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1997 DOD Budget: Potential Reductions to Operation and Maintenance Program (Letter Report, 09/18/96, GAO/NSIAD-96-220).

GAO evaluated the military services' and Department of Defense's (DOD)
fiscal year (FY) 1997 operations and maintenance (O&M) budget requests,
focusing on whether the O&M accounts should be funded in the amounts
requested.

GAO found that: (1) the Army, Navy, and Air Force's FY 1997 budgets for
spare parts could be reduced by $723 million; (2) the Air Force's FY
1997 budget request could be reduced by $388 million to reflect the
value of reclaimed spare parts used to satisfy other requirements; (3)
the Air Force and Navy overstated their spare parts budget request by
$60 million because they used inaccurate lead times, demand rates, and
due-out quantities in their requirements determination process; (4) this
inaccuracy resulted in the Air Force overstating its requirements by $8
million and the Navy overstating its requirements by $7 million; (5) the
services' budget request for bulk fuel could be reduced by $522.3
million, since the services requested more funds than actually needed;
(6) the services' have unobligated balances of at least $2.2 billion
from prior year appropriations; (7) the Air Force's FY 1997 O&M budget
request could be reduced by at least $376.2 million if some of its
aircraft are retired or placed in storage until needed; (8) the Air
Force's FY 1997 O&M budget request includes a one-time increase of
$194.5 million that will be passed to the Defense Business Operations
Fund (DBOF) to recover prior years' operating losses and the Army's FY
1997 O&M budget request includes $58.9 million that will be passed
through DBOF to cover the cost of unutilized plants; (9) the FY 1997
budget requests for civilian personnel could be reduced by $245.5
million; and (10) the Air Force could lose about $8.5 million during FY
1997 if corrective actions are not taken to ensure timely filing of fuel
tax refunds.

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

 REPORTNUM:  NSIAD-96-220
     TITLE:  1997 DOD Budget: Potential Reductions to Operation and 
             Maintenance Program
      DATE:  09/18/96
   SUBJECT:  Military budgets
             Military inventories
             Spare parts
             Inventory control systems
             Military cost control
             Military procurement
             Unobligated budget balances
             Military appropriations
             Budget cuts
             Aircraft maintenance
IDENTIFIER:  Air Force Reclamation Program
             B-1B Bomber
             F-15 Aircraft
             F-16 Aircraft
             Defense Business Operations Fund
             Hunter Unmanned Aerial Vehicle
             Army Afloat Prepositioning Program
             Bosnia
             Osprey Class Mine Hunter Coastal Ship
             DOD Environmental Restoration Account
             
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Cover
================================================================ COVER


Report to Congressional Committees

September 1996

1997 DOD BUDGET - POTENTIAL
REDUCTIONS TO OPERATION AND
MAINTENANCE PROGRAM

GAO/NSIAD-96-220

1997 DOD Budget

(703135)


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

  AFAA - Air Force Audit Agency
  AMC - Air Mobility Command
  DBOF - Defense Business Operating Fund
  DERA - Defense Environmental Restoratin Account
  DFSC - Defense Fuel Supply Center
  DOD - Department of Defense
  DOD-IG - DOD Inspector General
  FORSCOM - U.S.  Forces Command
  JCS - Joint Chief of Staff
  JROC - Joint Requirements Oversight Council
  JRTC - Joint Readiness Training Center
  LMSR - large, medium speed, roll-on/roll-off
  MHC - coastal mine hunter ships
  MSC - Military Sealift Command
  MTMC - Military Traffic Command
  MWR - morale, welfare, and recreation
  NTC - National Training Center
  O&M - operation and maintenance
  OPTEMPO - operating tempo
  RRF - Ready Reserve Fleet
  TRM - Training Resource Model
  USAREUR - U.S.  Army, Europe
  USTRANSCOM - U.S.  Transportation Command

Letter
=============================================================== LETTER


B-274141

September 18, 1996

Congressional Committees

This report evaluates the military services' and Department of
Defense's (DOD) fiscal year 1997 operation and maintenance (O&M)
budget requests, which total $79 billion.  Our objective was to
determine whether the O&M accounts should be funded in the amounts
requested. 

We reviewed selected O&M activities managed by the Army, the Navy,
the Air Force, and DOD at the headquarters level.  We also reviewed
O&M activities managed by U.S.  Army, Europe (USAREUR); U.S.  Forces
Command (FORSCOM); Air Combat Command; and the Atlantic and Pacific
Fleets.  The command and activities were selected for review because
(1) O&M funding levels are increasing, (2) ongoing and issued reports
by us and DOD audit agencies disclosed programmatic issues with O&M
implications, or (3) congressional committees' expressed interest. 

As shown in table 1, we identified potential budget reductions of
about $3.4 billion to the fiscal year 1997 O&M budget requests. 



                                     Table 1
                     
                     Potential Reductions to the Fiscal Year
                       1997 O&M Budget Requests by Program
                                     Category

                              (Dollars in millions)

                                                         Nation
                                 Marine     Air  Defens      al
Category           Army    Navy   Corps   Force       e   Guard       Total
---------------  ------  ------  ------  ------  ------  ------  ===============
Inventoy         $188.0   $67.0          $468.0                      $723.0
 management
Bulk fuel         113.8   166.3           242.2                       522.3
Unobligated       200.2   150.4           151.6                       502.2
 funds
Aircraft                                  376.2                       376.2
 storage
O&M pass-          58.9                   194.5                       253.4
 through to
 Defense
 business
 operating fund
Civilian           33.3   108.3            70.0   $33.9               245.5
 personnel
Operating Tempo   235.0                                               235.0
Transportation     92.5    25.0    12.5    55.0    65.0               250.0
Environmental                                      80.0               80.0
 restoration
Flying hours       40.3                            18.0               58.3
Air Force                                  48.0                       48.0
 basing
 strategy
Real property              27.9                                       27.9
 maintenance
Hunter unmanned    19.5                                               19.5
 aerial vehicle
 system
Training            8.1                                    $8.6       16.7
 rotations at
 the National
 Training
 Center and
 Joint
 Readiness
 Training
 Center
Prepositioning     13.7                                               13.7
 ship program
Fuel tax            2.3                     8.5                       10.8
 refunds
Bosnia                                      5.6                        5.6
 operations
Ammunition          1.3             3.9                                5.2
 maintenance
Mine hunter                 4.7                                        4.7
 ships
Moral, welfare,     2.1                                                2.1
 and recreation
 subsidy
================================================================================
Total            $1,009  $549.6   $16.4  $1,619  $196.9    $8.6     $3,400.1
                     .0                      .6
--------------------------------------------------------------------------------
In April, May, and June 1996, we provided your staffs with the
preliminary results of our work.  This report summarizes and updates
that information, but does not include any actions that may have been
taken by the Committees during their reviews of the services' budget
requests.  The following sections briefly discuss each of the
potential reductions. 


      INVENTORY MANAGEMENT
---------------------------------------------------------- Letter :0.1

The fiscal year 1997 Army, Navy, and Air Force budgets for spare
parts can be reduced by $723 million for the following reasons: 

  -- A 1993 Air Force Audit Agency (AFAA) report\1 found that program
     directors maintained aircraft in reconstitutable storage
     categories (i.e., aircraft with potential contingency,
     mobilization, or conversion use) even though they had not
     identified future requirements for the aircraft and had not
     regenerated an aircraft from reconstitutable storage for the
     active force in 25 years.  AFAA recommended that the Air Force
     Materiel Command delay procurement of current and future spare
     parts requirements, valued at $388 million, that were available
     for reclamation\2

and initiate screening of excess aircraft and engines containing
parts that could satisfy spare parts requirements.  In a February
1996 follow-up report,\3 AFAA found that Air Force personnel did not
release excess aircraft for programmed reclamation screening as
recommended.  Additionally, the Air Force Materiel Command did not
initiate screening of excess aircraft and engines for serviceable
spare parts.  As a result, timely reclamation was not scheduled for
816 aircraft classified as having no future operational use. 

Air Force management has initiated action to correct this problem. 
However, the changes are not reflected in the fiscal year 1997 budget
request.  Therefore, Congress could reduce the Air Force's fiscal
year 1997 budget request by $388 million to reflect the value of
reclaimed spare parts that could be used to satisfy other
requirements. 

  -- The Air Force, in determining its spare and repair parts budget
     request, does not consider parts on hand at the depot
     maintenance facilities as an offset to spare and repair parts
     requirements.  Although Congressional Committees have made
     several attempts to change this policy, the Air Force continues
     to exclude depot-level assets in its requirements data and
     budget computations.\4 Our analysis showed that the Air Force
     overstated its fiscal year 1996 spare parts budget request by
     $72 million because parts on hand for depot maintenance were not
     offset against budget requirements. 

In our March 1996 report, we also reported that the Navy spare parts
requirements and budget request for fiscal year 1997 were overstated
by at least $60 million.  This occurred because the Navy duplicated
depot maintenance requirements in its requirements and budget
computations.  The depot-level assets were included once as recurring
demands, based on past depot maintenance usage, and again in a
planned program requirements category that is not based on recurring
demands.  As a result of these duplications, the Navy's fiscal year
1997 requirements and budget estimates were overstated by at least
$60 million. 

  -- The Air Force and the Navy overstated their spare parts budget
     requests because inaccurate lead times, demand rates, due-out
     quantities, and inventory on hand and on order were used in the
     requirements determination process.  The use of inaccurate data
     resulted in overstated requirements of $8 million and $7 million
     for the Air Force and the Navy, respectively. 

  -- The Army budget stratification reports that are used to
     determine spare and repair parts budget requests are based on
     inaccurate data.  When an item's available inventory is not
     sufficient to meet the requirements, the item is considered to
     be in a deficit position and the aggregate value of items in a
     deficit position is the basis for determining the budget
     request. 

Our review\5 of 258 items with a reported deficit value of $519
million showed that the deficit position for $211 million of the
items was incorrect.  If accurate requirements and inventory data had
been used, the inventory deficit for these items would have been $23
million rather than the $211 million reported.  As a result, the
fiscal year 1996 budget request included $188 million ($211 million
minus $23 million) for items that were not in a deficit position. 

Because corrective actions were not taken in time to affect the
fiscal year 1997 budget request, we believe the fiscal year 1997
request is also overstated.  Therefore, Congress may want to reduce
the Army's spare and repair parts budget request by the $188 million
it was overstated in fiscal year 1996. 


--------------------
\1 Management of Air Force Reclamation Program (Project 93061013, May
26, 1993). 

\2 Reclamation is the process of removing serviceable and
economically repairable components and materiel from excess or
surplus property to satisfy valid requirements.  Reclamation is
limited to aircraft with no identified future use. 

\3 Follow-up Audit --Management of the Air Force Reclamation Program
(Project 95061010, Feb.  16, 1996). 

\4 Defense Logistics:  Requirement Determinations for Aviation Spare
Parts Need to Be Improved (GAO/NSIAD-96-70, Mar.  19, 1996). 

\5 Army Inventory:  Budget Requests for Spare and Repair Parts Are
Not Reliable (GAO/NSIAD-96-3, Dec.  29, 1995). 


      BULK FUEL REQUIREMENTS
---------------------------------------------------------- Letter :0.2

The Army, the Navy, and the Air Force O&M budget requests for bulk
fuel could be reduced by $522.3 million for the following reasons: 

  -- In September 1995,\6 we reported that for fiscal year 1996, the
     Army, the Navy, and the Air Force budget requests for bulk fuel
     totaled about
     $4.12 billion.  Of this, $4.01 billion was to be used to buy
     fuel from the Defense Fuel Supply Center (DFSC), with the
     remaining $107 million used to buy fuel from commercial sources. 
     Based on historical usage data, DFSC estimated that the
     services' fuel purchases would be about $3.57 billion, or about
     $440 million less than the services requested in their budgets,
     as shown below. 



                                     Table 2
                     
                       Bulk Fuel Requirements in the Fiscal
                       Year 1996 Budget Request and DFSC's
                        Estimate of Sales to the Services

                        (Dollars and numbers in millions)


                                  Barrel  Dollar  Barrel  Dollar  Barrel  Dollar
Service                                s       s       s       s       s       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
--------------------------------------------------------------------------------
As a result of the information in our September 1995 report, Congress
reduced the Navy's fiscal year 1996 fuel budget by $100 million. 
However, in February 1996 we found that the services' fuel
requirements had been reduced, and there is still about $340 million
in the services' fiscal year 1996 budgets that exceeds their fuel
needs. 

In view of the above, Congress may want to offset the $340 million
against the fiscal year 1997 request as follows:  Army--$80.7
million, Navy--$124.6 million, and Air Force--$134.3 million. 

  -- For fiscal year 1997, the services have again requested more
     funds for fuel than they will need.  They budgeted for 117.8
     million barrels of fuel at a cost of $3.796 million.  However,
     DFSC estimates that the services will buy 113.2 million barrels
     at a cost of about $3.613 billion, or $183 million less than the
     services estimate.  As a result, Congress may want to reduce the
     services' fiscal year 1997 budget requests by the amounts shown
     in table 3.  This reduction would be in addition to the off-set
     to the fiscal year 1996 budget. 



                                     Table 3
                     
                       Bulk Fuel Requirements in the Fiscal
                       Year 1997 Budget Request and DFSC's
                        Estimate of Sales to the Services

                        (Dollars and numbers in millions)


                                  Barrel  Dollar  Barrel  Dollar  Barrel  Dollar
Service                                s       s       s       s       s       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
--------------------------------------------------------------------------------

--------------------
\6 1996 DOD Budget:  Potential Reductions to Operation and
Maintenance Program (GAO/NSIAD-95-200BR, Sept.  26, 1995). 


      UNOBLIGATED BALANCES FROM
      PRIOR YEARS' O&M
      APPROPRIATIONS
---------------------------------------------------------- Letter :0.3

Unobligated balances of expired prior years' O&M appropriations are
generally not available for new obligations but may be used for
upward adjustments to existing obligations for the specific fiscal
year of the appropriation.  These expired unobligated balances may be
used to fund upward adjustments for 5 fiscal years after the year of
appropriation.  At the end of 5 years, the remaining balances are
canceled. 

As of September 30, 1995, the Army, the Navy, and the Air Force had
unobligated balances from prior year appropriations totaling $2.2
billion.  Service officials stated that the unobligated balances were
needed to satisfy upward adjustments to obligations that were
incurred in the specific fiscal year but have not yet been
liquidated. 

Our analysis shows that unobligated balances have been increasing
rather than decreasing and that the average annual increase over the
last 4 years has been $200.24 million for the Army, $150.42 million
for the Navy, and $151.57 million for the Air Force.  The reason for
the increasing balances is that the amount of the liquidations is
generally less than the amount initially obligated. 

Our analysis showed that the average annual increase in unobligated
balances was $502 million.  In view of this overall trend in
inaccurately establishing either requested amounts or obligations for
specific projects, Congress could reduce the services' O&M funding
request to amounts that more accurately reflect what is actually
needed. 


      AIRCRAFT STORAGE
---------------------------------------------------------- Letter :0.4

The Air Force's O&M budget request could be reduced by $376.2 million
if some aircraft were retired and others placed in storage until
needed. 

  -- The Air Force plans to upgrade its B-1B bombers to play a
     greater role in combat interdiction.  In a recent report,\7 we
     suggested that instead of upgrading the bombers, the Air Force
     should retire them.  We reported that upgrading the bombers will
     only marginally increase combat interdiction when compared to
     total interdiction capabilities that already exist.  On the
     other hand, retiring the aircraft could save the Air Force about
     $1 billion annually in operating costs, including approximately
     $366.7 million in O&M costs. 

  -- The Air Force currently assigns attrition aircraft\8 to active
     and reserve units where they are flown and maintained as combat
     designated aircraft.  In fiscal year 1997, the Air Force plans
     to have 126 attrition attack and fighter aircraft in the active
     force inventory. 

In 1995, we reported\9 that storing attrition aircraft could be a
money-saving alternative to assigning aircraft to active units.  A
1992 Air Force study concluded that the costs to store and
reconstitute F-15 and F-16 aircraft were 1.9 percent and 2.1 percent
of the aircraft's operation and maintenance costs, respectively.  In
addition, the Navy found that storing excess aircraft was the most
cost-effective way of managing them.  Historical attrition rates
indicate that some of the attrition aircraft will not be needed until
the year 2002.  Therefore, Congress may want to reduce the Air
Force's fiscal year 1997 budget by $9.5 million ($75,000 multiplied
by 126 aircraft) to encourage the Air Force to store its attrition
aircraft.  Our analyses of the operating and maintenance costs is
based on the funding the Air Force gave Air National Guard units for
additional attrition aircraft--about $75,000 per aircraft. 


--------------------
\7 U.S.  Combat Air Power:  Reassessing Plans to Modernize
Interdiction Capabilities Could Save Billions (GAO/NSIAD-96-72, May
13, 1996). 

\8 Attrition aircraft are aircraft that are used to replace aircraft
lost while performing peacetime missions. 

\9 Aircraft Requirements:  Air Force and Navy Need to Establish
Realistic Criteria for Backup Aircraft (GAO/NSIAD-95-180, Sept.  29,
1995). 


      DEFENSE BUSINESS OPERATING
      FUND PASS-THROUGHS
---------------------------------------------------------- Letter :0.5

The Defense Business Operating Fund (DBOF) is a revolving account
that provides various types of services and materials to the
military, which pays for these items with O&M funds. 

The Air Force's fiscal year 1997 O&M budget request includes a
one-time increase of $194.5 million that will be passed through to
DBOF so that it can recover prior years' operating losses and will
not have to increase the surcharge rate it charges its customers. 

Additionally, the Army's fiscal year 1997 O&M budget request includes
$58.9 million for pass-through to DBOF to cover the cost of
unutilized plants.  According to an Army official, the Army requested
the pass-through rather than having to pass the costs on to its
customers through increased surcharge rates.  For fiscal year 1997,
the Army changed its policy regarding unutilized plants.  The change
in policy is intended to encourage DBOF activities to put unused
plants and equipment into standby, idle, or layaway status.  Prior to
fiscal year 1997, the Army could pass the costs of unutilized plants
on to customers through increased DBOF rates. 

We have previously reported\10 that we do not agree with the practice
of using the O&M appropriation process to finance DBOF losses.  Doing
so fails to focus on DBOF's actual results of operations, diminishes
its incentive to operate efficiently, and makes it more difficult to
evaluate and monitor DBOF operations.  Our long-standing position has
been that DBOF managers should be required to request funds for and
justify the need to recover the prior years' losses to Congress
rather than covering such losses with an O&M pass-through to DBOF. 

In view of our long-standing position that DBOF managers be required
to request supplemental appropriations to cover losses associated
with Air Force and Army DBOF activities, Congress may want to reduce
the Air Force's O&M budget request by $194.5 million and the Army's
O&M budget request by $58.9 million. 


--------------------
\10 Defense Business Operations Fund:  Improved Pricing Practices and
Financial Reports Are Needed to Set Accurate Prices (GAO/AIMD-94-132,
June 22, 1994). 


      CIVILIAN PERSONNEL
      REQUIREMENTS
---------------------------------------------------------- Letter :0.6

The Army's, the Navy's, the Air Force's, and DOD's fiscal year 1997
budget requests for civilian personnel could be reduced by $245.5
million because (1) the projected civilian personnel levels at the
beginning of fiscal year 1997 will be less than those the services
used to determine their budget requests ($185.5 million) and (2) the
amount requested in the budget submission differs from the amount
shown in the budget justification documents ($60 million). 

Based on the number of Navy and DOD personnel onboard as of April
1996, and Army and Air Force personnel onboard as of May 1996, we
estimate that the actual end strength at the end of fiscal year
1996--the beginning figure for fiscal year 1997--will be 7,331\11
personnel less than the number used by the services to determine
their fiscal year 1997 budget request.  Because the services used a
larger beginning figure, the number of work years used in the budget
request is also overstated by 3,665 work years, or $185.5 million. 

Additionally, we found that the amount shown in the President's
budget for civilian personnel was $60 million more than the amount
shown in the justification documents. 

Table 4 shows the effect of the overstatement of work years and the
variance between the President's budget presentation and the
supporting documentation. 



                                     Table 4
                     
                       Civilian Personnel Overstatement for
                                 Fiscal Year 1997

                              (Dollars in millions)


                                                          Difference
                                                             between
           Our                  Difference                 amount in
     estimated     Beginning   between our               President's
Se   beginning      strength  estimate and                budget and
rv    strength    used in FY   estimate in  Work          supporting       Total
ic      for FY   1997 budget        budget  year  Valu  documentatio  overstatem
e       1997\a       request       request     s     e             n         ent
--  ----------  ------------  ------------  ----  ----  ------------  ==========
Ar     258,590       259,462           872   436  $28.          $5.0       $33.3
 my                                                  3
Na     235,373       239,961         4,588  2,29  111.         (3.0)       108.3
 vy                                            4     3
Ai     182,926       183,357           431   216  12.0         58.0\      70.0\c
 r
 F
 o
 r
 c
 e
Ot     101,933       103,373         1,440   719  33.9                      33.9
 h
 e
 r
 D
 O
 D
================================================================================
To     778,822       786,153         7,331  3,66  $185         $60.0      $245.5
 t                                             5    .5
 a
 l
--------------------------------------------------------------------------------
\a Actual attrition rate for fiscal year 1996 to date projected to
the end of the fiscal year.  The projected figure was then adjusted
downward to compensate for unknown events that could affect attrition
during the remainder of the fiscal year. 

\b Equivalent work years multiplied by the average annual
compensation rate. 

\c Air Force officials said that the $58 million overstatement is
offset by a $58-million understatement in contract and services.  If
this is the case, the total Air Force overstatement would be $12
million. 

In view of the overstated personnel requirements, Congress may want
to reduce the Army's budget request for civilian personnel by $33.3
million, the Navy's by $108.3 million, the Air Force's by $70
million, and other DOD agencies by $33.9 million. 


--------------------
\11 This equates to 3,665 work years. 


      ARMY OPERATING TEMPO
---------------------------------------------------------- Letter :0.7

The Army uses the Training Resource Model (TRM) to compute its
operating tempo (OPTEMPO) requirements.  OPTEMPO refers to the pace
of operations and training that units need in order to achieve a
prescribed level of readiness.  We reported\12 that TRM contained
outdated assumptions that resulted in an overstatement of training
requirements.  Although the Army is in the process of implementing
corrective measures, TRM remains outdated and the Army continues to
overestimate the amount of OPTEMPO funds it needs. 

For fiscal year 1997, the Army requested $2.61 billion for ground
OPTEMPO based on a training rate of 800 miles per vehicle per year. 
However, the Army only obligated 91 percent of its OPTEMPO funds in
fiscal year 1995.  In addition, one of the Army's major commands
planned to execute a training rate of only 720 miles for fiscal year
1996. 

Based on the fact that TRM has not been updated to more accurately
reflect actual training requirements and the Army's average
percentage of OPTEMPO funds obligated for fiscal year 1995 was 9
percent less than the Army planned to spend, we estimate the Army's
fiscal year 1997 request could be reduced about $235 million ($2.61
billion multiplied by 9 percent). 


--------------------
\12 Army Training:  One-Third of 1993 and 1994 Budgeted Funds Were
Used for Other Purposes (GAO/NSIAD-95-71, Apr.  7, 1995). 


      U.S.  TRANSPORTATION COMMAND
---------------------------------------------------------- Letter :0.8

The U.S.  Transportation Command (USTRANSCOM) is responsible for
providing air, land, and sea transportation services to the military
forces.  These services are provided through USTRANSCOM's three
component commands:  the Military Traffic Command (MTMC), the Air
Mobility Command (AMC), and the Military Sealift Command (MSC). 
USTRANSCOM operates under the DBOF system of financial management
whereby DOD customers request transportation services from
USTRANSCOM's component commands, which contract for the services and
bill the customers for those services.  DOD guidance requires that
USTRANSCOM recover its total cost from its customers.  Customers
generally pay for the transportation services with O&M funds. 

In February 1996,\13 we reported that DOD customers pay USTRANSCOM
substantially more--from 24 percent to 201 percent--than it costs
USTRANSCOM to provide the transportation services.  For example,
customers may pay MTMC and MSC $3,800 to arrange for shipment of a
container load from California to Korea.  However, the commercial
carrier may charge USTRANSCOM only $1,250 for providing the
transportation service. 

Factors that increase the transportation costs to the customers
include (1) fragmented transportation processes, (2) multiple
organizational elements to implement these processes, and (3)
component commands' organizational structure that requires
duplicative administrative and support activities. 

DOD and USTRANSCOM are reengineering the component commands'
transportation business processes, but are delaying organizational
changes that would eliminate duplicative and redundant functions
existing among the component commands.  We believe that waiting to
address the issues of organizational structure will be a significant
barrier to achieving the full benefits of the reengineering efforts. 

In order to encourage USTRANSCOM to make the needed organizational
changes, Congress may want to reduce USTRANSCOM's DBOF budget by $250
million, or 5 percent.  If the changes are made, the services would
need less O&M funds to pay for the more efficient and less costly
USTRANSCOM transportation services.  The reduction should be made
based on the percent of total transportation services that each of
the military services obtain from USTRANSCOM:  Army $92.5 million,
Navy $25 million, Marine Corps $12.5 million, Air Force $55 million,
and Defense-wide $65 million. 

DOD officials said that reducing the services' O&M budgets has the
effect of penalizing the services for USTRANSCOM's inefficient
operations.  They recommended and we agree that if the services' O&M
budget requests are reduced, USTRANSCOM should rebate a like amount
to each service. 


--------------------
\13 Defense Transportation:  Streamlining of the U.S.  Transportation
Command Is Needed (GAO/NSIAD-96-60, Feb.  22, 1996). 


      ENVIRONMENTAL RESTORATION
---------------------------------------------------------- Letter :0.9

In March 1996,\14 we reported that the Army's budget request does not
consider the funds contributed by the Shell Oil Company for its share
of the cleanup costs at the Rocky Mountain Arsenal.  According to
Army officials, there is about $80 million in the Shell account and
these funds are used to supplement funds transferred to O&M from the
Defense Environmental Restoration Account (DERA).\15

The Army rolls up the Arsenal's requirements for appropriated funds
into a consolidated DOD budget request and according to Army
officials, the Shell funds are not visible in the budgeting process
and do not influence funding decisions.  Army officials also said
that, in most instances, it is not feasible to use the Shell funds to
offset budget requirements because the funds do not represent a
steady fixed flow and are not fiscal year specific. 

Although the Shell contribution may not represent a fixed flow of
funds, there are about $80 million in the account, and this is more
than the Arsenal's allocation for environmental cleanup in fiscal
year 1996--about $75 million.  In view of the fact that the $80
million Shell contribution to the cleanup costs at the Arsenal has
not been considered in determining total requirements, Congress may
want to reduce the amount of funds transferred to Army O&M from the
Environmental Restoration Account in the fiscal year 1997 budget
request by $80 million. 


--------------------
\14 Environmental Cleanup:  Progress in Resolving Long-standing
Issues at the Rocky Mountain Arsenal (GAO/NSIAD-96-32, Mar.  29,
1996). 

\15 Congress established DERA in 1984 to fund the cleanup of inactive
contaminated sites on DOD installations.  DERA is a transfer account,
that is, funds in the account are available for transfer by the
Secretary of Defense to any appropriation account or fund for
obligation. 


      FLYING HOURS
--------------------------------------------------------- Letter :0.10

The Army and the Defense-wide fiscal year 1997 O&M budget requests
for flying hours can be reduced by $58.3 million for the following
reasons: 

  -- The Army traditionally requests more funds for its flying hour
     program than it obligates.  For example, in fiscal year 1995,
     the Army planned to fly 807,000 hours but only flew 748,419
     hours, a 7-percent reduction.  In fiscal year 1996, the Army's
     budget request was based on 690,667 flying hours.  However,
     after the budget was submitted, the Army adjusted its flying
     hour program downward by 5 percent.  Additionally, the Army flew
     about 5 percent fewer hours in the first quarter of fiscal year
     1996 than it planned. 

In view of the fact that the Army flew fewer hours than funded in
fiscal year 1995 and it appears that the Army will fly fewer hours
than funded in fiscal year 1996, Congress may wish to reduce the
Army's fiscal year 1997 flying hour budget by $40.3 million (5
percent of the $805 million requested). 

  -- The Defense Health Program's flying hour program supports the
     aeromedical evacuation system, which provides air transportation
     for injured, sick, and wounded active-duty members of the armed
     forces in the United States. 

A joint review conducted by the DOD Inspector General (DOD-IG) and
the Air Force Audit Agency\16 concluded that the Defense Health
Program's aircraft were being flown in excess of previous and current
training requirements and that the flying hour program should be
reduced from 17,211 hours to 8,550 hours--a savings of $20.2 million. 
In response to the report, the DOD Comptroller reviewed the
aeromedical flying hour program budget request for fiscal year 1997
and reduced the aeromedical flying hour program by 3,500 hours--a
reduction of $2.2 million. 

Because the DOD-IG recommended a $20.2 million reduction and the DOD
Comptroller only reduced the flying hour program by $2.2 million,
Congress may want to further reduce the program's fiscal year 1997
flying hour program by $18 million. 


--------------------
\16 DOD Inspector General Report No.  95-225, Aeromedical Evacuation
System, June 9, 1995. 


      AIR FORCE AIRCRAFT BASING
--------------------------------------------------------- Letter :0.11

Until 1992, Air Force F-15 and F-16 aircraft wings consisted of
3 squadrons, with 24 combat aircraft in each squadron.  In 1992, the
Air Force began reducing each squadron to 18 combat aircraft, or 54
combat aircraft in each wing. 

Our May 1996\17 report showed that the current F-15 and F-16 squadron
configuration is less efficient and more costly than the former
configuration of 24 aircraft in each squadron.  Our review of Air
Force base closure capacity data indicated that most fighter wings in
the United States could increase squadron size to previous levels
with little or no additional costs.  In fact, wing personnel at 2 Air
Force bases indicated that their installations could absorb 18
aircraft per wing at no additional cost.  If the Air Force changed
its wing configuration back to the previous level of 72 aircraft, it
could close 1 base, reduce maintenance personnel and equipment
requirements, and save about $48 million in fiscal year 1997. 
Accordingly, Congress may want to reduce the Air Force's fiscal year
1997 O&M request by $48 million. 


--------------------
\17 Air Force Aircraft:  Consolidating Fighter Squadrons Could Reduce
Costs
(GAO/NSIAD-96-82, May 6, 1996). 


      REAL PROPERTY MAINTENANCE
--------------------------------------------------------- Letter :0.12

The real property maintenance program funds the maintenance, repair,
and minor construction of facilities and properties.  The Navy's
Pacific Fleet's real property maintenance account is divided into 19
categories, 18 of which identify specific projects in areas such as
troop housing, utility systems, and maintenance.  The remaining
category is identified as "other." For fiscal year 1997, the Navy's
budget request included $27.9 million for the other category. 

We requested the list of projects to be funded from the other
category.  Pacific Fleet officials told us that a list does not exist
for the other category.  We also asked Navy Comptroller officials to
provide documentation to support the $27.9 million request.  At the
time we completed our review in July 1996, the requested
documentation had not been provided nor could the Navy explain how
the money would be used.  Therefore, Congress may wish to reduce the
Navy's O&M request by $27.9 million. 


      HUNTER UNMANNED AERIAL
      VEHICLE SYSTEM
--------------------------------------------------------- Letter :0.13

The Army's fiscal year 1997 O&M budget request includes $20 million
to operate, support, and store the Hunter Unmanned Aerial Vehicle
system.  In 1995, the Joint Chiefs of Staff (JCS) and the Joint
Requirements Oversight Council (JROC) recommended terminating the
Hunter program and reprogramming the funds to other warfighting
priorities.  Their memorandum directed that equipment already
delivered should be placed in an inactive storage status. 

In January 1996, the DOD Acquisition Decision Memorandum approved
termination of the Hunter program after delivery of seven systems. 
The memorandum also approved the operational use of one system until
a new unmanned aerial vehicle becomes available and authorized the
use of other assets for testing as well as operator and maintenance
training. 

Our evaluations of the Hunter program disclosed numerous
deficiencies.  In December 1993,\18

we reported that test results identified deficiencies that could
jeopardize the system's ability to meet military requirements.  In
March 1995,\19 we reported that the Hunter system was logistically
unsupportable and that tests had identified serious performance
problems that adversely impacted the system's effectiveness. 

Our analysis showed that $19.5 million of the $20 million the Army
requested will be used for depot operations, field training support,
and logistics support.  The remaining $500,000 will be used for
inactive storage.  In view of the numerous logistics and operational
problems highlighted in our reports and the fact that the JCS and the
JROC recommended that the Hunter program be terminated, Congress may
want to reduce the Army's budget by $19.5 million. 


--------------------
\18 Unmanned Aerial Vehicles:  Performance of Short Range System
Still in Question
(GAO/NSIAD-94-65, Dec.  15, 1993). 

\19 Unmanned Aerial Vehicles:  No More Hunter Systems Should Be
Bought Until Problems Are Fixed (GAO/NSIAD-95-52, Mar.  1, 1995). 


      TRAINING ROTATIONS AT THE
      NATIONAL TRAINING CENTER AND
      THE JOINT READINESS TRAINING
      CENTER
--------------------------------------------------------- Letter :0.14

The fiscal year 1997 Army and National Guard O&M budget requests for
training rotations can be reduced by $16.7 million for the following
reasons: 

  -- Two Army units (one active unit and one National Guard unit)
     that were scheduled to attend the National Training Center (NTC)
     in fiscal year 1997 are not ready for NTC training and will not
     go.  Because other units will not be sent in place of the two
     units, the number of NTC training rotations has been reduced to
     10 instead of 12 during fiscal year 1997.  As a result, the Army
     will not incur about $7.2 million of O&M training costs related
     to transportation, maintenance, and sending opposing force
     augmentees to NTC. 

  -- The National Guard planned to send a brigade to the Army's Joint
     Readiness Training Center (JRTC) in fiscal year 1997.  After the
     Army submitted its operating budget for JRTC, a decision was
     made to not send the brigade and no other unit will be sent in
     its place.  As a result, the Army will not incur about $900,000
     of costs that were included in the fiscal year 1997 budget. 

The Army agrees that its budget request is overstated by $8.1 million
due to changes in training rotations.  However, Army officials said
that they would like to retain $3 million of the $8.1 million to meet
other unfunded requirements. 

In addition to the costs incurred by the active Army for sending
units to the training centers, the National Guard also incurs costs
for sending its units to the training centers. 

The Army National Guard is allocated a training rotation each year at
NTC and JRTC.  According to the National Guard Bureau, it costs the
National Guard about $8.6 million more than normal annual training
expenses to send two brigades to the training centers.  Because of
the decision not to send a brigade to NTC and JRTC in fiscal year
1997, the National Guard budget could be reduced by $8.6 million. 


      ARMY PREPOSITIONING AFLOAT
      PROGRAM
--------------------------------------------------------- Letter :0.15

The Army currently has seven prepositioning ships that were activated
from the Ready Reserve Force (RRF).  The Army plans to use these
ships until it takes delivery of five large, medium speed,
roll-on/roll-off (LMSR) ships.  At that time, the Army will transfer
the materials from the seven existing ships to the five LMSR ships
and return the seven ships to RRF. 

The Army's fiscal year 1997 O&M budget request includes $173.8
million to lease and operate the prepositioning ships.  Included in
the $173.8 million is $12.6 million to lease and operate six ships
for 30 days to 92 days from the date the ships are unloaded until
they are returned to RRF.\20 The Army added costs for 30 to 92
additional days between the unloading date and the date the ships are
scheduled for return to RRF, because, according to an Army official,
the additional days would be needed if LMSRs are not delivered as
scheduled. 

In addition, the Army's budget includes $1.1 million to deactivate
one ship on the last day of the fiscal year even though the Military
Sealift Command has included the deactivation cost for the ship in
its fiscal year 1998 budget. 

In view of the fact that the Army included $12.6 million for
additional ship lease and operating costs and $1.1 million for
deactivation, which is scheduled for fiscal year 1998, Congress could
reduce the Army's fiscal year 1997 O&M budget request by $13.7
million. 


--------------------
\20 The Army pays the Military Sealift Command for the lease and
operation of the prepositioning ships. 


      FUEL TAX REFUNDS
--------------------------------------------------------- Letter :0.16

The Internal Revenue code imposes a federal excise tax on gasoline
and diesel fuel purchased.  However, the military services are
entitled to a refund for that portion of the fuel used on base.  In
September 1995, the Air Force Audit Agency\21 and the Army Audit
Agency\22 reported that neither service is receiving all the refunds
they are entitled to. 

The Air Force Audit Agency estimated that because the Air Force had
not established effective controls to ensure timely filing for the
tax refunds, the Air Force could lose about $8.5 million in fiscal
year 1997 if corrective actions are not taken.  The Army Audit Agency
similarly reported that the Army could lose as much as $2.3 million
in fiscal year 1997 because of its failure to seek and obtain fuel
tax refunds.  Therefore, Congress may want to reduce the Air Force's
fiscal year 1997 budget by $8.5 million and the Army's by $2.3
million to encourage them to improve their fuel tax refund filing
procedures. 


--------------------
\21 Follow-up Audit--Management of Ground Fuel Tax Refunds (Air Force
Audit Agency Project 94077011, Sept.  8, 1995). 

\22 Fuel Tax Refunds (Army Audit Agency NR-95-211, Sept.  8, 1995). 


      BOSNIA OPERATIONS
--------------------------------------------------------- Letter :0.17

The Air Force included $74.4 million in its fiscal year 1997 O&M
budget request for ongoing operations in Bosnia based on fiscal year
1996 cost estimates.  In March 1996, we reported\23

that the Air Force's fiscal year 1996 costs may be significantly less
than estimated because (1) per diem costs were less than planned ($89
million instead of $128 million) and (2) the number of flying hours
in fiscal year 1996 was reduced by
1,900 hours. 

We computed the estimated costs for fiscal year 1997 using the Air
Force's updated fiscal year 1996 costs for per diem and
transportation, and added an inflation factor of 3 percent.  Our
computation was $4.7 million less than the Air Force's estimate. 

In addition, the Air Force's cost estimate for the fiscal year 1997
air operations is overstated because the Air Force based its estimate
on the fiscal year 1996 program before it was reduced by 1,900 hours
(475 per quarter).  As a result, air operations, which are planned to
end after the first quarter of fiscal year 1997, are overstated by
475 hours, or $910,695.  Therefore, Congress may want to reduce the
Air Force's fiscal year 1997 budget request by $5.6 million ($4.7
million plus $900,000). 


--------------------
\23 Bosnia:  Costs Are Uncertain but Seem Likely to Exceed DOD's
Estimate (GAO/NSIAD-96-120BR, Mar.  14, 1996). 


      AMMUNITION MAINTENANCE
--------------------------------------------------------- Letter :0.18

The Army, as the single manager for conventional ammunition, is
responsible for managing and maintaining wholesale stocks of
conventional ammunition for all the services.  Each service provides
O&M funds to the Army to pay for maintenance and repair of its
ammunition. 

In June 1996,\24 we reported that the Army plans to spend $1.3
million and the Marine Corps $3.9 million in fiscal year 1997 to
restore ammunition items to a usable condition when, at the same
time, there are already sufficient excess ammunition items in a
ready-to-use condition.  Table 5 shows the planned maintenance
expenditures and the existing excess ammunition items. 



                                Table 5
                
                Fiscal Year 1997 Ammunition Maintenance
                   Expenditures for Like-Type Excess
                            Ammunition Items

                 (Quantities and dollars in thousands)


                                                Excess
                                             inventory  Quanti
Description                                   quantity      ty    Cost
--------------------------------------  --------------  ------  ------
5.56mm cartridge                              22,301.8   288.1   $86.4
40mm cartridge                                   727.7    50.0   112.5
40mm cartridge                                 1,049.0   350.0  1,118.
                                                                     5
155mm projectile                                 839.7    50.0  1,560.
                                                                     0
Fuze                                           3,773.6   245.0  2,290.
                                                                     8
======================================================================
Total                                         28,691.8   983.1  $5,168
                                                                    .2
----------------------------------------------------------------------
In view of the above, Congress may want to reduce the Army's and the
Marine Corps' fiscal year 1997 O&M requests by $1.3 million and $3.9
million, respectively. 


--------------------
\24 Defense Ammunition:  Significant Problems Left Unattended Will
Get Worse (GAO/NSIAD-96-129, June 21, 1996). 


      MINE HUNTER SHIPS
--------------------------------------------------------- Letter :0.19

The Navy plans to acquire 12 coastal mine hunter ships (MHC) by the
end of fiscal year 1999 at a total cost of about $1.5 billion. 
Although these ships were initially designed for U.S.  coastal
protection from Soviet mines, the need for them has greatly
diminished with the breakup of the Soviet Union.  In May 1995, the
DOD-IG reported\25 that the Navy could deactivate
5 of the 12 MHC ships and achieve O&M cost avoidance of $69.2
million\26 during fiscal years 1996-2001.  In March 1996, we
recommended\27 that the Navy consider deactivating and storing the
five unneeded ships or transferring them to other allied navies
through the foreign military sales program.  The Navy is currently
exploring these options. 

By the end of fiscal year 1997, the Navy will have received 10 of the
12 ships and has identified a requirement for 7 of them.  Our
analysis showed that if the Navy deactivated three ships--the number
of ships on hand by the end of fiscal year 1997 less the identified
requirement--it could save about $4.7 million ($6.9 million total O&M
costs less $2.2 million for deactivating the ships).  Therefore,
Congress may want to consider reducing the Navy's O&M request by $4.7
million to encourage the Navy to deactivate the unneeded ships. 


--------------------
\25 This report is classified. 

\26 The cost avoidance is the difference between the total O&M cost
($76.2 million) for the 6-year period and the cost of inactivating
the ships ($7 million). 

\27 Navy Mine Warfare:  Budget Realignment Can Help Improve
Countermine Capabilities (GAO/NSIAD-96-104, Mar.  13, 1996). 


      MORAL, WELFARE, AND
      RECREATION
--------------------------------------------------------- Letter :0.20

The Army's morale, welfare, and recreation (MWR) programs are
quality-of-life programs that provide a variety of community,
soldier, family, recreational, educational, and other support
activities.  The programs are funded by appropriated funds and/or
nonappropriated funds.  Appropriated fund support for the MWR
programs is included in the Army's O&M budget request. 

The Army Audit Agency reported\28 that the Army's Training and
Doctrine Command could reduce its annual MWR overhead costs by $2.1
million if it would transfer MWR accounting functions to a
centralized accounting facility at the Red River Army Depot.  The
Army Audit Agency also reported that the Training and Doctrine
Command was the only major Army command in the United States that had
not transferred its MWR accounting functions to Red River. 

In February 1996, the Command agreed to transfer its MWR accounting
functions to Red River Army Depot.  The transfer will save $2.1
million, which will be available to fund other MWR programs.  Because
the fiscal year 1997 budget request does not reflect the transfer of
accounting functions, Congress could reduce MWR appropriated fund
support to the Army by $2.1 million and not adversely affect MWR
services. 


--------------------
\28 Morale, Welfare, and Recreation Overhead and Layering (Army Audit
Agency SR 95-710, Aug.  9,1995). 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :1

This review is one of a series that examines defense budget issues. 
Our review approach consisted of interviews with program and budget
officials responsible for managing the programs and/or preparing the
budget requests; reviews and analyses of financial, budget support,
and program documents related to the O&M issues being reviewed; and
analysis of prior-year funding levels and obligations to identify
trends.  In addition, we reviewed our ongoing assignments and
recently issued reports as well as recently issued reports of the
DOD-IG and the service audit agencies to identify issues with O&M
ramifications. 

Our review was performed at Army, Navy, Air Force, and DOD
headquarters; USAREUR; FORSCOM; Atlantic and Pacific Fleets; and Air
Combat Command.  We performed our review from January to June 1996 in
accordance with generally accepted government auditing standards. 

Representatives of the services and DOD were given an opportunity to
comment on the issues in this report.  Their comments were
incorporated in the report where appropriate. 

We are sending copies of this report to the Secretaries of Defense,
the Army, the Navy, and the Air Force; the Director of the Office of
Management and Budget; the Chairmen and Ranking Minority Members of
the House and Senate Committees on Appropriations, Senate Committee
on Armed Services, and House Committee on National Security; and
other interested congressional committees.  Copies will be made
available to others upon request. 

This report was prepared under the direction of Mark E.  Gebicke,
Director, Military Operations and Capabilities Issues, who may be
reached on (202) 512-5140 if you or your staff have any questions. 
Major contributors to this report are listed in appendix I. 

Henry L.  Hinton, Jr.
Assistant Comptroller General

List of Congressional Committees

The Honorable Ted Stevens
Chairman
The Honorable Daniel K.  Inouye
Ranking Minority Member
Subcommittee on Defense
Committee on Appropriations
United States Senate

The Honorable John McCain
Chairman
The Honorable John Glenn
Ranking Minority Member
Subcommittee on Readiness
Committee on Armed Services
United States Senate

The Honorable John R.  Kasich
Chairman
The Honorable Martin Olav Sabo
Ranking Minority Member
Committee on the Budget
House of Representatives

The Honorable Herbert H.  Bateman
Chairman
The Honorable Norman Sisisky
Ranking Minority Member
Subcommittee on Military Readiness
Committee on National Security
House of Representatives

The Honorable C.  W.  Bill Young
Chairman
The Honorable John P.  Murtha
Ranking Minority Member
Subcommittee on National Security
Committee on Appropriations
House of Representatives


MAJOR CONTRIBUTORS TO THIS REPORT
=========================================================== Appendix I


   NATIONAL SECURITY AND
   INTERNATIONAL AFFAIRS DIVISION,
   WASHINGTON, D.C. 
--------------------------------------------------------- Appendix I:1

Robert J.  Lane
Carole F.  Coffey
Donna M.  Rogers


   ATLANTA REGIONAL OFFICE
--------------------------------------------------------- Appendix I:2

Robert M.  Crowl
Harry F.  Jobes


   KANSAS CITY REGIONAL OFFICE
--------------------------------------------------------- Appendix I:3

Leonard C.  Hill
Robert C.  Sommer
Mark T.  Amo


   LOS ANGLES REGIONAL OFFICE
--------------------------------------------------------- Appendix I:4

Revae E.  Steinman
Dale M.  Yuge
Yelena K.  Thompson


   NORFOLK REGIONAL OFFICE
--------------------------------------------------------- Appendix I:5

Thomas A.  Pantelides
Robert C.  Mandigo, Jr.
Cora M Bowman
Raul S.  Cajulis
Linda H.  Koetter
Jeanett H.  Reid


*** End of document. ***