Defense Sector: Trends in Employment and Spending (Briefing Report,
04/19/95, GAO/NSIAD-95-105BR).

The defense sector, as measured by Pentagon spending and military and
defense industry employment, has been shrinking, both in absolute terms
and relative to the U.S. economy, since the mid-1980s.  Declines in
Defense Department (DOD) spending and decreases in defense-related
employment has occurred during a period of strong increase in the gross
domestic product and in nondefense employment.  The defense reinvestment
and conversion initiative was established in 1993 to help ease the
displacement caused by defense downsizing.  Not all programs were tied
directly to DOD cuts, however.  Some individual programs in the
initiative also have purposes and will likely continue after the
initiative ends in fiscal year 1997.

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

 REPORTNUM:  NSIAD-95-105BR
     TITLE:  Defense Sector: Trends in Employment and Spending
      DATE:  04/19/95
   SUBJECT:  Defense procurement
             Reductions in force
             Defense industry
             Defense budgets
             Military downsizing
             Base closures
             Defense cost control
             Dual-use technologies
IDENTIFIER:  DOD Reinvestment and Conversion Initiative
             
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Cover
================================================================ COVER


Briefing Report to the Chairman, Committee on the Budget, House of
Representatives

April 1995

DEFENSE SECTOR - TRENDS IN
EMPLOYMENT AND SPENDING

GAO/NSIAD-95-105BR

Defense Sector


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

  BRAC - Base Realignment and Closure Commission
  DOD - Department of Defense
  SEMATECH - Semiconductor Technology

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


B-260487

April 19, 1995

The Honorable John R.  Kasich
Chairman, Committee on
 the Budget
House of Representatives

Dear Mr.  Chairman: 

This report responds to your request for data on (1) the extent of
the Department of Defense (DOD) and defense industry downsizing and
(2) defense reinvestment and conversion expenditures.  We briefed
your staff on our findings on February 10, 1995. 

In summary, the defense sector, as measured by DOD spending and DOD
and defense industry employment, has been shrinking, both in absolute
terms and relative to the U.S.  economy, since the mid-1980s. 
Declines in DOD spending and concomitant decreases in defense-related
employment have occurred during a period of strong increase in the
gross domestic product and in nondefense employment.  The defense
reinvestment and conversion initiative was established in 1993, in
part, to help ease the displacement caused by the defense sector
downsizing.  However, not all programs were tied directly to DOD
cuts.  Some individual programs contained in the initiative also have
other purposes and will likely continue after the initiative ends in
fiscal year 1997. 

Overall defense spending and employment peaked in the mid- to late
1980s and have steadily declined since then.  The most dramatic
drops, and those that have most directly affected the defense
industry, have been in the procurement accounts.  Defense-related
employment--active-duty military personnel, DOD civilian employees,
and defense industry employees--has followed the same pattern,
peaking in the mid- to late 1980s and declining since then.  Defense
industry employment has shown a slightly larger decrease than the
other components--35 percent since 1987. 

The level of defense industry activity and employment will depend in
part on the amount of future research and development and procurement
spending.  DOD expects the decline in procurement spending to bottom
out in 1996 and projects a 47-percent increase in procurement budget
authority, adjusted for inflation, from the 1996 level by 2001. 
Presently, however, further reductions in DOD employment and
infrastructure are expected.  For example, in anticipation of
upcoming base closure deliberations, DOD has identified
infrastructure reductions in addition to the 15 percent of bases
designated for closure in earlier rounds. 

The 5-year defense reinvestment and conversion initiative, started in
1993, is currently planned to continue through fiscal year 1997 and
combines some new and some existing programs.  Some programs, such as
separation pay, are directly tied to declines in defense spending and
are targeted to help individuals and communities cope with cutbacks
in military spending.  Other programs (1) provide assistance to
companies to develop dual-use technologies--that is, technologies
with both military and civilian applications or (2) generally support
the defense industrial base.  In commenting on a draft of this
report, DOD pointed out that since dual-use programs have long-term
objectives, they will continue after the administration's 5-year
initiative ends in 1997. 

The estimated cost of the administration's 5-year defense
reinvestment and conversion initiative has risen to $24.1
billion--$16.7 billion for technology initiatives and $7.4 billion
for worker and community assistance--from the original estimate of
$21.6 billion.  Projected spending was higher than initially proposed
in each of the first 4 years.  Existing programs, such as SEMATECH, a
consortium of semiconductor companies, were categorized as being part
of the defense reinvestment and conversion initiative after it was
announced in March 1993.  This accounts for at least part of the
spending increase from the initial proposal.  The executive branch's
fiscal year 1996 budget proposes $178 million less for fiscal year
1997 than the administration originally planned. 

Several indicators of the shrinking defense sector are (1) defense
employment relative to total employment and (2) defense spending as a
percentage of the gross domestic product.  Defense-related employment
as a percentage of total U.S.  employment reached a peak of 6.2
percent in 1987 and has declined to 3.8 percent in 1995.  Similarly,
defense spending as a percentage of gross domestic product peaked at
6.5 percent in the late 1980s and has since declined to 4.1 percent. 

Although defense spending and the defense industry have declined, the
U.S.  economy as a whole has expanded.  Since the late 1980s, total
nondefense-related employment has grown by 12 percent and the
nation's gross domestic product has increased by 18 percent.  Many
analysts forecast continuing growth over the near term. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :1

We obtained statistical data on defense spending and defense
conversion spending from DOD's Office of the Comptroller.  In
addition, we obtained information on other defense reinvestment and
conversion spending from officials at the Departments of Commerce and
Labor and from our ongoing work at the Department of Energy.  This
information includes estimates of future year requests. 

We obtained information on defense spending and defense-related
employment from DOD's Office of the Comptroller, except for fiscal
years 1996 and 1997 data on defense-related employment in private
industry.  We estimated these figures from previous years' data. 
Data on military base closures, including future estimates, were
obtained from senior DOD officials. 

We performed our work from December 1994 to February 1995 in
accordance with generally accepted government auditing standards.  We
did not obtain written agency comments.  However, we discussed the
data contained in this briefing report with senior DOD officials. 
They generally agreed with the information presented, but believed
that a fuller presentation of the Department's dual-use technology
was warranted.  We have made changes where appropriate, but this
report is not intended to be a comprehensive review of dual-use
technology. 


---------------------------------------------------------- Letter :1.1

We are providing copies of this briefing report to the Chairmen,
House and Senate Committees on Appropriations, the House Committee on
National Security, and the Senate Committee on Armed Services.  We
are also sending a copy of this report to the ranking minority
members of those committees and to the Secretary of Defense.  We will
provide copies to other interested parties

Please contact me at (202) 512-4587 if you or your staff have any
questions concerning this report.  The major contributors to this
briefing report were Katherine V.  Schinasi, Thomas P.  Hubbs, and
Thomas W.  Hopp. 

Sincerely yours,

David E.  Cooper
Director, Acquisition Policy, Technology,
 and Competitiveness Issues


Briefing Section I DEFENSE SECTOR
============================================================== Letter 

Briefing for House Committee on the Budget

Definitions

DOD Spending by Major Category



   (See figure in printed
   edition.)

   Source:  U.S.  Office of
   Management and Budget, Budget
   of the United States
   Government, fiscal year 1996
   and DOD briefing documents.

   (See figure in printed
   edition.)

Overall, spending decreased by over 35 percent from fiscal years 1985
to 1996.  The most pronounced drop occurred in procurement--over 70
percent. 

DOD projects a 47-percent increase in procurement budget authority,
adjusted for

DOD Spending and Defense-Related Employment



   (See figure in printed
   edition.)

   Source:  DOD, Office of
   Comptroller; however, GAO used
   previous years' data to
   extrapolate defense industry
   employees for fiscal years 1996
   and 1997.

   (See figure in printed
   edition.)

   Note:  Defense-related
   employment includes active-duty
   military, DOD civilian
   employees, and defense industry
   employees.

   (See figure in printed
   edition.)

DOD's budget authority and defense-related employment reached their
highest levels in the mid- to late 1980s and have declined since
then. 

Data on defense-related industry employment is reported on a biannual
basis by the Department of Labor's Bureau of Labor Statistics.  The
next report, expected in spring

Defense-Related Employment



   (See figure in printed
   edition.)

   Source:  DOD, Office of
   Comptroller; however, GAO used
   previous years' data to
   estimate private industry
   employees for fiscal years 1996
   and 1997.

   (See figure in printed
   edition.)

Total defense-related employment peaked at about 7 million workers in
1987 and declined to an estimated 4.8 million in 1995, a 32-percent
decrease.  Defense industry employment decreased by about 35 percent
from the 1987 peak but is still

DOD Procurement Spending and Industry Employment



   (See figure in printed
   edition.)

   Source:  DOD, Office of
   Comptroller.

   (See figure in printed
   edition.)

Procurement budget authority is expected to decrease by over 70
percent from fiscal years 1985 to 1996. 

Defense procurement spending decreased by over 65 percent from its
1985 peak, and defense industry employment decreased by 35 percent
from its 1987 peak.  The Department of Labor estimates that defense
industry employment will continue to decrease for the next 2 years. 

Since actual expenditures lag behind budget authority, employment may
continue to

Major Domestic Defense Base Closures



   (See figure in printed
   edition.)

   Source:  DOD, Office of
   Economic Security.

   (See figure in printed
   edition.)

   Note:  BRAC is the Defense Base
   Realignment and Closure
   Commission.

   (See figure in printed
   edition.)

To date, BRAC actions (1988, 1991, and 1993) represent a 15-percent
reduction in the number of facilities, from 495 to 425.  DOD
anticipates additional closings as a

Five-Year Defense Reinvestment and Conversion Initiative



   (See figure in printed
   edition.)

   Source:  Budget of the United
   States Government , fiscal year
   1995, DOD

   (See figure in printed
   edition.)

In March 1993, the administration announced a governmentwide 5-year,
$21.6-billion defense reinvestment and conversion initiative for
fiscal years 1993 through 1997. 

Assistance programs include separation benefits, education and
training, and economic adjustment planning grants to communities
affected by defense downsizing. 

Technology initiatives include long-term dual-use high-technology
investments.  Spending for technology initiatives associated with
defense reinvestment and conversion for all government programs is
expected to peak at $4.2 billion in fiscal year 1997. 

Governmentwide funding for worker and community assistance programs
increased for the first 3 years and then declined.  Governmentwide
funding for technology initiatives has continually increased, and DOD
said its program funding will continue

Defense Reinvestment and Conversion by Category



   (See figure in printed
   edition.)

   Source:  Budget of the United
   States Government , fiscal year
   1995, DOD and the Departments
   of Commerce, Energy, and Labor.

   (See figure in printed
   edition.)

About 30 percent of the defense reinvestment and conversion funding
is targeted to people and communities that are affected by defense
downsizing, including military base closures and defense industry
layoffs. 

About 70 percent of the funding supports technology initiatives. 
These include broader objectives of developing dual-use technologies
and generally supporting the

Defense Reinvestment and Conversion by Program



   (See figure in printed
   edition.)

   Source:  Departments of
   Commerce, Energy, Labor, and
   DOD.

   (See figure in printed
   edition.)

These programs represent the defense reinvestment and conversion
initiative as defined by the administration. 

Over 55 percent of technology initiative funding is for defense
dual-use programs. 

Funding has been provided through DOD and the Departments of
Commerce, Energy,

Defense Reinvestment and Conversion Initial and Revised Funding
Estimates



   (See figure in printed
   edition.)

   Source:  Initial Proposal
   (March 1993) - Office of
   Management and Budget.  Revised
   Funding Estimates (February
   1995) - Departments of
   Commerce, Labor, Energy, and
   DOD.

   (See figure in printed
   edition.)

Projected spending was higher than initially proposed for each of the
first 4 years of the defense reinvestment and conversion program.  In
the fiscal year 1996 budget, the administration is requesting $178
million less for fiscal year 1997 than originally anticipated. 

Existing programs, such as SEMATECH, were categorized as being part
of the defense reinvestment and conversion initiative after it was
announced in March 1993. 

DOD Spending and 5-Year Defense Reinvestment



   (See figure in printed
   edition.)

   Source:  DOD, for national
   defense spending; and the
   Departments of Commerce,
   Energy, Labor, and DOD for
   defense reinvestment and
   conversion spending.

   (See figure in printed
   edition.)

Programs within the defense reinvestment and conversion initiative
were to mitigate

Defense Employment and Reinvestment/Conversion



   (See figure in printed
   edition.)

   Source:  DOD, Office of
   Comptroller; however, GAO used
   previous years' data to
   extrapolate defense industry
   employees for fiscal years 1996
   and 1997.

   (See figure in printed
   edition.)

   Note:  Defense-related
   employment includes active-duty
   military, DOD civilian
   employees, and defense-related
   private industry employees.

   (See figure in printed
   edition.)

Programs within the defense reinvestment and conversion initiative
were to mitigate the impacts of decreases in defense-related
employment.  Some are mandated

Defense Employment as Percentage of Total Employment



   (See figure in printed
   edition.)

   Source:  DOD, Office of
   Comptroller.

   (See figure in printed
   edition.)

   Note:  Total defense-related
   employment includes active-duty
   military, DOD civilian
   employees, and defense-related
   private industry employees.

   (See figure in printed
   edition.)

Defense employment as a percentage of overall employment peaked at
6.2 percent in fiscal year 1987 and has steadily decreased to an
estimated 3.8 percent in fiscal

Defense Spending as Percentage of Gross Domestic Product



   (See figure in printed
   edition.)

   Source:  DOD, Office of
   Comptroller.

   (See figure in printed
   edition.)

Defense spending as a percentage of the gross domestic product peaked
at 6.5 percent in fiscal years 1986 and 1987 and has declined to an
estimated 4.1 percent

Growth in Nondefense-Related Employment



   (See figure in printed
   edition.)

   Source:  Department of Labor.

   (See figure in printed
   edition.)

Nondefense-related employment grew from 106.5 million workers to
119.5 million, a

Gross Domestic Product



   (See figure in printed
   edition.)

   Source:  DOD, Office of
   Comptroller.

   (See figure in printed
   edition.)

The gross domestic product grew from $5.8 trillion to $7.1 trillion,
an 18-percent increase from fiscal year 1987 to fiscal year 1995.