Defense Budget: Capital Asset Projects Undergo Significant Change Between Approval and Execution
Published: 1994-12-28T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Pursuant to a congressional request, GAO reviewed the Department of Defense's (DOD) capital budget, focusing on: (1) whether DOD carries out the projects identified in its capital budget; and (2) the effectiveness of the DOD capital budget preparation and review process.
section_title: What GAO Found
paragraphs: GAO found that: (1) DOD continues to have problems managing its capital asset program and carrying out its capital budget; (2) defense activities cancelled or postponed 86 percent and 65 percent of their fiscal year (FY) 1993 and FY 1994 capital budget projects, respectively, due to weaknesses in the budget justification, preparation, and review processes; (3) uncertainties due to base closings and realignments, budget reductions, and DOD management initiatives also contributed to other project cancellations; (4) activity managers usually replace cancelled projects with other projects, so the projects actually carried out bear little resemblance to those in the capital budget submitted to Congress; (5) new DOD guidance for justifying capital projects, if implemented, will strengthen the Defense Business Operations Fund's (DBOF) capital budgeting process; (6) the new guidance could be improved by directly linking capital projects to long-range investment needs and using investment criteria that maximize benefits and a cultural change; (7) proper implementation of the new guidance requires high-level management attention, training, and appropriate oversight mechanisms; and (8) listing capital asset program deficiencies in DOD Federal Managers' Financial Integrity Act reports would provide an added level of management attention.

section_title: Letter
paragraphs: The Department of Defense (DOD) is responsible for informing the Congress about its capital asset needs in an annual Defense Business Operations Fund (DBOF) capital budget. Capital assets include such things as equipment, minor construction, and management information systems. In fiscal year 1994, the DBOF capital budget totaled $1.8 billion.
Concerned about apparent discrepancies between the DBOF capital budget and actual capital asset spending, the Chairman, Subcommittee on Oversight of Government Management, Senate Committee on Governmental Affairs, asked us to (1) determine if DOD carries out the projects identified in the capital budget and (2) assess the effectiveness of DOD’s capital budget preparation and review process. The House and Senate Committees on Armed Services (in the Conference Report on the fiscal year 1994 National Defense Authorization Act) also required us to determine the extent that DOD carries out the DBOF capital budget.
subsections: section_title: Background
paragraphs: In fiscal year 1992, DOD consolidated nine industrial and stock funds into a single revolving fund called DBOF. The establishment of DBOF did not change any previous organizational reporting structure or command authority relationship. DOD consolidated cash management activities, which helped reduce the amount of cash needed to operate the funds, but functional and cost management responsibilities for the industrial and stock funds remained with the military departments and defense agencies.
Modeled after private sector business operations, DBOF industrial and stock fund activities have a contractual (buyer-seller) relationship with their customers, primarily other elements in the military departments and defense agencies. These activities, for a fee, provide such services as the overhaul of ships, tanks, and aircraft and sell over 5 million types of vital inventory items, such as landing gears and other aircraft parts. Many of these items are essential to maintaining the military readiness of weapon systems and military personnel. Activities within DBOF have assets reportedly valued at $126 billion and expect fiscal year 1995 revenue of $77 billion, making them equivalent to one of the world’s largest corporations.
When DBOF began in 1991, DOD reinstated a process where capital asset investments costing more than $15,000 are purchased with revolving funds rather than through direct appropriations. DOD funds these capital investments by including depreciation expenses in the prices activities charge their customers. If the amount of depreciation is not sufficient to fully fund the investment program, DOD adds a surcharge to the price. Table 1 identifies the capital budgets for fiscal years 1993 through 1995, along with the amount of the surcharge added each year.
Although capital asset investments are financed through DBOF revolving funds, DOD prepares and submits an annual DBOF capital budget to the Congress, which identifies the projects each activity will undertake during the fiscal year. All projects costing $500,000 or more must be shown as separate line items and fully explained and justified. Items under $500,000, such as forklifts, trucks, and trailers, must be equally justified but can be combined as one budget line item for each business area.
The DBOF Policy and Responsibilities Statement issued on September 27, 1991, and service-level guidance require the services and defense agencies to justify all projects included in the capital budget sent to the Congress.
Among other things, budget developers must document the reasons for planned capital investment purchases and their expected benefits. This justification data should include the workload projections the purchase is based on as well as the source or rationale supporting the projections. In addition, the benefits of a capital project should be supported, depending on its dollar value and purpose, by some type of cost or economic analysis. The statement also requires that this justification data be retained and readily available for review, audit, or evaluation.
Higher service and defense agency command levels review and consolidate field activities’ projects into budget submissions. These submissions are then sent to the DOD Comptroller for further review and evaluation. The Comptroller, in turn, consolidates the budget submissions into the capital budget, which is sent to the Congress.
section_title: Large Percentage of Capital Projects Are Canceled or Postponed
paragraphs: The activities cited in tables 2 and 3 canceled or postponed 86 and  65 percent of the projects they included in the fiscal years 1993 and 1994 capital budgets, respectively. The value of these projects was $40.3 million in fiscal year 1993 (57 percent of the activities’ total capital budgets) and $35.5 million in fiscal year 1994 (47 percent). Although the rate of cancellations and postponements varied, the Army activities, by far, were the least successful in carrying out their capital budgets. Tables 2 and 3 summarize the status of the fiscal years 1993 and 1994 capital budgets for the activities we visited.
When a project was canceled or postponed, officials at the six activities we visited told us they usually substituted it with another project. The Air Force Materiel Command, for example, has given the San Antonio Air Logistics Center reprogramming authority for any project under $500,000. Thus, when the DBOF capital budget is approved and funding levels are established for San Antonio, the local commander has the discretion to use that money for any capital project, not just those in the capital budget. In the fiscal year 1994 capital budget for the San Antonio Air Logistics Center, 77 of the 82 projects were less than $500,000.
Even though the Air Force Systems Command directed the San Antonio Air Logistics Center to keep documentation showing why projects are canceled, local managers at the Center were not clear about these requirements. As a result, some files for canceled projects had been discarded and others were missing justification documents. Therefore, in many cases, we were unable to determine why a project was canceled or postponed.
The Navy activities we visited had similar authority to cancel and substitute capital projects under $500,000. The Army activities, on the other hand, needed approval to cancel a project and substitute it with another. This approval, however, was not hard to obtain, as evidenced by the large percentage of canceled projects at the Army maintenance depots.
DOD officials acknowledged that DBOF activities have not always executed the capital asset program as planned. To address this problem, DOD specifically listed the capital asset projects authorized for execution in the fiscal year 1994 annual operating budgets that were issued to the DBOF activities. The services and DOD components must report any deviation from the approved capital asset program to the DOD Comptroller’s Office. This initiative could help improve program execution.
section_title: Poor Justification Process and Other Factors Caused Cancellations and Postponements
paragraphs: To determine why such a large percentage of projects are canceled or postponed, we interviewed managers at various levels of the capital budget preparation and review process. We also judgmentally selected and reviewed, in detail, 56 fiscal year 1994 budgeted projects for the 6 activities we visited. Based on this work, most cancellations and postponements seem to be occurring because DOD has not corrected the capital budgeting problems that existed before DBOF was created in 1991. In addition, Base Realignment and Closure decisions and other budget uncertainties have created an environment that contributed to capital projects being canceled and postponed.
subsections: section_title: Weaknesses in the Budget Justification Process Have Not Been Corrected
paragraphs: DOD’s industrial activities used revolving funds to finance capital asset purchases between fiscal years 1983 and 1989 under what was known as the Asset Capitalization Program. In fiscal year 1990, the Congress terminated this program and began funding capital equipment purchases through the procurement appropriation. This change, which lasted 2 fiscal years, was aimed at giving the Congress greater visibility over capital equipment purchases. It was necessary because of significant implementation problems service audit agencies, inspector generals, and we repeatedly identified between 1986 and 1990.
Before DBOF was implemented, we reported that DOD had not made the necessary changes to its capital equipment program. At that time, we concluded that the adoption of DOD’s proposal to fund capital equipment through DBOF, prior to correcting the previously reported weaknesses, could continue the abuses and poor management practices we found with the Asset Capitalization Program. As described below, many of the previously described weaknesses have continued under DBOF.
subsections: section_title: Capital Purchases Are Not Based on Long-Range Strategic Plans
paragraphs: One of the major implementation problems with the Asset Capitalization Program was that the industrial fund activities lacked a systematic approach to identifying capital investment opportunities. Although each of the activities was required to prepare long-range (3 to 7 years) strategic plans that identified facility and equipment requirements, these plans were not being used consistently to guide the activities’ current equipment needs or to buy priority equipment. As a result, these activities had no assurance that their most critical long-term needs were being met through the Asset Capitalization Program.
A similar situation existed at the six activities we visited. Although DOD relies on these activities to identify most of their capital equipment needs, these needs were not linked in any systematic way to the activities’ long-range requirements and future missions. In fact, the activities were no longer preparing long-range strategic plans. Several managers told us they lacked the resources to keep long-range plans current, and the downsizing environment reduced the emphasis on long-range planning. Officials at the two Army activities we visited said that long-range plans are no longer required.
Instead, the activities generally relied on local managers to identify and rank capital investment needs. For example, the Naval Air Warfare Center at Warminster, Pennsylvania, initially allows department heads to identify capital projects. These are reviewed and prioritized by a management board, approved by the Warminster Commanding Officer and other officials, and subsequently reviewed by several additional layers in the Navy and the DOD Comptroller.
However, (1) no documentation is prepared that links capital investment projects to Warminster’s long-term or future requirements, (2) Warminster officials canceled or postponed a large number of projects in the 1994 capital budget, and (3) higher level reviewers within the Navy seldom question the projects selected by the field activities. They said the activities and their commands were in the best position to know which projects best suited their requirements. This environment, in our view, does not provide the control necessary to ensure that the projects selected are the ones that best match long-range requirements.
section_title: Capital Projects Are Not Adequately Justified, Reviewed, and Approved
paragraphs: Another major implementation problem with the Asset Capitalization Program was that the industrial fund activities were not complying with procedures for justifying and approving capital projects. By not following these requirements, the activities had no assurance that capital resources were being used on the best projects. It also did not give them a baseline to measure the financial benefits of the projects.
During our audit work, we found that not much had changed. The Army activities, for example, were not performing any project analysis or preparing justifications until the year of execution. That is, justification documents for fiscal year 1993 projects were being prepared in fiscal year 1993, not in fiscal year 1991 when the budget was prepared. As a result, the budget was little more than a listing of projects local managers believed could be done within expected budget allocations. The Army Depot System Command also included a $5.4-million “contingency” amount (for which there were no specific projects) in the fiscal year 1994 capital budget sent to the Congress.
The consequence of this process is that when the Army activities performed an analysis, usually prior to or as part of the procurement action, they found many projects were not high priority. For example, one of Letterkenny’s 1994 projects was for a machine that punches holes in various metal components and precuts reinforcement rods for concrete applications. The existing machine was over 13 years old and beyond its estimated life expectancy. For that reason, a project to replace the machine was included in the budget, but when an analysis later showed that the existing machine was in good shape, the project was canceled. At the time of our review, the Army was aware of the deficiencies in its capital budget justification process and was taking action to improve the process, starting with the fiscal year 1994 capital budget.
Although the problems were not as systemic at the Air Force and the Navy activities we visited, none were fully adhering to sound justification and approval criteria for capital investments. A major part of the problem is that DOD’s current capital investment guidance for DBOF activities does not adequately describe how to justify a capital investment project. More importantly, the services have not yet developed detailed implementing policies and procedures for the field activities to follow. As a result, the activities were using service-level and local guidance that was either severely deficient or out of date. The Air Force, for example, was using expired guidance from the old Asset Capitalization Program. This guidance did not (1) reflect the major reorganization that had taken place at the San Antonio Air Logistics Center, (2) assigned duties to management positions that no longer existed, and (3) identified the capital asset threshold as $5,000 rather than $15,000. Also, the Navy activities we visited were using expired guidance and instructions from other Navy commands.
This lack of policies and procedures was confirmed in a report issued in July 1993 by the DBOF Implementation Review Group. This group, chartered by the Secretary of Defense, concluded that documentation requirements for capital investment decisions are not clearly defined and managers do not understand the process. It recommended that the DOD Comptroller clarify policy on techniques and procedures for investment analysis. This group also issued a DBOF improvement plan in September 1993 that tasked the DOD Comptroller to develop guidance on the techniques and procedures for analysis and documentation of capital projects. Implementation was anticipated for late 1994.
section_title: Program Benefits Are Not Measured
paragraphs: An effective capital investment program contains a mechanism for analyzing whether the projects meet the projected financial benefits and for collecting data so that management can make better investment decisions. This mechanism, called a post-investment analysis, was generally not done under the old Asset Capitalization Program. As a result, when we assessed this program in 1989, we concluded that DOD did know what benefits the program had produced or if equipment purchased had actually been used. This was important because we found many completed projects that had not achieved anticipated results.
Current DBOF criteria requires a post-investment analysis for any capital project that was justified wholly or partially on the basis of economic considerations. During our visits, we did not look at completed projects to determine whether they had achieved anticipated results, but we did find that none of the activities were doing post-investment analyses. A San Antonio Air Logistics Center official said, for example, that the Air Force Materiel Command no longer required this type of analysis. The Navy, on the other hand, had specific criteria for performing a post-investment analysis. Unfortunately, activity managers at the Navy’s Lakehurst and Warminster facilities said that they do not do these type of analyses. A Warminster official cited resource constraints as the primary reason for not performing a post-investment analysis.
section_title: Uncertain Environment Places a High Premium on Capital Investment Planning
paragraphs: All the activities we visited were affected by military downsizings, base closure and realignment decisions, and other DOD management initiatives. Since 1991, for example, the Letterkenny Army Depot has been either closed, downsized, realigned, or had its mission expanded because of the Base Realignment and Closure process. Likewise, the Naval Air Warfare Center at Warminster, Pennsylvania, will move to Patuxent River, Maryland, and become part of the Navy’s Aircraft Division as part of the 1991 Base Realignment and Closure recommendations.
Although the San Antonio Air Logistics Center was not directly affected by closure and realignment decisions, all air logistics centers and DOD depots are going through major changes that could affect their missions. In recent testimony, we discussed such issues as depot closings, DOD efforts to arrive at a proper mix of depot maintenance work between public and private sectors, and the public-private competition initiative DOD is using to allocate the depot maintenance workload.
According to agency officials, these initiatives plus other workload shifts (e.g., B-52 maintenance is moving from San Antonio to the Oklahoma City Depot) has made their capital asset needs hard to predict. Considering that the DBOF budget is prepared at the field level almost 18 months before the fiscal year it will be executed in, these officials said they were not surprised by the large number of cancellations and postponements.
However, in our review of the 56 projects, we were only able to tie 3 of the 36 cancellations and postponements specifically to the uncertainty of the downsizing environment. A number of projects were canceled because of “other higher priority requirements.” This was particularly true at the San Antonio Air Logistics Center. Because this Center did not always keep documentation associated with the cancellation decision, we were not able to determine if the cancellations were linked to specific changes in the Center’s business environment.
We understand the challenge DOD faces in trying to manage its capital investment program during this period of uncertainty. At the same time, we believe adequately justifying capital investment projects and linking them to the long-range strategic plans for each activity is more important than ever. Without the discipline associated with such a sound investment planning process, funds can be wasted on either unneeded or low priority projects.
section_title: Budget Presentation Does Not Adequately Reflect Project Changes
paragraphs: DOD’s capital budget includes projects for 3 fiscal years: the current year under consideration and an update of the 2 prior years’ budgets. For example, the fiscal year 1994 budget, which DOD submitted to the Congress in April 1993, included capital projects proposed for 1994 and an updated list of 1992 and 1993 projects.
We found that it was difficult to track the changes that occurred between the fiscal year 1993 budget and the 1993 update, primarily for two reasons. First, most capital projects (those under $500,000) are summarized by DBOF business area and identified by single line items in the budget. Therefore, it is impossible for us or the Congress to determine which or how many projects have been canceled without comparing detailed backup information for the 2-year period. Second, DOD does not indicate in the budget update what projects over $500,000 are replacements. The only way to tell is to compare the update with the previous year’s budget, which is a labor-intensive effort subject to error. For example, we noted that three planned fiscal year 1993 projects over $500,000 were not in the subsequent budget update and assumed they had been canceled. However, a service official pointed out that they had not been canceled. As a result of new cost estimates of less than $500,000, these projects were no longer identifiable as separate budget line items. They were still in the budget but as part of other budget categories.
section_title: DOD Has Developed New Capital Asset Justification Criteria
paragraphs: In response to the DBOF Implementation Review Group’s September 1993 recommendations, DOD has developed new guidance for justifying and performing economic analyses for DBOF capital investment projects. This guidance requires that all capital projects included in the DBOF capital budget be supported by a sound analytical evaluation. Based on our review of the guidance, we believe that it has the potential—if effectively implemented—to address most of the problems we found with DOD’s capital investment justification process.
The guidance requires DOD components to prepare a thorough economic analysis for all DBOF projects over $100,000 at least 18 months before the year of execution; certain environmental and equipment replacement projects are exempt. In addition, it requires activities to prepare project documentation that, among other things, describes the need for the project, workload projections that support the requirement, feasible alternatives considered, total project costs and savings expected over a 10-year period, estimating methods, and intangible benefits.
Similar requirements would apply to projects under $100,000, except that the economic evaluation would be less than a complete economic analysis. We believe these changes will help solve the budget justification deficiencies and require DBOF activities to include only its highest priority projects in the capital budget.
We do have three concerns about the new guidance. First, it makes no mention about the need to link capital projects to the long-range investment needs of the DBOF activity. DOD officials said, and to a certain extent we agree, that the strict justification requirements will reduce the likelihood that any unneeded project could be supported. They also pointed to new budget guidance that requires capital assets to meet long-range planning and programming objectives. Nevertheless, any new capital investment policy would be remiss if it did not require a direct link between large capital investments and the long-range mission of the installation. Long-range planning is even more important in an environment of downsizing since activities need to maximize shrinking resources.
Second, the new guidance advocates investment decision criteria that may not produce the greatest net benefits. For projects less than $100,000, for example, the draft guidance requires activities to use “payback” (the time necessary for an alternative to repay its investment cost) as the primary indicator to rank order projects. For projects equal to or over $100,000, the “benefit-to-investment ratio” (total present value of benefits divided by total present value of costs) is to be the primary indicator for ranking projects. This is contrary to the Office of Management and Budget (OMB) criteria, a recent GAO report, and current economic literature that advocates “net present value” as the appropriate criterion for choosing among independent, competing investment projects. “Net present value” is the difference between the present value of benefits and the present value of total costs. It is favored over other indicators because it more consistently results in the selection of projects with the greatest benefits, net of cost. (See app. I for numerical examples.) Furthermore, DOD would not need any additional information, beyond that necessary to calculate payback and benefit-to-investment ratios, to calculate net present value.
Third, the new policy guidance will require a major adjustment in the way activities select and justify capital projects—in effect a cultural change. We believe such a change will not come about just by issuing a new policy statement, particularly for such long-standing problems. In February 1992, we reported that private companies use a combination of techniques to successfully change their cultures. Two techniques most important to success were (1) top management support and commitment to the effort and (2) training of employees to instill in them the organization’s new mission, values, and guiding principles. Other key techniques included communicating the organization’s vision and goals to its employees and creating a specific management style that reinforces this desired vision and these goals. Unless DOD addresses these types of issues, we do not believe the new policy will be any more successful than the out-of-date and inadequate guidance that currently exists.
section_title: DOD Did Not Identify Capital Asset Program Deficiencies as a Material Weakness
paragraphs: Under the Federal Managers’ Financial Integrity Act, the Secretary of Defense is required to review DOD’s internal accounting and administrative controls to provide reasonable assurances that funds, property, and other assets are safeguarded against waste, loss, unauthorized use, or misappropriation and that internal management controls emphasize prevention and correction of specific problems. DOD has not identified the capital asset program deficiencies we cite in our report as material weaknesses requiring corrective action.
section_title: Recommendations
paragraphs: We endorse the direction that DOD has taken to improve the capital investment justification process. To build on those planned actions, we recommend that the Secretary of Defense require that the new DBOF policy statement on capital budget investment projects include requirements to (1) link capital investment projects to the DBOF activities long-range plans and missions and (2) rely on net present value as the primary investment decision criterion for rank ordering competing capital investment projects; develop plans and schedules for training the key people responsible for implementing the new guidance; develop mechanisms to track implementation of the new guidance and hold managers accountable for achieving the intent of the guidance; include capital asset justification program deficiencies as a material weakness in the Federal Managers’ Financial Integrity Act report; and identify, in its annual DBOF capital budget update, (1) projects canceled or postponed since submission of the last budget and (2) projects selected as replacements for those canceled or postponed.
section_title: Agency Comments and Our Evaluation
paragraphs: DOD reviewed a draft of this report and provided written comments. In summary, DOD agreed that there was an overall need to improve its policies governing the management of the DBOF capital asset program and that it had recently made such changes, which it said were consistent with improvements suggested in this report. (See app. II.) It disagreed, however, with our recommendations to use net present value as the primary investment decision criterion for choosing among competing investment projects and to cite capital asset justification deficiencies in the Federal Managers’ Financial Integrity Act report.
DOD offers no specific reason it has not adopted net present value as the primary criterion for choosing among competing investment projects. DOD’s comments refer to its new DBOF policy statement that it believes allows managers to consider net present value along with other economic indicators. While the policy statement does require DBOF managers to calculate net present value for each investment project, it says they should use either payback or benefit-to-investment ratio as the primary criterion for ranking projects. As we discuss earlier, this is inconsistent with OMB economic criteria and could cause managers to select projects that will not produce the greatest net benefits. (See app. I.)
DOD also said that the capital asset program deficiencies we identified are not sufficient to require inclusion under the Federal Managers’ Financial Integrity Act and that its new policy changes are expected to achieve the desired improvements and internal controls. We disagree. The problems with DOD’s capital investment program are long-standing and have been reported many times by us, the Inspectors General, and service audit agencies over the past 6 years. Although the new policy statement is a step in the right direction, we believe DOD needs high-level management oversight and attention to achieve effective implementation. Listing the program as a material weakness in the Federal Managers’ Financial Integrity Act report provides an added level of management attention. Further, during the fiscal year 1995 defense authorization process, the Senate and House Committees on Armed Services considered the problems in this area serious enough to reduce the money available for capital asset purchases by $160 million (from $1.6 billion spending authority requested by DOD to $1.44 billion). This emphasizes the need for DOD to address this issue as a material weakness and ensure that improvements are effectively implemented. Additional DOD comments and our responses appear in appendix II.
We performed our audit work between December 1992 and June 1994 in accordance with generally accepted government auditing standards. (See app. III for details on our scope and methodology.) We will also be sending copies to the Chairmen, Senate Committee on Governmental Affairs, House Committee on Government Operations, and Senate and House Committees on Appropriations; the Director, Office of Management and Budget; the Secretaries of Defense, the Army, the Navy, and the Air Force; and other interested parties. We will make copies available to others on request.
If you have any additional questions, please contact me on (202) 512-8412. Major contributors to this report are listed in appendix IV.
section_title: Basis for Using Net Present Value
paragraphs: The new policy guidance states that the primary criterion used for evaluating alternative investments should depend on the cost of the project. For projects under $100,000, the guidance requires the minimum payback period; for those $100,000 or more, it requires the maximum ratio of benefit to investment cost. This appendix presents some simple numerical examples to demonstrate that it is possible for either of these two criteria to signal the selection of one or more projects that differ from the selection signaled by the maximum net present value criterion.
The minimum payback period criterion calls for selection of the project that recovers its investment cost in the shortest period of time. Table I.1 shows a comparison of two competing, mutually exclusive projects.
According to the maximum benefit-to-cost ratio criterion, project A should be chosen because its B/C, 1.9, exceeds that of project B, 1.5. Yet a comparison of total benefits net of costs clearly indicates that project B is preferable because project B’s net benefit, $2.60, exceeds that of project A, $0.90.
Both of the preceding examples tacitly assume that only two projects are candidates for selection. Situations can arise, of course, when two or more projects can be selected, subject to a budget constraint. In such a situation, ranking projects by their benefit-to-cost ratios and choosing successively lower ranked projects (beginning with the project having the largest benefit-to-cost ratio) will maximize total net present value.
section_title: Comments From the Department of Defense
paragraphs: The following are GAO’s comments on the Department of Defense’s (DOD) letter dated September 16, 1994.
subsections: section_title: GAO Comments
paragraphs: 1. Here and several other times throughout the comments, DOD states that the problems with the capital asset budgeting process have been resolved. As we state in the report, however, the Defense Business Operations Fund (DBOF) entities we reviewed were not following existing guidance and not much was being done at higher levels to ensure that the capital asset justification criteria were being followed. Although the new guidance adds specificity to the requirements for acquiring a capital asset, the key issue is effective implementation. That is why we included recommendations for DOD to train its key managers on how to implement the new guidance, develop performance measures to track implementation, hold managers accountable for achieving the intent of the guidance, and include capital equipment program deficiencies in its Federal Managers’ Financial Integrity Act report. 2. We found no evidence that capital asset projects were being systematically assessed against this type of criteria. To the contrary, we saw a rather loose capital asset justification process that did not match the criteria to which DOD refers. DOD’s DBOF Implementation Review Group found similar circumstances and recommended that the DOD Comptroller develop guidance for analyzing and documenting its capital investment decisions. 3. DOD’s comment is out of context. At this point in the report, we are describing the results of our work as it relates to findings in past reports by us, defense Inspectors General, and service audit agencies. In that context, we found that DOD had not corrected previously identified problems. We recognize later in the report that DOD has developed new policy guidance that if properly implemented, will help resolve the problems we identified during our work. 4. DOD states that the necessary controls are in place to ensure selected capital projects match long-range plans of the DBOF activity. As support, it refers to new budget guidance that was issued in May 1994 and the new economic analysis policy for capital projects. During our work, however, we found a more basic problem. As we report, the activities we visited were not preparing long-range plans either because they lacked the resources to do so, or thought the requirement had been eliminated. Regardless of the reason, they were not attempting to match large capital purchase needs to the long-term future of that activity. In addition, we found little evidence that any of the review levels in the services or the Office of the Secretary of Defense (OSD) were performing this function; local managers were being relied upon to identify the projects they thought most appropriate for the budget.
More importantly, criteria already exists that requires long-range plans and the matching of capital asset projects to those needs. While we are recommending that the new policy include requirements to match capital asset needs to long-range plans, we also recognize that the policy is not enough. As stated in the report, DOD must also address long-standing cultural issues and develop ways to ensure that the policies are effectively implemented. 5. DOD was developing its new policies for acquiring capital investments as we completed our work and did not finalize them until after it had received our report for comment. Consequently, we have adjusted our report to recognize that the new policies have been completed. 6. We are aware that the military services and other defense components were involved in developing the new policy but do not believe that is enough to ensure effective implementation. The problems we describe in this report are long-standing deficiencies that will likely require direct intervention and continued management oversight and attention to correct. Our recommendations were developed with these long-term requirements in mind. 7. When we prepared our draft report, the DBOF Policy Committee charged with developing DOD’s new capital investment policy had agreed to eliminate the requirement to perform post-investment analyses for capital assets. The majority position of this committee was that limited resources should not be used to measure, track, and evaluate sunk investment costs. The DOD comptroller added the requirement to perform post-investment analyses when he approved the statement on August 8, 1994. Unless DOD develops a tracking and accountability system, as we recommend, compliance with this post-investment policy may not be any better than it was with the last one. 8. DOD agrees with our recommendation to update the DBOF capital budget by identifying projects canceled or deferred since the last budget and those that have taken their place. It proposes to do this, however, for only those projects over $500,000 that are shown as separate line items in the budget. This, in our view, is not enough to keep the Congress fully informed of DOD’s progress in bringing stability to the capital budgeting process. As we show in this report, the DBOF activities we visited canceled or postponed 86 percent and 65 percent of their budgeted projects during fiscal years 1993 and 1994, respectively. Because only 3.3 percent (15 of 456) of these canceled or deferred projects were under $500,000, DOD’s proposal to report only on those over $500,000 will do little to keep the Congress informed. An alternative we discussed with DOD comptroller officials was to report on a project-by-project basis for projects over $500,000 and to report in a summary manner on those projects under $500,000. This will give the Congress information similar to that in this report and serve as an effective measure of DOD’s progress in implementing its new DBOF capital investment policy. 9. DOD agrees with our recommendation for training the key people responsible for implementing the new guidance. As a solution, however, it is planning to incorporate economic analysis modules into existing training courses that are generally made available to its workforce. Comptroller representatives estimated that it could take 2, 3, or more years to cycle its key budget analysts, comptrollers, and management analysts through these courses. Although this is certainly an important component of training that is past due, we do not believe it will address the more immediate need to ensure that managers responsible for developing the DBOF capital budget understand and implement the new policy and budget guidance. 10. DOD does not identify any mechanisms or performance measures it will develop to track implementation of the new guidance. Without this type of information, it will be difficult to know how well the new policy is being implemented or to identify the managers who are not adequately adhering to the new requirements.
section_title: Scope and Methodology
paragraphs: We performed our audit work at the DOD Comptroller’s Office, military services, and defense agency headquarters as well as the three command and six field activity locations listed in table III.1.
We selected these locations to cover a cross-section of DBOF business areas and expected volume of capital investment projects. We interviewed responsible agency personnel and obtained pertinent documentation as it related to the DBOF process for capital project budget preparation and review.
To determine the extent to which DOD carries out the DBOF Capital Budget it sends to the Congress, we (1) identified the universe of capital projects included in the fiscal years 1993 and 1994 capital budget for the activities we visited and (2) compared them to the projects actually undertaken during those 2 fiscal years.
To assess the effectiveness of the budget preparation and review process and determine if capital projects are adequately justified and economically supported, we (1) reviewed the DOD policies, procedures, and guidance used to prepare and review capital budget projects and (2) identified internal controls in place to ensure that capital projects are selected in accordance with the procedures and guidance.
We judgmentally sampled 56 of 140 capital projects included in the various fiscal year 1994 budget submissions for the activities we visited. In selecting projects, we placed more emphasis on capital projects over $500,000. For all 56 projects, we (1) determined whether there was adequate documentation justifying the project, including, where appropriate, a properly prepared economic analysis and (2) examined, when applicable, the reasons for project cancellations and postponements.
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