Defense Acquisitions: Better Information Could Improve Visibility over Adjustments to DOD's Research and Development Funds
Published: 2004-09-17T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Congress recognizes that the DOD needs some flexibility to adjust research and development program levels. A key mechanism--below threshold reprogramming (BTR)--enables DOD to adjust program funding levels without seeking prior congressional approval as long as a certain dollar amount or percentage threshold is not exceeded. In response to a mandate by the appropriations committees, this report addresses (1) the quality of the information available about DOD's use of BTRs and withheld funds in fiscal years 2002 and 2003 and (2) the amount and volume of BTRs and temporarily withheld funds for those years. The report also addresses recent congressional direction on providing information on funding adjustments. DOD disagreed that its recent reports to Congress provide BTR information of limited quality but noted that the issues GAO raised in this regard can be addressed and that DOD was open to suggestions and will gladly work with committee staff to satisfy their needs. DOD also offered suggestions to clarify language on certain issues and to put its use of BTRs more in context. DOD's willingness to work with Congress is a constructive response that can lead to reporting changes that can meet the needs of both Congress and DOD. GAO has made appropriate clarifications of language and overall BTR context.
section_title: What GAO Found
paragraphs: DOD's recent reports to Congress provide BTR information of limited quality and do not contain data about funds withheld from DOD's research and development programs in fiscal years 2002 and 2003. DOD delivered its reports to Congress months after the time that Congress began considerations for the new budget, and accessibility was limited because the reports were classified. BTR data in the reports to Congress were derived through subtraction, rather than totaling the actual value of BTR transactions. The reports do not provide a complete picture of how BTRs are implemented on a program-by-program level. DOD has no overall system for maintaining detailed BTR and withhold data across organizations, although such data can be reconstructed from DOD's multiple data collection systems. GAO found that DOD organizations used BTRs frequently to increase or decrease research and development program funding levels. The Air Force, Army, Navy, and Missile Defense Agency (MDA) executed 1,927 BTRs, amounting to about $1 billion in fiscal year 2003. This amounted to about 2 percent of the research and development funds for these organizations. Among the programs affected by BTRs, about half lost funds and more than one-fourth gained funds. While the dollar amounts and frequency differed for fiscal year 2002, the patterns were similar. Although GAO did not observe any instances in which DOD's use of BTRs exceeded the thresholds, GAO's work was not conclusive on this point, as GAO did not design steps to assess compliance with thresholds. DOD withheld about $2.8 billion in funds in fiscal year 2003. Officials cited several reasons for implementing BTRs and withholds, including accommodating unanticipated changes or events, implementing congressional mandates, and, in the case of some withholds, controlling the execution of individual programs. Congress has required DOD to provide better and more timely information on reprogramming and withhold activities.

section_title: Letter
paragraphs: For fiscal year 2003, Congress appropriated $59 billion for defense research  and development overall. Most of this amount was appropriated for  research and development accounts for the military departments and  Defense-wide, including the Missile Defense Agency (MDA) and the Office  of the Secretary of Defense. While such funds are designated for hundreds  of individual programs, Congress recognizes that the Department of  Defense (DOD) needs to have some flexibility to adjust these funds for  unexpected needs or for other valid reasons. In fiscal year 2003, DOD  adjusted several billion dollars worth of appropriated research and  development funds for the military departments, MDA, and the Office of  the Secretary of Defense.
DOD uses two key mechanisms to adjust the distribution of research and  development funds—reprogramming and withholding. In this report,  reprogramming refers to the shifting of funds by DOD within individual  research and development accounts for purposes other than those  contemplated when Congress appropriated the funds, such as to different programs. Congressional defense committees have established  reprogramming guidelines, including setting dollar thresholds, that direct  DOD to seek the prior approval of the committees before executing the  movement of funds. In accordance with these guidelines, DOD regulations  require that when the amount to be reprogrammed falls below the  threshold, referred to as a below-threshold reprogramming (BTR), DOD  generally does not need congressional committee approval. DOD  regulations also provide that reprogrammings above the threshold do  require prior congressional committee approval. A single reprogramming  transaction adjusts at least two programs—the donor and the recipient.  Often, several programs can be adjusted. In this report, we treat each  adjustment as a BTR. Withheld funds are those funds appropriated to  programs that DOD temporarily holds back for some period of time during  the funds’ period of availability before releasing them to research and  development programs. Withheld funds are eventually either released to  the designated programs or reprogrammed for other uses.
The appropriations committees have expressed concern about how DOD is  reprogramming and withholding appropriated funds for research and  development and that DOD has not kept Congress adequately informed  about such actions. The Conference Report accompanying the fiscal year  2004 DOD Appropriations Act (P. L. 108-87) mandated that GAO review  DOD’s movement and withholding of research and development funds.  In response to the mandate, this report addresses (1) the quality of the  information available about DOD’s use of BTRs and withheld funds in  fiscal years 2002 and 2003 and (2) the amount and volume of BTRs and  withheld funds for those years. The report also addresses recent  congressional direction on reprogramming and withholding defense  research and development funds.
We focused our review on the military departments—the Air Force, Army,  and Navy (including the Marine Corps)—as well as MDA and the Office of  the Secretary of Defense. To determine the quality of the information  available about DOD’s use of BTRs and withholds, we reviewed the DOD  Financial Management Regulation and congressional reports; DOD internal  reports and reports to Congress; financial reports; data collection systems;  and financial records for all of the research and development programs  from the Army, Air Force, Navy, MDA, and Office of the Secretary of  Defense. In accordance with federal internal control standards, we have  defined quality of information as measured by such factors as timeliness,  accessibility, accuracy, and appropriateness of content. To determine the  amount and volume of BTRs and withheld funds, we obtained available  data from the Air Force, Army, Navy, and MDA’s data collection systems on  actual BTRs and withholds and developed a database containing data on  each research and development program. We conducted multiple analyses  about BTRs. We interviewed DOD policymakers and decision makers to  gain an understanding of how various reports are prepared and to obtain  information about BTRs and withholds. To gain insight into program-level  activities, we interviewed program managers and collected data from at  least three selected research and development programs in each of the  three military departments. We selected the programs on the basis of three  criteria: a laboratory, a program with significant net reduction or addition  of funds through BTRs, and a program with a relatively high number of  both reductions and additions of funds through BTRs. We performed our  review from November 2003 to July 2004 in accordance with generally  accepted government auditing standards. More details about our  methodology are in appendix I.
subsections: section_title: Background
paragraphs: The funds that DOD managers need for their research and development  programs first must be considered by DOD for inclusion in the President’s  Budget. If the President includes the funds in the budget he transmits to  Congress, then Congress considers the request. If Congress approves the  request, it appropriates funds for the programs in the annual DOD  appropriations act that is signed into law by the President. Three years can  lapse from the time a program manager begins formulating a research and  development program budget request to the time that funds are included in  an appropriations act that is signed into law and designated for the  program in the accompanying conference report. Figure 1 shows a typical  scenario for the research and development program budgeting process.
The resulting appropriations act typically specifies a lump sum for several  different accounts, including the research, development, test and  evaluation appropriation account of each of the military departments as  well as separately for DOD-wide research and development activities.
The account for research, development, test, and evaluation (referred to in  this report as research and development) is further broken down into  budget activities, such as basic research and advanced technology  development. Each budget activity is then subdivided into program  elements, which we refer to as programs in this report. The conference  report that accompanies the appropriations act lists the amounts Congress  designated for each activity and program. An individual program can be  further subdivided by DOD into projects or other activities. Following the  annual enactment of the appropriations act, the Office of Management and  Budget apportions the funds and DOD allots the funds and—except for  those being withheld—makes the money available or releases it to  managers for executing programs. Managers generally have 2 years to  obligate research and development funds before the funds expire.
By the time the budget approval process is complete and the funds are  made available, several things can be said about the appropriated amounts  for the individual program: (1) they represent decisions by Congress to  approve programs as requested, create new programs, and adjust the  requested amounts for others; (2) because of the elapsed time from the  point the program manager began formulating the budget request until  enactment of the appropriations act, situations may have changed that  cause a misalignment between the approved funds and the actual status of  the program; (3) the inherent unknowns in research and development will  result in some programs not being executed as contemplated by the  budget; and (4) unanticipated events will develop during the execution year  that were not anticipated in the budget.
It is for these and other reasons that Congress recognizes that DOD needs  some flexibility to adjust research and development funds after they are  appropriated. A primary vehicle for exercising this flexibility is  reprogramming. DOD can also withhold funds from programs prior to  reprogramming or releasing the funds. The Air Force and MDA restrict the  authority to reprogram or withhold funds to their headquarters staffs, while  the Army and Navy grant their subordinate commands and program  executive offices this authority.
This report defines withheld funds—or a withhold—as appropriated DOD  research and development funds that are not released by DOD to a  designated program for part of the 2-year period of availability of those  funds. Prior to being released for execution, funds may be withheld by the  Office of the Secretary of Defense and the headquarters for the military  departments and MDA. DOD withholds funds for a variety reasons and  does not seek prior congressional approval for these transactions. While  funds are withheld, the funds are still designated for the program but not  yet released to that program.
In contrast, reprogramming of appropriated funds is a mechanism for  which DOD has established a formal process for internal review and  approval and, when necessary, congressional notification and approval.  For fiscal year 2003, to implement congressional guidelines, DOD’s  reprogramming policy required prior written approval from congressional  defense committees for any research and development reprogramming  increase of at least $10 million to an existing program and for any decrease  of at least $10 million or 20 percent of the program’s appropriation,  whichever was greater. In fiscal year 2002, the threshold for increases was  $4 million, and, for decreases, $4 million or 20 percent of the appropriated  amount, whichever was greater. These thresholds are applied at the  program level of the budget. According to DOD’s Financial Management  Regulation and congressional guidelines, DOD generally does not have to  seek prior congressional approval for reprogrammings that do not exceed  the threshold; hence, these are BTRs. The threshold applies to both  individual BTRs and the cumulative amount of BTRs in each program  element. Thus, multiple BTRs for the same program must not exceed the  threshold in total. If congressional committees have denied a  reprogramming request above the threshold, DOD policy prohibits the use  of a series of BTRs to achieve the denied request.
DOD submits a number of reports to Congress each year to convey  appropriations-related information for each research and development  program. One of these reports, the DD 1416, is intended to capture all  changes made to the amount designated by Congress for a program,  including BTRs. The DD 1416 is Congress’s primary vehicle for information  about BTR changes by DOD to the amount designated for a program. The  annual DD 1416 report for Congress covers the entire fiscal year ending  September 30. A DOD regulation requires that the annual report for  Congress be sent by DOD components to the DOD Comptroller within  30 working days after September 30 for review prior to submission to  Congress. However, the DOD regulation does not specify a date by which  the report must be sent to Congress.
section_title: DOD Collects and Provides BTR Information of Limited Quality for Congress and Does Not Provide Congress with Withhold Data
paragraphs: DOD’s primary vehicle for reporting BTRs to Congress, the DD 1416 report,  has several limitations that reduce the report’s quality as a source of  information. DOD provided the DD 1416s for fiscal years 2002 and 2003 to  Congress several months after Congress began considering the new  budget. Because the reports contained classified information, their  distribution was limited. We found a number of discrepancies between the  BTR data in the DD 1416s and the information on actual BTRs in DOD  organizations’ data collection systems. Further, the reports did not include  detailed information about BTR activity on a program-by-program level,  such as whether programs gained or lost funding, and provided no  withhold data.
Data on actual BTRs in DOD are not centralized but rather are contained in  the individual data collection systems maintained by the military  departments, MDA, and the Office of the Secretary of Defense. These  systems range widely in their level of automation, detail, and accessibility.  The data needed to determine the amount and volume of BTRs for  fiscal years 2002 and 2003 were not readily available from some of the  systems and some manual data collection was necessary. Information on  actual BTRs did not always reconcile with the data contained in the  DD 1416 report to Congress.
subsections: section_title: DOD’s Reports to Congress Have Shortfalls
paragraphs: For fiscal years 2002 and 2003, DOD delivered the DD 1416s to Congress  several months after Congress began deliberations on the new budget year.  Each report was dated in April the year following the end of the fiscal year,  and was not delivered to Congress until May, according to a DOD official.  Thus, the report covering the fiscal year ending September 30, 2002, was  sent to Congress in May 2003, and the report for the fiscal year ending  September 30, 2003, was sent to Congress in May 2004. It appears that until  the reports were received, congressional committees were less informed  about the funds that were moved from one research and development  program to another when considering program budgets for the following  year. In addition, the reports were classified because of the sensitive nature  of some of the DOD programs. Classification restricts the ease with which  reports can be accessed by and circulated among congressional staff.
The data contained in the DD 1416s to Congress for both years had several  limitations. The reports listed a net amount intended to represent all BTRs  for each program—after all BTR increases and decreases were  calculated—that occurred in the fiscal year. We found that, except for the  Air Force, the net amounts were not based on actual BTR transactions.  Rather, the net amounts in the DD 1416s were derived by subtracting all  adjustments from the balance of programs’ funds, whether the adjustments  were BTRs or not. In addition, when we compared BTR information in the  DD 1416s with the BTR data provided to us by the DOD organizations, we  found that, except for MDA, the information did not match. The military  departments were not able to reconcile the data. In addition, the reports  did not contain detailed, continuous data on BTRs. For example, the  DD 1416s did not contain the total number of BTRs for each program,  whether funds were added or reduced, reasons for BTRs, or the donor or  recipient programs. Thus, the reports could not be used to understand what  changes occurred in an individual program during the year of execution.
Information about funds withheld from programs for some portion of their  availability period was not reported to Congress.
section_title: Data Collection Systems and Quality of Source Data Vary Widely
paragraphs: DOD does not have a single, centralized, integrated data collection system  to record, manage, and report on funds that have been reprogrammed  through BTRs or withheld. Rather, such information is maintained by the  individual organizations with responsibility for managing the funds  appropriated for each program. To satisfy the requirements of the mandate,  we developed a single database that contains information on research and  development funds reprogrammed and withheld in fiscal years 2002 and  2003 from the three military departments and MDA.
These organizations employ different systems to track and monitor BTRs.  Most but not all systems are centralized, and some organizations have  separate systems for recording funds withheld from programs. The quality  of BTR and withhold data varied across the three military departments and  MDA. We found several features of data collection systems that appeared  to be important to generating quality information. These included whether:  a centralized record and approval system was in place to track changes  within programs; reasons for changes were recorded; data on both donors  and recipients were included; details on transactions were easily  retrievable; and data reconciled with amounts reported in the DD 1416  report. Table 1 summarizes these features for the individual data collection  systems.
Details on each of the systems follow.
subsections: section_title: Army
paragraphs: The Army uses DOD’s computerized Program Budget Accounting System to  record and track BTRs. The accounting system is accessible at Army  headquarters and at all of the subordinate organizations. Although the  system provides the net dollar amount of the BTRs for each program and  project, the system has several limitations. For example, the system does  not show the details of each BTR transaction, such as the donors and  recipients of each transaction or the purpose. To identify the donors and  recipients, the Army must resort to paper records produced by the system  for each transaction. Furthermore, the system does not have the capability  to electronically retrieve information about prior individual BTRs because  the system only shows the cumulative net BTR balances. Prior individual  balances are overwritten after 10 days. Once 10 days have passed, if budget  officials do not print a record, the opportunity to save that data is lost. If  paper records were printed, budget officials can manually assemble and  analyze the records about individual BTR transactions. We found that  nearly 41 percent of the Army’s BTR data contained in the DD 1416 for  Army programs in fiscal year 2002 did not match the BTR data contained in  the paper records produced by the Army’s data collection system, and  nearly 46 percent of DD 1416 BTR data did not match for fiscal year 2003.
With regard to withholds, the data collection system provides some data on  funds withheld from Army programs by the Office of the Secretary of  Defense, Army headquarters, and subordinate organizations, but the  system only shows the cumulative amount of the withheld funds, not the  information for each BTR and withhold. Army Budget Office officials said a  report is produced with this information each month. Also, a user of the  system can, at any time, print a report that shows cumulative withhold  amounts up to the date of printing. However, as with the individual BTR  data, the individual withhold data gets overwritten after 10 days and cannot  be retrieved afterward. Thus, the Army has to rely on paper-based reports  to form an audit trail.
section_title: Navy
paragraphs: The Navy utilizes multiple systems to manage appropriated funds. Separate  systems are used at the headquarters level to record and track BTRs and  withholds. Another is used to allocate statutory obligations. Multiple  subordinate organizations have developed similar systems to record the  BTRs and withholds that they authorize. The Navy required about 10 weeks  to gather information about BTRs and withholds from subordinate  organizations and to consolidate that information with data maintained by  headquarters.
The Navy data collection systems identified all funding level changes, as  well as the programs from which funds were taken and added. The systems  did not identify the reasons for these changes. The Navy had detailed  records identifying the specific programs that were subject to BTRs and  withholds, including the donor or recipient for each BTR transaction, but  the reasons for reprogramming transactions were not available. While most  of the totals provided to us matched those included in the DD 1416, there  were discrepancies for some Navy programs.
section_title: Air Force
paragraphs: The Air Force uses a single, computer-based, data collection system to  manage adjustments to the funding level for each program. This system  was designed and is maintained by a contractor. The system is used to  record, track, and manage all changes to Air Force research and  development funding levels for headquarters and subordinate  organizations, including system program offices and laboratories. The  system maintains multiple years of information on research and  development funds withheld and reprogrammed. For most  reprogrammings, the system records the purpose of the changes and  identifies the programs from which funds were decreased and increased.  The system is updated about once a month and available principally to  those in the headquarters management unit. The system maintains data for  multiple years, and the data are easily retrievable. The Air Force had  detailed electronic records identifying the specific programs that were  subject to BTRs and withholds, including the donor or recipient for each  BTR transaction and the reasons for most of them. The information on  BTRs and withholds was not available below the program level, such as for  a project within a program. Some of the BTR data did not match the data  contained in the DD 1416s for fiscal years 2002 and 2003. Air Force officials  attributed the discrepancies to adjustments that had been made to BTRs in  its management information system and said the problem has been  corrected for fiscal year 2004.
MDA utilizes a single, computerized data collection system to record and  manage changes to program funding levels. The system records BTRs and  withholds for all of its programs, including the donors and recipients for  BTRs and the reasons for them. The system operates on a real-time basis  and is available to all participants from the headquarters unit to the  individual program offices. The system maintains multiple years of data,  and the data are electronically retrievable. MDA’s BTR data reconciled with  the DD 1416s for fiscal year 2003.
section_title: Office of the Secretary of Defense
paragraphs: The Office of the Secretary of Defense has data collection systems for  tracking BTRs and withholds for the research and development programs it  manages, but these systems were not available to record BTRs for fiscal  years 2002 and 2003 appropriations. Consequently, the office did not  provide records of individual BTRs. Officials managing these programs  stated that a data collection system to record and manage appropriated  funds would be helpful, and they are working to improve the system they  installed for fiscal year 2004.
section_title: BTRs and Withholds Used Frequently to Adjust or Control Programs’ Funding Levels
paragraphs: We found that the Air Force, Army, Navy, and MDA executed 1,927 BTRs in  fiscal year 2003, totaling about $1 billion. This amounted to about 2 percent  of their research and development funds. These transactions either  reduced or added to most research and development programs’ funding.  Although we did not observe any instances in which DOD’s use of BTRs  exceeded the thresholds, our work was not conclusive on this point as we  did not design steps to assess compliance with thresholds. Of the programs  affected by BTRs, 48 percent experienced a net loss in funding after  accounting for additions and reductions. The effect of BTRs on some  programs was so significant that the programs were essentially redirected.  With regard to withheld funds, the Army, Navy, and Air Force, and the  Office of the Secretary of Defense withheld a total of about $2.8 billion in  fiscal year 2003. The Office of the Secretary of Defense withheld 56 percent  of the funds, while the military departments withheld the rest. MDA did not  report withhold data except for those funds withheld from MDA by the  Office of the Secretary of Defense. Because DOD organizations have  learned to expect a volume of changes each year—although the specifics  are unpredictable—they have developed strategies to anticipate possible  DOD decisions to reprogram or withhold portions of their funding. Officials  noted that one strategy involves increasing programs’ budget requests to  cover anticipated BTRs and withholds so programs can continue to  perform at planned levels. Officials from the military departments, MDA,  and the Office of the Secretary of Defense cited several reasons for  implementing BTRs and withholds, including accommodating  unanticipated changes or events, implementing congressional mandates,  and, in the case of some withholds, controlling the execution of individual  programs.
subsections: section_title: Wide Use of BTRs and Withholds
paragraphs: In fiscal year 2003, DOD reprogrammed about $1.7 billion in research and  development funds. About $1 billion of this money—59 percent—was  reprogrammed by the Air Force, Army, Navy, and MDA using BTRs. This  amounted to about 2 percent of the research and development funds for  these organizations. The number and amount of BTRs executed in fiscal  year 2003 varied by organization, as shown in table 2. Additional details for  fiscal years 2002 and 2003 are contained in the appendixes.
MDA, which has a total of 12 programs (or 2 percent of the total),  accounted for 34 percent of the total dollar value of BTRs and 21 percent of  the total number of BTRs. MDA programs generally have larger research  and development budgets than other DOD organizations’ programs. MDA  programs in fiscal year 2003 ranged in size from about $7.5 million to about  $3.2 billion, while the smallest program among the three military  departments amounted to $313,000 and the largest was about $1.7 billion.  Additional details are shown in appendix III, table 9.
Of the programs that experienced BTRs in fiscal year 2003, 48 percent had  BTRs that resulted in a net loss of funds, while 28 percent had BTRs that  resulted in a net gain, as figure 2 shows. The percentage of programs  gaining and losing funds through BTRs varied across organizations. These  percentages—and the specific programs involved—also varied from year to  year. (App. III, fig. 5, shows percentages for fiscal year 2002.)
Some programs lost or gained such a substantial portion of their designated  funding that they were essentially redirected. For example, in fiscal year  2003, the Air Force’s KC-10S aircraft program was increased by 92 percent  through four BTRs. In contrast, the Air Force’s C-130J aircraft program was  reduced by 81 percent through four BTRs. More details on these programs  are shown in table 3.
The five programs in each of the three military departments and MDA with  the largest funding reductions and additions through BTRs during fiscal  year 2003 are shown in tables 4 and 5. Additional details are shown in  appendix III, tables 10-17. Again, patterns vary from year to year, as a  comparison of these appendix tables shows.
Funds taken from programs through BTRs may be applied to multiple other  programs. For example, in 2003, the Air Force and the Navy reprogrammed  a combined total of about $29 million from the Joint Strike Fighter to  15 other programs. Additional details are provided in appendix III,  tables 18-21. Similarly, the Army reprogrammed almost $8.7 million from  the Logistics and Engineer Equipment Program to 12 other programs in  fiscal year 2003, and the Navy reprogrammed almost $21.5 million from the  V-22 aircraft program to 8 other programs.
Overall, 76 percent of all research and development programs had at least  1 BTR, and 54 percent had more than 1, and 14 percent had 6 or more in  fiscal year 2003, as table 6 shows. The Navy and MDA had more programs  with substantial numbers of BTRs than did the Air Force or the Army.  Specifically, 27 percent of Navy programs and 66 percent of MDA programs  had 6 to 35 or more BTRs. Only 3 percent and 6 percent of Air Force and  Army programs, respectively, had this many. Additional details are shown  in table 7 and in appendix III, tables 22 and 23.
As figure 3 shows, 42 percent of programs had both BTR reductions and  additions in fiscal year 2003. The percent of such programs ranged from  28 percent in the Army to 80 percent in MDA. Additional details are shown  in appendix III, figure 5 and tables 24-32. Patterns vary from year to year, as  those tables show.
In fiscal year 2003, the DOD organizations we reviewed withheld a total of  about $2.8 billion in appropriated funds. The amounts withheld varied  widely, as table 8 shows. MDA officials said that while MDA does not  always release all appropriated funds immediately to its programs, MDA  does not consider such non-releases to be withholds and did not provide  this data to us. The Office of the Secretary of Defense, which withheld  substantially more than other organizations, accounted for 56 percent of  the total amount withheld. Withholds amounts for fiscal year 2002 are in  appendix III, table 33.
section_title: DOD’s Rationale for BTRs and Withholds
paragraphs: The military departments, MDA, and Office of the Secretary of Defense  officials cited several reasons for implementing BTRs and withholds.  Generally, the reasons involved accommodating unanticipated changes or  events, implementing congressional mandates, and, in the case of some  withholds, controlling the execution of individual programs.
subsections: section_title: Unanticipated Changes or Events
paragraphs: Officials from each of the DOD organizations noted that because they need  to estimate research and development program needs and budgets 2 or  more years in advance of receiving appropriated funds, by the time the  funds are actually received, factors upon which estimates are based may  have changed and unforeseen events may have occurred. Officials also  noted that current levels of flexibility are too limited given the adjustments  that may be needed to deal with such changes. For example, testing on a  program may have been accelerated or delayed; new requirements may  have arisen; design changes may be required; a program’s costs may have  increased; new technologies may have emerged; priorities may have  shifted; and unexpected events, such as operations in Afghanistan and Iraq,  may have occurred. Consequently, funding changes may be needed after  funds are appropriated.
Military department and MDA officials stated that having the flexibility to  adjust funding in such circumstances allows them to make better use of  available funds by fixing a problem promptly, taking advantage of an  opportunity, or responding to an unexpected contingency. For example, in  fiscal year 2003, the Air Force reprogrammed almost $10 million to the  KC-10S program to address unexpected cost increases in the cockpit  modernization program. According to Air Force officials, obtaining these  funds when they were needed avoided contract and schedule issues that  would have been detrimental to the program. Ultimately in this case, the  cockpit modernization program continued to experience unexpected cost  increases and schedule slippages, and the Air Force later cancelled the  program. In another example, Army officials stated that the presence of  improvised explosive devices in the Iraq conflict has made explosive  disposal robots more important than the budget preparation process  anticipated 3 years ago. They noted that the Army is using some of its BTR  flexibility to address this higher priority need.
Military department officials told us they also withhold funds for  unexpected events or opportunities that may arise during the fiscal year.  These withheld funds are then available for reprogramming as needed. For  example, the Army withheld and subsequently reprogrammed about  2.3 percent of funds from most programs in fiscal year 2003 to cover  expenses of ongoing operations. Officials said that this is the only year the  Army instituted a general withhold on its programs. The Navy withheld  2 percent from most research and development programs in fiscal year  2002 and 1 percent in fiscal year 2003. These funds were used to address  unexpected contingencies and emerging technological requirements. While  Air Force officials stated that they do not routinely withhold funds from all  programs, the Air Force Research Laboratory withholds about 5 percent  from all laboratory programs to provide for its headquarters unit. The  Office of the Secretary of Defense, Research and Development, withholds  and subsequently reprograms as necessary about 10 percent from the  research and development programs it manages to provide for  contingencies and to cover reductions resulting from statutory  requirements.
section_title: Implementing Statutory Obligations
paragraphs: Military department officials also use withholds to fund statutory  obligations. For example, DOD is required by statute to set aside research  and development funds for small business concerns to conduct research  projects that have the potential for commercialization. Two programs are  supported with these funds: the Small Business Innovation Research  Program, which stimulates early-stage research and development by small  business concerns; and the Small Business Technology Transfer Program,  which funds cooperative research and development projects involving a  small business and a research institution. The military departments and  MDA vary in the way they set aside the funds for these statutory  obligations. This variation provides these organizations with additional  flexibility in adjusting appropriated research and development funds. In  2003, the Army and the Navy exempted some intelligence programs from  the Small Business Innovation Research and the Small Business  Technology Transfer assessments. They then withheld the funds needed to  cover these assessments from the remaining programs. Air Force officials  informed us that they reallocate the assessments during the fiscal year to  adjust funds available to programs. For example, in fiscal year 2002, the Air  Force used a BTR to restore the Small Business Innovation Research  assessment it had earlier made against the B-2 program, to provide the  program with more money. Other programs were assessed a higher amount  to make up the difference.
In addition, military department officials use withholds to allocate  rescissions and reductions that are included in appropriations acts and  cancel appropriated funding. Rescissions or reductions may apply  specifically to some or all research and development accounts or across- the-board to other appropriations accounts. For example, for fiscal year  2003, because of a change in projected inflation estimates, Congress  directed a reduction of $1.4 billion across all operations and maintenance,  procurement, and research and development appropriations accounts, with  the reduction to be applied proportionally to each program within each  account. To implement this reduction, the Air Force and Navy used  withholds to reduce research and development programs’ appropriations  by $105.6 million and $78.2 million, respectively.
Officials from the Office of the Secretary of Defense noted that they  withhold funds from research and development programs to make certain  programs achieve a particular milestone or other event and to assure that  additional funds appropriated by Congress beyond the program’s requested  budget reach the intended program and can be used effectively. For  example, the Office of the Secretary of Defense sometimes withholds a  portion of a program’s appropriation to assure the program completes a  report, accomplishes a test, or complies in some other way with  headquarters’ direction. Often, these withholds are in response to a  congressional directive contained in authorization or appropriations report  language. Funds are usually released once the program has accomplished  the required task. Each year, Congress adds funds to certain programs’  requested budgets. Officials observed that there is often some uncertainty  as to which program Congress intended these funds to benefit and whether  those programs can effectively use the funds. Consequently, they withhold  the funds until they can determine which programs are to receive the  additional funds and to ensure that those programs can use the money  effectively before releasing the funds. In fiscal year 2002, these types of  withholds represented a large percentage of the Office of the Secretary of  Defense withholds, amounting to nearly $2.7 billion. However, the Office of  the Secretary of Defense has subsequently reduced its withholds of  congressional additions, while some of the departments have increased  theirs.
section_title: Managers Have Adopted Strategies for Anticipating BTRs and Withholds
paragraphs: DOD, military department, MDA, and program officials informed us that  while they can expect with some confidence that reprogramming and  withholds will occur during the budget year, they cannot predict the timing  or amount. In anticipation of these funding adjustments, program and  military department officials noted that program budgets are often  increased during preparation. While this does not appear to be an unusual  practice, we did not assess its extent or magnitude. This practice allows  programs to perform at planned levels if and when these actions actually  occur. Program officials stated that in cases for which anticipated  reductions were underestimated, schedules are sometimes slowed down in  response to BTRs and withholds. For example, tests or other scheduled  events may be delayed until withheld funds are released or the funds lost  through BTRs are paid back. If funds are not paid back, program schedules  may be permanently slowed. For example, according to Air Force officials,  when the Air Force reduced the C-130 avionics modernization program’s by  $35 million in fiscal year 2003, the program manager extended the  development program and renegotiated the development contract.
Funds also may be informally held back after they have been released to  programs. That is, program managers may be told not to spend some  portion of the funds that have actually been released to their programs in  order to provide funds for later reprogramming. This differs from  withholds because withholds can only be implemented before funds are  released to programs. The informal holding back of funds occurs after  funds are released, is done verbally, and is not recorded. This essentially  creates a pool of reserved funds that can be used to meet anticipated but  not fully identified requirements. MDA officials informed us that the Office  of the Secretary of Defense requires them to informally hold millions of  dollars each year in anticipation of the annual omnibus reprogramming.  Omnibus reprogramming is a compilation of several above-threshold  reprogrammings sent to Congress late in the fiscal year. For example, in  fiscal year 2003, the Office of the Secretary of Defense required MDA to  informally hold about $23 million and later used about $6 million of this  money for omnibus reprogramming. The remaining funds were then  released to MDA.
section_title: Recent Congressional Direction for Better Information
paragraphs: Congress has continued to express concerns about how DOD is adjusting  funding for research and development programs and about the adequacy of  information from DOD about such actions. Congress recently revised its  guidance to DOD on reprogramming and withholding appropriated funds  for research and development and on keeping Congress adequately  informed about such actions.
For fiscal year 2004, congressional guidelines had tightened the threshold  for decreases to $10 million or 20 percent of the program’s appropriation,  whichever was less, rather than the greater provision of fiscal year 2003.  For fiscal year 2005, Congress maintained the tightened thresholds of 2004  and added new direction on the reprogramming and withholding of  appropriated funds for research and development programs.
Furthermore, Congress directed DOD to provide better information on  reprogrammings and withholds both in the short- and the long-term.  Specifically, Congress directed:  the Secretary of Defense to provide data by January 31, 2005, on the  adequacy and use of the DOD’s current reprogramming and withholding  practices;  DOD to work with congressional defense committees on a method  providing timely and accurate data on reprogramming activity (both  below and above the threshold) and the application of statutory and  administrative withholds;  that reprogramming data be available on a least a monthly basis,  potentially in conjunction with DOD’s DD 1002 reports; and  that DOD should transmit the data electronically, if feasible, to  congressional defense committees.
section_title: Conclusions
paragraphs: DOD has a legitimate need for a degree of flexibility to adjust the funding  levels designated for individual research and development programs.  Congress has a legitimate need to maintain oversight over the funds it has  appropriated. Ideally, both sets of needs can be met through a combination  of approval thresholds for adjusting funding levels and reports on how  funds have been adjusted. However, DOD has not provided information of  sufficient quality and detail to Congress on how it adjusts appropriated  research and development funds through BTRs and withholds. In reaction,  Congress has tightened thresholds to a level of flexibility DOD officials  believe is too limited.
In passing the fiscal year 2005 DOD Appropriations Act, Congress has  directed DOD to take several actions to improve the information it provides  to Congress regarding DOD’s use of reprogrammings and withholds. The  direction for DOD and the congressional defense committees to work  together provides an excellent opportunity for DOD to make changes that  can serve the needs of both Congress and DOD. These changes may not be  difficult to make, as much of the desired information already exists within  DOD and some of the existing data collection systems are already  automated and contain more detailed information than currently reported.  How DOD responds to this direction will be critical to realizing this  opportunity.
section_title: Agency Comments and Our Evaluation
paragraphs: DOD provided us with written comments on a draft of this report. The  comments appear in appendix II.
DOD commented that our report should note more prominently that we  found no evidence the department violated existing congressionally  approved reprogramming thresholds. DOD expressed concern that  Congress had a misconception that the department had violated existing  threshholds and policies and had used the BTR process to initiate new start  programs. DOD disagreed that its recent reports to Congress provide BTR  information of limited quality and cited other information it provides to  Congress in addition to the DD 1416. It pointed out that the formats for the  information were developed with and approved by committee staff to  satisfy Congress’s needs. DOD did note that the issues we raised on the  quality of information it provides can be addressed, and that DOD was  open to suggestions and will gladly work with the committee staff to satisfy  its needs.
DOD offered several suggestions to put the findings of the report more in  context. These included providing the percentage value of BTRs along with  the dollar value, and noting the reasons DOD uses BTRs. DOD also noted  that the issue of withholds is separate from BTRs and that they are used  primarily to temporarily hold funding from execution until adequate  justification is provided that the resources will be executed efficiently and  effectively as intended by Congress. DOD stated that it was unaware of the  practice of increasing of budget requests to cover anticipated BTRs and  withholds and that this was against DOD policy.
DOD’s willingness to work with Congress is a constructive response that  can lead to reporting changes that can meet the needs of both Congress and  DOD. While current reporting formats may have been developed with  committee staff to meet its needs, recent congressional direction suggest  these needs have changed. Congress has required DOD to provide better  and more timely information on reprogramming and withhold activities. We  have clarified the language in the report that we did not observe any  instances in which DOD’s use of BTRs exceeded thresholds, but we cannot  be conclusive on this point as we did not design steps to assess compliance  with thresholds. The same observation and qualification applies to whether  BTRs were used to start new programs.
We did analyze the additional information DOD provides to Congress on  BTRs, specifically budget exhibits and monthly accounting reports.  However, in their current format, these reports do not provide detailed  information on individual BTRs or any information on withholds. To  provide additional context for our findings, we have added the percentage  value of BTRs in addition to their total dollar value, however, we do not  believe it is necessary for individual programs. While the draft report does  present the reasons DOD uses BTRs and withholds, we have added  language earlier in the report to highlight these reasons. We believe the  distinction between BTRs and withholds is adequately clear in the report.
We note that while withholds are used to ensure programs are properly  executed, we did find instances in which withholds were used to make  funds available for reprogramming.
We are sending copies of this report to the Secretary of Defense; the  Secretaries of the Army, the Navy, and the Air Force; the Director, Missile  Defense Agency; and interested congressional committees. We will also  make copies available to others upon request. In addition, the report will be  available at no charge on the GAO Web site at http://www.gao.gov.
If you or your staff has any questions concerning this report, please contact  me at (202) 512-4841 or D. Catherine Baltzell at (202) 512-8001. Other  contacts and key contributors are listed in appendix IV.
section_title: Scope and Methodology
paragraphs: To determine the quality of the information available about the Department  of Defense’s (DOD) use of below-threshold reprogrammings (BTR) and  withholds, we reviewed the DOD Financial Management Regulation and  recent congressional guidelines on reprogramming and withholds; various  DOD internal reports and reports to Congress; and data from financial  management systems recorded for the research and development programs  from the Army, Air Force, Navy, and Missile Defense Agency (MDA). We  reviewed DOD policy and interviewed decision makers to gain an  understanding of how various reports are prepared and to obtain  information about BTRs and withholds. Our interviews included officials in  the research and development and financial management offices of the Air  Force, Army, Navy and MDA; financial management and acquisition policy  decision maker offices including the Office of the Secretary of Defense  (Comptroller); Office of the Director of Defense Research and Engineering,  Director of Plans and Programs; Assistant Secretary of the Air Force for  Acquisition; Office of the Naval Research Controller; Aeronautical Systems  Command Financial Management office; Air Force Research Labs  Headquarters, Propulsion Directorate, and Sensors Directorate; Assistant  Secretary of the Army for Financial Management and Comptroller,  Investment Division-Army Budget Office; Deputy Assistant Secretary of the  Army, for Plans, Programs, and Resources Office; Army Science and  Technology Integration Office; and Army Research Laboratory  Headquarters. In accordance with federal internal control standards, we  defined quality of information as measured by such factors as timeliness,  accessibility, accuracy, and appropriateness of content.
In addition, we interviewed program officials and collected data from  13 research and development programs: Air Force (5), Army (4), and Navy  (4). The programs were selected on the basis of three criteria: a laboratory,  a program with significant net reduction or addition of funds through  BTRs, and a program with a relatively high number of both reductions and  additions of funds through BTRs. We interviewed program officials for the  Air Force’s C-130 Airlift and C-130J, and KC-10S; the Air Force Research  Lab’s Aerospace Propulsion and Aerospace Sensor’s Labs; the Army’s  Tactical Unmanned Aerial Vehicles, and Line-of-Sight Anti-Tank Missile  program offices; the Army’s Research Lab’s Weapons and Materials  Research, and Survivability/Lethality Directorates; the Navy’s Ocean  Engineering Technology Development, and Consolidated Training Systems  Development Program; the Office of Naval Research Systems Advanced  Technology program; and the Naval Ship and Aircraft Support program.
To determine the amount and volume of BTRs and withheld funds, we  obtained available data from the Air Force, Army, Navy, and MDA data  collection systems on actual BTRs and withholds and developed an  integrated, electronic database on adjustments to designated funding levels  for each research and development program. In developing our database,  we assessed the reliability of the available data, which includes recognizing  the limitations of the data as we have discussed in this report. We  performed electronic testing of required data elements, reviewed existing  information about the data and the systems that produced them, and  interviewed agency officials knowledgeable about the data. We determined  that the data were sufficiently reliable for the purpose of this report. We  conducted multiple analyses of BTR amounts and volume. We used readily  available, off-the-shelf commercial software to develop and analyze our  database. We performed our review from November 2003 to July 2004 in  accordance with generally accepted government auditing standards.
section_title: Comments from the Department of Defense
section_title: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Acknowledgments
paragraphs: In addition, key contributors to the report include Lily J. Chin,  Christopher A. Deperro, Joseph E. Dewechter, Alan Frazier, Ivy Hubler,  Matthew R. Mongin, Bonita J.P. Oden, Katrina D. Taylor, Bradley L. Terry,  and Adam Vodraska.
section_title: Related GAO Products
paragraphs: Coast Guard: Station Spending Requirements Met, but Better Processes  Needed to Track Designated Funds. GAO-04-704. Washington, D.C.: May 28,  2004.
Military Housing: Opportunities Exist to Better Explain Family  Housing O&M Budget Requests and Increase Visibility Over  Reprogramming of Funds. GAO-04-583. Washington, D.C.: May 27, 2004.
Future Years Defense Program: Actions Needed to Improve Transparency  of DOD’s Projected Resource Needs. GAO-04-514. Washington, D.C.:  May 7, 2004.
Budget Issues: Reprogramming of Federal Air Marshal Service Funds in  Fiscal Year 2003. GAO-04-577R. Washington, D.C.: March 31, 2004.
Budget Process: Long-Term Focus Is Critical. GAO-04-585T.  Washington, D.C.: March 23, 2004.
Major Management Challenges and Program Risks: Department of  Defense. GAO-03-98. Washington, D.C.: January 2003.
Defense Budget: Improved Reviews Needed to Ensure Better Management  of Obligated Funds. GAO-03-275. Washington, D.C.: January 30, 2003.
Performance Budgeting: Opportunities and Challenges. GAO-02-1106T.  Washington, D.C.: September 19, 2002.
Congressional Oversight: Challenges for the 21st Century.   GAO/T-OCG-00-11. Washington, D.C.: July 20, 2000.
Managing in the New Millennium: Shaping a More Efficient and  Effective Government for the 21st Century. GAO/T-OCG-00-9. Washington,  D.C.: March 29, 2000.
Congressional Oversight: Opportunities to Address Risks, Reduce Costs,  and Improve Performance. GAO/T-AIMD-00-96. Washington, D.C.:  February 17, 2000.
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