oversight

Overseas Allowances: Improvements Needed in Administration

Published by the Government Accountability Office on 1990-02-12.

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

    United   States   General   Accounting   Office

    Report to the Chairman, Committee on              --
    Armed Services, House of
    Representatives




    Improvements Needed
    in Administration
i
National Security and
International Affairs Division

B-236021

February 12,199O

The Honorable Les Aspin
Chairman, Committee on
  Armed Services
House of Representatives

Dear Mr. Chairman:

This report is in response to a requirement in the House Report supporting the Defense
Authorization Act for fiscal year 1989 that we review the adequacy and timeliness of the
overseas housing allowance and cost of living allowance programs.

We are sending copies of this report to the Director, Office of Management and Budget; the
Chairman, Senate Committee on Armed Services; the Secretaries of Defense, the Army, Navy,
and Air Force; the Chairmen, House and Senate Committees on Appropriations; and other
interested parties. We will make copies available to others upon request.

This report was prepared under the direction of Paul L. Jones, Director, Manpower Issues
(202) 275-3990. Other major contributors arc listed in appendix II.

Sincerely yours,




Frank C. Conahan
Assistant Comptroller General
                           The timeliness of currency exchange rate adjustments to the overseas
                           allowances did not appear to be a major problem, but some improve-
                           ments are needed. To reduce the G-month time lag between performing
                           surveys and making allowance adjustments will require some funda-
                           mental changes in the data collection processes and great,er use of
                           computers.



GAO’s Analysis

Service Member             The purpose to be served by the cost of living allowance program and
                           the standard for measuring its adequacy lack specificity. Nevertheless,
Perceptions                most of the service members GAO interviewed at 10 locations in 7 coun-
                           tries were generally satisfied with the living allowance they received.
                           They did not fully understand its purpose or how it was computed. Simi-
                           larly, most members GAOinterviewed were satisfied with their overseas
                           housing allowance but enlisted members wcr(l less satisfied than
                           officers.


Problems With DOD’s        GAOfound that the Per Diem Committee used inaccurate, incomplete,
                           and misrepresentativt, information in establishing allowance rates.
Development of Cost of     These problems can be attributed, in large part, t,o a lack of internal
Living Allowance           management controls. For example:

                         . Surveys on shopping pat terns were not representative of the military
                           population receiving the allowance. For example, 62 percent of the
                           surveys returned from one location came from officers even though they
                           constituted only 20 pcrccnt of the members receiving cost of living
                           allowances.
                         . Survey locations were not representative of the entire country. For
                           example, GAOnoted that 62.9 million could have been saved if UODhad
                           established separate indexes for two locations in Southern Italy.
                         . The Per Diem Committc‘tl is using incorrect and outdated 1T.S.prices that
                           overestimated the cost of living in the ITnited States. This reduces the
                           price>differential betwcstan[T.S. cost and the higher overseas cost,
                           thereby causing overseas (*ost,of living allowances t,o bc lower than
                           intcndcd.




                           Page 3                                      GAO/NSlAD-0046   Overseas Allowances
                  ExecutiveSummary




                  GAOalso noted that there is a time lag from the time cost of living and
                  housing survey data arc collected to when changes are implemented.
                  Given the small staff and the large number of forms that must be ana-
                  lyzed, these time lags appear to be unavoidable, unless major changes
                  are made to the procedures for collecting and analyzing data. GAO sug-
                  gests two ways. First, the number of personnel required to complete liv-
                  ing pattern surveys at locations could be reduced by using standard
                  statistical sampling procedures. Second, using computers to perform
                  required calculations could reduce the time required to compute an
                  allowance for a location or country to a matter of minutes or hours as
                  opposed to weeks and months


                  GAO makes a number of recommendations to the Secretary of Defense
Recommendations   designed to strengthen management controls over data collection and
                  analysis, provide automated support for decision-making, and bring
                  more consistency to the allowance-setting process.


                  uor) generally concurs with most of           findings and recommendations
Agency Comments                                         GAO'S

                  One of GAO'S proposals in a draft of this report was that DODstudy
                  whet,her a rate-setting process should be established that assumes that
                  available goods and services would be purchased on base. DOD per-
                  formed such a study and found no significant cost difference between
                  this approach and the current system. DOD stated that because of the
                  potential adverse impact on morale of any such change in the system, it
                  did not believe further study was warranted. Since DOD has performed
                  the analyses recommended in our draft report and its methodology
                  seemed reasonable, (;.A()has deleted the recommendation from the final
                  report. However, C;.Whas not analvzcd DOD'S studv.




                  Page5
Appendixes   Appendix I: Comments From the Department of Defense                      44
             Appendix II: Major GAO Contributors to This Report                       71

Tables       Table 2.1: Locations DOD Tested Overseas                                 17
             Table 2.2: Average U.S. Price for Selected Items                         21
             Table 3.1: Responses of Interviewees on What OHA                         27
                  Information Was Provided to Them
             Table 3.2: Cost Versus Reimbursement for Moving in and                   30
                  Moving Out
             Table 3.3: OHA Survey Response Rate by Location

Figures      Figure 1.1: 10 Year Total Costs of OHA and COLA
                  (Constant Fiscal Year 1990 Dollars)
             Figure 1.2: OHA and COLA for Typical Officer
             Figure 4.1: Excerpt From Living Pattern Survey




             Abbreviations

             COLA      Cost of Living Allowance
             DOD       Department of Defense
             GAO       General Accounting Office
             OHA       Overseas IIousing Allowance


             Page 7                                  GAO/NSlAD9646    Overseas Allowancrs
                      Chapter 1
                      Introduction




                      agreement lose their entire OHA. All members receiving OHA are sent sur-
                      vey forms so the Committee can determine the non-rent portions for the
                      allowance. However, failure to return the form does not affect whether
                      an individual receives the allowance.

                      In fiscal year 1988, the rental element accounted for 80 percent of the
                      total OIIX. Utilities and recurring maintenance accounted for 15 percent,
                      and moving-in and moving-out expenses accounted for 5 percent,


                      ~0~4 is intended to enable service members to maintain purchasing
Cost of Living        power at the U.S. level in overseas areas where the cost of living is
Allowance             higher. In some countries, such as Korea, the cost of living is lower, so
                      no CQIA is paid.

                      WLA is currently computed by comparing the results of two surveys
                      done at overseas locations with similar surveys performed in the United
                      States. About every 4 years or when a change in purchasing options
                      occurs, such as the opening or closing of a commissary or major local
                      retail outlet, overseas commands conduct a living pattern survey by ask-
                      ing service members where they shop. The purpose of the survey is to
                      obtain the names of local outlets used to purchase about 160 goods and
                      services, and the percentage of time these items are purchased off base
                      rather than at government facilities. Commands then use the living pat-
                      tern survey to conduct ii survey of the retail prices for these items. Com-
                      mittee staff then compare prices to I:.S. retail prices paid by military
                      families, as reported by the Bureau of Labor Statistics, and with US.
                      commissary and exchange prices to determine the need for and amount
                      of the COLAfor locations overseas. If the price differential is small, COLA
                      is small,


                      The Committee is chaired by the deputy assistant secretary of defense
Administration of     for military manpower and personnel policy, and has as members a dep-
Overseas Allowances   uty assistant secretary from each military department and representa-
                      tives from other departments that have uniformed services.’ The
                      Economics and Statistics Branch of the Committee is responsible for rec-
                      ommending allowance lcvcls. During fiscal year 1988, the Branch recom-
                      mended 535 OH.4 and 405 co~,h changes worth about $1.2 billion,




                      Page 9                                      GAO/NSL4D9046   Overseas Mlowances
                                         ChapLrr 1
                                         Introcluction




Figure 1.1: 10 Year Total Costs of OHA
and COLA (Constant Fiscal Year 1990
                                         1.4   Dollan in Billions
Dollars)
                                         1.3
                                         1.2
                                         1.1
                                         1.0
                                         0.9
                                         0.6
                                         0.7
                                         0.6
                                         0.5
                                         0.4
                                         0.3
                                         0.2
                                         0.1

                                           1962          1963       1984   1965   1966   1967       1964    1969    1990 est.   1931 est.

                                           Fiscal Year

                                                  F        COLA
                                                  ----     OHA
                                                  m        Total

                                         were sometimes ignored. This situation still exists. DOD’S 1988 Federal
                                         Managers’ Financial Integrity Act of 1982 (31 USC. 3512) annual
                                         report” identified the Committee’s lack of automation as a significant
                                         weakness that adversely affects housing and cost of living allowances.
                                         One of the Committee’s efforts to correct the weakness was a contractor
                                         study of OHA,which was completed on June 21, 1988. The study identi-
                                         fied several of the problems we noted during our review. According to
                                         DOLJ,automation does not remain a significant weakness. Since 1983, it
                                         has constantly emphasized automation and has taken strides to auto-
                                         mate parts of the housing allowance system. It still needs to automate
                                         the cost of living and non-rent portions of the system to enable it to
                                         react to economic change


                                          Our objectives were to evaluate (1) the adequacy and timeliness of
Objectives, Scope, and                      -
                                          increases in OIIA and (UL\ and (2) whether all appropriate items are
Methodology                               included and properly wv>ightcd when calculating VOLA.To accomplish




                                          Page 11                                               GAO/NSlAD9036   Overseas Allowanrrs
Chapter 1
Introduction




cost, and to examine internal management controls over the allowance-
setting procedures.

We used a structured format to interview ZOOrandomly selected service
members about COLAand onA-- sample of 20 at each overseas location.
The sample consisted of five first-time OHA recipients, two members
sharing the same housing, five members with dependents and three
without dependents, one homeowner, and four service members in the
grades of E-8, E-9, O-5, or O-6. Even though we selected these categories
and the 10 locations to cover a variety of situations in which OHA can be
received, our results cannot be projected because of the small sample
sizes.

The information obtained in Hawaii was limited because most service
members there are now under the variable housing allowance program.
The OHA program was phased out in Hawaii in November 1989. Informa-
tion gathered in Korea was unique because service members there do not
receive a COLA. Rather than gathering information about the adequacy
of COLA,we focused on whether members needed COLA and whether pro-
cedures were in place to identify if and when it would be needed.

We performed our work from August 1988 to June 1989 in accordance
with generally accepted government auditing standards.




 Page 13                                   GAO/NSlAt-9046   Overseas   AUowances
                       _-
                            (:hapter 2
                            Methods for Setting   COLA (‘an Re Improved




                            About 66 percent of the 180 service members we interviewed in coun-
Most Service Members        tries other than Korea’said that COLA “kept up” with the cost of living
Believe COLA Was            to a moderate extent, and 13 percent said to a great extent. However,
Adequate, but Few           the remaining 21 percent said that COLAhelpedlittle in “keeping up”
                            with living costs. Enlisted personnel were less likely than officers to say
Knew Its Purpose            that COLAwas adequate, and service members in certain locations-
                            k’okosuka, Okinawa, Naples, and Oahu-were less satisfied with their
                            ~OI,.Qthan their counterparts in other locations.

                            Most service members we interviewed misunderstood the purpose of
                            COLA.  Approximately 70 percent thought COLA was supposed to allow
                            them to purchase the same goods overseas as in the United States; 72
                            percent said COLA should rise whenever the exchange rate decreased;
                            and 42 percent thought COLA was supposed to help pay for their rent
                            and utilities. None of these perceptions accurately represent the purpose
                            of UM as expressed by DOD. American goods cannot be purchased at all
                            locations overseas, so the ability to purchase similar goods is actually
                            DOD’S goal for the program. COLAmay not go up every time the value of
                            the dollar declines because U.S. prices may also be affected at the same
                            rate; or because spending patterns may change. Finally, the OHA pro-
                            gram is designed to cover housing expenses at the overseas location, not
                            COI,~.DOD agrees service members should understand the purpose of
                            COLA,and plans to publish information on the program in fiscal year
                             1990.


                            POD’S current approach is based on collecting data in the United States
Alternative                 and at overseas locations on (1) what goods and services military per-
Approaches for              sonnel buy, (2) where they buy them, and (3) how much they pay for
Implementing a COLA         them. The Per Diem Committee uses several sources to obtain these
                            data, but the principal sources are (1) the living pattern surveys per-
System                      formed overseas, which ask service members where they shop and what
                            proportion of their shopping is done at those outlets, and (2) retail price
                            surveys for approximately 160 “market basket” items performed at
                            these retail outlets.

                             These data are then used to calculate a COLA index for a particular over-
                             seas location. An index number, such as “110,” for example, means the
                             overseas location is about 10 percent more expensive than the United




                             Pa@? 15                                      GAO/NSIAD-90-46   Overseas Allowances
                                    Chapter 2
                                    Methods for Setting COLA Can Be Improved




                                    reason indexes decreased in Japan (see table 2.1) was that members pur-
                                    chased a significant amount of their fruits, vegetables, and other food
                                    items at higher cost from local merchants because these products are
                                    frequently not available in commissaries. Based on past visits, quality,
                                    availability, and convenience were major factors influencing local pur-
                                    chase decisions. Table 2.1 shows the areas tested and the results.

Table 2.1: Locations   DOD Tested
Overseas                                                                                                                           Percent of
                                                                                                     COLA index                   total COLA
                                    Area                                                Actual              Test   Difference       recipients
                                    Germany"                                                112              112              0             520
                                    Italy"                                                  108              108              0              28
                                    Unlted Klngdom"                                         112              112              0              54
                                    Oahu                                                    108              108              0             121
                                    Okinawa, Japan                                          132              124            -8               57
                                    Yokosuka, Yokota. Camp
                                       Zama, Japan                                             136           126           -10             35
                                    Sample                                                                                                81.5
                                    “All localities   wsihln 1 hour of a commissary/exchange


                                    For this and other reasons, I)OUopposes changing the current basis used
                                    to determine COLA.

                                    Since DODhas performed the analysis recommended in our draft report,
                                    we have deleted this recommendation from the final report. Although
                                    L)oL)'s methodology seemcld reasonable, we did not review DOD'S study.



                                    In addition to evaluating ~01)‘soverall rationale supporting its COLA
Data Collection and                 approach and methodology, we also evaluated the processes used by the
Analysis Concerns                   Per Diem Committee 1.0set (WA rates. We found a variety of problems
                                    with both data collection and analysis.


Survey Responses Were               Since reported shopping patterns affect all COLA recipients at a location,
Not Representative                  survey respondents should be representative of the members at the loca-
                                    tion. We found several instances where the living pattern surveys did
                                    not represent the military population receiving COLA. For example, sur-
                                    IVY officials in Naples selected a sample based on a Department of State
                                    sample stratification, which overrepresented officers. Consequently, 62
                                    percent of the surveys rclturned came from officers, even though they
                                    constituted only 20 pt’rcclnt of the members receiving COLA. Officers



                                    Page 17                                                              GAO/NSIAD-9046 Overseas Allowances
                         Chapter 2
                         Methods for Setting   COLA Can Be Improved




                         been established for southern Italy,” approximately $2.8 million would
                         have been saved at those two locations in 1988, but DOD disagreed with
                         this estimate. Our estimate was based on DOD’S data, which should have
                         been tested previously to determine whether a separate allowance or a
                         combined one would have been appropriate.

                         Per Diem Committee staff did not ensure that the locations they used
                         represented other locations. Until early this year, the Committee had not
                         collected data on the populations receiving COLASat overseas locations.
                         The Committee also did not select survey locations using statistically
                         valid methods, but used locations that were most cooperative in
                         returning data. Finally, the Committee had not appropriately tested the
                         pricing data it received to determine if the data from different locations
                         should have been combined to calculate an overall COLA rate or whether
                         separate ~0~4 rates would have been more appropriate.

                         In its response to our draft report, DoD partially concurred with our
                         findings. DOD agreed that selecting locations using statistical techniques
                         could produce more representative analyses. It will include this as an
                         issue for additional study. It does not believe that its existing practices
                         are inappropriate, and that separate indexes are necessary for Italy,
                         despite our analyses. Nevertheless, it has requested a living pattern sur-
                         vey for 1990 for Sigonella Air Sation, with an emphasis on restaurant
                         prices, to help determine if separate indexes are needed for different
                         areas in Italy.


Living Pattern Surveys   DOD’S  current methodology calls for conducting living pattern surveys
Were Untimely            before retail price surveys so that data collectors know which off-base
                         outlem members most frequently used. However, at two locations in
                         Europe, living pattern surveys were done during or after the retail price
                         surveys. Of the eight locations in Japan conducting surveys in 1988,
                         three performed living pattern surveys after the price surveys, and
                         three did not submit any living pattern data at all. Only two of the eight
                         locations reported doing the surveys in a timely manner. The quality
                         and timeliness of the 1988 living pattern data from Japan was so poor
                         that the Per Diem Committee requested another survey in 1989. DOD
                         agrees that living pattern surveys should be conducted before retail


                          ‘Estahhshing separate indexes for swthcm Italy would have rmdted in a COLA of 102 for Cmuso
                         and 106 for Naples. With a COL.4 of 110 for the other full support locations, there would have ken
                         three Indexes for these locatkms m 19823.as opprwd lo the single index that did not adequately
                         represent the locations in the south



                         Page 19                                                   GAO/NSIAD-90-46     Overseas   Allowances
                                      Chapter 2
                                      Methods for Setting COLA Can Be Improved




                                      the Committee’s weighted average 1J.S.prices shows differences in com-
                                      monly purchased items (see table 2.2).

Table 2.2: Average   U.S. Price for
Selected Items                                                                                                            Per Diem
                                                                                                                 BLS’   Committee
                                                                                                         average U.S. average U.S.
                                                                                                                 price        price

                                      Item                                                                 ~~    ~..~
                                      Gasoltne (gal.)                                                              $0.98           $1.09
                                      Eggs (do2 1                                                                  $0 90           $1.05
                                      Fresh milk (qt )                                                             $0.59           $0 48
                                      Chtcken (lb.)                                                                $0 93           $1 00
                                      %ureau of Labor Statlstlcs, CPI D&&d   Report, October 1988. Average Price tables Pl to P4

                                      This comparison illustrates that the Committee may be overestimating
                                      the U.S. cost of living, which would reduce price differentials, thereby
                                      causing overseas COLAS to be lower than intended. According to a Com-
                                      mittee staff member, the Committee is considering using the Bureau’s
                                      prices, although they include only a small number of the market basket
                                      items. In its response to our draft report, DOD agreed that the adjustment
                                      factors it uses need to be reviewed. This issue will be included in its
                                      planned study of the cost of living program.


Lack of Stati stical                  The Per Diem Committee’s process for calculating COLAS and manipulat-
Analyses                              ing data is outdated and lacks analytic rigor. The actual COLA analysis is
                                      largely done with desktop calculators and handwritten spreadsheets.
                                      Nearly all of the averaging of data (prices and on-base/off-base percent-
                                      ages) is based on simple arithmetic means. There are standard statistical
                                      tests to determine whether any set of data, including data from several
                                      locations, ought to be combined, but these statistical tests were not being
                                      used. Committee price analysts also at times excluded high and low
                                      price because they believed the prices were unrepresentative.

                                      According to DOD, price analysts based their decisions on procedures
                                      (such as excluding designer clothing), reason, experience, comparison to
                                      past reports, and direct consultation with country representatives.
                                      Many of the problems that threaten the uniformity and objectivity of
                                      the system could be eliminated by modernizing and automating the data
                                      analysis process and utilizing standard statistical packages to aid in
                                      decision-making.



                                      Page 21                                                   GAO/NSIAD-9046      Overseas Allowances
                             Chapter 2
                             Methods for Setting   COLA Can Be Improved




                             Problems with the representativeness, accuracy, and completeness of
Lack of Management           the COIA surveys can be attributed, in large part, to a lack of internal
Controls Affect COLA         management controls. As a result, the Committee based the allowance
                             rates on inaccurate, incomplete, and nonrepresentative data. Therefore.
                             allowance levels may have been inappropriate. In its response to our
                             draft report, DOD acknowledged that these types of problems exist, and
                             plans corrective actions for fiscal year 1990. DOD further stated that
                             progress in addressing these problems will be monitored by the responsi-
                             ble deputy assistant secretary of defense. We believe this addresses the
                             substance of our concerns and have reworded the text accordingly.


Authority and Supervision    According to Committee officials, it does not have authority to task spe-
                             cific individuals or organizations to conduct the living pattern and retail
Are Lacking                  price surveys overseas. According to the Joint Federal Travel Regula-
                             tion, the senior commander in each country has overall responsibility
                             forthe surveys. The senior commander then delegates these responsibil-
                             ities each year to an individual within the command, as needed. Differ-
                             ent organizations have been involved in the survey process, and
                             individuals have not been aware of their responsibility to conduct the
                             surveys. Consequently, accountability for the surveys was lacking and
                             the quality and completeness of survey data varied from country to
                             country.

                             Confusion existed at some locations as to who was responsible for con-
                             ducting surveys and who had conducted prior surveys. Country points
                             of contact, responsible for overall coordination of the COIA surveys,
                             could not identify individuals responsible for conducting the surveys
                             bt,cause new officials were selected each year. At one location, two dif-
                             ferent organizations were, at, the same time, planning to conduct the liv-
                             ing pattern survey during the upcoming year. Neither organization was
                             aware of the other’s plans.

                            __I_                            .~~-
Training and Guidance Are     The Committee staff has provided minimal training and guidance to sur-
Minimal                       vcy coordinators on standard statistical principles of data collection and
                              analysis. According to most country points of contact and survey coor-
                              dinators we interviewed, they had not received any training on the sur-
                              vey objectives or methodology. Although they did have written
                              instructions, these instructions were inconsistent at different locations
                              and did not conform with standard statistical principles. Some survey
                              coordinators said they wcrc frustrated at having survey responsibilities
                              but inadequate guidance and training.


                              Page 23                                     GAO/NSlAD-90-46   Overseas Allowances
                      Chapter 2
                      Methods for Setting COLA Can Be Improved




                  . modernize and automate the COLAanalysis process to include standard
                    statistical testing and documenting criteria used in decision-making; and
                  l test its market basket assumptions to determine whether the basket ade-
                    quately reflects high cost items unique to overseas locations.

                                                -.~
                      In commenting on a draft of this report, DOD concurred with the recom-
Agency Comments       mendations stated above. However, DOD did not fully concur with recom-
                      mendations dealing with alternative approaches for implementing a
                      COLA system contained in the draft report. In finalizing our report, we
                      have incorporated their comments in the body of the report, and have
                      modified the text where appropriate. DOD also did not concur with our
                      recommendation that the described data collection and analysis prob-
                      lems are significant management weaknesses and should be included in
                      the DOD Federal Managers’ Financial Integrity Act armed reports.
                      Instead, DOD proposed correcting the problems and assigning responsibil-
                      ity for progress to the assistant deputy secretary of defense (military
                      manpower and personnel policy). We believe this action will address our
                      concerns, and we have deleted the recommendation from our final
                      report.




                      Page 25                                    GAO/NSlAD904   Overseas AUowances
                                             Chapter 3
                                             Methods for Setting OIL4 Can Be Improved




                                             was marginally adequate or better. However, the grades of recipients
                                             and their duty stations were major factors in their perceptions. A major-
                                             ity of enlisted personnel (59 to 63 percent) thought their OHA was mar-
                                             ginally adequate or inadequate, whereas a majority of officers (56
                                             percent) believed their OHA was adequate or better. Personnel at the
                                             three locations in Germany we visited were more likely to report the
                                             allowance was adequate or more than adequate (56 to 90 percent, with
                                             the highest in Frankfurt) than personnel assigned to the other locations
                                             visited. For example, compared to personnel in Germany, only 20 and 28
                                             percent of the personnel in Yokosuka and Okinawa, Japan, respectively,
                                             believed the housing allowance was adequate.

                                             Although 79 percent of the interviewees said they were told what their
                                             monthly rental ceiling would be, 71 percent said they were not told that
                                             their housing allowance could be lowered by factors beyond their con-
                                             trol, such as newly assigned personnel moving into lower cost housing.
                                             In addition, 62 percent were not told what items they could claim under
                                             moving-in and moving-out expenses, and 45 percent were not told how
                                             the utilities portion of their allowance would be calculated. Table 3.1
                                             summarizes these overall responses.

Table 3.1: Responses of Interviewees    on
What OHA Information Was Provided      to    Flqures in percent
Them                                                                                              Interviewee      response
                                                                                                                              Did not
                                             Information                                         Told           Not told       recall
                                             What the maxlmum monthly houslng                      79                  16             5
                                             allowance was for their grade level
                                             How the rental allowance would be                     45                 39            16
                                             determlned
                                             How the utlllties allowance would be                  44                 45            11
                                             determlned
                                             What the moving-In and moving-out allowance           24                 62            14
                                             would cover
                                             The posslbllity of the houslng allowance being        22                 71             7
                                             l0bW?rf?d



                                             The following example illustrates how lack of understanding can con-
                                             tribute to inappropriately low allowance levels. The 1987 Frankfurt sur-
                                             vey showed that reported moving-in and moving-out costs ranged from
                                             $0 to $3,600, with 65 percent reporting less than $50. The Per Diem
                                             Committee’s point of contact for Germany stated that these reported
                                             costs were obviously too low because service members must buy several
                                             transformers at $50 each and pay $35 for telephone installation. The



                                             Page 27                                          GAO/NSIAD.9046 Overseas Allowances
                              Chapter 3
                              Methods for Setting OHA Can Be Improved




                              separate averages was not the result of standard, rigorous statistical
                              procedures and consequently resulted in some incorrect decisions.

                              For six locations, we performed standard statistical tests on the signifi-
                              cance of the differences between average utility costs for officer and
                              enlisted personnel. Our tests showed the Committee took the correct
                              action for four locations and incorrect actions for Torrejon, Spain, and
                              Yokota, Japan. The Committee incorrectly judged that officer and
                              enlisted utility costs were about the same at Torrejon and Yokota and
                              established single rates for each location. As a result, officer personnel
                              were undercompensated for their utility expenses, while enlisted per-
                              sonnel were overcompensated. At Yokota, for example, officers with
                              dependents were undercompensated $32 a month, while enlisted person-
                              nel with dependents were overcompensated $27 a month. Separate rates
                              would have eliminated this discrepancy and saved about $166,000 annu-
                              ally in allowances paid to 670 personnel at this one location.


Records Not Maintained   on   The Per Diem Committee edited utility costs reported by service mem-
Excluded Data                 bers at overseas locations. First, it computed the monthly average utility
                              cost for each individual survey form, then it computed a combined aver-
                              age for all forms from a location. Committee compared individual utility
                              averages with the combined average and excluded data deemed too
                              clxtreme. Finally, it computed a new combined average.

                              According to a Committee analyst, high and low figures were excluded
                              to avoid capturing data from members who have part of their utilities
                              (*overed in rent and have excessive utility expenditures. Editing the util-
                              ity averages simply involves reviewing an accounting tape and checking
                              off t,hose that are deemed too high or too low. Memoranda were not kept
                              on which figures were excluded, and the criteria for making those deci-
                              sions was based on what was excluded the previous year.

                              Automating the edit would allow the use of statistical guidelines and the
                              maintenance of a clearer record of the editing decisions. The lack of
                              such records, and the absence of adequate statistical guidelines in deci-
                              sion-making, casts doubt on the adequacy and fairness of the data used
                              to compute this portion of the OHA.

                              In commenting on our draft report, DOD acknowledged it does not main-
                              t ain formal file memoranda. However, DOD said it keeps records of
                              (Bxcluded data points. IV(>reviewed the data and found information



                              Page 29                                     GAO/NSIAD-9046   Overseas   Allowances
                                               Chapter 3
                                               Methods for Setting   OHA Can Be Improved




                                               In its comments on our draft report, DOD agreed that this is a problem.
                                               DOD plans to correct the problem by collecting more accurate data on
                                               average time spent in privately leased housing for each major location
                                               within a country.


                                               Internal management controls over the OrIA survey methods are
Weak Management                                extremely weak. As a result, data gathered from these surveys are often
Controls                                       incomplete, inaccurate, and nonrepresentative, and allowance levels are
                                               inappropriate. This raises serious questions about whether the Commit-
                                               tee should use data resulting from its current survey methods as a basis
                                               for computing the non-rent portion of the allowance. Low response rates
                                               at one location caused the Committee to not adjust allowances, whereas
                                               unrealistically high response rates at two other locations indicated ana-
                                               lysts were using survey forms that should have been excluded. The pat-
                                               t,erns of responses at sclvcral ot,her locations indicated some bias in who
                                               returns the survey forms.


Response Rate Deficiencies                     [Tnless all OIIA survey forms are returned from a particular location, the
                                               possibility exists that an inappropriately high or low allowance could be
                                               computed. According to the Committee analyst responsible for the OBA
                                               survey, hc used a return rate of either 50 percent or 100 forms as a
                                               guideline. The 1988 response rates for locations in our review ranged
                                               from 8 percent to 110 perctknt, as shown in table 3.3.

Table 3.3: OHA Survey   Response   Rate   by
Location                                       Location                                                  Universe          Returns           Percent
                                               Frankfurt                                                     1504              1,659               110
                                               PamsteIn                                                      2,987             1,644                55
                                               Lakenheath"                                                   1,537               121                 8
                                               Naples                                                          807-              569                71
                                               Rota                                                            631               555               88
                                               Yokosuka                                                        974               266               27
                                               Ohlnawa                                                       2,585             1,082               42
                                               Seoul                                                           277               295              106
                                               ‘The survey officer could not explain Ihe low return rate Because of the low rate the Committee did not
                                               adjust the dllowances

                                               Scither the Committctk nor in-country survey coordinators determined
                                               whr~thcr survey results were representative (i.e, whether systemic dif-
                                               ferences existed between those who returned OIIA forms and those who
                                               did not). Statistical sampling allows survey results to be projected to the


                                               Page 31                                                     GAO/NSlALb90-46     Overseas   Allowances
                             Chapter 3
                             Methods for Setting   OHA Can Be Improved




                             expenses to service members.” The proposal made no mention of the
                             reimbursement methodology being contemplated by DOD. If enacted, the
                             proposal would permit reimbursing for allowable expenditures in three
                             separate categories. The first category is rent-related costs, which are
                             fixed, nonrefundable charges, such as an agent fee, levied by the land-
                             lord, the landlord’s agent, or the local government. The second is reason-
                             able security-related costs for the purchase and installation of
                             extraordinary security devices, such as window and door bars and
                             alarm systems, where service members are at risk. The third category is
                             other costs up to $1,000 that are required to make privately leased
                             quarters habitable, such as kitchen cabinets, stoves, and refrigerators.
                             The rent and security-related costs would be fully reimbursed for rea-
                             sonable expenditures; however, reasonable expendit,ures were not
                             defined in the DOD proposal.

                                                               -~
                             If the rental portion of OHA, which is established based on actual rents
Uniform Policy and           paid by recipients, is to operate as intended,? it must be allowed to react
Information Needed           to market conditions without interference. Policy directives at some
on Rental Ceiling            locations kept the system from working as intended and information
                             provided to service members at arrival briefings was misleading.

                         -
Misleading Information       Misleading information can result in an upward or downward pressure
                             on allowances that would not have naturally occurred had members
                             received the proper information. For example, at Yokosuka, Japan,
                             members were encouraged to rent above their ceiling to prevent a
                             decrease in the allowance when the ceiling was subsequently recalcu-
                             lated. If all service members followed this advise, they would initially
                             incur some out-of-pocket expenses, but over time, this would create an
                             upward pressure on the ceiling.




                             ‘DOD requested that the proposal be included in the legislative contingency package for fiscal year
                             1990 According to a Per Diem Committee official, the Office of Management and Budget declined to
                             Include the proposal in the package because msufficient funds were available to cwer the first year
                             cost of the proposal, estimated to be about $20 million The fiscal years 1990 and 1991 DOD authori-
                             zatmn bill included authority tu implement a modified version at DOD’s proposal
                             ‘In theory, the %-percent ceiling on ttrr rent portion of OHA will move up with inflation in the local
                             housmg market because new arnvals. who want to have the same quality of housing as those already
                             at the location, will be wilhng to pay more than the ceiling for the short time before the ceiling is
                             raised



                             Page 33                                                    GAO/NSIAD-9046       Overseas   Allowa.nces
                      Chapter 3
                      Methods for Setting   OHA Can Be Improved




                      Misperceptions by service members often occur because they receive
Conclusions           incomplete and sometimes misleading information. This can result in
                      depressed allowance levels. Depressed allowances can also occur
                      because responsible officials at overseas locations do not follow a uni-
                      form policy or receive sufficient guidance. The enforcement of policy
                      directives in some locations has also caused the system to fail and
                      imposed a hardship on some recipients.

                      Receiving adequate reimbursement for moving-in expenses and for utili-
                      ties and recurring maintenance expenses were the most troublesome
                      areas we observed. These types of expenses account for about 20 per-
                      cent of OIIA. The methodology used to obtain information necessary to
                      calculate t.hese portions of the allowance has resulted in less than ade-
                      quate allowances. In addition, differing interpretations on utility reim-
                      bursements in Germany, which raise equity issues because a significant
                      number of military personnel are being treated differently and are not
                      being reimbursed adequately for utility expenses, could exist at other
                      locations overseas.

                      We support DOD’S efforts to provide direct up-front reimbursement for
                      moving-in expenses. If successful, these efforts would treat service
                      members more equitably and should solve one of the problems we
                      observed with OHA.


                      We recommend that the Secretary of Defense direct the Per Diem Com-
Recommendations       mittee to submit a report prior to establishing a reimbursement method-
                      ology for moving-in expenses that would address the resale value of
                      items included in the allowance, and the definition of what constitutes a
                      reasonable expense.

                      We also recommend that the Secretary of Defense direct the Per Diem
                      Committee to

                  . develop and document uniform policies and guidance, based on standard
                    statistical methods, to ensure that surveys are accurate, complete, and
                    representative; and
                  l ensure that local command policy directives or information provided
                    with respect to housing do not serve to undermine the intent of the OHA
                    program.




                      Page 36                                     GAO/NSIAD90-46   Overseas   AIIowances
Chapter 4

Timeliness of Allowance Programs


                      The timeliness of adjustments to the overseas allowances-COLA and
                      OHA-directly affects the amounts received by service members over-
                      seas. We found the timeliness of adjustments was not a major problem,
                      but some improvements are needed. The currency exchange rate adjust-
                      ment process could be more responsive. Except for Navy personnel who
                      are not on direct deposit, the service finance centers report being able to
                      reflect currency adjustments within 2 weeks of notification. Also, there
                      is a time lag from when COIA and OIIA survey data are collected to when
                      changes are implemented. This lag could be reduced by modifying the
                      data collection procedure and automating the analysis process.


                      The currency exchangtb rate adjustment process is a factor for both the
Currency Adjustment   COLAand OIIA programs. The two allowances are paid in dollars, with the
Process               level being determined by the prevailing rate of exchange between for-
                      eign and U.S. currencies. The intent is for local economy purchasing
                      power to remain fixed as long as the same COL.~ and OHAlevels prevail.
                      To accomplish this. exchange rate movements must result in a compar-
                      able adjustment in the allowances, moving up or down as necessary.

                      The Committee’s goal in adjusting OBAand (:OW is to avoid continually
                      changing the allowances while minimizing the exchange rate discrepan-
                      cies. Committee staff collect daily exchange rate quotes for each coun-
                      try. The rates are averaged weekly, and the weekly average is compared
                      with the prevailing exchange rate established by the Committee for a
                      country. The percentage differences are accumulated over time. Com-
                      mittee staff monitor the accumulated percentage differences. According
                      to published procedures, when the accumulated difference exceeds 10
                      percent of the prevailing c,xchange rate, the allowance is to be adjusted.

                      In practice, these procedures were not always followed because the
                      Committee had substantial discretion in how it administered the cur-
                      rency adjustment process. For example. the 1988 currency rates in West
                      Germany had an accumulated difference of over 10 percent during sev-
                      eral periods without any change to the allowances. This contributed to a
                      7-week period whcrr> the difference always exceeded 20 percent. Conse-
                      quently, members IV(YCovercompensated or undercompensated twice as
                      much as they would have been had published procedures been followed.
                      In addition. when the allowance rate was changed, the amount of the
                      change somrt imcs diff’rred from what was indicated by the Committee’s
                      formula.




                      Page 37                                     GAO/NSIAtb9046   Oversea.s AUowances
                    Chapter 4
                    Timrlinrss of Allowance   Programs




                    One factor affecting the timeliness of the overseas allowances is the lag
Time Lags From      from when survey data are collected to when changes are made to the
Survey to           allowance rates. The surveys used to establish allowance rates require
Implementation of   considerable time for processing. Since new allowance rates are not ret-
                    reactive, any increase or decrease as a result of new data is lost during
Changes             that time lag. In addition, the longer the delay in setting the allowances,
                    the older the survey data gets, raising questions about how accurately it
                    reflects current conditions.

                    An example of the negative affect from a substantial time lag appeared
                    in the Yokosuka moving-in and moving-out analysis. Members in Yoko-
                    suka were surveyed in March 1988, at a time when the moving-in and
                    moving-out allowance monthly payment was $51. By August 16, 1988,
                    as a result of currency fluctuations, the rate had dropped to $49. On
                    September 1,5 months after the survey, the allowance for Yokosuka
                    was increased to $137, an $88.increase. This change means that in
                    March the allowance should have been about $88 higher, and members
                    lost that amount each month until the rate was adjusted (approximately
                    $440 for the 5-month period).

                    Time lags also exist on the ~0~4 side of the allowance-setting proce-
                    dures. Again in Japan, a 5-month lag occurred between the time prices
                    were collected and changes were made to the COLA rates in 1988. A good
                    part of this delay was because the Committee had trouble getting living
                    pattern survey data from the overseas commands. Of eight locations
                    being surveyed in .Japan, only two had performed living pattern surveys
                    prior to the retail price surveys, and three apparently did not perform
                    living pattern surveys In this case, the 6-month delay worked to a ser-
                    vice member’s advantage and to the government’s disadvantage, since
                    the recommended change based on this analysis was a drop in COLAfor
                    most of Japan.

                    Many factors contribute to these lags, such as delays at the overseas
                    commands and the need for follow-up, but a principal factor appears to
                    be the labor-intensive nature of the data collection and analysis of the
                    living pattern surveys and retail price surveys. The information
                    requested on these surveys is not the type that can be provided quickly.
                    Figure 4.1 shows one of six pages of the living pattern survey.

                    Committee analysts had to calculate over 1,009 averages by hand to set
                    the (‘ow for Italy. Given the small staff and large number of forms that




                    Page 39                                     GAO/NSLAD-9046   Overseas   Allowances
                                                                 Chapter 4
                                                                 Timeliness of Allowancr         Progran~s




Fitpure 4.1: Excerpt   From Living Pattern Survey

i
                          7.     Please           estimate        how     much you      or members      of your household        used each of
                                 these sc”rcSS     to buy                  the   items     listed   during      the past   year.     ease  your
                                 estimates    on volume,                   not   cost.        Show Only    percentage    of “SC,     not  outlet’s
                                 name.            Indlcste        items      not    Purchased     at all    by rritlng     N/A In Column A.
                                 Mail    order    qr catalog       purchases    should    be reported     in Column E.       Report
                                 items     purchased    locally       in Column    A regardless      of the item's     country     of
                                 origin.       The total      entries     for items    A thru   E must equal     100X.

                                                                  A            e                               0                          E
                                                                                                             SUPPlY
                                                               LOCal         Post         Military           Brought          Imports          From
                                -Item                          Market        Comm.         Comm/Px           TO Post            U.S.          Other   Total

                        Beef and Veal                                                                                                                 =100x
                        Pork                                                                                                                          =100x
                        Lamb and Other                                                                                                                =100x
                        Fish                                                                                                                          =100x
                        Poultry                                                                                                                       =100x
                        Canned          Meat/Fish                                                                                                     =100x
                        Egg=                                                                                                   --                     .100x
                        Fats       and Oils                                                                                                           =100x
                        Milk,       Fresh/Sub.                                                                                                        -100x
                        Cheese                                                                                                                        =100x
                        Milk.      Oried                                                                                                              .100x
                        Breab                                                                                                                         =100x
                        FlO”r/MiXSS                                                                                                                   =100x
                        Cereals                                                                                                                       =100x
                        RICC                                                                                                                          =100x
                        Coffee/Tea                                                                                                                    =100x
                        Soft   Drinks                                                                                                                 =100x
                        sugar                                                                                                                         =100x
                        Baby Food                                                                                                                     =100x
                        Fresh Fruit                                                                                                                   =100x
                        Canned Fruit                                                                                                                  =100x
                        Fresh    vegetables                                                                                                           =100x
                        Canned Vegetables                                                                                                             =100x
                        Frozen     vag/Frult                                                                                                          .100x
                        Detergent/Soap                                                                                                                =100x
                         Toiletries                                                                                                                   =100x
                        Paper    Products                                                                                                             =100x
                        nome Furnishings                                                                                                              =100x
                        nome Appliances                                                                                                                =100x
                        Men's    Clothing                                                                                                             =100x
                        Women's Clothing                                                                                                               =100x
                        Child’s     Clothing                                                                                                           =100x
                        Medlclnr                                                                                                                       =100x
                        Photo Suppll~S                                                                                                                 .100x
                        Reading     Matarid                                                                                                            =100X


                           a.         Forltew                shorn In Column E as “imports,”                 PleaSO    list         the   most
                                      irpoztsnt              suppllars:




                                                                   Page 41                                                                GAO/NSlAD-9040       Overseas   Allowances
Page 43   GAO/NSlAD-90-40   Overseas   Allowances
            Appendix I
            Comments From the Department           of Defense




         Along     with      these     studies,        which  will       be conducted        over the
next     few years,          immediate        attention      will     be given        to improved
instructions           and training           for survey      points       of contact        and better
accountability             in the field           through    use of letters             of appointment.
AlSO,      the DOD plans            to expand        the dissemination              of brochures       to
educate       Service        members about           the basics        of the Cost-of-Living              and
Overseas        Housing        Allowance        programs.         Finally,        processing      tech-
niques       which     are not dependent               on automation         will     be explored.
These interim            improvements           are now under          consideration.            Imple-
mentation        will     begin       in the next         few months.

         It is the DOD position                  that     data collection              and analysis
problems         in the Cost-of-Living                Allowance          program       or survey       problems
in the Overseas              Housing     Allowance         program         do not warrant           designa-
tion     as material           weaknesses        reportable         to the President              and the
Congress         under     the Federal         Manager's         Financial        Integrity         Act.       The
DOD does,          however,       plan   to take        action      to improve           performance         in
both      areas.       The specific           actions       planned        are described          in the
enclosure          which     responds       to all      findings         and recommendations.                  The
DOD intention            is to work conscientiously                      toward      instituting         lonq-
term improvements               which     integrate         additional         statistical          controls
and automation             into     management        of the overseas             allowance         programs.
The DOD is also              taking     immediate         action       to improve          management
 controls        and operating          efficiency          in the present.

          The   DOD appreciates             the   opportunity          to    comment       on the      draft
report.




                                       Deputy   Assistant     Secretary     of Defense
                                          (Resource     Management      and Support)

Enclosure
As stated




            Page 45                                                          GAO/NSIAD-9046         Overseas   AUowanres
                          Appendix I
                          Comments FromtheDrpaxtmrnl                     ofDefense




                          in other         locations.             The GAO also              noted      that     most Service
                          members        misunderstood              the purpose             of the cost-of-living
                          allOWa"Ce.             The GAO concluded                   that     the misunderstanding                     was
                          not surprising              because         the program's               purpose       and objectives
                          lack     specificity.               The GAO also               reported          that    the program             may
                          not be achieving                its     broad        objective          of maintaining               purchasing
                          power      parity        between        the United             States       and overseas             locations
                          at the lowest              cost     to the Government.                      The GAO concluded                  that
                          an alternative              methodology              of developing               cost    differentials,
                          based      on the expectation                    that      Service        members        would       utilize
                          Government-furnished                    on-base         shopping          facilities           to the extent
                          possible,          would      be more cost-effective.                            The GAO further
                          concluded          that,      at a time            of shrinking             Defense        budgets,          it may
                          be difficult             to justify            the expenditure                of several           hundred
                          million        dollars        simply         to enable           Service         members       to spend          inore
Now   on 0~   15-17       money on the local                   economies           in forelqn           countries.
                           (pp.     26-27/GAO          Draft      Report)

                          DOD RESPONSE:           Partially        concur.         The DOD agrees        that                    members
                          need to have a better               understanding           of the cost-of-living
                          allowance       program       and its      objectives.           To accomplish                        this
                          9o=1,       the Department        projects        having      the DoD-approved
                          information        brochure       explaining          the program      in formal
                          distribution         channels       during      FY 1990.

                          AS the GAO observed,                      79 percent        of Service          members      were
                          greatly          (13 percent)             or moderately            (66 percent)        satisfied        with
                          cost-of-living               allowances.             The DOD, therefore,               concurs       that
                          perceptually              the cost-of-living                allowance         is achieving         its
                          objective.              Whether        it    is doing       so in the most cost-effective
                          manner        is addressed             in detail        in the DOD response                to
                          RECOMMENDATION                1.     Indications          are that        members      are,      in fact,
                          already         making       cost-effective             purchase         decisions,        and that        it
                          is unfair           to expect          them always          to use commissary              and exchange
                          facilities            for    their        purchases.          Ther     fore,     the DOD does not
                          agree       that      current        cost-of-living             allowance        expenditures          are
                          unjustified.

                      0   FINDING        C:      Selected         Survev        R~SDO"S~S            Were      Not Reoresentative.
                          The GAO reported                 that      it     found     a number           of problems            with    the
                          data     collection            and analysis              used by the Per Diem,                     Travel,         and
                          Transportation               Allowance            Committee         to set cost-of-living
                          allowance          rates,        including           several        instances            where     the living
                          pattern        surveys        did      not represent             the military               population
                          actually         receiving           the cost-of-living                    allowance.            The GAO
                          reported,          for     example.           that    survey        officials            in Naples,         Italy,
                          selected         a sample          based        on a Department                of State        stratifica-
                          tion,      which       overrepresented                officers--while                 at two other
                          locations          some civilian                personnel        were erroneously                  sampled.
                          The GAO also             reported         that,       at several             locations,          a large
                          number       of members            were       surveyed        and who,           in turn,        responded--
                          but local          command officials                   forwarded           only      a small       proportion
                          of the survey              responses            to the Per Diem,                 Travel,       and Transpor-
                          tation       Allowance           Committee.              The GAO noted,               for    example,         that
                          at Ramstein            Air     Base,      Germany,          of a total             of 600 responses                to
                          a survey         directed          to 1,200          members,         only       120 were        actually
                          sent     to the Per Diem,                 Travel,          and Transportation                  Allowance


                                                                                                                                  page     2




                          Page47                                                                       GAO/NSIAD90-46             Overseas     Albwances
                     Appendix I
                     Commenta From the Department                  of Defense




                     DoD RESPONSE:               Partially          concur.         The DoD agrees              that
                     selecting          locations          via    statistical           techniques           may produce
                     more representative                   analyses.           Accordingly,            the DOD will
                     include        the     issue       of how to statistically                     select      representa-
                     tive     locations           in the comprehensive                  study       of the cost-of-
                     living      program.             In the interim,             however,          the DoD is not
                     convinced          that      its     current       tests     to determine             if locations         are
                     representative              are inappropriate.                    Periodically,             the DOD
                     computes         individual            indexes        for   each of the areas                 to determine
                      if they       appropriately              belong        in the grouping.                A recent
                     example        is the analysis               performed          in the Netherlands,                where     a
                     detailed         review        of reports           for   eight      locations          produced       new
                     grouping         arrangements.

                     As an immediate          measure        to determine             if separate         indexes
                     should      be prescribed        for      Southern        Italy,      the DOD has requested
                     a March       1990 livlnq     pattern           survey      and retail         price      report
                     from Sigonella          Naval   Air       Station,        which     is near        Comiso      but not
                     as isolated.          Reports      will      also      be required         for     Comiso      and
                     Naples      with  emphasis      on accurate             restaurant        prices.           A
                     determination         should    be made and implemented                      by June        1990.

                     The DOD does not agree                   with      the cost     savings        estimate        GAO
                     cited     for    Naples        and Comiso.             The savings        in these       areas     are
                     primarily        attributed           to lower         or missing       restaurant         prices.
                     If the DOD emphasis                  had been        to publish       separate        indexes      for
                     these     areas,       then      it would        have pursued         obtaining         missing      data
                     and would        have questioned               low prices.          HOWeVer,        as an index
                     was being        produced          based     on a collection            of five       reports,       the
                     Per Diem,        Travel,         and Transportation             Allowance          Committee
                     decided       that     sufficient/representative                    restaurant          data    was
                     available         from     the other         areas.

                 0   FINDING        E:       Selected          Living       Pattern         Surveys        Were     ComDleted          Out
                     Of seauence.               The GAO reported                 that       current        DOD methodology
                     calls      for     living         pattern         surveys      before         retail       price      surveys,
                     so that        data       collectors            know which           off-base         outlets        members
                     identify         as most frequently                    used.         The GAO found,               however,
                     that     at two locations                   in Europe,          living        pattern         surveys      were
                     done during             or after          the retail          price        surveys.           The GAO also
                     found      that,        in 1988 in Japan,                 three        locations          conducted        living
                     patter"        surveys          after       price      surveys--and             three       locations         did
                     not submit            any living            pattern       data       at all.          The GAO noted             that
                     the quality             and timeliness               of the 1988 living                   pattern       data
                     from Japan            was so poor             that     the Per Diem,              Travel,         and
                     Transportation                Allowance           Committee          requested          another       survey        in
Nowon pp 19-20       1989.        (p.      34/GAO        Draft       Report)

                     DOD RESPONSE:            concur.      The DOD agrees         that     living       pattern
                     surveys       must be completed          prior   to retail        price       surveys        and
                     that     new surveys         will  be required       if d survey           is not completed
                     properly.         Additional       guidance     will    be issued          to data
                     collectors        by the       end of 1989 to ensure           that      current       DOD
                     policy      is being       carried    out.     As preVioUsly          mentioned,           the DOD



                                                                                                                             Page      4




                     Page 49                                                                      GAO,‘NSIAD.90-%           Overseas Albvancrs
                      Appendix I
                      Comments From the Department                   of Defense




                      retail     price       surveys.           The GAO noted              that     the adjustment
                      factors      were      last     published           in 1981,         with     scme updating           to the
                      late    1970s.         The GAO further                reported         that     the Per Diem
                      Committee        may be overestimating                      the U.S.        cost     of living,
                      thereby      reducing        price        differentials              and causing          Overseas      cost
                      of living        to be lower            than      Intended.            The GAO noted           that,
                      according        to a Per Diem,               Travel,         and TranspcrtatiC"              Allowance
                      Committee        staff      member,         the Committee               is considering           using    the
Nowon pp 20-21        Bureau's       prices--even             though        they      include       only      a small      number
                      of the market            basket       items.           (pp.     35-36/GAO         Draft    Report)

                      DOD RESPONSE:          Concur.          The DOD agrees             that  adjustment       factors
                      used to update         U.S.      quarterly        retail       prices,     with   the
                      exception       of gasoline         and sane food            items      need to be
                      reviewed.         To date,       however,       efforts        to find     a method     to
                      update      them,   eve"     after      pursuing         the problem       with   other
                      statistical        agencies,        have bee"         unsuccessful.

                      The     factors      presently      being     used are                 based     on data     from the
                      “Urban        Family     Budgets    and Comparative                      Indexes     for    Selected
                      Urban       Areas"     report    published       by the                Bureau     of Labor
                      Statistics.            For budget       reasons,    the                Bureau     cancelled        this
                      report        in 1981.

                      The      DOD will         include      this      issue      in   its      comprehensive            study      of
                      the      cost-of-living             program.

                  0   FINDING         IJ:     U.&      of Statistical                Analvses          Results          in Arbitrary
                      Decision-making.                   The GAO reported                  that      the Per Diem,               Travel,
                      and Transportation                  Allowance            Committee           process         for      calculating
                      cost-of-living               allowances            and data          manipulation              is antiquated
                      and lacks           analytical           rigor.          The GAO found                that      (1) the ccst-
                      of-living           allowance          analysis           is largely           done with            desktop
                      calculators             and handwritten                 spreadsheets,               (2) averaging               is
                      done using            simple       arithmetic            means,         (3) standard             statistical
                      tests       are not being              used,       and (4) at times                  the price           analyses
                      excludes          high     and low prices                based       on "intuition"                 that     they
                      are unrepresentative.                        The GAO further                 found       that       the Per Diem
                      Committee           did not apply              statistical             tests       to the cost-of-
                      living        allowance          data      to determine              if its        decisions           were
                      appropriate.               The GAO concluded                   that      many of these                problems
                      could       be eliminated              by modernizing                and automating                 the data
                      analysis          process        and utilizing               standard          statistical              packages
                      to aid        in decision-making.                      The GAO also              learned         that      the Per
                      Diem,       Travel,        and Transportation                    Allowance           Committee
                      occasionally             did not receive                 all     the data          it requested              from
Now on pp 20-21       the cverseas             commands          during        the cost-of-living                    allowance-
                      setting         process.           (pp.      37-38/GAO           Draft       Report).

                      DOD RJXWON~:             Partially          concur.        The DOD agrees        that    cost-of-
                      living     allowance        activities           should      be automated.         The DOD also
                      supports       examination           of current         procedures     and ultimate
                      adoption       of valid        statistical          tests.       These   issues,      as
                      previously        noted,      will        be included        in the planned        study    and
                      subsequent        automation            of the cost-of-living            allowance       program.




                                                                                                                          Page      6




                      Page 51                                                                     GAO/NSIAD90-46           Overseas        Allowances
                    Appendix I
                    Comments From the Dqmtmrnt                     of Defense




                  according         to a Per Diem,           Travel,      and Transportation            Allowance
                  Committee         official,         it did    not have the authority               to task
                  specific        individuals           or organizations        to conduct         surveys
                  overseas,         which      has led to a lack           of accountability             for    the
                  surveys       and to variances              in the quality       and completeness               of
                  survey      data       from country         to country.       The GAO also           found      that
                  confusion         existed        at some locations          as to who was responsible
                  for     conducting          surveys      and who had conducted             prior     surveys.

                  The GAD also          reported       that     the Per Diem,            Travel,         and
                  Transportation            Allowance       Committee          staff     has provided             minimal
                  training       and guidance          to survey         coordinators            on standard
                  statistical         principles         of data       collection           and analysis.             The
                  GAO noted        that     most country          points       of contact          and survey
                  coordinators          had not received             any training             on the survey
                  objectives         or methodology.              In addi'-ion,           the GAO reported
                  that,       at the different           locations,          wiitten        instructions           were
                   inconsistent         and did       not conform          with      standard         statistical
                  principles.

                  The GAO also           observed        that    the Per Diem,            Travel,        and
                  Transportation            Allowance         Committee         did not document               decision
                  criteria        for    such things          as excluding          prices        or combining
                  averages.           The GAO found           that     the Per Diem,           Travel,         and
                  Transportation            Allowance         Committee         did not retain            previous
                  surveys       and summary          documentation            was retained           for    only      a few
                  years.        According         to the GAO.            As a result         of this         lack     of
                  documentation,            there       was not an audit            trail      and trend          analysis
                  could,      therefore,          not be performed.                The GAO concluded                that
                  many of the data              collection          and analysis          problems         can be
                  attributed          to poor       management         controls       over     the rate-setting
Now on pp 23-24   process.          (pp.    39-43/GAO         Draft      Report)

                  DOD RESPONSE:               Partially         concur.        As long         as surveys            are
                  conducted         by field          personnel,        and because            there      are very          few
                  individuals          who have had formal                  survey/statistical                 training,
                  it    is important           to permit          the overseas           commander          to pick         the
                  individual/office                most capable          to conduct            surveys,         in
                  accordance          with     Appendix         M of the Joint             Federal        Travel
                  Resulaticn.             Therefore,         the DOD does not agree                     that       survey
                  coordinators            should        be selected         by Washington             personnel.              The
                  DOD does,         however,          plan   several        enhancements            that      will       be
                  accomplished            during        the first       half     of FY 1990,            as follows.

                           Amend Appendix       M to recommend                     that      survey         duties     be
                           included    in performance     plans                    and      addressed           in
                           performance    ratings.

                           Amend      Appendix        M to      require         that:
                           --       commanders      assign      competent                  individuals           capable       of
                                    leading    survey      projects:
                           --       assigned         individuals           have         survey     duties        included           in
                                    performance            plans




                                                                                                                       Page         8




                    Page 53                                                                      GAO/NSIAD9046              Overseas     Allowances
                           Appendix1
                           Comments        From the Department             of Defense




                  r
                      that    the allowance             wa* adequate           or more than         adequate        (56 to
                      90 percent),          while       only     20 to 28 percent            of the personnel              in
                      Yokosuka       and Okinawa,             Japan,      respectively,         believed        the
                      housing      allowance         was adequate.                The GAO also        found     that
                      62 percent        of the        interviewees            had not been told            what     items
                      they    could     claim       under       moving-in         and moving-out         expenses--and
                      45 percent        were      not told        how the utilities             portion       of their
                      allowance        would      be calculated.               The GAO concluded            that      such a
                      lack    of understanding                of the moving-in           and moving-out             expenses
                      by Service        members         completing          the survey       could      (1) cause        a"
                      understatement            of costs         and (2) result          in the overall
                      allowance        being      inappropriately               low.    (pp.    47-49/GAO         Draft
Now on pp 26-28       Report)

                      DoD RESPONSZ:                 Partially          concur.       While   the GAO noted                       some
                      dissatisfaction                with     the      Over*eas      Housing    Allowance,                     this   may
                      be attributed               to factors           other    than    the allowance.

                      The Overseas               Housing          Allowance             program        is composed           of three
                      compo"e"ts:                rental,          utility/recurring                    maintenance,             and
                      initial/terminal                     occupancy           allowances.               The rental           allowance
                      accounts            for    approximately                 80 percent            of the Overseas               Housing.
                      Allowance,              the utility/recurring                         maintenance          allowance
                      accOu"t*           for     15 percent,                and the initial/terminal                       occupancy
                      allo"a"ce             for      5 percent.               The rental           portion       is designed             such
                      that       80 percent              of the rents              fall      at or below           the prescribed
                      rental         ceiling.              Review         of program           statistics           indicates          that
                      over       95 percent              of all         rental       costs       are covered           by the rental
                      tlllOW.?i”Cf?.            Very        few complaints                are received           regarding           this
                      component.                The other           two components                 are averages            --
                      approximately                  50 percent             of the members               will    have all          of their
                      incurred           costs         fully      reimbursed              and approximately                50 percent
                      will       be out-of-pocket                   *ome amount.                 Obviously,           not all
                      individuals               will       be satisfied              with      a" average          allowance.
                      Perhaps          a significant                amount         of dissatisfaction                   is related          to
                      reimbursement                  of up-front              expenses         on a per diem rather                    than
                      on a when incurred                       basis.          In this         regard,        the DOD has a
                      proposal           before          the Services              to replace            the initial/terminal
                      occupancy             allowance           with        a Moving-In            Housing       Allowance,            which
                      will       provide         up-front           funds.

                      The DOD agrees               that,       if members         are not apprised                of how their
                      initial/terminal                 occupancy         allowances          are computed,               co*t*       may
                      be underreported                 to the Per Diem,              Travel,        and Transportation
                      Allowance          Committee.              The DOD notes          that      detailed           information
                      concerning           overseas         housing        allowances          is contained              in both
                      Chapter         9 and Appendix              K of the Joint             Federal        Travel
                      Reaulations.               Three      months       in advance          of due date             for
                      submission           of housing            cost    data,      a survey        "kickoff"            letter        is
                      sent       to each country              point      of contact,           which      includes
                      instructions             for     reporting         costs      and a handout             for      members
                      detailing          which       expenses         should      be reported           for     initial/
                      terminal         allowance          purpose*.            Appendix        K contains            four
                      computation            examples         of the Overseas             Housing         Allowance             along
                      with       a Briefing          Sheet       which     local     commands         are encouraged                 to
                      disseminate            to incoming            personnel.          In addition,              the DOD has
                      designed         a" Overseas            Housing        Allowance         brochure         for      dissemina-


                                                                                                                                  Page      10

                      --




                           Page 55                                                                          GAO/NSLAB9046              OverseaS AlhvanCeS
                      ApprndixI
                      Comments       From the DepartmrntofDefense




                       rigorous         statistical          procedures--resulting               in incorrect
                      decisions           in two of six           locations         it tested.        The GAO
                      concluded           that      the nonstandard          procedures        also     resulted   in
                      officers          being       under    compensated          for  utility       expenses,    while
                      enlisted          personnel         were overcompensated.                 (pp.    51-52/GAO     Draft
Now on pp 28-29       Report)

                       DOD RESPONSE:             Concur.        The DOD supports            the use of standard,
                       rigorous      statistical           procedures        in prescribing           these
                       allowances.           As stated         above,    the DOD will          pursue       either
                       utilizing       resources         from within         DOD, where        available,          or
                       hiring      an independent            contractor        to help      the Per Diem
                       Committee       automate        its     analysis      and rate-setting             procedures.
                       In the interim,            the DOD will          apply     appropriate         statistical
                       procedures        wherever        possible.

                  0    FINDING       0:       Arbitrary           Exclusion        of Data.         The GAO reported
                       that    the Per Diem,                 Travel,        and Transportation             Allowance
                       Committee          edited        utility        costs     reported       by Service         members     at
                       overseas         locations            and excluded          data     deemed extreme.             The GAO
                       found     that      memoranda            were not kept            on which      figures       were
                       excluded--and              the criteria              for  judging       what    should      be excluded
                       was the previous                 year's       exclusions.            The GAO concluded             that
                        (1) the      lack       of automated              record     keeping      and (2) the absence
                       of adequate            statistical            guidelines          in decision-making--casts
                       doubt     on the adequacy                  and fairness           of the data         used to compute
                       this    portion          of overseas            housing       allowance.           (pp.   52-53/GAO
Now on pp 29-30        Draft     Report)

                       DOD ReSPONSE:         Partially         concur.       The DOD agrees     that  formal
                       file    memoranda     were      not kept       on excluded     data.   However
                       records    of excluded          data    points     are maintained.      Under    its
                       proposed     study    and subsequent            automation     of the overseas
                       housing    allowance!         the DOD will         address   GAO concerns.       This
                       should    be accomplished            during     FY 1991.

                  0    FINDING        P:     Undemavment               of Movinq-In              and Moving-Out
                       EXDeIISeS.          The GAO reported                 that       procedures          for      calculating
                       the moving-in             and moving-out                allowance          were not always
                       followed--which                resulted         in some members               not being            fully
                       reimbursed          for     allowable           expenses.             The GAO found              that     the
                       moving-in/moving-out                    expenses           in Germany,          Italy,         Spain,        and
                       the United          Kingdom         were based            on the average               amount        of time
                       Service       members         spent        in country,            rather      than       the average            time
                       spent      in private            housing--resulting                   in Service           members
                       actually        receiving            less     money than            they     should        have.         The GAO
                       also     reported         that,        because        none of the points                   of contact
                       reported        the average              length       of time         in private           housing         in 1987
                       and 1988,         the Per Diem,               Travel,          and Transportation                  Allowance
                       Committee         used 34 months                to compute            the monthly            allowance.
                       The GAO found             that       the average             time     spent     in private             housing
                       actually        ranged         from      18 to 24 months--resulting                          in Service
                       members       not receiving                a" adequate            allowance          for     moving-in          and
Nowon pp 30-31         moving-out          costs.            (PP.      53-54/GAO           Draft     Report)

                       DOD RESPONSE:    Concur.                     To resolve             the     underpayment       of       moving
                       expenses,  by the end of                     October,         the         DOD will    dispatch          a


                                                                                                                             Page      12
                  Appendix I
                  Comments From the Departmrnt                       of Defense




                  DOD RESWNSE:       Partially                       concur.     The            DOD does not agree      that
                  survey  points   of contact                        need guidance               on sampling   techniques
                  because  a census     rather                     than    a sample             survey  is conducted      for
                  nonrent  cost  data.

                  I" regard     to methods      for collecting          and                         analyzing          nonrent    data
                  and prescribing       appropriate       allowances,                               see the          DOD responses
                  to FINDINGS      L and S, s;hlch      address       these                           issues.

              0   FINDING      S:    Qualitv       Variance.            The GAO reported               that    no
                  standards       have been established                   for     review         of survey     forms       for
                  complete"ess,          accuracy       and/or        clarity--resulting                  in the
                  quality      and completeness             of survey            data      varying      from   country
                  to country.          The GAO noted           that       the deqree            of involvement          of
                  coordinators         in Yokosuka,           Japan,         appears         to have produced           a
                  significant        adlustment         in the 1988 allowances                      in that      city.
                  The GAO noted,          however,        that      few other            locations        took   smilar
Now on D 32       measures.         (pp.     57-58/GAO        Draft       Report)

                  DOD RESPONSE:                  Partially              concur.           The DOD does not agree                        that
                  standards             are lacking.                  While       there      are areas            that      cd" be
                  improved,             both     Appendix             M of the         Joint        Federal         Travel
                  Reaulation--Reporting                          Procedures             and Command Responsibilities
                  for     Travel          and Station               Per Diem Allowances                     for Members            on Duty
                  Outside          the continental                    United        States--and            the Memorandum                 for
                  Housing          Report         Project           Officer         which       is sent         to each point               of
                  contact          3 months            prior        to their          housing        cost       report        due date,
                  provide          information               regarding            review        of forms          for     complete-
                  Iless,      accuracy,              and clarity.                 While      the DOD strongly
                  recommends              that       the procedures                 outlined          in these          documents           be
                  closely           followed,            the DOD recognizes                     that      some local            commands
                  may ignore              this       guidance.              Instructions             in Appendix              M will        be
                  strengthened                to emphasize                the importance                of Command support                     in
                  reporting             cost      data.          The DOD will              also      revise         its     instruction
                  letter         to points             of contact             emphasizing            survey         problems          cited
                  by the GAO.                 Each of these                 .sources       will      indicate           that
                  commanders              are responsible                   for     supplying           reports         and that
                  noncompliance                 will       result         in no adjustment                  to allowance
                  levels.             This      will       be accomplished                 during         FY 1990.            As
                  previously              indicated,             in order           to improve            both      the cost-of-
                  living        and overseas                 housing          allowance           programs          in response             to
                  GAO suggestions,                     to include             more face-to-face                   training         of
                  survey        coordinators,                  the DOD plans               to study           the possibility                 of
                  hiring         a" additional                 person         to structure,               coordinate,             and
                  monitor          the training                and competency                of those           administering
                  surveys.              A decision             will       be made by March                  1990.

                  As indicated         in the DOD responses             to other         findings,      the DOD
                  will    also    study   other    methods      for     collecting           and analyzing
                  nonrent      data.     We believe      that     alternatives             which    do not so
                  heavily      depend    on country     point       of contact           involvement       may
                  provide      more statistically          defensible           results.

              0   FINDING    T:      The 50 Percent       Recoverv     Value      Rule.     The GAO
                  reported      that    a DOD legislative        proposal       to allow     up-front
                  reimbursement         of moving-in      expenses     includes        up to $1,000                                       for


                                                                                                                                  Page      14




                   Page 5Y                                                                             GAO/NSIABYO-M                Overseas        Allowances
                         Appendix1
                         CommentsFromtheDepartmrlltofDrfensc




                         rent    quarters         at or below           their     allowance            ceiling--resulting
                         in (1) enlisted              members       residing        in substandard                 housing      and
                          (2) rental       survey       update*         showing       that       the ceiling             needed     to
                         be reduced.            The GAO also            found     that,        1 year        after       the Per
                         Diem Committee             conducted         a special          study       of the rental
                         allowance        ceiling       at Torrejon,            the ceiling              was lowered           because
                         many new arrivals              were not moving                into      better        housing.         The
                         GAO reported           that,     while       the adjustment               appeared           to be
                         appropriate,           1 year      may have been insufficient                           time      to  note
                         any change         in housing--because                 the commander's                  directive         on
                         renting      at or below           ceiling         was still          in effect            for    the first
Now on p 34              half    of that        year.       (pp.      60-62/GAO          Draft       Report)

                         000 RESPONSE:           CO”C”lT.        The Do0 agrees         with    the GAO that         local
                         command policy,           when inconsistent           with     overall       overseas
                         housing     allowance        policy,       can have a negative             effect     on the
                         rental    portion       of the system.             As previously         stated,      language
                         will    be added      to the Joint           Federal    Travel      Resulation        to
                         address    proper       rental       procedures.

                     0   FINDING       W:       Currency          Adjustment            Process.          The GAO reported
                         that     the currency             rate      adjustment             process       is a factor            for     both
                         the cost-of-living                   allowance           and overseas            housing         allowance
                         programs--and             the Per Diem,                Travel,         and Transportation
                         Allowance          Committee's            goal       is to avoid           continually             changing
                         the allowances,               while       at the same time                 minimizing            the exchange
                         rate     discrepancies               that     do arise.              The GAO found             that,      because
                         the Committee             had substantial                 discretion           in administering                 the
                         process,        the Committee               exchange           rate     adjustment          procedures
                         were     not always           followed.              The GAO also            found       that,       when the
                         allowance          rate     was changed,               the amount          of change           sometimes
                         differed         from what was indicated                         by the Committee                formula.           In
                         evaluating           the effects            of the discretionary                      adjustments,           the
                         GAO found          that,      had the procedures                     been followed,              the Service
                         member would             have been just                about       as well       off.       According           to
                         the GAO, however,                  there      would       not have been any periods                         with
                         a" accumulated              difference             larger        than     about       17 percent
                         compared        with      a" actual           difference             that    always        exceeded
                         20 percent--a*              a result          of the discretionary                     adjustments.
Nowon pp 37-38            (PP.      65-67/GAO          Draft       Report)

                         000 RESPONSE:            Partially      concur.       The DOD agrees         that     there
                         are many instance*               when the DOD should         not intervene           with   the
                         system.       The Per Diem,          Travel,      and Transportation           Allowance
                         Committee      staff      has implemented          a more "hands-off"           approach        to
                         the system.          The 000 does not,            however,    agree     that     all
                         interventions          are inappropriate.             There   are cases        where
                         intervention         is useful        to preclude      making     unnecessary,
                         insignificant          changes.

                     0   FINDING      X:     Time Lass     from Survev         to Implementation           of
                         Chanqes.        The GAO reported           that    one factor     affecting         the
                         timeliness        of the overSea*          allowances      and cost-of-living
                         adjustments         is the lag      from when the survey            data      are collected
                         to when the changes            are actually         made to the rate*.              The GAO
                         concluded       that,    since    allowance        and adjustment         rates     are not
                         retroactive,          any inCreaSe       or decrease       as d result          of new data


                                                                                                                                 Page      16

                 L
                           Appendix I
                           Comments From the Department                  of Defense




                    r
                         (2) whether    a rate-setting          process   should   be established                                  with
                        the explicit     assumption        that    goods  and services      available                               on
                        base at lower      cost     would    be purchased     at those    facilities.
See   comment   1        (PP. 43-44/GAO      Draft     Report)

                        Do0 RESPONSE:            Partially         cmcuf.          The DOD agreed           with     the
                        appropriateness            of considering            the GAO proposal,              but
                        determined        that     use of proposed             alternate       cost    basing        should
                        not   be implemented.               Based     on the findings,            however,         the DOD
                        and other        Executive         Branch     Agencies        composing      the Per Diem
                        Committee        support       continuation          of cost-of-living              allowance
                        being      based    on where        members       shop.       While    one can state             that
                        commissaries,          exchanges,          and other         Government      facilities            could
                        be used,       to force        members      to do so exclusively               is impractical
                        and inappropriate.

                        As in the United                   States,         ~verseae           members      make purchase
                        choices        based         on multiple              criteria,          such as price,              quality,
                        availability,                location          and convenience.                  The question              that
                        must be asked                is whether            it      is appropriate             to concentrate              on
                        just       one of these              factors--location.                     Implementation              of such a
                        program        would         also      introduce             significant         difficulties.                For
                        example,           how far         should       members           be forced        to travel          to use
                        Government            facilities?               DO we have special                    rules      for
                        perishable            items        such as food?                   The answers          to just       these       two
                        questions           point        out the         fact        that     a" already          challenging
                        system        will      become         eve"     more cumbersome                and complex             should
                        members         be forced            to buy only               at commissaries/exchanges.

                        To determine            if    significant          savings      would        occur   under     this
                        proposal,         the DOD conducted                a test     at locations           that    account
                        for     over     80 percent           of Service        members        receiving       a cost-of-
                        living       allowance.             The test       assumed      that       members     purchased
                        solely       in the commissary               or exchange,           if the market           basket
                        good/service           was available             in those       facilities         in both       the
                        United       States        and overseas.             I" essence,           there   was little
                        difference          encountered           in   the prices         for      these   goods/services.

                        Because       a significant              portion         of the market           basket         is composed
                        of services            not always          available          at Government             installations
                         (restaurant           meals,       telephone          service,        domestic         service,          auto
                        insurance,           transportation              services         and recreational                events,
                        etc.    ( must       be purchased            on the local            market),        a cost-of-living
                        allowance          is still        warranted           for    all    test     locatrons.              The
                        primary        factor       related        to cost-of-living                allowances            in the
                        foreign       areas       tested        was the weakness               of the dollar,               which
                        drives       up the cost            of services/goods                on the local            market.
                        This     sane major           factor       will      continue        to drive        living         costs
                        even     if    forced       commissary           and exchange            usage      were      implemented,

                        In all      areas     tested,       except         Japan,    the DOD found          that     members
                        already       were maximizing              their      use of commissaries             and
                        exchanges        because      there        was no difference              between     actual      and
                        test    location        indexes.           In other       words,      the present        system
                        already       considers       availability             and,    therefore!         is a truer
                        measure       of compensation              needed       to cover      additlonal        overseas
                        costs.        The primary         reason         indexes     decreased         in Japan      (see


                                                                                                                              Page        18

                    L




                             Page 63                                                                     GAOINSIAD-9046            Overseas     AUowances
                 management        controls        over  t5e current       data collection                      and
                 analysis       processes        by requiring      the Per Diem,        Travel,                  and
                 Transportation           Allowance      committee     to:

                          develop      guldelines      on the minimum      training                    survey
                          coordinators          and points   of contact      at the                  overseas
                          commands      should     haxe <n the cost-of-living                          allowance
                          methodology:

                          communicate           clear   deltqatlons        of authority       and
                          responsibility            so that      overseas     commands     can be held
                          accountable           for  the quality         of their    surveys;

                          utilize       prices       from the Bureau      of Labor      Statistics       for
                          the applicable             items    :n the market     basket     rather     than
                          adlusting         the prices        from the quarterly        Washington,        D.C.,
                          retail      price      survey--and       'where these    prices       are not
                          available,          develop      new measures     for  average        U.S.  data
                          that     would      make the pr-ices        more accurate       and timely:

                          modernize           and automate          the cost-of-living             allowance
                          analysis          process--to         Include       standard     statistical              testing
                          and the          documentat:or          of criteria         used in decision
                          making:          and

                          test    the market     basket     assumptions          to determine       whether
                          the basket     adequately       reflects        high-cost      items     unique   to
Nowon pp 24-25            overseas    locations.        'pp.      44-45/GAO        Draft   Report)

                 000     RESPONSE:           Partially        sr~ncur.

                          The 000 agrees            that      training          guidelines        can be improved.
                          The Per Oiem,           Travel,         and Transportation                 Allowance
                          Committee        will     request         assistance           from OoO-level          training
                          offices       to develop          a List       of guidelines            related      to
                          understanding           cost-of-living                methodology          and conducting
                          surveys.         The 000 wil,             send instruction               letters     to the
                          Points      of Contact          1nstructinq            them to read Appendix                 M
                           (reporting        procedures,            before       beginning        the survey
                          process.         The instruction                letter       will    also      cite  the
                          living      pattern        suriey       problems          the GAO encountered              and
                          will      emphasize        that     copies        of the survey            summaries        should
                          not be discarded               and -hat         individual          questionnaires
                          should      be forwarded            wtth     the survey            summaries.        The
                          letter      will      be prepared           before        the end of 1989.

                          Appendix          M of the         Joint       Federal          Travel     Reoulations         will
                          be expanded            to provide            more instructions                for    conducting
                          Living        Pattern         and Retall           Price        Surveys.        AlSO     to avoid
                          having        all    institutional               knowledge           lost   each t&e          a new
                          point      of contact            1s assIgned,              instructions           in Appendix        M
                          also     will      indicate          that      formal        files/manuals           should       be
                          maintained           by the country                point        of contact        which     indicate
                          the offices/indivlduais                        who are charged              with     conducting
                          surveys.           Files       shoul-i       refer       replacements           to instructions
                          1n the Joint             Federal          rravel       Requlations          and should          also
                          note     the areas/facil::iPs                      to be surveyed             each year.


                                                                                                                   Page       20




                       Pagr 6.5                                                               GAO/NSIAD-YO-46OvcrseasAUowances
                                 Appendix I
                                 C,omments From the Department           of Defense




                                                                 _       --
                         r
                                  weaknesses          reportable          to the President          and the Congress.              The
                                  actions        planned       to correct       the problems           identified       in this
                                  report       will,      nevertheless,         be tracked       and monitored            by the
                                  Deputy       Assistant         Secretary      of Defense         (Military       Manpower      &
                                  Personnel          Policy)      who serves        as Chalrman           of the Per Diem,
                                  Travel,        and Transportation             Allowance       Committee         and also      has
                                  responsibility             for    implementlnq        the proposals.             status
                                  reporting          ~111 begin         in the    first    quarter          of FY 1990.

                             0    REC013MENOATION 5:                The GAO recommended            that    the Secretary        of
                                  Defense      direct         the Per Diem!         Travel,     and Transportation
                                  Allowance          Committee       to submit        a report     to accompany        the 000
                                  legislative            proposal      on the reimbursement              of moving-in
                                  expenses,          that     would    address      the resale       value    of items
                                  included         in the allowance:             the definition          of what    constitutes
                                  a reasonable             expense;     and the appropriateness               of a worldwide
                                  $1,000      ceiling         on items      purchased       to make leased        housing
Now   on 0      35                habitable.              (p. 63,GAO      Draft     Report)

                                  000 RESPONSE:             Nonconcur.            The legislation          in question         was
                                  submitted        before      the draft          GAO report       was prepared.
                                  Additionally,           language      in the FY 1990 House Armed Services
See   comment        4            Committee        authorization          bill       does not      include      the specific
                                  implementation            details    that        the GAO projected            would     be
                                  elements       of legislation.               It    indicates       only    that    up-front,
                                  lump-sum      payments          are permissible.              The 000 will         formulate
                                  implementation            details    after         enactment       of the legislation.

                             0    RECONMENOATION            6:    The GAO recommended       that    the Secretary     of
                                  Defense      identify        the Overseas     Housing   Allowance       survey  methods
                                  as significant            weaknesses     in the Do0 Federal         Managers'
                                  Financial       Integrity        Act annual    reports.        (p. 63/GAO Draft
See comment          3            Report)

                                  -RESPONSE:           No"co"c"~.           The Do0 agrees               that     the identified
                                  overseas   housing      allowance          survey        problems        exist.         The 000
                                  does not,   however,        agree      that     they        warrant      designation          as
                                  material   weaknesses         reportable            to the President               and the
                                  congress.     The actions          planned          to correct         the problems
                                  identified    in this       report       will,        nevertheless,            be tracked         and
                                  monitored   by the Deputy            Assistant           Secretary         of Defense
                                   (Military  Manpower        & Personnel             Policy)        who serves          as Chairman
                                  of the Per Diem,        Travel,        and Transportation                 Allowance
                                  Committee   and also        has responsibility                   for    implementing          the
                                  proposals.      Status      reporting          will      begin       in the      first     quarter
                                  of FY 1990.

                             0    RECONHENDATION       7:         The GAO recommended    that  the Secretary                         of
                                  Defense   direct     the        Per Diem,  Travel,  and Transportation
                                  Allowance     Committee          to:

                                          develop    and       document      uniform     policies      and        guidance,       based
                                          on standard          statistical        methods--to       eneure         that     surveys
                                          are accurate,            complete,      and representative;

See comment          2                    clarify       the    guidance       for     fully   reimbursing          utility
                                          expenses        so   that    Service        members    at the        same locations


                                                                                                                              Page        22




                                  Page 67                                                             GAO/NSlAD-9046         Overseas          Allowances
    Appendix I
    Comments From the Department            of Defense




r
       realistically             be rmplemented           by the survey           coordinators
       or,      instead,       the Department           can employ         professiOna
       survey        takers,      as discussed          in the DOD response               to
       FINDING         C.    In the    interim,         the DOD will          strengthen
       language          in the Joint        Federal        Travel     ReaulatiOn         to
       provide         more instructions            about      conducting         living      pattern
       surveys         and will     emphasize         the reporting           problems        cited
       by Khe GAO in the survey                   "kickoff"        letters,          as noted       in
       the DOD response             to FINDING          C.

       The DOD agrees        that         automation      of these           processes       should
       be evaluated.         This         will    be accomplished              after     the cost-
       of-living     allowance            study     is concluded,            which     is expected
       to be completed         by       the end of FY 1991.




L
                                                                                             Page        24




     Page 69                                                              GAO/NStAD-904           Overseas    AUowancrs
Appendix II

Major Contributors to This Report


                        John K. Harper, Assistant Director
National Security and   Anthony E. Collinsworth, Evaluator-in-Charge
International Affairs   Gary L. Petrovich, Evaluator
Division,               Tetsuo Miyabara, Social Science Analyst
                        Thomas Melito. Economist
Washington, D.C.        Carolyn S. Blocker, Writer-Editor


                        Katherine M. Iritani. Site Senior
Far East Office

                        Michael J. Kennedy, Site Senior
European Office




(381099)                Page 71                                   GAO/NSlAD40-46   Overseas Allowances
               Appendix I
               Comments From the Departmrnt   of Defense




               The following are GAO’S comments on the Department of Defense’s letter
               dated November 2, 1989.

                                              _-
               1. We have modified our text accordingly and have deleted this
GAO Comments   recommendation.

               2. We have deleted this recommendation from our report.

               3. We have deleted this recommendation because       DOD’S   proposed actions
               address our concerns

               4. The final proposal presented to the Congress differed from an earlier
               draft. and we have changed our report to reflect this.




               Page 70                                     GAO/NSIAD-9046    Overseas Allowancrs
                             Appendix I
                             Comments From the DrparTmrntofD~fense




                                                                                                                                                                -

                                      are treated      equitably               regardless             of     the     Military           Service
                                      to which    they    belong:              and

                                      assure      that     local    command policy        directives       or
                                      information         provided       with   respect     to housing       do not serve
                                      to undermine           the intent       of the Overseas        Housing    Allowance
                                      program       which      is to permit       Service     members    to obtain
Nowonp          35                    adequate        housing      overseas.        (pp.  63-64/GAO      Final    Report)

                             DOD RESPONSE:              concur.

                                      Either      utillzinq        Department      resources,       where   available,
                                      or a contractor,             the DOD will       develop      and document
                                      uniform       policies       and guidance,        based   on standard
                                      statistical           methods,     to ensure      that  surveys     are accurate,
                                      complete,          and representative.            This  will     be accomplished
                                      by FY 1991.

                                      Guidance         for   fully   reimbursing         utility                     expenses          has been
                                      provided         to the relevant         services          and               language          to this
                                      effect      will     appear    in the Joint          Federal                    Travel
                                      Requlation,          effective      October       1, 1989.

                                      Language        in the Joint         Federal     Travel       Resulations         will   be
                                      strengthened         to preclude           commanders       from advising          members
                                      to rent      either      above     or below      the prescribed            rental
                                      ceilings,         as this    results         in a distortion           of the overseas
                                      housing      allowance       ceiling-setting            process.          Language     will
                                      be implemented           by the second          quarter       of FY 1990.

                         0   RECOMMENDATION             8:    The GAO recommended                          that  the Secretary                  of
                             Defense       direct       the Chairman    of the Per                         Diem,   Travel,   and
                             Transportation             Allowance    Committee  to:

See   comment        2                eliminate         the discretionary                   element          in     the     currency
                                      adjustment          process:

                                      develop       statistical              sampling        procedures               for       collecting
                                      living       pattern          information;            and

                                      evaluate         the cost-effectiveness                       of      automating       the system
                                      for     collecting      and analyzing                   living          patterns      and retail
                                      prices,         and to automate         the           system          if appropriate.
Nowon     p 42                         (PP. 73-74/GAO         Draft       Report)

                             -RESPONSE:                 Partially           concur.

                                      The DOD partially              agrees      with  eliminating          the
                                      discretionary            element      in the currency           adjustment                        process.
                                      There      are some instances              where   intervention           is                   useful      to
                                      preclude       insignificant            changes    as noted        in the                      DoD
                                      response       to FINDING         W.

                                      The DOD agrees         with    the development           of statistical
                                      sampling     procedures        for   collecting       living      pattern
                                      information,        as long      as the study       of the cost-of-living
                                      allowance      program      produces       a method      that   can


                                                                                                                                         Page        23


                                                                                                                                                                     J
                             Page68                                                                         GAO/NSLAD-9046               Overseas         Ahwances
                        Appendix I
                        Comments From the Department               of Defense




                               Files     should   also    contain      copies    of at least     2 prior                    year
                               surveys      for reference        purposes     as well   as instruction
                               letters      and feedback       information       from the Per Diem
                               committee.       Appendix       M will      be rewritten   during       the                first
                               half    of FY 1990.

                               The DOD agrees            that     communication            concernlnq          the
                               delegation         of authority            and responsibility                at overseas
                               commands        can be improved.               Currently,           Appendix        M assigns
                               responsibility             for   reporting          to the "senior             Officer     of
                               the Uniformed           Services         in each country              or locality,         or
                               the designated            representative."                 This     senior      officer
                               assigns        a Point       of Contact         for    allowance          matters.
                               Appendix        M will       be revised         to require          a letter         of
                               appointment          deslqnating           responsible          official(s).

                               Appendix         M    will      be strengthened          by stating        that
                               commanders            should      assign      an individual         who is competent
                               at leading            survey      projects,        to include       selecting        a random
                               sample       for      living      pattern       surveys.      To improve
                               accountability,                 we will     also     recommend      that     survey    duties
                               be included              in performance          plans    and addressed           in
                               performance              ratings.

                               The DOD agrees              and is already               "sing     current       Bureau   of
                               Labor      Statistics          data      for      gasoline       and food        items.     since
                               prices       for     most U.S.        market         basket      items      are no longer
                               provided         by Bureau         of Labor          Statistics         for    any areas,
                               except       Washington,           D.C.,       the DOD plans            to have a
                               contractor           explore       the current             procedures         and suggest       a
                               proxy      for     average      ti.S.      retail        prices.

                               The DOD agrees             that     the cost-of-living               allowance         system
                               should       be modernized            and automated.             As indicated            in the
                               DOD response           to FINDING         C, the DoD will              conduct      a
                               comprehensive            study      of how cost-of-living                  data   are
                               collected,          analyzed,         and processed.             The study        will
                               utilize        rssources        within     the Department,               if available,          or
                               an outside          contractor.           The study          should      conclude        not
                               later      than     FY 1991.          Automation        will     be included           and will
                               cover      the "se of statistical                 testing         and documentation             of
                               criteria         used    in decision-making.

                               While   the DOD does not agree          that    the current       methodology
                               is incorrect,      it does agree      to examine     the     issue     in the
                               above-mentioned       cost-of-living       program    study,      which
                               should    be concluded       by the  end of FY 1991.

                    0   RECOIGENDATION       4:    The GAO recommended           that     the secretary     of
                        Defense   identify      the described        data   collection        and analysis
                        problems    as significant         weaknesses     that      adversely     affect   cost-
                        of-living    allowances       in the DOD Federal            Managers'    Financial
See   comment   3       Integrity    Act annual       reports.        (p. 45/GAO Draft         Report)

                        -RESPONSE:                  Nonconcur.        The DOD agrees            that      the identified
                        cost-of-living              allowance      problems  exist.             The      DOD does not,
                        however,       agree        that    they   warrant  designation                as material


                                                                                                                     Page         21




                         Page 66                                                              GAO/NSIAD-904            Overseas Allowances
                  -

                          table      below)        was that        members     purchased        a significant        amount
                          of their         fruits,     vegetables,            and other       food     items     (at higher
                          cost)      from       local  merchants          because      these      products      are
                          frequently           not available           in commissaries.              Based     on past
                          visits,        quality,      availability            and convenience            were major
                          factors        influencing         local       purchase      decisions.           The areas
                          tested       and the results              developed       were    as follows:

                                                        _      COLA Index                             Percent   of Total
                          Area                          Actual     rest            uf.z               COLA Recipients

                          Germany     *                     112         112               0                  52.0
                          Italy    *                        108         108          0                        2.8
                          United     Kingdom      *         I12         112          0                        5.4
                          Oahu                              108         108          0                       12.1
                          Okinawa,      Japan               132         124        - 8                        5.7
                          Yokosuka,       Yokota,
                            camp zama,       Japan          136         126        -10                     3.5
                          Sample                                                                             81.5
                                  *     All    localities          within       1 hour           of    commissary/exchange

                          The GAO noted             that   the DOD should         weigh     any SsVinqs         resulting
                          from      forced      commissary/exchange           shopping        against      its    policy    of
                          encouraging           Service      members     to participate           in local
                          communities.              Because     savings    would      occur     only   in Japan,          a
                          country        where      the GAO noted        a lower-than-normal             allowance
                          satisfaction            level     (see FINDING      B),     implementing         such a system
                          could       cause     Service      members     in that      area    to feel      eve"     less
                          satisfied         with      the cost-of-living          allowance.

                          Although          immediate           savings      possibilities           are presently           limited
                          to Japan,           a likely          negative       impact       to morale        and welfare         is
                          likely         across       a      current       cost-of-living            allowance       recipients.
                          Any decrease              in morale          can have the potential                  for adversely
                           impacting          retention.             Lowering        allowances         in Japan     is a
                          particularly              sensitive          morale/welfare           issue      since   approxi-
                          mately         75 percent           of projected           reductions         for most areas           in
                          Japan        involve        the availability               of fresh      vegetables,         fruits,
                          and other            food     items.

                      0   RECOMMENDATION              2:    The GAO recommended              that    the Secretary          of
                          Defense       direct       the Per Diem,         Travel,        and Transportation
                          Allowance         Committee         to develop      cost-of-living            allowance       rates
                          at a test         locat1o",         uslnq    the alternative            approach--as        a means
                          of determining             how rates       set using        the alternative           approach
                          would     differ       from     rates     set using       the current         methodology.
See comment   2           (p. 44/GAO Draft               Report)

                          DOD RESPONSE:   Partially    concur.                            Test        completed.       Refer      to
                          DOD response  to Recommendation                         1.

                      0   -3:                          The GAO recommended            that,      until  the issue
                          of how      cost-of-livlnq      allowance      rates     should        be set   is
                          resolved,        the Secretary      of Defense       should       strengthen      the



                                                                                                                             Page      19




                          Pagr 64                                                                       GAO/NSIAD-9046         Overseas AUowanees
                  -

                          is lost      during      the time  lag.       The GAO reported           that,       while
                          many factors          contribute   to the lags,        a principal           factor
                          appears      to be the labor-intensive            nature      of the data
                          collection        and analysis     of the living         pattern      surveys          and
                          retail     price      surveys.    The GAO concluded           that    the      following
                          two changes         to the data    collection      process        should       be made:

                                  the number        of people            required         to complete       living      pattern
                                  survey      forms    should           be reduced          by using     standard
                                  statistical         sampling           procedures;          and

                                  putting  both      of the cost-of-living         allowance       surveys     into
                                  a format   that      could   be screened    by computer         and increas-
                                  Inq automated        support   so the analyses        necessary       to
                                  compute  cost-of-living          allowances    for    a location        or
                                  country  could       be done in a matter      of minutes         or hours,       as
                                  opposed  to weeks         or months.

                          The GAO concluded              that     timeliness             does not appear       to be a
                          major     problem   in        administering              the    overseas   allowance
                          programs,       but it        can nevertheless                 be improved     (pp.    68-73/GAO
Now on pp 39-40           Draft     Report)

                          DOD RESPONSE:             concur.         The         DOD agrees     that     timeliness         can    be
                          improved.

                          The DOD also                agrees      that      increasing      automated       support       for    the
                          cost-of-living                 program         (and also     the overseas         housing
                          allowance             program)        is a" essential            upgrade     requirement.             The
                          plan       is to first             study       how the cost-of-living             allowance         index-
                          setting           process        can be improved,            then     automate      that    plan.        The
                          study        will       also     address        optically      screening       reports      by
                          computer            to determine            if    feasible.       Efforts      should     be
                          completed             during       FY 1991.

                          In addition,          the DOD agrees          that   the number          of living         pattern
                          surveys      can be reduced,           especially        if   it employs          professional
                          survey     takers.          The DOD will        also   indicate        in Appendix           M that
                          if   local     capability       permits       development         of scientific            random
                          sample     survey,        which   would     require      less     than     the    150 reports
                          presently       required,       then     it should       be accomplished.                If not,
                          the 150 sample            will  be required.           This     change       will    be issued
                          by the end of 1989.


                                                                    l    ****



                                                               RECOMMENDATIONS


                      0   RECOMMENDATION:                 The GAO recommended              that    the Secretary       of
                          Defense,       in consultation            with    other    Executive        Branch    Agencies
                          that      are members        of the Per Diem,           Travel,       and Transportation
                          Allowance        Committee,        resolve      the issue        of (1) whether
                          cost-of-living           allowance        rates     should      be set based       on a survey
                          that      asks   service       members      where    they    shop overseas         or


                                                                                                                         Page     17

                  -
                              Appendix I
                              Comments From the Departmrnt                    of Defense




                                                                _-
                      r
                              costs       for     Items     like       kitchen         cabinets,          stoves,         and
                              refrigerators              required           to make privately                 leased        quarters
                              habitable.             The GAO noted               that      the     $1,000        limit      was calculated
                              by using          a 50 percent              recovery         value      for      items      that     could     be
                              resold.          The GAO found,                 however,         that     (1) the          50 percent
                              recovery          rule     was an arbitrary                  detemination                not based         on any
                              objective           analysis,           (2) reasonable               expenditures             were     not
                              defined,          and (3) no analysis                    was performed               to determine
                              whether         country-specific                  ceilings         may be more equitable                    than  a
Now   on pp   32-33           single,         worldwide          ceiling.             (pp.     58-59/GAO           Draft      Report)

                              DOD RESWNSE:                  Partially              concur.           The legislative                 proposal         for
                              a new move-in               allowance             did not mention                   the reimbursement
                              methodology             being        contemplated                by the         DOD.        Nevertheless,             the
                              DOD agrees            that       the     50 percent              recovery           rule      for     selected
                              items      is not supported                     by current             statistical              evidence.            This
                              rule     has been           in     effect          since       the early             1960s.         The Department
                              has begun           a canvass            of locations                with       significant             military
                              populations             to determine                 what      the recovery               rule      should       be.      TO
                              date,      all      but two of the                   responses           have been received.                       When
                              all    are received,                 the rule            will      be revised             as appropriate.
                              The DOD also               agrees         that       “reasonable”               should        also      be defined
                              in the        final       proposal,              or that         a" alternative                 should        be
                              developed           for     the make-ready                    component           of the proposed
                              allO"a"Ce.              Finally,            the DOD does not concur                           that      no analysis
                              was performed               to determine                 a ceiling.               The DOD intention                  was
                              to make the system                      as administratively                       simple        as possible            and
                              still      cover        all       expenses           for      at least          80 percent            of Service
                              members.            This       flat-rate             system        is similar             to that         available
                              to civilian              employees             (transfer           allowance),              but     includes         a
                               recovery         value        rule.

                          0   FINDING         U:   Misleadina          Information.               The GAO reported            that
                              Service         members     at Yokosuka            were     encouraged         to rent      above -
                              their      ceiling       to prevent          a decrease           in the allowance            when the
                              ceiling         was subsequently              recalculated--while                members      at Kadena
                              Air     Base in Okinawa             were     encouraged           to   rent    below   ceiling       to
                              provide         a cushion        against        changes       in the allowance           rates.        The
                              GAO concluded            that     this     misleading           information         can result       in
                              a" unnatural           upward       or downward           pressure          on allowances.
Now   on pp   33-34            (pp.    59-6O/GAO         Draft       Report)

                              DOD RESPON.54:            Concur.         The DOD does not encourage                         local
                              commands       to tell      members         to rent       either        above      or below          the
                              prescribed         rental     ceilings,          because        this     results         in a
                              distortion         of the overseas              housing       allowance          ceiling-setting
                              process.         The DOD will           strengthen          language         in the Joint
                              Federal      Travel       Regulation          to provide          local     commands           the
                              necessary        guidance       for     proper       rental       procedure          during        the
                              second     quarter        of FY 1990.

                          0   -V:                  Local      Command Policies              Can Cause      The System          To
                              w.           The GAO reported             that     local      command policy         directives,
                              which      are    inconsistent          with     overall        overseas     housing       allowance
                              policy,        can have        a negative        effect       on the rental        portion        of
                              the     system.        The GAO found           that,       in the early        198Os,      the base
                              commander         at Torrs]o",          Spain,       dlrected        all enlisted        members     to


                                                                                                                                           Page      15
                     Appendix I
                     Comments From the Department                  of Defense




                     message   requesting        average       times    I" privately                          leased      housing
                     for  each major      location       within      each country.                            Thereafter,         the
                     DOD will    request      annual     updates      to this      list.

                      Once the DOD is able       to implement                          a"    allowance          that      provides
                      up-front     funds  to address   moving-in                            costs,     this       will      cease
                      being    a problem.

                 0    FINDING       Q:      Weak Manasement             Controls.           The GAO reported               that
                      internal        controls         over     the overseas           housing      allowance          survey
                      methods       need improvement.                AS a result,             data     gathered        from
                      surveys       can be incomplete,                inaccurate,           and "onrepresentatlve--
                      and allowance            levels       can be inappropriate.                   The GAO found
                       (1) low response              rates      at one location             that     led to no
                      allowance         adjustment,           (2) unusually            high     response        rates      at two
                      location*,          because        survey     forms      were used that             should       have
                      been excluded,             and (3) response              patterns         at several          locations
                      indicating          bias     in who returns            the forms.            The GAO concluded
                      that     this     raises       serious       questions          about     whether       the Per Diem
                      Committee         should       use survey         data      for    computing        the nonrent
Now on p.31           portion       of the allowance.                  (p. 55/GAO Draft              Report)

                      DOD RESPONSE:              Partially         concur.          The DOD supports                  the
                      adoption         of rigorous,           standard        statistical             procedures            in
                      prescribing           Overseas        Housing       Allowances.                The DOD recognizes
                      that     controls         should      be improved,            but disagrees               that      controls
                      are nonexistent,               and that        allowance           levels        are inappropriate.
                      As stated          above,      the DOD will          pursue          utilizing           available         DOD
                      resources          or hiring         a" independent              contractor            to help       the Per
                      Diem Committee             determine         appropriate             methods         for    collecting
                      data      (including         sampling        and other           alternatives             to current
                      data     collection          from members           process),             analyzing         it,     and
                      prescribing           appropriate          rates.         Automation            will      be emphasized
                      and alternatives               to involving           country          points        of contact          will
                      be    sought.

                      With   regard         to low response          rates,      see the DOD response       to
                      FINDING     J,       which     addresses      ways to make overseas          commanders
                      and survey           coordinators         more responsive,         and the DOD response
                      to FINDING           S, which       addresses      quality    variance    solutions.

                 0    FINDING        R:      Response           Rate Deflcle            ncies.          The GAO reported               that
                      the response             rate      for     locations            in its        review        ranged        from
                      8 percent          to 110 percent.                   The GAO found                that      neither         the Per
                      Diem Committee               "or     the     in-country             coordinators              determined
                      whether        systemic          differences             existed          between        those       who
                      returned         overseas          housing         allowance            forms       and those           who did
                      not.        The GAO also              found      that      data       collectors            were not given
                      adequate         training          or guidance             on the use of standard
                      statistical            methods          of data        collection             and     analysis.             The GAO
                      concluded          that      a tendency            for     higher         rates       of response             at the
                      senior       enlisted          grades        resulted           in the nonrent                portion         of the
                      housing        allowance           being       higher        than       it should           have been at the
                      locations          reviewed.              The GAO further                 concluded           that      the
                      response         rates       above        100 percent             indicate          a lack        of control         of
                      the survey           process          and raise          questions            about       its     legitimacy.
Nowon pp 31-32         (pp.     55-56/GAO          Draft        Report)


                                                                                                                               Page      13




                     Page 58                                                                       GAO/NSLAD-90-46           Overseas      Allcwances
                     Appendix1
                     CanmentsFromtheDepartmrntofDefense




                      tion      to incoming      members.         General     field     dissemination         is
                      anticipated         during    FY 1990.         Language       is also     being    prepared
                      for     inclusion       in the Joint        Federal     Travel      Resulation,       by the
                      end of 1989,         which    will    alert     members       to the    fact    that    rental
                      ceilings         may decrease      based     on a number        of factors.

                 0    FINDING           L:    Uniform    Policv     and Procedures             Lackins        For Non-
                      Rent       Portion        of Overseas      Housins       Allowance.           The GAO reported
                      that       criteria         for reporting      utility          costs    varied       by Service
                      and,       as a result          Service     members        were treated           differently--
                      depending            on their     Service.       The GAO also            reported         that    the
                      procedures            used to set utility/recurring                    maintenance
                      allowances             (1) were    not automated,              (2) relied       heavily         on staff
                      judgement,            and (3) sometimes          resulted           in decisions          being     made
Now   on p 28         arbitrarily.                (p. 50/GAO Draft           Report)

                      DOD RESPONSE:           Partially       concur.       The issue     of the varying
                      utility     reportinq        procedures        used by the Services          in Germany
                      was resolved         by a modification            (Change     35) to Chapter       9 of the
                      Joint    Federal      Travel      Resulations.         A message      to all   activities
                      addressing       this    change      was released        during   September.

                      The DOD agrees             that     procedures           used to set utility/recurring
                      maintenance           allowances          can be improved.                   The DOD does not,
                      however,         agree     that     decisions          are being          made in an arbitrary
                      manner.          Currently         decisions         are made based                on reason,        staff
                      experience,           and adopted           procedures.              While       the rental
                      component          of the overseas             housing         allowance           is automated,           the
                      other      two component*             are not presently                automated.             The DOD
                      supports         the use of accepted                 statistical             techniques         in
                      computing          and prescribing             the utility/recurring                    maintenance
                      and initial/terminal                  occupancy          allowance           components        of the
                      oversea*        housing        allowance.           The DOD will               study    alternatives
                      for    collecting          this     data      and processing              it     in an automated
                      environment.              As noted        previously,            this     study      should       be
                      completed          during      FY 1991.

                 0    FINDING        M:       Se
                                              &                                                                      in Germany.
                      The GAO reported                 that     some personnel           were     fully         reimbursed         for
                      their     utility          expenses,         while      others     received         about        $58 per
                      month     less        than     full     reimbursement          for    their       utilities.            The
                      GAO noted           that     the Per Diem,            Travel,      and Transportation
                      Allowance           Committee         plans      to clarify        the utility              expense      rules
                       in a revision             to the Joint            Federal     Travel       Regulation            thereby
Now   on0   28        ensuring          proper       payment.           (p.   50/GAO Draft          Report)

                      DOD    RESPONSE:            Concur.         See     DOD response            to   FINDING        L.

                 0    FINDING       N:      Inconsistent             Treatment      of Officers          and Enlisted
                      Personnel.           The GAO reported                that    a number       of countries         and
                      locations         have two utility                and recurring          maintenance        allowance
                      rates:         one for       officers          and one for        enlisted       personnel.         The
                      GAO noted         that     the Per Diem,             Travel,      and Transportation
                      Allowance         Committee          staff       separately       averaged       utility      costs
                      for    officers         and enlisted             men and,     when the difference               was
                      large      enough,       separate          allowances        were     set.     The GAO found,
                      however,        that     the comparisons               did   not employ        standard,


                                                                                                                           Page       11

                                                                                                                                                     -1


                     Page56                                                                    GAO/NSIAB9046               Overseas      AUowanccs
    Appendix I
    Comments From the Department                  of Defense




                --        individuals          assigned        to perform      the   survey      work      be
                          capable        of selecting          random    samples     (for   living
                          pattern        surveys):
                --        records        be maintained      by the    primary     country             point
                          of contact        that    include   assignments       of duties              and
                          responsibilities            and schedules       of areas     and
                          facilities        to be surveyed        each year:
                --        prior     year     surveys      be retained         for   2 years     for
                          reference         and trend      comparison:          and
                --        Per    Diem,      Travel,      and    Transportation        Allowance
                          Committee         instructions          and guidance       be retained.

    The DOD will          look   for    additional          ways to make overseas
    commanders         and survey       coordinators            more responsive     to survey
    requirements.            As part     of that        effort,      the DOD will     solicit
    their       input,    as well      as that      of service         headquarters
    activities,         during     the    first     half      of FY 1990.

    In order      to improve       the cost-of-living            allowance     program    in
    response      to GAO suggestion?,,           including       more training       of survey
    coordinators        as noted      in this      finding,      the DoD plans       to study
    the possibility          of hiring      an additional          person   to structure,
    coordinate       and monitor        the training         and competency       of those
    administering         surveys.        A decision        will   be made by March       1990.

    In    its         proposed        study     of the program,      the DOD will       also
    explore             the   feasibility         of collecting      both    living   pattern       and
    price            survey     data      through    a private   party     having    expertise       in
    survey            techniques.            The contractor     approach       may produce        a
    better            survey      and eliminate         the need for      constant    retraining.

    Regarding       the retention       of survey          data,      keeping     the          actual
    reports     for     2 years   is appropriate.                Currently      this           provides
    the ability         to do trend     analysis         for     3 survey     years            (current
    plus    the two on file).           This     parallels          the practice               employed
    by other      statistical       agencies.         Memoranda          documenting              the
    results     of cost-of-living           analyses         are retained         for          at least
    5 years.

    Finally,      the DOD agrees          that       a notation     system      is necessary
    for     documenting      decision       criteria         and maintaining        a" audit
    trail.       This   has been implemented                 into the current         environment
    and will      be further        addressed         in the future        automated
    environment.

0   m:                PerceDtions          of ReciDients.              The GAO reported           that
    the majority        of recipients           it  interviewed            (68 percent)
    believed     the housing          allowance       was marginally             adequate      or
    better.      The GAO noted,            however,       that     a majority         of enlisted
    personnel      thought      the overseas          housing        allowance        was
    marginally       adequate       or inadequate--while                 at the same time           a
    majority     of officers          (56 percent)          believed        that    their    overseas
    housing    allowance        was adequate          or better.            The GAO also
    reported     that     personnel        in Germany        were more likely             to report


                                                                                                    Page      9




    Page 54                                                                  GAO/NSL4LMO46          Overseas      AUowmces
                  Appendix I
                  Comments From the Department                     of Defense




                  The DOD does not agree,                   however,       that    its    analysts        make
                  editing       decisions        based      on "intuition."              Rather,       decisions       are
                  based      on (1) staff         procedures          (e.g.,      do not permit           designer
                  clothing):          (2) reason        and experience            (e.g.,      $700 dresses         are
                  not typically            purchased        by moderate         income      families):
                   (3) comparison           to past       reports;       and (4) direct            consultation
                  with     representatives            from the reporting               country.

              0   FINDING       I:         Renorted          Survev      Data Not Alwavs                 Used.        The GAO
                  reported         that,         in one Instance,                the Per Diem,              Travel,         and
                  Transportation                 Allowance          Committee           completely          disregarded
                  summary       data         submitted          by the survey              coordinators             in Okinawa
                  because       the data             indicated         much greater             use of commissary                 and
                  exchange          facilities             than     other      localities            in Japan.           The GAO
                  found      that       the Per Diem,               Travel,        and Transportation                   Allowance
                  Committee           did not request                 supporting           data      for    the     figures--
                  but      instead,            compared         them with          State       Department           data      and
                  decided,         without           any oblective             evidence,          that      the Department
                  of State         data        was more credible.                    The GAO noted              that      the
                  Okinawa        survey          coordinators             disagreed          with      these      actions        and
                  protested           the      fact      that     the Per Diem,              Travel,        and Transporta-
Nowonp   22       tlon     Allowance             Committee          did not request               any additional
                  supporting            data.          (pp.     38-39/GAO          Draft      Report)

                  DOD RESPONSE:                concur.            The DOD agrees                that      reported           survey
                  data      is not always               used.        The Okinawa             Survey         is an example.
                  The DOD analysts                 decided          not     to use the summary                    living         pattern
                  data      for     Okinawa        for      three       valid       reasons:             (1) requests              to
                  obtain        individual           living         pattern         surveys         through          our point            of
                  contact         at Yokota          AB were          unsuccessful:                (2) the Okinawa
                  summary         data      indicated           that      virtually          no local           economy
                  purchases           were     being        made; and (3) the survey                          of civilian
                  employees           at Okinawa            compared          very      closely         to the military
                  surveys         outside        Okinawa.             Because         there       is seldom            any
                  difference            between         military          and civilian              purchasing             patterns
                  overseas,           the civllian              survey        was used as a proxy                      for     the
                  military.             The DOD then              ordered          a new survey             for      Okinawa          for
                  the next          reporting           year.

                  The following           year      survey       proved      that       DOD analysts                    were
                  correct        in their       decision.           Summary        living      pattern                  data    for
                  Okinawa        compared       very     closely        with     other      locations                   in Japan.
                  If the DOD had used the prior                         year     survey,       eight                 additional
                  cost-of-living            allowance         index       points       would      have               been taken
                  away from members               in Okinawa          only     to be restored                        the following
                  year.

                  The DOD recognizes          that   surveys   will not always                                     be   perfect
                  and,     indeed,    some will    have to be rejected/reworked.                                             As
                  previously       noted,   the DOD will     issue  additional                                     guidance     on
                  this     subject    by the end of 1989.

              0   FINDING         J:  Lack of Manaoement                         Controls      Affect     Cost-of-Living
                  Allowance.          The GAO reported                       that     problems       with   the repre-
                  sentativeness,          accuracy,      and                 completeness          of the cost-of-
                  living      allowance      surveys     can                 be attributed,            in large     part,     to
                  a lack      of internal       management                     controls.        The GAO found           that,


                                                                                                                               Page      7




                  Page 52                                                                          GAO/NSlAD-9046              Overseas        Alluwances
                  Appendix I
                  Comments From the Department               of Defense




                  also  plans  to study              alternative*           to the       current   approach            and
                  make recommendations.                    That     study     should      be completed      by         the
                  end of FY 1991.

              0   FINDING       F:     Market        Basket     Items      Did Not Cauture            Unite         Costs
                  OV~EX3lS.          The GAO reported               that     the cost-of-living              allowance
                  methodology          is not designed              to collect         data      on living        costs
                  that     are unique          to over*ea*          locations.           The GAO noted            that,      as
                  a result,        significant           unique       costs      are not considered--like
                  high     road    taxes       and tolls         in the United           Kingdom       and Japan.
                  The GAO concluded                that     the Per Diem,           Travel,        and Transporta-
                  tion     Allowance        Committee          had no evidence              to support        its
                  assumption         that      the market          basket      items     adequately         approximate
                  differences          between        U.S.     and foreign          road      taxes    and tolls.
Nowonp   20
                   (pp.    34-35/GAO         Draft      Report)

                  DOD RESPONSE:        Partially        concur.         The DOD agrees        that    the
                  market  basket      does not specifically                 measure     all  costs,     some of
                  which  may be uniquely           high     or low.          The DOD does not,        however,
                  concur  that     the market        basket       fails      to produce     an allowance
                  which  adequately       reflect*        overall       living     costs.

                  The DoD market             basket      survey--which              is the same system               used by
                  the State         Department,          other       Government           Agencies,         the National
                  Foreign       Trade      Council,         and other         organizations              and companies--
                  contains        a fixed       number        (160)      of goods         and services.            BeCaUSe
                   it    is impractical           to collect           prices       for     all    goods      and
                  service*,         each     item     included         in the market              basket      becomes      an
                   "indicator"          representing           a collection             of related          items     (e.g.,
                  canned       corn    might      represent          all    canned        vegetables).            The
                  market       basket      contains         indicators          for     all     classes       of goods       and
                  services        covered       by the cost-of-living                     program,        such as food,
                  clothing,         recreation,           transportation,               home furnishings,              and
                  personal        services.

                  A successful          cost-of-living              allowance       program        requires        that
                  the goods        and services           in the market            basket      be fixed.           This
                  enables       the DOD to make consistent,                      systematic          allowance
                  determinations           in all       countries.            If a variable            system      were
                  utilized,        the result          would      be to substitute             only      high-cost
                  items,      thus    producing         higher        rather     than     consistent/unbiased
                  indexes.

                  A  final        point      is that      each of these     countries       has significant
                  cost-of-living               indexes     to address    high    costs.       In Japan      they
                  range        from     130-212       (or a 30 to 112 percent           supplement)      and in
                  the United            Kingdom      from    116-142  (as of September           1, 1989).

                  Even though          the DOD is          confident         that     the current           system    1s
                  valid,        this   issue     will      be covered          in   the planned           study    of the
                  cost-of-living            program.

              0   FINDING       G:     Iand                                                                                  The
                  GAO    reported        that   the Per Diem,    Travel,      and Transportation
                  Allowance        Committee       has been using     outdated        and,  in some
                  cases,      no longer       representative     adjustment         factors   to make
                  regional        adjustments        to Bureau of Labor       Statistics      quarterly


                                                                                                                   Page      5




                  Page 50                                                                 GAO/NSLAD-9046          Overseas ~Uowances
                          Appendix I
                          Comments From the Department                    of Defense




                           Committee        (not     600)--because          the written             instructions            called
                           for     a "minimum        response      of 120."          The GAO also              noted      that
                           neither      the    local       command nor Per Diem!                 Travel,         and
                           TranspOrtatio"            Allowance       Committee         officials            knew (1) whether
                           the 120 respondents                were   representative              of     the    military
Now   on pp   17-18        population        or (2) whether            they      were selectively                chosen       to
                           assure      a desired         outcome.         (PP.      31-32/GAO           Draft       Report)

                           DOD RESPONSE:         concur.                  While   existing      regulations,                         if
                           followed,      would   have               precluded      survey    errors,        the                following
                           actions   will      be taken                to strengthen       controls:

                                    A survey      "kickoff"         instruction         letter        will    be prepared
                                    and sent     to our Points             of Contact          instructing         them to
                                    read Appendix           M (Reporting         Procedures)            of the Joint
                                    Federal    Travel        Requlations         before        beginning        any survey
                                    process.        It will       cite     the living          pattern      survey     problems
                                    the GAO encountered,                emphasizing         that      surveys      should    not
                                    be discarded.            This     will     be accomplished             during     1989.

                                    Appendix    M will   be expanded      to provide     more instructions
                                     about  conducting     Living  Pattern     and Retail     Price     Surveys:
                                     This will    be accomplished     during    the  first   half    of
                                     FY 1990.

                                     The DOD will            also   explore       ways to                 make overseas
                                     commanders          and survey        coordinators                    more responsive                 to
                                     survey       requirements.            The DOD will                    solicit        their         input         as
                                     well      as that       of Service       headquarters                     activities             during
                                     the    first       half     of FY 1990.

                           Like     many of the            issues      related     to the cost-of-living
                           allowance         program,         the DOD plans          to have the Living             Pattern
                           Survey       issue      included        in a comprehensive            study      of how
                           cost-Of-living              data     are collected,          analyzed        and processed.
                           The study         will      include       examining       our current         procedures        and
                           suggesting          alternatives.               The study     will    utilize       resources
                           within       the Department,              if available,         or a" outside          contractor.
                           The study         should        conclude        not later     than    FY 1991.

                      0    FINDING          D:      Survev         Locations             Were      Not Alwavs          Renresentative.
                           The GAO reported                   that        survey         locations           were     not always
                           representative                 of the entire                  country,            The GAO found             that,       in
                            Italy,       five       out of the nine                    locations           that     were     selected          and
                           averaged           to    establish             a single           cost-of-living              allowance,            for
                           all     locations            in Italy,            were        not representative.                     The GAO
                           reported          that,        if separate               cost-of-living                allowances           had been
                           established              for     southern           Italy         in 1988,         approximately
                           $2.8 million               would        have been saved                   at Comiso         and Naples.               The
                           GAO also           found       that       the Committee                 did not select              survey
                           locations            Using       statistically                  valid       methods--but,             instead,
                           used locations                 that       were most cooperative                        in returning             data.
                           The GAO also               reported            that      the Committee               had not appropriately
                           tested        pricing          data       to determine                if a combined             cost-of-living
                           allowance            or separate               cost-of-living                 allowances          for     different
Now   on pp   18-19        locations            would       have been more appropriate.                                 (pp.     32-34/GAO
                           Draft      Report)


                                                                                                                                        Page      3




                          Page 48                                                                          GAO/NSIAD-904               Overseas AUowances
                       Appendix I
                       Comments From the Department                    of Defense




                                       GAO DRAFT REPORT - DATED AUGUST 25, 1989
                                           (GAO CODE 391099)  OSD CASE 8109

                     "OVERSEAS       ALLOWANCES:             IMPROVEMENTS            NEEDED       IN   ADMINISTRATION"

                            FINDINGS        AND RECOMMENDATIONS TO BE ADDRESSED                                IN   THE
                                           DOD RESPONSE TO THE GAO DRAFT REPORT
                                                                   l     ****


                                                                   FINDINGS


                 0     FINDING      A:       Problems           Identified         in Previous            Retorts.           The GAO
                       reported        that,       during         the past       several        years,        d number         of
                       reports      have       identified             problems       with     setting         overseas
                       allowances--and              many of those              problems         remain        unresolved.            The
                       GAO noted         that      a prior          GAO report          (GAO/FPCD-82-8,              “COmpUtatiOn
                       of Cost-of-Living                  for     Uniformed        Personnel          Could       Be More
                       Accurate,"           dated      February           25, 1982 (OSD Case 5871))                       found    that
                       living      pattern         survey         results      did not always               accurately
                       represent         purchasing             patterns--and            survey       results        were
                       sometimes          ignored.            The GAO noted            that     this      situation          still
                       exists.         The GAO also               reported       that,      after       the 1988 Federal
                       Managers       ' Financial             Integrity        Act annual           report        identified         the
                       Per Diem,         Travel,          and Transportation                Allowance           Committee's
                       lack     of automation               as a significant              weakness,           the Committee
                       had a contractor                 study       the Overseas          Housing         Allowance          to
Nowon ~0 IO-11         correct       this      weakness.               (pp.   20-21/GAO         Draft       Report)

                       DOD RESPONSE.:          Partially             concur.       While     the DOD agrees      that
                       not all     living      pattern            surveys      accurately       represent   purchasing
                       patterns,        it does not             agree     that    automation       remains  a
                       significant         weakness.

                       Since     1983,      the Committee          has continually              emphasized
                       automation.            Although      it   is true       that     the cost-of-living
                       program      and the nonrent            portion       of the overseas              housing
                       allowance        program       are not yet         automated,          the DOD has made
                       automation         strides       in the rental          ceiling        portion       of the
                       overseas       housing       allowance        program,        the foreign          exchange     rate
                       monitoring         system.       and an electronic              data     base system,       which
                       presently        provides        automated       allowance         rate      updates     to the
                       Service      finance        centers.

                 0     FINDING       a:     Service        Members         Believe        Cost-of-Livins               Allowance
                       Ademmte.         but Few Knew Its                 Puruos~.          The GAO reported                 that
                       66 percent          of the Service              members        it   interviewed            in countries
                       other     than      Korea      believed         that      the cost-of-living                  allowance
                       kept    up with         the cost        of living           to a moderate             extent:        while
                       approximately             21 percent          believed         that     it helped          little       with
                       living      costs.         The GAO also             reported        that      enlisted          personnel
                       were    less     likely        than     officers          to say that           the cost-of-living
                       allowance        was adequate.                In addition,            the GAO noted               that
                       Service      members         in certain           locations--i.e.,                Yokosuka,          Okinawa,
                       Naples,       and Oahu--were              less      satisfied         than      their      counterparts



                                                                                                                           Page     1


                                                                                                                                                        J




                        Page 46                                                                    GAO/NSIAD-9046           Overseas       Allowances
Appendix I

Comments From the Department of Defense


Note, GAO comments
supplementing those in the
report text appear at Ihe
end of this appendix                              THE   OFFICE    OF THE    ASSISTANT      SECRETARY       OF   DEFENSE
                                                                      KASHlNGTON D c 20301.1000




                                 Mr. Frank C. Conahan
                                 Assistant    Comptroller      General
                                 National    Security     and International
                                    Affairs   Division
                                 U.S. General      Accounting    Office
                                 Washington,     D.C.     20548

                                 Dear    Mr.     Conahan:

                                         This    is the Department     of Defense                 (DOD) response   to the
                                 General      Accounting    Office   (GAO) Draft                 Report,  "OVERSEAS ALLOWANCES:
                                 Improvements        Needed in Administration,"                    dated  August  25, 1989 (GAO
                                 Code 391099,        OSD Case 8109).

                                         The Department        generally       concurs  with    most of the findings         and
                                 recommendations        contained         in the draft    report.      Some of the report
                                 comments,    however,      appear        to be unnecessarily       harsh.     While   there
                                 is always     room for improvement,              it is the DOD position         that  the
                                 programs    are essentially           sound and that       the level      of approval     among
                                 overseas    Service      members       is reasonably     high    (as noted    in the GAO
                                 perception      surveys)    I
                                         The most troublesome                 point      raised      is the suggestion             that     the
                                 Department's         Cost-of-Living             Allowance         philosophy          be changed        from
                                 considering         where members actually                    shop to a system            which     assumes
                                 that    all   shopping        for items         contained         in the market           basket      takes
                                 place      in commissaries            or exchanges.              While    commissaries           and
                                 exchanges      are valued           shopping         resources,        it was never          assumed they
                                 would meet all          of the varied              shopping       needs of Service            members,
                                 especially        those     with      families.           In many instances             it is impracti-
                                 cal for members to exclusively                         use these       facilities,         particularly
                                 those      who reside       off post.           Testing        has shown that           any savings
                                 would be extremely              limited,        while       the potential           for negatively
                                 impacting      morale       and welfare           would exist          across       the spectrum          of
                                 allowance       recipients.             Any decrease            in morale        can have the poten-
                                 tial     for adversely          impacting          retention.

                                          The DOD is committed              to taking      corrective          actions     to address
                                 many of the points             noted     in the report.            Independent         studies      are
                                 planned      for both the Cost-of-Living                  Allowance          and the nonrent          parts
                                 of the Overseas          Housing       Allowance       programs        to bring       about    long-term
                                 improvements.           Alternate        data collection,            statistical         sampling,       and
                                 statistical       editing       techniques        will    be emphasized            and vigorously
                                 sought.       Once the best          alternatives         are selected,            they will       be
                                 automated       where practical.
                             L




                                        page44                                                         GAO/NSIAD-9046OverseasAllowances
                                                                                                         -
                      Chapter4
                      TimelinesaofAUowancePrograms




                      We recommend that the Secretary of Defense direct the Chairman of the
Recommendations       Per Diem Committee to

                  l   develop statistical sampling procedures for collecting living pattern
                      information and
                  l   evaluate the cost-effectiveness of automating the system for collecting
                      and analyzing living patterns and retail prices and to automate the sys-
                      tem if appropriate.


                      UODconcurs with the recommendations stated above. In our draft report,
Agency Comments       we recommended that DOL) eliminate the discretionary element in the
                      currency adjustment process. DOD did not fully concur, stating that inter-
                      vention is useful at times to preclude insignificant changes. DOD agreed,
                      though, that there are many instances when it should not intervene. In
                      light of DOD'S comment.s, we have deleted the recommendation from our
                      final report.




                      page42                                     GAO/NSLAD-90.40   Overseas Allowanres
              Chapter 4
              Tiieliness of Allowance Prognuns




              must be analyzed,’ these time lags appear to be unavoidable, unless fun-
              damental changes are made to procedures for collecting and analyzing
              data.

              Based on our review, we believe that changes to data collection and
              analysis should be made in two areas. First, the number of personnel
              required to complete living pattern surveys at a location could be
              reduced by using standard statistical sampling procedures. For example,
              408 of 2,794 members in Vicenza, Italy, were sent survey forms in 1988.
              However, based on standard statistical sampling procedures, the point
              of contact only needed to survey as few as 68 randomly selected mem-
              bers if the Committee wanted to have a g&percent confidence rate that
              would be within 10 percentage points of what the population would
              have responded had they been surveyed.

              Second, by putting both of the COLA surveys into a format that could be
              screened by computer and increasing automated support, Committee
              staff believe that the analyses necessary to compute COLAS for a location
              or country could be done in a matter of minutes or hours as opposed to
              weeks or months.

              In commenting on our draft report, DOD agreed that improvements in
              timeliness can be achieved. DOD also agreed that increased automation is
              an essential requirement, and the numbers of surveys could be reduced.


              Although timeliness does not appear to be a major problem in adminis-
Conclusions   tering the overseas allowance programs, we did find areas that could be
              improved. The currency adjustment process could become more respon-
              sive by eliminating t.he discretionary element and allowing the system to
              operate as intended.

              We realize that changing allowances immediately after collecting the
              data is an unrealistic goal, but the Committee can improve the timeliness
              of these procedures. These improvements would include using statistical
              sampling procedures and automating the data collection and analysis
              process.




              Page40                                     (;AO/NSIAD-90-46OverseasAUowanc~s
                      Chapter 4
                      Timeliness of AUowance Programs




                      To evaluate the effects of discretionary adjustments, we developed mod-
                      els based on the Committee’s published procedures to compare hypo-
                      thetical changes that should have been made based on these procedures
                      with actual changes over a lo-month period. The results show that at
                      the end of 10 months the service member would have been about as well
                      off, in terms of total allowances received, with automatic application of
                      the Committee’s published procedures as they were with the actual
                      changes. However, automatic application of the procedures would have
                      resulted in no periods with an accumulated difference larger than about
                       17 percent, compared to the 7-week period where the difference always
                      exceed 20 percent as a result of discretionary adjustments.

                      In its comments on our draft report, DOD noted that the Committee staff
                      has a “hands-off” approach to the currency adjustment system. Despite
                      this, intervention is sometimes necessary to preclude making unneces-
                      sary and significant changes.


                      Navy personnel who believe that allowance decreases are implemented
Navy Members’         more rapidly than allowance increases are correct if they are paid
Perceptions of the    directly rather than if they have direct deposit. The Navy Finance
Currency Adjustment   Center reported that if a member does not have direct deposit it takes
                       1 month to reflect an increase, although a decrease is reflected immedi-
Process               ately the next pay period. For members who have direct deposit, an
                      increase or decrease is reflected the next pay period.

                      The Kavy’s payment policy is to override the system, when nondirect
                      deposit decreases are required, to keep the member from being overpaid
                      and having to take the decrease in a lump sum when the system catches
                      up. Since the nondirect deposit is less automated and requires a change
                      to the leave and earning statement, the old higher rate would continue to
                      be paid unless the system was overridden. Unless overridden, excess
                      payments would be made for three pay periods before the system
                      caught up, at which time a large lump sum deduction would be made.
                      This is not necessary for increases since the members benefit. This pro-
                      cedure is not necessary for direct deposit since that system is fully auto-
                      mated and can make the change without a new leave and earning
                      statement.




                      Page 38                                    GAO/NSIAD-9046 Overseas Allowances
                  Chapter 3
                  Methods for Setting   OIL4 Can Be Improved




Agency Comments   with its proposed legislation that would address the resale value of
                  items included in the moving-in expenses, the definition of what consti-
                  tutes reasonable expenses, and the appropriateness of a worldwide ceil-
                  ing on items purchased to make leased housing habitable. Since the final
                  legislation did not contain the specific implementation details that had
                  been contained in the draft proposal, we have modified our
                  recommendation.

                  In our draft we had also recommended that the Secretary of Defense
                  identify the overseas housing allowance survey methods as a significant
                  weakness in the Federal Managers’ Financial Integrity Act annual
                  report. DOD did not agree and stated that the assistant secretary of
                  defense (military manpower and personnel policy) will track and moni-
                  tor DOD’S efforts to correct the problem we identified. We have deleted
                  this recommendation from our final report in light of DOD’S actions.

                  DOD  concurs with the two remaining recommendations dealing with
                  developing uniform policies and guidance, and ensuring that local direc-
                  tives did not undermine the intent of the OHA program.




                   Page 36                                     GAO/NSlAD.9@46   Overseas   AUowances
                          Chapter 3
                          Methods for Setting   OHA Can Be Improved




                          In contrast, at Kadena Air Base in Okinawa service members were
                          encouraged to rent below the ceiling, which they were told would pro-
                          vide a cushion against any changes in the allowance rates. According to
                          the Committee staff, if all members follow this advice, the rental ceilings
                          will move downward, depressing the rental allowance.


Local Command Policies    Local command policy directives that are inconsistent with overall OHA
                          policy can have a negative effect on the rental portion of the system.
Can Cause the System to   This occurred at least twice in the last several years, requiring the Per
Fail                      Diem Committee to implement special adjustment,s to the allowance.

                          According to the Committee point of contact for Spain, in the early
                          198Os, the base commander at Torrejon directed that all enlisted mem-
                          bers rent quarters at or below their allowance ceiling. Over time, this
                          directive resulted in enlisted members residing in substandard housing.
                          The in-country point of contact informed the Committee about the prob-
                          lem, described the living conditions of enlisted personnel, and indicated
                          rental allowances were regularly going up all over Spain, except at that
                          location.

                          The Committee conducted a special study to determine if higher rental
                          allowance ceilings were warranted. Committee staff visited off-base
                          housing and found that members were living in poor facilities because of
                          the base commander’s directive. This local command policy caused a
                          breakdown in the met,hodology because each rental update showed that
                          the ceilings needed to be reduced. As a result of the staff visit, the Com-
                          mittee adjusted the rtmtal ceilings upward. The increases varied, but the
                          highest for any grade was an additional $100.

                          At the end of 1 year. the Committee staff reviewed the rents of new
                          arrivals and found that many were not moving into better housing. The
                          Committee then lowrred the ceiling. The adjustment appears to be
                          appropriate, but limiting it to 1 year may have been insufficient because
                          the base commander’s directive was still in effect for the first half of the
                          year. Also, members who had previously entered into long-term lease
                          agreements could not take advantage of the opportunity to upgrade
                          their housing, and a few members who did upgrade their housing may
                          have suffered unexptlcted out-of-pocket costs when the ceiling was
                          lowered.                  I




                          Page 34                                     GAO/NSIAW9046   Overseas   Allowances
                       Chapter 3
                       Methods for Setting OIL4 Can Be Improved




                       entire population, whereas using a census does not. Also, data collectors
                       did not have adequate training or guidance on the use of standard statis-
                       tical methods of data collection and analysis. In its comments on our
                       draft report, DOD stated that such training or guidance is unnecessary
                       since DOD conducts a census rather than a statistical survey.

                       Professional survey and polling organizations usually try to identify a
                       “nonresponse bias” to determine any possible effects. We used response
                       rates by pay grade to test for such biases at three locations. These tests
                       showed a tendency for higher rates of response at the senior enlisted
                       grades, but a more mixed tendency at the officer grades. Because
                       responses were averaged, everyone at these locations benefited from the
                       nonresponse bias because senior enlisted grades spent more on housing
                       than did junior graded personnel. Consequently, the non-rent portion of
                       the housing allowance was higher than it should have been.

                       At the other end of the range, rates above 100 percent indicate a lack of
                       control of the survey process and raise questions about its legitimacy.
                       The 106-percent response from Seoul results from inappropriately sur-
                       veying members with noncommand-sponsored dependents. According to
                       the Committee analyst, the effect of including this group would be to
                       lower the allowances because this group is more likely to economize
                       than personnel with command-sponsored dependents.


Quality Variance       Each survey form is supposed to be reviewed for completeness, accu-
                       racy, and clarity by the local commands’ reporting officers. However,
                       the extent of the in-country coordinators’ involvement in the survey
                       process varied by location. As a result, the quality and completeness of
                       survey data varied from country to country. For example, at Yokosuka,
                       Japan, the survey coordinator provided service members with a housing
                       allowance worksheet to assist them in maintaining records of their hous-
                       ing expenditures for use in completing the OHA survey. It appears that
                       this involvement resulted in a significant increase in allowances at Yoko-
                       suka in 1988. The monthly moving-in and moving-out allowance
                       increased from $49 to $137, and the utilities and recurring maintenance
                       allowance increased from $160 to $173. The Committee staff attributed
                       the increases to command emphasis on reporting all costs. Few other
                       locations took such measures.


                          recently submitted a legislative proposal to the Office of Manage-
Proposed Legislation   DOD
                       ment and Budget that would allow up-front reimbursement of moving-in


                       Page 32                                    GAO/NSLAD-9046   Oveneas   .4Bowances
                                                                   -
                                       Chapter 3
                                       Methods for Setting    OHA Can Be Improved




                                       maintained to be inadequate for determining why the data were
                                       excluded.


                                       The monthly moving-in and moving-out allowance is supposed to be
Underpayment of                        computed by averaging all expenses reported by service members in an
Moving-In and                          area, then dividing this average by the number of months members typi-
Moving-Out Expenses                    tally reside in private housing. We found that these procedures were not
                                       always followed when computing the allowance, and, as a result, some
                                       members were not being fully reimbursed for allowable expenses,

                                       The moving-in and moving-out allowance in Germany, Italy, Spain, and
                                       the United Kingdom was based on the average amount of time service
                                       members spent in the country rather than the average time members
                                       actually spent in private housing. Since service members spent more
                                       time in a country than in private housing, moving-in and moving-out
                                       allowances were understated. Therefore, service members actually
                                       received less money than they should have.

                                       The points of contact should have reported the average length of time in
                                       private housing to the Committee, but none of them did so in 1987 and
                                       1988. Lacking this information, the Committee used 34 months” to com-
                                       pute the monthly allowance. We found the average time spent in private
                                       housing actually ranged from 18 to 24 months at these locations. There-
                                       fore, service members did not receive an adequate allowance for mov-
                                       ing-in and moving-out costs. We found the amount not recouped by a
                                       service member varied by location, as shown in table 3.2.

Table 3.2: Cost Versus Reimbursement
for Moving in and Moving Out           Dollars in thousands
                                                                            Average         Average             Loss to Total loss by
                                       Location                                 cost reimbursement             member        location
                                       Ramstein                                 $544            $288               $256         $1,342
                                       Lakenheath                                850             525                325 .__       1,162
                                                                                                                                 ~-.
                                       Frankfurt                                 544             352                192             5.57
                                       Wuerzburg                                  544             336              208
                                                                                                                --__                 296
                                                                                                                                 .~~__
                                       Naples                                   1,020             720
                                                                                                 _____.__-._____   300               443
                                       Rota                                       408             252              156               286
                                       Total




                                       LThe 34month figure was derived usmg a 36.month tour length and subtractq    1 month for the
                                       temporary lodging allowancr at the beginning and end of an overseas tour.



                                       Page 30                                                GAO/NSIAD-9046       Overseas   Allowmces
                            Chapter 3
                            Methods for Setting OHA RUI Be Improved




                            official also noted that leases in Germany require tenants to pay a
                            month’s rent for renovating their apartment when they leave. IJnder-
                            stating the moving-in and moving-out costs used to compute this portion
                            of the allowance would result in the overall allowance being inappropri-
                            ately low.

                            In commenting on our draft report, DOD noted that detailed information
                            about housing allowances is already contained in the Joint Federal
                            Travel Regulations. In addition, it has designed an OHA brochure that
                            will be distributed t,o the field during fiscal year 1990.


                            Criteria for reporting utility costs varied by service, and as a result, ser-
Uniform Policy and          vice members were treated differently depending upon whether they are
Procedures Lacking          Army or Air Force mc>mbers.In addition, procedures used to set the util-
for Non-Rent Portion        ity and recurring maintenance allowance were not automated and the
                            process relied heavily on Committee staff ,judgmcnt. This sometimes
of OHA                      resulted in decisions being made that were not based on established and
                            documented criteria.


Service Personnel Treated   Some personnel in Germany were fully reimbursed for their utility
Differently in Germany      expenses as is intended by regulation, but 33,000 personnel received
                            about $58 per month less than full reimbursement for their utilities. For
                            a l-year period, these personnel received about $22.8 million less than
                            their counterparts. The difference resulted from the services’ different.
                            interpretations of the Per Diem Committee’s guidance on certifying eligi-
                            bility for full reimbursement. The Committee staff, as a result of our
                            findings, has clarified the utility expense rules in a revision to the Joint
                            Federal Travel Regulations.


Inconsistent Treatment of   A number of countries and locations have two utility and recurring
Officers and Enlisted       maintenance allowance rates: one for officers and one for enlisted per-
                            sonnel. This situation exists in Germany and Italy, but not in Japan,
Personnel                   Korea, Spain, or the Tlnited Kingdom. Local command officials did not
                            know why separate rates were established in some locations but not in
                            others.

                            To calculate rates, the Per Diem Committee staff separately averaged
                            utility costs for officers and enlisted personnel. If the difference
                            between the t,wo avt>rages was large enough in the staff’s judgment, the
                            Committee set two separate allowances. However, the comparison of the
Chapter 3

Methods for Setting OHA Can Be Improved


                 OHA  is designed to reimburse military personnel for housing costs in
                 excess of their basic allowance for quarters. Together these two
                 allowances help pay for rent, utilities, recurring maintenance expenses,
                 and moving-in and moving-out expenses. For the rental portion of the
                 allowance, the service member is fully reimbursed up to a ceiling.’ If the
                 rent is higher than the ceiling, the member pays the difference. The non-
                 rent portion of OHA is the average of such expenses for a housing area as
                 reported on annual surveys. Overseas commands provide the Per Diem
                 Committee with data needed to est,ablish allowance levels for the differ-
                 ent housing areas.

                 Service members were generally satisfied with their housing allowances;
                 however, differences did exist. Enlisted personnel were less satisfied
                 than officers. Personnel in Germany were much more satisfied than
                 members in other locations. However, we found that (1) a lack of under-
                 standing about how the allowance is computed could have resulted in
                 the allowance being lower than it should have been and (2) the majority
                 of those interviewed incorrectly believed certain moving-in and moving-
                 out expenses were not considered in det,ermining t,he allowance and did
                 not, report such cxpc~nscs.

                 The problems we obsc,rved related to OHA were in the non-rent portions
                 of the allowance designed to reimburse utilit.ics, recurring maintenance,
                 and moving-in and moving-out expenses. Inconsist,encies existed in how
                 these portions wcr(’ c.omputed, and management controls over the collec-
                 tion of data used to compute the non-rent, portions of the allowance were
                 nonexistent. The 1’~ Dirm Committee recently proposed legislation that
                 would make it casit,r for service members to be reimbursed for moving-
                 in expenses.

                 The methodology used to compute the rental portion of OHA is adequate
                 because it is based on the actual rent paid by recipients. However, local
                 command policies and information provided at the overseas locations
                 occasionally kept the system from working as intended.


                 The 200 C)IIA recipients we interviewed were generally satisfied with
Perceptions of   their housing allowances. but most had not been informed about certain
Recipients       key features of OII,Ythat c.ould affect the allowance. The majority of
                 recipients we intcrvitwcd (68 percent) believed the housing allowance




                 Page 26                                    GAO/NSIAD9046   Overseas   AUowances
                              Chapter 2
                              Methods for Setting   COLA Can Be Improved




Inadequate Documentation      The Per Diem Committee did not document its decision criteria for such
at the Per Diem Committee     matters as excluding prices or combining averages. Also, living pattern
                              surveys were retained only until new ones were performed and sum-
                              mary documentation was retained for only a few years. Consequently,
                              there was not an adequate audit trail, anomalies in trends could not be
                              identified, and the ability to track certain data, such as changes in the
                              on-base and off-base shopping patterns, was lost.


                              Although the majority of service members we interviewed believed that
Conclusions                   COLA had kept pace with the cost of living at their overseas location,
                              they generally did not understand its purpose or how COLA rates were
                              set. This is not surprising, however, because the program’s purpose and
                              objectives lack specificity.

                              We identified a number of data collection and analysis problems with
                              DOD’S current COLA-setting methodology that should be corrected.
                              Because of these problems, COLA rates are often inappropriately high or
                              low. Survey responses were not representative of the population receiv-
                              ing cOk4 at overseas locations; survey locations were not representative
                              of the area covered by a COIA index rate; surveys were not performed in
                              a timely manner; and incorrect and outdated U.S. price data were used.
                              Also, the process lacked statistical and analytic rigor. Many of these
                              problems can be attributed to poor management controls over the rate-
                              setting process, and should be considered for reporting under the
                              requirements of the Federal Managers’ Financial Integrity Act.


                              To strengthen controls over the current data collection and analysis
Recommendations               processes, we recommend that the Secretary of Defense require the Per
                              Diem Committee to

                            . develop guidelines on the minimum training survey coordinators and
                              points of contact at the overseas commands should have on the COLA
                              methodology;
                            . communicate clear delegations of authority and responsibility so that
                              overseas commands can be held accountable for the quality of their
                              surveys;
                            . utilize prices from t,he Bureau of Labor Statistics for applicable items in
                              the market basket rather than adjusting the prices from the quarterly
                              Washington, D.C., retail price survey, and where these prices are not
                              available, develop new measures for average US. data that would make
                              the prices more accurate and timely;


                              Page 24                                      GAO/NSIAD-9046   Overseas Allowances
                           Chapter 2
                           Methods for Setting COLA Can Be Improved




                           The Committee occasionally did not receive all the data it requested
                           from the overseas commands during the annual cow-setting process.
                           Committee staff followed up when living pattern or pricing data were
                           late or incomplete, but in some situations the needed information never
                           reached the Committee.


Reported Survey Data Not   The Committee did not always base COLAS on data reported in the
                           surveys. For example. it disregarded summary data from the living pat-
Always Used                tern survey data submitted by the survey coordinators in Okinawa.
                           According to Per Diem Committee staff, the coordinators did not provide
                           the raw data to support the survey summary, and they disregarded the
                           data because the data indicated much greater use of commissary and
                           exchange facilities than other localities in Japan.

                           The Committee did not request further support for the reported figures
                           from the survey coordinators, but compared the Okinawa summary data
                           to data gathered by the Department of State.” The Committee decided
                           without any objective evidence that the Department of State data
                           reflected more credible changes in the percentages of local market shop-
                           ping than the overseas command survey data.; The Committee then used
                           historical trends and State data to develop a COLAlevel for Okinawa.

                           The Okinawa survey coordinators disagreed with these actions. Survey
                           coordinators stated that the summary submitted to the Committee was
                           accurate and that the raw data, which they had been instructed to keep,
                           supported the summary. The coordinators said the Committee did not
                           ask for any additional supporting data.

                           In commenting on our draft report, DOD agreed that survey data are not
                           always used and cited the Okinawa survey as an example. DOD also said
                           the reasons they had for not using the survey data were valid and the
                           survey performed confirmed that their decision was correct.




                           “In some mstances. State 1sresponsible for gathering retail prices used in setting civilian COLAS at a
                           location, while DOD is responsible for setting military COLAS at the same location.

                           ‘The State official conductmg this survey indicated he did not take a random sample of the cwilian
                           population, but surveyrd only DOD Dependents Schools civilians and did not monitor the response
                           rate.



                           Page 22                                                     GAO/NSIAD-9046      Overseas AUowances
                           Chapter 2
                           Methods for Setting COLA Can Be Improved




                           price surveys, and plans to issue guidance by the end of 1989. It also
                           plans to study alternatives to the current approach.


Market Basket Items Did    The COIA methodology is designed to capture prices for items available
                           both at overseas locations and in the llnited States. The methodology is
Not Capture Unique Costs   not designed to collect data on living costs that are unique to overseas
Overseas                   locations. In certain instances service members experience unique and
                           significant expenses at overseas locations. For example, road taxes and
                           tolls are high in the lrnited Kingdom and Japan. Road taxes in the
                           United Kingdom were about $190 per car in 1988. I Jnder the Commit-
                           tee’s current methodology, this cost is not considered a part of the mem-
                           ber’s transportation cost overseas.

                           Road taxes and tolls are not included in the market basket because the
                           Committee assumes t,he 12 transportation items it includes’ adequately
                           approximate any differences between 1J.S.and foreign road taxes and
                           tolls. The Committee had no evidence to support its assumption, which
                           seems questionable given that personnel in Japan who pay tolls said
                           they typically pay $30 to $80 per month.

                           In its response to our draft report, DOD noted that it uses the same sys-
                           tem for its market basket. survey as does the Department of State and
                           other government agencies. It agrees this system does not measure all
                           costs-some which may be uniquely high or low. However, DOD believes
                           the current market basket adequately considers such unique items as
                           tolls. Even though MM)believes the existing system is valid, it plans to
                           include this issue in its planned study of the cost of living program.


Incorrect and Outdated     The Bureau of Labor Statistics conducts a quarterly retail price survey
U.S. Prices Were Used      in the Washington, D.C., area that the Per Diem Committee adjusts for
                           regional differences to determine average 1J.S.prices. The adjustment
                           factors, however, were last published in 1981, with some dating to the
                           late 1970s and are no longer representative in some cases. So far, DOL)
                           has not found an adequate means to update these prices.

                           The Bureau currently publishes average U.S. prices for a few items, pri-
                           marily gasoline and food. A comparison of the Bureau’s average with




                           Page 20                                    GAO/NSIADBO4   Overseas Allowances
                                Chapter 2
                                Methods for Setting COLA Can Be Improved




                                were overrepresented at another location in Italy, and at two other loca-
                                tions some civilian personnel were erroneously sampled.

                                At several locations, a large number of members responded, but local
                                command officials forwarded only a small proportion of the responses to
                                the Committee. For example, at Ramstein Air Base approximately 1,200
                                survey forms were sent out and about 600 members responded, but only
                                 120 responses were sent to the Per Diem Committee because written
                                instructions called for a minimum response of 120. Neither local com-
                                mand officials nor Committee officials knew whether the 120 survey
                                respondents were representative of the military population in the area
                                or whether the responses were selectively chosen to ensure a desired
                                outcome.

                                In its response to our draft report, DOD agreed that survey responses
                                were not representative, and further stated that if existing regulations
                                had been followed, the survey errors would have been precluded. The
                                agency plans to strengthen internal controls, and study its current pro-
                                cedures for collecting and analyzing data.


Survey Locations   Were   Not   We found that survey locations were not always representative of the
                                entire country. According to the Committee’s survey methodology, living
Representative                  pattern surveys and retail price surveys were performed at only a few
                                locations within a country. The Committee then combined surveys from
                                these few locations to set COLASfor the entire country. For example, it
                                averaged data from five full support locations in Italy to set a single
                                COLAof 110 for all nine locations where U.S. military personnel serve.
                                This method is appropriate only if the locations chosen are representa-
                                tive of the other locations, which they were not for Italy.

                                 We computed separate indexes for each of the five locations and found
                                 that the indexes ranged from lows of 102 and 106 at two locations in
                                 southern Italy to highs near 110 in northern Italy. If separate COLAS had




                                  ‘In many countries, locations for COLA purposes are divided into four categories: full support, partial
                                 support, no support, and unque The support status depends on the availability of a commissary and
                                 exchange facility at the duty station, with the degree of support dependent on the distance to the
                                 facibties. A single COLA is established for each of the support categories, with full support areas
                                 typically having the lowest ULAA~



                                 Page 18                                                     GA0/NSL4B904         Overseas   Allowmces
Chapter 2
Methods for Setting   COLA Can Be Improved




States. COLAwould be set to equal 10 percent of service members’ spend-
able income.

This methodology for computing COLAis essentially expense-driven; that
is, the methodology depends upon receiving data on living expenses
reported by COLA recipients. If service members buy a higher proportion
of their market basket items at higher priced local businesses and if liv-
ing pattern surveys are performed frequently, DOD'S formula will result
in COLA rates that enable service members to continue patronizing those
local businesses.

Because this methodology is expense-driven, the reverse can also occur
if living pattern surveys are not performed often enough when the value
of the dollar is declining relative to the local currency. Service members
we interviewed in Japan believe this occurred in that country, causing
their COLA to drop as much as 21 percent in 1988. Local command offi-
cials had not conducted a living pattern survey for several years while
the dollar was depreciating relative to the .Japanese yen. When they con-
ducted a survey in 1988, service members in several areas reported
making more purchases at on-base commissaries, exchanges, and other
facilities. In both mainland Japan and Okinawa, service members stated
they were often compelled to shop at on-base facilities because the local
markets and shops were too expensive.

An alternative approach is similar to the first, except that the living
pattern survey would not be conducted. Instead, those market basket
items available at commissaries, exchanges, and other government-pro-
vided on-base facilities would be priced at those facilities. Price data for
market basket items not available on base would be collected at reasona-
bly priced outlets in the local community. In our draft report, we recom-
mended to DOD that, it evaluate the merits of using this alternative
approach.

In response to our draft report, DOD tested selected locations overseas
and in the IJnited States and assumed that market basket items availa-
ble in on-base facilities were purchased there rather than in the local
economy. In all areas tested, except Japan, DOD found that members
already were maximizing their use of commissaries and exchanges
because there was no difference between actual and test location
indexes. In other words, DOD found that the present system already con-
siders availability and, therefore, is a truer measure of compensation
needed to cover additional overseas costs. DOL)found that the primary



Page 16                                      GAO/NSlALWO4B   Overseas   Allowancrs
Chapter 2

Methods for Setting COLA Can Be Irnproved


                  COLAoriginated as part of the overseas station allowances first appropri-
                  ated for the Department of the Army for fiscal year 1943. The Career
                  Compensation Act of 1949 made this allowance permanent for all the
                  services, and instructed the service secretaries to develop regulations
                  for implementing it. Overseas COLA has received periodic congressional
                  attention since that time, but as DOD stated:

                  “Authority  to pay Overseas Station Allowance to military personnel was initially
                  granted with a minimum of Congressional rc’vxw and with a complete tack of Con-
                  gressional expression as to the tx~rposc to be served thrreby.“’

                  According to MD, the general purpose of (:OLAis to help defray the addi-
                  tional cost, of food and related living expenses incurred by military
                  members and their dependents while being assigned to permanent duty
                  outside the TJnited States. It said this means that COLA rates should be
                  set so that a service member’s purchasing power for nonhousing goods
                  and services acquired overseas will be equivalent to peers stationed in
                  the continental IJnited Stat,es. Determining the adequacy of COLA
                  required the Committee to exercise highly subjective ,judgments because
                  the allowance purpose and a standard to measure its adequacy lacked
                  specificity. Neverthr,less, most service members we interviewed were
                  generally satisfied with the amount of cotA they received, and believed
                  that COIA had kept pace with the cost of living at their overseas location.
                  However, they gcncrally did not understand COLA’Spurpose or how the
                  Committee set ratt5

                  We examined the approach and methodology currently used by DOD to
                  set ~OIA rates, and identified a number of problems with the data collec-
                  tion and analysis processes. For example:

              . Survey responses uscbdto establish shopping patterns were not represen-
                tative of c01-\ recipients.
              . Survey locations selected within a country were not always representa-
                tive of the entire country.
              l Living pattern survc~ys were not always performed in a timely manner.
              . Prices were improperly collected.
              - Standard statistical ln-occdures and tests were not employed and deci-
                sions on the use ol’ reported data were unsupported.
                                       Chapter 1
                                       Introduction




Figure 1.2: OHA and COLA for Typical
Officer




                                       these objectives, we performed work at Honolulu, Hawaii, and nine over-
                                       seas locations: Frankfurt, Wuerzburg, and Kaiserslautern, West Ger-
                                       many; Yokosuka and Okinawa, Japan; Rota, Spain; Seoul, Korea; Naples,
                                       Italy; and LakenheathlMildenhall,    United Kingdom. We also performed
                                       work in Washington, D.C.. at DOD’S Per Diem, Travel, and Transportation
                                       Allowance Committee: the Bureau of Labor Statistics; and the Depart-
                                       ment of State. In addition, we contacted the finance center for each ser-
                                       vice to obtain data on the timeliness of allowance adjustments.

                                       To obtain the necessary data, we (1) interviewed agency officials on pro-
                                       cedures, timeliness, calculation methods, and survey problems, (2) con-
                                       ducted structured interviews with randomly sampled allowance
                                       recipients to obtain information on unique cost items, actual living con-
                                       ditions, adequacy and timeliness problems, and their understanding of
                                       the programs’ purposes. and (3) reviewed survey forms provided to the
                                       Per Diem Committee by overseas commands, and the working papers it
                                       prepared. We reviewed and tested the survey forms and working papers
                                       to determine how closely the Committee follows its own procedures,
                                       whether alternative proc-edures could improve the process and reduce



                                       Page 12
                         Chapter 1
                         Introduction




                         affecting about 125,000 OEEA and 458,000 COLArecipients. DOD represent-
                         atives overseas provide the data used to calculate both allowances. Gen-
                         erally, each country has a point of contact responsible for ensuring that
                         local surveys are conducted and sent to the Branch.

                         The Branch also monit.ors the currency exchange rates between the
                         United States and the various host countries so that adjustments to
                         allowance levels based on currency fluctuations can be made when
                         needed. Adjustments can be made as often as every pay period. They
                         are based on an accumulated difference of 10 percent between the estab-
                         lished rate and the actual exchange rate.


                         In fiscal year 1988, the costs of COLAand OHA were $742 million and
Cost of the Allowances   $436 million, respectively. While the cost of OHA has increased to some
and Variance by          extent in recent years, COLAincreased sharply between fiscal years 1985
Location                 and 1988. The major contributing factors were (1) the declining value of
                         the dollar relative to other major currencies and (2) the increase in the
                         number of personnel receiving COLAfrom about 152,000 in fiscal year
                         1985 to about 458,000 in 1988. In Germany, for example, where DOD
                         began paying COLA in 1986, goods and services bought by service mem-
                         bers on the local economy cost 72 percent more in 1988, when the dollar
                         bought 1.8 deutsche marks, than it did in 1985, when the dollar was
                         worth 3.1 deutsche marks. Figure 1.1 shows the growth in these pro-
                         gram costs.

                         The amount of OHA and COLA vary significantly by location. For example,
                         figure 1.2 shows the allowance provided to a typical officel-l at some of
                         the locations we visited. In Yokosuka, Japan, a typical officer received
                         over $1,500 per month, whereas the same officer received about $250 in
                         Kaiserslautern, West Germany.


                         During the past several years, a number of reports have identified prob-
Problems Identified in   lems with setting overseas allowances. Many of the problems remain
Previous Reports         unresolved. In 1982, we reported” that living pattern surveys did not
                         always accurately represent purchasing patterns and survey results

                         4Ba.sedon the number rrrenmg OEIA at each officer pay grade, the typplcal officer is an O-3 (Savy
                         lieutenant and Army, Air Fw f, and Marine Corps captain) with Gyears of service and one
                         dependent.

                         ‘Computation of Cost-of-Ln’mg   Allowances for Uniformed Personnel Could Be More Accurate (GAO,’
                         FPCD-82-8. Feb. 25, 1982)



                         Page 10                                                    GAO/NSLAD-904       Overseas   Allowances
Chapter 1

Introduction


                   At many overseas locations where military personnel are stationed it is
                   more expensive to maintain a living standard comparable to their coun-
                   terparts in the ITnited States. A declining dollar relative to other curren-
                   cies has exacerbated the problem for service members living at some
                   overseas locations. and has dramatically driven up the allowances
                   intended to help defray these higher costs. The two allowances intended
                   to cover these higher costs are the overseas housing allowance (OHA) and
                   the cost of living allowam-e (COLA). The Department of Defense’s (DOD)
                   Per Diem, Transportation, and Travel Allowance Committee administers
                   these allowances.


                   In 1981, L)OL)adopted thcl current OIIA system for service members sta-
Overseas Housing   tioned overseas. This was partly in response to a GAOreport’ which con-
Allowance          cluded that the previous system improperly undercompensated junior
                   personnel and overcompensated senior personnel. OW. was intended to
                   remedy this inequity by reimbursing members whose off-base housing
                   costs exceed their basic, allowance for quarters.’

                   The Committee catculatc>s OIIA based on three cost elements. The first
                   clemrnt compensates sctlricc members up to a ceiling for the actual rent
                   they pay. Cornmilt t’o staff array the rent amounts for each grade and
                   location from highest to lowest. and establish the ceiling at the 80th per-
                   centile. ITnder this s>-stc>m80 percent, of the members can expect to have
                   all of their rent co\~~d by this portion of the allowance.

                   The second elemtlnt ot’ OIIA covers average utility and recurring mainte-
                   nance expenses reported by personnel at a particular location. The third
                   element covers moving-in and moving-out expenses that the service
                   member incurs to make the quarters habitable, such as for installation
                   of plumbing. heating, wit. c.onditioning, and appliances.

                   Committee staff obt amcd the data necessary to compute rent ceilings
                   from local housing offices who annually certify or recertify rental agree-
                   ments provided by scrvicc members. Members who do not provide an




                   Page x                                       GAOiNSL4B904   Ovrrsras Allowancrs
Contents


Executive Summary                                                                                2

Chapter 1                                                                                         8
Introduction          Overseas IIousing Allowance                                                 8
                      Cost of Living Allowance                                                    9
                      Administration of Overseas Allowances                                       9
                      Cost of the Allowances and Variance by Location                            10
                      Problems Identified in Previous Reports                                    10
                      Ob.jcctives, Scope. and Methodology                                        11

Chapter 2                                                                                        14
Methods for Setting   Most Service Members Relieve COLA Was Adequate, but                        15
                           Few Knew Its I’urpose
COLA Can Be           Alternative Approaches for Implementing a COLA System                      15
Improved              Data Collection and Analysis Concerns                                      17
                      Lack of Management Controls Affect COLA                                    23
                      Conclusions                                                                24
                      Recommendations                                                            24
                      Agency Comments                                                            25

Chapter 3                                                                                        26
Methods for Setting   Perceptions of Recipients
                      Iyniform Policy and Procedures Lacking for Non-Rent
                                                                                                 26
                                                                                                 28
OHA Can Be Improved         Portion of OIIA
                      ITnderpayment of Moving-In and Moving-Out Expenses                         30
                      Weak Management, Controls                                                  31
                      Proposed Legislation                                                       32
                      1‘niform Policy and Informat,ion Needed on Rental Ceiling                  33
                      Conclusions                                                                35
                      Recommendat ions                                                           35
                      Agency Comment 5                                                           36

Chapter 4                                                                                        37
Timeliness of         Currency Adjustment Process                                                37
                      Navy Members’ I’ereeptions of the Currency Adjustment                      38
Allowance Programs        Process
                      Time Lags From Survey to Implementation of Changes                         39
                      Conclusions                                                                40
                      Recommendations                                                            42
                      Agency Comments                                                            42



                      Page6                                     GAO/NSIAD90-46Overseas~owances
                              Executive Summary




Overseas Housing              GAO  found that the methodology used in setting the rental portion of the
                              housing allowance, which accounts for 80 percent of the overseas hous-
Allowance Concerns            ing allowance, is adequate because it is based on actual rent paid by the
                              recipient. However, GAO identified a number of problems associated with
                              the non-rent portion of the allowance covering reimbursement of utili-
                              ties, recurring maintenance, and moving in and out. For example:

                            . Because of a misapplication of the regulation, 33,000 personnel in Ger-
                              many received $58 a month less than they were entitled to under regula-
                              tions calling for full reimbursement of utility costs.
                            . GAO noted that the Per Diem Committee will approve separate rates for
                              utility and maintenance allowances for officers and enlisted personnel if
                              significant differences exist. However, GAO’S statistical test for six loca-
                              tions showed the committee in four cases made the correct determina-
                              tion, but in two cases made incorrect determinations. In one of these
                              cases, officers with dependents were undercompensated by $32 a month,
                              while enlisted personnel were overcompensated by $27 a month.
                            * GAO also noted that the monthly moving-in and moving-out expense is
                              supposed to be calculated by analyzing all expenses reported by service
                              members in an area and then dividing the average by the number of
                              months members typically reside in private housing. In making these
                              calculations, GAO not,ed the Per Diem Committee assumed that the aver-
                              age time service members spent in rental housing was 34 months. How-
                              ever, GAO found that actual time spent in rental housing ranged from 18
                              months to 24 months. ITsing the lower estimate at each location results
                              in a higher monthly recovery rate. For the six locations we examined,
                              GAO estimates that service personnel were undercompensated by $4
                              million.


Timeliness of Adjustments     GAO  analysis of adjustments based on fluctuations in currency exchange
                              rates showed that the Per Diem Committee did not always follow its pol-
                              icy to adjust cost of living and housing allowances when the prevailing
                              exchange rate established by the Committee increased or decreased by
                              10 percent. For example, the Committee exercised its discretion when it
                              did not change the allowance for a location in Germany, even though the
                              1O-percent differenc.e had been reached. This inaction by the Committee
                              resulted in a 7-week period where the difference between the old rate
                              and a rate based on weekly averages of daily exchange rate quotes dif-
                              fered by over 20 percent. We analyzed the effect of the delays in making
                              adjustments. and found that the delays did not affect the amount of
                              allowance service members received over the long term.



                              Page 4                                      GAO/NSIAD90-46   Overseas Akwances
Executive Summq


                   The total amount spent on overseas housing allowances and cost of liv-
Purpose            ing allowances for military personnel has increased from about $382
                   million in 1985 to approximately $1.2 billion in 1988. Despite the signifi-
                   cant increases, the allowances have not been adequate to cover some
                   high cost expenses overseas like automobile registration, repair, and
                   insurance.

                   Based on military members’ concerns about the overseas housing allow-
                   ance and cost of living allowance programs, the IIouse Committee on
                   Armed Services requested GAO to obtain service personnel views on the
                   adequacy of these allowances and evaluate the methodology and the
                   timeliness of adjustments to these allowances.


                   The overseas housing allowance and cost of living allowance are the
Background         principal overseas allowances for military personnel. Their general pur-
                   pose is to help defray living expenses for military personnel stationed
                   overseas. The Department of Defense’s (DOD)Per Diem, Transportation,
                   and Travel Allowance Committee administers these allowances.

                   The overseas housing allowance cost about $436 million in fiscal year
                   1988, up from about $230 million in fiscal year 1985. This allowance
                   covers rent, costs associated with moving in and out of a residence, utili-
                   ties, and recurring maintenance t,hat exceed the basic allowance for
                   quarters.

                   The cost of living allowance cost $742 million in fiscal year 1988, up
                   from about $162 million in fiscal year 1985. The major contributing fac-
                   tors for increases in both these allowances were (1) the declining value
                   of the dollar relativ,c to other major currencies and (2) t,he increase in
                   the number of pcrsonncl receiving cost of living allowances from about
                   152,000 in fiscal y(‘;tr 1985 to about 458.000 in 1988.


                   Most service mrmbcrs interviewed were generally satisfied with both
Results in Brief   the cost of living allowance and overseas housing allowance. IIowever,
                   GAO identified problems in the data collection process resulting in the
                   use of inaccurate and incomplete data to develop cost of living allow-
                   ance rates. GAO also found that non-rent portions of the housing allow-
                   ance (utilities, maintenance, and moving-in and moving-out expenses)
                   were not always computed correctly. Problems with calculating accurate
                   and representative allowances can be attributed, in large part, to a lack
                   of internal management controls.


                   page2                                       (;AO/NSIAD-90-46OverseasAUowances