Review Of The Army’s Plan To Close The Army Pictorial Center, Long Island City, New York B-146711 Department of the Army BY THE COMPTROLLER GENERAL OF THE UNITED STATES COMPTROLLER GENERAL OF THE UNITED STATES WASHINGTON. D.C. 20348 R-146711 Dear Mr. Chairman : This is in reply to your letter of April 14, 1970, in which you requested that the General Accounting Office (GAO) review the Army’s plaLt>-_p,has,e ,out motion-picture production at the Center, Long Island City, New York, As agreed w~rD~TPdF:aa~ g e , Executive Secretary to the Steering Com- mittee of the New York Congressional Delegation, we examined the case study that the Army Materiel Command had made to support, from a financial standpoint, the Army’s decision to close the Center. We reviewed’the Army’s methods for developing the study’s statistical and accounting data, to determine whether the appli- cation of this data appeared to be logical and consistent. We did not audit accounting records to verify the accuracy of the data analyzed. As a result of a previous study of all its audio-visual activities, the Army decided to reduce the Center’s mission by authorizing the Continental Army Command to be responsible for production of its own training films. Therefore, to determine potential savings from closing the Center, the case study com- pared the estimated costs of retention of the Center (assuming this reduced mission) with the estimated costs of full closure of the Center (assuming that its reduced mission would be ac- complished in total by commercial contractors and by other Army activities). The factors considered were operating costs over the S-year period ending June 30, 1975, the one-time costs of closure and relocation of the Center’s activities, and the one-time income from disposal of the Center’s real property. Estimates for the amounts involved were discounted to their present value, in accordance with the policy set forth in Depart- ment of Defense instructions, to give effect to the fact that all transactions would not occur immediately but would take place over the s-year period considered by the Army’s study. The pres- ent value technique is based on the principle that a dollar re- ceived today is worth more than a dollar to be received a year ---- 5OTl-i ANNIVERSARY 1X21- 1971 B-146711 from now. It requires use of discount rates, which in this case were those stipulated in Circular A-94 published by the Bureau of the Budget, now the Office of Management and Budget, The case study concluded that, if the Center were closed and its mission accomplished elsewhere, the Army would save about $17.3 million over the S-year period. We believe that this esti- mate is excessive by at least $9.4 million, as shown below. Army GAO Differ- study review ence (millions) Savings in operating costs-- 5 years--gross $20.0 $9& 6 $U.A Savings in operating costs-- 5 years--(present value) $15.8 $7.6 $ 8.2 Deduct one-time costs of closure (present value) 2.2 3.4 (1.2) Subtotal 13.6 4.2 9.4 Plus proceeds from dis- posal of real property (present value) 3.7 3.7 Net savings $17.3 $7.9 $-.%A In addition to these dollar adjustments, we point out below several other significant factors in the study which, we believe, were not given sufficient attention by the study group. More ex- tensive development of these factors by the study group might have resulted in estimated savings less than those shown in the study. Operating costs The case study concluded that, over a S-year period ending June 30, 1975, the Army would save approximately $20 million in operating costs if the Center were closed and its work load 2 B-146711 accomplished elsewhere. We have identified a variety of de- ficiencies in the study and have made adjustments totaling about $17 million--$13.7 million in decreases and $3.3 mil- lion in increases--to the operating cost savings shown in the study. As adjusted, the estimated savings in operating costs amount to about $9.6 million over a S-year period. On the basis of present value, the adjusted estimated operating sav- ings amount to about $7.6 million. We noted other estimated operating costs which, we be- lieve, had been based on inappropriate assumptions on the part of the study group. We did not develop alternative es- timates for these items, which included the number of person- nel required to operate the Center with its reduced mission and the amount of travel necessary under the alternatives con- sidered, because we found that the other deficiencies, which we estimated in the amount of $17 million, were of such sig- nificance as to indicate that the data used in the case study were not.consistently or thoroughly developed. The estimated cost of producing motion pictures commer- cially , if the Center were to be closed, comprised 60 percent of the Army’s projected S-year operating costs. This esti- mate is of doubtful validity because of the method used to develop projected costs. Our findings relating to the estimated operating costs are considered in more detail in pages 7 to 11. One-time costs and income With respect to one-time costs involved in closing the Center, the Army estimate, in our opinion, was understated by about $1.2 million. This represents estimated costs of per- sonnel who will remain at the Center through June 30, 1972, presumably for the caretaker functions of property maintenance and protection. Although the Army has included the estimate in the S-year operating costs, we believe that it should more properly be included as a one-time cost. The cost study included as one-time income an amount of $3.7 million, representing the appraised fair market value of the Center’s real estate discounted to its present value. 3 B-14.6711 This procedure is in accordance with Department of Defense policy, and we have not adjusted t.he Army’s estimate for this item. It should be noted, however, that in disposal of such properties, other requirements, such as use by another Fed- eral agency or by state or local governments, would take pre- cedence over sale on the open market. In the event that the facility is disposed of in this manner, the Government may not realize any proceeds. Another one-time cost not considered by the Army is that of early retirement of employees to be released through clo- sure of the Center. Although we did not determine the amount involved, we think that the Army should have considered this factor since the study group estimated that 153 people, or 40 percent of the Center’s civilian staff, would retire. We discussed our findings with officials of the Army Ma- teriel Command. They agreed with certain substantial adjust- ments and indicated that they would consider the others. They have not provided us, however, with an overall assess- ment of our findings. We have not requested formal comments from the Secretary of Defense on this report. We plan to make no further distribution of this report unless copies are specifically requested and then we shall make distribution only after your agreement has been obtained or public an- nouncement has been made by you concerning the contents of the report. We trust that this information meets your needs. Comptroller General of the United States The Honorable Emanuel Celler Chairman, Steering Committee New York Congressional Delegation 4 BACKGROUW On August 6, 1969, the Adjutant General, Department of the Army, requested that the Army Materiel Command conduct a case study to determine the economic desirability of continu- ing operation of the Army Pictorial Center. The request noted that a March 1969 report on an Army-wide study of audio- visual activities had recommended that the Continental Army Command USC its television facilities to produce the majority of films required by its various training organizations. The Center had been accomplishing this work load, but it had re- lied exclusively on motion picture filming in preference to producing selected subjects by television. Recognizing that the Army-wide study had been approved, the Adjutant General noted that the Centerss loss of the re- sponsibility to produce the majority of films required by the Continental Army Command would reduce its work load by about 45 percent by the end of 1973. The case study assumed that the Continental Army Command would begin producing its own television films without the need for further approval. Therefore 9 in considering the overall savings or costs to the Army to retain or to close the Center 9 the study group did not include an estimate for the cost of television production by the Continental Army Com- mand. Three alternatives were considered in the case study. 1. Retention of the existing facilities of the Center, acknowledging the 45-percent reduction in the motion- picture work load expected to occur with the loss of the responsibility to produce films required by the training activities of the Continental Army Command. 2. Partial closure of the Center which would retain only film distribution and depository functions. 3. Full closure of the Center and transfer of its func- tions to other facilities of the Materiel Command. The study group computed estimates of costs pertinent to each of the three alternatives for the 5-year period ending June 30, 1975. The results showed that the continued opera- tion of the Center would cost the Government approximately $49 million over the period, that partial closure of the Cen- ter would cost some $37 million, and that full closure of the Center and transfer of its work load elsewhere would cost only $29 million. The case study concluded that alterna- tive 3, with expected savings of $20 million, was the most eco- nomical course of action. Qur comments concern the study’s comparison of alternatives 1 and 3. DEFICIENCIES IN THE STUDY There are several major deficiencies in the Army Mate- riel Command's case study. These pertain to the method used to develop cost estimates for obtaining motion pictures from commercial sources and improper omission of certain cost es- timates and inclusion of others. DEVELOPMENTOF COST ESTIMATES FOR OBTAINING MOTION PICTURES FROM COMMERCIALSOURCES The most prominent weakness in the case study is in the cost estimates for having motion pictures produced commer- cially. s Under alternative 3-- complete closure of the Center-- officials of the Army Materiel Command anticipated that about 85 percent of the Army's motion-picture requirements would be obtained from commercial sources. The case study cost esti- mate of $17.6 million for this service represents about 60 percent of the total estimated costs of $29 million for alternative 3. The estimate was based on an analysis in an Army Audit Agency report of December 18, 1969, which compared estimates for producing certain motion pictures at the Center with quotations obtained from selected firms for producing the same pictures. There were several deficiencies in the analysis, partic- ularly concerning the solicitation of quotations from contrac- tors. 0fficial.s of the Center, with the approval of the Army Audit Agency, selected five scripts, considered to be repre- sentative of the Center's work load for 1969, for use in so- liciting pricing proposals from 25 contractors. Each of the 25 contractors was asked to submit proposals on 2 scripts. In this manner 10 proposals were solicited for each of the five scripts selected for a total of 50 proposals. At the time of the study, Army Audit Agency personnel noted that the number of scripts upon which the proposals were based was small in relation to the production work load and that the scripts were of a type representative of only about 70 percent of the Center's work load. Officials of the Army Audit Agency and the Materiel Com- mand noted that the requests for prices had specified two 7 conditions that would affect the credibility of the responses. They specified that (1) no current award could be expected and (2) no reimbursement would be made for preparing the proposals. Only 17 pricing proposals, out of the 50 solicited for purposes of the comparison, were received. Auditors of the Materiel Command expressed the belief that the number of re- sponses did not constitute a large enough sample upon which to develop valid cost data for a comparative analysis. Despite the reservations of the auditors of the Army Audit Agency and the Materiel Command, however, the contractors' pricing pro- posals were used in the cost comparison included in the Army Audit Agency report. Officials of the Center noted that most of the contrac- tors' proposals had omitted costs for certain required skills, crafts, and services. Because of time limitations, these of- ficials did not attempt to obtain more complete quotations, but rather, they developed an adjustment to compensate for the omission. Documents that we revieyed indicated that the Army Audit Agency had planned to include this adjustment in the cost comparison to be included in its report. The adjustment was not included, however, in the final report of the Army Au- dit Agency. The effect was to lower the estimate of costs at- tributable to obtaining motion pictures from commercial sources. We believe that the Army Audit Agency should have inves- tigated this matter further to determine whether the omissions from contractors' proposals were significant. We noted that auditors of the Materiel Command were of the opinion that the cost adjustment formulated by Center officials, but not in- cluded in the study, was reasonable considering the circum- stances surrounding the solicitation. As a result we believe that the analysis contained in the Army Audit Agency report is not acceptable and that the esti- mates of contractor costs included therein should not have been used in the case study. 8 IMPROPER OMISSION AND INCLUSION OF COST ESTIMATES A number of costs were excluded from the study or, in some instances, were included improperly. We identified sev- eral items that had been duplicated in the study. The following schedule shows the case study estimates for alternatives 1 and 3 and the $17 million in adjustments-- both increases and decreases--that we feel are appropriate. The net adjustments decrease the estimated cost savings by $10.4 million. GAO Adjustments to the Case Study and Economic Analysis Gross Alternatives estimated 1 3 cost savings Total operating costs $48,973,555 $28,956,823 $20,016,732 Cost items eliminated by GAO ' which reduce operating costs: Personnel 3,008,185 3,008,185 Communications 240,000 25,000 -215,000 Rent and utilities 4,760,OOO -4,760,OOO Supplies and materials 1,024,OOO 240,000 -784,000 P Total decreases in oper- ating costs 6,024,000a 3,273,18Sb -2,750,815 Adjusted operating costs 42,949,555 25,683,638 17,265,917 Cost items added by GAO which in- crease operating costs: Personnel 337,111a -337,111 Laboratory services 7,354,250a -7,354,250 Total operating costs af- ter adjustments $$2.949.555 $33.374.999 $ 9.574.556 Gross net decrease in the savings in operating costs $10.442.176 aDecreases to cost savings $13,715,361 b Increases to cost savings 3,273,185 Total deficiencies $>6,98&546 Note: These figures have not been discounted. 9 ii; /,I j: ! ,i 1,’ ’ i~j1 ‘ii,i Cost items eliminated by GAO ,I which reduce operating costs Personnel costs Under alternative 3 we eliminated two of the estimates for personnel requirements totaling about $3 million. The first estimate of $1.6 million pertains to the personnel costs at the U.S. Army Missile Command for administering commercial motion-picture production contracts over the S-year period. This cost had already been included in alternative 3 under the category of contractor costs. The second estimate of $1.4 millaion that we eliminated as an operating expense of alternative 3 involved the costs of personnel remaining at the Center after its closure on June 30, 1970. These personnel will remain at the Center from July 1, 1970, through June 30, 1972, presumably for the caretaker functions of property maintenance and protection. We believe that such costs should not be considered as normal operating costs under alternative 3, but as one-time expenses associated with the closure of the Center. Accordingly, we added this estimate, discounted to its present value of $1.2 million, to the study estimate of one-time costs. Cost of communications The estimates of $240,000 for communications for alter- native 1 and $25,000 for alternative 3 duplicated other cost estimates in the study. We eliminated these amounts in our computation. Cost of rent and utilities The case study included an amount of almost $4.8 million for rent and utilities for alternative 1. This element of cost, more properly entitled repair and utilities, was com- posed of such items as salaries and wages, materials and sup- plies) contractual services, and other costs which were also included in the case study under separate cost categories. Thus the estimated costs of continuing the operation of the Center were overstated by $4.8 million. 10 Cost of supplies and materials Supplies and materials were estimated at $4.9 million under alternative 1 and $1.2 million under alternative 3. These estimates come from the historical budget costs of the Center. We found that the estimates had not been based on the Center's most recent experience. Using more recent data available at the time of the study, we estimated that sup- plies and materials for alternative 1 would be approximately $3.9 million or about $1 million less than shown in the study. Similarly, the study figure for supplies and materials for alternative 3 should be reduced by about $240,000. Cost items added by GAO which increase operating costs Personnel costs In considering alternative 3, the study group failed to include an estimate for "the cost of personnel required to provide certain script-writing services, a function for- merly done at the Center. On the basis of historical data at the Center, we estimate that this service will cost about $337,000 for the period covered, and we have added this amount to alternative 3. Costs of laboratory services The case study guidance stated that release printing, a major part of laboratory processing costs for the distribution of motion pictures, would be accomplished by commercial con- tract. In its calculations for alternative 3, however, the study group made no estimate for this service, for performance either by the Government or by contract. The study group further failed to provide an estimate for certain types of laboratory services connected with the film depository func- tion. Using historical costs of the Center as a basis for our calculation, we estimate that the cost of these labora- tory services will be approximately $7.4 million over the 5-year period. U.S. GAO Wash., D.C. 11
Review of the Army's Plan to Close the Army Pictorial Center, Long Island City, New York
Published by the Government Accountability Office on 1971-06-07.
Below is a raw (and likely hideous) rendition of the original report. (PDF)