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Budget Options for National Defense March 2000

Although military capability depends on having the right size and configuration of forces with modern weapons, it also depends on how well those forces are supported. Do they have adequate numbers of experienced, trained personnel? Are the equipment and facilities they use maintained in good condition? The options in this chapter focus on the manpower, equipment, and facilities that support the readiness of U.S. forces. It includes options that would provide more funding for such resources as well as options that might allow the Department of Defense to meet its readiness goals at lower cost by changing the way the department manages its resources.
 

Resources and Readiness

Although the term readiness is used in different ways, the Joint Chiefs of Staff formally define it as the ability of units to deploy quickly and perform initially in wartime as they were designed to.⁽¹⁾ That ability reflects many factors. Traditional quantitative indicators of readiness compare units' resources--training, supplies, the condition of their equipment, and the number, grade, and skill distribution of their personnel--with standards based on wartime requirements. Other indicators of readiness examine the quality of recruits entering the force and the quality of the facilities in which military personnel live and work. Intangible factors, such as leadership and morale, also play an important role in readiness but are less easily quantified.

As U.S. forces were being reduced during the 1990s, both the Congress and DoD gave high priority to readiness. That commitment reflects the experience of senior military leaders, who, as junior officers during the post-Vietnam drawdown of the late 1970s, dealt first-hand with a military that was dubbed the "hollow force." Responding to fears that the post-Cold War drawdown could lead to similar problems, the three most recent Secretaries of Defense each identified readiness as the department's highest priority. That emphasis has been institutionalized through the creation of DoD's Senior Readiness Oversight Council and Congressionally mandated reports on readiness.

Perhaps because of that focus, the early years of the most recent drawdown brought little evidence of readiness problems. In 1994, a review by the Congressional Budget Office of trends in indicators of readiness concluded that the readiness of deployable units remained relatively good.⁽²⁾ The quality of new recruits, the experience level of the force, aggregate C-ratings (indicators of whether units have the resources required to perform their missions), and mission-capable rates for equipment were all high compared with historical levels. That study also cited factors that might lead to lower readiness in the future, such as shortfalls in funding to maintain real property. It also indicated that because the end of the Cold War left the military with a cushion of excess equipment, supplies, and personnel, DoD's ability to provide those things over the long run was not being tested.

Current Trends in Readiness

Today, reports of readiness problems are increasing. Many of those reports focus on personnel problems. Both the Army and the Air Force failed to meet their goals for recruiting enlisted personnel in 1999, and the Air Force also fell short of its goals for retaining enlisted personnel. In the case of officers, both the Navy and Air Force are unable to meet their stated requirements for pilots, the Army reports shortages of captains, and the Navy says it cannot retain enough young surface warfare officers. The Joint Chiefs cited concerns about recruiting, retention, and morale to explain why initiatives to increase compensation were their number one budget priority in 1999.

Military leaders have also expressed concern about the condition of equipment. The Air Force reports that mission-capable rates for its aircraft have declined by 10 percentage points--from 83 percent to 73 percent--since 1991. And rates of cannibalization (a measure of how often maintenance crews must take a part off one aircraft to maintain another) increased by 78 percent between 1995 and 1998, indicating a shortage of spare parts. The adequacy of training for Army units also became an issue in 1999 because of the poor performance of some armored units at the National Training Center.

Interpreting Current Trends

Readiness has clearly declined in some areas. But in many cases, the implications of such declines for national security and defense budgets are unclear. Do the reported readiness problems threaten national security, and if so, can they be resolved through additional funding?

Determining the policy implications of reported trends is complicated by the fact that some of those trends are spotty, affecting one service but not another. For example, in 1999, first- and second-term retention rates for enlisted personnel in the Air Force were at their lowest level in almost 20 years. But that same year, the Army experienced unusually high retention rates. Such a pattern makes it difficult to generalize about the adequacy of military compensation.

Another complication is that advocates of additional resources for readiness often overstate their case by measuring declines in readiness indicators from some peak level that existed only under exceptional circumstances. Thus, the Air Force reports its decline in mission-capable rates relative to the peaks achieved during and immediately after the Gulf War. Similarly, declines in the quality of recruits are often measured relative to the peaks achieved during the drawdown, when the services, having cut their demand for recruits more quickly than resources for recruiting, substantially exceeded their quality goals. At what point do declines from peak levels threaten national security? How much readiness is enough?

In addition, some of the most widely publicized problems with readiness appear to stem--at least in part--from management problems rather than from inadequate budgets. The roots of the current pilot shortage, for example, can be found in personnel-management decisions made during the drawdown. In 1993, the Air Force responded to a surplus of pilots by cutting the number of new pilots being trained so it could retain its older, more experienced pilots (including those in staff positions). Management issues may also contribute to the services' current recruiting shortfalls. Once the Navy recognized that the youth market had changed and that new approaches were necessary, it was able to overcome many of the recruiting problems it experienced in 1998.

An even more fundamental concern is that the ability of units to do what they were designed to do may not adequately define readiness in a period when national security depends, to a significant degree, on the ability of units to quickly undertake and successfully carry out new tasks. The commanders of two Army divisions that had units engaged in the Balkans reported recently that their divisions were not ready (the divisions were category C-4 in the Joint Chiefs' Status of Resources and Training System ratings). That assessment was accurate in the sense that, given the absence of the deployed units, those divisions could not deploy quickly to a major theater war and perform their primary mission as they were designed to. Yet the fact that some units from those divisions went to the Balkans--where they received not merely training but actual experience in peacekeeping--could contribute to the divisions' ability to respond to future contingencies.

Various Approaches to Readiness Issues

Evidence of declining readiness could be a sign that the military needs greater funding for such things as pay and health benefits, real property maintenance, equipment maintenance, and inventories of spare parts. Yet budget increases may not be the most appropriate solution for every readiness problem. In some cases, changes in Cold War programs or management and budgeting practices--an approach proposed by the 1996 Defense Science Board study of DoD infrastructure--may be necessary if high levels of readiness are not to prove prohibitively expensive. In other cases, either additional funding or management changes are already working their way through the system, or the readiness problem, although real, is a risk that DoD might choose to accept. Despite the department's stated commitment to readiness, many observers argue that it needs to strike a different balance between current readiness and the modernization and force-structure initiatives that are increasingly referred to as "future readiness."

The options in this chapter take varying approaches to improving readiness. Some would add resources without changing management practices. Those options involve the fewest risks and offer the greatest prospect for immediate increases in readiness. Other options would change traditional management practices--for example, by moving away from a pay system that differentiates between personnel on the basis of marital status; reducing DoD's direct role in providing housing, health care, and retail services; or consolidating depot maintenance functions. Whether accompanied by additional resources or not, those options could increase risks to readiness in the short run. But in the long run, they might lower the cost of maintaining readiness and free up resources for modernization.
 

The Military Compensation Package

The military compensation package includes both cash compensation (including deferred cash in the form of retirement pay) and noncash benefits (such as health care, housing, child care, and commissaries). Increases in that package were at the top of DoD's priorities in its budget for 2000 and continue to receive emphasis in the budget request for 2001. A military compensation package that can attract and retain high-quality, versatile personnel, who are able to learn new tasks and adapt to new practices quickly, might be an especially wise investment today--when the major threat to national security is diffuse and uncertain and deployments can involve a wide range of tasks that are not the focus of standard training.

The options in the sections below take varying approaches to the military's concerns about retaining a high-quality force. Some would add resources to compensation programs to improve DoD's ability to meet its personnel requirements; others would reduce the cost of meeting those requirements by changing the mix and type of benefits in the compensation package; and still others would lower costs or increase capabilities by changing the number or mix of personnel that DoD identifies as required.

Another tool that DoD might use to attract and retain personnel is working conditions--a category that includes such diverse elements as the frequency of deployments, the condition of facilities and equipment, the quality of military leadership, and opportunities for meaningful, patriotic service. Although such conditions are often determined by operational needs and are not normally considered part of the overall compensation package, failure to provide satisfying conditions of work can affect recruiting and retention. Many of the options in this chapter that address the condition of facilities and equipment--as well as some of the options in other chapters, such as the one that would increase staffing in military units--are aimed in part at changing the conditions of work for service members.
 

Cash Compensation

The Congress included a variety of pay changes in the National Defense Authorization Act for Fiscal Year 2000 in an effort to make military service more attractive and address the personnel problems reported by the Joint Chiefs. Those changes raised retirement benefits for service members who entered the force after 1986, provided an across-the-board pay raise of 4.8 percent (with a provision for future raises that would continue to exceed the growth of private-sector earnings), and restructured the military pay table to increase the importance of promotions rather than time in service. Those actions are expected to boost retention in the military as a whole (compared with what it would otherwise have been). But whether they will resolve the services' specific recruiting and retention problems is unclear.

Moreover, those gains in overall retention will be costly. One reason for the high cost is that service members--like others in U.S. society--place a much higher value on current income than future income. Thus, existing manpower models indicate that the increases in retirement pay are likely to be a less cost-effective tool for increasing recruiting and retention than additional pay raises would be. Another reason for the high cost of those provisions--and their questionable impact on DoD's most serious personnel shortages--is that the pay raises are not targeted toward those shortages. The 4.8 percent across-the-board raise will be paid not only to people in occupations where DoD has shortages but also to people in occupations where DoD has excess personnel.

Because frequent changes in any retirement system can disrupt expectations, further changes in the military retirement system may not be appropriate right now. But changes in basic pay are determined by DoD and the Congress on an annual basis. The options below examine possible policies for setting future pay raises, the potential for using special pay targeted toward personnel whose skills are in short supply, and the role of the unemployment compensation program in rewarding separation from active duty. An additional option would eliminate the difference between pay for married and single personnel; it illustrates how some analysts believe the military compensation system might be fundamentally restructured to make it more cost-effective.
 

Option 4-01
Modify Planned Pay Raises for Military Personnel
 

In 1999, the Congress established temporary procedures designed to increase basic pay in the military at a greater rate than pay in the private sector. Those procedures set the annual military pay raise between 2001 and 2006 at 0.5 percentage points above the increase in the employment cost index (ECI) for wages and salaries of private-sector workers. According to widely published reports, a "pay gap" of more than 13 percent separates military personnel from workers in the civilian sector. In advocating the new pay procedures, the Senate Armed Services Committee cited the need to "close the gap between military pay and private sector wages." The House Armed Services Committee called for smaller raises (equal to the increase in the ECI), referring only to the services' recent negative trends in retaining personnel. The temporary procedures enacted in 1999, combined with the raise authorized for 2000, will increase basic pay by about 3.3 percent (with compounding) above the change in the ECI.

This option would change the procedures that the Congress established, providing for either larger annual increases or smaller ones. The alternative of larger raises would increase basic pay by 2 percentage points more than the change in the ECI each year from 2001 through 2006, thus eliminating the reported pay gap. That change would add $612 million to defense outlays in 2001 and a total of $46.1 billion through 2010. The second alternative would follow the example of the House Armed Services Committee, limiting raises to the annual increase in the ECI without an additional 0.5 percentage points and leaving pay almost 3 percent lower in 2006 and beyond than under the temporary procedures. That alternative would save $204 million in 2001 and $14.8 billion through 2010.

Various policymakers and analysts disagree about the need to increase military pay relative to pay in the civilian sector. That disagreement centers on two issues: the meaning of the reported pay gap and the severity of current problems in recruiting and retaining military personnel.

The common approach to comparing increases in military and civilian pay has several shortcomings, according to studies by RAND (a federally funded research center) and the Congressional Budget Office. A 1999 paper by CBO noted that the 13 percent gap reported in the press measures changes in relative pay between the two sectors rather than absolute levels of pay, takes no account of the age and education level of workers, and uses an essentially arbitrary starting point, 1982. CBO's analysis indicated that among all groups of military personnel, on average, pay increases since 1982 have roughly matched those among comparable workers in the civilian economy. Moreover, the level of pay for military personnel, whether officer or enlisted, falls at about the 75th percentile of pay rates for workers in the civilian sector of the same age and education.

Notwithstanding such analyses, some proponents of higher military pay continue to argue that military personnel are paid less than they could earn in civilian jobs. The Chairman of the Joint Chiefs of Staff stated in 1998 that "You can argue about how big the pay gap is . . . but nobody [in the Pentagon] denies there's a gap." Some Members of Congress reportedly favored a plan to "close the pay gap" over three years through raises several percentage points higher than the average increase in private-sector pay. Thus, regardless of what the true situation may be, belief in the existence of a large pay gap remains a powerful force in discussions about the best course for military pay policy.

Advocates of smaller pay raises would probably take strong issue with the assertion that a pay gap exists or even matters. First, they would point out, no one has demonstrated a gap as proponents of higher pay think of it--a difference between civilian and military pay scales. Second, they would say, the pay of military personnel overall has not fallen relative to the pay of civilian workers of the same age and education level. In addition, they could argue, the notion of a pay gap--a measured difference between levels of pay in the military and civilian sectors--is not relevant to decisions about military pay. Depending on how service members and potential recruits view the advantages and disadvantages of military service, the armed forces might have to pay considerably more than civilian employers, or conceivably less, to attract and retain enough qualified personnel.

A second issue of contention is the services' recent ability to meet their personnel needs. The Air Force reported unusually heavy losses of experienced personnel in recent years, perhaps because of the large number of small-scale deployments during the 1990s. Such deployments affect both the personnel sent overseas and those who stay behind (see option 2-12 in Chapter 2). In addition, reenlistment rates among Air Force personnel completing their first and second enlistment terms have fallen recently. Moreover, every service but the Marine Corps had trouble meeting its recruiting objective in 1999, and the Army succeeded only because it reduced its objective. Advocates of larger pay raises would argue that increased pay could mitigate retention and recruiting problems that might otherwise become more severe.

Proponents of smaller pay raises might argue that retention problems are not widespread and that if recruiting difficulties persist, they are better addressed through less expensive policies than an across-the-board pay raise. The Army has been as stressed by deployments as the Air Force, those proponents might argue, yet the Army was able to reduce its planned accessions of recruits in 1999 because it retained more enlisted personnel than it had expected. The Air Force's problems, they might say, should be solved by the greater predictability of deployments under the service's new Expeditionary Aerospace Force concept or dealt with by expanding reenlistment bonuses (see the next option). Finally, proponents of smaller raises could argue that increasing pay is an expensive way to solve recruiting problems; less expensive alternatives include increasing the number of recruiters, spending more on advertising, and offering more generous education benefits or enlistment bonuses.

Opponents of both alternatives in this option--people who would prefer the status quo of planned pay raises slightly exceeding average increases in private-sector pay--might offer two arguments for their position. Some would say that if the reported pay gap or retention problems warrant raising military pay, slow change is the best approach. Better to see the effects of the planned raises and improvement in retirement benefits, they would argue, than to commit immediately to a large pay increase. Others would contend that even if retention problems are not serious or the reported pay gap does not exist, the planned increases are necessary because service members believe the reports that they are underpaid and their perceptions will determine their actions. According to advocates of the status quo, when the service chiefs supported members' belief that they were underpaid and the Congress set out to increase military pay, a course was set that could not be reversed without serious consequences.
 

Option 4-02
Increase Reliance on Selective Reenlistment Bonuses
 

Selective reenlistment bonuses (SRBs) are monetary incentives used to encourage the reenlistment of qualified service members in occupational specialties with high training costs or demonstrated shortfalls in retention. Eligible personnel generally receive half of their bonus when they reenlist and the remainder in annual anniversary payments over the course of their additional obligated service. Each service regularly adjusts its SRBs to address current retention problems, adding or dropping eligible specialties and raising or lowering bonus levels. Despite their use of reenlistment bonuses and other incentives, however, each of the services has at times had difficulty meeting its need for career personnel, particularly in some occupations.

This option would increase the services' spending on initial bonus payments to $400 million annually--roughly double the 1999 levels--and remove current restrictions on the maximum bonus amount that an individual can receive. Compared with funding for new bonuses in 2000, the higher level would represent an increase of 27 percent (the Congress responded to concerns about poor retention by adding $79 million for new bonuses to the services' budget request for 2000). Total spending on initial and anniversary SRB payments would rise from roughly $340 million and $465 million in 1999 and 2000, respectively, to more than $770 million in 2006 and beyond. That increase reflects both the cost of this option--$78 million in outlays in 2001 and $1.4 billion over 10 years--and the long-run cost of the earlier growth in initial payments.

Although this option would have a substantial direct effect on defense costs, the actual increase in personnel costs could be much smaller, or even negative. Increased spending on reenlistment bonuses should improve retention, allowing policymakers to slow the growth of basic pay or other elements of military compensation (see option 4-01). The estimated costs of this option do not reflect those offsetting savings, however, because the extent of the savings would depend on what actions, if any, policymakers took.

The four services use SRBs to differing extents. In late 1999, for example, almost half of the Navy personnel completing their initial enlistment term who were eligible for a bonus could receive one equal to a year's basic pay or more if they reenlisted for four years. In the Army, by contrast, only about 15 percent of equivalent personnel could receive a bonus equal to more than four months of pay for a four-year reenlistment. Large bonuses were less prevalent in the Air Force and the Marine Corps than in the Navy, but far more common than in the Army.

Advocates of expanding the SRB program might argue that current bonus levels are too small to provide meaningful differences in pay among occupations. One year's basic pay for a four-year reenlistment--the bonus level for first-term Air Force personnel in several computer-related occupations and the largest bonus that the Army offers--actually amounts to only about a 13 percent addition to total pay over four years after accounting for the other elements of cash compensation and for pay raises over those four years (which do not affect the bonus). The largest bonuses add somewhat more than one-third to recipients' pay, but only the Navy offers bonuses at that level and only for a few occupations that involve operating and maintaining nuclear power plants on ships and submarines. In the civilian sector, by contrast, differences in average pay of one-third or more are common, even among blue-collar occupations.

Proponents of this option would argue that larger pay differences among occupations would be a cost-effective tool for improving military readiness. Compared with across-the-board increases in pay or benefits, bonuses are more efficient because they can reduce shortages of experienced personnel in those occupations most critical for readiness without contributing to surpluses in other occupations. Bonuses can also be focused on the years of service in which personnel make career decisions. (Pay raises can be focused on certain grades or years of service, but policymakers have rarely been willing to do so.) And compared with pay increases, bonuses avoid the heavy cost of "tag-alongs"--the elements of compensation, such as retirement benefits, that are tied to levels of basic pay.

Some critics of expanding reenlistment bonuses would argue that large pay differences among occupations violate a longstanding principle of military compensation: that personnel with similar levels of responsibility should receive similar pay. In their view, reenlistment bonuses should be limited to a few critical specialties with severe shortages. Other critics of bonuses and other special and incentive pays would turn the "tag-along" argument of proponents on its head. Increasing reenlistment bonuses, those critics would say, unfairly deprives service members of the retirement and other benefits that they would receive if that money were instead made part of basic pay throughout their career.

Other opponents of this option might agree that the military should offer large pay differences among occupations but criticize the origin or timing of the expansion in bonuses. They would argue that decisions about reenlistment bonuses should be left to the individual services, who are better able than outsiders to compare the cost of added bonuses with the cost of alternatives for addressing shortages of experienced personnel, such as recruiting and training new personnel. Those critics might also point out that the Congress recently improved retirement benefits for many personnel and committed itself to increasing military pay at a rate greater than the increase in private-sector pay. Thus, they would argue, bonuses are not an alternative to across-the-board increases but an addition to them, and the results of those increases should be seen before the Congress considers expanding other incentives.
 

Option 4-03
Eliminate Differences in Pay Between Married and Single Service Members
 

The military generally pays married personnel more than single personnel performing the same job. The difference derives from the military's unique system of either providing food and housing to its members directly or paying them cash allowances to cover food and housing costs. Married personnel are generally thought to need more housing than single personnel, so both DoD-provided housing and housing allowances are larger for service members with dependents than for those without dependents. In addition, most single personnel in the junior enlisted pay grades (E-5 and below) are expected to eat in government dining facilities and live in DoD housing; they may provide their own meals and rent an apartment if they choose, but without specific authorization they cannot receive cash allowances to help cover the cost.

This option would eliminate the pay differences between married and single personnel by dropping the separate allowances for food and housing--in other words, moving to a salary system. Over a five-year transition period beginning in 2001, housing allowances for single personnel would gradually rise to the married level. In 2006, the food allowance and all but the locality-specific component of the housing allowance would be rolled into basic pay. (The locality-specific component would be combined with an existing allowance that accounts for differences in nonhousing costs.) An additional amount would be added to basic pay to compensate members for the increased liabilities they would incur for Social Security and federal income taxes when the nontaxable allowances were converted to taxable pay. Also in 2006, computation procedures for retirement pay and other elements of compensation that are linked to basic pay would be revised to prevent any increase in their costs. Making those changes would add $72 million to defense outlays in 2001 and a total of $34.2 billion through 2010--or about 6 percent to military personnel costs once the transition was completed in 2006. Increased tax receipts, however, would offset about $14.4 billion of the costs in the 2006-2010 period.

Since long before the modern volunteer military began in 1973, outside studies and government-sponsored commissions have recommended adopting a salary system for the military. A common argument is that paying two people with the same rank and job at different rates simply because one is married and the other unmarried is inequitable. The pay difference also creates an incentive for service members to marry, which raises the military's costs for dependents' health care and other benefits. In addition, proponents note that eliminating the separate food and housing allowances would make total military compensation more visible and thus more effective. It would also increase the visibility of another portion of defense costs: the tax revenues that are forgone because the current allowances are tax-free. Another advantage of this option is that most of the cost reflects a pay increase for single personnel, which could improve their retention.

Some critics might argue that this option would represent an ill-advised meddling with a pay system that has served the military well for over 50 years. But the most recent DoD study of moving to a salary system focused on the practical difficulties of making the transition. For example, devising payment schemes for the elements of compensation now tied to basic pay could prove difficult, in part because converting the allowances into basic pay would raise the basic pay of some groups of personnel more than that of others. Most of the difficulties, however, would derive from the current tax-free nature of the allowances. Calculating the increase in federal tax liabilities for a typical service member in each pay grade would be straightforward, but some personnel would wind up better off than before the transition and others worse off. In addition, Congressional budget rules might make it difficult to recognize the increase in tax receipts that would occur when the allowances were converted into taxable pay as an offset to the costs of this option. Finally, the cost estimate for this option assumes that service members would not be compensated for their additional liabilities for state and local taxes because those would depend on where members chose to establish residency; critics could point out that ignoring state and local taxes would effectively cut the pay of military personnel.

Another question that would arise in the transition to a salary system would be how to set rents for government housing for both single and married personnel once the current practice of charging an implicit rent equal to the service member's housing allowance was no longer practical. The cost estimate for this option assumes that rents would be based on the housing allowances at the end of the transition period, adjusted annually for changes in local housing costs. Rents for family housing would be equal to the full allowance. For bachelor housing, a "dorm fee" would gradually decline from the full allowance at the beginning of the transition period to half the allowance at the end. The estimate assumes that the services would continue their current policy of expecting most single personnel in grade E-5 or below to live in barracks or aboard ship; for such personnel, the dorm fee would be mandatory.

An alternative plan for family housing that might be appropriate after the transition would be to raise rents to levels sufficient to eliminate waiting lists for the available government housing. That alternative is examined in option 4-13.
 

Option 4-04
Deny Unemployment Compensation to Service Members Who Leave Voluntarily
 

Many military personnel who voluntarily leave active-duty service are eligible for unemployment benefits. That situation contrasts with the situation of civilian workers--who must have left their job involuntarily to qualify for unemployment compensation--even though payment amounts for the two groups are calculated the same way.

This option would subject former military personnel to the same rules as members of the civilian labor force; in other words, only personnel who left the service involuntarily would be eligible to receive unemployment benefits. That change would reduce the number of departing personnel eligible for benefits by at least two-thirds and save an average of $185 million annually through 2010. Because the Department of Defense ultimately reimburses the Department of Labor for the cost of unemployment payments to former service members, most of those savings ($1.8 billion through 2010) would occur in the defense budget. A small portion of the savings ($57 million through 2010) would occur in the Department of Labor's budget. (The latter savings would be in mandatory spending.)

Most personnel who leave military service do so voluntarily. Many choose not to reenlist after completing a term of service; others, who have served for a minimum of 20 years, opt for voluntary retirement. A much smaller group is separated involuntarily for reasons related to job or promotion performance or, in recent years, to the drawdown of military forces. Although the pressures associated with the drawdown may have blurred the line between voluntary and involuntary separation in the past, the end of the drawdown has restored that distinction.

Proponents of this option would argue that in addition to saving money, it would subject military personnel to the same rules as the rest of the workforce. Thus, in their view, it would make more equitable use of an entitlement program that was established with the intent of aiding people who lost their job involuntarily.

Critics, by contrast, might argue that the frequent moves associated with military service mean that members who separate voluntarily are unlikely to take up residence in the area of their final posting, making it difficult for them to find a new job before they leave the service. In those critics' view, voluntary separation from military service is not comparable with voluntary termination of civilian employment and therefore should not be subject to the same restrictions on eligibility for unemployment compensation.
 

Health Care Benefits

Health care, which costs DoD about $17 billion annually, is arguably the most important noncash element in the military's overall compensation package. A service member's degree of satisfaction with the military health care system can play an important role in his or her decision to remain in the military. That system is likely to be the focus of much DoD and Congressional attention this year. The Joint Chiefs of Staff recently created an advisory panel, the Defense Medical Oversight Committee, to help them identify how the military health care system could be improved. Thus, options that examine potential changes to that system may be especially timely.

The Structure of the Military Health Care System

The fundamental reason for the military to have a medical system is to keep service members ready for duty and provide them with care during military operations. During the Cold War, the military medical system was structured to fit scenarios involving mass casualties in a major European war. In peacetime, that structure would be available to provide large amounts of care to beneficiaries not on active duty, including the families of active-duty personnel, military retirees, surviving military spouses, and their dependents. More recent planning scenarios require less medical capacity; as a result, DoD has substantially reduced its system of military treatment facilities. Yet even with those reductions, the system is much larger than that required for current wartime scenarios. Most of its budget is devoted to caring for non-active-duty beneficiaries. Of the 8.1 million people eligible to use the system, only about one in six is a service member on active duty.

Active-duty personnel receive free health care through DoD's hospitals and clinics (called the direct care system) and a closely affiliated network of civilian providers. Family members and other beneficiaries who are not on active duty (and are not yet eligible for Medicare) have two health care options. One is to enroll in the plan known as Tricare Prime and agree to seek treatment through the same direct care system and network of civilian providers that serve active-duty personnel. Patients who use Tricare Prime face low (often no) fees and copayments for comprehensive care in exchange for the limited flexibility of a managed care approach. The second option is to use Tricare Standard or Extra--insurance programs that allow military beneficiaries to seek care from a larger number of civilian providers. Those plans feature benefits, copayments, and deductibles similar to the ones in private-sector fee-for-service plans and preferred provider plans, respectively. Beneficiaries who choose Tricare Standard or Extra can also receive care at very little cost from DoD's direct care system. But unlike people enrolled in Tricare Prime, they can do so only when space is available.

When military retirees and dependents reach age 65 and become eligible for Medicare, they may no longer use Tricare. However, they may still receive free care at military hospitals and clinics when space is available. They may also continue to fill prescriptions and get laboratory services free of charge at military treatment facilities.

Criticisms of Military Health Care

Three interrelated criticisms are often directed at DoD's health care system. First, some Tricare users complain of long waits for appointments at military hospitals and clinics or difficulty getting access to the limited number of specialists available through Tricare's networks of preferred providers. Some Tricare beneficiaries have also found it hard to get care when they are away from home.

To some extent, those concerns about access may reflect growing pains in the Tricare system, which DoD started in 1995 but only gradually expanded nationwide. Under Tricare, DoD relies on private contractors in different regions of the country to provide advice lines staffed by nurses, schedule appointments with military and civilian providers, set up networks of providers, negotiate payment rates, and process claims for reimbursement. Many of the complaints about Tricare focus on the service that those contractors provide. However, enrollees' satisfaction with Tricare has generally improved as the contractors and DoD have gained experience with the system and with coordinating benefits across different regions of the country.

Yet some of the reported problems with access to care under Tricare may reflect more fundamental problems. Long delays for patients seeking treatment in military facilities may indicate a lack of focus on customers' needs, inefficiency in the use of doctors' time, or the crowding out of Tricare Prime enrollees by other, lower-priority beneficiaries. Moreover, patient behavior is such that a medical system that does not use copayments to control usage may have to rely instead on implicit costs in the form of waiting time. In the absence of copayments, increasing the capacity of the system could lead to an increase in the number of patients, with no significant change in the average waiting time for a visit.

Second, some retirees over age 65, who are excluded from Tricare, claim that DoD has reneged on a promise to provide them with free lifetime medical care. Although the legal basis for such a claim has been denied by the U.S. Court of Appeals, many defense officials say they recognize an obligation to offer some care to older beneficiaries. But in some areas, base closures have limited DoD's ability to provide them with care on a space-available basis.

One reason that many older military beneficiaries would like comprehensive health coverage through DoD is that they face significant out-of-pocket costs under Medicare. Besides paying Part B premiums (about $550 per year), beneficiaries who receive treatment through Medicare's fee-for-service program must typically pay deductibles and coinsurance. Some military retirees over 65 get supplemental coverage through employers who hired them after their military service; others invest in medical savings accounts to cover future out-of-pocket costs or enroll in Medicare +Choice managed care plans. In addition, more than 50 percent of military retirees report that they buy private supplemental insurance, known as medigap policies, to cover some of the costs that Medicare does not.

Third, critics maintain that DoD's medical system has trouble planning for and controlling health care costs. Civilian health care plans must also plan for and control costs, but the structure of military health care benefits makes those tasks particularly difficult for DoD. Planning is complicated by the fact that beneficiaries who choose not to enroll in Tricare Prime can still turn to space-available care at military facilities or to Tricare Standard or Extra whenever that coverage is convenient for them. As a result, the amount of medical care they will seek from DoD in any given year is uncertain.

Cost control is complicated by the fact that care at military hospitals and clinics is free (or nearly free) to its recipients. Although DoD tries to manage the use of care, the system's incentive structure causes beneficiaries to use substantially more care than other U.S. residents--even though more care does not necessarily lead to better health outcomes. In addition, as private-sector employers and insurers have required beneficiaries to pay more of the cost of their care, beneficiaries who are also eligible for DoD's system have increased their reliance on military facilities for services, such as pharmacy and laboratory services, that would otherwise entail out-of-pocket costs.

The experience of private-sector health care programs suggests that charging a nominal copayment for routine outpatient visits and pharmacy services gives consumers an incentive to use care more prudently without significantly affecting their health. In the past, DoD has characterized options that would institute copayments for treatment in military facilities as cost-cutting initiatives that would harm the quality of life of service members. (In fact, the Administration's proposed budget for military health care includes additional funds in 2001 to eliminate existing copayments for active-duty family members enrolled in Tricare Prime who are treated by civilian providers.) Nevertheless, beginning to charge copayments at both military and civilian facilities could be viewed as a way to make DoD's efforts to provide improved access to health care and more uniform benefits affordable. Under the current system, high costs could limit efforts to expand benefits for retirees over 65 and to improve access for Tricare beneficiaries.

The options presented below represent a mix of approaches to those and other problems. Some of the options would try to provide better and more uniform benefits by adding resources to the military medical system; others would combine efforts to expand benefits with copayments aimed at making those initiatives more affordable; and still others would fundamentally restructure DoD's role in providing health care in the post-Cold War era.
 

Option 4-05
Increase Access to Health Care for Active-Duty Families at Military Treatment Facilities
 

Most families of active-duty personnel enroll in Tricare Prime, a health plan that promises comprehensive care at minimal cost. But many of those families complain that obtaining appointments to receive care at military hospitals and clinics--where Tricare Prime is centered--is difficult.

This option would improve access for active-duty personnel and their families at military treatment facilities through three approaches. It would expand DoD's capacity to offer outpatient services at those facilities by hiring more civilian staff to support military health care providers. It would also increase the number of exam rooms available for outpatient visits at military facilities. And it would change the incentives of physicians who supply care at military hospitals and clinics. Together, those measures would cost $1.2 billion through 2005, or a total of more than $2.7 billion over 10 years.

Some DoD planners say the military health care system is greatly in need of support staff, such as registered nurses and other skilled personnel who provide technical assistance and follow-up care. Over the past 10 years, DoD has cut the number of civilian workers in its system by 22 percent, while the number of military medical personnel has fallen by 13 percent. According to DoD analyses, military outpatient clinics have a lower ratio of support staff to health care providers (including physicians, physical therapists, and psychologists) than many health maintenance organizations (HMOs) in the private sector.

In a 1998 hearing before the House National Security Committee, the Surgeons General of the Army and Navy both identified support staff as a high-priority need within the military health system, since those personnel can free up physicians' time to see more patients. For its part, the Air Force has set a goal of having 3.5 support personnel per provider throughout its clinics based on what it believes are norms among HMOs. This option would give DoD new funding to bring its ratio of support staff to providers of outpatient care closer to private-sector levels.

Besides staffing, military facilities also differ from the private sector in their physical capacity for outpatient care. Most DoD hospitals were built decades ago and were designed to focus on inpatient beds rather than outpatient visits. Many civilian HMOs, by contrast, do not operate their own inpatient facilities at all. This option would provide new funding to build more rooms for outpatient exams at military facilities.

Although these measures would expand DoD's capacity for outpatient visits at base facilities, they might not be sufficient to improve access to care among active-duty families. For example, physicians could resist moves to add to their current workload of patients. This option would try to counter that possibility through monetary incentives for military physicians. Specifically, providers who serve as primary care managers would be eligible to receive up to $22,000 per year in bonus compensation that would be tied to the productivity of a group of military physicians, as measured by quality of care and patients' satisfaction and access. Bonuses would be divided among groups of physicians rather than awarded to individuals for two reasons: to use peer pressure to ensure that providers offered high-quality care, and to avoid the need to adjust measures of an individual physician's productivity for the relative complexity of his or her cases.

Supporters of this option would argue that expanding outpatient capacity and changing the incentives of providers could make the military health care system more accessible. Those changes could reduce waiting times and make it easier to schedule appointments at military hospitals and clinics. In addition, if health care is a key consideration in service members' decisions about whether to leave or stay in the military, such measures might help increase retention.

Opponents of expanding the number of support staff at military clinics might argue that DoD should have a lower ratio than is common in the private sector. DoD's health care providers must furnish more on-the-job training than civilian providers do, since active-duty support personnel often have not had much instruction in health care before entering military service. Moreover, critics of this option would contend that before DoD devotes more funding to hiring support staff or building exam rooms, it should first look at how it can better manage its current resources. Some might argue that DoD has too many physicians on active duty.

Other critics of this option contend that increasing the capacity of the system could do little to reduce delays in appointments because, in the absence of copayments, the additional capacity might simply induce beneficiaries to seek more care. (Such delays might be reduced, however, if DoD also began charging nominal copayments for outpatient visits; see option 4-09 below.) Moreover, the performance bonuses for physicians could create an incentive for them to provide unnecessary or poorer-quality care.
 

Option 4-06
Offer Comprehensive Health Coverage to Older Military Retirees
 

Over the past decade, DoD has closed 35 percent of its military hospitals and replaced others with smaller clinics, leaving less capacity in its direct care system. Because beneficiaries age 65 and older are eligible for health benefits through DoD only if space is available at military facilities, some of those people have had to seek care elsewhere, which increases the share of costs they bear themselves. As a result, service organizations that lobby on behalf of military retirees argue that DoD has broken a promise to provide free health care for life to people who agreed to pursue a career in the military.

This option would give military beneficiaries age 65 and older comprehensive health coverage through DoD using one of two distinct approaches. Under the first approach, beneficiaries would receive a payment from DoD approximately equal in value to a basic type of medigap plan (a supplemental insurance policy for Medicare). Beneficiaries could use that payment to buy supplemental coverage or could apply it toward any health expenses they now pay out of pocket. The second approach would offer beneficiaries coverage under the Federal Employees Health Benefits (FEHB) program, with DoD paying the same share of an enrollee's premium that it does for federal civilian workers. That approach would be more costly to DoD but more generous to older beneficiaries. To offset some of DoD's costs for either form of coverage, older military retirees who chose to accept the new benefit would no longer be permitted to use military health care facilities.

About half of older military beneficiaries report that they purchase private medigap insurance to protect themselves from high out-of-pocket expenses under Medicare. Ten standard medigap plans exist. Their annual premiums can vary widely--from about $600 per person to more than $2,000--depending on the types of benefits covered and the state in which the policyholder lives. In addition, if beneficiaries wait more than six months after turning 65 to buy a medigap plan, insurers may subject them to a waiting period for coverage or even refuse to sell them a policy because of their medical history or health status.

Under this option's first approach, the payment that DoD provided to older military retirees and dependents would roughly equal the value of a standard medigap "A" plan, the least generous type that covers core benefits such as copayments for physicians' services and long inpatient stays. (That value is about $700 in 2000.) Beneficiaries could use that payment to offset the cost of any medigap or employer-sponsored wraparound plan they chose, although they would have to make up the difference in price for plans with more generous benefits. Alternatively, they could deposit the tax-exempt payment in a medical savings account or apply it toward out-of-pocket premiums and copayments charged by managed care providers in the Medicare+Choice program.

Those payments would cost DoD $3 billion between 2001 and 2005, or a total of $9 billion over 10 years (assuming that most of the 1.4 million military beneficiaries in the United States age 65 and older would apply to receive such a payment). Over that 10-year period, however, DoD's costs would be more than offset by over $10 billion in savings from a smaller workload in the military health care system. Besides DoD's costs, the Medicare program would face an additional $13.7 billion in costs between 2001 and 2010. Those costs would arise because some beneficiaries who formerly received care at military treatment facilities would instead begin using Medicare and because a few who previously had no medigap coverage would tend to use more services once they had supplemental coverage. In sum, net costs under this option would total more than $12 billion through 2010.

Under the second approach, older military beneficiaries could enroll in one of the various health plans in the FEHB program each year and pay about 30 percent of the premium (the same share that other FEHB participants pay). In the case of a standard Blue Cross/Blue Shield policy, their share in 2000 would be $781 for an individual or $1,736 for a family. DoD would pay the remainder of the premium ($2,050 for an individual or $4,575 for a family policy, in this example). Such a plan would act as a wraparound policy for people enrolled in Medicare--covering most or all of Medicare's copayments and deductibles as well as most of the cost of prescription drugs. In many cases, an FEHB plan would cost Medicare beneficiaries less and provide more generous benefits than a private medigap policy. However, the total costs of such a plan--that is, the sum paid by DoD, Medicare, and enrollees--would be high.

This second approach would cost DoD more than $13 billion for FEHB premiums through 2005, or a total of more than $40 billion over 10 years (assuming that roughly 70 percent of older military beneficiaries would eventually choose to enroll in the FEHB program, including all those who now buy medigap plans, some who contribute toward employer-sponsored coverage, and a few who formerly relied on Medicare alone). Those 10-year costs, however, would be offset by more than $11 billion in savings over 10 years as fewer elderly patients went to DoD for care. As under the first approach, Medicare would also face higher costs--totaling $15 billion through 2010. When combined, net costs under this option would total $44 billion over the 10-year period.

Although neither approach in this option would be the same as providing free health care for life, either one would give older military retirees and their families a more uniform benefit than exists today. The reason is that the payment or FEHB enrollment would be available to all beneficiaries age 65 or older, whereas today only people who happen to live within driving distance of a military treatment facility receive many health care benefits. Supporters of this option would also point out that either approach is much more generous than the benefit that civilians receive through Medicare alone. In addition, the change would allow older military beneficiaries to choose from a broad range of civilian health care providers.

Opponents of the option could argue that either approach would impose significant new health care costs on the federal government without producing a clear effect on military recruiting and retention. In addition, some critics contend that excluding older beneficiaries from care at military treatment facilities would hurt DoD's ability to attract, train, and keep military doctors and other medical personnel because it would provide a less varied mixture of cases for them to treat.
 

Option 4-07
Offer a Nationwide Mail-Order Prescription Service to Older Military Retirees and Their Dependents
 

Any military beneficiary can fill a prescription--written by either a military or civilian physician--free of charge at DoD's pharmacies. For beneficiaries age 65 and older, prescription drugs can represent a major health expense, because older people are more likely to have chronic conditions than younger people and because fee-for-service Medicare does not cover the cost of most outpatient prescription drugs. Most of the 1.4 million military beneficiaries age 65 and older can obtain pharmacy services only if they are willing to travel to a military facility to have their prescriptions filled. Two exceptions to that system exist, however. In 1997, DoD added a mail-order pharmacy program for older beneficiaries who no longer have access to military facilities because of base closures and realignments. And beginning in spring 2000, DoD will provide a retail and mail-order pharmacy benefit to about 6,000 people age 65 and older if they choose to pay an enrollment fee to participate in the demonstration program.

This option would broaden the current mail-order pharmacy service to include all military retirees and their dependents age 65 and older living in the United States. Users of the mail-order service would pay $8 per prescription filled (up to a 90-day supply), which is similar to copayments that private-sector health maintenance organizations charge. Such a service would cover a wide variety of medications for chronic conditions (although retirees would probably still want to purchase drugs for acute illnesses at retail pharmacies rather than wait to receive them through the mail).

Expanding its mail-order service would cost DoD an additional $91 million in 2001 and $4.8 billion through 2010. That estimate is net of the revenue that DoD would collect in copayments.

Like other health care providers, DoD is facing rising pharmacy costs because of the broad availability of new drugs. Those costs increased by more than 6 percent a year between 1995 and 1997, according to the General Accounting Office, compared with an increase of just 1 percent a year in DoD's overall health care spending during that period. As pharmacy costs have risen, so has the value of DoD's drug benefit; thus, proponents of this option would argue, it might be reasonable to expect beneficiaries to share that increase by making copayments. In addition, studies suggest that charging a copayment gives consumers an incentive to use pharmacy products more prudently without significantly affecting their health.

This option would provide more uniform health care benefits to older military retirees and their dependents than the current system. And although beneficiaries would face some costs, those would probably be much lower than what most older civilians pay out of pocket to fill their prescriptions. In 1996, for example, Medicare enrollees spent an average of about $680 on pharmaceuticals, nearly half of which they paid out of pocket. (Many people hold medigap insurance policies to supplement their Medicare benefits, which may also help defray pharmacy expenses. People who buy a medigap policy must pick one of the more expensive types of plans to get any drug coverage at all and then pay half of the price of each prescription as well. In addition, their maximum pharmacy benefit is capped at $1,250 or $3,000 per year, depending on the type of medigap policy they buy.)

This option would have several potential disadvantages. First, it would add costs to DoD at a time when its budget already faces constraints. (However, an expanded mail-order pharmacy program would be less expensive to the federal government than helping older military beneficiaries buy supplemental coverage through a medigap policy or the Federal Employees Health Benefits program, as discussed in option 4-06.) Second, advocates for retirees would argue that a mail-order pharmacy benefit would not begin to provide the free health care for life that many retirees believe they were promised when they agreed to a career in the military.
 

Option 4-08
Downsize the Military Medical System
 

This option would substantially reduce the size of DoD's direct care system, cutting the number of beds in military facilities to the amount that DoD would need to care for two-thirds of the casualties it anticipates from two nearly simultaneous major wars. As part of that downsizing, DoD would convert many military hospitals into outpatient clinics, close other facilities, and reduce the number of active-duty physicians. This option would also discontinue the Tricare program for retirees and all types of dependents, requiring them to seek care in the civilian sector. Those younger than 65 would be offered coverage through the Federal Employees Health Benefits program, and those 65 or older (who now receive care at military hospitals and clinics only when space is available) would use their Medicare coverage and any private insurance they obtained.

Such restructuring of the military medical system would require additional spending in the near term but would offer substantial savings later on. Total net savings in outlays would be nearly $28 billion through 2010. That estimate reflects savings from operating a smaller military system, assuming that DoD faces the same upward pressures on the cost of care that private-sector providers and insurers do. It also takes into account higher Medicare spending (as older military beneficiaries rely more heavily on their Medicare benefits), the costs of closing facilities, and the costs of providing FEHB coverage to beneficiaries younger than 65. Under this option, DoD would pay the same share of the premiums for FEHB health plans that other federal agencies do for their civilian employees. In addition, families of active-duty service members who enrolled in FEHB would receive a voucher that covered much or all of the remaining share of the premium.

Supporters of downsizing note that although DoD's wartime medical requirements during the Cold War were based on the scenario of a large conventional conflict in Europe, more recent planning scenarios have led to sizable cuts in those requirements. Today, between military medical facilities, hospitals run by the Department of Veterans Affairs, and civilian facilities that have agreed to provide beds during a national emergency, the United States has more than twice the hospital capacity needed to meet the current wartime demand for 13,400 beds. Moreover, even after making the reductions in this option, DoD would still have about 9,000 beds in its expanded system--a much higher percentage of its wartime requirement than it met during the Cold War.

DoD would probably see several disadvantages, however, to making such deep cuts to its health care system. Military medical officials argue that DoD facilities and the care they provide in peacetime are essential for recruiting and training physicians and ensuring medical readiness. Downsizing that system to such an extent would require DoD to modify the way it trains and prepares for wartime. For example, it would need to strengthen ties with the civilian sector to provide casualty training for military medical personnel and to continue ensuring an adequate supply of beds for wartime.

Another potential drawback of this option is that those older beneficiaries who are able to rely on military facilities would have to seek care elsewhere. In addition, some beneficiaries who enrolled in FEHB plans would pay substantially more out of pocket than they do for care in the military system. Military retirees and their dependents would pay about 30 percent of their FEHB premium. (Dependents of active-duty members would pay little or no premium after receiving their voucher.) And enrollees in most FEHB plans would face copayments or deductibles for outpatient visits, prescription drugs, and other medical services.

Proponents of this option would counter that higher out-of-pocket costs could prompt more prudent use of medical care than in DoD's direct care system, where many services are provided at no or low cost. In addition, they might say, many FEHB plans would offer improved coverage and so might be worth the greater out-of-pocket expense. Moreover, the value of DoD's health benefits has grown dramatically with advances in technology and medical practices. Thus, proponents would argue, it is reasonable for military beneficiaries to share more of the costs associated with those advances--as many people covered by employer-sponsored plans in the private sector already do.
 

Option 4-09
Revise Cost Sharing for Military Health Benefits
 

This option would make three changes to the military health care system. First, all beneficiaries (except those on Medicare) would have to enroll in Tricare Prime, Standard, or Extra before using the military health care system. The annual enrollment fee for Tricare Prime would remain the same (no charge for active-duty personnel and their families and $230 for single coverage or $460 for family coverage for retirees). Under Tricare Extra or Standard, active-duty families would still pay no fee, but retirees would pay $115 a year for single or $230 for family coverage. Second, DoD would adjust enrollment fees for inflation by the annual change in the consumer price index for medical expenses. Third, users of Tricare Prime would pay the same copayments for outpatient care at military facilities (where they now pay nothing) as they do at civilian providers. In addition, all retirees would begin to pay small copayments if they chose to receive care at military facilities.

Together, those three changes would save DoD $327 million in 2001 and $4.1 billion through 2010. The savings would stem from enrollment fees, increased copayment charges, and more prudent use of care by beneficiaries. Under current law, DoD is allowed to spend some of the revenues it collects through copayments. This estimate assumes that the Congress would reduce DoD's appropriations by the amount of revenue collected under the option. However, if the Congress revoked DoD's automatic reimbursement authority, some of the estimated savings would take the form of an offset to mandatory spending.

By requiring beneficiaries to enroll, DoD could identify who uses its system. Military providers need to plan for the health care needs of a defined population to develop per capita budgets and build cost-effective delivery networks.

Proponents of this option could argue that the value of DoD's health benefits has risen with advances in medical technology, so users should expect to bear some of the associated cost, just as employees of private firms have. In addition, charging copayments would help curb excessive use of services by creating the same incentives for beneficiaries who receive care on-base as for those who use civilian providers. It would also eliminate the inequity of providing more generous benefits to people who live near a military hospital or clinic.

On the negative side, many military families and retirees would view even modest copayments at military facilities as an erosion of their benefits. Retention and morale might suffer, even though this option would still offer service members and their families more generous health benefits than most government or private-sector employers do.
 

Option 4-10
Have DoD and VA Purchase Drugs Jointly
 

In 1997, the Departments of Defense and Veterans Affairs (VA) spent about $1 billion and $1.3 billion, respectively, on pharmaceutical products for patients in their health care systems. Nationwide, spending on prescription drugs has grown roughly twice as fast in recent years as total national health spending. Constraining such cost growth is an important goal for DoD and VA: each operates its large health care system on a fixed annual appropriation, so spending more on prescription drugs means it has fewer resources to devote to other types of care for its beneficiaries.

This option would consolidate DoD's and VA's purchases of pharmaceutical products, as the Congressional Commission on Servicemembers and Veterans Transition Assistance has recommended. Specifically, it would require the two agencies to organize a joint procurement office and develop a common clinically based formulary (a list of prescription drugs that both agencies' health plans would agree to provide). Formularies can save money by encouraging providers to substitute generic versions for brand-name drugs or by selecting one or more preferred brand-name drugs within a therapeutic class. The joint formulary would apply throughout the VA health system, to mail-order pharmacy services, and at military hospitals and clinics. Once in place, it would allow the agencies to enter into more "committed-volume" contracts with pharmaceutical manufacturers, which generally lead to lower drug prices. In addition, this option would merge the two agencies' mail-order pharmacy services. Those changes would save DoD and VA a total of $21 million in outlays in 2001 and $810 million through 2010.

In recent years, DoD and VA have made efforts to combine some purchases, but that collaboration is limited, and they continue to maintain separate formularies and procurement offices. The VA's National Acquisition Center is responsible for purchasing prescription drugs for most federal agencies except DoD, and it negotiates and maintains the federal supply schedules of prices for those items. The Defense Supply Center Philadelphia (DSCP), an office of the Defense Logistics Agency, negotiates prices for pharmaceuticals and draws up contracts with vendors to buy and deliver those products to military treatment facilities. DSCP also makes plans to deliver those items overseas quickly in the event of a conflict.

Proponents of joint purchasing would argue that DoD and VA need to rein in the rapid growth of prescription drug costs. Without such measures, both agencies may be forced to ration more tightly the care they provide. In addition, those proponents would say, the need for separate procurement offices is not apparent. According to a 1998 report by DoD's Inspector General, only 0.05 percent of the items that the DSCP procures on behalf of military facilities are "militarily unique"; most are common items. VA officials maintain that the National Acquisition Center has already achieved significant savings on many of its pharmaceutical purchases through committed-volume contracts.

In developing a common formulary, the two agencies would need to adopt procedures by which physicians could prescribe nonformulary drugs to patients who needed them. (For example, a patient would require an alternative drug if he or she was allergic to the formulary drug in a therapeutic class.) The design and execution of such an exception process would affect the savings from this option. The stricter the process, the higher would be the cost of documenting and judging the patient's need for a nonformulary drug. A less restrictive process, however, would reduce the government's bargaining power and could reduce the savings from this option.

Critics of consolidation argue that such savings are unachievable anyway. The veterans who obtain health care from the VA make up a very different mix of medical cases than military beneficiaries do--for example, more of them suffer from mental illness, substance abuse, or severe disabilities (such as spinal cord injuries). Thus, the degree of overlap in prescription drugs dispensed by the two agencies may be limited.

Opponents of this option also argue that DoD and VA have already taken important steps to expand their joint procurement. They have entered into 19 joint national contracts to buy pharmaceutical products. Some officials believe that the agencies will achieve the bulk of any possible savings simply by sharing pricing data with one another so they can negotiate the lowest prices with pharmaceutical manufacturers and suppliers. Moreover, DoD officials contend that they must maintain their own procurement office to ensure that drug supplies will be available quickly in the event of war.

Other critics, however, might argue that this option would not go far enough. Savings could be even larger if DoD implemented a uniform formulary for all three types of pharmacies that its beneficiaries use: pharmacies at military hospitals and clinics, the mail-order service, and retail pharmacies (where beneficiaries receive partial reimbursement through insurance). DoD officials say that as they have tightened the formularies of drugs available at military facilities, beneficiaries have increasingly turned to retail outlets--which often costs DoD more than if the department had purchased the drugs at federal prices and dispensed them itself. (Consequently, the estimate for this option assumes that DoD's insurance claims for pharmacy services would increase.) If DoD could enforce a single formulary at all pharmacy outlets, it would enjoy more substantial savings.
 

Other Noncash Benefits

The military has traditionally provided a much broader array of noncash benefits than most civilian employers. Apart from health care, the list includes subsidized on-base housing; commissaries (on-base grocery stores); exchanges (general retail stores); child care; and morale, welfare, and recreation programs (golf courses, fitness centers, clubs, and the like). For the most part, DoD has chosen to rely on in-house organizations rather than private contractors to provide those subsidized goods and services.

In general, both economic theory and the commonsense notion that people are the best judge of where they would like to spend their money suggest that cash payments, rather than in-kind or noncash benefits, should play a dominant role in compensation. When private employers provide health care and other noncash benefits, it is often because that approach allows them to offer tax-free compensation or to take advantage of their ability to purchase goods and services at a lower price than employees could on their own.

Nonetheless, noncash benefits are likely to offer some special advantages to both individual service members and DoD. Those benefits mean that military personnel have familiar services readily available as they and their families move from one unfamiliar base to another. Noncash benefits, and the associated on-base lifestyle, can also provide a sense of belonging to an organization that cares for its members and their families. Likewise, such benefits can send the message that DoD is not just another employer and military service is not just a job. Among officers in critical specialties, military values and lifestyle and a sense of esprit de corps are the most frequently cited reasons to stay in the military.⁽³⁾

DoD's noncash benefit programs entail significant costs. In recent years, those costs have been raised by changes in the civilian economy (such as the growth of discount retailers that compete with on-base stores) or by the aging of DoD's infrastructure of housing and other facilities. In addition, post-Cold War rotation patterns could increase the number of service members who are able to spend much of their career at a single installation, making the advantages of distinct military communities less clear. A 1997 report by the Congressionally mandated National Defense Panel--a group that included four retired general officers--suggested that it might be time for DoD to reassess the role of military communities and noncash benefits.⁽⁴⁾ Panel members said that military personnel might be better off if some of the resources that DoD devotes to providing benefits such as housing, schools, medical care, and retail stores were instead devoted to raising cash compensation.

This section provides an array of options dealing with noncash benefits. Some of the options would increase funding for those programs. Others would reduce the cost of providing noncash benefits or replace them with cash payments. Still others would make the costs of noncash compensation more visible to encourage DoD and service members to make choices between cash and noncash benefits.
 

Option 4-11
Consolidate Military Personnel Costs in a Single Appropriation
 

More than 20 percent of the federal government's costs to recruit and retain military personnel fall outside the military personnel appropriation of the Department of Defense. The costs for many personnel benefits--commissaries, medical care, DoD schools, and on-base family housing--are paid by DoD out of other appropriations. Some additional benefits, such as the Montgomery GI Bill and veterans' disability payments, are paid by the Department of Veterans Affairs. This option would realign appropriations so the full cost of attracting and retaining military personnel appeared in DoD's military personnel account.

Under this option, each of the DoD-funded personnel-support costs mentioned above would become a budget activity or subactivity within the military personnel appropriation. Some VA programs might also be funded in the defense budget. The realignment of appropriations would have two related goals: to provide more accurate information about how much money is being allocated to support military personnel, and to give DoD managers more incentive to use resources wisely.

The current distribution of personnel costs among different appropriations makes it difficult for DoD, the Congress, or taxpayers to track the total level of resources devoted to supporting military personnel. Changes in the appropriation level for military personnel can be either offset or enhanced by changes in the resources devoted to health care, housing, or education benefits. The total picture is rarely, if ever, seen--making it hard to analyze total compensation or make comparisons with civilian compensation.

In addition, because personnel-support costs and military training and operating costs are mixed within the operation and maintenance (O&M) appropriation, interpreting trends in that important appropriation can be difficult. How much of the past growth in O&M spending per active-duty member resulted from growth in personnel costs, such as medical benefits, and how much resulted from changes in the cost of operating military units and installations?

The current distribution of personnel costs among appropriations and agencies can also distort the incentives that managers face. For example, because the costs of enhanced benefits under the Montgomery GI Bill would be paid by the VA, managers at DoD have little reason to ask whether other recruiting incentives might be more cost-effective. Similarly, compensation managers have little incentive to seek the most cost-effective mix of cash and in-kind benefits as long as DoD pays for in-kind benefits such as commissaries and housing out of different appropriations than cash benefits. With separate appropriations, no reliable mechanism exists to ensure that funds taken from in-kind benefits will be returned to service members in the form of pay raises. If both cash and in-kind benefits were paid from a single appropriation, the demand for greater in-kind benefits might be muted, and it might be easier for both the Congress and DoD managers to show service members that changes in benefits were not an erosion in the total compensation package. A consolidated budget for personnel support could even lead to growth of in-kind compensation when that was, in fact, the most cost-effective approach.

How much this option might save is unknown (thus, no savings table is shown). But with the total cost of supporting military personnel at about $95 billion a year, the potential savings from better management of those costs are substantial. (Savings of just 1 percent, for example, would equal almost $1 billion annually.)

In addition to providing savings, this option could lead to a realignment of responsibilities within the military services. Although no change would be required, the new approach to appropriations might eventually result in the consolidation of personnel-support functions under a single Assistant Secretary in each service and the Office of the Secretary of Defense. That realignment might in turn contribute to better coordination among the different personnel-support functions.

One potential disadvantage of this option is that it would require DoD to revise both the financial management systems used to track budget authority and outlays and the budget exhibits it prepares for the Congress. But because DoD already tracks the costs of its various personnel-support programs separately, moving those programs to a different appropriation would involve reorganizing current data rather than collecting new data.

A much more serious drawback of this option is that the new structure for appropriations could require changing the responsibilities and possibly the structure of the various Congressional subcommittees that authorize and appropriate funds for defense. That could prove difficult and controversial.
 

Option 4-12
Increase Housing Allowances to the Full Cost of Adequate Housing
 

The Department of Defense houses about one-third of military families in housing units it owns on military bases. Although many of those units are aging and in poor repair, the demand for on-base housing exceeds the supply in most areas. Military families who live off-base receive a cash allowance in lieu of housing; it typically covers only part of their housing costs, leaving them to pay 18.8 percent of those costs out of pocket. That situation contributes to the demand for on-base family housing and raises issues of equity between personnel living on- and off-base. Moreover, the fact that DoD cannot ensure that military families have access to high-quality housing presents a serious quality-of-life issue in the eyes of many senior military leaders.

This option would raise housing allowances to 100 percent of the estimated cost of adequate housing. Allowances would rise over a three-year period, reducing out-of-pocket costs to an average of 12 percent in the first year, 6 percent in the second year, and eliminating them in the third year. This option would increase allowances at a more rapid rate than the Administration's current proposal, which would reduce out-of-pocket costs to 15 percent in the first year and eliminate them within five years.

Raising housing allowances would directly benefit the roughly 752,000 active-duty personnel (both single and married) who live off-base. In addition, it would contribute indirectly to the quality of DoD's on-base units. Currently, DoD is experimenting with public/private partnerships designed to provide private capital to replace and revitalize on-base housing. Higher allowances would make the partnerships--whose return on investment typically depends on the size of housing allowances--more appealing to private firms. Another advantage is that service members would no longer have an incentive to accept on-base units that were not comparable in quality with available private-sector units. Queues for on-base housing would decline, and base commanders would have a strong incentive either to improve or to demolish substandard units.

The principal disadvantage of this option is its cost--approximately $1.4 billion a year more than the current system. This option would also further enshrine the current pay and allowance system, making it difficult to eliminate differences in pay between married and single personnel (see option 4-03). In addition, this option would represent a sharp break from DoD's historical goal of setting allowances to cover 85 percent of service members' housing costs. Although that practice holds down the cost of allowances, it contributes to long waiting lines for on-base units and to a perception that the department is not committed to providing service members and their families with a high quality of life.

The cost of this option would be equivalent to that of raising basic military pay by about 3 percent, but its impact would probably be much greater. Although service members accustomed to press reports that cite a 13 percent pay gap might not view a 3 percent pay raise as a major improvement in their quality of life, they would probably see the elimination of out-of-pocket housing costs as dramatic, visible evidence of DoD's commitment to improving service members' welfare. Thus, such a change could have an immediate impact on morale and retention. Further, the higher allowances might resolve DoD's housing problems by decreasing the demand for on-base units and allowing the department to reduce its role as a direct provider of housing.
 

Option 4-13
Increase Competition Between DoD and Private-Sector Housing
 

Most military families receive cash allowances for housing and buy or rent dwellings in the private sector. About one-third, however, live rent-free in on-base housing. It costs DoD about 35 percent more to provide a housing unit than it costs to rent a comparable unit in the private sector. Despite the cost, DoD intends to keep its inventory of housing. The department is experimenting with public/private partnerships that could provide private capital to replace or revitalize on-base housing units, many of which are nearing the end of their service life. But those partnerships are proceeding more slowly than planned, leaving many families in substandard units. Moreover, it is uncertain whether such partnerships will reduce the long-run costs to DoD of providing on-base housing.

This option would reduce the demand for on-base housing by requiring it to compete with private-sector housing. All military families would receive the cash allowance and be free to choose between DoD and private-sector units. DoD--and any companies it takes on as partners--would act like a private landlord, setting rents for on-base units at market-clearing levels (levels at which there would be neither excess vacancies nor waiting lists). On-base housing units would be replaced or revitalized if they met one of two criteria: their value to service members (the market-clearing rent they could command) was sufficient to cover both operating costs and amortized capital costs, or DoD deemed the units indispensable because of their historical nature or importance for military readiness. Those criteria would limit DoD to revitalizing or replacing about 25 percent of its existing housing stock.

The principal advantage of this option would be savings to DoD, which could amount to more than $5 billion in outlays through 2010. The main source of those savings would be lower revitalization and replacement costs as DoD retired aging units rather than investing in ones that could not cover their costs in competition with private-sector housing. Among other advantages, this option would let DoD focus on its warfighting mission rather than on real estate management, eliminate waiting lists for on-base units, and equalize the value of the housing benefits that it provides to families living on- and off-base. Moreover, the housing costs that service members as a whole pay out of pocket would not change: if rents paid to DoD exceeded the housing allowances paid to personnel living in DoD units, the excess would be returned to all service members through an increase in allowance rates.

The main disadvantage of this option is that reducing DoD's role as a provider of housing would limit the benefits associated with the current policy. Advocates argue that housing soldiers and their families on-base promotes esprit de corps, morale, and a sense that the military "takes care of its own." This option would represent a significant break with military tradition. As a result, it could have a negative impact on morale unless it received strong public support from senior military leaders.

On-base units are in high demand among military families primarily because of their low cost to service members. The allowance that families living in DoD housing forfeit equals only about 60 percent of the costs that the federal government incurs in providing a unit. Under this option, families that chose to live on-base would face higher costs than they do today because their rent to DoD would most likely exceed their housing allowance.
 

Option 4-14
Create Incentives for Military Families to Save Energy
 

The Department of Defense spent almost $310 million last year on gas, electricity, and water for the approximately 216,000 family housing units that it owns in the United States. DoD's efforts to reduce those costs by promoting resource conservation have met with limited success. One reason is that service members living in DoD-owned housing do not pay for their utilities and may not even know how much gas, electricity, and water they use. Landlords in the private sector have found that utility use typically declines by about 20 percent when tenants are responsible for their own utility bills.

This option would install utility meters in DoD housing units, provide cash utility allowances to the families living there, and then charge for utilities based on actual use. Residents who spent less than their allowance could keep the savings; those who spent more would pay the extra cost out of pocket. The budget for allowances would be set equal to the expected cost of utilities under the new system, or about 80 percent of what DoD now spends. The department would allocate that amount among the different housing units on the basis of their size, energy efficiency, and location. Once the program was established, the allowance budget for each year could be set equal to the previous year's actual utility charges plus an adjustment for inflation. As such, if service members were able to cut their utility usage by more than 20 percent, allowances would fall and the savings from this option would increase. If, however, 20 percent overestimates members' true ability to conserve, allowances would be higher and the savings would be less.

Because families who conserved aggressively would receive more in allowances than they would be charged for utilities, this option would reward people who tried to conserve energy. Families who did not economize would face utility bills in excess of their allowance. However, there is a risk that the allowances for some units might not accurately reflect their characteristics. People living in such a unit might find that the allowance did not cover all of their utility costs even after they had made reasonable conservation efforts.

The principal advantage of this option is that it would reduce DoD's costs by giving military families who live on-base the same incentives for conservation as most homeowners and renters--including military families living off-base. Although DoD would incur the up-front costs of determining allowance amounts, setting up a billing system, and installing meters, this option could provide total savings of about $580 million from 2001 through 2010.

Many DoD housing units already have a connection where a meter could be installed. Nonetheless, a temporary exemption from the metering requirement (and the utility allowances and charges) could be given for some older units if the Secretary of Defense certified that metering them was not feasible.
 

Option 4-15
Improve Military Families' Access to Child Care
 

Access to affordable, high-quality child care is important to many families of DoD military and civilian workers. Obtaining that access, however, can be particularly difficult for employees at isolated bases or for military families who must move frequently.

This option would increase DoD's support for child care in two ways. First, it would provide $350 million over six years for constructing DoD child care centers (to create spaces for an additional 25,000 children) as well as funds to cover DoD's share of the operating costs of those spaces. Second, it would provide matching funds to military families with eligible child care expenses who were either unable to get slots in DoD centers or preferred to rely on in-home or other sources of care. (Eligible expenses would be defined in the same way that they are for the federal tax credit for child care.) DoD's matching rates would be set so that families who received matching funds got the same kind of subsidy as families who used DoD child care centers. Thus, although DoD would, on average, match expenditures on a one-to-one basis, the matching rate could be higher for junior personnel and lower for senior personnel. DoD's matching payments would be capped at $3,926 per child per year (adjusted for inflation), which equals the department's average share of the operating cost of a slot in a child care center.

DoD helps ensure access to child care through two main programs. One program consists of around 800 day care centers (known as child care development centers) that DoD runs on military bases. Those high-quality centers have the capacity to care for about 60,000 children. Fees paid by patrons cover about half of their operating costs, and appropriated funds cover the rest. The other program is a network of DoD-certified in-home caregivers, or family child care homes. Those in-home caregivers are often the spouses of military personnel. Currently, DoD has certified almost 10,000 in-home caregivers who can offer care to about 60,000 children. Military families who use in-home care generally pay the full cost, although the Navy shares part of that cost at some of its installations.

Despite their size, those two programs serve only a minority of the DoD workers in need of child care. Most military families rely on the same kinds of public and private child care arrangements as non-DoD employees do. In some cases, that is a matter of preference; in other cases, it reflects a shortage of DoD-sponsored care. According to DoD estimates, an additional 256,000 child care spaces (either in centers or in family day care) are necessary to meet the needs of military families fully. The demand for additional spaces in DoD's child development centers is particularly acute; applicants often face long waiting lists. But DoD's ability to provide additional slots in those centers is limited both by the initial cost of construction and by the need to cover half of the annual operating costs associated with the slots.

This option would not resolve all of DoD's child care issues; some DoD child care centers might continue to have waiting lists. Nonetheless, the additional funds for child care facilities and matching grants included in this option would have an immediate impact on service members' access to high-quality, affordable child care. Not only would care in the DoD centers be more readily available, but the subsidy would encourage families who do not use those centers to seek higher-quality care than they might otherwise, since they would pay only half of the additional cost of that care.

This option's price tag would be substantial--about $1 billion annually--because the option would benefit all military families who needed child care, not just those for whom the child care centers were an option. Families who preferred in-home care for their children, had special needs that their local DoD center could not meet, were seeking care near their off-base home or near the military spouse's workplace, or needed child care on an unscheduled basis, only in the summer, or overnight would no longer be at a disadvantage relative to those preferring care in large on-base centers. A child care system that provided support to all families in need might appear more equitable than the current system.

Wider access to child care benefits would also have a negative aspect, however. It would widen the already significant gap between the value of the compensation packages that DoD provides to single and to married personnel (see option 4-03). One way to alleviate that concern and also reduce the cost of this option would be to lower the average matching rate. But unless the law that requires DoD to pay half of the operating costs of on-base centers was changed, that approach would leave families who relied on the matching grants at a disadvantage relative to those who used on-base centers.

In the long run, the matching grants in this option could reduce the pressure on DoD to expand its system of on-base care. That would be a disadvantage in the eyes of people who feel that the current system helps foster a sense of community among military personnel by encouraging families to bring their children to the base for day care even if they live off-base. But two advantages would potentially offset that disadvantage. First, this option would allow DoD to concentrate more on its core missions. Second, and perhaps more important, this option would provide immediate relief to many military families seeking affordable child care.
 

Option 4-16
Consolidate DoD Retail Activities and Increase Cash Compensation
 

The Department of Defense operates four separate retail systems: a DoD-wide network of grocery stores, or commissaries, run by the Defense Commissary Agency (DeCA), and three chains of general retail stores, or exchanges (the Army and Air Force Exchange Service, the Navy Exchange Command, and the U.S. Marine Corps exchange system). Both commissaries and exchanges try to give military personnel access to low-cost goods, but they operate under very different funding mechanisms. Commissaries receive a Congressional appropriation of about $1 billion a year in addition to about $5 billion in revenue from sales to customers. Exchanges, which have annual sales of about $10 billion, do not receive direct appropriations but rely solely on sales revenue to cover their costs. One reason the exchanges are able to operate without an appropriated subsidy is that they charge their customers a higher markup over wholesale prices than commissaries do. Another reason is that the exchange systems are nonappropriated-fund (NAF) entities rather than federal agencies, which enables them to use relatively flexible and businesslike personnel and procurement practices. Because DeCA is a federal agency, by contrast, commissaries must employ civil service personnel and use standard DoD procurement practices.

This option would consolidate all of DoD's commissaries and exchanges into a single NAF exchange system, which would operate without any appropriated subsidy. That system would be responsible for ensuring access to low-cost groceries and other retail goods at all DoD installations, including those in isolated or overseas locations. The consolidation would take place gradually over a two-year period. When it was complete, DoD's costs would be reduced by about $1.1 billion a year (in 2000 dollars)--about $1 billion from eliminating the commissary subsidy and an additional $100 million from eliminating duplicative functions among the exchange systems. Rather than saving that money, however, this option would return the $1.1 billion to active-duty service members through either an increase in basic pay (averaging about $600 per member per year before taxes) or a tax-free grocery allowance of $1,000 per year payable to each member eligible for cash subsistence payments. Payments to service members would be phased in to coincide with the consolidation of the commissary and exchange stores at each base.

Low-cost, on-base shopping has long been a benefit of military service. But recent declines in the size of U.S. forces and changes in the civilian retail industry have made it more difficult and costly for DoD's fragmented retail systems to provide that benefit. A recent study conducted for DeCA found that a $1 billion annual appropriation would not be enough to maintain the quality of commissaries in the future. Both commissaries and exchanges must now compete with large discount chains that offer low-cost, one-stop shopping for groceries and general merchandise just outside the gates of many military installations.

DoD has considered a variety of initiatives designed to duplicate the benefits of an integrated retail system: consolidating or encouraging cooperation among the exchanges; converting DeCA into a so-called performance-based organization with the freedom to use NAF-like personnel and procurement practices; building commissaries and exchanges next to one another at military bases; and providing combined commissary and exchange stores on an experimental basis. To date, however, those efforts have met with limited success.

This option would run into a problem that has hampered past attempts to consolidate the three exchange systems: the services' concerns about losing control over exchange earnings. The three exchange systems generate about $400 million in net earnings each year, most of which the services use to support morale, welfare, and recreation programs for their troops. How those earnings are allocated is a sensitive issue--even though the exchanges would produce little or no earnings if they had to pay for all of the in-kind support (including transportation of goods overseas and some building maintenance) that the services provide.

Moreover, by consolidating commissaries with exchanges, this option would face another, arguably more significant, problem. An exchange system operating without a subsidy would have to charge about 10 percent more for groceries than commissaries do now. (That estimate is based on the difference between the 20 percent markup that exchanges charge and the 5 percent markup that commissaries charge, the amount that commissary customers currently pay to have their groceries bagged, and evidence that exchanges pay lower wholesale prices than commissaries do.) At the current level of commissary sales, a 10 percent price increase would cost customers an extra $500 million annually.

About $230 million of the price increase would be borne by the military retirees who currently shop in commissaries. As a result, this option could face strong opposition from associations of military retirees, who would view it as a violation of the military's obligation to its retired personnel. On average, retirees could pay an additional $140 per year, but some retirees would be affected more than others. A retired couple who purchased all of their groceries at a commissary would pay about $330 more per year.

In contrast, active-duty service members--including those with large families who buy all of their groceries at commissaries--would clearly benefit. The average active-duty family would pay about $230 more per year for groceries--far less than the additional basic pay or grocery allowance that they would receive under this option. (A military family would have to spend about $10,000 per year on groceries in commissaries before a 10 percent price increase outweighed the benefits of a $1,000 allowance.) Cash allowances would be particularly attractive to personnel who live off-base and can shop near their home more conveniently than on-base. Moreover, all military families--active-duty, reserve, and retired--would gain from longer store hours, more convenient one-stop shopping, access to private-label groceries (not currently available in commissaries), and the security of a military shopping benefit that did not depend on the annual appropriation process.

DoD could target the $1.1 billion in cash payments to service members in a variety of ways. An allowance based solely on pay grade might be the most effective in enhancing retention and rewarding service members for their work, although some people might argue that an allowance tied to pay grade and family size would be more equitable. If desired, supplemental payments could be made to junior enlisted personnel who have large families and might otherwise be eligible for food stamps.

This option would provide a more cost-effective form of compensation than the current system of separate commissary and exchange benefits. In effect, commissary patrons would as a whole give up about $500 million a year in savings in exchange for $1.1 billion in cash payments to active-duty personnel. Such a trade could increase retention among active-duty members. Nonetheless, the option would represent a break with military tradition. Thus, unless it received strong public support from senior military leaders, it could harm the morale of the active-duty force despite the financial savings it would provide. Obtaining that support might require a Congressional commitment to a grocery allowance that would be tied to the cost of groceries and would not become simply an increase in military pay.
 

Option 4-17
Consolidate and Encourage Efficiencies in Military Exchange Activities
 

The Department of Defense's three exchange systems--the Army and Air Force Exchange Service, the Navy Exchange Command, and the Marine Corps system--provide a wide array of retail stores and consumer services at military bases. With combined annual sales of approximately $10 billion, operating costs of about $2 billion, and 80,000 employees, the exchanges constitute one of the largest retail businesses in the United States.

The Congress does not directly appropriate funds to the exchanges, but DoD provides them with about $400 million worth of free services each year. Those services include maintaining the exterior of exchange buildings (such as roofs, windows, and heating and cooling systems), transporting goods overseas, and providing utilities at overseas stores. The federal status of DoD exchanges offers other advantages as well: exemption from state and local excise taxes, a monopoly over on-base sales of goods and services, and access to free land and interest-free capital. Those exemptions and other subsidies are worth more than $1 billion a year, the Congressional Budget Office estimates.

Part of that annual subsidy is translated either into lower prices for military personnel and their families or into exchange earnings that support the services' morale, welfare, and recreation (MWR) programs. Another portion is absorbed by inefficiencies. Private retailers in the United States must be efficient to survive in the face of competition. The subsidies that exchanges receive, by contrast, alleviate the pressure of competition and allow the exchanges to operate in ways that private retailers could not afford to. For example, although economies of scale in the private sector often force private retailers to merge, DoD's three exchange systems remain separate--despite numerous studies showing that consolidation would significantly reduce operating costs. Subsidies also distort the incentives that exchange managers face. Because DoD provides free utilities overseas, the Army and Air Force Exchange Service can operate an ice cream production line in Germany without regard to utility costs. And because DoD pays to transport goods overseas, the exchanges can ship beer and carbonated beverages abroad rather than buying them locally.

This option would consolidate the three exchange systems into a single entity and introduce incentives for more efficient operations. Rather than receive DoD support services free of charge, the exchanges would receive a lump-sum appropriation equal to the historical cost of those services and would (like DoD's industrially funded activities) reimburse the providers of those services. Over the long run, consolidating the three exchange systems could save about $65 million a year in overhead costs. Requiring the exchanges to reimburse DoD for support services would save another $40 million a year if it induced the exchanges to reduce the costs of those activities by 10 percent. In all, savings would total $1.1 billion between 2001 and 2010. Initially, the savings might provide additional funding for MWR activities. Over the long run, the increase in exchange earnings would allow DoD to provide its planned level of MWR activities with less support from appropriated funds.
 

Option 4-18
Eliminate DoD's Elementary and Secondary Schools
 

The Domestic Dependent Elementary and Secondary Schools (DDESS) system operates schools on several military bases in the United States to educate dependents of military personnel living on those bases. The Department of Defense also operates a separate school system for military dependents living overseas.

This option would phase out most of the schools that DDESS runs in favor of increased use of local public schools and would consolidate management of any remaining DDESS schools into the much larger overseas school system. Those changes would save DoD a total of $1.5 billion between 2001 and 2010. Savings for the federal government as a whole would be less--about $400 million through 2010--because the Department of Education would have to spend more on Impact Aid, which it provides to local school districts that enroll dependents of federal employees. (These cost estimates assume that funding for Impact Aid would increase enough that the average amount paid per student living on federal land would remain at its current level.)

Critics would argue that DDESS takes an uneven and largely arbitrary approach to educating the dependents of active-duty service members. The distribution of DDESS schools is mainly a historical accident, dating to the time when segregated public schools in the South did not adequately serve an integrated military. The great majority of military bases in the United States have no DDESS school. And where such schools do exist, they generally enroll only dependents of active-duty members who live on-base; those living off-base, and dependents of civilian employees, are the responsibility of local school districts. In addition, most bases with DDESS facilities offer only elementary and middle schools; high school students living on-base use the public schools. In most of the places where DDESS operates schools, accredited public schools are readily available--with the possible exceptions of Guam, Puerto Rico, and West Point, where DoD would continue to run domestic schools under this option.

Closing DDESS schools need not create major disruptions. The roughly 30,000 students who might be affected already change schools frequently, in large part because they move often as their military parent is reassigned. In many locations, the public school district could continue to use the DDESS facility. (DoD already offers support to some local districts by allowing public schools to operate on-base or providing additional limited funding on a per-student basis.) Finally, to ease the transition, DDESS schools would be phased out at a rate of one per district per year rather than all at once. And the local school districts would receive additional one-time funding and transfer of facilities and equipment to help them absorb their new teaching load.

This option might have several disadvantages, however. First, many parents of DDESS students might be reluctant to see the schools phased out because they believe DoD schools offer higher-quality educations. Second, if local school districts did not maintain the on-base schools, former DDESS students might face longer commutes. Third, some of the savings to the federal government from this option would be offset by increased costs to local school districts. In the past, those districts have effectively been subsidized by not having to pay any of the costs of educating DDESS students while receiving at least some direct and indirect tax revenues from their parents. This option would eliminate that subsidy.
 

Requirements for Personnel

The military compensation package is one tool that DoD can use to adjust its number of personnel to meet requirements. But because there is not always a clear relationship between DoD's stated requirements for personnel and its military capabilities, reassessing those requirements is sometimes more appropriate than meeting them. Weaknesses in DoD's process for setting requirements for support activities are suggested by the fact that studies to determine the requirements of the department's civilian organizations often conclude that additional staffing is needed, even though those organizations find ways to restructure work and cut staff significantly if they must do so to prevent the work from being contracted out.

Since the advent of the all-volunteer force, DoD has made great strides in reducing requirements for military personnel by substituting civilians or contractors. Its ongoing effort to lower support costs by introducing competition between in-house organizations and contractors may encourage further cuts in the number of military personnel assigned to those organizations.

DoD also aims to reduce personnel requirements by substituting capital for labor. Over the long run, the most effective way to do that is to design new weapon systems that can be operated and maintained by smaller crews. For example, the Navy hopes to operate its new destroyer, the DD-21, with a crew of 95, compared with the crew of 340 for today's DDG-51.

The Navy is also working to foster a greater awareness of the cost of military manpower and to change long-standing traditions that treat sailors as a cheap source of labor. For instance, rather than rely on general-detail enlistees to chip paint on ships in the traditional, labor-intensive manner, the Navy is exploring alternative approaches: doing more painting in port using civilian contractors who have specialized tools and expertise, introducing new types of paint or surfaces that do not require frequent painting, and providing more and better hand tools. So-called "smart ship" technologies--such as sensors that replace sailors who would otherwise stand watch at stations throughout the ship--might allow significant reductions in manpower even on the Navy's existing fleet.

Yet despite recent efforts to use manpower more efficiently, DoD's stated manpower requirements remain heavily influenced by traditional personnel practices. Moreover, rather than driving changes in the mix of personnel, requirements may change over time in response to changes in that mix. This section includes two options that address DoD's requirements for military personnel. One option outlines ways to reduce requirements for Air Force and Navy pilots by changing the traditional career paths for those officers. The other option returns the ratio of enlisted personnel to officers and the proportion of officers in the field grades to the levels seen before the recent drawdown. That option is consistent with the view that recent trends in the officer corps have been driven not by requirements but by changes in the mix of personnel that emerged as a result of the drawdown.
 

Option 4-19
Cut Requirements for Pilots in Nonflying Positions
 

The Air Force and the Navy have fewer pilots than their stated requirements call for. In 1999, both services reported shortfalls of more than 1,000 pilots. The two services have undertaken several initiatives to address that problem, including paying special bonuses under the Aviation Continuation Pay program. But despite those efforts, pilot shortfalls are expected to persist for the foreseeable future.

This option would use an additional approach to address that problem: reducing the stated requirements for pilots in nonflying positions. Cutting those requirements by two-thirds would save $115 million in outlays in 2001 and $2.7 billion over 10 years by reducing the number of pilots who would need to be trained.

Both the Air Force and the Navy have many more pilots than they need for critical cockpit or flying positions. The shortfalls reflect the fact that the services have included many nonflying positions in their requirements for pilots. At the end of 1998, for example, nearly one-fourth of the Air Force's roughly 13,400 pilots were in nonflying positions, as were about half of the Navy's 6,600 pilots.

Supporters of this option would argue that some of the nonflying positions identified as requiring pilots are already being adequately filled by personnel with other backgrounds. In addition, the services could employ aviation navigators in some nonflying positions that require the expertise of a pilot.

The principal disadvantage of this option is that reducing the number of nonflying positions reserved for pilots could limit pilots' opportunity to gain the broader experience they need to progress in their careers. That problem might be alleviated, however, if the Air Force and Navy established a fly-only career path specifically for pilots who wanted to spend all 20 years of their military service in flying assignments. (Some pilots have indicated that they joined the military to fly and might be willing to stay in such a career path even if it limited their ability to be promoted.) A fly-only career path would lessen the number of nonflying positions needed to provide pilots with career-broadening opportunities. Another disadvantage of this option is that it might not leave enough shore positions for Navy pilots to rotate into between their tours at sea.
 

Option 4-20
Restructure the Officer Corps
 

As part of the post-Cold War drawdown in the military, each of the services cut its officer corps significantly. Those cuts, however, were accompanied by a change in the composition of the armed forces. The ratio of enlisted personnel to officers declined from 6.0 to 1 in 1989 to 5.2 to 1 in 1999 because the officer corps was cut by a smaller percentage than enlisted personnel. The percentage of senior officers--those in the general or flag grades as well as the so-called field grades (major through colonel)--increased. The percentage of officers who entered the military through the service academies also rose.

This option would offset those apparent consequences of the drawdown. It would return the enlisted-to-officer ratio and the percentage of general and flag-level officers to the levels that existed in 1989, when the drawdown began. In addition, the percentage of newly commissioned officers trained in the service academies would be reduced. The option would also reduce the number of field-grade officers, restoring the limits on those positions to levels consistent with the Defense Officer Personnel Management Act before the drawdown. Compared with the Administration's budget request for 2000, those changes would save $35 million in outlays in 2001 and a total of $12 billion through 2010.

In carrying out the drawdown, the services tried to protect officers who were already in the force, many of whom had based their career expectations and financial plans on continued military service. The decline in the enlisted-to-officer ratio suggests that those efforts may have created an unbalanced force. The services might argue that the decline was driven by changing requirements as a result of new technologies and military doctrines that have decreased the need for enlisted personnel relative to the need for officers. But some critics see the timing of the shift as suspicious. Moreover, when the drawdown began, none of the services expected that their future requirements for enlisted personnel would fall as much as they did relative to requirements for officers. This option would restore the enlisted-to-officer ratio to the 1989 level of 6.0 to 1 by reducing the size of the officer corps by about 15,900 and increasing the size of the enlisted force by an equal amount.

That reduction would be targeted primarily toward officers in the field, general, and flag grades. The percentage of general and flag officers would be reduced gradually to the 1989 level by restricting promotions into those grades. Reductions in the field grades could be achieved by encouraging officers to leave the service voluntarily, through such programs as the temporary early retirement authority (TERA), voluntary separation incentive (VSI), and special separation benefit (SSB).

Over a period of four to five years, the number of general or flag officers would be reduced by about 200 through attrition, while about 12,600 field-grade officers and 3,100 junior officers (second lieutenant through captain) would be separated. Assuming that field-grade officers with less than 20 years of service would receive TERA and those with 6 to 15 years of service would receive VSI or SSB, the savings in pay would initially be offset entirely by the cost of separation payments. Net savings in pay would amount to a total of $9.6 billion through 2010.

Supporters of this option would argue that the services' actions have resulted in a force that is too senior and contains more officers than needed to lead the remaining enlisted personnel. In their view, much of the expertise and combat readiness that senior officers provide could be obtained at lower cost from highly capable senior enlisted personnel and junior officers. Opponents, by contrast, might argue that separating additional senior officers would constitute a breach of faith because it would cut short the careers of some service members. Moreover, the services' efforts to implement the Goldwater-Nichols Defense Reorganization Act of 1986 and the Defense Acquisition Workforce Act of 1990 may have increased requirements for those relatively senior officers.

This option would also return the mix of academy and nonacademy graduates entering active duty to the level that prevailed before the drawdown. Although the number of students in the service academies declined during the drawdown, academy graduates account for 14 percent of new officers now compared with 9 percent in the early 1980s. Under this option, the total number of officer accessions would remain near the level planned by the Department of Defense, but the services would draw more officers from lower-cost commissioning programs--the Reserve Officer Training Corps (ROTC) and Officers Candidate School/Officer Training School (OCS/ OTS)--and fewer from the more costly service academies. The estimated savings from that action reflect only the costs that would change in the near term, such as operating expenses and pay for faculty and cadets. Those savings would be partially offset by additional costs of about $350 million over 10 years to procure officers from OCS and ROTC to replace those from the academies. As a result, this change would save $75 million in outlays in 2001 and a total of nearly $2.4 billion through 2010. In the longer term, savings might also accrue from changes in the academies' physical plant.

Supporters of changing the mix of new officers might argue that the academies are larger than many successful private colleges and that additional cuts to them are feasible. Moreover, a balanced mix of academy graduates and accessions from other commissioning programs may be needed to maintain good civil/ military relations and ensure that the officer corps reflects the full diversity of U.S. society. Opponents of that change would contend that the service academies are the best source of future military leaders and that academy graduates are well worth the dollars spent on them. Some opponents might also argue that the academies have already reduced their class size to the minimum efficient level.
 

Military Equipment and Facilities

To be ready for their missions, military units must have well-maintained equipment and facilities. Much of DoD's spending on readiness is devoted to that purpose. The department spends approximately $38 billion a year on maintaining its equipment--including the costs of intermediate maintenance performed at on-base repair shops, repair tasks performed at DoD's centralized maintenance depots, and tasks performed by contractors. In addition, the department devotes more than $22 billion a year to replacing, operating, and maintaining its infrastructure of buildings and facilities.

Maintaining equipment and facilities contributes to readiness directly by improving a unit's ability to carry out its assigned duties. That effect is most evident in the case of maintenance for combat systems: the extent to which its equipment is maintained in a condition that allows a unit to perform its missions is one of DoD's most important readiness indicators. The link between facilities and readiness is less direct, although senior defense officials argue that poorly maintained operational facilities can affect the safety and speed at which tasks are performed.

The quality of military equipment and facilities also contributes to readiness indirectly through its impact on morale, recruiting, and retention. That relationship may be most obvious in the case of quality-of-life facilities, such as on-base housing or buildings devoted to morale, welfare, and recreation programs. But poor working conditions and inadequately maintained equipment can also affect morale.

In addition, funds spent on keeping equipment and facilities from deteriorating and developing more serious maintenance problems contribute to readiness over the long run. By reducing the cost of future maintenance, they free up resources for other readiness needs. Even in the short run, failure to budget enough for maintaining and operating buildings can force base commanders to shift resources away from high-priority readiness programs (including unit training) to meet emergency needs.

Support of DoD Facilities

DoD is trying to develop a consistent and objective method for determining how much funding it requires to provide high-quality facilities for military personnel. Until it achieves that goal, estimates of funding shortfalls for maintenance of real property will remain uncertain. Nonetheless, comparisons of DoD spending with levels in the private sector suggest that the department tends to underfund real property maintenance. At various times, both the Congress and the Office of the Secretary of Defense have tried to increase that funding. In the late 1970s, the Congress responded to concerns about the "hollow force" by trying to keep the backlog of unfunded requirements for real property maintenance at the 1978 level. At other times, the defense planning guidance issued by the Secretary has set a minimum for the amount of real property maintenance to be funded relative to requirements. Among the options in this section are ones that would provide additional funding to maintain or replace aging facilities.

Yet in many cases, DoD may not need to maintain its existing inventory of real property. The military has large numbers of excess bases and facilities. Since the beginning of the drawdown, the average square feet of DoD buildings per active-duty service member has risen by about 35 percent. Options that would allow the department to close additional bases might help DoD bring its ownership costs under control. Other options that would reduce the need for additional funding would demolish excess buildings or lower the costs of operating buildings that remain in the inventory. In addition, previous options in this chapter that would reduce DoD's role in providing retail stores, housing, and medical care could significantly cut ownership costs by allowing the department to scale back the number of facilities it maintains.
 

Option 4-21
Increase Funding for Military Construction
 

When defense budgets are tight, one type of investment that is frequently deferred is military construction--particularly construction not associated with base realignment and closure actions. Eventually, however, outdated or inadequate facilities can have a negative impact on the readiness and morale of U.S. troops. This option would increase funding for military construction by $750 million a year (in 2000 dollars) through 2010. Those funds would allow DoD to increase its military construction by about 17 percent above planned levels.

At the current level of spending, the Department of Defense could replace its inventory of real property every 145 years--more than double the 67-year service life that the department recommends. Thus, when the average DoD facility (now 44 years old) reaches the end of its designated service life, it will be maintained rather than replaced. But as facilities age, they become more expensive to maintain. At some point, it may be cheaper to construct a new facility than to continue maintaining an older one. Additional funding for military construction would allow the services to replace facilities when that was cost-effective.

In February 1999, the service chiefs requested an additional $400 million to meet their construction requirements for fiscal year 2000. They argued that the additional funds could help finance projects directly related to mission capabilities (such as runways, piers, and training facilities) as well as quality-of-life projects (such as barracks) that contribute to readiness through their impact on retention and morale. The services always have a long list of construction projects they could undertake if funds were available, however, so it is difficult to know how much military construction funding they actually need.

One way to estimate that amount is to compare current funding with the levels of the 1980s, a period of relatively ample defense spending. The results of that comparison, however, vary widely depending on the measure used. To match the levels of spending per active-duty member seen in the 1980s, the department would have to increase its planned spending by about $750 million a year (in 2000 dollars). To keep funding proportional to the square feet of buildings in DoD's inventories, by contrast, the needed annual increase would be about $2.3 billion. That latter amount is probably an overestimate because DoD has a large number of excess buildings in its inventories that will be demolished when they reach the end of their service life. To avoid giving DoD money to replace unneeded facilities, the funding increase in this option is based on the lower estimate.

The principal disadvantage of this option is its cost, which would amount to $8.3 billion over 10 years. Because military construction has an indirect impact on mission capabilities, the benefits of additional construction projects are difficult to quantify. Thus, it is unclear whether additional funds would be better spent on construction projects or on other defense needs, such as weapons procurement. In addition, extra funds run the risk of being earmarked for projects that DoD does not consider its most pressing.
 

Option 4-22
Increase Funding for Real Property Maintenance
 

The services' real property maintenance (RPM) accounts are used to finance major and minor repairs, recurring maintenance, and related activities for the Department of Defense's stock of real property. RPM contributes to the readiness of U.S. forces by helping to ensure that facilities such as runways, docks, and piers are properly maintained and capable of their intended uses. In addition, DoD argues, having properly maintained facilities contributes to the quality of life of U.S. soldiers; crumbling roofs and exposed wiring in barracks, military hospitals, or work areas could be detrimental to morale, if not dangerous.

This option would increase funding for real property maintenance by $700 million per year (in 2000 dollars) in 2001 through 2010 (from the current level of $5.3 billion to $6 billion). That increase would cost DoD a total of about $7.7 billion through 2010.

According to testimony given by the services, the condition of DoD facilities has degraded in recent years. The average facility is 44 years old and approaching the end of its designated service life (67 years). As facilities age, the amount of maintenance they require increases. Commanders at some installations have reallocated resources originally appropriated for training and other operation and maintenance activities to their RPM accounts, which suggests the need for additional funding.

According to some criteria, DoD is significantly underfunding the maintenance of its facilities. For example, the Federal Facilities Council recommends funding maintenance activities for real property at a level of 2 percent to 4 percent of the cost to replace the property. DoD currently funds RPM at less than 1 percent of the replacement value of its facilities inventory. Following the council's recommendation and funding maintenance at just 2 percent of replacement value would require an additional $7 billion per year.

The $700 million annual increase in this option would improve DoD's ability to maintain its facilities but would be unlikely to result in overfunding that might encourage the department to maintain unneeded facilities. The actual amount of additional funding that DoD might need is uncertain, however. DoD's Installations Policy Board is trying to determine the appropriate level of spending on property maintenance. The board is encouraging a number of cross-service programs to provide common definitions and standards for measuring requirements, but their work is not yet complete.

Some critics of this option would argue that DoD has other pressing needs, including weapons procurement, that have a better claim to additional resources. DoD could control maintenance costs, they would say, through other approaches, such as demolishing excess facilities or replacing aging structures. Other opponents of this option, however, would contend that an increase of $700 million a year might not be enough to allow DoD to stem the deterioration of its facilities.
 

Option 4-23
Close and Realign Additional Military Bases
 

Beginning in the late 1980s, DoD sought to reduce its operating costs by closing unneeded military bases. Significant reductions in force structure at the end of the Cold War made many bases unnecessary. Because political and procedural difficulties had long made closing bases nearly impossible, the Congress set up four successive independent commissions on base realignment and closure. Those commissions recommended shutting or realigning (moving departments and facilities at) hundreds of military installations in the United States, Puerto Rico, and Guam. When all of the actions from the four BRAC rounds are completed, DoD will save about $5.6 billion a year in operating costs, it estimates.

This option would authorize two additional rounds of base closures and realignments in 2003 and 2005. In the long run, such actions can produce substantial savings. However, they require some up-front investment, so costs would increase in the short run. Between 2001 and 2010, this option would reduce DoD's costs by a net total of $4.7 billion. Beginning in 2012, the department could realize recurring savings of around $4 billion per year. Those estimates are based on DoD's experience and current projections for the four earlier rounds of base closings. (The estimates do not include the costs of environmental cleanup, since DoD is obligated to incur such costs regardless of whether it operates or closes bases.)

Closing and realigning additional military bases is consistent with DoD's overall drawdown of forces. By several measures, planned force reductions significantly exceed the projected decrease in base capacity. For example, the department intends to cut the number of military and civilian personnel by 34 percent from the 1990 level. But according to DoD, only 21 percent of the base infrastructure in the United States has been eliminated.

The Secretary of Defense asked the Congress in early 1998 and again in early 2000 to authorize two more rounds of base closures. In The Report of the Department of Defense on Base Realignment and Closure of April 1998, DoD stated that opportunities exist for further cutbacks and consolidations at several types of bases--such as defense laboratories, test and evaluation installations, training facilities, naval bases, aircraft installations, and supply facilities.

Some analysts, however, argue that the BRAC cuts have gone far enough in matching the planned reductions in forces. The base structure, they say, should retain enough excess capacity to accommodate new risks to national security that could require a surge in the number of military forces. Opponents of more closures also cite the possible adverse economic effects on local communities. Some opponents suggest that savings could be made by demolishing certain buildings or by achieving other operating efficiencies short of closing bases.
 

Option 4-24
Demolish Excess and Obsolete Structures
 

The defense drawdown has left many military bases with structures that the services no longer need and that have no remaining asset value. Those structures include buildings, such as schools and family housing units, as well as other facilities, such as piers and runways. In some cases, the structures are dangerous eyesores. In other cases, their availability attracts marginal users who benefit from occupying them because the users are not required to pay the full costs of the utilities and other support that the bases provide. Although demolishing those structures would entail up-front spending, it would allow the Department of Defense to avoid future maintenance costs. Estimates by DoD suggest that demolition projects may pay for themselves in as little as five years.

This option would increase funding to tear down excess, obsolete structures by $35 million a year over the 2001-2003 period. A majority of those annual funds, $30 million, would be allocated to the services' operation and maintenance (O&M) accounts to fund the demolition of excess facilities that are maintained with O&M dollars. The remaining $5 million would be allocated to the family housing accounts to pay for demolishing obsolete family housing units that are too costly to repair. Those funds would allow DoD to increase demolitions by 6 percent from planned levels and would generate $22 million in annual savings after 2003.

The services expect to tear down 80 million square feet of buildings by 2003 in accordance with a management reform that the Office of the Secretary of Defense (OSD) began in 1997. Recent defense plans have extended the Air Force's and Navy's demolition programs to 2005 to accommodate their large inventories of structures other than buildings. DoD plans to spend a total of $773 million on demolition programs during the 2000-2003 period, with an estimated savings in O&M costs of $160 million a year after that.

However, DoD officials maintain that the department's inventory of real property will still contain excess structures, such as buildings and other facilities that are maintained with O&M dollars, after the current demolition programs are completed in 2005. Funding above planned levels would be necessary to demolish the rest of those excess structures and generate additional O&M savings. In addition, current OSD plans do not fund the destruction of excess, obsolete family housing units. Although the services' family housing commands have adopted demolition as a key tool in their strategies for real property management, critics argue that the resources devoted to those activities are inadequate.

The primary disadvantage of this option is that the quantity of structures that are both excess and obsolete is unclear. If DoD has underestimated its requirements for facilities, demolition programs may destroy a structure that has a potential use in the future. One alternative to demolition is to board up a facility and cease maintaining it. Nonetheless, as long as structures remain in DoD's inventory, the department is likely to feel pressure to maintain them and make them available to potential users.

Support of Equipment

The military faces a number of challenges in its efforts to keep equipment in good working order. According to the services, the aging of equipment (described in Chapter 3) increases both the hours that must be spent on maintenance activities and the number and cost of spare parts. Other concerns cited by military leaders include a lack of well-trained maintenance personnel and wear and tear on equipment from an increased pace of operations. A further problem is shortages of spare parts--resulting not only from inadequate funding but also from inaccurate forecasts of requirements and poor control over existing inventories.

Despite those challenges, neither the Army nor the Marine Corps is reporting major problems with the readiness of equipment in its ground units. Moreover, a recent review of 16 of the Army's key air and ground systems--including CH-47D (Chinook) and AH-64D (Apache Longbow) helicopters, M1 tanks, and Bradley fighting vehicles--found "no increase in percent of equipment not mission capable and no downward trends that would indicate worsening conditions."⁽⁵⁾

Some observers believe, however, that the two services' success in keeping their aging equipment mission-capable is being achieved at the cost of unreasonably long working hours for maintenance personnel. To the extent that excessive workloads affect retention, that may not be a sustainable strategy. Unit commanders in the Army report that the availability of maintenance personnel with the right skills and experience is their most significant equipment readiness problem. And if maintenance personnel are heavily pressed in peacetime, their ability to maintain equipment at a wartime tempo of operations could be doubtful. Both the Army and the Marine Corps argue that modernization of equipment is necessary to prevent greater demands for maintenance in the future (see Chapter 3).

In the Air Force and Navy, by contrast, shortages of spare and repair parts have hurt the readiness of aviation units. The Navy reports that maintenance problems have contributed to a cycle in which the readiness of nondeployed air wings has declined further each year since 1996, forcing ever-greater shifts in resources to units just before deployment. In the Air Force, lack of adequate spare parts accounts for about half of the 10 percentage-point decline in overall mission-capable rates since 1991. Shortages of spare parts have also been a problem for Marine Corps aviation units. According to DoD, such shortages for Navy, Air Force, and Marine Corps aircraft result in part from unexpectedly high failure rates for some parts, past constraints on funding, and problems encountered in trying to introduce modern business practices.

Those problems, however, are not necessarily a sign that additional funding is needed now. It can take 12 to 36 months for spare-parts funding to affect supplies at the unit level, so today's low mission-capable rates in some operational units could be primarily a legacy of past problems. The Navy says it has begun to see reductions in rates of aircraft cannibalization and maintenance backlogs and increases in the percentage of aircraft available. The Air Force predicts that funding now in the pipeline will improve its mission-capable rates.

Whether past increases in funding for spare parts will significantly improve readiness in the near term remains to be seen. And even if current funding is adequate and problems with equipment readiness are being resolved, additional steps may be needed to forestall future problems in both ground and air units as weapon systems continue to age.

One of the options below looks at improving the condition of existing systems by replacing components that have high failure rates or rely on obsolete technology with more reliable components that, because they use current technology, might also be easier for the supply system to stock. Other options focus on DoD's ability to manage and control the cost of its maintenance activities. Although management initiatives are generally seen as ways to reduce costs, they could also make high-quality maintenance more affordable and thus more available over the long run.
 

Option 4-25
Apply Technology to Reduce the Cost of Operating Equipment
 

In some circumstances, agencies need to spend money to save money. This option would provide an additional $600 million a year to invest in technologies to reduce the operation and maintenance (O&M) costs of weapon systems. The funds would go into "technology insertion accounts" that would be held at the headquarters level of each service and be applied to equipment already used by military units in the field--for example, to support the research, development, procurement, and installation of reliable digital compasses in place of antiquated analog versions, or to replace universal joints on truck axles with constant-velocity joints, which reduce a fleet's tire wear by one-third. Such investments can lessen the need to repair or replace failed components, freeing up maintenance workers and ultimately reducing the costs of operating equipment. Similar opportunities to save on O&M costs without sacrificing performance exist for all of the services' aging weapon systems. Over 10 years, the $6 billion investment in this option could produce $10.6 billion in savings--for net savings of $4.6 billion through 2010.

The services currently spend relatively little on technology insertion. Of the $38 billion spent each year on maintaining weapon systems, only about $600 million is devoted to technology insertion to reduce costs. As an extreme example, the program manager for the M1A1 Abrams tank--the Army's second largest weapon system--received only $1.2 million for research and development (R&D) on ways to reduce the system's $2.9 billion annual operating costs. Studies conducted for DoD by the Logistics Management Institute and others have concluded that funding for technology insertion is inadequate.

The military's current funding for technology insertion programs is limited for three main reasons:

• The services focus their O&M spending on short-term needs rather than long-term investment. A March 1998 report by the Air Force Materiel Command stated, "The key barrier in today's increasingly tight budgetary environment is finding funding for an activity that will yield net benefits only in the future."
  
  
• Technology insertion initiatives typically need small quantities of funds from different appropriations--R&D, procurement, and O&M. But the services are prohibited (partly by law and partly by DoD regulations) from using R&D or procurement dollars for components that reduce O&M costs. The dilemma is that officials who want to reduce O&M costs cannot tap into the correct pots of money--R&D or procurement--to do so.
  
  
• No incentives exist to encourage technology insertion. Maintenance depots do not have a vested interest in improving the reliability of equipment, because that would reduce their already dwindling workload. Officials who control R&D or procurement funds often focus on the costs not of systems already in the field but of the next emerging weapon system.

This option would promote technology insertion through a combination of new funds and new funding mechanisms. The newly created accounts would be "fenced," or earmarked only for technology insertion, and would contain a blend of R&D, procurement, and O&M funds. Within each service, program managers of weapon systems would compete for access to the funds on the basis of their ability to demonstrate potential gains from technology insertion. Thus, program managers could have the resources to change the O&M costs of their systems. Establishing a separate pool of money for technology insertion would also create incentives within industry to vie for those dollars. If equipment manufacturers, subcontractors, and even depots knew that funding was available for R&D and procurement, they would have an incentive to devise and promote options for reducing O&M costs. Burden-sharing of R&D costs with private industry could increase because more dollars would be available for procuring the new technologies. (Industry officials have stated a willingness to assume the risks associated with research and development, but only if they can be assured of future procurement funding if the R&D is successful.)

The 10-year savings of $4.6 billion estimated for this option assume that each $1 invested in technology insertion yields a return of $3 over five years. The services report a range of returns on such investments, from 3-to-1 to as much as 20-to-1. But the dozens of separate O&M cost-reducing programs now in place suffer from inaccurate accounting of realized savings, so counting on high rates of return might be unrealistic. Many of those programs do not attempt to track the results of technology insertion. To help ensure a high rate of return under this option, project managers would provide account managers with detailed proposals that would include information about the past O&M costs of their systems, estimates of projected savings, and procedures to track and verify those savings.

Although potentially large, the savings under this option are uncertain. And as with any investment, there is a risk that DoD would not receive a good return on the investment. Service leaders claim they cannot absorb many more proposals for R&D or engineering changes without adding personnel to analyze and implement the proposals--thus adding to the cost of technology insertion and reducing the return. In addition, estimated savings might not materialize because reducing the labor force simply because of a labor-saving initiative is often difficult, both politically and practically. Finally, accurate data on costs and savings are not readily available, further clouding claims of gains made.

Each of the services is currently reforming its programs to account for the life-cycle costs of weapon systems, which could help better identify savings, but those efforts are not closely tied to technology insertion programs. Therefore, some observers argue that DoD should wait until the services can track costs better before offering additional funds to reduce costs.
 

Option 4-26
Change the Management and Pricing of Repairs
 

When subcomponents of weapon systems (such as transmissions and radars) break down, unit commanders often have them repaired in the unit's own maintenance and repair shops--called intermediate maintenance facilities, or general support facilities in the Army. That is the case even if it would be less costly for DoD as a whole if the subcomponents were sent to large, centralized maintenance facilities--called depots--for repair.

This option would reduce costs by changing the way in which DoD manages and charges for repair of those subcomponents--known as depot-level repairables (DLRs). Under this option, repair work for DLRs would be allocated to either depots or intermediate facilities by managers who were aware of the full costs of both sources of repair and had an incentive to minimize DoD's total repair bill. Such a system could save the department $3.4 billion over 10 years through improving inventory efficiency alone.

In the early 1990s, DoD tried to reduce the demand for repairs and make unit commanders more careful in their use of DLRs by shifting repair funds out of central accounts and into the budgets of individual units. To a large degree, the plan succeeded: demand for repair and replacements of DLRs declined. But because of problems in the price structure for repairs, shifting financial responsibility to unit commanders had unintended consequences. The prices that depots charge for DLRs overstate the actual cost of doing repairs because depots must cover their overhead and management costs. By contrast, some of the costs that intermediate facilities face (including the costs of capital and military labor) are not included in the prices that units pay. Thus, commanders have a financial incentive to repair DLRs in their own facilities regardless of the actual cost, and repair jobs that before would have gone to a depot are being handled by intermediate facilities. According to one joint Navy/Office of the Secretary of Defense study, intermediate maintenance is up to twice as expensive as depot repairs. Because intermediate facilities are not as well equipped for some tasks as depots, repairs could take longer or have higher failure rates. Besides raising costs, the shift in workload has increased excess capacity in the depots and may have decreased the quality of repairs overall.

This option would try to improve the distribution of the DLR workload between depots and intermediate maintenance facilities by centralizing management of DLRs. More important, it would provide a pricing system that more accurately reflects the actual cost of repairs. Within each service, equipment (or item) managers would assume control of all DLR inventories and allocate repairs between depots and intermediate facilities. They, not unit commanders, would decide which source of repair was less costly. Commanders would have a single point of contact--the item manager--for each type of DLR, regardless of whether the work had been allocated to an intermediate facility or a depot.

Under this option, both depots and intermediate facilities would charge item managers for repairs. Each repair facility would set its prices to cover only those costs that varied with the DLR workload, taking into account the time to complete the work, quality, and return of broken DLRs. In other words, it would cover the additional costs that would be incurred for each specific repair, such as materials, labor, and transportation. That pricing structure has been proposed by economists at RAND, the Center for Naval Analyses, and elsewhere. By encouraging item managers to send DLRs to the facility that could do the work at the lowest cost, it would let DoD minimize its total repair bill.

Intermediate facilities would continue to rely on direct appropriations to cover their fixed capital and overhead costs. In addition, military personnel who would deploy as part of maintenance units in wartime could continue to be assigned to intermediate facilities in peacetime and be paid from their service's central military personnel account. However, costs that varied with the amount of repair work at the intermediate facility would be covered not through direct appropriations but through the prices charged for DLR repairs. Those costs would include the salaries of civilian workers and military personnel whose positions were required not because of wartime deployments but because of the DLR repair workload in peacetime. In turn, the intermediate maintenance facilities would be required to reimburse the services' military personnel accounts for those salaries.

In the case of depots, repair costs that did not vary with workload would be paid by customers through a flat charge that did not depend on how much work they sent to the depot that year. Such a two-part pricing system--a flat charge plus a variable fee based on workload--is similar to the system that some telephone companies use. Costs that were not related to ongoing repair tasks but were previously included in DLR prices would be covered by direct appropriations. For example, the costs of maintaining excess facilities for wartime, such as the Army's Watervliet facility (a unique plant that manufactures large gun barrels), would not be charged to depot customers. That approach to pricing would allow the depot to cover its total costs but not charge more for an additional task than the task would cost to perform. A study by RAND concluded that such an approach would reduce the prices that depots charge for repairs. A price reduction could shift a significant amount of the DLR workload back to depots.

One disadvantage of this option is that commanders would have less control over their intermediate maintenance facilities. Thus, it would be harder for them to ensure that those facilities provided an adequate minimum number of personnel to cover wartime tasks or to support deployments and contingency operations. In addition, centralization and worldwide management of the DLR inventory would require new software and computer systems.

Another disadvantage is that developing appropriate prices for the depots and intermediate facilities could prove difficult. Depot managers, anxious to attract work by keeping their prices as low as possible, might try to move costs into the flat charge or direct appropriations that were in fact part of the costs of repair that varied with workload. Alternatively, depot managers might be reluctant to separate repair costs that varied with workload from those that were fixed because doing so would highlight their degree of excess capacity. In addition, an accurate historical database of repair costs at intermediate facilities does not exist, which makes pricing DLR repairs there difficult.

A more fundamental concern is that it might be difficult to predict exactly how managers would respond to the new prices. (DoD, for example, failed to predict how managers would respond to the current DLR pricing scheme.) The unintended consequences of changing prices could outweigh the benefits if this option was not implemented carefully and systematically. Opponents of this option might argue that it would be simpler for DoD to just order work to go to the facility that could perform it at the least cost. Supporters might counter that DoD already has rules about where DLRs are to be repaired but that current DLR prices are driving units to ignore those rules.
 

Option 4-27
Consolidate Depot Functions and Close Some Facilities
 

Despite four rounds of base realignment and closure, the services still have a large number of underutilized buildings and equipment within their network of maintenance depots. The individual services, the Office of the Secretary of Defense, and the General Accounting Office (GAO) have all recommended closing additional depot facilities to reduce that excess capacity, which GAO has estimated at about 50 percent and rising.

This option would authorize a BRAC commission that would focus exclusively on maintenance depots. Assuming the commission identified up to five facilities for closure, this option could save a total of $1.2 billion between 2001 and 2010. Closing additional depots would require some up-front investment, but the Department of Defense would probably break even within five to six years.

When the actions recommended by the four previous BRAC rounds are completed next year, 19 of the 38 major government-owned and-operated depots that existed in 1988 will no longer be functioning as government entities. Nevertheless, the depot network will still have excess capacity because its workload is declining for four reasons: the overall military force structure and stocks of weapons and equipment continue to be reduced, most new or modified weapon systems are more reliable than previous systems, manufacturers of weapon systems are seeking greater control over maintenance support for their systems, and some unit commanders are conducting more repairs in their own local maintenance facilities.

Proponents of a BRAC commission specifically for maintenance depots would argue that the unique characteristics of depots--including nondeployable personnel, huge fixed capital assets, and a mostly civilian workforce--set them apart from conventional military bases. In that view, the special expertise required to understand depot-industry issues--to determine to what extent repairs could be made more efficiently in the private sector and to define and identify excess capacity from an overall DoD perspective--underscores the need for a specialized BRAC panel whose members have knowledge of the unique attributes of the depot system. (That argument could also apply to the defense laboratories, research facilities, and test and evaluation facilities.)

Opponents of this option, by contrast, might argue that depot realignments and closures have gone far enough. Many critics feel that DoD should retain enough capacity within its depot system to accommodate new risks to national security that could require a surge in depot-level maintenance. In addition, depot closures could have adverse economic effects on local communities--at least in the short run.

Instead of closing more depots, opponents would argue, DoD could reduce excess capacity by entering into public/private partnerships that utilized that capacity during peacetime and thus made depots more cost-effective. For example, the commercial aviation industry reportedly faces a shortfall in its depot capacity and could potentially become a partner in sharing the costs of maintaining military depots.

1. Joint Chiefs of Staff, The Dictionary of Military and Associated Terms, JCS Publication 1-02 (March 1994, as amended through June 1999).

2. Congressional Budget Office, Trends in Selected Indicators of Military Readiness, 1980 Through 1993, CBO Paper (March 1994).

3. General Accounting Office, Perspectives of Surveyed Service Members in Retention Critical Specialties, GAO/NSIAD-99-197BR (August 1999), p. 30.

4. National Defense Panel, Transforming Defense: National Security in the 21st Century (December 1997), p. 83.

5. General Accounting Office, Military Readiness: Readiness Reports Do Not Provide a Clear Assessment of Army Equipment, GAO/ NSIAD-99-119 (June 1999).

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