Depot Maintenance: DOD Needs Plan to Ensure Compliance with	 
Public- and Private-Sector Funding Allocation (29-SEP-04,	 
GAO-04-871).							 
                                                                 
Under 10 U.S.C. 2466, the military departments and defense	 
agencies can use no more than 50 percent of annual depot	 
maintenance funding for work performed by private-sector	 
contractors. DOD also must submit two reports to the Congress	 
annually on the division of depot maintenance funding between the
public and private sectors--one about the percentage of funds	 
spent in the previous 2 fiscal years (prior-years report) and one
about the current and 4 succeeding fiscal years (future-years	 
report). As required, GAO reviewed the two DOD reports submitted 
in early 2004 and is, with this report, submitting its views to  
the Congress on whether (1) the military services met the	 
so-called "50-50 requirement" for fiscal years 2002-3 and (2) the
projections for fiscal years 2004-8 are reasonable estimates. GAO
also identified key limitations in the 50-50 process that affect 
the department's ability to comply with the 50-50 requirement.	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-04-871 					        
    ACCNO:   A12797						        
  TITLE:     Depot Maintenance: DOD Needs Plan to Ensure Compliance   
with Public- and Private-Sector Funding Allocation		 
     DATE:   09/29/2004 
  SUBJECT:   Data collection					 
	     Data integrity					 
	     Defense budgets					 
	     Defense procurement				 
	     Department of Defense contractors			 
	     Financial analysis 				 
	     Financial management systems			 
	     Financial records					 
	     Future budget projections				 
	     Maintenance costs					 
	     Maintenance services contracts			 
	     Private sector					 
	     Reporting requirements				 

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GAO-04-871

                 United States Government Accountability Office

                     GAO Report to Congressional Committees

September 2004

DEPOT MAINTENANCE

  DOD Needs Plan to Ensure Compliance with Public- and Private-Sector Funding
                                   Allocation

                                       a

GAO-04-871

September 2004

DEPOT MAINTENANCE

DOD Needs Plan to Ensure Compliance with Public- and Private-Sector Funding
Allocation

Recurring weaknesses in DOD's data gathering, reporting processes, and
financial systems prevented GAO from determining with precision if the
military services complied with the 50-50 requirement in fiscal years
2002-3. DOD data show all the services to be below the 50 percent funding
limit on private-sector work. However, as before, GAO found errors in the
data that, if corrected, would overall increase funding of the private
sector and move each service closer to the limit on contract maintenance.
For example, for fiscal year 2003, the Navy did not include about $410
million in private-sector maintenance work on aircraft carriers and
surface ships. Correcting for these and other errors would increase the
Navy's percentage of privatesector depot maintenance funds for that year
from the 44.5 percent reported to 47.9 percent. DOD reported significant
increases in depot maintenance funding from 2002 to 2003, but these did
not result in significant increases in the amount of work performed in DOD
depots during that period.

Because some data errors and omissions in DOD's prior-years report are
carried into future years, and changing depot maintenance requirements and
fluctuations in budget estimates make projecting out-year data difficult,
the future-years report does not represent reasonable estimates of
public-and private-sector maintenance funding for fiscal years 2004-8,
thereby limiting its usefulness to congressional and DOD decision makers.
GAO recommended last year that the Congress consider amending 10 U.S.C.
2466 to require only one report that would cover 50-50 data for the prior
year, current year, and budget year. In 2004 the Armed Services Committees
proposed changes in title 10 that would adopt GAO's recommendation.
Despite the limitations in the 50-50 data, the trend for this period shows
that the services are moving close to the 50 percent threshold, yet they
have no plan of action in place to prevent exceeding it. Such a plan would
allow for timely actions to be taken to mitigate the potential for
exceeding the 50 percent limit for private-sector funding.

Several limitations in the 50-50 process affect the quality of DOD's 50-50
reporting. First, three of the four military services did not have an
independent review and validation of their 50-50 data. Second, training
for those who are responsible for collecting, aggregating, and reporting
50-50 data was limited and sporadic. Third, management emphasis regarding
the need for accurate and complete 50-50 reporting was lacking.

DOD's Reported Fiscal Year 2003 50-50 Data and GAO's Adjustments in
Percents

Highlights of GAO-04-871, a report to the Senate and House Committees on
Armed Services

Under 10 U.S.C. 2466, the military departments and defense agencies can
use no more than 50 percent of annual depot maintenance funding for work
performed by privatesector contractors. DOD also must submit two reports
to the Congress annually on the division of depot maintenance funding
between the public and private sectors-one about the percentage of funds
spent in the previous 2 fiscal years (prior-years report) and one about
the current and 4 succeeding fiscal years (future-years report). As
required, GAO reviewed the two DOD reports submitted in early 2004 and is,
with this report, submitting its views to the Congress on whether (1) the
military services met the so-called "50-50 requirement" for fiscal years
2002-3 and (2) the projections for fiscal years 2004-8 are reasonable
estimates. GAO also identified key limitations in the 50-50 process that
affect the department's ability to comply with the 50-50 requirement.

GAO recommends that DOD have a plan to mitigate the potential for
exceeding the 50 percent privatesector funding threshold and improve the
50-50 data collection and reporting process so that the 50-50 reports
submitted to the Congress are more useful to decision makers. DOD
commented on a draft of this report. DOD concurred with the

recommendations and cited actions it will take to implement the
recommendations.

                                    Service

Public work reported

Public work adjusted

Private work reported

Private work adjusted

         Army 56.0 57.2 36.9 42.7 Navy/Marine Corps 54.7 51.3 44.5 47.9
      www.gao.gov/cgi-bin/getrpt?GAO-04-871. Air Force 52.0 51.6 47.7 48.2

To view the full product, including the scope Sources: DOD (data); GAO
(analysis).
and methodology, click on the link above. Notes: Totals will not equal 100
percent because of rounding and legislatively excluded public-
For more information, contact William Solis at private partnerships.
(202) 512-8365 or [email protected].

Contents

  Letter

Results in Brief
Background
Recurring Weaknesses in Data Preclude Determinations of

Compliance in Prior-Years Report with Precision Future-Year Projections Do
Not Provide Reasonable Estimates of Public- and Private-Sector Funding
Several Key Limitations Affect the Quality of DOD's 50-50

Reporting Conclusions Recommendations for Executive Action Agency Comments
and Our Evaluation

                                       1

                                      2 4

                                       8

13

17 22 23 24

Appendix I 	GAO Adjustments for Errors, Omissions, and Inconsistencies in
Military Departments' 50-50 Data for Fiscal Year 2003

Appendix II Scope and Methodology

Appendix III Comments from the Department of Defense

Related GAO Products

  Tables

Table 1: DOD's Reported Depot Maintenance Funding Allocations 7 Table 2:
GAO's Changes to the Army's FY 2003 50-50 Data 26 Table 3: GAO's Changes
to the Navy's and Marine Corps' FY 2003

50-50 Data 27 Table 4: GAO's Changes to the Air Force's FY 2003 50-50 Data
29

Abbreviations

DOD Department of Defense
GAO Government Accountability Office
OSD Office of the Secretary of Defense

This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
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separately.

United States Government Accountability Office Washington, DC 20548

September 29, 2004

The Honorable John W. Warner
Chairman
The Honorable Carl Levin
Ranking Minority Member
Committee on Armed Services
United States Senate

The Honorable Duncan Hunter
Chairman
The Honorable Ike Skelton
Ranking Minority Member
Committee on Armed Services
House of Representatives

Under 10 U.S.C. 2466, not more than 50 percent of annual depot
maintenance funding provided to the military departments and
defense agencies can be used for work accomplished by private-sector
contractors. Section 2466 also directs the Department of Defense (DOD)
to submit two annual reports to the Congress on the distribution of depot
maintenance funding between the public and private sectors. The first
report is to identify the percentage of funds expended by each military
department and defense agency during the preceding 2 fiscal years for the
performance of depot maintenance workloads by the public and private
sectors (known as the "prior-years report"). The second report is to
project the same information for the current and 4 succeeding fiscal years
(known as the "future-years report"). For 2004, DOD issued the prior-years
report on February 17, 2004, and the future-years report on April 6, 2004.

Section 2466 also requires us to submit our views to the Congress on
whether DOD complied with the so-called "50-50 requirement" in the
prior-years report and whether the projections in the future-years report
are reasonable. Accordingly, this report discusses whether (1) the
military
departments met the 50-50 requirement for fiscal years 2002 and 2003 and
(2) the projections for fiscal years 2004 through 2008 represent
reasonable
estimates. As part of our work, we also identified limitations in the
50-50
process that affect the quality of DOD's reporting.

To accomplish these objectives, we analyzed the reported 50-50 data and
each service's procedures and internal management controls for

  Results in Brief

collecting, aggregating, and validating depot maintenance information for
responding to the section 2466 requirements. We limited our analysis of
future-years data because initial audit efforts identified significant
recurring problem areas, similar to those found in prior audits, which are
not likely to change. While DOD's data cannot be relied on to provide a
precise measure of the funding between the public and private sectors, the
data, along with our adjustments, provide a rough approximation of the
allocations and some trends that may be useful to the Congress in
exercising its oversight role and to DOD officials in managing the depot
maintenance program. We conducted our review from February 2004 to July
2004 in accordance with generally accepted government auditing standards.
(See app. II for the details of our scope and methodology.)

Recurring weaknesses in DOD's data gathering, reporting processes, and
financial systems prevented us from determining with precision whether the
services were in compliance with the 50-50 requirement for fiscal years
2002 and 2003. DOD's data as submitted to the Congress show that the
military departments were below the 50 percent funding limitation on
private-sector work. However, as in past years, we found significant
errors and omissions in the data, which, if corrected, would overall
increase the percentages of funding going to the private sector and move
each department closer to the limit on private-sector funding. For
example, in its data for fiscal year 2003, the Navy, including the Marine
Corps, reported private-sector maintenance funding at 44.5 percent, but
our adjustments for errors moved the private-sector funding to 47.9
percent. Identified weaknesses indicate that the data in the prior-years
report cannot be relied on to provide a precise measure of the balance of
funding between the public and private sectors for the military
departments. At best, DOD's reported data-even with our
adjustments-provide only rough approximations of the past public-private
funding allocations, with some indications of trends that may be useful
information to the Congress in exercising its oversight role and to DOD
officials in managing the depot maintenance program. We also observed
that, even with a substantial increase in depot maintenance funding for
fiscal year 2003, workload at the military departments' public depots did
not significantly increase. For example, our analysis of the increased
funding from fiscal year 2002 to fiscal year 2003 showed that 81 percent
of the $710.6 million increase in funding for the Army went to its public
depots, but the depots' workload increased by only 6.3 percent. Navy and
Air Force public depots had a similar trend.

Because some data errors and omissions in DOD's prior-years report are
carried into future years and because of the difficulty in projecting
outyear data because of factors such as changing depot maintenance
requirements and fluctuations in budget estimates, the future-years report
does not represent reasonable estimates of public-and private-sector depot
maintenance funding allocations for fiscal years 2004 through 2008. These
factors limit the usefulness of the future-years report to congressional
and DOD decision makers. We have reported these shortcomings with the
future-years report in the past, and the problems continue to occur. While
limitations affect the usefulness of the futureyears report as a predictor
of actual funding allocations, the current future-years report shows that
the Navy and the Air Force are predicting more funding for the public
sector and less for the private sector. Errors and omissions could change
this trend, as both services are close to the threshold for private-sector
funding. For example, while the Navy projects that its funding for fiscal
year 2004 for the private sector will be at 49 percent, the affect of the
adjustments we made to the Navy's fiscal year 2003 data, when carried
forward along with not reporting its supplemental funding for 2004, could
cause the Navy to reach the limitation on 50-50. The Air Force has in
prior years required a waiver of the 50 percent limitation under 10 U.S.C.
2466, and Navy officials are aware of the potential to exceed the limit
for fiscal year 2004. Additionally, increasing contractor maintenance
operations supporting the Army in Iraq could result in the Army's
exceeding the 50 percent threshold. The extent of the percentage
adjustments we find each year would indicate that DOD cannot afford to
wait until the services reach the 50 percent limit before formulating a
plan to avoid exceeding the threshold for private-sector funding. Because
of the limitations of the future-years report, the Congress has proposed
in the Ronald W. Reagan National Defense Authorization Act for Fiscal Year
2005 amending section 2466(d) to require only one annual report from DOD
containing the percentage of funds expended during the preceding fiscal
year and projected to be expended for the current and next fiscal years.
This action would not affect the need for DOD and the services to have a
plan to mitigate the potential of exceeding the 50 percent limit for
private-sector funding as the military departments approach the threshold.

DOD's improvements in 50-50 guidance and operating processes have not
improved significantly in recent years, and several limitations in the
50-50 process continue to affect the quality of DOD's 50-50 reporting.
First, three of the four military services did not have an independent
review and validation of their 50-50 data. Second, training for those who
are responsible for collecting, aggregating, and reporting 50-50 data was

Background

limited and sporadic. Third, management's emphasis regarding the need for
accurate and complete 50-50 reporting was lacking.

We are making recommendations to DOD for improving the 50-50 data
gathering and reporting process (1) so that the 50-50 reports submitted to
the Congress are more useful to decision makers and (2) to help ensure
continued compliance with 10 U.S.C. 2466. In written comments on a draft
of this report, DOD concurred with our recommendations and cited actions
the department will take. The department's comments are included in
appendix III.

In addition to the 50-50 requirement in 10 U.S.C. 2466, two other title 10
provisions directly affect the reporting of workload allocations to the
public and private sectors.

o  	Section 2460 defines depot maintenance to encompass material
maintenance or repair requiring the overhauling, upgrading, or rebuilding
of parts, assemblies, or subassemblies and the testing and reclamation of
equipment, regardless of the source of funds or where maintenance or
repair is performed. Depot maintenance also encompasses software
maintenance, interim contractor support,1 and contractor logistics
support2 to the extent that work performed in these categories is for
depot maintenance. The statute excludes from depot maintenance the nuclear
refueling of an aircraft carrier; the procurement of major modifications
or upgrades of weapon systems that are designed to improve program
performance; and the procurement of parts for safety modifications,
although the term does include the installation of parts for safety
modifications.

o  	Section 2474 directs DOD to designate public depots as Centers of
Industrial and Technical Excellence and to improve their operations to
serve as recognized leaders in their core competencies.3 Section 342 of
the

1 Interim contractor support is designed to be an interim support
arrangement in which a contractor provides depot maintenance (and
sometimes other logistics support) as part of the acquisition strategy for
new systems.

2 Contractor logistics support is designed to be a lifetime support
concept in which a contractor provides most or all elements of logistics
support, including depot maintenance.

3 Core competencies are depot-level maintenance capabilities to be
retained in public depots to meet DOD's strategic and contingency plans
and for which the military departments believe that DOD should be a
recognized leader in the national technology and industrial base.

National Defense Authorization Act for Fiscal Year 2002 (Pub. L. No.
107107, Dec. 28, 2001) amended this statute to exclude qualifying
publicprivate partnerships4 from the 50 percent funding limitation on
contracting

in section 2466. Section 342 provides that the funds expended for the
performance of depot-level maintenance by nonfederal government personnel
located at the centers shall not be counted when applying the 50 percent
limitation if the personnel are provided pursuant to a publicprivate
partnership. This exclusion initially applied to depot maintenance funding
for fiscal years 2002 through 2005. Section 334 of the National Defense
Authorization Act for Fiscal Year 2003 (Pub. L. No. 107-314, Dec. 2, 2002)
extended this period to include all contracts entered into through fiscal
year 2006. Proposed legislation (S. 2400, section 333, as reported by the
Senate) would, if adopted, extend the period for the exclusion of the
reporting of this contractor work through 2009.

The Office of the Secretary of Defense (OSD) has issued guidance to the
military departments for reporting public-private workload allocations.
The guidance is consistent with the definition of "depot-level maintenance
and repair" in 10 U.S.C. 2460.5 The military departments have also issued
internal instructions to manage the data collection and reporting process,
tailored to their individual organizations and operating environments.

Pursuant to the congressional mandate regarding the DOD 50-50 requirement,
this is the 7th year that we have reported on the prior-year numbers and
the 5th year reporting on the future-year numbers.6 In past years, we have
reported on continuing data errors and inconsistencies in

4 DOD guidance defines a "public-private partnership" for depot
maintenance as an agreement between a public-sector depot maintenance
activity and one or more privateindustry or other entities to perform work
or utilize facilities and equipment. Such an arrangement includes the use
of public facilities, equipment, and employees to perform work for the
private sector under certain defined circumstances; private-sector use of
public-sector equipment and facilities to perform work for the public
sector; and worksharing agreements using both public-and private-sector
facilities and/or employees.

5 Because of the difficulty of segregating installation costs for safety
modifications from costs for installing other modifications (e.g., for
improved performance), OSD's guidance specifies that all modification
installation costs be reported when an installation is considered to be a
depot-level service.

6 For the two most recent reports, see GAO, Depot Maintenance: DOD's 50-50
Reporting Should Be Streamlined, GAO-03-1023 (Washington, D.C.: Sept. 15,
2003) and GAO, Depot Maintenance: Change in Reporting Practices and
Requirements Could Enhance Congressional Oversight, GAO-03-16 (Washington,
D.C.: Oct. 18, 2002). Other related GAO products are listed at the end of
this report.

reporting by the military departments and problems in documenting and
independently validating 50-50 data.

                            Summary of Data in DOD's
                           Most Recent 50-50 Reports

Table 1 provides a consolidated summary of DOD's 2004 prior-years and
future-years reports to the Congress on public- and private-sector funding
allocations for depot maintenance. The amounts shown are DOD's record of
actual obligations incurred for depot maintenance work in fiscal years
2002 and 2003 and projected obligations for fiscal years 2004-8 based on
the defense budget and service funding baselines.7 The percentages show
the department's record of the relative allocations between the public and
private sectors and the exempted workloads. Adding the public, private,
and private-exempted percentages together provides a total picture of
DOD's depot maintenance funding. Also, adding the private and
privateexempted percentages shows what the private-sector amount would
have been reported as, absent the recent legislation to exempt qualified
partnership workload.

7 Although 10 U.S.C. 2466 specifies the reporting of funds expended in
prior years and projected to be expended in future years, DOD's past and
current 50-50 reports are based on obligation data. A DOD official
explained that obligation data are considered to be more appropriate
because of the statutory requirement to report funds made available in a
given fiscal year and because expenditure data may not be completely
recognized in the accounting records for a year or more following the
funds' obligation.

         Table 1: DOD's Reported Depot Maintenance Funding Allocations

Dollars in millions

Military
department Prior fiscal years Future fiscal years

2002 2003 2004 2005 2006 2007

Army Navy/Marine Corps

        Public        $1,357  $1,932  $2,354  $2,402  $2,467  $2,495   $2,196 
                      49.6%    56.0%   53.6%   57.0%   54.9%   56.6%    56.9% 
        Private       $1,304  $1,273  $1,919  $1,691  $1,912  $1,803   $1,574 
                      47.6%    36.9%   43.7%   40.1%   42.5%   40.9%    40.8% 
    Private exempta    $76     $243    $117    $124    $114    $112       $91 
                       2.8%    7.1%    2.7%    2.9%    2.5%    2.5%      2.4% 
         Total        $2,737  $3,448  $4,390  $4,217  $4,493  $4,410   $3,861 

        Public        $5,258  $6,235  $4,560  $4,845  $4,842  $5,471   $4,813 
                      54.2%    54.7%   50.5%   51.3%   53.2%   57.1%    56.5% 
        Private       $4,206  $5,080  $4,434  $4,560  $4,235  $4,067   $3,664 
                      43.4%    44.5%   49.1%   48.3%   46.5%   42.5%    43.0% 
    Private exempta    $236     $91     $34     $32     $33     $35       $37 
                       2.4%    0.8%    0.4%    0.3%    0.4%    0.4%      0.4% 

        Total       $9,700  $11,406   $9,028  $9,437  $9,109  $9,572   $8,514 
      Air Force                                                       
        Public      $4,482   $5,004   $5,607  $5,744  $5,906  $6,040   $6,164 
                     54.0%   52.0%    54.9%    56.2%   56.6%   55.3%    54.5% 
       Private      $3,779   $4,583   $4,593  $4,458  $4,509  $4,860   $5,131 
                     45.5%   47.7%    45.0%    43.6%   43.2%   44.5%    45.3% 
Private exempta    $38     $27         $14     $20     $24     $25     $25 
                     0.5%     0.3%     0.1%    0.2%    0.2%    0.2%      0.2% 
        Total       $8,299   $9,614  $10,213  $10,222 $10,438 $10,925 $11,320 

Source: DOD.

aThe provision in 10 U.S.C. 2474 to exempt qualified public-private
partnerships from the 50 percent funding limitation began with the 2002
reporting year and is now continued for all contracts entered into through
fiscal year 2006. DOD interpreted this to mean that exemptions should also
be reported for fiscal years 2007 and 2008 for contracts initiated in
fiscal years 2002 through 2006.

    Limitations on Use of 50-50 Data As Reported by DOD

  Recurring Weaknesses in Data Preclude Determinations of Compliance in
  Prior-Years Report with Precision

DOD's 50-50 data with GAO's adjustments provide a rough approximation of
the allocation of depot maintenance funding between the public and private
sectors. In this regard, it is useful information to the Congress in
exercising its oversight role and to DOD officials in managing the depot
maintenance program. However, our prior reports have recognized the
limitations of DOD's financial systems, operations, and controls. Our
audits of DOD's financial management operations have routinely identified
pervasive weaknesses in financial systems, operations, and internal
controls that impede the department's ability to provide useful, reliable,
and timely financial information for day-to-day management and decision
making. In the financial management systems area, DOD continues to
struggle in its efforts to implement systems to support managerial
decision making. As we have reported, DOD can ill afford to invest in
systems that are not capable of providing DOD management with more
accurate, timely, and reliable information on the results of the
department's business operations.8

To date, none of the military services have passed the test of an
independent financial audit. A continuing inability to capture and report
the full cost of its programs represents one of the most significant
impediments facing DOD. Nonetheless, the data used to develop the 50-50
report are the only data available and are accepted and used for DOD's
decision making and for congressional oversight.

Recurring weaknesses in DOD's data gathering, reporting processes, and
financial systems prevented us from determining with precision whether the
services were in compliance with the 50-50 reporting requirement for
fiscal years 2002 and 2003. DOD's prior-years report for fiscal years 2002
and 2003 as submitted to the Congress in February 2004 shows the
Departments of the Army, Navy, and Air Force to be below the 50 percent
funding limitation on private-sector workloads for both years. The net
effects of correcting for the errors and omissions we identified would
increase the percentages of workload going to the private sector and move
each department closer to the contract limit. Appendix I shows the amounts
and effects of our adjustments to the reported data submitted by the
military departments for fiscal year 2003 and provides a description of
the major deficiencies we found.

8 See GAO, Department of Defense: Status of Financial Management
Weaknesses and Progress toward Reform, GAO-03-931T (Washington, D.C.: June
25, 2003).

Our analysis of DOD's reported depot maintenance funding for 2003 when
compared with the previous year revealed interesting information about the
mix of funding and workload. While there were significant increases in
depot maintenance funding for each of the services over this period, this
large funding increase did not result in significant increases in the
amount of work performed in the military depots, as discussed in each of
our discussions of the services' data.

    Army Reported Private-Sector Funding below 50 Percent Limit

Although the Army reported that its private-sector funding was below the
50 percent limit for both fiscal years 2002 and 2003, as in prior years,
we continued to find errors, omissions, and inconsistencies in the Army's
data.9 On the basis of the specific errors we identified, these errors
would add about $408 million in total to the Army's public-and
private-sector workloads in fiscal year 2003; the net effect of correcting
for these errors would add 5.8 percent to the private-sector percentage
allocation in fiscal year 2003. (See table 2 in app. I.)

For the prior-years report, the Army underreported funds received for
depot maintenance in the supplemental appropriations for fiscal year 2003.
Also, the Army continued to underreport public-and private-sector
depotlevel maintenance work at field locations, as it continued unfinished
efforts to consolidate maintenance activities and better control the
proliferation of depot-level tasks at nondepot locations. A unit from the
European Command, deployed to support the war in Iraq, did not report any
50-50 data. Staff turnover continued at the reporting commands, and
unfamiliarity with the 50-50 requirements contributed to increased errors.
For example, the errors we found in the Training and Doctrine Command's
50-50 data were directly related to a staff change in late 2003 after the
Command's longtime reporting official retired and was replaced with a new
person who was unfamiliar with 50-50 reporting requirements.

Increase in Depot While there was an over $700 million increase in depot
maintenance Maintenance Funding funding in the Army from fiscal year 2002
to fiscal year 2003, this increase Did Not Result in Large did not
translate into a significant increase in the amount of work Increase in
Work at performed in Army depots.

    Army Depots

9 GAO-03-16.

The Army's data for fiscal year 2003 showed an increase of $710.6 million
over the amount of funding reported for fiscal year 2002. About 81 percent
of this funding increase was reported as going to the Army depots,
suggesting that the depots might have received a substantial workload
increase. Our analysis of direct labor hours executed at the depots,
including overtime, during fiscal years 2002 and 2003 showed only a 6.3
percent increase. The price charged for depot maintenance work increased
7.4 percent. Army depot managers told us that the primary factors
increasing the depots' work were the Army's recapitalization program and
support for the war in Iraq. However, as one Army depot manager pointed
out, the supplemental appropriation for fiscal year 2003 was received too
late in the year to have a significant affect on the depots' workload
during that year. The additional funding late in 2003 allowed the depots
to order parts for work that would be done during 2004. Army depot
managers also said that factors such as increased costs for material and
depot revenues that exceeded budget plans in prior years affected the
price charged for depot maintenance.

    Navy Reported Private-Sector Funding below 50 Percent Limit

Although the Navy (including the Marine Corps) reported that its
private-sector funding was below the 50 percent limit for both fiscal
years, we found errors in the Navy's and Marine Corps' data, and we found
that the total dollar amount of errors affected the data for the private
sector more than the public sector. Correcting for the errors we found
increased the percentage share in fiscal year 2003 for the private sector
from 44.5 percent to 47.9 percent-a gain of 3.4 percent. (See table 3 in
app. I.)

We evaluated the Navy's and Marine Corps' data separately, since these
services have different processes. For the Navy, we identified several
problems that carried over from prior years' 50-50 efforts. The Navy did
not report any depot maintenance work accomplished along with the nuclear
refueling of its aircraft carriers, citing the exclusion of nuclear
refueling from the 10 U.S.C. 2460 definition of "depot maintenance." We
continue to believe that depot repairs not directly associated with
refueling tasks should be reported because these kinds of repair actions
are reported by other organizations and funding for these tasks is
identifiable in contracts and financial systems. The Navy also continues
to inconsistently report inactivation activities that involve the
servicing and preservation of systems and equipment before they are placed
in storage or in an inactive status. Officials report public-sector
funding for inactivation activities on nuclear ships but do not report
such work on nonnuclear ships, saying that the workload for the former is
complex while the workload for the latter is not. However, we believe all
such

depot-level work should be counted, since the statute and implementing
guidance do not make a distinction based on complexity. These two examples
would add about $410 million to the private-sector funding in fiscal year
2003.

We also determined that about $179 million of intermediate maintenance
workloads was incorrectly added to the public sector and that data for
both the public and private sectors contained errors in reporting along
with the underreporting of workloads.

For the Navy only, correcting for the errors we found increased the
private-sector percentage share in fiscal year 2003 from 45.8 percent to
49.1 percent-a gain of 3.3 percent.

Compared with the other services, the Marine Corps has a small depot
program, but its reporting errors are relatively higher. For example, as
in prior years, our review of the Marine Corps' 2003 data found that it
understated the private-sector total for fiscal year 2003 by about $35
million-about 50 percent. We also identified other errors, including about
a $6.7 million overstatement of the private sector when a reporting
official incorrectly included obligations from fiscal year 2002 in the
total for fiscal year 2003. A key contributor to this high error rate is
the piecemeal reporting process that the Marine Corps follows at its
command responsible for acquiring and upgrading Marine Corps weapon
systems, whereas this year, weapon systems managers submitted more than
150 individual responses. Marine Corps officials responsible for the 50-50
report said that, as a major component of the Marine Corps' funding for
the private sector, a consolidated report from this command would enhance
its oversight of the 50-50 reporting process and help eliminate some of
the errors and omissions in the Marine Corps' 50-50 data. Staff turnover
at the command's focal point for the 50-50 process also continues to be an
issue affecting the reporting of the 50-50 data. For example, in each of
the past 3 years, the focal point has changed and, at the time of our
review, another change was scheduled for next year.

Increase in Maintenance The Navy's data for fiscal year 2003 showed an
increase of $1.6 billion over Funding Did Not Create the amount of funding
reported for fiscal year 2002. About 52 percent of Significant New Work in
this funding increase was reported as going to Navy aviation depots and

shipyards and other government activities. As with the Army, this
funding2003 for Navy and Marine increase suggests that the Navy's depot
maintenance activities might haveCorps Depots received a substantial
workload increase. Our analysis of direct labor

hours executed at the aviation depots, including overtime, during fiscal

years 2002 and 2003 showed an increase of 4 percent. The price charged for
depot maintenance work increased 9 percent. For the four Navy shipyards
combined, direct labor hours decreased 2 percent, while prices for depot
maintenance work increased from 5 to 9 percent at three of the four
shipyards. Comparable pricing data for the Pearl Harbor shipyard were not
readily available. Navy aviation depot managers told us that most of the
increase in direct labor hours was due to increased demand for the
production of components, mandatory-completion-date aircraft, and
mission-critical engines in support of the Global War on Terrorism. The
primary factors increasing the depots' price for maintenance work included
the recoupment of prior years' losses caused primarily by increased costs
of material. Navy shipyard managers said that a number of factors can
affect direct labor hours such as the differences in the number of ship
availabilities for the fiscal years and changes in the amount of work that
is done on the available ships. They also said that the increased contract
work at the shipyards was the primary factor for the increased price for
depot maintenance work.

For fiscal year 2003, the Marine Corps reported an increase in funding of
about $150 million for the public sector and a corresponding decrease in
funding of about $22.7 million for the private sector . In analyzing the
change in direct labor hours executed by its two maintenance depots during
fiscal years 2002 and 2003, we observed that total hours decreased by
about 0.7 percent, while the price for maintenance work increased by about
11 percent. The Marine Corps' depot managers said that the decrease in
labor hours resulted from a combination of problems in obtaining some
materials needed to produce the work and receiving the supplemental
appropriation too late in the year to start up additional work. Also, they
said that the price increase was due largely to the declining workload and
increased costs of materials.

    Air Force Reported Private-Sector Funding below 50 Percent Limit

The Air Force reported that its private-sector funding was below the 50
percent limit for fiscal years 2002 and 2003. While we identified errors
in the amounts reported for programs supported by contractor logistics
support contracts and in the amount of private work exempted, the errors
were smaller than those for the other services. In total, the net effect
of the errors we found would increase the private-sector percentage share
in fiscal year 2003 from 47.7 percent to 48.2 percent-a gain of 0.5
percent. (See table 4 in app. I.)

The errors we found in this year's assessment resulted from a disconnect
between the reporting centers and the Air Force's 50-50 coordinator in

transposing reported data from an old automated database to a new one for
compiling the final report. Also, as with past reviews, the Air Force
continues to adjust its reporting for contract administration and
oversight costs. The adjustment increases the reported funding for the
public-sector funding and decreases the funding for the private sector.
The total adjustment was $44 million for fiscal year 2003. Consistent with
the 50-50 guidance, which states that costs should be associated with the
end product (i.e., the repaired item), we think these costs should instead
be treated as contracting expenses. Accordingly, we reversed this
adjustment in our analysis.

    Depot Maintenance Funding Increase Resulted in Little Additional Work for
    Air Force Depots

The Air Force reported a funding increase of $1.3 billion from fiscal year
2002 to fiscal year 2003. About 40 percent of this funding increase went
to Air Force depots, but the number of direct labor hours executed at the
depots, including overtime, during fiscal years 2002 and 2003 increased
only about 0.5 percent. At the same time, the prices charged for depot
maintenance work increased 14 percent. An Air Force official told us that
supplemental funds received in July 2003 were used to pay for costs
already incurred, not for new work. We reported recently that the price of
depot maintenance work performed in Air Force depots increased by 98
percent from fiscal year 2000 to fiscal year 2004. We also reported that
the increased cost of material accounted for about 67 percent of the total
cost increase.10

  Future-Year Projections Do Not Provide Reasonable Estimates of Publicand
  Private-Sector Funding

As in the past, DOD's latest future-years report does not provide
reasonable estimates of public-and private-sector depot maintenance
funding allocations for fiscal years 2004 through 2008 because the
future-year projections were based on (1) incorrect data and questionable
assumptions and (2) internal and external factors, which create
fluctuations in reported data. As a result, the future-years report
provides limited usefulness to the Congress or to DOD decision makers.
Despite these limitations, our analysis shows that the Navy and Air Force
are moving closer to the threshold for private-sector funding and
increased contractor maintenance to support ongoing combat operations and
that reconstitution efforts in the Army could cause the Army to exceed the
threshold. A plan to identify actions that would be taken to avoid

10 See GAO, Air Force Depot Maintenance: Improved Pricing and Cost
Reduction Practices Needed, GAO-04-498 (Washington, D.C.: June 17, 2004).

breaching the 50-50 threshold for private-sector funding would help the
military departments better manage their compliance with the 50-50
requirement. The Congress is considering amending the 50-50 legislation to
require a single report that would include data for years for which data
are more reliable and potential affects more immediate.

    Projections Based on Incorrect Data and Questionable Assumptions

For this year's future-years report, the projections are based, in part,
on incorrect data and questionable assumptions regarding future plans for
depot support. The net effect of the problems we found generally increases
the percentage of funding for projected private-sector work. Some of the
same problems identified in the data for prior-years were continued in the
future-years projections. For example, the Army did not include the $1.2
billion for its supplemental appropriation for depot maintenance in fiscal
year 2004 and could not explain why projected funding for the National
Guard dropped for fiscal year 2008 to about $20 million while steadily
increasing from $315 million for fiscal year 2005 to $371 million for
fiscal year 2007. Similarly, in its respective projections, the Navy
continued not to report depot maintenance accomplished with, but not
directly related to, nuclear refueling and the Marine Corps' adjustments
to its future-year projections were based on "best guess" estimates with
no supporting documentation. As we have reported in the past, the services
tend to place less emphasis and priority on collecting and validating the
future-years data compared with their efforts with the prior-years data.

    Internal and External Factors Can Create Fluctuations in Reported Data

Besides errors in reporting, other internal and external factors can
create fluctuations with reported data, which in turn can provide a
distorted and misleading view to outside observers about efforts to remain
compliant with the 50-50 requirement. For example, in the current
future-years report, the Air Force's projected public-sector work financed
through the working capital fund is about $1.2 billion higher for fiscal
year 2008 than the amount reported for fiscal year 2003-about a 23 percent
increase. For the same time period, projections are that funding for the
private sector would increase about $547.5 million, for an increase of
only 11.9 percent. Although this would appear to indicate a shifting of
work to the public depots, an Air Force official responsible for the
future-years report said that, in reality, the increased projections for
the public sector were due to price increases for depot maintenance work
affected primarily by the increased costs for materials.

    Errors and Omissions in Future-Years Report Limit Its Usefulness

The uncertainty and instability of budget estimates combined with the
errors and omissions we found result in a future-years report that is not
very reasonable or useful to congressional and DOD decision makers,
particularly, the further that the estimates are in the future. The
futureyears estimates are not reasonable because they represent budget and
planning data that change over time, incorporate the same errors found in
prior-years data, and also have other problems. The budget and planning
data used to project the share of depot maintenance work to be performed
in the public and private sectors in the future are estimates. At best,
they provide only rough estimates of future funding allocations, and these
estimates change over time. While we have identified these shortcomings in
the past, the problems continue and show no signs of improving.

    Services Moving Closer to Threshold for Private-Sector Funding

While the reported data have limitations that affect their usefulness as a
predictor of actual funding allocations, our analysis of DOD's 50-50 data
for fiscal years 2004-8 shows that the services are predicting that they
would not reach the threshold for private-sector funding. However, for
each year that we have reviewed the services' 50-50 data, our adjustments
to the data have moved the military departments closer to the 50 percent
limitation than had been reported.11

This year, with our adjustments to their 50-50 data for fiscal year 2003,
the Navy's, including the Marine Corps', and the Air Force's funding for
the private sector was about 48 percent for fiscal year 2003. Both
services' future-years projections are for a steady decease in funding for
the private sector with a general increase in funding for the public
sector. But changes, errors, or omissions could change this trend. For
instance, the Navy, including the Marine Corps, is projecting that its
fiscal year 2004 funding for the private sector will be at 49 percent, but
its projection does not consider the affect of the adjustments we made to
the Navy's data for fiscal year 2003, or $493 million in supplemental
funds that were not included in the Navy's fiscal year 2004 projection.
These errors, when carried forward, plus the unrecognized supplemental
funding would cause the Navy to reach the 50-50 limitation. The Air Force
has in prior years exceeded the 50 percent threshold for private-sector
funding, and Navy officials are aware of the potential to exceed the
threshold for fiscal year

11 Except that for 2 years, the Air Force reported that it exceeded the 50
percent limit and obtained a waiver, as permitted by 10 U.S.C. 2466.

2004.12 Reported future-year data for the Army show the Army with adequate
headroom. Although the Army believes it will not exceed statutory
limitations over the next few years, increased contractor depot
maintenance operations on U.S. military bases, in contractor plants, and
overseas bases to support ongoing Army military operations as well as
reconstitution activities could cause the Army to exceed statutory limits
in the future. Looking back, since 1998-the first year we reported on
DOD's 50-50 data-our adjustments to DOD's 50-50 data have consistently
shown that the amount of private-sector funding has been underreported by
the services.

To help monitor compliance with the 50-50 requirement, the Air Force has a
process to track and manage its depot maintenance workload distribution.
As the Air Force found in exceeding the 50 percent threshold, the amount
of work going to public depots cannot be easily increased by a significant
amount in a short amount of time. Thus, since it exceeded the threshold in
2000 and 2001, the Air Force has used a buffer of 2 percent prior to
reaching the 50 percent limitation as a point where it would begin
identifying actions that are needed to influence maintenance sourcing
decisions to help ensure continued compliance. According to the Air
Force's 50-50 coordinator, 2 percent represents a buffer of about $160
million and allows sufficient time to make maintenance sourcing decisions
to move workloads or assign new workloads appropriately to support
continued compliance. An OSD representative responsible for the 50-50
guidance agreed that 2 percent appears to be a practicable point to
trigger action from the services to avoid exceeding the 50 percent
threshold.

With regard to having a point that the services would use to identify
actions to help them remain compliant, OSD does not require the services
to formally establish a plan of action or to notify OSD of the specific
actions and decisions that they would undertake to remain compliant with
the 50 percent threshold for private-sector funding. Thus, OSD has no
formal means for (1) knowing whether the services have recognized the need
to develop plans to remain compliant with the 50 percent limitation on
private-sector funding or (2) encouraging the services to take timely
actions to avoid being noncompliant. The issue of having the services
undertake timely planning and prompt actions to avoid being

12 The Air Force reported itself as exceeding the 50 percent limit in
fiscal years 2000 and 2001, and a notice of waiver was duly issued to the
Congress.

noncompliant becomes even more essential, considering that our analyses
historically have generally shown that the services underreported the
percentage of private-sector funding-indicating that the services are
closer to the threshold than they have been reporting.

    Proposed Legislation Would Require a Single Report

  Several Key Limitations Affect the Quality of DOD's 50-50 Reporting

Because of the limitations of the future-years report as an accurate
predictor of depot maintenance funding allocation, we recommended last
year that the Congress consider amending 10 U.S.C. 2466 to require only
one 50-50 report.13 The single report would cover a 3-year period (prior
year, current year, and budget year), for which data are more reliable and
the potential affects more immediate. In the Ronald W. Reagan National
Defense Authorization Act for Fiscal Year 2005, the Congress has proposed
amending section 2466(d) to require only one annual report from DOD
containing the percentage of funds expended during the preceding fiscal
year and projected to be expended for the current and next fiscal years.14
Both the House and Senate versions of the 2005 Defense Authorization Bill
contain versions of this proposal. The adoption of a variation of this
proposal would not affect DOD's and the services' need for planning to
mitigate the potential of exceeding the 50 percent threshold for
private-sector funding.

DOD's improvements in 50-50 guidance and operating processes have not
advanced significantly in recent years, and key limitations remain in the
50-50 process that affect the quality of DOD's 50-50 reporting. First,
three of the four military services did not have an independent review and
validation of their 50-50 data prior to submission to the Office of the
Secretary of Defense, while the fourth had only a limited review. Second,
training for those who are responsible for collecting and aggregating
50-50 data was limited and sporadic. Third, management emphasis regarding
the need for accurate and complete reporting was lacking.

13 GAO-03-1023. 14 S. 2400, section 331 and H.R. 4200, section 321.

    Lack of Independent Review and Validation of 50-50 Data Contributes to Data
    Quality Problems

Without independent review and validation, DOD's 50-50 quality problems
continue. As we noted in our 50-50 report for 2003, the overall quality of
DOD's reporting in terms of accuracy and completeness has not improved
significantly in recent years.15 We recommended that, to further enhance
data verification and validation, the Secretary of Defense require the
Secretaries of the military departments to direct the use of service audit
agencies, or an agreed-upon alternate method, for third-party review and
validation of 50-50 data and to ensure that auditor-identified errors in
the data are rectified before reports are submitted to the Congress. While
DOD's 50-50 guidance for this year's 50-50 reports directed the military
departments to implement this recommendation, only the Navy took action
for an independent review and validation of its 50-50 data.

As we previously reported, we believe that independent review and
validation of the 50-50 data could help the military departments improve
their 50-50 reporting. For example, service audit agencies' involvement
typically identified and corrected substantial errors in the data before
the 50-50 reports went to the Congress. However, this year the Air Force
Audit Agency and the Army Audit Agency did not participate. Although the
Naval Audit Service suspended its 50-50 audit because of higher-priority
work, its work resulted in changes to the 50-50 data submitted to the
Congress. For example, in January 2004 the Naval Audit Service identified
over $90 million in errors and inconsistencies in the prior-year 50-50
data for selected activities at three major Navy commands, resulting in
changes to the reported data. Clearly independent review and validation
helps the military services improve the quality and completeness of the
50-50 data that are reported to the Congress. The Air Force's audit
service has opted out of the 50-50 review process, citing recent changes
to government auditing standards regarding auditor independence when
performing both audit and nonaudit management assistance services for the
same client.16 The Army Audit Agency said it was not asked to review the
Army's 2003 50-50 data. An Army Audit Agency official said that the agency
reviewed the Army's 50-50 data from 1998 to 2002, and there were open
recommendations from those audits that had not been implemented at the
time the Army's 2003 50-50 data were developed.

15 GAO-03-1023.

16 See revised standards in GAO, Government Auditing Standards: 2003
Revision, GAO-03-673G (Washington, D.C.: June 1, 2003).

As we have noted, we recognize that recent changes in government auditing
standards have been made to better address and specify independence issues
arising when an audit organization undertakes both audit and nonaudit
services for the same client. Nonetheless, the new auditing standards do
not preclude auditors from verifying the accuracy of data; providing other
technical assistance for the 50-50 process; and accomplishing other audits
of the depot maintenance process, programs, and activities. Improved
planning, management involvement, and documentation of roles and
responsibilities may be required, but a process can be developed to ensure
that independence will not be compromised. This has already been done so
that the services' audit agencies can perform similar functions-evaluating
validity and consistency of data as they are being developed for
subsequent decision making-in support of the base realignment and closure
process.

    Inadequate Staff Training Contributes to Errors and Inconsistencies in 50-50
    Data

During our review of the 50-50 reporting process, we observed that staff
training on 50-50 data gathering and reporting was limited and sporadic.
While three of the four military services provided some training, not all
staff responsible for 50-50 reporting had received this training.

We reported last year that, to ensure consistent and complete reporting,
the Secretary of Defense should require the Secretaries of the military
departments to ensure that 50-50 reporting guidance is appropriately
disseminated to reporting organizations and individuals and that staff are
properly and promptly trained in the application of the guidance.17 DOD's
50-50 guidance for this year's 50-50 reports directed the military
departments to implement this recommendation.

During our review of the 50-50 reporting process for this year, we
observed that, for the most part, reporting commands did receive the
guidance and that training was made available to staff with responsibility
for identifying and reporting 50-50 data. However, as previously
discussed, the services continue to experience turnover of personnel who
have responsibilities for developing and reporting 50-50 data, and new
staff were not always familiar with the data gathering and reporting
requirements. Examples follow:

17 GAO-03-1023.

o  	Army officials conduct an annual workshop on 50-50 requirements for
its reporting commands. However, at one command we visited, the reporting
official had not attended the workshop because she was assigned reporting
responsibility in October 2003-2 months after the annual workshop had been
conducted. She pointed out that her predecessor had retired shortly after
attending the workshop and she received very little training for her 50-50
data gathering and reporting requirements.

o  	Navy officials do not provide training conferences or workshops on
procedural requirements for the Navy's guidance to develop and report the
50-50 data. Primarily, reporting command coordinators are expected to
provide guidance on the requirements as they arise from the reporting
activities. During our review, we observed that several program offices
did not report 50-50 data accurately because reporting requirements were
not clearly understood and no inquiries were made to the reporting command
coordinators for clarification.

o  	Marine Corps officials facilitated a 1-day training conference in
August 2003 and January 2004 on the procedural requirements for its 2003
guidance to develop and report the 50-50 data. We found that, while the
number of reports regarding depot support increased, confusion still
existed regarding what should be reported. For instance, funds sent to
another service for depot maintenance support were not being reported in
accordance with OSD's 50-50 guidance because personnel responsible for
reporting thought the service receiving the funds should be the reporting
entity. The new 50-50 focal point for one reporting command said that the
August 2003 training might not have filtered down to the logisticians and
program managers who had direct responsibility for data development and
reporting and that he requested another session. He pointed out that the
January 2004 session was beneficial but was not timely, as the command's
reporting date for the 50-50 data was in January 2004.

o  	Air Force officials hold annual conferences primarily for the 50-50
points of contact at each center to learn from the previous reporting
cycle and to prepare for the next. These conferences are held at different
centers each year. However, not all personnel responsible for reporting
50-50 data at the program level are able to attend the conference because
of a lack of travel funds. Also, in discussing training needs at one
program office we visited, personnel said that they were not aware of the
annual conference and that training would be very helpful in understanding
the 50-50 reporting requirements.

    Lack of Management Emphasis Contributes to an Inaccurate, Incomplete 50-50
    Reporting Process

Management's emphasis at all levels in DOD is not sufficient to ensure
that the data are as complete and accurate as they can be. Our review
identified examples where management's emphasis on the 50-50 reporting
process was inadequate to promote accurate and complete reporting,
including the following:

o  	Army officials who compiled the Army's private work exemption for the
2003 prior-years report did not question the amount reported even though
the amount for 2003 varied from the amount reported in 2002 by more than
200 percent. In examining the supporting documentation, we found that the
correct amount for the exemption was $5.8 million-not the $243.2 million
that was reported-an error that possibly would have been corrected with an
emphasis on questioning significant variances from 1 year to the next. An
Army official told us that there is no management emphasis for questioning
data sources or amounts being reported.

o  	Navy officials rely primarily on command reporting coordinators to
review the program offices' data for accuracy. In conducting our review,
we found that, in some cases, the coordinators made inquiries to determine
whether the program offices understood the 50-50 reporting requirements,
depending on whether the data were suspect. In other instances, the
coordinators either answered questions as they arose from the program
offices or, if no questions were asked, accepted the 50-50 data without
further review. For instance, Navy officials generally accepted funds from
performance-based logistics contracts without determining whether all the
funds were used for depot-level maintenance. We found that some services
provided by these types of contracts were not for depot-level maintenance,
such as shipping, storage, and transportation, and should have been
excluded from the Navy's 50-50 data.

o  	Marine Corps officials responsible for compiling and submitting the
final report performed no examination to test the completeness or accuracy
of the reported data. In examining the final report along with the
supporting documentation, we observed a number of mechanical errors, such
as simple mathematical or transposition mistakes that probably would have
been corrected if management emphasized such an examination prior to final
submission to OSD.

o  	Air Force officials at reporting centers responsible for data
gathering and reporting and at headquarters responsible for submitting the
final report did no testing of the 50-50 data beyond that done by the Air
Force's 50-50 coordinator's examination for accuracy and completeness. Our
review showed that the errors we found might have been corrected if

Conclusions

management had required a review of the data for completeness and accuracy
before the final report was submitted to OSD.

As the military departments are moving closer to the 50 percent threshold
for depot maintenance funding performed by the private sector, special
emphasis is required for DOD and the services to undertake timely planning
and prompt action to help them remain compliant. The Air Force's
determination that special emphasis on depot maintenance sourcing
decisions is required whenever projections show that the Air Force is
within 2 percent of the 50 percent threshold for private sector funding is
a step in the right direction. Timely planning is necessary for DOD and
the services to take prompt actions such as identifying appropriate
workloads to be shifted to military depots and acquiring the capability to
perform them as a measure to prevent exceeding the 50 percent limit of 10
U.S.C. 2466. We believe that a 2 percent buffer is a reasonable point to
raise a flag of caution whenever the services are approaching the 50
percent threshold and to initiate plans that would help DOD and the
services avoid exceeding the threshold. Furthermore, as part of any
initiative to have the services better manage their distribution of depot
maintenance funding, we believe that the Office of the Secretary of
Defense should be fully aware of the services' potential to exceed the
threshold of 10 U.S.C. 2466 and be aware of the actions and decisions that
are being planned to mitigate this potential. A plan from each service
whenever it is within 2 percent of the 50 percent threshold would help OSD
monitor compliance and encourage the services to take prompt actions to
reduce the potential for exceeding the threshold.

Continuing errors and omissions in the data for both the prior- and
futureyears reports indicate that some level of error will always occur in
DOD's 50-50 data. Although our adjustments improved the quality of the
50-50 data, our review did not identify all the errors and omissions in
DOD's data. While recognizing this limitation, the data can be useful to
the Congress and DOD in overseeing and managing the DOD depot maintenance
system. Enhanced data verification and validation are possible through the
use of third-party review and validation before the reports are submitted
to the Congress. The services' audit agencies, that have done the
services' third-party review and validation in the past, or an agreed upon
alternate could be used for this purpose.

Limited and sporadic training for those responsible for collecting,
aggregating, and reporting 50-50 data and the lack of management attention
regarding the need for accurate and complete reporting present

continued challenges to the services in their ability to make significant
improvements to their collection, documentation, and reporting processes.
Unless all staff members are promptly and properly trained on the 50-50
requirements, systems, and processes and management's attention is focused
on the reporting process, the 50-50 reports generated by the services will
continue to have incomplete and inaccurate data.

Compared with the other services, the Marine Corps has a small depot
program, yet its reporting errors are relatively higher. A key contributor
to this high error rate is the piecemeal reporting process the Marine
Corps follows at its command responsible for acquiring and upgrading
weapon systems. Preparing a consolidated report from this command would
help the Marine Corps eliminate some of the errors and omissions in its
50-50 data.

Recommendations for 	We recommend that the Secretary of Defense take the
following four actions:

  Executive Action

o  	Direct the Secretaries of the military departments, within 30 days of
reporting 50-50 data indicating that past, current, or budget year data
are within 2 percent of exceeding the 50 percent threshold, to submit a
plan to the Office of the Secretary of Defense that identifies actions the
military department shall take to ensure continued compliance, including
the identification of decisions on candidate maintenance workload sourcing
that could be made to support remaining within the 50 percent threshold.

o  	Require the Secretaries of the military departments to direct the use
of the services' audit agencies or an agreed-upon alternate method for
third-party review and validation of 50-50 data and to ensure that
auditor-identified errors in the data are corrected before the data are
sent to the Congress.

o  	Direct the Secretaries of the military departments to emphasize that
individuals and staff receive proper and prompt training for 50-50 data
gathering and reporting and that management at all levels afford the 50-50
process the level of attention necessary to produce an accurate and
complete 50-50 report.

o  	Direct the Commandant of the Marine Corps to require the Marine Corps'
command responsible for weapon systems management to compile a
consolidated report on its depot maintenance funding allocation between
the public and private sectors.

  Agency Comments
  and Our Evaluation

The Deputy Under Secretary of Defense for Logistics and Materiel Readiness
provided written comments to a draft of this report. DOD generally
concurred with our recommendations and cited corrective actions it plans
to take. The department concurred in part with our first recommendation
and fully concurred with the other three.

Regarding its partial concurrence with our recommendation that would
require the military departments, within 30 days of reporting 50-50 data
within 2 percent of exceeding the 50 percent threshold, to submit a plan
to the Office of the Secretary of Defense identifying actions the military
departments shall take to ensure continued compliance with the 50-50
reporting requirements, DOD agreed that the 2 percent threshold is a
reasonable trigger point for additional oversight and management to ensure
compliance with the 50 percent threshold. According to the DOD response,
these measures are appropriately applied to current and budget year
reporting, but not to past year data, and the department will implement
the recommendation for current and budget year data. While we recognize
that past year data cannot be changed by any initiatives undertaken as a
result of reporting, the past year data can be an indicator of the future
unless actions are taken to change future workload assignments. The past
year data reflect the only actual 50-50 reporting results, with
projections used for both the current and budget year data. We have had
significant problems with 50-50 projections in the past. It is conceivable
that the past year data would indicate that a military department is over
the threshold in the prior year while the current and budget year
projections indicate that the military department is below the threshold.
Under this circumstance, it would appear reasonable to initiate actions to
make appropriate workload assignments that could help the military
department remain within the threshold for the current and budget years.
Thus, we continue to believe that the past, current, and budget year data
should be used as a trigger point to initiate additional oversight and
management.

DOD's written comments are reprinted in appendix III.

We are sending copies of this report to appropriate congressional
committees; the Secretary of Defense; the Secretaries of the Army, Navy,
and Air Force; the Commandant of the Marine Corps; and the Director,
Office of Management and Budget. We will make copies available to others
upon request. In addition, the report will be available at no charge on
the GAO Web site at http://www.gao.gov.

If you or your staff have questions regarding this report, please contact
me at (202) 512-8365 or [email protected] or Julia Denman, Assistant
Director, at (202) 512-4290 or [email protected]. Other major contributors
to this report were Vijaykumar Barnabas, Thomas Barger, Larry Junek,
Robert Malpass, Andy Marek, Renee McElveen, Enemencio Sanchez, John
Strong, Pamela Valentine, and Bobby Worrell.

William M. Solis Director, Defense Capabilities and Management

Appendix I: GAO Adjustments for Errors, Omissions, and Inconsistencies in
Military Departments' 50-50 Data for Fiscal Year 2003

Our review of the data supporting the Department of Defense's (DOD)
prior-years report identified errors, omissions, and inconsistencies that,
if corrected, would revise the total workloads and increase the
privatesector allocations for each of the military departments. Brief
descriptions of the larger and more extensive problems we found follow the
adjusted tables (2-4).

Our review of data for fiscal year 2003 reported by the Army and our
review of supporting documentation for selected activities identified
errors, omissions, and inconsistencies that, if corrected, would result in
greater adjustments in the public-and private-sector percentages reported
to the Congress, as shown in table 2.

  Department of the Army

Table 2: GAO's Changes to the Army's FY 2003 50-50 Data

                              Dollars in millions

                                Category     Allocation               Percent 
                    Public work reported      $1,932.1                  56.0% 
                         Net adjustments        136.5        
                    Public work adjusted      $2,068.6                  57.2% 
                   Private work reported       1,272.7                  36.9% 
                         Net adjustments        271.7        
                   Private work adjusted      $1,544.4                  42.7% 
                   Private work exempted        243.2                    7.1% 
                         Net adjustments       (237.4)       
                   Exempted private work                     
                                adjusted        $5.8                     0.2% 

Sources: DOD (data); GAO (analysis). Note: Numbers in parentheses are
negative. See limitation on data's reliability, page 31.

Errors we found included the following examples:

o  	Unreported depot-level work by the Soldier, Biological and Chemical
Command; FOX vehicle program office; and Aviation and Missile Command.

o  Overreported depot-level work by the Training and Doctrine Command.

o  	Reporting contract depot-level work as private work by National Guard
Bureau Aviation Classification Repair Activity Depots.

Appendix I: GAO Adjustments for Errors, Omissions, and Inconsistencies in
Military Departments' 50-50 Data for Fiscal Year 2003

o  	Incorrect exemption for private work by the Aviation and Missile
Command.

No data were available to quantify errors for the following:

o  	Unreported depot-level work associated with the Army's ongoing efforts
to consolidate maintenance activities and craft a national maintenance
program. Our prior 50-50 reports have documented recurring problems and
shortcomings in accurately and consistently reporting depot maintenance
accomplished by both public- and private-sector sources at nondepot
locations.

o  	Unreported depot-level work for a deployed unit from the European V
Corps.

o  	Unreported depot-level work from the Forces Command due to problems
with the Command's data collection systems and units that were deployed.

o  	Unreported special repair work by nondepot locations following an
organization's request and approval to do this work.

Our review of fiscal year 2003 data reported by the Navy and Marine Corps
and our review of supporting documentation for selected activities
identified errors, omissions, and inconsistencies that, if corrected,
would result in significant adjustments in the public-and privatesector
percentages reported to the Congress, as shown table 3.

  Department of the Navy

Table 3: GAO's Changes to the Navy's and Marine Corps' FY 2003 50-50 Data

                              Dollars in millions

                                Category     Allocation               Percent 
                    Public work reported      $6,234.7                  54.7% 
                         Net adjustments       (252.6)       
                    Public work adjusted      $5,982.1                  51.3% 
                   Private work reported       5,079.6                  44.5% 
                         Net adjustments        513.6        
                   Private work adjusted      $5,593.2                  47.9% 
                   Private work exempted        91.3                     0.8% 

Sources: DOD (data); GAO (analysis).

Note: Numbers in parentheses are negative. See limitation on data
reliability, page 31.

Appendix I: GAO Adjustments for Errors, Omissions, and Inconsistencies in
Military Departments' 50-50 Data for Fiscal Year 2003

Errors we found included the following examples:

o  	Unreported depot work on nuclear aircraft carriers. As reported last
year, Navy officials cite the definition in 10 U.S.C. 2460, which excludes
from depot maintenance the nuclear refueling of aircraft carriers, in
justifying why they do not report any of the depot work accomplished at
the same time as refueling. We believe that depot work that is reportable
elsewhere and separate from the refueling tasks should be reported.

o  	Inconsistent reporting of ship inactivations, which include depot
tasks for servicing and preserving equipment before it is placed in
storage or in an inactive status. Navy officials report for 50-50 purposes
the nuclear ship inactivation work performed in the public sector but do
not report surface ship inactivation work performed by the private sector.

o  	Underreporting of depot-level work for the installation of
modifications to shipboard equipment, for repair of components and systems
for the T-45 aircraft, and the F-100 engine.

o  Reporting intermediate-level maintenance as depot-level maintenance.

o  	Underreporting of maintenance work by the command responsible for
acquiring and upgrading Marine Corps weapon systems. The failure to report
this work has several causes, including the misunderstanding of what
should be reported and inadequate management and oversight of the
collection process to identify and resolve reporting deficiencies.

o  	Other errors included (1) work subcontracted by the public shipyards
to the private sector reported as public-sector work and (2) misreporting
by the Marine Corps of work obligated in fiscal year 2002 rather than
fiscal year 2003.

Department of the Air	Our review of fiscal year 2003 data reported by the
Air Force and of supporting documentation for selected activities
identified errors,

Force 	omissions, and inconsistencies that, if corrected, would result in
significant adjustments in the public-and private-sector percentages
reported to the Congress, as shown in table 4.

Appendix I: GAO Adjustments for Errors, Omissions, and Inconsistencies in
Military Departments' 50-50 Data for Fiscal Year 2003

          Table 4: GAO's Changes to the Air Force's FY 2003 50-50 Data

                              Dollars in millions

                                Category     Allocation               Percent 
                    Public work reported      $5,003.8                  52.0% 
                         Net adjustments       (40.9)        
                    Public work adjusted      $4,962.9                  51.6% 
                   Private work reported       4,583.3                  47.7% 
                         Net adjustments        53.3         
                   Private work adjusted      $4,636.6                  48.2% 
                   Private work exempted        26.6                     0.3% 
                         Net adjustments        (3.5)        
                   Exempted private work                     
                                adjusted        $23.1                    0.2% 

Sources: DOD (data); GAO (analysis).

Note: Numbers in parentheses are negative. See limitation on data's
reliability, page 31.

Errors we found included the following examples:

o  As in past years, Air Force officials continue to adjust the 50-50 data
for the salaries and overhead expenses of government employees
administering depot maintenance contracts funded through the working
capital fund. Officials subtract these amounts from the reported
private-sector amount-where they are accounted for within the working
capital fund-and add them to the public-sector funding for 50-50
reporting. Consistent with the 50-50 guidance that states that costs
should be associated with the end product, we think these costs should be
treated as contracting expenses.

o  Underreporting depot-level work for contractor logistics support.

o  Errors in reporting exempted private work.

                       Appendix II: Scope and Methodology

To determine whether the military departments met the 50-50 requirement in
the prior-years report, we analyzed each service's procedures and internal
management controls for collecting and reporting depot maintenance
information for the purpose of responding to the 10 U.S.C. 2466
requirement. We reviewed supporting details (summary records, accounting
reports, budget submissions, and contract documents) at departmental
headquarters, major commands, selected maintenance activities, and
reporting centers. We compared processes to determine consistency and
compliance with legislative provisions, Office of the Secretary of Defense
(OSD) guidance, and military service instructions. We selected certain
programs, reporting centers, and maintenance activities for a
more-detailed review.1 We particularly examined reporting categories that
Department of Defense (DOD) personnel and we had identified as problem
areas in current and past reviews. These areas included interserviced
workloads,2 contractor logistics support, warranties, software
maintenance, and depot maintenance at nondepot locations. We evaluated
processes for collecting and aggregating data to ensure accurate and
complete reporting and to identify errors, omissions, and inconsistencies.

To determine whether the future-year projections were based on accurate
data, valid assumptions, and existing plans and represented reasonable
estimates, we followed the same general approach and methodology we used
to review the prior-years report. Although the future-years report is a
budget-based projection of obligations, the definitions, guidance,
organization, and processes used to report future-years data are much the
same as those for the prior-years report of actual obligations. We
discussed with DOD officials the main differences between the two
processes and the manner in which the data were derived from budgets and
planning requirements and key assumptions made in the out-year data.

For reviews of both 50-50 reports, we performed certain checks and tests,
including variance analyses, to judge the consistency of this information
with data from prior years and with the future-years budgeting and

1 We selected the programs reviewed on the basis of size and importance
and any previously identified areas of concern. Given the nature of our
sample, the results are not projectible to the universe of depot
maintenance activities. We also did not audit the integrity of the
Department of Defense's financial systems and accounting data used to
prepare the 50-50 reports.

2 "Interserviced" workload is maintenance that one military service
performs on equipment owned and funded by another service.

Appendix II: Scope and Methodology

programming data used in DOD's budget submissions and reports to the
Congress. For example, we compared each service's 50-50 data reported in
February and April 2004 for fiscal years 2002 through 2008 with data
reported for these same years in the 50-50 reports submitted in fiscal
year 2003. We found repeated and significant changes, even though the
estimates were prepared only about 1 year apart. We used this analysis to
further discuss with officials and analyze reasons for changes in reported
data and percentage allocations between the 2003 and 2004 reports
submitted to the Congress.

Our work has shown that DOD's 50-50 data cannot be relied upon as a
precise measure of the allocation of depot maintenance funds between the
public and private sectors. However, the mandate in 10 U.S.C. 2466
requires (1) DOD to report the data, which are the only data available and
accepted and used for DOD decision making and for congressional oversight,
and (2) GAO to submit its views to the Congress on whether DOD has
complied with the 50-50 requirement. While DOD's data cannot be relied on
to provide a precise measure of the funding between the public and private
sectors, the data, along with our adjustments, provide a rough
approximation of the allocations and some trends that may be useful to the
Congress in exercising its oversight role and to DOD officials in managing
the depot maintenance program. Several factors concerning the validity and
completeness of data were considered in our methodology and approach to
reviewing the prior-and future-years reports. One key factor is the
continuing deficiencies we have noted in DOD's financial systems and
reports that preclude a clean opinion on its financial statements and that
result in limited accuracy of budget and cost information. Another factor
is that documenting depot maintenance workload allocations between the
public and private sectors is becoming more complicated by the
consolidation of maintenance activities and the performance of depot-level
maintenance at field locations. These complicating factors (1) make it
more difficult to identify work that meets the statutory definition of
"depot maintenance," (2) complicate workload reporting, and (3) result in
the underreporting of depot maintenance for both the public and private
sectors. In addition, changes in business philosophy and approach can make
analysis more difficult. For example, many new contracts are
performance-based and may not discretely identify maintenance activities
or account separately for their costs. This can result in the under-and
overreporting of depot maintenance work performed in the private sector.
It also forces more reliance on the contractor for providing information
needed in 50-50 reporting and may result in DOD's officials using more
assumptions and estimating methodologies in lieu of contract data.
Finally, given all the limitations to

Appendix II: Scope and Methodology

DOD's data and the time frame for our review, our analysis cannot be
relied on to identify all the errors, inconsistencies, and omissions in
DOD's data.

As part of our efforts to identify areas for improvement, we reviewed
DOD's efforts to improve the accuracy and completeness of reports. We
discussed with officials managing and coordinating the reporting process
their efforts to address known problem areas and respond to
recommendations by the audit agencies and us. We compared this year's sets
of instructions with last year's to identify changes and additions. We
reviewed efforts to identify reporting sources and to distribute guidance
and taskings to develop and report the 50-50 data. We asked primary data
collectors to provide their opinions on how well efforts were managed and
data verified and to identify "pain points" and ideas they had to improve
reporting. We reviewed prior recommendations to determine whether known
problem areas were being addressed and resolved. We applied this knowledge
to identify additional areas for improving the reporting process and
management controls.

We interviewed officials, examined documents, and obtained data at OSD,
Army, Navy, Marine Corps, and Air Force headquarters in the Washington,
D.C., area; Army Materiel Command in Alexandria, Virginia; Naval Sea
Systems Command in Washington, D.C.; Naval Air Systems Command in Patuxent
River, Maryland; Naval Inventory Control Point in Philadelphia,
Pennsylvania; Atlantic Fleet Command in Norfolk, Virginia; Pacific Fleet
Command in Honolulu, Hawaii; Marine Corps Systems Command in Quantico,
Virginia; Marine Corps Logistics Command in Albany, Georgia; Air Force
Materiel Command in Dayton, Ohio; Naval Audit Service in Crystal City,
Virginia; several public depots managed by the military departments'
materiel commands; and selected operating bases. We conducted our review
from February through July 2004 in accordance with generally accepted
government auditing standards.

Appendix III: Comments from the Department of Defense

Appendix III: Comments from the Department of Defense

Note: Page numbers in the draft report may differ from those in this
report.

Appendix III: Comments from the Department of Defense

Related GAO Products

Depot Maintenance: Army Needs Plan to Implement Depot �Maintenance
Report's Recommendations. GAO-04-220. Washington, D.C.:
January 8, 2004.

Depot Maintenance: DOD's 50-50 Reporting Should Be Streamlined.
GAO-03-1023. Washington, D.C.: September 15, 2003.

Depot Maintenance: Key Unresolved Issues Affect the Army Depot
�System's Viability. GAO-03-682. Washington, D.C.: July 7, 2003.

Department of Defense: Status of Financial Management�Weaknesses
and Progress toward Reform. GAO-03-931T.
Washington, D.C.: June 25, 2003.

Depot Maintenance: Change in Reporting Practices and
Requirements�Could Enhance Congressional Oversight. GAO-03-16.
Washington D.C.:
October 18, 2002.

Depot Maintenance: Management Attention Needed to Further�Improve
Workload Allocation Data. GAO-02-95. Washington, D.C.:
November 9, 2001.

Defense Logistics: Actions Needed to Overcome Capability Gaps in the
�Public Depot System. GAO-02-105. Washington, D.C.: October 12,
2001.

Defense Maintenance: Sustaining Readiness Support
Capabilities�Requires a Comprehensive Plan. GAO-01-533T.
Washington, D.C.:
March 23, 2001.

Depot Maintenance: Key Financial Issues for Consolidations at
Pearl�Harbor and Elsewhere Are Still Unresolved. GAO-01-19.
Washington, D.C.:
January 22, 2001.

Depot Maintenance: Action Needed to Avoid Exceeding Threshold on
�Contract Workloads. GAO/NSIAD-00-193. Washington, D.C.:
August 24, 2000.

Depot Maintenance: Air Force Waiver to 10 U.S.C. 2466. GAO/NSIAD-00-152R.
Washington, D.C.: May 22, 2000.

Depot Maintenance: Air Force Faces Challenges in Managing to 50-50
Threshold. GAO/T-NSIAD-00-112. Washington, D.C.: March 3, 2000.

Related GAO Products

Depot Maintenance: Future Year Estimates of Public and Private Workloads
Are Likely to Change. GAO/NSIAD-00-69. Washington, D.C.: March 1, 2000.

Depot Maintenance: Army Report Provides Incomplete Assessment of
Depot-type Capabilities. GAO/NSIAD-00-20. Washington, D.C.: October 15,
1999.

Depot Maintenance: Status of the Navy's Pearl Harbor Project.
GAO/NSIAD-99-199. Washington, D.C.: September 10, 1999.

Depot Maintenance: Workload Allocation Reporting Improved, but Lingering
Problems Remain. GAO/NSIAD-99-154. Washington, D.C.: July 13, 1999.

Navy Ship Maintenance: Allocation of Ship Maintenance Work in the Norfolk,
Virginia, Area. GAO/NSIAD-99-54. Washington, D.C.: February 24, 1999.

Defense Depot Maintenance: Public and Private Sector Workload Distribution
Reporting Can Be Further Improved. GAO/NSIAD-98-175. Washington, D.C.:
July 23, 1998.

Defense Depot Maintenance: DOD Shifting More Workload for New Weapon
Systems to the Private Sector. GAO/NSIAD-98-8. Washington, D.C.: March 31,
1998.

Defense Depot Maintenance: Information on Public and Private Sector
Workload Allocations. GAO/NSIAD-98-41. Washington, D.C.: January 20, 1998.

Defense Depot Maintenance: Uncertainties and Challenges DOD
Faces�in Restructuring Its Depot Maintenance Program.
GAO/T-NSIAD-97-112.
Washington, D.C.: May 1, 1997. Also GAO/T-NSIAD-97-111.
Washington, D.C.: March 18, 1997.

Defense Depot Maintenance: More Comprehensive and Consistent Workload Data
Needed for Decisionmakers. GAO/NSIAD-96-166. Washington, D.C.: May 21,
1996.

Defense Depot Maintenance: DOD's Policy Report Leaves Future Role of Depot
System Uncertain. GAO/NSIAD-96-165. Washington, D.C.: May 21, 1996.

Related GAO Products

Defense Depot Maintenance: Privatization and the Debate over�the
Public-Private Mix. GAO/T-NSIAD-96-148. Washington, D.C.:
April 17, 1996. Also GAO/T-NSIAD-96-146. Washington, D.C.: April 16, 1996.

Depot Maintenance: Issues in Allocating Workload between the Public and
Private Sectors. GAO/T-NSIAD-94-161. Washington, D.C.: April 12, 1994.

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