oversight

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)

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
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             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