Policy and Criteria Used to Assess Potential Commissary Store	 
Closures (26-APR-05, GAO-05-470R).				 
                                                                 
As part of its pay and benefits package for service members, the 
Department of Defense (DOD) operates supermarket-type stores	 
called commissaries to provide service members and their families
with groceries and authorized household supplies at the lowest	 
practical price. The Defense Commissary Agency (DeCA), DOD's	 
designated agency for managing commissary stores, operates 273	 
commissary stores in the United States and abroad. To ensure	 
efficient operation of the commissary stores, all commissary	 
stores are assessed annually to determine whether there should be
any operational changes or possible store closures. The Office of
the Under Secretary of Defense (Personnel and Readiness), which  
has oversight responsibility for DeCA operations, can either	 
endorse or change the results of the assessments or direct	 
additional actions. In August 2003, the Office of the Under	 
Secretary of Defense (Personnel and Readiness) proposed that the 
military services consider the closure of 14 commissary stores	 
not previously under consideration for closure. Subsequently,	 
various members of Congress raised questions about these proposed
actions, including whether DOD's policy and criteria for deciding
whether to close commissary stores adequately considered the	 
impact on quality of life of service members and their		 
dependents. Congress, in enacting the fiscal year 2005 defense	 
authorization act, included a provision mandating that quality of
life be a primary consideration in the closure decision-making	 
process. In response to a mandate in the Ronald W. Reagan	 
National Defense Authorization Act for Fiscal Year 2005, we	 
examined DeCA's policies and process for analyzing commissary	 
stores for potential closure. Our objectives were to review (1)  
the policy and criteria used to analyze potential commissary	 
store closures, determining whether these policies and criteria  
are consistent with the policies on preserving quality of life	 
for the armed forces, and (2) any studies or assessments	 
conducted to close commissary stores.				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-470R					        
    ACCNO:   A22737						        
  TITLE:     Policy and Criteria Used to Assess Potential Commissary  
Store Closures							 
     DATE:   04/26/2005 
  SUBJECT:   Military facilities				 
	     Military personnel 				 
	     Internal controls					 
	     Quality of life					 
	     Policies and procedures				 

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GAO-05-470R

A

United States Government Accountability Office Washington, D.C. 20548

April 26, 2005

The Honorable John 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

Subject: Policy and Criteria Used to Assess Potential Commissary Store
Closures

As part of its pay and benefits package for service members, the
Department of Defense (DOD) operates supermarket-type stores called
commissaries to provide service members and their families with groceries
and authorized household supplies at the lowest practical price. The
Defense Commissary Agency (DeCA), DOD's designated agency for managing
commissary stores, operates 273 commissary stores in the United States and
abroad. To ensure efficient operation of the commissary stores, all
commissary stores are assessed annually to determine whether there should
be any operational changes or possible store closures. The Office of the
Under Secretary of Defense (Personnel and Readiness), which has oversight
responsibility for DeCA operations, can either endorse or change the
results of the assessments or direct additional actions. In August 2003,
the Office of the Under Secretary of Defense (Personnel and Readiness)
proposed that the military services consider the closure of 14 commissary
stores not previously under consideration for closure. Subsequently,
various members of Congress raised questions about these proposed actions,
including whether DOD's policy and criteria for deciding whether to close
commissary stores adequately considered the impact on quality of life of
service members and their dependents. Congress, in enacting the fiscal
year 2005 defense authorization act, included a provision mandating that
quality of life be a primary consideration in the closure decision-making
process.

In response to a mandate in the Ronald W. Reagan National Defense
Authorization Act for Fiscal Year 2005,1 we examined DeCA's policies and
process for analyzing commissary stores for potential closure. Our
objectives were to review (1) the policy and criteria used to analyze
potential commissary store closures, determining whether these policies
and criteria are consistent with the policies on preserving quality of
life for the armed forces, and (2) any studies or assessments conducted to
close commissary stores.

We performed our work at DeCA headquarters located at Fort Lee, Virginia;
DeCA-East, Virginia Beach, Virginia; the Commissary Operating Board (COB);
and the Office of the Under Secretary for Defense (Personnel and
Readiness). To address our objectives, we reviewed regulations, policies,
and guidance related to the closure of commissary stores. We also reviewed
a March 2005 policy memo that implements the congressional direction
contained in the Ronald W. Reagan National Defense Authorization Act for
Fiscal Year 2005. In addition, we reviewed commissary store performance
assessments for fiscal years 2001 through 2004 and discussed data
reliability with officials in the Office of the Secretary of Defense.
Finally, we interviewed officials at DeCA headquarters, the COB, and in
the Office of the Under Secretary of Defense (Personnel and Readiness)
regarding how they balance business and quality of life factors in making
decisions about whether to close commissary stores. We determined that the
data used were sufficiently reliable for the purposes of this review. We
conducted our review from January through April 2005 in accordance with
generally accepted government auditing standards.

Summary	Based on a recent legislative requirement, the Office of the
Secretary of Defense issued new policy guidance in March 2005 to reinforce
and ensure that quality of life will be a primary consideration in all
future assessments of commissary operations. No assessments have been
conducted under the revised guidance.

Annual assessments of commissary stores' performance have been conducted
in recent years to determine whether operational changes were needed or
whether potential store closures should be considered.

1 Pub. L. No. 108-375, S: 597(b) (Oct. 28, 2004).

Consistent with the criteria in effect at that time, each assessment
considered both quality of life and business factors. After reviewing
DeCA's fiscal year 2002 annual assessment in August 2003, the Office of
the Principal Deputy Under Secretary of Defense (Personnel and Readiness)
proposed that DeCA consider closing 14 commissary stores primarily because
financial goals were not met or because too few active-duty personnel were
present. This decision was apparently inconsistent with DOD policy
requiring that quality of life and business factors be considered in the
aggregate. Significant concerns were expressed by the military services
and members of Congress over the closure of the 14 stores. DOD
subsequently decided to keep the 14 stores open, 6 because of their
improved financial performance and 8 because of quality of life concerns
and other factors. DeCA headquarters did not recommend any store closures
in the 2004 assessment process, the results of which are currently being
reviewed within the Office of the Under Secretary of Defense (Personnel
and Readiness).

Background	Commissary stores are located in 46 states and 14 foreign
countries. Headquartered at Fort Lee, Virginia, DeCA is DOD's designated
agency for managing commissary stores worldwide. As of September 30, 2004,
DeCA had 273 stores with annual sales of about $5 billion. The COB, which
consists of representatives from each of the military services, has
day-today operational oversight responsibilities for DeCA. The Under
Secretary of Defense (Personnel and Readiness) exercises overall
supervision of the commissary store system.

DeCA's mission is to provide beneficiaries with groceries and authorized
household supplies at the lowest practical price, charging patrons only
for the cost of goods plus a 5 percent surcharge. The funds generated by
the surcharge are used to acquire (including acquisition by lease),
construct, repair, maintain, and equip the physical infrastructure of
commissary stores and central product processing facilities. Additionally,
the recovered cost-of-goods sold is rolled over to purchase replacement
inventory. In fiscal year 2005, DeCA also received about $1.2 billion in
direct appropriations from Congress for its annual operating expenses.
This appropriation pays for employees' salaries, transportation, some
abovestore-level information technology, and other expenses. Any savings
in stores' operating costs do not affect the cost of merchandise sold in
the commissary stores because such savings reduce the need for
appropriated funds.

All commissary stores have been subject to annual performance assessments
to determine whether there should be any operational changes or possible
store closures. Since fiscal year 2001, DOD's policy required these
assessments to consider both quality of life and business factors, as seen
in table 1.2

  Table 1: Selected Assessment Criteria for Commissary Stores Factor Criteria

Quality of life  o  Presence of an active duty mission and at least 100
active personnel assigned to the installation.

o  Capacity of other commissaries in the area to adequately support the
customer base within a reasonable distance. Reasonable distance and time
are defined as 20 miles or 30 minutes travel one way.

o  Proximity to alternate civilian shopping.

Business case  o  Unit cost of operations.

o  Historical and projected sales data.

o  Fifteen year forecast of the installations' patron demographics and
mission changes.

o  Funding needed to sustain efficient and effective operations of an
existing commissary.

Source: GAO analysis of DOD data.

The annual assessment process includes the collection of sales and cost
data for each store. Information is also collected on patron demographics,
projected mission and force structure changes at the base where the
commissary store is located, proximity to the nearest commissary and
alternative commercial stores, and remoteness of the installation. Based
on these assessments, DeCA headquarters recommends any needed store
closures, the creation of combined stores, as well as any changes in store
operations to the COB.3 The COB can either endorse or change the proposed
actions, based upon the judgment and needs of the participating service
representatives. The COB then forwards the recommendations to the
Principal Deputy Under Secretary of Defense (Personnel and Readiness) for
final approval. The Principal Deputy Under Secretary of

2 Annual commissary assessments are mandated by Armed Services Commissary
Regulation, DOD 1330.17-R, and the Principal Deputy Under Secretary of
Defense (Personnel and Readiness) policy memo of June 8, 2004.

3 According to DeCA officials, the general policy is to close a commissary
store on an installation that is closed as a result of base closure.
However, subject to general and economic criteria, DOD may authorize a
commissary store to remain open or operate as a downscaled commissary or
allow the exchange service to operate a combined store to serve any
remaining active-duty or reservist personnel and retirees.

Defense can either endorse or change the proposed action or recommend
additional actions.

New Policy Guidance 	In March 2005, DOD issued new policy, based on
congressional direction, to ensure that quality of life is a primary
factor considered in evaluating

Issued	whether commissary stores should be closed and that the quality of
life of active-duty service members' dependents and members of the reserve
components is also considered. No assessments of commissary stores have
been conducted under the new policy.

                          Results of Prior Assessments

Prior to the issuance of new policy, DOD's policy and criteria for
assessing the potential closure of commissary stores required that both
quality of life and business factors be considered, which is consistent
with DOD's policies to preserve quality of life for service members.4 The
quality of life factors consider the number of active duty personnel,
remoteness of the duty stations, distance to the nearest alternative
commissary store, and availability of civilian shopping facilities, while
the business factors include the current and projected sales and cost of
operations. DOD's policy required that the criteria should be applied in
the aggregate for the commissary store program and not in isolation. Thus,
a commissary store with high operating costs relative to sales, but in a
remote location, might not be closed because of the negative effect
closure would have on activeduty service members' quality of life.

4 DOD policy regarding service member quality of life is a result of the
goals expressed in Department of Defense, A New Social Compact: A
Reciprocal Partnership Between the Department of Defense, Service Members
and Families (July 2002). This social compact identifies commissary stores
as an important nonpay compensation benefit for service members and their
families.

Since 2001, DeCA has recommended the closure of 12 commissary stores. Six
of these stores were closed because they were on installations that
closed.5 Three more stores were closed because of aging facilities,
declining customer base, declining sales, high unit costs, and close
proximity to another commissary.6 However, the COB deferred the
recommended closure of two additional stores, which remain open because of
quality of life, and one store because of prior arrangements to support a
contractor workforce.7

After reviewing DeCA's fiscal year 2002 annual assessment, which
recommended the closure of 2 stores (one on an installation that was
closing and another because there was less than 100 active-duty
personnel),8 the Principal Deputy Under Secretary of Defense (Personnel
and Readiness) recommended that as many as 14 additional commissary stores
be closed. The operating costs of these 14 stores in fiscal year 2002 were
about $6.5 million, or less than 1 percent of DeCA's annual
appropriations. Depending upon improvement in fiscal year 2003, 6 of these
14 stores were recommended for closure by the Principal Under Secretary of
Defense because their unit costs were very high compared to DeCA's overall
unit cost,9 as shown in table 2.

5 According to DeCA officials, these six stores were Presidio of San
Francisco, California; Winter Harbor, Maine; Roosevelt Roads, Puerto Rico;
Bad Aibling, Germany; Bad Kreuznach, Germany; and Costanzo, Italy.

6 These three stores were Point Mugu, California; New Cumberland,
Pennsylvania; and Fort Monroe, Virginia.

7 These three stores were Fort Greeley, Alaska; Mitchel Field, New York;
and Sagami Depot, Japan.

8 These 2 are part of the 12 commissary stores noted above.

9 Unit cost is determined by dividing store operating costs by annual
sales.

  Table 2: Unit Cost Comparison for Commissary Stores Recommended for Closure

                     Commissary Fiscal year 2002 unit cost

Yuma Proving Ground, Arizona

Lakehurst , New Jersey

Dahlgren, Virginia

Kelley Barracks, Germany

Hario, Japan

Pusan, Korea

DeCA overall unit cost

Source: GAO analysis of DeCA assessment data.

Service officials stated these six commissary stores had existed primarily
for quality of life reasons and should not be evaluated strictly on
business factors such as unit cost. They believed that the Principal
Deputy Under Secretary of Defense (Personnel and Readiness) failed to
consider the difficulty that patrons could encounter in getting to the
next nearest commissary due to terrain, urban congestion, or security
concerns. Likewise, service officials noted that service members and their
dependents cannot always find products in alternate overseas civilian
shopping locations that typically could be purchased in stateside civilian
shopping locations.

The Principal Deputy Under Secretary of Defense (Personnel and Readiness)
recommended the remaining eight commissary stores10-7 overseas and 1 in
the United States-for closure because they served fewer than 100
active-duty members or there was another commissary store in close
proximity. Army and Navy officials noted that these commissary stores also
existed because of other quality of life concerns. For example, some of
these overseas commissary stores were located in housing areas, improving
quality of life by providing easy and safe access. Army and Navy officials
also noted that some families overseas only have one vehicle, which is
used during the day by the active-duty service member, leaving no
transportation available for the dependents. In other overseas locations,
patrons face difficult winter conditions, limited public transportation,
and dangerous roads, especially in remote mountainous terrain. Likewise,
for

10 These eight commissary stores were: Dugway Proving Ground, Utah;
Idar-Oberstein, Germany; Neubrucke, Germany; Panzer Kaserne, Germany; Camp
Kure, Japan; Sagami Depot, Japan; Sagamihara, Japan; and Chinhae, Korea

the U.S. commissary, Army officials noted that nearest commissary to
Dugway Proving Ground is over 100 miles away, and alternative civilian
shopping is nearly 40 miles away. By May 2004, DOD decided that all 14
commissary stores could remain open because they were now meeting
financial goals or were needed to maintain quality of life for service
members.

DeCA did not recommend any commissary store closures in its 2004
assessment that is currently being reviewed within the office of the Under
Secretary of Defense (Personnel and Readiness). However, because of
existing agreements with the host nations, three overseas commissary
stores will close in fiscal year 2005, and two other overseas stores will
consolidate to improve customer service and maximize efficiencies.11

Agency Comments	In commenting on a draft of this report, the Deputy Under
Secretary of Defense (Military Community and Family Policy) concurred with
the report. The department provided various technical comments which were
incorporated as appropriate. DOD's comments are reprinted in the enclosure
of this report.

We are sending copies of this report to the Secretary of Defense; the
Under Secretary of Defense (Personnel and Readiness); the Chairman,
Commissary Operating Board; the Director, Defense Commissary Agency; and
the Director, Office of Management and Budget. In addition, the report
will be available at no charge on GAO's Web site at http://www.gao.gov and
to others upon request.

11 Camp Howze, Korea, closed November 30, 2004, and Camp Page, Korea, will
close March 31, 2005, in accordance with a United States/Republic of Korea
Land Partnership Agreement, and Rhein-Main, Germany, will close September
30, 2005 when the United States Air Force Europe relocates its military
airlift mission. The Naples and Gricignano, Italy, commissaries will be
consolidated at Gricignano to meet Navy restationing needs.

Please contact me at (202) 512-5581 if you or your staff have any
questions concerning this report. Major contributors to this report were
Michael Kennedy, Paul Gvoth, Julia Matta, and Renee Brown.

Barry W. Holman Director, Defense Capabilities and Management

Enclosure I

                    Comments from the Department of Defense

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