oversight

Defense Budget: Tracking of Emergency Response Funds for the War on Terrorism

Published by the Government Accountability Office on 2003-04-30.

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

             United States General Accounting Office

GAO          Report to the Subcommittee on
             Defense, Committee on Appropriations,
             U.S. Senate


April 2003
             DEFENSE BUDGET

             Tracking of
             Emergency Response
             Funds for the War on
             Terrorism




GAO-03-346
                                               April 2003


                                               DEFENSE BUDGET

                                               Tracking of Emergency Response Funds
Highlights of GAO-03-346, a report to the
Chairman and Ranking Minority Member,          for the War on Terrorism
Subcommittee on Defense, Committee on
Appropriations, U.S. Senate




As of January 2003, Congress had               While DOD followed the Office of Management and Budget’s (OMB)
provided a total of $38 billion to the         guidance in managing the initial $15 billion in war on terrorism funds that
Department of Defense (DOD) to                 were placed in the Defense Emergency Response Fund in fiscal years 2001
cover emergency response costs                 and 2002, DOD provided its components with limited guidance on how to
related to the war on terrorism.               use these funds. DOD allocated the funds according to OMB’s 10 funding
Appropriated in different ways in
fiscal years 2001, 2002, and 2003,
                                               categories. However, DOD’s designations of allowable line items for each
these funds are meant to pay                   category were broad and, thus, could be interpreted in different ways. Also,
for expenses that DOD would                    while OMB directed that the funds were to be used for urgent and known
not normally incur, such as                    needs, DOD did not define those needs further. Finally, DOD directed the
contingency military operations                components to use an internal financial management regulation for
and Pentagon building repairs.                 contingency funding to determine if costs were incremental or not; however,
                                               as we have reported previously, these regulations are insufficient for this
Because our prior work raised                  purpose. In the absence of detailed guidance military officials sometimes
questions about DOD’s oversight                had to use their best judgment in obligating emergency response funds.
of contingency fund spending, GAO
was asked to review DOD’s                      DOD’s ability to track the use of emergency response funds has varying
management of emergency
response funds, specifically:
                                               limitations depending on the appropriation. For the fiscal years 2001 and
•    DOD’s adherence to OMB                    2002 emergency response funds managed separately in the Defense
     guidance in managing funds                Emergency Response Fund ($15 billion), DOD can report a breakdown
     and the sufficiency of DOD’s              of obligations by its 10 funding categories, but cannot correlate this
     guidance on the use of these              information with its appropriation account structure. For emergency
     funds, and                                response funds provided in fiscal years 2002 and 2003 ($20.5 billion) that
•    DOD’s ability to track the use            were transferred into or placed directly into DOD’s regular appropriations
     of emergency response funds               accounts, DOD cannot use its accounting system to track the use of these
     in general.                               funds because they are commingled with those appropriated for other
                                               purposes. While DOD has an alternative process intended to track
We limited our review of DOD’s                 obligations for contingency operations related to the war on terrorism, it
guidance to the initial funds placed
in the Defense Emergency
                                               cannot identify the portion of obligations that are funded with emergency
Response Fund. We did not verify               response funds. DOD acknowledged these limitations and, in December
the accuracy of the data contained             2002, began requiring additional reporting on the use of these funds.
in DOD’s obligation reports or the
appropriateness of individual                  DOD partially concurred with this report, noting it clearly told components
expenditures.                                  to use DOD’s financial regulation for guidance and also held meetings for
                                               clarification. DOD agreed funds were commingled, but noted it had a
                                               process to track incremental costs for the war on terrorism.

                                               DOD Emergency Response Funds (fiscal years 2001 through 2003)
Because DOD is revising its
guidance and compiling more data                Dollars in billions
based on our prior work, we are
                                                Fiscal year           Total   Appropriation type
not making a new                                2001/2002             $17.5   Emergency supplementals ($15 billion Defense Emergency
recommendation.                                                               Response Fund, $2.3 billion other accounts, and $0.2 billion
                                                                              rescinded)
www.gao.gov/cgi-bin/getrpt?GAO-03-346.
                                                2002                   13.4   Supplemental
To view the full report, including the scope    2003                    7.1   Annual appropriation
and methodology, click on the link above.       Total                 $38.0
For more information, contact Sharon Pickup
                                               Source: DOD.
at (202) 512-9619 or pickups@gao.gov.
Contents


Letter                                                                                1
               Results in Brief                                                       3
               Background                                                             5
               DOD Provided Limited Internal Guidance on Use of Initial
                 Emergency Response Funds                                             7
               DOD’s Ability to Track the Use of Emergency Response Funds Has
                 Varying Limitations                                                 10
               Agency Comments and Our Evaluation                                    13

Appendix I     Scope and Methodology                                                 16



Appendix II    Appropriation of Emergency Response Funds
               to DOD for Fiscal Years 2001, 2002, and 2003                          18



Appendix III   OMB Guidelines and Criteria for Emergency
               Funding Requests Related to the Terrorist Attacks
               of September 11, 2001                                                 21



Appendix IV    Comments from the Department of Defense                               23



Appendix V     GAO Contacts and Staff Acknowledgments                                25



Tables
               Table 1: Status of Funds in the Defense Emergency Response Fund
                        as of December 2002                                           8
               Table 2: Transfer of Emergency Response Funds to DOD
                        (fiscal years 2001 through 2003)                             18


Figures
               Figure 1: Emergency Response Funding Categories and Sample
                        Line Items                                                    6


               Page i                                         GAO-03-346 Defense Budget
Figure 2: Comparison Between Defense Emergency Response
         Funding Categories and DOD Appropriation Accounts                                19
Figure 3: Congressional Designation of Fiscal Year 2002
         Emergency Response Funds for the Air Force                                       19
Figure 4: Congressional Designation of Fiscal Year 2003
         Emergency Response Funds for the Air Force                                       20




Abbreviations

DOD       Department of Defense
OMB       Office of Management and Budget




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Page ii                                                      GAO-03-346 Defense Budget
United States General Accounting Office
Washington, DC 20548




                                   April 30, 2003

                                   The Honorable Ted Stevens
                                   Chairman
                                   The Honorable Daniel K. Inouye
                                   Ranking Minority Member
                                   Subcommittee on Defense
                                   Committee on Appropriations
                                   United States Senate

                                   As of January 2003, Congress had provided a total of about $38 billion to
                                   fund the Department of Defense’s (DOD) efforts to recover from and
                                   respond to the September 11, 2001, terrorist attacks.1 Following the
                                   attacks, Congress initially provided, and the President approved, about
                                   $17.5 billion in emergency response funds to DOD through two emergency
                                   supplemental appropriations in fiscal years 2001 and 2002. Because of the
                                   urgent circumstances, Congress sought an expeditious means to provide
                                   funds to DOD and, with the Office of Management and Budget (OMB),
                                   agreed that DOD could manage these initial funds in the Defense
                                   Emergency Response Fund—an existing account that is separate from
                                   DOD’s regular appropriations accounts.2 Of the initial $17.5 billion, DOD
                                   received about $15 billion in the Defense Emergency Response Fund,
                                   $2.3 billion was provided to other accounts, and $0.2 billion was rescinded.
                                   Concerned about dual accounting, Congress provided the remaining
                                   $20.5 billion in two subsequent appropriations in fiscal year 2002 and
                                   fiscal year 2003 to DOD’s regular appropriation accounts either through
                                   transfers from the Defense Emergency Response Fund or directly.3 Among
                                   other things, DOD is using emergency response funds to cover the cost of
                                   repairs to the Pentagon and contingency operations related to the global


                                   1
                                       For purposes of this report, we refer to these funds as “emergency response” funds.
                                   2
                                    This fund was established in 1989 to fund DOD’s expenses for supplies and services
                                   provided in response to natural or manmade disasters or emergencies. DOD’s regular
                                   appropriations accounts include operation and maintenance; procurement; research,
                                   development, test and evaluation; and military personnel.
                                   3
                                     For the emergency supplementals of fiscal years 2001 and 2002, Congress specifically
                                   designated in statutes the use of appropriated funds for responses to the September 11,
                                   2001, attacks. For the two subsequent appropriations in fiscal years 2002 and 2003,
                                   Congress designated funds for responses to the attacks in conference report language
                                   rather than in the pertinent statutes.



                                   Page 1                                                          GAO-03-346 Defense Budget
war on terrorism. In general, applicable OMB and DOD guidance requires
funds provided for the war on terrorism to be used for expenses that are
emergency and incremental in nature—expenses that DOD would have
otherwise not incurred.

For the past several years, we have been reviewing cost and funding issues
associated with overseas contingency operations. Among other things, we
have reported about the need to strengthen DOD’s oversight of funds
appropriated for contingency operations, including improving guidance to
clarify incremental costs.4 In March 2002, you requested that we continue
this effort by examining DOD’s oversight of the Defense Emergency
Response Fund and the cost of contingency operations in the Balkans and
Southwest Asia. In June 2002, we briefed your staff on the preliminary
results of this work. In September 2002, we reported on the costs
associated with operations in the Balkans and Southwest Asia.5 This report
summarizes our observations on (1) the extent to which DOD had adhered
to OMB’s guidance for managing funds provided separately for the
Defense Emergency Response Fund (appropriated in the first two
emergency supplemental appropriations), (2) the sufficiency of DOD’s
guidance to its components on the use of these funds, and (3) its ability in
general to track the use of emergency response funds. We are also
providing information on DOD’s plans to expand its reporting on the use
of emergency response funds.

More recently, in February and April of 2003 appropriations, DOD received
about $73 billion in additional funding for war on terrorism-related
expenses. However, this review is limited to the $38 billion in funds
provided under four previous appropriations. In performing our work, we
did not verify the accuracy of the data contained in DOD obligation




4
  For example, see U.S. General Accounting Office, Defense Budget: Need to
Strengthen Guidance and Oversight of Contingency Operations Costs, GAO-02-450
(Washington, D.C.: May 2002).
5
 U.S. General Accounting Office, Defense Budget: Contingency Operations in the Balkans
May Need Less Funding in Fiscal Year 2003, GAO-02-1073 (Washington, D.C.: Sept. 2002).




Page 2                                                    GAO-03-346 Defense Budget
                   reports or the appropriateness of individual expenditures.6 For details on
                   our scope and methodology, see appendix I.


                   DOD adhered to OMB guidance in managing the allocation of the
Results in Brief   $15 billion in emergency response funds provided to the Defense
                   Emergency Response Fund under fiscal years 2001 and 2002 emergency
                   supplemental appropriations, but provided limited guidance to military
                   components on the use of these funds. In accordance with OMB guidance,
                   DOD allocated funds to its components in 10 funding categories and did
                   not transfer these funds to its regular accounts. These funds were to be
                   used for emergency and incremental needs. While DOD designated
                   allowable line items for each funding category, these designations were
                   broad and subject to interpretation. For example, DOD designated
                   “mobilization of guard and reserves” as an allowable line item.
                   Mobilization involves many factors such as special pay, transportation,
                   and equipment; however, DOD did not specify which could be funded.
                   Furthermore, OMB, among other things, directed that any requirement to
                   be funded must reflect an urgent and known need. However, DOD did not
                   establish any specific parameters to define the meaning of urgent and
                   known. To determine incremental needs, components were to rely on
                   DOD’s internal financial management regulation.7 As we reported in May
                   2002, this regulation does not provide sufficient guidance on the types of
                   costs defined to be incremental. In the absence of detailed guidance,
                   command officials were sometimes uncertain on whether expenses were
                   allowable and often had to use their best judgment in obligating
                   emergency response funds. Because DOD is in the process of improving its
                   guidance based on recommendations from our prior work, we are not
                   making a recommendation in this report.

                   DOD’s ability to track the use of funds appropriated for the war on
                   terrorism has varying limitations depending on the appropriation. For



                   6
                     We note GAO has designated DOD’s financial management area as high risk due to
                   long-standing deficiencies in DOD’s systems, processes, and internal controls. Among other
                   things, these deficiencies affect DOD’s ability to ensure basic accountability and maintain
                   control of funds. For example, DOD does not have the systems and processes in place to
                   capture the required cost information from the hundreds of millions of transactions it
                   processes each year. (See U.S. General Accounting Office, Major Management Challenges
                   and Program Risks: Department of Defense, GAO-03-98 (Washington, D.C.: Jan. 2003.)
                   7
                    Department of Defense Financial Management Regulation, DOD 7000.14-R, vol. 12,
                   chapter 23 on Contingency Operations, February 2001.




                   Page 3                                                       GAO-03-346 Defense Budget
funds provided under the fiscal years 2001 and 2002 emergency
supplemental appropriations that were managed separately in the Defense
Emergency Response Fund ($15 billion), DOD is able to provide a
breakdown of obligations for the 10 funding categories, but reporting
proved to be cumbersome because the categories do not correlate with
DOD’s regular appropriations accounting structure. For funds provided
under the two subsequent DOD appropriations in fiscal years 2002 and
2003 ($20.5 billion), DOD is not able to separately track the use of
emergency response funds. As generally occurs with funds in any
appropriation, these funds are commingled in DOD’s regular
appropriations accounts with funds appropriated for other purposes.
Because DOD’s accounting system only captures data on total obligations
and does not distinguish sources of funds, DOD is not able to identify
those obligations that are funded from emergency response funds. While
DOD has an alternative process intended to track incremental costs
(obligations) of contingency operations, including operations related to
the war on terrorism, these operations are funded from multiple sources.
Because of the aforementioned characteristics of its accounting system,
DOD cannot identify the portion of contingency operations-related
obligations funded with emergency response funds.

During our review, DOD officials acknowledged the limitations in their
ability to specifically track the use of emergency response funds and, in
November 2002, established additional reporting requirements related
to the use of emergency response funds. In general, components will
continue to report obligations for funds provided under the first two
emergency supplementals that were managed separately in the Defense
Emergency Response Fund. DOD will also compile additional data on
emergency response funds provided under the two subsequent
appropriations, including a more detailed breakdown of incremental costs
for contingency operations, obligations from supplemental funds, and
obligations from funds borrowed from baseline programs to pay for
expenses related to the war on terrorism. According to DOD officials,
components will rely on parallel tracking systems at the command and
unit level to compile this data. At this point, these officials believe it would
be too costly and time-consuming to modify DOD’s accounting system to
generate more detailed funding and obligation data. Rather, they
emphasized the expanded reporting requirements will provide the
management information that DOD needs to oversee the obligation of
emergency response funds, justify needs for any additional funding, and
provide transparency to Congress, OMB, and others. Because the
components are still compiling data, we are not making a recommendation



Page 4                                                GAO-03-346 Defense Budget
             in this report but will monitor DOD’s progress in compiling the additional
             data during our ongoing review of contingency operation costs.


             As of January 2003, Congress had provided about $38 billion, through a
Background   total of four appropriations, for DOD’s emergency response needs related
             to the war on terrorism. In September 2001 and December 2001, Congress
             enacted two emergency supplemental appropriations to quickly provide
             initial funds to meet the emergency needs of DOD and other federal
             agencies to recover from and respond to the September 11 terrorist
             attacks.8 These supplementals, enacted in two separate fiscal years, fiscal
             year 2001 and fiscal year 2002, provided about $17.5 billion to DOD. Given
             the urgent circumstances, Congress sought an expeditious mechanism to
             transfer funds and, therefore, provided funds to DOD through the Defense
             Emergency Response Fund. This fund is a distinct account and DOD
             manages it separately from its regular appropriations accounts. Of the
             initial $17.5 billion, DOD received about $15 billion in the Defense
             Emergency Response Fund, $2.3 billion was provided to other accounts,
             and $0.2 billion was rescinded.

             Shortly after the September 11, 2001, attacks, OMB and DOD agreed on
             certain parameters for managing funds placed in the Defense Emergency
             Response Fund, including that funds would be obligated in 10 funding
             categories. OMB stipulated that DOD was to manage the allocation of
             funds within the 10 categories and could not transfer these funds to its
             regular appropriations accounts. Moreover, OMB used these categories in
             its reports to Congress on the expenditure of the funds.

             Based on DOD’s limited estimates regarding requirements for each
             category, OMB apportioned funds to the Defense Emergency Response
             Fund.9 According to DOD officials, these estimates had to be prepared
             quickly, within days of the attacks, and reflected the best judgment of
             DOD’s needs at the time without knowing the exact nature of the U.S.
             response to the attacks. For each category, DOD also identified multiple


             8
              2001 Emergency Supplemental Appropriations Act for Recovery from and Response to
             Terrorist Attacks on the United States, Pub. L. No. 107-38 (2001) and Department of
             Defense and Emergency Supplemental Appropriations for Recovery from and Response to
             Terrorist Attacks on the United States Act, 2002, Pub. L. No. 107-117 (2002).
             9
              Funds under the two initial supplemental appropriations were appropriated to a
             governmentwide emergency response fund and subsequently apportioned to DOD and
             other federal agencies.




             Page 5                                                  GAO-03-346 Defense Budget
line items for which expenses could be incurred. Figure 1 identifies the
10 categories and identifies some of the line items that DOD established
for one of the categories.

Figure 1: Emergency Response Funding Categories and Sample Line Items




The 10 categories do not correlate with DOD’s existing appropriation
accounts (see app. II). However, the expenses related to a category
would be similar to the types of expenses funded under several
appropriation accounts. For example, DOD may incur operation and
maintenance, and procurement expenses under the categories of improved
command and control and enhanced force protection. Because the
10 funding categories established by OMB and DOD did not correlate
with DOD’s existing appropriation account structure, a dual system of
accounting emerged, which some believed to be cumbersome for tracking
purposes. Therefore, for subsequent appropriations—a second
supplemental appropriation in fiscal years 2002 and DOD’s regular
appropriation in fiscal year 200310—Congress changed its method of
providing funds. Specifically, in these appropriations, DOD received about
$20.5 billion in funds either through the Defense Emergency Response
Fund (fiscal year 2002) to its regular appropriation accounts or directly to




10
 2002 Supplemental Appropriations Act for Further Recovery From and Response to
Terrorist Attacks on the United States, Pub. L. No. 107-206 (2002) and Department of
Defense Appropriations Act, 2003, Pub. L. No. 107-248 (2002).




Page 6                                                      GAO-03-346 Defense Budget
                     its appropriation accounts (fiscal year 2003).11 Appendix II provides
                     additional details on these two appropriations.

                     On September 14, 2001, OMB issued specific guidelines and criteria for
                     federal departments and agencies to apply in identifying and evaluating
                     requirements to be funded under the initial emergency supplemental
                     appropriations. This guidance covered two areas—response and recovery,
                     and preparedness and mitigation—and outlined 15 conditions to be met.
                     Among other things, these conditions stipulated that requirements must be
                     known, not speculative; urgent, not reasonably handled at a later time; and
                     unable to be reasonably met through the use of existing agency funds.
                     Appendix III lists OMB’s guidelines and criteria.

                     Because expenses related to contingency operations could be funded with
                     emergency response funds, DOD also relied on its existing financial
                     management regulation for guidance. Specifically, volume 12, chapter 23
                     of this regulation requires that costs incurred in support of contingency
                     operations be limited to the incremental costs of the operation—costs that
                     are above and beyond the baseline costs for training, operations, and
                     personnel. The regulation further states that incremental costs are
                     additional costs that would not have been incurred had the contingency
                     operation not been supported.


                     DOD adhered to OMB guidance in managing the allocation of $15 billion in
DOD Provided         initial emergency response funds placed in the Defense Emergency
Limited Internal     Response Fund after the September 11th attacks. While DOD instructed its
                     components to follow OMB guidelines and internal DOD guidelines and
Guidance on Use of   financial regulations in obligating emergency response funds, it did not
Initial Emergency    provide specific internal guidance to assist the components in determining
                     allowable expenses. As a result, command officials were sometimes
Response Funds       uncertain on the appropriateness of expenses and often had to rely on
                     their best judgment in obligating these funds.




                     11
                       Of the $20.5 billion, $11.3 billion was provided to the Defense Emergency Response Fund
                     and subsequently most has been transferred as needed to DOD’s regular appropriation
                     accounts. The remainder was appropriated directly to appropriation accounts. The fiscal
                     year 2003 Appropriations Act provided DOD’s regular appropriation and did not specifically
                     identify emergency response funds. Rather, the related conference report, H.R. 107-732,
                     shows how Congress designated funds to be used for emergency response including dollar
                     amounts and specific purposes within DOD’s regular appropriation account.




                     Page 7                                                      GAO-03-346 Defense Budget
DOD Adhered to       In accordance with OMB guidance, DOD reported on its allocation of
OMB Guidance         funds to its components in 10 funding categories and did not transfer these
Managing Emergency   funds into its regular appropriation accounts. As of December 2002, DOD
                     reported it had obligated about $14 billion of the $15 billion provided in
Response Funds       the emergency supplementals of fiscal years 2001 and 2002 (see table 1).



                     Table 1: Status of Funds in the Defense Emergency Response Fund as of
                     December 2002

                         Dollars in billions
                         Funding category                                 Allocation   Obligated       Unobligated
                         Increased Situational Awareness                      $3.531      $3.301            $0.230
                         Enhanced Force Protection                             1.349       1.310             0.039
                         Improved Command and Control                          1.391       1.351             0.040
                         Increased Worldwide Posture                           4.894       4.836             0.058
                         Offensive Counterterrorism                            1.821       1.741             0.080
                         Procurementa                                              0           0                 0
                         Initial Crisis Response                               0.489       0.460             0.029
                         Pentagon Repairs/Upgrades                             0.563       0.563                 0
                         Other Requirements                                    0.216       0.191             0.025
                         Airport Security                                      0.225       0.217             0.007
                         Unallocated                                           0.526           0             0.526
                                b
                         Total                                               $15.006    $13.970             $1.036
                     Source: DOD reported data as of December 31, 2002.
                     a
                      Although funding was not allocated to the Procurement category, procurements were funded under
                     other categories.
                     b
                     Figures may not add due to rounding.


                     The data shown in table 1 are based on monthly obligation reports from
                     DOD’s defense financial accounting system database. These funds do not
                     expire and, therefore, are available until used. We did not verify the
                     accuracy or completeness of this data.

                     As table 1 shows, as of December 31, 2002, DOD reported data shows over
                     $1 billion of the funds in the Defense Emergency Response Fund remains
                     unobligated. Over half of that amount, $526 million, had not been allocated
                     to the 10 funding categories. According to DOD officials, in March 2003,
                     DOD plans to review the status of the unobligated funds and validate
                     whether requirements for the funds continue to exist.




                     Page 8                                                            GAO-03-346 Defense Budget
DOD Provided Limited        For each of the 10 funding categories established by OMB and DOD,
Internal Guidance           DOD identified line items that could be funded under the 10 categories.
for Specific Use of Funds   However, these line items were broad in nature and DOD did not identify
                            the specific types of expenses that could be funded within each line item.
                            In addition, OMB, among other things, directed that any requirement to be
                            funded must reflect an urgent and known need. However, DOD did not
                            establish any specific parameters to define the meaning of urgent and
                            known. Also, in the event that funds in the Defense Emergency Response
                            Fund would be needed to meet the requirements of contingency
                            operations, DOD stipulated that funds would be used to cover the
                            incremental costs of contingency operations. DOD directed components to
                            use its existing financial management regulation in reporting incremental
                            costs, but it did not offer any further guidance as to how commands were
                            to distinguish incremental from baseline costs. In May 2002, we reported
                            that DOD’s financial management regulation did not provide sufficient
                            information on what types of costs met DOD’s definition of incremental
                            costs, which resulted in various interpretations among the services—and
                            even among units within a service—as to appropriate and proper
                            expenditures.12 As a result, we recommended that DOD expand its
                            financial management regulation to include more comprehensive
                            guidance governing the use of contingency funds. DOD agreed with our
                            recommendation and, as of April 2003, is still working on revisions to its
                            guidance. Because DOD is in the process of improving its guidance based
                            on recommendations from our prior work, we are not making a new
                            recommendation in this report.

                            In the absence of detailed guidance, command officials often had to
                            use their best judgment in deciding how to spend the defense emergency
                            response funds, and we found the same type of uncertainty among
                            commands as we reported in May 2002. For example, command officials
                            told us that determining what could be purchased from each category
                            and line item was often difficult because the categories and line items
                            were broad and generally differed from DOD’s regular appropriation
                            accounts. For example, DOD designated mobilization of guard and
                            reserves as an allowable line item for the category of increased worldwide
                            posture. Mobilization involves many factors, such as special pay,
                            transportation, and equipment, but DOD did not specify which could be
                            appropriately funded.




                            12
                                 GAO-02-450.




                            Page 9                                            GAO-03-346 Defense Budget
                         We also found differing interpretations existed as to whether requirements
                         were urgent or known. Some commands used emergency response funds
                         on items that could not be delivered in a reasonable time frame to be
                         considered urgent. For example, one command purchased a RC-135
                         Rivet Joint aircraft for intelligence, communications, and reconnaissance.
                         Typically, this aircraft would not be fielded for 8 years because it needed
                         multiple contractors to install and test its integrated electronics suite.
                         In another example, one command, before it knew its specific role in
                         supporting the war on terrorism, obligated $52 million for spare parts
                         based on an analysis of prior usage. By contrast, another command was
                         reluctant to obligate funds until its specific role had been determined.
                         Moreover, in some cases, command officials were unclear about how
                         to determine the incremental costs to their regular appropriations.
                         For example, commands used emergency response funds to pay for
                         accelerated ship maintenance that was already planned for future budgets
                         and to purchase computer and communication upgrades that were
                         previously unfunded from the regular appropriation.

                         DOD officials told us that they had to quickly develop funding
                         requirements after the terrorists attacks and used OMB guidance and
                         available DOD instructions to instruct their components on how the funds
                         could be used. The officials said that obligating funds in 10 categories and
                         related line items that were not directly related to their appropriation
                         accounts was confusing. In recognizing the lack of detailed guidance, DOD
                         officials also told us that they maintained constant communication among
                         all levels of DOD, especially at the command and unit levels, in order to
                         review and clarify the use of emergency response funds. Furthermore, the
                         officials said that they believe most of the funds were obligated for
                         appropriate purposes.


                         DOD’s ability to track funds appropriated for the war on terrorism has
DOD’s Ability to Track   varying limitations depending on the appropriation. For funds provided
the Use of Emergency     under the two emergency supplemental appropriations of fiscal years 2001
                         and 2002 and managed out of the Defense Emergency Response Fund,
Response Funds Has       DOD is able to report a breakdown of obligations by the 10 categories,
Varying Limitations      but found that tracking these obligations was cumbersome because the
                         categories do not correlate with its regular appropriations account
                         structure. For the two subsequent appropriations in fiscal year 2002 and
                         2003, DOD cannot separately identify obligations funded with emergency
                         response funds because these funds are commingled with funds
                         appropriated for other purposes, and DOD’s accounting system does not
                         distinguish among obligations. For example, in its fiscal year 2003


                         Page 10                                            GAO-03-346 Defense Budget
                        appropriation, Congress appropriated about $3.7 billion for the Air Force’s
                        operation and maintenance subactivity group related to primary combat
                        forces, including about $389 million in emergency response funds for
                        expenses related to the war on terrorism, and about $3.3 billion for
                        expenses not related to the war on terrorism. All of these funds were
                        commingled in the Air Force’s operation and maintenance account. Within
                        DOD’s accounting system, DOD records obligations, but does not identify
                        the source of funds. Therefore, at any given time, DOD is only able to
                        track and report total obligations for operation and maintenance purposes
                        and cannot separately identify obligations funded from emergency
                        response funds.

                        DOD officials agreed that DOD’s accounting system does not separately
                        track obligations funded with emergency response funds, but they
                        emphasized that DOD has established procedures intended to track
                        obligations for contingency operations, including operations associated
                        with the war on terrorism such as in Afghanistan. Under DOD’s financial
                        management regulation, DOD components are required to track and report
                        the incremental costs (obligations) for each contingency operation. DOD
                        established a special code for each operation, and components track
                        obligations in a management tracking system separate from DOD’s
                        accounting system. The components report the total obligations for each
                        contingency operation according to four specific cost categories:
                        personnel, personnel support, operating support, and transportation—and
                        by appropriation account. This information is reported monthly and is
                        provided to Congress. However, the contingency cost categories do not
                        correlate with DOD’s appropriation accounting structure. Also, funding
                        for contingency operations comes from both special funding sources
                        such as emergency response funds, as well as, the regular peacetime
                        appropriations given to components. Because DOD’s accounting system
                        does not separately track obligations by funding source, DOD’s reporting
                        does not identify the portion of contingency operations-related obligations
                        funded with emergency response funds.


DOD Sets Up             During our review, DOD acknowledged the limitations of its ability to
Additional Reporting    track the war on terrorism obligations and acknowledged the continued
Requirements Intended   interest of Congress, OMB, GAO, and other organizations regarding the
                        use of the funds. Starting in December 2002, DOD expanded its reporting
to Improve Tracking     on obligations associated with the war on terrorism and contingency
                        operations. Specifically, in addition to continuing the separate tracking
                        of fiscal year 2001 and fiscal year 2002 emergency supplemental funds
                        contained in the Defense Emergency Response Fund, components are


                        Page 11                                            GAO-03-346 Defense Budget
    now required to report more detailed data on obligations associated
    with the two subsequent appropriations in fiscal year 2002 and 2003.
    The additional reporting requirements are as follows:

•   For the fiscal year 2002 supplemental, components are, on a monthly
    basis, to describe the purpose of the obligation, provide the amount, and
    identify the appropriation account.
•   For the fiscal year 2003 appropriation, components are, on a monthly
    basis, to identify which funds they are obligating from their peacetime
    budget to directly support the global war on terrorism, i.e., components
    are using their baseline budget for the war on terrorism obligations.
    The report is to describe the purpose of the obligation and the amount
    and identify what activities were not being accomplished and the
    appropriation account affected. This is referred to as “cash flowing.”

    Furthermore, components are to start compiling and reporting on four
    additional cost categories for contingency operations: reconstitution of
    forces and capability, recapitalization, classified programs, and working
    capital fund. DOD officials stated the data are compiled from individual
    command and unit management tracking systems, which are not linked
    with DOD’s accounting system, referred to as parallel tracking.

    According to DOD officials, the additional reporting is expected to provide
    the management information that DOD needs to better manage and
    oversee the war on terrorism obligations and that Congress and others
    need to exercise oversight responsibilities. Officials believe that requiring
    components to provide additional data on obligations is preferable to
    modifying the accounting system to distinguish war on terrorism-related
    obligations from other obligations. Officials told us that modifying the
    accounting system would be too costly, time consuming, and the effort
    would not justify the value added at this time. Also, officials point out that
    the additional work involved and learning curve associated with a
    modified accounting system would pose problems because of the
    complexity involved with additional reporting, the time involved with
    obtaining staff competency, and the need to retrain staff due to assignment
    rotations. As of February 2003, components were still compiling data;
    therefore, we are not making a recommendation in this report, but will
    continue to review DOD’s expanded reporting efforts in our ongoing
    review of contingency operations costs.




    Page 12                                             GAO-03-346 Defense Budget
                     In written comments on a draft of this report, DOD partially concurred
Agency Comments      with the report (see app. IV). Specifically, DOD disagreed that guidance
and Our Evaluation   provided to components on how to use emergency response funds was
                     not sufficient. DOD stated that components were clearly instructed to
                     treat expenses as incremental costs as defined in DOD’s financial
                     management regulation and that subsequent meetings were held to clarify
                     this guidance. DOD also noted that, because the category structure used
                     for emergency response funds was unique, some confusion existed among
                     the components. DOD stated that the confusion dissipated as the
                     components became more familiar with the structure.

                     In our report, we recognized that DOD directed components to rely on the
                     financial regulation, as well as other guidelines, and acknowledged DOD’s
                     view that it maintained constant communication to review and clarify the
                     use of emergency response funds. However, in our May 2002 report, we
                     noted that the financial regulation does not provide sufficient guidance on
                     the types of costs that are defined as incremental, which resulted in
                     various interpretations among the services. DOD agreed with the
                     recommendation made in that report that the regulation be expanded to
                     include more comprehensive guidance. During our work conducted for
                     this report, we found that command officials were sometimes uncertain
                     about whether certain expenses were allowable, including how to
                     determine incremental costs, and sometimes had to use their best
                     judgment in obligating emergency response funds. We continue to believe
                     that more comprehensive guidance is warranted. Because DOD is still
                     revising the guidance based on prior GAO work, we are not making a new
                     recommendation in this report.

                     While DOD stated our report correctly said that DOD cannot correlate the
                     funding categories for emergency response funds with its appropriation
                     accounts, it believed we were only partially accurate in stating that DOD
                     is unable to track all emergency response funds in its accounting system.
                     DOD noted that it had implemented a process to track incremental costs
                     related to the war on terrorism and, in particular, the Defense Finance
                     Accounting Service collects cost information on contingencies from
                     components. DOD also noted that it is implementing procedures to
                     capture the incremental costs of Operation Iraqi Freedom. Our report
                     specifically recognizes DOD has established procedures intended to track
                     incremental costs for contingency operations including operations
                     associated with the war on terrorism, and that the components report this
                     type of information. However, we note that this information is compiled in
                     a management tracking system separate from DOD’s accounting system.
                     Furthermore, funding for contingency operations comes from both special


                     Page 13                                            GAO-03-346 Defense Budget
funding sources such as emergency response funds, as well as regular
peacetime appropriations. Because DOD’s accounting system does not
separately track obligations by funding source, DOD’s reporting does not
identify the portion of contingency-operations related obligations funded
with emergency response funds.

Further, DOD partially agreed that its accounting system cannot report
on the $20.5 billion in emergency response funds provided for the war on
terrorism in fiscal years 2002 and 2003. DOD noted that it received only
$13.5 billion and that, except for $305 million appropriated for Pentagon
repairs, these funds went directly to component accounts and their
execution is captured in accounting reports. DOD noted that components
report separately on obligations of these funds. In subsequent discussions,
a DOD comptroller official confirmed the accuracy of our calculation that
DOD had received a total of $20.5 billion. As discussed previously, our
report recognizes that components report separately on obligations
related contingency operations, but that these reports do not distinguish
the portion of contingency operations-related operations funded with
emergency response funds.


Unless you publicly announce its contents earlier, we plan no further
distribution of this report until 30 days from the date of this letter. At that
time, we will send copies of this report to interested congressional
committees with jurisdiction over DOD’s budget.

Also at that time, we will send copies of this report to the Secretary
of Defense; the DOD Comptroller; the Secretaries of the Army, the Navy,
and the Air Force; the Director of the Defense Finance and Accounting
Service; the Director of the OMB, and others upon request. In addition,
the report will be available at no charge on the GAO Web site at
http://www.gao.gov/.




Page 14                                               GAO-03-346 Defense Budget
If you have any questions regarding this report, please contact me at
(202) 512-9619 or pickups@gao.gov, or Gary Billen, Assistant Director,
at (214) 777-5703 or billeng@gao.gov. Major contributors to this report are
acknowledged in appendix V.




Sharon L. Pickup
Director, Defense Capabilities and Management




Page 15                                            GAO-03-346 Defense Budget
             Appendix I: Scope and Methodology
Appendix I: Scope and Methodology


             To determine the extent that the Department of Defense (DOD) adhered
             to the Office of Management and Budgets (OMB) guidance for managing
             funds provided separately for the Defense Emergency Response Fund
             (appropriated in the first two emergency supplemental appropriations)
             and the sufficiency of DOD’s guidance to its components on the use of
             these funds, we reviewed the guidance provided by OMB to federal
             government departments and agencies and the guidance provided by
             DOD to its defense components for justifying their obligations funded
             through the emergency supplementals of fiscal years 2001 and 2002. We
             interviewed knowledgeable DOD officials responsible for implementing
             this guidance, obtained DOD reports of emergency response fund
             allocations to DOD component commands, and used these reports to
             select sites for our subsequent visits. At DOD’s component commands,
             we interviewed officials and obtained reports or examples of obligations
             (purchases). We compared selected examples of obligations to OMB and
             DOD guidance. We also relied on prior GAO work regarding DOD’s
             guidance and reporting for contingency operations.

             To assess DOD’s ability to track the use of emergency funds provided to
             DOD in the emergency supplementals of fiscal years 2001 and 2002, the
             supplemental for fiscal year 2002, and the DOD appropriation for fiscal
             year 2003, we analyzed relevant DOD financial documents, including the
             Office of the Secretary of Defense monthly reports allocating the funds to
             services and commands and the Defense Finance and Accounting Service
             monthly obligation reports and accounting manuals. We did not verify the
             accuracy and completeness of this data. We also reviewed budget and
             accounting procedures and documents and interviewed knowledgeable
             DOD officials.

             We performed our work at the Office of the Secretary of Defense; the
             Office of the Comptroller; the headquarters of the Army, the Army
             Reserve, the Army National Guard, the National Guard, the Navy, and
             the Air Force; and the following commands and centers:

             •   Transportation Command, Scott Air Force Base, Ill.
             •   Army Forces Command, Fort McPherson, Ga.
             •   Army Central Forces Command, Fort McPherson, Ga.
             •   Air Force Aeronautical Services Center, Wright-Patterson
                 Air Force Base, Ohio
             •   Air Force Air Armament Center, Eglin Air Force Base, Fla.
             •   Air Force Air Combat Command, Langley Air Force Base, Va.
             •   Navy Atlantic Fleet Command, Norfolk Naval Base, Va.
             •   Army Tank-Automotive and Armaments Command, Warren, Mich.



             Page 16                                           GAO-03-346 Defense Budget
Appendix I: Scope and Methodology




•   Army Materiel Command, Alexandria, Va.
•   Air Force Materiel Command, Wright-Patterson Air Force Base, Ohio
•   Air Mobility Command, Scott Air Force Base, Ill.
•   Special Operations Command, MacDill Air Force Base, Tampa, Fla.
•   Pacific Command, Pearl Harbor, Hawaii
•   Air Force Special Operations Command, Hurlburt Field, Fla.
•   Army Special Operations Command, Fort Bragg, N.C.

We performed our review between March 2002 and February 2003 in
accordance with generally accepted government auditing standards.




Page 17                                         GAO-03-346 Defense Budget
                                                Appendix II: Appropriation of Emergency
Appendix II: Appropriation of Emergency         Response Funds to DOD for Fiscal Years 2001,
                                                2002, and 2003


Response Funds to DOD for Fiscal Years
2001, 2002, and 2003
                                                As of January 2003, Congress appropriated a total of about $38 billion in
                                                fiscal years 2001, 2002, and 2003 to fund DOD’s expenses related to the
                                                war on terrorism. As table 2 shows, Congress provided these emergency
                                                response funds in four appropriations—two emergency supplementals
                                                (fiscal years 2001 and 2002), a fiscal year 2002 supplemental, and the fiscal
                                                year 2003 Defense appropriation—and used different methods to transfer
                                                funds to DOD.

Table 2: Transfer of Emergency Response Funds to DOD (fiscal years 2001 through 2003)

 Dollars in billions
 Fiscal year Amount          Appropriation type                      Method of funds transfer
                                                     a
 2001/2002           $17.5   Emergency supplementals                 Funds appropriated to a governmentwide emergency response fund and
                                                                     then apportioned by OMB. DOD’s funds were primarily apportioned to
                                                                                                              b
                                                                     the Defense Emergency Response Fund.
                                            c
 2002                13.4    Supplemental                            Funds primarily appropriated to the Defense Emergency Response Fund
                                                                     and subsequently transferred, as needed, to DOD’s regular
                                                                                             d
                                                                     appropriation accounts.
 2003                $7.1    Regular appropriatione                  Funds appropriated directly to DOD’s regular appropriation accounts.
Source: DOD.
                                                a
                                                2001 Emergency Supplemental Appropriations Act for Recovery From and Response to Terrorist
                                                Attacks on the United States, Pub. L. No. 107-38 (2001), and Department of Defense and Emergency
                                                Supplemental Appropriations for Recovery from and Response to Terrorist Attacks on the United
                                                States Act, 2002, Pub. L. No. 107-117 (2002).
                                                b
                                                Of this amount, DOD was apportioned $15 billion that was placed into the Defense Emergency
                                                Response Fund. The remainder was transferred to other DOD appropriations accounts or rescinded.
                                                c
                                                2002 Supplemental Appropriations Act for Further Recovery From and Response to Terrorist Attacks
                                                on the United States, Pub. L. No. 107-206 (2002).
                                                d
                                                Of the $13.4 billion, DOD received $11.9 billion for the Defense Emergency Response Fund but only
                                                $11.3 billion was placed into the fund. The remainder of $2.1 billion was appropriated to other DOD
                                                appropriation accounts.
                                                e
                                                    Department of Defense Appropriation Act, 2003, Pub. L. No. 107-248 (2002).



Fiscal Years 2001 and 2002                      Congress appropriated about $17.5 billion to fund DOD’s emergency
                                                needs in the aftermath of the September 2001 terrorist attacks during
                                                fiscal years 2001 and 2002. Of this amount, about $15 billion was
                                                eventually transferred to DOD’s Defense Emergency Response Fund.
                                                OMB, in conjunction with DOD, identified 10 broad funding categories to
                                                govern the use of these funds. While funds in the Defense Emergency
                                                Response Fund were obligated for similar types of requirements funded
                                                under several of DOD’s regular appropriations account, such as for
                                                operation and maintenance and military personnel expenses, the 10
                                                categories do not directly correlate with DOD’s existing appropriation
                                                account structure. Figure 2 lists the Defense Emergency Response funding



                                                Page 18                                                              GAO-03-346 Defense Budget
                   Appendix II: Appropriation of Emergency
                   Response Funds to DOD for Fiscal Years 2001,
                   2002, and 2003




                   categories and provides examples of DOD’s regular
                   appropriation accounts.

                   Figure 2: Comparison Between Defense Emergency Response Funding Categories
                   and DOD Appropriation Accounts




Fiscal Year 2002   In an emergency supplemental appropriation for fiscal year 2002,
                   Congress appropriated $13.4 billion in emergency response funds, of
                   which $11.3 billion was placed in the Defense Emergency Response
                   Fund for subsequent transfer to DOD’s regular appropriation accounts.
                   Furthermore, Congress designated the distribution of these funds by
                   DOD component, appropriation account, and purpose. Figure 3 provides
                   an example of how Congress designated the use of fiscal year 2002
                   emergency response funds for the Air Force.

                   Figure 3: Congressional Designation of Fiscal Year 2002 Emergency Response
                   Funds for the Air Force




                   Page 19                                              GAO-03-346 Defense Budget
                   Appendix II: Appropriation of Emergency
                   Response Funds to DOD for Fiscal Years 2001,
                   2002, and 2003




Fiscal Year 2003   In fiscal year 2003, Congress appropriated $7.1 billion in emergency
                   response funds to DOD as part of DOD’s regular appropriation, and these
                   funds were appropriated directly to DOD’s regular appropriation accounts.
                   In contrast to the fiscal year 2002 emergency supplemental, Congress
                   provided more detail in designating the distribution of fiscal year 2003
                   emergency response funds. In the conference report accompanying the
                   fiscal year 2003 appropriation act, Congress designated specific funding
                   levels by appropriation account, DOD component, budget activity, and
                   subactivity group. Figure 4 provides an example of how Congress
                   designated funding for the Air Force.

                   Figure 4: Congressional Designation of Fiscal Year 2003 Emergency Response
                   Funds for the Air Force




                   a
                   DERF refers to the Defense Emergency Response Fund.




                   Page 20                                               GAO-03-346 Defense Budget
               Appendix III: OMB Guidelines and Criteria
Appendix III: OMB Guidelines and Criteria
               for Emergency Funding Requests Related to
               the Terrorist Attacks of September 11, 2001


for Emergency Funding Requests Related to
the Terrorist Attacks of September 11, 2001
               In a September 14, 2001, memorandum, OMB provided the heads of
               federal departments and agencies with the following guidelines and
               criteria for requesting emergency funding related to the terrorist attacks
               of September 11, 2001.


               (1)   The damage to be repaired must have been directly caused by the
Response and         terrorist acts.
Recovery
               (2)   The absence of funding, and consequently a delay in damage repair,
                     protection or other activities, would result in significant economic
                     loss/hardship, attack risk or human endangerment/suffering,
                     including the cost of enhanced security and relocation of employees
                     to secure sites.

               (3)   Any action ordered by the President to respond to the national
                     security consequences of the events of September 11, 2001.

               (4)   The requirement is known, i.e., not a speculative need.

               (5)   The requirement is urgent, i.e., could not reasonably be handled at a
                     later time.

               (6)   The activity to be performed is an appropriate federal role and
                     reflects an appropriate sharing of responsibility among state, local,
                     private, and federal entities.

               (7)   The level of funding is limited to the amount necessary to restore the
                     entity/facility to current standards and requirements (e.g., damage to
                     a 1950s building would be repaired using current building codes and
                     standards and guidelines for counter-terrorism defense).

               (8)   The requirement is not competitive with or duplicative of activities of
                     other agencies with statutorily mandated disaster assistance
                     programs such as Small Business Administration and Federal
                     Emergency Management Agency.

               (9)   The requirement cannot reasonably be met through the use of
                     existing agency funds, e.g., through reprogramming actions or the use
                     of other emergency funds.




               Page 21                                             GAO-03-346 Defense Budget
                   Appendix III: OMB Guidelines and Criteria
                   for Emergency Funding Requests Related to
                   the Terrorist Attacks of September 11, 2001




                   (10) Funds should address specific deficiencies, encountered or identified
Preparedness and        to prevent events such as those that occurred on September 11, 2001,
Mitigation              and may include expenditures for: law enforcement and investigative
                        activities; general preparation and response (planning, training,
                        equipment, and personnel); physical protection of government
                        facilities and employees; physical protection of the national populace
                        and infrastructure; and governmental awareness of potential threats.

                   (11) Funds can be used to enhance U.S. abilities to interdict
                        terrorist threats.

                   (12) The activity to be performed is an appropriate federal role and
                        reflects an appropriate sharing of responsibility among state, local,
                        private, and federal entities.

                   (13) The requirement is urgent, i.e., could not reasonably be handled at a
                        later time.

                   (14) Activities are not competitive with or duplicative of activities of other
                        agencies with statutorily mandated preparation programs such as
                        DOD and Federal Emergency Management Agency.

                   (15) The requirement cannot reasonably be met through the use of
                        existing agency funds, e.g., through reprogramming actions or the use
                        of other emergency funds.




                   Page 22                                             GAO-03-346 Defense Budget
             Appendix IV: Comments from the Department
Appendix IV: Comments from the
             of Defense



Department of Defense




             Page 23                                     GAO-03-346 Defense Budget
Appendix IV: Comments from the Department
of Defense




Page 24                                     GAO-03-346 Defense Budget
                  Appendix V: GAO Contacts and Staff
Appendix V: GAO Contacts and Staff
                  Acknowledgments



Acknowledgments

                  Sharon Pickup (202) 512-9619
GAO Contacts      Gary Billen (214) 777-5703


                  In addition to the names above, the following individuals made significant
Staff             contributions to this report: Nancy Benco; Bruce Brown; George Duncan;
Acknowledgments   Harry Jobes; Tom Mahalek; Charles Patton, Jr.; Kenneth Patton; and James
                  Reid.




(350254)
                  Page 25                                           GAO-03-346 Defense Budget
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