oversight

Financial Management: DOD's Liability for Aircraft Disposal Can Be Estimated

Published by the Government Accountability Office on 1997-11-20.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                United States General Accounting Office

GAO             Report to the Secretary of Defense




November 1997
                FINANCIAL
                MANAGEMENT
                DOD’s Liability for
                Aircraft Disposal Can
                Be Estimated




GAO/AIMD-98-9
             United States
GAO          General Accounting Office
             Washington, D.C. 20548

             Accounting and Information
             Management Division

             B-273004

             November 20, 1997

             The Honorable William S. Cohen
             The Secretary of Defense

             Dear Mr. Secretary:

             Recent laws have enhanced the legislative requirements to provide
             policymakers and agency program managers with more reliable financial
             information to formulate budgets, manage government programs, and
             make difficult policy choices.1 Recognizing the extent of incomplete and
             unreliable information on the cost and consequences of government
             programs and activities, these laws have made implementation of new
             accounting standards and audited financial statements a priority. New
             federal accounting standards have been adopted to enhance financial
             statements by requiring that government agencies show the financial
             results of their entire operations and provide relevant information on
             agencies’ true financial status. This report discusses one such requirement
             for valuable information related to the disposal costs of federal agencies’
             property, plant, and equipment (PP&E). The second in a planned series of
             reports on the Department of Defense’s (DOD) implementation of this
             requirement, this report focuses on aircraft.2 The disposal process for
             aircraft includes removal from active service, demilitarization, removal
             and disposal of hazardous materials, storage, reclamation of parts, and
             final disposal/salvage.


             In October 1990, the Federal Accounting Standards Advisory Board
Background   (FASAB) was established by the Secretary of the Treasury, the Director of
             the Office of Management and Budget (OMB), and the Comptroller General
             of the United States to consider and recommend accounting standards to
             address the financial and budgetary information needs of the Congress,
             executives agencies, and other users of federal financial information.
             Using a due process and consensus building approach, the nine-member
             Board, which has since its formation included a member from DOD,
             recommends accounting standards for the federal government. Once FASAB
             recommends accounting standards, the Secretary of the Treasury, the
             Director of OMB, and the Comptroller General decide whether to adopt the

             1
              The Chief Financial Officers Act (CFO) of 1990, the Government Management Reform Act (GMRA) of
             1994, and the Federal Financial Management Improvement Act of 1996.
             2
              See our first report, Financial Management: Factors to Consider in Estimating Environmental
             Liabilities for Removing Hazardous Materials in Nuclear Submarines and Ships (GAO/AIMD-97-135R,
             August 7, 1997).



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recommended standards. If they are adopted, the standards are published
as Statements of Federal Financial Accounting Standards (SFFAS) by OMB
and by GAO. In addition, the Federal Financial Management Improvement
Act of 1996, as well as the Federal Managers’ Financial Integrity Act,
requires federal agencies to implement and maintain financial
management systems that will permit the preparation of financial
statements that substantially comply with applicable federal accounting
standards.

Issued in December 1995 and effective beginning with fiscal year 1997,
SFFAS No. 5, Accounting for Liabilities of the Federal Government, requires
the recognition of a liability for any probable and measurable future
outflow of resources arising from past transactions.3 The statement
defines probable as that which is likely to occur based on current facts
and circumstances. It also states that a future outflow is measurable if it
can be reasonably estimated. The statement recognizes that this estimate
may not be precise and in such cases, it provides for recording the lowest
estimate and disclosing in the financial statements the full range of
estimated outflows that are likely to occur.

SFFAS No. 6, Accounting for Property, Plant, and Equipment, which is
effective beginning in fiscal year 1998, deals with various accounting
issues pertaining to PP&E. This statement establishes several new
accounting categories of PP&E, collectively called stewardship PP&E. Other
PP&E is referred to as general PP&E. One of the new stewardship
categories—federal mission PP&E—is defined as tangible items owned by a
federal government entity, principally DOD, that have no expected
nongovernmental use, are held for use in the event of emergency, war, or
natural disaster, and have an unpredictable useful life. Federal mission
PP&E, which includes ships, submarines, aircraft, and combat vehicles, is a
major part of DOD’s total PP&E.

SFFAS No. 6 also provides information on how SFFAS No. 5’s standard on
liabilities should be applied to PP&E. Specifically, SFFAS No. 6 discusses how
to recognize the liability for the clean up4 of hazardous waste in PP&E.
While this statement modifies SFFAS No. 5 with respect to the timing of


3
These requirements generally mirror those of the Statement of Financial Accounting Standard No. 5,
Accounting for Contingencies (FASB No. 5), which was effective prior to the development of SFFAS
No. 5.
4
 SFFAS No. 6 defines cleanup as the removal, containment, and/or disposal of (1) hazardous waste
from property or (2) material and/or property that consists of hazardous waste at permanent or
temporary closure or shutdown of associated property, plant, and equipment.



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                     liability recognition for general PP&E, it has no effect on accounting for
                     liabilities related to aircraft and other federal mission PP&E.


                     DOD has not yet implemented the federal accounting standard that requires
Results in Brief     recognizing and reporting liabilities such as those associated with aircraft
                     disposal, nor has it provided guidance to the military services. Aircraft
                     disposal is an ongoing process and the cost can be reasonably estimated.
                     Accordingly, these activities meet the criteria for a reportable liability.
                     Information on the three major disposal processes—demilitarization,
                     storage and maintenance, and hazardous materials removal and
                     disposal—is available to develop cost estimates. The Congress has
                     recognized the importance of accumulating and considering disposal cost
                     information. In the National Defense Authorization Act for Fiscal Year
                     1995, the Congress required DOD to develop life-cycle environmental costs,
                     including demilitarization and disposal costs, for major defense acquisition
                     programs.


                     We undertook this review to assist DOD in its efforts to meet the new
Objectives, Scope,   federal accounting standard, SFFAS No. 5, and because of our responsibility
and Methodology      to audit the federal government’s consolidated financial statements
                     beginning with fiscal year 1997. Our objectives were to determine (1) the
                     status of DOD’s efforts to implement the new federal accounting standard
                     for disclosure of liabilities, such as aircraft disposal, and (2) whether an
                     estimate of the minimum disposal liability for aircraft, including the
                     removal and disposal of hazardous materials, could be made. The
                     following was done to accomplish our objectives.

                     To assess the status of DOD’s efforts to implement SFFAS No. 5, we reviewed
                     DOD  regulations and interviewed officials from the DOD Comptroller’s
                     office. To gain an understanding of the procedures and the financial and
                     logistical management information systems that can be used to
                     accumulate and report on aircraft disposal costs, we (1) examined the
                     management and financial reporting for these programs used by the
                     services, (2) reviewed applicable DOD and service instructions and
                     regulations, and (3) interviewed DOD, Air Force, Army, and Navy officials.

                     To determine if the liability is reasonably estimable, we identified the
                     financial and logistical management information systems and reporting
                     mechanisms in place that contain information about the costs of aircraft
                     disposal, including demilitarization and hazardous material disposal



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processes. We visited DOD’s designated aircraft storage, reclamation, and
disposal facility at the Aerospace Maintenance and Regeneration Center
(AMARC) where data were readily available for addressing removal and
disposal costs of older, out of service aircraft systems. To determine if the
liability could be estimated for newer aircraft, we selected five aircraft for
review. The five aircraft selected were the Air Force’s F-16 and B-1B, the
Navy’s F-14 and F-18, and the Army’s AH-64 Apache Helicopter. We chose
these five aircraft because they represent the primary fighter or attack and
bomber aircraft for each of the services, have the largest number in their
class, and represent about 17 percent of the services’ combined active and
inactive inventory.

Because environmental costs are more variable and are likely to raise
more complex estimation issues, we performed a more in-depth analysis
of these costs. Using data initially obtained at AMARC, information in the
DOD hazardous material disposal manual, and visits to maintenance depots,
we prepared a list of hazardous materials associated with each of these
aircraft. On a case-by-case basis, we then obtained depot level officials’
concurrence that these items represent the primary hazardous material on
each of these aircraft.

To compute the cost of removing hazardous materials from each aircraft,
we reviewed documents that stated a standard or estimated removal time
for each of the hazardous material items from the depot responsible for
program depot maintenance on the applicable aircraft and AMARC’s hourly
labor rate. We did not independently verify the data obtained from the
inventory and financial systems or the reported removal times.

We interviewed the services’ environmental engineers to determine which
hazardous materials require disposal. To determine the costs of disposing
of these materials, we reviewed disposal and shipping records at AMARC
and the various depots. For those materials that were not scheduled for
disposal, we interviewed various depot personnel to determine their
methods for reusing and recycling them. We also discussed disposal
procedures with various offices of the Defense Reutilization and
Marketing Service.

During our review, we contacted personnel and/or conducted work at
various locations including the Army Aviation and Troop Command
Headquarters, St. Louis, Missouri; Aerospace Maintenance and
Regeneration Center, Davis-Monthan Air Force Base, Arizona; Air
Logistics Centers at Hill Air Force Base, Utah, and Tinker Air Force Base,



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                     Oklahoma; Office of the Chief of Naval Operations; Naval Aviation Depots
                     at Jacksonville, Florida and North Island, California; Corpus Christi Army
                     Depot, Corpus Christi, Texas; offices of the Defense Reutilization and
                     Marketing Service, Battle Creek, Michigan; and applicable headquarters
                     offices in the Washington, D.C., area.

                     We conducted our review from July 1996 through June 1997 in accordance
                     with generally accepted government auditing standards. We provided a
                     draft of this report to the Department of Defense for review and comment.
                     We received oral comments which have been incorporated as appropriate.


                     Although SFFAS No. 5 is effective beginning with fiscal year 1997, as of the
DOD Has Not          end of the fiscal year on September 30, 1997, DOD had not established a
Implemented SFFAS    policy to implement this federal accounting standard. On September 30,
No. 5                1997, the DOD Comptroller’s office posted revisions to the electronic
                     version of DOD’s Financial Management Regulation to include SFFAS Nos. 1
                     through 4, but SFFAS No. 5 was not included. In addition, the DOD
                     Comptroller, who is responsible for developing and issuing guidance on
                     accounting standards, and the Under Secretary of Defense (Acquisition
                     and Technology), who is responsible for the operational activities
                     associated with aircraft disposal, have not provided implementation
                     guidance to the services to assist them in estimating the disposal costs for
                     aircraft. Service officials stated that they are reluctant to estimate a
                     liability for their aircraft until they receive DOD-wide guidance. Unless
                     prompt action to implement this standard is taken, it is unlikely that DOD’s
                     fiscal year 1997 financial statements will include an estimate of aircraft
                     disposal costs as required.


                     One of the key criteria cited in SFFAS No. 5 for a liability to be reported is
Aircraft Disposal    that a future cost is probable—that is, the future outflow of resources is
Liability Has Been   likely to occur. While the likelihood of a future outflow may be difficult to
Incurred             determine and an entity may have difficulty deciding whether to record a
                     liability for certain events, DOD continually disposes of aircraft and has an
                     amount for disposal costs in its annual budget. Thus, because it is known
                     at the time of acquisition that costs will be incurred for the disposal of
                     aircraft, the probability criterion for recording a liability is met. The
                     Congress has also recognized that disposal costs will be incurred and has
                     emphasized the importance of accumulating and considering this
                     information. For example, the National Defense Authorization Act for
                     Fiscal Year 1995 requires the Secretary of Defense to determine, as early in



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                            the acquisition process as feasible, the life-cycle costs for major defense
                            acquisitions, including the materials to be used and methods of disposal.
                            The life-cycle cost estimates are required before proceeding with the
                            major acquisition.


Aircraft Disposal Process   All aircraft are eventually disposed of using the same basic processes. Any
                            estimate of the disposal liability must take into account these processes
                            and use them as the basis for determining costs. The disposal process
                            starts with the decision to remove an aircraft from service, referred to as
                            retirement (Army), decommissioning (Air Force), and striking (Navy) of
                            military aircraft. Aircraft disposal consideration begins when the services
                            prepare an updated force structure plan. The plan shows the projected
                            requirements for each type of aircraft and includes new procurement and
                            various attrition factors including crashes, programmed retirements,
                            airframe stress tests, parts reclamation needs, and foreign military sales.
                            Active aircraft not needed to meet the services’ current and forecasted
                            requirements are sent to AMARC, DOD’s designated storage and disposal
                            facility for aircraft for temporary or long-term storage and eventual
                            disposal.

                            Aircraft arriving at AMARC are either placed in a flyable or temporary hold
                            status, prepared for foreign military sales, salvaged for parts, or placed
                            into long-term storage awaiting either eventual disposal or reuse
                            determination. AMARC officials stated that, in general, planes that undergo
                            the storage process are not recalled and are ultimately disposed of through
                            sales or salvage. Once the military services have determined no further
                            need exists for the aircraft, they are released for disposal. These aircraft
                            and related parts are subjected to demilitarization processes to prevent
                            further military use before they are transferred to the Defense
                            Reutilization and Marketing Service (DRMS) for sale as scrap.5
                            Demilitarization may take place at the air base, at AMARC, or at the local
                            DRMS field office. Part of the demilitarization process involves removing all
                            remaining hazardous materials from the aircraft.


Inventory of Aircraft       Aircraft acquired by the services are, in general, considered mission
                            assets. The Air Force’s Reliability and Maintainability Information System
                            (REMIS), the Navy’s Aircraft Inventory Reporting System (AIRS), the Army’s
                            Continuing Balance System-Expanded (CBS-X), and AMARC’s Aircraft Status

                            5
                             The way the disposal process works is detailed in our report Federal Property Disposal: Information
                            on DOD’s Personal Property Disposal Process (GAO/NSIAD-97-155BR, July 8, 1997).



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                                          Directory identify the number of active and inactive aircraft and are used
                                          by the services to keep track of their aircraft inventories. As shown in
                                          table 1, DOD reported about 18,000 active aircraft as of September 30, 1996,
                                          the most recent data available.

Table 1: DOD’s Aircraft Inventory as of
September 30, 1996                        Service/aircraft type                                                 Active                Inactive
                                          Air Force
                                          B-1B Bomber                                                                95                         0
                                          B-52 Bomber                                                                94                        124
                                          C-130 Transport                                                           682                        90
                                          F-4 Fighter                                                                  0                       903
                                          F-15 Fighter                                                              767                        121
                                          F-16 Fighter                                                            1,541                        354
                                          F-111 Fighter/Bomber                                                       18                        285
                                          KC-135 Tanker                                                             492                        67
                                          Other                                                                   2,298                   1,266
                                          Army
                                          AH-64 Apache Helicopter                                                   727                         0
                                          UH-60 Blackhawk Helicopter                                              1,351                         0
                                          UH-1 Huey Helicopter                                                    2,011                        211
                                          AH-1 Cobra Helicopter                                                     622                        17
                                          Other                                                                   2,191                        28
                                          Navy
                                          A-4 Fighter/Bomber                                                           0                       263
                                          A-7 Attack Bomber                                                            0                       234
                                          AV-8 Fighter                                                              195                        40
                                          F-14 Fighter                                                              311                        90
                                          F-18 Fighter                                                              811                        52
                                          P-3 Surveillance                                                          285                        136
                                          T-34 Trainer                                                              319                        26
                                          CH-46 Helicopter                                                          262                         0
                                          Other                                                                   2,634                        975
                                          Total                                                                 17,706                    5,282
                                          Source: AMARC, Army (CBS-X), Navy (AIRS), and Air Force (REMIS) data. We did not
                                          independently verify these data. See footnote 6 for information on reliability problems associated
                                          with DOD’s accounting and logistical data.



                                          The aircraft inventory serves as the basis for estimating the disposal
                                          liability although factors such as foreign military sales would have to be



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                             considered in adjusting the number of aircraft. According to a March 1997
                             AMARC report, about 4 percent of AMARC’s inventory at any given time is
                             scheduled for foreign military sales. Aircraft lost during operations,
                             however, are generally replaced to maintain the inventory at certain levels.
                             As a result, operational losses may not reduce the total liability for aircraft
                             disposal.


                             The second key criterion in SFFAS No. 5 for reporting of a liability is that an
Aircraft Disposal            amount be reasonably estimable. Information is available to develop cost
Liability Could Be           estimates for each of the major aircraft disposal processes described in
Estimated                    the previous section—demilitarization, storage maintenance, and
                             hazardous materials removal and disposal.6 These processes account for
                             most of the aircraft disposal costs.

                             Our review focused on five aircraft (the Air Force’s F-16 and B-1B, the
                             Navy’s F-14 and F-18, and the Army’s Apache Helicopter). Although data
                             were available for each of the disposal processes, we performed a more
                             detailed analysis of the costs associated with the removal and disposal of
                             hazardous materials because these costs are more variable and likely to
                             present more complex estimation issues. The information in the following
                             sections indicates the types and sources of information available for DOD
                             to develop an aircraft disposal cost estimate. As stated in SFFAS No. 5, this
                             process may result in a range of potential aggregate costs, the lowest of
                             which should be recorded unless an amount within the range which is
                             most likely to occur is estimable.


Estimated Demilitarization   Demilitarization includes removing weapons and other designated items
Costs                        from the aircraft and then taking the aircraft off line. Other
                             demilitarization actions include removing equipment that has, directly or
                             indirectly, a significant military utility or capacity, such as sensitive radar
                             equipment. A salvage or residual value for the aircraft was deducted from
                             the demilitarization costs, since historically the remains of aircraft are sold
                             as scrap at the time of disposal. As shown in table 2, demilitarization costs
                             varied considerably for the three aircraft in our review for which this
                             information was readily available from program offices. Although the B-1B
                             and the Apache Helicopter are newer aircraft for which demilitarization

                             6
                              We, as well as the DOD Inspector General and service auditors, have reported problems with the
                             reliability of information in DOD’s accounting and logistical systems. While there are limitations in the
                             data, DOD is working to improve the systems which should over time, increase the accuracy of the
                             information and improve the disposal liability estimates. See GAO report Defense Financial
                             Management (GAO/HR-97-3, February 1997).



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                                      plans and costs have not yet been developed, disposal cost estimates could
                                      be based on cost experience for other aircraft with similar missions. AMARC
                                      officials stated that disposal tasks are generally similar among aircraft
                                      although the quantity and complexity of specific items may differ. For new
                                      weapons systems, including aircraft, the disposal costs, including
                                      demilitarization costs, are to be developed as part of the life-cycle costs
                                      required by the National Defense Authorization Act for Fiscal Year 1995.

Table 2: Estimated Demilitarization
Costs                                                                                    Residual
                                                              Demilitarization      recouped from          Net demilitarization
                                      Type of aircraft       costs per aircraft               sale                        costs
                                      F-14                            $107,819               $3,020                  $104,799
                                      F-16                              $8,561               $1,693                     $6,868
                                      F-18                             $20,550               $1,700                    $18,850
                                      Source: GAO computation based on AMARC and maintenance depot data.



                                      Jacksonville Naval Depot officials stated that the demilitarization cost for
                                      the F-14 was significantly more than the other two aircraft because of the
                                      complexity of the disposal work effort and the related costs.


Estimated Cost to Maintain            Aircraft are stored at AMARC’s long-term storage facility. All openings,
Aircraft in Storage                   cracks, and joints have to be sealed and delicate surfaces protected from
                                      the hot sun, wind, and sand. The preservation process is repeated every 4
                                      to 5 years to ensure that each aircraft is adequately protected. According
                                      to AMARC’s costing system, the maintenance costs of aircraft in long-term
                                      storage are about $400 per aircraft per year. According to an AMARC
                                      official, aircraft, on average, are kept in long-term storage for 20 years.
                                      They also stated that, in general, planes that undergo the storage process
                                      are not recalled and are ultimately disposed of through sales or salvage.
                                      Such storage costs could result in a significant liability. For example, if the
                                      current active inventory of 18,000 aircraft were all maintained in storage
                                      for the average of 20 years and AMARC’s estimated maintenance cost of
                                      $400 per aircraft per year were used, the storage costs would be at least
                                      $140 million.


Removal and Disposal of               All five aircraft types we reviewed contained hazardous materials that
Hazardous Materials                   must be removed, and if necessary, disposed of when the aircraft are taken
                                      out of service. Some hazardous materials can be recycled and reused




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                                      multiple times, but the materials may ultimately have to be disposed of
                                      appropriately. For the five aircraft, sufficient information was available in
                                      DOD’s and the services’ financial and management information systems to
                                      estimate a cost for the removal of hazardous materials contained in these
                                      aircraft. Costs associated with disposal of these materials are currently
                                      insignificant, but will need to be considered based on assumptions of final
                                      disposal methods.

                                      There are numerous sources available to DOD for identifying which
                                      materials used in aircraft are considered hazardous and have to be cleaned
                                      up before aircraft disposal. DOD Manual 4160.21-M, known as the Property
                                      Disposal Manual and 40 Code of Federal Regulations (C.F.R.) 261 identify
                                      which materials are considered hazardous. Environmental managers at the
                                      services’ program offices and at the depots responsible for the aircraft, as
                                      well as maintenance personnel, are knowledgeable about the hazardous
                                      materials unique to specific aircraft. In addition, environmental managers
                                      at various Defense Reutilization and Marketing Offices (DRMOs) are
                                      familiar with the hazardous materials on aircraft. The aircraft we reviewed
                                      contain various hazardous materials, as shown in table 3. See appendix I
                                      for definitions of these materials.

Table 3: Hazardous Materials on the
Five Aircraft                                                                                                Aircraft
                                      Hazardous materials                                  F-16     B-1B       F-14      F-18      Apache
                                      Fire suppressant                                        √          √         √         √              √
                                      Hydrazine                                               √
                                      Batteries                                               √          √         √         √              √
                                      Petroleum, oil, & lubricants (POL)a                     √          √         √         √              √
                                      Composites   b
                                                                                              √          √         √         √
                                      Magnesium thorium                                       √
                                      Pyrotechnics                                            √          √         √         √              √
                                      Coolants                                                √          √         √         √
                                      Fuel cells                                                                                            √
                                      Tubing removal                                                                         √
                                      Liquid oxygen                                                                √
                                      a
                                       POL products are not hazardous materials under Federal law, but a number of states including
                                      Alaska, California, and Florida, consider POL products hazardous materials.
                                      b
                                       While the Air Force considers composites, such as carbon fiber wings, to be hazardous
                                      materials, the Navy does not if the material’s structural integrity is not compromised. We included
                                      composites because DRMS, which is responsible for their removal and disposal, considers
                                      composites to be hazardous material.

                                      Source: AMARC and maintenance depot logistical systems.




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                                       Some hazardous materials in aircraft are not shown in the above table. For
                                       example, there are many items on the aircraft, such as cadmium-plated
                                       bolts and other small items, that are too numerous to separately remove
                                       and account for during the disposal process. Because the cadmium plated
                                       items are sold for scrap and the specific items and quantities are not
                                       separately identified, they were not included in the sample aircraft
                                       analysis. However, DOD and the services would have to consider the
                                       significance of such items in the aggregate on a servicewide or DOD-wide
                                       basis.

                                       Information on the removal costs of hazardous materials in older aircraft
                                       is generally available at AMARC and is based on its experience in aircraft
                                       disposal. However, AMARC officials said they did not yet have significant
                                       experience in dismantling and disposing of the five aircraft in our review.
                                       Therefore, the officials suggested that a reasonable estimation approach
                                       would be to use removal times that are reported by the cognizant depots
                                       that perform maintenance on these systems. The removal times for each
                                       hazardous material can then be multiplied by AMARC’s hourly labor rate.
                                       Using this estimation method, table 4 shows the estimated cost of
                                       removing hazardous materials from the five aircraft.

Table 4: Estimated Cost for Removing
Hazardous Material                                                                                             Removal cost per
                                       Aircraft type                                                                    aircraft
                                       F-16                                                                               $ 14,788
                                       B-1B                                                                              $123,084
                                       F-14                                                                               $ 14,725
                                       F-18                                                                               $ 10,753
                                       Apache Helicopter                                                                      $ 313
                                       Source: GAO computation based on AMARC hourly labor rate and the maintenance depot’s
                                       removal times.



                                       The wide variance in hazardous material removal costs can be accounted
                                       for by differences in the size and complexity of the five aircraft. For
                                       example, the B-1B weighs about 190,000 pounds compared to the smaller
                                       F-16 which weighs about 18,000 pounds. Moreover, the B-1B has over
                                       1,000 items associated with pyrotechnics that cost an estimated $92,000 to
                                       remove. The cost to remove pyrotechnics from the F-16 is only about
                                       $1,700 per aircraft. Similarly, it takes a significant number of staff hours,
                                       estimated at about $11,000, to remove the fuel from the B-1B tanks and
                                       fuel lines and to take the protective measures for the fuel system. For the




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                      F-16, the same procedures take just a few hours at an estimated cost of
                      about $200. The fuel is removed from the aircraft because it can be reused.

                      The Apache Helicopter hazardous material removal cost estimate is much
                      less than for the other aircraft because it contains considerably less
                      hazardous material. For example, it costs an estimated $68 per aircraft to
                      remove pyrotechnics from the Apache compared to about $1,700 to
                      remove pyrotechnics from an F-16. The F-16 cost estimate includes
                      removing one or two ejection seats and canopies and related detonating
                      cord devices, compared to removing only emergency escape explosive
                      bolts and related material for the Apache’s crew doors.

                      For some mission assets, such as nuclear submarines, the actual
                      hazardous material disposal costs are significant. However, unlike the
                      removal costs, hazardous material disposal costs for the five aircraft in our
                      review appear not to be significant because these materials are often
                      reutilized, recycled, consumed (as is the case for fuel), or sold. Also, DOD
                      does not track disposal costs by specific aircraft system since hazardous
                      materials are disposed of in bulk. For example, AMARC transfers its
                      nonrecyclable fuel to Davis-Monthan Air Force Base, which then disposes
                      of it along with the base’s waste fuel through its bulk disposal contract.
                      For the first 6 months of fiscal year 1996, AMARC paid Davis-Monthan less
                      than $54,000 to dispose of all of its hazardous material. However, although
                      recycling and reuse accounts for much of the hazardous material disposal
                      costs, currently the possibility that reuse or recycling needs and capacity
                      will change in the future must be considered in estimating the ultimate
                      disposal costs for hazardous materials.


                      DOD officials have pointed out that the total disposal cost estimate for
Reporting Total       aircraft will result in a significant liability—much of which would not
Disposal Costs by     require outlays in the current year. Thus, one way to provide a proper
Future Time Periods   context for this reported liability and make it more meaningful to
                      decisionmakers would be to, in a footnote to the financial statements,
Would Be Useful       provide a breakdown of the liability based on the approximate time
                      periods the aircraft are expected to be taken out of service. Table 5 is a
                      simplified illustration of how the aircraft disposal liability could be
                      reported by time period. For the purposes of this illustration, the following
                      assumptions were used: (1) all aircraft had the same disposal costs,
                      (2) 50 percent of the aircraft were currently awaiting disposal and the
                      remaining aircraft were to be disposed of over the next 10 years, and
                      (3) the total estimated liability was $500.



                      Page 12                          GAO/AIMD-98-9 DOD’s Liability for Aircraft Disposal
                                            B-273004




Table 5: Example of How the Liability
Could Be Disclosed by Time Period           Liability associated
                                            with aircraft          Liability associated with aircraft to be
                                            currently awaiting            deactivated in fiscal years
                                            disposal               1998     1999     2000     2001     2002     Thereafter    Total
                                            $250                     $25      $25      $25      $25      $25          $125     $500

                                            This information could provide an important context for congressional
                                            and other budget decisionmakers on the total liability by showing the
                                            potential annual impact of the actions that have already occurred or are
                                            expected to occur during various budget periods including those outside
                                            the annually submitted Future Years Defense Program. Further, if the time
                                            periods used to present these data are consistent with budget justification
                                            documents, such as DOD’s Future Years Defense Program, this type of
                                            disclosure would provide a link between budgetary and accounting
                                            information, one of the key objectives of the CFO Act.


                                            As of September 30, 1997, DOD had not incorporated SFFAS No. 5 in its
Conclusions                                 Financial Management Regulation. In addition, the DOD Comptroller and
                                            the Under Secretary of Defense (Acquisition and Technology) had not
                                            issued implementation guidance to the services to assist them in
                                            estimating aircraft disposal costs. Such costs are both probable and
                                            estimable and therefore meet the criteria stated in SFFAS No. 5 for
                                            reportable liabilities. DOD and the military services have information
                                            available to develop cost estimates on each of the major aircraft disposal
                                            processes. Development of the needed policy and implementing guidance
                                            is necessary to help ensure that an estimate of aircraft disposal costs is
                                            recorded in DOD’s fiscal year 1997 financial statements as required.
                                            Moreover, life-cycle cost estimates that include disposal costs will provide
                                            important information to the Congress and other decisionmakers on the
                                            true costs of aircraft as well as other weapon systems.


                                            We recommend that you ensure that
Recommendations
                                        •   the DOD Comptroller incorporate SFFAS No. 5 in DOD’s Financial
                                            Management Regulation,
                                        •   the DOD Comptroller and the Under Secretary of Defense (Acquisition and
                                            Technology) promptly issue joint implementing guidance for the services
                                            on the SFFAS No. 5 requirements for recognition of a liability for aircraft
                                            disposal costs, and




                                            Page 13                              GAO/AIMD-98-9 DOD’s Liability for Aircraft Disposal
                         B-273004




                     •   the DOD Comptroller include the estimated aircraft disposal liability in
                         DOD’s fiscal year 1997 financial statements.



                         In commenting on a draft of this report, Department of Defense officials
Agency Comments          concurred with our recommendations that SFFAS No. 5 be incorporated in
and Our Evaluation       DOD’s Financial Management Regulation and that joint implementing
                         guidance be issued promptly on the SFFAS No. 5 requirements for
                         recognition of a liability for aircraft disposal costs. In addition, DOD stated
                         that current disposal cost estimates can be reasonably determined for
                         aircraft that have been in the active inventory for some time. However,
                         DOD stated that it would be necessary to delay the reporting of the aircraft
                         disposal liability until fiscal year 1998 because the development and
                         coordination of procedures and reporting guidance would take time to
                         complete. They also stated that the cleanup cost provisions in SFFAS No. 6
                         must be considered.

                         SFFAS No. 5 was issued almost 2 years ago, to allow agencies ample time to
                         develop implementing policies and procedures prior to its fiscal year 1997
                         effective date. As stated in the report, information is available on all of the
                         major aircraft disposal processes to develop a reasonable estimate of
                         these costs. Such an estimate need not be precise—SFFAS No. 5 permits the
                         reporting of a range. Also, as noted in this report, the cleanup cost
                         provisions of SFFAS No. 6 do not affect the reporting of the aircraft disposal
                         liability. Accordingly, we believe that DOD, with a concentrated effort, can
                         develop an estimate of aircraft disposal costs for its fiscal year 1997
                         financial statements.


                         This report contains recommendations to you. The head of a federal
                         agency is required by 31 U.S.C. 720 to submit a written statement on
                         actions taken on these recommendations. You should submit your
                         statement to the Senate Committee on Governmental Affairs and the
                         House Committee on Government Reform and Oversight within 60 days of
                         the date of this report. A written statement also must be sent to the House
                         and Senate Committees on Appropriations with the agency’s first request
                         for appropriations made over 60 days after the date of this report.

                         We are sending copies of this report to the Chairmen and Ranking
                         Minority Members of the House and Senate Committees on
                         Appropriations, the House and Senate Committees on the Budget, the
                         Senate Committee on Armed Services, the House Committee on National



                         Page 14                           GAO/AIMD-98-9 DOD’s Liability for Aircraft Disposal
B-273004




Security, the Senate Committee on Governmental Affairs, the House
Committee on Government Reform and Oversight and its Subcommittee
on Government Management, Information, and Technology, and the
Director of the Office of Management and Budget. We are also sending
copies to the Acting Under Secretary of Defense (Comptroller), the Air
Force Assistant Secretary for Financial Management and Comptroller, the
Army Assistant Secretary for Financial Management and Comptroller, the
Navy Assistant Secretary for Financial Management and Comptroller, the
Under Secretary of Defense (Acquisition and Technology), the Deputy
Under Secretary of Defense for Environmental Security, and the Acting
Director, Defense Finance and Accounting Service. Copies will be made
available to others upon request.

Please contact me at (202) 512-9095 if you have any questions concerning
this report. Major contributors to this report are listed in appendix II.

Sincerely yours,




Lisa G. Jacobson
Director, Defense Audits




Page 15                         GAO/AIMD-98-9 DOD’s Liability for Aircraft Disposal
Appendix I

Hazardous Materials in Aircraft


               Hazardous material - Any waste that, because of its quantity, concentration
               or toxicity, corrosiveness, mutagenicity or flammability, or physical,
               chemical, or infectious characteristics may (1) cause, or significantly
               contribute to, an increase in mortality or an increase in serious irreversible
               or incapacitating reversible illness or (2) pose a substantial present or
               potential hazard to human health or the environment when improperly
               treated, stored, transported, disposed of, or otherwise managed. Some of
               the hazardous materials contained in the aircraft we reviewed are
               discussed below.

               Batteries - Batteries consist of the following types: lead-acid, lithium-sulfur
               dioxide, magnesium, silver-bearing, mercury, and nickel cadmium. Unless
               batteries are to be recycled or reused, they must be turned in as hazardous
               material or hazardous waste.

               Composites - Carbon composite fiber material made of long carbon fibers
               mixed with bonding and hardening agents, such as epoxy resins. The
               health hazards associated with composite fibers appear to be similar to the
               effects of fiberglass, including inhalation of the fibers, which can cause
               bronchial irritation.

               Coolant - A fluid that circulates through a machine or over some of its
               parts in order to draw off heat. This includes chemical substances used in
               aircraft for cooling radar and related equipment. Certain forms of this
               material may be harmful if skin contact occurs.

               Fire suppressant - Substances used to keep materials on aircraft, such as
               fuel, from igniting and burning. Halon, one such suppressant, is an
               ozone-depleting substance that is reclaimed or recovered.

               Fuel cells - Fuel cells, which hold fuel, are not in themselves considered
               hazardous material, but because they are contaminated with fuel they can
               become hazardous. Aviation fuel contains benzene and toluene, both
               hazardous materials.

               Hydrazine - Supplemental liquid propellant, found only on the F-16, used to
               power an emergency power unit in the event of main engine failure.
               Hydrazine is an extremely dangerous material if inhaled and has to be
               specially handled during transfer by teams dressed in protective gear.




               Page 16                           GAO/AIMD-98-9 DOD’s Liability for Aircraft Disposal
Appendix I
Hazardous Materials in Aircraft




Magnesium Thorium - Alloy of thorium and magnesium used to produce a
strong, lightweight aircraft component. Thorium presents an internal and
external radiation hazard.

Petroleum, oil, and lubricants - Includes jet fuel, hydraulic fluid, antifreeze
products, and other lubricants found on aircraft. In some states, these
products are not considered hazardous.

Pyrotechnics - Explosive devices used to jettison the canopy and activate
the pilot’s ejection seat. On helicopters, these devices are used to shear off
hinge pins on the fuselage doors to enable crew to extricate themselves in
the event of a crash-landing.




Page 17                           GAO/AIMD-98-9 DOD’s Liability for Aircraft Disposal
Appendix II

Major Contributors to This Report


                       William D. Grindstaff, Assistant Director
Accounting and         Jacob W. Sprouse, Jr., Audit Manager
Information            Linda Brigham, Auditor
Management Division,   Francine M. DelVecchio, Communications Analyst

Washington, D.C.
                       Dieter M. Kiefer, Assistant Director
Kansas City Office     Marshall S. Picow, Auditor in Charge
                       Gary L. Nelson, Auditor
                       Darryl S. Meador, Evaluator




(918878)               Page 18                        GAO/AIMD-98-9 DOD’s Liability for Aircraft Disposal
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