Future Years Defense Program: Actions Needed to Improve Transparency of DOD's Projected Resource Needs
Released: 2004-05-07T00:00:00

Letter

Background

In 1962, DOD instituted the Planning, Programming, and Budgeting System to establish near-term projections in defense spending. This system was intended to provide the necessary data to assist defense decision makers in making trade-offs among potential alternatives, thereby resulting in the best possible mix of forces, equipment, and support to accomplish DOD’s mission. The military services and other DOD components developed the detailed data projections for the budget year in which funds were being requested and at least the 4 succeeding years and provided them to the Office of the Secretary of Defense. The resulting projections were compiled and recorded in a 5-year plan. In 1987, Congress directed the Secretary of Defense to submit the five-year defense program (currently referred to as the future years defense program, or FYDP) used by the Secretary in formulating the estimated expenditures and proposed appropriations included in the President’s annual budget to support DOD programs, projects and activities. The FYDP, which is submitted annually to Congress, is considered the official report that fulfills this legislative requirement.

The Office of Program Analysis and Evaluation has responsibility for the assembly and distribution of the FYDP. The Office of the Under Secretary of Defense (Comptroller) has responsibility for the annual budget justification material that is presented to Congress. These offices work collaboratively to ensure that the data presented in the budget justification material and the FYDP are equivalent at the appropriation account level.

The FYDP provides DOD and Congress a tool for looking at future funding needs beyond immediate budget priorities and can be considered a long- term capital plan. As GAO has previously reported, leading practices in capital decision making include developing a long-term capital plan to guide implementation of organizational goals and objectives and help decision makers establish priorities over the long term. In 2002, Congress directed the Department of Homeland Security to begin developing a future budget plan modeled after DOD’s FYDP.

In the 2001 QDR Report, DOD established a new defense strategy and shifted the basis of defense planning from a “threat-based” model to a “capabilities-based” model. According to the QDR report, the capabilities- based model is intended to focus more on how an adversary might fight rather than specifically on whom the adversary might be or where a war might occur. The report further states that in adopting a capabilities-based approach, the United States must identify the capabilities required to deter and defeat adversaries, maintain its military advantage, and transform its forces and institutions.

The QDR report also outlined a new risk management framework to use in considering trade-offs among defense objectives and resource constraints. This framework consists of four dimensions of risk: Force management–the ability to recruit, retain, train, and equip sufficient numbers of quality personnel and sustain the readiness of the force while accomplishing its many operational tasks; Operational–the ability to achieve military objectives in a near-term conflict or other contingency; Future challenges–the ability to invest in new capabilities and develop new operational concepts needed to dissuade or defeat mid- to long-term military challenges; and Institutional–the ability to develop management practices and controls that use resources efficiently and promote the effective operation of the Defense establishment.

These risk areas will form the basis for DOD’s annual performance goals and for tracking associated performance results. Moreover, the QDR states that an assessment of the capabilities needed to counter both current and future threats must be included in DOD’s approach to assessing and mitigating risk.

FYDP Provides Congress with Mixed Visibility of Projected DOD Spending

The FYDP provides Congress visibility of broad DOD funding shifts and priorities regarding thousands of programs that have been aggregated, or grouped, by appropriation category. For example, we noted that DOD increases its Research, Development, Test and Evaluation (RDT&E) account category and decreases other account categories in the 2004 FYDP. Other funding shifts/priorities are less visible because the FYDP report, organized by program, cannot display some specific costs that are important to decision makers, such as funding for DOD’s civilian workforce. Moreover, the FYDP is a reflection of the limitations of DOD’s budget preparation process. For example, as we have reported in the past, the FYDP reflects DOD’s overly optimistic estimations of future program costs that often lead to costs being understated. Such understatements may have implications for many programs beyond the years covered by the FYDP. Finally, the costs of ongoing operations in Iraq and Afghanistan, which have been funded through supplemental appropriations, are not projected in the FYDP thereby limiting the visibility over these funds. The administration is expected to request additional supplemental funds in calendar year 2005 according to DOD officials. Although some costs are difficult to predict, DOD expects costs to become more predictable later this year. However, some requirements it plans to fund with the supplemental appropriation have already been identified.

Some Funding Shifts/Priorities Are Visible at the Appropriation Category Level in the FYDP; Others Are Less Visible

The FYDP was designed to provide resource information at the program level that could be aggregated a variety of ways including up to the appropriation category level. For individual programs, this means that decision makers have visibility over planned funding for 4 or 5 years beyond the current budget year. Similarly, the programs can be aggregated in a variety of ways to analyze future funding trends. For example, our comparison of the 2003 FYDP to the 2004 FYDP provides visibility of funding shifts that DOD made at the appropriation category level, specifically showing that over the common years of both FYDPs, DOD plans to increase funding in its RDT&E appropriation category, while in most years decreasing funds to Procurement, Military Construction, Military Personnel, and Operation and Maintenance. According to DOD officials, this shift toward RDT&E reflects DOD’s emphasis on transforming military forces. Since the FYDP does not clearly identify those programs DOD considers transformational, we could not validate this claim. Figure 1 shows the changes made between the 2003 and 2004 FYDPs to the department’s appropriation categories for the common 4-year period, 2004–2007. Appendix II provides a more detailed table.

Compared to the 2003 FYDP, funding in the Operation and Maintenance appropriation category in the 2004 FYDP was reduced by at least $9 billion per year from 2004 through 2007 for a total of $42 billion over that period. About $41 billion of that decrease is accounted for by the elimination of the Defense Emergency Response Fund, which had projected over $10 billion in funding each year for 2004 through 2007 in the 2003 FYDP, but had no funding in the 2004 FYDP for those years. Over those same years, the “Other DOD accounts” category increased by a total of $19 billion. The increase in these categories was mainly fueled by a $22 billion increase in the Defense Health Program, which was offset somewhat by a decrease in Revolving Management Funds.

Although DOD’s policy priorities can be discerned at the appropriation level, some important funding categories cannot be identified because program elements, the most basic components of the report, are intended to capture the total cost of the program, as opposed to individual costs that comprise the program. For example, funding for spare parts, civilian personnel, and information technology are included in funding for individual programs and cannot be readily extracted from them. Congress has expressed interest in all of these funding categories. We note that DOD officials stated that these funding categories are delineated in other reports to Congress.

Program elements that encompass multiple systems, such as the Army’s Future Combat Systems and DOD’s Ballistic Missile Defense System, could also limit visibility over funding trends and trade-offs in the FYDP. For example, in its 2004 budget justification material, the administration requested funding for the Army’s Future Combat Systems—often referred to as a “system of systems”—under a single program element. In the National Defense Authorization Act for Fiscal Year 2004, Congress rejected the single program element and instead required the Secretary of Defense to break Future Combat Systems into three program elements. In the conference report accompanying the bill, the conferees noted that “the high cost and high risk require congressional oversight which can be better accomplished through the application of separate and distinct program elements for the [Future Combat System].” In another example, DOD had proposed that Congress repeal its requirement for specifying Ballistic Missile Defense System program elements. According to DOD’s legislative proposal, this would coincide with the Secretary of Defense’s goal to establish a single program that allows allocating and re-allocating of funds among competing priorities within the program. While Congress provided the administration flexibility for specifying program elements related to Ballistic Missile Defense, it nonetheless noted that budget reporting for Ballistic Missile Defense under one program element would be inappropriate.

FYDP Limits Visibility of Some Future Costs through Overly Optimistic Planning Assumptions

Since the mid-1980s, we have reported a limitation in DOD’s budget formulation—the use of overly optimistic planning assumptions. Such overly optimistic assumptions limit the visibility of costs projected throughout the FYDP period and beyond. As a result, DOD has too many programs for the available dollars, which often leads to program instability, costly program stretch-outs, and program termination. For example, in January 2003, we reported that the estimated cost of developing eight major weapon systems had increased from about $47 billion in fiscal year 1998 to about $72 billion by fiscal year 2003. We currently expect DOD’s funding needs in some areas to be higher than the estimates in the FYDP. The following are some examples of anticipated cost increases based on recent reports where we made recommendations to improve the management and costs estimates of these programs.

As we reported in April 2003, cost increases have been a factor in the Air Force substantially decreasing the number of F/A-22 Raptors to be purchased—from 648 to 276. Moreover, current budget estimates, which exceed mandated cost limitations, are dependent on billions of dollars of cost offset initiatives which, if not achieved as planned, will further increase program costs. In addition, GAO considers continued acquisition of this aircraft at increasing annual rates before adequate testing is completed to be a high-risk strategy that could further increase production costs.

DOD has not required the services to set aside funds to support the procurement and maintenance of elements of the Ballistic Missile Defense System. Management of this “system of systems” was shifted from the services to the Department’s Missile Defense Agency in January 2002, but procurement and maintenance costs will be borne by the services as elements of the system demonstrate sufficient maturity to enter into full- rate production. In April 2003, we concluded that because DOD had not yet set aside funds to cover its long-term costs, the department could find that it cannot afford to procure and maintain that system unless it reduces or eliminates its investment in other important weapons systems. We recommended that the Secretary of Defense explore the option of requiring the services to set aside funds for this purpose in the FYDP. DOD concurred with this recommendation, noting that doing so would not only promote the stability of the overall defense budget but would also significantly improve the likelihood that an element or component would actually be fielded.

Since its inception in fiscal year 1986, DOD’s $24 billion chemical demilitarization program (a 2001 estimate) has been plagued by frequent schedule delays, cost overruns, and continuing management problems. In October 2003, we testified that program officials had raised preliminary total program cost estimates by $1.4 billion and that other factors, yet to be considered, could raise these estimates even more.

In written comments on a draft of this report, DOD strongly objected to our conclusion that DOD has historically employed overly optimistic assumptions and noted that these statements do not reflect recent efforts to correct this problem. In August 2001, DOD established guidance that all major acquisition programs should be funded to the Cost Analysis Improvement Group estimates, which, according to DOD, have historically been far more accurate than Service estimates. However, as DOD acknowledges in its written comments, there is currently no auditable data available to document the effects of this guidance; therefore, we could not analyze this claim. Further, GAO reports issued after a draft of this report was sent to DOD – such as our March 2004 report on the Air Force’s F/A- 22 program and our April 2004 testimony on DOD’s Chemical Demilitarization program – continue to raise questions about DOD’s planning assumptions. For example, in our F/A-22 report, we continued to observe that additional increases in development costs for the F/A-22 are likely and in our report on DOD’s Chemical Demilitarization Program, we observed that the program continues to fall behind schedule milestones.

Some of the examples listed above will have budgetary impacts beyond the 2009 end date of the 2004 FYDP. As the Congressional Budget Office (CBO) reported in January 2003, “programs to develop weapon systems often run for a decade or more before those systems are fielded, and other policy decisions have long-term implications; thus, decisions made today can influence the size and composition of the nation’s armed forces for many years to come.” In its February 2004 update to that report, CBO projected that if the programs represented in the 2004 FYDP were carried out as currently envisioned by DOD, demand for resources would grow from the current projection in 2009 of $439 billion to an average demand for resources of $458 billion a year between 2010 and 2022. When CBO assumed that costs for weapons programs and certain other activities would continue to grow as they have historically rather than as DOD currently projects, CBO’s projections increased to an average of $473 billion a year through 2009 and an average of $533 billion between 2010 and 2022.

FYDP Does Not Provide Visibility Over Future Costs of Operations Funded through Supplemental Appropriations

The FYDP does not include future costs for ongoing operations when these operations are funded through supplemental appropriations. Since the attacks of September 11, 2001, DOD has received supplemental appropriations totaling $158 billion in constant 2004 dollars to support operations in Iraq, Afghanistan, and elsewhere, as well as to initially recover and respond to the terrorist attacks. This amount exceeds the $99 billion DOD received in supplemental appropriations throughout all of the 1990s and is more than what DOD requested for its entire Operation and Maintenance account for fiscal year 2004. Table 1 summarizes these supplemental appropriations.

In presentations related to the 2005 President’s budget submitted to Congress in early February 2004, DOD officials reported that the budget does not include funding for ongoing operations in Iraq and Afghanistan, and they expect another supplemental will be needed in January 2005 to finance incremental costs for these operations. Senior DOD officials indicated that operations in Iraq and Afghanistan will continue into fiscal year 2005, but the requirements and costs of these continued operations are difficult to estimate because of uncertainties surrounding the political situations in these regions. However, they noted that funding estimates will likely become clearer over the course of the year. For example, the Under Secretary of Defense (Comptroller) stated that by July 2004, the operations in Iraq and Afghanistan may be better defined and that having time to analyze expenditures will help in making more realistic projections. In addition, Service and DOD officials have already identified some requirements that have associated costs. For example, the Army has been authorized to temporarily increase its end strength by 30,000 soldiers. In briefings on the 2005 budget request, DOD and Army officials stated that they intended to partially fund this additional end strength with the supplemental appropriation anticipated for 2005.

DOD, with congressional approval, has used different approaches in the past to fund operations. For example, in the former Yugoslavia, DOD funded operations begun in fiscal year 1996 through a combination of transfers between DOD accounts, absorbing costs within accounts, and supplemental appropriations. However, in 1997, Congress established the Overseas Contingency Operations Transfer Fund, which provided funding to DOD rather than directly to the individual military services, and allowed DOD to manage the funding of contingency operations among the military services more effectively and with some flexibility. In 2002, DOD determined that funding for operations in the former Yugoslavia were sufficiently stable to be included directly in appropriation account requests. GAO observed in a 1994 report that if an operation continued into a new fiscal year, it would seem appropriate that DOD would build the expected costs of that operation into its budget and allow Congress to expressly authorize and appropriate funds for its continuation. We continue to hold this view.

The FYDP Has Not Been Linked to Important QDR Initiatives, Thereby Limiting Congressional Visibility

The FYDP, as currently structured, does not contain a link to defense capabilities or the dimensions of the risk management framework, both important QDR initiatives, limiting the FYDP’s usefulness and congressional visibility of the initiatives’ implementation. Further, although DOD is considering how to link resources to these initiatives, it does not have specific plans to make these linkages in the FYDP. The Major Force Programs, initially developed as the fundamental framework of the FYDP, remain virtually unchanged and are not representative of DOD’s capabilities-based approach. Furthermore, additional program aggregations that DOD created in the FYDP’s structure do not capture information related to capabilities-based analysis or the risk management framework in part because these concepts have not been fully developed.

FYDP Structure Does Not Reflect QDR Initiatives

DOD has modified the FYDP over time to create new categories of program elements; however, it currently does not include categorizations that are intended to relate to the QDR’s initiatives regarding defense capabilities and the risk management framework. Major Force Programs, originally established to organize the FYDP into the major DOD missions, have remained virtually the same in the five decades since their introduction, do not reflect how DOD combat forces and their missions have changed over time, and do not organize the FYDP by major defense capabilities. For example, the Major Force Program of General Purpose Forces includes large numbers of programs with varied capabilities that would complicate comparisons needed for understanding defense capabilities and associated trade-off decisions inherent in risk management. General Purpose Forces include virtually all conventional forces within DOD and slightly over one-third of DOD funding is allocated to this broad category. Ground combat units, tactical air forces, and combatant ships are among the wide array of forces considered General Purpose Forces. Including forces with such diverse capabilities in the same category diminishes the Major Force Program’s usefulness to DOD and Congress for identifying trade-offs among programs. Additionally, all available resources with comparable capabilities are not categorized in the same Major Force Program. For example, the Major Force Program structure identifies Guard and Reserve forces separately despite the fact that today Guard and Reserve forces are integrated into their respective Service’s force structure, deploy and fight with the general forces, and have some of the same capabilities.

Over time, as decision makers needed information not captured in the Major Force Programs, DOD created new aggregations of program elements and added attributes to the FYDP’s structure. The most recent aggregation categorized the data by force and infrastructure categories, which were developed to relate every dollar, person, and piece of equipment in the FYDP to either forces or infrastructure. This model groups forces, the warfighting tools of the Combatant Commanders, into broad operational categories according to their intended use (such as homeland defense or intelligence operations), and groups infrastructure, the set of activities needed to create and sustain forces, based upon the type of support activity it performs (such as force installations or central logistics). DOD has also added attribute fields to the program elements for such activities as space and management headquarters in order to capture the resources associated with specific areas of interest. However, these new aggregations and attributes were not intended to relate the FYDP’s resources to defense capabilities or the risk management framework.

DOD Does Not Have Specific Plans to Link the FYDP to Important QDR Initiatives

According to officials, DOD does not have specific plans to link capabilities and the risk management framework to the FYDP, in part, because these concepts have not been fully developed. For example, capability-based analysis is still under development. DOD officials describe this as a complex process—representing a fundamental shift in the basis of defense planning and requiring the participation of all DOD components. In the past, DOD focused on whom an adversary might be, whereas the current approach focuses on how future adversaries might fight. DOD’s April 2003 Transformation Planning Guidance states that joint operating concepts will provide the construct for a new capabilities-based resource allocation process. To date, these joint operating concepts have not been formalized. According to DOD officials, while some concepts may be completed near-term, the overall initiative is expected to take 4 to 5 years to complete.

Furthermore, although the risk management framework has been better defined than the capabilities have, it also has not been fully implemented because it has not been fully linked to resources. In December 2002, DOD instructed its components to begin displaying the linkage of plans, outputs, and resources in future budget justification material based upon the four dimensions of its risk management framework. According to DOD officials, in the fiscal year 2005 budget submission, DOD provided this linkage for 40 percent of its resources. DOD plans to complete this process by fiscal year 2007, but does not currently have plans to link the risk management framework to the FYDP as part of this process. DOD’s 2003 Annual Report provided an example of how the FYDP could be linked to the risk management framework using the Force and Infrastructure categories. However, according to DOD officials, this example was intended to be a rough aggregation for a specific performance metric and is not officially recognized as the most appropriate way to show how DOD’s resources link to the risk management framework. Therefore, this linkage has not been integrated into the FYDP’s structure.

Conclusions

It is important for DOD and congressional decision makers to have the most complete information possible on the costs of ongoing operations as they deliberate the budget. In a previous report, we observed that if an operation continues into a new fiscal year, it would seem appropriate that DOD would build the expected costs of that operation into its budget and allow Congress to expressly authorize and appropriate funds for its continuation. We recognize that defining those expected costs is challenging and that supplemental appropriations are sometimes necessary. Nonetheless, the consequences of not considering the expected costs of ongoing operations as part of larger budget deliberations will mean that neither the administration nor congressional decision makers will have the opportunity to fully examine budget implications of the global war on terrorism. Indeed, the FYDP could be a useful tool for weighing the costs of defense priorities such as the global war on terrorism and DOD’s transformation efforts. However, as a reflection of the budget, the FYDP is weakened in this regard because it does not include known or likely costs of ongoing operations funded through supplemental appropriations. Without a clear understanding of such costs, members of Congress cannot make informed decisions about appropriations between competing priorities.

Additionally, the FYDP as it is currently structured does not provide either DOD or Congress with full visibility over how resources are allocated according to key tenets of the defense strategy outlined in the QDR. As a result, resource allocations may not reflect the priorities of the defense strategy, including its new capabilities-based approach and the risk management framework. Yet, the current strategic environment and growing demand for resources require that DOD and Congress allocate resources according to the highest defense priorities. Indeed, as the common report that captures all components’ future program and budget proposals, the FYDP provides DOD an option for linking resource plans to its risk management framework and capabilities assessment and providing that information to Congress. Furthermore, this linkage could provide a crosswalk between capabilities and the risk management framework such that assessments of capabilities could be made in terms of the risk management framework, which balances dimensions of risk, such as near term operational risk versus risks associated with mid- to long-term military challenges.

Recommendations for Executive Action

In the interest of providing Congress greater visibility over projected defense spending, we recommend that the Secretary of Defense direct the Undersecretary of Defense (Comptroller) to take the following two actions: (1) provide Congress data on known or likely costs for ongoing operations that are expected to extend into fiscal year 2005 for consideration during its deliberation over DOD’s fiscal year 2005 budget request and accompanying FYDP and (2) include known or likely projected costs of ongoing operations for the fiscal year 2006 and subsequent budget requests and accompanying FYDPs.

To enhance the effectiveness of the FYDP as a tool for planning and analysis in the current strategic environment, the Secretary of Defense should direct the Office of Program Analysis and Evaluation to take the following two actions: (1) align the program elements in the FYDP to defense capabilities needed to meet the defense strategy, as these capabilities are identified and approved, and the dimensions of the risk management framework and include this alignment with the FYDP provided to Congress, and (2) report funding levels for defense capabilities and the dimensions of the risk framework in its summary FYDP report to Congress.

Agency Comments and Our Evaluation

In written comments on a draft of this report, DOD provided some general overarching comments concerning our characterization of the FYDP as a database, as well as other comments responding to our specific recommendations.

First, DOD noted that it had redefined the FYDP as a report rather than a database, and stated that it maintains a variety of databases to support decision making that should not be confused with the FYDP itself. DOD stated that our characterization of the FYDP as a database resulted in a misinterpretation that pervades our draft report and results in incorrect assertions and conclusions. We have updated our report to refer to the FYDP as a report rather than a database in response to the definition change provided in DOD’s April 2004 guidance – issued after our draft report was sent to DOD for comment. However, we disagree with the DOD statement that characterizing the FYDP as a flexible database structure leads to incorrect assertions and conclusions. Whether the FYDP is referred to as a database or a report, it is an existing tool used to inform analyses, as DOD acknowledged in its written comments, and it has been modified over time to capture resource information associated with special areas of interest. Although a variety of databases are maintained by DOD to support decision making, the FYDP is submitted annually to Congress, as required. Therefore, we believe that our recommendations that DOD provide Congress with greater information in fiscal year 2005 and beyond on known or likely costs of operations, and enhance the FYDP as a tool in the new strategic environment provide practical solutions for improving congressional visibility of DOD’s allocation of resources, as discussed below.

DOD neither concurred nor nonconcurred with the recommendations that the Undersecretary of Defense (Comptroller) provide Congress data on known or likely costs for ongoing operations that are expected to extend into fiscal year 2005 and beyond. DOD stated that it already provides this information to Congress as soon as it is sufficiently reliable and that, at this point in the war on terrorism, current operations are too fluid to permit an accurate determination of the amount of funding required a year in advance. In response to our statement that DOD does not include the costs of ongoing operations funded through supplemental appropriations, DOD further stated that items funded through supplemental appropriations are above and beyond resources budgeted and appropriated for peacetime operations and that funding requirements for wartime and contingency operations are driven by events and situations that DOD cannot anticipate. We are encouraged that DOD agrees with the principle of providing these data to Congress as soon as they are sufficiently reliable. As we reported, DOD indicated that operations in Iraq and Afghanistan will continue into fiscal year 2005; therefore, it is reasonable that DOD would anticipate some costs associated with these operations. However, DOD did not budget any funds for these operations in its fiscal year 2005 budget request or accompanying FYDP submitted to Congress. Based on statements by the Undersecretary of Defense (Comptroller) that cost data will become clearer as the year progresses, we expect that DOD will be able to provide such data to Congress for both the fiscal year 2005 and 2006 budget deliberations. In addition, some requirements that have associated costs, such as the Army’s temporary increase in endstrength, have already been identified. We acknowledge in our report the challenges associated with estimating costs for ongoing operations. Although DOD states that including these estimates would unnecessarily complicate resource discussions and decisions, we maintain that the challenges of estimating costs for ongoing operations must be weighed against Congress’s responsibility for balancing government-wide funding priorities using the best available data at the time of its budget deliberations.

Lastly, DOD nonconcurred with our recommendations for the Office of Program Analysis and Evaluation to align the program elements in the FYDP with defense capabilities and the risk management framework and include this alignment with the FYDP provided to Congress. DOD stated that it does not use the FYDP as a tool to conduct analyses of capability or risk trade-offs between systems, as such a tool would be relatively uninformative and needlessly complex, though the FYDP does inform those analyses. DOD also said it does not intend to embed capabilities or the risk management framework in the FYDP, as these constructs are still being developed and may change significantly, but it is working to create decision-support tools that will link resource allocations to capability and performance metrics, and it may be able to report on those allocations as the tools and processes mature. We maintain our view that the FYDP is the ideal vehicle for providing information on these new concepts to Congress. First, since the FYDP already exists as a legally mandated reporting mechanism, it avoids the creation of any duplicative reporting. Second, because the FYDP cuts across all the services and agencies, it provides a macro picture of DOD resource allocations in terms of both missions and appropriations. Third, as we note in our report, because the FYDP is flexible, DOD has periodically built new categories of program elements into it to provide decision makers with resource information as needed. Currently, Congress cannot use the FYDP to identify the results of DOD’s resource analyses of capabilities or risk trade-offs between programs because these relationships are not aligned with the program elements in the FYDP. We recognize that the FYDP is not the only tool available for defense resource decision making; however, we note, as DOD has stated in its written comments, that the FYDP informs analyses and reflects the resource implications of decisions. While we recognize that DOD is still working to define these concepts, we maintain our view that, once defined, reporting these relationships with the FYDP provided to Congress would improve congressional visibility of DOD resource allocations.

DOD’s comments are included in their entirety in appendix III. Annotated evaluations of DOD’s comments are also included in appendix III.

We are sending copies of this report to the Secretary of Defense; the Undersecretary of Defense (Comptroller); and the Director, Office of Management and Budget. We will also make copies available to others upon request. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov.

If you have any questions about this report, please contact me at (202) 512-9619. Major contributors to this report are listed in appendix IV.

Appendix I: Scope and Methodology

We determined that the automated FYDP data was sufficiently reliable for use in meeting this report’s objectives. DOD checks the FYDP data against its budget request sent to Congress at the appropriation category level. We also compared the FYDP data with published documents DOD provided to ensure that the automated data correctly represented DOD’s budget request. Specifically, we compared total budget estimates, appropriation totals, military and civilian personnel levels, force structure levels, and some specific program information. Based on our and DOD’s comparison, we were satisfied that the automated FYDP data and published data were in agreement. GAO has designated DOD’s financial management area as high risk due to long-standing deficiencies in DOD’s systems, processes, and internal controls. Since some of these systems provide the data used in the budgeting process, there are limitations to the FYDP’s use. However, since we determined the FYDP accurately represents DOD’s budget request, it is sufficiently reliable as used for this report.

To determine whether the FYDP provides visibility over DOD funding priorities we compared DOD reports and Secretary of Defense congressional testimonies that supported the 2003 and 2004 budget submissions against FYDP data. We also analyzed resource data from the 2003 and 2004 FYDPs for fiscal years 2004 – 2007 to identify trends. We adjusted the current dollars to constant 2004 dollars using appropriate DOD Comptroller inflation indexes to eliminate the effects of inflation. To determine whether the FYDP provides visibility over likely future budget requests, we reviewed other related GAO, Congressional Research Service, and Congressional Budget Office reports and interviewed program and budget officials at the Office of the Secretary of Defense and service headquarters. In addition, we summarized documents related to supplemental appropriations and analyzed DOD officials’ statements regarding plans for supplemental appropriations in 2005.

To determine whether the FYDP is useful for implementing DOD’s risk management framework and capabilities based planning, we interviewed appropriate officials at the Office of the Secretary of Defense, service headquarters, and the Institute for Defense Analyses— the organization currently under contract to make improvements to the FYDP, and examined various DOD planning and budget documents including the 2001 Report of the Quadrennial Defense Review, DOD’s 2003 Annual Report to the President and the Congress, and DOD’s fiscal year 2003 and 2004 budget submissions. We also examined the structure of the FYDP to determine if it currently included, or was possible to include, a link to the risk management framework or defense capabilities.

Our review was conducted between June 2003 and February 2004 in accordance with generally accepted government auditing standards.

Appendix II: Comparison of DOD’s 2003 and 2004 FYDPs by Primary Appropriation Category

Total obligation authority in millions of FY 2004 dollars

Other DOD programs include chemical agent and munitions destruction, the defense health program, drug interdiction and counter-drug activities, and the Office of the Inspector General.

Appendix III: Comments from the Department of Defense

The following are GAO’s comments on the Department of Defense’s letter dated April 13, 2004.

GAO Comments

1. DOD objected to our observation that DOD has historically employed overly optimistic planning assumptions in its budget formulations. In response to its comments, we acknowledged DOD guidance to reduce future resource shortfalls on page 11 of this report and noted the lack of auditable data to document the effects of this guidance. We also provided additional examples of GAO reports that continue to raise questions about DOD’s planning assumptions. 2. DOD provided a rationale for growth in civilian personnel costs. We intended civilian personnel to be an example of costs not visible in the FYDP, as opposed to an example of cost growth. Therefore, we have clarified the language on page 2 of this report to reflect this point. Further, we are not proposing that civilian personnel costs be disassociated from programs, as suggested by DOD’s comments. 3. DOD reiterated that it already provides Congress reliable information on the known costs for ongoing operations as soon as it is available. As we stated in our evaluation of agency comments on page 19 of this report, we are encouraged that DOD agrees with the principle of providing these data to Congress as soon as they are sufficiently reliable. However, we note that cost data is expected to become clearer as the year progresses and some requirements that have associated costs have already been identified. Therefore, we expect that DOD will be able to provide such data to Congress for their fiscal year 2005 and 2006 budget deliberations. 4. DOD noted that our report implied that the cost of increased Army force structure has been fully identified and asserted that, to the contrary, the work to define the particulars of this plan in sufficient detail to support budget development is still in progress. However, we note that in February 2004, the Undersecretary of Defense (Comptroller) outlined an Army force-restructuring plan that would be partially funded through the existing fiscal year 2004 supplemental appropriation. While DOD may not have fully defined the particulars of this plan, since it has identified a funding timeline, we believe that at least some of the cost of increased Army force structure can be estimated at this time. 5. Based on comments from the Air Force, DOD asked that we clarify that the reduction in the number of F/A-22 aircraft being purchased was not largely due to cost increases, and it referred to the role played by two Quadrennial Defense Reviews in the decision. Our report stated, however, that cost increases have been one factor in the Air Force’s substantially decreasing the number of F/A-22 Raptors to be purchased – from 648 to 276. Moreover, development costs have increased dramatically and in a report that was issued after this draft was sent to DOD for comment, GAO continued to observe that additional increases in development costs for the F/A-22 are likely. We maintain our view that the F/A-22 program illustrates that DOD’s funding needs in some areas exceed the estimates used in the FYDP. 6. Based on comments from the Air Force, DOD challenged our implication that the F/A-22 program will exceed mandated cost limitations if billions of dollars of cost offset initiatives are not achieved as planned. In February 2003, we reported that the Air Force has had some success in implementing cost reduction plans to offset cost growth. However, production improvement programs, also designed to offset costs, have faced recent funding cutbacks and therefore are unlikely to offset cost growth as planned. The Air Force stated that it has no intention of violating mandated cost limitations, but that it does intend to seek relief from them as part of the fiscal year 2006 President’s budget. To the extent that the Air Force requests additional funds for the F/A-22, our view that the FYDP understates costs is further confirmed.

Appendix IV: GAO Contact and Staff Acknowledgments

GAO Contact

Acknowledgments

In addition to the person named above, Patricia Lentini, Margaret Best, Barbara Gannon, Christine Fossett, Tom Mahalek, Betsy Morris, Ricardo Marquez, Jane Hunt, and Michael Zola also made major contributions to this report.