Defense Management: Proposed Lodging Policy May Lead to 	 
Improvements, but More Actions Are Required (18-MAR-02, 	 
GAO-02-351).							 
								 
The military services primarily operate two types of hotels, or  
lodges, to support official travelers. The first, called	 
permanent-change-of-station (PCS) lodges,  support military	 
personnel and their families moving to new duty stations. These  
are intended to provide military travelers and their families	 
with a clean, affordable place to stay while they prepare to move
and while they wait for permanent quarters at their new station. 
The second type, called temporary duty (TDY) lodges, support	 
military and civilians temporarily traveling on official	 
business. PCS lodges are the subject of a proposed policy change 
by the Department of Defense (DOD). DOD's current policy permits 
PCS lodges to be managed as part of morale, welfare, and	 
recreation (MWR) programs. The proposed policy would change this 
practice by requiring separation of lodge revenues from those	 
used for MWR purposes. Except for the Marine Corps, the proposed 
policy change will not impact the services' MWR programs. Only	 
the Marine Corps currently uses PCS lodge earnings to support its
MWR programs. From fiscal years 1996 through 2000, the net	 
profits reported by the Marine Corps' lodges steadily increased  
from $1.8 million to $5.1 million, and are considered an	 
important source of funds for the Marine Corps' MWR programs.	 
Marine Corps officials do not believe the policy change is	 
required and said that, if implemented, the Corps would have to  
make changes, such as reducing quality-of-life programs at some  
installations or seeking additional appropriations to compensate 
for the loss of this revenue. The proposed policy is predicated  
on resolving a perceived regulatory conflict and achieving other 
management objectives. DOD officials believe separation of PCS	 
lodging funds from MWR funds is required to resolve a conflict	 
with the Joint Federal Travel Regulation. However, the regulation
does not apply to lodging management, and the policy change, by  
itself, is likely to have little direct effect on DOD's broader  
management objectives. The services' plans for building new PCS  
lodges are consistent with department guidance. The proposed	 
change will not, by itself, change that guidance.		 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-351 					        
    ACCNO:   A02901						        
  TITLE:     Defense Management: Proposed Lodging Policy May Lead to  
Improvements, but More Actions Are Required			 
     DATE:   03/18/2002 
  SUBJECT:   Funds management					 
	     Military housing					 
	     Military personnel 				 
	     Nonappropriated federal funds			 
	     Program evaluation 				 
	     Recreation 					 
	     Travel						 
	     Travel costs					 
	     DOD Morale, Welfare, and Recreation		 
	     Program						 
								 
	     Permanent Change of Station (PCS)			 

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GAO-02-351
     
Report to the Chairman and Ranking Minority Member, Special Oversight Panel
on Morale, Welfare, and Recreation, Committee on Armed Services, House of
Representatives

United States General Accounting Office

GAO

March 2002 DEFENSE MANAGEMENT

Proposed Lodging Policy May Lead to Improvements, but More Actions Are
Required

GAO- 02- 351

Page i GAO- 02- 351 Defense Management Letter 1

Results in Brief 2 Background 5 Proposed Policy Change Impacts the Marine
Corps? MWR Program 9 Proposed Policy Change Based on Resolving a Perceived

Regulatory Conflict and Achieving Other Management Objectives 18 DOD
Guidance Allows Services to Build PCS Lodges in Excess of

Official Traveler Needs 25 Conclusions 30 Recommendations for Executive
Action 31 Agency Comments 32

Appendix I Scope and Methodology 34

Appendix II Comments from the Department of Defense 36

Appendix III Staff Acknowledgments 39

Tables

Table 1: Magnitude of DOD?s TDY and PCS Lodging Programs 5 Table 2: Summary
of All Marine Corps Reported MWR Sales and

Profits for Profitable Activities in Fiscal Year 2000 at Installations with
PCS Lodges 11 Table 3: Percent of Appropriated Support to MWR Provided by

Services for Fiscal Year 2000 13 Table 4: PCS Lodging Room Rates - Fiscal
Year 2000 21 Table 5: Estimated New PCS Lodge Construction- Increasing

Room Inventories in Fiscal Years 1996- 2000 and Fiscal Years 2001- 2005 28
Table 6: Difference Between PCS Lodging Occupancy by Official

and Unofficial Travelers - Fiscal Year 2000 29 Contents

Page ii GAO- 02- 351 Defense Management Abbreviations

DOD Department of Defense MWR morale, welfare, and recreation OSD Office of
the Secretary of Defense PCS permanent- change- of- station TDY temporary
duty

Page 1 GAO- 02- 351 Defense Management

March 18, 2002 The Honorable Roscoe G. Bartlett Chairman The Honorable
Robert A. Underwood Ranking Minority Member Special Oversight Panel on

Morale, Welfare, and Recreation Committee on Armed Services House of
Representatives

The military services principally operate two types of hotels, or lodges, to
support official travelers. The first, called permanent- change- of- station
lodges, primarily supports military personnel and their families who are
moving to new duty stations. These lodges are intended to provide military
travelers and their families with a clean, affordable place to stay while
they prepare to move and while they wait for permanent quarters at their new
duty stations. The second type of lodge, called temporary duty lodges,
primarily supports military and civilians temporarily traveling on official
business. 1 Permanent- change- of- station lodges are the subject of a
proposed policy change by the Department of Defense and are the focus of
this report. The department?s current policy permits these lodges to be
managed as part of morale, welfare, and recreation programs, which include
such things as libraries and gymnasiums. The proposed policy would change
this practice by requiring separation of lodge revenues from those used for
morale, welfare, and recreation purposes.

In a report provided May 2, 2001, to the Senate and House Committees on
Armed Services and signed by the acting assistant secretary of defense for
force management policy, the department based its proposed policy revision
on a perceived need to align policy for permanent- change- ofstation lodging
with the Joint Federal Travel Regulation. The department believed that its
current policy was in conflict with the requirements of the regulation and
that the policy change would resolve the conflict by removing permanent-
change- of- station lodging revenues from morale, welfare, and recreation
programs. In our discussions with the department,

1 The services also operate recreational lodging and lodging used by those
individuals visiting patients in military treatment facilities. These lodges
have little or no effect on the permanent- change- of- station lodging
program and are not covered in this report.

United States General Accounting Office Washington, DC 20548

Page 2 GAO- 02- 351 Defense Management

it also saw the proposed policy change as a first step to achieve other
management objectives, including making the services? lodging programs more
consistent with each other, reducing room rates for lodging, and improving
lodging facilities. Further, the department wanted greater assurance that
the military services are building new lodges primarily to support the needs
of official military travelers and their families.

You requested that we review the proposed policy change. As agreed with your
office, this report addresses the following questions:

 What will be the potential impact of the proposed policy change on the
military services? morale, welfare, and recreation programs?

 What is the basis for the proposed policy change, and will it help the
department improve management including the quality and consistency of the
services? lodging programs?

 Are the services? plans for building new permanent- change- of- station
lodges consistent with current department guidance, and will the proposed
policy change this guidance?

To answer these questions, we interviewed key officials in the Office of the
Secretary of Defense who are responsible for developing lodging policies and
appropriate headquarters personnel for each of the military services. We
also visited 16 military installations to determine how the lodges were
being locally managed and supported and to observe their physical condition.
We also sought information on future lodging construction plans to meet the
needs of permanent- change- of- station travelers. More information on our
scope and methodology is included in appendix I.

Except for the Marine Corps, the proposed policy change will not impact the
services? morale, welfare, and recreation programs. Only the Marine Corps
currently uses permanent- change- of- station lodge earnings to support its
morale, welfare, and recreation programs. From fiscal years 1996 through
2000, the net profits reported by the Marine Corps? lodges steadily
increased from about $1.8 million to about $5.1 million, and are considered
an important source of funds for the Marine Corps? morale, welfare, and
recreation programs. Marine Corps officials do not believe the policy change
is required and said that, if implemented, the Corps would have to make
changes, such as reducing quality- of- life programs at some installations
or seeking additional appropriations to compensate for the loss of this
revenue. For this reason, they may ask for a waiver from the policy if it is
implemented. If the department adopts the new policy, Results in Brief

Page 3 GAO- 02- 351 Defense Management

the Marine Corps might need a temporary waiver giving it time to develop
funding options for its morale, welfare, and recreation programs and to
maintain a healthy lodging program. However, various alternatives are
available that could negate the need for a permanent waiver such as
increasing the use of appropriated funds in line with the practices of the
other services. On October 1, 2000, the Army took a number of steps to
ensure it would be in compliance with the proposed lodging policy should it
be adopted. This action included creation of a single lodging fund for both
permanent- change- of- station and temporary- duty lodge revenues separate
from its morale, welfare, and recreation fund. However, we believe one step
that the Army has taken- authorizing its installations to impose a surcharge
on some users of the lodges that is then used to help support local morale,
welfare, and recreation activities- violates department and Army
regulations, which require that revenues from lodges be used only for
lodging programs. The Air Force and Navy do not use lodging revenues to
support their morale, welfare, and recreation programs. As a result, the
proposed policy change would not affect these programs. However, the Navy
has not created a consolidated lodging fund for both permanent- change- of-
station and temporary duty lodges, as seems to be suggested by the
department?s May 2 report addressing the proposed policy.

The proposed policy is predicated on resolving a perceived regulatory
conflict and achieving other management objectives. Department officials
believe separation of permanent- change- of- station lodging funds from
morale, welfare, and recreation funds is required in order to resolve a
conflict with the Joint Federal Travel Regulation. However, we do not
believe the regulation applies to lodging management, since it deals with
allowances and reimbursement of expenses for uniformed service members
traveling on orders. At the same time, the lodging- policy proposal is
within the department?s discretion and could be a first step toward
achieving a number of planned management improvements across the services.
However, the change, by itself, is likely to have little direct effect on
the department?s broader management objectives. These include (1) making the
lodging programs more consistent across the military services, (2) reducing
lodging rates where appropriate, (3) improving the overall quality of
lodging facilities, and (4) eliminating the construction of new permanent-
change- of- station lodges that may exceed the needs of official travelers.
While the proposed policy would require revenues to be used exclusively to
support lodges, it would not change other department guidance that gives the
military services wide discretion in managing their lodging programs,
including permitting morale, welfare, and recreation programs to operate
permanent- change- of- station lodges. Department

Page 4 GAO- 02- 351 Defense Management

officials said that the lodging policy is only the first step in their plans
to improve the lodging program and that they will eventually need to
recommend further changes to the department?s guidance to address these
other issues. Until these changes are made, however, the lodging programs
may continue to be managed in a widely divergent manner.

Regarding the last question on building plans, the services? plans for
building new permanent- change- of- station lodges are consistent with
department guidance. The proposed policy change will not, by itself, change
that guidance. However, the department has two sets of guidance in this
area. Following the first set, the Air Force and Army base their permanent-
change- of- station construction or expansion plans on the number of
military and civilian personnel traveling on official orders. Following the
second set, however, the Navy and Marine Corps base their plans on a patron
base beyond the needs of these types of official travelers. Specifically,
the guidance allows them to also consider the demand of other eligible
travelers, such as members of the armed forces and their families not on
orders and retired members of the armed forces and their families. While
available data indicate that all the services have recently constructed or
plan to construct new permanent- change- ofstation lodges, the Navy and
Marine Corps are planning to significantly increase the total number of
rooms despite relatively low occupancy rates for patrons on official orders.
From 2001 through 2005, for example, the Navy plans to add 940 permanent-
change- of- station rooms at 15 installations at an estimated cost of $121.4
million, although its overall occupancy rate for patrons on permanent-
change- of- station orders was only 23 percent in fiscal year 2000. Over the
same time period, the Marine Corps also plans to add 237 rooms at seven
locations, although its overall occupancy rate for patrons on permanent-
change- of- station orders was only 31 percent in fiscal year 2000.
Department officials are aware that the Navy and Marine Corps are expanding
lodging capacity beyond the needs of official travelers but said they cannot
revise or disapprove construction projects as long as the services have
sufficient financial resources and are complying with applicable DOD
guidance and instructions. They pointed out, however, that this excess
capacity has a cost, in the form of higher average room rates, which
eventually must be borne by the operating components that pay the travel
costs of individual travelers.

We are making recommendations for executive action designed to help the
Department of Defense improve its lodging- program management and ensure
compliance with regulatory requirements. In commenting on a

Page 5 GAO- 02- 351 Defense Management

draft of this report, DOD concurred with three of our recommendations and
partially concurred with the fourth.

The Department of Defense?s (DOD) lodging programs were established to
maintain mission readiness and improve productivity. They were intended to
provide quality, temporary lodging facilities and service for authorized
personnel and to reduce official travel costs for DOD?s mobile military
community. DOD?s lodging programs are classified as either permanentchange-
of- station (PCS) or temporary duty (TDY). The major differences between PCS
and TDY lodges are the number of rooms (fewer PCS rooms); the type of
traveler they primarily serve; and their primary source of funding and
support. TDY lodging typically receives more appropriated funding than does
PCS lodging, which relies primarily upon nonappropriated funds generated
from lodge operations. Historically, DOD?s lodging programs have had varying
linkages to the department?s morale, welfare, and recreation (MWR) programs.

The assistant secretary of defense for force management policy is
responsible for establishing uniform policies for service lodging programs.
DOD?s lodging programs are classified as TDY or PCS on the basis of the type
of traveler they primarily serve. Table 1 shows the magnitude of DOD?s
lodging programs.

Table 1: Magnitude of DOD?s TDY and PCS Lodging Programs TDY PCS

Military service Number of installations with TDY lodges Number of

rooms Number of installations with PCS lodges Number of

rooms

Air Force a 94 29,923 77 3,390 Army b 77 17,794 61 3,819 Navy c 77 22,140 41
2,552 Marine Corps d 17 3,271 12 749

Total 265 73,128 191 10,510

a Air Force data as of September 2000. b Army data as of June 2000. c Navy
data as of May 2001 and PCS room data as of June 2001. d Marine Corps data
as of September 2001.

Source: Data provided by each service.

Background DOD Lodge Program

Page 6 GAO- 02- 351 Defense Management

TDY lodges serve mainly individual military or civilian travelers who are
temporarily assigned to a duty station other than their home station. In
addition, they can serve military personnel and their families who are
changing permanent duty stations. On a space available basis, they also
serve military retirees and other people authorized by installation
commanders. Room rates at these lodges are set at the lowest rate possible
to reduce travel costs yet recover authorized nonappropriated fund expenses.
While departmental regulations state that the cost of major upgrades and new
lodges is expected to be paid with appropriated funds, in recent years some
services have added a surcharge 2 to the nightly room rate, which they
accumulate and use for lodge construction and major renovation. The revenues
from TDY lodging must be maintained in a separate nonappropriated fund
account, designated as a lodging or billeting fund, and used only to operate
and maintain the lodging facilities. Prior to 1991, Army TDY lodges were
part of its MWR program. However, based on a GAO report 3 that found the
Army was overcharging TDY travelers to subsidize MWR activities, the Army,
in 1991, established a separate lodging fund for TDY lodging revenues.

PCS lodges primarily serve military personnel or DOD civilians (traveling
outside the continental United States) who are changing permanent duty
stations and their families. On a reservation basis, PCS lodges can also
accommodate families, relatives, and guests of hospitalized military or
their families and official guests of the installation as determined by the
installation commander. On a space available basis, they can serve other
authorized patrons, such as civilian PCS (personnel traveling inside the
continental United States); military and civilian TDY personnel; military
members not on official travel; military retirees; and relatives and guests
of service members assigned to the installation. According to DOD?s current
guidance, 4 the military services can choose how they provide PCS lodging
services: (1) through a lodging or billeting fund with all of its revenue
used to support lodging activities, as do the Air Force, the Army, and the
Navy or (2) through an MWR fund as does the Marine Corps. When services are
provided through an MWR fund, revenue is deposited into a

2 The Army and the Air Force have added surcharges while the Navy and Marine
Corps have not. 3 Army Housing: Overcharges and Inefficient Use of On- Base
Lodging Divert Training Funds, (GAO/ NSIAD- 90- 241, Sept. 28, 1990). 4
Department of Defense Instruction 1015.12, Lodging Program Resource
Management,

October 30, 1996.

Page 7 GAO- 02- 351 Defense Management

single MWR installation account 5 and used for the benefit of the local MWR
program. The Marine Corps PCS lodging program is currently the only DOD
lodging program operating in this manner. The cost of new PCS lodge
construction for all the services is paid with nonappropriated funds, but
the department?s regulations permit some maintenance and repair to be paid
with appropriated funds.

Because the department allows the services to choose their method of
managing PCS lodging, it has two sets of instructions providing guidance on
managing lodging operations. One applies to PCS lodges operated as revenue-
generating MWR or exchange service 6 activities, and the other applies to
all lodges not operated as such. Both sets of instructions implement policy,
assign responsibility, and prescribe procedures for operating the lodges.
However, the instructions differ in their program goals and authorized
patronage, allowing wide latitude in the operation of PCS lodging programs.

DOD?s MWR program provides for the physical, cultural, and social needs and
the well- being of service members, their families, and eligible civilians
by providing an affordable source of goods and services like those available
to civilian communities. DOD has determined that these programs are vital to
mission accomplishment, are an integral part of the non- pay compensation
system, and provide quality- of- life benefits for authorized patrons. The
services? MWR programs- such as gymnasiums, fast food operations, and
libraries- are intended to provide a sense of community among patrons in
order to make individuals more satisfied with military life and to attract
people to military careers.

MWR programs receive financial support primarily from two sources:
nonappropriated funds- generated from profitable business activities such as
retail outlets, restaurants, and golf courses- and funds appropriated by
Congress. DOD regulations classify MWR activities into three categories,
which relate to the degree of appropriated fund support they are expected to
receive.

5 Each installation has a single MWR account. In addition, there is a
central MWR construction account that maintains funds collected from each
installation. These fund are used to address requirements at each
installation on a priority basis.

6 Military exchange services operate a wide range of retail activities such
as department stores, gas stations, and restaurants. MWR Programs

Page 8 GAO- 02- 351 Defense Management

 Category A activities- such as athletic fields, gymnasiums, and libraries-
are considered the most essential to supporting MWR. Such activities promote
the physical and mental well- being of the military member, supporting the
basic military mission. They are generally not expected to support
themselves financially. Accordingly, DOD policy provides that a minimum of
85 percent of total expenditures should come from appropriated funds. The
use of nonappropriated funds is limited to specific instances where
appropriated funds are prohibited by law or where nonappropriated funds are
essential to operate a facility or program.

 Category B activities- such as swimming pools, automotive hobby shops, and
child care centers- are closely related, in terms of mission support, to
those in Category A. These activities provide, to the extent possible, the
community support systems that make DOD installations temporary hometowns
for a mobile military population. DOD views these activities as having a
limited ability to generate nonappropriated fund support and thus requiring
less appropriated support than activities in Category A. The DOD standard
for appropriated fund support is a minimum of 65 percent of total
expenditures.

 Category C activities- such as golf courses, clubs, and bowling alleys-
are revenue- generating activities. Although they may lack the ability to
completely sustain themselves, they are expected to generate enough income
to cover most of their operating expenses. In many cases, they also generate
enough income to help support Category A and B activities. Thus, they may
receive limited support from appropriated funds.

DOD has established separate but similar classifications for its lodging
program. TDY lodges are classified as Category A activities and are thus
authorized a higher degree of appropriated support. PCS lodges may be
classified, at the option of the service, as either Category A or Category C
activities. In the past, the Army, Navy, and Marine Corps operated PCS
lodges as Category C activities. In these cases, the lodges were part of the
services? MWR programs and lodging revenues were often used to financially
support other MWR programs. Currently, the Marine Corps? lodging program is
the only one that still has any significant financial connection with MWR
operations. DOD?s proposed change to its PCS lodging policy is intended to
sever this last connection and ensure that no PCS lodging revenues are used
to support MWR programs. 7 This change, if

7 The proposed policy change does not restrict the services from offering
recreational lodging as a component of an installation?s MWR program.

Page 9 GAO- 02- 351 Defense Management

adopted, would require the services to deposit all PCS lodging revenues into
a lodging fund separate from the MWR fund, which would be dedicated to
supporting the service?s lodging program.

Except for the Marine Corps, DOD?s proposed policy change will not impact
the services? MWR programs. The Marine Corps still uses PCS lodging earnings
to help support its MWR programs. Without these earnings, Marine Corps
officials told us that they would have to seek additional appropriations or
local installations would have to make changes to their MWR programs that
could affect the quality of life of marines and their families. Therefore,
Corps officials may request a waiver from the policy if it is adopted.
However, the Corps has options that could lessen the effect of the policy on
both its MWR and lodging programs if necessary. With regard to the Army,
prior to October 2000, the Army also used PCS lodging funds to support its
MWR program. Presuming adoption of the policy change, the Army took a number
of actions to minimize the impact on its MWR program. Therefore, it will no
longer be affected by the policy change. However, as part of these
provisions, the Army now permits its installations to charge its patrons not
on official orders, such as military retirees, a surcharge that can be used
by the local installation?s MWR program. This practice violates department
and Army regulations. According to DOD, the Navy and Air Force PCS lodging
programs already conform to the proposed policy, which would then have no
impact on their MWR programs.

The Marine Corps has 14 PCS lodges at 12 of its 19 installations. Since 1996
the PCS lodges have reported steadily increasing earnings. For example, in
fiscal year 1996 they reported a net profit of about $1.8 million, and by
fiscal year 2000, they reported a net profit of about $5.1 million, which
was used to operate the lodging program as well as help support MWR programs
at the local installations. Marine Corps officials believe that the proposed
policy is inappropriate for the Marine Corps, considering its size,
decentralized organization, and the manner in which it operates its MWR and
its TDY lodging programs. In addition, they believe that the lodges are a
good source of future revenue for the MWR programs.

If these lodging earnings are no longer available to the MWR programs,
Marine Corps officials said that they would have to make changes to their
MWR programs, such as reducing the quality- of- life services, raising
rates, or seeking additional appropriations to compensate for lost revenues.
Additionally, they are concerned that some of the lodges will not be able
Proposed Policy

Change Impacts the Marine Corps? MWR Program

The Marine Corps May Request a Waiver If Proposed Policy Is Implemented

Page 10 GAO- 02- 351 Defense Management

to operate profitably if they are removed from the MWR program. Currently,
the MWR program provides the funds needed to expand, renovate, and construct
new lodges. Without this support, officials said some installations might
not be able to afford to renovate or build new lodges. They were also
concerned that the proposed change might result in additional costs for
overhead and common support and were unsure whether a separate lodging fund
would be able to reimburse the MWR fund for the value of the lodging assets
previously financed and built by the MWR fund. For these and other reasons,
Marine Corps officials said they may ask for a waiver if the policy is
implemented.

Earnings from what the Marine Corps terms its MWR business activities, 8
including its PCS lodges, help to support a number of MWR programs that
cannot support themselves. In fiscal year 2000, the Marines? MWR business
activities at installations that had PCS lodges reported profits of
approximately $49 million. (See table 2.)

8 The Marine Corps? MWR program has three business activities- retail sales,
services, and food and hospitality, which includes lodging. These activities
generate revenues to pay for their own operations and use earnings to
support other MWR activities that may not generate revenues or may generate
insufficient revenues to offset their costs.

Page 11 GAO- 02- 351 Defense Management

Table 2: Summary of All Marine Corps Reported MWR Sales and Profits for
Profitable Activities in Fiscal Year 2000 at Installations with PCS Lodges

Dollars in thousands

Reported sales Reported profits from profitable activities

Marine Corps installations All MWR programs PCS lodges a Percent b MWR PCS
lodges a Percent c

Barstow, Calif. $ 4,241 $ 47 1.1 $ 295 $ 14 4.7 Beaufort, S. C. 9,911 525
5.3 912 224 24.6 Butler, Japan 40,953 3, 709 9.1 5, 661 2,120 37.4 Iwakuni,
Japan 32,743 429 1.3 2, 839 243 8.6 Hawaii 67,729 606 .9 4,366 215 4.9
Lejeune, N. C. 133,855 1, 409 1.1 11,163 492 4.4 Miramar, Calif. 10,856 1,
424 13.1 1, 744 461 26.4 Parris Island, S. C. 36,712 357 1.0 3, 146 67 2.1
Pendleton, Calif. 151,513 1, 953 1.3 9, 620 509 5.3 Quantico, Va. 60,961 1,
614 2.6 4, 395 482 11.0 29 Palms, Calif. 51,687 357 .7 3,521 82 2.3 Yuma,
Ariz. 17,147 504 2.9 1, 623 228 14.0

Total $618,308 $12,934 2.1 $49,285 $5,137 10.4

a PCS lodge sales and reported profits are included in MWR sales and
reported profits. b GAO calculation of Marine Corps? reported lodging sales
as a percent of total reported MWR programs sales. c GAO calculation of
Marine Corps? reported lodging profits as a percent of reported MWR profits.

Source: Marine Corps Community Services data.

Profits shown in table 2 are those reported for installations with PCS
lodges before these profits were used to help support local MWR programs
that may either collect no revenue, or insufficient revenue, to offset their
operating costs (e. g., parks and picnic areas, swimming pools, and child
development centers). After this support was provided, the Marine Corps? MWR
program reported profits of about $7. 8 million. If the PCS lodging profits
of about $5.1 million had been set aside to support only the lodging
programs, the MWR would still have earned about $2. 7 million more than MWR
expenses.

The impact of losing PCS lodging earnings varies by installation. As a
percent of total reported MWR program sales and profits in fiscal year 2000
(see table 2), PCS lodging was 2.1 percent of sales; but 10.4 percent of
profits. These PCS profits ranged from a low of 2.1 percent of the total MWR
profits at Parris Island, S. C., to as much as 37.4 percent at Camp Butler,
Japan. All of the installations in table 2 earned a profit before those

Page 12 GAO- 02- 351 Defense Management

profits were used to help support local MWR programs. In addition, all but
two of the MWR funds would have had profits remaining (after paying all MWR
support costs) even if lodging earnings had not been available to them. The
MWR fund at Parris Island, S. C., for example, had a net loss of about $940,
000 in fiscal year 2000 after paying all MWR support costs. Without the
$67,000 in profits from the PCS lodge, the net loss would have been even
greater. The MWR fund at Camp Lejeune, N. C., would also have lost money if
lodging earnings were not included. In fiscal year 2000, its net profit was
about $68,000 after paying all MWR support costs. Without the $492,000 in
PCS lodging profits, the fund would have lost about $424,000 for the year.
Camp Lejeune officials said that this loss would have had a significant
impact on the quality of life of that Marine community.

According to Marine Corps officials, the impact of separating PCS lodging
funds from the MWR program would be greater than suggested by simply
focusing on PCS lodge profits. The officials indicated that removal of the
PCS lodging funds would eliminate much needed funding flexibility and the
ability to provide advance funding for future activities. Therefore, if the
proposed policy is adopted, they said that these installations might have to
increase fees or eliminate certain programs.

The Marine Corps has several options to compensate the MWR fund for the lost
PCS lodging revenue. Currently the Marine Corps is not considering any of
these options, which suggests that it is likely to request a waiver from the
policy if it is adopted. Each of the options for maintaining a healthy MWR
operation at each Marine Corps installation would need to be studied to
determine which option or which combination would be the most effective.
These options include, but would not be limited to,

 reducing or eliminating some MWR services or increasing the services?
fees;

 seeking additional appropriations or reprioritizing existing
appropriations; and

 using the potential reimbursement for the net book value 9 of the lodging
assets.

9 Net book value represents the original cost of the facilities plus any
improvements minus the allowable depreciation. Options to Compensate

Marine Corps MWR Fund for the Loss of Lodging Revenue

Page 13 GAO- 02- 351 Defense Management

Marine Corps officials often cited reducing or eliminating MWR services as a
possible but undesirable outcome of the policy change, but they did not
specify which services would be reduced or eliminated, saying that this
would be an individual installation decision. They also discussed the
potential need to raise the fees charged for other MWR services used by
Marines and their families. These MWR services, especially MWR Category B
and C programs, charge varying fees to help support the MWR program. Raising
the fees and reducing or eliminating some of these services is an option for
the MWR program to offset the loss of lodging revenues.

A second option available to the Marine Corps would be to seek additional
appropriations or to reprioritize them. Depending on how vital the MWR
program is to the military mission, DOD regulations permit varying levels of
appropriated support. However, as shown in table 3, the Marine Corps
provided less appropriated support in fiscal year 2000 than did the other
services for Categories A and B MWR programs.

Table 3: Percent of Appropriated Support to MWR Provided by Services for
Fiscal Year 2000

Category A C ategory B

DOD minimum goal 85 65 Navy 89 66 Army 90 66 Air Force 96 66 Average 92 66

Marine Corps 76 52 Note: Category C programs receive little appropriated
support. Source: DOD December 26, 2001, MWR Report.

According to DOD policy, 10 Category A MWR programs (e. g., free
professional entertainment and physical fitness programs) are considered
most essential in meeting each of the military services? objectives and have
virtually no capacity for generating nonappropriated revenues. DOD guidance
specifies that they are to be supported almost entirely with appropriated
funds. However, according to DOD data, in fiscal year 2000 Marine Corps
appropriations paid 76 percent of Category A expenses

10 Department of Defense Instruction 1015.10 Programs for Military Morale,
Welfare, and

Recreation (MWR), November 3, 1995 (Administrative Reissuance Incorporating
Change 1, October 31, 1996).

Page 14 GAO- 02- 351 Defense Management

compared to an average of about 92 percent by the other military services.
(See table 3.) A portion of its lodging earnings helped offset the
shortfall.

Category B MWR programs (e. g., childcare programs and youth activities) are
similar to Category A programs in importance to each service but have some
revenue- generating capacity. In fiscal year 2000, Marine Corps
appropriations paid 52 percent of Category B MWR expenses, compared to
approximately 66 percent by the other services. Again, the Marine Corps used
a portion of its lodging earnings to help offset the shortfall.

Category C MWR programs (e. g., golf courses and bowling alleys) have enough
revenue- generating capacity to cover most operating expenses and generally
receive limited appropriated support.

Because the Marine Corps has discretion to determine how much of its
operations and maintenance appropriations will be used to support MWR
activities, it could look for opportunities to allocate a greater portion of
these appropriations to support MWR activities at levels closer to those
provided by the other services. In fact, Marine Corps officials said they
were taking steps to increase the percentage of appropriated support for MWR
programs. The Corps also has the option to seek additional appropriations
from the Congress to make up for the MWR program?s loss of lodging revenues.

A third option available to the Marine Corps is to follow a practice
recently used by the Army- reimbursing the MWR fund for the value of lodge
assets previously held in the MWR program. The Marine Corps estimates the
current net book value of its lodging facilities is about $18 million but
this could increase as current and planned construction projects are
completed. Because most of these assets were built or obtained with MWR
funds, the MWR program may be entitled to a reimbursement if the lodging
assets are transferred to a separate lodging fund. The Army used this
approach when it changed its lodging program to meet the requirements of the
proposed policy. In that case, the Army established a multiyear payment
schedule to reimburse the MWR program from annual lodging receipts. Such a
program in the Marine Corps could provide a source of annual funds to help
compensate for lost lodging revenue, at least in the shortterm.

Page 15 GAO- 02- 351 Defense Management

The Marine Corps also stated that without continued MWR support, the
operations of some of its PCS lodges would be negatively affected. There are
options, however, that could reduce this impact. Each of these would need to
be studied to determine which or which combination would offer the best
alternative. The options include, but would not be limited to

 sharing pooled PCS lodge revenues across all installations and

 combining PCS and TDY lodging operations and sharing resources. Pooling
and sharing of lodging profits across the Marine Corps installations (e. g.,
creating a centrally managed lodging fund) could help ensure that money is
available to meet all installations? PCS lodging needs, including
construction or remodeling needs and additional support costs. Shortfalls at
one location could be met with profits from others. The Marine Corps already
pools and shares some lodging earnings. For example, each MWR business
activity (including the lodges) contributes to a central MWR construction
fund, which is shared by all installations.

Currently, the Marine Corps PCS and TDY lodges (like those of the Navy) are
managed and operated by two separate organizations. The Office of the Deputy
Commandant, Installations and Logistics manages the Marine Corps? TDY
lodges, and the Marine Corps Community Services manages its PCS lodges. The
Marine Corps could combine its TDY and PCS lodging operations similar to
those of the Air Force and Army, potentially reducing the management and
overhead costs associated with managing two distinct lodge systems.

On October 1, 2000, the Army took steps to ensure it would be in compliance
with the proposed lodging policy should it be adopted. This included
creation of a single lodging fund for both PCS and TDY revenues separate
from its MWR fund. It also authorized its installations to impose a
surcharge on some users of its lodges that is used to help support local
morale, welfare, and recreation activities. We believe this practice
violates DOD and Army regulations.

Prior to October 1, 2000, the Army operated separate TDY and PCS lodging
programs. Revenues from the TDY program were deposited into a separate
lodging fund and used exclusively to support TDY lodges. However, revenues
from the PCS lodging program were deposited into the Army?s MWR fund. While
this fund, in turn, paid the lodges? operating expenses and funded capital
improvements, excess lodging earnings were used to support other Army MWR
programs. Options to Ensure Marine

Corps Lodges Will Continue to Operate without MWR Support

The Army Has Taken Steps to Comply with the Proposed Policy But Is Still
Using Some Lodging Revenues to Support MWR Programs

Army Made Changes to Comply with Expected Policy

Page 16 GAO- 02- 351 Defense Management

On October 1, 2000, the Army combined operations of the two lodging programs
and began depositing all lodging revenues into a single lodging fund at each
installation. 11 Considering potential management efficiencies, Army
officials believe that the financial impact on its overall MWR program would
be minimal. They estimated that the MWR fund will annually lose lodging
earnings of about $5 million, 12 after deducting MWR overhead and
recapitalization costs. They consider the impact on any particular
installation to be limited because the loss is shared by the 61
installations with PCS lodges. Additionally, the Army?s MWR construction
fund will lose about $800,000 annually, representing the PCS lodges?
historical contribution to the fund, which was based on a 2- percent
assessment of lodging revenues.

However, the MWR fund will also benefit from the change because it will no
longer be responsible for maintaining existing or constructing new lodges.
From fiscal years 1996 through 2000, for example, the MWR fund reported
spending about $38 million on the construction of new PCS lodges. In
addition, the Army has estimated that it currently has a $635million backlog
of maintenance and repair in its PCS and TDY lodges. 13 Installation MWR
funds will no longer be responsible for the PCS portion of this backlog. The
Army central lodge construction fund will also reimburse each installation
MWR program for the estimated book value of the PCS lodging assets as of
October 1, 2000. This is being done in recognition that the assets were
initially constructed or renovated with MWR funds but that the MWR programs
would no longer be able to benefit financially from the investments. The
total reimbursement will be $49.5 million, paid out over 6 years.

To further lessen the impact of the loss of lodging revenue to installation
MWR programs, the Army permits installations to impose a surcharge on
patrons not traveling on official orders, such as military retirees, and
transfer the proceeds to the MWR funds at the local installations. Army
installations can choose whether to participate and can set the surcharge

11 The Army also maintains a central lodge construction fund, containing
funds from each installation with a lodging program, at its lodging
headquarters in Alexandria, Virginia. 12 For example, gross revenues for
fiscal year 2000 were about $14 million, but the MWR programs returned about
$9 million to the lodging program in various types of support ranging from
operating expenses to capital improvements.

13 Army lodging officials said they could not provide us a breakdown of the
PCS portion of this backlog without an extensive data- gathering effort.
Army Improperly Diverts Some

Lodging Revenue to MWR

Page 17 GAO- 02- 351 Defense Management

amount. Twenty- three of 61 installations in the United States and overseas
elected to participate in fiscal year 2001. The surcharge rates ranged from
$1 at West Point, N. Y., to $25 14 at Army locations at Camp Zama and Kure,
Japan, and generated more than $1.8 million during fiscal year 2001.

Under DOD and Army guidance, this transfer of funds to the MWR program is
prohibited. The transfer violates the provisions of DOD and Army
regulations, set forth below:

 DODI 1015.12, Lodging Program Resource Management states that
nonappropriated funds that are generated from, or associated with, lodging
programs shall be used only for lodging programs unless they are organized
as part of the single MWR fund. 15

 Army Regulation 215- 1, MWR Activities and Nonappropriated Fund
Instrumentalities 16 provides that supplemental mission nonappropriated
funds, such as the funds from lodging operations, will not be used to
subsidize MWR programs and that such funds can be used only for the
requirement for which they were established- in this instance, lodging.

While the Air Force and Navy manage their PCS lodging programs differently,
neither provides any lodging revenue to its MWR programs. Rather,
historically the Air Force and the Navy have deposited all revenues into
separate lodging funds and reinvested them into the lodging programs;
therefore they are already in compliance with what the proposed policy would
require. The Air Force manages TDY and PCS lodges as one program, and most
management operations are the same for both types of facilities. The
managing agent is Air Force Services. While the Navy already maintains
separate accounting of its lodging fund from its MWR fund, it has not
created a consolidated lodging fund for both PCS and TDY lodges as seems to
be suggested by the department?s May 2, 2001, report to the Congress. The
Navy?s PCS and TDY lodges are managed by two separate organizations, which
have separate lodging funds with distinct management philosophies and goals.
Navy Exchange Service Command manages the Navy?s PCS lodging and the Naval
Facilities Engineering Command manages its TDY lodging.

14 According to an Army lodging official, the $25 charge is only for
contractor personnel. 15 Oct. 30, 1996; paragraph 4. 6. 16 Oct. 25, 1998;
paragraph 4. 7, 4.8, and 4.11. Air Force and Navy MWR

Programs Will Not Be Affected by the Proposed Policy

Page 18 GAO- 02- 351 Defense Management

DOD officials provided two primary reasons for changing the PCS lodging
policy. First, they perceived a need to resolve a conflict with the Joint
Federal Travel Regulation. In DOD?s view, resolution of the conflict
required separation of lodging revenues from those used for MWR purposes.
Second, the officials told us the policy change was a first step to achieve
a number of other management objectives. Our analysis indicates that the
policy change may serve an important management purpose, ensuring that
lodging funds are retained and used exclusively for lodging programs.
However, the change is not compelled by requirements of the Joint Federal
Travel Regulation. And while consistency and achieving other management
objectives appear to be reasonable, much more will be required to enable DOD
to accomplish the other management objectives.

In its May 2001 report to Congress, 17 DOD based the proposed policy change
on a determination that its current PCS policy is in conflict with
requirements of the Joint Federal Travel Regulation. DOD reported that its
current policy defines PCS lodging as an ?unofficial lodging program? while
the Joint Federal Travel Regulation defines PCS lodges as ?official

travel government quarters.? DOD viewed the proposed policy as resolving
this conflict by removing PCS lodging revenues from MWR programs.

Although we believe the policy change is within the discretion of the
department, we do not find a conflict between the department?s current
policy and the Joint Federal Travel Regulation. In our view, the regulation
deals with allowances for travel and transportation; it does not apply to
lodging policy.

DOD officials also outlined a number of other management objectives they
expected to accomplish, aimed at improving management of the lodging
programs. These included (1) making the programs more consistent across the
military services, (2) reducing lodging rates where appropriate, (3)
improving the overall quality of lodging facilities, and (4) eliminating the
construction of new PCS lodges that may exceed the needs of official DOD
travelers. The proposed policy, however, does not specifically address these
objectives. Therefore, the policy change, by itself, will not allow DOD to
accomplish them. Supplemental DOD guidance for operating both

17 Report on Lodging Programs provided to the Senate and House Armed
Services Committees; May 2, 2001. Proposed Policy

Change Based on Resolving a Perceived Regulatory Conflict and Achieving
Other Management Objectives

The PCS Policy Change Intended to Resolve a Perceived Conflict with Travel
Regulation

The Policy Change by Itself Will Not Allow DOD to Accomplish Most Other
Management Objectives

Page 19 GAO- 02- 351 Defense Management

TDY and PCS lodges will be required. Department officials said that the
lodging policy is only the first step in their plans to improve the lodging
program and that they will eventually need to recommend further change to
the department?s guidance to address these other issues.

According to officials in the Office of the Secretary of Defense (OSD), the
military services? PCS lodging programs have evolved over time and have
widely different operating philosophies and approaches. In addition, when
DOD revised its lodging policies and implementing guidance in 1995 and 1996,
they were written so that the military services could continue to operate
their unique PCS lodging programs; they were not written to ensure
consistent lodging programs across the services. The proposed new policy
change does not address this issue.

Contrasting PCS and TDY lodging programs, OSD officials pointed out that TDY
lodging guidance ensures greater consistency across the services. It
requires that the services manage their TDY lodges similar to Category A MWR
activities. Such lodges are considered to be mission- sustaining; can
receive appropriated funds for major renovations and new lodge construction;
and can receive other appropriated support typically provided by the local
installation (e. g., for minor repairs and electricity). The goal of this
type of lodging program, according to DOD?s guidance, is to provide quality
lodging facilities at the lowest possible price to official DOD patrons
traveling on orders. This, in turn, reduces the travel costs of operational
units, allowing use of appropriated funds for other purposes.

However, current PCS lodging guidance permits management of lodges as
Category A mission- sustaining lodges or as Category C revenue- generating
lodges. First, for Category A mission- sustaining PCS lodges, the services
follow DOD?s lodging guidance which is similar to guidance followed by TDY
lodges. A major difference, however, is that the services must use
nonappropriated funds (e. g., from lodging revenues), not appropriated
funds, to renovate or build new PCS lodges. The Air Force and Army have
combined their TDY and PCS lodging programs and operate them as Category A
mission- sustaining activities. While they maintain some distinctions
between the two types of lodges (e. g., PCS lodges are designed more for
families and generally provide some type of kitchen facilities), lodging
rates are kept as low as possible. Further, generally one organization on
each installation manages and oversees lodging operations. Revenues in these
cases are deposited into a single lodging fund and are used only to support
the lodging programs. Create Consistent Lodging

Policy and Operations

Page 20 GAO- 02- 351 Defense Management

Second, the services MWR program or exchange service can manage PCS lodges
as Category C activities. In these cases, DOD?s lodging criteria are
completely different. Most notably, they do not designate PCS lodges as
mission- sustaining. Rather, they are classified as revenue- generating
activities that, with some minor exceptions, should be financially
selfsupporting. Consequently, they are expected to receive only limited
appropriated support. There is also no requirement that lodging rates be
kept to the lowest possible price. The Navy and Marine Corps have separate
TDY and PCS lodging programs. They manage their TDY programs as the Air
Force and Army manage theirs but manage their PCS programs as revenue-
generating activities. Each military installation usually has two lodging
organizations, each with its own rate structures and funding priorities. The
Navy?s PCS lodging revenues go into a separate lodging fund, while Marine
Corps revenues go into a single MWR fund. DOD officials said that besides
creating an inequitable situation among the services, the variety of
operations makes it practically impossible to collect consistent data and
analyze the effectiveness of the lodging programs.

The proposed lodging policy, by itself, will not result in more consistent
lodging policies and operations among the services. Although, the proposed
policy would prevent the services from operating PCS lodges as Category C
MWR activities and require them to deposit lodging revenues into ?the
Military Service?s Lodging Fund,? it would not prevent the services? MWR
programs from continuing to manage separate PCS lodging programs. DOD?s May
2, 2001, report, for example, states that the Navy?s PCS program will not be
affected by the change because the Navy already deposits PCS lodging revenue
into a separate lodging fund. Moreover, if DOD implements the proposed
policy, OSD officials said that the Navy and the Marine Corps could choose
to continue to operate separate PCS and TDY lodging programs as long as
lodging revenues were not used to support MWR programs. Thus, the policy
would not necessarily resolve DOD?s concern about the inconsistent
management approaches being used by the military services.

OSD officials said, and we confirmed, that there is a relatively large
difference in PCS room rates charged by the military services. As shown in
table 4 below, the average room rates for fiscal year 2000 ranged from $27
to $55 (actual room rates ranged between $6 and $105 overseas and between
$15 and $70 domestically). In these officials? views, this variation in
rates creates an inequitable situation between the services that should be
resolved. Reduce Lodging Room Rates

Page 21 GAO- 02- 351 Defense Management

Table 4: PCS Lodging Room Rates - Fiscal Year 2000 Military services Average
nightly

room rate Criteria for room rates Other room rate factors

Air Force $27 Based on a formula designed to recover operating expenses and
to refurbish interiors over a 5- year period

$6- per- bed- night surcharge to fund needed construction and major
renovation ($ 8 overseas) a Army $37 b Rates varied across installations and

were designed to help cover lodging and other MWR program costs

2% of aggregate installation MWR earnings from all MWR activities were
collected centrally to pay for construction. Marine Corps $44 Based on local
market survey and

designed to earn at least a 25 % profit 2.5 % of all lodging revenues is
transferred to a central fund to support MWR construction and

major renovations Navy $55 Designed to be at least 20 % lower

than local commercial room rates and to earn at least a 20- percent profit

Construction and major renovations are funded from current lodge earnings.

a Surcharge amounts are included in the Air Force?s room rates. b Rate is
before Army combined PCS and TDY lodging. Average rate for fiscal year 2001
is $32 and is based on a formula designed to recover only lodge operating
expenses and to refurbish lodge interiors over a 5- year period. This rate
also includes a $6- per- bed- night surcharge to pay for a lodge
modernization plan.

Source: Data provided by each service.

All of the services offer lodging at rates below commercial rates. However,
higher lodging room rates in some services increase the appropriations
needed to support PCS travelers. PCS travelers and their families 18 and a
large number of TDY travelers stay at PCS lodges. Because these travelers
are reimbursed for the actual cost of their rooms, higher rates have a
direct impact on the operation and maintenance accounts of their
organizational units.

As shown in table 4, the services have different criteria for establishing
PCS room rates. The Air Force uses the same formula as it does for TDY
rates. This formula is designed to recover current operating costs and
provide sufficient funds to periodically refurbish lodging interiors (e. g.,

18 PCS travelers and their families receive a maximum of $180 per day for a
maximum of 10 days to help them offset the cost of lodging and other living
expenses. Section 632 of the National Defense Authorization Act for Fiscal
Year 2002 (Public Law 107- 107) increased this allowance to $180 per day
from $110 per day. The 10- day period includes the time military travelers
and their families spend while they are preparing to move and while they
wait for permanent quarters at their new duty station. It does not include
the PCS travel time needed to travel between duty stations. While military
travelers are also authorized to stay in military lodges while they are
enroute to their new duty station, they receive a different type of travel
allowance during this period.

Page 22 GAO- 02- 351 Defense Management

furniture and paint). 19 It also adds a $6 per- night surcharge (included in
the room rates shown above), which is collected centrally and used to pay
for the expense of renovating existing lodges and building new ones.
Theoretically, this process establishes the lowest possible price needed to
meet lodging standards. As shown in the footnotes to table 4, the Army has,
since October 1, 2001, adopted a similar approach to that of the Air Force
in establishing nightly room rates. It now uses, for example, the same type
of formula for establishing PCS room rates and charges a $6 per night
surcharge to fund the construction and renovation of its lodges.

The Navy and Marine Corps have greater flexibility to establish lodging
rates. Each performs a local market survey and/ or attempts to establish
rates that are lower than the federal per- diem rate but will allow them to
earn at least a 20- or 25- percent profit.

The proposed policy change does not specifically address lodging rates.
There could be some impact on the rates, however, depending on how the
services choose to implement the new policy. For example, when the Army
implemented the proposed policy, it combined its TDY and PCS lodging
programs and began to eliminate distinctions between the two; it set a
single rate of $32, which includes the $6 per night surcharge, for both
types of lodges. It is not clear at this time how the proposed policy might
affect rates charged by the Navy and Marine Corps. As discussed in the
previous section, the proposed policy does not specifically require the Navy
to combine its TDY and PCS lodging programs, and Navy officials indicated
they do not plan to do so.

OSD officials perceived a wide difference in the quality of PCS lodges
across the services. They attributed this difference to a number of factors,
all related to funding. How the proposed policy will affect some of these
issues is unclear.

 First, the inconsistent operating and funding arrangements allowed by
DOD?s current lodging guidance allows some services to deposit lodging
revenues into a lodging or billeting fund while the Marine Corps deposits
revenues into an MWR fund. This creates an inconsistency in how lodging
funds can be used. The new policy will eliminate this inconsistency.

19 The Air Force develops 5- year plans to refurbish the interior of the
lodges. The cost of these plans is built into the rate structure. Improve
Quality of Lodging

Facilities

Page 23 GAO- 02- 351 Defense Management

 Second, differences exist in how funding is obtained for lodging
modernization and new construction. Lodging revenues in the Army and Air
Force (which operate their lodges as Category A mission- sustaining
activities) must be sufficient to fund current operating expenses, periodic
refurbishment of the lodging interiors, major renovations to the building
exteriors, and the construction of any new or replacement lodges. However,
the formula used by these two services to set lodging rates does not include
factors for renovation or new construction. Therefore, the Army and Air
Force lodging programs have added a nightly surcharge to their room rates to
pay for these types of capital improvements. The Navy and Marine Corps
(which operate their lodges as Category C revenuegenerating activities) have
greater flexibility to set lodging rates to generate additional revenue for
capital improvements or other purposes.

 Third, the degree of appropriated support provided at the local
installation level (e. g., minor repairs and grounds maintenance) varies
greatly. Much depends on other funding priorities at the installation and
the installation commander?s interest and support.

During our work, we stayed at and/ or visited 16 of DOD?s 191 installations
with PCS lodges, many of which had more than one PCS lodge building. We
observed the general quality of the facilities and discussed management and
funding issues with local managers. While this small sample does not allow
us to project findings to all PCS lodges, our overall impression is that the
lodges were generally in good condition. While we noted differences in the
quality and age of the buildings and general appearance of the surrounding
grounds, most of the interior furnishings were reasonably up to date, and
the rooms were clean. Naturally, some of the lodges appeared better than
others, but for our small sample, this did not seem to be related to a
particular service or method of operation. Rather, it was more a product of
the lodges? age (some were over 50 years old while others had recently been
constructed); how recently the interiors had been refurbished (each of the
services seemed to have a cyclical refurbishment plan to keep the interiors
fresh); whether the exteriors had been adequately maintained or recently
renovated; and the degree of support and interest by the local installation
commander and his management team. To illustrate this last point, the PCS
lodging facilities at Fort Bragg, N. C., appeared to be in very good
condition. Local lodging managers said they were lucky because a past
installation commander had considered the lodges to be an important quality-
of- life issue and made them a priority for funding. Other locations we
visited had not benefited from this degree of support.

Page 24 GAO- 02- 351 Defense Management

The proposed policy will ensure that lodging revenues are used exclusively
for lodging purposes, but the extent to which it will change existing
conditions and approaches to upkeep and renovation is unclear. All the
services already have programs underway to either renovate or build new or
replacement lodges. Because DOD?s current guidance does not permit the
services to use appropriations to fund PCS lodge construction, they have
used different methods to generate needed funds. For example, as shown in
table 4 above, the Air Force and Army currently charge $6 per room, per
night, which is deposited into centrally managed construction funds and
redistributed on a priority basis. Similarly, each Marine Corps lodge
deposits 2.5- percent of its annual revenues into a central MWR construction
fund, which is redistributed on a priority basis to all MWR programs. The
Navy?s PCS lodging program, which is managed centrally by the Navy Exchange
Service Command, earns sufficient profits to renovate existing lodges and
build new ones. As discussed previously, similar differences also exist with
regard to appropriated fund support at the local installation level. Army
and Air Force lodges (because they operate as Category A mission- sustaining
activities) are authorized to receive appropriated funding for routine
maintenance and other types of support. Navy and Marine Corps lodges
(because they operate as Category C revenue- generating activities) are also
authorized some indirect appropriated support but generally are expected to
be self- supporting at most installations. These funding differences are
unlikely to be resolved by the proposed policy change.

As discussed in more detail later, OSD officials said that under current
guidance, they are not able to limit the construction of new PCS lodges,
particularly in the Navy and Marine Corps, even when it is clear that the
new lodges are not needed to support PCS travelers. Because the Navy and
Marine Corps operate their PCS lodges as Category C revenuegenerating
activities, current guidance allows them to construct lodges to meet the
needs of all authorized MWR patrons, not just those of patrons traveling on
orders. As a result, they are building new lodges, some in recreational
areas or in other areas that have a high demand by MWR patrons. While the
proposed policy will prevent the Marine Corps from using PCS lodging
revenues to support MWR programs, it does not change the guidance relating
to the construction of PCS lodges. Thus, the Navy, and possibly the Marine
Corps, may continue to build PCS lodging in excess of demand by patrons
traveling on government orders.

For the most part, the proposed policy does not change the underlying DOD
instructions and guidance that give the military services wide discretion in
managing their lodging programs. As a result, the policy Eliminate
Construction of New

Lodges That Exceeds the Needs of PCS Travelers

Most Management Objectives Necessitate Longer- Term Actions

Page 25 GAO- 02- 351 Defense Management

change, by itself, will not result in the type of managerial improvements
OSD officials envision for the program. OSD officials said they recognized
that the proposed policy was only the first step in revising the
department?s lodging operations and that they would eventually recommend
changing the DOD instructions to address the other management issues. Until
this is done, however, the lodging programs will continue to be managed in a
widely divergent manner.

The services? plans for building new PCS lodges are consistent with
department guidance. However, two sets of OSD policy guidance are available
to the services in managing their lodging programs- MWR guidance followed by
the Navy and Marine Corps, which allows them to add new lodging rooms beyond
those required to meet the needs of PCS travelers, and lodging guidance
followed by the Air Force and Army, which is oriented to meeting the more
limited needs of official military and civilian travelers. Each of the
services is constructing or has plans to construct sizeable quantities of
new or replacement PCS lodges.

DOD has two sets of PCS lodging guidance depending on how the military
services choose to manage their programs: MWR guidance and lodging guidance.
These different sets of guidance have different program emphasis and, more
importantly, allow the services to use a different authorized patron base to
determine how many lodge rooms are needed to accommodate travelers. MWR
guidance allows construction to support all MWR patrons. Lodging guidance
allows construction to support only patrons on travel orders.

DOD?s MWR guidance 20 stipulates that PCS lodges are provided specifically
for PCS personnel and their families but identifies a number of other
authorized users, including TDY travelers, members of the armed forces and
their families not on official travel, retired members of the armed forces
and their families, and others at the discretion of the base commander (e.
g., DOD civilians and their families, other federal employees, guests, and
even members of the public under some limited

20 Department of Defense Instruction 1015.10 Programs for Military Morale,
Welfare, and Recreation (MWR), November 3, 1995 (Administrative Reissuance
Incorporating Change 1, October 31, 1996). DOD Guidance

Allows Services to Build PCS Lodges in Excess of Official Traveler Needs

The Military Services Follow Divergent Guidelines to Justify New PCS Lodge
Construction Projects

MWR Guidance and Approach

Page 26 GAO- 02- 351 Defense Management

circumstances). While PCS travelers are given preference, other authorized
users can make confirmed reservations in advance of their stay. In addition,
the guidance allows the services to consider all these authorized users when
determining whether there is a need to expand existing lodges or build new
ones.

The Navy Exchange Service Command, which manages the PCS lodging program for
the Navy, operates the PCS lodging program in accordance with this MWR
guidance. Therefore, to determine its PCS lodging requirements, the Exchange
Service tracks total occupancy rates and other data that indicate whether
there is an unmet demand from any of its authorized patrons (e. g., number
of people turned away). It then assesses the potential return on investment
and prepares long range plans to build new lodges or expand existing ones at
the installations with the most need. Navy officials pointed out, however,
that the installation must approve any expansion or construction plans
before funds are committed.

The Marine Corps Community Services, which manages the Corps? PCS lodging
program, operates the PCS lodging program as a Category C MWR activity to
earn a profit. Unlike the other services, these profits are used to help
support Marine Corps MWR programs at the local installation level. Capital
to renovate or build new PCS lodges comes predominately from a MWR
construction fund managed centrally at the Marine Corps Community Services?
headquarters at Quantico, Va. This fund receives 2.5 percent of the revenues
from all Marine Corps MWR business activities (including the PCS lodges)
managed by the Marine Corps Community Services and redistributes them to the
activities based on relative priorities and potential return on investment.
From fiscal years 1996 through 2000, the Marine Corps PCS lodging programs
contributed about $1.2 million to the fund but received MWR program
commitments of about $21 million to renovate or build new lodges. 21
According to a Marine Corps lodging official, to determine PCS lodging
requirements, the Corps relies on four factors, 1) condition of current
facilities, 2) percent of occupancy and the number of reservation requests
that could not be filled, 3) return on investment of the planned lodging,
and 4) availability of housing in the local area.

21 Over time and with increasing revenues from lodging operations, the
Marine Corps could in turn devote a greater portion of its lodging revenues
to meeting non- lodging MWR needs.

Page 27 GAO- 02- 351 Defense Management

DOD?s lodging guidance 22 says that PCS lodges are provided specifically for
PCS travelers. It also identifies a number of other authorized users, such
as TDY travelers and relatives and guests of military personnel stationed at
the installation. The primary distinction between MWR and lodging guidance,
therefore, is more a matter of emphasis. Under the lodging guidance, other
authorized users stay at PCS lodges on a ?spaceavailable

basis,? which generally means they cannot obtain a confirmed reservation
until 24 hours before the night of the stay, while MWR guidance allows all
authorized users to obtain reservations in advance. The goal as stated in
the lodging guidance is ?to provide quality lodging facilities and service
to authorized personnel and maintain maximum occupancy to reduce official
travel costs.?

Air Force Services, which manages the TDY and PCS lodging programs for the
Air Force, operates both programs as Category A mission- sustaining
activities. Because such programs are not designed to generate profits, the
Air Force added a surcharge- currently $6 in the United States and $8
overseas- to its nightly room rates to help fund construction of new and
replacement lodges. This surcharge generated about $100 million 23 from
fiscal years 1996 through 2000. Over the last several years, the Air Force
has based its PCS construction program on a 1995 contractor report that
described the condition of the Air Force?s PCS lodges and recommended a
comprehensive program to bring them up to standard. This program involved
the construction of lodges at a cost of about $141 million with an
additional $224 million in additional requirements not yet funded. Air Force
officials said that their decision to build new PCS lodging capacity is
based on estimates of upcoming military personnel moves, not on the lodging
demands of unofficial travelers.

The U. S. Army Community and Family Support Center manages the Army?s PCS
and TDY lodging operations. 24 In February 2000 it approved a

?wellness strategy? aimed at addressing an estimated $635 million backlog of
maintenance and repair requirements for its PCS and TDY lodges. Currently,
the Army funds this strategy and any resulting lodge

22 Department of Defense Instruction 1015.12, Lodging Program Resource
Management,

October 30, 1996. 23 About $70 million was collected from the surcharge on
TDY rooms and $30 million on PCS rooms. 24 The Community and Family Support
Center is a Field Operating Agency under the Army?s assistant chief of staff
for installation management. Lodging Guidance and

Approach

Page 28 GAO- 02- 351 Defense Management

construction and renovation with a $6 per- room, per- night surcharge.
Because the Army estimates it will take 32 years to complete the program at
this rate, it expects to increase the surcharge incrementally by $1 per year
(starting in fiscal year 2003) until it reaches $12. According to Army
lodging officials, part of their wellness strategy includes reviewing the
occupancy rates at each installation and resizing the number of lodge rooms
as necessary. Its internal guidance stipulates that ?a lodging operation
should be sized to accommodate 90 percent of its official lodging demand on
an annual basis.? In this case, official lodging demand is defined as PCS
personnel and their families and TDY personnel, both military and civilian.

All of the services have recently built PCS lodges as part of their plans to
replace or modernize their lodges. However, as shown in table 5, three of
the services are building or have identified building plans that lead to a
net increase in their inventory of PCS lodging rooms in the coming years.

Table 5: Estimated New PCS Lodge Construction- Increasing Room Inventories
in Fiscal Years 1996- 2000 and Fiscal Years 2001- 2005

Dollars in millions

Net increase in PCS lodging rooms Fiscal years 1996- 2000 Fiscal years 2001-
2005

Military services Reported Cost Locations Rooms Estimated

Cost Locations Rooms

Navy $42.4 11 587 a $121. 4 b 15 b 940 b Marine Corps $3.0 1 36 $24.6 7 237
Air Force $93.3 16 540 $47.6 c 4 c 180 c Army $38.0 6 259 None None None

a The Navy reduced its lodge rooms by 225 rooms at 4 locations during this
time period. b The Navy is reviewing two projects in Japan (150 rooms at an
estimated cost of $27.2 million) and one in Puerto Rico (100 rooms at $15.3
million) for their viability. If any of these are not built, the numbers
will be reduced accordingly. c The Air Force numbers are only for fiscal
years 2001- 02.

Source: Data provided by each service.

As shown in table 5, the Navy Exchange Service estimates that it will spend
about $121.4 million from fiscal years 2001 through 2005 for a net increase
of 940 PCS lodging rooms at 15 Navy installations. These numbers do not
include additional Navy plans to replace 769 rooms at 14 installations at an
estimated cost of about $84 million, over the same Services Are Building or

Plan to Build Additional PCS Lodges

Page 29 GAO- 02- 351 Defense Management

period. 25 The Marine Corps and the Air Force also have plans for new lodge
construction. In addition, the Air Force has identified the need for $224
million to construct 1,039 new rooms at 36 bases but is unsure which ones,
if any, will be funded. While the Army does not have plans for a net
increase in PCS rooms, during fiscal year 2002, as part of its wellness
strategy, the Army plans to spend $54 million to renovate or build
replacement lodging rooms for those that are not considered worth
renovating.

Available data on PCS lodge occupancy rates indicate that overall occupancy
varies only slightly between the services. For example, during fiscal year
2000 the Air Force at 88 percent had the highest occupancy rate and the Army
at 80 percent had the lowest. However, the mix of patrons who are using PCS
lodges varies greatly. (See table 6.)

Table 6: Difference Between PCS Lodging Occupancy by Official and Unofficial
Travelers - Fiscal Year 2000

Official travelers Unofficial travelers Military services PCS TDY Total

Navy 23 % 30 % 53 % 47 % Marine Corps 31 % 14 % 45 % 55 % Air Force a a 95 %
5 % Army 54 % 20 % 74 % 26 % a Air Force data do not specify whether
official travelers are PCS or TDY.

Source: Data provided by each service.

The data in table six coupled with the service lodge construction plans (see
table 5) indicate that the Navy and Marine Corps plan significantly more new
construction than would be necessary based on PCS traveler use. For example,
the Navy recently has had plans to add 110 PCS rooms at the North Island
Naval Air Station in California, which would have brought its total
inventory there to 300 rooms. This contrasts with the fact that, in fiscal
year 2000, however, only 38 percent of the occupants were official travelers
(11 percent PCS and 27 percent TDY). The other 62 percent were other
authorized travelers. In justifying this expansion, Navy officials cited an
expected increase in Navy personnel in the area and a

25 The Navy is reviewing one project in Japan to replace 50 rooms at an
estimated cost of $10 million for its viability. If this project is not
built, these numbers will be reduced accordingly.

Page 30 GAO- 02- 351 Defense Management

large number of reservation requests. More recently, the terrorist events of
September 11, 2001, are causing the Navy to rethink the size of this project
based on force protection requirements and environmental issues- issues
unrelated to PCS occupancy rates.

Officials in the Office of the Assistant Secretary of Defense, Force
Management Policy, are responsible for overseeing DOD?s lodging programs and
establishing appropriate policies. In this capacity, they have review and
approval authority for all major PCS lodging- construction projects.
According to these officials, however, they cannot limit construction
projects as long as the requesting authority has complied with applicable
DOD guidance and instructions. They are aware, for example, that the Navy
and Marine Corps have expanded existing lodges and built new ones that
exceed the needs of PCS and other official travelers. Because DOD?s current
guidance allows this, OSD officials state that they have little recourse but
to approve the projects as long as sufficient financial resources are
available.

They pointed out, however, that this excess capacity has a cost that is
borne by DOD. The higher room rates charged by the Navy and Marine Corps PCS
lodging programs (see table 4) increase DOD travel expenses. As we pointed
out earlier, this is one of several key reasons DOD wanted to change the PCS
lodging policy.

Although we do not believe that travel regulations require DOD to revise its
PCS lodging policy, the department does have the discretion to make the
proposed change to bring consistency to the program and to reach desired
management objectives. Although the proposed policy change would not impact
the other services? overall MWR programs, it would impact the Marine Corps?
MWR program. However, the Marine Corps has several options to help it
compensate for potential lost MWR revenue and to preserve a financially
healthy lodging operation. For this reason, if the proposed policy is
adopted and the Marine Corps requests a waiver, we would support a short-
term waiver to permit the Marine Corps time to evaluate implementation
options. However, we do not believe that a permanent waiver is necessary,
considering the reported amount of lodging earnings involved. While the Navy
already separates accounting of its lodging fund from its MWR fund, it does
not currently plan to create a consolidated lodging fund for both PCS and
TDY lodges as seems to be suggested by OSD?s May 2, 2001, report to the
Congress. Clarification of the intent of the policy guidance in this area is
needed. In addition, the OSD Has Limited Control

Over the Construction of New PCS Lodges

Conclusions

Page 31 GAO- 02- 351 Defense Management

Army?s practice of charging unofficial travelers a nightly surcharge that it
provides to the local installation?s MWR fund violates DOD and Army
regulations.

DOD?s desired lodging- management objectives- such as consistent lodging
policy and operations, reduced room rates, improved lodging facilities, and
limitations on new PCS construction- will not happen based simply on the
proposed lodging policy change. Such improvements would likely require a
revision of internal policies and instructions for both the TDY and PCS
lodging programs. Also, the proposed policy leaves in doubt whether DOD
expects the services to merge all operations of PCS and TDY lodging or if
these operations may, in the case of the Navy and Marine Corps, continue to
operate separately. DOD?s current lodging guidance permits a wide disparity
in operating and managing PCS lodging programs. This authorizes the Navy and
Marine Corps to charge higher rates to help fund the construction of lodging
accommodations in excess of the need of PCS travelers. These higher room
rates increase the travel expenses for the department and for those of the
services? operation and maintenance accounts. DOD officials acknowledge that
the proposed policy change is but the first step in achieving DOD?s desired
goals.

We recommend that the secretary of defense in conjunction with the assistant
secretary of defense for force management policy take the following actions
if the proposed policy is implemented

 Provide the Marine Corps with a short- term waiver, if requested, to
permit it time to evaluate policy implementation options and

 Clarify the proposed policy with regard to whether DOD expects the
services to combine PCS and TDY lodging programs and funds or will allow
these separate operations to continue.

Regardless of whether the proposed policy is implemented, the assistant
secretary of defense for force management policy should:

 Provide the military services with a policy framework including improved
lodging guidance to help achieve DOD?s desired lodging- program management
objectives, including consistent lodging policy and operations, reduced room
rates, improved lodging facilities, and limitations on new construction not
focused on official PCS and TDY travelers; and

 Require the Army to adhere to DOD?s and its own regulations by
discontinuing the transfer of lodging revenues (unofficial- traveler
Recommendations for

Executive Action

Page 32 GAO- 02- 351 Defense Management

surcharge) to installation MWR funds and returning the proceeds collected
thus far to the Army?s lodging fund.

In commenting on a draft of this report, the assistant secretary of defense
for force management policy concurred with the first three recommendations
but partially concurred with the fourth. The assistant secretary stated that
if the policy is implemented the department will (1) provide a short- term
waiver so that Marine Corps leadership can evaluate policy implementation
options and (2) clarify the proposed policy regarding whether the services
will be directed to combine PCS and TDY lodging programs and funds or if the
services can continue separate operations. Regardless of whether the
proposed policy is implemented, the assistant secretary stated that the
department will provide clear policy guidance, expected to be published by
September 30, 2003, to achieve its lodging program management objectives.
While we commend departmental recognition of the need for additional policy
guidance to achieve lodging- program management objectives, we would urge a
quicker time frame than the year and a half the department has established
for issuing the guidance.

The assistant secretary also stated the department will require the Army to
discontinue the transfer of lodging revenues (unofficial- traveler
surcharge) to installation MWR funds. The department does not agree,
however, that the proceeds already collected should be returned to the
Army?s lodging fund. DOD stated that return of the proceeds would create an
undue hardship on the MWR program because the funds have already been
committed. We continue to believe our recommendation is sound. The revenues
in question were transferred from the Army?s lodging funds to its MWR funds
in violation of clear prohibitions contained in DOD Instruction 1015.12 and
Army Regulation 215- 1. The DOD instruction further provides that
nonappropriated funds are government funds entitled to the same protection
as appropriated funds. The instruction recognizes an individual fiduciary
responsibility for properly using nonappropriated funds. The Army regulation
contains nearly identical provisions and further provides that DOD
directives and implementing Army regulations have the force and effect of
law. Under these circumstances, we find no reason to modify our
recommendation. The department?s written comments are presented in their
entirety in appendix II.

We are sending copies of this report to the secretary of defense; the under
secretary of defense (personnel and readiness); the secretaries of the Air
Agency Comments

Page 33 GAO- 02- 351 Defense Management

Force, the Army, and the Navy; the director, Office of Management and
Budget; and interested congressional committees and members. We will also
make copies available to others upon request.

If you or your staff have questions concerning this letter, please contact
us on (202) 512- 8412. Staff acknowledgements are listed in appendix III.

Barry W. Holman, Director Defense Capabilities and Management

Appendix I: Scope and Methodology Page 34 GAO- 02- 351 Defense Management

To determine the potential impact of the policy change on service MWR
programs, we interviewed and received briefings on the policy change and its
impact from key officials in the OSD who are responsible for developing MWR
and lodging policy and from appropriate military service headquarters
personnel who manage the services? MWR and lodging operations. We also
obtained DOD and service headquarters overviews of their PCS and TDY lodging
operations in addition to their policies and regulations that govern MWR and
lodge funding and operations, as well as nonappropriated funds and
nonappropriated fund instrumentality management and control. We also
obtained and reviewed financial reports and other lodging and MWR revenue
and expense data. In addition, we obtained and reviewed the Marine Corps
Community Services? Annual Report for 1999, which included an unqualified
opinion on its financial statements by an independent public accountant. We
analyzed this information and identified additional impacts on both the
services? MWR programs as well as their lodging programs. We used the
impacts on the Army?s programs to compare with the potential impacts on the
Marine Corps? programs and to help us propose options for maintaining the
health of the Marine Corps? MWR and lodging programs.

To determine to what extent DOD will accomplish its management objectives
with the policy change, we first interviewed OSD officials to determine what
they hoped to accomplish with the policy change and what they saw as the
future of DOD?s and the services? lodging programs. OSD officials were aware
that the proposed policy change would have a limited effect and discussed
this issue with us. We obtained and reviewed departmental and service MWR
and lodging guidance to establish how each service was allowed to operate
their PCS and TDY lodging programs. We then compared this information with
the way in which the services were operating their programs to determine
whether their operations were within departmental guidelines. We identified
actions likely required to implement DOD?s objectives for improving
management of the lodging program and then compared this to the impact of
the proposed policy to determine the extent to which the new policy would
achieve DOD?s objectives.

To determine whether the services? plans for building new PCS lodges was
consistent with department guidance, we assessed authorities provided for
new construction under existing department guidance with the construction
plans of each service. To compare construction plans with the needs of PCS
travelers, we obtained the number and location of their lodging facilities;
number of rooms, room rates, and official and unofficial occupancy rates at
each facility; reported past and future construction Appendix I: Scope and
Methodology

Appendix I: Scope and Methodology Page 35 GAO- 02- 351 Defense Management

schedules and costs; and reported revenue and expenses for each program. We
analyzed this information within each service and between the services. We
then compared each service?s official and unofficial occupancy rates with
their past and future plans for construction to give us an indication of
which service had construction plans that did not match with their official
traveler occupancy rate.

We reviewed the proposed policy justification and the Army?s use of the
unofficial traveler?s surcharge to determine whether they were consistent
with law and regulation.

Our work was performed at the Office of the Assistant Secretary of Defense
Force Management Policy in Washington, D. C.; Navy Exchange Service Command
headquarters in Virginia Beach, Va.; the Food and Hospitality Branch, Marine
Corps Community Services, United States Marine Corps at Quantico, Va.; the
Army Community and Family Support Center in Alexandria, Va.; and the Air
Force Combat Support and Community Services Office in Crystal City, Va. We
also visited the following 16 military installations to determine how the
lodges were being managed and supported and to observe their physical
condition: Andrews Air Force Base, Md.; Wright- Patterson Air Force Base,
Ohio; Scott Air Force Base, Ill.; Fort Meade, Md.; Fort McPherson, Ga.; Fort
Bragg, N. C.; Fort Belvoir, Va.; Camp Lejeune, N. C.; Quantico, Va.; Camp
Pendleton, Calif.; Miramar Marine Corps Air Station, Calif.; Norfolk Naval
Station, Va.; Little Creek Naval Amphibious Base, Va.; Oceana Naval Air
Station, Dam Neck Annex, Va.; San Diego Naval Station, Calif.; and North
Island (Coronado) Naval Air Station, Calif. We did not independently verify
the data the DOD provided. Moreover, while our most recent financial audit 1
disclosed a continuing inability to capture and report the full cost of
DOD?s programs, the data provided by the department is the only data
available for our analysis.

We conducted our review from March 2001 through January 2002 in accordance
with generally accepted government auditing standards.

1 DOD Financial Management: Integrated Approach Accountability and
Incentives are Keys to Effective Reform (GAO- 01- 681T, May 8, 2001).

Appendix II: Comments from the Department of Defense

Page 36 GAO- 02- 351 Defense Management

Appendix II: Comments from the Department of Defense

Appendix II: Comments from the Department of Defense

Page 37 GAO- 02- 351 Defense Management

Appendix II: Comments from the Department of Defense

Page 38 GAO- 02- 351 Defense Management

Appendix III: Staff Acknowledgments Page 39 GAO- 02- 351 Defense Management

Robert Ackley, Roger Corrado, James Hatcher, M. Jane Hunt, Richard Meeks,
and Paul Newton made key contributions to this report. Appendix III: Staff
Acknowledgments

Acknowledgments

(350050)

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