Defense Inventory: Information on the Use of Spare Parts Funding 
Is Lacking (11-JUN-01, GAO-01-472).				 
								 
In recent years, Congress has provided the military services with
additional funding to address the shortage of spare parts. This  
report provides information on how the funding was used and how  
the Department of Defense (DOD) plans to improve its financial	 
information on spare parts funding. GAO found that the $1.1	 
billion earmarked for spare parts in the 1999 appropriations act 
was placed in military services' operation and maintenance	 
accounts. However, DOD did not separately track the use of these 
funds, which could have been used for other purposes. As a	 
result, DOD plans to annually develop detailed financial	 
management information on spare parts funding uses.		 
Implementation of DOD's plan should increase visibility and	 
accountability for the use of spare parts funds. The plan should 
also help to determine the extent to which progress is being made
in addressing spare parts shortages. Such information, when	 
developed through a reliable and consistent methodology, would	 
also be useful for congressional decision making and oversight.  
However, the Department does not plan to provide it to Congress. 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-01-472 					        
    ACCNO:   A01151						        
  TITLE:     Defense Inventory: Information on the Use of Spare Parts 
             Funding Is Lacking                                               
     DATE:   06/11/2001 
  SUBJECT:   Logistics						 
	     Spare parts					 
	     Reporting requirements				 
	     Congressional oversight				 
	     Military appropriations				 
	     Funds management					 

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GAO-01-472
     
A

Report to the Chairmen, Committee on Appropriations, and the Subcommittee on
Defense, Committee on Appropriations, House of Representatives

June 2001 DEFENSE INVENTORY

Information on the Use of Spare Parts Funding Is Lacking

GAO- 01- 472

GAO United States General Accounting Office

Page i GAO- 01- 472 Defense Inventory Letter 1

Results in Brief 1 Background 2 Funds Were Largely Used for Operation and
Maintenance

Activities, but Not Necessarily for Spare Parts 4 Department Plans to
Develop Detailed Information on Spare Parts

Funding, but Does Not Plan to Provide It to the Congress 6 Conclusions 7
Recommendation for Executive Action 7 Agency Comments 7 Scope and
Methodology 8

Appendix I Comments From the Department of Defense 10

Tables

Table 1: Transfers of Funds Specifically Earmarked for Spare Parts and
Associated Logistical Support 5 Contents

Page 1 GAO- 01- 472 Defense Inventory

June 11, 2001

The Honorable Bill Young Chairman, Committee on Appropriations House of
Representatives

The Honorable Jerry Lewis Chairman, Subcommittee on Defense Committee on
Appropriations House of Representatives

In recent years, the military services have been reporting that a shortage
of spare parts has caused a decline in military readiness. Despite
additional funding provided by the Congress to address this issue, the
services are still reporting concerns about spare parts shortages. You
expressed concern about whether the added funding had been used to reduce
spare parts shortages and asked that we review how the Department of Defense
had used the funds. 1 In response to your request, this report addresses (1)
what the Department and the military services did with the funds the
Congress specifically provided for spare parts and (2) what plans the
Department has to improve financial management information on spare parts
funding. As agreed with your staff, we focused this review on the funds,
totaling about $1. 1 billion, that were specifically earmarked for spare
parts and associated logistical support in the Emergency Supplemental
Appropriations Act for Fiscal Year 1999.

The funds earmarked specifically for spare parts and associated logistical
support, totaling about $1.1 billion, were largely placed in the military
services? operation and maintenance accounts. However, current financial
information does not show the extent to which the Department used these
funds for spare parts. Available documentation shows that the Department of
Defense transferred 92 percent of these funds to the military services?
operation and maintenance accounts. The remaining 8 percent was transferred
to a Navy procurement account related to spare

1 This is one in a series of reviews related to concerns you raised about
spare parts issues. We have other reviews in progress that deal with such
issues as spare parts shortages in each of the services, spare parts
requirements for Army war reserves, and quality of spare parts. We are
reporting separately on each of these issues.

United States General Accounting Office Washington, DC 20548

Results in Brief

Page 2 GAO- 01- 472 Defense Inventory

parts for new equipment. Once the funds were transferred into the operation
and maintenance accounts, the Department did not separately track the use of
these funds. They could have been used for a variety of purposes, including
obtaining new or repaired spare parts. Funds within the services? operation
and maintenance accounts are tracked in over 200 subactivity groups, ranging
from 27 in the Marine Corps to 63 in the Air Force, but spare parts is not
one of them. Instead, funding for spare parts is included in numerous
subactivity groups and not separately tracked within such subactivity
groups.

The Department of Defense plans to annually develop detailed financial
management information on spare parts funding uses. However, the Department
has indicated that it does not plan to report the information to the
Congress. According to a June 2000 regulation, the Department and the
military services are to develop information annually on the quantity and
funding for all spare parts. The information is to be developed for the
first time in conjunction with the fiscal year 2002 operation and
maintenance budget request. The information is to include all spare parts by
groupings, such as ships, aircraft, and combat vehicles.

Continuing concerns about the impact of spare parts shortages on readiness
make reliable and timely information about the use of funds for spare parts
essential for effective congressional oversight. Consequently, we are
recommending to the Secretary of Defense that the information required by
the June 2000 regulation routinely be provided to the Congress as an
integral part of the Department?s annual budget submission. The Department
of Defense agreed with our recommendation.

Spare parts are repair parts and components, including kits, assemblies, and
subassemblies (both reparable and nonreparable items) required for the
maintenance of all equipment. Reparable items are those that are returned to
the supply system to be repaired when they are no longer in working
condition. Nonreparable items are called consumables, which means they are
consumed in use or can not be economically repaired.

For several years, the military services have, to varying degrees, expressed
concern that a lack of spare parts has reduced their ability to carry out
their missions. In the Quarterly Readiness Report to the Congress for
October -December 2000, the Department reported the following:

 The Department continues to face challenges in the readiness of aviation
assets, in part, because of spare parts shortages. Background

Page 3 GAO- 01- 472 Defense Inventory

 Most Army equipment was at or above readiness goals, but prepositioned war
reserves still had spare parts shortages.  Nondeployed Navy units had
aviation spare parts shortages.  Funding for Air Force spare parts was on
track, and previous spare parts

funding initiatives were beginning to improve the availability of parts and
consequently were helping to curb the declining trend in aircraft readiness.
However, engine readiness had declined since it peaked in May 2000, and a
reason for the decline was continuing parts problems.

In response to such concerns, the Congress has provided additional funding.
Funding for spare parts is typically provided as part of the appropriations
for operation and maintenance. 2 During fiscal years 1996- 2000, the
Congress consistently funded the President?s Defense operation and
maintenance budget request and provided additional funding.

In the Emergency Supplemental Appropriations Act for Fiscal Year 1999 (P. L.
106- 31 sec. 2007), the Congress provided the Department of Defense with
about $1. 1 billion specifically for use for spare parts and associated
logistical support. That act indicated that funds were to be available for
obligation 3 until the end of fiscal year 2000 and could be transferred only
to the operation and maintenance or procurement accounts. Section 8170 of
the Department of Defense Appropriations Act for Fiscal Year 2000 (P. L.
106- 79) reduced fiscal year 2000 funding for spare parts and associated
logistical support by $550 million. The act then directed that the
unobligated funds available from section 2007 of the fiscal year 1999
emergency supplemental be made available to finance spares and logistical
support activities in the exact amounts that were reduced in the fiscal year
2000 act.

We have reported recently on the Department?s difficulties in financial and
inventory management as high- risk areas that are vulnerable to waste,

2 Besides funding for spare parts, the operation and maintenance
appropriations are intended to cover the costs associated with many diverse
Department of Defense items and activities, such as the pay and benefits for
most of the Department?s 700, 000 civilian employees, fuel, other supplies,
operations at military bases, training and education of individual service
members, and medical care. 3 Obligations are financial amounts associated
with orders placed, contracts awarded,

services rendered, and other transactions occurring during a given period
that would require payments during the same period or in the future.

Page 4 GAO- 01- 472 Defense Inventory

fraud, abuse, and mismanagement. 4 We also recently testified 5 that none of
the military services or the Department as a whole passed the test of an
independent financial audit for fiscal year 2000 because of pervasive
weaknesses in its financial management systems, operations, and controls. We
pointed out that, despite progress, ineffective asset accountability and the
lack of internal controls continue to adversely affect visibility over
inventories. Furthermore, unreliable cost and budget information undermines
the Department?s ability to effectively measure performance, maintain
adequate fund control, and reliably report on how much money it has spent
and for what purposes. 6

We further testified that the Department continued to spend more than
necessary to procure and manage inventory. The Department?s records showed
that, as of September 30, 1999, inventory on order, valued at about $1.6
billion, would not have been ordered based on current requirements. However,
we also pointed out that at the same time the Department had experienced
equipment readiness problems because of a lack of spare parts.

The vast majority of the funds provided specifically for spare parts were
placed in the military services? operation and maintenance accounts.
However, the Department of Defense financial management information does not
show the extent to which this funding was used for spare parts. Once the
funds are in these accounts, the Department does not routinely track the
amount of funds that are used for spare parts. They could have been used for
a variety of purposes including spare parts.

The Department of Defense transferred 92 percent of the funds specifically
earmarked for spare parts and associated logistical support to operation and
maintenance accounts. The remaining 8 percent was transferred to a

4 These difficulties in the financial management and inventory management
areas are discussed in our reports entitled Major Management Challenges and
Program Risks: Department of Defense (GAO- 01- 244, Jan. 2001) and High-
Risk Series: An Update (GAO- 01- 263, Jan. 2001 ).

5 Major Management Challenges and Program Risks: Departments of Defense,
State, and Veterans Affairs (GAO- 01- 492T, Mar. 7, 2001), testimony
delivered before the Subcommittee on National Security, Veterans Affairs,
and International Relations, House Committee on Government Reform. 6 Recent
financial audits show that obligated balances were not always correct or

supported. Funds Were Largely

Used for Operation and Maintenance Activities, but Not Necessarily for Spare
Parts

Page 5 GAO- 01- 472 Defense Inventory

Navy procurement account associated with spare parts for new weapon systems
or equipment. Of the $1. 1249 billion earmarked specifically for spare parts
and associated logistical support, as authorized, $1.0372 billion was
transferred by the Department to the services? operation and maintenance
accounts (see table 1). At that point, the vast majority of the funds
earmarked for spare parts and associated logistical support became
indistinguishable from other operation and maintenance funds. Officials of
the Department of Defense and the military services explained that
obligations incurred for spare parts were included with obligations incurred
with various operation and maintenance subactivities and were not tracked
separately. They advised us that, consequently, they could not readily
provide information to show how those funds were used.

Table 1: Transfers of Funds Specifically Earmarked for Spare Parts and
Associated Logistical Support

Dollars in thousands

Service Operation and maintenance Procurement Total

Army $170,000 $170,000

Navy 312, 400 $87,700 400, 100

Marine Corps 40, 000 40, 000

Air Force 466,800 466,800

Air Force Reserve 23,000 23,000

Air National Guard 25,000 25,000 Total $1,037, 200 $87,700 $1,124, 900

Source: GAO analysis based on Department of Defense transfer documents.

The services? operation and maintenance accounts typically contain four
budget activities: (1) operating forces, (2) mobilization, (3) training and
recruiting, and (4) administration and servicewide activities. 7 Budget
activities are in turn divided into activity groups, which are further
divided into subactivity groups. The number of activity groups and
subactivity groups varies for each service.

In total, these operation and maintenance accounts comprise over 200
subactivity groups and range from 27 in the Marine Corps to 63 in the Air
Force. They include some major programs such as Army divisions, fleet
ballistic missiles, and Air Force primary combat forces and smaller

7 The Marine Corps is an exception with only three budget activities and
does not include the mobilization budget activity.

Page 6 GAO- 01- 472 Defense Inventory

programs such as real property maintenance for accession training at the
service academies, junior reserve officers training corps, and off- duty and
voluntary education program.

Funding for spare parts is spread across various subactivity groups. For
example, a portion of the Air Force?s operation and maintenance funds goes
to its eight major commands for use in their flying hour programs. These
major commands use such funds to pay for fuel, maintenance, and spare parts.
The flying hour program is not separately identified in the operation and
maintenance account; flying hour costs are charged to numerous subactivity
groups, and funds for spare parts are included in those costs.

The Department of Defense plans to annually develop detailed financial
management information on spare parts funding, but does not plan to provide
it to the Congress as part of its budget submission. Starting with the
budget request for fiscal year 2002, the Department and the sevices are to
develop information that will show the amount of operation and maintenance
appropriations used for spare parts and the quantity of consumable and
reparable spare parts used. 8 The regulation that deals with specific backup
material requirements

associated with the justification for operation and maintenance
appropriations was revised in June 2000. The revision calls for the
development of information on the quantity of parts involved and funding for
each grouping, such as ships, aircraft, and combat vehicles, within the
Department?s and each service?s operation and maintenance account. According
to the revised regulation, the information is also to include an explanation
of changes in the quantity and funding between years and deviations between
actual and program data.

In the past, the Department asked the services to provide information
designed to show the funding used to purchase reparable parts. However, the
information did not show the funding for consumable parts and did not
reflect the quantities of reparable parts involved. In addition, there was
no explanation of changes in funding used between years and deviations
between actual and program data.

8 The Department of Defense Financial Management Regulation (vol. 2A, ch. 3)
requires the Department and each service to prepare backup material on spare
parts, identified as exhibit OP- 31. Department Plans to

Develop Detailed Information on Spare Parts Funding, but Does Not Plan to
Provide It to the Congress

Page 7 GAO- 01- 472 Defense Inventory

The revised regulation states that the information on spare parts is not to
be included in the Department?s budget request submitted to the Congress. An
official from the Department?s Office of the Comptroller told us that this
information is only for internal Department use and that the Department is
not required to provide the information to the Congress.

This official also said that as of May 2001, the Department had not started
to develop the information on spare parts required by the revised regulation
because of the Department- wide strategic review by the Secretary of
Defense.

Implementation of the Department?s plan to develop detailed information on
spare parts funding should increase visibility and accountability for the
use of spare parts funds. The plan should also help to determine the extent
to which progress is being made in addressing spare parts shortages. Such
information, when developed through a reliable and consistent methodology,
would also be useful for congressional decisionmaking and oversight.
However, the Department does not plan to provide it to the Congress.

Continuing concerns about the impact of spare parts shortages on readiness
make reliable and timely information about the use of funds for spare parts
essential for effective congressional oversight. Therefore, we are
recommending that the Secretary of Defense routinely provide to the
Congress, as an integral part of the operation and maintenance budget
submission, the spare parts information required by the Department?s revised
regulation associated with the justification for operation and maintenance
appropriations.

In commenting on a draft of this report, the Acting Deputy Under Secretary
of Defense for Logistics and Materiel Readiness indicated that the
Department of Defense generally agreed with the report and concurred with
the recommendation. Specifically, the Acting Deputy Under Secretary
indicated that copies of the Department?s and the military services?
detailed spare parts information required by the Department?s revised
regulation would routinely be provided to the Congress as part of the annual
budget submission. Moreover, the Department will incorporate this new
congressional reporting requirement in its financial management regulation
when it is updated. The Department?s comments are reprinted in their
entirety in appendix I. Conclusions

Recommendation for Executive Action

Agency Comments

Page 8 GAO- 01- 472 Defense Inventory

To determine what the Department and the services did with the funding
specifically provided for spare parts and associated logistical support, we
reviewed the legislative history and the provisions of relevant
appropriations acts and documented the amount and purpose of supplemental
funding provided by the Congress. We obtained information from the
Department of Defense and the military services on the transfer of
supplemental funding from the Department of Defense to the services. We
asked officials from the Department?s Office of the Comptroller and the
individual services and their major commands for information on how they
tracked the status of obligations for spare parts at their respective
levels. We discussed with officials of the Department of Defense and
individual services whether they had procedures to determine whether the
earmarked funds were obligated for spare parts. We also obtained
documentation on the extent to which the Department of Defense tracks
funding for spare parts embedded in the normal operation and maintenance
accounts. We also reviewed our prior reports dealing with high- risk
operations within the Department of Defense.

To ascertain what plans the Department has to improve financial management
information on spare parts funding, we contacted the Department?s Office of
the Comptroller. We also reviewed the revised chapter of the Department?s
Financial Management Regulation that deals with specific backup material
requirements associated with the budget formulation and justification for
operation and maintenance appropriations. We also compared the provisions
related to spare parts in the revised regulation with the provisions in the
regulation just prior to the revision. We discussed the differences in the
regulation requirements with an official in the Office of the Comptroller
and obtained information about the status of efforts to implement the
revised requirements dealing with spare parts.

We performed our work from June 2000 to May 2001 in accordance with
generally accepted U. S. government auditing standards.

We are sending copies of this report to the Chairmen and Ranking Members of
the Senate Committee on Appropriations and the Senate Committee on Armed
Services; the Chairman and Ranking Minority Member, House Committee on Armed
Services; the Secretaries of Defense, the Army, the Air Force, and the Navy;
the Commandant of the Marine Corps; and the Director of the Office of
Management and Budget. We will also make copies available to others upon
request. Scope and

Methodology

Page 9 GAO- 01- 472 Defense Inventory

Please contact David Warren on (202) 512- 8412 or Gregory Kutz on (202) 512-
9505 if you or your staff have any questions concerning this report. Key
contributors to this report were Jeffrey L. Overton, John C. Wren, Jeanett
H. Reid, and Joseph F. Murray.

David R. Warren Director, Defense Capabilities and Management

Gregory D. Kutz Director, Financial Management and Assurance

Appendix I: Comments From the Department of Defense

Page 10 GAO- 01- 472 Defense Inventory

Appendix I: Comments From the Department of Defense

Appendix I: Comments From the Department of Defense

Page 11 GAO- 01- 472 Defense Inventory (709508)

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