In recent years, Congress and DOD have had an ongoing debate concerning core depot maintenance capabilities and the work needed to support these capabilities; the role of military depots; and the size, composition, and allocation of depot maintenance work between the public and private sectors. Since the mid-1990s, DOD policy and advisory groups have called for contracting with the private sector for a greater share of the Department’s logistics support work, including depot maintenance, and related activities such as supply support, engineering, and transportation. An integral part of the policy shift is the debate over how DOD identifies its core logistics capabilities that are to be performed by federal employees in federal facilities. The Deputy Under Secretary of Defense for Acquisition, Technology, and Logistics is responsible for maintenance issues, including core. We recently testified on core capabilities, DOD management of the depot system, and related issues. DOD estimates that it will spend about one-third of its $297 billion budget for fiscal year 2001 on logistics support activities at military maintenance, supply management, engineering, distribution, and transportation activities and at thousands of contractor locations. As a result of force structure reductions, depot closures under the base realignment and closure process in fiscal years 1988 to 2001, and DOD’s desire to place greater reliance on the private sector for the performance of depot maintenance, the number of “major” depots (those employing more than 400 persons) was halved from 38 to 19. During this same period, the total amount of work (measured in direct labor hours) accomplished at the military depots was cut in half and the depot maintenance workforce was reduced by about three-fifths (from 156,000 in fiscal year 1987 to about 64,500 in fiscal year 2001) as shown in figure 1. At the same time, annual funding for contracted depot maintenance work has increased by 90 percent. The provisions of 10 U.S.C. 2464 concerning the identification and maintenance of a core logistics capability and DOD implementing guidance are aimed at ensuring that repair capabilities will be available to meet the military needs should a national defense emergency or contingency occur. The concept of core work is not unique to DOD. However, the term gained increased importance in its relationship to military depots in the 1980s and 1990s. The concept of core and the identification of core capabilities for depot maintenance began in the 1980s; and until the early 1990s, each of the services used its own processes for determining core workloads needed to support the identified depot maintenance capabilities. The concept of core is one that has usage in the private sector and in the government with respect to decisions over whether support functions might best be provided in-house or outsourced to contractors. In recent years, as private sector firms have approached decisions on whether or not to outsource various activities or functions, they first evaluate the business to identify those activities that are critical to the performance of the mission of the business and which the owners or managers believe they should perform in-house with workers in their employment. These “core” activities are not evaluated for contracting out. Remaining activities are studied to determine if in-house performance can be improved and/or costs can be reduced. The results of this assessment are compared with offers from external businesses. The criteria for outsourcing would generally be that the external business would provide these non-core activities for less cost and/or would provide improved capability or better service than can be provided using internal resources. Essential to an understanding of how private businesses use this concept is the fact that decisions over what is core is a somewhat subjective determination, one that is not absolute. What one business considers core and not subject to contracting out, another business might identify as a candidate for outsourcing. For example, Disney World retains as company employees the maintenance workers who keep their rides functioning at a high readiness condition while another recreation facility might decide to contract out the responsibility for equipment maintenance. Within the government, the concept of “core” and a related concept of “inherently governmental” are a key part of the government’s policy regarding what activities it should perform with federal employees and what activities the private sector should perform. Office of Management and Budget (OMB) Circular A-76, which was first adopted in 1966, sets forth the general government policy that federal agencies are to obtain commercially available goods and services from the private sector when it is cost-effective to do so. A commercial activity is one that is performed by a federal agency and that provides a product or service, such as base operating support or payroll, that could be obtained from a commercial source. The handbook implementing A-76 provides the procedures for competitively determining whether commercial activities government agencies are currently performing should continue to be done in-house (or by another federal agency) or whether they should be contracted to the private sector. At the outset, inherently governmental activities—those that are so intimately related to the exercise of the public interest as to mandate performance by federal employees—are reserved for government performance. These activities are thus in a sense “core” and outside the coverage of A-76. The core concept appears again within the universe of commercial services covered by A-76. The circular exempts from its cost comparison provisions activities that make up an agency’s “core capability.” Thus, under the circular, the government will retain a minimum core capability of specialized scientific or technical in-house employees necessary to fulfill an agency’s mission responsibilities or to meet emergency requirements. Again, these activities are reserved for government performance. While the term “inherently governmental” is defined in statute and in the circular and the term “core” is defined in the circular, agency officials exercise broad discretion in applying them to agency functions. Depot maintenance workloads valued at $3 million or more are exempt from the A-76 process by 10 U.S.C. 2469. The use of the A-76 process in DOD has proven to be controversial with concerns often expressed about the fairness of the process and of the cost comparisons between the public and private sectors. Section 852 of the 2001 Defense Authorization Act provided for a panel of experts to be convened by the Comptroller General to review process and procedures governing the transfer of commercial activities from government personnel to the private sector. The panel is required to report its findings and recommendations to the Congress by May 1, 2002. Legislation was enacted in 1984 that sought to add clarity to the meaning of “core” as it applies to logistics activities involving military facilities.The provision, codified at 10 U.S.C. 2464, provides for a concept of core to be applied to DOD logistics activities. Under the current provision the Secretary of Defense is required to identify and maintain a “core logistics capability” that is government-owned and operated to ensure the existence of a ready and controlled source of technical competence and resources so that the military can effectively and timely respond to mobilizations, national defense emergencies and contingencies. The capabilities are to include those necessary to maintain and repair the weapon systems and equipment that are identified by the Secretary in consultation with the Joint Chiefs of Staff as necessary to meet the nation’s military needs. Further, the Secretary is to identify the workloads required to maintain the core capabilities and to require their performance in government facilities. Finally, the Secretary is to assign these facilities sufficient workloads to ensure peacetime cost efficiency and technical competencies and surge capacity and reconstitution capabilities to support our military strategic and contingency plans. In addition to the 10 U.S.C. 2464 requirements described above, 10 U.S.C. 2466 specifies that no more than 50 percent of the funds made available for depot maintenance may be spent for private sector performance. This sets aside 50 percent of the funding for public-sector performance of these workloads in essence establishing a minimum public-sector core for depot maintenance. Before the 1997 amendment, private-sector performance was limited to no more than 40 percent. The trend in DOD in recent years has been toward increasing reliance on the private sector for depot maintenance work and increasing reliance on original equipment manufacturers for long-term logistics support. In November 1993, the Office of the Deputy Under Secretary of Defense for Logistics outlined a standard multi-step method for determining core requirements and directed the services to use this method in computing biennial core requirements. In 1996, the core methodology was revised to include (1) an assessment of the risk involved in reducing the core capability requirement as a result of having maintenance capability in the private sector and (2) the use of a best-value comparison approach for assigning non-core work to the public and private sectors. The current core methodology provides a computational framework for quantifying core depot maintenance capabilities and the workload needed to sustain these capabilities. It includes three general processes: The identification of the numbers and types of weapon systems required to support the Joint Chiefs of Staff’s wartime planning scenarios; The computation of depot maintenance core work requirements measured in direct labor hours to support the weapon systems’ expected wartime operations as identified in the war planning scenarios; and The determination of industrial capabilities (including the associated personnel, technical skills, facilities, and equipment) that would be needed to accomplish the direct labor hours identified above that is generated from the planning scenarios. That determination is adjusted to translate those capabilities into peacetime workloads needed to support them. These peacetime workloads represent the projected core work requirements for the next program year in terms of direct labor hours. For example, the estimate made in fiscal year 2000 projected the core requirements for fiscal year 2001. To conclude the process, the services then identify specific repair workloads and allocate the core work hours needed to accomplish the maintenance work at the public depots that will be used to support the core capabilities. During the latter part of the 1990s, DOD made significant changes in specific maintenance workloads it identified as supporting core capabilities.