United States General Accounting Office GAO Report to the Chairman, Committee on Armed Services, House of Representatives NATIONAL DEFENSE January 2001 STOCKPILE Improved Financial Plan Needed to Enhance Decision-making GAO-01-17 Report Date Report Type Dates Covered (from... to) ("DD MON YYYY") N/A ("DD MON YYYY") 00JAN2001 Title and Subtitle Contract or Grant Number NATIONAL DEFENSE STOCKPILE Improved Financial Plan Needed to Enhance Decision-making Program Element Number Authors Project Number Task Number Work Unit Number Performing Organization Name(s) and Address(es) Performing Organization General Accounting Office Washington, DC 20013 Number(s) GAO-01-17 Sponsoring/Monitoring Agency Name(s) and Address(es) Monitoring Agency Acronym Monitoring Agency Report Number(s) Distribution/Availability Statement Approved for public release, distribution unlimited Supplementary Notes Abstract The National Defense Stockpile is composed of strategic and critical materials that can be used in times of national emergency. The stockpile was established to minimize dependence on foreign sources of these materials. Because of changes in mobilization planning and modernization of weapon systems, stockpiling requirements for numerous materials have been reduced dramatically in the past two decades, with only a few materials still being required. The reported value of stockpile inventories on hand has also decreased through annually authorized sales of excess stockpile materials, from about $10.1 billion in fiscal year 1987 to about $3.4 billion as of September 30, 1999. Subject Terms Document Classification Classification of SF298 unclassified unclassified Classification of Abstract Limitation of Abstract unclassified unlimited Number of Pages 26 United States General Accounting Office Washington, D.C. 20548 Letter January 26, 2001 The Honorable Bob Stump Chairman, Committee on Armed Services House of Representatives Dear Mr. Chairman: The National Defense Stockpile is composed of strategic and critical materials that can be used in times of national emergency. The stockpile was established to minimize dependence on foreign sources of these materials. Because of changes in mobilization planning and modernization of weapon systems, stockpiling requirements for numerous materials have been reduced dramatically in the past two decades, with only a few materials still being required. The reported value of stockpile inventories on hand has also decreased through annually authorized sales of excess stockpile materials, from about $10.1 billion in fiscal year 1987 to about $3.4 billion as of September 30, 1999. The Defense Logistics Agency’s Defense National Stockpile Center manages the stockpile program and is responsible for the sale of materials that exceed stockpile requirements. The Center deposits collections from gross sales of stockpile materials to a U.S. Treasury transaction fund. The transaction fund is used for various purposes, including outlays to pay for stockpile operations. The Congress has also mandated transfers from the fund to Defense and other federal programs. The late Chairman, Subcommittee on Military Readiness, Representative Herbert H. Bateman, noting that collections from sales of stockpile materials can be transferred to other programs, expressed concern about whether sufficient funds will likely be available in the future for effective management of the stockpile. Our August 20, 1999, report1 provided initial information on projected stockpile gross sales from fiscal year 1999 through 2010 as well as on corresponding projections for remaining inventory. 1National Defense Stockpile: Sales Revenue and Inventory Data (GAO/NSIAD-99-201R, Aug. 20, 1999). PPaaggee 11 GGAAOO--0011--1177 NNaattiioonnaall DDeeffeennssee SSttoocckkppiillee As agreed with your office, this report addresses whether existing cash balances and projected collections from stockpile gross sales will be sufficient to meet all expected stockpile transaction fund outlays for fiscal years 2000-2010. Results in Brief The National Defense Stockpile transaction fund’s projected long-term outlays exceed projected collections from gross sales. Projections do not include all likely outlays, so the timing and size of a gap between available funds and outlays is unclear. The Center has a long-range financial plan in which projected collections through fiscal year 2003 may reasonably be expected to meet its projected outlays, including costs of operations and currently projected transfers to other federal programs. After that, the fund’s cash balance will offset shortfalls during fiscal years 2004-2009, but the plan projects a negative cash balance of $48 million in fiscal year 2010. The cash may run out sooner because the Center’s financial plans do not include all environmental costs to dispose of hazardous materials or clean up storage sites.2 For example, the Center is reasonably certain it will have to pay an additional $80 million in disposal costs that are not included in the current plan. The cash projections in the financial plans may also be affected if (1) commodity prices increase or decrease or (2) the fund is required to pay for additional probable3 environmental cleanup costs that may be identified through ongoing or future studies. Complete information is essential for decision-making regarding the use of funds in the stockpile transaction fund. Consequently, we recommend that the Administrator of the Defense National Stockpile Center revise the Center’s long-range plan to reflect all probable and measurable outlays to aid decision-making and oversight of stockpile operations. The Department of Defense agreed with our recommendation, stating that the long-range plan will be revised as recommended. 2Department of Defense 7000.14-R, Department of Defense Financial Management Regulation, Volume 6B, Form and Content of the Department of Defense Audited Financial Statements, December 1998, requires the Defense Logistics Agency to report estimated environmental cleanup and disposal costs. 3 Statement of Federal Financial Accounting Standards No. 5, Accounting for Liabilities of the Federal Government, defines “probable” as that which can reasonably be expected or is believed to be more likely than not on the basis of available evidence or logic. Page 2 GAO-01-17 National Defense Stockpile Background The stockpile program was established under the Strategic and Critical Materials Stock Piling Act4 to maintain and manage strategic and critical materials for use during a national emergency.5 The stockpile’s operating funding limits and transaction fund transfers have been authorized annually in national defense authorization acts.6 The stockpiling act established a separate fund in the Treasury called the National Defense Stockpile Transaction Fund.7 The transaction fund is available, subject to limitations in the appropriation acts, to fund expenses associated with the operation of the stockpile, including payroll, storage, disposal of hazardous materials, and environmental restoration. The fund is also used for congressionally mandated transfers to other government departments, such as the general fund of the Department of the Treasury, the Department of Health and Human Services, and the military services within the Department of Defense. 450 U.S.C. §98 et seq. 5 The reported value of these requirements has decreased from about $16 billion in the 1980s to about $6 million in fiscal year 1999. Most of the current requirements value is for beryllium, a metal used in nuclear reactors and various defense weapons. 6The authorization covering fiscal year 2000 was the National Defense Authorization Act for Fiscal Year 2000 (P.L. 106-65). 750 U.S.C. §98h. Page 3 GAO-01-17 National Defense Stockpile The President has delegated authority for management of the operational aspects of the National Defense Stockpile to the Secretary of Defense.8 The Defense Logistics Agency assigned responsibility to its Defense National Stockpile Center. As of September 30, 1999, the Center managed 69 sites (10 staffed and 59 unstaffed satellite stockpile sites). Some sites are located on property owned by the military services or the General Services Administration and some are leased from the private sector. As of September 30, 1999, the Center stored 77 types of materials with a reported market value of about $3.4 billion.9 In 1997, the Department of Defense declared 99 percent of the National Defense Stockpile’s reported material value as excess material. The Center established a long-range plan to vacate 66 sites, reduce staffing, sell most of the excess materials, and transfer Center functions to another as yet unidentified entity. The Gap Between Defense National Stockpile Center projections indicate that collections from gross sales during fiscal years 2000-2003 will generally meet or exceed Projected Collections planned Center expenditures, including operating costs and planned and Outlays Is Greater transfers. However, as shown in figure 1, total expected outlays will exceed Than Reported collections beginning in fiscal year 2004. 8Executive Order 12626 (Feb. 25, 1988). 9According to the Defense National Stockpile Center, this value is based on September 30, 1999, prices at which comparable materials were being traded. In the absence of current trading data, market values are estimated. Unaudited stockpile financial statements for fiscal year 1999 reported inventory and related property of about $2.8 billion on a historical cost basis (acquisition plus fees) and $3.5 billion at market value. According to stockpile staff, the difference in estimated market values and the fiscal year 1999 financial statements occurred because the financial statement disclosure of market value was based on March 31, 1999, prices and the market value was based on September 30, 1999, data. Page 4 GAO-01-17 National Defense Stockpile Figure1: Projected Collections and Outlays for Fiscal Years 2000-2010 Dollarsinmillions 500 450 400 350 300 250 200 150 100 50 0 FiscalYear 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Collections $465 467 427 419 371 340 218 91 71 57 45 Outlays $393 432 432 399 389 380 373 279 245 245 205 Collections Outlays Source: Defense National Stockpile Center. The total outlays of $3.77 billion during fiscal years 2000-2010 include an estimated $670 million for stockpile operations and about $3.1 billion to be transferred to other agencies. Of the amount to be transferred to other agencies, $1.65 billion is for the military services and is authorized annually. Other transfers, such as transfers to the Department of Health and Human Services, have been mandated under law to occur over future years.10 These outlays of $3.77 billion exceed the sum of (1) the projected cash 10 P.L.105-261 §3303. Page 5 GAO-01-17 National Defense Stockpile balance of $752 million in the transaction fund plus (2) the estimated collections ($2.97 billion), thus resulting in a $48-million shortfall in fiscal year 2010. Figure 2 shows an expected significant drop in the transaction fund balance after fiscal year 2004 and, by fiscal year 2010, the Center projects a shortfall of about $48 million. Figure2: Projected Ending Balances of the Stockpile Transaction Fund for Fiscal Years 1999-2010 Dollars in millions 1000 858 854 874 856 823 816 800 752 661 600 473 400 299 200 111 0 -48 -200 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Fiscal Year Source: Defense National Stockpile Center. Appendix I provides details on projected sales revenues, inventory values, cash collections, outlays, and remaining cash balances. Environmental outlays will further reduce transaction fund balances. Outlays for stockpile operations in the Center’s projections include some outlays related to compliance with environmental laws and cleanup of Page 6 GAO-01-17 National Defense Stockpile contamination resulting from past operations. These outlays have been a relatively small part of the stockpile’s annual operating budget: $3.6 million out of the $74.2 million budgeted in fiscal year 2000. However, the Center’s projected environmental compliance outlays for fiscal years 2001-2010 do not include $80 million of estimated disposal outlays that the Center is likely to incur. Specifically, the Center estimated disposal outlays of $40 million to convert its inventory of thorium nitrate to thorium oxide and another $20 million for disposal of the thorium oxide (if it cannot be sold). It also estimated $20 million to repackage and store mercury. However, according to Center officials, these compliance outlays have not been included in the Center’s transaction fund cash flow projections because of uncertainty about the value and the timing of these actions. The Department of Defense Financial Management Regulation11 requires that the Defense Logistics Agency estimate and report the cost to clean up and dispose of hazardous material resulting from its prior and current operations. The Department of Defense criteria cite the requirements contained in the Statements of Federal Accounting Standards. Specifically the Federal Financial Accounting Standards12 require the estimated costs of environmental cleanup and disposal to be reported if it is probable and measurable. These costs would also be useful in the Center’s long-range financial plan. In addition, the transaction fund’s outlays for environmental cleanup could increase further because the Department has not yet fully assessed environmental damage at some or all of the 47 active stockpile sites that have stored hazardous material. Consequently, the Department has only partially estimated the likely environmental cleanup costs and has not determined the share of these costs that will be paid by the transaction fund. The Department identified some environmental cleanup costs in its annual cleanup report to the Congress for fiscal year 1999, which contained cleanup costs of $83.5 million for 15 of the sites. However, assessments at these sites are preliminary and could change, and they must be supplemented by assessments at the other 32 active stockpile sites that have stored hazardous materials. Figure 3, which is based on the Center’s 11 DOD 7000.14-R. 12 Statement of Federal Financial Accounting Standards No.5, Accounting for Liabilities of the Federal Government, Feb. 28, 1997, and No.6, Accounting for Property, Plant, and Equipment, Feb. 28, 1997. Page 7 GAO-01-17 National Defense Stockpile