Coast Guard: Budget Challenges for 2001 and Beyond (Testimony,
03/15/2000, GAO/T-RCED-00-103).
This testimony presents information on the challenges that the Coast
Guard faces in its fiscal year 2001 and future budget requests. The
testimony is based on recently completed and ongoing GAO work on the
Coast Guard's progress in justifying and managing its Deepwater Project
and opportunities to improve the Coast Guard's operating efficiencies.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: T-RCED-00-103
TITLE: Coast Guard: Budget Challenges for 2001 and Beyond
DATE: 03/15/2000
SUBJECT: Budget cuts
Human resources utilization
Cost control
Mission budgeting
Procurement planning
Future budget projections
Presidential budgets
Cost effectiveness analysis
Financial management
IDENTIFIER: Coast Guard Deepwater Capability Replacement Project
Fleet Logistic Support Improvement Program
Coast Guard Aviation Logistics Management Information
System
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GAO/T-RCED-00-103
United States General Accounting Office
Testimony
FILLIN \o \* MERGEFORMAT Before the Subcommittee on Coast Guard and Maritime
Transportation, Committee on Transportation and Infrastructure, House of
Representatives
FILLIN \* MERGEFORMAT Expected at 10:00 a.m. EST
Wednesday
March 15, 2000
FILLIN \o \* MERGEFORMAT COAST GUARD
FILLIN \o \* MERGEFORMAT Budget Challenges for
2001 and Beyond
Statement of FILLIN \o \* MERGEFORMAT John H. Anderson, Jr.,
Director, Transportation Issues,
Resources, Community, and Economic
Development Division
EMBED Word.Picture.8 Mr. Chairman and Members of the Subcommittee:
We are pleased to be here today to discuss challenges that the Coast Guard
faces in its fiscal year 2001 and future budget requests. For fiscal year
2001, the Coast Guard is asking for $4.7 billion, representing a 14-percent
increase over this year's appropriations. Over the last 4 years, we have
issued a series of reports and testified before this Subcommittee and others
on budget challenges facing the agency. A major budget challenge facing the
Coast Guard involves its Deepwater Project-an effort to replace or modernize
the Coast Guard's cutter and aircraft fleets and their associated support
systems. This project could cost about $10 billion or more over the next 20
years. The Coast Guard is asking for $42.3 million in fiscal year 2001 for
the Deepwater Project, in part to pay three teams of contractors that are
developing proposals for the agency's next generation of ships and aircraft.
About a year from now, in its fiscal year 2002 budget request, the agency
plans to ask for $350 million for this project. Beginning in fiscal year
2003 and throughout the remaining life of the project, annual funding
requests exceeding $500 million are expected. Although large in its scope,
the Deepwater Project is by no means the only budget issue that the Coast
Guard faces. As we have reported previously, the Coast Guard has a number of
opportunities to improve the efficiency and cost-effectiveness of its
operations. Taking advantage of these opportunities will require the Coast
Guard to make some tough decisions and reconsider some fundamental positions
about its operations.
My testimony today, which is based on recently completed and ongoing work,
addresses two topics: (1) the Coast Guard's progress in justifying and
managing its Deepwater Project and (2) opportunities for improving the Coast
Guard's operating efficiencies.
In summary, our work shows the following:
* Our prior report on the Deepwater project questioned its justification
and affordability. For example, the Coast Guard had significantly
understated the remaining useful life of its aircraft and ships. In
response to our report, the Coast Guard is addressing many of our
concerns regarding the justification for the project by gathering
additional data on the condition of its existing ships and aircraft.
However, the Coast Guard plans to request significant funds-starting
with $350 million for fiscal year 2002-before the planning phase of the
project is completed and without having some other key issues resolved.
For example, the Coast Guard will ask the Congress to approve funding
for the program before it has developed and proven the effectiveness of
new technologies, such as the development of software used in
communications equipment, and received assurance that the contractor
can successfully produce a product on time and at cost. Experience has
shown that when projects are undertaken before major uncertainties like
these are resolved, cost, schedule, and performance risks increase. How
the Coast Guard manages risks in the acquisition process-particularly
in the next 12 to 18 months-is critical to the success of the program.
At the request of this Subcommittee, we will examine the revised
justification for the project and the Coast Guard's management of the
acquisition process and report to you early next year.
* The Coast Guard has opportunities to improve the efficiency and
cost-effectiveness of its operations. Past studies by us and others
have recommended cost-cutting measures, such as consolidating or
closing training centers and other facilities, lengthening rotation
periods for military personnel, and more efficiently managing the spare
parts inventories for cutters and aircraft. The Coast Guard has not
taken action on many of these recommendations, although it is working
on systems to improve the management of its spare parts inventories.
* In a report we issued earlier this month, we identified another area
that would save money for the federal government, although not have a
major effect on the Coast Guard's budget. It involves the potential
conversion of commissioned officer positions in administrative and
support positions to civilian positions. The Coast Guard has agreed to
examine whether conversions of the military officer positions that we
identified are possible.
The Coast Guard Is Addressing Our Concerns on the Deepwater Project, but Key
Questions Remain as It Seeks More Funding
The Coast Guard is addressing many of our previous concerns about the
justification of the Deepwater Project. However, numerous uncertainties
still exist, including the project's affordability, the accuracy of
estimates for project costs and delivery, the adequacy of management
controls in place to oversee the project, and the contracting strategy to be
used. These challenges must be addressed both before and after it awards a
contract for its Deepwater system in January 2002.
Last year, we testified before this Subcommittee and others that the Coast
Guard lacked accurate and complete data as a basis for justifying the
Deepwater Project, including information on the useful life, performance
shortfalls, and capability gaps of the Coast Guard's existing fleet of
aircraft and ships. According to Department of Transportation guidelines,
these data should have been available before the Coast Guard had its
contractors design a new deepwater system starting in August 1998. Two
important actions have occurred since we testified before this Subcommittee
last year:
* First, in December 1999, an Interagency Task Force on U.S. Coast Guard
Roles and Missions-spearheaded by the Office of Management and Budget
(OMB)-concluded that there is a national interest in having the Coast
Guard continue its maritime and national security responsibilities. The
Task Force also stated that planning for the modernization of the Coast
Guard's Deepwater ships and aircraft is a national priority. The Coast
Guard has contracted with the Center for Naval Analysis (a nonprofit
research and analysis organization) to use the findings of the Task
Force to revise its justification for the Deepwater Project. The Coast
Guard expects to issue its revised justification later this year.
* Second, the Coast Guard has developed additional data on the condition
of its ships and aircraft and has provided this information to its
contractors. For example, an October 1998 study on the condition of
Coast Guard aircraft concluded that with appropriate maintenance and
upgrades, these aircraft would be capable of operating to 2012 and
beyond. Also, a September 1999 study on the condition of Coast Guard
cutters concluded that assuming maintenance support remains at current
levels, Coast Guard cutters have a service life until 2007 and beyond.
Having these data available before contractors begin designing the
overall Deepwater system would help ensure that contractors design
systems that fully utilize existing assets and that they develop
realistic implementation plans and cost estimates. However, three teams
of contractors are well along in developing separate Deepwater
proposals, and the Coast Guard estimates that they have completed more
than half of their basic designs for the system. The Coast Guard
acknowledges the importance of providing contractors with accurate data
on the need to replace or modernize deepwater ships and aircraft and
has done so as the data have been developed.
Three areas critical to the ultimate success of the Deepwater Project still
need to be addressed and monitored closely as the project proceeds:
* First, the affordability of the project is a major concern. The Coast
Guard may be asking the Congress for levels of funding for its capital
projects that far exceed historical funding levels. For example, last
year we estimated that the Coast Guard's total capital budget needs
will be about $700 million annually beginning in fiscal year 2003,
including about $500 million for the Deepwater project. This is almost
twice the average annual capital funding it has received in recent
years. To help agencies like the Coast Guard that face large capital
expenditures, OMB calls on them to prioritize their planned capital
projects. To be in a position to fund the Deepwater project, the Coast
Guard has begun to do this. For example, the Coast Guard has
established an "Investment Board" composed of senior agency managers
who evaluate the agency's assets and assign priorities to capital
acquisition projects. In addition, the Congress has required the agency
to build a 5-year capital investment plan as a means of managing its
budget within future funding constraints. Recognizing that
affordability will be a major factor in the project's success, the
Coast Guard has asked its contractors and a third-party consultant to
explore alternative implementation and spending plans for the project.
For example, the evaluation by contractors will include identifying the
optimum and minimum funding streams for building the Deepwater system.
* Second, uncertainties on cost, schedule, and the performance of the
overall Deepwater program will likely remain when it is launched next
year before the planning phase of the project is completed. The Coast
Guard plans to request $350 million for the Deepwater Project in
February 2001, but it will not complete its planning process until
contractors submit their final proposals in July 2001 and it awards the
contract for the Deepwater Project in January 2002. Beyond the issue of
asking for funds that may not be fully supported by a completed
planning process, the federal government's implementation of many major
acquisition projects has not been good and provides some lessons for
the Deepwater Project. For example, our prior work on other major
acquisition projects such as those undertaken by the Department of
Defense (DOD), Federal Aviation Administration, and Department of
Energy shows that projects are often undertaken despite uncertainties
regarding engineering designs, software development, the compatibility
of different components in the system, manufacturing processes,
affordability, and assurance that contractors can successfully produce
a product on time and at cost. When this happens, experience shows that
cost increases, schedule slips, and production problems can occur. The
Coast Guard faces similar uncertainties and must take care to avoid
problems that have beset these other programs. Clearly, the Coast Guard
needs to modernize its cutter and aircraft fleets in the future but
must do it right and minimize the risks associated with the program.
How well the Coast Guard identifies and manages its risks will be a key
to its success.
* Third, the Coast Guard's current acquisition strategy is unique, and
its success may not be known for some time. The agency's strategy calls
on three teams of contractors-which have been working on the project
for about the last 18 months-to propose designs and schedules to
replace or modernize all of the Coast Guard's deepwater ships,
aircraft, and associated systems. Each contractor team is composed of a
consortium made up of an aircraft manufacturer, a shipyard, and
manufacturers of radars, communications, and other types of equipment.
The Coast Guard expects to award a contract to only one of the
contractor teams in January 2002 to modernize or replace all deepwater
ships, aircraft, and systems over the next 20 years. Initially, the
Coast Guard expects that competition among the three teams of
contractors to design the system will help to control costs and produce
the best design. However, because the Deepwater Project will involve
the same contractor team delivering different components (for example,
ships, aircraft, and communications equipment) at different times over
the 20-year period, a key question is how costs will be controlled and
performance ensured once the contract is awarded in 2002. Because the
Coast Guard will be "locked-in" to a single contractor team, the Coast
Guard's strategy must incorporate ways to ensure that it procures
technologically up-to-date equipment at a fair and reasonable price.
Coast Guard Has Opportunities to Improve Its Efficiency
The Coast Guard carried out a series of actions to streamline its operations
and achieved significant cost-savings from fiscal years 1994 through 1999.
While a number of issues were addressed, others were not, and we believe
that the Coast Guard has additional opportunities to improve its operating
efficiencies. At the request of this Subcommittee, we have studied
cost-cutting options for the Coast Guard. Many of these options, which are
still relevant today, have not been adopted. Following are several examples
of these options:
* Lengthen periods between assignment rotations for military personnel.
In general, the Coast Guard rotates its officers and enlisted personnel
every 2 to 4 years. Past studies by groups outside the Coast Guard have
pointed out that lengthening periods between reassignments could
substantially reduce transfer costs, which now amount to more than $75
million annually. Moreover, the Coast Guard's relocation costs for
officers is higher than the costs for DOD officers. The Coast Guard
thinks its current rotation policies are appropriate and does not plan
to study the issue further. Coast Guard officials said that changing
current practices would have several undesirable effects, including
reduced opportunities to command a variety of units or vessels and
lower morale among personnel assigned to undesirable locations for
extended periods of time. However, the agency has offered no data or
analyses to support these claims.
* Consolidate functions or close facilities. Previous studies by the
Coast Guard have identified this as another option to reduce
expenditures. For example, several years ago, the Coast Guard
identified a cost-cutting option that would consolidate its training
facilities, a move that would have resulted in annual savings of about
$9 million, by closing the facility at Petaluma, California. Fearing
opposition by the local community, the Coast Guard postponed taking
this step. The possible closure of some boat stations and the Coast
Guard's Shipyard near Baltimore, Maryland, have also been discussed in
the last several years, but no action has been taken.
* Consolidate cutter and aircraft spare parts inventory systems. Coast
Guard officials have stated that the consolidation of information
systems for cutter and aircraft spare parts could save money. The Coast
Guard is currently developing independent
systems for its cutters (Fleet Logistics System) and its aircraft (Aviation
Logistics Management Information System). These officials indicated that it
is too late to achieve any savings by consolidating the systems at this
stage in their development. However, they plan to explore the potential for
consolidating the systems after both systems are operational.
The Coast Guard has not implemented many of these efficiency-enhancing
options because they are controversial, require cultural changes within the
Coast Guard, or are not popular with the public. We have suggested several
possible strategies and approaches for encouraging the Coast Guard to be
more proactive in pursuing efficiency measures. One approach to help the
agency identify and implement facilities' consolidations and closures is to
institute a facility closure approach similar to the one DOD used to
evaluate base closures. Under this approach, an independent commission would
be given the authority to recommend the closure of some of the Coast Guard's
facilities. To date, such a commission has not been established.
Another area that would not provide significant budgetary savings for the
Coast Guard, especially in the short-term, but would save money for the
federal government over the longer-term involves the use of civilian rather
than military personnel in some administrative and support positions. As we
reported earlier this month, we believe that about 800 commissioned officer
positions in administrative and support positions have potential for
conversion to civilian positions. Doing so could result in long-term
potential savings that amount to about $15 million annually for the federal
government because the salary and benefits of a commissioned officer are, on
average, approximately 21 percent more expensive than those of a civilian
employee in the same position. To its credit, the Coast Guard has agreed
that additional conversions, in addition to those it has made in the past,
are possible and that it will examine each of the positions we identified
for conversion.
- - - -
In conclusion, the Deepwater Project will be at a critical juncture in the
next 12 to 18 months because once the project is launched and a major
infusion of funding occurs, it will become more difficult to change the
project's course. Completing project planning, adopting a sound acquisition
strategy, and providing effective oversight of contractors are vital
elements to the project's success. The Coast Guard's plan to request
significant funds for the project next February while many uncertainties
still remain should be closely examined. At the request of this
Subcommittee, we are currently evaluating this issue and other aspects of
the project, including how well the Coast Guard is positioning itself for
the challenges ahead. We will report to you before budget hearings next year
on this important matter. Even though the Deepwater Project may be the most
significant single budget challenge that the Coast Guard faces, we believe
the agency should vigorously explore any opportunities to improve its
operational efficiency, including the potential conversion of certain
commissioned officer positions to civilian positions.
Mr. Chairman, this concludes my testimony. I will be happy to respond to any
questions you or other Members may have.
(348208)
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