Morale, Welfare, and Recreation: Declining Funds Require DOD to Take
Action (Letter Report, 02/28/94, GAO/NSIAD-94-120).

The Pentagon's morale, welfare, and recreation program provides service
members and their families with such services as commissaries, fast food
restaurants, health clubs, and golf courses.  The financial outlook for
the program appears to be worsening.  Exchange stores--the largest
producer of program revenue and a source of money for other program
activities--have seen revenues shrink since 1989.  Defense downsizing
and increased private sector competition are likely to further dampen
program revenues during the 1990s.  Appropriated funds, which now
constitute about 10 percent of program funding, are also expected to
decline along with overall budgets.  Cuts in program services are likely
unless changes are made soon.  The Defense Department's (DOD)
decentralized approach to managing the program--a $12 billion enterprise
when exchanges are included--may not be well-suited to an environment of
diminishing patronage and funding.  Because individual commanders have
broad discretion in allocating money at installations, funds from
different sources become mixed, making it hard to know whether the
program is providing the best mix of services with the least demand on
taxpayer dollars.  Also of concern are cash balances of more than $300
million at some Army installations.  If not managed carefully, the money
could be spent in ways that incur future costs and worsen finances in
the long run.  Program consolidation has been tried successfully by some
of the services but has been resisted by others.  A DOD strategic review
of the program, a promising catalyst for change initially, appears to
have stalled.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  NSIAD-94-120
     TITLE:  Morale, Welfare, and Recreation: Declining Funds Require 
             DOD to Take Action
      DATE:  02/28/94
   SUBJECT:  Defense appropriations
             Internal controls
             Funds management
             Sales
             Program abuses
             Military facilities
             Budget receipts
             Nonappropriated federal funds
             Defense cost control
             Post exchanges
IDENTIFIER:  DOD Morale, Welfare, and Recreation Program
             
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Cover
================================================================ COVER


Report to the Chairman, Panel on Morale, Welfare, and Recreation,
Committee on Armed Services, House of Representatives

February 1994

MORALE, WELFARE, AND RECREATION -
DECLINING FUNDS REQUIRE DOD TO
TAKE ACTION

GAO/NSIAD-94-120

Morale, Welfare, and Recreation


Abbreviations
=============================================================== ABBREV

  AAFES - Army and Air Force Exchange System
  DOD - Department of Defense
  GAO - General Accounting Office
  MWR - Morale, Welfare, and Recreation
  NSIAD - National Security and International Affairs Division

Letter
=============================================================== LETTER


B-256548

February 28, 1994

The Honorable Solomon P.  Ortiz
Chairman, Panel on Morale, Welfare,
 and Recreation
Committee on Armed Services
House of Representatives

Dear Mr.  Chairman: 

The services the Department of Defense (DOD) provides its people
through the morale, welfare, and recreation (MWR) program constitute
a multibillion dollar business.  Yet, apart from sheer size, the
analogy with big business is not a good one.  Except for the exchange
stores, the MWR program is really a collage of individual activities
that are managed at the installation level.  The former Chairman
asked us to review the program as it adapts to reductions in military
force structure, budgets, and bases.  Specifically, this report
addresses MWR's financial status, the problems facing the program's
management, and actions DOD is taking or contemplating to improve the
program's operation. 


   BACKGROUND
------------------------------------------------------------ Letter :1

The MWR program provides service members, their dependents, and
eligible civilians with an affordable source of goods and services
like those available to civilian communities.  For those eligible,
DOD provides activities such as retail outlets, fast food operations,
clubs, libraries, gymnasiums, golf courses, and family recreation
facilities.  DOD intends for the MWR program to go beyond providing
basic needs to making individuals more satisfied with military life
and attracting people to military careers.  MWR programs operate on
military installations and receive financial support primarily from
two sources--nonappropriated funds, generated from revenue, and
appropriated funds. 

DOD classifies MWR activities into three categories, which receive
various degrees of appropriated funds (see app.  I).  Category A
includes mission-sustaining activities, such as athletic fields,
gymnasiums, and libraries that are to be supported primarily with
appropriated funds and that are generally not expected to generate
revenues.  Category B activities, such as swimming pools, automotive
hobby shops, and child care centers, generate some revenue but still
receive a significant amount of appropriated funds.  Category C
activities, such as golf courses, bowling alleys, and movie theaters,
are expected to generate revenue and to be primarily self-supporting. 
Commissaries, or food stores, are also technically considered part of
the MWR program.  However, we did not include them in our review
because the services manage the commissaries separately and the
revenue generated from the stores is not shared with other MWR
activities. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

The financial outlook of the MWR program appears to be worsening. 
Exchange stores--the largest producer of MWR revenue and a source of
dividends for other MWR activities--have experienced declining income
since 1989.  Revenue generated by MWR activities is likely to
decrease in the 1990s because of the downsizing of forces and
increasing private sector competition.  Appropriated funds--which now
constitute 10 percent of MWR funding--are also expected to decline as
overall budgets decline.  If changes are not made soon, the declining
financial conditions are likely to force reductions in the services
the program provides. 

DOD's decentralized approach to managing the MWR program--a
$12-billion enterprise when exchanges are included--may not be
well-suited to the receding patronage and funding the program now
faces.  For example, some category C activities are not making money
and some base commanders feel that other programs, such as child
care, demand too large a share of MWR funds.  Because of each
individual commander's discretion in allocating money at the
installation, funds from different sources become mixed.  This
hampers accountability for and analysis of individual activities and
makes it difficult to know whether the MWR program is providing the
best mix of services with the least demand on taxpayers' money.  Also
of concern are cash balances of over $300 million Army installations
have accumulated.  This money does not necessarily represent profits
generated by the installations themselves, but funds distributed from
different sources.  If not managed carefully, the money could be
spent by installations in a way that incurs future costs and worsens
finances in the long run. 

Many of these problems are well-known, and different remedies have
been studied, most of which involve sacrificing some
installation-level flexibility to improve financial management.  A
common conclusion of such studies is that the MWR program is too
fragmented and needs to be consolidated.  Indeed, the consolidation
of the Army and the Air Force exchanges appears to be a success and
is being followed by the consolidation of the commissaries.  However,
the Navy and the Marines have resisted further consolidation and
prefer to engineer their own vertical mergers of exchanges and other
MWR activities.  Regardless of whether consolidation emerges as the
best path for the MWR program, it is clear that significant changes
in the program are necessary to improve the efficiency of services. 
Until recently, a strategic review of the MWR program conducted by
DOD offered promise of serving as the catalyst for such changes. 
However, after 2 years in the making, it appears that the review has
stalled and will not foster the needed changes in time. 


   FINANCIAL STATUS OF THE MWR
   PROGRAM
------------------------------------------------------------ Letter :3

Revenues from exchange stores and other MWR activities supply about
90 percent of MWR funds, while appropriations supply the remaining 10
percent.  The amount and sources of funds available to MWR activities
in fiscal year 1992 are shown in table 1. 



                           Table 1
           
           Amount and Sources of Funds Available to
              MWR activities in Fiscal Year 1992

                    (Dollars in millions)

Sources of Funds                            Amount     Total
----------------------------------------  --------  --------
Revenues
Exchanges                                 $9,322.2
Other MWR activities                       2,025.8
============================================================
Subtotal                                            $11,348.
                                                           0
Appropriated funds
Exchanges                                  $ 246.9
============================================================
Other MWR activities Subtotal              1,018.0   1,264.9
============================================================
Total MWR funds available                           $12,612.
                                                           9
------------------------------------------------------------
Source:  DOD. 

Over the past 6 years, MWR revenues and appropriations have been
stable enough to avoid precipitous cutbacks in MWR activities. 
However, the financial picture is worsening.  Dividends from exchange
stores have been declining since 1989, and could continue to fall as
military force levels decline.  Similarly, the amount of appropriated
funds the services can devote to MWR activities is likely to decline
as competition for funding within smaller service budgets
intensifies. 


      EXCHANGES' FINANCIAL
      CONDITION IS KEY TO THE MWR
      PROGRAM
---------------------------------------------------------- Letter :3.1

The continued financial health of the exchanges is clearly critical
to the viability of the MWR program.  The exchanges not only provide
merchandise and services at reasonable prices to the military
community worldwide, but are counted on to make a profit to help
defray the cost of other MWR activities, easing the burden on the
need for appropriated funds.  The exchange system also provides
services such as uniform sales stores and school lunch programs. 
These services would otherwise require appropriated money to provide. 

Three separate exchange systems operate within DOD.  The Army and the
Air Force operate the consolidated Army and Air Force Exchange System
(AAFES), while the Navy and the Marine Corps operate their own
exchange stores.  With total revenue from sales, concessions, and
other sources of over $6.5 billion in fiscal year 1992, AAFES is
about three times the size of the Navy Exchange System, which had a
total revenue of over $2 billion.  The Marine Corps exchanges
generated $536 million in revenue during fiscal year 1992. 

During fiscal years 1987 through 1992, the exchanges were
continuously profitable and paid dividends to the MWR program. 
During that period, net income for AAFES and the Navy Exchange System
amounted to about
5 percent of sales, over half of which was paid to other MWR
activities in the form of dividends.  Because the Marine Corps merges
the financial information for its exchanges with its other MWR
activities, its data is not comparable with AAFES and the Navy
exchanges.  Even though the exchanges are profitable, they are
subsidized with appropriated money for expenses such as military
personnel, overseas transportation of goods, and certain utilities
and minor construction.  This subsidy was about $247 million in
fiscal year 1992, approaching the amount of dividends--$305
million--the exchanges paid to MWR activities in that year. 

As shown in figure 1, the net income and dividends from AAFES and the
Navy Exchange System have declined gradually since fiscal year 1989. 
Although the Marine Corps has begun to develop comparable data on its
exchanges, such data is not available for past years. 

   Figure 1:  AAFES and Navy
   Exchange Net Income and
   Dividends Paid to MWR
   Activities (Constant Fiscal
   Year 1992 Dollars)

   (See figure in printed
   edition.)

Source:  GAO analysis of DOD data. 

According to Navy officials, Navy stores were hit harder by a general
economic downturn in 1990.  While both exchanges' net income
decreased in fiscal years 1991 and 1992, the Navy's decreased
substantially more in 1991--19 percent compared to AAFES' 2 percent. 
Both exchanges' net profit decreased about the same in fiscal year
1992, about 9 percent.  The financial condition of the Navy's
exchanges was compounded by the fact that during these years, the
stores paid out over 90 percent of net income in dividends to MWR
activities--compared to over 60 percent for AAFES--leaving less money
to reinvest in equipment and facilities.  The Navy exchanges agreed
to do this to enable the Navy to use more of its appropriated funds
for mission-specific purposes, such as ship upkeep, than for MWR
programs.  The Navy has since decided to lower the amount of such
dividends and successfully sought an increase in fiscal year 1994
appropriated funds for MWR programs. 

For several reasons, exchange dividends are not likely to rebound
over the next few years, and may even decline further.  Perhaps the
most visible reasons are the force structure reductions and base
closure actions that will continue to occur over the next several
years.  In addition, an August 1993 study by the Logistics Management
Institute cites the increasing competition from the private sector,
noting that "Price clubs and discount stores have eroded the price
advantage that AAFES has traditionally held."\1

However, exchange system officials believe that the exchanges'
financial condition will be strong if they aggressively streamline
operations. 


--------------------
\1 Strategies to Improve the Financial Status of Army Recreation
Business Programs (AR208R1, Aug.  1993, Logistics Management
Institute). 


      FINANCIAL CONDITION OF OTHER
      MWR ACTIVITIES IS WEAK
---------------------------------------------------------- Letter :3.2

MWR activities other than the exchanges collectively do not produce
enough revenue to cover their expenses.  For example, for fiscal year
1992, these activities produced $2,025 million in revenue, but
required $1,018 million in appropriations and $305 million in
dividends to cover expenses.  Because these activities represent all
three categories of the MWR program, they are not all expected to
turn a profit, nor would it be reasonable to expect that collectively
they would compare favorably with the financial condition of the
exchanges.  However, the financial status of the category C
activities--those intended to make a profit--appears worse than that
of the exchanges.  According to the Logistics Management Institute
study, among the Army's primary category C activities--bowling
centers, golf courses, and clubs--only the golf courses show a profit
(about $2.3 million in fiscal year 1991).  Even when appropriated
funds are counted as income, the bowling centers and clubs do not
show a profit. 

Without significant improvements in operations or increased
appropriations, these other MWR activities are likely to be cut back. 
The revenue produced by other MWR activities is likely to decline in
future years for the same reasons exchange revenue and dividends are
expected to decline.  Compounding the loss of revenue is the expected
reduction in appropriated funds.  Funding for MWR activities must
compete with other demands on DOD's budget, and the services expect
MWR appropriated funds to decline as budgets decline.  For example,
the Army expects to reduce appropriations used for MWR activities by
about 20 percent from fiscal years 1993 to 1994.  Army officials
expect appropriated fund levels to stay at least this low for the
next few years. 

Because MWR expenses may not fall as quickly as revenue, the gap
between revenue and expenses may widen in the near term.  The
Logistics Management Institute attributes the latter phenomenon to
the fact that overhead expenses will continue to be incurred after
the customer base begins to decline.  Thus, unless MWR expenses can
be reduced through sound financial decisions, activities will have to
be curtailed because MWR is not likely to receive a larger share of
appropriated funds. 


   OTHER MANAGEMENT PROBLEMS
   CONFRONTING THE MWR PROGRAM
------------------------------------------------------------ Letter :4

Unlike exchanges, other MWR activities operate under a decentralized
management philosophy.  Decisions on how to run individual activities
and how to spend revenue, dividends, and appropriated funds are made
by installation commanders.  While the decentralized approach
provides the flexibility to tailor MWR services to the individual
needs of the services and installations, it also clouds oversight of
how funds are being spent and how efficiently and effectively
activities are being run.  Perhaps the greatest challenge facing the
MWR program today is providing quality services while ensuring
effective stewardship of increasingly scarce financial resources. 


      MIXING OF FUNDS BLURS
      OVERSIGHT
---------------------------------------------------------- Letter :4.1

Installation commanders have the flexibility to decide how to channel
appropriated and nonappropriated funds to different MWR activities. 
A byproduct of this flexibility is that revenue, dividends, and
appropriated funds are commingled at the local level, making it
difficult to track which monies are funding which activities.  From a
management standpoint, this mixing of funds hampers the ability to
identify which activities are doing well and which are not, making it
difficult for the services to make hard business decisions.  Thus,
while a dedicated analysis can point out that the more lucrative
category C activities are not making a profit, this information is
not routinely visible to aid management of the MWR program.  For
example, it is difficult to target initiatives to improve the
patronage and profitability of bowling centers if the fact that they
are losing money cannot be readily determined. 

Another byproduct of commingling MWR funds is the perception of
inequity by service members.  For example, most of the installation
commanders we spoke with complained that they had to devote MWR
revenue to cover child care program costs, even though the program
receives appropriations through the Military Child Care Act of 1989
and collects fees from parents.  The commanders noted that
subsidizing child care causes resentment among those service members
who do not benefit from the program but do patronize other MWR
activities.  Similarly, some service members have questioned the use
of funds to subsidize officers' and other clubs on the basis that
these clubs are not popular.  Otherwise, the clubs would generate
greater patronage and would not need subsidies. 

In December 1993, we reported on another problem--abuse in DOD's
recycling program--that further blurs the funding of MWR
activities.\2 Specifically, we reported that millions of dollars were
being used annually for MWR activities that should have been used
instead to offset the need for appropriated funds or be returned to
the U.S.  Treasury.  Military bases were routinely receiving money
from the sale of aircraft, vehicles, and other materials that DOD
policy specifically excluded from the recycling program and then were
using the proceeds to fund MWR activities.  In addition, some
installations, without proper authorization, were holding their own
sales rather than selling materials through disposal offices. 
Therefore, the total amount installations were receiving from the
recycling program and spending on MWR activities was unknown. 


--------------------
\2 Department of Defense:  Widespread Abuse in Recycling Program
Increases Funds for Recreation Activities (GAO/NSIAD-94-40, Dec.  10,
1993). 


      SERVICES ALLOCATE
      APPROPRIATED FUNDS
      DIFFERENTLY
---------------------------------------------------------- Letter :4.2

The individual services have a wide degree of latitude in how they
channel appropriations to MWR activities.  No separate line item
appears in the DOD or service budgets for MWR activities.  Instead,
the services draw funds for their MWR programs from several
appropriations--primarily the Operations and Maintenance and Military
Personnel accounts.  Consequently, differences exist between how the
individual services distribute appropriated funds to MWR activities,
as evidenced in the per capita variances shown in table 2. 



                           Table 2
           
            Per Capita MWR Funds Appropriated for
                 Fiscal Years 1989 to 1992\a

                                     Air              Marine
Fiscal year               Army     Force      Navy     Corps
--------------------  --------  --------  --------  --------
1989                       552       489       283       214
1990                       559       529       293       230
1991                       617       536       337       240
1992                       523       577       342       263
------------------------------------------------------------
\a These figures exclude appropriated funds for exchanges and
military construction.  The figures include indirect operating costs,
including allocations of installations' overhead costs. 

Source:  DOD. 

The differences among these figures illustrate the flexibility the
services have in allocating appropriations to the MWR program, as
well as the complexity in overseeing the program.  The significantly
lower numbers for the Navy and the Marine Corps indicate their
decisions to spend more appropriated funds on mission activities than
on MWR activities.  While the services are free to devote what they
consider the right amount of appropriations to MWR, it is difficult
to tell whether the best decisions are being made.  For example, DOD
found it necessary to create a one-time, $10-million MWR line item
for the Marine Corps in the fiscal year 1995 budget to compensate for
the Marine Corps' traditionally low funding for the MWR program.  On
the other hand, the fact that the Air Force and the Army devote about
double the amount of appropriations to MWR does not necessarily mean
that their programs provide twice the level or quality of activities. 
The higher funding could mean that some activities are being funded
in one service that another service charges for or that some are
being run inefficiently. 

We also found a wide range in the use of appropriated funds to
support category A activities among the different service
installations we visited.  Such activities have the least ability to
generate revenue.  The Air Force installations we visited used about
75 percent of appropriated funds on category A activities, the Army
installations used about 50 percent, and the Marine Corps units used
only about 25 percent.  The mix of appropriated and nonappropriated
funds used to support category B activities also varied greatly among
the installations we visited.  We generally found the funding of
category C activities to be more consistent, with most installations
using less than 10 percent of appropriated funds to support these
activities. 


      ARMY CASH LEVEL MANAGEMENT
---------------------------------------------------------- Letter :4.3

Another problem concerning the MWR program is the high level of
nonappropriated cash balances being held, particularly by Army
installations.  The Army has made some progress in reducing this
balance--as of September 30, 1992, the Army had an MWR cash balance
of $458.4 million and as of September 30, 1993, the balance was
$385.9 million.  Most of this balance--$310.2 million--was being held
at the installation level.  Table 3 shows the planned use of the
installations' cash balance, as of September 30, 1993. 



                           Table 3
           
            Planned use of Army Installation Level
                       MWR Cash Balance

                    (Dollars in millions)

Item                                        Amount     Total
----------------------------------------  --------  --------
September 30, 1993, cash balance                      $310.2
Less:
Liabilities                                 $122.5
Contribution to major construction fund       30.0
Minor improvements and construction          108.0
============================================================
Subtotal                                               260.5
============================================================
Unencumbered cash                                      $49.7
------------------------------------------------------------
Source:  U.S.  Army. 

The cash balance has raised several concerns.  First, at the same
time most of the cash is being held at installations, Army
headquarters needs more money to finance centrally managed
construction projects.  Second, individual installations could
obligate funds for minor capital improvement and construction
projects that in the long term are unaffordable or not good
investments.  Third, installations may hold unnecessarily high
balances to earn interest rather than to distribute the money to
individual MWR activities.  Also, the cash itself does not
necessarily represent profit.  Thus, while its sources are
nonappropriated (such as from dividends and MWR revenue), the
balances exist partly because appropriated funds defray a portion of
the installations' MWR costs. 

The Army recently developed a financial plan to reduce
nonappropriated cash balances.  Some of the changes involve (1)
reducing the amount of AAFES dividends and recreation machine (slot
machine) trust fund profits distributed to installations; (2) paying
interest on installation deposits in the fund only on the first $1
million, to discourage large cash balances at the installation level;
and (3) enforcing a set of financial standards for installation MWR
activities designed to improve business management.  The standards
call for all appropriated funds to go to category A activities, for
category B activities to break even, and for category C activities to
make a profit.  Army officials have established a goal to close those
category B and C activities that do not meet the standards by 1995. 


   CONSOLIDATIONS AND OTHER
   PROPOSED REMEDIES
------------------------------------------------------------ Letter :5

Potential solutions to the MWR program's long-standing problems have
been studied and proposed for a number of years.  A remedy frequently
recommended has been horizontal consolidation of like MWR activities,
particularly service exchange stores.  Another solution, preferred by
the Navy and the Marine Corps, is a complete or partial vertical
merger of MWR activities within each service.  The August 1993
Logistics Management Institute study also proposes contracting out of
some MWR activities to the private sector. 

One element common to these solutions is the recognition that some
flexibility at the local level will have to be sacrificed to improve
the financial outlook for the MWR program.  While an argument can be
made that local flexibility is critical to tailoring MWR activities
to the needs of a particular installation community, the poor
financial results of these activities suggests that such flexibility
has not produced results.  On the other hand, any changes in MWR
management that would result in the loss of local flexibility must be
attentive to the unique needs of remote installations that do not
necessarily have commercial alternatives to MWR services. 


      LONG-STANDING CONSOLIDATION
      AND COOPERATION ISSUES
---------------------------------------------------------- Letter :5.1

Since 1968, studies by DOD, our office, and others have recommended
the consolidation of exchanges into a single entity.  While Army and
Air Force exchanges have consolidated under AAFES, the Navy and the
Marine Corps retain independent exchanges.  Although a 1990 study
again predicted financial benefits would be achieved through
consolidation, DOD decided against further consolidation of the
exchanges at that time, partly because of opposition by the Navy and
the Marine Corps.  However, DOD and the services did take other steps
to consolidate and improve the operation of MWR activities. 

According to AAFES officials, consolidation of all exchanges would be
beneficial and a phased consolidation should be done.  Navy and
Marine Corps officials, however, remain strongly against it because
of the significant start-up costs associated with consolidation and
possible loss of the savings they are attempting to achieve through
their vertical merging of MWR and exchanges and other initiatives. 
They also believe that the current systems are a more efficient,
customer-oriented operation because of the decentralized control and
entrepreneurial spirit generated by the independent exchanges. 

The Marine Corps, on its own initiative, merged its MWR activities
with its exchange system in 1988, and the Navy has tested a similar
merger at two installations.  Since the merger, the Marine Corps has
reported cost savings totaling $4.3 million.  Initially, problems
were encountered in merging the systems; however, Marine Corps
officials believe most problems have been resolved or are in the
process of being resolved.  A key lesson learned was that even though
the Marine Corps exchange and MWR activities are relatively small,
the merger took several years to accomplish.  The 5 years experience
with the merger provided time for change to occur gradually--allowing
managers to adjust systems and operations to assure a more efficient
and effective transition. 

In 1991, the services consolidated their commissaries under the
Defense Commissary Agency.  Despite many start-up problems, the new
agency realized a savings of about $7.6 million in fiscal year 1992. 
The agency projects cost savings will reach $90 million by the end of
fiscal year 1995. 

Many of the problems experienced in the consolidation can be
attributed to the 1-year timetable allotted for completing the
consolidation instead of a more reasonable period of 3 to 5 years. 
The shortened timetable contributed to accounting and inventory
systems incompatibility problems.  Also, planning for personnel
requirements was inadequate, and experienced personnel either found
other jobs or were prematurely released.  According to the managers
of the commissary consolidation, key lessons learned were the need
for (1) an adequate time-phased transition period to integrate
systems and (2) a competent, experienced merger management team in
charge of the effort. 

Instead of consolidating the exchange systems in 1991, DOD directed
the military services to initiate cooperative efforts to increase
efficiencies, encourage competition, standardize certain functions to
allow for comparisons among the exchange systems, and to improve
patron service.  Cooperative efforts include common use of
AAFES-developed restaurant chains, joint use of equipment and
supplies contracts, and store swapping.  This latter effort involves
the Navy running an AAFES store in an area dominated by Navy
installations in return for AAFES running a Navy store in an area
dominated by Army or Air Force installations.  Also, financial
reporting formats are being standardized and a standardized financial
year-end report for 1992 is being tested. 

A 1991 Logistics Management Institute study DOD relied on in deciding
to delay consolidation of the exchanges advised that cooperative
initiatives represented some of the first steps needed to be taken
toward consolidation if that route where chosen later.  According to
the study, the initiatives would significantly reduce the business
risks of full consolidation if it was undertaken at a later time. 
The study advised DOD not to make a decision on consolidation for
another 3 years.  By then, the study projected that the cooperative
efforts should be completed, giving decisionmakers a much better
basis to compare exchange operations. 

As those years have passed, DOD has begun to feel the effects of
force structure reductions and base closures.  Further studies of
exchange consolidation are probably unnecessary and a decision on
whether to consolidate should be made soon.  Navy officials stated
that they have committed or are about to commit substantial funds to
reorganize and upgrade their operations, as well to staff their new
headquarters location.  They believe that continued uncertainty about
the exchange system's future hampers these efforts. 


      LOGISTICS MANAGEMENT
      INSTITUTE STUDY
---------------------------------------------------------- Letter :5.2

In August 1993, the Logistics Management Institute completed an
Army-requested study of alternative management structures for
revenue-generating (category C) MWR activities.  The study found
that, based on generally accepted accounting principles, the Army's
MWR business programs lost $72 million in fiscal year 1991.  Thus,
these activities were using, rather than generating, funds. 

The Institute assessed the advantages and disadvantages of four
management options to improve the financial status of the Army's MWR
business programs.  As requested by the Army, the study does not
recommend any course of action.  The options evaluated were

  retaining the status quo with enhancements such as creating a
     professional career track for managers, adopting private sector
     financial performance standards, and removing government
     impediments such as daily inventories;

  centralizing MWR management under a business activity center to
     minimize overhead at the installation and command levels, while
     making enhancements such as in the first option;

  transferring MWR business activities to AAFES to eliminate overhead
     without incurring the cost of a new organization, such as a
     business activity center; and

  contracting out some business activities under public-private
     ventures. 

The study estimates that all four options offer savings to the Army,
ranging from at least $20 million annually for the enhanced status
quo to over $100 million annually for the business activity center. 
The Army believes these savings estimates are optimistic and that
some of the study's methodology is inconsistent.  Nonetheless, the
Army is reviewing the alternatives in the study and is using the
study as the impetus to develop a plan for both the structure of MWR
and the future of MWR business programs.  The Army has formed a task
force to recommend a course of action to the MWR Board of Directors. 


      DOD STRATEGIC MWR REVIEW HAS
      BECOME INACTIVE
---------------------------------------------------------- Letter :5.3

Since 1991, DOD has been conducting a strategic review of the MWR
program to eliminate inconsistencies from service to service and to
improve program oversight.  Other objectives of the review include
(1) refining the criteria for use of appropriated funds to support
MWR activities and (2) developing standards and procedures for
oversight and fiduciary responsibilities, financial management, and
construction programs.  At the close of our review, we learned that
the strategic review group did not meet all of its objectives and was
no longer convening.  As a result, a revision to DOD's MWR regulation
that has been in draft form for
3 years has not been issued. 

One change DOD was considering was reducing MWR activity categories
from three to two.  One category would have consisted of core or
mission essential activities supported only with appropriated funds. 
The core programs are those activities needed to meet mission
readiness requirements, such as physical fitness.  The second
category would have included all other MWR activities to be supported
exclusively from nonappropriated funds generated from the sales of
goods and services.  Included would be revenue-generating activities
such as exchanges and golf courses, along with community-type
services such as swimming pools.  In essence, the second category
would combine the activities currently included in categories B and
C.  However, at the conclusion of our review, a DOD official said DOD
no longer plans to change to a two-category system. 

We believe the two-category system has merit since it would (1)
provide oversight and top-level responsibility for the mission
essential activities to be funded by appropriated money and (2)
eliminate the mixing of appropriated and nonappropriated funds
between different categories.  Further, by relying solely on
revenues, management of the noncore community service activities
would likely be encouraged to more closely focus on their need based
on usage and to employ business practices that would minimize cost
and attract more customers. 


   RECOMMENDATIONS
------------------------------------------------------------ Letter :6

We recommend that the Secretary of Defense establish milestones for
the completion of the strategic MWR review and the implementing
guidance (1) to improve the management and oversight of the MWR
program and (2) to ensure that the services have sound management
strategies that anticipate the likelihood that MWR funding will
decline faster than costs. 

The Army faces the competing challenges of managing the (1)
liquidation of a large cash balance, (2) improved performance of
category C business activities, and (3) reduction in the reliance on
appropriated funds.  Accordingly, we recommend that the Secretary of
the Army delay the further obligation of funds for MWR capital
improvement and construction projects until such projects are shown
to be sound investments, affordable, and consistent with the need to
be less reliant on appropriated funds in the future.  To the extent
such projects do not prove to be the best use of funds, we also
recommend the Secretary redirect the funds to efforts that will
increase MWR profits or lower MWR expenses. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :7

To answer questions regarding DOD's MWR policies, we reviewed (1)
DOD's guidance and directives related to MWR management and funding
and (2) the services' guidance and directives on the operation of
installation MWR programs.  We also interviewed officials in the
Office of the Secretary of Defense responsible for the MWR program. 
We interviewed program officials for each of the services and each of
the exchanges. 

To assess the financial status of the exchange systems, we reviewed
and compared audited financial statements of the three exchange
systems for fiscal years 1988 through 1992.  Because the Marine Corps
financial statements merge exchange and MWR operations, we
concentrated our comparison on the financial performance of the Army
and Air Force and Navy Exchange systems.  We also interviewed
officials at all three exchange systems, external auditors of the
Navy Exchange Command, and an industry analyst. 

The individual services provided data on the per capita amount of
appropriated funds each service distributes to MWR activities.  The
data was consistent regarding (1) the standard expense categories
each service reports to the Office of the Secretary of Defense and
(2) the use of average military end strengths as the base in
computing the per capita amounts.  However, we did not verify the
accuracy of the data provided. 

To obtain information on base-level MWR management and operations, we
visited the services' exchange headquarters in Staten Island, New
York, and Dallas, Texas, as well as 24 service installations.  At
each of the 24 bases, we observed operations of MWR activities and
interviewed commanders and other MWR officials. 

We conducted our review from December 1991 to December 1993 in
accordance with generally accepted government auditing standards.  As
requested, we did not obtain official agency comments.  However, we
discussed the results of our work with responsible agency officials,
and we have incorporated their comments where appropriate. 


---------------------------------------------------------- Letter :7.1

We are sending copies of this report to the Chairmen, House
Committees on Armed Services, on Appropriations, and on Government
Operations, and Senate Committees on Armed Services, on
Appropriations, and on Governmental Affairs; the Secretaries of
Defense, the Army, the Navy, and the Air Force; the Commandant of the
Marine Corps; and the Director of the Office of Management and
Budget.  We will also make copies available to others upon request. 
Please call me or David Warren, Associate Director, on (202) 512-8412
if you or your staff have any questions.  Other major contributors
are listed in appendix II. 

Sincerely yours,

Donna M.  Heivilin
Director, Defense Management
 and NASA Issues


CATEGORIES OF MORALE, WELFARE, AND
RECREATION ACTIVITIES
=========================================================== Appendix I


   CATEGORY A
--------------------------------------------------------- Appendix I:1

Libraries
Sports and athletics
Recreation centers
Free admission motion pictures for isolated or deployed units
Armed forces professional entertainment overseas
Unit level programs
Parks and picnic areas


   CATEGORY B
--------------------------------------------------------- Appendix I:2

Arts and crafts
Auto crafts
Entertainment (music and theater)
Outdoor recreation
Swimming pools
Youth sports activities
Child development
Bowling lanes (12 lanes or less)
Information, tickets, and tours
Marinas (without resale)
Skeet and trap ranges


   CATEGORY C
--------------------------------------------------------- Appendix I:3

Open messes
Golf
Bowling lanes (over 12 lanes)
Marinas/boating
Audio/photo resale
Riding stables
Rod and gun clubs
Aero clubs
Skating
Cabins and cottages
Armed forces recreation centers
Equipment rental
Scuba diving


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix II


   NATIONAL SECURITY AND
   INTERNATIONAL AFFAIRS DIVISION,
   WASHINGTON, D.C. 
-------------------------------------------------------- Appendix II:1

Bernard Easton, Assistant Director
Foy Wicker, Assistant Director
Jennifer Thomas, Evaluator-in-Charge
Paul Newton, Evaluator


   DALLAS REGIONAL OFFICE
-------------------------------------------------------- Appendix II:2

Calvin Phillips, Regional Assignment Manager
Richard Madson, Site Senior
Mary Costello, Evaluator
Bonifacio Roldan-Galarza, Evaluator


   NORFOLK REGIONAL OFFICE
-------------------------------------------------------- Appendix II:3

Dudley Roache, Regional Management Representative
Lawrence Dixon, Regional Assignment Manager
Joseph Radosevich, Evaluator
Raul Cajulis, Evaluator


   NEW YORK REGIONAL OFFICE
-------------------------------------------------------- Appendix II:4

Ruth Levy, Regional Assignment Manager
William Petersen, Evaluator


   EUROPEAN OFFICE
-------------------------------------------------------- Appendix II:5

Kevin Perkins, Site Senior

