Overseas Contingency Operations: OMB and DOD Should Revise the Criteria for Determining Eligible Costs and Identify the Costs Likely to Endure Long Term
Published: 2017-01-18T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Since 2001 Congress has provided over $1.6 trillion in appropriations to fund OCO. For fiscal year 2017, DOD requested $64.6 billion in funding for OCO. While DOD's OCO budget request has included amounts for contingency operations primarily in Iraq and Afghanistan, more recently the request has also included other activities, such as efforts to deter Russia and reassure U.S. allies and partners. DOD acknowledges that many OCO costs are likely to endure after contingency operations cease.
GAO was asked to review DOD's use of OCO funds. This review assesses (1) the extent to which OMB's 2010 criteria address the activities included in DOD's OCO budget request; and (2) whether DOD has developed and reported an estimate of the costs being funded with OCO appropriations that are likely to endure beyond current contingency operations. GAO analyzed OMB's criteria for determining whether costs belonged in the OCO budget and reviewed DOD-provided information on its enduring OCO costs.
section_title: What GAO Found
paragraphs: In 2010 the Office of Management and Budget (OMB), in collaboration with the Department of Defense (DOD), issued criteria for deciding whether items properly belong in the base budget or in the overseas contingency operations (OCO) funding request, but the criteria are outdated and do not address the full scope of activities included in DOD's fiscal year 2017 OCO budget request. For example, they do not address geographic areas such as Syria and Libya, where DOD has begun military operations; DOD's deterrence and counterterrorism initiatives; or requests for OCO funding to support requirements not related to ongoing contingency operations. Further, the amount of OCO appropriations DOD considers as non-war increased from about 4 percent in fiscal year 2010 to 12 percent in fiscal year 2015. DOD officials agree that updated guidance is needed but note that the Office of Management and Budget has deferred the decision to update the criteria until a new administration is in place in 2017. Without reevaluating and revising the criteria, decision makers may be hindered in their ability to set priorities and make funding trade-offs.
DOD officials told GAO that the department had developed an initial estimate of costs being funded with OCO appropriations that are likely to endure beyond current operations, but has not finalized or reported its estimate outside of the department. In May and July 2016, OMB and DOD officials said the estimate of enduring costs was between $20 billion and $30 billion—as much as 46 percent of DOD's total OCO budget request for fiscal year 2017—and indicated that DOD continues to evaluate and revise this estimate, which might be closer to the higher end of that range. GAO recommended in 2014 that DOD develop guidance for transitioning enduring costs funded by OCO appropriations to DOD's base budget. According to DOD officials, DOD has not finalized and reported its estimate of enduring costs because current statutory spending caps limit its ability to increase base budget funding. Without a reliable estimate of DOD's enduring OCO costs, decision makers will not have a complete picture of the department's future funding needs or be able to make informed choices and trade-offs in budget formulation and decision making.
section_title: What GAO Recommends
paragraphs: GAO recommends that DOD, in collaboration with OMB, reevaluate and revise the criteria for determining what can be included in DOD's OCO budget requests; and that DOD develop a complete and reliable estimate of enduring OCO costs to report in future budget requests. DOD concurred with our first recommendation and plans to propose revised OCO criteria to OMB. DOD partially concurred with our second recommendation but identified no steps planned to develop and report its enduring OCO costs.

section_title: Letter
paragraphs: Since September 11, 2001, Congress has provided the Department of  Defense (DOD) with over $1.6 trillion in appropriations to fund overseas  contingency operations (OCO). DOD defines contingency operations as  small, medium, or large-scale military operations, including support for  peacekeeping operations, major humanitarian assistance efforts,  noncombatant evacuation operations, and international disaster relief  efforts. Since fiscal year 2010, DOD has submitted requests for both  base and OCO funding as part of its annual budget request to  Congress. While the OCO budget request has included amounts for  contingency operations primarily in Iraq and Afghanistan, more recently  the OCO budget request has included a number of other operations and  activities such as the European Reassurance Initiative, which is intended  to deter Russia and reassure U.S. allies and partners.
In our body of work since 2007, we have reported on multiple issues  associated with OCO funds, including the level of transparency in DOD’s  OCO funding requests, the accuracy and reliability of DOD’s OCO cost  reporting, and efforts to transition enduring OCO costs to DOD’s base  budget. For example, in November 2007, we found that changes in  DOD’s then Global War on Terror (GWOT) funding guidance had resulted  in billions of dollars being added to GWOT funding requests for what  DOD called the “longer war against terror,” making it difficult to distinguish  between incremental costs to support specific contingency operations  and base costs. We recommended that DOD issue specific guidance  defining what constituted “the longer war against terror,” identify what  costs were related to that category, and build such costs into the base  defense budget rather than into OCO. Responding to our  recommendations, OMB, in collaboration with DOD, issued criteria in  early 2009 to use as a guide for deciding whether funding properly  belongs in the base budget or in the budget for OCO requirements. In  March 2009, we found that limitations in DOD’s approach for identifying  the costs associated with specific contingency operations may have  resulted in an overstatement of those costs and could have led to their  being included in DOD’s contingency funding requests rather than in the  base budget. We recommended that DOD develop a plan and timetable  for evaluating whether expenses not directly attributable to specific  GWOT contingency operations were instead incremental costs that  should continue to be funded outside of the base budget. DOD partially  concurred with this recommendation and indicated that it collaborated  with the Office of Management and Budget (OMB) to refine the criteria  used for determining where costs would be categorized, either in base or  OCO budgets. The criteria were subsequently updated in September  2010, but they have not been updated since that time. In June 2014, we  found that U.S. Central Command primarily used OCO appropriations to  operate its headquarters, although some of the costs were determined to  be enduring and were expected to continue after the end of contingency  operations. We recommended that DOD develop guidance for  transitioning enduring costs funded with OCO appropriations to DOD’s  base budget. DOD partially agreed, stating that while the timeline for  transitioning enduring costs to the base budget was critical, the process  could not be accomplished as a one-time event due to the evolution of  threats and the impact of budget laws.
You asked us to examine several issues related to OCO funds. For this  report, we assessed (1) the extent to which the OMB’s 2010 criteria  address the activities included in DOD’s OCO budget request; and (2)  whether DOD has developed and reported an estimate of the costs being  funded with OCO appropriations that are likely to endure beyond current  contingency operations. Additionally, we discuss in appendix II how DOD  has reported obligations of OCO appropriations.
To assess the extent to which the OMB’s 2010 criteria address the  activities included in DOD’s OCO budget request, we discussed with each  of the military services the processes and guidance used for building their  budget requests. We also examined criteria issued by the OMB, as well  as guidance issued by the Office of the Under Secretary of Defense  (Comptroller) and the military services, and compared the guidance with  DOD’s fiscal year 2017 budget request for OCO in order to determine  whether activities currently categorized under OCO are consistent with  the guidance. In addition, we compared the content and timeliness of  DOD’s guidance and the OMB’s criteria, developed in collaboration with  DOD, to GAO’s Standards for Internal Control in the Federal Government  that relate to implementing control activities through policies and to  reviewing policies periodically for continued relevance. Further, we  discussed with officials from the OMB and the Under Secretary of  Defense (Comptroller) the steps they take to ensure that the OCO budget  request is consistent with DOD’s guidance and the OMB’s OCO criteria,  and any plans to update the guidance.
To assess whether DOD has developed and reported an estimate of the  costs being funded with OCO appropriations that are likely to endure  beyond current contingency operations, we reviewed DOD’s budget  submissions and met with staff from the OMB, the Office of the Under  Secretary of Defense (Comptroller), and each of the military services to  discuss any steps taken to develop and report to Congress or other  stakeholders an estimate of enduring OCO costs. We also reviewed  information provided by the military services regarding those OCO costs  they deemed to be enduring. In addition, we compared DOD’s policies  and other guidance documents and officials’ related actions with cost- estimating practices in the Handbook of Federal Accounting Standards  and Standards for Internal Control in the Federal Government, which,  among other things, call for agencies to provide reliable and timely  information on the full costs of their federal programs aimed at assisting  congressional and executive decision makers in allocating federal  resources and making decisions to improve operating economy and  efficiency.
We conducted this performance audit from January 2016 to January 2017  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives. More details on our objectives,  scope, and methodology can be found in appendix III.
subsections: section_title: Background
paragraphs: As part of DOD’s annual Planning, Programming, Budgeting, and  Execution process, the military services and defense agencies submit a  budget request—known as the Budget Estimate Submission—that  addresses their estimated annual funding requirements for both base and  OCO activities. In building their budget requests the military services  and defense agencies use guidance issued by the Office of the Under  Secretary of Defense (Comptroller) as well as guidance issued within  their own organizations, including criteria for determining whether  requirements belong in the base or in the OCO budget requests.  Specifically, the military services and defense agencies use guidance in  the September 2007 Financial Management Regulation, DOD 7000.14-R,  volume 12, chapter 23, and OMB’s September 2010 Criteria for  War/Overseas Contingency Operations Funding Requests for  determining whether requests for funding should be included in the base  or in the OCO funding requests.
The Under Secretary of Defense (Comptroller) is responsible for  conducting and coordinating DOD’s budget review activities, which  include preparation of annual budget request submissions. Upon receipt  of the budget request from the military services and defense agencies,  budget analysts in the Office of the Under Secretary of Defense  (Comptroller) review the requests, focusing on issues such as whether  the requested funds can be executed in the budget year. Per agreement  between the Office of the Under Secretary of Defense (Comptroller) and  the OMB, senior budget examiners from the OMB also participate in the  budget review process at this point to preclude the necessity for a  separate review by the OMB. Officials from both offices work together to  review the military services’ budget submissions to ensure that requested  funding aligns with current policy and is sufficiently justified to Congress.  Once approved, the Budget Estimate Submission is included in the  annual President’s Budget.
The Budget Control Act of 2011, as amended, imposes government-wide  discretionary spending limits for fiscal years 2012 through 2021 to reduce  projected spending by about $1 trillion over a 10-year period. All  amounts appropriated to DOD are subject to specific limits on defense  spending. Appropriated amounts designated for OCO that would  otherwise exceed the annual limits established for defense spending will  instead result in an adjustment to the overall defense spending limit  established for a particular fiscal year, and will not trigger a sequestration,  which is an automatic cancellation of budgetary resources provided by  discretionary appropriations or direct spending laws.
The Bipartisan Budget Act of 2015 provided for a base funding level in  fiscal year 2017 of $551 billion for defense and provided for a specified  amount of $58.8 billion in adjustments to the defense cap for OCO  funding for fiscal year 2017. Consistent with the expected amount set by  the Bipartisan Budget Act of 2015, DOD’s initial fiscal year 2017 budget  request for OCO was $58.8 billion. In November 2016, DOD submitted to  Congress an amendment to its initial request for an additional $5.8 billion  in OCO funding to support requirements that were unforeseen at the time  of the original budget submission.
section_title: Criteria DOD Uses for Determining Items Appropriate for Its OCO Budget Request Do Not Address the Full Scope of Activities Included in Its OCO Budget Request
paragraphs: In 2010, in collaboration with DOD, the OMB developed updated criteria  for deciding whether items properly belong in the base or in the OCO  funding request, but these criteria do not address the full scope of  activities included in DOD’s fiscal year 2017 OCO budget request. DOD  uses the OMB’s guidance in determining what costs are eligible to be  included in its OCO budget requests. However, the criteria were issued in  2010, when military operations in Iraq and Afghanistan were the principal  contingency operations supported by DOD, and these criteria do not  address geographic areas, such as Syria and Libya, where DOD has  begun combat operations since the criteria were first developed. Further,  according to officials, the criteria were not applied to the department’s  deterrence and counterterrorism initiatives, such as the $3.4 billion  requested in fiscal year 2017 for the European Reassurance Initiative, or  to the $5.2 billion of its OCO request intended to fund base budget  requirements, such as readiness and readiness support requirements.
subsections: section_title: OMB’s Criteria Are Intended to Guide DOD’s OCO Budget Requests
paragraphs: Criteria developed in collaboration with DOD and issued by the OMB in  September 2010 provide guidance for determining whether funding  properly belongs in the base or in the OCO funding request. DOD officials  stated that the OMB’s criteria are the principal guidance used to make  determinations regarding what should be included in their OCO funding  requests. The criteria identify items and activities eligible for OCO funding  so long as they are associated with specified geographic areas, such as  Afghanistan, Iraq, and Pakistan, in which combat or direct combat support  operations are occurring. Other geographic areas not specifically  identified in the criteria may be included on a case-by-case basis. Eligible  OCO items and activities include, among others, the replacement or  repair of major equipment lost in operations, the replacement of ground  equipment, equipment modifications, aircraft replacement, the cost of  direct combat operations, short-term health care related to combat, and  special pay for deployed service members. The criteria also specifically  exclude certain activities from OCO funding requests. Some exclusions  are expenses related to equipment service-life extension programs, base  realignment and closure projects, family support initiatives, personnel  costs relating to recruiting and retention, and maintenance of industrial  base capacity. The complete list of OCO criteria can be found in appendix  I.
section_title: Existing Criteria Do Not Address the Full Scope of Activities Included in DOD’s OCO Budget Request
paragraphs: We recommended in November 2007 that DOD shift certain contingency  costs into the annual base budget to allow for prioritization and trade-offs  among DOD’s needs and to enhance visibility in defense spending. The  department concurred with this recommendation and in February 2009  the OMB, in collaboration with DOD, issued criteria to assist in  determining whether funding properly belonged in DOD’s base budget or  in its budget for OCO. The criteria were subsequently updated in  September 2010 to build on prior experience by clarifying language,  eliminating areas of confusion, and providing guidance for activities  previously unanticipated. OMB’s criteria were issued when military  operations in Iraq and Afghanistan were the principal contingency  operations supported by DOD. Since 2010 the scope of activities funded  through the OCO has evolved and, as a result, the criteria do not  specifically address activities included in DOD’s fiscal year 2017 OCO  budget request. Specifically, the criteria do not address operations in new  geographic areas such as Syria and Libya, the department’s deterrence  and counterterrorism initiatives, or requests for OCO amounts to fund  base budget requirements, such as readiness.
Operations in New Geographic Areas  Since the criteria were issued in 2010, DOD has begun military  operations in several countries, such as Syria and Libya, to fight the  spread of the Islamic State of Iraq and Syria (ISIS). Neither Syria nor  Libya is specifically included in the 2010 criteria as designated  geographic areas covered for purposes of OCO funding, although the  criteria allow for the addition of other areas on a case-by-case basis.  In October 2014, DOD designated military operations against ISIS as  Operation Inherent Resolve. As part of the operation, DOD has  conducted airstrikes against ISIS forces and provided training,  equipment, advice, and assistance to forces on the ground that are  partnered with the United States. For fiscal year 2017, DOD  requested $9.9 billion in OCO funds for Operation Inherent Resolve  and other related missions against ISIS. In August 2016, DOD began  Operation Odyssey Lightning, which includes precision airstrikes  against ISIS in Libya. For fiscal year 2017, DOD requested $20 million  for Operation Odyssey Lightning. According to officials from the Office  of the Under Secretary of Defense (Comptroller), OMB annually  reviews exceptions to the criteria submitted in DOD’s budget requests  and has granted DOD waivers to allow exceptions, such as for  operations in countries not included in the criteria to be included in its  OCO funding request as a short-term fix until the criteria can be  updated.
Deterrence and Counterterrorism Initiatives  According to officials from the Office of the Under Secretary of  Defense (Comptroller), the OMB’s 2010 criteria were not applied to  the department’s deterrence and counterterrorism initiatives included  in its OCO budget request for fiscal year 2017. For example, DOD’s  fiscal year 2017 OCO budget request seeks $3.4 billion for the  European Reassurance Initiative, intended to deter Russia and  reassure U.S. allies and partners, particularly within Central and  Eastern Europe. Specifically, the requested amount would enhance  training and exercises, support improvements to key infrastructure,  and fund three continuous brigade-sized rotations to train with allies.  In addition, DOD’s fiscal year 2017 OCO budget request includes $1  billion for the Counterterrorism Partnership Fund, intended to provide  direct counterterrorism support to partner nations and augment U.S.  capability to support partners in counterterrorism operations. As  described in appendix II to this report, the obligation of appropriations  for these initiatives was not included in required monthly reporting on  the costs of war. In appendix II, we describe in more detail how  DOD reports on the obligation of OCO appropriations, including  appropriations for the European Reassurance Initiative and  Counterterrorism Partnership Fund.
OCO Funding in Support of Base Requirements  DOD’s fiscal year 2017 OCO budget request also includes about $5.2  billion in what DOD identifies as Bipartisan Budget Act (BBA) of 2015  Compliance. According to DOD officials, these are base amounts  included in DOD’s OCO budget request in order to reach the fiscal  year 2017 OCO appropriations level of $58.8 billion, which was  specified by the Bipartisan Budget Act of 2015. DOD identified  activities supported by the $5.2 billion as including readiness,  readiness support requirements, increased counterterrorism activities  in Africa, and preferred munitions. These activities are not specifically  included in the OMB’s 2010 OCO criteria. GAO has previously  reported that Congress made additional OCO funding available for  base programs and activities in fiscal years 2009 through 2016.  Specifically, Congress made additional funding available to DOD’s  O&M base in two areas: OCO funding for programs and activities  requested in the base budget itself, and OCO funding for readiness- related efforts.
Taking DOD’s fiscal year 2017 OCO budget request as a whole,  about $45.1 billion (70 percent) of DOD’s request is for supporting  Operation Freedom’s Sentinel and related missions, primarily in  Afghanistan, to train, advise, and assist Afghan forces and to conduct  counter-terrorism operations against the remnants of Al Qaeda.  However, the remaining $19.5 billion (30 percent) of DOD’s fiscal year  2017 request is for activities that may not be specifically addressed by  the OMB’s 2010 criteria. Figure 1 shows the percentage, by activity,  of DOD’s fiscal year 2017 OCO budget request.
Moreover, the proportion of OCO appropriations DOD considers to be  non-war increased between fiscal years 2010 and 2015. DOD is required  to report operations costs associated with specific contingency  operations. The reports, referred to as Cost of War Reports, are  produced monthly. Our analysis of past reports found that, while overall  OCO appropriations have been trending down since 2010, the proportion  of OCO appropriations not associated with specific operations identified in  the statutory Cost of War reporting requirement has trended upward over  the period. In fiscal year 2010, the Cost of War Report excluded about  $6.4 billion of OCO appropriations, or about 4 percent of the overall OCO  appropriation. By 2015, the amount excluded was about $7.4 billion, but  this represented 12 percent of DOD’s OCO appropriations in fiscal year  2015. This is shown in table 1 below and explained further in appendix II  to this report.
According to GAO’s Standards for Internal Control in the Federal  Government, management should implement control activities through  policies and should periodically review those policies for continued  relevance if there is a significant change. Congress has also recognized  that the OMB criteria are outdated and urged the OMB to update its  criteria. Specifically, the Fiscal Year 2015 Joint Explanatory Statement for  the National Defense Authorization Act noted that the criteria developed  by the OMB for OCO funding requests have not been updated in over 4  years, during which time significant fact-of-life world events have occurred  that dictate a need to re-examine and update those criteria to ensure that  they remain relevant and adaptable for evaluating DOD budget and  reprogramming requests. Congress encouraged DOD to evaluate the  OCO criteria on a regular basis to ensure proper delineation of base and  OCO budget requests, and urged the OMB to update its OCO criteria in  time to support the fiscal year 2016 budget submission. However,  according to officials, DOD’s budgets for fiscal years 2016 and 2017 were  developed using the existing, but outdated, OCO criteria developed in  2010.
section_title: DOD Acknowledges Need to Update Criteria But Is Deferring Action
paragraphs: Officials from the Office of the Under Secretary of Defense (Comptroller)  acknowledged that the OMB criteria need to be updated to address  geographic areas where contingency operations are currently ongoing,  such as Syria and Libya. However, DOD officials noted that the OMB has  deferred the decision to update the criteria until a new administration is in  place in 2017. Further, officials from the Office of the Under Secretary of  Defense (Comptroller) also told us that the deterrence and  counterterrorism initiatives included in DOD’s OCO budget request for  fiscal year 2017 were not evaluated against the OMB criteria in light of    an Administration decision to include funding for the European  Reassurance Initiative and Counterterrorism Partnership Fund in DOD’s  OCO budget request beginning in 2015. Therefore, DOD did not apply the  criteria. Without the OMB and DOD reevaluating and revising the criteria  for determining items and activities that can appropriately be included in  DOD’s OCO budget request, decision makers may be hindered in their  ability to set priorities and make funding trade-offs.
section_title: DOD Has Developed an Initial Estimate of Its Enduring Costs but Has Not Finalized and Reported the Estimate Externally
paragraphs: DOD officials told us that the department had developed an initial  estimate of costs being funded with OCO appropriations that are likely to  endure beyond current operations, but that it has not finalized or reported  its estimate outside of the department. According to DOD officials, an  internal working group established in 2014 estimated that enduring costs  account for between $20 billion and $30 billion per year – as much as 46  percent of DOD’s total OCO budget request for fiscal year 2017.
subsections: section_title: DOD Developed an Initial Estimate of Its Enduring OCO Costs
paragraphs: In May and July 2016, the OMB and DOD officials respectively told us  that the estimate of DOD’s enduring OCO costs, those costs that would  remain after the contingency operations end, and that would need to be  transitioned to DOD’s base budget request if OCO funding were no longer  available, are in the range of $20 billion to $30 billion per year. According  to DOD officials, this estimate was preliminary and was developed by a  working group established by DOD in 2014, to include the military  services, tasked with identifying DOD’s enduring OCO costs. As part of  this effort, DOD officials stated, the working group was asked to identify  costs the military services had funded with OCO to maintain full readiness  levels, in areas such as depot maintenance and ship operations, and to  identify costs expected to continue once combat operations have  concluded. Although the officials stated that the estimate came from  efforts within the working group, they did not provide any documentation  of how the estimate was developed.
Service officials indicated that they have continued efforts to determine  the magnitude of OCO funds used to support enduring requirements. We  discussed with each of the military services what efforts they were taking  to identify enduring costs, and both the Army and the Navy provided us  evidence that they were beginning to categorize and identify enduring  OCO requirements and the associated costs of those requirements. For  example, the Navy stated that it was beginning to capture its enduring  OCO requirements such as those required to leverage full readiness  levels. Additionally, Army officials shared with us that the Army had begun  categorizing and tracking in its financial management system its OCO  requirements that would likely endure beyond current contingency  operations. Army officials estimated that over 40 percent of its fiscal year  2017 OCO funding is needed to support functions they consider to be  enduring, including requirements for the European Reassurance Initiative.
According to officials with the Office of the Under Secretary of Defense  (Comptroller), the initial estimate of enduring costs of between $20 billion  and $30 billion did not include the $5.2 billion in OCO funding requested  for base requirements. These officials indicated that the department  continues to evaluate and revise this estimate, and that it could be closer  to the higher end of the range.
section_title: DOD Has Not Finalized and Reported Its Estimate of Enduring OCO Costs
paragraphs: DOD has acknowledged that some of its OCO costs could be enduring.  Although the department has acknowledged that it has OCO costs that  will continue once its current combat operations cease, it has not finalized  and reported an estimate of its enduring OCO costs to Congress. DOD  continues to evaluate OCO requirements and its future impact to the out- year budget. However, the department is not developing long-term OCO  requirements as part of the budget and programming process (e.g.,  Future Year Defense Program).
We have previously identified multiple issues associated with the use of  OCO funds and efforts to transition enduring OCO costs to the base  budget. In June 2014 we found that U.S. Central Command, two of its  service component commands, and its theater special operations  command headquarters primarily used OCO appropriations to operate  their headquarters, although some of the costs were determined to be  enduring and were expected to continue after the end of contingency  operations. We recommended that DOD develop guidance for  transitioning enduring costs funded by OCO appropriations to DOD’s  base budget request. DOD partially agreed, stating that while the timeline  for transitioning enduring costs to the base budget was critical, the  process could not be accomplished as a one-time event due to the  evolution of threats and the impact of budget laws.
Congress has also expressed interest in knowing the total cost of  enduring activities. Specifically, the Senate Appropriations Committee’s  report accompanying a bill for DOD’s fiscal year 2015 appropriations  stated that the committee does not have an understanding of enduring  activities funded by the OCO budget or a clear path forward in migrating  enduring resources to the base budget. The committee further noted  that there is a potential for risk entailed in continuing to fund non- contingency-related activities through the OCO budget.
In its fiscal year 2016 budget request, DOD reported that the  Administration intended to propose a plan to transition its enduring OCO  costs to the base budget. According to information included in DOD’s  budget, as the U.S. combat mission ended in Afghanistan, it was time to  reconsider the appropriate financing mechanism for costs of overseas  operations that were enduring. The plan envisioned by the Administration  would transition all enduring costs currently funded in the OCO budget to  the base budget beginning in 2017 and ending by 2020. However, it was  also asserted that the transition would not be possible if the sequester- level discretionary spending caps were to remain in place. According to  DOD officials, the plan was not submitted, since the fiscal year 2017  budget was developed so as to be consistent with the Bipartisan Budget  Act of 2015, which increased the amount of enduring costs funded in  OCO.
Both GAO and other federal standards emphasize that agencies should  provide complete and reliable information on the costs of programs to  make decisions and that they should communicate information externally.  Specifically, Standards for Internal Control in the Federal Government  emphasizes using complete information to make decisions and then to  communicate such information externally. The FASAB Handbook of  Federal Accounting Standards and Other Pronouncements, as Amended,  also requires agencies to provide reliable information on the full costs of  their federal programs aimed at assisting congressional and executive  decision makers in allocating federal resources and making decisions to  improve operating economy and efficiency.
According to DOD officials, although DOD developed an initial estimate of  enduring costs, DOD has not finalized and reported its estimate of  enduring costs externally because current statutory spending caps limit its  ability to increase base budget funding. Without the finalized estimates, it  remains difficult to determine which enduring costs are supported with  OCO funds. Further, without a complete and reliable estimate of DOD’s  enduring OCO costs, neither DOD nor congressional decision makers will  have a complete picture of the department’s future funding needs.
section_title: Conclusions
paragraphs: Intended to be short-term emergency funding for contingency operations,  OCO funding has evolved to become an established and significant part  of DOD’s budget. However, the underlying criteria for OCO funding  requests have not kept pace with this evolution. The OMB 2010 criteria,  developed in concert with DOD, were issued as a means to determine  whether funding properly belongs in DOD’s base budget or, alternatively,  in its budget for OCO. Now 6 years later, the criteria are not reflective of  DOD’s current operations, which include Libya and Syria. Moreover,  activities such as deterrence and counterterrorism initiatives, which are  not directly related to ongoing military operations, are also being funded  with OCO amounts. Continued reliance on outdated criteria that do not  reflect the current policy for how OCO funds are to be used will only  further reduce budget clarity and erode the credibility of DOD’s OCO  budget request. Further, the lack of a complete and reliable estimate of  enduring costs makes it difficult to ensure that Congress has a complete  picture of the department’s future funding requirements. Such an estimate  would also assist in planning for a transition to budgets that do not rely on  OCO to cover non-war- related costs. Without a reliable estimate of  enduring costs, decision makers will not have information needed to  make informed choices and trade-offs in budget formulation and decision- making.
section_title: Recommendations for Executive Action
paragraphs: To provide additional information for congressional decision makers  regarding DOD’s budget, we recommend that the Secretary of Defense  direct the Under Secretary of Defense (Comptroller), in consultation with  the OMB, to reevaluate and revise the criteria for determining what can  be included in DOD’s OCO budget requests to reflect current OCO- related activities and relevant budget policy directing in which budget  requests OCO funds may be included.
To assist decision makers in formulating DOD’s future budgets, we  recommend that the Secretary of Defense direct the Under Secretary of  Defense (Comptroller) to develop a complete and reliable estimate of  DOD’s enduring OCO costs and to report these costs in concert with the  department’s future budget requests, and to use the estimate as a  foundation for any future efforts to transition enduring costs to DOD’s  base budget.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to DOD for review and comment. In its  written comments, reproduced in appendix IV, DOD concurred with our  first recommendation that it, in consultation with the Office of  Management and Budget, reevaluate and revise the criteria for  determining what can be included in DOD’s OCO budget requests. DOD  commented that it plans to propose revised criteria to OMB that will  accommodate the current and evolving threats worldwide, as well as  reflect any changes to OCO policy adopted by the new administration.
DOD partially concurred with our second recommendation that it develop  a complete and reliable estimate of its enduring OCO costs, report those  costs in concert with DOD’s future budget requests, and use the estimate  as a foundation for future efforts to transition enduring OCO costs to the  base budget. The department commented that developing reliable  estimates of enduring OCO costs is an important first step to any future  effort to transition enduring OCO costs to the base budget and  commented that in the context of such an effort, it would consider  developing and reporting formal estimates of those costs. However, DOD  stated that until there is relief from the budgetary caps established by the  Budget Control Act of 2011, DOD will need OCO to finance  counterterrorism operations such as Operation Freedom Sentinel and  Operation Inherent Resolve. While DOD concurs that developing reliable  estimates of enduring OCO costs is an important first step in any future  effort to transition these costs to the base budget, DOD offered no plans  to take action to address this recommendation. We continue to believe  that developing and reporting formal estimates of enduring costs,  particularly costs that are not specifically addressed by OMB’s 2010  criteria, such as OCO funding used to support base requirements, and  funding for the European Reassurance Initiative and Counterterrorism  Partnership Fund is important to provide Congress with a complete  picture of DOD’s long term budget needs for use in future budget  formulation. DOD also provided technical comments, which we  incorporated as appropriate.
We are sending copies of this report to the Secretary of Defense and  appropriate congressional committees. In addition, the report is available  at no charge on the GAO website at http://www.gao.gov.
If you or your staff have any questions about this report, please contact  me at (404) 679-1816 or pendletonj@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. Key contributors to this report are listed in  appendix V.
section_title: Appendix I: Office of Management and Budget’s Criteria for Overseas Contingency Operations (OCO) Funding Requests, Issued in September 2010
paragraphs: Appendix I: Office of Management and  Budget’s Criteria for Overseas Contingency  Operations (OCO) Funding Requests, Issued in  September 2010 Replacement of losses that have occurred but only for items not already programmed  for replacement in the Future Years Defense Plan (FYDP) — no accelerations.  Accelerations can be made in the base budget.  Replacement or repair to original capability (to upgraded capability if that is currently  available) of equipment returning from theater. The replacement may be a similar end  item if the original item is no longer in production. Incremental cost of non-war related  upgrades, if made, should be included in the base.  Purchase of specialized, theater-specific equipment. Funding must be obligated within  12 months.
Combat losses and washouts (returning equipment that is not economical to repair);  replacement of equipment given to coalition partners, if consistent with approved policy;  in-theater stocks above customary equipping levels on a case-by-case basis.
Equipment modifications (enhancements)
Operationally-required modifications to equipment used in theater or in direct support of  combat operations, for which funding can be obligated in 12 months, and that is not  already programmed in FYDP.
Replenishment of munitions expended in combat operations in theater. Training  ammunition for theater-unique training events is allowed. Forecasted expenditures are  not allowed. Case-by-case assessment for munitions where existing stocks are  insufficient to sustain theater combat operations.
Combat losses, defined as losses by accident or by enemy action that occur in the  theater of operations.
Facilities and infrastructure in the theater of operations in direct support of combat  operations. The level of construction should be the minimum to meet operational  requirements. At non-enduring locations, facilities and infrastructure for temporary use  are covered. At enduring locations, construction requirements must be tied to surge  operations or major changes in operational requirements and will be considered on a  case-by-case basis.
Projects required for combat operations in these specific theaters that can be delivered  in 12 months.
Definition of Criteria  Direct War costs:  transport of personnel, equipment, and supplies to, from and within the theater of  operations;  deployment specific training and preparation for units and personnel (military and  civilian) to assume their directed missions as defined in the orders for deployment  into the theater of operations;  Within the theater, the incremental costs above the funding programmed in the base  budget to:  support commanders in the conduct of their directed missions (to include  Emergency Response Programs);  build and maintain temporary facilities;  provide food, fuel, supplies, contracted services and other support; and,  cover the operational costs of coalition partners supporting US military missions, as  mutually agreed.
Indirect War Costs: Indirect war costs incurred outside the theater of operations will be  evaluated on a case-by-case basis.
Short-term care directly related to combat. Infrastructure that is only to be used during  the current conflict.
Incremental special pays and allowances for Service members and civilians deployed to  a combat zone; incremental pay, special pays and allowances for Reserve Component  personnel mobilized to support war missions.
Operations and equipment that meet the criteria in this guidance.
Resetting in-theater stocks of supplies and equipment to pre-war levels - Excludes  costs for reconfiguring prepositioned sets or for maintaining them.
Training, equipping, and sustaining Iraqi and Afghan military and police forces.
War fuel costs, and funding to ensure that logistical support to combat operations is not  degraded due to cash losses in DoD’s baseline fuel program. Would fund enough of  any base fuel shortfall attributable to fuel price increases to maintain sufficient on-hand  cash for the Defense Working Capital Funds to cover seven days disbursements. (This  would enable the Fund to partially cover losses attributable to fuel cost increases.)
subsections: section_title: Exclusions from war/overseas contingency funding – appropriately funded in the base budget Training equipment
paragraphs: Training vehicles, aircraft, ammunition, and simulators. Exception: training base stocks  of specialized, theater-specific equipment that is required to support combat operations  in the theater of operations, and support to deployment-specific training described  above.
Equipment Service Life Extension Programs  (SLEPs)
Acceleration of SLEPs already in the FYDP.
BRAC projects.
Family support initiatives to include the construction of childcare facilities; funding  private-public partnerships to expand military families’ access to childcare; and support  for service members’ spouses professional development.
Programs to maintain industrial base capacity (e.g. “war-stoppers”).
Definition of Criteria  Recruiting and retention bonuses to maintain end-strength. Basic Pay and the Basic  allowances for Housing and Subsistence for permanently authorized end strength.  Individual augmentees will be decided on a case-by-case basis.
Support for the personnel, operations, or the construction or maintenance of facilities, at  U.S. Offices of Security Cooperation in theater  Items proposed for increases in reprogrammings or as payback for prior  reprogrammings must meet the criteria above.
section_title: Appendix II: Department of Defense (DOD) Reporting on Obligation of Overseas Contingency Operation (OCO) Appropriations
paragraphs: DOD reports on the costs of certain contingency operations monthly to  Congress through its Cost of War report. According to the Fiscal Year  2016 Instructions for Reporting on the Cost of War issued by the Office of  the Under Secretary of Defense (Comptroller), the Cost of War report is  intended to provide stakeholders, such as Congress, visibility into the  ways in which war-related OCO appropriations are obligated. DOD  produces the Cost of War reports to address a congressional requirement  to report on obligations and disbursements related to select operations  identified by Congress, such as Operation Freedom’s Sentinel (primarily  in Afghanistan) and Operation Inherent Resolve (primarily in Iraq and  Syria). DOD also reports on additional operations based on annual  guidance from the Office of the Under Secretary of Defense (Comptroller)  that instructs the components on which contingency operations they are  to report against. In addition to Operations Freedom’s Sentinel and  Inherent Resolve, the instructions for fiscal year 2016 also included  Operation Enduring Freedom, Operation Noble Eagle, and post- Operation New Dawn Iraq activities. DOD reports on obligations  associated with these operations based on guidance within DOD  7000.14-R, Financial Management Regulation, volume 12, chapter 23,  (Sept. 2007) which generally defines what is considered a contingency  cost and establishes requirements for how the department is to report on  those costs.
According to DOD’s September 2015 Cost of War report , of the $1.56  trillion in OCO funds appropriated from fiscal years 2001 through 2015,  DOD considers about $1.41 trillion as war funds, with the remainder  deemed as either unrelated to ongoing contingency operations—a  category that DOD refers to as “non-war”—or for classified purposes. For  fiscal years 2010 through 2015, DOD’s Cost of War reports have included  data on about 94 percent of its OCO appropriations.
In addition to obligations associated with OCO-designated appropriations,  the Cost of War report includes obligations of base funds if they are  considered to be war-related, as well as war-related obligations of funds  that are transferred into OCO accounts, according to DOD officials and  guidance. Obligations associated with non-war OCO appropriations are  not included in DOD’s Cost of War reporting. For example, for fiscal year  2015, $7.4 billion in non-war OCO appropriations were not included in the  Cost of War reports. The appropriations excluded include the following: $5.1 billion in funds requested by DOD for base needs and provided  for in DOD’s OCO appropriation, as well as other baseline programs  funded in OCO by Congress; $1.3 billion for the Counterterrorism Partnership Fund; and $984 million for the European Reassurance Initiative.
While obligations associated with these non-war appropriations are not  included in the Cost of War report, DOD does report these obligations in  response to congressional mandates and requests. For example, for  fiscal year 2015, DOD separately reported obligations associated with  about $3.3 billion in OCO appropriations—including obligations  associated with the Counterterrorism Partnership Fund, European  Reassurance Initiative, and military readiness funding included in DOD’s  OCO appropriation. DOD did not separately report on obligations  associated with about $4.2 billion in OCO appropriations (see table 3).
In addition, officials in the Office of the Under Secretary of Defense  (Comptroller) said that DOD includes all OCO obligations in several  reports on budget execution, including DOD’s internal reports, reports to  the OMB, and budget justification materials prepared for Congress. In our  August 2016 report on DOD’s operation and maintenance appropriations  and September 2016 report on its bulk fuel spending, we found that DOD  reported a combination of base and OCO obligations in its budget  justification materials and execution reports, but did not separately report  its base and OCO obligations. We recommended that DOD separately  report base and OCO obligations in its budget justification materials and  execution reports or in another reporting mechanism. DOD did not concur  with the recommendations. In its comments on our reports, DOD stated  that many legacy financial systems currently cannot distinguish between  base and OCO obligations easily, though DOD would be able to  separately report base and OCO obligations across all appropriations  once all DOD components have converted from their legacy financial  systems.
We have previously found DOD Cost of War data to be of limited  reliability and have made recommendations that DOD improve the  reliability of financial information in its Cost of War reports. While DOD  has taken steps to improve its cost of war reporting, challenges remain in  ensuring the accuracy and reliability of the reported costs. For example,  in June 2016, the DOD Inspector General found that the Air Force had  underreported $237.9 million in obligations associated with Operation  Inherent Resolve because the service did not have adequate controls  over the processing and reporting of its costs. The obligations  underreported included those associated with flying hours; command,  control, communications, computer, and intelligence; and general support  and administrative equipment. The DOD Inspector General  recommended that the Air Force develop and implement standard  operating procedures, including operation-specific guidance, to ensure  that personnel enter necessary costs into the system used to produce the  Cost of War report. The DOD Inspector General further recommended  that the Defense Financial Accounting Service and the Air Force update  business rules to ensure that Operation Inherent Resolve costs are  accurately reported. DOD concurred with these recommendations. In  October 2016, DOD officials stated that the Defense Financial Accounting  Service and the Air Force had taken steps to address these  recommendations. Specifically, DOD stated that formal documentation of  new standard operating procedures will be completed by January 2017,  and that the business rules for reporting the costs of Operation Inherent  Resolve have been updated.
section_title: Appendix III: Scope and Methodology
paragraphs: To assess the extent to which the Office of Management and Budget’s  (OMB) 2010 criteria address the activities included in DOD’s OCO budget  request, we discussed with each of the military services the processes  used for building their budget requests, including any guidance used in  determining what should be included in each respective OCO budget  request. Additionally, we examined guidance used by the military services  and compared the guidance with DOD’s fiscal year 2017 budget request  for OCO to determine whether activities currently funded by OCO are  addressed by the guidance. We also reviewed criteria issued by the OMB  as well as budget guidance issued by the Office of the Under Secretary of  Defense (Comptroller) and the military services to determine what, if any,  direction was issued regarding funding with OCO items not directly tied to  contingency operations. We also discussed with officials from the Office  of the Under Secretary of Defense (Comptroller) whether the OMB’s 2010  OCO guidance was applied in determining whether to fund activities  included in DOD’s fiscal year 2017 OCO budget request. In addition, we  compared the content and timeliness of DOD’s and the OMB’s guidance  to the guidance in the Standards for Internal Control in the Federal  Government that relates to implementing control activities through  policies and to reviewing policies periodically for continued relevance.  Further, we discussed with officials from the OMB and the Under  Secretary of Defense (Comptroller) the steps they take to ensure that the  OCO budget request is consistent with DOD’s and the OMB’s OCO  guidance, as well as any plans to update it.
To assess whether DOD has developed and reported an estimate of the  costs being funded with OCO appropriations that are likely to endure  beyond current contingency operations, we reviewed DOD’s budget  submissions and met with staff from the OMB, the Office of the Under  Secretary of Defense (Comptroller), and each of the military services to  discuss steps taken to develop and report to Congress or other  stakeholders an estimate of enduring OCO costs. We also reviewed  information provided by the Army and Navy regarding those OCO costs  they deemed to be enduring. In addition, we compared DOD’s policies  and other guidance documents and officials’ related actions to  requirements in the FASAB Handbook of Federal Accounting Standards  and Other Pronouncements, as Amended, which requires agencies to  provide reliable and timely information on the full costs of their federal  programs aimed at assisting congressional and executive decision  makers in allocating federal resources and making decisions to improve  operating economy and efficiency. Further, we compared DOD’s policies  and actions to the Standards for Internal Control in the Federal  Government, which emphasizes using complete information to make  decisions and then to communicate such information externally.
We conducted this performance audit from January 2016 to January 2017  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
section_title: Appendix IV: Comments from the Department of Defense
section_title: Appendix V: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Martin De Alteriis, Rich Geiger,  Assistant Director; Amie Lesser, Felicia Lopez, Carol Petersen, Richard  Powelson, Daniel Ramsey, Sharon Reid, Susan Tindall, John Van Shaik,  and Cheryl Weissman made key contributions to this report.