Financial Management: DOD's Liability for Aircraft Disposal Can Be
Estimated (Letter Report, 11/20/97, GAO/AIMD-98-9).

Pursuant to a legislative mandate, GAO reviewed: (1) the status of the
Department of Defense's (DOD) efforts to implement the new federal
accounting standard for disclosure of liabilities, such as aircraft
disposal; and (2) whether an estimate of the minimum disposal liability
for aircraft, including the removal and disposal of hazardous materials,
could be made.

GAO noted that: (1) DOD has not implemented the federal accounting
standard that requires recognizing and reporting liabilities such as
those associated with aircraft disposal, nor has DOD provided guidance
to the military services; (2) aircraft disposal is an ongoing process
and the cost can be reasonably estimated; (3) accordingly, these
activities meet the criteria for a reportable liability; (4) information
on the three major disposal processes--demilitarization, storage and
maintenance, and hazardous materials removal and disposal--is available
to develop cost estimates; (5) Congress has recognized the importance of
accumulating and considering disposal cost information; and (6) in the
National Defense Authorization Act for Fiscal Year 1995, Congress
required DOD to develop life-cycle environmental costs, including
demilitarization and disposal costs, for major defense aquisition
programs.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  AIMD-98-9
     TITLE:  Financial Management: DOD's Liability for Aircraft Disposal 
             Can Be Estimated
      DATE:  11/20/97
   SUBJECT:  Cost analysis
             Military aircraft
             Accounting procedures
             Hazardous substances
             Waste treatment
             Property disposal
             Financial statements
             Government liability (legal)
IDENTIFIER:  F-16 Aircraft
             F-14 Aircraft
             F-18 Aircraft
             B-1B Aircraft
             Apache Helicopter
             AH-64 Helicopter
             
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Cover
================================================================ COVER


Report to the Secretary of Defense

November 1997

FINANCIAL MANAGEMENT - DOD'S
LIABILITY FOR AIRCRAFT DISPOSAL
CAN BE ESTIMATED

GAO/AIMD-98-9

DOD's Liability for Aircraft Disposal

(918878)


Abbreviations
=============================================================== ABBREV

  AIRS - Aircraft Inventory Reporting System
  AMARC - Aerospace Maintenance and Regeneration Center
  CBS-X - Continuing Balance System-Expanded
  CFO - Chief Financial Officer
  DOD - Department of Defense
  DRMO - Defense Reutilization and Marketing Office
  DRMS - Defense Reutilization and Marketing Service
  FASAB - Federal Accounting Standards Advisory Board
  FASB - Statement of Federal Financial Accounting Standards
  GMRA - Government Management and Reform Act
  OMB - Office of Management and Budget
  PP&E - property, plant, and equipment
  REMIS - Reliability and Maintainability Information System
  SFFAS - Statement of Federal Financial Accounting Standards

Letter
=============================================================== LETTER


B-273004

November 20, 1997

The Honorable William S.  Cohen
The Secretary of Defense

Dear Mr.  Secretary: 

Recent laws have enhanced the legislative requirements to provide
policymakers and agency program managers with more reliable financial
information to formulate budgets, manage government programs, and
make difficult policy choices.\1 Recognizing the extent of incomplete
and unreliable information on the cost and consequences of government
programs and activities, these laws have made implementation of new
accounting standards and audited financial statements a priority. 
New federal accounting standards have been adopted to enhance
financial statements by requiring that government agencies show the
financial results of their entire operations and provide relevant
information on agencies' true financial status.  This report
discusses one such requirement for valuable information related to
the disposal costs of federal agencies' property, plant, and
equipment (PP&E).  The second in a planned series of reports on the
Department of Defense's (DOD) implementation of this requirement,
this report focuses on aircraft.\2 The disposal process for aircraft
includes removal from active service, demilitarization, removal and
disposal of hazardous materials, storage, reclamation of parts, and
final disposal/salvage. 


--------------------
\1 The Chief Financial Officers Act (CFO) of 1990, the Government
Management Reform Act (GMRA) of 1994, and the Federal Financial
Management Improvement Act of 1996. 

\2 See our first report, Financial Management:  Factors to Consider
in Estimating Environmental Liabilities for Removing Hazardous
Materials in Nuclear Submarines and Ships (GAO/AIMD-97-135R, August
7, 1997). 


   BACKGROUND
------------------------------------------------------------ Letter :1

In October 1990, the Federal Accounting Standards Advisory Board
(FASAB) was established by the Secretary of the Treasury, the
Director of the Office of Management and Budget (OMB), and the
Comptroller General of the United States to consider and recommend
accounting standards to address the financial and budgetary
information needs of the Congress, executives agencies, and other
users of federal financial information.  Using a due process and
consensus building approach, the nine-member Board, which has since
its formation included a member from DOD, recommends accounting
standards for the federal government.  Once FASAB recommends
accounting standards, the Secretary of the Treasury, the Director of
OMB, and the Comptroller General decide whether to adopt the
recommended standards.  If they are adopted, the standards are
published as Statements of Federal Financial Accounting Standards
(SFFAS) by OMB and by GAO.  In addition, the Federal Financial
Management Improvement Act of 1996, as well as the Federal Managers'
Financial Integrity Act, requires federal agencies to implement and
maintain financial management systems that will permit the
preparation of financial statements that substantially comply with
applicable federal accounting standards. 

Issued in December 1995 and effective beginning with fiscal year
1997, SFFAS No.  5, Accounting for Liabilities of the Federal
Government, requires the recognition of a liability for any probable
and measurable future outflow of resources arising from past
transactions.\3 The statement defines probable as that which is
likely to occur based on current facts and circumstances.  It also
states that a future outflow is measurable if it can be reasonably
estimated.  The statement recognizes that this estimate may not be
precise and in such cases, it provides for recording the lowest
estimate and disclosing in the financial statements the full range of
estimated outflows that are likely to occur. 

SFFAS No.  6, Accounting for Property, Plant, and Equipment, which is
effective beginning in fiscal year 1998, deals with various
accounting issues pertaining to PP&E.  This statement establishes
several new accounting categories of PP&E, collectively called
stewardship PP&E.  Other PP&E is referred to as general PP&E.  One of
the new stewardship categories--federal mission PP&E--is defined as
tangible items owned by a federal government entity, principally DOD,
that have no expected nongovernmental use, are held for use in the
event of emergency, war, or natural disaster, and have an
unpredictable useful life.  Federal mission PP&E, which includes
ships, submarines, aircraft, and combat vehicles, is a major part of
DOD's total PP&E. 

SFFAS No.  6 also provides information on how SFFAS No.  5's standard
on liabilities should be applied to PP&E.  Specifically, SFFAS No.  6
discusses how to recognize the liability for the clean up\4 of
hazardous waste in PP&E.  While this statement modifies SFFAS No.  5
with respect to the timing of liability recognition for general PP&E,
it has no effect on accounting for liabilities related to aircraft
and other federal mission PP&E. 


--------------------
\3 These requirements generally mirror those of the Statement of
Financial Accounting Standard No.  5, Accounting for Contingencies
(FASB No.  5), which was effective prior to the development of SFFAS
No.  5. 

\4 SFFAS No.  6 defines cleanup as the removal, containment, and/or
disposal of (1) hazardous waste from property or (2) material and/or
property that consists of hazardous waste at permanent or temporary
closure or shutdown of associated property, plant, and equipment. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

DOD has not yet implemented the federal accounting standard that
requires recognizing and reporting liabilities such as those
associated with aircraft disposal, nor has it provided guidance to
the military services.  Aircraft disposal is an ongoing process and
the cost can be reasonably estimated.  Accordingly, these activities
meet the criteria for a reportable liability.  Information on the
three major disposal processes--demilitarization, storage and
maintenance, and hazardous materials removal and disposal--is
available to develop cost estimates.  The Congress has recognized the
importance of accumulating and considering disposal cost information. 
In the National Defense Authorization Act for Fiscal Year 1995, the
Congress required DOD to develop life-cycle environmental costs,
including demilitarization and disposal costs, for major defense
acquisition programs. 


   OBJECTIVES, SCOPE, AND
   METHODOLOGY
------------------------------------------------------------ Letter :3

We undertook this review to assist DOD in its efforts to meet the new
federal accounting standard, SFFAS No.  5, and because of our
responsibility to audit the federal government's consolidated
financial statements beginning with fiscal year 1997.  Our objectives
were to determine (1) the status of DOD's efforts to implement the
new federal accounting standard for disclosure of liabilities, such
as aircraft disposal, and (2) whether an estimate of the minimum
disposal liability for aircraft, including the removal and disposal
of hazardous materials, could be made.  The following was done to
accomplish our objectives. 

To assess the status of DOD's efforts to implement SFFAS No.  5, we
reviewed DOD regulations and interviewed officials from the DOD
Comptroller's office.  To gain an understanding of the procedures and
the financial and logistical management information systems that can
be used to accumulate and report on aircraft disposal costs, we (1)
examined the management and financial reporting for these programs
used by the services, (2) reviewed applicable DOD and service
instructions and regulations, and (3) interviewed DOD, Air Force,
Army, and Navy officials. 

To determine if the liability is reasonably estimable, we identified
the financial and logistical management information systems and
reporting mechanisms in place that contain information about the
costs of aircraft disposal, including demilitarization and hazardous
material disposal processes.  We visited DOD's designated aircraft
storage, reclamation, and disposal facility at the Aerospace
Maintenance and Regeneration Center (AMARC) where data were readily
available for addressing removal and disposal costs of older, out of
service aircraft systems.  To determine if the liability could be
estimated for newer aircraft, we selected five aircraft for review. 
The five aircraft selected were the Air Force's F-16 and B-1B, the
Navy's F-14 and F-18, and the Army's AH-64 Apache Helicopter.  We
chose these five aircraft because they represent the primary fighter
or attack and bomber aircraft for each of the services, have the
largest number in their class, and represent about 17 percent of the
services' combined active and inactive inventory. 

Because environmental costs are more variable and are likely to raise
more complex estimation issues, we performed a more in-depth analysis
of these costs.  Using data initially obtained at AMARC, information
in the DOD hazardous material disposal manual, and visits to
maintenance depots, we prepared a list of hazardous materials
associated with each of these aircraft.  On a case-by-case basis, we
then obtained depot level officials' concurrence that these items
represent the primary hazardous material on each of these aircraft. 

To compute the cost of removing hazardous materials from each
aircraft, we reviewed documents that stated a standard or estimated
removal time for each of the hazardous material items from the depot
responsible for program depot maintenance on the applicable aircraft
and AMARC's hourly labor rate.  We did not independently verify the
data obtained from the inventory and financial systems or the
reported removal times. 

We interviewed the services' environmental engineers to determine
which hazardous materials require disposal.  To determine the costs
of disposing of these materials, we reviewed disposal and shipping
records at AMARC and the various depots.  For those materials that
were not scheduled for disposal, we interviewed various depot
personnel to determine their methods for reusing and recycling them. 
We also discussed disposal procedures with various offices of the
Defense Reutilization and Marketing Service. 

During our review, we contacted personnel and/or conducted work at
various locations including the Army Aviation and Troop Command
Headquarters, St.  Louis, Missouri; Aerospace Maintenance and
Regeneration Center, Davis-Monthan Air Force Base, Arizona; Air
Logistics Centers at Hill Air Force Base, Utah, and Tinker Air Force
Base, Oklahoma; Office of the Chief of Naval Operations; Naval
Aviation Depots at Jacksonville, Florida and North Island,
California; Corpus Christi Army Depot, Corpus Christi, Texas; offices
of the Defense Reutilization and Marketing Service, Battle Creek,
Michigan; and applicable headquarters offices in the Washington,
D.C., area. 

We conducted our review from July 1996 through June 1997 in
accordance with generally accepted government auditing standards.  We
provided a draft of this report to the Department of Defense for
review and comment.  We received oral comments which have been
incorporated as appropriate. 


   DOD HAS NOT IMPLEMENTED SFFAS
   NO.  5
------------------------------------------------------------ Letter :4

Although SFFAS No.  5 is effective beginning with fiscal year 1997,
as of the end of the fiscal year on September 30, 1997, DOD had not
established a policy to implement this federal accounting standard. 
On September 30, 1997, the DOD Comptroller's office posted revisions
to the electronic version of DOD's Financial Management Regulation to
include SFFAS Nos.  1 through 4, but SFFAS No.  5 was not included. 
In addition, the DOD Comptroller, who is responsible for developing
and issuing guidance on accounting standards, and the Under Secretary
of Defense (Acquisition and Technology), who is responsible for the
operational activities associated with aircraft disposal, have not
provided implementation guidance to the services to assist them in
estimating the disposal costs for aircraft.  Service officials stated
that they are reluctant to estimate a liability for their aircraft
until they receive DOD-wide guidance.  Unless prompt action to
implement this standard is taken, it is unlikely that DOD's fiscal
year 1997 financial statements will include an estimate of aircraft
disposal costs as required. 


   AIRCRAFT DISPOSAL LIABILITY HAS
   BEEN INCURRED
------------------------------------------------------------ Letter :5

One of the key criteria cited in SFFAS No.  5 for a liability to be
reported is that a future cost is probable--that is, the future
outflow of resources is likely to occur.  While the likelihood of a
future outflow may be difficult to determine and an entity may have
difficulty deciding whether to record a liability for certain events,
DOD continually disposes of aircraft and has an amount for disposal
costs in its annual budget.  Thus, because it is known at the time of
acquisition that costs will be incurred for the disposal of aircraft,
the probability criterion for recording a liability is met.  The
Congress has also recognized that disposal costs will be incurred and
has emphasized the importance of accumulating and considering this
information.  For example, the National Defense Authorization Act for
Fiscal Year 1995 requires the Secretary of Defense to determine, as
early in the acquisition process as feasible, the life-cycle costs
for major defense acquisitions, including the materials to be used
and methods of disposal.  The life-cycle cost estimates are required
before proceeding with the major acquisition. 


      AIRCRAFT DISPOSAL PROCESS
---------------------------------------------------------- Letter :5.1

All aircraft are eventually disposed of using the same basic
processes.  Any estimate of the disposal liability must take into
account these processes and use them as the basis for determining
costs.  The disposal process starts with the decision to remove an
aircraft from service, referred to as retirement (Army),
decommissioning (Air Force), and striking (Navy) of military
aircraft.  Aircraft disposal consideration begins when the services
prepare an updated force structure plan.  The plan shows the
projected requirements for each type of aircraft and includes new
procurement and various attrition factors including crashes,
programmed retirements, airframe stress tests, parts reclamation
needs, and foreign military sales.  Active aircraft not needed to
meet the services' current and forecasted requirements are sent to
AMARC, DOD's designated storage and disposal facility for aircraft
for temporary or long-term storage and eventual disposal. 

Aircraft arriving at AMARC are either placed in a flyable or
temporary hold status, prepared for foreign military sales, salvaged
for parts, or placed into long-term storage awaiting either eventual
disposal or reuse determination.  AMARC officials stated that, in
general, planes that undergo the storage process are not recalled and
are ultimately disposed of through sales or salvage.  Once the
military services have determined no further need exists for the
aircraft, they are released for disposal.  These aircraft and related
parts are subjected to demilitarization processes to prevent further
military use before they are transferred to the Defense Reutilization
and Marketing Service (DRMS) for sale as scrap.\5 Demilitarization
may take place at the air base, at AMARC, or at the local DRMS field
office.  Part of the demilitarization process involves removing all
remaining hazardous materials from the aircraft. 


--------------------
\5 The way the disposal process works is detailed in our report
Federal Property Disposal:  Information on DOD's Personal Property
Disposal Process (GAO/NSIAD-97-155BR, July 8, 1997). 


      INVENTORY OF AIRCRAFT
---------------------------------------------------------- Letter :5.2

Aircraft acquired by the services are, in general, considered mission
assets.  The Air Force's Reliability and Maintainability Information
System (REMIS), the Navy's Aircraft Inventory Reporting System
(AIRS), the Army's Continuing Balance System-Expanded (CBS-X), and
AMARC's Aircraft Status Directory identify the number of active and
inactive aircraft and are used by the services to keep track of their
aircraft inventories.  As shown in table 1, DOD reported about 18,000
active aircraft as of September 30, 1996, the most recent data
available. 



                                Table 1
                
                DOD's Aircraft Inventory as of September
                                30, 1996

Service/aircraft type                             Active      Inactive
------------------------------------------  ------------  ------------
Air Force
B-1B Bomber                                           95             0
B-52 Bomber                                           94           124
C-130 Transport                                      682            90
F-4 Fighter                                            0           903
F-15 Fighter                                         767           121
F-16 Fighter                                       1,541           354
F-111 Fighter/Bomber                                  18           285
KC-135 Tanker                                        492            67
Other                                              2,298         1,266
Army
AH-64 Apache Helicopter                              727             0
UH-60 Blackhawk Helicopter                         1,351             0
UH-1 Huey Helicopter                               2,011           211
AH-1 Cobra Helicopter                                622            17
Other                                              2,191            28
Navy
A-4 Fighter/Bomber                                     0           263
A-7 Attack Bomber                                      0           234
AV-8 Fighter                                         195            40
F-14 Fighter                                         311            90
F-18 Fighter                                         811            52
P-3 Surveillance                                     285           136
T-34 Trainer                                         319            26
CH-46 Helicopter                                     262             0
Other                                              2,634           975
======================================================================
Total                                             17,706         5,282
----------------------------------------------------------------------
Source:  AMARC, Army (CBS-X), Navy (AIRS), and Air Force (REMIS)
data.  We did not independently verify these data.  See footnote 6
for information on reliability problems associated with DOD's
accounting and logistical data. 

The aircraft inventory serves as the basis for estimating the
disposal liability although factors such as foreign military sales
would have to be considered in adjusting the number of aircraft. 
According to a March 1997 AMARC report, about 4 percent of AMARC's
inventory at any given time is scheduled for foreign military sales. 
Aircraft lost during operations, however, are generally replaced to
maintain the inventory at certain levels.  As a result, operational
losses may not reduce the total liability for aircraft disposal. 


   AIRCRAFT DISPOSAL LIABILITY
   COULD BE ESTIMATED
------------------------------------------------------------ Letter :6

The second key criterion in SFFAS No.  5 for reporting of a liability
is that an amount be reasonably estimable.  Information is available
to develop cost estimates for each of the major aircraft disposal
processes described in the previous section--demilitarization,
storage maintenance, and hazardous materials removal and disposal.\6
These processes account for most of the aircraft disposal costs. 

Our review focused on five aircraft (the Air Force's F-16 and B-1B,
the Navy's F-14 and F-18, and the Army's Apache Helicopter). 
Although data were available for each of the disposal processes, we
performed a more detailed analysis of the costs associated with the
removal and disposal of hazardous materials because these costs are
more variable and likely to present more complex estimation issues. 
The information in the following sections indicates the types and
sources of information available for DOD to develop an aircraft
disposal cost estimate.  As stated in SFFAS No.  5, this process may
result in a range of potential aggregate costs, the lowest of which
should be recorded unless an amount within the range which is most
likely to occur is estimable. 


--------------------
\6 We, as well as the DOD Inspector General and service auditors,
have reported problems with the reliability of information in DOD's
accounting and logistical systems.  While there are limitations in
the data, DOD is working to improve the systems which should over
time, increase the accuracy of the information and improve the
disposal liability estimates.  See GAO report Defense Financial
Management (GAO/HR-97-3, February 1997). 


      ESTIMATED DEMILITARIZATION
      COSTS
---------------------------------------------------------- Letter :6.1

Demilitarization includes removing weapons and other designated items
from the aircraft and then taking the aircraft off line.  Other
demilitarization actions include removing equipment that has,
directly or indirectly, a significant military utility or capacity,
such as sensitive radar equipment.  A salvage or residual value for
the aircraft was deducted from the demilitarization costs, since
historically the remains of aircraft are sold as scrap at the time of
disposal.  As shown in table 2, demilitarization costs varied
considerably for the three aircraft in our review for which this
information was readily available from program offices.  Although the
B-1B and the Apache Helicopter are newer aircraft for which
demilitarization plans and costs have not yet been developed,
disposal cost estimates could be based on cost experience for other
aircraft with similar missions.  AMARC officials stated that disposal
tasks are generally similar among aircraft although the quantity and
complexity of specific items may differ.  For new weapons systems,
including aircraft, the disposal costs, including demilitarization
costs, are to be developed as part of the life-cycle costs required
by the National Defense Authorization Act for Fiscal Year 1995. 



                                Table 2
                
                    Estimated Demilitarization Costs

                          Demilitariza      Residual               Net
                            tion costs      recouped  demilitarization
Type of aircraft          per aircraft     from sale             costs
------------------------  ------------  ------------  ----------------
F-14                          $107,819        $3,020          $104,799
F-16                            $8,561        $1,693            $6,868
F-18                           $20,550        $1,700           $18,850
----------------------------------------------------------------------
Source:  GAO computation based on AMARC and maintenance depot data. 

Jacksonville Naval Depot officials stated that the demilitarization
cost for the F-14 was significantly more than the other two aircraft
because of the complexity of the disposal work effort and the related
costs. 


      ESTIMATED COST TO MAINTAIN
      AIRCRAFT IN STORAGE
---------------------------------------------------------- Letter :6.2

Aircraft are stored at AMARC's long-term storage facility.  All
openings, cracks, and joints have to be sealed and delicate surfaces
protected from the hot sun, wind, and sand.  The preservation process
is repeated every 4 to 5 years to ensure that each aircraft is
adequately protected.  According to AMARC's costing system, the
maintenance costs of aircraft in long-term storage are about $400 per
aircraft per year.  According to an AMARC official, aircraft, on
average, are kept in long-term storage for 20 years.  They also
stated that, in general, planes that undergo the storage process are
not recalled and are ultimately disposed of through sales or salvage. 
Such storage costs could result in a significant liability.  For
example, if the current active inventory of 18,000 aircraft were all
maintained in storage for the average of 20 years and AMARC's
estimated maintenance cost of $400 per aircraft per year were used,
the storage costs would be at least $140 million. 


      REMOVAL AND DISPOSAL OF
      HAZARDOUS MATERIALS
---------------------------------------------------------- Letter :6.3

All five aircraft types we reviewed contained hazardous materials
that must be removed, and if necessary, disposed of when the aircraft
are taken out of service.  Some hazardous materials can be recycled
and reused multiple times, but the materials may ultimately have to
be disposed of appropriately.  For the five aircraft, sufficient
information was available in DOD's and the services' financial and
management information systems to estimate a cost for the removal of
hazardous materials contained in these aircraft.  Costs associated
with disposal of these materials are currently insignificant, but
will need to be considered based on assumptions of final disposal
methods. 

There are numerous sources available to DOD for identifying which
materials used in aircraft are considered hazardous and have to be
cleaned up before aircraft disposal.  DOD Manual 4160.21-M, known as
the Property Disposal Manual and 40 Code of Federal Regulations
(C.F.R.) 261 identify which materials are considered hazardous. 
Environmental managers at the services' program offices and at the
depots responsible for the aircraft, as well as maintenance
personnel, are knowledgeable about the hazardous materials unique to
specific aircraft.  In addition, environmental managers at various
Defense Reutilization and Marketing Offices (DRMOs) are familiar with
the hazardous materials on aircraft.  The aircraft we reviewed
contain various hazardous materials, as shown in table 3.  See
appendix I for definitions of these materials. 



                                Table 3
                
                Hazardous Materials on the Five Aircraft

                                                   Aircraft
                                        ------------------------------
                                          F-    B-    F-    F-
Hazardous materials                       16    1B    14    18  Apache
--------------------------------------  ----  ----  ----  ----  ------
Fire suppressant                                                 
Hydrazine                                  
Batteries                                                        
Petroleum, oil, & lubricants (POL)\a                             
Composites\b                                              
Magnesium thorium                          
Pyrotechnics                                                     
Coolants                                                  
Fuel cells                                                           
Tubing removal                                               
Liquid oxygen                                          
----------------------------------------------------------------------
\a POL products are not hazardous materials under Federal law, but a
number of states including Alaska, California, and Florida, consider
POL products hazardous materials. 

\b While the Air Force considers composites, such as carbon fiber
wings, to be hazardous materials, the Navy does not if the material's
structural integrity is not compromised.  We included composites
because DRMS, which is responsible for their removal and disposal,
considers composites to be hazardous material. 

Source:  AMARC and maintenance depot logistical systems. 

Some hazardous materials in aircraft are not shown in the above
table.  For example, there are many items on the aircraft, such as
cadmium-plated bolts and other small items, that are too numerous to
separately remove and account for during the disposal process. 
Because the cadmium plated items are sold for scrap and the specific
items and quantities are not separately identified, they were not
included in the sample aircraft analysis.  However, DOD and the
services would have to consider the significance of such items in the
aggregate on a servicewide or DOD-wide basis. 

Information on the removal costs of hazardous materials in older
aircraft is generally available at AMARC and is based on its
experience in aircraft disposal.  However, AMARC officials said they
did not yet have significant experience in dismantling and disposing
of the five aircraft in our review.  Therefore, the officials
suggested that a reasonable estimation approach would be to use
removal times that are reported by the cognizant depots that perform
maintenance on these systems.  The removal times for each hazardous
material can then be multiplied by AMARC's hourly labor rate.  Using
this estimation method, table 4 shows the estimated cost of removing
hazardous materials from the five aircraft. 



                                Table 4
                
                 Estimated Cost for Removing Hazardous
                                Material

                                                      Removal cost per
Aircraft type                                                 aircraft
--------------------------------------------------  ------------------
F-16                                                          $ 14,788
B-1B                                                          $123,084
F-14                                                          $ 14,725
F-18                                                          $ 10,753
Apache Helicopter                                                $ 313
----------------------------------------------------------------------
Source:  GAO computation based on AMARC hourly labor rate and the
maintenance depot's removal times. 

The wide variance in hazardous material removal costs can be
accounted for by differences in the size and complexity of the five
aircraft.  For example, the B-1B weighs about 190,000 pounds compared
to the smaller F-16 which weighs about 18,000 pounds.  Moreover, the
B-1B has over 1,000 items associated with pyrotechnics that cost an
estimated $92,000 to remove.  The cost to remove pyrotechnics from
the F-16 is only about $1,700 per aircraft.  Similarly, it takes a
significant number of staff hours, estimated at about $11,000, to
remove the fuel from the B-1B tanks and fuel lines and to take the
protective measures for the fuel system.  For the F-16, the same
procedures take just a few hours at an estimated cost of about $200. 
The fuel is removed from the aircraft because it can be reused. 

The Apache Helicopter hazardous material removal cost estimate is
much less than for the other aircraft because it contains
considerably less hazardous material.  For example, it costs an
estimated $68 per aircraft to remove pyrotechnics from the Apache
compared to about $1,700 to remove pyrotechnics from an F-16.  The
F-16 cost estimate includes removing one or two ejection seats and
canopies and related detonating cord devices, compared to removing
only emergency escape explosive bolts and related material for the
Apache's crew doors. 

For some mission assets, such as nuclear submarines, the actual
hazardous material disposal costs are significant.  However, unlike
the removal costs, hazardous material disposal costs for the five
aircraft in our review appear not to be significant because these
materials are often reutilized, recycled, consumed (as is the case
for fuel), or sold.  Also, DOD does not track disposal costs by
specific aircraft system since hazardous materials are disposed of in
bulk.  For example, AMARC transfers its nonrecyclable fuel to
Davis-Monthan Air Force Base, which then disposes of it along with
the base's waste fuel through its bulk disposal contract.  For the
first 6 months of fiscal year 1996, AMARC paid Davis-Monthan less
than $54,000 to dispose of all of its hazardous material.  However,
although recycling and reuse accounts for much of the hazardous
material disposal costs, currently the possibility that reuse or
recycling needs and capacity will change in the future must be
considered in estimating the ultimate disposal costs for hazardous
materials. 


   REPORTING TOTAL DISPOSAL COSTS
   BY FUTURE TIME PERIODS WOULD BE
   USEFUL
------------------------------------------------------------ Letter :7

DOD officials have pointed out that the total disposal cost estimate
for aircraft will result in a significant liability--much of which
would not require outlays in the current year.  Thus, one way to
provide a proper context for this reported liability and make it more
meaningful to decisionmakers would be to, in a footnote to the
financial statements, provide a breakdown of the liability based on
the approximate time periods the aircraft are expected to be taken
out of service.  Table 5 is a simplified illustration of how the
aircraft disposal liability could be reported by time period.  For
the purposes of this illustration, the following assumptions were
used:  (1) all aircraft had the same disposal costs, (2) 50 percent
of the aircraft were currently awaiting disposal and the remaining
aircraft were to be disposed of over the next 10 years, and (3) the
total estimated liability was $500. 



                                Table 5
                
                 Example of How the Liability Could Be
                        Disclosed by Time Period

                           Liability associated with
                           aircraft to be deactivated
                                in fiscal years
                          ----------------------------
Liability associated
with aircraft currently                                 Thereaft  Tota
awaiting disposal         1998  1999  2000  2001  2002        er     l
------------------------  ----  ----  ----  ----  ----  --------  ====
$250                       $25   $25   $25   $25   $25      $125  $500
----------------------------------------------------------------------
This information could provide an important context for congressional
and other budget decisionmakers on the total liability by showing the
potential annual impact of the actions that have already occurred or
are expected to occur during various budget periods including those
outside the annually submitted Future Years Defense Program. 
Further, if the time periods used to present these data are
consistent with budget justification documents, such as DOD's Future
Years Defense Program, this type of disclosure would provide a link
between budgetary and accounting information, one of the key
objectives of the CFO Act. 


   CONCLUSIONS
------------------------------------------------------------ Letter :8

As of September 30, 1997, DOD had not incorporated SFFAS No.  5 in
its Financial Management Regulation.  In addition, the DOD
Comptroller and the Under Secretary of Defense (Acquisition and
Technology) had not issued implementation guidance to the services to
assist them in estimating aircraft disposal costs.  Such costs are
both probable and estimable and therefore meet the criteria stated in
SFFAS No.  5 for reportable liabilities.  DOD and the military
services have information available to develop cost estimates on each
of the major aircraft disposal processes.  Development of the needed
policy and implementing guidance is necessary to help ensure that an
estimate of aircraft disposal costs is recorded in DOD's fiscal year
1997 financial statements as required.  Moreover, life-cycle cost
estimates that include disposal costs will provide important
information to the Congress and other decisionmakers on the true
costs of aircraft as well as other weapon systems. 


   RECOMMENDATIONS
------------------------------------------------------------ Letter :9

We recommend that you ensure that

  -- the DOD Comptroller incorporate SFFAS No.  5 in DOD's Financial
     Management Regulation,

  -- the DOD Comptroller and the Under Secretary of Defense
     (Acquisition and Technology) promptly issue joint implementing
     guidance for the services on the SFFAS No.  5 requirements for
     recognition of a liability for aircraft disposal costs, and

  -- the DOD Comptroller include the estimated aircraft disposal
     liability in DOD's fiscal year 1997 financial statements. 


   AGENCY COMMENTS AND OUR
   EVALUATION
----------------------------------------------------------- Letter :10

In commenting on a draft of this report, Department of Defense
officials concurred with our recommendations that SFFAS No.  5 be
incorporated in DOD's Financial Management Regulation and that joint
implementing guidance be issued promptly on the SFFAS No.  5
requirements for recognition of a liability for aircraft disposal
costs.  In addition, DOD stated that current disposal cost estimates
can be reasonably determined for aircraft that have been in the
active inventory for some time.  However, DOD stated that it would be
necessary to delay the reporting of the aircraft disposal liability
until fiscal year 1998 because the development and coordination of
procedures and reporting guidance would take time to complete.  They
also stated that the cleanup cost provisions in SFFAS No.  6 must be
considered. 

SFFAS No.  5 was issued almost 2 years ago, to allow agencies ample
time to develop implementing policies and procedures prior to its
fiscal year 1997 effective date.  As stated in the report,
information is available on all of the major aircraft disposal
processes to develop a reasonable estimate of these costs.  Such an
estimate need not be precise--SFFAS No.  5 permits the reporting of a
range.  Also, as noted in this report, the cleanup cost provisions of
SFFAS No.  6 do not affect the reporting of the aircraft disposal
liability.  Accordingly, we believe that DOD, with a concentrated
effort, can develop an estimate of aircraft disposal costs for its
fiscal year 1997 financial statements. 


--------------------------------------------------------- Letter :10.1

This report contains recommendations to you.  The head of a federal
agency is required by 31 U.S.C.  720 to submit a written statement on
actions taken on these recommendations.  You should submit your
statement to the Senate Committee on Governmental Affairs and the
House Committee on Government Reform and Oversight within 60 days of
the date of this report.  A written statement also must be sent to
the House and Senate Committees on Appropriations with the agency's
first request for appropriations made over 60 days after the date of
this report. 

We are sending copies of this report to the Chairmen and Ranking
Minority Members of the House and Senate Committees on
Appropriations, the House and Senate Committees on the Budget, the
Senate Committee on Armed Services, the House Committee on National
Security, the Senate Committee on Governmental Affairs, the House
Committee on Government Reform and Oversight and its Subcommittee on
Government Management, Information, and Technology, and the Director
of the Office of Management and Budget.  We are also sending copies
to the Acting Under Secretary of Defense (Comptroller), the Air Force
Assistant Secretary for Financial Management and Comptroller, the
Army Assistant Secretary for Financial Management and Comptroller,
the Navy Assistant Secretary for Financial Management and
Comptroller, the Under Secretary of Defense (Acquisition and
Technology), the Deputy Under Secretary of Defense for Environmental
Security, and the Acting Director, Defense Finance and Accounting
Service.  Copies will be made available to others upon request. 

Please contact me at (202) 512-9095 if you have any questions
concerning this report.  Major contributors to this report are listed
in appendix II. 

Sincerely yours,

Lisa G.  Jacobson
Director, Defense Audits


HAZARDOUS MATERIALS IN AIRCRAFT
=========================================================== Appendix I

Hazardous material - Any waste that, because of its quantity,
concentration or toxicity, corrosiveness, mutagenicity or
flammability, or physical, chemical, or infectious characteristics
may (1) cause, or significantly contribute to, an increase in
mortality or an increase in serious irreversible or incapacitating
reversible illness or (2) pose a substantial present or potential
hazard to human health or the environment when improperly treated,
stored, transported, disposed of, or otherwise managed.  Some of the
hazardous materials contained in the aircraft we reviewed are
discussed below. 

Batteries - Batteries consist of the following types:  lead-acid,
lithium-sulfur dioxide, magnesium, silver-bearing, mercury, and
nickel cadmium.  Unless batteries are to be recycled or reused, they
must be turned in as hazardous material or hazardous waste. 

Composites - Carbon composite fiber material made of long carbon
fibers mixed with bonding and hardening agents, such as epoxy resins. 
The health hazards associated with composite fibers appear to be
similar to the effects of fiberglass, including inhalation of the
fibers, which can cause bronchial irritation. 

Coolant - A fluid that circulates through a machine or over some of
its parts in order to draw off heat.  This includes chemical
substances used in aircraft for cooling radar and related equipment. 
Certain forms of this material may be harmful if skin contact occurs. 

Fire suppressant - Substances used to keep materials on aircraft,
such as fuel, from igniting and burning.  Halon, one such
suppressant, is an ozone-depleting substance that is reclaimed or
recovered. 

Fuel cells - Fuel cells, which hold fuel, are not in themselves
considered hazardous material, but because they are contaminated with
fuel they can become hazardous.  Aviation fuel contains benzene and
toluene, both hazardous materials. 

Hydrazine - Supplemental liquid propellant, found only on the F-16,
used to power an emergency power unit in the event of main engine
failure.  Hydrazine is an extremely dangerous material if inhaled and
has to be specially handled during transfer by teams dressed in
protective gear. 

Magnesium Thorium - Alloy of thorium and magnesium used to produce a
strong, lightweight aircraft component.  Thorium presents an internal
and external radiation hazard. 

Petroleum, oil, and lubricants - Includes jet fuel, hydraulic fluid,
antifreeze products, and other lubricants found on aircraft.  In some
states, these products are not considered hazardous. 

Pyrotechnics - Explosive devices used to jettison the canopy and
activate the pilot's ejection seat.  On helicopters, these devices
are used to shear off hinge pins on the fuselage doors to enable crew
to extricate themselves in the event of a crash-landing. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix II


   ACCOUNTING AND INFORMATION
   MANAGEMENT DIVISION,
   WASHINGTON, D.C. 
-------------------------------------------------------- Appendix II:1

William D.  Grindstaff, Assistant Director
Jacob W.  Sprouse, Jr., Audit Manager
Linda Brigham, Auditor
Francine M.  DelVecchio, Communications Analyst


   KANSAS CITY OFFICE
-------------------------------------------------------- Appendix II:2

Dieter M.  Kiefer, Assistant Director
Marshall S.  Picow, Auditor in Charge
Gary L.  Nelson, Auditor
Darryl S.  Meador, Evaluator


*** End of document. ***