Military Personnel: DOD Needs to Establish a Strategy and Improve
Transparency over Reserve and National Guard Compensation to	 
Manage Significant Growth in Cost (20-JUN-07, GAO-07-828).	 
                                                                 
The Department of Defense (DOD) has increasingly relied on	 
reserve personnel to carry out its military operations. Congress 
and DOD have taken steps to enhance reserve compensation, such as
improving health care benefits. Concerns exist, however, that	 
rising compensation costs may not be sustainable in the future,  
especially given the nation's large and growing long-range fiscal
imbalance. Under the statutory authority of the Comptroller	 
General to conduct work on his own initiative, GAO (1) reviewed  
how much it has cost the federal government to compensate reserve
personnel since fiscal year 2000; (2) assessed the extent to	 
which DOD's mix of cash, noncash, and deferred compensation has  
helped DOD meet its human capital goals; and (3) evaluated the	 
extent to which DOD's approach to reserve compensation provides  
transparency over total cost to the federal government. To	 
address these objectives, GAO analyzed budget data and relevant  
legislation and also interviewed appropriate officials. GAO	 
focused this review on part-time reservists and full-time, active
guard and reserve.						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-828 					        
    ACCNO:   A71046						        
  TITLE:     Military Personnel: DOD Needs to Establish a Strategy and
Improve Transparency over Reserve and National Guard Compensation
to Manage Significant Growth in Cost				 
     DATE:   06/20/2007 
  SUBJECT:   Armed forces reserves				 
	     Cost analysis					 
	     Financial analysis 				 
	     Health care costs					 
	     Military compensation				 
	     Military pay					 
	     Military personnel 				 
	     Military reserve personnel 			 
	     Performance measures				 
	     Salary increases					 
	     Strategic planning 				 
	     Transparency					 
	     DOD Selected Reserve Program			 
	     Global War on Terrorism				 

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GAO-07-828

   

     * [1] 

          * [2]Results in Brief
          * [3]Background
          * [4]Cost to Compensate Guard and Reserve Personnel Has Increased
          * [5]DOD Does Not Know the Extent to Which Its Mix of Compensatio

               * [6]Mix of Reserve Compensation Has Shifted to Deferred
                 Compensa
               * [7]DOD Does Not Have an Established Compensation Strategy
                 and P

          * [8]DOD Does Not Have Transparency over Total Costs of Reserve C
          * [9]Conclusions
          * [10]Recommendations for Executive Action
          * [11]Matter for Congressional Consideration
          * [12]Agency Comments and Our Evaluation

     * [13]Appendix I: Updated Active Duty Compensation Costs
     * [14]Appendix II: Scope and Methodology
     * [15]Appendix III: Pay and Benefits of the Selected Reserve
     * [16]Appendix IV: Comments from the Department of Defense and GAO

          * [17]GAO Response to Department of Defense's Technical Comments

     * [18]Appendix V: GAO Contact and Staff Acknowledgments

          * [19]GAO Contact
          * [20]Acknowledgments

     * [21]Related GAO Products

          * [22]Order by Mail or Phone

Report to Congressional Committees

United States Government Accountability Office

GAO

June 2007

MILITARY PERSONNEL

DOD Needs to Establish a Strategy and Improve Transparency over Reserve
and National Guard Compensation to Manage Significant Growth in Cost

GAO-07-828

Contents

Letter 1

Results in Brief 5
Background 9
Cost to Compensate Guard and Reserve Personnel Has Increased Significantly
Since Fiscal Year 2000 14
DOD Does Not Know the Extent to Which Its Mix of Compensation Is Meeting
Its Human Capital Goals 24
DOD Does Not Have Transparency over Total Costs of Reserve Compensation 30
Conclusions 35
Recommendations for Executive Action 36
Matter for Congressional Consideration 37
Agency Comments and Our Evaluation 37
Appendix I Updated Active Duty Compensation Costs 40
Appendix II Scope and Methodology 43
Appendix III Pay and Benefits of the Selected Reserve 49
Appendix IV Comments from the Department of Defense and GAO's Response 59
GAO Response to Department of Defense's Technical Comments 67
Appendix V GAO Contact and Staff Acknowledgments 72
Related GAO Products 73

Tables

Table 1: Types of Compensation for Servicemembers, as of Fiscal Year 2007
13
Table 2: Summary of Changes in Reserve Compensation Costs for Fiscal Years
2000-2006 20
Table 3: Summary of Changes in Active Duty Compensation Costs for Fiscal
Years 2000 and 2006 41

Figures

Figure 1: Organizational Chart of the National Guard and Reserve 10
Figure 2: Total Compensation Cost of Reserve Components, Fiscal Years
2000-2006 15
Figure 3: Per Capita Costs for Part-Time Reservists by Compensation Type,
Fiscal Years 2000-2006 16
Figure 4: Per Capita Cost for Full-time Reservists by Compensation Type,
Fiscal Years 2000-2006 18
Figure 5: DOD's Estimated Cost to the Government for TRICARE Reserve
Select, Fiscal Years 2005-2013 23
Figure 6: Allocation of Reserve Compensation to Cash, Noncash, and
Deferred Categories in Fiscal Years 2000 and 2006 25
Figure 7: Components of Total Reserve Compensation Costs 32

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United States Government Accountability Office
Washington, DC 20548

June 20, 2007

Congressional Committees

Questions about the adequacy of National Guard and reserve compensation
have been raised as the Department of Defense (DOD) increasingly relies on
reservists to carry out its military operations domestically and abroad.
In 1973, when the U.S. military first transitioned from a draft to an
all-volunteer force, decision makers recognized that military pay needed
to be increased to a level that was generally competitive with the
civilian sector.1 Since then, the amount of military pay and benefits has
progressively increased for both active duty and reserve servicemembers,
although the basic structure of military compensation remains largely
unchanged. DOD provides active duty, guard, and reserve servicemembers
with a compensation package made up of cash, such as pay and allowances;
noncash benefits, such as education assistance and health care; and
deferred compensation, such as retirement pensions and benefits. Guard and
reserve servicemembers are generally eligible for the same pay and
allowance system as their active duty counterparts.2

Since September 2001, the department has called more than 500,000
reservists to active duty in support of the Global War on Terrorism. Given
that there are few indications that the current use of reserve forces will
decline in the near future, DOD and Congress have taken steps to enhance
reserve compensation. For example, Congress expanded health care benefits
to all reservists and their families and authorized regular increases in
basic pay and additional education benefits for mobilized reservists. In
addition, Congress established the Commission on National Guard and
Reserves in the national defense authorization act for fiscal year 20053
to assess various aspects of the reserves, including compensation, and
this commission is expected to address compensation in its final report
due by January 2008.

1The "All-Volunteer pay raise" occurred in 1972, a year before
conscription ended. This pay raise increased enlisted and officer pay. For
example, the pay of an enlisted servicemember at the E-2 pay grade
increased about 87 percent, while pay for an officer at pay grade O-1
increased by about 10 percent.

2There are some differences in compensation between reserve and active
duty servicemembers. For example, reservists and their families do not
always live in close proximity to military bases, which limits their
ability to take advantage of installation-based benefits. In addition,
eligible reservists receive their retirement annuity at age 60, while
eligible active duty servicemembers receive their annuity immediately upon
retirement.

DOD also recently explored the need for changing the military compensation
system when the Secretary of Defense formed an independent advisory
committee to study compensation in 2005.4 Of particular concern to the
department was the growth in entitlement spending for things like health
care and the appropriateness of the mix of in-service and post service
compensation. DOD leaders expressed concern that rising compensation costs
may not be sustainable in the future and could crowd out other important
investments needed to recapitalize equipment and infrastructure.
Similarly, the committee's report stated that the current military
compensation system is inefficient, and made recommendations to modernize
the compensation system and provide greater flexibility for efficient and
effective force management. Specifically, the report made recommendations
to change the retirement system and health benefits.

Similarly, we expressed concerns about whether the country's current
spending trends are both affordable and sustainable in our 2005 report on
the challenges facing the United States in the 21st century.5 Given the
nation's large and growing long-range fiscal imbalance, we believe it is
time for a baseline review of all major federal programs and policies,
including military compensation, to ensure that they are efficiently and
effectively meeting their objectives and are well adapted to 21st century
realities. Many federal programs--such as military compensation--were
designed decades ago to address challenges of prior eras related to labor
markets, security conditions, organizational structures, and compensation
strategies. As a result of the mounting concerns, in 2005 we assessed the
active duty compensation system and made a number of recommendations to
improve the transparency, reasonableness, appropriateness, affordability,
and sustainability of the active duty compensation system.6 We found that
the piecemeal approach to compensation resulted in a lack of transparency
that created an inability to identify total compensation costs and assess
how compensation investments are allocated to cash, noncash, and deferred
compensation. We also reported that the federal government's total cost to
provide active duty compensation was substantial and rising, totaling
about $158 billion, which was about $112,000 per servicemember in fiscal
year 2004. We recently updated these costs and found that in fiscal year
2006 the federal government spent about $173 billion or about $126,000 per
servicemember--an increase of about 32 percent from fiscal year 2000. See
appendix I for more detailed information on active duty compensation costs
and the allocation of those costs to cash, noncash, and deferred
compensation.

3 Ronald W. Reagan National Defense Authorization Act for Fiscal Year
2005, Pub. L. No. 108-375, S 513 (Oct. 2004).

4Defense Advisory Committee on Military Compensation, The Military
Compensation System: Completing the Transition to an All-Volunteer Force
(Arlington, Va.: Apr. 28, 2006).

5 GAO, 21st Century Challenges: Reexamining the Base of the Federal
Government, [23]GAO-05-352T (Washington, D.C.: February 2005).

We recognize that compensation is an important recruiting and retention
tool, particularly during a time of increased military operations, and any
proposed changes must be given careful consideration. In light of the
evolving 21st century realities, under the statutory authority of the
Comptroller General to conduct evaluations on his own initiative, we (1)
identified how much it has cost the federal government to provide cash,
noncash, and deferred benefits to compensate reserve personnel since
fiscal year 2000; (2) assessed the extent to which DOD's mix of cash,
noncash, and deferred compensation has helped DOD meet its human capital
goals; and (3) assessed the extent to which DOD's approach to reserve
compensation provides transparency over total cost to the federal
government.

In conducting this review, we focused our scope on part-time, drilling
reservists, and full-time reservists serving in the Active Guard and
Reserve program of the Selected Reserve.7 We excluded guard and reserve
members who were mobilized8 from our cost estimates, because, once
reservists are mobilized, their compensation costs are paid out of the
active components' budgets. Our review included the years from fiscal year
2000 through fiscal year 2006 to capture costs prior to the increased use
of reservists and changes to compensation policy. To identify how
reservists are compensated and how much it has cost the federal government
to provide cash, noncash, and deferred compensation, we analyzed relevant
regulations, legislation, and budget justification books, and also
interviewed appropriate officials at DOD and the Department of Veterans
Affairs about costs not presented in budgets, such as the accrued costs
for non-Medicare-eligible retirees' health care. In addition, we
calculated the costs of some types of compensation, such as the federal
income tax advantage. To determine per capita costs, we divided the total
cost of the part-time population by an adjusted average strength of the
part-time reservists--which we calculated by subtracting the average
number of mobilized reservists from the average strength for each fiscal
year. For the full-time reservists, we divided their total cost by their
average strength. To assess the extent to which DOD's mix of cash,
noncash, and deferred compensation helped DOD meet its human capital
goals, we reviewed applicable directives, policy, and guidance and
interviewed DOD officials to determine whether the current reserve
compensation system follows those directives, policy, and guidance. We
also reviewed DOD directives and guidance as well as federal government
standards such as the Government Performance and Results Act of 1993. To
assess the extent to which DOD's approach provided transparency over total
costs to the federal government, we reviewed applicable directives,
policy, and guidance and interviewed DOD officials to determine whether
the current reserve compensation system follows those directives, policy,
and guidance. We reviewed how compensation costs are presented to decision
makers. To update our previous work on the cost to the federal government
of compensating active duty servicemembers, we (1) interviewed appropriate
officials, (2) analyzed and compiled data for fiscal years 2000 through
2006 from military personnel and operations and maintenance budget
justification books, (3) estimated the total federal tax expenditure for
military compensation and the costs of future veterans' benefits for
current active duty servicemembers, and (4) requested estimates of accrual
health care costs for retirees and their dependents from DOD's Office of
the Actuary and health care costs for active duty servicemembers and their
dependents from DOD's Office of Health Affairs. We conducted our review
from October 2006 through May 2007 in accordance with generally accepted
government auditing standards. More detailed information on our scope and
methodology is provided in appendix II.

6 GAO, Military Personnel: DOD Needs to Improve the Transparency and
Reassess the Reasonableness, Appropriateness, Affordability, and
Sustainability of Its Military Compensation System, [24]GAO-05-798
(Washington, D.C.: July 19, 2005).

7 DOD's Selected Reserve is made up of members from the Army Reserve, Army
National Guard, Air Force Reserve, Air National Guard, Marine Corps
Reserve, and Navy Reserve. We did not include the Coast Guard Reserve. The
Selected Reserve is the first category of the reserves that is subject to
recall to active duty to augment the active component in time of war or
national emergency. For this reason, the Selected Reserve has priority for
training, equipment, and personnel over all other categories of
reservists. The Selected Reserve consists of units and individuals that
serve on an "active reserve" status. Unlike other categories of the
reserves, part-time Selected Reservists are required to maintain readiness
through scheduled drilling and training, usually 1 weekend a month and 2
weeks a year. Full-time Selected Reservists serve as full-time
administration and support staff to the various reserve components.

8 Mobilization is the process by which the armed forces are brought into a
state of readiness for war or national emergency or to support some other
operational mission. In this report, we use the term mobilization to refer
to the process of calling up reserve components for active-duty service.
We use the term mobilized reservist to refer to a reservist who has
received orders to active duty.

Results in Brief

The total cost to the federal government to provide compensation for
part-time and full-time reservists has risen about 47 percent, from about
$13.9 billion in fiscal year 2000 to about $20.5 billion in fiscal year
2006 in constant fiscal year 2006 dollars. 9 Most reservists are part
time, and their per capita total cost, including cash, noncash, and
deferred compensation, almost doubled, from about $10,100 in fiscal year
2000 to about $19,100 in fiscal year 2006. In addition to part-time
reservists, the reserve workforce includes a small percentage of
reservists who work full time, and their per capita total compensation
cost increased 28 percent, from about $90,100 in fiscal year 2000 to about
$115,200 in fiscal year 2006.10 Much of this growth can be attributed to
the cost to provide reservists with deferred compensation. From fiscal
year 2000 to fiscal year 2006, deferred compensation costs more than
tripled, increasing from $1.7 billion to $5.8 billion. This growth is
largely attributed to additional health care benefits that have been
provided for future reserve retirees and their families. For example,
Congress enhanced retirees' health care benefits in fiscal year 2001 by
adding health care benefits for life. These increases in cost are mainly
driven by entitlements that are unlikely to subside at the end of the
ongoing military operations in Iraq and Afghanistan. For example, DOD
officials anticipate significant future growth in the cost of noncash
compensation as a result of the recent expansion of health care benefits
for reservists and their families, which will provide continuation of
health coverage as reservists transition on and off of active duty.

9 Unless noted, all costs have been adjusted for inflation and are
presented in fiscal year 2006 constant dollars. To calculate the costs in
constant dollars, we used an official DOD source, the National Defense
Budget Estimates for fiscal year 2007, published by the Office of the
Under Secretary of Defense (Comptroller), for military pay deflators or
price indices. There are several other potential price indices or
deflators that could be used to adjust for inflation. Using the other
indices would have shown a similar or larger increase in real spending for
compensation.

10 The per capita costs of full-time reservists are slightly lower than
the per capita costs for active duty servicemembers, as shown in appendix
I. This is because some costs are not associated with full-time
reservists, such as accrual costs for veterans' benefits or costs for
installation-based benefits, such as exchanges and family support
programs.

DOD does not know the extent to which its mix of cash, noncash, and
deferred compensation is meeting its human capital goals of recruiting and
retaining a high-quality force, in part, because it lacks an established
compensation strategy and performance measures to identify the appropriate
mix of reserve compensation needed to maintain its force. The mix of
reserve compensation has shifted toward more deferred benefits, increasing
from 12 percent of total reserve compensation in fiscal year 2000 to 28
percent in fiscal year 2006. This increase in deferred compensation may
not provide the most efficient allocation or the best return on the
compensation investment. Studies indicate cash is not only preferred to
noncash and deferred compensation, but it is also a more efficient
recruiting and retention tool for active duty servicemembers. 11
Furthermore, fewer than one in four part-time reservists will receive
these costly deferred benefits, given that about 24 percent of those who
join the guard and reserve will ultimately earn nondisability retirement
pay and health care for life. We have previously found that programs, such
as compensation systems, need performance measures and goals to guide
decision makers and program policy.12 In addition, DOD's personnel and
readiness strategic plan states the importance of identifying requirements
and tailoring compensation and other programs to achieve objectives and of
continuously reviewing personnel management.13 In 1979 and again in 2005,
we identified DOD's lack of a compensation strategy as a problem in
establishing a basis for evaluating changes to the total compensation
system.14 Moreover, the situation today is further complicated by the
frequency of mobilizations in support of the ongoing operations and the
components' recent recruiting challenges. Congress and DOD have taken a
piecemeal approach to military compensation by adding various
benefits--such as health care--and cash--such as bonuses and increases to
basic pay--to address current recruiting problems and to take care of
servicemembers over their lifetime. Furthermore, they have not adequately
considered the appropriateness, affordability, and sustainability of the
related cost of these additions. Determining the return on investment for
compensation and the impact of compensation on recruiting and retention is
not an easy task. However, given that reserve compensation is becoming
increasingly costly, DOD does not know if the additions to the
compensation system are appropriate to ensure that the reserve components
recruit and retain a high-quality workforce in sufficient numbers and the
federal government has the best return on investment. DOD officials have
stated during testimony before Congress that adding deferred compensation,
such as TRICARE for life, is not their preference. However, until DOD
establishes a strategy for its compensation system and develops
performance measures to evaluate the efficiency of compensation tools, DOD
and Congress will be unable to make informed decisions about which
compensation tools and mix will provide the best return on investment, be
sustainable in the long-term, and be effective in recruiting and retaining
the future reserve force.

11 John T. Warner and Saul Pleeter, "The Personal Discount Rate: Evidence
from Military Downsizing Programs," The American Economic Review (Mar.
2001); Defense Advisory Committee on Military Compensation, The Military
Compensation System: Completing the Transition to an All-Volunteer Force,
(Arlington, Va.: Apr. 28, 2006); DOD, 9th Quadrennial Review of Military
Compensation vol I (Washington, D.C.: May 17, 2002); and Commission on the
National Guard and Reserves, Strengthening America's Defenses in the New
Security Environment (Mar. 1, 2007).

12 GAO, A Model of Strategic Human Capital Management, [25]GAO-02-373SP
(Washington, D.C.: Mar. 15, 2002).

DOD's approach to reserve compensation does not provide decision makers in
Congress and DOD with adequate transparency over total cost for providing
reserve compensation--including the allocation of costs to cash, noncash,
and deferred compensation and the total cost of mobilized reservists.
Despite the fact that sound business practices require adequate
transparency over investments of resources, there is no single source that
provides the total cost for reserve compensation. We have also previously
reported there is not a single source for active duty compensation costs.
In fact, reserve compensation costs are found in three different federal
departments--DOD, the Department of Veterans Affairs, and the Department
of Treasury. Furthermore, within DOD, compensation costs are found in
three different budgets--the reserve components' military personnel,
active components' military personnel, and active components' operation
and maintenance. For example, specific types of compensation, such as
basic pay and health care, are located in different budgets, making it
difficult for decision makers to see the full cost of all the sources of
compensation provided to reservists. In addition, reservists who were
mobilized to support the war on terrorism have been paid out of the active
components' budgets through supplemental funding during the mobilization,
which further dilutes decision makers' ability to see the full picture of
the cost of reserve compensation to the federal government. DOD is taking
measures to address some of these problems. For example, DOD and the
services are in the process of implementing a system, known as the Defense
Integrated Military Human Resources System, to consolidate their personnel
and pay systems. This consolidation may improve transparency by
integrating all human resource information for active, guard, and reserve
personnel of all the services; however, we have recently reported that
this task is proving to be difficult to complete because each service has
unique requirements. 15 Nevertheless, DOD has no plans to compile into one
place, that is readily accessible, the total cost for reserve personnel
compensation, including mobilized reservists, and the allocation of these
costs among cash, noncash, and deferred compensation. Such a compilation
could enable decision makers to accurately assess these costs and to
manage the total force as well as efficiently and effectively make
fact-based human capital adjustments. Until total cost for reserve
compensation is compiled in a transparent and easily accessible manner,
decision makers will be unable to determine the affordability and
efficiency of the reserve compensation system. This is especially
important given the growing fiscal challenges the country faces.

13 Under Secretary of Defense for Personnel and Readiness (OUSD--P&R),
Strategic Plan, FY2006-2011.

14 GAO, Military Personnel: DOD Needs to Improve the Transparency and
Reassess the Reasonableness, Appropriateness, Affordability, and
Sustainability of Its Military Compensation System, [26]GAO-05-798
(Washington, D.C.: July 19, 2005); The Congress Should Act to Establish
Military Compensation Principles, [27]GAO/FPCD-79-11 (Washington, D.C.:
May 9, 1979).

We are recommending that DOD take steps to assess the appropriateness of
the reserve compensation system and to improve transparency over total
reserve compensation costs. In commenting on a draft of this report, DOD
partially concurred with our recommendations. In response to our specific
recommendation to develop a compensation strategy and performance
measures, the department partially concurred and described several steps
that it had taken including chartering an independent commission to review
military compensation. In addition, the department noted that it has
primarily sought cash compensation in recent years, and that the increases
in deferred compensation were not sought by DOD. In response to our
recommendation to improve transparency, DOD felt that the Office of
Management and Budget could more appropriately address this recommendation
because it has visibility over all parts of the budget. We continue to
believe that DOD needs an explicit compensation strategy and performance
measures to better position the department to make business case arguments
for or against changes to the compensation system, and provide fact-based
evidence regarding the efficiency of the allocation of cash, noncash, and
deferred compensation. We also continue to believe that DOD is in the best
position to exercise ownership over total compensation costs and,
accordingly, should compile and present total compensation costs as part
of its budget submission. In addition, the department provided several
technical comments which we have incorporated where appropriate. DOD asked
that we include these technical comments in our report, and our response
to them is shown in appendix IV.

15 GAO, Defense Business Transformation: A Comprehensive Plan, Integrated
Efforts, and Sustained Leadership are Needed to Assure Success,
[28]GAO-07-229T (Washington, D.C.: Nov. 16, 2006); and DOD Systems
Modernization: Management of Integrated Military Human Capital Program
Needs Additional Improvements, [29]GAO-05-189  (Washington, D.C.: Feb. 11,
2005).

Background

DOD's National Guard and reserve personnel are assigned to the Ready
Reserve, Standby Reserve, or Retired Reserve.16 At the end of fiscal year
2006, DOD had approximately 1.1 million guard and reserve members in the
Ready Reserve. The Ready Reserve is comprised of military members of the
National Guard and reserve, organized in units, or as individuals, who are
subject to recall for active duty to augment the active component in time
of war or national emergency. Figure 1 shows the three subcategories that
exist within the Ready Reserve: the Selected Reserve, the Individual Ready
Reserve, and the Inactive National Guard.

16 We did not include the Standby or Retired Reserve in our study. The
Standby Reserve are not required to perform training, and are not part of
units, but make up a pool of trained individuals who could be mobilized if
necessary to fill needs in specific skills. These reservists are either on
active or inactive status. Active status refers to those temporarily
assigned for hardship or other cogent reasons, those not having fulfilled
their military service obligation or those retained in active status when
provided for by law, or those members of Congress and others identified by
their employers as "key personnel" and who have been removed from the
Ready Reserve because they are critical to the national security in their
civilian employment. The Inactive Status List is comprised of those
reservists who are not required by law or regulation to remain in an
active program and who retain their reserve affiliation in a
nonparticipating status, and those who have skills which may be of
possible future use. The Retired Reserve consists of all reserve officers
and enlisted personnel who receive or are eligible for retired pay on the
basis of active duty or reserve service.

Figure 1: Organizational Chart of the National Guard and Reserve

As of fiscal year 2006, the Selected Reserve had a total of about 826,000
members. The Selected Reserve largely consists of units and individuals
designated by their respective services that serve in an "active drilling"
status. These units and individuals are required to maintain readiness
through scheduled drilling and active duty for training, usually 1 weekend
a month and 2 weeks a year. They also have priority for training,
equipment, and personnel over all other categories of reservists. From
fiscal years 2000 through 2006, about 9 percent of the Selected Reserve
average strength served in the Active Guard and Reserve program as
full-time reservists. These full-time reservists perform duties associated
with organizing, administering, recruiting, instructing, or training the
various reserve components. The Individual Ready Reserve and the Inactive
National Guard do not currently have these drilling and training
requirements according to DOD policy and are comprised principally of
individuals who have had training, previously served in the active
component or in the Selected Reserve, or have some period of their
military service obligation remaining.17 These members may voluntarily
participate in training for retirement points and promotion with or
without pay.

17 Within the Inactive National Guard, Army National Guard personnel in an
inactive status not in the Selected Reserve will mobilize with their units
if they are attached to a specific National Guard unit but do not
participate in training activities. In order for these personnel to remain
members of the Inactive National Guard they must muster once a year with
their assigned unit.

DOD's selected reservists serve in one of six reserve components: the Army
National Guard, the Army Reserve, the Navy Reserve, the Air National
Guard, the Air Force Reserve, and the Marine Corps Reserve. The Army
National Guard and the Air National Guard comprise what is known as the
National Guard. The National Guard is unique in that it has dual missions,
both federal and state; when not in federal service, it is available for
use by the governor as provided by the U.S. Constitution and laws of the
state. The National Guard is the only military force immediately available
to a governor in times of emergency, including civil unrest and natural or
manmade disasters. Under state law, the National Guard provides protection
of life and property and preserves peace, order, and public safety.

Since the end of the Cold War, the roles and contributions of the reserve
force have changed. In the post-World War II era, DOD's reserve operated
primarily as a strategic force--a force management tool that was rarely
activated. For example, from 1945 to 1989, reservists were called to
active duty as part of a mobilization by the federal government only four
times, an average of less than once per decade. Since 1990, reservists
have been mobilized by the federal government six times, an average of
nearly once every 3 years. Additionally, since September 11, 2001, reserve
forces have been used extensively to support the Global War on Terrorism.
In fact, about 500,000 reservists have been mobilized, primarily for
contingency operations in Afghanistan and Iraq. As a result of the change
in use, reserve units are becoming more integrated into military
operations, calling for a new relational model between the active and
reserve components, which changes the nature of reserve service to an
operational role for the reserve components and requires more frequent
mobilizations as well as incorporation into the total force.

To attract and retain sufficient numbers and quality of guard and reserve
personnel, DOD provides reserve personnel with a mix of cash, noncash, and
deferred compensation based on duty status. When in part-time drilling
status, reservists receive cash compensation or basic pay on a prorated
basis as well as other cash incentives, such as retention bonuses or
special pays for proficiency in an area.18 Part-time reservists are also
entitled to noncash benefits, such as unlimited access to commissaries, a
premium-based health care benefit for reservists and their dependents, and
educational benefits. Lastly, part-time reservists who become retirement
eligible qualify for retirement benefits including a pension, health care
for life, and access to installation-based benefits such as exchanges. The
key difference in deferred benefits between active duty servicemembers and
part-time reservists is when they become eligible to receive these
benefits. For example, a part-time reservist becomes eligible for a
retirement annuity at age 60; in contrast, active duty servicemembers
become eligible for retirement benefits at any age after completing a
minimum of 20 years of service.

Reservists activated for contingency operations are eligible to receive
the same compensation and benefits as active duty personnel including
regular military compensation--basic pay, housing and subsistence
allowances, and the federal tax advantage19--depending on their pay grade
and years of service--and special and incentive pays. In addition,
mobilized reservists are eligible for full health care benefits for
themselves and their dependents. Table 1 illustrates this mix and compares
it to the compensation provided to active duty servicemembers. In
addition, appendix III contains more details about the compensation
available for reserve personnel.

18 Part-time reservists' cash compensation--basic pay and special pays--is
based on the 1/30th rule. That is, the member is entitled to 1/30th of the
monthly pay for each day of duty or period of inactive duty.

19 Allowances for housing and subsistence are not taxed. In addition,
servicemembers who serve 1 day in a combat zone are eligible to exclude,
for tax purposes, all of their pay and allowances earned for the month.
Officers' tax exclusion is limited to the highest amount earned by
enlisted personnel plus hostile fire and imminent danger pay.

Table 1: Types of Compensation for Servicemembers, as of Fiscal Year 2007

                                                           Reserve            
                                                          full-time           
                                     Reserve part-time in  support            
                                         drill/annual                Active   
                                           training         (AGR)   component 
Basic pay                                  X               X         X     
Housing allowance                          a               X         X     
Subsistence allowance                      b               X         X     
Subsistence in kind                        X               X         X     
Special and incentive pays                 X               X         X     
Bonuses                                    X               X         X     
Clothing allowance                         X               X         X     
Permanent change of station                                X         X     
travel                                                                     
Tax advantage (housing and                 c               X         X     
subsistence allowances are                                                 
nontaxable)                                                                
TRICARE (health care)                                      X         X     
TRICARE Reserve Select                     Xd                              
TRICARE Dental                            X d              X         X     
Veterans Affairs life insurance            X               X         X     
Montgomery GI Bill (education              X               X         X     
benefit)e                                                                  
Tuition assistance                         X               X         X     
Student loan repayment                     X               X         X     
Veterans Affairs home loan                 Xf              X         X     
Commissaries and exchanges                 X               X         X     
Morale, welfare, and recreation     Space availableg       X         X     
services                                                                   
Family support centers              Space available        X         X     
Child care centers                  Space available        X         X     
Legal assistance                    Space available        X         X     
Retirement                                 X               X         X     
Veterans Affairs health careh              X               X         X     
Disability retirement or                   X               X         X     
separationi                                                                

Source: GAO analysis.

a The member is entitled to a housing allowance for annual training, but
the rate is provided under Basic Allowance for Housing/Reserve Component.
In addition, if the annual training period is 31 days or more, then the
member would receive a housing allowance.

b Part-time enlisted personnel may receive rations-in-kind while drilling.
During annual training, reservists receive a subsistence allowance.

c Reservists receive the tax advantage while on annual or active duty
training.

d Reservists are eligible to enroll for TRICARE Reserve Select and TRICARE
Dental Plan for a monthly premium; see appendix III for more details.

eThe Department of Veterans Affairs administers this educational benefit;
however, the services are responsible for the cost of the benefit.

f Eligibility determined by 2 years of active duty service, not less than
90 days mobilized, or 6 years of reserve service.

g Although eligible, the commander can set priority for active duty
servicemembers if the facilities or services can not handle the demand.

h Member qualifies based on service in active military or mobilization.

i Servicemembers may qualify for both DOD and Veterans Affairs disability
retirement.

Cost to Compensate Guard and Reserve Personnel Has Increased Significantly Since
Fiscal Year 2000

The total cost to the federal government to compensate both part-time and
full-time National Guard and reserve personnel increased significantly,
about 47 percent, from fiscal year 2000 to fiscal year 2006. The cost
increased from about $13.9 billion in fiscal year 2000 to about $20.5
billion in fiscal year 2006, as shown in figure 2. This cost includes (1)
cash compensation, such as basic pay and other allowances; (2) noncash
compensation, such as education assistance and health care; and (3)
deferred compensation, that is, benefits that promise future compensation
like retirement pay and health care. However, this cost does not include
all compensation, such as accrual costs for veterans' benefits.20

20 Veterans' benefits include health care, compensation and pension,
education and training, vocational rehabilitation, home loans, life
insurance, burial benefits, and dependents' and survivors' benefits.
Reservists who have served honorably on active duty establish veteran
status and may therefore be eligible for veterans' benefits including
health care and monthly compensation, depending on the length of active
military service and other eligibility factors. In addition, reservists
who are never called to active duty may qualify for some veterans'
benefits such as education, home loan guaranty, vocational rehabilitation,
disability pension, and life insurance. In the absence of a formal
actuarial model, we were unable to determine the deferred or accrual costs
for reservists' benefits provided by the Department of Veterans Affairs.
Furthermore, the Veterans Affairs budget does not distinguish between
active and reserve cost, which prevented us from associating current
noncash costs for programs such as vocational rehabilitation and
disability pension with reserve compensation. In addition, we decided to
associate all installation-based noncash benefits (such as commissaries
and morale, welfare, and recreation centers) with the active components'
compensation costs although reservists are eligible to take advantage of
those benefits. As a result, our compensation cost for reserve and guard
personnel is likely understated.

Figure 2: Total Compensation Cost of Reserve Components, Fiscal Years
2000-2006

Over this same time period, the per capita cost to the federal government
for part-time drilling reservists21 almost doubled, from about $10,100 in
fiscal year 2000 to about $19,100 in fiscal year 2006, as shown in figure
3. This per capita cost is an average of what it cost the government to
compensate servicemembers; it is not what the servicemembers "receive in
their paycheck." Servicemembers' individual cash compensation will vary
significantly depending on individual pay grade and other factors such as
years of service or if the servicemember has dependents. The compensation
cost does not include all of the cost needed to support additional
servicemembers, because it does not include those costs associated with
recruiting and training personnel.

21 Part-time, drilling, reservists refer to reserve and National Guard
personnel who drill 1 weekend a month and participate in active duty
training for 2 weeks a year. These personnel are referred to as pay groups
A and B in the services budget justification books, and they also may
participate in special and school training, such as operational,
refresher, and proficiency training. In addition, we included pay groups F
and P in our calculations.

Figure 3: Per Capita Costs for Part-Time Reservists by Compensation Type,
Fiscal Years 2000-2006

This increase in per capita cost occurred during a time when the average
strength of part-time drilling reservists declined by about 6 percent,
from about 746,400 reservists in fiscal year 2000 to 699,800 reservists in
fiscal year 2006. This decline in the average number of part-time
personnel may be attributed to many factors, such as the Navy's
restructuring of its force, as part of its Active-Reserve Integration
process, which reduced the number of part-time reservists. Moreover, Army
National Guard and Army Reserve officials attributed the decline in
average strength to their recruiting difficulties.

In addition to part-time reservists, about 9 percent of reservists work
full-time, and their per capita cost to the federal government also
increased, as shown in figure 4, from about $90,100 in fiscal year 2000 to
about $115,200 in fiscal year 2006, about 28 percent.22 Although full-time
reservists are eligible to receive the same compensation as active duty
servicemembers, the per capita cost for compensation presented here is
less than the per capita cost for an active duty servicemember. This is
because some costs were not associated with the full-time reservists, such
as accrual costs for veterans' benefits or costs for installation-based
benefits, such as exchanges and family support programs. This increase is
similar to the trends in active duty per capita compensation cost (see
app. I for similar data on active duty servicemembers' compensation cost).
Unlike their part-time counterparts, the full-time reservists' average
strength increased by about 9 percent during this time period, increasing
from about 64,500 in fiscal year 2000 to 70,300 in fiscal year 2006.23

22 Full-time reserve and National Guard personnel are referred to as
"Administration and Support" in the budget justification books, but are
referred to as active guard and reserve (AGR) or full-time support (FTS)
by some services. These Selected Reservists are on active duty or
full-time National Guard duty to organize, administer, recruit, instruct,
and train reserve component members.

23 The percentage of full-time reservists varies by component. For
example, in fiscal year 2006 the Navy Reserve and the Air National Guard
had the highest percentage of full-time reservists, about 12 and 18
percent, respectively; while the Air Force Reserve and Marine Corps
Reserve had the lowest percentage, about 3 and 6 percent, respectively.

Figure 4: Per Capita Cost for Full-time Reservists by Compensation Type,
Fiscal Years 2000-2006

The growth in reserve compensation overall is primarily attributed to
increases in deferred compensation, although cash and noncash compensation
also increased.

           o Deferred compensation represents more of overall reserve
           compensation costs in fiscal year 2006--increasing from 12 percent
           in fiscal year 2000 to 28 percent in fiscal year 2006.
           Specifically, deferred compensation more than tripled, increasing
           from 1.7 billion in fiscal year 2000 to 5.8 billion in fiscal year
           2006. This increase was largely due to the increase in new health
           care benefits for the Medicare-eligible population, known as
           TRICARE for Life.24 Further, DOD estimates that TRICARE for Life
           represented 48 percent of the increase in DOD's spending on health
           care from fiscal years 2000 through 2005.25 Retirement pay
           accrual26 also contributed to the growth in deferred compensation,
           and its increase was a result of across-the-board increases in the
           basic pay rate. Additionally, in fiscal year 2004 Congress
           enhanced disability retirement benefits to allow concurrent
           receipt--simultaneous payment--of DOD retirement pay and
           Department of Veterans Affairs disability benefits. Prior to this
           enhancement, retirees had to decide whether to receive DOD's full,
           but generally taxable, retirement pay or receive the nontaxable
           veteran's disability pay, which would reduce or offset
           dollar-for-dollar DOD's retirement pay. As a result of this
           expansion of benefits, the Treasury Department, through general
           revenues, was required to cover the additional military retirement
           cost of providing concurrent receipt, which was about $251 million
           in fiscal year 2006.

           o Noncash benefits also increased--about 29 percent--primarily due
           to increased costs for full-time reservists' health care benefits
           and expanded health care benefits for part-time reservists and
           their families.27 Since fiscal year 2000, noncash benefits have
           represented about 11 percent of overall compensation costs.

           o Cash compensation, including basic pay and enlistment and
           reenlistment bonuses, increased about 19 percent between fiscal
           years 2000 and 2006. This increase is largely a result of
           across-the-board increases in basic pay. In addition, the reserve
           components also experienced significant growth in the reserve
           incentive program. Specifically, the costs of reenlistment bonuses
           increased over 1000 percent, rising from about $36 million in
           fiscal year 2000 to almost half a billion dollars in fiscal year
           2006. Cash compensation decreased from 76 percent of overall
           compensation costs in fiscal year 2000 to 61 percent of cost in
           fiscal year 2006.

24 In fiscal year 2001, Congress expanded retiree health care coverage to
supplement Medicare.

25GAO, DOD's 21st Century Health Care Spending Challenges,
[30]GAO-07-766CG (Washington, D.C.: Apr. 18, 2007).

26An accrual cost is an estimated future cost for current servicemembers
to receive an entitled benefit. Accrual accounting methods are used to
calculate retirement and disability pay and retirement health care
benefits.

27Costs for the Reserve Officers' Training Corps and Junior Reserve
Officers' Training Corps were included in the reserve components budget in
fiscal year 2000. In fiscal year 2006, these costs were moved to the
active components budget and slightly offset the growth of noncash and
cash benefits.

Table 2 provides a detailed list of the components of reserve compensation
and how they have changed from fiscal year 2000 to fiscal year 2006.

Table 2: Summary of Changes in Reserve Compensation Costs for Fiscal Years
2000-2006

Fiscal year 2006                                                           
constant dollars                                                           
                                                          Percentage of total 
Components of             Fiscal    Fiscal Percentage compensation (Fiscal 
compensation           year 2000 year 2006     change           year 2006) 
Cash Compensation (in                                                      
billions)                                                                  
Part-Time                                                                  
Annual & inactive duty      $4.7      $4.2                                 
training pay                                                               
School and special           1.5       2.0                                 
training pay                                                               
Other special program         .2        .1                                 
paya                                                                       
Reserve incentive             .1        .9                                 
programs                                                                   
Full-Time                                                                  
Pay & allowance              4.5       5.7                                 
Subsistence allowance        .04       .04                                 
Tax expenditure               .3        .4                                 
Reserve incentive           .002       .02                                 
programs                                                                   
Otherb                       .04       .02                                 
Total cash                  10.5      12.5       18.8                   61 
Noncash benefits (in                                                       
billions)                                                                  
Part-Time                                                                  
Education                     .2        .5                                 
Subsistence-in-kind           .1       .08                                 
Clothing & uniforms           .3        .2                                 
Health care                   --       .03                                 
Travel                        .5        .4                                 
Full-Time                                                                  
Subsistence-in-kind         .003     .0002                                 
Clothing & uniforms         .009      .005                                 
Health care                   .5        .7                                 
Otherc                        .1        .2                                 
Total noncash                1.7       2.2       29.1                   11 
Deferred benefits (in                                                      
billions)                                                                  
Part-Time                                                                  
Retired pay accrual           .5        .9                                 
Department of the             --       .07                                 
Treasury                                                                   
Retired health care          .09       2.7                                 
accrual                                                                    
Full-Time                                                                  
Retired pay accrual           .8       1.0                                 
Department of the             --        .2                                 
Treasury                                                                   
Retired health care           .3        .8                                 
accrual                                                                    
Total deferred               1.7       5.8      245.6                   28 
Total compensation (in     $13.9     $20.5       47.0                      
billions)                                                                  
Total part-time per      $10,100   $19,100       88.5                      
capita                                                                     
Total full-time per      $90,100  $115,200       27.8                      
capita                                                                     

Source: GAO analysis of DOD data.

Note: Numbers may not total due to rounding.

aIncludes Reserve Officers' Training Corps, Health Professions Scholarship
program, Medical Financial Assistance program, Platoon Leaders Class,
Branch Officers Basic Course, Nurse Candidate Bonus Program, and Chaplain
Candidate program.

bIncludes $30,000 lump sum bonus and transition benefits.

cIncludes travel, death gratuities, disability and hospitalization
benefits, adoption expenses, and federal workplace transportation subsidy.

In addition to calculating reserve compensation cost, we also updated our
previous work on active duty compensation costs and found those costs have
also increased, rising from about $131.7 billion to $173.2 billion (32
percent) from fiscal year 2000 to fiscal year 2006. Cash compensation
accounted for 48 percent of total active duty compensation costs, while
noncash and deferred compensation accounted for 21 and 31 percent,
respectively. In fiscal year 2006, it cost the federal government more
than $126,000, on average, to provide annual compensation to active duty
servicemembers.28 See appendix I for more information on active duty
compensation cost. When taken together, active and reserve compensation
costs have grown markedly since 2000, and these costs may not be
sustainable within the context of DOD's total budgetary needs and the
nation's increasing fiscal imbalance. Total military compensation for the
active and reserve components increased from about $147 billion in fiscal
year 2000 to $195 billion in fiscal year 2006--about 33 percent.

Much of these increases in compensation costs are not directly driven by
ongoing operations in Iraq and Afghanistan and, as a result, it is not
anticipated that the costs will significantly recede after the operations
in Iraq and Afghanistan subside. While some of the costs are directly
related to the ongoing operations--such as the pay for mobilized
reservists and enlistment and reenlistment bonuses--most of the
significant increases were made to basic pay and deferred compensation,
such as retirement pay and health care for retirees, which will not recede
after ongoing operations are ended. An example of a recently expanded
noncash compensation benefit that will not recede after the ongoing
military operations are completed is the premium-based health care benefit
for reservists and their dependents known as TRICARE Reserve Select. This
benefit will provide a continuation of health coverage as National Guard
and reserve personnel transition on and off of active duty. DOD officials
anticipate that TRICARE Reserve Select will result in significant future
growth in the cost of noncash compensation.29 According to DOD estimates,
the cost for this new health care benefit will increase dramatically in
fiscal year 2008 to about $381 million, and will continue to increase to
about $874 million, about $1,100 per capita, by fiscal year 2013, as shown
in figure 5. DOD estimates that it may be a few years before a significant
number of reservists enroll in the program. However, if enrollment numbers
prove higher than DOD estimated, the cost for TRICARE Reserve Select may
be higher than currently projected. In addition, DOD predicts that the
cost for health care will consume more than 12 percent of its total budget
by fiscal year 2015, compared to 7.5 percent in fiscal year 2005. As a
result, service officials have commented that the only way to control
personnel costs may be to reduce the number of personnel.

28According to DOD, about 95,000 mobilized reservists were paid out of
active duty cash compensation costs in fiscal year 2006. Our active duty
per capita cost estimates do not take these mobilized reservists into
account, because our per capita costs are based on active duty end
strength. If you considered these reservists, the average costs to provide
compensation would be lower.

29In the National Defense Authorization Act for Fiscal Year 2004, Congress
established TRICARE health care coverage for unemployed reservists or
those ineligible for health care coverage from their civilian employer.
However, this provision was not implemented by DOD. The Ronald W. Reagan
National Defense Authorization Act for Fiscal Year 2005 included
provisions for reservists to receive 1 year of TRICARE standard for each
period of 90 consecutive days served in a contingency operation given that
the reservists signed a commitment to serve continuously in the Selected
Reserve during the covered period. When implemented by DOD, the program
was called TRICARE Reserve Select. The National Defense Authorization Act
for Fiscal Year 2006 enhanced this coverage by creating a three-tier
system of eligibility, based on the percentage of co-pay. See appendix III
for further details. The John Warner National Defense Authorization Act
for Fiscal Year 2007 further expanded the program to give access to the
benefit to all Selected Reservists and eliminated the tiered eligibility
system. TRICARE Reserve Select is scheduled to be implemented in October
2007.

Figure 5: DOD's Estimated Cost to the Government for TRICARE Reserve
Select, Fiscal Years 2005-2013

Moreover, total compensation costs for reservists will likely increase
after contingency operations subside. According to DOD officials, after
contingency operations end, the number of drills executed is expected to
increase. Since fiscal year 2001, the number of executed drills and
training decreased for part-time reservists. This decrease is, in part,
due to the increased number of reservists called to active duty, which has
left fewer reservists and units available to do their required drills.
Although this may not have an impact on the per capita costs of reserve
compensation, it would drive up overall costs to compensate more part-time
reservists.

DOD Does Not Know the Extent to Which Its Mix of Compensation Is Meeting Its
Human Capital Goals

DOD does not know the extent to which its mix of cash, noncash, and
deferred compensation is meeting its human capital goals of recruiting and
retaining personnel. DOD's and Congress' piecemeal approach to reserve
compensation has created a mix of compensation that has shifted toward
more deferred compensation, even though this may not be an efficient use
of resources. In addition, DOD is unable to gauge the efficiency and
effectiveness of the mix of reserve compensation and its compensation
tools because it lacks a compensation strategy and performance measures to
assess its mix of compensation.

Mix of Reserve Compensation Has Shifted to Deferred Compensation, Which May Not
Enable DOD to Meet Key Human Capital Goals of Recruiting and Retention

DOD and Congress have reacted to the current environment to address
recruiting and retention problems by adding compensation. However, these
efforts have been done in a piecemeal fashion that has shifted the mix of
reserve compensation toward more deferred benefits, even though this may
not be the most efficient allocation of compensation to enable DOD to meet
its recruiting and retention human capital goals. Significant increases in
the frequency and length of mobilizations to Iraq and Afghanistan have led
to reservists being separated from their families for longer periods and
potentially experiencing interruptions in their civilian careers. In fact,
a recent memorandum from the Secretary of Defense indicates that
reservists should expect to be mobilized on a regular cycle--with a goal
of 1 year mobilized followed by 5 years nonmobilized. This change in
utilization of reservists and the components' recent recruiting and
retention challenges have corresponded with Congress and DOD adding
various benefits and types of pay to address recruiting problems in some
reserve components and to take care of servicemembers over their lifetime.
For example, the cost of the reserve incentive program, which primarily
provides discretionary cash bonuses for enlistment and reenlistment,
increased more than 1,000 percent from fiscal year 2000 to fiscal year
2006. According to service officials, this increase was to address
potential recruiting shortfalls.

The resulting complex accumulation of pays and benefits has shifted the
mix of reserve compensation toward deferred compensation--that is, the
promise of future compensation like retirement pay and health care. Figure
6 shows an increase in deferred compensation from 12 percent of total
reserve compensation in fiscal year 2000 to 28 percent in fiscal year
2006. This shift to deferred compensation has also been observed for
active duty compensation costs. See appendix I for more information on the
active component's compensation costs. Deferred compensation affects the
current cost of compensation because funds must be set aside today to
provide these benefits in the future, over the reservist's lifetime.

Figure 6: Allocation of Reserve Compensation to Cash, Noncash, and
Deferred Categories in Fiscal Years 2000 and 2006

While DOD and Congress have added pays and benefits over the past 6 years,
it is questionable whether there was consideration of the appropriateness
of the changes, including how the changes compared to compensation in the
civilian sector, what the efficiency and return of these changes would be
in terms of meeting the department's human capital goals of recruiting and
retention, or whether the compensation changes were affordable and
sustainable over the long term. DOD defines efficiency of its compensation
system as paying no higher or lower than necessary to fulfill the basic
objective of attracting, retaining, and motivating the kinds and numbers
of servicemembers needed.30 However, this increase in deferred
compensation is not necessarily the most efficient allocation, nor does it
provide the best return on the compensation investment. In fact, DOD does
not know the most efficient allocation of compensation needed to meet its
recruiting and retention goals because it has not evaluated reserve
compensation to determine the appropriate mix of compensation to attract
and retain sufficient numbers of qualified personnel. Although the
efficiency of noncash and deferred compensation is difficult to assess
because the value servicemembers place on them is highly individualized,
studies indicate cash compensation is not only preferred to noncash and
deferred compensation, but it is also a more efficient recruiting and
retention tool for active duty servicemembers. In our 2005 report on
active duty compensation, we stated that it is generally accepted that
some deferred benefits, such as retirement, are not valued as highly by
servicemembers as current cash compensation.31 Cash pay today is a far
more efficient tool than future cash or benefits for the recruiting and
retention of active duty personnel. For example, a study assessing the
military draw down in the early 1990s found that when active duty
servicemembers were offered a choice of lump-sum cash payments or
annuities, a vast majority selected the lump-sum payment, even though it
had considerably less net present value.32 This preference for cash
compensation has a profound impact on the efficiency of DOD's compensation
system, especially considering that fewer than one in four part-time
reservists will receive these costly deferred benefits. 33 More
specifically, about 24 percent of those who join the guard and reserve
will ultimately earn nondisability retirement pay and health care for
life. Typically, deferred and noncash compensation is offered across the
board, which limits the department's flexibility to offer incentives,
target personnel, or turn on and off compensation as it is needed to
recruit and retain. Moreover, these changes may not be sustainable over
the long term. Some of the noncash and deferred compensation that have
been added in response to the department's recruiting and retention
problems are inflexible benefits and long-term costs that the department
will find difficult to stop providing, such as health care for reservists.

30Department of Defense, Office of the Secretary of Defense, Military
Compensation Background Papers: Compensation Elements and Related Manpower
Cost Items, Their Purpose and Legislative Backgrounds, 6th ed.
(Washington, D.C.: April 2005).

31 GAO, Military Personnel: DOD Needs to Improve the Transparency and
Reassess the Reasonableness, Appropriateness, Affordability, and
Sustainability of Its Military Compensation System, [31]GAO-05-798
(Washington, D.C.: July 19, 2005).

32John T. Warner and Saul Pleeter, "The Personal Discount Rate: Evidence
from Military Downsizing Programs," The American Economic Review (March
2001).

33GAO, Military Personnel: DOD Needs More Data Before It Can Determine if
Costly Changes to the Reserve Retirement System Are Warranted,
[32]GAO-04-1005 (Washington, D.C.: Sept. 15, 2004).

Concerns about the most efficient and effective allocation of compensation
to meet recruiting and retention goals are increasingly important given
the recent recruiting and retention challenges the services have faced. In
November 2005, we reported that the reserve components were having
recruiting and retention challenges, specifically filling certain
occupation specialties such as military police.34 The Congressional
Research Service also reported that the reserve components missed
recruiting goals by 12 to 20 percent in fiscal year 2005.35 Although the
Marine Corps Reserve and Air Force Reserve met their 2006 recruiting
goals, the other reserve components missed their goals. In addition,
officials expressed concern that the services will have difficulty meeting
future recruiting goals. The Commission on the National Guard and Reserves
reported that polling data of young people suggest that the future for
recruitment remains problematic as the propensity of youth to join the
military declined from 15 percent in 2005 to 10 percent in 2006.36 In
addition to a decline in propensity to join the military, according to
DOD, fewer soldiers leaving active duty are transitioning to the reserves.
Moreover, the quality of recruits is declining.37 At a time when the
nation faces an increasing fiscal imbalance, until DOD assesses what the
appropriate compensation mix should be so that it uses its compensation
resources in the most efficient manner possible, DOD may be unable to
sustain these costs and effectively balance the department's needs for new
equipment and personnel while recruiting and retaining the future reserve
force.

34GAO, Military Personnel: DOD Needs Action Plan to Address Enlisted
Personnel Recruitment and Retention Challenges, [33]GAO-06-134
(Washington, D.C.: Nov. 17, 2005); Military Personnel: Preliminary
Observations on Recruiting and Retention Issues within the U.S. Armed
Forces, [34]GAO-05-419T (Washington, D.C.: Mar. 16, 2005).

35CRS, Recruiting and Retention: An Overview for FY2005 and FY2006 Results
for Active and Reserve Component Enlisted Personnel (Washington, D.C.:
Jan. 26, 2007).

36Commission on the National Guard and Reserves, Strengthening America's
Defense in the New Security Environment (Washington, D.C.: March 1, 2007).

37DOD measures enlisted recruits quality based on two criteria--graduation
from high school and score on the Armed Forces Qualification Test (AFQT).
Since fiscal year 1993, DOD's goals for recruit quality have been that at
least 90 percent of new recruits must be high school graduates and at
least 60 percent must score above average on the AFQT. CRS reported that
three of the six reserve components--Army National Guard, Army Reserve,
and Navy Reserve--each missed one of their quality goals in 2006. An
increase in waivers for past offenses also raises concerns about the
quality of new recruits.

DOD Does Not Have an Established Compensation Strategy and Performance Measures
to Gauge the Efficiency of Reserve Compensation

DOD is unable to gauge the efficiency of the mix of reserve compensation
and its compensation tools because it has not established a compensation
strategy or performance measures. We have previously found that programs,
such as compensation systems, need performance measures and goals to guide
decision makers and program policy.38 Moreover, DOD's Personnel and
Readiness strategic plan states the importance of DOD identifying
requirements and tailoring compensation and other programs to achieve
objectives and continuously reviewing personnel management.39 In addition,
we have also reported that it is necessary for an agency to monitor and
evaluate its progress toward its human capital goals and the contribution
that human capital outcomes have made toward achieving program results.40

The lack of a compensation strategy to guide compensation policy is a
long-standing problem faced by DOD. We identified the lack of explicit
compensation principles in 1979 and again in 2005 in our reports on active
duty compensation.41 Our past reports pointed out that DOD lacks explicit
compensation principles, which creates challenges in making major changes
to compensation. The Military Compensation Background Papers describe six
principles that the compensation system is designed to achieve; those
principles are: managing manpower, compatibility with the level of
technology servicemembers employ, equity, effectiveness in war and peace,
flexibility, and motivation. These principles, however, do not provide a
clear strategy to guide military compensation policy, as stated in this
excerpt:

"the relationships between the individual components of compensation and
their systemic interrelationships as a coherent structure remain largely
implicit rather than explicit. Virtually every aspect of military activity
has explicit doctrines, principles, and practices embodied in field
manuals, technical manuals, and various joint publications. Military
compensation is noteworthy in its lack of such an explicit intellectual
foundation." 42

38GAO, A Model of Strategic Human Capital Management, [35]GAO-02-373SP
(Washington, D.C.: Mar. 15, 2002).

39Under Secretary of Defense for Personnel and Readiness (OUSD--P&R),
Strategic Plan, FY2006-2011.

40GAO, Human Capital: Key Principles for Effective Strategic Workforce
Planning, [36]GAO-04-39 (Washington, D.C.: Dec. 11, 2003).

41GAO, Military Personnel: DOD Needs to Improve the Transparency and
Reassess the Reasonableness, Appropriateness, Affordability, and
Sustainability of Its Military Compensation System, [37]GAO-05-798
(Washington, D.C.: July 19, 2005); The Congress Should Act to Establish
Military Compensation Principles, [38]GAO/FPCD-79-11 (Washington, D.C.:
May 9, 1979).

42Department of Defense, Office of the Secretary of Defense, Military
Compensation Background Papers: Compensation Elements and Related Manpower
Cost Items, Their Purpose and Legislative Backgrounds, 6th ed.
(Washington, D.C.: April 2005).

Moreover, DOD does not have performance measures to gauge the efficiency
of its compensation system or the various compensation tools. Performance
measures are used to evaluate how closely a program's achievements are
aligned with program objectives, and to assess whether a program is
achieving its intended outcome. DOD and Congress have generally increased
all types of compensation--adding more benefits while increasing
bonuses--making it impossible to determine the relative value of each of
these initiatives. Without these measures DOD does not know which of its
compensation tools--cash, noncash, or deferred--works best for recruiting
and retaining personnel, and it does not know the most effective,
efficient mix of compensation.

Determining the return on investment for compensation and the impact of
compensation on recruiting and retention is not an easy task and should be
approached with caution. DOD and service officials often point to meeting
end strength or recruiting and retention goals as evidence that
compensation is appropriate or working. Although end strength is an
important indicator, we do not believe it is sufficient alone. Meeting
recruiting and retention goals does not indicate if the compensation
system is efficient or yielding the best return on the department's
investment. There are numerous other factors, such as the economy, ongoing
contingency operations, and DOD's own recruiting and advertising program,
that also influence the department's ability to recruit and retain
servicemembers.43 As a result, DOD does not know if the additions to the
compensation system--which are becoming increasingly costly, rising 47
percent from fiscal year 2000 to 2006--are appropriate to ensure the
reserve components recruit and retain a high-quality workforce in
sufficient numbers and that the federal government has the best return on
investment.

43DOD, 9th Quadrennial Review of Military Compensation vol I (May 17,
2002); Commission on the National Guard and Reserves, Strengthening
America's Defenses in the New Security Environment (Mar. 1, 2007); GAO,
Military Recruiting: DOD Needs to Establish Objectives and Measures to
Better Evaluate Advertising's Effectiveness, [39]GAO-03-1005 (Washington,
D.C.: Sept. 19, 2003).

In DOD's response to this report, the department emphasized that it has
not sought some of the increases in deferred and noncash compensation that
Congress has recently given to servicemembers. Also, in our discussions
with DOD officials, they told us that the department has focused on cash
compensation in recent years and, in some cases, has opposed increases in
deferred compensation. For example, the Secretary of Defense stated, in
May 12, 2004, testimony before the Senate Appropriations Defense
Subcommittee that, in recent years, Congress has often added
entitlement-like changes, beyond DOD's recommendations, which concentrated
on those who have already served. The Secretary of Defense's statement
pointed out the fiscal effects of these decisions by stating that
entitlements such as TRICARE for life are increasing substantially the
permanent costs of running the department with only modest effect on
recruiting and retaining personnel. Nevertheless, DOD has not formally
assessed the appropriate mix of compensation and has not developed a
written policy or document that specifies the department's overarching
strategy for compensation. Until DOD establishes a strategy for
determining the best mix of cash, noncash, and deferred compensation and
develops performance measures to evaluate the efficiency of compensation
tools, DOD and Congress will be unable to make informed decisions about
which compensation tools will provide the best return on investment, be
sustainable in the long-term, and be effective in recruiting and retaining
the future reserve force.

DOD Does Not Have Transparency over Total Costs of Reserve Compensation

Decision makers in Congress and DOD do not have adequate transparency over
total costs for providing reserve compensation--including the allocation
of costs to cash, noncash, and deferred compensation--and the cost of
mobilized reservists. Good business practices require adequate
transparency over investments of resources, especially in times of fiscal
constraint. However, today there is no single source where decision makers
can go to see all the costs of reserve compensation. In addition, the cost
of mobilized reservists is also not transparent.

Part of the lack of transparency is due to the fact that about a quarter
of the costs of reserve compensation fall outside the military personnel
appropriation for DOD. In fact, costs are located within three federal
agencies--DOD, Department of Veterans Affairs, and Department of the
Treasury--depending on the type of compensation and the duty status of the
reservists--active reserve or mobilized, as shown in figure 7.
Furthermore, within DOD, compensation costs are found in four different
budgets--the reserve components' military personnel, active components'
military personnel, active components' operation and maintenance, and the
Defense Health Program. Most of the cash costs--such as basic pay,
allowances, and special pays and incentives--are located in either the
reserve or active military personnel budgets, depending on whether the
reservist is mobilized.44 In addition, the reserve military personnel
budgets combine some cash costs. For example, pays and allowances include
such costs as retired pay accrual, basic allowance for subsistence, basic
allowance for housing, and special and incentive pay as authorized.
Furthermore, some noncash costs are located in the active operation and
maintenance budget and active and reserve military personnel budgets.45
Some of these noncash costs, such as those for commissary and morale,
welfare, and recreation facility use, are not broken out by active and
reserve costs because use of these facilities is open to both components.
Moreover, deferred costs for health care for the Medicare-eligible
retirees and their dependents are found in the Defense Health Program
budget, while some of the costs for concurrent receipt of disability
retirement from DOD and Veterans Affairs are found in the Treasury
budget.46

44The military personnel budgets include such things as basic pay,
allowances for housing and subsistence, special and incentive pays, other
allowances, and retired pay accrual. The pay and benefits for mobilized
reservists are located in the active military personnel budget.

45The operation and maintenance budget includes costs for morale, welfare,
and recreation programs and commissaries. The Veterans Affairs budget
includes costs for the Home Loan Guaranty program and disability
compensation. The military personnel budgets include costs for noncash
items such as death gratuities and clothing and travel allowances.

46The Health Affairs budget includes costs for all health care benefits
except for health care for retirees younger than age 65. The Treasury
budget includes contributions to retirement pay accrual to offset
concurrent receipts.

Figure 7: Components of Total Reserve Compensation Costs

Furthermore, we had to calculate some costs for reserve compensation
because they were not captured in any budget documents. To do this, DOD
provided, at our request, the accrual costs for future retirees and their
dependents. Similarly, we estimated the tax expenditure for the federal
government from the nontaxable compensation provided to servicemembers.47
We estimated that the cost for tax expenditures for full-time reservists
alone was $436 million in fiscal year 2006. In addition, the Department of
Veterans Affairs does not calculate the accrual cost for veterans'
benefits for reservists and we did not attempt to calculate these costs
either because reservists are likely to be eligible for the majority of
these benefits based upon active duty service. In appendix I, we present
the accrual costs for active duty veterans' benefits that we calculated
using data from the 1999 President's Budget. Comparable information for
the reserve components was not available. As a result, these costs are
unknown. This lack of information makes it difficult for decision makers
to see the full costs of all the compensation pays and benefits provided
to reservists.

Transparency over compensation costs is further limited when reservists
are mobilized because mobilized reservists are paid from active duty
budgets. Moreover, compensation costs for mobilized reservists are
difficult to determine within the active components' budgets, in part,
because they have been paid out of the supplemental funding the active
components receive for the global war on terrorism. The absence of
information about the compensation costs of mobilized reservists further
dilutes decision makers' ability to see the full picture of the costs of
reserve compensation to the federal government. In addition, as
mobilizations are expected to become a regular part of reservists'
careers, these costs will become a part of doing business for the
reserves, which increases the importance of being able to identify them.48

DOD is taking measures to address some of these problems. For example, DOD
required the services to include detailed cost estimates of reserves
called to active duty in the fiscal year 2007 and 2008 supplemental
submissions. In addition, DOD is working on a system to consolidate
personnel and pay systems for all active and reserve components, known as
the Defense Integrated Military Human Resources System. This consolidation
may improve transparency of DOD costs by integrating all human resource
information for active, guard, and reserve personnel of all the services.
However, as we reported in 2005 and 2006, this task is proving to be
difficult to complete.49 We found that the services have unique
requirements that are limiting the flexibility to consolidate to a single
solution. Furthermore, service officials told us that this system is
unlikely to improve transparency over budgeted costs.

47Retired reservists who are age 60 or older are eligible for the same
health care benefits as their active duty counterparts. Nontaxable
compensation refers to the Basic Allowance for Subsistence and Basic
Allowance for Housing that full-time reservists are eligible to receive.

48Secretary of Defense, Memorandum for Secretaries of the Military
Departments, Chairman of the Joint Chiefs of Staff, Under Secretaries of
Defense, "Utilization of the Total Force" (Jan. 19, 2007). This memorandum
states that the planning objective for involuntary mobilization for the
Guard and reserves will remain a 1-year mobilized to 5-year demobilized
ratio. However, today's global demands will require a number of selected
National Guard and reserve units to be remobilized sooner than this
standard.

In 2005, we recommended that DOD compile the total costs to provide
military compensation and communicate these costs to decision makers
within the administration and Congress. Despite our recommendation, DOD
has not compiled in one place, that is readily accessible, the total costs
for active or reserve personnel compensation, including mobilized
reservists, and the allocation of these costs among cash, noncash, and
deferred compensation. Such a compilation could enable decision makers to
accurately assess these costs and to manage the total force as well as
efficiently and effectively make fact-based human capital adjustments.

Some steps have been taken to improve transparency and recognition appears
to be growing about the effect of rising compensation costs. For example,
the Office of Management and Budget appears to have recognized the need
for greater transparency over compensation costs. For the first time, in
its Analytical Perspectives for fiscal year 2008, the Office of Management
and Budget described the total cost of DOD active duty compensation and
its allocation to cash, noncash, and deferred compensation.50 The
Analytical Perspectives document also describes significant growth in per
capita compensation in recent years. However, this analysis is submitted
separately, and is part of a more than 400-page document that accompanies
the budget but is not part of the military budget submission. In addition,
in its February 2007 report on federal budget options, the Congressional
Budget Office discussed the option of consolidating military personnel
costs in a single appropriation.51 The report stated that the
consolidation of compensation costs would not only provide more complete
information about how much money is being allocated in support of military
personnel, but it would also give DOD managers a greater incentive to use
resources wisely. Until total costs for reserve compensation are compiled
in a transparent and easily accessible manner, decision makers will be
unable to determine the affordability and efficiency of the reserve
compensation system. Knowing these costs is especially important given the
growing fiscal challenges the country faces.

49GAO, Defense Business Transformation: A Comprehensive Plan, Integrated
Efforts, and Sustained Leadership are Needed to Assure Success,
[40]GAO-07-229T (Washington, D.C.: Nov. 16, 2006); DOD Systems
Modernization: Management of Integrated Military Human Capital Program
Needs Additional Improvements, [41]GAO-05-189 (Washington, D.C.: Feb. 11,
2005).

50The Office of Management and Budget, Analytical Perspectives: Budget of
the United States Government, Fiscal Year 2008 (Washington, D.C.: 2007).

Conclusions

DOD and Congress have reacted to the dramatic shift from a strategic to an
operational reserve by adding compensation without adequate consideration
of how the additions compare with civilian sector compensation; whether
they are appropriate, affordable, and sustainable over the long term; or
their return on investment in terms of recruiting and retention. Looking
forward, DOD officials are concerned about their ability to manage
personnel costs, because so much of the costs are in entitlements--items
that managers have little to no control over, such as retirement pay and
health care. As a result, it is highly questionable whether the
increasingly costly compensation system is affordable, sustainable, and
fiscally sound over the long term. This challenge is especially acute
given the nation's increasingly constrained fiscal environment and DOD's
need to balance its personnel costs with its desire for new equipment and
infrastructure. Without assessing what the appropriate compensation mix
should be, DOD will be unable to ensure that it uses its compensation
resources most efficiently. Moreover, until DOD establishes a compensation
strategy on which to base changes in compensation and performance measures
to gauge the efficiency of changes to the compensation system, DOD will be
unable to use its compensation resources in the most effective and
efficient manner, which ultimately could negatively affect DOD's ability
to recruit and retain a highly qualified force in sufficient numbers.

In addition to the lack of an underpinning compensation strategy, the lack
of transparency over compensation costs makes it difficult to make
fact-based decisions about the efficiency and effectiveness of adjustments
to the compensation system, and in broader terms adjustments to the total
force. A complete picture of total compensation cost for reserve personnel
includes the costs for those reservists who are mobilized as well as the
costs for cash, noncash, and deferred compensation. Without an inclusive
display of all the reserve compensation costs, DOD will not be able to
determine the magnitude of funding and potential for current investments
and operations to turn into long-term financial commitments, thus
prompting real questions about the affordability and sustainability of the
rate of growth in defense spending. Understanding the total cost of
military compensation can provide DOD and Congress with important
information as they make assessments on compensation matters, and it also
allows decision makers to make informed trade-offs among competing demands
for such things as force structure, equipment acquisition, and
infrastructure decisions. Moreover, as DOD embraces the change in the use
of reservists to an operational force mobilized more regularly, the
traditional use of reservists as "weekend warriors" becomes less
realistic. In today's environment reservists will likely be activated
regularly during their career--and those associated compensation costs are
likely significant. Taken together, the lack of a compensation strategy,
performance measures, and transparency limits decision makers' ability to
make fact-based decisions about the appropriateness of the mix and level
of compensation provided to reservists.

51Congressional Budget Office, Budget Options (Washington, D.C.: February
2007).

Recommendations for Executive Action

To improve the appropriateness of the reserve compensation system and to
gain transparency over total reserve compensation costs, we recommend that
the Secretary of Defense take the following actions:

           o Establish a clear compensation strategy that includes
           performance measures to evaluate the efficiency of compensation in
           meeting recruiting and retention goals, and use the performance
           measures to monitor the performance of compensation and assess
           what mix of compensation will be most efficient in the future.

           o Compile the total costs to provide reserve compensation for
           part-time, full-time, and mobilized reservists and communicate
           these costs as well as the allocation of these costs among cash,
           noncash, and deferred compensation to decision makers within the
           administration and Congress--perhaps as an annual exhibit as part
           of the President's budget submission to Congress.

Matter for Congressional Consideration

As future changes are considered to pay and benefits for National Guard
and reserve personnel as well as veterans, Congress should consider the
long-term affordability and sustainability of these changes, including the
long-term implications for the deficit and military readiness.

Agency Comments and Our Evaluation

We provided the Department of Veterans Affairs and DOD a draft of this
report for review and comment. The Department of Veterans Affairs agreed
with the statements in the report as they pertain to the department and
had no formal comments on the report. DOD's comments are reprinted in this
report as appendix IV. DOD partially concurred with our recommendations,
but had several technical comments, which we have incorporated where
appropriate.

DOD partially concurred with our first recommendation to establish a clear
compensation strategy and use performance measures to monitor and assess
the mix of compensation. DOD noted that the department has consistently
communicated its approach to Congress in Congressional testimony and that
DOD has sponsored efforts, such as the Defense Advisory Committee on
Military Compensation, to assess its overarching compensation strategy.
DOD also pointed out that it has generally not sought increases in
deferred and noncash compensation, and stated during congressional
testimony the department's preference for cash compensation. We believe
that DOD's argument that Congress has mandated changes to compensation
that it did not seek further illustrates why the department needs to
develop an explicit compensation strategy and performance measures. As we
point out in this report, a compensation strategy could be used to
underpin the department's compensation decisions and performance measures
to track their effectiveness. Furthermore, the department would be in a
better position to make business case arguments for or against changes to
its compensation system, and provide fact-based evidence regarding the
efficiency of the allocation of cash, noncash, or deferred compensation.

DOD also partially concurred with our second recommendation to compile
total costs to provide reserve compensation for both drilling and
mobilized reservists and communicate those costs to decision makers within
the administration and Congress. In its response to this report, DOD
stated that this recommendation may be more appropriate for the Office of
Management and Budget since the costs extended to multiple federal
departments. We made a similar recommendation to the department in our
July 2005 report on active duty compensation. Since our 2005 report, the
Office of Management and Budget published a compilation of active duty
compensation costs and the allocation of cost to cash, noncash, and
deferred compensation in its fiscal year 2008 Analytical Perspectives. In
addition, the department noted that it has discussed with the Office of
Management and Budget the possibility of expanding the information to
include Guard and reserve compensation costs. Such actions represent steps
in the right direction. However, placing the information in the 400-plus
page Analytical Perspectives document that accompanies the budget may not
be as effective as an annual budget exhibit included as part of the
military budget request. While we believe OMB has taken a step in the
right direction, we continue to believe that DOD is in the best position
to exercise ownership over total compensation costs and, accordingly,
should compile and present total compensation costs as part of its budget
submission. As we stated in our report, lack of transparency over
compensation costs is, in part, due to the fact that DOD lacks a single
source to illustrate total compensation costs for drilling, full-time, and
mobilized reservists. We continue to believe that compilation of costs in
a single source is an important first step in gaining transparency over
total reserve compensation costs. This type of compilation would provide
decision makers with a resource to make fact-based decisions about future
changes to compensation.

We are sending copies of this report to the appropriate congressional
committees, the Secretary of Defense, and other interested parties. In
addition, the report will be available at no charge on GAO's Web site at
[42]http://www.gao.gov . If you or your staff have any questions regarding
this report, please contact me at (404)679-1900 or [43][email protected]
. Contact points for our Offices of Congressional Relations and Public
Affairs may be found on the last page of this report. Other staff members
who made key contributions to this report are listed in appendix V.

John H. Pendleton
Acting Director, Defense Capabilities and Management

List of Congressional Committees

The Honorable Carl Levin
Chairman
The Honorable John McCain
Ranking Member
Committee on Armed Services
United States Senate

The Honorable Daniel Inouye
Chairman
The Honorable Ted Stevens
Ranking Member
Subcommittee on Defense
Committee on Appropriations
United States Senate

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

The Honorable John P. Murtha
Chairman
The Honorable C.W. Bill Young
Ranking Member
Subcommittee on Defense
Committee on Appropriations House
of Representatives

Appendix I: Updated Active Duty Compensation Costs

We originally reported total active duty compensation costs to the federal
government in July 2005.1 This appendix updates the total compensation
costs in that report. As shown in table 1, adjusted for inflation, the
total cost for providing active duty compensation increased from about
$131.7 billion to $173.2 billion (32 percent) from fiscal year 2000 to
fiscal year 2006. Cash benefits accounted for 48 percent of total
compensation costs, while noncash and deferred benefits accounted for 21
and 31 percent, respectively. In fiscal year 2006, it cost the federal
government more than $126,000, on average, to provide annual compensation
to active duty servicemembers. Three things are important to remember
about our estimate. First, it is an average of what it cost the government
to compensate servicemembers, not what the servicemembers "receive in
their paycheck." Second, agencies other than Department of Defense (DOD),
such as the Department of Veterans Affairs, Department of Education, and
Department of Labor, provide compensation to servicemembers, so our
estimate includes their appropriated costs. Third, the estimate does not
include the cost of adding servicemembers, because it does not include
costs for acquiring and training personnel.

1GAO, Military Personnel: DOD Needs to Improve the Transparency and
Reassess the Reasonableness, Appropriateness, Affordability, and
Sustainability of Its Military Compensation System, [44]GAO-05-798
(Washington, D.C.: July 19, 2005).

Table 3: Summary of Changes in Active Duty Compensation Costs for Fiscal
Years 2000 and 2006

Fiscal year 2006                                                           
constant dollars                                                           
                                                          Percentage of total 
Components of         Fiscal Fiscal year Percentage   compensation (fiscal 
compensation       year 2000        2006     change             year 2006) 
Cash (in billions)                                                         
Basic pay              $40.8       $48.2         18                        
Housing allowance        7.7        14.8         92                        
Subsistence              3.3         3.5          6                        
allowance                                                                  
Special and              3.5         5.2         48                        
incentive pays                                                             
Allowance                2.0         3.2         60                        
Tax expenditure          6.6         8.5         30                        
Total cash (in         $63.9        83.4         30                     48 
billions)                                                                  
Total per capita      46,559      60,713         30                        
cash                                                                       
Noncash benefits                                                           
(in billions)                                                              
Subsistence in           1.3         2.7        111                        
kind                                                                       
Othera                  15.6        17.4         19                        
Educationb               0.4         0.6         63                        
Health care              9.9        13.6         38                        
Family housing and       2.4         2.3        (5)                        
barracks                                                                   
Total noncash (in       29.6        36.6         24                     21 
billions)                                                                  
Total per capita      21,581      26,721         24                        
noncash                                                                    
Deferred benefits                                                          
(in billions)                                                              
Retired pay             13.0        12.7        (2)                        
accrual                                                                    
Veterans Affairs -       8.9        10.5         18                        
health care                                                                
Veterans Affairs-        9.5        11.3         18                        
compensation and                                                           
pension                                                                    
Veterans Affairs -       0.9         1.1         18                        
other                                                                      
Department of the        0.0         2.4                                   
Treasury                                                                   
Health care              5.8        15.3        162                        
accrual                                                                    
Total deferred (in      38.1        53.3         39                     31 
billions)                                                                  
Total per capita      27,831      38,806         39                        
deferred                                                                   
Total compensation    $131.7      $173.2         32                        
(in billions)                                                              
Total per capita     $95,971    $126,239         32                        

Source: GAO analysis.

Note: The numbers may not total due to rounding. According to DOD, about
95,000 mobilized reservists were paid out of active duty cash compensation
costs in fiscal year 2006. Our active duty per capita cost estimates do
not take these mobilized reservists into account because our per capita
costs are based on active duty end strength. The per capita costs to
provide compensation would be lower if these reservists are taken into
consideration.

aIncludes separation pay, partial dislocation allowance, transportation
subsidy, permanent change of station, DOD dependents' education, adoption
expenses, savings deposit program, death gratuities, survivor benefits,
Servicemember Group Life Insurance hazard payments, Veterans Affairs home
loan guaranty program, other personnel support, special support, Morale
Welfare and Recreation, commissaries, Social Security tax, unemployment
benefits, special compensation, impact aid, and veterans employment and
training.

bIncludes education, off-duty voluntary education, and servicemember GI
bill and certification.

To calculate the cost to the federal government of compensating active
duty servicemembers, we interviewed officials from DOD, Department of
Veterans Affairs, Department of Labor, Department of Education, Office of
Management and Budget, and the Congressional Budget Office. We analyzed
and compiled data for fiscal years 2000-2006 from the Army, Air Force,
Marine Corps, and Navy's military personnel and operations and maintenance
budget justification books. We also reviewed and compiled data from the
Department of Veterans Affairs benefits and health care budget
justification books. To estimate the total federal tax expenditure that
results from the tax-exempt housing and subsistence allowances military
personnel receive, we used the National Bureau of Economic Research's
TAXSIM Model to simulate tax liabilities under different scenarios.2 To
estimate health care accrual costs, we used official DOD estimates of
accrual health care costs for all retirees and their dependents. In
addition, DOD's Office of Health Affairs provided us the estimated cost of
health care for active duty servicemembers and their dependents for fiscal
years 2004-2006. To calculate the costs of future veterans' benefits for
current active duty servicemembers, including the costs for health care,
compensation, pension, and other types of benefits, we used notional costs
as a percentage of basic pay for accruing and actuarially funding
Department of Veterans Affairs benefits in the DOD budget. Lastly, we used
deflators to adjust the budget appropriations into current fiscal year
2006 dollars. For more detailed information on our methodology, see
appendix II.

2National Bureau of Economic Research's TAXSIM Model simulates the U.S.
federal income tax rules. See Daniel Feenberg and Elisabeth Coutts "An
Introduction to the TAXSIM Model," Journal of Policy Analysis and
Management, vol. 12, no. 1, 1993, pp. 189-194.

Appendix II: Scope and Methodology Appendix II: Scope and Methodology

To determine how Guard and reserve servicemembers have been compensated,
we analyzed relevant regulations and legislation since 2000, identified
changes in compensation policy, and compiled a list of pays and benefits
for which reservists are currently eligible. We then used budgetary data
to assign costs to the various pays and benefits of the reserve
compensation system. This included compiling data for fiscal years
2000-2006 from the Army National Guard, Army Reserve, Air National Guard,
Air Force Reserve, Marine Corps Reserve, and Navy Reserve's military
personnel and operation and maintenance budget justification books. Within
the operation and maintenance justification books, we reviewed the budgets
of the defense health program; the defense commissary agency; the morale,
welfare, and recreation activities (OP-34 exhibit); and DOD dependent
education activity. We also reviewed data from the Department of Veterans
Affairs benefits and health care budget justification books. In addition,
we interviewed DOD officials in Washington, D.C., from the offices of (1)
the Assistant Secretary of Defense for Reserve Affairs; (2) the
Comptroller within the Office of Secretary of Defense; (3) each of the
national guard and reserve components, excluding the Coast Guard; (4) the
Actuary; (5) Health Affairs; and (6) the Office of Program Analysis and
Evaluation. We also interviewed officials from the Department of Veterans
Affairs in Washington, D.C., the Office of Management and Budget in
Washington, D.C., and the Congressional Budget Office in Washington D.C.

All of the associated costs for the reserves could not be found in the
budgetary exhibits. In some instances, we requested data from the
appropriate federal agency. For example, the Office of Health Affairs
provided (1) per capita TRICARE cost estimates for full-time
administration and support personnel for fiscal years 2004 through 2006;
(2) cost estimates for TRICARE Reserve Select (TRS) for fiscal year 2005
and fiscal year 2006; and (3) projected cost estimates for TRS for fiscal
year 2008 to fiscal year 2013. To calculate the health care cost for
full-time reservists for fiscal years 2000 through 2003, we relied on our
previous health care cost estimates for active duty personnel.1 The Office
of the Actuary provided the costs for the retired health care accrual.
Although the Department of Veterans Affairs provided assistance, we
determined that the portion of reserve deferred or acrual cost associated
with most veterans' programs could not be identified without creating an
accrual model.

1GAO, Military Personnel: DOD Needs to Improve the Transparency and
Reassess the Reasonableness, Appropriateness, Affordability, and
Sustainability of Its Military Compensation System, [45]GAO-05-798
(Washington, D.C.: July 19, 2005).

In other instances, we found it necessary to estimate the cost to the
federal government. For example, we used the data from the Office of the
Actuary's Valuation Report to calculate the Department of Treasury's
contribution to disability compensation accrual. We also estimated total
federal tax expenditures that resulted from tax-exempt housing and
subsistence allowances received by military personnel in 2005 and 2006. To
do this we estimated the taxes owed by an active duty servicemember for
every combination of years of service, rank, and family size,2 with and
without the tax exemption for housing and subsistence. The number and pays
of servicemembers were provided by DOD's Selected Military Compensation
Tables. Only military income was used to calculate the taxes owed.3 We
calculated taxes owed for each group using the National Bureau of Economic
Research's TAXSIM model, which simulates tax liabilities under different
scenarios.4 We calculated the tax expenditure as the difference between
the taxes owed without the tax exemptions and with the tax exemptions. We
determined the average tax expenditure for active duty servicemembers by
computing an average based on the number of servicemembers in each
category. We applied these results to the active duty compensation cost.

Next, to estimate the percentage difference in tax expenditure between
active duty and full-time reservists, we computed the ratio of average tax
expenditure in 2006 based on the distribution of years of service and
ranks for full-time reservists and active duty servicemembers. When
computing the taxes owed by reservists, we assumed that the family size of
full-time reservists was the same as active duty servicemembers of
identical rank and years of service. Data for reservists were taken from
the Official Guard and Reserve Manpower Strength and Statistics5. We
applied these results to the compensation cost of full-time reservists.

2The first dependent is assumed to be a spouse. Other dependents are
assumed to be children.

3In most cases, including additional income, such as from a spouse, would
increase the marginal tax rate and increase our estimate of the tax
expenditure. However, an exception might be servicemembers eligible for
the Earned Income Tax Credit, where more income could increase the credit,
lower the marginal tax rate, and decrease the size of the tax expenditure.

4The National Bureau of Economic Research's TAXSIM Model simulates the
U.S. federal tax income tax rules. See Daniel Feenberg and Elizabeth
Coutts, "An Introduction to the TAXSIM Model," Journal of Policy Analysis
and Management, vol. 12, no. 1 (1993), pp. 189-194.

Additionally, to estimate future health care costs for the current reserve
population when they retire, we used official estimates of health care
accrual costs for servicemembers older than 65 (Medicare eligible) and
younger than 65 (non-Medicare eligible). DOD's Office of the Actuary
provided the per capita normal costs for postretirement medical benefits,
that is, the present value of the current year's attributed portion of
future benefits for active personnel and their eligible dependents. The
2000-2002 per capita normal costs were provided by DOD's Office of the
Actuary based on data from a report prepared by Milliman USA Consultants
and Actuaries.6 Per capita normal costs for 2003 and 2004 were based on
data from Milliman's spreadsheets.7 The 2005 and 2006 per capita normal
costs come from the DOD Office of the Actuaries' valuations as of
September 30, 2004, and September 30, 2005, respectively.

Finally, when calculating aggregate costs for the various types of
compensation, we used military personnel deflators from the National
Defense Budget Estimates for fiscal year 2007 published by the Office of
the Under Secretary of Defense (Comptroller) to adjust the budget
appropriations into current fiscal year 2006 dollars. To aid our analysis,
we classified the types of compensation into three categories: cash,
noncash, and deferred. In addition, we classified the reserve service
population into two categories: full-time and part-time. Our analysis
produced per capita costs for each category of the population. For the
full-time per capita cost, we used the average strength identified in the
military personnel budget justification books for the administration and
support population as the denominator. The average strength, of Pay Groups
A (reservists assigned to units), B (reservists designated as Individual
Mobilization Augmentees), F (reservists completing initial entry
training), and P, located in the military personnel budget justification
books was adjusted by subtracting the average number of mobilized Select
Reservists from each fiscal year to approximate the actual number of
part-time drilling or "active" reservists. This "normalized" strength was
used as the denominator for the part-time per capita cost. The office of
the Assistant Secretary of Defense for Reserve Affairs provided assistance
with querying the Contingency Tracking System managed by DOD's Defense
Manpower Data Center to identify the monthly number of reservists serving
on active duty orders for named contingencies by reserve component. To
assess the reliability of Contingency Tracking System data, we interviewed
knowledgeable officials about the system and related internal controls,
and we reviewed our prior work on the reliability of Contingency Tracking
System data. To assess the reliability of the analysis (monthly deployment
totals) produced by the Defense Manpower Data Center from the Contingency
Tracking System, we reviewed the SAS program that generated the results.
We determined the data we received were reliable for there intended
purpose in this engagement.

5 Office of the Assistant Secretary of Defense (Reserve Affairs), Official
Guard and Reserve Manpower Strengths and Statistics: FY 2006 Summary.

6Milliman USA Consultants and Actuaries, Analysis of the U.S. Military's
Projected Retiree Medical Liabilities as of September 30, 1999 (Vienna,
VA); Analysis of the U.S. Military's Projected Retiree Medical Liabilities
as of September 30, 2000 (Vienna, VA); Analysis of the U.S. Military's
Projected Retiree Medical Liabilities as of September 30, 2001 (Vienna,
VA).

7 Milliman USA Consultants and Actuaries, Analysis of the U.S. Military's
Projected Retiree Medical Liabilities as of September 30, 2000 (Vienna,
VA; March 21, 2002); Analysis of the U.S. Military's Projected Retiree
Medical Liabilities as of September 30, 2001 (Vienna, VA; January 21,
2003).

To assess the extent to which DOD's mix of cash, noncash, and deferred
compensation helped DOD meet its human capital goals, we reviewed the
requirements for establishing program objectives and outcome measures in
federal government standards such as the Government Performance and
Results Act of 1993 as well as in GAO guidance and strategies for human
capital management. We reviewed applicable DOD directives, policy, and
guidance and interviewed DOD officials from each of the reserve
components, as well as representatives from the Office of the Secretary of
Defense and Reserve Affairs in Washington, D.C., to assess whether DOD had
established any strategies for compensation or outcome measures to
determine the efficiency of its compensation tools. We interviewed DOD
recruiting and retention officials to determine the extent to which
compensation is used to attract and retain reserve personnel. These
interviews were conducted with officials in the U.S. Army Accessions
Command at Ft. Knox, Kentucky; U.S. Army Retention Command at Ft.
McPherson, Georgia; and Air National Guard Office of Recruiting and
Retention in Arlington, Virginia. We also reviewed reports done by DOD,
the Congressional Research Service, the Commission on the National Guard
and Reserves, the private sector, and others on recruiting and retention
of reserve forces as well as commonly accepted economic theory.

To assess the extent to which DOD's approach provided transparency over
total costs to the federal government and determine whether DOD followed
those directives, policy, and guidance, we reviewed how compensation costs
are presented to decision makers by analyzing the budget justification
books and comparing them to applicable directives, policy, and guidance,
such as the DOD Financial Management Regulation. We also interviewed
knowledgeable officials at the National Guard Bureau (for the Army and Air
National Guard), the Air Force Reserve Budget Division, the Army Reserves
(Office of the Comptroller), Marine Corps Reserves, and Navy Reserve
Budget offices in Washington, D.C. to learn more about transparency
issues. We compared DOD directives and guidance to standards such as the
Government Performance and Results Act and commonly accepted economic
theory.

To calculate the cost to the federal government of compensating active
duty servicemembers, we interviewed officials from DOD including the
Office of the Secretary of Defense, Under Secretary for Personnel and
Readiness' office of compensation, the Office of the Comptroller within
the Office of the Secretary of Defense and the Services, the Office of the
Actuary, and Health Affairs all in Arlington, Virginia. In addition, we
interviewed officials from Department of Veterans Affairs, Department of
Labor, Department of Education, Office of Management and Budget, and the
Congressional Budget Office, all in Washington, D.C.

We examined and compiled data for fiscal years 2000-2006 from the Army,
Air Force, Marine Corps, and Navy's military personnel and operations and
maintenance budget justification books. Within the operations and
maintenance justification books, we reviewed the Defense Health Program,
the Defense Commissary Agency, the morale, welfare and recreation (OP-34
exhibit), and DOD dependent education activity budgets. We also reviewed
and compiled data from the Department of Veterans Affairs benefits and
health care budget justification books. We used deflators to adjust the
budget appropriations into current fiscal year 2006 dollars.

To calculate the costs of future veterans' benefits for current active
duty servicemembers, including the costs for health care, compensation,
pension, and other types of benefits, we used notional costs as a
percentage of basic pay of accruing and actuarially funding Veterans
Affairs benefits in the DOD budget. The notional cost percentages we used
were unofficial Office of Management and Budget estimates. These estimates
were based on the most recent official percentages shown in table 12-2 of
the 1999 President's Budget.

Lastly, all active duty compensation costs are not presented in budgets.
As a result, we estimated the total federal tax expenditure and our
methods are described as part of the reserve compensation costs on page
39. We requested DOD's Office of the Actuary provide health care accrual
costs as described in appendix I. We also requested that DOD's Office of
Health Affairs provide health care cost estimates for active duty
servicemembers and their dependents for fiscal years 2004-2006. We relied
on our previously calculated active duty health care costs for fiscal
years 2000 through 2003.8 We conducted our review from October 2006
through May 2007 in accordance with generally accepted government auditing
standards.

8GAO, Military Personnel: DOD Needs to Improve the Transparency and
Reassess the Reasonableness, Appropriateness, Affordability, and
Sustainability of Its Military Compensation System, [46]GAO-05-798
(Washington, D.C.: July 19, 2005).

Appendix III: Pay and Benefits of the Selected Reserve 

                                     Part-time Guard and reserve servicemembers
                                                       Active duty   Active duty                  
                                                       (other than   (other than                  
                                                       training) for training) for                
                   Inactive duty    Active duty for    30 days or    31 days or     Full-time     
Compensation       training (IDT)   training (ADT)     less          more           support       
Cash compensation                                                                                 
Pay and allowances                                                                                
Basic pay          1/30 of the      Amount is          Amount is     Amount is      Amount is     
                   monthly basic    determined by the  determined by determined by  determined by 
                   pay rate for     member's years of  the member's  the member's   the member's  
                   each IDT period  service and pay    years of      years of       years of      
                                    grade.             service and   service and    service and   
                                                       pay grade.    pay grade.     pay grade.    
Basic Allowance    Not eligible     If ADT is 31 days  Not eligible  Amount is      Amount is     
for Housing                         or more, the                     determined by  determined by 
                                    servicemember is                 member's pay   member's pay  
                                    eligible. The                    grade,         grade,        
                                    amount is                        location of    location of   
                                    determined by the                permanent duty permanent     
                                    member's pay                     station, and   duty station, 
                                    grade, location of               dependent      and dependent 
                                    permanent duty                   status.        status.       
                                    station, and                                                  
                                    dependent status.                                             
Basic Allowance    Not eligible     Eligible           Eligible      Not eligible   Not eligible  
for                                                                                               
Housing/Reserve                                                                                   
Component                                                                                         
Basic Allowance    Not eligible     Eligible, amount   Eligibile,    Eligible,      Eligible,     
Subsistence                         depends on if the  amount        amount depends amount        
                   (Enlisted        servicemember is   depends on if on if the      depends on if 
                   servicemembers   an officer or      the           servicemember  the           
                   may receive      enlisted.          servicemember is an officer  servicemember 
                   rations-in-kind)                    is an officer or enlisted.   is an officer 
                                                       or enlisted.                 or enlisted.  
Family Separation  Not eligible     Eligible, limited  Not eligible  Eligible,      Eligible, for 
Allowance                           to members with                  limited to     members with  
                                    dependents during                members with   dependents,   
                                    permanent change                 dependents     if member     
                                    station when                     during         meets         
                                    family cannot                    permanent      statutory and 
                                    accompany member                 change of      regulatory    
                                    or temporary duty                station when   requirements. 
                                    status                           family cannot                
                                    (unaccompanied for               accompany                    
                                    31 days or more).                member or                    
                                                                     temporary duty               
                                                                     status                       
                                                                     (unaccompanied               
                                                                     for 31 days or               
                                                                     more).                       
Tax Benefit        Not eligible     Housing and        Housing and   Housing and    Housing and   
                                    subsistence        subsistence   subsistence    subsistence   
                                    allowances are     allowances    allowances are allowances    
                                    nontaxable         are           nontaxable     are           
                                    benefits. In       nontaxable    benefits. In   nontaxable    
                                    addition, all pay, benefits. In  addition, all  benefits. In  
                                    allowances, and    addition, all pay,           addition, all 
                                    bonuses earned     pay,          allowances,    pay,          
                                    during a month     allowances,   and bonuses    allowances,   
                                    while in a combat  and bonuses   earned during  and bonuses   
                                    zone and qualified earned during a month while  earned during 
                                    hazardous duty     a month while in a combat    a month while 
                                    area for 1day of   in a combat   zone and       in a combat   
                                    the month are      zone and      qualified      zone and      
                                    nontaxable.        qualified     hazardous duty qualified     
                                    Officers' monthly  hazardous     area for 1day  hazardous     
                                    tax exclusion of   duty area for of the month   duty area for 
                                    military pay       1day of the   are            1day of the   
                                    earned is capped   month are     nontaxable.    month are     
                                    at the highest     nontaxable.   Officers'      nontaxable.   
                                    enlisted monthly   Officers'     monthly tax    Officers'     
                                    basic pay plus     monthly tax   exclusion of   monthly tax   
                                    $225 for hazardous exclusion of  military pay   exclusion of  
                                    fire and Imminent  military pay  earned is      military pay  
                                    Danger Pay (IDP).  earned is     capped at the  earned is     
                                                       capped at the highest        capped at the 
                                                       highest       enlisted       highest       
                                                       enlisted      monthly basic  enlisted      
                                                       monthly basic pay plus $225  monthly basic 
                                                       pay plus $225 for hazardous  pay plus $225 
                                                       for hazardous fire and       for hazardous 
                                                       fire and      Imminent       fire and      
                                                       Imminent      Danger Pay.    Imminent      
                                                       Danger Pay.                  Danger Pay.   
Special and incentive paysa                                                                       
Hostile            Eligible;        Eligible, if the   Eligible, if  Eligible, if   Eligible, if  
Fire/Imminent      however, DOD     member meets the   the member    the member     the member    
Danger Pay         policy states    statutory and      meets the     meets the      meets the     
                   that a member    regulatory         statutory and statutory and  statutory and 
                   shall not        requirements of    regulatory    regulatory     regulatory    
                   perform duty in  the pay.           requirements  requirements   requirements  
                   a hostile                           of the pay.   of the pay.    of the pay.   
                   fire/imminent                                                                  
                   danger area                                                                    
Hazardous Duty     Eligible, at     Eligible, if the   Eligible, if  Eligible, if   Eligible, if  
Incentive Pay      1/30 of the      member meets the   the member    the member     the member    
                   authorized rate  statutory and      meets the     meets the      meets the     
                   for each IDT     regulatory         statutory and statutory and  statutory and 
                   period, if the   requirements of    regulatory    regulatory     regulatory    
                   member meets the the pay.           requirements  requirements   requirements  
                   statutory and                       of the pay.   of the pay.    of the pay.   
                   regulatory                                                                     
                   requirements of                                                                
                   the pay, except                                                                
                   for fire                                                                       
                   fighters.                                                                      
Aviation Career    Eligible, at     Eligible, if the   Eligible, if  Eligible, if   Eligible, if  
Incentive Pay      1/30 of the      member meets the   the member    the member     the member    
                   authorized rate  statutory and      meets the     meets the      meets the     
                   for each IDT     regulatory         statutory and statutory and  statutory and 
                   period, if the   requirements of    regulatory    regulatory     regulatory    
                   member meets the the pay.           requirements  requirements   requirements  
                   statutory and                       of the pay.   of the pay.    of the pay.   
                   regulatory                                                                     
                   requirements of                                                                
                   the pay.                                                                       
Career Enlisted    Eligible, at     Eligible, if the   Eligible, if  Eligible, if   Eligible, if  
Flyers Incentive   1/30 of the      member meets the   the member    the member     the member    
Pay                authorized rate  statutory and      meets the     meets the      meets the     
                   for each IDT     regulatory         statutory and statutory and  statutory and 
                   period.          requirements of    regulatory    regulatory     regulatory    
                                    the pay.           requirements  requirements   requirements  
                                                       of the pay.   of the pay.    of the pay.   
Foreign Language   Eligible, if the Eligible, if the   Eligible, if  Eligible, if   Eligible, if  
Proficiency Pay    member meets the member meets the   the member    the member     the member    
                   statutory and    statutory and      meets the     meets the      meets the     
                   regulatory       regulatory         statutory and statutory and  statutory and 
                   requirements of  requirements of    regulatory    regulatory     regulatory    
                   the pay.         the pay.           requirements  requirements   requirements  
                                                       of the pay.   of the pay.    of the pay.   
Submarine Duty     Eligible, at     Eligible, if the   Eligible, if  Eligible, if   Eligible, if  
Incentive Pay      1/30 of the      member meets the   the member    the member     the member    
                   authorized rate  statutory and      meets the     meets the      meets the     
                   for each IDT     regulatory         statutory and statutory and  statutory and 
                   period, if the   requirements of    regulatory    regulatory     regulatory    
                   member meets the the pay.           requirements  requirements   requirements  
                   statutory and                       of the pay.   of the pay.    of the pay.   
                   regulatory                                                                     
                   requirements of                                                                
                   the pay.                                                                       
Diving Duty        Eligible, at     Eligible, if the   Eligible, if  Eligible, if   Eligible, if  
Special Pay        1/30 of the      member meets the   the member    the member     the member    
                   authorized rate  statutory and      meets the     meets the      meets the     
                   for each IDT     regulatory         statutory and statutory and  statutory and 
                   period, if the   requirements of    regulatory    regulatory     regulatory    
                   member meets the the pay.           requirements  requirements   requirements  
                   statutory and                       of the pay.   of the pay.    of the pay.   
                   regulatory                                                                     
                   requirements of                                                                
                   the pay.                                                                       
Special Duty       Eligible, at     Eligible. However, Eligible.     Eligible.      Eligible, if  
Assignment Pay     1/30 of the      the Secretary of   However, the  However, the   the member    
                   authorized rate  the military       Secretary of  Secretary of   meets the     
                   for each IDT     department may     the military  the military   statutory and 
                   period, if the   authorize payment  department    department may regulatory    
                   member meets the only to those      may authorize authorize      requirements  
                   statutory and    reservists on      payment only  payment only   of the pay.   
                   regulatory       active duty in     to those      to those                     
                   requirements of  excess of 180      reservists on reservists on                
                   the pay.         days.              active duty   active duty in               
                                                       in excess of  excess of 180                
                                                       180 days.     days.                        
Officers Holding   Eligible for     Eligible for       Eligible for  Eligible for   Eligible for  
Positions of       officers only,   officers only, if  officers      officers only, officers      
Unusual            for each day of  the member meets   only, if the  if the member  only, if the  
Responsibility and duty that meets  the statutory and  member meets  meets the      member meets  
of Critical Nature the statutory    regulatory         the statutory statutory and  the statutory 
                   and regulatory   requirements of    and           regulatory     and           
                   requirements of  the pay.           regulatory    requirements   regulatory    
                   the pay.                            requirements  of the pay.    requirements  
                                                       of the pay.                  of the pay.   
Hardship Duty Pay  Not eligible     Eligible when      Eligible when Eligible when  Eligible, if  
(mission)                           assigned to a      assigned to a assigned to a  the member    
                                    designated         designated    designated     meets the     
                                    mission.           mission.      mission.       statutory and 
                                                                                    regulatory    
                                                                                    requirements  
                                                                                    for the pay.  
Hardship Duty Pay  Not eligible     Eligible from the  Eligible from Eligible from  Eligible if   
(location)                          first day if       the first day the first day  the member    
                                    assigned           if assigned   if assigned    meets the     
                                    permanently to a   permanently   permanently to statutory and 
                                    designated         to a          a designated   regulatory    
                                    location or if     designated    location or if requirements  
                                    assigned           location or   assigned       for the pay.  
                                    temporarily to a   if assigned   temporarily to               
                                    designated         temporarily   a designated                 
                                    location for more  to a          location for                 
                                    than 30            designated    more than 30                 
                                    consecutive days,  location for  consecutive                  
                                    payable from first more than 30  days, payable                
                                    day.               consecutive   from first                   
                                                       days, payable day.                         
                                                       from first                                 
                                                       day.                                       
Special Pay for    Eligible at 1/30 Eligible at 1/30   Eligible at   Eligible at    Eligible at   
Members of Weapons of the           of the authorized  1/30 of the   1/30 of the    1/30 of the   
of Mass            authorized rate  rate for each duty authorized    authorized     authorized    
Destruction Civil  for each duty    day.               rate for each rate for each  rate for each 
Support Teams      day.                                duty day.     duty day.      duty day.     
Medical and Dental Not eligible     Eligible, medical  Eligible,     Eligible       Eligible, if  
Special Pay                         officers are       medical                      the member    
                                    authorized         officers are                 meets the     
                                    $450/month and     authorized                   statutory and 
                                    dental officers    $450/month                   regulatory    
                                    $350/month.        and dental                   requirements  
                                                       officers                     of the pay.   
                                                       $350/month.                                
Other health care  Not eligible     Not eligible       Not eligible  Eligible       Eligible, if  
professions:                                                                        the member    
optometrists;                                                                       meets the     
psychologists and                                                                   statutory and 
non-physician                                                                       regulatory    
health care                                                                         requirements  
providers; nurse                                                                    of the pay.   
anesthetists &                                                                                    
veterinarians                                                                                     
Bonusesb                                                                                          
Selected Reserve   Eligible for     Eligible for       Eligible for  Eligible for   Eligible for  
Officer            officers who     officers who agree officers who  officers who   officers who  
Affiliation Bonus  agree to fill    to fill critical   agree to fill agree to fill  agree to fill 
                   critical         shortfalls.        critical      critical       critical      
                   shortfalls.                         shortfalls.   shortfalls.    shortfalls;   
                                                                                    however, DOD  
                                                                                    policy        
                                                                                    prohibits.    
Selected Reserve   Limited to       Limited to         Limited to    Limited to     Limited to    
Enlistment Bonus   Selected Reserve Selected Reserve   Selected      Selected       Selected      
                   who enlist to    who enlist to fill Reserve who   Reserve who    Reserve who   
                   fill critical    critical           enlist to     enlist to fill enlist to     
                   shortfalls.      shortfalls.        fill critical critical       fill critical 
                                                       shortfalls.   shortfalls.    shortfalls;   
                                                                                    however, DOD  
                                                                                    policy        
                                                                                    prohibits..   
Selected Reserve   Limited to       Limited to         Limited to    Limited to     Limited to    
Reenlistment Bonus Selected Reserve Selected Reserve   Selected      Selected       Selected      
                   who reenlist to  who reenlist to    Reserve who   Reserve who    Reserve who   
                   fill critical    fill critical      reenlist to   reenlist to    reenlist to   
                   shortfalls.      shortfalls.        fill critical fill critical  fill critical 
                                                       shortfalls.   shortfalls.    shortfalls;   
                                                                                    however, DOD  
                                                                                    policy        
                                                                                    prohibits..   
$30,000 Lump Sum   Not eligible     Not eligible       Not eligible  Not eligible   Option        
Bonus                                                                               available to  
                                                                                    Active Guard  
                                                                                    and Reserves  
                                                                                    with 15 years 
                                                                                    of service    
                                                                                    who first     
                                                                                    became a      
                                                                                    member after  
                                                                                    August 1,     
                                                                                    1986 and      
                                                                                    elect to      
                                                                                    accept the    
                                                                                    lump sum      
                                                                                    bonus and to  
                                                                                    remain under  
                                                                                    the Redux     
                                                                                    retirement    
                                                                                    plan.         
Noncash                                                                                           
copensation                                                                                       
Medical and dental                                                                                
carec                                                                                             
Member Medical and Eligible for     Eligible, if 30    Eligible for  Eligible for   Eligible for  
Dental Benefits    treatment of     days or less, for  treatment of  treatment      treatment     
                   injury, illness  treatment of       injury,                      provided at a 
                   or disease       injury, illness or illness or    provided at a  military      
                   incurred or      disease incurred   disease       military       treatment     
                   aggravated in    or aggravated in   incurred or   treatment      facility.     
                   line of duty.    line of duty and   aggravated in facility.                    
                                    if 31 days or more line of duty.                              
                                    it is the same as                                             
                                    active duty.                                                  
TRICARE Dental     Eligible         Eligible, if ADT   Eligible      Dental care    Dental care   
Program for                         is 30 days or                    and            and           
Reserve Component                   less; however, if                                             
members                             ADT is 31 days or                treatment      treatment     
                                    more then dental                 provided at a  provided at   
                                    care and treatment               military       military      
                                    provided at a                    treatment      treatment     
                                    military                         facility.      facility.     
                                    treatmentfacility.                                            
Dependent Medical  Not eligible     Eligible, if the   Not eligible  Eligible, at   Eligible, at  
Benefits                                                             military       military      
                                    member is ordered                facilities if  facilities if 
                                    to active duty for               space is       space is      
                                    training for 31                  available or   available or  
                                    days                             the            the           
                                                                     servicemember  servicemember 
                                    or more.                         may select     may select    
                                                                     from TRICARE   from TRICARE  
                                                                     Standard,      Standard,     
                                                                     Extra, Prime   Extra, Prime  
                                                                     or Prime       or Prime      
                                                                     Remote.        Remote.       
Transitional       Not eligible     Eligible, for 180  Not eligible  Eligible, for  Eligible, for 
Health Care:                        days, if                         180 days, if   180 days, if  
Member and                          involuntarily                    involuntarily  involuntarily 
Dependents                          separated from                   separated from separated     
                                    active duty.                     active duty or from active   
                                                                     if released    duty.         
                                                                     from active                  
                                                                     duty while                   
                                                                     serving in a                 
                                                                     contingency                  
                                                                     operation for                
                                                                     a period of                  
                                                                     more than 30                 
                                                                     days.                        
TRICARE Reserve    Eligible, if                                      Not eligible   Not eligible  
Select Tier I:     member meets                                                                   
Member and         eligibility                                                                    
Dependentsd        requirements and                                                               
                   enrolls,                                                                       
TRICARE Reserve    Eligible, if                                      Not eligible   Not eligible  
Select Tier II:    member meets                                                                   
Member and         eligbility                                                                     
Dependents         requirements and                                                               
                   enrolls.                                                                       
TRICARE Reserve    Eligible, if                                      Not eligible   Not eligible  
Select Tier III:   member meets                                                                   
Member and         eligibility                                                                    
Dependents         requirements and                                                               
                   enrolls.                                                                       
TRICARE Dental     Eligible         Eligible           Eligible      Eligible       Eligible      
Program for                                                                                       
Dependents                                                                                        
Installation-based                                                                                
benefits                                                                                          
(availability                                                                                     
limited by                                                                                        
geographic                                                                                        
location)                                                                                         
Commissary         Unlimited        Unlimited          Unlimited     Unlimited      Unlimited     
Privileges                                                                                        
Post Exchange      Unlimited        Unlimited          Unlimited     Unlimited      Unlimited     
Privileges                                                                                        
Morale, Welfare,   Eligible,        Eligible, however, Eligible,     Eligible,      Eligible,     
Recreation         however, may     may have limited   however, may  however, may   however, may  
Services           have limited     availability for   have limited  have limited   have limited  
                   availability for various services.  availability  availability   availability  
                   various                             for various   for various    for various   
                   services.                           services.     services.      services.     
Family Support     Eligible for     Eligible           Eligible      Eligible       Eligible      
Centers            some services                                                                  
                   but not all.                                                                   
Child Care Centers Eligible,        Eligible, but      Eligible, but Eligible, but  Eligible, but 
                   however, may     availability of    availability  availability   availability  
                   have limited     space may be       of space may  of space may   of space may  
                   availability.    limited.           be limited.   be limited.    be limited.   
Space Required     Eligible to      Eligible           Eligible      Eligible       Eligible      
Travel             travel between                                                                 
                   the member's                                                                   
                   home and place                                                                 
                   of training.                                                                   
Space Available    Eligible for the Eligible for the   Eligible for  Eligible for   Eligible for  
Travel             member only      member and         the member    the member and the member    
                   within the       dependents to all  and           dependents to  and           
                   continental      locations.         dependents to all locations. dependents to 
                   United States of                    all                          all           
                   America.                            locations.                   locations.    
Legal Assistance   Usually limited  Subject to the     Subject to    Subject to the Subject to    
                   to services that availability of    the           availability   the           
                   are associated   legal staff        availability  of legal staff availability  
                   with military    resources.         of legal      resources.     of legal      
                   requirements.                       staff                        staff         
                                                       resources.                   resources.    
Insurancee                                                                                        
Servicemember      Selected Reserve Selected Reserve   Coverage      Coverage       Coverage      
Group Life         members are      members are        continues or  continues or   continues or  
Insurance          automatically    automatically      eligible to   eligible to    eligible to   
                   enrolled and may enrolled and may   enroll.       enroll.        enroll.       
                   decline          decline coverage.                                             
                   coverage.                                                                      
Servicemember      Eligible, if the Eligible, if the   Eligible, if  Eligible, if   Eligible, if  
Group Life         member is        member is enrolled the member is the member is  the member is 
Insurance Family   enrolled in      in Servicemember   enrolled in   enrolled in    enrolled in   
Coverage           Servicemember    Group Life         Servicemember Servicemember  Servicemember 
                   Group Life       Insurance.         Group Life    Group Life     Group Life    
                   Insurance.                          Insurance.    Insurance.     Insurance.    
Traumatic Injury   Selected         Selected           Selected      Selected       Automatically 
Protection Program Reservists are   Reservists are     Reservists    Reservists are enrolled if   
                   automatically    automatically      are           automatically  the reservist 
                   enrolled if the  enrolled if the    automatically enrolled if    has           
                   reservist has    reservist has      enrolled if   the reservist  Servicemember 
                   Servicemember    Servicemember      the reservist has            Group Life    
                   Group Life       Group Life         has           Servicemember  Insurance     
                   Insurance        Insurance          Servicemember Group Life     coverage.     
                   coverage.        coverage.          Group Life    Insurance                    
                                                       Insurance     coverage.                    
                                                       coverage.                                  
Leave                                                                                             
Accumulation of    Not eligible     Eligible, if ADT   Not eligible  Eligible       Eligible      
Leave                               is 31 days or                                                 
                                    more.                                                         
Payment for Unused Not applicable.  Eligible, if ADT   Not eligible  Eligible, up   Eligible, up  
Leave                               is 31 days or                    to 60 days in  to 60 days in 
                                    more. Up to 60                   career, but if career.       
                                    days in career. If               on active duty               
                                    on ADT for more                  for more than                
                                    than 30 days but                 30 days but                  
                                    less than 365                    less than 365                
                                    days, may sell                   days, may sell               
                                    unused leave in                  unused leave                 
                                    excess of the                    in excess of                 
                                    60-day career                    the 60-day                   
                                    limit.                           career limit.                
Education                                                                                         
Montgomery GI Bill Requires a       Requires a 6-year  Requires a    Requires a     Requires a    
- Selected         6-year Selected  Selected Reserve   6-year        6-year         6-year        
Reservef           Reserve service  service agreement. Selected      Selected       Selected      
                   agreement.                          Reserve       Reserve        Reserve       
                                                       service       service        service       
                                                       agreement.    agreement.     agreement.    
Montgomery GI Bill Enlisted must be Enlisted must be   Enlisted must Enlisted must  Enlisted must 
Kicker             or have been     or have been       be or have    be or have     be or have    
                   Montgomery GI    Montgomery GI      been          been           been          
                   Bill-Selected    Bill-Selected      Montgomery GI Montgomery GI  Montgomery GI 
                   Reserve eligible Reserve eligible   Bill-Selected Bill-Selected  Bill-Selected 
                   and serve in a   and serve in a     Reserve       Reserve        Reserve       
                   critically       critically         eligible and  eligible and   eligible and  
                   undermanned      undermanned skill. serve in a    serve in a     serve in a    
                   skill. Member    Member must agree  critically    critically     critically    
                   must agree to a  to a 6-year        undermanned   undermanned    undermanned   
                   6-year service   service            skill. Member skill. Member  skill. Member 
                   obligation.      obligation.        must agree to must agree to  must agree to 
                                                       a 6-year      a 6-year       a 6-year      
                                                       service       service        service       
                                                       obligation.   obligation.    obligation.   
Reserve Officers   Scholarship      Scholarship        Scholarship   Scholarship    Not eligible. 
Training Corps     program for      program for        program for   program for                  
Scholarship        Reserve Officers Reserve Officers   Reserve       Reserve                      
Program            Training Corps   Training Corps     Officers      Officers                     
                   participants.    participants.      Training      Training Corps               
                                                       Corps         participants.                
                                                       participants.                              
Armed Forces       Restricted to    Restricted to      Restricted to Restricted to  Restricted to 
Health Professions officers in      officers in        officers in   officers in    officers in   
Stipend Program    designated       designated health  designated    designated     designated    
                   health           professions with   health        health         health        
                   professions with obligatory periods professions   professions    professions   
                   obligatory       of military        with          with           with          
                   periods of       training.          obligatory    obligatory     obligatory    
                   military                            periods of    periods of     periods of    
                   training.                           military      military       military      
                                                       training.     training.      training.     
The Loan Repayment Enlistment       Enlistment         Enlistment    Enlistment     Enlistment    
Program            incentive        incentive.         incentive     incentive.     incentive     
Tuition Assistance Available to     Eligible, but an   Eligible ,    Eligible , but Eligible ,    
                   Selected         officer must agree but an        an officer     but an        
                   Reservist        to serve on active officer must  must agree to  officer must  
                   members of the   duty or full-time  agree to      serve on       agree to      
                   Army National    National Guard     serve on      active duty or serve on      
                   Guard and Army   duty, unless       active duty   full-time      active duty   
                   Reserve.         waived by the      or full-time  National Guard or full-time  
                                    Secretary          National      duty, unless   National      
                                    concerned.         Guard duty,   waived by the  Guard duty,   
                                                       unless waived Secretary      unless waived 
                                                       by the        concerned.     by the        
                                                       Secretary                    Secretary     
                                                       concerned.                   concerned.    
Reserve            Eligible upon    Eligible upon      Eligible upon Eligible upon  Eligible upon 
Educational        completion of 90 completion of 90   completion of completion of  completion of 
Assistance Program consecutive days consecutive days   90            90 consecutive 90            
                   of active        of active service  consecutive   days of active consecutive   
                   service in       in support of a    days of       service in     days of       
                   support of a     contingency        active        support of a   active        
                   contingency      operation.         service in    contingency    service in    
                   operation.                          support of a  operation.     support of a  
                                                       contingency                  contingency   
                                                       operation.                   operation.    
Other                                                                                             
Clothing Allowance Initial          Initial allowance  Initial       Some enlisted, Eligible      
                   allowance paid   paid to some       allowance     and officers                 
                   to enlisted who  enlisted and       paid to       called to                    
                   are not issued   officers at the    enlisted some active duty                  
                   clothing and     beginning of their and officers  for more than                
                   officers at the  service.           at the        90 days may                  
                   beginning of                        beginning of  receive an                   
                   their service.                      their         extra clothing               
                                                       service.      allowance.                   
Transportation     Not eligible     Not eligible       Eligible      Eligible       Eligible      
Incentive Program                                                                                 
Permanent Change   Not eligible     Not eligible       Not eligible  Eligible if    Eligible      
of Station Travel                                                    orders are for               
                                                                     20 weeks or                  
                                                                     more.                        
Veterans Affairs-  Eligible, if     Eligible, if       Eligible, if  Eligible, if   Eligible      
Home Loan g        completed 6      completed 6 years  completed 6   completed 6                  
                   years of         of honorable       years of      years of                     
                   honorable        reserve service.   honorable     honorable                    
                   reserve service.                    reserve       reserve                      
                                                       service.      service.                     
Deferred compensation                                                                             
Reserve retirement Must earn 50     Must earn 50       Must earn 50  Must earn 50   Must have a   
                   participation    participation      participation participation  minimum of 20 
                   points per year  points per year    points per    points per     qualifying    
                   for a minimum of for a minimum of   year for a    year for a     years to be   
                   20 years.        20 years. Eligible minimum of 20 minimum of 20  eligible for  
                   Eligible to      to receive pay and years.        years.         retirement    
                   receive pay and  health care at age Eligible to   Eligible to    pay and       
                   health care at   60.                receive pay   receive pay    benefits.     
                   age 60.                             and health    and health                   
                                                       care at age   care at age                  
                                                       60.           60.                          
Retirement or      Eligible, if the Eligible, if the   Eligible, if  Eligible, if   Eligible, if  
Separation for     disability was   disability was     the           the disability the           
Disabilityh        incurred or      incurred or        disability    was incurred   disability    
                   aggravated in    aggravated in the  was incurred  or aggravated  was incurred  
                   the line of duty line of duty.      or aggravated in the line of or aggravated 
                   while:                              in the line   duty.          in the line   
                   performing                          of duty.                     of duty.      
                   inactive duty                                                                  
                   training (IDT),                                                                
                   traveling                                                                      
                   directly to or                                                                 
                   from the IDT                                                                   
                   site, remaining                                                                
                   overnight                                                                      
                   immediately                                                                    
                   before or                                                                      
                   between                                                                        
                   successive IDT                                                                 
                   periods.                                                                       
Veterans Affairs-  Generally not    Generally not      Generally not Generally not  A member      
Health care        eligible unless  eligible unless    eligible      eligible       qualifies     
                   member qualifies member qualifies   unless member unless member  based on      
                   based on service based on service   qualifies     qualifies      active duty   
                   in active        in active military based on      based on       status.       
                   military or      or mobilization    service in    service in                   
                   mobilization for for a contingency  active        active                       
                   a contingency    operation.         military or   military or                  
                   operation.                          mobilization  mobilization                 
                                                       for a         for a                        
                                                       contingency   contingency                  
                                                       operation.    operation.                   

Source: GAO analysis.

Note: Current through fiscal year 2006.

aSpecial and incentive pays are intended to compensate members for more
hazardous conditions than usually experienced in peacetime and provide
incentives for certain career fields that would otherwise experience
manpower shortfalls.

bBonuses are intended to provide services with a flexible tool for
targeting particular skills and address critical manpower shortfalls.

cThere are a variety of programs offering varying levels of coverage
depending on duty status and enrollment.

dThe John Warner National Defense Authorization Act for Fiscal Year 2007
authorized the enhancement of TRICARE Reserve Select by making all
Selected Reserve members and dependents eligible for the program at 28
percent of the premium. The change to the program is scheduled to take
effect by October 2007.

eThe insurance programs listed are supervised by the Department of
Veterans Affairs. Enrollment in the programs requires the payment of a
premium. The insurance may be bought in increments of $50,000 up to a
maximum of $400,000. Children are insured at $10,000 at no additional
cost. Up to $100,000 coverage can be purchased for a spouse. Traumatic
injury insurance provides immediate financial assistance to traumatically
injured servicemembers so their families can travel to be with them during
an often extensive recovery and rehabilitation process. Payments range
from $25,000 to $100,000 depending on the type and severity of injury.

fUnlike Montgomery GI Bill-Active Duty, for reservists meeting the
eligibility requirement, the benefit is automatic and the members are not
required to make a payment. The Montgomery GI Bill-Reserve Component
benefit amount is smaller than the Montgomery GI Bill -Active Duty
benefit.

gThe majority of reservists have prior service in the active component.
Since fees for active duty applications are lower than reserve
applications, reservists with active duty prior service usually apply
based on their prior active duty service.

hBoth DOD and Veterans Affairs provide disability compensation. Since
2005, disabled veterans have been eligible to receive disability
compensation from Veterans Affairs and disability retirement from DOD.

Appendix IV: Comments from the Department of Defense and GAO's Response

See comment 1.

See comment 3.

See comment 2.

See comment 8.

See comment 7.

See comment 6.

See comment 5.

See comment 4.

See comment 15.

See comment 14.

See comment 8.

See comment 8.

See comment 8.

See comment 13

See comment 12.

See comment 11.

See comment 10.

See comment 9.

See comment 8.

See comment 19.

See comment 18.

See comment 17.

See comment 8.

See comment 16.

See comment 8.

See comment 24.

See comment 8.

See comment 24.

See comment 23.

See comment 8.

See comment 22.

See comment 21

See comment 21.

See comment 20.

GAO Response to Department of Defense's Technical Comments

The Department of Defense (DOD) made comments on the presentation of the
data in our report and raised a number of technical concerns. Our response
to DOD's technical comments follows.

           1. DOD commented that we did not adequately describe the impact of
           the increase in funding related to the Global War on Terrorism. In
           its comments, DOD stated that in fiscal year 2006 more than $15.6
           billion of the $173.2 billion in compensation costs were
           supplemental funding for the Global War on Terrorism. While it is
           true that our estimates include supplemental funding, we do not
           believe that the inclusion of this funding changes our findings or
           conclusions. Costs paid from supplemental funding represents real
           costs to the federal government that we believe are appropriate to
           include when calculating how much the federal government spends on
           compensating military servicemembers. However, we understand DOD's
           concern, and footnotes in the report that explain our approach are
           sufficient. Furthermore, we believe that DOD's comment illustrates
           the importance of providing greater transparency over mobilized
           reservists' costs. As we have previously testified, with Global
           War on Terrorism costs likely to continue for the foreseeable
           future, it is becoming increasingly important that DOD move those
           costs into the baseline budget as the level of effort becomes
           better known and is more predictable.1 Greater transparency over
           costs would provide administration and congressional decision
           makers more information to make fact-based decisions and weigh
           competing priorities for the nation's resources.
           2. DOD did not disagree with our overall finding that active duty
           compensation costs to the government have increased since fiscal
           year 2000. However, DOD stated that our reliance on end strength
           numbers for active duty personnel distorts active duty per capita
           costs calculations because that number does not include mobilized
           reservists. We did note in the report that mobilized reservists
           are paid out of active duty cash compensation costs and that our
           active duty per capita cost estimates do not take these mobilized
           reservists into account, and acknowledge in the report that the
           per capita costs to provide compensation would be lower if these
           mobilized reservists were taken into consideration. DOD's concern
           further highlights the need for the department to establish
           greater transparency over the costs of reservists. As we state in
           this report, accounting for mobilized reservists is problematic,
           given that they count against reserve end strength numbers but are
           paid out of active duty accounts.
           3. DOD raised concerns about the adjustments we made in our data
           to account for inflation, and felt that the deflators, or price
           indices, we chose understated the real growth in compensation
           costs between fiscal years 2000 and 2006. We are aware that the
           price indices we used make our growth estimates conservative and
           that other indices would show similar or greater growth. We
           recognize that in examining the growth of military compensation
           over time, the division of this growth between real growth and
           growth due to inflation depends on the price index or deflator
           used to adjust for inflation. For example, when dividing total
           growth in compensation between real growth and growth due to
           inflation, a higher rate of inflation will produce a lower real
           growth rate, and vice versa. We used the deflators for military
           pay that are contained in the National Defense Budget Estimates
           for fiscal year 2007 that are published by the Office of the Under
           Secretary of Defense of the Comptroller because they represent the
           official DOD indices for military pay budget matters. This office
           produces several different deflators or price indices that DOD
           uses officially to adjust dollars amounts for inflation for
           different budgetary purposes, such as procurement or operations
           and maintenance. We recognize, as DOD suggested in its comments,
           that we could have used the Employment Cost Index or the Consumer
           Price Index (for Urban Wage Earners and Clerical Workers) to
           adjust for inflation. Although DOD suggested the Employment Cost
           Index for wages and salaries would have been a more appropriate
           price index, we would have used the Employment Cost Index specific
           for total compensation for the private sector, because the
           military compensation number we calculated included more than
           wages and salaries. For example, in addition to wages and salaries
           we also included such things as allowances for housing and
           subsistence and retirement pay accrual. As we previously stated in
           our report, we used the military pay deflator and found that
           reserve compensation costs grew at a real rate of 47 percent from
           fiscal year 2000 to fiscal year 2006. When we redid our
           calculations using the Employment Cost Index, we found that
           reserve compensation costs grew 48 percent from fiscal year 2000
           to fiscal year 2006. When we redid our calculations using the
           Consumer Price Index, we found that reserve compensation costs
           grew 55 percent from fiscal year 2000 to fiscal year 2006.
           However, we note that DOD does not use this index to prepare its
           military personnel budgets.
           4. DOD commented that the calculation of the part-time reservists
           should have included pay groups for initial entry reservists in
           the average strength. We agree and changed our data to include the
           pay groups for the initial entry reservists in the average
           strength.
           5. DOD commented that the department made a conscious decision to
           improve the transparency of compensation costs of mobilized
           reservists starting in the fiscal year 2007 supplemental
           submission. We agree that the services have taken the first step
           of displaying these costs as part of the supplemental request;
           however, we believe the department would benefit from greater
           transparency over these costs, including presenting them as part
           of a complete picture of compensation costs in the military
           personnel justification books.
           6. The sentence in question does not discuss whether or not
           reserve retirement pay has changed or whether DOD sought the
           TRICARE Reserve Select program; it simply provides examples of
           deferred compensation. However, we altered the sentence for
           clarity to reflect that we were talking about health care benefits
           for retirees.
           7. We adjusted the language for clarification to reflect the fact
           that not living in close proximity to military bases does not
           effect eligibility.
           8. We adjusted the language as suggested.
           9. We changed the sentence to reflect the fact we are referring to
           mobilized personnel only.
           10. We specify in the introduction of the report that we limited
           our scope to, part-time, drilling reservists, and full-time
           support personnel serving in the Active Guard and Reserve program
           of the Selected Reserve. We excluded reserve and guard members who
           were mobilized from our cost estimates. We defined our scope based
           on cost information presented by DOD in the budget justification
           books. These books present the cost of part-time and
           Administration and Support personnel.
           11. Our Results in Brief now show that DOD has testified that
           adding deferred compensation is not their preference.
           12. We excluded mobilized reservists from our cost estimates
           because their costs are not presented in the reserve justification
           books. However, we believe that the total costs of the Guard and
           reserve should include the cost for mobilized reservists and that
           the department should take steps to provide greater transparency
           over all compensation costs for decision makers to make fact-based
           decisions.
           13. We added language to clarify that mobilized reservists are
           paid out of supplemental funding.
           14. We addressed the comment by adding a footnote to the section.
           15. We reordered the presentation of the reserve components as
           suggested.
           16. Agency officials told us that ongoing operations had been part
           of the reason for the increase in full-time reservists during the
           course of the review. However, we deleted the sentence as
           requested in the department's formal comments.
           17. We defined our use of the term full-time reservists to mean
           Active Guard and Reserve in the introduction of the report.
           18. This statement is referring to reserve compensation costs as
           they are currently presented to decision makers in the
           justification books. However, we added "reserve" into the sentence
           for further clarification.
           19. The report did not state that DOD has sought increases in
           deferred compensation, so no change was needed.
           20. The sentence refers to the cost of the program to the
           government and not to bonuses received by individuals.
           21. We added a statement to acknowledge that DOD has not sought
           some recent additions to deferred compensation, specifically
           TRICARE for life. However, DOD has not formally assessed the
           appropriate mix of compensation and has not developed a written
           policy or document that specifies the departments overarching
           strategy for compensation.
           22. While it is true that DOD has sponsored a study assessing the
           use of compensation under a reserve continuum of service concept,
           we continue to believe that DOD has not developed any performance
           measures to regularly and systematically assess all types of
           compensation. The study points out the effectiveness of targeted
           compensation. This is an example of the foundation for the
           compensation strategy we are recommending DOD formalize.
           23. The focus of our reports in 2005 and 2007 was on the
           difficulties with rolling out the Defense Integrated Military
           Human Resources System rather than on any particular service
           system.
           24. DOD provided separate enclosures, in addition to its agency
           comments, that provided technical comments on tables in our
           report. We made those changes as suggested.

1 GAO, Global War on Terrorism: Observations on Funding, Costs, and Future
Commitments, [47]GAO-06-885T (Washington, D.C.: July 18, 2006).

Appendix V: GAO Contact and Staff Acknowledgments

GAO Contact

John Pendleton, (404) 679-1900 or [48][email protected]

Acknowledgments

In addition to the contact named above, David Moser, Assistant Director;
Lori Atkinson, Ben Bolitzer, Renee Brown, Linda Keefer, Susan Langley,
Julia Matta, Erin Noel, Charles Perdue, Rebecca Shea, Kathryn Smith, and
Sonja Ware made key contributions to this report.

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(350922)

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www.gao.gov/cgi-bin/getrpt? [63]GAO-07-828 .

To view the full product, including the scope

and methodology, click on the link above.

For more information, contact John Pendleton at (404) 679-1900 or
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Highlights of [64]GAO-07-828 , a report to congressional committees

June 2007

MILITARY PERSONNEL

DOD Needs to Establish a Strategy and Improve Transparency over Reserve
and National Guard Compensation to Manage Significant Growth in Cost

The Department of Defense (DOD) has increasingly relied on reserve
personnel to carry out its military operations. Congress and DOD have
taken steps to enhance reserve compensation, such as improving health care
benefits. Concerns exist, however, that rising compensation costs may not
be sustainable in the future, especially given the nation's large and
growing long-range fiscal imbalance. Under the statutory authority of the
Comptroller General to conduct work on his own initiative, GAO (1)
reviewed how much it has cost the federal government to compensate reserve
personnel since fiscal year 2000;

(2) assessed the extent to which DOD's mix of cash, noncash, and deferred
compensation has helped DOD meet its human capital goals; and (3)
evaluated the extent to which DOD's approach to reserve compensation
provides transparency over total cost to the federal government. To
address these objectives, GAO analyzed budget data and relevant
legislation and also interviewed appropriate officials. GAO focused this
review on part-time reservists and full-time, active guard and reserve.

[65]What GAO Recommends

GAO is making recommendations to assess the appropriateness of the reserve
compensation system and to improve transparency over total reserve
compensation costs. DOD partially concurred with GAO's recommendations.

Using fiscal year (FY) 2006 constant dollars, the federal government's
total cost to compensate part-time and full-time reserve personnel has
increased 47 percent since FY 2000, rising from about $13.9 billion in FY
2000 to about $20.5 billion in FY 2006. Most reservists are part-time, and
their per capita compensation costs nearly doubled from about $10,100 in
FY 2000 to about $19,100 in FY 2006. Additionally, a small percentage of
reservists work full-time, and their per capita costs increased about 28
percent from FY 2000 to FY 2006. Cash compensation, which servicemembers
see in their "paycheck," has increased about 19 percent. However, much of
the total growth in compensation is driven by the costs for deferred
compensation. These costs tripled over this period, primarily attributed
to enhanced health care benefits. Moreover, DOD officials anticipate
significant continued growth in health care costs because of the expansion
of health care coverage to reserve personnel in FY 2007.

DOD does not know the extent to which its mix of pay and benefits meets
its human capital goals in part because it lacks an established
compensation strategy to identify the appropriate mix of reserve
compensation to maintain its force. DOD and Congress have added pay and
benefits using a piecemeal approach that has not been based on an
established strategy and that has not adequately considered the
appropriateness, affordability, and sustainability of the related costs.
These additions have contributed to a shift in the mix of compensation
toward more deferred benefits--that is, future compensation such as
retirement pay and health care for life. Deferred benefits increased from
12 percent of total reserve compensation in FY 2000 to 28 percent of total
compensation in FY 2006. This increase in deferred compensation may not be
the most efficient allocation given that fewer than one in four of those
who join the reserve will ultimately earn nondisability retirement pay and
health care for life. Moreover, DOD does not know the efficiency and
effectiveness of these changes in meeting its recruiting and retention
goals because it does not have performance measures. Without performance
measures, DOD cannot determine the return on its compensation investment
or make fact-based choices on how its compensation resources should be
allocated.

DOD's approach to reserve compensation does not provide decision makers in
Congress and DOD with adequate transparency over total cost for
reservists--including the allocation of costs to cash, noncash, and
deferred compensation, as well as the cost for mobilized reservists.
Despite the fact that sound business practices require adequate
transparency over investments of resources, currently costs are found in
multiple budgets within three federal departments. Until total reserve
compensation costs are compiled in a transparent manner--and decisions are
based on established compensation strategies--decision makers will be
unable to determine the affordability, cost effectiveness, and ultimately
the sustainability of the reserve compensation system. Increased
transparency is especially important given the growing fiscal challenges
the country faces.

References

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  63. http://www.gao.gov/cgi-bin/getrpt?GAO-07-828
  64. http://www.gao.gov/cgi-bin/getrpt?GAO-07-828
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