DOD Budget: Substantial Risks in Weapons Modernization Plans (Testimony,
10/08/98, GAO/T-NSIAD-99-20).

GAO discussed the Department of Defense's (DOD) budgetary plans to
modernize its forces, focusing on: (1) DOD's experience over the last
few years in trying to shift funds from nonmission or infrastructure
programs to acquisition programs; (2) the risks in DOD's ability to
execute its Future Years Defense Program (FYDP) for fiscal years 1999
through 2003; and (3) the implications of current procurement trends for
DOD's future modernization.

GAO noted that: (1) although DOD has reduced military and civilian
personnel, force structure, and facilities over several years, it has
been unable to follow through with planned funding increases for modern
weapon systems; (2) this has occurred, in part, because DOD has not
shifted funds from infrastructure to modernization; (3) in 1997,
infrastructure spending was 59 percent of DOD's total budget, the same
percentage that was reported in the bottom-up review report for 1994;
(4) consequently, DOD has repeatedly shifted planned funding increases
for modern weapon systems further into the future with each succeeding
FYDP; (5) DOD acknowledged in its 1997 Quadrennial Defense Review report
that it has had to postpone procurement plans because funds were
redirected to pay for underestimated operating costs and new program
demands, and projected savings from outsourcing and other initiatives
had not materialized; (6) although DOD made adjustments in the 1999 FYDP
to decrease the risk that funds would migrate from procurement to
unplanned operating expenses, the 1999-2003 program, like previous
programs, is based on optimistic assumptions about savings and
procurement plans; (7) a further indication of risk can be found in
DOD's procurement plans; (8) the rise and fall of DOD's procurement
spending over the last 33 years has followed the movement in the total
budget; (9) however, DOD projects that procurement funding will rise in
real terms during 1998-2003 by approximately 29 percent while the total
DOD budget will remain relatively flat; (10) DOD's current procurement
trends have longer term implications; (11) as DOD reduced programmed
procurement in successive FYDPs, it has reprogrammed some procurement to
the years beyond the FYDP to create a bow wave of demand for procurement
funds; (12) this bow wave, according to DOD, tends to disrupt planned
modernization programs unless additional funds are made available; (13)
GAO has reported that DOD employs overly optimistic planning assumptions
in its budget formulation which leads to far too many programs for the
available dollars; (14) optimistic planning provides an unclear picture
of defense priorities because tough decisions and trade-offs are
avoided; and (15) in order for DOD to have an efficient and effective
program and for Congress to properly exercise its oversight
responsibilities, it is critical that DOD present realistic assumptions
and plans in its future budgets.

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

 REPORTNUM:  T-NSIAD-99-20
     TITLE:  DOD Budget: Substantial Risks in Weapons Modernization Plans
      DATE:  10/08/98
   SUBJECT:  Defense cost control
             Defense budgets
             Defense economic analysis
             Future budget projections
             Financial management
             Weapons systems
             Defense procurement
             Military downsizing
IDENTIFIER:  DOD Future Years Defense Program
             DOD Quadrennial Defense Review
             DOD Chemical Demilitarization Program
             Defense Health Program
             Strategic Arms Reduction Treaty
             
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Cover
================================================================ COVER


Before the Subcommittees on Military Procurement and Research and
Development, Committee on National Security, House of Representatives

For Release on Delivery
Expected at
11:00 a.m., EDT
Thursday,
October 8, 1998

DOD BUDGET - SUBSTANTIAL RISKS IN
WEAPONS MODERNIZATION PLANS

Statement of Richard Davis, Director, National Security Analysis,
National Security and International Affairs Division

GAO/T-NSIAD-99-20

GAO/NSIAD-99-20T


(701151)


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

  DOD - Department of Defense
  FYDP - Future Years Defense Program
  O&M - operation and maintenance
  OSD - Office of the Secretary of Defense
  QDR - Quadrennial Defense Review
  START - Strategic Arms Reduction Treaty

============================================================ Chapter 0

Messrs.  Chairmen and Members of the Subcommittees: 

We are pleased to be here today to discuss our work on the Department
of Defense's (DOD) budgetary plans to modernize its forces.  You
requested that we discuss our recent analysis of DOD's Future Years
Defense Program (FYDP).  Specifically, we will discuss (1) DOD's
experience over the last few years in trying to shift funds from
nonmission or infrastructure programs to acquisition programs, (2)
the risks in DOD's ability to execute its FYDP for fiscal years 1999
through 2003, and (3) the implications of current procurement trends
for DOD's future modernization. 


   SUMMARY
---------------------------------------------------------- Chapter 0:1

Although DOD has reduced military and civilian personnel, force
structure, and facilities over several years, it has been unable to
follow through with planned funding increases for modern weapon
systems.  This has occurred, in part, because DOD has not shifted
funds from infrastructure to modernization.  In 1997, infrastructure
spending was 59 percent of DOD's total budget, the same percentage
that was reported in the bottom-up review report for 1994. 
Consequently, DOD has repeatedly shifted planned funding increases
for modern weapon systems further into the future with each
succeeding FYDP.  DOD acknowledged in its 1997 Quadrennial Defense
Review (QDR) report that it has had to postpone procurement plans
because funds were redirected to pay for underestimated operating
costs and new program demands, and projected savings from outsourcing
and other initiatives had not materialized. 

Although DOD made adjustments in the 1999 FYDP to decrease the risk
that funds would migrate from procurement to unplanned operating
expenses, the 1999-2003 program, like previous programs, is based on
optimistic assumptions about savings and procurement plans.  For
example, considerable risk remains in the services' plans to cut
175,000 military and civilian personnel and save $3.7 billion
annually by 2003.  Specifically, plans for some cuts were incomplete
or were based on optimistic assumptions about the potential to
achieve savings through outsourcing and reengineering.  A further
indication of risk can be found in DOD's procurement plans. 
Specifically, the rise and fall of DOD's procurement spending over
the last 33 years has followed the movement in the total budget. 
However, DOD projects that procurement funding will rise in real
terms during 1998-2003 by approximately 29 percent while the total
DOD budget will remain relatively flat. 

DOD's current procurement trends have longer term implications.  As
DOD reduced programmed procurement in successive FYDPs, it has
reprogrammed some procurement to the years beyond the FYDP to create
a "bow wave" of demand for procurement funds.  This bow wave,
according to DOD, tends to disrupt planned modernization programs
unless additional funds are made available. 

We have reported that DOD employs overly optimistic planning
assumptions in its budget formulation, which leads to far too many
programs for the available dollars.  Optimistic planning provides an
unclear picture of defense priorities because tough decisions and
trade-offs are avoided.  In order for DOD to have an efficient and
effective program and for Congress to properly exercise its oversight
responsibilities, it is critical that DOD present realistic
assumptions and plans in its future budgets. 


   BACKGROUND
---------------------------------------------------------- Chapter 0:2

Since the mid-1980s, we have reported that DOD employs a systemic
bias toward overly optimistic planning assumptions in its budget
formulation.  We have said that this results in too many programs for
the available dollars--plans/funding mismatch.  This, in turn, leads
to program instability, costly program stretch-outs, and program
terminations.  In essence, DOD's budgets have been unrealistic. 

In 1994, we reported that the 1995 FYDP for fiscal years 1995-99, the
FYDP that reflected the budgetary decisions from the bottom-up
review, revealed a substantial amount of risk resulting in
overprogramming that could be in excess of $150 billion.\1 In 1995,
we reported that DOD's total program for fiscal years 1996-99 had
increased by about $12.6 billion; approximately $27 billion in
planned weapon system modernization programs for these
4 years had been eliminated, reduced, or deferred to the year 2000
and beyond; and military personnel, operation and maintenance (O&M),
and family housing accounts had increased by over $21 billion.  The
net effect was a more costly program, despite substantial reductions
in DOD's weapons modernization program between 1996 and 1999.\2 In
October 1997, we reported that DOD's 1998 FYDP for fiscal years
1998-2001 had substantial risk that programs would not be executed as
planned.\3

Specifically, we said that although DOD projected billions of dollars
in savings due to management initiatives, it did not have details on
how all the savings would be achieved.  Also, although DOD projected
no real growth in the cost of the Defense Health Program during
1998-2001, O&M funds in DOD's health program had increased 73 percent
in real terms during 1985-96.  DOD acknowledged in its May 1997 QDR
report that the 1998 FYDP included substantial financial risk.  It
stated that, compared to the 1998 FYDP, the QDR proposed a more
balanced, modern, and capable defense program that can be achieved
within currently proposed budgets. 


--------------------
\1 Future Years Defense Program:  Optimistic Estimates Lead to
Billions in Overprogramming (GAO/NSIAD-94-210, July 29, 1994). 

\2 Future Years Defense Program:  1996 Program Is Considerably
Different From the 1995 Program (GAO/NSIAD-95-213, Sept.  15, 1995). 

\3 Future Years Defense Program:  DOD's 1998 Plan Has Substantial
Risk in Execution (GAO/NSIAD-98-26, Oct.  23, 1997). 


   DOD'S MODERNIZATION GOALS HAVE
   NOT BEEN ACHIEVED
---------------------------------------------------------- Chapter 0:3

Since 1989 and the fall of the Berlin Wall, DOD has reduced the
number of men and women in uniform by 33 percent and removed a
significant number of Army divisions, Air Force wings, and Navy ships
from the active forces.  In addition, DOD decided to realign and
close numerous major domestic military installations and smaller
installations and to realign many others.  During the same period,
the defense budget has declined from $374 billion to $262 billion in
constant 1999 dollars--a reduction of 30 percent.  The procurement
accounts have led the decline with a combined reduction of over 50
percent, whereas the research, development, test, and evaluation
accounts have declined by some 20 percent. 

In the early years of the procurement decline, DOD said that it could
afford to delay weapons procurement because as forces were reduced,
the remaining units could be equipped with modern systems already
fielded.  But in the mid-1990s, DOD believed that the delay had to
end.  For example, the Secretary of Defense testified in February
1995 that a new phase of modernization had to begin immediately to
sustain the quality of the force over the long term.  According to
the Secretary, funding for modernization would come from out-year
real budget growth, reduced infrastructure costs, and acquisition
reform savings. 

Primarily as a result of congressional actions, DOD received
increased funding earlier than planned by the administration.  The
1996 FYDP projected total funding for fiscal years 1996-98 of $738.5
billion.  However, Congress actually appropriated $767.3 billion--an
increase of almost $30 billion. 

Our analysis of DOD's programs and infrastructure activities over the
past several years showed that the infrastructure portion of DOD's
budget had not decreased as DOD planned.\4 In 1997, infrastructure
spending was 59 percent of DOD's total budget, the same percentage
that was reported in DOD's bottom-up review report for 1994.  We have
stated in prior reports that DOD must reduce its military personnel
and O&M costs if it is to reduce its infrastructure because 80
percent of DOD's infrastructure activities are funded from these
appropriation accounts. 

Planned funding increases for modern weapon systems have repeatedly
been shifted further into the future with each succeeding FYDP.  For
example, since 1995, DOD has lowered the estimated funding for 1998
procurement from about $57 billion in the 1995 FYDP to about $43
billion in the 1998 FYDP.  Moreover, in the 1995 FYDP, DOD planned to
achieve a $60-billion annual funding level for procurement by fiscal
year 1999.  One year later in the 1996 FYDP, DOD projected that it
would achieve that funding level in fiscal year 2000.  In the 1997
FYDP, the $60- billion level had slipped again to 2001.  The
following table compares DOD's procurement plans for the last five
FYDPs. 



                                     Table 1
                     
                      Comparison of DOD's Procurement Plans

                              (Dollars in billions)

                          Planned procurement funding
--------------------------------------------------------------------------------
                                                                          Averag
FYDP                1995  1996  1997  1998  1999  2000  2001  2002  2003       e
------------------  ----  ----  ----  ----  ----  ----  ----  ----  ----  ------
1995                $43.  $48.  $49.  $57.  $60.
                       3     4     8     1     1
1996                      39.4  43.5  51.4  54.2  $62.  $67.
                                                     3     3
1997                            38.9  45.5  50.5  57.7  60.1
1998                                  42.6  50.7  57.0  60.7  $68.  $68.
                                                                 3     0
1999                                        48.7  54.1  61.3  60.7  63.5
Unrealized                   -     -     -     -     -     -     -     -   -$9.0
 procurement              $9.0  $10.  $14.  $11.  $8.2  $6.0  $7.6  $4.5
                                   9     5     4
--------------------------------------------------------------------------------
Source:  DOD's FYDPs. 

In the QDR, DOD acknowledges that it has a historic, serious
problem--the postponement of procurement modernization plans to pay
for current operating and support costs.  DOD refers to this as
migration of funds.  According to DOD, the chronic erosion of
procurement funding has three general sources:  underestimated
day-to-day operating costs, unrealized savings from initiatives such
as outsourcing or business process reengineering, and new program
demands.  The QDR concluded that as much as $10 billion to $12
billion per year in future procurement funding could be redirected as
a result of these three general sources.  The QDR also identified
other areas of significant future cost risks. 

To address this financial instability, the QDR recommended cuts in
some force structure and personnel, the elimination of additional
excess facilities through more base closures and realignments, the
streamlining of the infrastructure, and reduced quantities of some
weapon systems.  By taking these actions, the Secretary of Defense
intended that the 1999 budget and FYDP would be fiscally executable,
modernization targets would be met, the overall defense program would
be rebalanced, and the program would become more stable. 


--------------------
\4 Future Years Defense Program:  Lower Inflation Outlook Was Most
Significant Change From 1996 to 1997 Program (GAO/NSIAD-97-36, Dec. 
12, 1996); Defense Infrastructure:  Costs Projected to Increase
Between 1997 and 2001 (GAO/NSIAD-96-174, May 31, 1996); and Future
Years Defense Program:  1996 Program Is Considerably Different From
the 1995 Program. 


   SUBSTANTIAL RISKS REMAIN IN
   DOD'S 1999-2003 PROGRAM DESPITE
   CHANGES TO REDUCE RISKS
   IDENTIFIED IN THE QDR
---------------------------------------------------------- Chapter 0:4

The 1999 FYDP reflects the budget blueprint outlined in the balanced
budget agreement.  Within the agreed to budgets, DOD made program
additions and cuts to reduce risks identified in the QDR.  For
example, DOD

  -- increased planned funding for the Defense Health Program, which
     had been significantly underbudgeted in prior FYDPs;

  -- created an acquisition program stability reserve to address
     unforeseeable cost growth that can result from technical risk
     and uncertainty associated with developing advanced technology
     for weapon systems; and

  -- reduced planned quantities of some weapon systems such as the
     Joint Surveillance Target Attack Radar Systems' aircraft, F-22
     fighters, and F/A-18E/F fighters. 

Despite the adjustments to decrease the risk that funds would migrate
from procurement to unplanned operating expenses, there are
substantial risks that DOD's program may not be executable as
planned. 


      SOME PERSONNEL CUTS AND
      ASSOCIATED SAVINGS MAY NOT
      BE ACHIEVED
-------------------------------------------------------- Chapter 0:4.1

DOD's decision to reduce personnel as part of the QDR was driven
largely by the objective of identifying dollar savings that could be
used to increase modernization funding.  We reported in April 1998
that considerable risk remains in some of the services' plans to cut
175,000 personnel and save $3.7 billion annually by 2003.\5

The 1999 FYDP does not include all the personnel cuts directed by the
QDR.  With the exception of the Air Force, the services had plans
that should enable them to achieve the majority of their active
military cuts by the end of 1999.  The Office of the Secretary of
Defense (OSD) determined that some of the Air Force's active military
cuts announced in May 1997 to restructure fighter squadrons and
consolidate bomber squadrons should not be included in the 1999 FYDP
because the plans were not executable at that time. 

Plans for some cuts included in the 1999 FYDP were incomplete or
based on optimistic assumptions.  For example, the Army has not
decided how 25,000 of the 45,000 reserve cuts will be allocated. 
This decision will not be made before the next force structure
review.  Moreover, plans to achieve savings through outsourcing and
reengineering may not be implemented by 2003 as originally
anticipated.  For example, the Army planned to compete 48,000
positions to achieve the majority of its civilian reductions. 
However, according to a senior Army official, those reductions cannot
be completed by 2003.  Although the Army had announced studies
covering about 14,000 positions, it had not identified the specific
functions or locations of the remaining positions to be studied.  In
addition, the Army's plan to eliminate about 5,300 civilian personnel
in the Army Materiel Command through reengineering efforts involved
risk because the Command did not have specific plans to achieve these
reductions.\6 Although outsourcing is only a small part of the Navy's
QDR cuts, the Navy had an aggressive outsourcing program that
involved risk.  Specifically, the Navy programmed savings of $2.5
billion in the 1999 FYDP based on plans to study 80,500
positions--10,000 military and 70,500 civilian--by 2003.  Moreover,
the Navy had not identified the majority of the specific functions to
be studied to achieve the expected savings.  According to a senior
Navy acquisition official, the Navy's ambitious projected outsourcing
savings may not materialize, thereby jeopardizing its long-term O&M
and procurement plans. 

OSD recognizes that personnel cuts and the planned savings from those
cuts have not always been achieved, which contribute to the migration
of procurement funding.  Therefore, OSD has established two principal
mechanisms for monitoring the services' progress to reduce personnel
positions.  First, it expects to review the services' plans to reduce
personnel positions during annual reviews of the services' budgets. 
Second, the Defense Management Council is expected to monitor the
services' progress in meeting outsourcing goals.\7


--------------------
\5 Quadrennial Defense Review:  All Personnel Cuts and Associated
Savings May Not Be Achieved (GAO/NSIAD-98-100, Apr.  30, 1998). 

\6 The Army now plans to eliminate 7,410 personnel. 

\7 The council, chaired by the Deputy Secretary of Defense, was
charged by the Secretary to ensure implementation of DOD's initiative
to streamline and improve infrastructure and support activities. 


      UNPROGRAMMED BILLS COULD
      LEAD TO HIGHER O&M COSTS
-------------------------------------------------------- Chapter 0:4.2

The QDR reported that unprogrammed expenses arise that displace
funding previously planned for procurement.  According to DOD, the
most predictable of these expenses are underestimated costs in
day-to-day operations, especially for depot maintenance, real
property maintenance, and medical care.  The least predictable are
unplanned deployments and smaller scale contingencies. 


         DEPOT MAINTENANCE
------------------------------------------------------ Chapter 0:4.2.1

The services and the defense agencies plan to obligate $73 billion
for depot maintenance between 1999 and 2003.  While we have noted
that DOD tends to adjust maintenance requirements as it moves closer
to obligating funds, the $73-billion estimate does not allow the
defense agencies and the services to achieve OSD's goal of funding 85
percent of their maintenance requirements during 1999-2003.  For
example, the Army is projected to meet only 68 percent of its depot
maintenance requirements in 1999 and 79 percent by 2003. 


         REAL PROPERTY MAINTENANCE
------------------------------------------------------ Chapter 0:4.2.2

Despite four base realignment and closure rounds, DOD still has
excess, aging facilities and has not programmed sufficient funds for
maintenance, repair, and upgrades.  Each service has risk in its real
property maintenance program to the extent that validated real
property needs are not met.  For example, in the 1999 President's
budget, the Air Force plans to fund real property maintenance at the
preventive maintenance level in 1999, which allows for day-to-day
recurring maintenance.  This results in risk because the physical
plant is degraded and the backlog of maintenance and repair
requirements increases.  Also, while the Marine Corps added funds
during 1999-2003, the Commandant of the Marine Corps determined that
the planned funding would merely minimize deterioration of its
facilities.  Furthermore, although the Army added approximately $1
billion for real property maintenance in the 1999 FYDP, it was not
projected to meet its funding goal until 2002. 


         DOD HEALTH PROGRAM
------------------------------------------------------ Chapter 0:4.2.3

According to a Defense Health Affairs official, the cumulative O&M
funding increase of $1.6 billion over the 1998 FYDP adequately funds
the core medical mission, which is comprised of two parts, direct
care and managed care contracts.  However, the 1999 FYDP funding is
contingent on several assumptions that contain risk.  First, the
Defense Health Program assumes program-related personnel reductions
due to outsourcing and privatization initiatives.  Savings for these
efforts are estimated to be $131 million by 2003.  Second, the
program assumes a 1-percent savings from utilization management, such
as reducing the length of hospital stays from 4 days to 3 days. 
Third, population adjustments due to force structure reductions play
a pivotal role.  The projected program assumes that the active
military force will be reduced by 61,700 personnel who will be a mix
of retirees and nonretirees.  If a higher percentage of the
end-strength reduction stems from retirements than originally
planned, the program will experience higher costs because retirees
and their dependents will remain part of the beneficiary population. 
According to a senior Defense Health Affairs official, the funded
program does not include an allowance for the impact of advances in
medical technology and the intensity of treatment that was identified
in our previous report as a risk factor.\8

Our recent work raises questions about whether cost savings and
efficiencies in defense health care will materialize.  In August
1997,\9 we reported that a key cost-saving initiative of TRICARE,
DOD's new managed health care system, was returning substantially
less savings than anticipated and the situation was not likely to
improve.  In our February 1998 testimony to Congress,\10 we stated
that implementation of TRICARE was proving complicated and difficult
and that delays had occurred and may continue. 


--------------------
\8 Defense Health Program:  Future Costs Are Likely to Be Greater
Than Estimated (GAO/NSIAD-97-83BR, Feb.  21, 1997). 

\9 Defense Health Care:  TRICARE Resource Sharing Program Failing to
Achieve Expected Savings (GAO/HEHS-97-130, Aug.  22, 1997). 

\10 Defense Health Care:  Operational Difficulties and System
Uncertainties Pose Continuing Challenges to TRICARE
(GAO/T-HEHS-98-100, Feb.  26, 1998). 


         CONTINGENCY OPERATIONS
------------------------------------------------------ Chapter 0:4.2.4

Notwithstanding the historical costs of several, often overlapping
contingency operations, the 1999 FYDP provides funds for the
projected "steady state" costs of Southwest Asia operations--$800
million in 1999.  According to OSD officials, by design, the FYDP
does not include funds for (1) the sustainment of increased
operations in the Persian Gulf to counter Iraq's intransigence on
U.N.  inspections, (2) the President's extension of the mission in
Bosnia, or (3) unknown contingency operations.  DOD's position is
that costs for the Bosnia mission should be financed separately from
planned DOD funding for 1999-2003.  Further, the QDR concluded that
contingency operations will likely occur frequently over the next 15
to 20 years and may require significant forces, given the national
security strategy of engagement and the probable future international
environment.  Thus, it is likely that DOD will continue to have
unplanned expenses to meet contingency operations. 


      RISK IN MEETING PROCUREMENT
      GOALS
-------------------------------------------------------- Chapter 0:4.3

We reported in October 1997 that, since 1965, O&M spending has
increased consistently with increases in procurement spending. 
However, in its 1998 FYDP, DOD deviated from this historical pattern
and projected increases in procurement together with decreases in
O&M.  In the 1999 FYDP, DOD takes a more moderate position,
projecting that O&M spending in real terms will remain relatively
flat while procurement increases at a moderate rate. 

We reported that DOD's plans for procurement spending also run
counter to another historical trend.  Specifically, DOD's procurement
spending rises and falls with its total budget.  However, in the 1998
FYDP, DOD projected an increase in procurement of about 43 percent,
but a relatively flat total DOD budget.  The 1999 FYDP procurement
projections continue to run counter to the historical trend, although
DOD has moderated its position.  Specifically, DOD projects that
procurement funding will rise in real terms during 1998-2003 by
approximately 29 percent, while the total DOD budget will remain
relatively flat. 


      PROGRAM DEMANDS AND COST
      GROWTH
-------------------------------------------------------- Chapter 0:4.4

The QDR report cited cost growth of complex, technologically advanced
programs and new program demands as two areas contributing to the
migration of funds from procurement.  For years, we have reported on
the impact of cost growth in weapon systems and other programs such
as environmental restoration.  Specifically, we reported in July 1994
that program cost increases of 20 to 40 percent have been common for
major weapon programs and that numerous programs experienced
increases much greater than that.  We continue to find programs with
optimistic cost projections.  For example, we reported in June 1997
that it was doubtful that the Air Force could achieve planned
production cost reductions of $13 billion in its F-22 fighter
aircraft program.\11

Other DOD programs have also experienced cost growth.  For example,
DOD estimated in December 1997 that the projected life- cycle cost of
the Chemical Demilitarization Program had increased by 27 percent
over the previous year's estimate.\12 As stated earlier, DOD has
established a reserve fund that can be used to help alleviate
disruptions caused by cost growth in weapon systems and other
programs due to technological problems.  However, it remains to be
seen whether the need will exceed available reserve funds. 

Policy decisions and new program demands can also cause perturbations
in DOD's funding plans, according to the QDR report.  DOD has
programmed $1.4 billion more for the National Missile Defense System
in the 1999 FYDP than the 1998 FYDP.  Despite the increase,
considerable risk remains with the system's funding.  For example,
technical and schedule risks are very high, according to the QDR, our
analysis,\13 and an independent panel.\14
The panel noted that based on its experience, high technical risk is
likely to cause increased costs and program delays and could cause
program failure.  In addition to the technical and schedule risks,
the 1999 FYDP does not include funds to procure the missile system. 
If the decision in 2000 is made to deploy an initial missile system
by 2003, billions of dollars of procurement funds would be required
to augment the currently programmed research and development funds. 

As another example, the 1999 FYDP was predicated on the United States
shifting to a Strategic Arms Reduction Treaty (START) II nuclear
force posture.  START II calls for further reductions in aggregate
force levels, the elimination of multiple warhead intercontinental
ballistic missile launchers and heavy intercontinental ballistic
missiles, and a limit on the number of submarine-launched ballistic
missile warheads.  START II was approved by the U.S.  Senate in
January 1996, but its enforcement is pending until ratification by
Russia's parliament.  In the absence of
START II enforcement, the United States may decide to sustain the
option of continuing START I force levels.  According to the
Secretary of Defense's 1998 Annual Report to the President and the
Congress, the 1999 budget request includes an additional $57 million
beyond what otherwise would have been requested to sustain the START
I level.  However, maintaining this force beyond 1999 will result in
additional unplanned costs. 


--------------------
\11 Tactical Aircraft:  Restructuring of the Air Force F-22 Fighter
Program (GAO/NSIAD-97-156, June 4, 1997). 

\12 The program was established by the Department of Defense
Authorization Act, 1986 (P.L.  99-145).  DOD is required to destroy
the complete chemical stockpile by April 29, 2007. 

\13 National Missile Defense:  Schedule and Technical Risks Represent
Significant Development Challenges (GAO/NSIAD-98-28, Dec.  12, 1997). 

\14 Report of the Panel on Reducing Risk in Ballistic Missile Defense
Flight Test Programs (Feb.  27, 1998). 


   IMPLICATIONS FOR DOD'S FUTURE
   MODERNIZATION
---------------------------------------------------------- Chapter 0:5

In its QDR report, DOD recognized that current procurement trends
have long-term implications.  Specifically, "As successive FYDPs
reduced the amount of procurement programmed in the six-year planning
period, some of these reductions have accumulated into long-term
projections, creating a so-called `bow wave' of demand for
procurement funding in the middle of the next decade." The QDR report
concludes that "this bow wave would tend to disrupt planned
modernization programs unless additional investment resources are
made available in future years."

The bow wave is particularly evident when considering DOD's aircraft
modernization plans.  In September 1997, we reported that DOD planned
to buy or significantly modify at least 8,500 aircraft in 17 aircraft
programs at a total procurement cost of $334.8 billion (in 1997
dollars) through the aircrafts' planned completions.\15 DOD's planned
funding for these aircraft programs exceeds in all but 1 year,
between fiscal year 2000 and 2015, the long-term historical average
percentage of the budget devoted to aircraft purchases.  Compounding
these funding difficulties is the fact that these projections are
conservative.  The projections do not allow for real program cost
growth, which historically has averaged at least 20 percent, or for
the procurement of additional systems.  However, as a result of the
QDR, the 1999 FYDP service aircraft procurement accounts have been
moderated.  Compared with the 1998 FYDP, the 1999 FYDP reduces
projected aircraft funding by $3.9 billion, or 4 percent. 


--------------------
\15 Aircraft Acquisition:  Affordability of DOD's Investment Strategy
(GAO/NSIAD-97-88, Sept.  8, 1997). 


   OBSERVATIONS
---------------------------------------------------------- Chapter 0:6

As the Chairman of the Joint Chiefs of Staff testified last week, DOD
continues to face difficult funding decisions in trying to balance
current readiness against modernization, infrastructure, and quality
of life issues.\16 DOD has and will continue to face difficult
decisions in an effort to balance its program within projected
budgets.  Optimistic planning provides an unclear picture of defense
priorities because tough decisions and trade-offs are avoided.  In
order for DOD to have an efficient and effective program and for
Congress to properly exercise its oversight responsibilities, it is
critical that DOD present realistic assumptions and plans in its
future budgets. 


--------------------
\16 Statement of General Henry H.  Shelton, Chairman of the Joint
Chiefs of Staff, before the Committee on Armed Services, United
States Senate (Sept.  29, 1998). 


-------------------------------------------------------- Chapter 0:6.1

Messrs.  Chairmen, this concludes our prepared statement.  We will be
glad to answer any questions you or members of the Subcommittees may
have. 


*** End of document. ***