Future Years Defense Program: Substantial Risks Remain in DOD's 1999-2003 Plan
Published: 1998-07-31T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Pursuant to a congressional request, GAO reviewed the Department of Defense's (DOD) Future Years Defense Program (FYDP) for fiscal year 1999, focusing on: (1) DOD's plans to address the financial and programmatic risk areas that the Quadrennial Defense Review (QDR) found in DOD's program; (2) comparing DOD's 1999 FYDP with its 1998 FYDP to identify major changes and adjustments to address these risks areas; and (3) whether there were risk areas in DOD's 1999 program.
section_title: What GAO Found
paragraphs: GAO noted that: (1) although DOD has reduced military and civilian personnel, force structure, and facilities over several years, DOD has been unable to shift funds from infrastructure to modernization; (2) in 1997, infrastructure spending was 59 percent of DOD's total budget, the same percentage as in 1994; (3) DOD acknowledged in the QDR that it has postponed procurement plans because funds were redirected to pay for underestimated operating costs and new program demands, and projected savings from outsourcing and other initiatives had not materialized; (4) to address this diversion of funds, the QDR directed DOD to cut some force structure and personnel, eliminate additional excess facilities through more base closures and realignments, streamline infrastructure, and reduce quantities of some new weapon systems; (5) DOD made adjustments in the 1999 FYDP to decrease the risk that funds would migrate from procurement to unplanned operating expenses; (6) DOD has programmed additional funds for new programs and has moderated its procurement plans; (7) as a result of these and other changes, DOD believes that its 1999 program is on a sounder financial footing; (8) although DOD made adjustments to the 1999 FYDP, GAO continues to see risks that DOD's program may not be executable as planned; (9) for example, DOD projects savings of $24.1 billion as a result of lower projected inflation rates and fuel costs and favorable foreign currency exchange rates; (10) if these rates and costs do not hold true to DOD's assumptions, projected savings will not materialize, and DOD will have to adjust future budgets by cutting programs and/or requesting additional budget authority; (11) further indication of risk can be found in DOD's procurement plans and additional proposed initiatives to reduce facilities; (12) DOD's estimates for procurement spending, in relation to DOD's total budget, run counter to DOD's experience over the last 32 years; (13) DOD procurement spending rises and falls in nearly direct proportion to movements in its total budget; (14) DOD projects that procurement funding will rise in real terms during 1998-2003 by approximately 29 percent while the total DOD budget will remain relatively flat; (15) on some important proposed initiatives, DOD will need congressional approval; and (16) as long as the funding levels agreed to in the balanced budget agreement for national defense remain unaltered, DOD must solve its funding issues within its current and projected total budget.

section_title: Letter
paragraphs: Our earlier analysis of the Department of Defense’s (DOD) Future Years Defense Program (FYDP) for fiscal year 1998 found substantial risk that the program would not be executed as planned. According to DOD, compared to the fiscal year 1998 FYDP, the Quadrennial Defense Review (QDR) proposed a more balanced, modern, and capable program that can be executed within currently proposed budgets. DOD planned to incorporate many of the details of the QDR blueprint into its fiscal year 1999 FYDP. As you requested, we (1) identified the Department’s plans to address the financial and programmatic risk areas that the QDR found in DOD’s program, (2) compared DOD’s 1999 FYDP with its 1998 FYDP to identify major changes and adjustments to address these risks areas, and (3) explored whether there were risk areas in DOD’s 1999 program. Our report does not reflect any adjustments that may have been taken by the Committees on Authorizations and Appropriations during their reviews of the 1999 defense budget request.
subsections: section_title: Background
paragraphs: The QDR was required by the Military Force Structure Review Act, which was included in the National Defense Authorization Act for Fiscal  Year 1997 (P.L. 104-201). The act directed the Secretary of Defense, in consultation with the Chairman, Joint Chiefs of Staff, to conduct a review of the defense needs from 1997 to 2015.
Since its bottom-up review in 1993, DOD has repeatedly stated that it must reduce its infrastructure to offset the cost of future modern weapon systems. Our analysis of DOD’s FYDPs and infrastructure activities over the past several years showed that the infrastructure portion of DOD’s budget had not decreased as DOD planned. Further, planned funding increases for modern weapon systems have repeatedly been shifted further into the future with each succeeding FYDP.
In May 1997, under the balanced budget agreement, the President and Congress set forth a budget blueprint for the national defense budget function. As part of the agreement, national defense funding levels were established for 1999-2002.
The FYDP is an authoritative record of current and projected force structure, costs, and personnel levels that has been approved by the Secretary of Defense. In addition, it is used extensively throughout DOD for analytical purposes and for making programming and budgeting decisions. The 1998 FYDP supported the President’s 1998 budget and included budget estimates for 1998-2003. The 1999 FYDP supports the President’s 1999 budget and includes budget estimates for 1999-2003.
section_title: DOD’s Plans to Address Risk
paragraphs: A principal objective of the QDR was to understand and devise ways to manage the financial risk in DOD’s program. In the QDR, the Department acknowledges that it has a historic, serious problem—the postponement of procurement modernization plans to pay for current operating and support costs. DOD refers to this as migration of funds. According to DOD, the chronic erosion of procurement funding has three general sources: underestimated day-to-day operating costs, unrealized savings from initiatives such as outsourcing or business process reengineering, and new program demands. The QDR concluded that as much as $10 billion to $12 billion per year in future procurement funding could be redirected as a result of these three general sources. The QDR also identifies other areas of significant future cost risks.
To address this financial instability, the QDR directed DOD to cut some force structure and personnel, eliminate additional excess facilities through more base closures and realignments, streamline infrastructure, and reduce quantities of some new weapon systems. By taking these actions, the Secretary of Defense intended that the 1999 budget and FYDP would be fiscally executable, modernization targets would be met, the overall defense program would be rebalanced, and the program would become more stable.
During the QDR, DOD identified initiatives to reduce infrastructure costs and personnel. However, even as the QDR report was released, the Department acknowledged that more could be done. The Department’s November 1997 Defense Reform Initiative Report provided a second set of initiatives to streamline and improve DOD’s infrastructure and support activities. Money saved by these initiatives is to help fund weapons modernization. The Defense Management Council, chaired by the Deputy Secretary of Defense, was charged by the Secretary to ensure implementation of the reform decisions. The Council also was directed to examine similar reforms for each of the services and to negotiate an annual performance contract with the director of each defense agency.
section_title: The 1999 FYDP Reflects Significant Resource Adjustments
paragraphs: The 1999 FYDP reflects the budget blueprint outlined in the balanced budget agreement, and therefore, its total budget does not vary greatly from that in the 1998 FYDP. The common 5-year period of both FYDPs (1999-2003) shows that the 1998 FYDP totaled $1,355 billion and the 1999 FYDP totaled $1,356 billion. Table 1 compares the two plans, by primary appropriation account.
section_title: Appropriation Changes to Rebalance the Defense Program
paragraphs: As shown in table 1, DOD adjusted its three largest appropriations substantially in the 1999 FYDP. Specifically, DOD added $24.9 billion to operation and maintenance (O&M) accounts and decreased the procurement and military personnel accounts by $16.4 billion and $6.4 billion, respectively. (App. I shows the differences between accounts in the 1998 and 1999 FYDPs for each appropriation.)
subsections: section_title: Program Additions and Cuts to Reduce Risk Identified in QDR
paragraphs: DOD made other adjustments in the 1999 FYDP to (1) meet unplanned operating expenses, such as medical care, or new program demands, such as the National Missile Defense System and (2) avoid disrupting or displacing other investment plans.
In the 1999 FYDP, the Defense Health Program, which accounts for about  11 percent of annual O&M spending, is projected to receive higher funding in every year (1999-2003) when compared with the 1998 FYDP. The cumulative projected increase from the 1998 FYDP is $1.6 billion. According to a Defense Health Affairs official, the projected increase would adequately fund the core medical mission, which is comprised of 2 parts, direct care and managed care contracts. However, significant cost-saving initiatives will be necessary in the non-patient care areas of the program.
The 1999 FYDP includes an acquisition program stability reserve to address unforeseeable cost growth that can result from technical risk and uncertainty associated with developing advanced technology for weapons systems, for example, unexpected engineering problems. Currently, cost growth in one program requires offsets from other programs, which in turn can disrupt the overall modernization program. DOD’s plan is to distribute the reserve among programs for the budget year before a President’s budget is submitted to Congress. The service acquisition executives centrally will manage the reserves, and the Under Secretary of Defense for Acquisition and Technology will provide oversight. These reserve funds total $2.4 billion for 2000-2003. Between 2000 and 2003, approximately $2.3 billion, or 97 percent, of the funding is programmed in procurement accounts for the Army, Air Force, Navy, and Marine Corps. The remaining 3 percent is programmed in the defense-wide research, development, test, and evaluation account. Table 2 shows the allocation of these funds, by year.
As stated in a recent report on weapon acquisitions, we have not evaluated the program stability reserve or the way DOD plans to implement it. Nonetheless, DOD’s use of the reserve has the potential for communicating to program managers which practices will be encouraged and which ones will not. For example, if the reserve funds are used primarily to pay for problems that are revealed in late product development or early production, the fund could reinforce existing incentives for not dealing with problems until they occur. Conversely, if the fund is used to resolve and preclude problems, the fund could encourage problems to be revealed earlier in programs.
The 1999 FYDP increased National Missile Defense System research, development, test, and evaluation funding by $1.4 billion, or 75 percent ($1.8 billion to $3.2 billion), from the 1998 FYDP. The program is to provide protection against a limited ballistic missile attack. DOD’s approach, commonly referred to as “3+3,” is to develop, within 3 years, elements of an initial system that can be deployed within 3 years of a deployment decision. The initial deployment decision review is scheduled for 2000. According to DOD, if a sufficient missile threat to the United States has not materialized at that time, development will continue, and the program will maintain a capability to deploy within 3 years.
The QDR directed that some planned procurement be cut, in part to address overall affordability concerns. In the 1999 FYDP, DOD reduced quantities of some weapon systems from the 1998 FYDP. For example, DOD reduced the planned purchase of Joint Surveillance Target Attack Radar Systems’ aircraft from 8 to 2, F-22 fighters from 70 to 58, and F/A-18E/F fighters from 228 to 204.
section_title: Some Funding Additions in Anticipation of Future Expenses
paragraphs: When comparing the 1999 FYDP with the 1998 FYDP, substantial planned funding appears in the 1999 FYDP outyears. OSD has programmed funds in two appropriation accounts without distributing the amounts to a DOD organization. Within the revolving and management funds, DOD working capital funds are anticipated to receive $450 million in 2000 to reduce advance billings. Moreover, in 2003, $700 million is programmed for potential purchases of war reserve materials. According to an Army official, the Army and an outside study group have verified requirement shortages in Army war reserve materials. If future DOD programming and budgeting cycles reveal that the programmed funds are needed, then the amounts would be requested in the applicable President’s budget. Accordingly, trade-offs within other DOD programs would not have to be made.
Estimated costs associated with DOD’s request for the base closure and realignment round in 2001 appear in the defense-wide contingencies account. Net costs of $832 million and $1.45 billion are programmed in fiscal years 2002 and 2003, respectively. The costs represent a net amount, since DOD anticipates savings from the avoidance of military construction and the cessation of some O&M activities. If Congress does not give DOD new base closure authority, DOD could budget these funds for other activities.
section_title: Infrastructure Reductions Are Critical to Achieving DOD’s Modernization Plans
paragraphs: In 1997, infrastructure spending was 59 percent of DOD’s total budget, the same percentage that was reported in DOD’s bottom-up review report for 1994. Both the 1998 and the 1999 FYDPs projected that infrastructure spending would decline to 54 percent of DOD’s budget in 2003.
To modernize the force, DOD plans to increase procurement funding to $60 billion per year. If DOD is to achieve a $60 billion budget goal, it must reduce funding for its infrastructure activities from the military personnel and O&M accounts. As explained in our previous reports and reflected in the 1999 FYDP, about 80 percent of DOD’s infrastructure activities are funded from these appropriation accounts. However, as discussed in the next section, our review of the 1999 FYDP found substantial risks that DOD’s plans may not occur, thereby jeopardizing DOD’s attempts at fixing the migration of funds problem and adhering to procurement plans.
section_title: DOD’s Program Continues to Have Substantial Risk
paragraphs: Although DOD made adjustments in the 1999 FYDP to decrease the risk that funds would migrate from procurement to unplanned operating expenses, we continue to see risks that DOD’s program may not be executable as planned. These risks involve unrealized savings and other program needs.
subsections: section_title: Projected Savings From Favorable Inflation and Foreign Currency Exchange Rates Used for Additional Programs
paragraphs: We reported in May 1998 that as a result of lower projected inflation rates by the executive branch, DOD calculated that its goods and services over the 1999-2003 period would cost about $21.3 billion less than projected  1 year ago. In addition, DOD projected savings of about $2.8 billion as a result of lower projected fuel costs and favorable foreign currency exchange rates. DOD said that with these assumed savings, it can fund additional procurement items and civilian and military pay raises, which account for $15 billion of the $24.1 billion.
The executive branch’s projection of DOD’s inflation rate for 1999 is 1.5 percent, which is a historically low rate of inflation. If the projected savings from lower inflation, lower fuel costs, and favorable foreign currency exchange rates materialize, DOD can fund the additional programs. However, if those savings do not materialize, DOD will have to adjust its future budgets by cutting programs and/or requesting additional budget authority from the President and Congress.
section_title: Some Personnel Cuts and Associated Savings May Not Be Achieved
paragraphs: DOD’s decision to reduce personnel as part of the QDR was driven largely by the objective of identifying dollar savings that could be used to increase modernization funding. We reported in April 1998 that considerable risk remains in some of the services’ plans to cut 175,000 personnel and save $3.7 billion annually by 2003. The projected cuts and savings are as a result of the QDR and are in addition to those previously planned.
The 1999 FYDP does not include all the personnel cuts directed by the QDR. With the exception of the Air Force, the services have plans that should enable them to achieve the majority of their active military cuts by the end of 1999. OSD determined that some of the Air Force’s active military cuts announced in May 1997 to restructure fighter squadrons and consolidate bomber squadrons should not be included in the 1999 FYDP because the plans were not executable at this time.
In addition, plans for some cuts included in the 1999 FYDP are still incomplete or based on optimistic assumptions. For example, there is no agreement within the Army on how 25,000 of the 45,000 reserve cuts will be allocated. This decision on how to allocate the reserve cuts will not be made before the next force structure review. Moreover, plans to achieve savings through outsourcing and reengineering may not be implemented by 2003 as originally anticipated. For example, the Army plans to compete 48,000 positions to achieve the majority of its civilian reductions. However, according to an Army official, those reductions cannot be completed by 2003. Although it announced studies covering about 14,000 positions, it has not identified the specific functions or location of the remaining positions to be studied. In addition, the Army’s plan to eliminate about 5,300 civilian personnel in the Army Materiel Command through reengineering efforts involves risk because the Command does not have specific plans to achieve these reductions. Although outsourcing is only a small part of the Navy’s QDR cuts, the Navy has an aggressive outsourcing program that involves risk. Specifically, the Navy has programmed savings of $2.5 billion in the 1999 FYDP based on plans to study 80,500 positions—10,000 military and 70,500 civilian—by 2003. Moreover, the Navy has not identified the majority of the specific functions that will be studied to achieve the expected savings. According to a Navy acquisition official, the Navy’s ambitious projected outsourcing savings may not materialize, thereby jeopardizing its long-term O&M and procurement plans.
OSD recognizes that personnel cuts and the planned savings from those cuts have not always been achieved, which contribute to the migration of procurement funding. Therefore, OSD has established two principal mechanisms for monitoring the services’ progress in reducing personnel positions. First, it expects to review the services’ plans for reducing personnel positions during annual reviews of the services’ budgets. Second, the Defense Management Council will monitor the services’ progress in meeting outsourcing goals.
DOD’s plans are based on the assumption that Congress will modify the permanent statutory minimum end-strength levels. These personnel levels, or floors, require the services to collectively employ at least 1,414,590 active duty military personnel. This assumption risks the execution of DOD plans. If Congress does not lower the floors, costs for military personnel will be substantially higher. Currently, DOD plans to have 1,396,000 active duty military personnel in 1999, but if the services must retain about 19,000 personnel to meet the floors, they would need about $1.1 billion more in 1999 military personnel funds. Furthermore, costs to meet the floors in 2000-2003 would be higher because DOD projects lower end-strength levels than currently permitted by law. Notably, in 2003, DOD projects 1,366,000 personnel—about 49,000 below current statutory floors. If DOD is precluded from implementing its planned personnel reductions, it would have to make other compensating adjustments to its overall program.
section_title: Unprogrammed Bills Could Lead to Higher O&M Costs
paragraphs: The QDR reported that unprogrammed expenses arise that displace funding previously planned for procurement. The most predictable of these expenses are underestimated costs in day-to-day operations, especially for depot maintenance, real property maintenance, and medical care. The least predictable are unplanned deployments and smaller-scale contingencies.
The services and defense agencies plan to obligate $73 billion for depot maintenance between 1999 and 2003. This estimate, despite its magnitude, does not allow the defense agencies and services to achieve OSD’s goal of funding 85 percent of their maintenance requirements during 1999-2003. According to DOD, the potential liability of unfunded depot maintenance in the 1999 FYDP is $300 million per year. For example, the Army—which added $362 million between 1999 and 2003—is projected to meet only 68 percent of its depot maintenance requirements in 1999 and 79 percent by 2003.
Despite four base realignment and closure rounds, DOD still has excess, aging facilities and has not programmed sufficient funds for maintenance, repair, and upgrades. Each service has risk embedded in its real property maintenance program to the extent that validated real property needs are not met. For example, in the 1999 President’s budget submission, the Air Force plans to fund real property maintenance at the preventive or preservation maintenance level in 1999, which allows only for day-to-day recurring maintenance. This results in risk because the physical plant is degraded and the backlog of maintenance and repair requirements increases. Also, while the Marine Corps added funds during 1999-2003, the Commandant of the Marine Corps determined that the planned funding would merely minimize deterioration of its facilities. Further, although the Army added approximately $1 billion for real property maintenance in the 1999 FYDP, it was not projected to meet its funding goal until 2002.
According to a Defense Health Affairs official, the cumulative O&M funding increase of $1.6 billion over the 1998 FYDP adequately funds the core medical mission, which is comprised of 2 parts, direct care and managed care contracts. However, the 1999 FYDP funding is contingent on several assumptions that contain risk. First, the Defense Health Program assumes program-related personnel reductions due to outsourcing and privatization initiatives. Estimated savings for these efforts grow to $131 million by 2003. Second, the program assumes a 1-percent savings from utilization management, such as reducing the length of hospital stays from 4 days to 3 days. Third, population adjustments due to force structure reductions play a pivotal role. The projected program assumes that Congress will authorize QDR recommended reductions of 61,700 active military personnel and the reductions will be a mix of retirements and nonretirement attrition. If end-strength reductions are not authorized or a higher percentage of the reduction stems from retirements than originally planned, the program will experience higher costs than estimated. Without the authority to reduce active duty end strengths, the beneficiary population of service personnel and their dependents will not decrease. In addition, retirements do not reduce costs because retirees and their dependents remain part of the beneficiary population. According to a Defense Health Affairs official, the funded program does not include an allowance for the impact of advances in medical technology and the intensity of treatment that was identified in a previous GAO report as a risk factor.
Our recent work raises questions about whether cost savings and efficiencies in defense health care will materialize. In August 1997, we reported that a key cost-saving initiative of TRICARE, DOD’s new managed health care system, was returning substantially less savings than anticipated and the situation was not likely to improve. In our February 1998 testimony to Congress, we stated that implementation of TRICARE was proving complicated and difficult and that delays had occurred and may continue.
Notwithstanding the historical costs of several, often overlapping contingency operations, the 1999 FYDP provides funds only for the projected “steady state” costs of Southwest Asia operations—$800 million in 1999. According to OSD officials, by design the FYDP does not include funds for (1) the sustainment of increased operations in the Persian Gulf to counter Iraq’s intransigence on United Nations inspections, (2) the President’s extension of the mission in Bosnia, or (3) unknown contingency operations. DOD’s position is that costs for the mission in Bosnia should be financed separately from planned DOD funding for 1999-2003. Further, the QDR concluded that contingency operations will likely occur frequently over the next 15 to 20 years and may require significant forces, given the national security strategy of engagement and the probable future international environment. Thus, it is likely that DOD will continue to have unplanned expenses to meet contingency operations.
section_title: Base Closure Savings Have Been Difficult to Estimate Precisely
paragraphs: In reporting on lessons learned from prior base closure rounds, we noted that savings, though not well documented, are expected to be substantial.However, the precise amount and timing of net recurring savings realized from base closure actions is uncertain. For example, when compared with the 1998 FYDP, the Air Force has revised its 1999 FYDP O&M savings for the fourth round of base closures. In the 1998 FYDP, the Air Force estimated net savings at $253 million, whereas in the 1999 FYDP it projects net savings at $85 million—a difference of $167 million. This is the second consecutive FYDP that the Air Force has lowered its expectations of near-term savings.
In our comparison of the 1997 and 1998 FYDPs, we reported that the Navy’s savings estimates for the fourth round of base closures were incorrect in that the savings were for outsourcing and competition initiatives. In the 1999 FYDP, the Navy continues to report estimated outsourcing savings incorrectly as base closure savings. According to a Chief of Naval Operations official, the Navy will work with appropriate budget and programming offices to correct the reported FYDP information.
section_title: Risk in Meeting Procurement Goals
paragraphs: We reported that, since 1965, O&M spending has increased consistently with increases in procurement spending. However, in its 1998 FYDP, DOD was optimistic in projecting increases in procurement together with decreases in O&M. In the 1999 FYDP, DOD takes a more moderate position, projecting that O&M spending in real terms will remain relatively flat while procurement increases at a moderate rate. Figure 3 shows the historical relationship between O&M and procurement spending and compares the projections of the 1998 and the 1999 FYDPs.
We reported that DOD’s plans for procurement spending also run counter to another historical trend. Specifically, DOD procurement spending rises and falls in nearly direct proportion to movements in its total budget; however, in the 1998 FYDP, DOD projected an increase in procurement of about 43 percent but a relatively flat total DOD budget. The 1999 FYDP procurement projections continue to run counter to the historical trend, although DOD has moderated its position. Specifically, DOD projects that procurement funding will rise in real terms during 1998-2003 by approximately 29 percent while the total DOD budget will remain relatively flat. Figure 4 shows the historical relationship between the total DOD budget and procurement spending and DOD’s 1999 FYDP projections.
section_title: Recent Procurement Trends Impact Longer-Term Affordability
paragraphs: Over the 1995-98 FYDPs, DOD did not meet its plans to increase procurement. For example, since 1995, DOD has lowered the estimated funding for 1998 procurement from about $57 billion in the 1995 FYDP to about $43 billion in the 1998 FYDP. The 1999 FYDP continues this trend, as table 3 shows.
In its QDR report, DOD recognized that these trends have longer-term implications. Specifically, “some of these reductions have accumulated into long-term projections, creating a so-called ’bow wave’ of demand for procurement funding in the middle of the next decade.” The QDR report concludes that “this bow wave would tend to disrupt planned modernization programs unless additional investment resources are made available in future years.”
The bow wave is particularly evident when considering DOD’s aircraft modernization plans. In September 1997, we reported that DOD’s aircraft investment strategy involved the purchase or significant modification of at least 8,499 aircraft in 17 aircraft programs at a total procurement cost of $334.8 billion (in 1997 dollars) through the aircrafts’ planned completions.DOD’s planned funding for the 17 aircraft programs exceeds, in all but  1 year between fiscal year 2000 and 2015, the long-term historical average percentage of the budget devoted to aircraft purchases. Compounding these funding difficulties is the fact that these projections are very conservative. The projections do not allow for real program cost growth, which historically has averaged at least 20 percent, nor do the projections allow for the procurement of additional systems. However, as a result of the QDR, the 1999 FYDP service aircraft procurement accounts have been moderated. Compared with the 1998 FYDP, the 1999 FYDP reduces projected funding by $3.9 billion, or 4 percent.
section_title: Program Demands and Cost Growth
paragraphs: The QDR report cited cost growth of complex, technologically advanced programs and new program demands as two areas contributing to the migration of funds from procurement. For years, we have reported on the impact of cost growth in weapon systems and other programs such as environmental restoration. Specifically, we reported in 1994 that program cost increases of 20 to 40 percent have been common for major weapon programs and that numerous programs experienced increases much greater than that. We continue to find programs with optimistic cost projections. For example, we reported in June 1997 that we were skeptical the Air Force could achieve planned production cost reductions of $13 billion in its F-22 fighter aircraft program.
Other DOD programs have also experienced cost growth. For example, DOD estimated in December 1997 that the projected life-cycle cost of the Chemical Demilitarization Program had increased by 27 percent over the previous year’s estimate. As stated earlier, DOD has established a reserve fund that can be used to help alleviate disruptions caused by cost growth in weapon systems and other programs due to technological problems. However, it remains to be seen whether the need will exceed available reserve funds.
Policy decisions and new program demands can also cause perturbations in DOD’s funding plans, according to the QDR report. DOD has programmed $1.4 billion more for the National Missile Defense System in the 1999 FYDP than the 1998 FYDP. Despite the increase, considerable risk remains with the program’s funding. For example, technical and schedule risks are very high, according to the QDR, our analysis, and an independent panel. The panel noted that based on its experience, high technical risk is likely to cause increased costs and program delays and could cause program failure. In addition to the technical and schedule risks, the 1999 FYDP does not include funds to procure the missile system. If the decision is made in 2000 to deploy an initial missile system by 2003, billions of dollars of procurement funds would be required to augment the currently programmed research and development funds.
As another example, the 1999 FYDP was predicated on the U.S. shifting to a Strategic Arms Reduction Treaty (START) II nuclear force posture. START II calls for further reductions in aggregate force levels, the elimination of multiple-warhead intercontinental ballistic missile launchers, the elimination of heavy intercontinental ballistic missiles, and a limit on the number of submarine-launched ballistic missile warheads. START II was approved by the U.S. Senate in January 1996 but is pending enforcement until ratification by Russia’s parliament. In the absence of START II enforcement, the United States may decide to sustain the option of continuing START I force levels. According to the Secretary of Defense’s 1998 Annual Report to the President and the Congress, the 1999 budget request includes an additional $57 million beyond what otherwise would have been requested to sustain the START I level. However, maintaining this force beyond 1999 will result in additional unplanned costs.
section_title: Conclusions
paragraphs: Recently, DOD has found itself in a counterproductive cycle. Past attempts at streamlining infrastructure and/or reengineering business practices have not produced the anticipated savings programmed in recent FYDPs. Money saved from these initiatives was to help fund modernization. For the past 5 years, projected procurement funding has slipped with each succeeding FYDP. Moreover, unanticipated contingency costs, higher day-to-day operating expenses, and new program demands also have caused the migration of funds from procurement to operating and support costs. In the QDR, DOD specified this problem, identified its causes, and directed measures to make the program more stable. In the 1999 FYDP, DOD has taken a step toward abating this chronic migration of funds. However, even with a rebalanced program, DOD faces substantial risk in its execution of this first, post-QDR plan. We found that several of DOD’s projections are questionable and/or contain risk. Furthermore, as long as the national defense funding levels agreed to in the balanced budget agreement remain unaltered, solutions to DOD’s funding issues must be found within its current and projected budget. Therefore, it is critical that DOD continues to strive for realistic assumptions and plans in its future budget cycles.
section_title: Agency Comments and Our Evaluation
paragraphs: In commenting on a draft of this report, DOD took issue with some of our characterizations. DOD stated that the 1999 FYDP represents considerable progress toward the objectives of funding readiness-related O&M requirements, implementing plans to streamline and reduce infrastructure, and reducing the risk of migrating funds. DOD noted that our report does not acknowledge that the risks in achieving these objectives have been substantially reduced in the 1999 FYDP and the Department’s program is on a sounder financial footing. Moreover, DOD acknowledges that all risks have not been eliminated and intends to pursue future initiatives to address the remaining risks. We agree, as stated in our report, that DOD made adjustments from the 1998 FYDP to the 1999 FYDP to increase O&M and decrease the risk that funds would migrate from procurement to operating expenses. Moreover, it has plans to reduce infrastructure. However, as explained in this report, we continue to see risks that DOD’s program may not be executable as planned in part because the services’ plans to reduce military and civilian personnel are incomplete or based on optimistic assumptions.
DOD said that it has been able to reduce the proportion of resources devoted to infrastructure activities from 47 percent in 1994 to 45 percent in 1997, as a percent of total obligation authority. Moreover, DOD states that we are inaccurate in reporting that infrastructure in 1997 remains at 59 percent of DOD’s total budget, the same percentage as in 1994. Our method of calculating the infrastructure in DOD’s budget is based on the methodology prescribed by OSD’s Office of Program Analysis and Evaluation (PA&E) in late 1995. We have consistently used this methodology since then to report on DOD’s progress in reducing its infrastructure and DOD has agreed with our prior reports, findings, and analysis. The methodology includes both direct infrastructure (that which can be clearly identified in the FYDP) and a percentage of the defense working capital funds that represents the infrastructure portion of these funds.
In discussing DOD’s comments with PA&E officials, they stated that for a number of reasons, including the difficulty of estimating the infrastructure portion of defense working capital funds, PA&E is evaluating different methodologies to estimate infrastructure in its budget. One such measure, which DOD used to derive the percentages discussed in its letter, is to estimate only the direct infrastructure. However, there are important limitations in this methodology. While it is a simpler methodology, it excludes a significant part of the infrastructure, which PA&E previously considered important to capture. Moreover, DOD established an important baseline in its October 1993 bottom-up review report when it said that infrastructure activities in 1994 would account for approximately 59 percent of DOD’s total obligational authority (including revolving funds) and that it needed to reduce that infrastructure. We strongly believe that it is important to maintain a consistent baseline to measure changes in infrastructure over time.
DOD believes that its assumptions of the savings rates for outsourcing personnel are conservative. According to DOD, the estimated savings reflected in the 1999 FYDP assume that the Department successfully executes the currently projected schedule of competitions. Moreover, DOD emphasizes that it needs to closely monitor implementation of projected competition schedules through the programming and budgeting cycles. We believe DOD has taken a step in the right direction to monitor implementation of the outsourcing process. However, considerable risk remains in the services’ plans to cut planned personnel by 2003 because the plans are still incomplete or based on optimistic assumptions. DOD suggested several technical changes for clarification and accuracy, which we incorporated in the report where appropriate. DOD’s comments are reprinted in their entirety in appendix II.
section_title: Scope and Methodology
paragraphs: To determine the major program adjustments in DOD’s fiscal year 1999 FYDP, we interviewed officials in the Office of Under Secretary of Defense (Comptroller); the Office of Program Analysis and Evaluation; the Army, Navy, and Air Force program and budget offices; and Office of the Assistant Secretary of Defense (Health Affairs). We examined a variety of DOD planning and budget documents, including the 1998 and 1999 FYDPs and the QDR report. We also reviewed the President’s fiscal year 1999 budget submission; our prior reports; and pertinent reports by the Congressional Budget Office, the Congressional Research Service, and others.
To determine the implications of program changes and underlying planning assumptions, we discussed the changes with DOD officials.
We compared DOD’s automated data with published documents provided by DOD. Specifically, we compared total budget estimates, appropriation totals, military and civilian force levels, force structure levels, and some specific program information. Based on our comparisons, we were satisfied that DOD’s automated FYDP data and published data were in agreement. We did not test DOD’s management controls of the FYDP data.
Our review was conducted from November 1997 through June 1998 in accordance with generally accepted government auditing standards.
We are sending copies of this report to other appropriate Senate and House Committees; the Secretaries of Defense, the Air Force, the Army, and the Navy; and the Director, Office of Management and Budget. We will also provide copies to others upon request.
If you have any questions concerning this report, please call me on (202) 512-3504. Major contributors to this report are listed in appendix III.
section_title: Department of Defense’s 1998 and 1999 Future Years Defense Programs, by Accounts
paragraphs: The following tables show the differences between accounts in the 1998 and 1999 Future Years Defense Programs (FYDP) for each appropriation. Totals may not add due to rounding.
In the 1998 FYDP for 1999, $965 million was programmed for the modernization reserve.
subsections: section_title: Table I.8: Research, Development, Test, and Evaluation Appropriation Accounts, 1998 and 1999 FYDPs
section_title: Table I.12: Defense-wide Contingencies, 1998 and 1999 FYDPs
section_title: Comments From the Department of Defense
section_title: Major Contributors to This Report
subsections: section_title: National Security and International Affairs Division, Washington, D.C.
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