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United States Government Accountability Office: 

DOD Transformation: Challenges And Opportunities: 

The Honorable David M. Walker: 
Comptroller General of the United States: 

Defense Acquisition University's PEO/SYSCOM: 
Ft. Belvoir, Virginia: 
November, 8 2006: 

The Case for Change: 

The federal government is on a "burning platform," and the status quo 
way of doing business is unacceptable for a variety of reasons, 
including: 

Past fiscal trends and significant long-range challenges: 

Rising public expectations for demonstrable results and enhanced 
responsiveness: 

Selected trends and challenges having no boundaries: 

Additional resource demands due to Iraq, Afghanistan, incremental 
homeland security needs, and recent natural disasters in the United 
States: 

Numerous government performance/accountability and high risk 
challenges: 

Outdated federal organizational structures, policies, and practices: 

Composition of Federal Spending: 

[See PDF for image] - graphic text 

3 pie charts with 5 items each. 

1965: 
Defense: 43.0%; 
Social Security: 15.0%; 
Medicare & Medicaid: 0%; 
Net interest: 7.0%; 
All other spending: 35.0%. 

1985: 
Defense: 27.0%; 
Social Security: 20.0%; 
Medicare & Medicaid: 9.0%; 
Net interest: 14.0%; 
All other spending: 30.0%. 

2005: 
Defense: 20.0%; 
Social Security: 21.0%; 
Medicare & Medicaid: 19.0%; 
Net interest: 7.0%; 
All other spending: 32.0%. 

Source: Office of Management and Budget. 

[End of Figure] 

Federal Spending for Mandatory and Discretionary Programs: 

[See PDF for image] - graphic text 

3 pie charts with 3 items each. 

1965: 
Discretionary: 66%; 
Mandatory: 27%; 
Net Interest: 7%. 

1985: 
Discretionary: 44%; 
Mandatory: 42%; 
Net Interest: 14%. 

2005: 
Discretionary: 39%; 
Mandatory: 54%; 
Net Interest: 7%. 

Source: Office of Management and Budget. 

[End of Figure] 

GAO-07-226CG 4: 

Surplus or Deficit as a Share of GDP Fiscal Years 1962*2005: 

[See PDF for image] - graphic text: 

Line/Stacked Bar combo chart with 1 line (Unified) and 43 bars. 

Fiscal year: 1962; 
On-budget: -1%; 
Off-budget: -0.2%; 
Unified: -1.3%. 

Fiscal year: 1963; 
On-budget: -0.7%; 
Off-budget: -0.1%; 
Unified: -0.8%. 

Fiscal year: 1964; 
On-budget: -1%; 
Off-budget: 0.1%; 
Unified: -0.9%. 

Fiscal year: 1965; 
On-budget: -0.2%; 
Off-budget: No data; 
Unified: -0.2%. 

Fiscal year: 1966; 
On-budget: -0.4%; 
Off-budget: -0.1%; 
Unified: -0.5%. 

Fiscal year: 1967; 
On-budget: -1.6%; 
Off-budget: 0.5%; 
Unified: -1.1%. 

Fiscal year: 1968; 
On-budget: -3.2%; 
Off-budget: 0.3%; 
Unified: -2.9%. 

Fiscal year: 1969; 
On-budget: -0.1%; 
Off-budget: 0.4%; 
Unified: 0.3%. 

Fiscal year: 1970; 
On-budget: -0.9%; 
Off-budget: 0.6%; 
Unified: -0.3%. 

Fiscal year: 1971; 
On-budget: -2.4%; 
Off-budget: 0.3%; 
Unified: -2.1%. 

Fiscal year: 1972; 
On-budget: -2.2%; 
Off-budget: 0.3%; 
Unified: -2%. 

Fiscal year: 1973; 
On-budget: -1.2%; 
Off-budget: No data; 
Unified: -1.1%. 

Fiscal year: 1974; 
On-budget: -0.6%; 
Off-budget: 0.1%; 
Unified: -0.4%. 

Fiscal year: 1975; 
On-budget: -3.5%; 
Off-budget: 0.1%; 
Unified: -3.4%. 

Fiscal year: 1976; 
On-budget: -4.1%; 
Off-budget: -0.2%; 
Unified: -4.2%. 

Fiscal year: 1977; 
On-budget: -2.5%; 
Off-budget: -0.2%; 
Unified: -2.7%. 

Fiscal year: 1978; 
On-budget: -2.5%; 
Off-budget: -0.2%; 
Unified: -2.7%. 

Fiscal year: 1979; 
On-budget: -1.5%; 
Off-budget: -0.1%; 
Unified: -1.6%. 

Fiscal year: 1980; 
On-budget: -2.7%; 
Off-budget: No data; 
Unified: -2.7%. 

Fiscal year: 1981; 
On-budget: -2.4%; 
Off-budget: -0.2%; 
Unified: -2.6%. 

Fiscal year: 1982; 
On-budget: -3.7%; 
Off-budget: -0.2%; 
Unified: -4%. 

Fiscal year: 1983; 
On-budget: -6%; 
Off-budget: No data; 
Unified: -6%. 

Fiscal year: 1984; 
On-budget: -4.8%; 
Off-budget: No data; 
Unified: -4.8%. 

Fiscal year: 1985; 
On-budget: -5.3%; 
Off-budget: 0.2%; 
Unified: -5.1%. 

Fiscal year: 1986; 
On-budget: -5.4%; 
Off-budget: 0.4%; 
Unified: -5%. 

Fiscal year: 1987; 
On-budget: -3.6%; 
Off-budget: 0.4%; 
Unified: -3.2%. 

Fiscal year: 1988; 
On-budget: -3.9%; 
Off-budget: 0.8%; 
Unified: -3.1%. 

Fiscal year: 1989; 
On-budget: -3.8%; 
Off-budget: 1%; 
Unified: -2.8%. 

Fiscal year: 1990; 
On-budget: -4.8%; 
Off-budget: 1%; 
Unified: -3.9%. 

Fiscal year: 1991; 
On-budget: -5.4%; 
Off-budget: 0.9%; 
Unified: -4.5%. 

Fiscal year: 1992; 
On-budget: -5.5%; 
Off-budget: 0.8%; 
Unified: -4.7%. 

Fiscal year: 1993; 
On-budget: -4.6%; 
Off-budget: 0.7%; 
Unified: -3.9%. 

Fiscal year: 1994; 
On-budget: -3.7%; 
Off-budget: 0.8%; 
Unified: -2.9%. 

Fiscal year: 1995; 
On-budget: -3.1%; 
Off-budget: 0.9%; 
Unified: -2.2%. 

Fiscal year: 1996; 
On-budget: -2.3%; 
Off-budget: 0.9%; 
Unified: -1.4%. 

Fiscal year: 1997; 
On-budget: -1.3%; 
Off-budget: 1%; 
Unified: -0.3%. 

Fiscal year: 1998; 
On-budget: -0.3%; 
Off-budget: 1.1%; 
Unified: 0.8%. 

Fiscal year: 1999; 
On-budget: No data; 
Off-budget: 1.4%; 
Unified: 1.4%. 

Fiscal year: 2000; 
On-budget: 0.9%; 
Off-budget: 1.5%; 
Unified: 2.4%. 

Fiscal year: 2001; 
On-budget: -0.3%; 
Off-budget: 1.6%; 
Unified: 1.3%. 

Fiscal year: 2002; 
On-budget: -3.1%; 
Off-budget: 1.5%; 
Unified: -1.5%. 

Fiscal year: 2003; 
On-budget: -4.9%; 
Off-budget: 1.5%; 
Unified: -3.5%. 

Fiscal year: 2004; 
On-budget: -4.9%; 
Off-budget: 1.3%; 
Unified: -3.6%. 

Fiscal Year: 2005; 
On-Budget: -4.0%; 
Off-Budget: 1.4%; 
Unified: -2.6%.

Source: Office of Management and Budget: 

[End of Figure] 

Fiscal Year 2004 and 2005 Deficits and Net Operating Costs: 

Dollars in billions. 

On-Budget Deficit; 
Fiscal Year 2004: ($568); 
Fiscal Year 2005: ($494). 

Off-Budget Surplus*; 
Fiscal Year 2004: $155; 
Fiscal Year 2005: $175. 

Unified Deficit; 
Fiscal Year 2004: ($413); 
Fiscal Year 2005: ($318). 

Net Operating Cost; 
Fiscal Year 2004: ($616); 
Fiscal Year 2005: ($760).  

*Includes $151 billion in fiscal year 2004 and $173 billion in fiscal 
year 2005 in Social Security surpluses and $4 billion in fiscal year 
2004 and $2 billion in fiscal year 2005 in Postal Service surpluses. 

Sources: The Office of Management and Budget and the Department of the 
Treasury. 

[End of table] 

Estimated Fiscal Exposures ($ trillions): 

Explicit liabilities (Publicly held debt, military & civilian pensions 
& retiree health, other); 
2000: $6.9; 
2005: $9.9. 

Commitments & Contingencies: e.g., PBGC, undelivered orders; 
2000: $0.5; 
2005: $0.9. 

Implicit exposures; 
2000: $13.0; 
2005: $35.6. 

Implicit exposures: Future Social Security benefits; 
2000: $3.8; 
2005: $5.7. 

Implicit exposures: Future Medicare Part A benefits; 
2000: $2.7; 
2005: $8.8. 

Implicit exposures: Medicare Part B benefits; 
2000: $6.5; 
2005: $12.4. 

Implicit exposures: Medicare Part D benefits; 
2005: $8.7. 

Total; 
2000: $20.4; 
2005: $46.4. 

Source: U.S. government's consolidated financial statements (CFS). 

Note: Estimates for Social Security and Medicare are at present value 
as of January 1 of each year as reported in the CFS and all other data 
are as of September 30. 

[End of table] 

How Big is Our Growing Fiscal Burden? 

Our total fiscal burden can be translated and compared as follows: 

Our total fiscal burden can be translated and compared as follows: 

Total Fiscal exposures: $46.4 trillion; 
Total Household net worth[1]: $51.1 trillion; 
* Burden/Net worth ratio: 91 percent; 

Burden[2]: 
Per person: $156,000; 
Per full-time worker: $375,000; 
Per Household: $411,000; 

Income: 
Median Household income[3]: $44,389; 
Disposable personal income per capita[4]: $30,431; 

Notes: (1) Federal Reserve Board, Flow of Funds Accounts, Table B.100, 
2005:Q3 (Dec. 8, 2005); (2) Burdens are calculated using total U.S. 
population as of 9/30/05, from the U.S. Census Bureau, full-time 
workers for 2004, reported by the Bureau of Economic Analysis, in NIPA 
table 6.5D (Aug. 4, 2005); and households for 2004, reported by the 
U.S. Census Bureau, in Income Poverty & Health Insurance Coverage in 
the US: 2004 (Aug. 2005); (3) U.S. Census Bureau, Income Poverty & 
Health Insurance Coverage in the US: 2004 (Aug. 2005); and (4) Bureau 
of Economic Analysis, Personal Income and Outlays: October 2005, table 
2, 2005:Q3, (Dec.1, 2005). 

Sources: GAO analysis. 

[End of figure] 

Composition of Spending as a Share of GDP Under Baseline Extended: 

[See PDF for image] -graphic text: 

Line/Stacked Bar combo chart with 4 groups, 1 line (Revenue) and 4 bars 
per group. 

2005; 
Net interest: 1.5%; 
Social Security: 4.2%; 
Medicare & Medicaid: 3.9%; 
All other spending: 10.5%; 
Revenue: 17.5%. 

2015; 
Net interest: 1.6%; 
Social Security: 4.6%; 
Medicare & Medicaid: 5.3%; 
All other spending: 8.5%; 
Revenue: 19.7%. 

2030; 
Net interest: 2.6%; 
Social Security: 6.4%; 
Medicare & Medicaid: 8.3%; 
All other spending: 8.4%; 
Revenue: 19.8%. 

2040; 
Net interest: 5.5%; 
Social Security: 6.9%; 
Medicare & Medicaid: 10.3%; 
All other spending: 8.4%; 
Revenue: 19.8%. 

Notes: In addition to the expiration of tax cuts, revenue as a share of 
GDP increases through 2016 due to (1) real bracket creep, (2) more 
taxpayers becoming subject to the AMT, and (3) increased revenue from 
tax-deferred retirement accounts. After 2016, revenue as a share of GDP 
is held constant. 

Source: GAO's August 2006 analysis. 

[End of Figure] 

Composition of Spending as a Share of GDP: 

(Assuming Discretionary Spending Grows with GDP After 2006 and All 
Expiring Tax Provisions are Extended): 

[See PDF for image] -graphic text: 

Line/Stacked Bar combo chart with 4 groups, 1 line (Revenue) and 4 bars 
per group. 

2005; 
Net interest: 1.5%; 
Social Security: 4.2%; 
Medicare & Medicaid: 3.9%; 
All other spending: 10.5%; 
Revenue: 17.5%. 

2015; 
Net interest: 2.4%; 
Social Security: 4.6%; 
Medicare & Medicaid: 5.3%; 
All other spending: 9.9%; 
Revenue: 17.5%. 

2030; 
Net interest: 6.9%; 
Social Security: 6.7%; 
Medicare & Medicaid: 8.3%; 
All other spending: 9.9%; 
Revenue: 17.6%. 

2040; 
Net interest: 13.7%; 
Social Security: 7.5%; 
Medicare & Medicaid: 10.3%; 
All other spending: 9.9%; 
Revenue: 17.6%. 

Source: GAO's August 2006 analysis. 

[End of Figure] 

Current Fiscal Policy Is Unsustainable: 

The "Status Quo" is Not an Option: 

* We face large and growing structural deficits largely due to known 
demographic trends and rising health care costs. 

* GAO's simulations show that balancing the budget in 2040 could 
require actions as large as: 

- Cutting total federal spending by 60 percent or: 

- Raising federal taxes to 2 times today's level: 

* Faster Economic Growth Can Help, but It Cannot Solve the Problem: 

* Closing the current long-term fiscal gap based on reasonable 
assumptions would require real average annual economic growth in the 
double digit range every year for the next 75 years. 

* During the 1990s, the economy grew at an average 3.2 percent per 
year. 

* As a result, we cannot simply grow our way out of this problem. Tough 
choices will be required. 

The Way Forward: A Three-Pronged Approach: 

1. Strengthen Budget and Legislative Processes and Controls: 

2. Improve Financial Reporting and Performance Metrics: 

3. Fundamental Reexamination & Transformation for the 21St Century 
(i.e., entitlement programs, other spending, and tax policy): 

Solutions Require Active Involvement from both the Executive and 
Legislative Branches: 

GAO-07-226CG 12: 

Key National Indicators: 

What: A portfolio of economic, social, and environmental outcome- based 
measures that could be used to help assess the nations and other 
governmental jurisdictions position and progress: 

Who: Many countries and several states, regions, and localities have 
already undertaken related initiatives (e.g., Australia, New Zealand, 
Canada, United Kingdom, Oregon, Silicon Valley (California) and 
Boston): 

Why: Development of such a portfolio of indicators could have a number 
of possible benefits, including: 

* Serving as a framework for related strategic planning efforts: 

* Enhancing performance and accountability reporting: 

* Informing public policy decisions, including much needed baseline 
reviews of existing government policies, programs, functions, and 
activities: 

* Facilitating public education and debate as well as an informed 
electorate: 

Way Forward: Consortium of key players housed b -r the National 
Academies domestically and related efforts by the OED and others 
internationally. 

Key National Indicators: Where the World's Sole Superpower Ranks: 

The United States may be the only superpower, but compared to most 
other OECD countries on selected key economic, social, and 
environmental indicators, on average, the U.S. ranks: 

16 0ut Of 28: 

OECD Categories for Kev Indicators: 

* Population/Migration; 
* Energy; 
* Environment; 
* Quality of Life. 
* Macroeconomic Trends; 
* Labor Market; 
* Education; 
* Economic Globalization. 
* Prices; 
* Science & Tech; 
* Public Finance; 

Source: 2006 OECD Factbook: 

GAO's Strategic Plan: 

Serving The Congress And The Nation GAO's Strategic Plan Framework: 

Mission GAO exists to support the Congress in meeting its 
constitutional responsibilities and to help improve the performance and 
ensure the accountability of the federal government for the benefit of 
the American people. 

Goals and Objectives: 

Provide Timely, Quality Service to the Congress and the Federal 
Government to. 

Address Current and Emerging Challenges to the Well-Being and Financial 
Security of the American People related to. 

* Health care needs and financing: 

* Education and protection of children: 

* Work opportunities and worker protection: 

* Retirement income security: 

* Effective system of justice: 

* Viable communities: 

* Natural resources use and environmental protection: 

* Physical infrastructure: 

Respond to Changing Security Threats and the Challenges of Global 
Interdependence involving. 

* Emerging threats: 

* Advancement of U.S. interests: 

* Military capabilities and readiness: 

* Global market forces: 

Help Transform the Federal Government's Role and How It Does Business 
to Meet 21st Century Challenges by assessing. 

* Roles in achieving federal objectives: 

* Government transformation: 

* Key management challenges and program risks: 

* Fiscal position and financing of the government: 

Quality of Life: 

Maximize the Value of GAO by Being a Model Federal Agency and a World- 
Class Professional Services Organization in the areas of. 

* Client and customer satisfaction: 

* Strategic leadership: 

* Institutional knowledge and experience: 

* Process improvement: 

* Employer of choice: 

Themes: 

Long-term Fiscal Imbalance: 
National Security: 
Global Interdependence: 
Changing Economy: 
Demographics: 
Science and Technology: 
Quality of Life: 
Governance: 

Core Values: 

Accountability: 
Integrity: 
Reliability: 

Source: GAO. 

GAO Strategic Plan 2004-2009: 

GAO's High-Risk List 2006: 

High Risk Areas: Addressing Challenges in Broad-based Transformations: 
Protecting the federal government's Information Systems and the 
Nation's Critical Infrastructures; 
Designated High Risk: 1997. 

High Risk Areas: Addressing Challenges in Broad-based Transformations: 
Strategic Human Capital Management[A]; 
Designated High Risk: 2001. 

High Risk Areas: Addressing Challenges in Broad-based Transformations: 
U.S. Postal Service Transformation Efforts and Long-Term Outlook[A]; 
Designated High Risk: 2001. 

High Risk Areas: Addressing Challenges in Broad-based Transformations: 
Managing Federal real Property[A]; 
Designated High Risk: 2003. 

High Risk Areas: Addressing Challenges in Broad-based Transformations: 
Implementing an transforming the Department of Homeland Security; 
Designated High Risk: 2003. 

High Risk Areas: Addressing Challenges in Broad-based Transformations: 
Establishing appropriate and effective information-sharing mechanisms 
to improve Homeland Security; 
Designated High Risk: 2005. 

High Risk Areas: Addressing Challenges in Broad-based Transformations: 
DOD approach to business transformation[A];  
Designated High Risk: 2005. 

High Risk Areas: Addressing Challenges in Broad-based Transformations: 
DOD approach to business transformation[A]: DOD Supply Chain 
Management(formerly Inventory Management); 
Designated High Risk: 1990. 

High Risk Areas: Addressing Challenges in Broad-based Transformations: 
DOD approach to business transformation[A]: DOD Weapon Systems 
Acquisition; 
Designated High Risk: 1990. 

High Risk Areas: Addressing Challenges in Broad-based Transformations: 
DOD approach to business transformation[A]: DOD Business Systems 
Modernization 
Designated High Risk: 1995. 

High Risk Areas: Addressing Challenges in Broad-based Transformations: 
DOD approach to business transformation[A]: DOD Financial Management; 
Designated High Risk: 1995. 

High Risk Areas: Addressing Challenges in Broad-based Transformations: 
DOD approach to business transformation[A]: DOD Support Infrastructure 
Management; 
Designated High Risk: 1997. 

High Risk Areas: Addressing Challenges in Broad-based Transformations: 
DOD approach to business transformation[A]: DOD Personnel Security 
Clearance Program; 
Designated High Risk: 2005. 

High Risk Areas: Managing Federal Contracting More effectively:  DOE 
Contract Management; 
Designated High Risk: 1990. 

High Risk Areas: Managing Federal Contracting More effectively:  NASA 
Contract Management; 
Designated High Risk: 1990. 

High Risk Areas: Managing Federal Contracting More effectively:  DOD 
Contract Management; 
Designated High Risk: 1992. 

High Risk Areas: Managing Federal Contracting More effectively:  
Management of Interagency Contracting; 
Designated High Risk: 2005. 

High Risk Areas: Assessing the Efficiency and Effectiveness of Tax Law 
Administration: Enforcement of Tax Laws[A,B]; 
Designated High Risk: 1990. 

High Risk Areas: Assessing the Efficiency and Effectiveness of Tax Law 
Administration: IRS Business Systems Modernization[C]; 
Designated High Risk: 1995. 

High Risk Areas: Modernizing and Safeguarding Insurance and Benefit 
Programs: Medicare program[A]; 
Designated High Risk: 1990. 

High Risk Areas: Modernizing and Safeguarding Insurance and Benefit 
Programs: HUD Single-family Mortgage Insurance and Rental Housing 
Assistance Programs; 
Designated High Risk: 1994. 

High Risk Areas: Modernizing and Safeguarding Insurance and Benefit 
Programs: Medicaid program[A]; 
Designated High Risk:  2003. 

High Risk Areas: Modernizing and Safeguarding Insurance and Benefit 
Programs: Modernizing Federal Disability Program[A]; 
Designated High Risk: 2003.  

High Risk Areas: Modernizing and Safeguarding Insurance and Benefit 
Programs: Pension Benefit Guaranty Corporation Single-Employer 
Insurance Program[A]; 
Designated High Risk: 2003. 

High Risk Areas: Modernizing and Safeguarding Insurance and Benefit 
Programs: National Flood Insurance Program; 
Designated High Risk: 2006. 

High Risk Areas: Other: FAA Air Traffic Control Modernization;  
Designated High Risk: 1995. 

[A] Legislation is likely to be necessary, as a supplement to actions 
by the executive branch, in order to effectively address this high-risk 
area. 

[B] Two high-risk areas-Collection of Unpaid Taxes and Earned Income 
Credit Noncompliance-have been consolidated to make this area. 

[C] The IRS Financial Management high-risk area has been incorporated 
into this high-risk area. 

21St Century Challenges Report: 

Provides background, framework, and questions to assist in reexamining 
the base: 

Covers entitlements & other mandatory spending, discretionary spending, 
and tax policies and programs: 

Based on GAO's work for the Congress: 

Issued February 16, 2005: 

Twelve Reexamination Areas: 

Mission Areas: 

* Defense: 

* Education & Employment: 

* Financial Regulation & Housing: 

* Health Care: 

* Homeland Security: 

* International Affairs: 

* Natural Resources, Energy & Environment: 

* Retirement & Disability: 

* Science & Technology: 

* Transportation: 

CROSSCUTTING AREAS: 

* Improving Governance: 

* Reexamining the Tax System: 

Generic Reexamination Criteria and Sample Questions: 

relevance of purpose and the federal role: 

Why did the federal government initiate this program and what was the 
government trying to accomplish? 

Have there been significant changes in the country or the world that 
relate to the reason for initiating it? 

measuring success: 

Are there outcome-based measures? If not, why? 

If there are outcome-based measures, how successful is it based on 
these measures? 

targeting benefits: 

Is it well targeted to those with the greatest needs and the least 
capacity to meet those needs? 

affordability and cost effectiveness: 

Is it using the most cost-effective or net beneficial approaches when 
compared to other tools and program designs? 

best practices: 

Is the responsible entity employing prevailing best practices to 
discharge its responsibilities and achieve its mission? 

Illustrative 21St Century Questions: National Defense: 

How should the historical allocation of resources across services and 
programs be changed to reflect the results of a forward-looking 
comprehensive threat/risk assessment as part of DOD's capabilities- 
based approach to determining defense needs? 

Can DOD afford to invest in transformational systems such as the Future 
Combat System and national missile defense at the same time it 
continues to pursue large investments in legacy systems such as the F- 
22A and new systems like the Joint Strike Fighter, especially if cost 
growth and schedule delays continue at historical rates? 

Given the global availability of rapidly advancing technology, does DOD 
need to reconsider its approach for identifying critical technologies 
and protecting those technologies from being exploited in order to 
maintain its military superiority? 

Given the growing encumbrance of pay and benefit costs, especially 
health care, within DOD's budget, how might DOD's recruitment, 
retention, and compensation strategies (including benefit programs) be 
reexamined and revised to ensure that DOD maintains a total military 
and civilian workforce with the mix of skills needed to execute the 
national security strategy while using resources in a more targeted, 
evidence-based, and cost-effective manner? 

Do the role, size, and structure of forces and capabilities comprising 
the strategic triad need to be adjusted to meet the challenges of 
providing strategic deterrence in the new security and fiscal 
environment? 

Does DOD need to create a senior management position responsible and 
accountable for taking a strategic, integrated, and sustained approach 
to managing the day-to-day business operations of the department, 
including ongoing efforts to transform DOD's business operations and 
address the many related and longstanding high-risk areas? Should 
specific qualifications requirements and periods of tenure or terms be 
established for selected DOD positions related to key business 
operations? 

DOD Lacks An Affordable Plan to Balance Current Requirements With 
Investments in New Capabilities: 

DOD needs to reexamine its force strategies as well as its structure 
and business processes to meet 21St century challenges: 

DOD's plans to transform its military capabilities may not be 
affordable or sustainable: 

DOD's efforts to transform its business systems and processes will take 
many years to achieve: 

Active Duty Personnel Pay and Benefits Need To Be Reexamined and 
Revised: 

* The cost of active duty pay and benefits was $158 billion in fiscal 
year 2004 and growing. 

* Enhanced pay and benefits, including health care costs, increased 
costs to an average of $111,783 per person. 

* DOD needs to assess the affordability and sustainability of the 
compensation system and the reasonableness and appropriateness of the 
allocation to cash and benefits and whether changes could more 
efficiently achieve recruiting and retention goals. 

Total Compensation Costs for Fiscal Years 2000-2004: 

[See PDF for image] -- graphic text: 

Bar graph with five items. 

2004 constant dollars. 

2000: $123; 
2001: $131; 
2002: $141; 
2003: $155; 
2004: $158. 

Source: GAO-05-798: 

*Our calculations include supplemental funding for the Global War on 
Terrorism. Since fiscal year 2002 over 100,000 mobilized reservists 
were paid out of the cash compensation. If you considered these 
personnel, the average costs to provide compensation would be about 
$5,000 per capita lower. 

[End of Figure] 

DOD Continues to Confront Pervasive, Longstanding Management Problems 
Related to Its Business Operations: 

Management weaknesses cut across all of DOD's major business areas, and 
its approach to business transformation was designated as high risk in 
2005: 

Examples of longstanding issues include: 

* Supply chain management has been designated high risk since 1990: 

* Weapons System Acquisition was also designated high risk in 1990: 

* Financial Management has been designated as high-risk since 1995: 

Selected Potential DOD Transformation Related Actions: 

Revise the current approach to developing national military strategy 
(e.g., order, integration): 

Take a longer range, and more enterprise-wide approach to program 
planning and budget integration (e.g., life cycles, opportunity costs): 

Employ a more strategic and integrated approach to business information 
system efforts and financial audit initiatives: 

Differentiate between war fighting and business systems development, 
implementation, and maintenance (e.g., resource control, project 
approval): 

Focus on achieving real success in connection with financial management 
efforts (e.g., systems, controls, information, compliance and 
opinions): 

Employ a total force management approach to planning and execution 
(e.g., military, civilian, contractors): 

Get the design and implementation of the NSPS right, including 
modernizing and integrating the DOD, Service, domain, unit, and 
individual performance measurement and reward systems: 

Revise the process for developing and communicating key changes (e.g., 
DOD transformation, NSPS): 

Reduce the number of layers, silos, and footprints: 

Recognize the difference between approving and informing: 

Review and revise current military compensation policies and practices 
(e.g., more targeted and market-based): 

Strengthen emphasis on horizontal and external activities (e.g., 
partnerships): 

Create a Chief Management Officer to drive the business transformation 
process: 

Systemic Defense Acquisition Challenges: 

1. Service budgets are allocated largely according to top line 
historical percentages rather than Defense-wide strategic assessments 
and current and likely resource limitations. 

2. Capabilities and requirements are based primarily on individual 
service wants versus collective Defense needs (i.e. based on current 
and expected future threats) that are both affordable and sustainable 
over time. 

3. Defense consistently over-promises and under-delivers in connection 
with major weapons, information, and other systems (i.e. capabilities, 
costs, quantities, schedule). 

4. Defense often employs a "plug and pray approach" when costs escalate 
(i.e. divide total funding dollars by cost per copy, plug the number 
that can be purchased, then pray that Congress will provide more 
funding to buy more quantities). 

5. Congress sometimes forces the department to buy items (e.g. weapons 
systems) and provide services (e.g. additional health care for non- 
actives that he department does not want and we cannot afford. 

6. DOD tries to develop high risk technologies after programs start 
instead of setting up funding, organizations, and processes to conduct 
high risk technology development activities in low cost environments 
(i.e. technology development is not separated from product 
development). Program decisions to move into design and production are 
made without adequate standards or knowledge. 

7. Program requirements are often set at unrealistic levels, then 
changed frequently as recognition sets in that they cannot be achieved. 
As a result, too much time passes, threats may change, and/or members 
of the user and acquisition communities may simply change their mind. 
The resulting program instability causes cost escalation, schedule 
delays, fewer quantities and reduced contractor accountability. 

8. Contracts, especially service contracts, often do not have 
definitive or realistic requirements at the outset in order to control 
costs and facilitate accountability. 

9. Contracts typically do not accurately reflect the complexity of 
projects nor appropriately allocate risk between the contractors and 
the taxpayers (e.g. cost plus, cancellation charges). 

10. Key program staff rotate too frequently thus promoting myopia and 
reducing accountability (i.e. tours based on time versus key 
milestones). Additionally, the revolving door between industry and the 
Department presents potential conflicts of interest. 

11. The acquisition workforce faces serious challenges (e.g. size, 
skills, knowledge, succession planning). 

12. Incentive and award fees are often paid based on contractor 
attitudes and efforts versus positive results (i.e. cost, quality, 
schedule). 

13. Inadequate oversight is being conducted by both the Defense 
Department and the Congress which results in little to no 
accountability for recurring and systemic problems. 

14. Some individual program and funding decisions made within the 
Department and by the Congress serve to undercut sound policies. 

15. Lack of a professional, term-based CIVIO at DOD serves to slow 
progress on defense transformation and reduce the chance of success in 
the acquisitions/contracting and other key business areas. 

Key Leadership Attributes Needed for These Challenging and Changing 
Times: 

* Courage: 
* Integrity: 
* Creativity: 
* Stewardship: 

On the Web: 

Web site: [Hyperlink, http://www.gao.gov/cghome.htm]: 

Contact: 

Paul Anderson, Managing Director, Public Affairs AndersonP1@gao.gov 
(202) 512-4800: 

U.S. Government Accountability Office 441 G Street NW, Room 7149 
Washington, D.C. 20548: 

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