In October 1998, we issued a report that raised concerns about the justification and the affordability of the Deepwater Replacement Project. Our major findings included the following: The Coast Guard had understated the remaining useful life of its aircraft and, to a lesser extent, its ships. For example, the justification the Coast Guard prepared in late 1995 estimated that its aircraft would need to be phased out starting in 1998. However, last year, the Coast Guard issued a study showing that its aircraft, with appropriate maintenance and upgrades, would be capable of operating until at least 2010 and likely beyond. The study’s findings suggest that in upgrading or replacing its deepwater ships and aircraft, the Coast Guard should give a relatively low priority to modernizing or replacing its aircraft. Since our report was issued, the Coast Guard has taken additional steps to assess the condition and the remaining useful life of its ships, including hiring naval architects to evaluate the condition of its deepwater ships and completing studies on two 378-foot cutters. According to a Deepwater Project official, contractors have also conducted their own evaluations of the condition of deepwater ships and aircraft to validate their condition. The Coast Guard had not conducted a rigorous analysis comparing the current capabilities of its aircraft and ships with current and future requirements, as required by DOT’s and the Coast Guard’s own guidance. Although the Coast Guard asserted that its current deepwater ships and aircraft were incapable of effectively performing future missions or meeting the future demand for its services, we were unable to validate these assertions. The Coast Guard had originally planned to complete a comparative assessment of the current capabilities and the functional needs of the future deepwater system by November 1998, but work on that assessment has slipped. The Coast Guard completed a baseline study of the capabilities of its existing fleet of ships and aircraft last month; a comparative assessment is planned for completion in April 1999. The Coast Guard lacked support for its estimates of the resource hours needed for its deepwater ships and aircraft to perform required missions. We attempted to verify the Coast Guard’s estimates of surface and aviation hours needed for deepwater law enforcement missions, which constitute over 95 percent of the total estimated mission-related hours for its ships and about 90 percent of the total estimated mission-related hours for its aircraft. We could not verify the reasonableness of these estimates because the sources for the data were not documented or available. An independent group—the Presidential Roles and Missions Commission—will study the Coast Guard’s roles and missions and report on its findings by October 1999. The Coast Guard plans to use this study to recalculate the operating levels needed to meet the requirements of its missions for its revised mission analysis, which is scheduled for completion in January 2000. We agree that the Coast Guard should start now to explore alternative ways to modernize its deepwater ships and aircraft. However, proceeding with the project without a clear understanding of the current condition of its ships and aircraft and whether they are deficient in their capabilities and service demands increases the risk that the contractors, now developing proposals for the project, could develop alternatives or designs that would not be the most cost-effective to meet the Coast Guard’s needs for the Deepwater Project. We recommended that the Coast Guard expedite the development and issuance of updated information from internal studies to the contractors. The Coast Guard agreed with our recommendation and has made progress in developing data on the condition of its ships and aircraft; however, other data on its roles and missions and any shortfalls in its performance capabilities will not be available until later this year or early next year. Contractors, however, are scheduled to provide the Coast Guard with an analysis of alternatives for the Deepwater Project later this month and conceptual designs for the system in December 1999. The Coast Guard agreed with the importance of providing contractors with accurate and complete data as soon as possible; however, it also noted the importance of starting now because of the long lead times associated with a project of this magnitude. The agency plans to provide the contractors with data on its roles and missions and performance shortfalls as soon as the information becomes available. Coast Guard officials believe that they will have data in enough time so as not to adversely affect the contractors’ proposals. We plan to continue monitoring the project to ensure that contractors receive timely and accurate data to include in their proposals. Our report also raised concerns about the project’s affordability. The estimated cost of the Deepwater Project could consume nearly all of the agency’s projected spending for its capital projects. Unless the Congress grants additional funds, which under current budget laws could mean reducing funding for other agencies or programs, the Coast Guard’s other capital projects could be severely affected. In January 1999, Coast Guard officials told us that they plan to address the Deepwater Project’s affordability issue in two ways. First, they believe that competition among three teams of contractors to develop alternative deepwater systems will help minimize the project’s life-cycle costs because the proposed costs will be one key factor in selecting the winning proposal. Second, they said that the agency’s independent evaluation group would analyze various funding alternatives to determine their impact on the project. The group will examine the most cost-effective funding amounts for the project as well as the minimum amount that is needed each year. However, until the Coast Guard develops its revised mission analysis in early 2000 and the contractors provide their cost estimates for various alternatives, it will not be known whether the affordability issue has been adequately addressed. Furthermore, the Coast Guard will have additional time to demonstrate that it has put in place a prudent strategy for dealing with the cost of the project within probable funding levels—a practice that becomes highly critical during this time of fiscal constraint. The ability of the Coast Guard to meet its future capital needs depends largely on the funding requirements for the Deepwater Project. The agency faces potential funding shortages of as much as $300 million by 2002 to complete ongoing and future projects. To deal with this, the Coast Guard must improve its capital planning process to prioritize and manage its capital projects more effectively, renew cost-saving efforts, and/or secure additional funds. In our May 1997 report, we discussed the challenges that the Coast Guard faces in the future as it buys ships, aircraft, and other equipment in a constrained budget environment. We reported that balanced budget agreements would create substantial pressure on the Coast Guard’s budget for capital spending in the coming years. Even with the current projections for surpluses in the federal budget, agencies such as the Coast Guard are still subject to spending limits and must continue to operate in a constrained budget environment. In an effort to balance the budget, caps on discretionary spending have been set. OMB develops budget marks, or targets, for agencies such as the Coast Guard so that they can develop budget plans and requests that are aligned with the marks. For fiscal years 2001 through 2004, OMB has set a mark of $485 million a year for the Coast Guard’s budget for capital spending. As figure 1 shows, the extent to which capital funding requirements are less than or greater than OMB’s target for fiscal years 2001 through 2004 depends largely on the amount needed for the Deepwater Project.Funding needs for ongoing acquisition projects decline steadily through fiscal year 2004 as projects such as the buoy tenders are completed. The funding needs for fiscal year 2001 are well within the budget mark set by OMB, mainly because the projected cost for the Deepwater Project is still relatively low, at $42.3 million. In later years, however, the ability of the Coast Guard to stay within the OMB mark for its budget for capital spending is more uncertain. For example, if the Coast Guard’s funding needs for the Deepwater Project and other new projects amount to $300 million annually beginning in 2002, the Coast Guard will experience a funding gap of about $100 million in fiscal year 2002 but little or no gap in fiscal years 2003 and 2004. If, on the other hand, funding requirements for the Deepwater Project approach its initial estimate of $500 million annually beginning in 2002, then the Coast Guard will face a substantial funding gap— exceeding $200 million in 2002 and beyond. The Coast Guard is developing a new capital planning process that, when implemented, could improve its ability to set priorities and manage its capital projects and ultimately provide a workable approach for acquiring the ships and aircraft it needs within its approved budget. Begun in 1997, this effort is directed at aligning capital needs with probable levels of funding. The Coast Guard’s previous capital plans simply identified various funding needs regardless of probable funding. The Coast Guard acknowledged that this approach no longer reflected the budget climate and needed revision. In January 1999, the agency produced a draft of a new capital plan that identifies strategies for dealing with the affordability of projects such as Deepwater. These strategies include the following: Implementing a number of techniques to control capital costs, such as extending the service life of the Coast Guard’s ships and aircraft and replacing equipment with fewer, more capable assets. As an example, extending the service life of aircraft rather than replacing them could result in significant cost savings. A Coast Guard study estimates that between $257 million and $297 million in upgrades and maintenance could extend the service lives of current deepwater aircraft by 11 to 28 years longer than the Coast Guard’s initial estimate of when it would have to phase out these aircraft. The Coast Guard estimates that a one-for-one replacement would cost $3.8 billion to replace the same aircraft, or about $3.5 billion more than the option to extend the aircraft’s service life. Establishing an “Investment Board” composed of senior agency managers, such as Assistant Commandants for Operations and Marine Safety, the Director of Resources, and the Chief Financial Officer. The board will examine the agency’s portfolio of assets and assign priorities to projects, including shore facilities, and build a range of budget scenarios over a 5-year period as a means of meeting the budget target given to the Coast Guard by OMB. This strategy would involve making trade-offs between projects.