Future Years Defense Program: Risks in Operation and Maintenance and
Procurement Programs (Letter Report, 10/05/2000, GAO/GAO-01-33).

This report summarizes GAO's findings on the Department of Defense's
(DOD) Future Years Defense Program (FYDP). Although total funding in the
2001 FYDP is about $16 billion more than in the 2000 FYDP, DOD may not
be able to implement its operation and maintenance and procurement
programs as planned. GAO identified several areas in which costs may be
understated or savings overstated, increasing the risk that in the next
FYDP the military will have to shift more funds to these accounts from
other accounts. DOD's efforts to reduce its infrastructure costs may not
yield the savings that it planned to use to fund modernization and
readiness needs. Because the military services and the defense
organizations have already adjusted their current budgets and future
years funding projects to reflect these expected savings, they will
likely experience funding shortfalls unless other adjustments are made
or additional ends are provided.

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

 REPORTNUM:  GAO-01-33
     TITLE:  Future Years Defense Program: Risks in Operation and
	     Maintenance and Procurement Programs
      DATE:  10/05/2000
   SUBJECT:  Defense procurement
	     Defense budgets
	     Future budget projections
	     Defense contingency planning
	     Combat readiness
IDENTIFIER:  F-22 Aircraft
	     F/A-18E/F Aircraft
	     Kosovo
	     Bosnia
	     DOD Future Years Defense Program
	     FYDP
	     DOD Planning, Programming, and Budgeting System
	     Overseas Contingency Operations Transfer Fund

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GAO-01-33

Report to the Honorable John R. Kasich, Chairman, Committee on the Budget,
House of Representatives

October 2000 FUTURE YEARS DEFENSE PROGRAM

Risks in Operation and Maintenance and Procurement Programs

GAO- 01- 33

Letter 3 Tables Table 1: DOD's 2000 and 2001 FYDPs, by Primary

Appropriation Category (total obligational authority in billions of fiscal
year 2001 dollars) 6 Table 2: Funding Programmed to Begin Implementation of

the First Proposed Base Closure Round (in billions of fiscal year 2001
dollars) 16 Table 3: Reductions in Planned Procurement Funding (in billions

of dollars) 20 Figures Figure 1: Historic and Projected Military
Construction

Funding From 1991 to 2005 (in billions of fiscal year 2001 dollars) 10
Figure 2: Annual Defense Health Program Funding Levels

in the 2000 and 2001 FYDPs (in billions of fiscal year 2001 dollars) 11
Figure 3: Annual Procurement Funding Levels in the 2000

and 2001 FYDPs (in billions of fiscal year 2001 dollars) 18

Abbreviations

DOD Department of Defense FYDP Future Years Defense Program O& M operation
and maintenance

October 5, 2000

Lett er

The Honorable John R. Kasich Chairman, Committee on the Budget House of
Representatives

Dear Mr. Chairman: The Department of Defense's (DOD) Future Years Defense
Program (FYDP) is the official document that summarizes the force levels and
funding associated with specific programs that the Secretary of Defense
would like Congress to approve. The FYDP reflects decisions made in the DOD
Planning, Programming, and Budgeting System, which is intended to produce
the best possible mixture of forces, equipment, and support to accomplish
DOD's mission. The FYDP presents estimated appropriation needs for the
budget year for which funds are being requested from Congress and at least
the 4 years following it. The fiscal year 2000 FYDP supported the
President's 2000 budget and requested $278.5 billion for 2000 and $1,434
billion total funding for fiscal years 2001- 05. 1 The fiscal year 2001 FYDP
supports the President's 2001 budget and requests $1, 450 billion total
funding for 2001- 05. As requested, this report concentrates on the period
common to both FYDPs, 2001- 05, and discusses the risks that the 2001 FYDP
faces that may prevent it from being implemented as planned. The report also
discusses recent actions taken by Congress on DOD's budget for 2001 during
its consideration of the Fiscal Year 2001 National Defense Authorization Act
and its enactment of the Fiscal Year 2001 Defense Appropriations Act.

Results in Brief Although total funding in the 2001 FYDP is about $16
billion more than in the 2000 FYDP, there are risks that DOD will not be
able to implement its

operation and maintenance and procurement programs as planned. We identified
several areas in the operation and maintenance accounts where costs may be
understated or savings overstated, adding risk that DOD in

1 Unless otherwise stated, the years and dollars shown in this report are on
a fiscal year basis and in constant fiscal year 2001 dollars.

the next FYDP will have to shift more funds to these accounts from other
accounts, such as procurement. Specifically,

U. S. military forces are participating in operations in the Balkans (Kosovo
and Bosnia) and Southwest Asia. DOD assumed that U. S. forces will be
deployed in Southwest Asia at least through 2005 and programmed about $1.1
billion each fiscal year through 2005. DOD programmed $3. 1 billion in 2001
for operations in the Balkans. However, because DOD considers the situation
in the Balkans as uncertain, it programmed only $1 billion annually from
2002 through 2005 for operations in the Balkans and for any other potential
operations. To the extent that existing operations or new operations cost
more than the $1 billion programmed, DOD will need to shift funds from other
accounts to pay for these operations or will need to seek supplemental funds
from Congress. To fund readiness needs, DOD programmed $1.5 billion less for
real

property maintenance in the 2001 FYDP than was programmed in the 2000 FYDP.
According to the military services, the backlog of real property maintenance
is projected to continue to grow to $26 billion by 2005. If DOD has to spend
more money on real property maintenance than it budgeted for, as it has in
the past few years, it will need to shift funds from other accounts, thereby
introducing risk that other programs will not be implemented as planned.
Although DOD plans to increase Defense Health Program funding by

$615 million over the 2001- 05 time period, DOD officials report that an
additional $6 billion is required to maintain the existing program through
2005. 2 In addition, congressional defense authorization committees are
considering numerous bills that would add requirements to the Defense Health
Program. Further risks may be incurred if Congress passes legislation to
expand military health benefits and does not provide full funding for those
additional benefits. DOD has long sought to reduce the cost of supporting
its infrastructure,

which receives about half of its funds from operation and maintenance
accounts, so that it could use the savings to fund modernization and
readiness needs. DOD has sought these reductions primarily through
additional base closures and efficiencies in operations through reform
initiatives. However, Congress did not approve additional base closures.
Moreover, our work has shown that the portion of DOD's budget devoted to
infrastructure has not been reduced, despite the

2 Value is in current year dollars.

expectations that it would. Future reductions are also in doubt because DOD
may not achieve the $10. 8 billion in savings in the 2001- 05 time frame
from defense reform initiatives. Our work shows that the projected savings
will be lower during the 2001- 05 time frame and that the pace of realizing
these savings will be slower than projected by DOD. Because the military
services and the defense organizations have already adjusted their current
budgets and future years funding projections to reflect these expected
savings, they will likely experience funding shortfalls, unless other
adjustments are made or additional funds are provided.

DOD programmed $3. 2 billion less in procurement funding in the 2001 FYDP
than it had programmed in the 2000 FYDP. This action runs counter to its
goal of substantially increasing procurement and adds risk to its long- term
modernization program for aircraft, ships, and other weapon systems that
will cost billions of dollars. This shifting of procurement funds to other
activities creates a large demand for procurement funds beyond the FYDP and
raises the risk that existing equipment will deteriorate and become
obsolete, which could compromise the technological superiority of future
forces. Another factor that adds risk to DOD's modernization plans is the
long- standing problem of cost growth in weapon systems. Recently, we and
others have reported that the costs for the Navy's F/ A- 18E/ F aircraft,
the Air Force's F- 22 aircraft program, the Army's Comanche helicopter
program, and the multiservice Joint Strike Fighter program could exceed
current projected costs.

We provided a draft of this report to DOD for its review and comment. DOD
chose not to comment.

Background In June 2000, we compared the planned funding levels for the 2000
and 2001 FYDPs. 3 We stated that in constant dollars, there are only minor

increases in the projected year- to- year funding totals over the common 5-
year period, 2001- 05, from the 2000 FYDP to the 2001 FYDP. Table 1 from
that report shows the year- to- year changes by primary appropriation
categories.

3 Future Years Defense Program: Comparison of Planned Funding Levels for the
2000 and 2001 Programs( GAO/ NSIAD- 00- 179, June 14, 2000).

Table 1: DOD's 2000 and 2001 FYDPs, by Primary Appropriation Category (total
obligational authority in billions of fiscal year 2001 dollars)

Percent change Appropriation category FYDP 2001 2002 2003 2004 2005 Total

2001- 05

Military personnel 2000 $76.5

$76.1 $75.9

$75.9 $75.9

$380. 3 2001

75.8 76.0

75.7 76.0

76.0 379. 5 Change

-0.7 -0.1

-0.2 0.1

0.1 -0. 8 -0. 2 Operation and maintenance 2000

105.1 103.6

103.7 104.2

104.4 521. 0

2001 109.0

105.3 104.7

105.2 105.1

529. 4 Change

4.0 1.7

1.0 1.0

0.7 8.5 1. 6

Procurement 2000 61.4

60.8 63.7

64.9 68.9

319. 6 2001

60.3 62.0

64.4 64.0

65.8 316. 4 Change

-1.1 1.2

0.7 -0.8

-3.1 -3. 2 -1. 0 Research, development, test, and evaluation 2000

34.1 33.8

33.0 32.7

31.3 165. 0 2001

37.9 37.7

36.3 35.4

33.7 180. 9 Change

3.8 3.9

3.2 2.7

2.4 15. 9 9. 6 Military construction 2000

7.1 4.1

4.1 4.2

4.4 23. 9 2001

4.6 4.2

3.7 4.3

5.0 21. 7 Change

-2.5 0.1

-0.5 0.2

0.5 -2. 2 -9. 1 Family housing 2000

3.8 3.5

3.6 3.6

3.6 18. 2 2001

3.5 3.7

3.7 3.8

3.8 18. 4 Change

-0.4 0.1

0.1 0.2

0.2 0.2 1. 3 Other a 2000

0.8 1.3

2.1 1.2

0.9 6.3

2001 1.3

0.8 0.7

0.4 0.4

3.6 Change

0.5 -0.6

-1.4 -0.8

-0.5 -2. 7 -42. 5

Total 2000 $288.7

$283.3 $286.1

$286.7 $289.4

$1,434. 2 2001

$292.3 $289.6

$289.2 $289.1

$289.7 $1,450. 0 Change

$3.7 $6.3

$3.1 $2.4

$0.4 $15. 8 1. 1 a Includes revolving and management funds and defensewide
contingencies.

Note: Totals may not add due to rounding. Source: Our analysis of FYDP data.

Since the mid- 1980s, we have reported and testified that DOD employs overly
optimistic planning assumptions in its budget formulation, which leads to
far too many programs for the available dollars. Over the last few years, we
have reported and testified that DOD has had difficulty meeting its planned
growth in procurement funds and that procurement plans had

been shifted to the future. 4 This pattern was caused by the need to use
procurement funds for operation and maintenance (O& M) activities.

DOD May Have to Shift We identified several areas in the O& M accounts where
costs may be

More Funds to understated or savings overstated, adding risk that DOD in the
next FYDP

will have to shift more of its funds from other accounts, such as Operation
and

procurement, to meet O& M needs. These areas include the estimated costs
Maintenance

of contingency operations in the Balkans and possibly other areas, which

may cost more than the $1 billion programmed annually in the FYDP for 2002-
05; real property maintenance, which have been greater than budgeted

amounts over the last few years; the Defense Health Program, which DOD
estimates are understated by

at least $6 billion over the next 5 years; 5 bulk fuel, which may increase
beyond expectations; and ship depot maintenance, which may be understated by
about

$574 million. They also include the projected savings of $10.8 billion from
the Defense Reform Initiative, which may not materialize in the expected
time frames.

Additional O& M Funds for U. S. military forces are participating in a
number of contingency

Ongoing Contingency operations, most notably in the Balkans (Kosovo and
Bosnia) and

Southwest Asia. 6 DOD budgets and Congress appropriates funds for the
Operations May Be Needed

costs of these ongoing operations to the Overseas Contingency Operations
Transfer Fund. As operations unfold during the year, DOD transfers funds out
of this Fund to the military services and to the smaller DOD

4 Future Years Defense Program: Funding Increase and Planned Savings in
Fiscal Year 2000 Program Are at Risk( GAO/ NSIAD- 00- 11, Nov. 22, 1999);
DOD Budget: Substantial Risks in Weapons Modernization Plans( GAO/ T- NSIAD-
99- 20, Oct. 8, 1998); and Future Years Defense Program: Substantial Risks
Remain in DOD's 1999- 2003 Plan( GAO/ NSIAD- 98- 204, July 31, 1998). 5
Value is in current year dollars.

6 Contingency operations include noncombatant evacuation operations, no- fly
zone enforcement, humanitarian assistance, and peace enforcement operations.

components that also have a supporting role in the operations. 7 Any monies
remaining in the Fund at the end of the fiscal year can be carried over to
the next fiscal year. In the 2001 FYDP, DOD increases total funding for the
Overseas Contingency Operations Transfer Fund by about $9. 7 billion, or 382
percent, over that programmed in the 2000 FYDP. The increase was primarily
to fund ongoing operations in Kosovo, which began after the 2000 budget was
submitted, and in Southwest Asia.

Despite this increase, DOD may need additional O& M funds for contingency
operations. DOD assumes that U. S. forces will be deployed in Southwest
Asia, in support of their current mission, at least through 2005.
Accordingly, funding in the 2001 FYDP for Southwest Asia remains constant at
about $1. 1 billion each fiscal year. DOD programmed $3. 1 billion in 2001
for operations in the Balkans. However, because DOD considers the situation
in the Balkans as uncertain, it programmed about $1 billion annually from
2002 through 2005 for operations in the Balkans and for any other potential
operations. To the extent that existing or new operations cost more than the
$1 billion programmed, DOD will need to shift funds from other accounts to
pay for these operations or will need to seek supplemental funds from
Congress.

Congress recently provided $6.0 billion for the Overseas Contingency
Operations Transfer Fund-$ 2.8 billion in the Fiscal Year 2001 Defense
Appropriations Act and $3.2 billion in fiscal year 2000 emergency
supplementals. 8

Additional Risk in Real To maintain readiness within given funding levels,
DOD plans to reduce or

Property Maintenance Is delay funding for real property maintenance. 9 Over
90 percent of real

Assumed property maintenance activities are funded in DOD's O& M accounts.
Our

analysis shows that DOD has programmed $1.5 billion less for real property
maintenance in the 2001 FYDP than was programmed in the 2000 FYDP. Most of
this decrease ($ 1.2 billion) is planned to occur in the Army's

7 Smaller defense components such as the Defense Information Systems Agency,
the National Security Agency, and the Special Operations Command. 8 P. L.
106- 246, July 13, 2000, and P. L. 106- 259, Aug. 9, 2000.

9 Real property maintenance includes the maintenance and repair of real
property such as utilities, buildings, facilities, pavements, land, and
grounds as well as repair of electrical circuitry, heating and air-
conditioning, water pipes, and routine maintenance work.

accounts as a result of the Army's decision to reduce real property
maintenance funding to 69 percent of requirements.

DOD officials have expressed concern about the adequacy of planned funding
for real property maintenance. The Secretary of the Army stated that the
Army has decided to assume some risk by funding its real property
maintenance at only 69 percent of known requirements, 10 thereby
exacerbating the deterioration of its aging infrastructure. Even though the
Navy projects increased funding for real property maintenance, 11 the Vice
Chief of Naval Operations has stated that the Navy remains concerned about
the backlog of critical repairs, which it projects will grow to $3. 7
billion in 2005. According to the Vice Chief, this backlog will make it that
much more difficult to “turn the corner on the chronic
deterioration” of naval bases, which is becoming a significant
quality- of- life issue for the service. Similarly, the Secretary and the
Chief of Staff of the Air Force have reported that real property maintenance
is funded at a minimum level intended to accomplish only the day- to- day
maintenance required to sustain facilities and infrastructure. 12 According
to these officials, the available funds do not provide the resources
necessary to reduce the repair and maintenance backlog, which is currently
at $4 billion and is expected to increase. In recognition of DOD's concern
about real property maintenance funding, Congress, in the Fiscal Year 2001
Defense Appropriations Act, provided $250 million in supplemental funding
specifically earmarked for these activities available through fiscal year
2001.

DOD reports that one of the most significant factors in the growth of the
maintenance and repair backlog is the underfunding of military construction
projects to replace older facilities with newer buildings that are cheaper
to maintain. As figure 1 shows, the downward trend in military construction
funding is projected to continue through 2003 and then funding is projected
to increase through 2005.

10 Statement of the Secretary of the Army on the Posture of the United
States Army and the Fiscal Year 2001 Budget Request, Mar. 22, 2000. 11
Statement of the Vice Chief of Naval Operations before the House Committee
on Armed Services, Feb. 29, 2000. 12 Air Force Posture Statement 2000, Feb.
10, 2000.

Figure 1: Historic and Projected Military Construction Funding From 1991 to
2005 (in billions of fiscal year 2001 dollars)

9 8 7 6 5 4 3 2 1 0

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Fiscal Year

Source: Our analysis of FYDP data.

Our recent work, 13 which examined DOD's real property maintenance, shows
that DOD plans to fund repairs below the level required to keep most
facilities at current conditions. For example, the Air Force had planned no
money for repair projects until fiscal year 2003 (although it planned to
spend some funds on emergency minor repairs and other forms of what it terms
preventive maintenance). The work also shows that the backlog of repairs,
some rated critical by the services, is projected to increase as a result of
the reduced funding levels. For example, the Army and the Navy both estimate
their backlogs of critical repairs will grow by 12 percent between 2001 and
2005, to $18.8 billion and $3. 7 billion, respectively. Current service
projections show the combined backlog of the active and reserve components
of the Army, the Navy, and the Air Force increasing to $26 billion by 2005.
We have also reported that, between 1994

13 Defense Budget: Real Property Maintenance and Base Operations Fund
Movements (GAO/ T- NSIAD- 00- 101, Mar. 1, 2000) and Military Real Property
Maintenance: Management Improvements Are Needed to Ensure Adequate
Facilities( GAO/ T- NSIAD- 00- 111, Mar. 1, 2000).

and 1999, DOD consistently spent more on real property maintenance than it
had programmed. 14 If historical trends continue, DOD will find it necessary
to again shift funds to real property maintenance, thereby introducing risk
that other programs will not be implemented as planned.

Defense Health Funding The Defense Health Program comprises about 10 percent
of DOD's total

Understated O& M funding for both the 2000 and 2001 FYDPs. The 2001 FYDP
plans to

increase funding for the program by $615 million (1. 1 percent) over the
2001- 05 period, as compared to the 2000 FYDP. Figure 2 shows annual funding
level projections from both FYDPs.

Figure 2: Annual Defense Health Program Funding Levels in the 2000 and 2001
FYDPs (in billions of fiscal year 2001 dollars)

11.6 11. 6

11.5 11. 4

11.4 11.3

11. 2 11.2

11. 2 11. 2 11. 1 11.1

11. 1 11.0

11. 0 11. 0

11. 0 10.9 10.8 10.7 10.6

2000 FYDP 2001 FYDP

Source: Our analysis of FYDP data.

14 Defense Budget: Analysis of Real Property Maintenance and Base Operations
Fund Movements( GAO/ NSIAD- 00- 87, Feb. 29, 2000).

Despite this planned funding increase, DOD resource management officials
report that the projected funding levels in the 2001 FYDP are inadequate to
maintain their current program. DOD Comptroller officials estimate that an
additional $6 billion is required just to maintain the existing program
through 2005. 15

This understating of Defense Health Program funding requirements is known
within DOD and has been going on for several years. In 1999, we reported
that there was risk to the sufficiency of the projected annual funding
levels for the Defense Health Program. 16 DOD's difficulty in adequately
estimating its health care needs is due, in part, to the lack of a universal
beneficiary enrollment requirement that clearly identifies the population
for whom DOD is to provide health care. In addition, officials with the
Office of the Secretary of Defense told us that they only work to make
Defense Health Program FYDP projections realistic for the current budget
year and that they underfund the program in the outyears to free up funds
for other defense programs. As such, DOD is not providing Congress with a
realistic picture of funding requirements and the trade- offs required
within the defense budget to meet these known requirements.

Funding requirements for the Defense Health Program, as presented to
Congress as part of the President's budget, have been understated for the
last several years. For example, the Fiscal Year 1997 Defense Appropriations
Act added about $475 million to the program to address a shortfall
discovered after the initial budget was submitted. 17 In 1998, DOD's
Comptroller submitted a budget amendment to add $274 million to the program
to fully fund it. Despite DOD's testimony in February 1998 that the core
programs of the 1999 Defense Health Program were fully funded, the services
later reported that the funding shortfall could be as much as $613 million.
In 1999, the Defense Health Program received $347 million more than
requested in DOD's original budget. The Department of Defense Appropriations
Act for Fiscal Year 2000 provided $320 million more than requested by DOD
for the program. 18 Again in the Fiscal Year 2000

15 Value is in current year dollars. 16 Defense Health Program: Reporting of
Funding Adjustments Would Assist Congressional Oversight( GAO/ HEHS- 99- 79,
Apr. 29, 1999).

17 P. L. 104- 208, Sept. 30, 1996. 18 P. L. 106- 79, Oct. 25, 1999.

Emergency Supplemental Appropriations Act, Congress added $615.6 million to
cover unanticipated Defense Health Program cost increases in fiscal years
1998 through 2001. In this act, Congress also appropriated an additional
$695. 9 million for unfunded requirements that will remain available through
fiscal year 2002. Also, in the Fiscal Year 2001 Defense Appropriations Act,
Congress included $100 million in supplemental funding for the Defense
Health Program available through 2001, which is intended to cover expanded
pharmacy access for military retirees, including those over age 65.

Congressional defense authorization committees are considering numerous
bills that would add requirements to the Defense Health Program. If
increased benefits are enacted and full funding for those increased benefits
are not provided, the extent to which the program's requirements are
understated in the 2001 FYDP could be further exacerbated.

Volatile Fuel Prices Increase The recent volatility of fuel prices
introduces risk into DOD's projected

O& M Risk O& M funding. Bulk fuel prices are volatile due to increases and
decreases

in crude oil prices. In the 2000 FYDP, DOD assumed savings from lower fuel
costs. Conversely, DOD added $3.5 billion to its 2001 FYDP for projected
increased fuel costs for ship and jet fuel, diesel oil, and gasoline. The
Office of Management and Budget provides DOD with inflation estimates for
fuel purchases in November for inclusion in the President's budget. The
Department of Energy reports that crude oil prices doubled between November
1998 and November 1999, and since November 1999, prices have increased by an
additional $5.09 per barrel. Crude oil prices are expected to begin
decreasing; however, the Department of Energy continues to project that
prices during fiscal year 2001 will be an average of $4.51 per barrel above
those used to develop the 2001 FYDP.

The Fiscal Year 2000 Emergency Supplemental Appropriations Act provides $1.
6 billion to cover fuel price increases through fiscal year 2001. If the
volatility in crude oil prices continues and prices do not decrease as
currently projected, DOD may need to adjust the fiscal year 2002 price it
charges the military services and other customers. Since the services use
this price to budget for their bulk fuel purchases, they would have to
program more funds for fuel, if DOD has to increase its price.

Other Risks Exist in Army Officials report additional risks in Army and Navy
programs. Army officials

and Navy Programs report that O& M funding decreases of $3.8 billion from
the 2000 FYDP to

the 2001 FYDP have added significant risks to programs such as depot
maintenance, information management, transportation, and ammunition
stockpile management. For example, in February 2000, the Vice Chief of Naval
Operations also expressed concern about the funding of ship depot
maintenance and stated that fleet commanders report this account as being
underfunded. The Navy has budgeted ship depot maintenance at the goal rate
of 93. 5 percent of requirements in 2001; however, according to a Ship
Maintenance Policy official, the FYDP funded the other years below the 93. 5
percent rate due to uncertainties in the ship depot maintenance schedule. If
the Navy increases funds for 2002- 05 to the 2001 rate of 93. 5 percent, it
will require an additional $574 million. In recognition of the Navy's need
for additional ship depot maintenance funding, Congress provided $362
million in supplemental funding in the Fiscal Year 2000 Emergency
Supplemental Appropriations Act for these activities through fiscal year
2001.

DOD Unable to Shift Funds DOD has long sought to reduce the cost of
supporting its infrastructure,

to Modernization which receives about half of its funding from O& M
accounts, so that it

and Readiness Through could use the savings to fund modernization and
readiness needs. These

Infrastructure Reductions reductions have been primarily through base
closures and efficiencies in

operations through reform initiatives. However, our work has shown that the
portion of DOD's FYDP devoted to direct infrastructure, 19 relative to
mission, has not changed, despite the expectations that it would. 20 Future
reductions are also in doubt because (1) projected savings from defense
reforms could be lower during the 2001- 05 time frame and (2) Congress has
not granted authorization to conduct further base closure rounds.

19 Using the FYDP, DOD has clearly identified program elements that fund
infrastructure activities and refers to these as “direct
infrastructure.” In addition to this direct infrastructure, there are
parts of the total infrastructure funding that cannot be clearly identified
in the FYDP. In the past, DOD estimated that this “indirect”
infrastructure was, on average, an additional 14 percent of its total
program.

20 Future Years Defense Program: Lower Inflation Outlook Was Most
Significant Change From 1996 to 1997 Program( GAO/ NSIAD- 97- 36, Dec. 12,
1996); Defense Infrastructure: Costs Projected to Increase Between 1997 and
2001( GAO/ NSIAD- 96- 174, May 31, 1996); and Future Years Defense Program:
1996 Program Is Considerably Different From the 1995 Program( GAO/ NSIAD-
95- 213, Sept. 15, 1995).

Defense Reforms May Not The Defense Reform Initiative, announced by the
Secretary of Defense in

Produce Projected Savings November 1997, represents a number of management
initiatives

During 2001- 05 Time Frame undertaken to improve the effectiveness and
efficiency of DOD's business

operations. Included are initiatives such as adopting the best business
practices of the private sector, reducing and reorganizing headquarters
elements, expanding the use of public- private competitions (using the
Office of Management and Budget's A- 76 process), 21 and eliminating
unneeded infrastructure. The ultimate goals of this effort are to improve
service to the warfighters, who depend on DOD's internal businesses for
support, and help reduce infrastructure costs so that savings in operation
and maintenance funding can be shifted to support weapons modernization. The
services and Defense agencies have assumed in the 2001 FYDP that the
Initiative would result in $10.8 billion in savings in the 2001- 05 time
frame and have applied these projected savings to other programs.

In July 2000, we reported that only a few of the reform initiatives had been
completed and, that while most of the remaining initiatives are progressing,
they face barriers that could keep them from meeting specific time frames
and goals. 22 As such, the Initiative, thus far, has not resulted in large
savings, primarily because most individual initiatives are long- term
efforts that require significant up- front investments to implement. We also
reported that it could take some time before these investments are offset
and net savings begin to accrue. Because the defense components have already
adjusted their current budgets and future years funding projections to
reflect these expected savings, they will likely experience funding
shortfalls, unless other adjustments are made or additional funds are
provided. For example, the Navy projects savings of $4. 9 billion between
2001 and 2005 resulting from its strategic sourcing and A- 76 initiatives.
23 Similarly, the Army assumes $2.6 billion in savings from it's A- 76
studies over the same time period.

21 Under A- 76, agencies conduct public/ private competitions to determine
whether the public or private sector will perform selected commercial
activities and functions. 22 Defense Management: Actions Needed to Sustain
Reform Initiatives and Achieve Greater Results( GAO/ NSIAD- 00- 72, July 25,
2000).

23 Strategic sourcing relies on a broad range of manpower management
techniques such as reengineering, reorganization, and prioritization to
achieve savings rather than relying solely on A- 76 competitions.

Congress Did Not Approve DOD continues to emphasize that additional base
realignment and closure

Additional Base Realignment and rounds are necessary to reduce unneeded
infrastructure and to free up

Closure Rounds funds for readiness, weapon modernization, and quality- of-
life plans. In

both the 2000 and the 2001 FYDPs, DOD assumed congressional approval for two
more rounds of base closures and programmed funds to begin implementation of
the first round. The 2000 FYDP assumed approval for these rounds in 2001 and
2005 and included approximately $2.7 billion in fiscal years 2002- 04 to
begin implementation of a 2001 base closure round. DOD estimated that net
savings resulting from the base closure round would begin to occur in fiscal
year 2005 and programmed $167 million in savings for that year. The 2001
FYDP assumes base closure rounds in 2003 and 2005 and includes about $2
billion in investments to begin implementation of a 2003 round. Table 2
shows the programmed funds for and savings from the first proposed base
closure round.

Table 2: Funding Programmed to Begin Implementation of the First Proposed
Base Closure Round (in billions of fiscal year 2001 dollars)

2001 2002 2003 2004 2005 Total

2000 FYDP $0.813 $1. 382 $0.541 $- 0. 167 a $2. 569

2001 FYDP $0.653 $1. 280 $1. 933

a Net savings. Source: Our analysis of FYDP data.

As in the recent past, Congress did not approve additional base closure
rounds. In May 1999, the Senate rejected a proposed amendment to its version
of the proposed National Defense Authorization for Fiscal Year 2000 bill to
establish base closures in 2001 and 2005. In June 2000, the Senate rejected
additional rounds in 2003 and 2005. Therefore, until additional rounds are
approved, DOD will have the net cost of the rounds to reallocate to other
programs. DOD stated that without base closure authority, it will need to
continue spending scarce funds on maintaining excess infrastructure and
identify other funding sources to meet higher priority needs, such as
modernization.

Long- Term DOD programmed $3. 2 billion less for procurement in the 2001
FYDP than

Modernization Plans it had programmed in the 2000 FYDP. This action runs
counter to its goal of

substantially increasing procurement and adds risk to its long- term Are at
Risk

modernization program for aircraft, ships, and other weapon systems that
will cost billions of dollars. The 2001 FYDP continues the shift of funds
from planned procurement to operations and support activities. Given the
volume of acquisition and development projects underway, this shifting of
procurement funds to other activities creates a large demand for procurement
beyond the FYDP. Moreover, it impacts DOD's ability to address problems
related to deteriorating and obsolete equipment, which compromises the
technological superiority of future forces. Another factor that adds risk to
DOD's modernization plans is cost growth in weapon systems.

Decrease in Projected As figure 3 shows, the 2000 FYDP projected that
procurement would

Procurement Funding increase from $61.4 billion in 2001 to $68.9 billion in
2005. The 2001 FYDP

Runs Counter to also shows an increase between those years, but a more
modest increase.

Modernization Goals However, there is $3.2 billion less in overall
procurement funding

programmed in the 2001 FYDP than in the 2000 FYDP. The most significant
difference is projected for 2005- DOD programmed $3.1 billion less in the
2001 FYDP than the 2000 FYDP. Both the Army and the Navy/ Marine Corps
decreased programmed procurement funding by over $1 billion each for 2005.

Figure 3: Annual Procurement Funding Levels in the 2000 and 2001 FYDPs (in
billions of fiscal year 2001 dollars)

70 68.9 68

66 65.8

64.9 64.4 64.0 64

63.7 62 62.0 61.4

60.8 60

60.3 58 56

2000 FYDP 2001 FYDP

Source: Our analysis of FYDP data.

This projected reduction in 2005 runs counter to DOD's goal of substantially
increasing procurement and adds risk to DOD's long- term modernization
program. Specifically, the military services plan to procure aircraft,
ships, and other weapon systems that will cost billions of dollars. For
example,

the Army plans to procure 480 crusader self- propelled howitzers through
2011 at an estimated cost of over $11 billion; the Army plans to spend
billions of dollars to procure new and refurbish

existing vehicles and other equipment as part of its program to transform
its forces to be more responsive, deployable, survivable, and sustainable;
the Navy plans to procure 30 new attack submarines by 2021 at an

estimated cost of over $61 billion; and the Air Force plans to procure 333
F- 22 aircraft through 2011 at an

estimated cost of over $36 billion. Although DOD's planned procurement
spending reached the Quadrennial Defense Review's goal of $60 billion in
2001 of the current FYDP, and is projected to average over $63 billion over
the 2001- 05 period, the Secretary

of Defense said, and others agree, that projected procurement funding levels
are insufficient to implement planned modernization programs. The
Congressional Budget Office estimated that procurement budgets must average
about $90 billion annually- about $27 billion above projected levels- to
replace current equipment as it wears out or becomes obsolete. 24

Procurement Funding In 1997, the Quadrennial Defense Review expressed
concerns about the

Migrates to Other Activities chronic migration of funds for planned
procurement to operations and

support activities. The 2001 FYDP continues this funding migration pattern.
For example, the Navy has announced that it will procure five fewer ships
from 2002 to 2005 than stated in the 2001 budget proposal. The Navy still
plans to purchase at least some of the five ships, but beyond the 2001 FYDP.
Table 3 further illustrates the extent that DOD has lowered procurement
funding estimates over time. It indicates that as DOD got closer to the
budget year, it has lowered procurement funding from prior year estimates.
For example, since the 1996 FYDP, DOD has lowered the estimated funding for
2001 procurement from over $67 billion to about $60 billion.

24 An Analysis of the President's Budgetary Proposals for Fiscal Year 2000,
Apr. 1999.

Table 3: Reductions in Planned Procurement Funding (in billions of dollars)
Planned procurement funding FYDP 1995 1996 1997 1998 1999 2000 2001

1995 $43. 3 $48.4 $49.8 $57.1 $60.1 1996 39.4 43.5 51.4 54.2 $62. 3 $67. 3
1997 38.9 45.5 50.5 57. 7 60. 1 1998 42.6 50.7 57. 0 60. 7 1999 48.7 54. 1
61. 3 2000 53. 0 61. 8 2001 60. 3 Unrealized

-$ 9.0 -$ 10.9 -$ 14.5 -$ 11.4 -$ 9. 3 -$ 7. 0 procurement Source: 1995,
1996, 1997, 1998, 1999, 2000, and 2001 FYDPs.

DOD Places Higher Priority In its Annual Report to the President and
Congress for 2000, DOD states

on Current Obligations that its priorities are its personnel, readiness, and
modernization. However,

it acknowledges the migration of procurement funds to pay for operation and
support activities. As noted in the report on the Quadrennial Defense
Review, this shifting of procurement funds to other activities creates a
large, bow wave, demand for procurement beyond the FYDP. Moreover, the
report noted that the migration of procurement funds causes deterioration
and obsolescence in equipment and compromises the technological superiority
of future forces. All of the services have expressed concerns about their
aging equipment along with the associated increased maintenance costs. For
example, the Air Force has stated that the average age of its fighter
aircraft is currently 20 years and it will increase to 30 years by 2015. The
Chief of Naval Operations has stated that aging systems is one of the
challenges the Navy faces in keeping its equipment mission ready. The
Secretary of the Army has stated that the Army must continue to replace its
aging equipment to be prepared for future wars. The Chairman of the Joint
Chiefs of Staff testified before Congress that a challenge before DOD is to
cope with the higher than expected maintenance costs for aging equipment.
Using procurement funding to fund other activities will exacerbate the
equipment aging problem and add to the bow wave for procurement funding in
years beyond the FYDP.

Procurement Programs May The historical cost growth associated with major
acquisition programs also

Need Additional Funds Due adds risk to DOD's procurement programs in the
2001 FYDP. In 1998, we

to Cost Growth testified that cost increases of 20 to 40 percent had become
common for

major weapons programs and that numerous programs experienced even greater
increases. 25 Recently, we and others have reported that the costs for four
of DOD's major procurement programs could exceed current projected costs.

In May 2000, we reported that engine problems with the Navy's F/ A- 18E/ F
aircraft could require the development of a new engine, resulting in
additional procurement costs for aircraft to be purchased as well as
additional costs to retrofit aircraft already purchased. 26 In March 2000,
we reported that the Air Force's F- 22 aircraft program

faces risks that contractor costs will continue to exceed budgets and that
overhead costs will increase. 27 In August 1999, we reported that cost
overruns would not allow the

Army to achieve its goals of executing the Comanche helicopter procurement
program within planned funding levels. 28 In March 1999, the Congressional
Budget Office estimated that the unit

cost of the multi- service Joint Strike Fighter aircraft could be as much as
$25 billion, or 51 percent, higher than expected, depending on which variant
was procured. 29

Observations Although total funding in the 2001 FYDP is almost $16 billion
more than in the 2000 FYDP, the 2001 program, like previous Defense
programs, is based

on optimistic assumptions about savings and funding plans for operation 25
DOD Budget: Substantial Risks in Weapons Modernization Plans( GAO/ T- NSIAD-
99- 20, Oct. 8, 1998). 26 Defense Acquisitions: F/ A- 18E/ F Aircraft Does
Not Meet All Criteria for Multiyear Procurement( GAO/ NSIAD- 00- 158, May
26, 2000).

27 F- 22 Aircraft: Development Cost Goal Achievable if Major Problems Are
Avoided (GAO/ NSIAD- 00- 68, Mar. 14, 2000). 28 Defense Acquisitions:
Comanche Program Cost, Schedule, and Performance Status (GAO/ NSIAD- 99-
146, Aug. 24, 1999). 29 Statement by Christopher Jehn, Assistant Director,
National Security Division, Congressional Budget Office, on Modernizing
Tactical Aircraft, before the Subcommittee on Airland, Senate Armed Services
Committee, on Mar. 10, 1999.

and maintenance and procurement. This results in too many programs for the
available dollars. In other words, a mismatch exists between Defense's plans
and the projected available funding. Optimistic planning provides an unclear
picture of defense priorities because tough decisions and trade- offs
between needs and wants are avoided. Until DOD presents realistic
assumptions and plans in its future budgets, Congress will lack the accurate
and realistic information it needs to properly exercise its oversight.

Agency Comments We provided a draft of this report to DOD for its review and
comment. DOD chose not to comment.

Scope and To determine the major program adjustments in DOD's defense plan,
we

Methodology analyzed funding data from the 2000 and 2001 FYDPs for fiscal
years

2001- 05. We adjusted the current dollars to constant 2001 dollars using
appropriate DOD Comptroller inflation indexes. We did not test DOD's
management controls of the FYDP data or verify the data contained in either
the 2000 or the 2001 FYDP. However, we did compare DOD's automated FYDP data
with published documents DOD provided. Specifically, we compared total
budget estimates, appropriation totals, military and civilian personnel
levels, force structure levels, and some specific program information. Based
on our comparison, we were satisfied that the automated FYDP data and
published data were in agreement.

To identify risks in the 2001 FYDP, we examined various DOD planning and
budget documents, including the 2000 Report of the Secretary of Defense to
the President and Congress, programming and budget decisions for the 2001
budget, the President's fiscal years 2000 and 2001 budget submissions, the
Mid- Session Review of Fiscal Year 2001 Budget, Selected Acquisition
Reports, and the Report of the Quadrennial Defense Review. We did not
evaluate the reliability of the service's reported backlog of critical
maintenance and repairs.

We also reviewed congressional testimonies of various DOD officials to
support the 2000 and 2001 budget submissions; our prior reports; and
pertinent reports by the Congressional Budget Office, the Congressional
Research Service, and others. In addition, we provided each of the services
and the Office of the Secretary of Defense (Program Analysis and

Evaluation) with questions about the changes between the two FYDPs. We
included their responses throughout the report as appropriate.

Our review was conducted from April through August 2000 in accordance with
generally accepted government auditing standards.

We are sending copies of this report to other appropriate congressional
committees; the Honorable William Cohen, Secretary of Defense; the Honorable
F. Whitten Peters, Secretary of the Air Force; the Honorable Louis Caldera,
Secretary of the Army; and the Honorable Richard Danzig, Secretary of the
Navy. We will also provide copies to others upon request.

If you have any questions concerning this report, please call Robert
Pelletier on (202) 512- 4032. Key contributors to this report were George O.
Morse, Suzanne Wren, Mary Jo LaCasse, and Patricia Lentini.

Sincerely yours, Norman J. Rabkin Director, National Security

Preparedness

(702040) Lett er

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