oversight

Defense Budget: Observations on the Air Force Flying Hour Program

Published by the Government Accountability Office on 1999-07-08.

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

                   United States General Accounting Office

GAO                Report to the Chairman and the Ranking
                   Minority Member, Subcommittee on
                   Defense, Committee on Appropriations
                   U.S. Senate

July 1999
                   DEFENSE BUDGET

                   Observations on the
                   Air Force Flying Hour
                   Program




GAO/NSIAD-99-165
United States General Accounting Office                                                  National Security and
Washington, D.C. 20548                                                            International Affairs Division



                                    B-282754                                                                 Letter

                                    July 8, 1999

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

                                    This report responds to your request that we study the Air Force’s budget
                                    formulation process for its flying hour program for fiscal years 1997
                                    through 1999. During fiscal years 1997 and 1998, the Air Force reported
                                    funding deficits of $171 million and $200 million, respectively, in its flying
                                    hour program, and it projects a similar deficit for fiscal year 1999.
                                    Concerned that shortfalls in this program would curtail flying operations
                                    and in turn pose a serious risk to the readiness of Air Force aviation units,
                                    the Air Force requested and received additional money for the program in
                                    each fiscal year.

                                    The requests for additional funding raised concerns in Congress about the
                                    validity and accuracy of the Air Force’s budget formulation process for its
                                    flying hour program. As agreed with your offices, this report (1) identifies
                                    the extent to which the Air Force has flown the hours requested in its
                                    budget, (2) describes the process that the Air Force uses to determine
                                    flying hour requirements, (3) discusses how the requirements and specific
                                    cost factors are used to develop the budget estimate for the flying hour
                                    program, and (4) compares program funding and obligations incurred in
                                    fiscal year 1997 and fiscal year 1998 and provides reasons for the
                                    differences.



Background                          The Air Force’s flying hour program comprises the number of hours needed
                                    to attain and maintain combat readiness and capability for its aircrews, to
                                    test weapon systems and tactics, and to fulfill collateral requirements such
                                    as air shows, demonstration rides for VIPs, and ferrying aircraft. The
                                    number of hours required is determined annually at the major commands
                                    by operations and training personnel.




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                      Air Force documents show that funding for active Air Force flying hours
                      was about $2.8 billion for fiscal year 1998. The funds are part of the
                      congressional appropriation for Air Force Operation and Maintenance,
                      which totals about $20 billion annually. Air Force headquarters distributes
                      the flying hour funds to its eight major commands, which have the
                      responsibility of managing the funds. The major commands use the
                      operation and maintenance dollars to pay for fuel, maintenance, and spare
                      parts in support of flying operations.1

                      The Air Force flying hour program is not reflected as a separate line item in
                      the operation and maintenance appropriation. The budget is organized by
                      budget activity groups, activity groups, and sub-activity groups; flying hour
                      costs are spread throughout this budget structure by the use of program
                      element codes. These program elements are used as the basic building
                      blocks for identifying resource requirements in the Air Force’s portion of
                      the President’s budget. Costs per flying hour in fiscal year 1998 were
                      expensed within 39 program element codes spread throughout 12
                      sub-activity groups.



Results in Brief      In the last 4 years, the Air Force has requested funding for more flying
                      hours than it has been able to fly. From fiscal year 1995 through fiscal year
                      1998, the Air Force flew fewer hours than were programmed, ranging from
                      a low of about 89 percent of programmed hours in fiscal year 1995 to a high
                      of about 94 percent in fiscal year 1996. Programmed hours were not flown
                      for a variety of reasons, including deployments, bad weather, and
                      maintenance or supply problems. The Air Force did not cite a shortage of
                      flying hour funding as a cause for underflying the program.

                      In July 1997, the Air Force changed its method for determining its flying
                      hour requirements by better linking these hours to missions required for
                      maintaining readiness and proficiency. For fighter and bomber aircraft, for
                      example, the Air Combat Command has two readiness levels—basic
                      mission-capable and combat mission-ready. For each level, the new
                      method specifies the number of sorties required, the training events to be
                      accomplished, and the hours required for accomplishing them. The Air
                      Force Chief of Staff has also emphasized to its major commands the need


                      1
                      The Air Force’s major commands include Air Combat Command, Air Education and Training
                      Command, Air Force Academy, Air Forces Europe, Air Mobility Command, Air Force Material
                      Command, Pacific Air Forces, and Space Command.




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                          to fly all programmed hours in fiscal year 1999. The remainder of this fiscal
                          year should serve as a good indication of the Air Force’s general ability to
                          fly the hours it says are needed to maintain combat readiness and
                          proficiency while maintaining support for contingencies in Europe and
                          Southwest Asia.

                          The methodology used by the Air Force to cost out the flying hour program
                          depends heavily on stable prices for its repairable and consumable spare
                          parts. Management problems in determining prices for these items have
                          led to multiple price changes that have, in turn, led the Air Force to believe
                          it would exhaust its flying hour funding before the end of the fiscal year. As
                          a result, for the last 2 fiscal years, it requested, and received, additional
                          congressional funding for its flying hour program that ultimately proved to
                          be in excess of its requirements since it flew fewer hours than
                          programmed. In total, Congress provided about $5 million more for the
                          flying hour program than the Air Force’s obligations during fiscal year 1997
                          and about $357 million more than its obligations in fiscal year 1998.
                          Ultimately, these excess funds were used to support unmet needs for
                          funding in other operation and maintenance programs, such as real
                          property maintenance and base operation support.

                          The Air Force is currently implementing our prior recommendations aimed
                          at improving the financial operations of the Air Force’s supply management
                          activity group. Continued progress in implementing these
                          recommendations should enable the Air Force to provide the pricing
                          stability needed to more accurately assess the adequacy of its flying hour
                          funding as the budget year progresses. Therefore, we are not making any
                          additional recommendations at this time.



Historically, Air Force   During fiscal years 1995 through 1998, the Air Force each year requested
                          funding for more flying hours than its flying units were able to execute.
Flying Hour               Annually, the major commands are asked to determine the number of hours
Requirements Have         needed to attain and maintain combat proficient aircrews and to complete
                          collateral flying requirements. In making this determination, command
Exceeded the Number       personnel consider the frequency of flying (number of sorties or hours) and
of Hours Units Could      specific training events each aircrew must accomplish. The flying
Fly                       requirements, expressed in hours, become the basis for the funding
                          requested in the President’s budget. From fiscal year 1995 through fiscal
                          year 1998, the total Air Force requirement remained fairly constant at about
                          1.3 million hours each year.




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In each fiscal year the Air Force flew fewer hours than were programmed.
This ranged from a low of about 89 percent of the programmed hours in
fiscal year 1995 to a high of about 94 percent in fiscal year 1996. The hours
programmed and the percent flown are shown in table 1.



Table 1: Air Force Flying Hours Programmed and Percentage Flown
(fiscal years 1995–98)

Fiscal                                                President’s                             Percent
year                                               budget (hours)                               flown
1995                                                     1,453,501                                88.7
1996                                                     1,327,155                                93.7
1997                                                     1,285,695                                91.7
1998                                                     1,290,256                                92.5
Note: The numbers and percentages shown in table 1 are aggregates; the actual hours and
percentages flown vary among each flying unit. For example, the aggregate for fiscal year 1998 was
92.5 percent, but as we reported in Air Force Supply: Management Actions Create Spare Parts
Shortages and Operational Problems (GAO/NSIAD/AIMD-99-77, April 1999), the B-1B and the F-16
aircraft in the Air Combat Command flew only 83 percent of their total flying hours during fiscal year
1998.
Source: Department of the Air Force.


As each unit recognizes that it will be unable to fly its programmed hours, it
“turns in” the hours to the major command and provides the reason for
doing so. The reasons for not flying the program varied, but a shortage of
flying hour funding was not cited as one of them. The reasons that were
cited by units from the Air Combat Command and Air Mobility Command
included

•   supporting contingencies (such as enforcing the no-fly zone in Iraq),
•   evacuation of aircraft due to hurricanes,
•   aircraft grounded for safety considerations, and
•   higher than normal non-mission-capable rates due to maintenance and
    supply problems.

The flying hour requirement in the budget request does not include flying in
support of contingency operations such as those in Bosnia and Iraq.
However, hours flown in support of contingency operations are counted
against programmed hours already funded in the President’s budget up to
the number of hours an aircraft would have flown at its home station. For
additional hours flown, the Air Force receives additional funding from a
centrally managed Department of Defense (DOD) contingency account.



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                        For example, in fiscal year 1998, Air Combat Command units flew about
                        79,400 hours in support of contingencies; about 54,500 hours were counted
                        against the programmed hours, and funding was received for the remaining
                        24,900 hours.



Air Force Has Revised   In mid-1996, the Air Force Chief of Staff expressed concern that the service
                        was not fully executing its flying hour program and emphasized that it is Air
Its Requirements        Force policy to fly the complete program. Accordingly, he tasked the major
Determination           commands with (1) revalidating their flying hour requirements to ensure
                        that they were adequate to meet readiness levels and (2) addressing their
Processes to Better     ability to execute these hours. The Acting Secretary of the Air Force
Link Flying Hours to    reported to Congress in March 1998 that these actions had been completed.
Mission-Oriented
                        In response to these concerns, the major commands revised their
Training Programs       requirements determinations processes to tie them more closely to
                        mission-oriented training programs. The Air Combat Command, for
                        example, developed and implemented the Ready Aircrew Program, which
                        incorporates a computer model to determine flying hour requirements for
                        its fighters and bombers. Air Force officials said that the new system links
                        flying hour training with warfighting commanders in chief requirements
                        and standardizes the methodology for determining the hours needed to
                        ensure combat proficiency. The Air Mobility Command has adopted a
                        similar, model-based approach to determining its requirements.2

                        The basis for Air Combat Command’s requirements model is their
                        task-based Ready Aircrew Program. The Ready Aircrew Program is the
                        continuation-training program designed to focus training on capabilities
                        needed to accomplish a unit’s core missions. The program establishes two
                        levels of proficiency: basic mission-capable and combat mission-ready.
                        Each level is defined by a total number of Ready Aircrew Program sorties,
                        broken down into mission types, plus specific weapons qualifications and
                        associated events. For example, an experienced F-16 pilot would require
                        60 sorties annually to achieve basic mission-capable and 96 sorties to
                        achieve combat mission-ready status. The level that individual pilots are
                        required to maintain is determined by their position in the unit; for
                        example, all line pilots, commanders, and operations officers must


                        2
                         Previously, the commands based requirements largely on training programs that required a specific
                        number of sorties or hours per pilot, but did not use models to standardize the calculations by aircraft
                        type.




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maintain combat mission-ready, while staff officers fly at the basic mission-
capable level. Guidelines for mission types and weapons qualifications are
provided in the training manual for each aircraft, but these are
supplemented by unit-specific requirements issued annually by the major
command.

These sortie requirements are factors used in the computer model, which
calculates the total sortie requirements for each flying unit. Other factors
the model considers are as follows:

• The number of primary aircrews (line pilots). These pilots must
  maintain combat mission-ready status.
• The experience mix of the pilots assigned. An inexperienced pilot
  (generally, a pilot with less than 500 hours logged in the aircraft)
  requires 20 more sorties per year than an experienced pilot.
• The number of attached pilots. Staff officers who are required to
  maintain basic mission-capable status are attached to the unit to satisfy
  flying requirements.
• Special capability sorties. Units may be required to maintain some
  pilots with special capabilities or qualifications that require additional
  sorties.
• Collateral sorties. Each unit must fly some number of sorties not
  directly related to combat employment or training but necessary for
  accomplishment of unit training programs. These include ferry flights,
  deployments, incentive flights, air shows, and so forth.

For budgeting purposes, the flying hour requirements are based on notional
models of each unit type that assume that each unit will have all its aircraft
and personnel assigned. Once the model has calculated the unit’s sortie
requirements, the sorties are converted to flying hours. The conversion is
made using unit-specific averages of sortie duration. The average sortie
duration varies among units according to geographic location, proximity to
training ranges, and the type of aircraft the unit flies. The result of the
calculation is the units flying hour requirement. The total requirement for
all units in the command is provided to financial management staff for use
in developing the budget for flying hours.

The Air Mobility Command also uses models to develop its flying hour
program. Air Mobility Command has developed airframe-specific models
that compute flying hour requirements based on the number of aircraft
commanders, co-pilots, and navigators authorized and the types, number,
and duration of training events they must complete annually. The models



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consider two types of training requirements: (1) experiencing
requirements, which represent the flying training co-pilots must
accomplish to upgrade to aircraft commander and (2) currency
requirements, which represent the specific training needed for aircrews to
develop flying skills. While all flying provides experiencing training,
currency training can only be obtained through the accomplishment of
specific training events.

In 1998, the Air Force Audit Agency reviewed Air Mobility Command’s
flying hour program to determine if managers used effectively structured
models and accurate data to compute flying hour requirements. The audit
reported that opportunities existed to improve the model structure and
inputs. According to the report, Air Mobility Command personnel teamed
with the auditors to develop an improved, single-model structure for all
applicable aircraft, and the Command’s personnel validated all the relevant
factors used in the models. 3 This structure was provided to U.S. Air Force
headquarters to serve as a basis for developing guidance for all Air Force
mobility flying hour programs.

The Air Mobility Command flying hour program differs from Air Combat
Command’s program in that funding is provided from two sources.
Traditionally, Air Mobility Command training requirements are Operation
and Maintenance funded, while missions flown in support of the U. S.
Transportation Command are funded by the Transportation Working
Capital Fund. These missions involve movement of passengers and/or
cargo, and the customer reimburses the working capital fund. The Air
Mobility Command flying hour models were designed to calculate a
distribution of flying hours by funding sources based on assumptions about
the types of missions expected to be flown. Once the hours needed are
determined, the requirements are provided to financial personnel for use in
developing the flying hour budget.




3
Airlift and Air Refueling Aircraft Flying Hour Program, Air Force Audit Agency, Audit WS099011,
December 9, 1998.




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Programmed Hours       The basis for flying hour funding is the number of programmed hours
                       multiplied by the projected cost per flying hour rate. Each major command
and Cost Factors Are   develops a cost per flying hour rate for each of the aircraft types in its
Used to Prepare the    inventory. The rates comprise three major program expense elements—
                       depot-level repairable parts, consumable supplies, and aviation fuel.
Budget Estimate        Depot-level repairable items are parts that can be repaired at a
                       maintenance facility and are used in direct support of aircraft maintenance
                       (e.g., aircraft engines). Consumables are generally defined as
                       non-repairable supply items used by maintenance personnel in direct
                       support of aircraft maintenance. Aviation fuel is the cost of fuel purchased
                       to operate aircraft.

                       Cost per flying hour rates are developed in accordance with guidance from
                       the Air Force Cost Analysis Improvement Group (AFCAIG). AFCAIG is a
                       General Officer/Senior Executive Service group co-chaired by the Deputy
                       Assistant Secretary of the Air Force for Cost and Economics and the
                       Deputy Chief of Staff for Installations and Logistics. The group includes
                       representatives from budget, logistics, and planning sections. The
                       guidance is issued annually by the Comptroller and Air Force Logistics in
                       the form of an AFCAIG letter, which begins the AFCAIG process. Under
                       this guidance, cost factors are developed by the major commands and
                       submitted by mid-November to Air Force headquarters for validation and
                       approval.

                       The annual AFCAIG process develops costs for the budget 2 years into the
                       future; for example, the 1997 cycle, using the most current cost data
                       available, developed the cost factors used in the fiscal year 1999 budget.
                       The major commands begin the factor development process by calculating
                       a baseline cost per hour for each aircraft type. Essentially, this process is
                       accomplished by dividing the accumulated obligations for each expense
                       element by the number of hours flown. For example, the baseline cost per
                       hour for depot-level repairable parts for the F-15E in fiscal year 1997 was
                       $2,667—accumulated obligations of about $100 million divided by the
                       37,531 hours flown. The baseline cost per flying hour is then adjusted by a
                       conversion factor (provided in the guidance from headquarters) to state the
                       costs in fiscal year 1998 dollars. For the example cited above, the 1.198
                       factor used that year increased the baseline cost to $3,195 per flying hour.

                       Once the baseline cost per flying hour rates are determined, the major
                       commands review them and propose adjustments. An adjustment is an
                       increase or decrease due to a forecasted change in policy, procedure, or




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situation that will affect the cost per flying hour. The major command must
compile data that is sufficient to allow reviewers within the process to
understand the command’s requirements. The reasons for adjustments
include, but are not limited to, the following:

• Warranty expiration—when a system has been covered by a warranty,
  the true sustainment costs have not been captured in the baseline.
• Special program starting—the price paid in the baseline year would no
  longer be needed because the system is transferring to a special
  program, such as Contractor Logistic Support.
• Changes in the level of maintenance—changing from two-level to
  three-level, or vice versa, would affect the depot-level repairable cost
  and the consumable supply cost associated with repair.

The completed baseline and proposed adjustments are submitted to Air
Force headquarters for validation and approval. The validation is done by
Air Force logistics and the Air Force Cost Analysis Agency (AFCAA) in
conjunction with the major command’s Director of Plans. The result is a
coordinated position and a validated package submitted by mid-December.
AFCAA provides a copy to the various panels that comprise the AFCAIG in
preparation for January briefings. In January, the major commands’
representatives brief the AFCAIG in regard to the cost drivers of the
validated factors and the major commands’ total requirement. The
AFCAIG approves or disapproves the validated submissions.

Each February, AFCAA provides the Air Force Budget office with the
approved factors for each major command. Budget personnel put the cost
factors into the Automated Budget Interactive Data Environment System
(ABIDES) computer database to price the flying hour program, and they
provide the total dollar amount back to AFCAA. The AFCAIG then briefs
the Air Force corporate structure, which is the top-level forum for
considering and deciding Air Force resource allocation issues. If changes
result from this review, the budget office will adjust the cost factors and
distribute to the major commands (by May of each year) the adjusted
AFCAIG cost per flying hour factors along with an explanation for the
adjustments.

Finally, the cost factors are adjusted to accommodate the annual composite
price changes forecast by managers of the Air Force Working Capital Fund.
The fund provides resources for Air Force Material Command’s (AFMC)
Supply Management Activity Group, which provides supply support to the
major commands. Each year the managers estimate a rate of increase or



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                              decrease in prices and submit it to the Under Secretary of Defense for
                              approval. Once approved, the composite rate is provided to the Air Force
                              budget office. The budget office applies the rate to the approved AFCAIG
                              cost factors. These final factors, applied through the ABIDES database,
                              become the basis for the cost of flying hours requested in the President’s
                              budget.



Price Instability Has         The accuracy of the costs projected by the system described above
                              depends heavily on the working capital fund concept that requires
Led to Obligations            stabilized prices for repairable parts and consumable supplies. These
Exceeding Funds               prices are established by AFMC. For the past 2 fiscal years, and
                              particularly in fiscal year 1998, AFMC has not provided this stability.
Provided for the Fying        Instead, financial management and systems problems at AFMC resulted in
Hour Program                  price lists that contained numerous errors. Efforts to correct the errors
                              and changes in pricing policies created wide fluctuations of prices paid by
                              the major commands. In total, the price lists provided to the commands
                              were changed six times during fiscal year 1998. These price changes
                              caused a great deal of concern among the commands regarding their ability
                              to support the flying hour program and distorted the baseline data used for
                              future years’ budgeting. In a June 1998 report, we recommended that
                              AFMC develop and implement procedures to stabilize prices. AFMC
                              efforts to accomplish this are currently in progress.


Working Capital Fund          The Air Force Working Capital Fund was created in 1996 by the Under
Concept Requires Stabilized   Secretary of Defense (Comptroller) as a reorganization of the Defense
                              Business Operations Fund. The Working Capital Fund is a revolving fund
Prices                        established to create a customer-provider relationship between military
                              operating units and support organizations (for the purposes of this report,
                              the Supply Management Activity Group (SMAG)). SMAG generates
                              revenue by selling to Air Force units the items necessary to support troops,
                              weapon systems, aircraft, communications systems, and other military
                              equipment. SMAG is expected to break even over time by setting its prices
                              to recover both the costs of goods and operating costs over the long run.
                              Variations in program execution may result in gains or losses for the year,
                              but such gains or losses are generally reflected in offsetting adjustments to
                              stabilized rates established in subsequent fiscal years.

                              DOD Financial Management Regulation 7000.14R requires that the prices,
                              once established, be stabilized for the remainder of the fiscal year. This
                              stabilized rate policy serves to protect appropriated fund customers from



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unforeseen cost changes, and thereby enables customers to more
accurately plan and budget for support requirements. According to the
regulations, the policy also reduces disruptive fluctuations in the support
facility’s workload levels and permits more effective use of resources.

For the past 2 years, SMAG has been unable to establish accurate price lists
for the repairable parts and consumable items it supplies to Air Force flying
units. In June 1998, we reported that SMAG lacked reliable data on which
to base its prices and could not ensure that the composite price change
approved by the Under Secretary of Defense (Comptroller) was
implemented.4 The report further stated that on October 1, 1997, the Air
Force made two major changes in SMAG’s cost allocation procedures, but
that SMAG lacked reliable sales revenue and operational cost data needed
to effectively implement the change.

 As a result, the price lists issued by SMAG to its customers contained
inaccurate pricing and/or prices that fluctuated widely from those
previously charged. In April 1997, the Air Force determined that SMAG’s
composite price increase was higher than the one approved for fiscal year
1997 by the Under Secretary of Defense (Comptroller); consequently,
prices were reduced by about 18 percent for the remainder of the year. In
fiscal year 1998, when SMAG attempted to implement a composite rate
increase of about 19.3 percent, the price list that became effective
October 1 contained so many erroneous prices that SMAG revised it a
month later and revised it again effective December 1. Despite the DOD
regulations requiring stabilized prices, SMAG changed the price list a total
of six times during fiscal year 1998. Table 2 shows how the changes
affected the prices of specific items.




4
Air Force Supply Management: Analysis of Activity Group’s Financial Reports, Prices, and Cash
Management (GAO/AIMD/NSIAD-98-118, June 1998).




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Table 2: Examples of Price Changes During Fiscal Year 1998

                                                                  Percent of change from                             Percent of change from
Type of part               Initial price   Second price             initial to second price            Third price      second to third price
Cell assembly                   $9,939                 $13,152                            32.3            $14,503                       10.2
Duct assembly                   17,544                   19,340                          10.2              23,516                       21.6
Case, turbine                    9,235                   10,199                           10.4             16,795                       64.7
#3 bearing                       3,981                    5,654                           42.0              5,106                      (9.7)a
Liner                           10,893                   12,141                           11.5              2,700                     (77.8)a
Case, gas turbine                1,478                 204,413                       13730.4           No change                  No change
                                           a
                                               Percentages in parentheses indicate price reductions.
                                           Source: Air Combat Command.




Price Changes Hamper                       The lack of accurate and stable prices for depot-level repairable and
Budgeting at Major                         consumable parts caused a great deal of concern among the flying
                                           commands. According to Air Force officials, the overpricing by SMAG in
Commands                                   fiscal year 1997 was identified only after budget execution reviews revealed
                                           that the commands would not have enough money to complete their flying
                                           hour programs if spending continued at the current rate. Even though
                                           SMAG reduced its prices in mid-year, the Air Force requested and received
                                           supplemental funding (about $108 million) to correct the projected
                                           shortfall.

                                           Similarly, in deliberations over the fiscal year 1998 budget, the Air Force
                                           told Congress that the rapid growth in costs for repairable parts and
                                           consumables required substantial funding in addition to its budget request.
                                           Congress provided $300 million to offset the perceived shortage.
                                           Nevertheless, the numerous price changes made it difficult for the
                                           commands to determine if they had been provided adequate funding to
                                           complete the flying hour program. Air Combat Command officials
                                           acknowledged that the changes made it virtually impossible for them to
                                           determine whether funding was sufficient, but their analysis showed that
                                           they expected shortages if additional funding was not provided. In late
                                           fiscal year 1998, $181 million was reprogrammed into the flying hour
                                           program.

                                           In addition to creating uncertainty over the adequacy of funding for the
                                           current year, the pricing and policy changes implemented by SMAG may
                                           affect budgeting for future years. This is because (1) budgeting is based on
                                           actual obligations in prior years, (2) SMAG’s new procedures significantly



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                                            affected the fiscal year 1998 prices charged for individual items, and (3) the
                                            impact varied significantly from one customer to the next. In our 1998
                                            report on SMAG, we reported that Air Force budget officials estimated it
                                            would take at least 1 to 2 years, perhaps more, before the Air Force has
                                            reliable historical data on the amount of money needed by individual
                                            customers.



Pricing Problems Continued                  Although SMAG’s problems with pricing have been known for some time, it
into Fiscal Year 1999                       appears they have continued into this fiscal year. The approved composite
                                            rate increase for fiscal year 1999 was 0.4 percent. However, both Air
                                            Combat Command and Air Mobility Command budget personnel told us
                                            they were experiencing, on the whole, a much greater increase. As a result
                                            of the commands’ concerns, SMAG once again issued a new price list
                                            effective January 1, 1999. According to an AFMC official, this change
                                            reduced prices by about 7 to 7.5 percent across the board. Table 3 provides
                                            several examples of the magnitude of changes in the exchange price for
                                            specific repairable parts.



Table 3: Examples of the Magnitude of Fiscal Year 1999 Price Changes

                                 Price in             Price in Oct. 1998         Percent change from              Price in    Percent change
Repairable part                Sept. 1998         (new fiscal year price)             fiscal year 1998          Jan. 1999     from Sept. 1998
Core module                    $1,557,348                       $1,709,633                               10    $1,592,204                2.24
Core module                       380,493                          671,099                               76       625,003               64.26
Fan module                         91,731                          219,221                              139       204,163              122.57
HPT module                         87,109                          148,031                               70       137,863               58.26
Fan drive                          58,339                          155,164                              166       144,507              147.70
Exciter                         3,725,818                             1,686                      (99.95)a           1,433             (99.96)a
Comp rotor                         55,694                          152,593                        173.98           14,660             (73.68)a
Fan rotor                          15,096                          105,730                        600.38          131,726              772.59
Turbine rotor                      52,695                            96,913                        83.91           10,018             (80.99)a
                                            a
                                                Percentages in parentheses indicate price reductions.
                                            Source: Air Combat Command.


                                            In our June 1998 report, we recommended that AFMC develop and
                                            implement procedures to ensure that the prices that are established for
                                            individual inventory items are consistent with the composite prices
                                            developed and approved by the Under Secretary of Defense (Comptroller)
                                            during the budget process. In March 1999, the Air Force responded to a



                                            Page 13                                                           GAO/NSIAD-99-165 Defense Budget
                         B-282754




                         request for the current implementation status of this recommendation.
                         According to that response, the Air Force Director of Supply tasked AFMC
                         to assess the current pricing methodology and develop a long-term solution
                         that would provide stabilized prices consistent with the President’s budget.
                         In turn, AFMC established an Integrated Product Team that is currently
                         working on several options. In addition, AFMC requested assistance from
                         the Air Force Audit Agency to assess their pricing policies. Both efforts are
                         currently in progress.


Comparison of Budgeted   The flying hour program included in the President’s budget does not
Costs With Actual        include the cost of flying in support of contingencies, while the Air Force
                         accounting system accumulates the costs of all flying without regard to its
Obligations              purpose. Therefore, the most valid and meaningful comparison is between
                         the total funding received for flying hours and the total amount obligated
                         for that purpose. Through supplemental funding and DOD reprogramming
                         actions, the Air Force received more each year for flying hours than was
                         obligated. According to Air Force budget officials, the excess in fiscal year
                         1997 was about $5 million, but in fiscal year 1998, the excess was about
                         $357 million. Table 4 shows this comparison.



                         Table 4: Comparison of Flying Hour Program Funding and Obligations (fiscal
                         years 1997–98)

                         Dollars in millions
                         Funding                                                              1997           1998
                         President’s budget                                                $2,301.4       $2,717.7
                         Congressional increase for depot-level repairable parts                             246.1
                         Other (adjustments for force structure changes, etc.)               (10.0)
                         Contingency flying hours (reimbursement from DOD)                     81.5          160.9
                         Supplemental/Omnibus reprogramming                                   108.4          181.5
                         Total funding                                                     $2,481.3       $3,306.2
                         Total obligations                                                 $2,476.4       $2,949.6
                         Funding excess                                                        $4.9        $356.6
                         Source: Department of the Air Force.


                         Air Force officials said that the excess flying hour money was used by
                         headquarters or the major commands to satisfy unmet funding
                         requirements in other operation and maintenance programs. Table 5 shows
                         the distribution of the excess fiscal year 1998 flying hour funds.



                         Page 14                                                   GAO/NSIAD-99-165 Defense Budget
              B-282754




              Table 5: Distribution of Excess Flying Hour Funds to Other Operation and
              Maintenance Accounts—(fiscal year 1998)

              Dollars in millions
              Operation and maintenance account                                 Dollars received
              Expenses for training and ranges                                            $69.0
              Air operations training, combat communications                               61.0
              Environmental compliance                                                     36.0
              Base operating support                                                       35.0
              Undergraduate pilot training                                                  35.0
              Expenses for SR-71 retirement                                                 30.0
              Real property maintenance                                                    26.5
              Depot purchased equipment for maintenance requirements                       22.0
              Temporary duty, supplies, equipment, contracts                               14.0
              Battlelabs                                                                   13.0
              Headquarters and administrative expenses                                     10.0
              Updated flying hour factors                                                    5.0
              Total                                                                      $356.5
              Source: Department of the Air Force.




Conclusions   The Air Force continues to request funding for more hours than it has been
              able to fly in the current world environment. A number of factors have
              affected the service’s ability to fly all the programmed hours, but a shortage
              of funding is not one of them. The Air Force has revised its requirements
              determination process, received adequate funding, and provided the major
              commands with top-level command emphasis on flying all the programmed
              hours in fiscal year 1999. The amount of flying hours the Air Force
              completes in the remainder of this fiscal year should serve as a good
              indication of its general ability to fly the hours it says are needed to
              maintain combat readiness and proficiency while maintaining support for
              contingencies in Europe and Southwest Asia.

              The methodology used by the Air Force to determine the cost of the flying
              hour program appears sound, but it depends heavily on stable prices for its
              repairable and consumable spare parts. Until the SMAG is able to
              overcome its management problems and provide stable prices to its
              customers, the flying hour program will experience fluctuating costs and
              uncertainty regarding the adequacy of funding.




              Page 15                                           GAO/NSIAD-99-165 Defense Budget
              B-282754




              We are not making specific recommendations at this time because the Air
              Force is in the process of correcting the pricing problems identified in our
              previous report on the financial operations of the supply management
              activity group.



Scope and     To identify the extent to which the Air Force has flown the hours requested
              in the President’s budget, we obtained and reviewed major command
Methodology   quarterly execution reports from Air Force Headquarters, Directorate of
              Operations and Training, Washington, D.C. These reports compare the
              number of hours programmed in the President’s budget with the number of
              hours executed, by type of aircraft, at each of the eight major commands.

              To meet our objective of how the Air Force determines flying hour
              requirements, we reviewed regulations and obtained briefings at Air
              Combat Command, Langley Air Force Base, Virginia, and Air Mobility
              Command, Scott Air Force Base, Illinois. We obtained documents on the
              assumptions and specific requirements used in these models. We selected
              these two commands because they comprise over two-thirds of the flying
              hour program funding.

              To determine how the budget estimate for the flying hour program is
              developed, we reviewed the Air Force’s flying hour process guide and
              interviewed officials from the Air Force Cost Analysis Agency, Crystal City,
              Virginia, and Air Force Logistics Directorate, Washington, D.C. In addition,
              we discussed price changes in the Air Force Working Capital Fund with
              representatives of the Air Force Deputy Assistant Secretary (Budget).

              The financial information used in this report on the actual obligations
              incurred for the flying hour program compared to budget requests in fiscal
              years 1997 and 1998 was produced by financial and accounting records
              from the Secretary of the Air Force Financial Management and Budget
              Office (SAF/FMBO), Washington, D.C. The SAF/FMBO also provided
              documentation that showed the Air Force spent funds initially set aside for
              flying hours for other purposes. We did not independently verify this
              information.

              We conducted our review from August 1998 to May 1999 in accordance
              with generally accepted government auditing standards.




              Page 16                                       GAO/NSIAD-99-165 Defense Budget
                  B-282754




Agency Comments   A draft of this report was provided to the Air Force for their comments.
                  The Air Force stated they are working to improve requirement
                  identification and pricing issues identified in the report. The Air Force also
                  suggested several technical changes to the draft, which we have
                  incorporated where appropriate. Air Force comments are presented in
                  appendix I.


                  We are sending copies of this report to Representative Jerry Lewis,
                  Chairman, and Representative John P. Murtha, Ranking Minority Member,
                  House Committee on Appropriations, Subcommittee on Defense; Senator
                  James M. Inhofe, Chairman, and Senator Charles S. Robb, Ranking Minority
                  Member, Senate Committee on Armed Services, Subcommittee on
                  Readiness and Management Support; and Representative Herbert H.
                  Bateman, Chairman, and Representative Solomon P. Ortiz, Ranking
                  Minority Member, House Committee on Armed Services, Subcommittee on
                  Military Readiness. We are also sending copies of this report to the
                  Honorable William S. Cohen, Secretary of Defense, and the Honorable F.
                  Whitten Peters, Acting Secretary of the Air Force. Copies will also be made
                  available to others upon request.

                  If you have any questions about this report, please contact me at (202)
                  512-5140 or Brenda S. Farrell at (202) 512-3604. Other major contributors
                  to this report include Carol R. Schuster, James K. Mahaffey, Robert L.
                  Coleman, and Raymond G. Bickert.




                  Mark E. Gebicke
                  Director, National Security
                  Preparedness Issues




                  Page 17                                        GAO/NSIAD-99-165 Defense Budget
Appendix I

Comments From the Department of the Air
Force                                                                    ApIenxdi




 Note: GAO’s comment
 supplementing those in the
Ap1p1




 report text appear at the end
 of this appendix.




See comment 1.




                                 Page 18   GAO/NSIAD-99-165 Defense Budget
                   Appendix I
                   Comments From the Department of the Air
                   Force




                   The following is our comment on the Department of the Air Force’s letter
                   dated June 16, 1999.



GAO Comments       1. We disagree with the Air Force’s characterization of our report. The
                   primary findings in this report are that (1) the Air Force has consistently
                   requested funding for more flying hours than it has been able to fly for each
                   of the last 4 fiscal years—ranging from 89 to 94 percent of estimated flying
                   hours; (2) continuing financial management problems associated with the
                   pricing of individual inventory items have contributed to the Air Force’s
                   inability to accurately estimate the funding it needs for this program; and
                   (3) the eventual surplus funds that Congress originally intended for the
                   flying hour program—$5 million in fiscal year 1997 and $357 million in
                   fiscal year 1998—have been shifted to other operation and maintenance
                   purposes. Moreover, we have not made any new recommendations in this
                   report because the Air Force is in the process of implementing our earlier
                   recommendations aimed at improving the financial operations of the Air
                   Force’s supply management activity group.




(703260)   Leetr   Page 19                                        GAO/NSIAD-99-165 Defense Budget
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