Defense Budget: Observations on the Air Force Flying Hour Program (Letter
Report, 07/08/1999, GAO/NSIAD-99-165).

During 1997 and 1998, the Air Force reported funding deficits of $171
million and $200 million in its flying hour program. It expects a
similar deficit for 1999. The Air Force, concerned that shortfalls in
this program would curtail flying operations and pose a serious risk to
the readiness of aviation units, requested and received additional money
for this program in each fiscal year. Members of Congress have raised
concerns about the validity and accuracy of the Air Force's budget
formulation process for its flying hour program. This report (1)
identifies the extent to which the Air Force has flown the hours
requested in its budget, (2) describes the process that the Air Force
uses to determine flying hour requirements, (3) discusses how the
requirements and specific cost factors are used to develop the budget
estimate for the flying hour program, and (4) compares program funding
and obligations incurred in 1997 and 1998 and provides the reasons for
the difference.

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

 REPORTNUM:  NSIAD-99-165
     TITLE:  Defense Budget: Observations on the Air Force Flying Hour
	     Program
      DATE:  07/08/1999
   SUBJECT:  Military cost control
	     Military aircraft
	     Flight training
	     Air Force supplies
	     Combat readiness
	     Avionics
	     Spare parts
	     Military budgets
	     Prices and pricing
IDENTIFIER:  Air Force Ready Aircrew Program
	     Air Force Automated Budget Interactive Data Environment
	     System
	     Air Force Working Capital Fund
	     Air Force Flying Hour Program

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    United States General Accounting Office GAO                 Report
    to the Chairman and the Ranking Minority Member, Subcommittee on
    Defense, Committee on Appropriations U.S. Senate July 1999
    DEFENSE BUDGET Observations on the Air Force Flying Hour Program
    GAO/NSIAD-99-165 United States General Accounting Office
    National Security and Washington, D.C. 20548
    International Affairs Division B-282754
    Letter July 8, 1999 The Honorable Ted Stevens Chairman The
    Honorable Daniel K. Inouye Ranking Minority Member Subcommittee on
    Defense Committee on Appropriations United States Senate This
    report responds to your request that we study the Air Force's
    budget formulation process for its flying hour program for fiscal
    years 1997 through 1999.  During fiscal years 1997 and 1998, the
    Air Force reported funding deficits of $171 million and $200
    million, respectively, in its flying hour program, and it projects
    a similar deficit for fiscal year 1999. Concerned that shortfalls
    in this program would curtail flying operations and in turn pose a
    serious risk to the readiness of Air Force aviation units, the Air
    Force requested and received additional money for the program in
    each fiscal year. The requests for additional funding raised
    concerns in Congress about the validity and accuracy of the Air
    Force's budget formulation process for its flying hour program.
    As agreed with your offices, this report (1) identifies the extent
    to which the Air Force has flown the hours requested in its
    budget, (2) describes the process that the Air Force uses to
    determine flying hour requirements, (3) discusses how the
    requirements and specific cost factors are used to develop the
    budget estimate for the flying hour program, and (4) compares
    program funding and obligations incurred in fiscal year 1997 and
    fiscal year 1998 and provides reasons for the differences.
    Background                          The Air Force's flying hour
    program comprises the number of hours needed to attain and
    maintain combat readiness and capability for its aircrews, to test
    weapon systems and tactics, and to fulfill collateral requirements
    such as air shows, demonstration rides for VIPs, and ferrying
    aircraft.  The number of hours required is determined annually at
    the major commands by operations and training personnel. Letter
    Page 1                                          GAO/NSIAD-99-165
    Defense Budget B-282754 Air Force documents show that funding for
    active Air Force flying hours was about $2.8 billion for fiscal
    year 1998.  The funds are part of the congressional appropriation
    for Air Force Operation and Maintenance, which totals about $20
    billion annually.  Air Force headquarters distributes the flying
    hour funds to its eight major commands, which have the
    responsibility of managing the funds.  The major commands use the
    operation and maintenance dollars to pay for fuel, maintenance,
    and spare parts in support of flying operations.1 The Air Force
    flying hour program is not reflected as a separate line item in
    the operation and maintenance appropriation.  The budget is
    organized by budget activity groups, activity groups, and sub-
    activity groups; flying hour costs are spread throughout this
    budget structure by the use of program element codes.  These
    program elements are used as the basic building blocks for
    identifying resource requirements in the Air Force's portion of
    the President's budget.  Costs per flying hour in fiscal year 1998
    were expensed within 39 program element codes spread throughout 12
    sub-activity groups. Results in Brief        In the last 4 years,
    the Air Force has requested funding for more flying hours than it
    has been able to fly.  From fiscal year 1995 through fiscal year
    1998, the Air Force flew fewer hours than were programmed, ranging
    from a low of about 89 percent of programmed hours in fiscal year
    1995 to a high of about 94 percent in fiscal year 1996.
    Programmed hours were not flown for a variety of reasons,
    including deployments, bad weather, and maintenance or supply
    problems.  The Air Force did not cite a shortage of flying hour
    funding as a cause for underflying the program. In July 1997, the
    Air Force changed its method for determining its flying hour
    requirements by better linking these hours to missions required
    for maintaining readiness and proficiency.  For fighter and bomber
    aircraft, for example, the Air Combat Command has two readiness
    levels-basic mission-capable and combat mission-ready.   For each
    level, the new method specifies the number of sorties required,
    the training events to be accomplished, and the hours required for
    accomplishing them.  The Air Force Chief of Staff has also
    emphasized to its major commands the need 1The Air Force's major
    commands include Air Combat Command, Air Education and Training
    Command, Air Force Academy, Air Forces Europe, Air Mobility
    Command, Air Force Material Command, Pacific Air Forces, and Space
    Command. Letter    Page 2
    GAO/NSIAD-99-165  Defense Budget B-282754 to fly all programmed
    hours in fiscal year 1999.  The remainder of this fiscal year
    should serve as a good indication of the Air Force's general
    ability to fly the hours it says are needed to maintain combat
    readiness and proficiency while maintaining support for
    contingencies in Europe and Southwest Asia. The methodology used
    by the Air Force to cost out the flying hour program depends
    heavily on stable prices for its repairable and consumable spare
    parts.  Management problems in determining prices for these items
    have led to multiple price changes that have, in turn, led the Air
    Force to believe it would exhaust its flying hour funding before
    the end of the fiscal year.  As a result, for the last 2 fiscal
    years, it requested, and received, additional congressional
    funding for its flying hour program that ultimately proved to be
    in excess of its requirements since it flew fewer hours than
    programmed.  In total, Congress provided about $5 million more for
    the flying hour program than the Air Force's obligations during
    fiscal year 1997 and about $357 million more than its obligations
    in fiscal year 1998. Ultimately, these excess funds were used to
    support unmet needs for funding in other operation and maintenance
    programs, such as real property maintenance and base operation
    support. The Air Force is currently implementing our prior
    recommendations aimed at improving the financial operations of the
    Air Force's supply management activity group.  Continued progress
    in implementing these recommendations should enable the Air Force
    to provide the pricing stability needed to more accurately assess
    the adequacy of its flying hour funding as the budget year
    progresses.  Therefore, we are not making any additional
    recommendations at this time. Historically, Air Force  During
    fiscal years 1995 through 1998, the Air Force each year requested
    Flying Hour                       funding for more flying hours
    than its flying units were able to execute. Annually, the major
    commands are asked to determine the number of hours Requirements
    Have                 needed to attain and maintain combat
    proficient aircrews and to complete Exceeded the Number
    collateral flying requirements.  In making this determination,
    command of Hours Units Could              personnel consider the
    frequency of flying (number of sorties or hours) and specific
    training events each aircrew must accomplish.  The flying Fly
    requirements, expressed in hours, become the basis for the funding
    requested in the President's budget.  From fiscal year 1995
    through fiscal year 1998, the total Air Force requirement remained
    fairly constant at about 1.3 million hours each year. Page 3
    GAO/NSIAD-99-165  Defense Budget B-282754 In each fiscal year the
    Air Force flew fewer hours than were programmed. This ranged from
    a low of about 89 percent of the programmed hours in fiscal year
    1995 to a high of about 94 percent in fiscal year 1996.  The hours
    programmed and the percent flown are shown in table 1. Table 1:
    Air Force Flying Hours Programmed and Percentage Flown (fiscal
    years 199598) Fiscal
    President's                            Percent year
    budget (hours)                                 flown 1995
    1,453,501                                88.7 1996
    1,327,155                                93.7 1997
    1,285,695                                91.7 1998
    1,290,256                                92.5 Note: The numbers
    and percentages shown in table 1 are aggregates; the actual hours
    and percentages flown vary among each flying unit.  For example,
    the aggregate for fiscal year 1998 was 92.5 percent, but as we
    reported in Air Force Supply: Management Actions Create Spare
    Parts Shortages and Operational Problems (GAO/NSIAD/AIMD-99-77,
    April 1999), the B-1B and the F-16 aircraft in the Air Combat
    Command flew only 83 percent of their total flying hours during
    fiscal year 1998. Source: Department of the Air Force. As each
    unit recognizes that it will be unable to fly its programmed
    hours, it "turns in" the hours to the major command and provides
    the reason for doing so.  The reasons for not flying the program
    varied, but a shortage of flying hour funding was not cited as one
    of them.  The reasons that were cited by units from the Air Combat
    Command and Air Mobility Command included * supporting
    contingencies (such as enforcing the no-fly zone in Iraq), *
    evacuation of aircraft due to hurricanes, * aircraft grounded for
    safety considerations, and * higher than normal non-mission-
    capable rates due to maintenance and supply problems. The flying
    hour requirement in the budget request does not include flying in
    support of contingency operations such as those in Bosnia and
    Iraq. However, hours flown in support of contingency operations
    are counted against programmed hours already funded in the
    President's budget up to the number of hours an aircraft would
    have flown at its home station.  For additional hours flown, the
    Air Force receives additional funding from a centrally managed
    Department of Defense (DOD) contingency account. Page 4
    GAO/NSIAD-99-165  Defense Budget B-282754 For example, in fiscal
    year 1998, Air Combat Command units flew about 79,400 hours in
    support of contingencies; about 54,500 hours were counted against
    the programmed hours, and funding was received for the remaining
    24,900 hours. Air Force Has Revised  In mid-1996, the Air Force
    Chief of Staff expressed concern that the service Its Requirements
    was not fully executing its flying hour program and emphasized
    that it is Air Force policy to fly the complete program.
    Accordingly, he tasked the major Determination
    commands with (1) revalidating their flying hour requirements to
    ensure Processes to Better               that they were adequate
    to meet readiness levels and (2) addressing their Link Flying
    Hours to              ability to execute these hours.  The Acting
    Secretary of the Air Force reported to Congress in March 1998 that
    these actions had been completed. Mission-Oriented Training
    Programs                 In response to these concerns, the major
    commands revised their requirements determinations processes to
    tie them more closely to mission-oriented training programs.  The
    Air Combat Command, for example, developed and implemented the
    Ready Aircrew Program, which incorporates a computer model to
    determine flying hour requirements for its fighters and bombers.
    Air Force officials said that the new system links flying hour
    training with warfighting commanders in chief requirements and
    standardizes the methodology for determining the hours needed to
    ensure combat proficiency.  The Air Mobility Command has adopted a
    similar, model-based approach to determining its requirements.2
    The basis for Air Combat Command's requirements model is their
    task-based Ready Aircrew Program.  The Ready Aircrew Program is
    the continuation-training program designed to focus training on
    capabilities needed to accomplish a unit's core missions.  The
    program establishes two levels of proficiency: basic mission-
    capable and combat mission-ready. Each level is defined by a total
    number of Ready Aircrew Program sorties, broken down into mission
    types, plus specific weapons qualifications and associated events.
    For example, an experienced F-16 pilot would require 60 sorties
    annually to achieve basic mission-capable and 96 sorties to
    achieve combat mission-ready status.  The level that individual
    pilots are required to maintain is determined by their position in
    the unit; for example, all line pilots, commanders, and operations
    officers must 2Previously, the commands based requirements largely
    on training programs that required a specific number of sorties or
    hours per pilot, but did not use models to standardize the
    calculations by aircraft type. Page 5
    GAO/NSIAD-99-165  Defense Budget B-282754 maintain combat mission-
    ready, while staff officers fly at the basic mission- capable
    level.  Guidelines for mission types and weapons qualifications
    are provided in the training manual for each aircraft, but these
    are supplemented by unit-specific requirements issued annually by
    the major command. These sortie requirements are factors used in
    the computer model, which calculates the total sortie requirements
    for each flying unit.  Other factors the model considers are as
    follows: * The number of primary aircrews (line pilots).  These
    pilots must maintain combat mission-ready status. * The experience
    mix of the pilots assigned.  An inexperienced pilot (generally, a
    pilot with less than 500 hours logged in the aircraft) requires 20
    more sorties per year than an experienced pilot. * The number of
    attached pilots.  Staff officers who are required to maintain
    basic mission-capable status are attached to the unit to satisfy
    flying requirements. * Special capability sorties.  Units may be
    required to maintain some pilots with special capabilities or
    qualifications that require additional sorties. * Collateral
    sorties.  Each unit must fly some number of sorties not directly
    related to combat employment or training but necessary for
    accomplishment of unit training programs.  These include ferry
    flights, deployments, incentive flights, air shows, and so forth.
    For budgeting purposes, the flying hour requirements are based on
    notional models of each unit type that assume that each unit will
    have all its aircraft and personnel assigned.  Once the model has
    calculated the unit's sortie requirements, the sorties are
    converted to flying hours.  The conversion is made using unit-
    specific averages of sortie duration.  The average sortie duration
    varies among units according to geographic location, proximity to
    training ranges, and the type of aircraft the unit flies.  The
    result of the calculation is the units flying hour requirement.
    The total requirement for all units in the command is provided to
    financial management staff for use in developing the budget for
    flying hours. The Air Mobility Command also uses models to develop
    its flying hour program.  Air Mobility Command has developed
    airframe-specific models that compute flying hour requirements
    based on the number of aircraft commanders, co-pilots, and
    navigators authorized and the types, number, and duration of
    training events they must complete annually.  The models Page 6
    GAO/NSIAD-99-165  Defense Budget B-282754 consider two types of
    training requirements: (1) experiencing requirements, which
    represent the flying training co-pilots must accomplish to upgrade
    to aircraft commander and (2) currency requirements, which
    represent the specific training needed for aircrews to develop
    flying skills.  While all flying provides experiencing training,
    currency training can only be obtained through the accomplishment
    of specific training events. In 1998, the Air Force Audit Agency
    reviewed Air Mobility Command's flying hour program to determine
    if managers used effectively structured models and accurate data
    to compute flying hour requirements.  The audit reported that
    opportunities existed to improve the model structure and inputs.
    According to the report, Air Mobility Command personnel teamed
    with the auditors to develop an improved, single-model structure
    for all applicable aircraft, and the Command's personnel validated
    all the relevant factors used in the models.3  This structure was
    provided to U.S. Air Force headquarters to serve as a basis for
    developing guidance for all Air Force mobility flying hour
    programs. The Air Mobility Command flying hour program differs
    from Air Combat Command's program in that funding is provided from
    two sources. Traditionally, Air Mobility Command training
    requirements are Operation and Maintenance funded, while missions
    flown in support of the U. S. Transportation Command are funded by
    the Transportation Working Capital Fund.  These missions involve
    movement of passengers and/or cargo, and the customer reimburses
    the working capital fund.  The Air Mobility Command flying hour
    models were designed to calculate a distribution of flying hours
    by funding sources based on assumptions about the types of
    missions expected to be flown.  Once the hours needed are
    determined, the requirements are provided to financial personnel
    for use in developing the flying hour budget. 3Airlift and Air
    Refueling Aircraft Flying Hour Program, Air Force Audit Agency,
    Audit WS099011, December 9, 1998. Page 7
    GAO/NSIAD-99-165  Defense Budget B-282754 Programmed Hours
    The basis for flying hour funding is the number of programmed
    hours and Cost Factors Are     multiplied by the projected cost
    per flying hour rate.  Each major command develops a cost per
    flying hour rate for each of the aircraft types in its Used to
    Prepare the      inventory.  The rates comprise three major
    program expense elements- Budget Estimate          depot-level
    repairable parts, consumable supplies, and aviation fuel. Depot-
    level repairable items are parts that can be repaired at a
    maintenance facility and are used in direct support of aircraft
    maintenance (e.g., aircraft engines).  Consumables are generally
    defined as non-repairable supply items used by maintenance
    personnel in direct support of aircraft maintenance.  Aviation
    fuel is the cost of fuel purchased to operate aircraft. Cost per
    flying hour rates are developed in accordance with guidance from
    the Air Force Cost Analysis Improvement Group (AFCAIG).  AFCAIG is
    a General Officer/Senior Executive Service group co-chaired by the
    Deputy Assistant Secretary of the Air Force for Cost and Economics
    and the Deputy Chief of Staff for Installations and Logistics.
    The group includes representatives from budget, logistics, and
    planning sections.  The guidance is issued annually by the
    Comptroller and Air Force Logistics in the form of an AFCAIG
    letter, which begins the AFCAIG process.  Under this guidance,
    cost factors are developed by the major commands and submitted by
    mid-November to Air Force headquarters for validation and
    approval. The annual AFCAIG process develops costs for the budget
    2 years into the future; for example, the 1997 cycle, using the
    most current cost data available, developed the cost factors used
    in the fiscal year 1999 budget. The major commands begin the
    factor development process by calculating a baseline cost per hour
    for each aircraft type.  Essentially, this process is accomplished
    by dividing the accumulated obligations for each expense element
    by the number of hours flown.  For example, the baseline cost per
    hour for depot-level repairable parts for the F-15E in fiscal year
    1997 was $2,667-accumulated obligations of about $100 million
    divided by the 37,531 hours flown.  The baseline cost per flying
    hour is then adjusted by a conversion factor (provided in the
    guidance from headquarters) to state the costs in fiscal year 1998
    dollars.  For the example cited above, the 1.198 factor used that
    year increased the baseline cost to $3,195 per flying hour. Once
    the baseline cost per flying hour rates are determined, the major
    commands review them and propose adjustments.  An adjustment is an
    increase or decrease due to a forecasted change in policy,
    procedure, or Page 8
    GAO/NSIAD-99-165  Defense Budget B-282754 situation that will
    affect the cost per flying hour.  The major command must compile
    data that is sufficient to allow reviewers within the process to
    understand the command's requirements.  The reasons for
    adjustments include, but are not limited to, the following: *
    Warranty expiration-when a system has been covered by a warranty,
    the true sustainment costs have not been captured in the baseline.
* Special program starting-the price paid in the baseline year
    would no longer be needed because the system is transferring to a
    special program, such as Contractor Logistic Support. * Changes in
    the level of maintenance-changing from two-level to three-level,
    or vice versa, would affect the depot-level repairable cost and
    the consumable supply cost associated with repair. The completed
    baseline and proposed adjustments are submitted to Air Force
    headquarters for validation and approval.  The validation is done
    by Air Force logistics and the Air Force Cost Analysis Agency
    (AFCAA) in conjunction with the major command's Director of Plans.
    The result is a coordinated position and a validated package
    submitted by mid-December. AFCAA provides a copy to the various
    panels that comprise the AFCAIG in preparation for January
    briefings.  In January, the major commands' representatives brief
    the AFCAIG in regard to the cost drivers of the validated factors
    and the major commands' total requirement.  The AFCAIG approves or
    disapproves the validated submissions. Each February, AFCAA
    provides the Air Force Budget office with the approved factors for
    each major command.  Budget personnel put the cost factors into
    the Automated Budget Interactive Data Environment System (ABIDES)
    computer database to price the flying hour program, and they
    provide the total dollar amount back to AFCAA.  The AFCAIG then
    briefs the Air Force corporate structure, which is the top-level
    forum for considering and deciding Air Force resource allocation
    issues.  If changes result from this review, the budget office
    will adjust the cost factors and distribute to the major commands
    (by May of each year) the adjusted AFCAIG cost per flying hour
    factors along with an explanation for the adjustments. Finally,
    the cost factors are adjusted to accommodate the annual composite
    price changes forecast by managers of the Air Force Working
    Capital Fund. The fund provides resources for Air Force Material
    Command's (AFMC) Supply Management Activity Group, which provides
    supply support to the major commands.  Each year the managers
    estimate a rate of increase or Page 9
    GAO/NSIAD-99-165  Defense Budget B-282754 decrease in prices and
    submit it to the Under Secretary of Defense for approval.  Once
    approved, the composite rate is provided to the Air Force budget
    office.  The budget office applies the rate to the approved AFCAIG
    cost factors.  These final factors, applied through the ABIDES
    database, become the basis for the cost of flying hours requested
    in the President's budget. Price Instability Has              The
    accuracy of the costs projected by the system described above Led
    to Obligations                 depends heavily on the working
    capital fund concept that requires stabilized prices for
    repairable parts and consumable supplies.  These Exceeding Funds
    prices are established by AFMC.  For the past 2 fiscal years, and
    Provided for the Fying  particularly in fiscal year 1998, AFMC has
    not provided this stability. Hour Program
    Instead, financial management and systems problems at AFMC
    resulted in price lists that contained numerous errors.  Efforts
    to correct the errors and changes in pricing policies created wide
    fluctuations of prices paid by the major commands.  In total, the
    price lists provided to the commands were changed six times during
    fiscal year 1998.  These price changes caused a great deal of
    concern among the commands regarding their ability to support the
    flying hour program and distorted the baseline data used for
    future years' budgeting.  In a June 1998 report, we recommended
    that AFMC develop and implement procedures to stabilize prices.
    AFMC efforts to accomplish this are currently in progress. Working
    Capital Fund               The Air Force Working Capital Fund was
    created in 1996 by the Under Concept Requires Stabilized
    Secretary of Defense (Comptroller) as a reorganization of the
    Defense Prices                             Business Operations
    Fund.  The Working Capital Fund is a revolving fund established to
    create a customer-provider relationship between military operating
    units and support organizations (for the purposes of this report,
    the Supply Management Activity Group (SMAG)).  SMAG generates
    revenue by selling to Air Force units the items necessary to
    support troops, weapon systems, aircraft, communications systems,
    and other military equipment.  SMAG is expected to break even over
    time by setting its prices to recover both the costs of goods and
    operating costs over the long run. Variations in program execution
    may result in gains or losses for the year, but such gains or
    losses are generally reflected in offsetting adjustments to
    stabilized rates established in subsequent fiscal years. DOD
    Financial Management Regulation 7000.14R requires that the prices,
    once established, be stabilized for the remainder of the fiscal
    year.  This stabilized rate policy serves to protect appropriated
    fund customers from Page 10
    GAO/NSIAD-99-165  Defense Budget B-282754 unforeseen cost changes,
    and thereby enables customers to more accurately plan and budget
    for support requirements.  According to the regulations, the
    policy also reduces disruptive fluctuations in the support
    facility's workload levels and permits more effective use of
    resources. For the past 2 years, SMAG has been unable to establish
    accurate price lists for the repairable parts and consumable items
    it supplies to Air Force flying units.  In June 1998, we reported
    that SMAG lacked reliable data on which to base its prices and
    could not ensure that the composite price change approved by the
    Under Secretary of Defense (Comptroller) was implemented.4  The
    report further stated that on October 1, 1997, the Air Force made
    two major changes in SMAG's cost allocation procedures, but that
    SMAG lacked reliable sales revenue and operational cost data
    needed to effectively implement the change. As a result, the price
    lists issued by SMAG to its customers contained inaccurate pricing
    and/or prices that fluctuated widely from those previously
    charged.  In April 1997, the Air Force determined that SMAG's
    composite price increase was higher than the one approved for
    fiscal year 1997 by the Under Secretary of Defense (Comptroller);
    consequently, prices were reduced by about 18 percent for the
    remainder of the year.  In fiscal year 1998, when SMAG attempted
    to implement a composite rate increase of about 19.3 percent, the
    price list that became effective October 1 contained so many
    erroneous prices that SMAG revised it a month later and revised it
    again effective December 1.  Despite the DOD regulations requiring
    stabilized prices, SMAG changed the price list a total of six
    times during fiscal year 1998.  Table 2 shows how the changes
    affected the prices of specific items. 4Air Force Supply
    Management: Analysis of Activity Group's Financial Reports,
    Prices, and Cash Management (GAO/AIMD/NSIAD-98-118, June 1998).
    Page 11
    GAO/NSIAD-99-165  Defense Budget B-282754 Table 2:  Examples of
    Price Changes During Fiscal Year 1998 Percent of change  from
    Percent of change  from Type of part               Initial price
    Second price            initial to second price           Third
    price       second to third price Cell assembly
    $9,939                 $13,152                         32.3
    $14,503                        10.2 Duct assembly
    17,544                  19,340                         10.2
    23,516                        21.6 Case, turbine
    9,235                  10,199                         10.4
    16,795                        64.7 #3 bearing
    3,981                   5,654                          42.0
    5,106                       (9.7)a Liner
    10,893                  12,141                          11.5
    2,700                      (77.8)a Case, gas turbine
    1,478                 204,413                     13730.4
    No change                   No change aPercentages in parentheses
    indicate price reductions. Source: Air Combat Command. Price
    Changes Hamper                        The lack of accurate and
    stable prices for depot-level repairable and Budgeting at Major
    consumable parts caused a great deal of concern among the flying
    Commands                                    commands.  According
    to Air Force officials, the overpricing by SMAG in fiscal year
    1997 was identified only after budget execution reviews revealed
    that the commands would not have enough money to complete their
    flying hour programs if spending continued at the current rate.
    Even though SMAG reduced its prices in mid-year, the Air Force
    requested and received supplemental funding (about $108 million)
    to correct the projected shortfall. Similarly, in deliberations
    over the fiscal year 1998 budget, the Air Force told Congress that
    the rapid growth in costs for repairable parts and consumables
    required substantial funding in addition to its budget request.
    Congress provided $300 million to offset the perceived shortage.
    Nevertheless, the numerous price changes made it difficult for the
    commands to determine if they had been provided adequate funding
    to complete the flying hour program.  Air Combat Command officials
    acknowledged that the changes made it virtually impossible for
    them to determine whether funding was sufficient, but their
    analysis showed that they expected shortages if additional funding
    was not provided.  In late fiscal year 1998, $181 million was
    reprogrammed into the flying hour program. In addition to creating
    uncertainty over the adequacy of funding for the current year, the
    pricing and policy changes implemented by SMAG may affect
    budgeting for future years.  This is because (1) budgeting is
    based on actual obligations in prior years, (2) SMAG's new
    procedures significantly Page 12
    GAO/NSIAD-99-165  Defense Budget B-282754 affected the fiscal year
    1998 prices charged for individual items, and (3) the impact
    varied significantly from one customer to the next.  In our 1998
    report on SMAG, we reported that Air Force budget officials
    estimated it would take at least 1 to 2 years, perhaps more,
    before the Air Force has reliable historical data on the amount of
    money needed by individual customers. Pricing Problems Continued
    Although SMAG's problems with pricing have been known for some
    time, it into Fiscal Year 1999                         appears
    they have continued into this fiscal year.  The approved composite
    rate increase for fiscal year 1999 was 0.4 percent.  However, both
    Air Combat Command and Air Mobility Command budget personnel told
    us they were experiencing, on the whole, a much greater increase.
    As a result of the commands' concerns, SMAG once again issued a
    new price list effective January 1, 1999.  According to an AFMC
    official, this change reduced prices by about 7 to 7.5 percent
    across the board. Table 3 provides several examples of the
    magnitude of changes in the exchange price for specific repairable
    parts. Table 3:  Examples of the Magnitude of Fiscal Year 1999
    Price Changes Price in               Price in Oct. 1998
    Percent change from                Price in    Percent change
    Repairable part                 Sept. 1998       (new fiscal year
    price)              fiscal year 1998            Jan. 1999    from
    Sept. 1998 Core module                    $1,557,348
    $1,709,633                               10      $1,592,204
    2.24 Core module                       380,493
    671,099                               76        625,003
    64.26 Fan module                         91,731
    219,221                              139        204,163
    122.57 HPT module                         87,109
    148,031                               70        137,863
    58.26 Fan drive                          58,339
    155,164                              166        144,507
    147.70 Exciter                          3,725,818
    1,686                      (99.95)a              1,433
    (99.96)a Comp rotor                         55,694
    152,593                       173.98              14,660
    (73.68)a Fan rotor                          15,096
    105,730                       600.38            131,726
    772.59 Turbine rotor                      52,695
    96,913                        83.91              10,018
    (80.99)a aPercentages in parentheses indicate price reductions.
    Source: Air Combat Command. In our June 1998 report, we
    recommended that AFMC develop and implement procedures to ensure
    that the prices that are established for individual inventory
    items are consistent with the composite prices developed and
    approved by the Under Secretary of Defense (Comptroller) during
    the budget process.  In March 1999, the Air Force responded to a
    Page 13
    GAO/NSIAD-99-165  Defense Budget B-282754 request for the current
    implementation status of this recommendation. According to that
    response, the Air Force Director of Supply tasked AFMC to assess
    the current pricing methodology and develop a long-term solution
    that would provide stabilized prices consistent with the
    President's budget. In turn, AFMC established an Integrated
    Product Team that is currently working on several options.  In
    addition, AFMC requested assistance from the Air Force Audit
    Agency to assess their pricing policies.  Both efforts are
    currently in progress. Comparison of Budgeted     The flying hour
    program included in the President's budget does not Costs With
    Actual          include the cost of flying in support of
    contingencies, while the Air Force Obligations
    accounting system accumulates the costs of all flying without
    regard to its purpose.  Therefore, the most valid and meaningful
    comparison is between the total funding received for flying hours
    and the total amount obligated for that purpose.  Through
    supplemental funding and DOD reprogramming actions, the Air Force
    received more each year for flying hours than was obligated.
    According to Air Force budget officials, the excess in fiscal year
    1997 was about $5 million, but in fiscal year 1998, the excess was
    about $357 million.  Table 4 shows this comparison. Table 4:
    Comparison of Flying Hour Program Funding and Obligations (fiscal
    years 199798) Dollars in millions Funding
    1997           1998 President's budget
    $2,301.4        $2,717.7 Congressional increase for depot-level
    repairable parts                              246.1 Other
    (adjustments for force structure changes, etc.)
    (10.0) Contingency flying hours (reimbursement from DOD)
    81.5          160.9 Supplemental/Omnibus reprogramming
    108.4          181.5 Total funding
    $2,481.3        $3,306.2 Total obligations
    $2,476.4        $2,949.6 Funding excess
    $4.9         $356.6 Source: Department of the Air Force. Air Force
    officials said that the excess flying hour money was used by
    headquarters or the major commands to satisfy unmet funding
    requirements in other operation and maintenance programs.  Table 5
    shows the distribution of the excess fiscal year 1998 flying hour
    funds. Page 14
    GAO/NSIAD-99-165  Defense Budget B-282754 Table 5:  Distribution
    of Excess Flying Hour Funds to Other Operation and Maintenance
    Accounts-(fiscal year 1998) Dollars in millions Operation and
    maintenance account                                  Dollars
    received Expenses for training and ranges
    $69.0 Air operations training, combat communications
    61.0 Environmental compliance
    36.0 Base operating support
    35.0 Undergraduate pilot training
    35.0 Expenses for SR-71 retirement
    30.0 Real property maintenance
    26.5 Depot purchased equipment for maintenance requirements
    22.0 Temporary duty, supplies, equipment, contracts
    14.0 Battlelabs
    13.0 Headquarters and administrative expenses
    10.0 Updated flying hour factors
    5.0 Total
    $356.5 Source: Department of the Air Force. Conclusions    The Air
    Force continues to request funding for more hours than it has been
    able to fly in the current world environment.  A number of factors
    have affected the service's ability to fly all the programmed
    hours, but a shortage of funding is not one of them.  The Air
    Force has revised its requirements determination process, received
    adequate funding, and provided the major commands with top-level
    command emphasis on flying all the programmed hours in fiscal year
    1999.  The amount of flying hours the Air Force completes in the
    remainder of this fiscal year should serve as a good indication of
    its general ability to fly the hours it says are needed to
    maintain combat readiness and proficiency while maintaining
    support for contingencies in Europe and Southwest Asia. The
    methodology used by the Air Force to determine the cost of the
    flying hour program appears sound, but it depends heavily on
    stable prices for its repairable and consumable spare parts.
    Until the SMAG is able to overcome its management problems and
    provide stable prices to its customers, the flying hour program
    will experience fluctuating costs and uncertainty regarding the
    adequacy of funding. Page 15
    GAO/NSIAD-99-165  Defense Budget B-282754 We are not making
    specific recommendations at this time because the Air Force is in
    the process of correcting the pricing problems identified in our
    previous report on the financial operations of the supply
    management activity group. Scope and      To identify the extent
    to which the Air Force has flown the hours requested Methodology
    in the President's budget, we obtained and reviewed major command
    quarterly execution reports from Air Force Headquarters,
    Directorate of Operations and Training, Washington, D.C.  These
    reports compare the number of hours programmed in the President's
    budget with the number of hours executed, by type of aircraft, at
    each of the eight major commands. To meet our objective of how the
    Air Force determines flying hour requirements, we reviewed
    regulations and obtained briefings at Air Combat Command, Langley
    Air Force Base, Virginia, and Air Mobility Command, Scott Air
    Force Base, Illinois.  We obtained documents on the assumptions
    and specific requirements used in these models.  We selected these
    two commands because they comprise over two-thirds of the flying
    hour program funding. To determine how the budget estimate for the
    flying hour program is developed, we reviewed the Air Force's
    flying hour process guide and interviewed officials from the Air
    Force Cost Analysis Agency, Crystal City, Virginia, and Air Force
    Logistics Directorate, Washington, D.C.  In addition, we discussed
    price changes in the Air Force Working Capital Fund with
    representatives of the Air Force Deputy Assistant Secretary
    (Budget). The financial information used in this report on the
    actual obligations incurred for the flying hour program compared
    to budget requests in fiscal years 1997 and 1998 was produced by
    financial and accounting records from the Secretary of the Air
    Force Financial Management and Budget Office (SAF/FMBO),
    Washington, D.C.  The SAF/FMBO also provided documentation that
    showed the Air Force spent funds initially set aside for flying
    hours for other purposes.  We did not independently verify this
    information. We conducted our review from August 1998 to May 1999
    in accordance with generally accepted government auditing
    standards. Page 16
    GAO/NSIAD-99-165  Defense Budget B-282754 Agency Comments    A
    draft of this report was provided to the Air Force for their
    comments. The Air Force stated they are working to improve
    requirement identification and pricing issues identified in the
    report.  The Air Force also suggested several technical changes to
    the draft, which we have incorporated where appropriate.  Air
    Force comments are presented in appendix I. We are sending copies
    of this report to Representative Jerry Lewis, Chairman, and
    Representative John P. Murtha, Ranking Minority Member, House
    Committee on Appropriations, Subcommittee on Defense; Senator
    James M. Inhofe, Chairman, and Senator Charles S. Robb, Ranking
    Minority Member, Senate Committee on Armed Services, Subcommittee
    on Readiness and Management Support; and Representative Herbert H.
    Bateman, Chairman, and Representative Solomon P. Ortiz, Ranking
    Minority Member, House Committee on Armed Services, Subcommittee
    on Military Readiness.  We are also sending copies of this report
    to the Honorable William S. Cohen, Secretary of Defense, and the
    Honorable F. Whitten Peters, Acting Secretary of the Air Force.
    Copies will also be made available to others upon request. If you
    have any questions about this report, please contact me at (202)
    512-5140 or Brenda S. Farrell at (202) 512-3604.  Other major
    contributors to this report include Carol R. Schuster, James K.
    Mahaffey, Robert L. Coleman, and Raymond G. Bickert. Mark E.
    Gebicke Director, National Security Preparedness Issues Page 17
    GAO/NSIAD-99-165  Defense Budget Appendix I Comments From the
    Department of the Air Force
    Appendix I Note: GAO's comment Ap1p1 supplementing those in the
    report text appear at the end of this appendix. See comment 1.
    Page 18    GAO/NSIAD-99-165  Defense Budget Appendix I Comments
    From the Department of the Air Force The following is our comment
    on the Department of the Air Force's letter dated June 16, 1999.
    GAO Comments          1.  We disagree with the Air Force's
    characterization of our report.  The primary findings in this
    report are that (1) the Air Force has consistently requested
    funding for more flying hours than it has been able to fly for
    each of the last 4 fiscal years-ranging from 89 to 94 percent of
    estimated flying hours; (2) continuing financial management
    problems associated with the pricing of individual inventory items
    have contributed to the Air Force's inability to accurately
    estimate the funding it needs for this program; and (3) the
    eventual surplus funds that Congress originally intended for the
    flying hour program-$5 million in fiscal year 1997 and $357
    million in fiscal year 1998-have been shifted to other operation
    and maintenance purposes.  Moreover, we have not made any new
    recommendations in this report because the Air Force is in the
    process of implementing our earlier recommendations aimed at
    improving the financial operations of the Air Force's supply
    management activity group. (703260)    Letter    Page 19
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