DOD’s Plans to Address Risk

A principal objective of the QDR was to understand and devise ways to manage the financial risk in DOD’s program. DOD refers to this as migration of funds. To address this financial instability, the QDR directed DOD to cut some force structure and personnel, eliminate additional excess facilities through more base closures and realignments, streamline infrastructure, and reduce quantities of some new weapon systems. Infrastructure Reductions Are Critical to Achieving DOD’s Modernization Plans

In 1997, infrastructure spending was 59 percent of DOD’s total budget, the same percentage that was reported in DOD’s bottom-up review report for 1994. DOD’s Program Continues to Have Substantial Risk

Although DOD made adjustments in the 1999 FYDP to decrease the risk that funds would migrate from procurement to unplanned operating expenses, we continue to see risks that DOD’s program may not be executable as planned. These risks involve unrealized savings and other program needs. In addition, DOD projected savings of about $2.8 billion as a result of lower projected fuel costs and favorable foreign currency exchange rates. DOD said that with these assumed savings, it can fund additional procurement items and civilian and military pay raises, which account for $15 billion of the $24.1 billion. However, if those savings do not materialize, DOD will have to adjust its future budgets by cutting programs and/or requesting additional budget authority from the President and Congress. Specifically, DOD procurement spending rises and falls in nearly direct proportion to movements in its total budget; however, in the 1998 FYDP, DOD projected an increase in procurement of about 43 percent but a relatively flat total DOD budget. The 1999 FYDP procurement projections continue to run counter to the historical trend, although DOD has moderated its position. Specifically, DOD projects that procurement funding will rise in real terms during 1998-2003 by approximately 29 percent while the total DOD budget will remain relatively flat. Figure 4 shows the historical relationship between the total DOD budget and procurement spending and DOD’s 1999 FYDP projections. Program Demands and Cost Growth

The QDR report cited cost growth of complex, technologically advanced programs and new program demands as two areas contributing to the migration of funds from procurement. Furthermore, as long as the national defense funding levels agreed to in the balanced budget agreement remain unaltered, solutions to DOD’s funding issues must be found within its current and projected budget. DOD noted that our report does not acknowledge that the risks in achieving these objectives have been substantially reduced in the 1999 FYDP and the Department’s program is on a sounder financial footing. Moreover, it has plans to reduce infrastructure. DOD believes that its assumptions of the savings rates for outsourcing personnel are conservative.
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed the Department of Defense's (DOD) Future Years Defense Program (FYDP) for fiscal year 1999, focusing on: (1) DOD's plans to address the financial and programmatic risk areas that the Quadrennial Defense Review (QDR) found in DOD's program; (2) comparing DOD's 1999 FYDP with its 1998 FYDP to identify major changes and adjustments to address these risks areas; and (3) whether there were risk areas in DOD's 1999 program.

What GAO Found

GAO noted that: (1) although DOD has reduced military and civilian personnel, force structure, and facilities over several years, DOD has been unable to shift funds from infrastructure to modernization; (2) in 1997, infrastructure spending was 59 percent of DOD's total budget, the same percentage as in 1994; (3) DOD acknowledged in the QDR that it has postponed procurement plans because funds were redirected to pay for underestimated operating costs and new program demands, and projected savings from outsourcing and other initiatives had not materialized; (4) to address this diversion of funds, the QDR directed DOD to cut some force structure and personnel, eliminate additional excess facilities through more base closures and realignments, streamline infrastructure, and reduce quantities of some new weapon systems; (5) DOD made adjustments in the 1999 FYDP to decrease the risk that funds would migrate from procurement to unplanned operating expenses; (6) DOD has programmed additional funds for new programs and has moderated its procurement plans; (7) as a result of these and other changes, DOD believes that its 1999 program is on a sounder financial footing; (8) although DOD made adjustments to the 1999 FYDP, GAO continues to see risks that DOD's program may not be executable as planned; (9) for example, DOD projects savings of $24.1 billion as a result of lower projected inflation rates and fuel costs and favorable foreign currency exchange rates; (10) if these rates and costs do not hold true to DOD's assumptions, projected savings will not materialize, and DOD will have to adjust future budgets by cutting programs and/or requesting additional budget authority; (11) further indication of risk can be found in DOD's procurement plans and additional proposed initiatives to reduce facilities; (12) DOD's estimates for procurement spending, in relation to DOD's total budget, run counter to DOD's experience over the last 32 years; (13) DOD procurement spending rises and falls in nearly direct proportion to movements in its total budget; (14) DOD projects that procurement funding will rise in real terms during 1998-2003 by approximately 29 percent while the total DOD budget will remain relatively flat; (15) on some important proposed initiatives, DOD will need congressional approval; and (16) as long as the funding levels agreed to in the balanced budget agreement for national defense remain unaltered, DOD must solve its funding issues within its current and projected total budget.