Guard and Reserve Personnel: Fiscal, Security, and Human Capital 
Challenges Should be Considered in Developing a Revised Business 
Model for the Reserve Component (20-JUN-07, GAO-07-984).	 
                                                                 
Over 580,000 reservists have been activated for military	 
operations between September 2001 and March 2007. The challenges 
of continuing to mobilize large numbers of reserve component	 
servicemembers for ongoing operations while balancing their	 
support to homeland defense missions have led to questions about 
whether changes are needed in the way the reserve components are 
structured and resourced, particularly in light of mounting 21st 
century fiscal imbalances. This testimony focuses on: (1) the	 
nation's fiscal and security challenges and their implications	 
for the Department of Defense (DOD) and the National Guard and	 
Reserves; (2) the need for DOD to better align its reserve	 
component business model, including human capital strategies,	 
with the reserve forces' current and future needs; and (3) the	 
extent to which DOD's current compensation system for reserve and
National Guard personnel is helping the department to meet its	 
human capital goals of recruiting and retaining a high-quality	 
force. The testimony is based on GAO's body of work on the	 
nation's long-term fiscal outlook, National Guard and reserve	 
readiness, military personnel issues such as recruitment and	 
retention, and the report GAO is issuing today on reserve and	 
National Guard compensation issues. GAO has made several	 
recommendations to address these challenges.			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-984 					        
    ACCNO:   A71049						        
  TITLE:     Guard and Reserve Personnel: Fiscal, Security, and Human 
Capital Challenges Should be Considered in Developing a Revised  
Business Model for the Reserve Component			 
     DATE:   06/20/2007 
  SUBJECT:   Armed forces reserves				 
	     Cost analysis					 
	     Fiscal policies					 
	     Human capital					 
	     Human capital management				 
	     Military compensation				 
	     Military pay					 
	     Military personnel 				 
	     Military reserve personnel 			 
	     Personnel recruiting				 
	     Strategic planning 				 
	     Cost growth					 
	     Policies and procedures				 
	     Transparency					 
	     DOD Selected Reserve Program			 
	     GAO High Risk Series				 

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GAO-07-984

   

     * [1]Summary
     * [2]Background
     * [3]Long Term Fiscal Challenges Require DOD to Balance Wants, Ne
     * [4]Guard and Reserve Business Model Should be Revised to Better

          * [5]Reserve Component Business Model Is Not Fully Aligned with H
          * [6]DOD Needs More Effective Strategies for Recruiting and Retai
          * [7]DOD Policies and Procedures Should Facilitate Individuals' S

     * [8]DOD Does Not Have a Compensation Strategy and Lacks Transpar

          * [9]Cost to Compensate National Guard and Reserve Servicemembers
          * [10]DOD Does Not Know the Extent to Which Its Mix of Reserve Com
          * [11]DOD Has Not Established a Compensation Strategy and Performa
          * [12]DOD Does Not Have Transparency over Total Costs of Reserve C

     * [13]Conclusions
     * [14]Enclosure I: GAO Contact and Staff Acknowledgments

          * [15]GAO Contact
          * [16]Acknowledgments

     * [17]Related GAO Products

          * [18]Order by Mail or Phone

Testimony

Before the Commission on the National Guard and Reserves

United States Government Accountability Office

GAO

For Release on Delivery
Expected at 10:30 a.m. EDT
Wednesday, June 20, 2007

GUARD AND RESERVE PERSONNEL

Fiscal, Security, and Human Capital Challenges Should be Considered in
Developing a Revised Business Model for the Reserve Component

Statement of David M. Walker
Comptroller General of the United States

GAO-07-984

Mr. Chairman and Members of the Commission:

It is a pleasure to appear before you today to discuss the challenges the
National Guard and reserves are facing as the nation moves into the 21st
century with mounting fiscal imbalances and new national security concerns
overseas and homeland security needs at home. The work the Commission is
undertaking is very important, and it is a tribute to the Commission that
Congress and the Department of Defense (DOD) have already begun
implementing some of the recommendations in the Commission's March 2007
report. As you know, between September 2001 and March 2007, over 580,000
reservists have been activated in numbers not seen since World War II, and
reservists from all the services have made major contributions to
sustaining ongoing overseas operations as well as homeland security
activities. The challenges in mobilizing large numbers of reservists on an
ongoing basis have led to questions about whether changes are needed in
the way the reserve components are structured and resourced. Over the last
few years, we have undertaken a body of work examining the National Guard
and reserve's changing roles and missions and recruiting, training, and
equipping challenges. Today, I would like to provide you with our
observations based on this work. In addition, I would like to highlight
our report that is being issued today that focuses on reserve component
pay and compensation.1

My statement today will focus on three main issues: (1) the nation's
fiscal and security challenges and their implications for DOD and its
reserve components, (2) the need for DOD to better align its business
model with the reserve forces' current and future needs, and (3) the
extent to which DOD's current compensation system for reservists is
helping the department to meet its human capital goals of recruiting and
retaining a high-quality force. My statement is based on our analysis of
the nation's long-term fiscal outlook, as well as challenges in
maintaining U.S. military readiness for overseas and homeland missions. In
addition, this testimony relies heavily on our past work on human capital
issues, including recruitment, retention, and pay and compensation. We
updated some of our information during recent discussions with DOD, Army,
and National Guard Bureau officials. To perform our assessment of DOD's
reserve pay and compensation we analyzed relevant regulations,
legislation, and budget justification books, and we interviewed
appropriate officials at DOD and the Department of Veterans Affairs. Our
scope included fiscal year 2000 through fiscal year 2006 to capture costs
prior to the increased use of reservists and associated changes to reserve
and Guard compensation. We conducted our work in accordance with generally
accepted government auditing standards. A list of our past reports can be
found in the Related GAO Products section at the end of this statement.

1GAO, Military Personnel: DOD Needs to Establish a Strategy and Improve
Transparency over Reserve and National Guard Compensation to Manage
Significant Growth in Cost, [19]GAO-07-828 (Washington, D.C.: June 20,
2007).

Summary

The nation's growing fiscal imbalance and changing security environment
require a fundamental reexamination of defense activities, including the
role and structure of the reserve components. The nation faces large and
growing structural deficits due primarily to known demographic trends and
rising health care costs. If left unchecked, these fiscal imbalances will
ultimately impede economic growth, which could impact our ability to
address national and homeland security needs. The imbalances are so
significant that neither slowing the discretionary spending growth nor
allowing certain tax provisions to expire--nor both together--would
eliminate them. Rather, a fundamental reexamination of major priorities is
needed to ensure that federal programs and priorities respond to emerging
social, economic, and security changes and challenges. To facilitate this
reexamination, we issued a 21st Century Challenges report which
highlighted the need for reexamining the base of federal government in 12
areas, including national defense.2 Within national defense, we suggested
several key issues that need to be addressed including whether the role,
structure, and business model of the reserve components are appropriate in
light of the changing securing environment. These issues will need to be
addressed in the context of DOD's overall fiscal challenges, which include
rising compensation and acquisition costs, the cost of supporting ongoing
military operations, and inefficient policies and business practices. To
put DOD on a more sustainable path, we have suggested that DOD reexamine
key defense policies and practices, develop budgets that set clear
priorities based on current and future needs, establish a Chief Management
Officer to oversee business transformation, and address areas within
defense that we have identified as high risk.3 As the Commission completes
its work, it will be important to examine reserve component policies and
practices and evaluate future funding requirements for the Guard and
reserves in the context of DOD's broader affordability and sustainability
challenges.

2GAO, 21st Century Challenges: Reexamining the Base of the Federal
Government, [20]GAO-05-325SP (Washington, D.C.: Feb. 1, 2005).

3GAO, High-Risk Series: An Update [21]GAO-07-310 (Washington, D.C.: Jan.
31, 2007). DOD has sole responsibility for eight high risk areas and
shares responsibility for seven other areas with other federal
organizations.

DOD's heavy reliance on the reserve components in recent years to support
operations in Iraq, Afghanistan, and at home has highlighted the need to
better align the reserve components' business model to support their 21st
century roles. An effective business model--including an integrated set of
strategies and policies for recruiting, training, and compensating
individuals and equipping units--is needed to support the National Guard
and reserves in conducting 21st century missions within fiscally
sustainable resource levels. Although each of the services' reserve
components face challenges in adapting to the new security environment,
our work has shown that the current business model of the Army National
Guard and Army Reserve is not sustainable in the long-term given their
changing roles and high pace of operations. In addition, our past work has
shown that all of the reserve components face human capital challenges
that will need to be addressed as part of a systematic effort to reassess
and revise the reserve component business model. These challenges include:
(1) addressing inefficiencies in recruiting and retaining personnel in
high-demand career fields and occupations, and (2) developing policies,
procedures, and business processes to facilitate a smooth transition of
personnel between reserve and active duty status. We have made numerous
recommendations intended to help the department address these issues. For
example, we have recommended that DOD assess the Army Reserve's
requirements for full-time support servicemembers and develop a strategic
framework that integrates and aligns personnel policies to meet
organizational goals. While DOD has taken some recent steps to address our
recommendations, such as establishing new mobilization policies intended
to achieve more predictable deployments, DOD has not fully addressed these
challenges in a way that supports an integrated business model.

An appropriate compensation strategy that supports human capital goals is
another key component of a sustainable business model. However, DOD does
not know the extent to which its current compensation system for reserve
and Guard servicemembers is helping it meet its human capital goals of
recruiting and retaining personnel. Two primary reasons for this
uncertainty are that (1) the department has not established an overall
compensation strategy to identify the appropriate mix of reserve
compensation to efficiently maintain its force, and (2) its approach to
compensation does not provide decision makers in Congress and DOD with
adequate transparency over total costs for reservists. Using fiscal year
2006 constant dollars, the federal government's total cost to compensate
part-time and full-time reserve servicemembers--including cash, noncash,
and deferred benefits--has increased about 47 percent since fiscal year
2000, rising from about $13.9 billion in fiscal year 2000 to about $20.5
billion in fiscal year 2006. Much of the total growth in compensation is
driven by the costs for deferred compensation--that is, funds set aside
today for future compensation such as retirement pay and health care. The
cost for deferred compensation has tripled over this period, primarily due
to costs to provide enhanced health care benefits for retirees. This
allocation is questionable from an efficiency perspective, since fewer
than one in four of those who join the reserves will ultimately earn
retirement benefits. The shift in the mix of compensation can be
attributed to the fact that DOD and Congress have added pays and benefits
for reservists and Guard service members in recent years using a piecemeal
approach that has not been based on an established strategy and does not
adequately consider the appropriateness, affordability, and sustainability
of the increased compensation costs. Moreover, DOD does not know the
efficiency and effectiveness of these changes in meeting its recruiting
and retention goals because it has not established performance measures.
Furthermore, because costs to compensate servicemembers are found in
multiple budgets both within and outside of DOD and are not compiled in a
single source to provide total cost, DOD's approach to reserve
compensation does not provide decision makers in Congress and DOD with
adequate transparency over compensation--including the allocation of costs
to cash, noncash, and deferred compensation, as well as the cost for
mobilized reservists. 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. In our report on reserve compensation
that we are issuing today, we are making recommendations that DOD (1)
establish an overall compensation strategy and performance measures and
(2) compile costs in a transparent manner to aid decision makers. In
commenting on a draft of our report on reserve compensation, DOD partially
concurred with our recommendations.

Background

DOD has six reserve components: the Army National Guard, the Army Reserve,
the Air National Guard, the Air Force Reserve, the Navy Reserve, and the
Marine Corps Reserve. The six reserve components combined are authorized
about 830,000 personnel (see fig. 1).

Figure 1: Reserve Component Authorized Personnel

Sixty-five percent of the total authorized personnel in all of the reserve
components combined are in the two Army reserve components. Each of the
reserve components are composed primarily of citizen soldiers who balance
the demands of a civilian career with military service on a part-time
basis, usually 1 weekend a month and 2 weeks a year for annual training.
In addition, reserve forces have some full-time servicemembers who enhance
readiness by assisting unit commanders in administrative, training, and
maintenance tasks.

DOD's fiscal year 2008 budget request for the Army National Guard and Army
Reserve is about $13.5 billion and $7.1 billion respectively. When
combined, these amounts equate to about 16 percent of the Army's total
budget request. DOD has also requested about $8.2 billion for the Air
National Guard and $4.3 billion for the Air Force Reserve, which equate to
about 9 percent of the Air Force's total budget request. In contrast, the
Navy and Marine Corps allocate about 3 and 5 percent respectively of their
service's budgets to their reserve components, which are significantly
smaller in size than the Army and Air Force reserve components.

On September 14, 2001, President Bush declared that a national emergency
existed as a result of the attacks on the World Trade Center in New York
and the Pentagon in Washington, D.C., and he invoked the partial
mobilization authority4 which enabled the activation of up to 1,000,000
reservists for periods of active duty not to exceed 24 consecutive months.
The Office of the Secretary of Defense implements the activation of
reservists under this mobilization authority, and provides policy,
programs, and guidance for the mobilization and demobilization of the
reserve components.

The National Guard, comprised of the Army National Guard and the Air
National Guard, has a unique dual mission that consists of both federal
and state roles. In its federal status, along with the Army Reserve and
Air Force Reserve, respectively, the National Guard has been deployed to
Afghanistan and Iraq, as well as to other locations around the world. In
this status, National Guard members are paid using federal funds. The
National Guard may also be activated under state law to provide critical
infrastructure protection or respond to state emergencies under control of
the governor. In this status, the National Guard is paid using state
funds. In addition, the National Guard may be activated under Title 32 of
the United States Code by which Guard forces remain under the control of
the state governor but are compensated with federal funding. This
authority has been used to assist states in responding to large-scale,
multistate events, such as Hurricane Katrina in 2005.

410 U.S.C. S12302.

Long Term Fiscal Challenges Require DOD to Balance Wants, Needs, and
Affordability of Its Active and Reserve Forces

The nation's growing fiscal imbalance and changing security environment
require a fundamental reexamination of defense activities, including the
role and structure of the reserve components. Our nation is on an
unsustainable fiscal path. Long-term budget simulations we and others5
have performed indicate that, over the long-term, we face large and
growing structural deficits due primarily to known demographic trends and
rising health care costs. Absent policy changes on the spending and /or
revenue side of the budget, the growth in mandatory spending on federal
retirement and health entitlements will encumber an escalating share of
the government's resources. By 2040 federal revenues may be adequate to
pay little more than interest on the federal debt. The imbalances are so
significant that neither slowing discretionary spending growth nor
allowing certain tax provisions to expire--nor both together--would
eliminate them. If not addressed in the coming years, these fiscal
imbalances will lead to serious budgetary pressures on federal
discretionary spending which includes defense accounts. A symptom of these
budgetary pressures is seen in the declining proportion of federal
spending available for discretionary spending. For example, while the
proportion of federal spending for mandatory programs doubled from 26
percent in 1966 to 53 percent in 2006, the proportion of federal spending
available for discretionary spending has decreased from 67 percent to 38
percent in the same period (see fig. 2).

5As we reported in 2005 ( [22]GAO-05-352T ), the Congressional Budget
Office has also produced long-term budget simulations that show over the
long-term the nation faces a large and growing structural deficit.

Figure 2: Federal Spending for Mandatory and Discretionary Programs

Another sign of the existing budgetary pressure on defense spending is
seen in the declining share of defense spending as a proportion of total
federal spending. Since 1966 defense spending as a proportion of total
federal spending has declined from 43 percent to 20 percent (see fig. 3).

Figure 3: Composition of Federal Spending

Federal spending on defense in constant 2000 dollars has fluctuated over
the years in response to changing economic conditions and a changing
security environment (see fig. 4). For example, defense spending declined
in real terms from 1990 to 1998 following the end of the Cold War. More
recently, defense spending has increased as result of the Global War on
Terror. However, future pressures on the federal budget are likely to lead
to a downturn in defense spending in the future.

Figure 4: National Defense Outlays in Constant Fiscal Year 2000 Dollars,
1962-2008

Note: Amounts exclude supplemental funding to support military operations.

To address the tough choices for our fiscal future, a fundamental
reexamination of major priorities is needed. This will enable us to
recapture our fiscal flexibility and ensure that federal programs and
priorities respond to emerging social, economic, and security changes and
challenges. Our capacity to address a range of important challenges
reshaping American society and our place in the world will be predicated
on when and how we deal with this historically unprecedented long-term
fiscal challenge. Absent action to avert this fiscal crisis, these forces
will ultimately erode, if not suddenly damage, our economy, our standard
of living, and ultimately our national security. Ultimately, this
reexamination should entail a national discussion about what Americans
want from their government and how much they are willing to pay for those
things.

In addition to these growing fiscal constraints, DOD faces a number of
other near- and long -term challenges. DOD's near-term challenges include
paying for operations in Iraq and Afghanistan and maintaining readiness.
To pay for its operations, DOD has been given a significant infusion of
funds, with an annual appropriation totaling over $430 billion for fiscal
year 2007 and additional funding for homeland defense and operations in
Iraq, Afghanistan, and elsewhere approximating $380 billion over the past
3 fiscal years. Despite this infusion of funds, DOD still faces
significant challenges in maintaining readiness in all components active
and reserve. For example, the significant use of Army National Guard
forces for overseas and homeland security missions since September 11,
2001, has resulted in declining readiness, weakening the Army National
Guard's preparedness for future missions.6 In addition, DOD faces the
long-term challenge of determining how it will reorganize its forces and
identify the capabilities it will need to protect the country from
current, emerging, and future conventional and unconventional security
threats. Specific issues that will need to be addressed while DOD meets
these long-term challenges include weapons modernization, force
transformation, and military pay and benefits. Striking an affordable
balance between near- and long-term needs will be an ongoing challenge,
particularly with the federal government's current and projected fiscal
imbalances.

Although DOD's budget is likely to be constrained by future fiscal
limitations, DOD continues to pursue some inefficient programs and
practices, including, directly or indirectly, 15 of 27 areas that we have
identified as high risk.7 Since 1990, we have periodically reported on
government operations that we identify as high risk and which need urgent
attention and transformation in order to ensure that our national
government functions in the most economical, efficient, and effective
manner possible. Out of the 27 items on our list of high-risk areas
governmentwide, DOD has sole responsibility for 8. These 8 areas are: (1)
business transformation, (2) business systems modernization, (3) personnel
security clearance program, (4) support infrastructure management, (5)
financial management, (6) supply chain management, (7) weapon systems
acquisition, and (8) contract management. In addition to the DOD-specific
high-risk areas, DOD shares responsibility for 7 other high-risk areas
that are governmentwide in scope, such as strategic human capital
management. DOD has thus far failed to effectively address many of these
high risk programs resulting in billions of dollars spent annually to
sustain inefficient policies and business practices in key operations that
support our forces.

6GAO, Reserve Forces: Actions Needed to Better Prepare the National Guard
for Future Overseas and Domestic Missions, [23]GAO-05-21 (Washington,
D.C.: Nov. 10, 2004).

7GAO, High-Risk Series: An Update [24]GAO-07-310 (Washington, D.C.: Jan.
31, 2007).

To address these critical inefficiencies, we have suggested that DOD
reexamine defense policies and practices, develop budgets that set clear
priorities and consider long-term resource implications, address high-risk
areas, and designate a Chief Management Officer8 who would be responsible
for overall business transformation efforts. In addition, to facilitate
decision makers in this process of reexamining the base of the federal
government, we have drawn on our past and pending work to produce a 21st
Century Challenges report9 which provides examples of the kinds of hard
choices the country will need to make stemming from these fiscal
challenges. This report identifies challenges in 12 broad areas including
homeland security, international affairs, and national defense. Within the
national defense area, we draw attention to specific challenges DOD and
the nation face concerning the reserve component. These challenges include
addressing the following questions:

           o Are the active and reserve components appropriately sized,
           structured, and used to meet the current and future national
           security demands?

           o Is the current business model sustainable for the reserve
           component?

           Reexamining reserve component policies and practices should be
           included as part of the overall DOD-wide reexamination effort we
           advocate. Moreover, as the Commission evaluates potential changes
           to the Guard and reserves' structure and policies, it will be
           important to consider the funding implications of alternative
           approaches within the context of the nation's and DOD's fiscal
           challenges. A variety of competing proposals are being made to
           restructure and enhance funding for the reserve components, such
           as expanding personnel benefits and procuring equipment. It will
           be important to understand the analytical basis for such proposals
           and assess the extent to which they address long-term
           affordability and sustainability challenges.
			  
8GAO-07-310.

9GAO, 21st Century Challenges: Reexamining the Base of the Federal
Government, [25]GAO-05-325SP (Washington, D.C.: Feb. 1, 2005).

           Guard and Reserve Business Model Should be Revised to Better Align
			  with 21st Century Roles and Missions

           Although DOD recognizes that the changing security environment has
           placed new demands on reserve components, DOD has not yet fully
           adapted the reserve component business model to support
           reservists' evolving roles and missions. An effective business
           model--including an integrated set of strategies and policies for
           recruiting, training, and compensating individuals as well as for
           equipping units--is needed to support the National Guard and
           reserves in conducting 21st century missions within fiscally
           sustainable resource levels. Although each of the services'
           reserve components faces challenges, our work has shown that the
           Army National Guard and Army Reserve do not have a sustainable set
           of policies and resourcing strategies that aligns with their
           changing roles and high pace of operations. In addition, we have
           found that all of the reserve components face human capital
           challenges that will need to be addressed as part of a systematic
           effort to reassess and revise the reserve components' business
           model. These challenges include: (1) addressing inefficiencies in
           recruiting and retaining personnel with needed skills, and (2)
           eliminating inefficient policies, procedures, and business systems
           which impede the smooth transition of personnel between reserve
           and active duty status. While DOD has taken some recent steps to
           address these challenges, such as establishing new mobilization
           policies intended to achieve more predictable deployments, DOD has
           not fully addressed these challenges in a way that supports an
           integrated business model.
			  
			  Reserve Component Business Model Is Not Fully Aligned with Heavy
			  Reliance on Reserves in the New Security Environment

           The changing security environment has had significant implications
           for the Guard and reserves and led to a need to reexamine and
           revise the reserve component business model. Although each of the
           services' reserve components has faced challenges in adapting to
           the new security environment, the Army National Guard and Army
           Reserve are most in need of a fundamental rethinking of the manner
           in which they are organized and structured to support operations
           at home and abroad. We have previously reported and testified to
           the Commission that DOD's business model for the Army National
           Guard is not sustainable over time at the current pace of
           operations as evidenced by the significant personnel and equipment
           shortages that nondeployed National Guard units have experienced
           in order to fully equip and staff units deployed overseas.10 The
           ongoing demand for Army National Guard units to support overseas
           operations represents a fundamental change from the strategic
           reserve mission for which its units were structured. We have also
           reported that the Army National Guard historically has been
           structured primarily to serve as a strategic reserve force and has
           faced significant challenges and worsening personnel and equipment
           shortages as a result of supporting ongoing operations.11 In
           addition, potential threats against the homeland have implications
           for the reserves' missions and business model. Both the Army
           National Guard and Air National Guard have increasingly been
           called upon to prepare for and respond to domestic disasters such
           as Hurricane Katrina.12 Moreover, the National Guard could
           potentially be called on to play a key role in responding to
           terrorist events. In January 2007, we reported that the types and
           quantities of equipment the National Guard needs to respond to
           potential large-scale terrorist events and natural disasters have
           not been fully identified because the multiple federal and state
           agencies that would have roles in responding to such events have
           not completed and integrated their plans.13 Establishing plans and
           requirements for National Guard units to respond to homeland
           security missions should be a key starting part of a comprehensive
           reassessment of the Army and Air National Guard's business model.
			  
10GAO, Reserve Forces: Army National Guard and Army Reserve Readiness for
21st Century Challenges, [26]GAO-06-1109T (Washington, D.C.: Sept. 21,
2006).

           The other reserve components are also playing key roles in
           supporting ongoing operations and adapting to new missions which
           require them to reexamine long-standing policies and ways of doing
           business. For example, numerous Marine Corps reserve units have
           deployed to Iraq and Afghanistan to help meet the high demand for
           ground forces, and nondeployed units face equipment and personnel
           challenges. In addition, the Air National Guard, Air Force
           Reserve, and Navy Reserve have contributed in numerous ways such
           as providing airlift and intelligence capabilities. Although Air
           National Guard and Air Force Reserve units have historically been
           resourced at higher levels than their Army counterparts, senior
           leaders have recently testified about increasing readiness
           challenges in supporting ongoing operations and an aging aircraft
           inventory.
			  
11GAO, Reserve Forces: An Integrated Plan is Needed to Address Army
Reserve Personnel and Equipment Shortages, [27]GAO-05-660 (Washington,
D.C.: July 12, 2005).

12 GAO, Hurricane Katrina: Better Plans and Exercises Needed to Guide the
Military's Response to Catastrophic Natural Disasters, [28]GAO-06-643
(Washington, D.C.: May 15, 2006).

13GAO, Reserve Forces: Actions Needed to Identify National Guard Domestic
Equipment Requirements and Readiness, [29]GAO-07-60 (Washington, D.C.:
Jan. 26, 2007).			  

           The reserve components have taken some steps to adjust their
           business models to align with their new roles, but face challenges
           in equipping and training personnel. The Army is implementing a
           new modular brigade structure for its active and reserve
           components. However, implementing this restructuring is
           complicated by challenges such as significant retraining of
           personnel into reassigned specialties that will take several years
           to complete. In addition, the Air Force's planned changes to its
           reserve force structure will have significant impacts on personnel
           and training requirements.
			  
			  DOD Needs More Effective Strategies for Recruiting and Retaining
			  Personnel with Required Skills

           DOD will also need to develop more effective strategies for
           recruiting and retaining personnel in needed occupational
           specialties as part of an overall effort to adapt the reserve
           components' business model to meet the needs of the new security
           environment. Even when the reserve components have met their
           overall goals for recruiting and retaining servicemembers during
           the last few years, they have faced difficulties recruiting and
           retaining personnel with certain skills. DOD must recruit and
           retain tens of thousands of reserve and National Guard members
           each year to fill almost 860 occupational specialties. The current
           pace of operations and the likelihood of deployment of reservists
           from all the services, coupled with a growing economy that offers
           opportunities in the private sector, have made recruiting and
           retaining members for all the services and components a
           significant challenge. In addition, DOD reports that over half of
           today's youth between 16 and 21 cannot meet the military's entry
           standards for education, aptitude, health, moral character, or
           other requirements. In addition, future retention challenges will
           also include the dynamics of a new generation that appear to be
           increasingly likely to make frequent job changes over the course
           of a career.

           We reported in November 2005 that even when DOD met aggregate
           recruiting and retention goals, it had too many personnel in some
           occupations and not enough in others. For example, the services
           were not consistently able to fill all their requirements for
           about 47 percent of their reserve and National Guard occupational
           specialties, while other occupational specialties were
           consistently overfilled.14 Underfilled occupations included:
           combat engineers, intelligence analysts, field artillery surveyors
           and data systems specialists, and explosive ordnance disposal
           technicians. On the other hand, the services consistently were
           able to recruit more personnel in about 21 percent of reserve and
           National Guard occupational specialties than they were authorized.
           Examples of specialties that were overfilled included: avionic
           mechanics, personnel clerks, supply specialists, motor vehicle
           operators, and patient administration specialists.
			  
14GAO, Military Personnel: DOD Needs Action Plan to Address Enlisted
Personnel Recruitment and Retention Challenges, [30]GAO-06-134
(Washington, D.C.: Nov. 17, 2005).

           We also noted that while DOD had taken several steps, such as
           adjusting its recruiting, advertising, and financial incentives
           programs, to help meet recruiting and retention goals, DOD lacked
           information on financial incentives provided for certain
           occupational specialties. This made it difficult for the
           department to determine whether the financial incentives were
           being targeted most effectively. We found that while DOD requires
           some reporting by the active components on their over- and
           underfilled occupational specialties, the department has levied no
           such requirement on the reserve components. Further, DOD requires
           the service components to provide minimal justification of their
           use of financial incentives paid to service members in some
           occupational specialties and lacks the information needed to
           ensure funding spent on recruiting and retention is appropriately
           and effectively targeted to occupational specialties for which the
           components have the greatest need. We recommended that DOD require
           the services to report all their over- and underfilled
           occupational specialties, including reasons why the specialties
           are over- and underfilled, and to justify the use of financial
           incentives provided to service members in occupational specialties
           that have more personnel than authorized. Based on this
           information, we also recommended that DOD develop a management
           plan to address recruiting and retention challenges. DOD
           acknowledged the importance of annually tracking fill rates across
           occupations and the need to closely manage bonus programs.
			  
			  DOD Policies and Procedures Should Facilitate Individuals' Smooth
			  Transition between Reserve and Active Duty Status

           If the nation expects reservists to routinely support domestic and
           overseas contingencies rather than serving as a strategic reserve,
           DOD will also need to develop an integrated set of policies,
           procedures, and business systems to more efficiently enable
           reservists to move from peacetime to operational status. The
           processes that DOD uses to transition reservists from their
           reserve status to active duty status to support national security
           objectives--particularly those used to support involuntary
           mobilization--have not been efficient in providing a sustainable
           flow of trained forces to meet the changing operational needs of
           combatant commanders in the new security environment.

           Following the start of military operations in Iraq, we reported
           that the processes DOD used to activate reserve personnel to
           support military operations after September 11, 2001, were
           hampered by inefficiencies and DOD lacked adequate systems for
           tracking personnel and other resources.15 Specifically, DOD's
           mobilization process relied on multiple layers of coordination
           between the services, the Office of the Secretary of Defense, and
           the Joint Staff to validate, approve, and fill mobilization
           requirements. In addition, DOD officials did not have visibility
           over the entire mobilization process, including the readiness of
           the force, primarily because DOD lacked adequate systems for
           tracking personnel and other resources within small units and some
           systems used by the active and reserve components were
           incompatible.16 We recommended that DOD (1) capture readiness
           information for all the units that are available to meet combatant
           commander requirements so that resources would be visible to key
           mobilization officials, (2) develop a single system or fully
           integrated automated systems that would provide for the seamless
           transfer of reservists' information, and (3) develop a strategic
           framework that integrates and aligns personnel policies to meet
           organizational goals. We also reported that the Army Reserve and
           the Army National Guard were not provided the number of full-time
           support personnel they needed to maintain unit readiness and had
           not been provided additional staff as units made preparations for
           deployments.17 We recommended that the Army reassess the full-time
           support needs of the Army Reserve in light of its new operational
           role.

           DOD has agreed with many of our recommendations to improve the
           transition of reserve personnel from peacetime to operational
           status and has begun to take actions intended to address
           mobilization challenges. For example, in January 2007, the
           Secretary of Defense authorized a decrease in the length of
           mobilizations, such as those to Iraq and Afghanistan, from 18
           months to 1 year18 and directed the services to manage
           mobilizations of reservists with the goal of mobilizing reserve
           personnel for no more than 1 year for every 5 years. Further, to
           improve unit cohesion, the Secretary directed that the services
           mobilize forces on a unit basis rather than mobilizing individuals
           and transferring them to deploying units. However, the extent to
           which DOD will be able to implement these policies in the midst of
           ongoing operations is unclear. Also, it is not clear what impact
           these policies will have on employer support for the reserves. We
           recently reported that additional actions are needed to improve
           oversight of reserve employment issues, such as improving
           reporting of information on reservists' complaints to Congress.19

15GAO, Military Personnel: DOD Actions Needed to Improve the Efficiency of
Mobilizations for Reserve Forces, [31]GAO-03-921 (Washington, D.C.: Aug.
21 2003).

16 [32]GAO-03-921 .

17GAO, Reserve Forces: Army National Guard and Army Reserve Readiness for
21st Century Challenges, [33]GAO-06-1109T (Washington, D.C.: Sept. 21,
2006); GAO, Reserve Forces: Observations on Recent National Guard Use in
Overseas and Homeland Missions and Future Challenges, [34]GAO-04-670T
(Washington, D.C.: April. 29, 2004).

18Services can, at their discretion, exclude individual skill training
required for deployment and post-mobilization leave activities from the
1-year activation period.			  

           We have also identified numerous problems with DOD's data bases
           and business systems, which have impeded the smooth transition of
           personnel from reserve to active duty status. For example, we
           found numerous errors in pay and benefits provided to reservists
           who were mobilized to support operations.20 These problems are
           symptoms of a larger DOD-wide problem resulting from the
           proliferation of numerous service- and component-unique business
           systems during the past few decades. DOD initiated the Defense
           Integrated Military Human Resources System (DIMHRS) program in
           fiscal year 1998 to consolidate the personnel and pay systems
           across the military components. However, 9 years after program
           initiation, DOD has yet to deploy DIMHRS, and the concerns it was
           intended to address persist.21 In 2005, we reported that DOD was
           not effectively managing the DIMHRS program, thereby jeopardizing
           the likelihood that it would deliver promised system capabilities
           and benefits on time and within budget.22 We made several
           recommendations aimed at improving the department's oversight of
           the program. We are currently evaluating DOD's implementation of
           our prior recommendations.
			  
19GAO, Military Personnel: Additional Actions Needed To Improve Oversight
Of Reserve Employment Issues, [35]GAO-07-259 (Washington, D.C.: Feb. 8,
2007).

20GAO, Army National Guard: Inefficient, Error-Prone Process Results in
Travel Reimbursement Problems for Mobilized Soldiers, [36]GAO-05-79
(Washington D.C.: Jan. 31, 2005).

21GAO, Military Pay: Army Reserve Soldiers Mobilized to Active Duty
Experienced Significant Pay Problems, [37]GAO-04-911 (Washington, D.C.:
Aug. 20, 2004), and Military Pay: Army National Guard Personnel Mobilized
to Active Duty Experienced Significant Pay Problems, [38]GAO-04-89
(Washington, D.C.: Nov. 13, 2003).	

           DOD Does Not Have a Compensation Strategy and Lacks Transparency
			  over National Guard and Reserve Compensation Costs		  

           Developing compensation strategies targeted to recruit and retain
           individuals with needed skills is another key element of a sound
           business model. However, DOD does not know the extent to which its
           current compensation system for Guard and reserve servicemembers
           is helping it meet its human capital goals of recruiting and
           retaining personnel. The cost to compensate National Guard and
           reserve servicemembers has increased about 47 percent since fiscal
           year 2000. In addition, the mix of compensation--cash, noncash,
           and deferred compensation--has shifted more toward deferred, even
           though this may not be the most efficient use of resources.
           Moreover, the department does not know if the current mix is
           appropriate or sustainable to efficiently maintain its force
           primarily because (1) it has not established an overall
           compensation strategy and performance measures and (2) its
           approach to compensation does not provide decision makers in
           Congress and DOD with adequate transparency over total costs for
           reservists.
			  
			  Cost to Compensate National Guard and Reserve Servicemembers Has
			  Increased Significantly Since Fiscal Year 2000

           The total cost to the federal government to compensate both
           part-time and full-time reserve and National Guard servicemembers
           has increased significantly--about 47 percent--since fiscal year
           2000, increasing from about $13.9 billion in fiscal year 2000 to
           about $20.5 billion in fiscal year 2006. 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, such as retirement pay and
           health care. However, this cost does not include all compensation,
           such as accrual costs for veterans' benefits.23 Moreover, these
           costs do not include National Guard and reserve members who were
           called to active duty to support military operations.
			  
22See, for example, GAO, DOD Systems Modernization: Management of
Integrated Military Human Capital Program Needs Additional Improvements,
[39]GAO-05-189 (Washington, D.C.: Feb. 11, 2005); Defense Management:
Foundational Steps Being Taken to Manage DOD Business Systems
Modernization, but Much Remains to be Accomplished to Effect True Business
Transformation, [40]GAO-06-234T (Washington, D.C.: Nov. 9, 2005); and
Defense Business Transformation: A Comprehensive Plan, Integrated Efforts
and Sustained Leadership Are Needed to Assure Success, [41]GAO-07-229T
(Washington, D.C.: Nov. 16, 2006).

           Health care costs are a primary factor contributing to the growth
           in reserve compensation. Since fiscal year 2000, total health care
           costs for reservists have grown about 500 percent, from $835
           million in fiscal year 2000 to $4.4 billion in fiscal year 2006.
           This increase is largely due to new and enhanced health care
           benefits for retirees. For example, in 2001 Congress added TRICARE
           for Life, a health care benefit for Medicare-eligible retirees,24
           and 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 Additionally, Congress added a premium-based
           health care benefit for Selected Reservists and their dependents
           known as TRICARE Reserve Select that provides a continuation of
           health coverage as reservists transition on and off of active
           duty.26 According to DOD estimates, the cost for this new health
           care benefit will increase in fiscal year 2008 to about $381
           million, and will continue to increase to about $874 million by
           fiscal year 2013. Moreover, DOD predicts that the cost for health
           care will continue to increase significantly and consume more than
           12 percent of its total budget by fiscal year 2015, compared to
           7.5 percent in fiscal year 2005.
			  
23Veterans' benefits include health care, compensation and pension,
education and training, vocational rehabilitation, guaranty 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.

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

25GAO, DOD's 21st Century Health Care Spending Challenges, presentation
for the Task Force on the Future of Military Health Care, [42]GAO-07-766CG
(Washington, D.C.: April 18, 2007).

           Over this same time period, the per capita cost to the federal
           government for part-time drilling reservists27 almost doubled,
           from about $10,100 in fiscal year 2000 to about $19,100 in fiscal
           year 2006. 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
           and family status.28 It is noteworthy that this increase in per
           capita cost occurred during a time when the average number of
           part-time drilling reservists declined by about 6 percent from
           about 746,400 in fiscal year 2000 to 699,800 in fiscal year 2006.
           This decline in the average number of part-time servicemembers 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.
			  
26In 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 the 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. 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.

27Part-time drilling reservists 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 part-time analysis.

28This compensation does not include all of the costs required to support
additional servicemembers, because it does not include those costs
associated with recruiting and training personnel.
		
           In addition to the drilling reservists, about 9 percent of
           reservists work full-time, and their per capita cost to the
           federal government also increased, from about $90,100 in fiscal
           year 2000 to about $115,200 in fiscal year 2006, or about 28
           percent.29 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 2006.30 Full-time reservists are eligible
           to receive the same compensation as active duty servicemembers,
           whose per capita cost for compensation was about $126,200 in
           fiscal year 2006. Figure 5 shows the trend in per capita costs for
           part-time reservists, full-time reservists, and active duty
           servicemembers from fiscal year 2000 through fiscal year 2006.
           Although full-time reservists are eligible to receive the same
           compensation as active duty service members, 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.
			  
29Full-time reserve and National Guard personnel are referred to as
"Administration and Support" in the budget justification books, but are
often referred to as active guard and reserve (AGR) or full-time support
(FTS), depending on service culture. These personnel are called to active
duty for reasons including organizing, administering, recruiting,
instructing, and training reserve component personnel, and special work
such as security.

30The 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 5: Trend in Per Capita Costs for Part-Time Reservists,
           Full-Time Reservists, and Active Duty Servicemembers, Fiscal Years
           2000 through 2006
			  
			  DOD Does Not Know the Extent to Which Its Mix of Reserve Compensation
			  Is Meeting Its Human Capital Goals

           DOD and Congress have reacted to the current environment of
           increased mobilizations and recruiting difficulties by adding to
           reservists' 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 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 family separations for longer periods and
           interruptions in reservists' civilian careers. In recent years,
           Congress and DOD have added benefits and pays to address reserve
           component recruiting problems. For example, the reserve incentive
           program, which primarily provides discretionary cash bonuses for
           enlistment and reenlistment, increased more than 1000 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 that deferred
           compensation increased from 12 percent of total reserve
           compensation in fiscal year 2000 to 28 percent in fiscal year
           2006. 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 in Fiscal Years 2000 and 2006

While DOD and Congress have added pays and benefits over the past 6 years,
it is questionable whether DOD and Congress adequately considered 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.31 However, this increase in
deferred compensation may not necessarily provide the most efficient
allocation or 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 servicemembers.

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.32 Cash pay today
is a far more efficient tool than future cash or benefits for the
recruiting and retention of active duty servicemembers. For example, a
study assessing the military drawdown 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.33 This preference for cash
compensation has a profound impact on the efficiency of DOD's compensation
system, especially considering that less than one in four part-time
reservists will receive these costly deferred benefits.34 More
specifically, about 24 percent of those who join the reserve and Guard
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 servicemembers, or turn on and off compensation as it is needed to
recruit and retain servicemembers. 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 problems are, in fact, inflexible benefits and long-term costs
that the department will find difficult to stop providing, such as health
care for reservists.

31Department 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).

32GAO, Military Personnel: DOD Needs to Improve the Transparency and
Reassess the Reasonableness, Appropriateness, Affordability, and
Sustainability of Its Military Compensation System, [43]GAO-05-798
(Washington, D.C.: July 19, 2005).

33John T. Warner and Saul Pleeter, "The Personal Discount Rate: Evidence
from Military Downsizing Programs," The American Economic Review (March
2001).

34GAO, Military Personnel: DOD Needs More Data Before It Can Determine if
Costly Changes to the Reserve Retirement System Are Warranted,
[44]GAO-04-1005 (Washington, D.C.: Sept. 15, 2004).

DOD Has Not Established a Compensation Strategy and Performance Measures to
Gauge 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 an overall
compensation strategy or performance measures.35 We have previously found
that programs such as compensation systems need performance measures and
goals to guide decision makers and program policy.36 Moreover, DOD's
Personnel and Readiness strategic plan states the importance for DOD to
identify requirements and tailor compensation and other programs to
achieve objectives and continuously review personnel management.37 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.38

The lack of a 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.39 Our past reports pointed out that DOD lacked explicit
compensation principles, which creates challenges in making major changes
to compensation. Moreover, DOD does not have performance measures to gauge
the efficiency of its compensation system or the various compensation
tools. Without performance measures, DOD does not know which of its
compensation tools--cash, noncash, or deferred--works best at recruiting
and retaining servicemembers, and it does not know the most effective,
efficient mix of compensation.

35Department 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).

36GAO, A Model of Strategic Human Capital Management, [45]GAO-02-373SP
(Washington, D.C.: Mar. 15, 2002).

37Under Secretary of Defense for Personnel and Readiness' (OUSD--P&R),
Strategic Plan, FY2006-2011 (April 18, 2006).

38GAO, Human Capital: Key Principles for Effective Strategic Workforce
Planning, [46]GAO-04-39 (Washington, D.C.: Dec. 11, 2003).

39GAO, Military Personnel: DOD Needs to Improve the Transparency and
Reassess the Reasonableness, Appropriateness, Affordability, and
Sustainability of Its Military Compensation System, [47]GAO-05-798
(Washington, D.C.: July 19, 2005); The Congress Should Act to Establish
Military Compensation Principles, [48]GAO/FPCD-79-11 (Washington, D.C.:
May 9, 1979).

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. In fact, numerous other factors, such as the economy, ongoing
contingency operations, and DOD's own recruiting and advertising program
also influence the department's ability to recruit and retain
servicemembers.40 As a result, DOD does not know if the additions to the
compensation system--which are becoming increasingly costly--are
appropriate to enable the reserve components to recruit and retain a
high-quality workforce in sufficient numbers and that the federal
government has the best return on investment. 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.

40DOD, 9th Quadrennial Review of Military Compensation (Volume I; May 17,
2002); Commission on the National Guard and Reserves, Strengthening
America's Defenses in the New Security Environment (March 1, 2007); GAO,
Military Recruiting: DOD Needs to Establish Objectives and Measures to
Better Evaluate Advertising's Effectiveness, [49]GAO-03-1005 (Sept. 19,
2003).

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
balance constraints. 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 are found outside the military
personnel appropriation for DOD. In fact, costs are located within three
federal agencies--DOD, Department of Veterans Affairs, and Department of
Treasury--depending on the type of compensation and the status of the
reservists--active reserve or mobilized. 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.41 In addition, the reserve military personnel budgets combine
some cash costs. For example, pays and allowances includes 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.42 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 usage
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 are found in the Treasury
budget.43

41The 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.

42The operation and maintenance budget includes costs for morale, welfare,
and recreation programs and commissaries. The Veteran's 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.

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 are 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.44

In our report on reserve compensation that we issued today,45 we are
making recommendations to assess the appropriateness of the reserve
compensation system and to improve transparency over total reserve
compensation costs. Our recommendations are that DOD (1) establish a clear
compensation strategy that includes performance measures and (2) compile
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.

In commenting on a draft of our report on reserve compensation, 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 they 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 many of
the increases in deferred compensation were not sought by DOD. In response
to our recommendation to improve transparency, DOD stated 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 to
underpin its business case to decision makers, and transparent information
that compiles the total costs of compensation as part of the military
budget submission.

43The 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.

44Secretary 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 memo
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.

45 [50]GAO-07-828 .

Conclusions

A general reassessment of the Guard and reserves' business model and human
capital strategies is critical to enable DOD to continue to achieve its
goal of having a sustainable all-volunteer force. The current business
model that was developed under Cold War assumptions is not well aligned
with the Guard and reserves' new operational role. The Commission has the
opportunity to take a comprehensive look at how DOD and Congress need to
work together to craft a business model for the reserve component that
addresses both current and future challenges. A revised business model for
the reserve component should include integrated policies, procedures, and
business systems for recruiting and retaining personnel; facilitation of
individuals' movement between reserve and active duty status; and
compensation of personnel with a combination of cash and benefits that
best supports the achievement of human capital goals. In the past, DOD and
Congress have reacted to the reserves' new operational role by adding
compensation without adequate consideration of how additional compensation
and benefits 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. The Commission
has the opportunity to consider how DOD should construct a pay and
compensation strategy that addresses these challenges to ensure that DOD
uses its compensation resources more efficiently which ultimately would
improve DOD's ability to recruit a highly qualified force in sufficient
numbers. Addressing these challenges as part of a comprehensive
reassessment of the reserve component's business model is especially
important in light of existing budgetary pressures. Without a sustainable
business model, DOD may not be well positioned to support operations at
home and abroad and achieve its long-term goals of transformation and
modernization.

Mr. Chairman and Members of the Commission, this concludes my prepared
statement. I would be happy to answer any questions you may have at this
time.

For further information regarding this testimony, please contact Janet A.
St. Laurent at (202) 512-4402 or [51][email protected] . Contact points
for our Offices of Congressional Relations and Public Affairs may be found
on the last page of this statement. Individuals who made key contributions
to this testimony are listed in enclosure I.

Enclosure I: GAO Contact and Staff Acknowledgments

GAO Contact

Janet A. St. Laurent, (202) 512-4402 or [52][email protected]

Acknowledgments

In addition to the contact named above, Derek B. Stewart, Director; John
H. Pendleton, Acting Director; Margaret G. Morgan, Assistant Director;
David E. Moser, Assistant Director; Lori A. Atkinson; Alissa H. Czyz;
Linda S. Keefer; James P. Klein; Susan C. Langley; Tom C. Murphy; Hilary
L. Murrish; Erin S. Noel; Kristy C. Williams; Steve Woods; and Suzanne K.
Wren made key contributions to this statement.

Related GAO Products

Military Personnel: DOD Needs to Establish a Strategy and Improve
Transparency over Reserve and National Guard Compensation to Manage
Significant Growth in Cost. [53]GAO-07-828. Washington, D.C.: June 20,
2007.

Military Base Closures: Management Strategy Needed to Mitigate Challenges
and Improve Communication to Help Ensure Timely Implementation of Air
National Guard Recommendations. [54]GAO-07-641 . Washington, D.C.: May 16,
2007.

High-Risk Series: An Update.  GAO-07-310.  Washington, D.C.: January 2007.

Military Personnel: Additional Actions Needed To Improve Oversight Of
Reserve Employment Issues. [55]GAO-07-259 . Washington, D.C.: February 8,
2007.

Military Personnel: Reserve Components Need Guidance to Accurately and
Consistently Account for Volunteers on Active Duty for Operational
Support. [56]GAO-07-93 . Washington, D.C.: October 31, 2006.

Reserve Forces: Actions Needed to Identify National Guard Domestic
Equipment. GAO-07-60. Washington, D.C.: January 2007.

Military Recruiting: DOD and Services Need Better Data to Enhance
Visibility over Recruiter Irregularities. [57]GAO-06-846 . Washington,
D.C.: August 8, 2006.

Reserve Forces: Army National Guard's Role, Organization, and Equipment
Need to be Reexamined. [58]GAO-06-170T . Washington, D.C.: October 20,
2005.

Military Personnel: DOD Needs Action Plan to Address Enlisted Personnel
Recruitment and Retention Challenges. [59]GAO-06-134 . Washington, D.C.:
November 17, 2005.

Force Structure: Assessments of Navy Reserve Manpower Requirements Need to
Consider the Most Cost-effective Mix of Active and Reserve Manpower to
Meet Mission Needs. [60]GAO-06-125 . Washington, D.C.: October 18, 2005.

Reserve Forces: Plans Needed to Improve Army National Guard Equipment
Readiness and Better Integrate Guard into Army Force Transformation
Initiatives. [61]GAO-06-111 . Washington, D.C.: October 4, 2005.

Military Personnel: Federal Management of Servicemember Employment Rights
Can Be Further Improved. [62]GAO-06-60 . Washington, D.C.: October 19,
2005.

Reserve Forces: An Integrated Plan Is Needed to Address Army Reserve
Personnel and Equipment Shortages. [63]GAO-05-660 . Washington, D.C.: July
12, 2005.

21st Century Challenges: Reexamining the Base of the Federal Government.
GAO-05-325SP. Washington, D.C.: 2005.

Military Personnel: A Strategic Approach Is Needed to Address Long-term
Guard and Reserve Force Availability. [64]GAO-05-285T . Washington, D.C.:
February 2, 2005.

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

Reserve Forces: Actions Needed to Better Prepare the National Guard for
Future Overseas and Domestic Missions. [65]GAO-05-21 . Washington D.C.:
November 10, 2004.

Military Personnel: DOD Needs to Address Long-term Reserve Force
Availability and Related Mobilization and Demobilization Issues.
[66]GAO-04-1031 . Washington, D.C.: September 15, 2004.

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

Reserve Forces: Observations on Recent National Guard Use in Overseas and
Homeland Missions and Future Challenges. [67]GAO-04-670T . Washington,
D.C.: April 29, 2004.

Military Personnel: DOD Actions Needed to Improve the Efficiency of
Mobilizations for Reserve Forces.GAO-03-921. Washington, D.C.: August 21,
2003.

Reserve Forces: DOD Actions Needed to Better Manage Relations between
Reservists and Their Employers. [68]GAO-02-608 . Washington, D.C.: June
13, 2002.

(351047)

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[75]www.gao.gov/cgi-bin/getrpt?GAO-07-984 .

To view the full product, including the scope
and methodology, click on the link above.

For more information, contact Janet A. St. Laurent at (202) 512-4402 or
[email protected].

Highlights of [76]GAO-07-984 , a testimony before the Commission on the
National Guard and Reserves

June 20, 2007

GUARD AND RESERVE PERSONNEL

Fiscal, Security, and Human Capital Challenges Should be Considered in
Developing a Revised Business Model for the Reserve Component

Over 580,000 reservists have been activated for military operations
between September 2001 and March 2007. The challenges of continuing to
mobilize large numbers of reserve component servicemembers for ongoing
operations while balancing their support to homeland defense missions have
led to questions about whether changes are needed in the way the reserve
components are structured and resourced, particularly in light of mounting
21st century fiscal imbalances.

This testimony focuses on: (1) the nation's fiscal and security challenges
and their implications for the Department of Defense (DOD) and the
National Guard and Reserves; (2) the need for DOD to better align its
reserve component business model, including human capital strategies, with
the reserve forces' current and future needs; and (3) the extent to which
DOD's current compensation system for reserve and National Guard personnel
is helping the department to meet its human capital goals of recruiting
and retaining a high-quality force. The testimony is based on GAO's body
of work on the nation's long-term fiscal outlook, National Guard and
reserve readiness, military personnel issues such as recruitment and
retention, and the report GAO is issuing today on reserve and National
Guard compensation issues. GAO has made several recommendations to address
these challenges.

The nation's growing fiscal imbalance and changing security environment
require a fundamental reexamination of defense activities, including the
role and structure of the reserve components. The fiscal imbalance, which
is due to factors such as mounting budget deficits and rising health care
costs, could threaten the nation's future economy and national security.
As the fiscal imbalance constrains federal funding, future defense budgets
are likely to be affected. DOD faces significant fiscal challenges due to
rising compensation and acquisition costs, military operations, and
inefficient policies and business practices. To put DOD on a more
sustainable path, GAO has suggested that DOD reexamine defense policies
and practices, address high risk areas, and develop budgets that set clear
priorities based on current and future threats. Reexamining reserve
component policies and practices should be included as part of an overall
DOD-wide effort to address long-term affordability and sustainability
challenges.

DOD's heavy reliance on the reserve components in recent years to support
military operations and homeland security needs has highlighted the need
to better align the reserves' business model with their 21st century
roles. GAO's work has shown that the reserve components face several human
capital challenges that will need to be considered as part of an overall
effort to develop a new business model. Specifically, GAO's past work has
shown that the reserves face challenges including (1) recruiting and
retaining members with needed skills, and (2) developing policies,
procedures and business processes that facilitate a smooth transition
between reserve and active duty status. GAO has made numerous
recommendations to assist DOD in addressing these issues.

DOD also does not know the extent to which its reserve compensation system
is helping to meet recruiting and retention goals because (1) it has not
established a strategy to identify the appropriate mix of compensation and
(2) its approach does not provide decision makers with adequate
transparency over total costs to compensate reservists, which have risen
47 percent since fiscal year (FY) 2000 in constant dollars. DOD's and
Congress' piecemeal approach of adding pays and benefits has contributed
to a shift in the mix of compensation toward more deferred benefits--such
as retirement pay and health care--from 12 percent of total compensation
in FY 2000 to 28 percent in FY 2006, primarily due to costs for enhanced
health care for retirees. This allocation is questionable from an
efficiency perspective since only 24 percent of those who join the
reserves will ultimately receive retirement benefits. Further, reserve
compensation costs are found in multiple federal budgets, which does not
provide decision makers with adequate transparency over total costs. GAO
is recommending today that DOD (1) establish an overall compensation
strategy and (2) compile costs in a transparent manner to enable decision
makers to determine the affordability, effectiveness, and sustainability
of the reserve compensation system. DOD partially concurred with the
recommendations.

References

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