Military Personnel: DOD Has Taken Steps to Address		 
Servicemembers' Financial Needs, but Additional Effort Is	 
Warranted (18-MAY-06, GAO-06-749T).				 
                                                                 
The finances of servicemembers and their families have been an	 
ongoing concern of Congress and the Department of Defense (DOD), 
especially in light of more frequent deployments to support	 
conflicts in Iraq and Afghanistan. Adverse effects that may	 
result when servicemembers experience financial problems include 
loss of security clearances, criminal or nonjudicial sanctions,  
adverse personnel actions, or adverse impacts on unit readiness. 
To decrease the likelihood that servicemembers will experience	 
financial problems, DOD has requested and Congress has granted	 
annual increases in military basic pay for all active duty	 
servicemembers and increases in special pays and allowances for  
deployed servicemembers. The military has also developed personal
financial management (PFM) programs to help avoid or mitigate	 
adverse effects associated with personal financial problems.	 
However, studies published in 2002 showed that servicemembers	 
continue to report financial problems. This testimony provides a 
summary of GAO's prior work examining (1) the extent to which	 
deployments have affected the financial conditions of active duty
servicemembers and their families, and (2) steps that DOD has	 
taken to assist servicemembers with their financial needs.	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-749T					        
    ACCNO:   A54204						        
  TITLE:     Military Personnel: DOD Has Taken Steps to Address       
Servicemembers' Financial Needs, but Additional Effort Is	 
Warranted							 
     DATE:   05/18/2006 
  SUBJECT:   Financial management				 
	     Military dependents				 
	     Military pay					 
	     Military personnel 				 
	     Surveys						 
	     Financial counseling				 

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GAO-06-749T

     

     * Summary
     * Background
     * Financial Conditions Similar for Deployed and Nondeployed Se
          * Data Suggest Financial Conditions of Deployed Servicemembers
          * Deployed Servicemembers Faced Problems Receiving Family Sepa
          * Some Financial Products May Negatively Affect Servicemembers
     * DOD Has Taken Steps to Assist Servicemembers with Financial
          * Services Require Financial Management Training
          * DOD's Financial Readiness Campaign Provides Resources Develo
          * Command Financial Specialists and PFM Program Staff Are Avai
          * Free Legal Assistance Offered, but Servicemembers Do Not Mak
          * Service Relief/Aid Societies Provide Financial Assistance
          * Non-DOD Resources May Be Used When Sevicemembers Need Additi
          * Armed Forces Disciplinary Control Boards Can Help Curb Preda
          * DOD Lacks Oversight Framework for Assessing and Monitoring P
     * Concluding Observations
     * Staff Contact and Acknowledgments
     * Related GAO Products
          * Order by Mail or Phone

Testimony

Before the Subcommittee on Oversight and Investigations, Committee on
Financial Services, House of Representatives

United States Government Accountability Office

GAO

For Release on Delivery Expected at 10:00 a.m. EDT

Thursday, May 18, 2006

MILITARY PERSONNEL

DOD Has Taken Steps to Address Servicemembers' Financial Needs, but
Additional Effort Is Warranted

Statement of Valerie C. Melvin, Acting Director Defense Capabilities and
Management

GAO-06-749T

Madam Chairwoman and Members of the Subcommittee:

I am pleased to be here today to discuss the financial service needs of
military personnel and their families. The finances of servicemembers and
their families have been an ongoing concern of Congress and the Department
of Defense (DOD), especially in light of more frequent deployments to
support the war on terrorism and conflicts in Iraq and Afghanistan. DOD's
Social Compact, which is part of its human capital strategic plan, notes
that mission readiness and quality of life depend on whether
servicemembers use their financial resources responsibly. Some adverse
effects that may result when servicemembers experience serious financial
problems include loss of security clearances, criminal or nonjudicial
sanctions, or adverse personnel actions including possible discharge from
the military. Servicemembers with serious financial issues may also have
an adverse impact on the readiness of the unit. For example,
servicemembers' financial problems may take the servicemembers and
possibly their unit commanders away from their primary duties in order to
address problems with creditors. In a 2002 report to Congress, the Navy
identified an estimated $250 million in productivity and salary losses due
to servicemembers' poor personal financial management.1

Congress and DOD have taken steps to decrease the likelihood that deployed
and nondeployed servicemembers will experience financial problems. DOD has
requested and Congress has granted annual increases in military basic pay
for all active duty servicemembers and increases in special pays and
allowances for deployed servicemembers, such as the family separation
allowance and hostile fire/imminent danger pay. The military also has
developed personal financial management (PFM) programs to provide
servicemembers with financial literacy training, financial counseling, and
other assistance to avoid or mitigate the adverse effects associated with
personal financial problems.''

Despite the added compensation and the assistance provided through the PFM
programs, studies in recent years by DOD and others show that active duty
servicemembers continue to report financial problems. For example, a 2002
study2 noted that 20 percent of junior enlisted servicemembers reported
that they struggled to make ends meet financially and another 4 percent
regarded themselves as "in over their heads" with respect to their
finances.

1 See Department of Defense, Report  on  Personal  and  Family  Financial 
Management  Programs  (Mar. 31, 2002) in response to a House Committee on
Armed Services requirement in the National Defense Authorization Act for
Fiscal Year 2002.

In this context, my testimony today will summarize our prior work
examining (1) the extent to which deployments have affected the financial
conditions of active duty servicemembers and their families and (2) steps
that DOD has taken to assist servicemembers with their financial needs.

My statement is based primarily on our work completed in April 20053 and
our institutional knowledge from prior reviews examining financial issues
of servicemembers and their families (see GAO Related Products at the end
of this testimony statement). Other information, such as the current
status of our recommendations to DOD that were pending at the time when
the reports were issued, will also be discussed. We conducted our work in
accordance with generally accepted government auditing standards during
May 2006.

                                    Summary

DOD-wide survey data suggest that deployment status does not affect active
duty servicemembers' financial conditions, although some deployed
servicemembers faced additional problems with receiving family separation
allowances and communicating with creditors and family. DOD data based on
servicemember responses to a 2003 DOD-wide survey suggest that
servicemembers who were deployed for at least 30 days reported similar
levels of financial health or problems as those who had not deployed. For
example, of the junior enlisted personnel, 3 percent of the deployed group
and 2 percent of the nondeployed group indicated that they were in "over
their heads" financially; and 13 percent of the deployed group and 15
percent of the nondeployed group responded that they found it "tough to
make ends meet but keeping your head above water" financially. These
responses are consistent with the findings that we obtained in a survey of
all PFM program managers and in focus groups conducted during our 13 site
visits. However, problems receiving family separation allowance promptly
and communicating with creditors and families may result in financial
difficulties for some deployed servicemembers. Based on DOD pay data for
January 2005, almost 6,000 of 71,000 deployed servicemembers who have
dependents did not obtain their family separation allowance in a timely
manner. The family separation allowance of $250 per month is designed to
compensate servicemembers for extra expenses (e.g., childcare costs) that
result when they are involuntarily separated from their families. Not
receiving this compensation each month to help defray household costs can
place a financial strain on the family when the servicemembers are
deployed. Furthermore, problems communicating with creditors-caused by
limited Internet access, few telephones and high fees, and delays in
receiving ground mail-can affect deployed servicemembers' abilities to
resolve financial issues. Failure to avoid or promptly correct serious
financial problems can result in consequences for these servicemembers,
such as bad credit ratings or adverse effects on unit readiness and
morale. Additionally, some financial products marketed to servicemembers
may negatively affect their financial conditions.

2 See RAND, Assessing  the  Personal  Financial  Problems  of  Junior 
Enlisted  Personnel, MR-1444-OSD (2002). This report defines junior
enlisted as those enlisted servicemembers with fewer than 10 years of
service. Our report defines junior enlisted as servicemembers in pay
grades E1 to E4.

3 The findings cited in this testimony were primarily taken from GAO,
Military  Personnel:  More  DOD  Actions  Needed  to  Address 
Servicemembers'  Personal  Financial  Management  Issues, GAO-05-348
(Washington, D.C.: Apr. 26, 2005); and GAO, Military  Personnel:  DOD's 
Tools  for  Curbing  the  Use  and  Effects  of  Predatory  Lending  Not 
Fully  Utilized, GAO-05-349 (Washington, D.C.: Apr. 26, 2005).

DOD has taken a number of steps to assist servicemembers with their
financial needs; however, some of this assistance is underutilized. One
step is PFM training for servicemembers, which is required by all four
military services, although the extent to which the training is not
received is unknown because servicewide totals are not always collected.
DOD also provides legal assistance on purchase contracts for large items
and other financial documents. According to the attorneys and other
personnel, servicemembers do not make full use of available legal services
because they may not take the time to visit the attorney's office or they
fear information about their financial problems would get back to the
command and limit their career progression. In addition, each service has
a relief or aid society designed to provide financial assistance through
counseling and education as well as financial relief through grants or
no-interest loans. Some servicemembers in our focus groups stated that
they would not use grants or no-interest loans from a society because they
take too long, are intrusive because the financial institution or
relief/aid society requires in-depth financial information in the loan or
grant application, or could be career limiting if the command found out
the servicemember was having financial problems. Servicemembers may choose
to use non-DOD resources if they do not want the command to be aware of
their financial conditions or they need products or support not offered
through DOD, the services, or the installation. Furthermore, DOD
established Armed Forces Disciplinary Control Boards that can make
recommendations to place businesses off-limits to servicemembers, which
can be an effective tool for avoiding or correcting unfair practices, but
data gathered during some of our site visits revealed few times when
boards were used to address predatory lending practices. Although DOD has
taken these many steps to assist servicemembers with their financial
needs, it does not have the results-oriented, departmentwide data needed
to assess the effectiveness of its PFM programs and provide necessary
oversight. Without an oversight framework requiring evaluation and a
reporting relationship between DOD and the services, DOD and Congress do
not have the visibility or oversight needed to assess the effectiveness of
DOD's financial management training and assistance to servicemembers.

                                   Background

Because large numbers of Americans lack knowledge about basic personal
economics and financial planning, U.S. policymakers and others have
focused on financial literacy, i.e., the ability to make informed
judgments and to take effective actions regarding the current and future
use and management of money.4 While informed consumers can choose
appropriate financial investments, products, and services, those who
exercise poor money management and financial decision making can lower
their family's standard of living and interfere with their crucial
long-term goals.

One vehicle for promoting the financial literacy of Americans is the
congressionally created Financial Literacy and Education Commission.5
Created in 2003, the Commission is charged with (1) developing a national
strategy to promote financial literacy and education for all Americans;
(2) coordinating financial education efforts among federal agencies and
among the federal, state, and local governments; nonprofit organizations;
and private enterprises; and (3) identifying areas of overlap and
duplication among federal financial literacy activities.

4 See GAO, Highlights  of  a  GAO  Forum:  The  Federal  Government's 
Role  in  Improving  Financial  Literacy, GAO-05-93SP (Washington, D.C.:
Nov. 15, 2004) for an overview of financial literacy issues. This report
resulted from a July 28, 2004, forum that GAO hosted to develop
recommendations on the role of the federal government in improving
financial literacy. The forum's participants included a select group of
individuals with expertise in financial literacy and education. They
included representatives of federal and state agencies, the financial
industry, nonprofit organizations, and academic institutions.

5 Pub. L. No. 108-159, Title V, (2003).

Since at least the 1980s, the military services have offered PFM programs
to help servicemembers address their financial conditions. Among other
things, the PFM programs provide financial literacy training to
servicemembers, particularly to junior enlisted personnel during their
first months in the military. The group-provided financial literacy
training is supplemented with other types of financial management
assistance, often on a one-on-one basis. For example, servicemembers might
obtain one-on-one counseling from staff in their unit or legal assistance
attorneys at the installation.

In May 2003, the Office of the Under Secretary of Defense for Personnel
and Readiness, DOD's policy office for the PFM programs, established its
Financial Readiness Campaign, with objectives that include increasing
personal readiness by, among other things, (1) increasing financial
awareness and abilities and (2) increasing savings and reducing dependence
on credit. The campaign attempted to accomplish these objectives largely
by providing on-installation PFM program providers with access to
national-level programs, products, and support.

To minimize financial burdens on servicemembers, DOD has requested and
Congress has increased cash compensation for active duty military
personnel. For example, the average increases in military basic pay
exceeded the average increases in private-sector wages for each of the 5
years prior to when we issued our April 2005 report. Also, in April 2003,
Congress increased the family separation allowance from $100 per month to
$250 per month and hostile fire/imminent danger pay from $150 per month to
$225 per month for eligible deployed servicemembers. The family separation
allowance is designed to provide compensation to servicemembers with
dependents for the added expenses (e.g., extra childcare costs, automobile
maintenance, or home repairs) incurred because of involuntary separations
such as deployments in support of contingency operations like Operation
Iraqi Freedom. Hostile fire/imminent danger pay provides special pay for
"duty subject to hostile fire or imminent danger" and is designed to
compensate servicemembers for physical danger. Iraq, Afghanistan, Kuwait,
Saudi Arabia, and many other nearby countries have been declared imminent
danger zones. In addition to these special pays, some or all income that
active duty servicemembers earn in a combat zone is tax free.6

 Financial Conditions Similar for Deployed and Nondeployed Servicemembers, but
Pay Administration and Communication Problems Existed for Deployed Members

Data from DOD suggest that the financial conditions for deployed and
nondeployed servicemembers and their families were similar. However,
deployed servicemembers faced problems with the administration of an
allowance as well as an inability to communicate with creditors.
Additionally, some financial products marketed to servicemembers may
negatively affect their financial condition.

Data Suggest Financial Conditions of Deployed Servicemembers and Their Families
Similar to Nondeployed Servicemembers and Their Families

In a 2003 DOD-wide survey, servicemembers who were deployed for at least
30 days reported similar levels of financial health or problems as those
who had not deployed. For example, an analysis of the responses for only
junior enlisted personnel showed that 3 percent of the deployed group and
2 percent of the nondeployed group indicated that they were in "over their
heads" financially; and 13 percent of the deployed group and 15 percent of
the nondeployed group responded that they found it "tough to make ends
meet but keeping your head above water" financially. Figure 1 shows
estimates of financial conditions for all servicemembers based on their
responses to this survey.7

6 Department of Treasury, Internal Revenue Service, Armed  Forces'  Tax 
Guide:  For  Use  in  Preparing  2005  Returns, Publication 3, Cat. No.
46072M. This publication noted that all military pay for the month is
excluded from income when an enlisted servicemember, a warrant officer, or
commissioned officer served in a combat zone during any part of a month or
while hospitalized as a result of service in the combat zone. The amount
of the exclusion for a commissioned officer (other than a warrant officer)
is limited to the highest rate of enlisted pay, plus hostile fire/imminent
danger pay for each month during any part of which an officer served in a
combat zone or while hospitalized as a result of service there.

7 DOD's March 2003 survey sample consisted of 34,929 individuals
identified by stratified random sampling procedures. DOD reported that
completed surveys were received from 10,828 respondents, which resulted in
an overall weighted response rate for eligible servicemembers, corrected
for nonproportional sampling of 35 percent.

Figure 1: Self-Reported Financial Condition of Servicemembers Who Were and
Were Not Deployed for at Least 30 Days at the Time They Completed the 2003
DOD Surveya

aSampling errors of estimates for servicemembers who were not deployed do
not exceed +/-2 percentage points. Sampling errors of estimates for
servicemembers who were deployed do not exceed +/-5 percentage points.
These sampling errors do not include errors due to other sources, such as
potential bias attributable to the overall 35 percent response rate. DOD
conducted research to assess the impact of this response rate on overall
estimates. We have no reason to believe that potential nonresponse bias
not otherwise accounted for by DOD's research is substantial for the
variables we studied in this report.

These responses are consistent with the findings that we obtained in a
survey of all PFM program managers and during our 13 site visits. In the
survey of PFM program managers, about 21 percent indicated that they
believed servicemembers are better off financially after a deployment;
about 54 percent indicated that the servicemembers are about the same
financially after a deployment; and about 25 percent believed the
servicemembers are worse off financially after a deployment. Also, 90
percent of the 232 recently deployed servicemembers surveyed in our focus
groups said that their financial situations either improved or remained
about the same after a deployment.

The 2003 DOD survey also asked servicemembers whether they had experienced
three types of negative financial events: pressure by creditors, falling
behind in paying bills, and bouncing two or more checks. Again, the
findings for deployed and nondeployed servicemembers were similar. For
example, 19 percent of the deployed group and 17 percent of the
nondeployed group said they were pressured by creditors; 21 percent of the
deployed group and 17 percent of the nondeployed group said they fell
behind in paying bills; and 16 percent of the deployed group and 13
percent of the nondeployed group said they had bounced two or more
checks.8

The special pays and allowances that some servicemembers receive when
deployed, particularly to dangerous locations, may be one reason for the
similar findings for the deployed and nondeployed groups.
Deployment-related special pays and allowances can increase
servicemembers' total cash compensation by hundreds of dollars per month.
Moreover, some or all income that servicemembers earn while serving in a
combat zone is tax free.

Deployed Servicemembers Faced Problems Receiving Family Separation Allowance and
Communicating with Creditors

Deployed servicemembers experienced problems receiving their family's
separation allowance promptly and communicating with creditors and
families. Regarding family separation allowance, DOD pay data for January
2005 showed that almost 6,000 of 71,000 deployed servicemembers who have
dependents did not receive their family separation allowance in a timely
manner. The family separation allowance of $250 per month is designed to
compensate servicemembers for extra expenses (e.g., childcare costs) that
result when they are involuntarily separated from their families. Delays
in obtaining this allowance could cause undue hardship for some families
faced with such extra expenses. We previously reported similar findings
for the administration of family separation allowance to Army Reserve
soldiers and recommended that the Secretary of the Army, in conjunction
with the DOD Comptroller, clarify and simplify procedures and forms for
implementing the family separation allowance entitlement policy.9

The services had different, sometimes confusing, procedures that
servicemembers performed to obtain their family separation allowance. DOD
officials suggested other factors to explain why some eligible
servicemembers had not received their family separation allowance on a
monthly basis. These factors included servicemembers might not have been
aware of the benefit, they may not have filed the required eligibility
form, or errors or delays might have occurred when their unit entered data
into the pay system. In response to our recommendation that DOD take steps
to correct the delayed payment of this allowance, DOD notified finance
offices that they should emphasize the prompt processing of such
transactions so that payment for the entitlement would begin within 30
days of deployment.

8 The sampling errors cited for fig. 1 also apply for these findings.

9 See GAO, Military  Pay:  Army  Reserve  Soldiers  Mobilized  to  Active 
Duty  Experienced  Significant  Pay  Problems, GAO-04-911 (Washington,
D.C.: Aug. 20, 2004).

Servicemembers may also experience financial difficulties as a result of
communication constraints while deployed. For example, individuals in the
focus groups for our April 2005 report suggested that deployed junior
enlisted personnel sometimes had less access to the Internet than did
senior deployed personnel, making it difficult for the former to keep up
with their bills. In addition, some Army servicemembers told us that they
(1) could not call stateside toll-free numbers because the numbers were
inaccessible from overseas or (2) incurred substantial costs-sometimes $1
per minute-to call stateside creditors. Furthermore, in our March 2004
testimony,10 we documented some of the problems associated with mail
delivery to deployed troops.

Failure to avoid or promptly correct financial problems can result in
negative consequences for servicemembers. These include increased debt for
servicemembers, bad credit histories, and poor performance of their duties
when distracted by financial problems. In our April 2005 report, we
recommended and DOD partially concurred that DOD identify and implement
steps to allow deployed servicemembers better communications with
creditors. In their comments, DOD cited operational requirements as a
reason that communications with creditors may not be appropriate. In
addition, DOD noted that servicemembers should have extended absence plans
for their personal finances to ensure that their obligations are covered.

10 See GAO, Military  Personnel:  Observations  Related  to  Reserve 
Compensation,  Selective  Reenlistment  Bonuses,  and  Mail  Delivery  to 
Deployed  Troops, GAO-04-582T (Washington, D.C.: Mar. 24, 2004).

Some Financial Products May Negatively Affect Servicemembers' Financial
Conditions

Some financial products may also negatively affect servicemembers'
financial conditions. For example, although servicemembers already receive
substantial, low-cost government-sponsored life insurance, we found that a
small group of companies sold products that combine life insurance with a
savings fund.11 These products promised high returns but included
provisions that reduced the likelihood that military purchasers would
benefit. These products usually provided a small amount of additional
death benefits and had much higher premiums than those for the government
insurance. These products also had provisions to use accumulated savings
to pay the insurance premiums if the servicemembers stopped making
payments. Moreover, servicemembers were being marketed a securities
product, known as a mutual fund contractual plan, which features higher
up-front sales charges than other mutual fund products and has largely
disappeared from the civilian marketplace. For both types of products, the
servicemembers who stopped making regular payments in the early years paid
higher sales charges and likely received lower returns than if they had
invested in other products.

Our November 2005 report made recommendations that included asking
Congress to consider banning contractual plans and direct regulators to
work cooperatively with DOD to develop appropriateness or suitability
standards for financial products sold to servicemembers. We also
recommended that regulators ensure that products being sold to
servicemembers meet existing insurance requirements and that DOD and
financial regulators take steps to improve information sharing between
them. In response to the concerns over the products being marketed to
servicemembers, securities and insurance regulators have begun cooperating
with DOD to expand financial literacy.

11 See GAO, Financial  Product  Sales:  Actions  Needed  to  Protect 
Military  Members,  GAO-06-245T (Washington, D.C.: Nov. 17, 2005) and
Financial  Product  Sales:  Actions  Needed  to  Better  Protect  Military
Members,  GAO-06-23 (Washington, D.C.: Nov. 2, 2005).

 DOD Has Taken Steps to Assist Servicemembers with Financial Concerns, but Some
                          Assistance Is Underutilized

DOD has taken a number of steps to assist servicemembers with their
financial concerns, including providing military-sponsored PFM training,
establishing a Financial Readiness Campaign, providing command financial
specialists, and using Armed Forces Disciplinary Control Boards.
Servicemembers can also access resources available outside of DOD (see
fig. 2). However, servicemembers and DOD are not fully utilizing some of
this assistance. In addition, DOD does not have an oversight framework to
assess the effectiveness of the steps taken to assist servicemembers.

Figure 2: Financial Management Assistance and Training Available to
Servicemembers

Services Require Financial Management Training

All four military services require PFM training for servicemembers, and
the timing and location of the training varies by service. The Army begins
this training at initial military, or basic, where soldiers receive 2
hours of PFM training. The training continues at Advanced Individual
Training schools, where soldiers receive an additional 2 hours of training
and at the soldiers' first duty station, where they are to receive an
additional 8 hours of PFM training. In contrast, Navy personnel receive 16
hours of PFM training during Advanced Individual Training; while, the
Marine Corps and the Air Force begin training servicemembers on financial
issues at their first duty stations.

Events, such as deployments or permanent changes of station, can trigger
additional financial management training for servicemembers. The length of
this additional training and the topics covered can vary by installation
and command. Unit leadership also may refer a servicemember for financial
management training or counseling if the command is aware of an
individual's financial problems (e.g., abusing check-cashing privileges).

Despite these policies, some servicemembers have not received the required
training, but the extent to which the training is not received is unknown
because servicewide totals are not always collected. The Army, which is
the only service that collected installation-level PFM data, estimated
that about 82 percent of its junior enlisted soldiers completed PFM
training in fiscal year 2003. Some senior Army officers at visited
installations acknowledged the need to provide PFM training to junior
enlisted servicemembers, but also noted that deployment schedules limited
the time available to prepare soldiers for their warfighting mission
(e.g., firing a weapon). While some services reported taking steps to
improve their monitoring of PFM training completion-an important
output-they still do not address the larger issue of training outcomes,
such as whether PFM training helps servicemembers manage their finances
better.12

12 The DOD Instruction 1342.27, dated November 2004, states that "within 3
months after arriving at the first permanent duty station, a servicemember
shall demonstrate a basic understanding of pay and entitlements, banking
and allotments, checkbook management, budgeting and saving (to include the
thrift savings plan), insurance, credit management, car buying, permanent
change of station moves . . . and information on obtaining counseling or
assistance on financial matters." The instruction, however, does not
specify how this is to be measured. It simply says that such an
understanding means to comprehend the underlying principles of a subject
and apply them to everyday life situations.

DOD's Financial Readiness Campaign Provides Resources Developed with Assistance
from External Organizations

DOD's Financial Readiness Campaign, which was launched in May 2003,
supplements PFM programs offered by the individual services through
Web-based sources developed with assistance from external organizations.
The Under Secretary of Defense for Personnel and Readiness stated that the
department initiated the campaign to improve the financial management
resources available to servicemembers and their families and to stimulate
a culture that values financial health and savings. The campaign allows
installation-level providers of PFM programs to access national programs
and services developed by federal agencies and nonprofit organizations.

The primary tool of the Financial Readiness Campaign has been a Web site
designed to assist PFM program managers in developing installation-level
campaigns to meet the financial management needs of their local military
community. This Web site is linked to the campaign's 27 partner
organizations (e.g., federal agencies, Consumer Federation of America, and
service relief/aid societies) that have pledged to support DOD in
implementing the Financial Readiness Campaign. DOD's May 2004 assessment
of the campaign13 noted, however, that installation-level PFM staffs had
made minimal use of the campaign's Web site. DOD campaign officials stated
that it was early in implementation of campaign efforts and that they had
been brainstorming ideas to repackage information given to PFM program
managers, as well as servicemembers and their families.

Command Financial Specialists and PFM Program Staff Are Available for Financial
Education and Counseling

At the installation level, the military services provide command financial
specialists, who are usually senior enlisted personnel trained by PFM
program managers, to assist servicemembers with financial issues. These
noncommissioned officers may perform the education and counseling role of
the command financial specialist as a collateral or full-time duty. The
Navy, Marine Corps, and Army use command financial specialists to provide
unit assistance to servicemembers in financial difficulties. The Air Force
does not use command financial specialists within the unit, but has the
squadron First Sergeant provide first-level counseling.

Individual servicemembers who require counseling beyond the capability of
the command financial specialists or First Sergeants in the Air Force can
see the installation's PFM program manager or PFM staff. The PFM program
manager is a professional staff member designated and trained to organize
and execute financial planning and counseling programs for the military
community. PFM program managers and staff offer individual financial
counseling as well as group classes on financial issues.

13 Office of the Deputy Under Secretary of Defense (Military Community and
Family Policy), Initial  Assessment  and  Follow-on  Plan  for  the 
Department  of  Defense  Financial  Readiness  Campaign  (May 27, 2004).

Free Legal Assistance Offered, but Servicemembers Do Not Make Full Use of This
Assistance

DOD provides free legal assistance on contracts and other financial
documents at installations, but servicemembers do not make full use this
assistance. For example, legal assistance attorneys may review purchase
contracts for large items such as homes and cars. In addition, the legal
assistance attorneys offer classes on varying financial issues including
powers of attorney, wills, and divorces. However, legal assistance
attorneys at the 13 installations we visited for our April 2005 report
stated that servicemembers rarely seek their assistance before entering
into financial contracts for goods or services such as purchasing cars or
lifetime film developing.

Instead, according to the attorneys, servicemembers are more likely to
seek their assistance after encountering problems. For example, used car
dealers offered low interest rates for financing a vehicle, but the
contract stated that the interest rate could be converted to a higher rate
later if the lender did not approve the loan. Servicemembers were later
called to sign a new contract with a higher rate. By that time, some
servicemembers found it difficult to terminate the transaction because
their trade-in vehicles had been sold.

Legal assistance attorneys, as well as other personnel in our interviews
and focus groups, noted reasons why servicemembers might not take greater
advantage of the free legal assistance before entering into business
agreements. They stated that junior enlisted servicemembers who want their
purchases or loans immediately may not take the time to visit the
attorney's office for such a review. Additionally, the legal assistance
attorneys noted that some servicemembers feared information about their
financial problems would get back to the command and limit their career
progression.

Service Relief/Aid Societies Provide Financial Assistance

Each service has a relief or aid society designed to provide financial
assistance to servicemembers. The Army Emergency Relief Society,
Navy-Marine Corps Relief Society, and the Air Force Aid Society are all
private, nonprofit organizations. These societies provide counseling and
education as well as financial relief through grants or no-interest loans
to eligible servicemembers experiencing emergencies. Emergencies include
funds needed to attend the funeral of a family member, repair a primary
vehicle, or buy food. For example, in 2003, the Navy-Marine Corps Relief
Society provided $26.6 million in interest-free loans and $4.8 million in
grants to servicemembers for emergencies.

Some servicemembers in our focus groups stated that they would not use
grants or no-interest loans from a service society because they take too
long, are intrusive because the financial institution or relief/aid
society requires in-depth financial information in the loan or grant
application, or could be career limiting if the command found out the
servicemembers were having financial problems. The Army Emergency Relief
Society attempted to address the time and intrusiveness concerns with its
test program, Commander's Referral, for active duty soldiers lacking funds
to meet monthly obligations of $500 or less. After the commander approves
the loans, the servicemembers can expect to receive funds quickly.
However, noncommissioned officers in our individual interviews and focus
groups said the program still did not address servicemembers' fears that
revealing financial problems to the command could jeopardize their
careers.

Non-DOD Resources May Be Used When Sevicemembers Need Additional Financial
Support or Confidentiality

Servicemembers may choose to use non-DOD resources if they do not want the
command to be aware of their financial conditions or they need financial
products or support not offered through DOD, the services, or the
installation. In such cases, servicemembers may use other financial
resources outside of DOD, which are available to the general public. These
can include banks or credit unions for competitive rates on home or
automobile loans, commercial Web sites for interest rate quotes on other
consumer loans, consumer counseling for debt restructuring, and financial
planners for advice on issues such as retirement planning.

Armed Forces Disciplinary Control Boards Can Help Curb Predatory Lending
Practices

DOD has used Armed Forces Disciplinary Control Boards to help curb
predatory lending practices and minimize their effects. These boards and
the recommendations that they make to an installation commander to place
businesses off-limits to servicemembers can be effective tools for
avoiding or correcting unfair practices. However, data gathered during
some of our site visits to the various installations revealed few times
when the boards were used to address predatory lending practices. For
example, the board at Fort Drum, New York, had not met in about 4 years,
and the board's director was unaware of two lawsuits filed by the New York
Attorney General that involved Fort Drum servicemembers.

           o  The Attorney General settled a lawsuit in 2004 on behalf of 177
           plaintiffs-most of whom were Fort Drum servicemembers-involving a
           furniture store that had improperly garnished wages pursuant to
           unlawful agreements it had required customers to sign at the time
           of purchase.
           o  The Attorney General filed a lawsuit in 2004 involving catalog
           sales stores. He characterized the stores as payday-lending firms
           that charged excessive interest rates on loans disguised as
           payments toward catalog purchases. Some servicemembers and family
           members at Fort Drum fell prey to this practice. The Attorney
           General stated that he found it particularly troubling that two of
           the catalog stores were located near the Fort Drum gate.

           In contrast to the Fort Drum situations, businesses near two other
           installations we visited changed their lending practices after
           boards recommended that commanders place or threaten to place the
           businesses on off-limits lists. Despite such successes, boards
           might not be used as a tool for dealing with predatory lenders for
           a variety of reasons. For example, as a result of high
           deployments, commanders may minimize some administrative duties,
           such as convening the boards, to use their personnel for other
           purposes. In addition, the boards may have little basis to
           recommend placing or threatening to place businesses on the list
           if the lenders operate within state laws. Furthermore, significant
           effort may be required to put businesses on off-limits lists.
           While recognizing these limitations, in our April 2005 report we
           nonetheless recommended that all Armed Forces Disciplinary Control
           Boards be required to meet twice a year. In responding to our
           recommendation, DOD indicated that it intended to establish a
           requirement for the boards to meet even more frequently-four times
           a year-and direct that businesses on the off-limits list for one
           service be off-limits for all services.

           Although DOD has made resources available to assist
           servicemembers, it lacks the results-oriented, departmentwide data
           needed to assess the effectiveness of its PFM programs and provide
           necessary oversight. The November 2004 DOD instruction that
           provides guidance to the services on servicemembers' financial
           management does not address program evaluation or the reports that
           services should supply to DOD for its

           oversight role.14 In our 2003 report,15 we noted that an earlier
           draft of the instruction emphasized evaluating the programs and
           cited metrics such as the number of servicemembers with wages
           garnished. DOD officials said that these metrics were eliminated
           because the services did not want the additional reporting
           requirements.

           The only DOD-wide evaluative data available for assessing the PFM
           programs and servicemembers' financial conditions were obtained
           from a general-purpose annual survey that focuses on the financial
           conditions of servicemembers as well as a range of other unrelated
           issues. The data were limited because (1) DOD policy officials for
           the PFM programs can only include a few financial-related items to
           this general purpose survey, (2) a response rate of 35 percent on
           a March 2003 active duty survey leads to questions about the
           generalizability of the findings, and (3) DOD has no means for
           confirming the self-reported information for survey items that ask
           about objective events such as filing for bankruptcy. Without an
           oversight framework requiring common evaluation DOD-wide and
           reporting relationships among DOD and the services, DOD and
           Congress do not have the visibility or oversight they need to
           assess the effectiveness of DOD's financial management training
           and assistance to servicemembers. In response to a recommendation
           in our April 2005 report for DOD to develop a DOD-wide oversight
           framework and formalize its oversight role for the PFM programs,
           the department indicated that it is pursuing management
           information that includes personal finances to support its
           implementation of the President's Management Agenda and to comply
           with the Government Performance Results Act.

           In summary, as mentioned earlier in my testimony, Congress and DOD
           have taken steps to decrease the likelihood that deployed and
           nondeployed servicemembers will experience financial problems. The
           prior increases in compensation, efforts to increase the financial
           literacy of servicemembers, and fuller utilization of the tools
           that DOD has provided for addressing the use of predatory lenders
           should positively affect the financial conditions of military
           personnel. While additional efforts are warranted to implement our
           recommendations on issues such as improving DOD's oversight
           framework for assessing its PFM programs, some of these efforts to
           address the personal financial conditions of servicemembers and
           correct past programmatic shortcomings are well underway.
           Sustaining this momentum will be key to minimizing the adverse
           effects that personal financial management problems can have on
           the servicemember, unit, and service.

           Madam Chairwoman and Members of the Subcommittee, this concludes
           my prepared statement. I would be happy to respond to any
           questions you may have.

           For further information regarding this testimony, please contact
           me at 202-512-6304 or [email protected]. Individuals making key
           contributions to this testimony include Jack E. Edwards, Assistant
           Director; Renee S. Brown; Marion A. Gatling; Cody Goebel; Barry
           Kirby; Marie A. Mak; Terry Richardson; and John Van Schaik.

           Financial Product Sales: Actions Needed to Protect Military
           Members. GAO-06-245T . Washington, D.C.: November 17, 2005.

           Financial Product Sales: Actions Needed to Better Protect Military
           Members. GAO-06-23 . Washington, D.C.: November 2, 2005.

           Military Personnel: DOD Needs Better Controls over Supplemental
           Life Insurance Solicitation Policies Involving Servicemembers.
           GAO-05-696 . Washington, D.C.: June 29, 2005.

           Military Personnel: DOD's Comments on GAO's Report on More DOD
           Actions Needed to Address Servicemembers' Personal Financial
           Management Issues. GAO-05-638R . Washington D.C.: May 11, 2005.

           Military Personnel: More DOD Actions Needed to Address
           Servicemembers' Personal Financial Management Issues. GAO-05-348 .
           Washington, D.C.: April 26, 2005.

           Military Personnel: DOD Tools for Curbing the Use and Effects of
           Predatory Lending Not Fully Utilized. GAO-05-349 . Washington,
           D.C.: April 26, 2005.

           Credit Reporting Literacy: Consumers Understood the Basics but
           Could Benefit from Targeted Educational Efforts. GAO-05-223 .
           Washington, D.C.: March 16, 2005.

           DOD Systems Modernization: Management of Integrated Military Human
           Capital Program Needs Additional Improvements. GAO-05-189 .
           Washington, D.C.: February 11, 2005.

           Highlights of a GAO Forum: The Federal Government's Role in
           Improving Financial Literacy. GAO-05-93SP . Washington, D.C.:
           November 15, 2004.

           Military Personnel: DOD Needs More Data Before It Can Determine if
           Costly Changes to the Reserve Retirement System Are Warranted.
           GAO-04-1005 . Washington, D.C.: September 15, 2004.

           Military Pay: Army Reserve Soldiers Mobilized to Active Duty
           Experienced Significant Pay Problems. GAO-04-911 . Washington, D.
           C.: August 20, 2004.

           Military Pay: Army Reserve Soldiers Mobilized to Active Duty
           Experienced Significant Pay Problems. GAO-04-990T . Washington,
           D.C.: July 20, 2004.

           Military Personnel: Survivor Benefits for Servicemembers and
           Federal, State, and City Government Employees. GAO-04-814 .
           Washington, D.C.: July 15, 2004.

           Military Personnel: DOD Has Not Implemented the High Deployment
           Allowance That Could Compensate Servicemembers Deployed Frequently
           for Short Periods. GAO-04-805 . Washington, D.C.: June 25, 2004.

           Military Personnel: Active Duty Compensation and Its Tax
           Treatment. GAO-04-721R . Washington, D.C.: May 7, 2004.

           Military Personnel: Observations Related to Reserve Compensation,
           Selective Reenlistment Bonuses, and Mail Delivery to Deployed
           Troops. GAO-04-582T . Washington, D.C.: March 24, 2004.

           Military Personnel: Bankruptcy Filings among Active Duty Service
           Members. GAO-04-465R . Washington, D.C.: February 27, 2004.

           Military Pay: Army National Guard Personnel Mobilized to Active
           Duty Experienced Significant Pay Problems. GAO-04-413T .
           Washington, D.C.: January 28, 2004.

           Military Personnel: DOD Needs More Effective Controls to Better
           Assess the Progress of the Selective Reenlistment Bonus Program.
           GAO-04-86 . Washington, D.C.: November 13, 2003.

           Military Pay: Army National Guard Personnel Mobilized to Active
           Duty Experienced Significant Pay Problems. GAO-04-89 . Washington,
           D.C.: November 13, 2003.

           Military Personnel: DFAS Has Not Met All Information Technology
           Requirements for Its New Pay System. GAO-04-149R . Washington,
           D.C.: October 20, 2003.

           Military Personnel: DOD Needs More Data to Address Financial and
           Health Care Issues Affecting Reservists. GAO-03-1004 . Washington,
           D.C.: September 10, 2003.

           Military Personnel: DOD Needs to Assess Certain Factors in
           Determining Whether Hazardous Duty Pay Is Warranted for Duty in
           the Polar Regions. GAO-03-554 . Washington, D.C.: April 29, 2003.

           Military Personnel: Management and Oversight of Selective
           Reenlistment Bonus Program Needs Improvement. GAO-03-149 .
           Washington, D.C.: November 25, 2002.

           Military Personnel: Active Duty Benefits Reflect Changing
           Demographics, but Opportunities Exist to Improve. GAO-02-935 .
           Washington, D.C.: September 18, 2002.

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DOD Lacks Oversight Framework for Assessing and Monitoring PFM Program
Effectiveness

                            Concluding Observations

14 DOD Instruction 1342.27, Personal  Financial  Management  for  Service 
Members  (Nov. 12, 2004).

15 See GAO, Military  Personnel:  DOD  Needs  More  Data  to  Address 
Financial  and  Health  Care  Issues  Affecting  Reservists, GAO-03-1004
(Washington, D.C.: Sept. 10, 2003).

                       Staff Contact and Acknowledgments

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Highlights of GAO-06-749T , a testimony before the Subcommittee on
Oversight and Investigations, Committee on Financial Services, House of
Representatives

May 18, 2006

MILITARY PERSONNEL

DOD Has Taken Steps to Address Servicemembers' Financial Needs, but
Additional Effort Is Warranted

The finances of servicemembers and their families have been an ongoing
concern of Congress and the Department of Defense (DOD), especially in
light of more frequent deployments to support conflicts in Iraq and
Afghanistan. Adverse effects that may result when servicemembers
experience financial problems include loss of security clearances,
criminal or nonjudicial sanctions, adverse personnel actions, or adverse
impacts on unit readiness. To decrease the likelihood that servicemembers
will experience financial problems, DOD has requested and Congress has
granted annual increases in military basic pay for all active duty
servicemembers and increases in special pays and allowances for deployed
servicemembers. The military has also developed personal financial
management (PFM) programs to help avoid or mitigate adverse effects
associated with personal financial problems. However, studies published in
2002 showed that servicemembers continue to report financial problems.

This testimony provides a summary of GAO's prior work examining (1) the
extent to which deployments have affected the financial conditions of
active duty servicemembers and their families, and (2) steps that DOD has
taken to assist servicemembers with their financial needs.

DOD data suggests that deployment status does not affect the financial
condition of active duty servicemembers, although some deployed
servicemembers faced certain problems. Data from a 2003 DOD-wide survey
suggests that servicemembers who were deployed for at least 30 days
reported similar levels of financial health or problems as those who had
not deployed. For example, of junior enlisted personnel, 3 percent of the
deployed group and 2 percent of the nondeployed group indicated that they
were in "over their heads" financially; and 13 percent of the deployed
group and 15 percent of the nondeployed group responded that they found it
"tough to make ends meet but keeping your head above water" financially.
However, problems receiving family separation allowance and communicating
with creditors may result in financial difficulties for some deployed
servicemembers. Based on DOD pay data for January 2005, almost 6,000 of
71,000 deployed servicemembers who had dependents did not obtain their
family separation allowance in a timely manner. Furthermore, problems
communicating with creditors-caused by limited Internet access, few
telephones and high fees, and delays in receiving ground mail-can affect
deployed servicemembers' abilities to resolve financial issues.
Additionally, some financial products marketed to servicemembers may
negatively affect their financial condition.

DOD has taken a number of steps to assist servicemembers with their
financial needs, although some of this assistance has been underutilized.
These steps include PFM training for servicemembers, which is required by
all four military services. DOD also provides free legal assistance on
purchase contracts for large items and other financial documents. However,
according to the attorneys and other personnel, servicemembers do not make
full use of available legal services because they may not take the time to
visit the attorney's office or they fear information about a financial
problem would get back to the command and limit their career progression.
In addition, each service has a relief or aid society designed to provide
financial assistance through counseling and education as well as financial
relief through grants or no-interest loans. Some servicemembers in our
focus groups stated that they would not use relief from a service society
because they take too long, are intrusive, require too much in-depth
financial information, or may be career limiting if the command found out.
Servicemembers may use non-DOD resources if they do not want the command
to be aware of their financial conditions or they need products or support
not offered through DOD, the services, or the installation. Although DOD
has taken these steps to assist servicemembers with their financial needs,
it does not have the results-oriented departmentwide data needed to assess
the effectiveness of its PFM programs and provide necessary oversight.
Without an oversight framework requiring evaluation and a reporting
relationship between DOD and the services, DOD and Congress do not have
the visibility or oversight needed to assess the effectiveness of DOD's
financial management training and assistance to servicemembers.
*** End of document. ***