During fiscal year 2002, U.S. military forces participated in a number of contingency operations, and Congress appropriated funds to cover DOD’s costs. Contingency operations for fiscal year 2002 included efforts to combat terrorism as well as contingency operations in the Balkans and Southwest Asia. Operations in these latter two areas accounted for 17 percent of DOD’s reported contingency costs for fiscal year 2002 through May 2002, the latest available data. The bulk of the costs have been incurred in combating terrorism. In the Balkans, the United States was first engaged in Bosnia and then in the Yugoslavian province of Kosovo. U.S. involvement in Bosnia began in July 1992 as part of humanitarian relief efforts. Then, in April 1993, the United States began to participate in NATO’s enforcement of a no-fly zone over Bosnia and Herzegovina in support of United Nations peacekeeping. In December 1995, the United States deployed military personnel in and around Bosnia to assist in implementing the General Framework Agreement (also known as the “Dayton Agreement”). Since then, the number of U.S. military personnel stationed in Bosnia has steadily declined from about 18,000 troops in February 1996 to about 2,500 troops in July 2002. In March 1999, the United States provided military forces in support of NATO’s combat operations against Yugoslavia following the failure of peace talks and escalating violence against ethnic Albanians in Kosovo. Combat operations officially ended on June 20, 1999. With Yugoslavia’s acceptance of a peace plan and the United Nations’ endorsement of a plan, the United States began providing troops for the NATO-led Kosovo force, whose mission is peace enforcement in Kosovo. The United States is currently providing 5,000 troops as part of the NATO force. In addition, the United States has about 400 troops in the Republic of Macedonia to operate a staging base for U.S. troops entering and departing Kosovo. From the inception of operations through May 2002, Balkan costs have totaled $19.5 billion. U.S. forces have been involved in enforcing the no-fly zone over parts of Iraq since the end of the Persian Gulf War in 1991. The U.S. force involved has on average comprised about 20,000 troops, many of them Navy and Marine Corps personnel deployed on ships. Beginning in December 1998, the United States conducted low-level air strikes against Iraq, first in support of the United Nations’ weapons of mass destruction inspection efforts and then in response to Iraqi attempts to target allied aircraft enforcing the no-fly zones. From the inception of operations through May 2002, Southwest Asia costs have totaled $10.2 billion. Following the terrorist attacks of September 11, 2001, U.S. military forces began military operations to combat terrorism. These operations fall into two categories—defense of the United States and overseas operations, principally in Central Asia to date. More than 148,000 military personnel were involved in these operations as of July/August 2002. Through May 2002, DOD’s reported costs for these efforts totaled $11.1 billion. Within budget and appropriations accounts, operation and maintenance costs account for the majority of all contingency operations costs. In fiscal years 2000 and 2001 combined, operation and maintenance costs accounted for 87 percent of the total; military personnel costs accounted for the remaining 13 percent. During fiscal year 2002 through May 2002, operation and maintenance costs accounted for 65 percent of the total; military personnel costs accounted for the balance of the costs.Operation and maintenance funds are used for a variety of purposes, including the transportation of personnel, goods, and equipment; unit operating support costs; and intelligence, communications, and logistics support. Military personnel accounts fund the pay and allowances of mobilized reservists as well as special payments or allowances for all qualifying military personnel, such as Imminent Danger Pay and Family Separation Allowance. The method for funding operations in the Balkans and Southwest Asia changed in fiscal year 2002. Prior to fiscal year 2002, Congress appropriated funds both directly to the services’ appropriations accounts and to the Overseas Contingency Operations Transfer Fund (OCOTF).DOD transferred funds in the OCOTF to the services’ appropriations accounts as operations unfolded during the year. Any funds remaining in the fund at the end of the fiscal year were carried over to the next fiscal year. We reported in May 2002 that limited guidance and oversight, combined with a lack of cost-consciousness, contributed to some questionable expenditures of contingency funds. Beginning in fiscal year 2002, DOD proposed that the funding for its Southwest Asia operations be provided directly to the services’ appropriations accounts. Congress not only directly appropriated funds to the services’ appropriations accounts for the U.S. operations in Southwest Asia, but directly appropriated funds for the operations in the Balkans as well. Congress also significantly reduced funding for contingency operations to encourage the services to spend funds more efficiently and effectively. In the case of new, expanded, or otherwise unfunded operations, costs are not budgeted in advance. DOD must use funds appropriated for other activities that are planned for later in the fiscal year. If these funds are not replenished through supplemental appropriations or the reprogramming of funds from other sources, the services have to absorb the costs within their regular appropriations. The military services received a combination of funding provided by the DOD appropriations act for fiscal year 2002 and funds that remained in the OCOTF. For Balkan operations, the amount that Congress appropriated was $650 million less than the amount requested in the President’s budget. For Southwest Asia operations, requested funding was included in the military services’ overall accounts. The services collectively received about $24 million less in funding than they had estimated was needed. In response to the reduction in funding, the military services took steps to reduce costs in order to keep costs in line with available funding, although they will have to absorb some costs related to operations in both the Balkans and Southwest Asia. The proportion of costs that will have to be absorbed represents less than 1 percent of each of the services’ appropriation for operation and maintenance. The services took important cost-cutting steps to meet reduced funding levels in fiscal year 2002. Funding for Balkan operations was reduced by $650 million in fiscal year 2002 and was appropriated directly into the services’ military personnel and operation and maintenance accounts. The services were generally funded at the amounts requested for military personnel and less than requested for operation and maintenance. The Senate Appropriations Committee, in its report on DOD’s appropriations for fiscal year 2002, suggested that providing funds directly into the services’ accounts would lead to better accountability and the elimination of redundant and questionable costs. Subsequently, Congress appropriated funds for contingency operations directly into the services’ accounts as part of their base programs. The Army, which had the largest share of Balkan costs, received the largest funding reduction. Within the Army, the Army in Europe, which is responsible for paying the bulk of the Balkan operations’ costs, started fiscal year 2002 with a large gap between its estimated cost and the funding that the Department of the Army told it to expect. Specifically, prior to the beginning of fiscal year 2002 (in July 2001), the Army in Europe estimated that its Balkan operations would cost $1.458 billion, but it was told to expect funding of $1.152 billion with a promise of an additional $150 million later in fiscal year 2002. To address the reduced funding, the Army in Europe took a number of steps to reduce costs. We previously reported that the Army in Europe in April 2001 provided us with its revised cost estimate for fiscal year 2002, which reflected as much as a $284 million decline in costs from DOD’s initial budget estimate because of a variety of factors. The reduction reflected a reduction in the amount of personnel and equipment in both Bosnia and Kosovo, as well as declines in other costs, including those for contractors and airlift services in Kosovo. Additional troop and heavy- equipment reductions, and improved contract management and oversight of the Army’s Balkan Support Contract, allowed the Army in Europe in July 2002 to further reduce its fiscal year 2002 estimate for Balkan operations by $231 million from its July 2001 estimate for fiscal year 2002. This included action on our previous report finding involving the Army in Europe’s counting airlift costs twice—directly paying the Air Force for airlift charges and including transportation costs on travel orders. Army in Europe officials stated that correcting this double obligation of airlift billing charges reduced costs. The remaining $75 million difference between the Army in Europe’s July 2002 estimate of $1.227 billion and the $1.152 billion in funding it had initially been told to expect will have to be covered by using funds planned for other activities within existing Army programs. In early September 2002, an Army headquarters budget official told us that the Army was still working to identify a source for the needed funds. The Army’s Forces Command, which is responsible for Army units and facilities in the continental United States and Puerto Rico, also started fiscal year 2002 with a large gap between its estimated cost and the funding the Department of the Army told it to expect. Specifically, Forces Command’s original fiscal year 2002 estimate for Balkan operations was $169 million, but it was told to expect funding of $65.7 million. By February 2002, Forces Command had reduced its estimate to $116.3 million on the basis of its cost experience. In August 2002, Forces Command told us that it would reduce its costs to the $65 million in available funding as a result of continued analysis of initial estimates and actual costs. The Air Force, which had the second largest share of Balkan costs, received $51 million less than its estimated costs of about $174 million. In August 2002, the Air Force told us that it had reduced its cost estimate for fiscal year 2002 by $49 million. This brought the estimate closer to available funding.