In 1962, DOD instituted the Planning, Programming, and Budgeting System to establish near-term projections in defense spending. This system was intended to provide the necessary data to assist defense decision makers in making trade-offs among potential alternatives, thereby resulting in the best possible mix of forces, equipment, and support to accomplish DOD’s mission. The military services and other DOD components developed the detailed data projections for the budget year in which funds were being requested and at least the 4 succeeding years and provided them to the Office of the Secretary of Defense. The resulting projections were compiled and recorded in a 5-year plan. In 1987, Congress directed the Secretary of Defense to submit the five-year defense program (currently referred to as the future years defense program, or FYDP) used by the Secretary in formulating the estimated expenditures and proposed appropriations included in the President’s annual budget to support DOD programs, projects and activities. The FYDP, which is submitted annually to Congress, is considered the official report that fulfills this legislative requirement. The Office of Program Analysis and Evaluation has responsibility for the assembly and distribution of the FYDP. The Office of the Under Secretary of Defense (Comptroller) has responsibility for the annual budget justification material that is presented to Congress. These offices work collaboratively to ensure that the data presented in the budget justification material and the FYDP are equivalent at the appropriation account level. The FYDP provides DOD and Congress a tool for looking at future funding needs beyond immediate budget priorities and can be considered a long- term capital plan. As GAO has previously reported, leading practices in capital decision making include developing a long-term capital plan to guide implementation of organizational goals and objectives and help decision makers establish priorities over the long term. In 2002, Congress directed the Department of Homeland Security to begin developing a future budget plan modeled after DOD’s FYDP. In the 2001 QDR Report, DOD established a new defense strategy and shifted the basis of defense planning from a “threat-based” model to a “capabilities-based” model. According to the QDR report, the capabilities- based model is intended to focus more on how an adversary might fight rather than specifically on whom the adversary might be or where a war might occur. The report further states that in adopting a capabilities-based approach, the United States must identify the capabilities required to deter and defeat adversaries, maintain its military advantage, and transform its forces and institutions. The QDR report also outlined a new risk management framework to use in considering trade-offs among defense objectives and resource constraints. This framework consists of four dimensions of risk: Force management–the ability to recruit, retain, train, and equip sufficient numbers of quality personnel and sustain the readiness of the force while accomplishing its many operational tasks; Operational–the ability to achieve military objectives in a near-term conflict or other contingency; Future challenges–the ability to invest in new capabilities and develop new operational concepts needed to dissuade or defeat mid- to long-term military challenges; and Institutional–the ability to develop management practices and controls that use resources efficiently and promote the effective operation of the Defense establishment. These risk areas will form the basis for DOD’s annual performance goals and for tracking associated performance results. Moreover, the QDR states that an assessment of the capabilities needed to counter both current and future threats must be included in DOD’s approach to assessing and mitigating risk. The FYDP provides Congress visibility of broad DOD funding shifts and priorities regarding thousands of programs that have been aggregated, or grouped, by appropriation category. For example, we noted that DOD increases its Research, Development, Test and Evaluation (RDT&E) account category and decreases other account categories in the 2004 FYDP. Other funding shifts/priorities are less visible because the FYDP report, organized by program, cannot display some specific costs that are important to decision makers, such as funding for DOD’s civilian workforce. Moreover, the FYDP is a reflection of the limitations of DOD’s budget preparation process. For example, as we have reported in the past, the FYDP reflects DOD’s overly optimistic estimations of future program costs that often lead to costs being understated. Such understatements may have implications for many programs beyond the years covered by the FYDP. Finally, the costs of ongoing operations in Iraq and Afghanistan, which have been funded through supplemental appropriations, are not projected in the FYDP thereby limiting the visibility over these funds. The administration is expected to request additional supplemental funds in calendar year 2005 according to DOD officials. Although some costs are difficult to predict, DOD expects costs to become more predictable later this year. However, some requirements it plans to fund with the supplemental appropriation have already been identified. The FYDP was designed to provide resource information at the program level that could be aggregated a variety of ways including up to the appropriation category level. For individual programs, this means that decision makers have visibility over planned funding for 4 or 5 years beyond the current budget year. Similarly, the programs can be aggregated in a variety of ways to analyze future funding trends. For example, our comparison of the 2003 FYDP to the 2004 FYDP provides visibility of funding shifts that DOD made at the appropriation category level, specifically showing that over the common years of both FYDPs, DOD plans to increase funding in its RDT&E appropriation category, while in most years decreasing funds to Procurement, Military Construction, Military Personnel, and Operation and Maintenance. According to DOD officials, this shift toward RDT&E reflects DOD’s emphasis on transforming military forces. Since the FYDP does not clearly identify those programs DOD considers transformational, we could not validate this claim. Figure 1 shows the changes made between the 2003 and 2004 FYDPs to the department’s appropriation categories for the common 4-year period, 2004–2007. Appendix II provides a more detailed table. Compared to the 2003 FYDP, funding in the Operation and Maintenance appropriation category in the 2004 FYDP was reduced by at least $9 billion per year from 2004 through 2007 for a total of $42 billion over that period. About $41 billion of that decrease is accounted for by the elimination of the Defense Emergency Response Fund, which had projected over $10 billion in funding each year for 2004 through 2007 in the 2003 FYDP, but had no funding in the 2004 FYDP for those years. Over those same years, the “Other DOD accounts” category increased by a total of $19 billion. The increase in these categories was mainly fueled by a $22 billion increase in the Defense Health Program, which was offset somewhat by a decrease in Revolving Management Funds. Although DOD’s policy priorities can be discerned at the appropriation level, some important funding categories cannot be identified because program elements, the most basic components of the report, are intended to capture the total cost of the program, as opposed to individual costs that comprise the program. For example, funding for spare parts, civilian personnel, and information technology are included in funding for individual programs and cannot be readily extracted from them. Congress has expressed interest in all of these funding categories. We note that DOD officials stated that these funding categories are delineated in other reports to Congress. Program elements that encompass multiple systems, such as the Army’s Future Combat Systems and DOD’s Ballistic Missile Defense System, could also limit visibility over funding trends and trade-offs in the FYDP. For example, in its 2004 budget justification material, the administration requested funding for the Army’s Future Combat Systems—often referred to as a “system of systems”—under a single program element. In the National Defense Authorization Act for Fiscal Year 2004, Congress rejected the single program element and instead required the Secretary of Defense to break Future Combat Systems into three program elements. In the conference report accompanying the bill, the conferees noted that “the high cost and high risk require congressional oversight which can be better accomplished through the application of separate and distinct program elements for the [Future Combat System].” In another example, DOD had proposed that Congress repeal its requirement for specifying Ballistic Missile Defense System program elements. According to DOD’s legislative proposal, this would coincide with the Secretary of Defense’s goal to establish a single program that allows allocating and re-allocating of funds among competing priorities within the program. While Congress provided the administration flexibility for specifying program elements related to Ballistic Missile Defense, it nonetheless noted that budget reporting for Ballistic Missile Defense under one program element would be inappropriate. Since the mid-1980s, we have reported a limitation in DOD’s budget formulation—the use of overly optimistic planning assumptions. Such overly optimistic assumptions limit the visibility of costs projected throughout the FYDP period and beyond. As a result, DOD has too many programs for the available dollars, which often leads to program instability, costly program stretch-outs, and program termination. For example, in January 2003, we reported that the estimated cost of developing eight major weapon systems had increased from about $47 billion in fiscal year 1998 to about $72 billion by fiscal year 2003. We currently expect DOD’s funding needs in some areas to be higher than the estimates in the FYDP. The following are some examples of anticipated cost increases based on recent reports where we made recommendations to improve the management and costs estimates of these programs. As we reported in April 2003, cost increases have been a factor in the Air Force substantially decreasing the number of F/A-22 Raptors to be purchased—from 648 to 276. Moreover, current budget estimates, which exceed mandated cost limitations, are dependent on billions of dollars of cost offset initiatives which, if not achieved as planned, will further increase program costs.