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Contingency Operations: Update on DOD's Fiscal Year 1995 Cost and Funding (Briefing Report, 06/27/96, GAO/NSIAD-96-184BR).

Pursuant to a congressional request, GAO provided information on the
Department of Defense's (DOD) incremental costs for contingency
operations, focusing on: (1) how the services covered costs in excess of
supplemental funding; and (2) why the incremental costs of contingency
operations surged in September 1995.

GAO found that: (1) the Army and the Navy reported incremental
contingency costs that exceeded their supplemental appropriations; (2)
the Army funded its shortfall with reserve funds from its regular
appropriation; (3) the Navy deferred or reduced other spending to absorb
its shortfall; (4) the Army's and Navy's reported shortfalls may have
exceeded their actual shortfalls; and (5) September 1995 incremental
costs surged primarily because of accounting adjustments and yearend
payments.

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

 REPORTNUM:  NSIAD-96-184BR
     TITLE:  Contingency Operations: Update on DOD's Fiscal Year 1995 
             Cost and Funding
      DATE:  06/27/96
   SUBJECT:  Defense contingency planning
             Future budget projections
             Supplemental appropriations
             Military operations
             Accounting procedures
             Yearend spending
             Military appropriations
             Financial management
             Cost accounting
IDENTIFIER:  Iraq
             Bosnia
             DOD Operation Southern Watch
             Jordan
             U.S.S. Lincoln
             U.S.S. Independence
             U.S.S. Nimitz
             Korea
             Kuwait
             
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Cover
================================================================ COVER


Briefing Report to Congressional Requesters

June 1996

CONTINGENCY OPERATIONS - UPDATE ON
DOD'S FISCAL YEAR 1995 COST AND
FUNDING

GAO/NSIAD-96-184BR

Contingency Operations

(701085)


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

  DOD - Department of Defense
  O&M - operation and maintenance

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


B-272270

June 27, 1996

The Honorable Strom Thurmond
Chairman, Committee on Armed Services
United States Senate

The Honorable Floyd D.  Spence
Chairman, Committee on National Security
House of Representatives

The Department of Defense (DOD) participated in contingency
operations in several places, including Haiti, Southwest Asia, and
the former Yugoslavia during fiscal year 1995.  To help cover the
incremental costs\1

of these operations, the Congress provided DOD with a supplemental
appropriation.  We previously reported to you that while DOD ended
fiscal year 1995 with supplemental funding of $12 million above its
reported incremental costs, some of the services and defensewide
agencies as a whole had reported costs in excess of their
supplemental appropriations while other services reported costs below
their supplemental appropriations.\2 We also reported that costs
surged in September 1995.  Based on continued interest in these
issues, we agreed with your offices to provide information on (1) how
the services that reported costs in excess of supplemental funding
covered their shortfalls and (2) why the surge occurred.  We recently
briefed your staff on these issues. 


--------------------
\1 As used in this report, "incremental costs" means those costs that
would not have been incurred if it were not for the operation.  This
is the same definition that is contained in 10 U.S.C.  127a, as
amended by the fiscal year 1996 Department of Defense Authorization
Act. 

\2 Contingency Operations:  Defense Cost and Funding Issues
(GAO/NSIAD-96-121BR, Mar.  15, 1996). 


   BACKGROUND
------------------------------------------------------------ Letter :1

The Congress appropriated $253 billion for DOD for fiscal year 1995,
of which $92 billion was for operation and maintenance (O&M). 
Through fiscal year 1996, DOD's annual appropriations have not
included funds for possible contingency operations.  DOD has not
budgeted for the incremental costs of military operations or
contingencies.  It has budgeted to be ready to conduct such
operations.  When the services have had to conduct these operations,
the planned budget execution cycle was disrupted.  DOD then had to
absorb the incremental costs of these operations, which were mostly
O&M items, within its appropriations or seek supplemental
appropriations. 

In the Emergency Supplemental Appropriations and Rescissions for the
Department of Defense to Preserve and Enhance Military Readiness Act
of 1995 (P.L.  104-6), the Congress, in April 1995, provided DOD
$2,235 million for incremental costs associated with ongoing
operations in a variety of locations, including Somalia, Rwanda, the
former Yugoslavia, Haiti, Cuba, Southwest Asia, and Korea.  The vast
majority--91 percent--of the appropriation was for O&M.  DOD reported
fiscal year 1995 contingency operations-related incremental costs of
$2,223 million, $12 million less than its supplemental funding. 

In our March 1996 report, we stated that some of the services
received fiscal year 1995 supplemental funding in excess of their
reported costs.  This excess funding was used for a variety of
otherwise unfunded operational needs.  Other services and defensewide
agencies as a whole, on the other hand, reported costs that exceeded
their supplemental appropriations. 

Through August 1995, DOD had reported costs of $1.9 billion. 
Projecting August costs to September, we estimated that had September
costs been the same as August costs, DOD's full fiscal year 1995
reported costs would have been $266 million below appropriated
funding.  However, reported September costs were about 4 times more
than the costs of the previous month and over $120 million more than
the sum of the prior
3 months--June through August. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

The Army and the Navy reported incremental costs in excess of their
O&M supplemental appropriations.  While they covered their shortfall
differently, both Army and Navy officials believe that unit readiness
was not affected significantly.  The reported shortfalls, however,
may not be as great as reported costs suggest.  We previously
reported that some Army and Navy O&M costs were overstated.  For
example, in fiscal year 1995, we identified instances totaling $33
million where the Army did not reduce its reported incremental costs
for such things as normal operating costs not incurred and training
not conducted due to participation in contingency operations. 

The surge in September costs primarily related to (1) accounting
adjustments; (2) end-of-fiscal year payments; and (3) other spending,
including spending associated with higher operating tempo in Bosnia
and Southwest Asia.  We identified $92 million in accounting
adjustments and $82 million in end-of-fiscal year payments, which
together represented
60 percent of the September costs we examined.  For example, we
identified $62 million in accounting adjustments made by the Army and
the Air Force to reflect costs that should have been reported earlier
in the fiscal year.  Regarding year-end payments, the Air Force
reported about $47 million in payments for items such as
communication requirements, support and base maintenance contracts,
consumables, and landing fees.  Over half of the $47 million involved
payments to other DOD components, such as the Army Corps of
Engineers, and to contractors for expenses incurred in the last
quarter of the fiscal year, although funds were not obligated until
the end of the fiscal year to pay for them.  The balance of these
payments was for expenses incurred in September. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :3

To obtain information on how the Army and the Navy covered their
differences between funding and reported costs, we reviewed service
documents and met with officials in the military services, including
those in selected major commands.  We also discussed these matters
with officials from the Office of the Secretary of Defense.  Because
we found in our March 1996 review that the vast majority of the
differences between funding and reported costs was in O&M accounts,
we focused our efforts on these accounts. 

To obtain information on the surge in reported costs for September
1995, we reviewed the O&M appropriation accounts because they
constituted the vast majority of that surge.  We also analyzed DOD's
monthly contingency operation incremental cost reports to identify
the sources of the surge by service and operation, and we selected
those operations that accounted for 88 percent of the reported
September 1995 costs.  We then reviewed service documentation
supporting those operations and discussed the reasons for the surge
with officials from the affected major commands and with service
headquarters officials. 

We previously reported that when considering the cost of operations,
it should be recognized that DOD's financial systems cannot reliably
determine costs.  DOD's systems are classified as high risk, are not
integrated, and cannot easily capture actual incremental costs.  Only
the total obligations are captured by the accounting systems.  The
services use various management information systems to identify
incremental obligations and to estimate costs. 

We performed our work between March and May 1996 in accordance with
generally accepted government auditing standards.  We reviewed the
information in this briefing report with DOD officials and made
changes where appropriate.  DOD officials generally agreed with our
findings. 


---------------------------------------------------------- Letter :3.1

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

If you or your staff have any questions about this report, please
contact me at (202) 512-3504.  The major contributors to this report
are listed in appendix I. 

Richard Davis
Director, National Security
 Analysis


BACKGROUND
============================================================ Chapter I


   REPORTED INCREMENTAL COSTS FOR
   FISCAL YEAR 1995 OPERATIONS
---------------------------------------------------------- Chapter I:1



   (See figure in printed
   edition.)

The Secretary of Defense's 1995 Annual Report to the President and
the Congress describes contingency operations as military operations
that go beyond the routine deployment or stationing of U.S.  forces
abroad but fall short of large-scale theater warfare.  U.S.  military
forces participated in several contingency operations during fiscal
year 1995.  These operations included (1) activities in support of
United Nations peace operations in Haiti, Southwest Asia, and the
former Yugoslavia; (2) the increased deployment of military
capability to South Korea in response to heightened tensions; (3) the
deployment of additional military forces to Kuwait and Saudi Arabia
in response to the threat of renewed Iraqi aggression against Kuwait;
and (4) the enforcement of a revised U.S.  policy designed to prevent
Cuban migrants from reaching the United States.  The map shows where
these operations occurred and the Department of Defense's (DOD)
reported incremental costs for each operation. 

Most of DOD's reported incremental costs are for operations in four
areas--Southwest Asia, Haiti, Cuba, and the former Yugoslavia.  These
costs total about $2 billion, or 92 percent of DOD's total reported
incremental costs.  Within Southwest Asia, DOD participated in
operations to (1) enforce United Nations sanctions against Iraq, (2)
enforce the no-fly zone over both northern and southern Iraq, and (3)
provide humanitarian relief to the population of northern Iraq. 


   SERVICES' FISCAL YEAR 1995 O&M
   INCREMENTAL COSTS AND FUNDING
---------------------------------------------------------- Chapter I:2



   (See figure in printed
   edition.)

In April 1995, the Congress provided DOD with an emergency
supplemental appropriation of $2,235 million to fund contingency
operations occurring in fiscal year 1995.  The vast majority--91
percent--of the appropriation was for operation and maintenance
(O&M), which funds the operating costs of a deployment, such as
transportation and contractor support.  The balance of the
appropriation was for military personnel accounts, which fund the
cost of incremental pay, such as imminent danger pay.  Through the
end of fiscal year 1995, DOD reported about $2,223 million for
contingency operations-related incremental costs.  Therefore, DOD
ended the fiscal year with supplemental funding of $12 million above
its reported incremental costs.  However, some of the services and
defensewide agencies as a whole reported costs that were in excess of
their supplemental appropriations, while other services reported
costs below their supplemental appropriations. 

The Army and the Navy reported O&M incremental costs of $81 million
and $31 million, respectively, in excess of their supplemental
funding.  Defensewide agencies collectively reported O&M incremental
costs of $3 million in excess of their supplemental funding.  The Air
Force and the Marine Corps reported incremental O&M costs that were
less than their supplemental O&M funding.  The Air Force received
$118 million more in O&M supplemental funding than its reported
costs; the Marine Corps $15 million more.  Both services used their
excess O&M funding for a variety of otherwise unfunded operational
needs. 


Briefing Section II HOW SERVICES
ABSORBED FUNDING SHORTFALLS
============================================================ Chapter I


   ARMY'S REPORTED O&M COSTS
   EXCEEDED SUPPLEMENTAL FUNDING
---------------------------------------------------------- Chapter I:3



   (See figure in printed
   edition.)

The Army reported $81 million more in O&M incremental costs than its
O&M supplemental appropriation.  The Army absorbed this shortfall
within its fiscal year 1995 appropriation.  Army officials told us
that $41 million was funded through a special reserve fund, which is
created at the beginning of each fiscal year for senior leadership to
(1) take advantage of opportunities that arise throughout the year
and/or (2) cover unbudgeted expenditures in the year of execution. 
In fiscal year 1995, this fund was created by requiring the commands
to provide a total of $50 million, less than one-half of 1 percent of
the active Army's $18 billion O&M appropriation.\1 The remaining $40
million was absorbed within nonreadiness accounts, resulting in some
unfunded nonreadiness requirements, such as environmental and
construction requirements to initiate base closures.  According to
Army officials, unit readiness was not affected by the $81-million
shortfall. 

The Army's reported shortfall may not be as great as its reported
costs suggest.  We previously reported that some Army O&M costs were
overstated.\2 The Army has not offset its reported incremental costs
to reflect costs that are not incurred when soldiers are deployed for
contingency operations.  For example, in fiscal year 1995, we
identified instances totaling $33 million where the Army did not
reduce its reported incremental costs for such things as (1) normal
operating costs not incurred and training not conducted due to
participation in contingency operations and (2) items purchased but
not used and either retained by the unit or returned to the DOD
supply system for credit that was not deducted from reported
incremental costs.  We did not identify any instances of
underreporting of O&M costs. 


--------------------
\1 The remaining $9 million of the special reserve fund was spent on
such activities as funding the Commission on Roles and Missions of
the Armed Forces and reviewing information systems and consolidations
in the Army. 

\2 Contingency Operations:  DOD's Reported Costs Contain Significant
Inaccuracies (GAO/NSIAD-96-115, May 17, 1996). 


   NAVY'S REPORTED O&M COSTS
   EXCEEDED SUPPLEMENTAL FUNDING
---------------------------------------------------------- Chapter I:4



   (See figure in printed
   edition.)

The Navy reported $31 million more in O&M incremental costs than its
supplemental appropriation.  The Navy's Pacific Fleet had the bulk of
the shortfall, almost two-thirds, or $20 million.  To help cover the
shortfall, Navy headquarters provided the Pacific Fleet with $11
million in additional funds.  These funds were drawn from $41 million
the Navy was allotted for flying hours in emergency supplemental
funds beyond those funds the Congress provided for the cost of
contingency operations.  The Pacific Fleet absorbed the balance of
its shortfall--$9 million--by deferring funding for base support
programs. 

The Navy Comptroller office provided us documentation indicating that
the other Navy commands with significant shortfalls either deferred
or reduced spending to absorb their shortfalls.  The Naval Reserve
Force covered its $4.4-million shortfall by deferring funding for
helicopter and aircraft maintenance.  The Naval Air Systems Command
covered its $3-million shortfall by deferring or reducing funding for
tactical systems software programs, transportation requirements, and
other programs.  The Navy Computers and Telecommunications Command
funded its $2-million shortfall by deferring funding for the
maintenance of real property at facilities in both the Atlantic and
Pacific regions.  The Chief of Naval Personnel covered its
$1.1-million shortfall by reducing purchases of subsistence items. 
According to the Navy Comptroller office, the deferrals and
reductions in program funding were made in programs where the least
negative readiness impact would occur. 

As was the case with the Army, we recently reported that the
shortfall may not be as great as the reported costs suggest.  We
found an instance where the Navy may have overstated its costs in
fiscal year 1995 because it did not adjust incremental flying hour
costs to reflect over $1 million worth of free fuel received.\3

While the Navy has advised us that it does account for free fuel in
its flying hour cost factors, it did not provide any documents to
support this position.  While we identified instances of
underreporting Navy procurement costs in fiscal year 1995 in our
report on the accuracy of contingency cost reporting, we did not
identify any instances of underreporting of O&M costs. 

Briefing Section III

--------------------
\3 In some cases, the United States is provided fuel by other nations
at no cost for U.S.  ground, air, and naval forces during contingency
operations. 


REASONS FOR SEPTEMBER O&M COST
SURGE
============================================================ Chapter I


   REPORTED INCREMENTAL COSTS
   SURGED IN LATE FISCAL YEAR 1995
---------------------------------------------------------- Chapter I:5



   (See figure in printed
   edition.)

We previously reported that through August 1995, DOD had reported
costs of $1.9 billion.  Projecting August costs to September, we
estimated that had September costs approximated August costs, DOD's
full fiscal year 1995 reported costs would have been $266 million
below appropriated funding.  However, reported costs surged in
September to bring reported costs within $12 million of the funding
provided through the supplemental appropriation.  The reported
September costs were about 4 times more than the costs of the
previous month and over $120 million more than the sum of the prior 3
months--June through August. 

The surge in costs was due to a sharp increase in reported September
1995 O&M costs.  Between August and September 1995, reported O&M
costs increased from $75 million to $330 million.  O&M costs then
declined to $74 million in October 1995, the first month of fiscal
year 1996, suggesting that September costs were atypical. 

Except for the Marine Corps, each of the military services and other
DOD agencies, such as the Defense Health Program and the Defense
Mapping Agency, reported a collective increase of $256 million in
September over August O&M costs.  The Army and the Air Force reported
the largest increases, $112 million and $106 million, respectively. 
The Navy reported a smaller increase, $35 million, and other DOD
agencies collectively reported the smallest increase, $3 million. 
The Marine Corps reported September costs that were about $1 million
below August costs. 


   PRINCIPAL REASONS WHY REPORTED
   O&M COSTS SURGED IN SEPTEMBER
---------------------------------------------------------- Chapter I:6



   (See figure in printed
   edition.)

The surge in September O&M costs primarily related to (1) accounting
adjustments and (2) end-of-fiscal year payments.  As previously
noted, we examined 88 percent of reported September costs, or $292
million of the $330 million.  We identified $92 million in accounting
adjustments and $82 million in end-of-fiscal year payments, which
together represented 60 percent of the amount we examined and more
than half of all reported September costs. 

The balance of the O&M costs reviewed was $118 million.  Some of
these costs related to higher operating tempo costs, including flying
and steaming hours for operations involving the former Yugoslavia and
Iraq.  In the case of the former Yugoslavia, the pace of operations
increased during the bombing campaign in Bosnia that began in late
August and ended September 22, 1995.  In September 1995, the Air
Force and the Navy reported O&M costs of $49 million and $17 million,
respectively, involving the former Yugoslavia, an increase of $25
million and $10 million, respectively, above reported August 1995
costs. 

In the case of Iraq, operations increased as the United States
provided support for Jordan while that country provided asylum for
two high-level Iraqi defectors.  These costs related to Operation
Southern Watch.  The Navy reported $29 million in Southern Watch O&M
costs in September 1995, or more than 3 times reported August O&M
costs of $8 million.  Of the September 1995 reported costs, the
Navy's Pacific Fleet reported costs of about $25 million, including
$17 million for air and ship operations attributed to both the
aircraft carriers USS Lincoln and USS Independence being deployed in
the Persian Gulf area, and an additional carrier, USS Nimitz,
preparing for deployment.  During September 1995, the USS Lincoln and
the USS Independence conducted 24-hour, "around the clock,"
operations in which one carrier supported 12 hours of operations as
normal when operating alone in the Gulf, and the other carrier
conducted operations for the other 12 hours.  This effectively
doubled the Pacific Fleet's costs for air and ship operations for the
month of September in that region. 


   ACCOUNTING ADJUSTMENTS
---------------------------------------------------------- Chapter I:7



   (See figure in printed
   edition.)

\a Total in this chart does not match the accompanying text and the
preceding chart due to rounding. 

The services, in finalizing their financial data at the end of the
fiscal year, made accounting adjustments for a variety of reasons. 
These reasons included correcting errors and omissions.  Both the
Army and the Air Force adjusted their reported costs to reflect
omissions.  For example, the Air Force included in its September
report $24 million in Korea costs that we were told should have been
reported throughout the year.  This amount reflected the cost of
operating and maintaining more aircraft than anticipated because of
heightened tensions on the Korean peninsula.  According to an Air
Force official, while costs for these aircraft were being incurred
throughout the fiscal year, through an administrative oversight prior
to September 1995, the Air Force had not been including them in its
contingency cost reporting.  Upon recognizing this and the need to
properly report these costs as contingency related, Air Force
officials told us that they took action to do so in late fiscal year
1995 and included all these costs incurred throughout the fiscal year
in the September 1995 cost report. 

The Air Force also adjusted reported costs to include (1) about $17
million in costs associated with aircraft maintenance in Southern
Watch that were incurred before September but were not reported
earlier due to an administrative error and (2) $1 million in costs
associated with operations in the former Yugoslavia that had not been
included in its contingency cost reporting.  The Army erroneously
deleted $20 million in cumulative Haiti costs from its August cost
report, which it corrected by including the cost in its September
report. 

The Army also adjusted its cost reporting to include (1) $25 million
in Operation Southern Watch costs to correct overbilling of Kuwait
and (2) $6 million in reimbursement it received from the Department
of State.  In the case of Kuwait, the government of Kuwait reimburses
the Army for some costs associated with exercises conducted in that
country.  Exercises are not considered contingencies and so are
normally not included in contingency cost reporting.  The Army does
not include the reimbursed exercise costs in its contingency cost
reporting.  However, the Army billed Kuwait, and Kuwait paid $25
million for exercise costs that were really contingency costs. 
Subsequently, the Army reimbursed Kuwait and revised its September
contingency cost report to reflect this adjustment. 

The Army does not include costs incurred on behalf of other U.S. 
government agencies in its contingency cost reporting if it is
reimbursed by those agencies.  Until it is reimbursed, the Army pays
and reports these costs.  The Army had been incurring and reporting
costs involving the Department of State.  When it was reimbursed by
the Department of State, it reduced its August costs by $6 million to
reflect the reimbursement.  The reduction had the effect of making
the change between August and September costs appear to be $6 million
higher than it actually was. 


   YEAR-END PAYMENTS
---------------------------------------------------------- Chapter I:8



   (See figure in printed
   edition.)

Part of the surge in reported costs related to end-of-fiscal year
payments.  Among the services, the Air Force had the largest amount
of such payments, totaling $65 million.  Of this amount, the Air
Force reported about $47 million for items such as communication
requirements, support and base maintenance contracts, consumables,
and landing fees.  Over half of the $47 million involved payments to
other DOD components, such as the Army Corps of Engineers, and to
contractors for expenses incurred in the last quarter of the fiscal
year, although funds were not obligated until the end of the fiscal
year to pay for them.  Consequently, these costs were reported in the
September cost report when the funds were obligated.  The balance of
these payments was for expenses incurred in September.  The remaining
Air Force year-end payments related to $18 million in estimated
transportation costs for September in anticipation of billings.  The
Army also reported $8 million in payments to pay transportation bills
both received earlier in the fiscal year and in anticipation of
further billings.  The Navy reported almost $9 million in payments
for a September airfield rental billing and to support Navy P-3
operations in Oman. 


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

NATIONAL SECURITY AND
INTERNATIONAL AFFAIRS DIVISION,
WASHINGTON, D.C. 

Steven H.  Sternlieb, Assistant Director
Lisa M.  Quinn, Evaluator

NORFOLK FIELD OFFICE

Joseph A.  Rutecki, Evaluator-in-Charge
Carleen C.  Bennett, Evaluator


*** End of document. ***