Defense Management: Estimating Impact of Changes to Commissary Access
Policy (Letter Report, 12/20/96, GAO/NSIAD-97-45).

Commissaries are stores that sell groceries and household supplies to
members of the military, retirees, and their dependents. The Defense
Commissary Agency manages all service commissaries worldwide and has
received an average of about $1 billion in federal support annually
during the past five years. The Defense Department (DOD) has proposed
allowing reservists unlimited access to commissaries three times in the
recent past. DOD officials view this policy change as a low- or no-cost
way to increase military service benefits. This report discusses the (1)
evolution of the policy on military reservists' access to the
commissaries and proposals to change that policy, (2) sources of the
Defense Commissary Agency's funding, and (3) information needed to
analyze the impact on appropriated funds of granting military reservists
unlimited access to the commissary system.

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

 REPORTNUM:  NSIAD-97-45
     TITLE:  Defense Management: Estimating Impact of Changes to 
             Commissary Access Policy
      DATE:  12/20/96
   SUBJECT:  Military reserve personnel
             Appropriated funds
             Post exchanges
             Financial analysis
             Defense cost control
             Sales taxes
IDENTIFIER:  DOD Surcharge Collections Fund
             DOD Reserve Components Survey
             DOD Commissary Patron Demographic Survey
             
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Cover
================================================================ COVER


Report to Congressional Committees

December 1996

DEFENSE MANAGEMENT - ESTIMATING
IMPACT OF CHANGES TO COMMISSARY
ACCESS POLICY

GAO/NSIAD-97-45

Defense Management

(709194)


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

  DeCA - Defense Commissary Agency
  DOD - Department of Defense
  IRR - Individual Ready Reserve

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


B-272685

December 20, 1996

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

Conference Report 104-261 directed us to review proposals to change
the Department of Defense (DOD) policy that limits military
reservists' access to commissary stores.  Commissaries are stores
that sell groceries and household supplies to members of the
military, retirees, and their dependents.  The Defense Commissary
Agency (DeCA) manages and operates all service commissaries located
worldwide and has received an average of about $1 billion in federal
government support annually over the past 5 years.  DOD has proposed
allowing reservists unlimited access to commissaries three times in
the recent past.  DOD officials view this policy change as a low or
no cost way to increase military service benefits.  Specifically,
this report discusses

  -- the evolution of the policy on military reservists' access to
     the commissaries and proposals to change that policy,

  -- the sources of DeCA's funding, and

  -- the information needed to analyze the impact on appropriated
     funds of granting military reservists unlimited access to the
     commissary system. 


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

Military commissaries have existed for many years and provide a
nonpay benefit to U.S.  military personnel.  They sell tax-free food
and household items at cost\1 plus a 5-percent surcharge. 

DeCA is responsible for operating DOD's worldwide commissary system. 
It was established in October 1991 to consolidate the four separate
commissary systems then operated by the military services. 
Headquartered at Fort Lee, Virginia, DeCA is organized into 7 regions
and employs about 18,000 people.  It operates a system of 309
stores--209 in the continental United States and 100 overseas. 
According to DeCA, it is the ninth largest food retailer in the
United States and has total annual sales of approximately $5 billion
with U.S.  stores generating about 75 percent of the sales. 

The eligible commissary customer base totals over 11 million people
consisting of about 3.8 million active duty personnel and their
family members; about 2.3 million Selected Reservists\2 and their
spouses and children; and almost 4.9 million retired military
personnel, which includes their spouses and children.  In addition,
the customer base includes a number of "Gray Area" retirees,\3 some
members of the Individual Ready Reserve (IRR),\4 Medal of Honor
recipients, veterans with a 100-percent disability, and civil
servants (including diplomats) and their dependents overseas.  The
active duty community has unlimited access privileges to the
commissaries as do the other members of the customer base. 
Reservists, on the other hand, are (1) authorized 12 visits per year
if they have earned a minimum number of points creditable for
retirement and (2) access during any period of active duty service. 
According to DeCA, military retirees account for almost half of its
customer patronage.  DeCA employees in the continental United States
are not authorized to shop in commissaries. 


--------------------
\1 The cost of commissary resale items basically equals the
acquisition cost from the suppliers that includes the cost of
transportation to the place of receipt by the government within the
continental United States, Alaska, and Hawaii.  Cost does not include
(1) transportation costs for shipment overseas or (2) any costs to
operate the commissary system, e.g., labor, utilities, equipment,
supplies, real property maintenance, and nonpersonnel general and
administrative costs. 

\2 Selected Reservists participate in periodic unit training and
usually participate in a 2-week active duty training period during
each year. 

\3 These are retired reservists who are eligible for retired pay at
age 60 but have not yet reached that age. 

\4 These reservists do not routinely participate in periodic unit
drills and would be activated individually, not as part of a unit,
during a time of crisis. 


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

Commissary access for military reservists before 1986 was limited to
a maximum of 14 days and was authorized only during periods of active
duty training.  Since 1990, reservists have been authorized to earn
12 visits a year to the commissary system in addition to access
during any period of active duty service.  DOD has submitted three
proposals since 1990 to grant reservists unlimited access; however,
none have been adopted by Congress because of concerns about the
impact such a change might have on the level of appropriated funds
and the concerns expressed by civilian grocery providers about the
impact on their businesses. 

The commissary system is funded primarily from an annual
appropriation that has averaged about $1 billion for fiscal years
1992 through 1996.  The other funding source is the 5-percent
surcharge that is added to each sale in all commissary stores.  This
source has provided an average of about $315 million over the same
period.  Appropriated funds are used primarily to cover the labor
costs of the commissary system and the transportation of U.S.  goods
to overseas stores. 

While DOD has proposed legislation to grant reservists unlimited
commissary access, it has not developed estimates of the potential
financial impacts of such a policy change.  Further, while DOD could
obtain the data necessary to develop such estimates, it has not
collected or compiled such data.  Potentially, any increase in the
commissary customer base, such as granting unlimited access to
reservists, could increase the sales and overall workload of the
commissary system and increase personnel costs.  Higher personnel
costs could, in turn, increase the level of appropriated funds needed
for commissary operations or, at least, cause funding levels to be
higher than they would otherwise be. 

DOD's fiscal year 1996 and 1997 proposals called for variations of a
1-year field test to identify the effects of increased access for
reservists on commissary operations.  Field tests would give specific
individuals unlimited commissary access for 1 year to develop impact
studies.  The difficulty with such a test is that it runs the risk of
appearing to withdraw a benefit following the test's conclusion. 

We believe that a methodologically sound study, using data that could
be developed by DOD and DeCA, could provide reliable estimates of the
financial impact of granting reservists unlimited commissary access. 
Key elements of such a study would be to (1) establish baseline data
by determining the current level of reservist patronage of the
commissary system, (2) correlate commissary locations in the United
States with reservist population concentrations to identify locations
with the potential to experience increased patronage, and (3)
estimate the effects of increased commissary sales/workloads on
operating costs (primarily personnel) and the level of appropriated
fund support needed. 


   EVOLUTION OF COMMISSARY ACCESS
   POLICY FOR RESERVISTS
------------------------------------------------------------ Letter :3

Prior to 1986, Selected Reservists were allowed commissary privileges
only during periods of active duty--normally 14 days during each
year--but not during weekend drills.  In 1986, Selected Reservists
were authorized to use the commissary once for each day of active
duty training up to a maximum of 14 times.  These commissary visits
could be used anytime during the 1-year period following the
completion date of active duty training. 

The current reservist access policy was established in 1990.  That
year, legislation set access for all members of the Ready
Reserve--Selected Reservists and certain members of the IRR--who earn
at least 50 retirement points per year the right to a minimum of 12
commissary visits per year.  "Gray Area" retirees were also
authorized 12 visits each calendar year.  Reservists entitled to
commissary access are issued a special card that is punched each time
a purchase is made at a commissary. 

Since 1993, DOD has proposed changing commissary policy three times
to allow reservists unlimited access; however, neither DOD nor DeCA
have performed any studies to examine or analyze the potential
financial impact of these suggested policy changes.  None of the
proposals were adopted by Congress.  The first was submitted for
fiscal year 1994 and would have granted reservists, including "Gray
Area" retirees, the same unlimited access as active duty personnel. 
For fiscal year 1996, DOD proposed that "Gray Area" retirees be
granted permanent, unlimited commissary access and that the other
reservists be provided unlimited access for a 1-year test period. 
For fiscal year 1997, DOD proposed a 1-year test of unlimited
benefits for all reservists (including dependents) at one or more
areas in the United States.  No plans have been developed to conduct
the field tests proposed in fiscal years 1996 and 1997. 


      OPINIONS REGARDING
      RESERVISTS' UNLIMITED ACCESS
      TO COMMISSARIES
---------------------------------------------------------- Letter :3.1

Officials in DOD and DeCA and representatives of industry and
military associations hold varying opinions concerning unlimited
commissary access for reservists; however, none of the organizations
or offices we visited had performed any analysis or conducted any
studies to support their particular views. 

DOD officials who are responsible for personnel and reserve affairs
proposed the initiative and believed that the effects on appropriated
funding levels would be minor or nonexistent.  They stated that the
proposed policy change was the "right thing to do," and would not
likely affect private sector grocers adversely.  On the other hand,
an official in the DOD Comptroller's office expressed reservations
about the policy change because it could potentially lead to the
hiring of additional personnel, thereby increasing the need for
appropriated funding.  DeCA officials stated that they did not know
what the financial impact would be and that the agency would carry
out any policy established by DOD and Congress. 

Representatives of the Reserve Officers' Association and the Military
Coalition strongly support unlimited commissary access for reservists
on the basis that this change would take away what they perceive as a
"second class citizen" stigma for reservists when compared to the
active military.  These groups also said that the proposed change
would not greatly affect private sector supermarkets. 

Representatives from the Food Marketing Institute, a food industry
association and lobby group, told us that their organization did not
support the proposed change, had lobbied strongly against it, and
believed the food industry would lose customers and sales if
reservists were given unlimited commissary access. 

The Congressional Budget Office is conducting an overall review of
DOD's resale operations, which include the exchange systems;
commissaries; and morale, welfare and recreation activities.  An
initial report is expected in late 1996 or early 1997.  This work is
being performed for the House Committees on Budget and Government
Reform and Oversight.  Broad objectives include examining overall
costs, identifying any hidden costs, and determining the worth or
value of these activities to their patrons. 


   COMMISSARY FUNDING SOURCES
------------------------------------------------------------ Letter :4

Commissary funding is obtained from two primary sources--an annual
appropriation and a surcharge added to each sale.  For fiscal years
1992 to 1996, DeCA's total obligations have averaged about $1.31
billion annually, about $1 billion (over 70 percent) in appropriated
funds and $315 million from the surcharge.  Because appropriated
funds pay for DeCA's personnel costs, there is a valid concern that
the need for appropriated funds would increase if the customer base
expanded and sales increased.  Appendix II presents additional data
on commissary funding. 


      APPROPRIATED FUNDS
---------------------------------------------------------- Letter :4.1

The largest funding source is the annual congressional appropriation. 
DeCA has received an average of about $1 billion annually for the 5
years of its existence.  Appropriated funds are used primarily to
cover two operating expenses:  (1) labor costs (civilian employee
salaries and personnel contracts) and (2) the transportation of U.S. 
goods to overseas stores.  Appropriated fund support in 1996 totaled
almost $879 million.  Of this total, $595 million went toward labor
costs, $149 million for transportation, and $135 million for
nonpersonnel administrative and other expenses. 


      SURCHARGE COLLECTIONS
---------------------------------------------------------- Letter :4.2

Military commissaries are nonprofit organizations that sell
merchandise at cost plus a 5-percent surcharge.  The surcharge is
placed into the revolving Surcharge Collections Fund from which DeCA
has obligated, on average, about $315 million annually.  The
surcharge is used to pay for (1) facilities, maintenance, and
operating supplies, such as paper bags and packaging materials; (2)
construction of new commissaries and the renovation of older stores;
and (3) some equipment, including data processing items. 


   INFORMATION NEEDED TO ASSESS
   THE IMPACT OF POLICY CHANGE
------------------------------------------------------------ Letter :5

The actual financial impact, if any, of allowing reservists unlimited
access would depend on the extent of additional commissary sales and
increased costs generated as a result of programmatic changes DeCA
might make to accommodate any increase in sales.  These changes, such
as additional hiring and store expansion or renovation, could take
some time to occur and to have a measurable impact on operations. 

DOD proposed in fiscal year 1996 that a nationwide field test be
conducted for a 1-year period to evaluate the impact of unlimited
access by reservists.  In fiscal year 1997, DOD suggested another
test at one or more areas in the United States.  Both suggestions
would require temporarily granting access to commissaries to all
reservists or, at least, those in a certain area or areas.  The
primary concern with testing unlimited accessibility is that
withdrawal of the benefit later could have a negative impact on
morale and on the perception of the benefits of military service. 

We believe DOD and DeCA could develop reliable estimates of the
potential impact of this policy change using a study and data
analysis approach and that such an approach would be more appropriate
than a field test.  Key elements of such a study are discussed in the
following sections. 


      ESTIMATING CURRENT
      COMMISSARY PATRONAGE
---------------------------------------------------------- Letter :5.1

The first step in analyzing the impact of opening the commissaries to
reservists is to determine how many personnel in each category (e.g.,
"Gray Area" retirees, Selected Reservists, IRR, active duty, etc.)
use the commissaries.  This information could be developed by DeCA
using recognized survey techniques.  While DOD has conducted two
surveys involving reservists in the past several years, neither has
provided adequate or sufficient information regarding reservist
usage. 

  -- A 1992 DOD Reserve Components Survey was done to gain insight
     into the utilization of and satisfaction with military
     facilities by reserve officers, enlisted personnel, and their
     spouses.  It did not attempt to estimate the overall commissary
     patronage level attributable to reservists or project their
     usage to the system as a whole.  This survey disclosed that 39
     percent of reservists reported that they used the commissary
     system; however, 61 percent said they did not.  Sixty eight
     percent of all reservists surveyed cited distance from the
     commissary as a factor that limited their usage of the system
     while the policy restricting reservists' access to commissaries
     was reported by 25 percent. 

  -- A 1994 Commissary Patron Demographic Survey developed
     information to describe certain aspects of the typical
     commissary customer and estimated that reservists represented
     about 5 percent of commissary patronage.  However, according to
     DeCA officials as well as our analysis, the survey results were
     not projectable to a systemwide perspective because of flaws in
     methodology.  Specifically, (1) the distribution of commissaries
     selected for the survey was based on the distribution of the
     general population--not the population distribution of
     reservists in the United States--and (2) the survey was
     conducted during a holiday period that did not represent normal
     operations. 


      COMMISSARY LOCATIONS,
      RESERVIST POPULATIONS, AND
      INCREASED USAGE
---------------------------------------------------------- Letter :5.2

To identify locations where increased patronage is most likely, DeCA
needs to analyze the locations of commissaries in relation to
concentrations of reservists and the distances to individual stores. 
Reservists are located throughout the United States, but, only 209
stores were available within the continental United States in 1996. 
This means that many reservists are not located close to a store and,
therefore, may not be able to use the system on a regular basis. 
Analyzing demographic data that reflects the location of reservists
in relation to available commissary stores and baseline estimates of
existing patronage levels in the overall system should identify those
geographic areas where increased sales are likely or possible.  The
distribution of stores is shown in table 1. 



                                Table 1
                
                Commissary Store and State Distribution
                                Summary

Stores per state                  Number of states        Total stores
------------------------------  ------------------  ------------------
0                                                6                   0
1                                               13                  13
2                                               11                  22
3                                                2                   6
4                                                8                  32
5                                                4                  20
6                                                2                  12
7 or more                                        8                 108
======================================================================
Total                                           54                 213
----------------------------------------------------------------------
Note:  State and store totals include the District of Columbia as
well as three locations outside the continental United States--Puerto
Rico, Guam, and the U.S.  Virgin Islands. 

Stores likely to experience sales increases could be identified by
analyzing the demographic data and determining the baseline estimates
of existing patronage levels.  Potential sales increases could be
estimated by several approaches or a combination thereof.  For
example, (1) reservists could be surveyed by interview at commissary
stores determined to be most likely to experience increased
patronage, (2) reservists could be surveyed on a nationwide basis to
gain insight into any anticipated changes in buying patterns and
commissary usage, and (3) commissary store managers could be
interviewed for their views and estimates of potential increases (if
their estimates were thought to be reliable).  The costs and
reliability of the results would vary under each approach; therefore,
a judgment weighing the tradeoffs would be necessary to determine the
specific approach to use. 


      ESTIMATE OF THE EFFECT OF
      SALES INCREASE ON FUNDING
      LEVELS
---------------------------------------------------------- Letter :5.3

DOD and DeCA need to develop a detailed understanding of how
increased sales would affect store costs, in particular labor costs,
and commissary store workloads (sales levels, customer volumes, store
hours, etc.).  Such an understanding is important to the process of
projecting the level of increase that would likely trigger actions
affecting appropriated funding levels--additional personnel hours,
overtime, and additional hiring. 

A major supermarket chain operating in the Washington, D.C., area
uses a methodology that involves the comparison of historical store
sales and payroll hours to estimate and project the effect of
increased sales on personnel and other costs at new stores or at
existing stores with changing demographics.  For example, comparing
the personnel and other costs of a store with annual sales of $20
million to one with 10-percent higher sales, that is, one with sales
of $22 million, provides valuable and reliable indications of the
additional number of personnel hours needed to support a 10-percent
increase at a store with historical sales of $20 million. 

Such a methodology could be applied to the commissary system to
develop a range of estimates of the impact on personnel and other
costs generated from various percentages of projected increased
patronage and sales from reservists, that is, 5, 10, 15, 20, etc. 
The increased personnel costs, if any, calculated at store and
regional levels for each projected sales increase would roughly equal
the potential impact range on the level of appropriated fund support
resulting from granting reservists unlimited commissary access. 


   RECOMMENDATION
------------------------------------------------------------ Letter :6

We recommend that the Secretary of Defense ensure that any future
legislative proposal to expand commissary access for military
reservists be supported by a methodologically sound analysis that
estimates the potential impact on appropriated fund support for the
commissary system. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :7

DOD concurred with our recommendation and stated that DeCA and the
Office of the Assistant Secretary of Defense (Reserve Affairs) will
jointly develop a survey targeted to ascertain the impact expansion
of commissary access to military reservists will have on the
commissary system.  According to DOD, the results of the survey and
subsequent analysis will be used to determine the feasibility of
future legislative proposals to expand commissary access to military
reservists.  Where appropriate, we have incorporated DOD's comments
and other points of clarification throughout the report. 

Appendix I explains our scope and methodology.  Appendix II shows
charts depicting budget and obligation information for DeCA since it
was established.  Appendix III contains a reproduction of DOD's
comments.  The major contributors to this report are listed in
appendix IV. 

We are sending copies of this report to interested congressional
committees and Members of Congress; the Secretary of Defense; the
Director, DeCA; and the Director, Office of Management and Budget. 
We will also make copies available to others on request. 


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

Please contact me at (202) 512-8412 if you or your staff have any
questions concerning this report. 

David R.  Warren, Director
Defense Management Issues


SCOPE AND METHODOLOGY
=========================================================== Appendix I

Our study of the Department of Defense (DOD) policy regarding access
to the commissary system by military reservists and proposed changes
to allow unlimited access was conducted primarily at offices in the
Office of the Secretary of Defense in the Pentagon and at Defense
Commissary Agency (DeCA) headquarters at Fort Lee, Virginia. 

We interviewed DeCA officials and reviewed and analyzed financial
data for headquarters, regions, and commissaries within those regions
to obtain information regarding DeCA's budget and funding sources and
the application of funds from each source.  We did not verify the
accuracy of the data provided by these officials.  At Fort Lee,
Virginia, we toured the commissary store and interviewed the manager
to obtain information on commissary prices, sales, and operations. 

We interviewed DOD officials in the offices of the Assistant
Secretary of Defense (Reserve Affairs), the Assistant Secretary of
Defense (Force Management and Personnel), and the DOD Comptroller's
Office to gain information on the rationale for granting reservists
unlimited commissary access and their views on the issue.  We were
also briefed by representatives of the Reserve Officers' Association,
the Military Coalition, and the Food Marketing Institute.  In
addition, we contacted a local grocery chain to discuss its methods
to evaluate and project sales increases on their operations and
costs. 

We conducted our review from April 1996 to December 1996 in
accordance with generally accepted government auditing standards. 


DECA SALES, BUDGET, AND OBLIGATION
INFORMATION
========================================================== Appendix II

   Figure II.1:  Number of
   Continental U.  S.  Stores and
   Sales Data, Fiscal Years
   1986-95

   (See figure in printed
   edition.)

Source:  DeCA. 

   Figure II.2:  Average Annual
   Appropriated Fund and Surcharge
   Obligations, Fiscal Years
   1992-96

   (See figure in printed
   edition.)

Note:  APF--appropriated funds. 

Source:  DeCA. 

   Figure II.3:  Average Annual
   Surcharge Obligations, Fiscal
   Years 1992-96

   (See figure in printed
   edition.)

Note:  ADP--automated data processing. 

   Source:  DeCA.

   (See figure in printed
   edition.)

   Figure II.4:  DeCA
   Appropriations, Fiscal Years
   1992-96

   (See figure in printed
   edition.)

Source:  DeCA. 




(See figure in printed edition.)APPENDIX III
COMMENTS FROM THE DEPARTMENT OF
DEFENSE
========================================================== Appendix II


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix IV

NATIONAL SECURITY AND
INTERNATIONAL AFFAIRS DIVISION,
WASHINGTON, D.C. 

Brad Hathaway, Associate Director
Foy Wicker, Assistant Director
Jennifer Thomas, Evaluator-in-Charge

OFFICE OF GENERAL COUNSEL

Raymond J.  Wyrsch

ECONOMIC ANALYSIS GROUP

Charles W.  Perdue

*** End of document. ***