Over the past 7 years, DOD has increasingly used the SRB program to address retention shortfalls. The program’s budget has grown from $308 million in fiscal year 1997 to an estimated $734 million in fiscal year 2003—a 138 percent increase after the effect of inflation was held constant (see fig. 1). The budget is estimated to grow to $803 million in fiscal year 2005, with most of the projected growth resulting from increases in the Air Force SRB program budget. Our 2002 report noted that in fiscal year 2001 the Air Force extended reenlistment bonuses to 80 percent of its specialties. In recent years, Congress has appropriated less money than the services have requested for the SRB program. Based on our work, in fiscal 2003 Congress appropriated $32 million less than DOD requested. Congressional committees proposed further SRB budget reductions during their reviews of DOD’s fiscal year 2004 budget request. The House Appropriations Committee proposed a $44.6-million reduction; the Senate Appropriations Committee, a $22-million reduction; and the Senate Armed Services Committee, a $46-million reduction. The Senate Armed Services Committee additionally noted concerns about proposed SRB program budget increases at a time when overall retention rates are robust and the benefits of military service are increasing overall. DOD appealed these proposed reductions, noting that “the effects of an improving economy and the waning emotional patriotic high of the decisive victory in Operation Iraqi Freedom will combine to increase pressures on both the recruiting and retention programs.” For fiscal year 2004, Congress appropriated $697 million for the SRB program, which was a reduction of $38.6 million from the amount DOD requested. Despite increased use of the SRB program, DOD has cited continued retention problems in specialized occupations such as air traffic controller, linguist, and information technology specialist. A more favorable picture is present with regard to overall retention. All of the services reported that they met overall retention goals for fiscal year 2002 and, with the exception of the Air Force missing its retention goal for second term airmen, expect to meet overall retention goals in fiscal year 2003. Further bolstering these retention expectations are recent survey results showing improvements in servicemembers’ attitudes toward remaining in the military. For example, the 2002 DOD-wide status of forces survey found that the career intent of military personnel had improved between 1999 and 2002, rising from 50 to 58 percent. The survey results showed that retention attitudes were particularly better for junior enlisted (up 11 percent) and junior officers (up 13 percent). In addition, the 2002 Air Force-wide quality of life survey found that 66 percent of enlisted personnel reported they would make the Air Force a career, which is an increase from 58 percent, reported in 1997. According to DOD officials, the effects of more recent events such as extended deployments and other higher operations tempo issues could change servicemembers’ attitudes toward remaining in the military. Congressionally approved reforms in basic pay implemented during the last 3 years were intended in part to address retention problems, particularly with mid-grade enlisted personnel. In the 2002 Quadrennial Review of Military Compensation, DOD attributed the increased use of SRBs in the late 1990s to a growing pay discrepancy between civilians and the mid-career enlisted force. For that period, the review noted an increased use of bonuses for personnel with 10 to 14 years of service. DOD noted that while bonuses are a very important compensation tool, their use is intended for specific purposes and for relatively short periods of time. According to that review, bonuses are appropriate for use within particular skill categories, not as a tool for resolving military and civilian pay differentials across an entire segment of the force. The report noted that widespread pay differentials should be remedied through pay table restructuring. Pay table restructuring began in fiscal year 2001, and additional military pay adjustments have been approved in subsequent budgets. DOD’s May 2003 report did not thoroughly address four of the five congressional concerns about effective and efficient management of the SRB program. First, the report indirectly addressed SRB program effectiveness and efficiency by discussing bonuses as a general military retention tool instead of the effectiveness and efficiency of the program in targeting bonuses to improve retention in selected critical occupations. Second, DOD did not permit us to review the draft guidance, but—based on DOD’s comments on our 2002 SRB report, excerpts of draft criteria contained in DOD’s mandated report, and our discussions with DOD officials—the replacement guidance could expand the SRB program by giving the services more flexibility in designating occupations as critical and either eliminate or weaken the requirement for annual SRB program reviews. Third, OSD did not outline steps to match program execution to appropriated funding as the mandate required; instead, OSD reiterated the need for program-execution flexibility. Fourth, OSD’s evaluation of the services’ administration of their SRBs program was limited, relied largely on service-provided descriptions, and did not use consistent procedures and metrics. Finally, as required by the fifth concern in the mandate, DOD identified the most salient advantages and disadvantages resulting from paying SRBs as lump sums. DOD’s report did not directly discuss how effectively and efficiently each service is currently using the SRB program to address retention problems in critical occupations. Although the mandate noted, “a reassessment of the program is warranted to ensure it is being managed efficiently,” DOD’s response to concern one did not provide sufficient detail to document the effective and efficient use of the program in awarding SRBs. In response to one of the other four congressional concerns, DOD stated that the “intent of retention bonuses is to influence personnel inventories in specific situations in which less costly methods have proven inadequate or impractical.” The report did not, however, document what methods had been used previously or the cost-effectiveness of those methods in achieving desired retention levels. Also absent from the report was a discussion of how key factors influence the current use of SRBs. Examples of key factors include the effects of changes in the basic pay, overall retention rates, and civilian unemployment. For example: Despite increasing basic pay to address the discrepancy between military and civilian pay noted in the 2002 Quadrennial Review of Military Compensation, the budgets for the SRB program are projected to grow to $803 million in fiscal year 2005. In comments received on our preliminary observations briefing, DOD officials noted that our use of constant 2004 dollars in our budget trend analysis did not fully account for the effects of the basic pay changes that exceeded the inflation level and thus increased the size of individual bonuses. At the same time, future SRB program budgets do not show decreases that might be expected as these pay table changes address overall military-civilian pay discrepancies and problems identified within various pay grades. The report did not address the extent to which recent higher levels of overall retention offer opportunities for reducing the number of occupations eligible for SRBs or the bonus amounts awarded for reenlistment. DOD officials have noted that all of the services met or exceeded their aggregate retention goals in fiscal year 2002 and that strong overall retention is expected to continue. However, they cited retention shortfalls in some occupational specialties as areas of concern. Although a generally positive aggregate retention climate might present DOD with opportunities to curtail use of its SRB program, the report did not discuss under what conditions reductions in the program might or might not be appropriate at this time. Despite noting a relationship between civilian unemployment rates and military retention, DOD’s report did not indicate whether civilian unemployment—which is at a 9-year high—might result in the need for fewer SRBs being offered and possibly at lower bonus levels. One study cited in DOD’s report noted that there is a relationship between higher unemployment rates and improved overall military retention. In part of its answer to concern three, DOD noted that changes in the economy and labor market drive changes in actual reenlistment rates. Just as periods of relatively lower civilian unemployment might suggest the need for greater use of the SRB program, periods of relatively higher unemployment might conversely suggest less need for SRBs. Despite civilian unemployment being at its highest rate in several years, the SRB program budget is projected to increase in fiscal year 2005. Instead of directly addressing program effectiveness and efficiency, the 2003 report discussed the general benefits of using bonuses to retain military personnel. DOD’s report cited numerous studies that demonstrated or postulated this effect. However, findings from some studies may not be readily generalized to the way that the SRB program is currently managed or to the economic conditions that currently exist. More specifically, some studies used outdated retention data obtained in the mid-1970s or were performed in a very different retention environment (e.g., the increase in force size during the 1980s and the large draw-down of military forces in the 1990s). Even given our concerns about some of the findings, we believe DOD presented sufficient support for its conclusion that bonuses can be effective in promoting retention. A largely unaddressed, but more pertinent issue is how effectively and efficiently DOD applied this tool to improve retention in critical occupations under recent and current economic conditions. DOD did not permit us to review the draft guidance that will replace the current DOD directive and the DOD instruction canceled in 1996. Our findings for this concern are based on DOD’s comments on our 2002 SRB report, excerpts of draft criteria contained in DOD’s mandated report, and our discussions with DOD officials. Changes to the guidance could lower the threshold required for designating occupations as critical and may eliminate or weaken the requirement for formal annual reviews of the SRB program. DOD’s planned changes to the replacement guidance could provide the services with greater flexibility for designating a specialty as critical but could weaken the controls for targeting the specialties receiving SRBs by lowering the threshold required for making such a designation.