During 1998, the Navy consolidated the Pearl Harbor Naval Shipyard and the Naval Intermediate Maintenance Facility in Hawaii. Because of concerns raised about certain aspects of the consolidation, the Navy implemented a test project, commonly called the Pearl Harbor pilot, to determine if integrating the management, operations, and funding of the shipyard and the intermediate maintenance facility can result in greater efficiency and lower overall ship maintenance costs. In September 1999, we reported the Pearl Harbor pilot was not yet complete and preliminary results were mixed, and we recommended that the Navy take steps to address unresolved issues related to financial management of the consolidated facility. The Navy accomplishes maintenance on its surface ships and submarines at three levels: organizational, intermediate, and depot. Organizational- level maintenance includes all maintenance actions that can be accomplished by a ship’s crew. For example, the ship’s crew may replace or fix a cracked gasket or leaks around a hatch or doorway aboard ship. Traditionally, intermediate-level maintenance is accomplished by Navy intermediate maintenance activities for work that is beyond the capability or capacity of a ship’s crew. An intermediate maintenance activity tests, calibrates, and repairs ship systems and equipment, which the ship’s crew may not have the tools or capability to do. On the other hand, depot work includes all maintenance actions that require skills or facilities beyond those of the organizational and intermediate levels. Shipyards with extensive shop facilities, specialized equipment, and highly skilled personnel accomplish major repairs, overhauls, and modifications. Figure 1 shows where the Navy’s ship maintenance activities are located. In March 1994, the Chief of Naval Operations announced a regional maintenance program to streamline the Navy ship repair and maintenance processes, reduce infrastructure and costs, and maximize outputs. The plan was to (1) optimize intermediate-level maintenance through consolidation of intermediate activities, (2) integrate intermediate and depot activities to be managed by fleet commanders, and (3) conduct fleet maintenance using an integrated maintenance process supported by common business and maintenance procedures. The first phase, consolidation of intermediate-level maintenance, nears completion. For the second phase of the program, the Navy has implemented the Pearl Harbor pilot and may consolidate the operations of the Puget Sound Naval Shipyard and the Intermediate Maintenance Facility, Northwest (formerly the Trident Refit Center, Bangor, and the Ship Intermediate Maintenance Facility, Everett). The third phase, using a single maintenance process for fleet maintenance, is to be completed in fiscal year 2001. Prior to the consolidation, the Pearl Harbor Naval Shipyard and the Naval Intermediate Maintenance Facility were individual commands with individual physical plants, organizational infrastructures, and administrative support services. The shipyard was managed by the Naval Sea Systems Command and funded through the Navy Working Capital Fund, while the intermediate maintenance facility was managed by the Pacific Fleet and financed through direct appropriations. Navy officials recognized that these different financial and organizational structures required them to use cumbersome, work-around procedures to share workloads and resources between the shipyard and the intermediate maintenance facility. The private ship repair facilities in Hawaii also complete a small amount of maintenance work for the Navy. On April 30, 1998, the Navy consolidated the operations of the Pearl Harbor Naval Shipyard and the Naval Intermediate Maintenance Facility, including overhead functions such as engineering, quality assurance, occupational safety, and administration. Similarly, maintenance shops, crane operations, and calibration laboratories were also consolidated. Further, the Pacific Fleet assumed ownership and overall management and financial responsibility for the consolidated facility, and the Naval Sea Systems Command continued to be the technical and operating authority. The Navy named the consolidated facility the Pearl Harbor Naval Shipyard and Intermediate Maintenance Facility. This consolidation is the Navy’s first attempt at the full-scale, total merger of two maintenance activities operating under separate command structures and financial systems. To achieve a fully integrated organization, the Navy decided the consolidated facility should use a single financial structure and selected direct appropriations instead of the working capital fund during the pilot period. This decision was based on several factors, including the belief that the pilot goals could more readily be achieved by using direct appropriations. The Pacific Fleet was the largest customer of ship maintenance activities in Hawaii, and most Fleet maintenance activities (ship repair facilities, shore intermediate maintenance activities, trident refit centers, and aviation intermediate maintenance departments) were funded with direct appropriations. Thus, they expected fewer financial issues using direct appropriations because the Fleet could integrate the consolidated facility into its financial structure and would not need to establish another system. Several Navy officials also believed that the working capital fund included fees and charges that overstate ship maintenance costs compared to direct appropriations, under which some overhead is not directly assigned to the cost of operations. On the other hand, the working capital fund accounts for these costs in an attempt to identify the full cost of ship maintenance operations. While the level of resources required to carry out ship maintenance activities is likely to be similar regardless of whether financed using direct appropriations or the working capital fund, using the working capital fund a customer is more likely to be directly responsible for a larger portion of those costs. Use of a working capital fund better enables Department of Defense (DOD) components to fully account for their share of the program costs. If Navy officials decide that direct appropriations are the most appropriate financial structure at Pearl Harbor after the completion of the pilot, the consolidated facility would then be permanently transferred from the working capital fund. The Deputy Secretary of Defense required the Navy to develop a test plan to determine whether the Pearl Harbor consolidation had resulted in an increased use of personnel and lower overall unit costs than separate facilities. A panel comprised of officials from the Office of the Secretary of Defense (OSD) and the Navy selected nine test metrics that represent a variety of issues and performance indicators for the consolidated facility (see table 2). The Navy used fiscal year 1997 as the baseline for measuring success or failure of the consolidated facility because this was the last full year the former Pearl Harbor shipyard and the intermediate maintenance facility operated as independent activities. The baseline is compared with data for fiscal year 1999. Fiscal year 1998 was eliminated because of the operational turbulence expected by the consolidation of activities during the year. The Conference Report for the Department of Defense Appropriations Act for Fiscal Year 1998 concluded that it would take at least 2 years before the Navy could determine whether the consolidation of maintenance activities for the pilot was effective and should be made permanent or expanded to other locations. The report directed the Navy to report its findings from the pilot to the Committees on Appropriations on or after April 1, 1999, and not to expand the pilot until 6 months after it had made its report. The conferees also directed the Navy not to make any permanent changes to the workforce in terms of total number of employees or any other permanent changes until the pilot was completed. Navy officials expect to issue the report in fiscal year 2001. At the time of our 1999 report, we noted that while the consolidation of shipyard and intermediate maintenance activities offered clear benefits, the close proximity of the facilities and the larger portion of Fleet-funded work in Hawaii may favorably affect the pilot’s results; this may not be the case at other locations. Consequently, we concluded the Pearl Harbor pilot provided only a general indication that future consolidations would result in efficiencies largely because of unique aspects of Pearl Harbor ship maintenance activities and financial management issues. Further, we reported that OSD and Navy officials had different opinions over the potential impact of using direct appropriations on the following issues. Cost visibility and accountability for consolidated ship maintenance operations. The Congress established working capital funds to, among other purposes, provide a flexible funding mechanism that would allow defense industrial and service activities to operate on the same basis as the private sector, including the use of standard cost accounting practices and techniques. According to OSD officials, applying these practices and techniques has made shipyard costs more visible and improved the efficiency of operations. Naval shipyards and activities remaining in the working capital fund. OSD officials were concerned that the Navy had not adequately addressed the impact of removing all naval shipyards from the working capital fund. They believed that if the Navy removed the shipyards from the fund, the Navy would have to request direct appropriations to pay the cost of the shipyards to transfer from the working capital fund or other activities in the fund would need to absorb a larger share of costs. Ship maintenance activities during periods without appropriations. A working capital fund is not directly subject to the annual appropriations cycle and can continue operations without interruption between fiscal years. Consequently, the former Pearl Harbor shipyard operators were freed from reprogramming limitations and restrictions applicable to regular appropriations and were allowed to incur costs without waiting for enactment of an appropriation. Because this financial flexibility is considered critical to shipyard operations, OSD officials were concerned that the Navy had not addressed how eliminating this flexibility would affect Pearl Harbor operations or future consolidations. Capital improvement program for consolidated ship maintenance activities. According to OSD officials, an important aspect of a working capital fund is its capital improvement program. In the case of the former Pearl Harbor shipyard, it depreciated its capital assets and collected this expense through the reimbursable rate charged to its customers. Therefore, the fund had a ready reserve to finance capital improvements for the shipyard. However, OSD officials were concerned that future funding levels may be insufficient because of uncertainties in the appropriation process. We concluded that while the consolidation of shipyard and intermediate maintenance activities offered clear benefits, financial management issues existed that needed to be resolved for future operations at Pearl Harbor and in considering other consolidations. OSD concurred with the intent of our recommendations to resolve financial management issues related to the consolidation at Pearl Harbor and indicated that the Departments of Defense and the Navy would correct them. This report discusses the extent to which these issues have been addressed by the Departments.