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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