In fiscal year 2004, DOD owns and manages about 230,000 housing units for military families. At the same time, DOD is increasingly moving to privatize its housing, relying on the private sector to renovate and operate privatized housing as well as build and maintain many new housing units. As of February 2004, DOD had privatized about 55,100 housing units and expected to privatize about 160,000 housing units by the end of fiscal year 2007, including construction of many new units. To operate and maintain the government-owned infrastructure, the services use family housing O&M funds to perform maintenance, pay utilities, provide services, manage the family housing program, and fund various other family housing requirements. Also, funding for military-owned and privatization support costs is provided for in the family housing O&M portion of the annual military construction appropriation. For fiscal year 2004, Congress appropriated about $2.7 billion for family housing O&M in the military construction appropriation. The services request these funds using a budget structure comprised of nine accounts and subaccounts (see fig. 1). In turn, Congress, in its conference report accompanying the bill, uses the same nine accounts and subaccounts to designate its understanding of how the funds are to be used. As shown in figure 1, DOD groups the four subaccounts—management, services, furnishings, miscellaneous—under the operations account. Congressional conferees expressed several concerns about the services’ family housing O&M budget requests in the conference report accompanying the 2004 military construction appropriation bill. Conferees stated concerns about the services not adequately explaining the assumptions and methods used to develop the family housing O&M budget requests and about the services’ reprogramming actions. Furthermore, conferees reduced each of the services’ fiscal year 2004 family housing O&M budget requests by $10 million due to the way the services calculated their family housing O&M requirements. Conferees further reduced the Navy’s request by another $7.7 million due to concerns about how the Navy accounted for its housing privatization effort in its family housing O&M budget request for fiscal year 2004. As part of the President’s budget request to Congress, the services develop budget requests and justification submissions to fund family housing O&M programs and activities. The process begins with the family housing master plans, which provide a consolidated strategy for planning, programming, and executing the family housing program and include funding plans for maintaining government-owned housing and plans indicating a time frame for privatization. The services’ budget formulation process translates the strategy from the family housing master plans into their respective budget requests. In that process, assumptions about the future requirements for family housing, including assumptions related to housing privatization, are established and refined. The budget requests are based largely on historical obligations adjusted for pricing and program assumptions. The Office of the Secretary of Defense (OSD) provides inputs on key pricing assumptions such as inflation, foreign currency rates, and pay adjustments. OSD and the services determine program assumptions including expected reductions in inventory due to housing privatization. For example, when the services are developing the budget request for the utilities account, they typically look at prior year costs per unit and adjust the costs for anticipated inflation and expected changes in housing unit inventory. The family housing O&M budget requests are developed through a series of scheduled steps as part of DOD’s Planning, Programming, and Budgeting System. The planning stage begins about one year before the budget request is sent to Congress, as the family housing O&M requirements are defined based on the family housing master plans (see app. I, slides 10 and 11). Around the same time, OSD issues its Defense Planning Guidance, which may provide broad planning assumptions for the services. For example, DOD’s requirement to eliminate inadequate housing by 2007 is derived from the Defense Planning Guidance. In the programming phase, the services develop their Program Objectives Memorandums, which are 6-year plans that define service requirements. Program Objectives Memorandum budget targets, including family housing O&M budget targets, are then matched against the services’ available resources. The programming phase concludes with decisions that are documented in OSD’s Program Decision Memorandums issued about 3 to 4 months before the President submits the budget to Congress. At the same time, the services are developing the family housing O&M budget request. This request is included in the budget submission the services send to OSD for consideration. As the budgeting phase begins, changes to the budget estimation submission are issued as Program Budget Decisions, the last of which is generally issued 2 months before the President submits the budget to Congress in February. When submitting the budget requests to Congress, the services include justification submissions to summarize the process by which the budget request was derived. Typically, the justification submissions for family housing O&M accounts include a definition of what the account funds, a description of the prior fiscal year’s appropriation, and expected pricing and program changes to that account. The estimate for the budget year is then developed based on those changes. In addition, the justification submissions provide a brief statement about pricing and program changes. During the budget execution year, reprogrammings may be necessary if obligations for each account and subaccount do not match the initial funding amount as specified in the conference report. Historically, the services have reprogrammed family housing O&M funds to pay for unexpected events such as natural disasters, utility rate increases, and foreign currency differences. Delays in housing privatization have also caused some of the services to reprogram funds to pay for expenses associated with housing units they had expected to privatize, according to service officials. Also, OSD and the services consider all family housing O&M accounts, except maintenance, as “must-pay” accounts, meaning that such programs and activities funded in these accounts must be paid even if the obligations differ from the initial funding amount. According to DOD’s Financial Management Regulation, the services are required to notify Congress of any reprogramming of family housing O&M funds that are 10 percent or more of the initial funding level. The conference report accompanying the 2004 Military Construction Appropriations Act further states that the services are to notify Congress when reprogrammings reach 10 percent in the family housing O&M accounts and subaccounts. Congress authorized DOD to establish the Military Housing Privatization Initiative, to use private sector investment capital and housing construction expertise to finance, own, operate, and maintain military housing in an effort to help eliminate inadequate housing from DOD’s inventory. In 2002, OSD accelerated the goal of eliminating inadequate military family housing from fiscal year 2010 to 2007, which has impacted the services’ ability to budget for family housing O&M. As the services privatize their housing, reductions in their housing inventory will occur. As such, funding levels for the family housing O&M accounts and subaccounts are affected differently by privatization (see app. I, slide 15). Some accounts are more directly related to the inventory of military- owned housing and will therefore be expected to decrease generally in proportion to the decrease in inventory due to privatization. These accounts include costs for utilities, furnishings, and services (e.g., trash removal, snow clearing, and fire and police protection). Other accounts, such as leasing, are based on specific anticipated requirements independent from the housing inventory and pace of privatization. Some accounts, primarily the management subaccount and maintenance of real property account, are partially influenced by privatization-related factors. The management subaccount, for example, covers mostly salary costs for activities such as housing referrals, waiting lists, tenant and landlord complaints, and basic housing allowance surveys in addition to the administrative costs directly related to managing military-owned housing. As a result, many of these costs remain regardless of privatization since they are not related to the housing inventory. Budget justification materials submitted to Congress for family housing O&M funding do not clearly and consistently explain how the housing privatization program impacts the services’ budget requests. The services use similar assumptions and methods to develop budget requests for family housing O&M, but they often rely on assumptions established up to a year and a half before the budgets are executed. While the services have the ability to revise and update their budget requests, they typically choose not to because of the difficulty of doing so when faced, in part, with other competing defense priorities, and the relatively small size of the family housing O&M budget. Furthermore, changes in the pace of expected privatization can affect funding required for individual accounts and subaccounts, although not uniformly, but the impact of privatization is not well explained in the services’ budget justifications. The services use similar pricing and program assumptions and methods to develop their family housing O&M budget requests and base their budget requests largely on historical obligations adjusted for assumptions about pricing (e.g., inflation, foreign currency rates, and pay adjustments) and the housing program (e.g., expected reductions in inventory due to housing privatization). For example, when the services are developing the budget requests for the utilities account, they typically look at prior year costs per unit and adjust the costs for anticipated inflation and expected changes in housing unit inventory. Further, many of the pricing and program assumptions for family housing O&M are established up to a year and a half before the budget is executed. For example, service officials told us that the fiscal year 2004 budget requests were largely determined when the services’ Program Objectives Memorandums were completed in May 2002. Similarly, many of the assumptions, such as the privatization rate, used in preparing the fiscal year 2004 budget request were largely based on the services’ 2002 family housing master plans. Once these assumptions are established, service officials told us that the budget requests are less likely to be changed, even if newer information becomes available.