DOD annually spends about $15 billion—or about 6 percent of its $243 billion fiscal year 1996 budget—on depot maintenance work that involves the repair, overhaul, modification, and upgrading of aircraft, ships, ground vehicles, and other equipment. Over $4 billion is spent on Air Force systems and equipment. Most of the Air Force’s depot maintenance work is performed at five depots that are located at its five air logistics centers. Since the early 1970s, we and others have reported on the redundancies and excess capacity that exist in DOD depots and the need to downsize and improve the operational efficiency of these depots. These problems have been exacerbated in recent years by reductions in military force structure and related weapon system procurement; changes in military operational requirements due to the end of the Cold War; increased reliability, maintainability, and durability of military systems; increased maintenance performed in operational units; and increased privatization of depot maintenance workloads. Beginning in the late 1980s, DOD—primarily through the BRAC process—reduced some of its excess capacity by closing a number of depots and transferring most workloads to remaining depots and some to the private sector. Altogether, the first three BRAC rounds (1988, 1991, and 1993) resulted in recommendations to close nine Army and Navy depots and the Air Force’s Aerospace Guidance and Metrology Center. Despite major force structure reductions and significant excess capacity in the Air Force depot maintenance system, none of the Air Force’s five air logistics centers or the large, multi-commodity depots contained within them were recommended for closure during the first three BRAC rounds. As shown in table 1, for fiscal year 1996, the five centers reported approximately 57.2 million direct labor hours of depot maintenance capacity and accomplished about 31.5 million hours of work—leaving about 25.8 million hours of excess capacity, or about 45 percent. DOD’s February 1995 report to the BRAC Commission recommended reducing excess Air Force depot maintenance capacity and costs by downsizing all five air logistics centers, including their depots. DOD estimated that this downsizing would require one-time costs of $183 million and would result in net savings of $138.7 million during the 6-year implementation period. The downsizing was to be accomplished through consolidating similar workloads, mothballing or disposing of plant equipment, and tearing down buildings. The Commission also estimated that annual savings would be $89 million after the implementation period and that the net present value of all costs and savings over a 20-year period would be $991.2 million. The 1995 BRAC Commission concluded that DOD’s downsizing approach would not adequately reduce infrastructure and overhead costs. It recommended closing the Sacramento and San Antonio centers and transferring their workloads to the remaining depots or private sector commercial activities. In making its closure and workload transfer recommendations, the Commission considered the effects on the local communities, workload transfer costs, and potential effects on readiness. It concluded that the savings and benefits outweighed the potential drawbacks. The Commission’s report noted that given the significant amount of excess depot capacity and limited DOD resources, closure is a necessity. Further, closing these activities would improve the use of the remaining centers and substantially reduce DOD operating costs. The specific Commission recommendations were as follows: Realign Kelly Air Force Base, including the air logistics center; disestablish the defense distribution depot; consolidate the workloads to other DOD depots or to private sector commercial activities as determined by the Defense Depot Maintenance Council; and move the required equipment and personnel to the receiving locations. Close McClellan Air Force Base, including the air logistics center; disestablish the defense distribution depot; move the common-use ground communication electronics to Tobyhanna Army Depot, Pennsylvania; retain the radiation center and make it available for dual use and/or research, or close as appropriate; consolidate the remaining workloads with other DOD depots or private sector commercial activities as determined by the Council; and move the required equipment and any required personnel to receiving locations. All other activities and facilities at the base will close. The Commission estimated that these recommendations would require one-time implementation costs of $822.6 million but would yield net savings of $151.2 million during the 6-year implementation period. Further, they would yield annual savings of $338.2 million after the implementation period, about $70 million of which represented depot maintenance savings. The projected depot maintenance savings were developed by assuming that the number of depot maintenance personnel could be reduced by 15 percent. The Commission estimated that the net present value of savings over 20 years, including the 6-year implementation period, would be $3.5 billion. The Commission’s savings projections did not include savings from moving workloads to depots with lower labor rates, consolidating workloads in underused facilities and reducing excess capacity, increasing efficiency, and reducing the overhead rates at receiving depots. In considering the BRAC recommendations to close the two centers, the President and the Secretary of Defense expressed concerns about the near-term costs and potential effects on local communities and Air Force readiness. In response to these concerns, the President, in forwarding the Commission’s recommendations to Congress for approval, indicated that the air logistics centers’ work should be privatized in place or in the local communities. He also directed the Secretary of Defense to retain 8,700 jobs at McClellan Air Force Base and 16,000 jobs at Kelly Air Force Base until 2001 to further mitigate the closures’ impact on the local communities. Additionally, the size of the workforce remaining in the Sacramento and San Antonio areas through 2004 was expected to remain above 4,350 and 11,000, respectively. McClellan has about 2,600 personnel and San Antonio has about 3,100 personnel assigned to organizations whose mission is to provide various base support services (such as security; maintenance of buildings, roads, and grounds; and medical clinic services) to the logistics center and all tenants. Depot maintenance employees comprise 66 percent of the Sacramento center personnel and 47 percent of the San Antonio center personnel. The centers’ maintenance depots perform about $1.65 billion of depot maintenance work annually, about $400 million of which belongs to the other services and is done through interservicing. They also perform other logistics functions such as engineering support and weapon system and item management. Kelly Air Force Base had about 19,500 employees at the time of the 1995 BRAC process—of which 12,850 were air logistics center personnel, including 6,000 involved in depot maintenance. In addition to the air logistics center, Kelly has several other tenant activities, including the Air Intelligence Agency, Defense Information Systems Agency, Defense Distribution Depot, and guard and reserve units. McClellan Air Force Base employed about 14,000 people—of which 7,314 were center employees, including 4,853 depot maintenance personnel. In addition to the air logistics center, McClellan has a defense distribution depot, Coast Guard air station, and reserve units. Several statutes influence the allocation of depot maintenance workloads between the public and private sectors. According to 10 U.S.C. 2464, a “core logistics capability” is to be identified by the Secretary of Defense and maintained by DOD, unless the Secretary waives DOD performance as not required for national defense. Further, 10 U.S.C. 2466 and 2469 limit the extent to which depot-level workloads can be converted to private sector performance. Section 2466 specifies that not more than 40 percent of the funds allocated in a fiscal year for depot-level maintenance or repair can be spent on private sector performance—the so-called “60/40” rule. Section 2469 prohibits DOD from transferring in-house maintenance and repair workloads valued at not less than $3 million to another DOD activity without using “merit-based selection procedures for competitions” among all DOD depots or to contractor performance without the use of “competitive procedures for competitions among private and public sector entities.” Privatizing defense depot activities in place could yield cost savings if other public and private activities were more fully utilizing their maintenance repair capacity. Because substantial excess capacity exists in both the public and private sectors, privatizing Sacramento and San Antonio workloads in place will result in missed opportunities to reduce the overall cost of Air Force depot maintenance operations. In recent years, depot maintenance rates have increased sharply. One of the major reasons for this increase is that as requirements have declined, the large fixed overhead costs for both the depots and the bases on which they are located must be allocated to a smaller depot maintenance workload base. As we noted previously, about 3,100 military and civilian personnel are involved in base support operations at Kelly Air Force Base and 2,600 at McClellan Air Force Base. These operations support center activities, including the depots, as well as other base tenant activities. It is estimated that a military depot with several thousand employees incurs fixed overhead costs of from $50 million to $100 million annually. By closing bases, DOD can eliminate base support and depot maintenance infrastructure and achieve substantial future savings. Additionally, consolidating workloads from closing depots with workloads of underused Air Force depots could yield additional savings at the receiving depots by increasing their efficiency, spreading their fixed overhead costs over a larger workload base, and lowering their average costs. Privatizing-in-place does not substantially reduce infrastructure and excess capacity. It just moves some of it to the private sector. Private sector manufacturing and repair facilities also have extensive excess capacity.