DOD Bulk Fuel: Budgeting for Bulk Fuel and Other Operation and
Maintenance Activities (Testimony, 07/30/96, GAO/T-NSIAD-96-208).
GAO discussed the military services' budgeting for bulk fuel. GAO noted
that: (1) the Defense Fuel Supply Center's (DFSC) planned bulk fuel
sales to the services are about $440 million less than the services'
estimated requirements for fiscal year (FY) 1996; (2) Department of
Defense (DOD) officials believe that their bulk fuel estimates are not
overstated, since the estimates reflect the need to respond to changing
requirements and actual fuel use was greater than the amount requested
in 2 of the past 4 years; (3) the estimates did not include supplemental
funds used to finance contingency operations or fuel returned to DFSC
for credit; (4) the $183 million difference in the services' and DFSC
estimates for FY 1997 is not as significant as in FY 1996 because DOD,
the services, and DFSC have worked to align their estimates more
closely; (5) other overestimated operation and maintenance (O&M)
accounts include the Army's operating tempo account and the Army's and
Navy's depot maintenance accounts; (6) the services have a consistent
pattern of over- and underestimating requirements for their O&M
activities; (7) O&M obligations may not reflect the activities' actual
costs because DOD financial systems do not effectively account for and
control actual costs incurred; and (8) although variations between
requirement estimates and actual obligations always occur, the services
need to make their estimates more accurate to enhance and facilitate
budget decisionmaking.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: T-NSIAD-96-208
TITLE: DOD Bulk Fuel: Budgeting for Bulk Fuel and Other Operation
and Maintenance Activities
DATE: 07/30/96
SUBJECT: Budget obligations
Future budget projections
Military procurement
Fuel supplies
Military appropriations
Military cost control
Defense contingency planning
Military budgets
Reprogramming of appropriated funds
Financial management
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Cover
================================================================ COVER
Before the Subcommittee on National Security, International Affairs,
and Criminal Justice, Committee on Government Reform and Oversight,
House of Representatives
For Release on Delivery
Expected at
10:00 am, EDT
Tuesday,
July 30, 1996
DOD BULK FUEL - BUDGETING FOR BULK
FUEL AND OTHER OPERATION AND
MAINTENANCE ACTIVITIES
Statement of Sharon A. Cekala, Associate Director, Military
Operations and Capabilities Issues, National Security and
International Affairs Division
GAO/T-NSIAD-96-208
GAO/NSIAD-96-208T
(703170)
Abbreviations
=============================================================== ABBREV
DOD - Department of Defense
DFSC - Defense Fuel Supp;y Center
O&M - operation and maintenance
============================================================ Chapter 0
Mr. Chairman and Members of the Subcommittee:
We appreciate the opportunity to be here today to discuss our work on
the military services' budgeting for bulk fuel.\1 The bulk fuel
budgeting issues I will describe, however, may be symptomatic of a
larger issue relating to how the services estimate requirements for
operation and maintenance (O&M) activities.\2 Our work has shown a
recurring pattern of the Department of Defense (DOD) estimating that
it needs more funds than it obligates for some O&M activities.\3
My statement focuses on
-- the services' use of O&M funds and their latitude in obligating
the funds,
-- specific overestimating of funds needed for bulk fuel, and
-- bulk fuel as one example of the services' overestimating their
needs for some activities within the O&M account.
--------------------
\1 DOD Bulk Fuel: Services' Fuel Requirements Could Be Reduced and
Funds Used for Other Purposes (GAO/NSIAD-96-96, Mar. 28, 1996).
\2 The words "activity" and "activities" are generally used in this
statement to refer to "items of expense," which is the term used in
appropriations law.
\3 In our analysis of O&M activities below the level of detail shown
in the budget, we compared the amount obligated to DOD's estimated
requirements. We were unable to compare the obligated amounts to the
amounts appropriated for the O&M activities because that information
is not available at the DOD or services' headquarters level.
THE O&M BUDGET AND WHAT IT
PROVIDES FOR
---------------------------------------------------------- Chapter 0:1
The O&M appropriation provides the services with funds to carry out
day-to-day activities such as the recruitment and fielding of a
trained and ready force, equipment maintenance and repair, child care
and family centers, transportation services, civilian personnel
management and pay, and maintenance of the infrastructure to support
the forces.
The services have a great deal of flexibility as to how they obligate
O&M funds,\4 and we recognize the need for flexibility. We also
recognize that the amounts obligated will rarely agree with the
estimated requirements reflected in the budget request. However, the
issue is to what extent DOD's budget estimates should reflect actual
experience. For example, our analysis of certain O&M activities
shows a pattern of the estimated requirements being more than what is
obligated. Conversely, for other O&M activities, our analysis shows
a pattern of the estimated requirements being less than what is
obligated. When these patterns consistently appear, a question
should be raised as to whether the budget estimates accurately
portray the services' needs.
--------------------
\4 Some limitations have been imposed on this flexibility. If a
service moves more than $20 million from one budget activity to
another, for example, from operating forces to mobilization, the move
is subject to normal reprogramming procedures. If a service moves
$20 million or more from certain subactivity groups within a budget
activity, for example, from combat units to depot maintenance, it is
required to provide prior written notification to the congressional
defense committees.
DETERMINING BULK FUEL
REQUIREMENTS
---------------------------------------------------------- Chapter 0:2
The Defense Fuel Supply Center (DFSC) has the primary responsibility
for providing the services with the fuel they need. DFSC purchases
the fuel from commercial sources and sells it to the services.
Although DFSC is the primary source, the services also buy a small
amount of fuel directly from commercial sources.
As part of our annual review of the services' fiscal years 1996 and
1997 O&M budget requests, we compared the estimated requirements for
bulk fuel as reflected in the O&M budget requests to the amount of
fuel DFSC estimated it will sell to the services. Our reviews show
that DFSC's planned fuel sales to the services were less than what
the services estimated their requirements to be in their budget
requests.
The services determine their fuel requirements and budget requests
based on flying hours, steaming days, tank training miles, and base
operation needs. The services advise DFSC of their requirements so
DFSC can determine the amount of fuel it will need to satisfy the
services' operating requirements and for war reserves and its other
customers' needs. DFSC estimates the amount of fuel the services
will buy from it based on the services' historical usage data
adjusted for events expected to occur during the fiscal year.
SERVICES OVERESTIMATE BULK FUEL
NEEDS
---------------------------------------------------------- Chapter 0:3
In their budget submissions for fiscal year 1996, the services
estimated their requirements for bulk fuel to be $4.12 billion:
$4.01 billion for fuel from DFSC and $107 million for fuel from
commercial sources.
In February 1996, DFSC estimated that the services' fuel purchases in
fiscal year 1996 would be about $3.57 billion, or about $440 million
less than the approximately $4 billion the services had estimated.
The services' budget estimates and DFSC's estimated sales are shown
in the table 1.
Table 1
Bulk Fuel Requirements in the Services'
Fiscal Year 1996 Budget Requests and
DFSC Estimated Sales to the Services
(Numbers in millions)
Barre Dollar Barre Dollar Barre Dollar
Service ls s ls s ls s
------------------------- ----- ------ ----- ------ ----- ------
Army 10.5 $316.9 7.5 $236.2 3.0 $80.7
Navy 46.5 1,461. 39.3 1,236. 7.2 224.6
2 6
Air Force 69.7 2,235. 66.7 2,100. 3.0 134.3
2 9
======================================================================
Total 126.7 $4,013 113.5 $3,573 13.2 $439.6
.3 .7 \a
----------------------------------------------------------------------
\a The overestimated fuel requirements affect the O&M appropriation
as well as other appropriations. Neither we nor DOD could determine
the specific amounts for each appropriation.
It should be noted that DFSC's February 1996 estimate of fuel sales
to the services is lower than the sales estimated when the services
submitted their budget requests in February 1995. In our report on
potential reductions to the fiscal year 1996 O&M budget, we estimated
that the services would purchase about $3.7 billion of fuel in fiscal
year 1996, or about $330 million less than the services' estimated
requirements.\5
DOD officials do not agree that their bulk fuel budget requests were
overstated. In commenting on our March 1996 report, they said that
fuel is a major element of logistics preparedness and is budgeted in
O&M accounts so that they can respond to changing requirements. DOD
also said that the amount of fuel used was greater than the amount
requested for 2 of the past 4 years (fiscal years 1992-95). As a
result, DOD did not agree with our suggestion in the report that
funds for bulk fuel be reduced.
We agree that fuel requirements change, and we have considered those
changing requirements in our analysis of bulk fuel. For example,
when we reviewed the fuel budget request in May and June 1995, we
estimated the services' purchases for fiscal year 1996 as $116.8
million barrels of fuel for about $3.7 billion. In our March 1996
report, we noted that DFSC's estimate of the services' purchases for
fiscal year 1996 was reduced to 113.5 million barrels at a cost of
about $3.6 billion. Therefore, the difference between the services'
budget estimates for fiscal year 1996 and DFSC's estimates had
increased.
We do not agree, however, that the services used more fuel in 2 of
the past 4 years than was reflected in the budget requests. The
documentation provided by DOD to support its position showed that the
services had used more fuel than was reflected in the budget requests
due to fuel used during contingency situations. DOD based its
position on a comparison of total fuel used--for normal operational
needs and contingency situations--to the budget request, which did
not include supplemental funds used to finance contingency
operations.
Additionally, the services return fuel to DFSC for credit.\6 However,
it is unclear whether the services consistently consider the returns
or only gross purchases when they estimate their annual fuel needs.
For fiscal year 1996, DFSC estimates that the Navy and the Air Force
will return about 6 million barrels for credit valued at about $189
million. According to DOD officials, the fuel credits represent
funds that the services then obligate for other purposes.
Our analysis of the estimated bulk fuel requirements reflected in the
fiscal year 1997 budget requests shows that the services continue to
overestimate their needs. The services estimated their requirements
as 117.8 million barrels of fuel at a cost of about $3.8 billion.
DFSC estimates that the services' fuel purchases will be about 113.2
million barrels, costing about $3.6 billion, or about $183 million
less than the $3.8 billion the services requested. (See table 2.)
However, the difference between the services' and DFSC's estimates is
not as significant as in fiscal year 1996. DOD, the services, and
DFSC have worked to ensure that the estimates are more closely
aligned. For example, the Navy changed the basis for its
requirements from a 4-year average to a 3-year average and recognized
changes in deployment patterns of its military sealift ships. This
had the effect of reducing the average use to reflect current
consumption and operating patterns.
Table 2
Bulk Fuel Requirements in the Services'
Fiscal Year 1997 Budget Requests and
DFSC Estimated Sales to the Services
(Numbers in millions)
Barre Dollar Barre Dollar Barre Dollar
Service ls s ls s ls s
------------------------- ----- ------ ----- ------ ----- ------
Army 9.2 $294.8 8.2 $261.7 1.0 $33.1
Navy 43.7 1,398. 42.5 1,356. 1.2 41.7
3 6
Air Force 64.9 2,102. 62.5 1,995. 2.4 107.9
9 0
======================================================================
Total 117.8 $3,796 113.2 $3,613 4.6 $182.7
.0 .3 \a
----------------------------------------------------------------------
\a The overestimated fuel requirements affect the O&M as well as
other appropriations. Neither we nor DOD could determine the
specific amounts for each appropriation.
--------------------
\5 1996 DOD Budget: Potential Reductions to Operation and
Maintenance Program (GAO/NSIAD-95-200BR, Sept. 26, 1995).
\6 As ships and aircraft are readied for maintenance, the fuel tanks
are emptied and the fuel is returned to DFSC for credit.
OVERESTIMATED REQUIREMENTS ARE
NOT LIMITED TO BULK FUEL
---------------------------------------------------------- Chapter 0:4
As I mentioned at the beginning of my statement, overestimating for
bulk fuel requirements may be symptomatic of a larger issue. In
other reports, we identified similar patterns of differences between
estimates reflected in the services' budget submissions and ultimate
obligations for particular O&M activities.\7
We recognize that DOD has faced and will continue to face unplanned
for contingencies that it will have to pay for by moving funds.
However, we have also noted that certain O&M activities are
consistently overestimated, while others are consistently
underestimated. For example:
-- In our April 1995 report on Army training, we pointed out that
about $1.2 billion, or one-third, of the $3.6 billion designated
for operating tempo\8 for U.S. Forces Command and U.S. Army,
Europe, forces in fiscal years 1993-94 was used to fund other
O&M activities. These activities included base operations, real
property maintenance, and contingency operations in Somalia and
Haiti. According to Army officials, funds were moved from
operating tempo to the other O&M activities because the
activities were either unfunded (contingency operations) or
underfunded (base operations and real property maintenance).
The use of operating tempo funds for other O&M activities is an issue
that we have repeatedly pointed out in our annual O&M budget reviews.
The Army requests and receives funds to operate its combat vehicles
at 800 miles per vehicle per year to achieve a prescribed readiness
level. However, since fiscal year 1992, the Army has consistently
operated at a reduced rate--about 630 miles per vehicle per year in
fiscal year 1995--and obligates the remaining operating tempo funds
for other O&M activities. In spite of operating at a reduced rate,
reported readiness levels have not suffered.
-- In our July 1995 report on depot maintenance, we reported that
during fiscal years 1993-95, the Army and the Navy received
about $591 million more than they requested for depot
maintenance. A comparison of the amount of depot maintenance
work done to the amount of funds requested and received shows
that for fiscal years 1993-94, the services obligated about $485
million less for depot maintenance than the amount requested and
about $832 million less than the amount received. The funds
requested but not obligated for depot maintenance were obligated
for military contingencies and other O&M activities such as real
property maintenance and base operations.
According to service officials, the depot maintenance backlogs are
manageable and represent an acceptable minimal level of risk. They
attribute the lack of adverse effect to the funding levels; the
levels of depot maintenance work done; and the reductions to the
force levels, which have made more equipment available to the
remaining forces.
These examples are typical of what we recently reported on O&M
funding trends. In our June 1996 report, we showed that the
estimated needs reflected in the Army's and the Air Force's budget
requests for many O&M activities were often overestimated for fiscal
years 1993-95 when compared to the amounts they obligated for those
activities. This pattern was particularly true for the Army, which
obligated less funds for its combat units than it estimated it would
need and less than the amount provided in the conference reports to
the appropriation acts for this activity. Conversely, the Army
obligated more than it estimated it would need for infrastructure and
management activities, again obligating more than cited in the
conference reports.\9
For fiscal years 1993-95, the amount of funds the Army obligated for
O&M activities related to combat forces and support of the forces was
$900 million less than the $11.9 billion estimated requirements
reflected in its budget request. When training and recruiting funds
are also considered, the Army obligated about $1.3 billion less than
the estimated requirements. In total, about 64 percent of the Army's
fiscal years 1993-95 O&M budget requests was for infrastructure-type
functions like base support and management activities. However,
about 70 percent of the Army's O&M funds were obligated for these
purposes.
In addition, funds obligated for an O&M activity may not reflect the
actual costs of that activity. Each of our previous Chief Financial
Officers Act financial audits of the military services shows that DOD
decisionmakers did not have reliable cost information available to
consider in their deliberations. For example, our work showed that
the Army could not generate data on actual costs incurred for Desert
Shield and Desert Storm operations. Instead, the Army reported
obligations from its existing systems. As a result, the costs of
materials consumed during Desert Shield and Desert Storm--but
obligated in a prior period--were not included in costs reported on
an obligational basis.\10
This represents another example of the need for effective financial
management systems throughout DOD. Since our February 1990
report,\11 which was our first attempt to audit the fiscal year 1988
financial statements of the Air Force, we have noted that DOD's
systems do not effectively account for and control actual costs
incurred. In November 1995, we expressed our concern over the pace
of needed systems improvements.\12 Until DOD takes action to correct
these systems deficiencies, its decisionmakers will continue to
receive inaccurate and unreliable data from their systems.
--------------------
\7 Army Training: One-Third of 1993 and 1994 Budgeted Funds Were
Used for Other Purposes (GAO/NSIAD-95-71, Apr. 7, 1995); Depot
Maintenance: Some Funds Intended for Maintenance Are Used for Other
Purposes (GAO/NSIAD-95-124, July 6, 1995); and Operation and
Maintenance Funding: Trends in Army and Air Force Use of Funds for
Combat Forces and Infrastructure (GAO/NSIAD-96-141, June 4, 1996).
\8 Operating tempo is the pace of unit training that the Army
believes it needs to conduct to maintain its fleet of tracked and
wheeled vehicles at a prescribed readiness level. Operating tempo
funds cover the cost of fuel, reparable spare parts, and consumable
spare parts.
\9 In our analysis, we categorized O&M activities as being related to
combat forces and support of forces; training and recruiting; base
support; or management, command, and servicewide activities. These
categories were based on criteria developed by the Institute for
Defense Analyses, the Joint Chiefs of Staff, and the Office of
Program Analysis and Evaluation. These categories do not always
agree with those the services used in their budget requests.
\10 Financial Management: Immediate Actions Needed to Improve Army
Financial Operations and Controls (GAO/AFMD-92-82, Aug. 7, 1992).
\11 Financial Audit: Air Force Does Not Effectively Account for
Billions of Dollars of Resources (GAO/AFMD-90-23, Feb. 23, 1990).
\12 Financial Management: Challenges Facing DOD in Meeting the Goals
of the Chief Financial Officers Act (GAO/T-AIMD-96-1, Nov. 14,
1995).
CONCLUSIONS
---------------------------------------------------------- Chapter 0:5
We fully recognize that because of unforeseen circumstances and
changes in funding priorities, the services need flexibility in how
they obligate their O&M funds. And, we know that the amounts
obligated will rarely agree with the estimated requirements reflected
in budget requests. However, we also believe that accurate budget
estimates are an essential component of fiscal responsibility and
that identifying and fully understanding variations--and recurring
patterns among variations--between estimates and actual results will
enhance and facilitate budget decision-making.
-------------------------------------------------------- Chapter 0:5.1
Mr. Chairman, this concludes my prepared statement. I would be
pleased to answer any questions that you or members of the
Subcommittee may have.
*** End of document. ***