still a slight improvement  over the fiscal year 1997 baseline. However, senior Navy officials said the  metric is more of an indicator of efficiencies achieved by changes in  maintenance procedures rather than efficiencies caused by the  consolidation. There is nothing in the consolidation’s design or structure  that targeted maintenance procedures for improvement. According to the  Navy’s contractors, this metric should not be used to measure schedule  integrity of the consolidated facility because it mixes schedule data with  cost data, resulting in subjective data that are not accurate indicators of the  facility’s schedule integrity. The Navy has not generated the index for all of  fiscal year 2000.
section_title: Casualty Reports Caused by Activity Work
paragraphs: Although the data for this metric indicate a slight degradation in  performance following the consolidation, the results are inconclusive  because the change in the overall performance was insignificant with  respect to the consolidation’s accomplishments and there was no clear  relationship between the reports and the quality of work performed.  According to the Navy, the purpose of this metric is to ensure that depot- level work completed by the consolidated facility did not deteriorate as a  result of the consolidation. It is based on an analysis of casualty reports  that are filed by the ship after any equipment failure and, in some instances,  identify maintenance work improperly performed by the consolidated  facility.
In its comments on a draft of this report, DOD stated that the metric  indicates “successful performance” when there is no change in value of the  metric from the former shipyard’s historical level of work quality. Although  the number of reports identifying equipment failures relating to the  maintenance work increased from two in the baseline fiscal year 1997 to  four in fiscal year 1999 after the consolidation, these numbers are relatively  insignificant considering that the consolidated facility repairs several  hundreds of pieces of equipment annually. According to the Navy’s  contractors, the number of casualty reports related to depot-level work  was insignificant before and after the consolidation, indicating that there  was no major problems with the end quality of depot maintenance work  completed at Pearl Harbor during both periods. However, the contractors  questioned whether casualty reports are useful measurements because  there was no clear relationship between the reports and the quality of work  performed during a maintenance project. For example, because there are  no standard procedures or methods for writing casualty reports, some  reports did not explicitly identify the cause of the equipment failure. In  other instances, the equipment failure identified in the casualty reports can  be coincidental and unrelated to any work performed by the consolidated  facility. The Navy has not yet reviewed the casualty reports for fiscal year  2000 to identify equipment failures caused by work improperly performed  by the consolidated facility.
section_title: Earned Value
paragraphs: Results for this metric are inconclusive because the change in the overall  performance was insignificant and the data indicated both positive and  negative results depending on the work and ship type. To determine the  earned value metric, labor hours to complete a unit of work in fiscal year  1997 are compared with hours to complete the same unit of work in fiscal  year 1999 and later to measure the consolidation’s effect on maintenance  outputs. However, after the analysis was completed for fiscal year 1999,  Navy and contractor officials concluded that the change in the overall  performance based on this metric was insignificant. In addition, the  supporting data for the metric, while indicating an overall decline in  performance since the consolidation, showed both positive and negative  results depending on the specific work and type of ship sampled. The 1999  data for submarines showed more labor hours were expended for four cost  drivers and less for one cost driver compared to data for fiscal year 1997.  The 1999 data for surface ships showed more labor hours were expended  for one cost driver and less for two cost drivers compared to fiscal  year 1997. The Navy has not explored the earned value metric for fiscal  year 2000.
section_title: Some Planned Benefits Have Yet to Be Achieved
paragraphs: The Navy has not moved the projected number of overhead workers to  direct maintenance positions to increase productivity and has not  consolidated all the industrial plant equipment as envisioned in the Pilot  Study Report.
The consolidation did not result in the projected number of overhead  workers moving to direct maintenance work−an important element in  increasing the consolidated facility’s productivity. To increase productivity,  one of the stated goals of the Pearl Harbor consolidation was to increase  the number of direct maintenance workers relative to the number of  supervisors and overhead personnel without increasing costs. Logically,  increasing the number of maintenance workers should result in increased  maintenance. To accomplish this goal, the Pilot Study Report proposed  that 95 civilian overhead workers be moved to positions in direct  maintenance work; however, only four workers moved. According to  Pacific Fleet and Pearl Harbor officials, moving civilians to such positions  has been impractical because of (1) the time required for overhead workers  to become skilled, usually several years; (2) personnel regulations  implementing the process for downgrades; and (3) potentially negative  reaction by workers and employee representatives. In addition, several  department directors and overhead supervisors said they were unwilling to  release any personnel because of the increased workload due to changes in  administrative and financial systems since the consolidation. Furthermore,  other Navy officials said that efforts to move supervisors to direct  maintenance resulted in too few supervisors, which led to problems in  planning and coordinating work on maintenance projects. Pacific Fleet and  Pearl Harbor officials believe that moving overhead workers to direct  maintenance work is too difficult, and they believe this will not happen.
Industrial plant equipment has not been completely consolidated at  integrated maintenance shops to improve maintenance operations, as  suggested in the Pilot Study Report. Of the 271 items of industrial  equipment at the former intermediate maintenance facility, 114 items were  relocated, 132 items were mothballed, and 25 items were kept operational  at their original location. According to Pearl Harbor officials, the removal  and installation of the 114 relocated items cost little or nothing. Although  many of the 132 mothballed items are in better condition and newer than  the same type of equipment in the consolidated shops, the funding required  to relocate the intermediate maintenance equipment has not been  available. Most mothballed items are semipermanently attached heavy  equipment that requires funding to remove, transport, and install  elsewhere. Officials do not plan to request funding to move the equipment  until after the pilot period because of budgetary constraints.
section_title: Conclusions and Recommendations for Executive Action, Agency Comments, and Matters for Congressional Consideration
subsections: section_title: Conclusions
paragraphs: Although OSD concurred with the intent of the recommendations in our  1999 report to resolve financial management issues and assure cost  visibility, the Navy’s consolidation of ship maintenance activities at Pearl  Harbor has not yet shown that it can adequately identify and account for  the total cost of operations or distinguish between depot and intermediate  work performed by consolidated ship maintenance activities on an ongoing  basis. Such data are needed to comply with the Statement of Federal  Financial Accounting Standards No. 4 requirements for determining full  cost of operations, which are intended to provide managers relevant and  reliable data for making resource allocations, program modifications, and  performance evaluations. Additionally, improved cost and performance  data are needed to show compliance with 10 U.S.C. 2466, the Chief  Financial Officers Act, and the Government Performance and Results Act.  Although managers and workers performing ship maintenance and repairs  at Pearl Harbor may not be directly affected, the lack of reliable cost and  performance data impairs the ability of senior OSD and Navy officials to  make timely, well-informed decisions to facilitate the effective and efficient  management of the Navy’s overall ship maintenance activities, the Pearl  Harbor consolidation, and other potential consolidations of ship  maintenance activities. More specifically, to provide senior OSD and Navy  officials reliable cost and performance data to facilitate their decision- making process, the Navy needs to implement a method that includes  appropriate costing methodologies or techniques that provide sufficient  data to (1) adequately identify and account for the total cost of operations,  (2) distinguish between depot and intermediate work performed by  consolidated ship maintenance activities, and (3) show compliance with  10 U.S.C. 2466, the Chief Financial Officers Act, the Government  Performance and Results Act, DOD regulations, and federal accounting  standards.
Other consolidations of naval shipyards and intermediate maintenance  activities are likely, even though little progress has been made since our  prior report toward resolving OSD’s and the Navy’s differences over key  issues related to the financial structure for the consolidation of ship  maintenance activities at Pearl Harbor and for potential consolidations at  other naval locations. Consequently, several outstanding financial issues  still need to be resolved to facilitate effective and efficient ship  maintenance operations at Pearl Harbor and other potential  consolidations. First, OSD and Navy officials differ over the appropriate  amount the Navy should compensate the working capital fund when a  naval shipyard leaves the fund. Because DOD regulations provide only  general guidance governing the transfer of working capital fund  organizations, more specific guidance is needed on the processes,  procedures, and costing methodology to help resolve the Pearl Harbor  dispute and prevent similar occurrences in other potential transfers of  naval shipyards to direct appropriations. Second, officials differ over the  potential impact of using direct appropriations on the consolidated  facility’s flexibility to, as are naval shipyards operating under the working  capital fund, continue routine ship maintenance operations if potential  funding gaps occur at the beginning of fiscal years or expected  maintenance costs exceed annual appropriations. This needs to be  addressed to determine whether steps are considered necessary to mitigate  the risk of ship maintenance activities funded with direct appropriations  not being able to continue routine operations during funding gaps at the  beginning of fiscal years and funding shortfalls at the end of fiscal years.  Third, officials still differ about whether funding levels under direct  appropriations will be sufficient to maintain an adequate capital  improvement program for the consolidated facility, because of  uncertainties in competing with other Navy programs and priorities for  funding during the budgeting and appropriations processes. This needs to  be resolved to help assure that capital improvement programs for  consolidated ship maintenance activities funded with direct appropriations  receive proper funding.
Although the Pearl Harbor consolidation has made more effective use of  workers and facilities in Hawaii, the data available for the test metrics up to  now provide an inconclusive assessment of the consolidated facility’s  overall accomplishments in achieving greater efficiencies and lowering  costs. Consequently, overall results of the metrics should not be used as the  basis for making future consolidations of naval shipyards and intermediate  maintenance activities. However, lessons learned from the metrics used in  evaluating the Pearl Harbor consolidation should be useful in framing  evaluation plans that would provide more conclusive data for future  consolidations at other naval locations.
section_title: Recommendations for Executive Action
paragraphs: We recommend that before the Navy implements permanent changes at the  Pearl Harbor facility and any other consolidations of naval shipyards and  intermediate maintenance activities, the Secretary of Defense direct the  Secretary of the Navy to implement a method to (1) account for the total  cost of consolidated ship maintenance operations on an ongoing basis and  (2) distinguish between depot and intermediate work of consolidated ship  maintenance activities. The method should include appropriate costing  methodologies or techniques that provide sufficient data to show  compliance with 10 U.S.C. 2466, the Chief Financial Officers Act, the  Government Performance and Results Act, DOD regulations, and federal  accounting standards.
To help prevent disputes in the transfer of working capital fund activities to  direct appropriations, we recommend that the Secretary of Defense direct  the Under Secretary of Defense (Comptroller/Chief Financial Officer) to  clarify DOD financial management regulations, to include specifying the  processes, procedures, and costing methodology, governing the transfers of  working capital fund activities to direct appropriations.
We further recommend that before permanent changes are made at Pearl  Harbor and any further consolidations are implemented at other naval  locations, the Secretary of Defense direct the Under Secretary of Defense  (Comptroller/Chief Financial Officer) and the Secretary of the Navy to  resolve issues related to (1) buyout costs for the former Pearl Harbor  shipyard if the Navy decides to formally transfer it to direct appropriations,  (2) loss of flexibility to continue routine ship maintenance operations  through potential funding gaps at the beginning of fiscal years or when  expected maintenance costs exceed annual appropriations, and (3) funding  for the capital improvement program for the consolidated facility.
We recommend that before the Navy consolidates additional shipyards and  intermediate maintenance activities, the Secretary of Defense direct the  Secretary of the Navy to develop additional metrics to measure the  efficiency and effectiveness of consolidated ship maintenance activities,  drawing on lessons learned from the consolidation at Pearl Harbor.
section_title: DOD Comments and Our Evaluation
paragraphs: In its written comments on a draft of this report, DOD agreed with the  report’s recommendations. However, it did not indicate specific actions or  milestones for resolving the financial issues first raised in our 1999 report  on the Pearl Harbor consolidation. As a result, we have added matters for  congressional consideration to help assure timely implementation of our  recommendations for executive action.
section_title: Matters for Congressional Consideration
paragraphs: The Congress may wish to require the Secretary of the Navy to report the  Navy’s strategy and time frame for the implementation of a method to  (1) account for the total cost of consolidated ship maintenance operations  on an ongoing basis and (2) distinguish between depot and intermediate  work of consolidated ship maintenance activities. In addition, the Congress  may wish to require the Under Secretary of Defense (Comptroller/Chief  Financial Officer) and the Secretary of the Navy to report their strategy and  time frame for the resolution of issues related to (1) buyout costs for the  transfer, (2) loss of flexibility to continue routine ship maintenance  operations through potential funding gaps at the beginning of fiscal years  or when expected maintenance costs exceed annual appropriations, and  (3) funding for the facility’s capital improvement program.