Order Code RL31404
CRS Report for Congress
Received through the CRS Web
Defense Procurement: Full Funding Policy —
Background, Issues, and Options for Congress
Updated June 29, 2004
Ronald O’Rourke
Specialist in National Defense
Foreign Affairs, Defense, and Trade Division
Stephen Daggett
Specialist in National Defense
Foreign Affairs, Defense, and Trade Division
Congressional Research Service ˜ The Library of Congress

Defense Procurement: Full Funding Policy —
Background, Issues, and Options for Congress
Summary
The full funding policy is a federal budgeting rule imposed on DOD by
Congress in the 1950s that requires the entire procurement cost of a weapon or piece
of military equipment to be funded in the year in which the item is procured.
Although technical in nature, the policy relates to Congress’ power of the purse and
its responsibility for conducting oversight of Department of Defense (DOD)
programs. Support for the policy has been periodically reaffirmed over the years by
Congress, the General Accounting Office, and DOD.
In recent years some DOD weapons — specifically, certain Navy ships — have
been procured with funding profiles that do not conform to the policy as it
traditionally has been applied to DOD weapon procurement programs. DOD, as part
of its FY2005 defense budget submission, is proposing to procure ships and aircraft
using funding approaches that do not conform to the policy as traditionally applied.
DOD’s proposals, if implemented, could establish new precedents for procuring
other DOD weapons and equipment with non-conforming funding approaches. Such
precedents could further circumscribe the full funding policy. This, in turn, could
limit and complicate Congress’ oversight of DOD procurement programs, or require
different approaches to exercise control and oversight.
A principal effect of the full funding policy is to prevent the use of incremental
funding, under which the cost of a weapon is divided into two or more annual
portions. Incremental funding fell out of favor because opponents believed it could
make the total procurement costs of weapons and equipment more difficult for
Congress to understand and track, create a potential for DOD to start procurement of
an item without necessarily stating its total cost to Congress, permit one Congress to
“tie the hands” of future Congresses, and increase weapon procurement costs by
exposing weapons under construction to uneconomic start-up and stop costs.
Supporters of incremental funding, however, could argue that its use in DOD
procurement programs could produce certain advantages in terms of reducing
disruption to other programs, avoiding investment bias against very expensive items,
improving near-term production economies of scale, and preserving flexibility for
future Congresses to halt funding for weapons under construction that have become
unnecessary or inappropriate.
Congress has several options for responding to recent proposals for procuring
DOD ships and aircraft with funding mechanisms that do not conform to the full
funding policy. These options could have the effect of terminating, modifying,
maintaining, or strengthening the full funding policy. In weighing these options,
Congress may consider several factors, including Congress’ power of the purse, its
ability to conduct oversight of DOD procurement programs, the impact on future
Congresses, DOD budgeting discipline, and the potential impact on weapon costs.
The process of weighing options may involve balancing a need to meet DOD
procurement goals within available funding against the goal of preserving Congress’
control over DOD spending and its ability to conduct oversight of DOD programs.

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Description of Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Origins, Rationale, and Governing Regulations . . . . . . . . . . . . . . . . . . . . . . 2
A Congressionally Imposed Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Governing Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Alternative of Incremental Funding . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Non-conforming Procurements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Recent Procurements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
DOD Sealift and Auxiliary Ships in NDSF . . . . . . . . . . . . . . . . . . 4
Individual Navy Ships in SCN in the 1990s . . . . . . . . . . . . . . . . . 5
LHD-8 Amphibious Assault Ship in SCN . . . . . . . . . . . . . . . . . . . 6
Acquisition Aerial Refueling Tanker Aircraft . . . . . . . . . . . . . . . . 6
Proposed Procurements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
DD(X) and LCS Lead Ships in RDT&E . . . . . . . . . . . . . . . . . . . . 6
CVN-21 Aircraft Carrier . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
C-17 Airlift Aircraft MYP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Advance Appropriations for Navy Ships in SCN . . . . . . . . . . . . . 8
Issues and Options for Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Responding to Specific Non-Conforming Proposals . . . . . . . . . . . . . . 11
General Legislative Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Congressional Power of the Purse . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Congressional Oversight of DOD Procurement Programs . . . . . . . . . 14
Future Congresses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
DOD Budgeting and Program-Execution Discipline . . . . . . . . . . . . . . 15
Potential Impact on Weapon Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
FY2003 Legislative Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
FY2003 Defense Authorization Bill (H.R. 4546/S. 2514) . . . . . . . . . . . . . . 17
House . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Conference Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
FY2003 Defense Appropriations Bill (H.R. 5010) . . . . . . . . . . . . . . . . . . . 19
House . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Senate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Conference Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
FY2004 Defense Authorization Bill (H.R. 1588) . . . . . . . . . . . . . . . . . . . . 21
Conference Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
FY2004 Defense Appropriations Bill (H.R. 2658/S. 1382) . . . . . . . . . . . . . 22
House . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Senate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Conference Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
FY2005 Defense Authorization Bill (H.R. 4200/S. 2400) . . . . . . . . . . . . . . 23
House . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Senate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
FY2005 Defense Appropriations Bill (H.R. 4613/S. 2559) . . . . . . . . . . . . . 25
House . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Senate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Appendix A: Detailed Background on the Policy . . . . . . . . . . . . . . . . . . . . . . . . 31
Laws and Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Antideficiency and Adequacy of Appropriations Acts . . . . . . . . . . . . 31
OMB Circular A-11 (July 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
DOD Directive 7000.14-R (June 2004) . . . . . . . . . . . . . . . . . . . . . . . . 32
Congressional Hearings and Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
1969 GAO Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
1973 House Appropriations Committee Report . . . . . . . . . . . . . . . . . 39
1978 House Budget Committee Hearing . . . . . . . . . . . . . . . . . . . . . . . 39
1996 GAO Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
2001 GAO Letter Report and Briefing . . . . . . . . . . . . . . . . . . . . . . . . . 47

Defense Procurement: Full Funding Policy
— Background, Issues, and
Options for Congress
Introduction
The full funding policy is a federal budgeting rule that has been applied to
Department of Defense (DOD) procurement programs since the 1950s. Although
technical in nature, the policy relates to Congress’ power of the purse and its
responsibility for conducting oversight of DOD programs. The application of the full
funding policy to DOD procurement programs has been affirmed at various times
over the last five decades by Congress, the General Accounting Office (GAO), and
DOD.
In recent years, some DOD weapons — specifically, certain Navy ships — have
been procured with funding profiles that do not conform to the policy as it
traditionally has been applied to DOD weapon procurement programs. DOD, as part
of its FY2005 defense budget submission, is proposing to procure ships and aircraft
using funding approaches that do not conform to the policy as traditionally applied.
DOD’s proposals, if implemented, could establish new precedents for procuring
other DOD weapons and equipment with non-conforming funding approaches. Such
precedents could further circumscribe the full funding policy, which in turn could
limit and complicate Congress’ ability to conduct oversight of DOD procurement
programs. Procurement accounts for about 19% of DOD’s proposed FY2005 budget.
The issue for Congress is how to respond to DOD’s proposals for procuring
ships and aircraft for DOD with funding approaches that do not conform to the full
funding policy as traditionally applied to DOD weapon procurement programs.
Congress’ decision on this issue could have significant implications for Congress’
ability to conduct oversight of DOD procurement programs. It could also affect
DOD’s budgeting practices, budget discipline, and annual funding requirements.
Background
Description of Policy
For DOD procurement programs, the full funding policy requires the entire
procurement cost of a weapon or piece of equipment to be funded in the year in
which the item is procured. The rule applies to all weapons and equipment that DOD
procures through the procurement title of the annual DOD appropriations act. In

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general, the policy means that DOD cannot contract for the construction of a new
weapon or piece of equipment until the entire cost of that item has been approved by
Congress. Sufficient funding must be available for a complete, usable end item
before a contract can be let for the construction of that item.
A principal effect of the full funding policy is to prevent the use of incremental
funding in the procurement of DOD weapons and equipment. Under incremental
funding, a weapon’s cost is divided into two or more annual portions, or increments,
that reflect the need to make annual progress payments to the contractor as the
weapon is built. Congress then approves each year’s increment as part of its action
on that year’s budget. Under incremental funding, DOD can contract for the
construction of a weapon after Congress approves only the initial increment of its
cost, and completion of the weapon is dependent on the approval of the remaining
increments in future years by that Congress or future Congresses.
There are two general exceptions to the full funding policy. One permits the use
of advance procurement funding for components or parts of an item that have long
production lead times.1 The other permits advance procurement funding for
economic order quantity (EOQ) procurements, which normally occur in programs
that have been approved for multiyear procurement (MYP).2
Origins, Rationale, and Governing Regulations
A Congressionally Imposed Policy. Congress imposed the full funding
policy on DOD in the 1950s to make the total procurement costs of DOD weapons
and equipment more visible and thereby enhance Congress’ ability to understand and
track these costs. Congress’ intent in imposing the policy was to strengthen
discipline in DOD budgeting and improve Congress’ ability to control DOD spending
and carry out its oversight of DOD activities. Understanding total costs and how
1 Advance procurement funding is partial procurement funding for an item that appears in
the budget one or more years prior to the year the item is procured. It is sometimes
described informally as a “downpayment” on an item to be procured in a future year.
Advance procurement funding is used routinely and extensively in the procurement of the
Navy’s nuclear-powered warships, since nuclear-propulsion equipment has long production
leadtimes. Advance procurement funding is also provided for other DOD weapons that
incorporate components with long production leadtimes, though the amounts of funding
provided are usually much smaller than those provided for nuclear-powered warships.
2 MYP is a special contracting arrangement, approved by Congress on a program-by-
program basis, that permits DOD to use a single contract to procure multiple copies of a
given item that are scheduled to be procured across a series of years. An MYP arrangement
approved for the Navy’s F/A-18E/F strike-fighter program, for example, permitted the Navy
to procure, under a single contract, a total of 198 to 224 F/A-18E/Fs to be procured during
the five-year period FY2000-FY2004. MYP arrangements are governed by 10 USC
2306(b). EOQ procurement involves procuring multiple copies of a key component of a
certain weapon covered by an MYP at the start of the MYP period so as to achieve
significantly reduced costs on that component. For example, an MYP arrangement to
procure a total of 12 ships of a certain kind over a period of four years could involve
procuring, in the first year of the arrangement, 12 sets of ship-propulsion or ship-combat
system equipment.

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previously appropriated funds are used are key components of Congress’ oversight
capability.
Governing Regulations. The full funding policy is consistent with two
basic laws regarding executive branch expenditures — the Antideficiency Act of
1870, as amended, and the Adequacy of Appropriations Act of 1861. Regulations
governing the policy are found in Office of Management and Budget (OMB) Circular
A-11 and DOD Directive 7000.14-R, which provide guidelines on budget
formulation. Support for the policy has been periodically reaffirmed over the years
by Congress, the General Accounting Office (GAO), and DOD.
For a detailed discussion of the origins, rationale, and governing regulations of
the full funding policy, as well as examples of where Congress, GAO, and DOD have
affirmed their support for the policy, see Appendix A.
Alternative of Incremental Funding. Prior to the imposition of the full
funding policy, DOD weapon procurement was accomplished through incremental
funding. Incremental funding fell out of favor because opponents believed it did (or
could do) one or more of the following:
! make the total procurement costs of weapons and equipment more
difficult for Congress to understand and track;
! create a potential for DOD to start procurement of an item without
necessarily understanding its total cost, stating that total cost to
Congress, or providing fully for that total cost in future DOD
budgets — the so-called “camel’s-nose-under-the-tent” issue;
! permit one Congress to “tie the hands” of one or more future
Congresses by providing initial procurement funding for a weapon
whose cost would have to be largely funded by one or more future
Congresses;
! increase weapon procurement costs by exposing weapons under
construction to potential uneconomic start-up and stop costs that can
occur when budget reductions or other unexpected developments
cause one or more of the planned increments to be reduced or
deferred.
Although incremental funding fell out of favor due to the above considerations,
supporters of incremental funding could argue that its use in DOD (or federal)
procurement can be advantageous because it can do one or more of the following:
! permit very expensive items, such as large Navy ships, to be
procured in a given year without displacing other programs from that
year’s budget, which can increase the costs of the displaced
programs due to uneconomic program-disruption start-up and start
costs;

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! avoid a potential bias against the procurement of very expensive
items that might result from use of full funding due to the item’s
large up-front procurement cost (which appears in the budget)
overshadowing the item’s long-term benefits (which do not appear
in the budget) or its lower life cycle operation and support (O&S)
costs compared to alternatives with lower up-front procurement
costs;
! permit construction to start on a larger number of items in a given
year within that year’s amount of funding, so as to achieve better
production economies of that item than would have been possible
under full funding;
! recognize that certain DOD procurement programs, particularly
those incorporating significant amounts of advanced technology,
bear some resemblance to research and development activities, even
though they are intended to produce usable end items;
! reduce the amount of unobligated balances associated with DOD
procurement programs;
! implicitly recognize potential limits on DOD’s ability to accurately
predict the total procurement cost of items, such as ships, that take
several years to build; and
! preserve flexibility for future Congresses to stop “throwing good
money after bad” by halting funding for the procurement of an item
under construction that has become unnecessary or inappropriate due
to unanticipated shifts in U.S. strategy or the international security
environment.
Non-conforming Procurements
In recent years, some items, notably Navy ships, have been procured with
funding profiles that do not conform to the policy as traditionally applied to DOD
procurement programs. In addition, DOD is now proposing to procure other items,
including both ships and aircraft, with funding profiles that do not conform to the
policy as traditionally applied.
Recent Procurements.
DOD Sealift and Auxiliary Ships in NDSF. As part of its action on the
FY1993 defense budget, Congress created the National Defense Sealift Fund (NDSF)
— a revolving fund in the DOD budget for the procurement, operation, and
maintenance of DOD-owned sealift ships3 — and transferred procurement of new
3 Sealift ships are cargo ships that transport military equipment and supplies from one land
mass to another. Government-owned sealift ships are operated by the Military Sealift
(continued...)

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military sealift ships and certain Navy auxiliary ships from the Shipbuilding and
Conversion, Navy (SCN) appropriation account, where they traditionally had been
procured, to the NDSF.4 Since the NDSF is outside the procurement title of the
defense appropriation act, sealift ships procured since FY1993, including DOD’s new
Large, Medium-Speed, Roll-on/Roll-off (LMSR) ships, as well as Navy Lewis and
Clark (TAKE-1) dry cargo ships procured since FY2003,5 have not been subject to
the full funding policy as traditionally applied to DOD procurement programs.
As discussed in a 1996 CRS report,6 although individual LMSRs were
ostensibly fully funded each year by Congress, like ships procured in the SCN
account, DOD in some cases actually applied LMSR funding provided in a given
year to partially finance the construction of LMSRs authorized in various years. For
example, although Congress ostensibly approved $546.4 million in FY1995 for the
procurement of 2 LMSRs, the FY1995 funds were actually applied to help finance
portions of 16 LMSRs whose construction contracts were awarded between FY1993
and FY1997. In explaining its use of funds in the LMSR program, DOD stated:
The National Defense Sealift Fund (NDSF) is not a procurement appropriation
but a revolving fund. Dollars appropriated by Congress for the fund are not
appropriated to purchase specific hulls as in the case of, for example the Navy’s
DDG-51 program. Rather, dollars made available to the NDSF are executed on
an oldest money first basis. Therefore, full funding provisions as normally
understood for ship acquisition do not apply.7
Individual Navy Ships in SCN in the 1990s. The Navy during the 1990s
procured several individual ships in the SCN account during the 1990s — including
amphibious ships, aircraft carriers, and an attack submarine — with funding profiles
3 (...continued)
Command using mostly civilian crews.
4 Congress created the NDSF through Section 1024 of the FY1993 defense authorization act
(H.R. 5006; see pages 178-181 of H.Rept. 102-966 of October 1, 1992, the conference report
on the act), as amended by Title V of the FY1993 defense appropriations act (H.R. 5504).
5 The first 3 ships in the Navy’s 12-ship Lewis and Clark (TAKE-1) class auxiliary ship
program were procured in the SCN account using full funding. The Administration, as part
of its proposed FY2003 defense budget and FY2003-FY2007 Future Years Defense Plan
(FYDP), proposed to fund the remaining 9 ships in the program during the years FY2003-
FY2007 in the NDSF, where they would not be subject to the full funding provision as
traditionally applied to DOD procurement programs. This proposal was consistent with
congressional interest for this approach expressed in action on the FY2001 defense budget.
(See H.Rept. 106-616 of May 12, 2000, the House Armed Services Committee report on the
FY2001 defense authorization bill [H.R. 4205], page 89; S.Rept. 106-292, the Senate Armed
Services Committee report on the FY2001 defense authorization bill [S. 2549], page 93; and
H.Rept. 106-945, the conference report on the FY2001 defense authorization bill [H.R.
4205], p. 35 [Sec. 127].)
6 CRS Report 96-257 F, Sealift (LMSR) Shipbuilding and Conversion Program: Background
and Status
, by Valerie Bailey Grasso.
7 DOD information paper on strategic sealift acquisition program provided to CRS by U.S.
Navy Office of Legislative Affairs, Jan. 25, 1995, p. 1.

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approved by Congress that, for various reasons, do not appear to conform to the full
funding policy as traditionally applied to DOD procurement programs. These ships
were listed and discussed in CRS testimony to the House Armed Services Committee
on March 9, 1999.8
LHD-8 Amphibious Assault Ship in SCN. More recently, Congress
included, in both the FY2000 and FY2001 defense appropriations acts, a provision
in the SCN section stating “That the Secretary of the Navy is hereby granted the
authority to enter into a contract for an LHD-1 [class] Amphibious Assault Ship
which shall be funded on an incremental basis.” The ship in question is LHD-8,
which is now being funded on an incremental basis, with the final increment
scheduled for FY2006. DOD records the ship in its budget presentations as an
FY2002-procured item.
Acquisition Aerial Refueling Tanker Aircraft. As part of its action on the
FY2002 defense appropriations bill, Congress granted DOD authority to enter into
a 10-year leasing arrangement for 100 aircraft based on the Boeing 767 commercial
aircraft design to serve as Air Force aerial refueling tankers. Although this was a
leasing arrangement rather than a procurement action, some critics argued that the
stream of annual lease payments to be made under the arrangement could be viewed
as the equivalent of incremental funding. As part of its action on the FY2004 defense
authorization bill, Congress granted DOD revised authority to enter into a 10-year
leasing arrangement for 20 aircraft and to procure up to 80 additional aircraft under
a multiyear procurement contract that uses incremental funding.9
Proposed Procurements. In addition to the recent non-conforming
examples cited above, DOD has proposed procuring additional ships and aircraft
using funding approaches that would not conform to the full funding policy as
traditionally applied to DOD procurement programs.10
DD(X) and LCS Lead Ships in RDT&E. The Administration, as part of its
proposed FY2005 defense budget and FY2005-FY2009 FYDP, is proposing to
procure the lead ships in the Navy’s DD(X) destroyer program and Litoral Combat
8 Statement of Ronald O’Rourke, Specialist in National Defense, Congressional Research
Service, Before the House National Security Committee Subcommittee on Military
Procurement Hearing on Littoral Warfare Protection and Ship Recapitalization, March 9,
1999, pp. 8-12. Among the ships discussed were the amphibious ships LHD-6, LHD-7,
LHD-8, and LPD-18, the aircraft carriers CVN-76 and CVN-77, and the attack submarine
SSN-23.
9 For more on the tanker leasing proposal, see CRS Report RL32056, The Air Force KC-767
Tanker Lease Proposal: Key Issues For Congress
, coordinated by Christopher Bolkcom.
10 DOD has also recently adopted a new approach for developing major weapons systems
called evolutionary acquisition with spiral development, or spiral development for short.
Spiral development has potentially important implications for congressional oversight of
DOD weapon acquisition programs, but not necessarily for any reasons relating to the full
funding policy. For a discussion of spiral development, see CRS Report RS21195,
Evolutionary Acquisition and Spiral Development in DOD Programs: Policy Issues for
Congress
, by Gary J. Pagliano and Ronald O’Rourke.

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Ship (LCS) program11 in FY2005 in the Navy’s research development, test and
evaluation (RDT&E) account rather than the SCN account, where Navy ships
traditionally have been procured. Since the Navy’s RDT&E account is outside the
procurement title of the defense appropriation act, the ship would not be subject to
the full funding policy as traditionally applied to DOD procurement programs.
CVN-21 Aircraft Carrier. The Administration, as part of its FY2005 defense
budget and FY2005-FY2009 FYDP, is proposing to procure CVN-21, the Navy’s
next aircraft carrier, in FY2007 using a funding profile called split funding. Under
split funding, the cost of the item in question (or, in the case of an item that has
received advance procurement funding in prior years for long-leadtime components,
the remaining portion of that item’s procurement cost) is divided between the year
in which the item is procured and the following year. Since items procured under
split funding are not fully funded in the year they are procured, and receive an
additional increment of funding approved by Congress the following year, split
funding can be viewed as a form of incremental funding. In the case of CVN-21,
which has an estimated procurement cost of about $8.6 billion, about $3.0 billion
(about 34.5% of the ship’s cost) is to be provided through a series of advance
procurement payments made between FY2001 and FY2006. The remaining $5.6
billion (about 65.5% of the ship’s cost) is to be split between the year of procurement
(FY2007), with about $2.8 billion, and the following year (FY2008), with about $2.8
billion.12
C-17 Airlift Aircraft MYP. The Administration, as part of its FY2003,
FY2004, and FY2005 defense budgets and its FY2003-FY2007, FY2004-FY2009,
and FY2005-FY2009 FYDPs, has proposed procuring 60 C-17 airlift aircraft under
a follow-on multiyear procurement (MYP) arrangement approved by Congress in
FY200213 that would procure at least some of the aircraft with funding profiles that
resemble incremental funding rather than full funding.14 Under this approach, the Air
Force has requested Congress to appropriate enough money in a given year to make
progress payments on the MYP contract rather than to fully fund a specific number
of aircraft. The affect would be to reduce requested funding in the initial years of the
contract and increase amounts requested in later years. This proposal is of particular
11 For more on the DD(X) and LCS programs, see CRS Report RS21059, Navy DD(X)
Destroyer Program: Background and Issues for Congress
, CRS Report RS21305, Navy
Littoral Combat Ship (LCS): Background and Issues for Congress
, and CRS Report
RS32109, Navy DD(X) and LCS Ship Acquisition Programs: Oversight Issues and Options
for Congress
, all by Ronald O’Rourke.
12 For more on the CVN-21 program, see CRS Report RS20643, Navy CVN-21 Aircraft
Carrier Program: Background and Issues for Congress
, by Ronald O’Rourke.
13 The first MYP arrangement for the C-17 program was completed with the procurement
of 8 C-17s in FY2003. Congress, as part of its action on the FY2002 defense budget,
granted authority for a follow-on MYP arrangement for the C-17 program that began with
additional C-17s procured in FY2003. Congress provided advance procurement funding for
this follow-on MYP arrangement in FY2002.
14 Fulghum, David A. Military Budget Boost Yields Marginal Change. Aviation Week &
Space Technology
, February 11, 2002: 11. For more on the C-17 program, see CRS Report
RL30685, Military Airlift: C-17 Aircraft Program, by Christopher Bolkcom.

CRS-8
note because it would, if implemented, extend use of something resembling
incremental procurement to an area of defense weapon procurement outside
shipbuilding.
Advance Appropriations for Navy Ships in SCN. In 2001, some Navy
officials advocated the use of a funding arrangement called advance (or advanced)
appropriations for Navy ships, particularly as a means of increasing the number of
ships that could be placed under construction in the near term with available funding.
Use of advance appropriations would enable the Navy to begin construction on a ship
in a given year even though the budget authority for that year provided only an initial
increment of the total procurement cost of the ship.
Under advance appropriations, funding for the entire procurement cost of a ship
would be approved by Congress in a single decision. In contrast, however, to
traditional full funding, in which the full procurement cost of the ship is assigned to
(i.e., scored in) the budget year in which it is procured, under advance appropriations,
the procurement cost of the ship approved in a given year would be divided into
several portions, or increments, that would be scored across several budget years
starting with the original year of procurement.
In contrast to incremental funding, under which Congress must take a positive
action each year to approve the portion of the ship’s cost assigned to that year, with
advance appropriations, Congress each year would need to take a positive action to
cancel the portion of the ship’s cost assigned to that year. Although Navy supporters
of the advance appropriation concept stressed that advance appropriations is a form
of full funding rather than incremental funding, they acknowledge that advance
appropriations could be described informally as a legislatively locked-in counterpart
to incremental funding.
OMB Circular A-11 defines advance appropriations as appropriations that are:
! Enacted normally in the current year;
! Scored after the budget year (e.g., in each of one, two, or more later
years, depending on the language); and
! Available for obligation in the year scored and subsequent years if
specified in the language.15
The circular allows for the use of advance appropriations to help finance capital
assets under certain circumstances. Specifically, Principle 2 in Appendix J on
principles of financing capital assets, states (italics as in the original):
Regular appropriations for the full funding of a capital project or a useful
segment (or investment) of a capital project in the budget year are preferred. If
15 Source: OMB Circular A-11 (July 2003 version), Appendix J (Principles Of Budgeting
For Capital Asset Acquisitions), Section E (Glossary). For the text of this document on the
Internet, go to [http://www.whitehouse.gov/omb/circulars/a11/current_year/app_j.pdf].

CRS-9
this results in spikes that, in the judgment of OMB, cannot be accommodated by
the agency or the Congress, a combination of regular and advance appropriations
that together provide full funding for a capital project or a useful segment or an
investment should be proposed in the budget.
Explanation: Principle 1 (Full Funding) is met as long as a combination of
regular and advance appropriations provide budget authority sufficient to
complete the capital project or useful segment or investment. Full funding in the
budget year with regular appropriations alone is preferred because it leads to
tradeoffs within the budget year with spending for other capital assets and with
spending for purposes other than capital assets. In contrast, full funding for a
capital project (investment) over several years with regular appropriations for the
first year and advance appropriations for subsequent years may bias tradeoffs in
the budget year in favor of the proposed asset because with advance
appropriations the full cost of the asset is not included in the budget year.
Advance appropriations, because they are scored in the year they become
available for obligation, may constrain the budget authority and outlays available
for regular appropriations of that year.
If, however, the lumpiness caused by regular appropriations cannot be
accommodated within an agency or Appropriations Subcommittee, advance
appropriations can ameliorate that problem while still providing that all of the
budget authority is enacted in advance for the capital project (investment) or
useful segment. The latter helps ensure that agencies develop appropriate plans
and budgets and that all costs and benefits are identified prior to providing
resources. In addition, amounts of advance appropriations can be matched to
funding requirements for completing natural components of the useful segment.
Advance appropriations have the same benefits as regular appropriations for
improved planning, management, and accountability of the project (investment).
Navy advocates of using advance appropriations for Navy shipbuilding noted
that the mechanism is used by several federal agencies other than DOD.16
16 Agencies cited by the Navy included the Departments of Agriculture, Commerce,
Education, Energy, Health and Human Services, Housing and Urban Development, Interior,
Justice, Labor, State, Transportation, and Treasury, as well as the Corporation for Public
Broadcasting, the General Services Administration, the International Assistance Program,
the National Aeronautics and Space Administration, the National Science Foundation, the
Smithsonian Institution, and the Social Security Administration. (Slides for May 3, 2001
Navy briefing to CRS, Advance Appropriations for Navy Shipbuilding, pages 19-21.)
The Navy also argued that current law, contrary to some assertions, does not prohibit the use
of advance appropriations. Specifically, the Navy argued that:
! 31 USC 1341, [the] “Anti-Deficiency Act,” prohibits writing a contract
which “involves the government in a contract or obligation for the
payment of money before an appropriation is made unless authorized by
law
.”
! 10 USC 2306b [the provision covering multi-year procurement contracts]
allows [DOD and certain other federal agencies] to enter into multi-year
contracts for the purchase of weapon systems, as long as [there is] “a
(continued...)

CRS-10
Although use of advance appropriations for Navy shipbuilding was supported
by some Navy officials and some Members of Congress,17 the Navy in 2001
apparently did not receive approval from the Office of Management and Budget
(OMB) to use the approach for shipbuilding, and did not officially propose its use as
part of its FY2002 budget submission to Congress.18 Congress in 2001 did not adopt
advance appropriations as a mechanism for funding Navy ships. The House
Appropriations Committee, in its report (H.Rept. 107-298 of November 19, 2001) on
the FY2002 defense appropriations bill (H.R. 3338), stated that it was
dismayed that the Navy continues to advocate the use of alternative financing
mechanisms to artificially increase shipbuilding rates, such as advanced
appropriations, or incremental funding of ships, which only serve to decrease
cost visibility and accountability on these important programs. In attempting to
establish advanced appropriations as a legitimate budgeting technique, those
Navy advocates of such practices would actually decrease the flexibility of future
Administrations and Congresses to make rational capital budgeting decisions
with regard to shipbuilding programs. Accordingly, the Committee bill includes
a new general provision (section 8150) which prohibits the Defense Department
from budgeting for shipbuilding programs on the basis of advanced
appropriations.19
The general provision mentioned above (Section 8150) was not included in the final
version of the bill that was passed by Congress and signed into law (P.L. 107-117 of
January 10, 2002).
16 (...continued)
reasonable expectation that throughout the contemplated contract period
the head of the agency will request funding for the contract at the level
required to avoid contract cancellation.”
! 31 USC 1105 [a provision relating to the contents of the federal budget
and its submission to Congress] requires that [the executive branch]
identify in advance of need future appropriations that will have to be
approved in order to complete the contract. These advance appropriations
have to be specifically approved by Congress to allow [the executive
branch] to obligate the government in advance of receipt of funds. (Slides
for May 3, 2001 Navy briefing to CRS, Advance Appropriations for Navy
Shipbuilding
, page 16. Emphasis as on the briefing slide.)
17 Bohmfalk, Christian, “ O’Keefe: Advance Appropriations, If Used Correctly, Could Help
Navy,” Inside the Navy, Nov. 26, 2001; Bohmfalk, Christian, “Stevens Promotes Advance
Appropriations To Boost Ship Production,” Inside the Navy, Sept. 10, 2001; McCarthy,
Mike, “CNO Advocates Advance Funding of Ships,” Defense Week, July 16, 2001, p. 2;
Bohmfalk, Christian, “Senior Navy Leaders Describe Benefits of Advance Appropriations,”
Inside the Navy, Apr. 16, 2001; Castelli, Christopher J., “Congress Weighs Using ‘Advance
Appropriations’ For Shipbuilding,” Inside the Navy, Apr. 9, 2001; Eisman, Dale, “Plan
Would Boost Navy Shipbuilding,” Norfolk Virginian-Pilot, Apr. 5, 2001.
18 Eisman, Dale, “White House Rejects Proposal To Stretch Shipbuilding Funds,” Norfolk
Virginian-Pilot
, Sept. 6, 2001; Bohmfalk, Christian, “Advance Appropriations, Not Part of
FY-02 Request, May Resurface,” Inside the Navy, July 16, 2001.
19 H.Rept. 107-298, p. 119.

CRS-11
Issues and Options for Congress
Options
Responding to Specific Non-Conforming Proposals. In response to
the proposals listed above to procure ships and aircraft with funding profiles that do
not conform to the policy as traditionally applied to DOD procurement programs,
Congress has six basic options:
! Approve procurement of the items using the proposed non-
conforming approach without added bill or report language.
This option, if implemented, might well be viewed by DOD or
others as setting a precedent for applying non-conforming funding
approaches to other DOD procurement programs in the future.
! Approve procurement of the items using the proposed non-
conforming approach, but with added bill or report language
intended to limit the application of the approach strictly to the
specific program in question. This option would accommodate
DOD’s request for FY2003 while attempting to avoid setting such
a precedent. The success of this option in not setting such a
precedent could depend on the forcefulness of the wording used in
the bill or report language.
! Approve procurement of the items with a conforming funding
approach, but without added bill or report language. This
option would avoid setting a precedent for using non-conforming
approaches in the future and perhaps, by inference, also affirm
Congress’ preference for the full funding policy.
! Approve procurement of the items with both a conforming
funding approach and added bill or report language affirming
Congress’ preference for the full funding policy. This option would
avoid setting a precedent for using non-conforming approaches in
the future and positively affirm Congress’ preference for the full
funding policy.
! Reject procurement of the requested items entirely, without
added bill or report language. This option might or might not be
interpreted by DOD as affirming Congress’ preference for the full
funding provision, depending on other issues relating to the program
(e.g., concerns about need for the program, or its cost) that might be
viewed as having influenced Congress’ decision on it.
! Reject procurement of the items with added bill or report
language affirming Congress’ preference for the full funding policy.
This option would positively affirm Congress’ preference for the full
funding provision, particularly if the added legislation or comment
makes it clear that Congress’ decision to not procure the items was

CRS-12
directly related to the proposal to fund them using a non-conforming
approach.
General Legislative Options. In addition to responding to specific
proposals for procuring ships and aircraft with non-conforming approaches, Congress
may consider options for addressing legislatively the application of the full funding
policy to DOD procurement programs generally. In this regard, Congress could
decide to either maintain the status quo or add new bill or report language.
New bill or report language could be aimed at any of the following basic
objectives:
! Terminating the application of the full funding policy to DOD
procurement programs. This option could involve dropping the
current policy preference for full funding and permitting DOD to
employ either full funding, incremental funding, or some other
funding approach, depending on which approach DOD deems most
appropriate for the program in question. Alternatively, this option
could involve instituting a new policy that prohibits the use of full
funding and perhaps establishes a new policy preference for using
incremental funding or some other funding approach.
! Relaxing or otherwise modifying the application of the policy to
DOD procurement programs. This option could involve permitting
non-conforming approaches to be used for certain categories of
weapons or equipment, or for procurements conducted under certain
circumstances. It could also involve permitting DOD to make
greater use of alternative budgeting mechanisms, such as revolving
funds, for procurement of weapons and equipment. As discussed in
Appendix A, a 1996 GAO report examined some alternative
mechanisms used at certain government agencies other than DOD
and recommended that “The Congress should consider enabling
agencies to use more flexible budgeting mechanisms that
accommodate up-front funding over the longer term while providing
appropriate oversight and control.”20
! Strengthening or expanding the scope of application of the
policy as it relates to DOD programs. This option could involve
giving the full funding provision a specific basis in statute for DOD
(or federal) programs, or applying it to DOD programs funded
outside the procurement title of the DOD appropriations act, such as
those funded in the RDT&E account or the National Defense Sealift
Fund.
One recent example of proposed legislation relating to the use of full funding
in DOD procurement programs, mentioned earlier, was Section 8150 of the FY2002
20 U.S. General Accounting Office, Budget Issues: Budgeting for Federal Capital,
GAO/AIMD-97-5, Nov. 1996, p. 14.

CRS-13
defense appropriations bill (H.R. 3338) as reported by the House Appropriations
Committee (H.Rept. 107-298 of January 10, 2002), which stated:
None of the funds appropriated in this Act may be used to prepare a budget
request for submission to Congress by the Department of Defense for fiscal year
2003 that contains any proposal to acquire ships for the Department of the Navy
through the use of incremental funding amounts or advanced appropriations. The
limitation against incremental funding does not apply to the specific shipbuilding
programs that were funded on an incremental basis in fiscal year 2002.
As mentioned earlier, this provision was not included in the final version of the bill
that was passed by Congress and signed into law (P.L. 107-117 of January 10, 2002).
A second example concerns the National Defense Airlift Fund (NDAF) — a
revolving fund outside the procurement title of the DOD appropriations act that was
similar to the NDSF, but intended for airlift aircraft such as the C-17. The NDAF
was established by report language on the FY2001 defense appropriations bill (H.R.
4576/S. 2593).21 The conference report on the bill directed that C-17s be procured
in the NDAF rather than the Air Force’s aircraft procurement account, where airlift
planes traditionally had been procured, but also directed that C-17 procurement
conform to the full funding policy:
The conferees direct that the Department of Defense budget for all future C-17
procurement and support costs within the National Defense Airlift Fund. The
conferees direct that future budget documents for the NDAF should conform to
the requirements for other DOD procurement accounts including the content and
format of budget exhibits, reprogramming thresholds among procurement,
advanced procurement, and interim contractor support line items, application of
the procurement full funding policy
, and Congressional notification for changes
in quantity.22
The NDAF was disestablished as part of Congress’ action on the FY2002 defense
appropriations bill,23 and procurement of C-17s reverted to the Air Force’s aircraft
procurement account.
A third example is Section 1007 of the FY1996 defense authorization bill (H.R.
1530) as reported by the House National Security Committee (H.Rept. 104-131 of
June 1, 1995), which would amend 10 USC 114 at the end by adding the following
new subsection:
(f) (1) No funds may be appropriated, or authorized to be appropriated, for any
fiscal year for a purpose named in paragraph (1), (3), (4), or (5) of subsection (a)
using incremental funding.
21 See pages136-137 of the Senate Appropriations Committee’s report (H.Rept. 106-298 of
May 18, 2000) on the FY2001 defense appropriations bill (S. 2593), and page 284 of the
conference report (H.Rept. 106-754 of July 17, 2000) of the bill (H.R. 4576).
22 H.Rept. 106-754, p. 284. (Emphasis added.)
23 See the House Appropriation Committee’s report (H.Rept. 107-298 of November 19,
2001) on the FY2002 defense appropriations bill (H.R. 3338), p. 261.

CRS-14
(2) In the budget submitted by the President for any fiscal year, the President
may not request appropriations, or authorization of appropriations, on the basis
of incremental funding for a purpose specified in paragraph (1).
(3) In this subsection, the term ``incremental funding’‘ means the provision of
funds for a fiscal year for a procurement in less than the full amount required for
procurement of a complete and usable product, with the expectation (or plan) for
additional funding to be made for subsequent fiscal years to complete the
procurement of a complete and usable product.

(4) This subsection does not apply with respect to funding classified as advance
procurement funding.
This provision was not included in the final version of the bill (S. 1124) that was
passed by Congress and signed into law (P.L. 104-106 of February 10, 1996).24
Issues
In considering options for responding to specific DOD proposals for non-
conforming approaches, or for addressing the issue of full funding in DOD
procurement generally, Congress can consider several factors, including Congress’
power of the purse, congressional oversight of DOD procurement programs, future
Congresses, DOD budgeting and program-execution discipline, and the potential
impact on weapon procurement costs.
Congressional Power of the Purse. As shown in the excerpts from the
congressional hearings and reports presented in Appendix A, the full funding policy
has long been considered important to Congress’ ability to control executive branch
spending. DOD spending forms a large part of overall federal spending (and an even
larger share of discretionary federal spending). Procurement of weapons and
equipment in turn forms an important part of overall DOD spending (and an even
larger share of the portion of the DOD budget that is considered more “discretionary”
in nature). Congressional hearings and GAO reports over the years suggest that
circumscribing the application of the full funding policy to DOD procurement
programs could reduce congressional control over spending.
Congressional Oversight of DOD Procurement Programs. As also
shown in the excerpts presented in Appendix A, the full funding policy has
traditionally been viewed as beneficial in terms of making the total cost of DOD
weapons and equipment more visible to Congress. As mentioned earlier,
understanding total costs and how previously appropriated funds are used are key
components of Congress’ oversight capability. Incremental funding or other non-
conforming funding approaches, by spreading the costs of individual weapons or
pieces of equipment over several years, could complicate the task of understanding
and tracking total weapon costs and the uses of previously appropriated funds,
24 The conference report on H.R. 1530 (H.Rept. 104-406 of December 13, 1995) was passed
by Congress but vetoed by the President on January 28, 1995. Congress then passed the
conference report on S. 1124, a new version of the bill (H.Rept. 104-450 of January 22,
1996), which the President signed into law.

CRS-15
particularly if such approaches are applied to numerous weapon acquisition
programs.
As also shown in the excerpts from the 1996 GAO report presented in Appendix
A, however, GAO’s case studies of certain federal agencies other than DOD suggests
that there may be room under certain circumstances for using alternative funding
mechanisms, such as revolving funds, in a way that preserves congressional control
of spending and congressional oversight. The issue is whether these alternative
mechanisms would be appropriate for DOD, which has a much larger budget and
much larger annual capital needs than most other federal agencies.
Future Congresses. As discussed in the excerpts presented in Appendix A,
use of incremental funding or other non-conforming approaches could commit future
Congresses to providing funding for programs initiated by previous Congresses, and
thereby reduce the flexibility of future Congresses to adapt current-year budgets to
changing needs. Alternatively, as mentioned earlier, it could be argued that
incremental funding can enhance Congress’ ability to respond to changing
circumstances by giving future congresses the ability to stop funding the construction
of a weapon that suddenly becomes unnecessary or inappropriate due to unanticipated
shifts in U.S. strategy or the international security environment. Incremental funding,
in this view, could permit Congress to stop throwing good money after bad.
DOD Budgeting and Program-Execution Discipline. Independent of
its importance to congressional powers and responsibilities, the full funding policy
is viewed by DOD and others as imposing discipline on DOD budgeting practices.
As shown in the excerpts presented in Appendix A, full funding is often viewed as
helping to ensure that DOD officials identify, make investment trade-offs on the basis
of, and budget adequately for the full costs of its weapons and equipment. In
addition, DOD has sometimes stated that full funding is a source of discipline on
DOD program managers that encourages them to execute their programs within cost.
Alternatively, as mentioned earlier, it could be argued that use of incremental
funding can assist in the making of unbiased investment trade-offs by avoiding a
potential bias against the procurement of very expensive items that might result from
an item’s large up-front procurement cost (which appears in the budget)
overshadowing its long-term benefits (which do not appear in the budget) or its lower
life cycle operation and support (O&S) costs compared to alternatives with lower up-
front procurement costs. It could also be argued that some DOD procurement
programs incorporate significant amounts of advanced technology and that GAO, in
a 2001 letter report and briefing on incremental funding of capital asset acquisitions,
stated that it “recognizes that some incremental funding for high technology
acquisitions is justified because, while such projects are intended to result in a usable
asset, they are closer in nature to research and development activities.”25
25 Letter dated Feb. 26, 2001, to The Honorable Pete V. Domenici, Chairman, Committee
on the Budget, United States Senate, from Paul L. Posner, Managing Director, Federal
Budget, Strategic Issues, General Accounting Office, on the subject “Budget Issues:
Incremental Funding of Capital Asset Acquisitions.” (GAO-01-432R Incremental Funding
(continued...)

CRS-16
In addition, it could be argued that use of incremental funding would be
advantageous in DOD budgeting because, as mentioned earlier, it reduces the amount
of unobligated balances associated with DOD procurement programs. Finally, it
could be argued that use of incremental funding can be advantageous in DOD
budgeting because it implicitly recognizes potential limits on DOD’s ability to
accurately predict the total procurement costs of items, such as ships, that take
several years to build.
Potential Impact on Weapon Costs. Funding approaches like incremental
funding and advance appropriations can permit the military services to start
construction on a greater number of weapons in the near term than would be possible
under full funding. This could make incremental funding and advance appropriations
attractive in the near term to service officials, industry officials, and their supporters,
particularly given the decreased rates of weapon procurement that began in the early
1990s and are currently programmed by DOD to continue for several more years.
The full costs of weapons started under these approaches, however, would eventually
have to be paid in later years (along with the costs of weapons procured in those later
years).
As reflected in some of the excerpts presented in Appendix A, incremental
funding traditionally has been viewed as creating a potential for increasing weapon
procurement costs due to uneconomic start-up and stop costs that can occur when
budget reductions or other unexpected developments cause one or more of the
planned increments to be reduced or deferred. A related argument is that if firms are
uncertain about approval of future funding increments for a particular weapon, they
may be less inclined to invest in new and more efficient production technologies for
that weapon, effectively increasing its cost.
It could also be argued, however, that incremental funding or advance
appropriations can help reduce weapon procurement costs in at least two specific
cases. The first concerns a very expensive item, such as a large ship, that is usually
procured once every few years. The examples usually cited are aircraft carriers and
amphibious assault ships. If the Navy is not permitted to have a one-year “spike” in
the SCN account in the year that it procures such a ship, then fully funding the ship
within the SCN account could require other planned ship-procurement efforts to be
delayed to the following year. Such a delay, it can be argued, could disrupt the
production lines for those other ships, which could increase their procurement prices
due to the resulting shut-down and start-up costs.
The second concerns a very specific (and perhaps rare) scenario under which a
weapon that is beyond its initial “ramp-up” period of procurement (i.e., a program
that is ready from a technical and managerial standpoint to execute higher rates of
procurement) is, due to near-term budget constraints, planned for procurement at a
very uneconomic rate in the near term, but at a more-than-economic-rate a few years
later. Under such a specific scenario, use of incremental funding or advance
appropriations could permit the service to shift the start of production of some of the
25 (...continued)
of Capital Assets) p. 3.

CRS-17
units planned for later years into the near term, improving production economies of
scale in the near term while preserving adequate production economies of scale in
later years. If the near-term gains in economies of scale are greater than the
downstream losses in economies of scale, the result could be a reduced combined
procurement cost for all of the weapons in question.
Two factors bear upon the current debate over whether to procure DOD
weapons using non-conforming funding approaches: The first is the relatively low
rates at which many DOD weapon and equipment programs are currently planned for
procurement. The second is the interest that some Members of Congress have in
modernizing DOD’s weapons and equipment more quickly than now planned and in
maintaining the financial health of U.S. defense firms, particularly those that have
experienced several years of reduced production rates. One potentially important
question is whether the military services or defense firms are taking advantage of
these two factors to induce Congress to adopt non-conforming funding approaches
that could permit increased weapon-procurement rates in the near term, but also, by
reducing adherence to the full funding policy, permanently weaken Congress’ ability
to conduct oversight of DOD programs.
Military and defense-industry officials likely would not admit openly to
pursuing such a strategy. Indeed, they might not even be aware that proposals for
non-conforming funding approaches could pose such a trade-off for Congress.
Nevertheless, addressing such proposals may involve balancing a need to meet DOD
procurement goals within available funding against the goal of preserving Congress’
control over DOD spending and its ability to conduct oversight of DOD programs.
FY2003 Legislative Activity
FY2003 Defense Authorization Bill (H.R. 4546/S. 2514)
House. In its markup of the FY2003 defense authorization bill (H.R. 4546),
the House Armed Services Committee included a provision (Section 141) that
specifically requires the use of full funding for executing multiyear procurement
(MYP) arrangements approved in the future, unless otherwise authorized by
Congress. The provision would prohibit, unless specifically authorized by law, the
use in future MYP arrangements of, among other things, funding approaches
resembling incremental funding — including funding approaches like the one the Air
Force proposed, as part of its FY2003 defense budget and FY2003-FY2007 FYDP,
for the follow-on MYP arrangement for the C-17 program. Section 141 would not,
however, apply to the follow-on C-17 MYP arrangement itself, because the section
would cover MYP arrangements that are authorized in the future and the follow-on
MYP arrangement for the C-17 program was approved by Congress in 2001 as part
of its action on the FY2002 defense budget. The provision reads as follows:
SEC. 141. REVISIONS TO MULTIYEAR CONTRACTING AUTHORITY.
(a) USE OF PROCUREMENT AND ADVANCE PROCUREMENT
FUNDS- Section 2306b(i) of title 10, United States Code, is amended by adding
at the end the following new paragraph:

CRS-18
“(4)(A) Unless otherwise authorized by law, the Secretary of Defense may
obligate funds for procurement of an end item under a multiyear contract for the
purchase of property only for procurement of a complete and usable end item.
“(B) Unless otherwise authorized by law, the Secretary of Defense may
obligate funds appropriated for any fiscal year for advance procurement under
a multiyear contract for the purchase of property only for the procurement of
those long-lead items necessary in order to meet a planned delivery schedule for
complete major end items that are programmed under the contract to be acquired
with funds appropriated for a subsequent fiscal year.”.
(b) EFFECTIVE DATE- Paragraph (4) of section 2306b(i) of title 10,
United States Code, as added by subsection (a), shall not apply with respect to
any multiyear contract authorized by law before the date of the enactment of this
Act.
Conference Report. The conference report (H.Rept. 107-772 of November
12, 2002) on the FY2003 defense authorization bill (S. 2514) contains a provision
(Section 820), similar to Section 141 of the House-reported version of H.R. 4546,
that requires the use of full funding for executing multiyear procurement (MYP)
arrangements approved in the future:
SEC. 820. REVISIONS TO MULTIYEAR CONTRACTING AUTHORITY.
(a) USE OF PROCUREMENT AND ADVANCE PROCUREMENT FUNDS.
— Section 2306b(i) of title 10, United States Code, is amended by adding at the
end the following new paragraph:
“(4)(A) The Secretary of Defense may obligate funds for procurement of an end
item under a multiyear contract for the purchase of property only for
procurement of a complete and usable end item.
“(B) The Secretary of Defense may obligate funds appropriated for any fiscal
year for advance procurement under a contract for the purchase of property only
for the procurement of those long-lead items necessary in order to meet a planned
delivery schedule for complete major end items that are programmed under the
contract to be acquired with funds appropriated for a subsequent fiscal year
(including an economic order quantity of such long-lead items when authorized
by law).”.
(b) EFFECTIVE DATE. — (1) Paragraph (4) of section 2306b(i) of title 10,
United States Code, as added by subsection (a), shall not apply with respect to
any contract awarded before the date of the enactment of this Act.
(2) Nothing in this section shall be construed to authorize the expenditure of
funds under any contract awarded before the date of the enactment of this Act for
any purpose other than the purpose for which such funds have been authorized
and appropriated.
In their report, the conferees noted that this section amended the language of the
House-reported Section 141 to

CRS-19
permit the purchase of economic order quantities of long-lead items where
authorized by law. The conference amendment would also clarify that nothing
in the section authorizes the use of funds available under contracts awarded prior
to the effective date of the provision for any purpose other than the purpose for
which such funds were authorized and appropriated. Consequently, although the
section would not apply to contracts awarded before the date of enactment, funds
available under such contracts could not be used in a manner that would be
inconsistent with the requirements of the section unless such funds were
authorized and appropriated for such purposes. (page 673)
FY2003 Defense Appropriations Bill (H.R. 5010)
House. In its report (H.Rept. 107-532 of June 25, 2002) on the FY2003
defense appropriations bill (H.R. 5010), the House Appropriations Committee stated
the following regarding the Air Force’s FY2003 proposal to procure 60 C-17 airlift
aircraft under a follow-on multiyear procurement (MYP) arrangement approved by
Congress in FY2002 that would procure at least some of the aircraft with funding
profiles that resemble incremental funding rather than full funding:
The Air Force has adopted a budgeting approach for the C — 17 that delays
the need to request $1,500,000,000 in budget authority until 2007 and 2008.
Instead of following the traditional method of requesting funding equal to the
cost of the planes being built, the Air Force has matched its funding request to
when payments are due to the contractor. The Air Force calls this change
“transformation”. The proper term is incremental funding and it is inconsistent
with DOD fiscal policy. Although the planes are delivered on the same schedule
and at the same cost under either approach, incremental funding allows programs
to push off onto future years costs that should be covered now.
Last year, when the Congress was considering multiyear procurement
authority for the C — 17, the Air Force sought bill language specifically
authorizing this new approach. The Congress approved the multiyear, but denied
the Air Force’s request for special authority. Nevertheless, the Air Force
proceeded with the incremental funding and reinterpreted the regulations as
permitting this approach. For example, while the DOD Financial Management
Regulations (FMR) define Advance Procurement as being for “long leadtime
items”, the Air Force believes that this can be interpreted to apply to any
component of the aircraft or even to final assembly. While the FMR calls for
advance procurement to be “relatively low” compared to the cost of the end item,
the Air Force proposal would, in some cases, fund half of the cost of the airplane
with advanced procurement. The Air Force position is not consistent with any
reasonable interpretation of the FMR.
Therefore, the Committee has included bill language requiring that the
fiscal year 2003 C — 17 Advance Procurement be used to support the acquisition
in fiscal year 2004 of 15 C — 17 aircraft (the planned production rate) and
directs the Air Force to include the funds to complete the purchase of those 15
C — 17s in its 2004 budget submission.
The Committee directs the Under Secretary of Defense (Comptroller) to
restructure the outyear funding for the C — 17 program to bring it into
compliance with the proper use of advance procurement as defined in the FMR.
The Committee is fully supportive of the C — 17 program and the multiyear

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procurement of 60 additional airplanes and directs that these changes be
implemented in a manner that would not adversely affect the cost or delivery of
these planes. (Page 168)
Senate. In its report (S.Rept. 107-213 of July 18, 2002) on the FY2003
defense appropriations bill (H.R. 5010), the Senate Appropriations Committee
“recommends several actions to restore fiscal discipline to the Department [of
Defense].” (Pages 4-5) Among these are recommendations to fully fund the C-17
multiyear procurement request and to reduce amounts requested for advance
procurement for Navy shipbuilding programs.
With regard to the C-17 multiyear procurement funding request, the committee
stated:
The Air Force has not requested sufficient funding in its budget proposal
to fully fund the purchase of 15 [C-17] aircraft per year. Instead, it has chosen
to request only the amount of funds it expects to obligate each year to start the
production of 15 aircraft, and finance the remaining costs in later years. This
financing scheme runs counter to the ‘full funding’ principles which guide
Federal Government procurement practice, and thus creates a future liability for
the Air Force and Congress. For these reasons, the Committee disapproves the
Air Force’s C — 17 financing proposal. Instead the Committee recommends an
increase of $585,900,000 to fully fund the purchase of 15 C — 17 aircraft in
fiscal year 2003. The Committee intends to work with the Air Force over the
coming months to ensure that plans for executing the remainder of the C — 17
multi-year procurement program are both cost effective and consistent with full
funding principles. (Page 147)
With regard to requests for advance procurement funding for Navy shipbuilding
programs, the committee stated:
The Committee notes that the Navy’s requests for advance procurement
funding for shipbuilding programs have increased in recent years. Almost
universally among programs, the cumulative amount requested for advance
procurement funds exceeds 30 percent of the total cost of the vessel.
As stated in DOD Directive 7000.14 — R, advance procurement requests
should be limited to those items whose lead-times are greater than the life of the
appropriation and where the lead-time of an item far exceeds the production time
of the end item itself. The regulation further states that the amounts budgeted for
advance procurement should be relatively low compared to the remaining portion
of the cost of the end item. However, based on detailed information received
from the Department, the Committee finds countless inconsistencies in the
Navy’s adherence to this policy.
As the Committee endeavors to assist the Navy in increasing funding for
shipbuilding programs, in addition to providing increased funding over the
budget request, it finds that a portion of the funds requested for advance
procurement would be more effectively used to alleviate the costs associated
with completion of prior year [Navy shipbuilding] programs....
The Committee’s recommendation fully funds the increased costs
associated with the “swap” of DDG — 51 and LPD — 17 class workload among

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the two main shipbuilders. Further, it fully funds the entire DDG — 51 class
prior year completion bill throughout the Future Years Defense Plan, pays
$150,000,000 towards the LPD — 17 class fiscal year 2004 bill and fully funds
both the fiscal year 2003 and fiscal year 2004 costs associated with the VA
[Virginia] Class submarine program. (Page 127)
Conference Report. The conference report (H.Rept. 107-732 of October 9,
2002) on H.R. 5010 stated the following With regard to the C-17 multiyear
procurement funding request:
In the Department of Defense’s fiscal year 2003 budget submission, the Air
Force did not request a sufficient amount to fully fund the purchase of 15 C —
17 cargo aircraft per year. Instead, it requested only the amount of funds it
expected to obligate each year to start production of 15 aircraft, and financed the
remaining costs in later years. This financing scheme runs counter to the “full
funding” principles which guide Federal government procurement practice, and
thereby creates a future liability for the Air Force and Congress. For this reason,
the conferees disapprove the Air Force’s C — 17 financing proposal. As such,
the conference agreement includes an increase of $585,900,000 over the budget
request to fully fund the purchase of 15 C — 17 aircraft in fiscal year 2003.
Additionally, the conferees agree to retain House language which directs that
funds made available within the “Aircraft Procurement, Air Force” account be
used for advance procurement of 15 aircraft. (page 206)
FY2004 Defense Authorization Bill (H.R. 1588)
Conference Report. The conference report (H.Rept. 108-354 of November
7 (legislative day, November 6), 2003) on H.R. 1588 contained a provision (Section
135) that, as stated on page 541 of the report, “would authorize the Secretary of the
Air Force to enter into a lease for no more than 20 aerial refueling tanker aircraft, and
would further authorize the Secretary of the Air Force to enter into a multiyear
procurement program, using incremental funding, for up to 80 aerial refueling aircraft
for not in excess of 10 program years beginning as early as FY2004.” Section 135
stated, in part:
(b) MULTIYEAR PROCUREMENT AUTHORITY. — (1) Beginning with the
fiscal year 2004 program year, the Secretary of the Air Force may, in accordance
with section 2306b of title 10, United States Code, enter into a multiyear contract
for the purchase of tanker aircraft necessary to meet the requirements of the Air
Force for which leasing of tanker aircraft is provided for under the multiyear
aircraft lease pilot program but for which the number of tanker aircraft leased
under the authority of subsection (a) is insufficient.
(2) The total number of tanker aircraft purchased through a multiyear contract
under this subsection may not exceed 80.
(3) Notwithstanding subsection (k) of section 2306b of title 10, United States
Code, a contract under this subsection may be for any period not in excess of 10
program years.
(4) A multiyear contract under this subsection may be initiated or continued for
any fiscal year for which sufficient funds are available to pay the costs of such

CRS-22
contract for that fiscal year, without regard to whether funds are available to pay
the costs of such contract for any subsequent fiscal year. Such contract shall
provide, however, that performance under the contract during the subsequent
year or years of the contract is contingent upon the appropriation of funds and
shall also provide for a cancellation payment to be made to the contractor if such
appropriations are not made.
FY2004 Defense Appropriations Bill (H.R. 2658/S. 1382)
House. In its report (H.Rept. 108-187 of July 2, 2003) on H.R. 2658, the
House Appropriations Committee stated:
The Committee has altered the presentation of the fiscal year 2004
requested Shipbuilding and Conversion, Navy (SCN) appropriation language by
merging the appropriation for full funding with the appropriation for advanced
procurement. The Committee’s intention is to provide a certain level of financial
flexibility to better accommodate changes based on cost growth. This
recommendation, if properly implemented by the Navy, should allow for
managing costs within the program thereby limiting the necessity of
reprogramming funds from other high priority programs to accommodate cost
growth in a ship class. The Committee reserves the right to revert to the previous
method of appropriating funds for SCN should the Navy not properly manage the
merging of these appropriations. (page 150)
Senate. In its report (S.Rept. 108-87 of July 10, 2003) on S. 1382, the Senate
Appropriations Committee stated:
The Committee is aware that the Department of the Navy plans to fund the
purchase of ships in fiscal year 2005 within the Research and Development,
Navy account. These ships — the first in their class — the DD(X)
next-generation destroyer and the Littoral Combat Ship [LCS] are currently
planned to be procured with research and development dollars with the second
ship in each class to be procured with Shipbuilding and Conversion, Navy [SCN]
funds in fiscal year 2006.
The Committee understands that there are seeming advantages to this
approach — reducing prior year shipbuilding costs and providing these programs
with the additional flexibility that is inherent in research and development
funding. The Committee is concerned, however, that the Department will not
reap the benefits it seeks. Central to the argument that supports building the first
ship in a class with research and development funding is the necessity to learn
lessons from the research, development and testing being done. If the Navy plans,
as it currently does, to fund the second ship in each of these classes in fiscal year
2006 in SCN before actual construction even begins on the research and
development funded ships, the distinction between funding in research and
development and SCN only becomes one of full-funding.
Therefore, the Committee directs that if these ships — the DD(X) and LCS
— are funded in research and development, all research and development
acquisition rules will apply, including technology readiness reviews, milestone
decisions, and test and evaluation before these ships may enter Shipbuilding and
Conversion, Navy for procurement.

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If the Navy chooses not to follow the acquisition policies required of
research and development programs before they enter procurement, funding for
these first ships in their class shall be requested in Shipbuilding and Conversion,
Navy, as has been the tradition. (pages 154-155)
Conference Report. The conference report (H.Rept. 108-283 of September
24, 2003) on H.R. 2658 stated:
The conferees agree with the Senate concerning the Navy’s plans to fund
the purchase of ships — DD(X) and LCS — in fiscal year 2005 within the
Research, Development, Test and Evaluation (RDT&E) appropriation. The
conferees believe that the use of research and development funding to procure
first ships of a class is not in keeping with budgetary guidelines regarding
full-funding. The conferees agree that should the fiscal year 2005 request
include these ships — DD(X) and LCS — within RDT&E, all research and
development acquisition rules shall apply, including technology readiness
reviews, milestone decisions, and test and evaluation before these ships may
transition to procurement. (page 292)
FY2005 Defense Authorization Bill (H.R. 4200/S. 2400)
House. In marking up H.R. 4200, the House Armed Services Committee
included a provision (Section 804) that, as stated in the committee’s report on the bill
(H.Rept. 108-491 of May 14, 2004, page 346), “would amend section 2306b(g) and
section 2306c(d) of title 10, United States Code [provisions relating to DOD
multiyear procurement contracts], to require the head of the agency concerned to
provide written notification, to the congressional defense committees, in those
instances when cancellation costs that are above $100 million are not fully funded.
The written notification would include a financial risk assessment for not fully
funding the cancellation ceiling.” The section states:
SEC. 804. FUNDING FOR CONTRACT CEILINGS FOR CERTAIN
MULTIYEAR PROCUREMENT CONTRACTS.
(a) MULTIYEAR CONTRACTS RELATING TO PROPERTY- Section
2306b(g) of title 10, United States Code, is amended —
(1) by inserting `(1)’ before `Before any’;
(2) by striking `Committee’ through `House of Representatives’ and inserting
`congressional defense committees’; and
(3) by adding at the end the following new paragraph:
`(2) In the case of a contract described in subsection (a) with a cancellation
ceiling described in paragraph (1), if the budget for the contract does not include
proposed funding for the costs of contract cancellation up to the cancellation
ceiling established in the contract, the head of the agency concerned shall, as part
of the certification required by subsection (i)(1)(A), give written notification to
the congressional defense committees of —

CRS-24
`(A) the cancellation ceiling amounts planned for each program year in the
proposed multiyear procurement contract, together with the reasons for the
amounts planned;
`(B) the extent to which costs of contract cancellation are not included in the
budget for the contract; and
`(C) a financial risk assessment of not including budgeting for costs of contract
cancellation, including proposed funding sources to meet such cancellation costs
if the contract is canceled.’.
(b) MULTIYEAR CONTRACTS RELATING TO SERVICES- Section 2306c(d)
of title 10, United States Code, is amended —
(1) in paragraphs (1), (3), and (4), by striking `committees of Congress named in
paragraph (5)’ and inserting `congressional defense committees’ each place it
appears; and
(2) by amending paragraph (5) to read as follows:
`(5) In the case of a contract described in subsection (a) with a cancellation
ceiling described in paragraph (4), if the budget for the contract does not include
proposed funding for the costs of contract cancellation up to the cancellation
ceiling established in the contract, the head of the agency concerned shall give
written notification to the congressional defense committees of —
`(A) the cancellation ceiling amounts planned for each program year in the
proposed multiyear procurement contract, together with the reasons for the
amounts planned;
`(B) the extent to which costs of contract cancellation are not included in the
budget for the contract; and
`(C) a financial risk assessment of not including budgeting for costs of contract
cancellation, including proposed funding sources to meet such cancellation costs
if the contract is canceled.’
Senate. In its report (S.Rept. 108-260 of May 11, 2004) on S. 2400, the Senate
Armed Services Committee states:
The Future Years Defense Program submitted with the budget request included
full funding for the first LHA(R)-class amphibious assault ship in fiscal year
2008. The committee understands that acceleration of this ship, by providing the
first increment of SCN funding in fiscal year 2005, would reduce the cost of this
ship by $150.0 million. The Chief of Naval Operations and the Commandant of
the Marine Corps have included this acceleration on their Unfunded Priority
Lists. Therefore, the committee recommends an increase of $150.0 million for
advance procurement and advance construction of components for the first
amphibious assault ship of the LHA(R)-class. (page 74)
The report also states:

CRS-25
To ease the [F-22 fighter] production backlog, while maintaining the production
rate at that established for the fiscal year 2004 contract, the committee
recommends a decrease in APAF of $280.2 million, for a total authorization of
$3.4 billion for the procurement of at least 22 F/A — 22 aircraft in fiscal year
2005. The committee is aware that the Department of Defense has approved the
F/A — 22 program as a “buy to budget” program. If the authorized level of
funding is sufficient to procure more than 22 aircraft, the Air Force may do so
after the Secretary of the Air Force provides a letter to the Committees on Armed
Services of the Senate and the House of Representatives certifying that the
contractor is delivering aircraft within the contractual delivery schedule, and that
the program is fully funded to include initial spares, logistics, and training
requirements. (page 106)
FY2005 Defense Appropriations Bill (H.R. 4613/S. 2559)
House. Section 8008 of H.R. 4613 as reported by the House Appropriations
Committee grants permission for multiyear procurement programs, with the
following provision, among others:
Provided further, That none of the funds provided in this Act may be used for a
multiyear contract executed after the date of the enactment of this Act unless in
the case of any such contract —
(1) the Secretary of Defense has submitted to Congress a budget request for full
funding of units to be procured through the contract;
(2) cancellation provisions in the contract do not include consideration of
recurring manufacturing costs of the contractor associated with the production
of unfunded units to be delivered under the contract;
(3) the contract provides that payments to the contractor under the contract shall
not be made in advance of incurred costs on funded units; and
(4) the contract does not provide for a price adjustment based on a failure to
award a follow-on contract.26
The Aircraft Procurement, Air Force, paragraph of the bill makes funds
available for the procurement of Air Force aircraft and related purposes, with the
following provisions:
Provided, That amounts provided under this heading shall be used for the
procurement of 15 C-17 aircraft: Provided further, That amounts provided under
this heading shall be used for the advance procurement of not less than 15 C-17
aircraft: Provided further, That the Secretary of the Air Force shall fully fund the
procurement of not less than 15 C-17 aircraft in fiscal year 2006.27
26 Italics as in the original.
27 Italics as in the original.

CRS-26
In its report (H.Rept. 108-553 of June 18, 2004) on H.R. 4613, the House
Appropriations Committee stated, at the beginning of its discussion of procurement
programs:
In the Aircraft Procurement, Air Force section of this report the Committee
discusses how the Air Force ignored the law and the express intent of Congress
by using the current multiyear contract for the C — 17 aircraft as a vehicle to
support an incremental funding strategy. In so doing, it also has inappropriately
committed the government to potential Anti-Deficiency Act violations and
unfunded liability costs running in the hundreds of millions of dollars in the
event a follow-on contract for this program is not entered into by a date certain,
or if certain production levels are not agreed to.
Regrettably, the Committee has learned the Air Force has also entered into
a similar multiyear contract for the C — 130J aircraft. The current production
profile includes three aircraft whose manufacture has been approved in the
absence of a fully funded appropriation for this purpose. In addition, in this
contract the contractor has received a commitment on behalf of the government
by the Air Force that the annual production rate will be sustained at 16 aircraft
from 2007 through 2009, between Air Force, Navy, and Marine Corps purchases
and potential foreign sales. Failure to achieve this rate will significantly increase
the cost per plane to the Air Force, representing a contingent liability the
government is obliged to pay. At present, current projections suggest this rate
will not be met, with shortfalls of 4 aircraft each in 2007 and 2008 and 6 aircraft
in 2009. If these projections hold, the Air Force and the taxpayer will foot the
bill. In effect, the Air Force has permitted itself to become a de facto sales agent
for this program, putting it in a position to insist that other elements of the
Department of Defense and the Congress help it find a way to fund this
production profile or pay significant penalties.
The Committee realizes that properly administered multiyear procurements can
result in significant savings. However, the multiple abuses of sound contracting
principles and fiscal responsibility by the Air Force in these instances cannot and
will not become a model for future multiyear acquisitions. Accordingly, the
Committee has recommended several modifications to section 8008 of this bill,
and the Committee directs these requirements be met before future multiyear
production contracts can be entered into:
(1) Multiyear contracts must follow full funding policies and not be used
as vehicles for incrementally funding procurement;
(2) Contract cancellation ceilings may not include recurring manufacturing
costs of unfunded units;
(3) Contract payments may not be made in advance of projected
manufacturing costs (to include purchase of materials) for funded units;
(4) Advance procurement funds may not be used to pay the costs of normal
fabrication and assembly of unit components. The use of these funds should be
restricted to long-lead items, economic-order quantity buys, and the one-time
non-recurring costs of improving manufacturing capabilities;
(5) Advance procurement funds are limited to no more than 10 percent of
total procurement costs; and

CRS-27
(6) Regular procurement funds for units should be requested for the
appropriate fiscal year to be obligated to pay for normal fabrication and assembly
of funded units and components.
The Committee also takes exception to the Air Force’s use of a unique
provision in the current C — 17 multiyear contract that allows the contractor to
add charges to the fixed price contract if a follow-on contract is not awarded. The
amended general provision further directs that no new multiyear contracts
provide for such a price adjustment. (pages 105-107)
In the section of the report concerning the C-17 program in particular, the report
stated:
The Committee is extremely displeased by the Air Force’s continued use
of a flawed and irresponsible financial strategy for the C-17 multiyear
procurement contract. In fiscal year 2003, the Air Force proposed a budget
request it referred to as “transformational”. The Committee, however, saw it for
what it was — an incremental financing scheme that abused the political support
for this program and flaunted acquisition regulations and standard practices. In
that year, the Congress provided full funding for all 15 aircraft, and directed the
Air Force to fully fund the same number in fiscal year 2004.
Unfortunately, for fiscal year 2004 and now with the fiscal year 2005
Defense budget request, the Air Force has continued its financial sleight-of-hand
on the C — 17 program. Based on a recently concluded investigation by the
Committee’s Surveys and Investigations staff, the Committee learned the Air
Force is using a combination of advance procurement funding and exorbitant
cancellation ceilings to keep the contractor to a production schedule which has
as many as 5 aircraft at any given time in the production line for which funds
have not been appropriated. Not once in the past has the Committee indicated
its approval for using advance procurement funding to proceed with production
of aircraft for which full appropriations have not been approved. Nor is the
Committee aware of any change in Department of Defense (DOD) fiscal policy
or regulations that would permit this. As both DOD and Office of Management
and Budget financial officials put it to Committee investigators, the Air Force
had “pushed the envelope.” And, in the Committee’s view, the ‘envelope’ has
been pushed too far.
Moreover, the Air Force also included a provision in the second C — 17
multiyear procurement contract that assumes additional funding for aircraft will
be approved following the end of the contract. Otherwise, the Department will
be liable to pay the contractor significant termination costs. This contingent
liability places a burden not just on the current Congress, but on the next
Congress as well, and could be interpreted as a violation of the Anti-Deficiency
Act.
In order to prevent such future financial chicanery on the part of the Air
Force or any other military service, the Committee includes a new general
provision that significantly amends authority carried in past Defense
Appropriations acts regarding multiyear procurement contracts. This provision
is discussed elsewhere in this report. With regard to the current funding shortfall
in fiscal year 2005, the Committee has added an additional $158,600,000 and one
aircraft. Bill language is also included in the Aircraft Procurement paragraph
directing that funds provided are for the procurement of 15 aircraft in fiscal year

CRS-28
2005, that advance procurement funds are provided for the procurement of 15
aircraft in fiscal year 2006, and that the Secretary of the Air Force shall fully
fund the procurement of 15 aircraft in fiscal year 2006. In placing this
requirement upon the Air Force, the Committee would note the commitment of
the Secretary of the Air Force, during a public hearing on this matter, to work
with the Committee to “set it right”. The Committee anticipates that the
Secretary will do just that. (page 192)
In a follow-on section concerning interim contractor support (ICS) for the C-17
fleet, the report states:
In the preceding part of this report, the Committee expresses its displeasure
with the funding strategy the Air Force has employed to execute the C — 17
program. That strategy has resulted in an incremental funding scheme for the C
— 17 that the Committee finds unacceptable. In order to fully fund 15 aircraft
in fiscal year 2005, the budget request must be amended to provide for one
additional aircraft and $158,600,000. Therefore, the Committee provides
increased funding for one additional C — 17 in fiscal year 2005, and reduced
funding in this account by a like amount.
The Committee finds it puzzling that the Air Force refuses to fully fund
aircraft in production, yet the fiscal year 2005 request for C — 17 ICS includes
funding of $176,000,000 in new capability block upgrades and improvements to
the existing fleet. In budget justification materials, the Air Force identifies
$114,000,000 of this amount as needed to address unfunded requirements. The
Committee wishes to send a very clear message — it considers full funding of the
aircraft in production to be this program’s number one unfunded requirement.
Once the Air Force understands this message and provides the resources needed
to bring this program in line with a traditional, fully funded procurement
program, the Committee will entertain any funding requests for new capability
to the existing fleet. (page 193)
In its discussion of the Army’s proposal for funding the construction a theater
support vessel (TSV) through the Army’s research and development account, the
report states:
Fiscal year 2005 is the first year in which funding has been requested to
construct such a vessel. The Committee notes that the total cost of this vessel is
approximately $141,600,000, and the Army had planned to incrementally fund
its construction over the course of fiscal years 2005 through 2007. The
Committee firmly believes that the Department should fully fund major
investment items and accordingly has added sufficient funding in the fiscal year
2005 bill to complete this vessel. (pages 254-255; see also page 249)
The committee in the above passage is applying the traditional full funding policy to
this vessel even though it is being acquired through the Army’s research and
development account, which falls outside the procurement title of the DOD
appropriations act.
In its discussion of the Navy’s proposal for funding the construction of the lead
Littoral Combat Ship (LCS) through the Navy’s research and development account,
the report states:

CRS-29
The Committee recommendation includes increasing the budget request for the
construction of the first Flight 0 LCS by $107,000,000, fully funding this
construction effort at $214,000,000. The fiscal year 2005 request included only
$107,000,000 for the first increment of the LCS construction. Budget
documentation indicates the Navy plans to request an additional $107,000,000
for the second and final increment for the first ship in fiscal year 2006. The
Committee strongly opposes incremental funding of ship construction and
therefore has provided a total of $214,000,000 in 2005 for construction of the
first LCS, fully funding the construction requirement in one year. (page 288-
289; see also page 274)
The committee in the above passage is applying the traditional full funding policy to
this ship even though it is being acquired through the Navy’s research and
development account, which falls outside the procurement title of the DOD
appropriations act.
In its discussion of the Navy’s newest plan for procuring a new amphibious
assault ship known as the LHA(R), or more simply as LHA, in FY2008, the report
stated that
the Navy’s new plan presumes designing a ship that would alter the amphibious
nature of the LHA, and then, proposing an incrementally funded construction
program.... Should the Navy and Marine Corps determine that the re-structure
of the LHA(R) program is the way ahead for the future, a fully funded program
for design and construction of a ship to meet this requirement should be included
in a future budget request. The Committee will not support a proposal which
suggests that construction be incrementally funded. (page 289)
In its discussion of the Navy’s plan to fund the construction of a planned new
class of ships known as Maritime Prepositioning Force (Future) (MPF[F]) ships
through the National Defense Sealift Fund (NDSF) starting in FY2007, the report
states:
Budget documentation provided to Congress in support of the fiscal year
2005 budget request provided no information detailing how the MPF(F) funds
were to be spent. The only information provided states that lead hull
construction costs are to be incrementally funded beginning in fiscal year 2007.
Requests for additional information yielded no detail of the planned expenditures
due to a not yet completed study by the Center for Naval Analysis. The
Committee notes that while detail was not provided to Congress, the trade press
was provided some information and printed articles quoting senior Navy officials
on plans for the possible construction of a fleet of MPF(F) ships.
The Committee believes the Navy must provide sufficient justification of
its requests for appropriated funds. While the Committee appreciates that the
timing inherent in the budget process does not always favor rapid transition to
new ideas, it is not reasonable to request Congress provide funds for a program
with no justification except that which is printed in the trade press. Furthermore,
the Navy is well aware of the Committee’s views with respect to incremental
funding of programs. The Committee finds little humor in being asked to fund
an unjustified request of nearly $100 million, for what is intended upon its
maturation to become an incrementally funded program. (page 352)

CRS-30
The committee in the above passage is suggesting that it will prefer to apply the
traditional full funding policy to these ships even though they are to be acquired
through the NDSF, which falls outside the procurement title of the DOD
appropriations act.
Senate. In its report (S.Rept. 108-284 of June 24, 2004), the Senate
Appropriations Committee stated:
The Committee supports the budget request for the Littoral Combat Ship
[LCS] and consents to the Navy’s request to fund construction of the first
prototype ship for each of two ship designs in the Research and Development,
Navy account. Approval for funding LCS in the research and development
account is strictly based on the acknowledgement of the prototypical nature and
high level of technical risk inherent in this program. The Committee finds LCS
to be unique and unlike any other shipbuilding program the Navy has previously
pursued; and therefore, grants the Navy’s request for the increased flexibility that
funding within the research and development account affords. However, the
Committee directs that all follow-on ships beyond one prototype for each LCS
ship design be fully funded in the Shipbuilding and Conversion, Navy account.
(Pages 156-157)

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Appendix A: Detailed Background on the Policy
This appendix provides a detailed discussion of the origins, rationale, and
governing regulations of the full funding policy, as well as examples of where
Congress, GAO, and DOD have affirmed their support for the policy.
Laws and Regulations
Antideficiency and Adequacy of Appropriations Acts. The full funding
policy, also known as up-front funding, is consistent with two basic laws regarding
executive branch expenditures — the Antideficiency Act of 1870, as amended, and
the Adequacy of Appropriations Act of 1861. As summarized in a 1996 GAO report:
The Antideficiency Act, as amended, implements Congress’ constitutional
oversight of the executive branch’s expenditure of funds. The act reflects laws
enacted by the Congress since 1870 to respond to abuses of budget authority and
to gain more effective control over appropriations. The central provision of the
act (31 U.S.C. 1341(a)(1)) prevents agencies from entering into obligations prior
to an appropriation or from incurring obligations that exceed an appropriation,
absent specific statutory authority. Thus, agencies may not enter into contracts
that obligate the government to pay for goods and services unless there are
sufficient funds available to cover their cost in full. Instead, agencies must
budget for the full cost of contracts up-front. Also, the Adequacy of
Appropriations Act (40 U.S.C. 11), established in 1861, prohibits agencies from
entering into a contract unless the contract is authorized by law or there is an
appropriation to cover the cost of the contract.28
OMB Circular A-11 (July 2003). Circular A-11 from the Office of
Management (OMB)29 provides guidance to executive branch agencies on the
preparation of budget submissions to Congress. The current version of the circular
was issued on July 25, 2003. Section 31.4 of the circular, which covers the full
funding policy, states in part:
Requests for acquisition of capital assets must propose full funding to cover the
full costs of the project or a useful segment of the project, consistent with the
policy stated in section 300.6(b). Specifically, requests for procurement programs
must provide for full funding of the entire cost.... Remember that Administration
policy and the Antideficiency Act require you to have sufficient budget authority
or other budgetary resources to cover the full amount of unconditional
obligations under any contract.
Section 300.6(a) of the circular states (italics as in the original):
28 U.S. General Accounting Office, Budget Issues: Budgeting for Federal Capital,
GAO/AIMD-97-5, Nov. 1996, p. 28.
29 For the text of this document on the Internet, go to [http://www.whitehouse.gov
/omb/circulars/a11/03toc.html].

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(a) Background.
Good budgeting requires that appropriations for the full costs of asset acquisition
be enacted in advance to help ensure that all costs and benefits are fully taken
into account when decisions are made about providing resources. For most
spending on acquisitions, this rule is followed throughout the Government. When
capital assets are funded in increments, without certainty if or when future
funding will be available, it can and occasionally does result in poor planning,
acquisition of assets not fully justified, higher acquisition costs, project
(investment) delays, cancellation of major investments, the loss of sunk costs, or
inadequate funding to maintain and operate the assets.
Section 300.6(b) of the circular states in part (italics as in the original):
(b) Full funding policy.
The full funding policy (see section 31.4) requires that each useful segment (or
module) of a capital investment be fully funded with either regular annual
appropriations or advance appropriations. For definitions of these terms, see
section 300.4 or the Glossary of Appendix J. Appendix J elaborates on the full
funding concept (see Appendix J section C, Principles of Financing).
Appendix J, Section C, lists four principles for financing capital assets.
Principle 1, on full funding, states (italics as in the original):
Budget authority sufficient to complete a useful segment of a capital project
(investment) (or the entire capital project, if it is not divisible into useful
segments) must be appropriated before any obligations for the useful segment (or
project) (or investment) may be incurred.
Explanation: Good budgeting requires that appropriations for the full costs of
asset acquisition be enacted in advance to help ensure that all costs and benefits
are fully taken into account at the time decisions are made to provide resources.
Full funding with regular appropriations in the budget year also leads to tradeoffs
within the budget year with spending for other capital assets and with spending
for purposes other than capital assets. Full funding increases the opportunity to
use performance-based fixed price contracts, allows for more efficient work
planning and management of the capital project (or investment), and increases
the accountability for the achievement of the baseline goals.
When full funding is not followed and capital projects (or investments) or useful
segments are funded in increments, without certainty if or when future funding
will be available, the result is sometimes poor planning, acquisition of assets not
fully justified, higher acquisition costs, cancellation of major investments, the
loss of sunk costs, or inadequate funding to maintain and operate the assets.
DOD Directive 7000.14-R (June 2004). Section 010202(A) of DOD
Directive 7000.14-R on budget formulation and presentation (updated June 23, 2004)
states (underlining as in the original):
Policy for Full Funding. It is the policy of the Department of Defense to fully
fund procurements that are covered within the procurement title of the annual
DOD Appropriations Act. There are 2 basic policies concerning full funding.

CRS-33
1. The first is to provide funds at the outset for the total estimated cost of a given
program so that the Congress and the public can be fully aware of the dimensions
and cost when the program is first presented in the budget.
2. The second is to provide funding each fiscal year to procure a complete, usable
end item. In other words, an end item budgeted in a fiscal year cannot depend
upon a future year’s funding to complete the procurement. However, efficient
production of major defense systems has necessitated two general exceptions to
this policy — advance procurement for long lead-time items and advance
economic order quantity (EOQ) procurement. EOQ is normally associated with
multiyear procurements but can be requested for annualized procurements on an
exception basis for unusual circumstances (such as combined parts buys for a
block of satellites). Both efforts must be identified in an Exhibit P-10, Advance
Procurement, when the Budget Estimate Submission is submitted to OSD and
when the President’s budget request is submitted to the Congress.30
30 U.S. Department of Defense. Comptroller. Financial Management Regulation, Volume
2A, Budget Formulation and Presentation
. Washington, 2004. (DOD 7000.14-R, June
2004) pp. 1-13 and 1-14. For the text of this directive on the Internet, go to:
[http://www.dtic.mil/comptroller/fmr/02a/].
Paragraphs 3 and 4 of Section 010202(B) define advance procurement and economic
order quantity (EOQ) procurement as follows (underlining as in the original):
3. Advance Procurement (Long Lead-time Items). Advance procurement requests
for long leadtime items shall be limited to the end items in major procurement
appropriations. Long lead-time procurements shall be for components, parts, and
material whose lead-times are greater than the life of the appropriation (3-5
years). In some circumstances, Advance Procurement is also warranted when
items have significantly longer lead-times than other components, parts, and
material of the same end item or when efforts must be funded in an advance
procurement timeframe in order to maintain a planned production schedule. For
new development programs, the planned production schedule should be based on
a full funding basis without the use of long lead material. Planning the program
content this way provides additional flexibility should development delays arise.
When advance procurement is part of the program, however, the cost of
components, material, parts, and effort budgeted for advance procurement shall
be relatively low compared to the remaining portion of the cost of the end item.
Each budget request for advance procurement shall represent, at a minimum, the
termination liability associated with the total cost of the long lead-time
components, material, parts, and effort for which the advance procurement
request is being made. The termination liability should not cover the cost of the
end item budgeted in the following fiscal year(s). The full cost of components,
material, parts, and effort included in the advance procurement request should
be budgeted in the FYDP consistent with full funding procedures. The budget
requests will properly debit and credit advance procurement budget requests as
defined in Exhibits P-1, P-5, P-10 and P-40 instructions.
4. Economic Order Quantity (EOQ) Procurement. EOQ is normally associated
with multiyear procurements but can be requested for annualized procurements
on an exception basis for unusual circumstances (such as combined parts buys
for a block of satellites). It is the general policy of the Department of Defense
not to create unfunded contract liabilities for EOQ procurements. Rather,
(continued...)

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Congressional Hearings and Reports
This section presents excerpts from five sources that discuss in some detail the
origins of and rationale for the full funding policy. The excerpts also provide
examples of how support for the policy has been periodically reaffirmed over the
years by Congress, the General Accounting Office (GAO), and DOD. The
documents are a 1969 GAO report, a 1973 House Appropriations Committee report,
a 1978 House Budget Committee hearing, a 1996 GAO report, and a 2001 GAO
letter report and briefing.
1969 GAO Report. A 1969 GAO report on the full funding provision31
outlined the origins, rationale, and early DOD regulations governing the policy.
Although it is a long excerpt (about 4 pages as reprinted here), it is significant as an
early and detailed recapitulation of the history of the full funding policy:
The concept of full funding was initially applied to Navy shipbuilding
authorized by the act of March 10, 1951 (65 Stat. 4).32 Prior to the execution of
30 (...continued)
funding for EOQ procurements shall be included in advance procurement budget
requests unless an exception to the general policy is granted by the
USD(Comptroller). The EOQ procurement may satisfy procurement
requirements for no more than five program years. Unless it would be more
effective to fully fund the EOQ, or the USD(Comptroller) has granted an
exception to the general policy to allow inclusion of EOQ costs in a cancellation
clause, the advance procurement funding for an EOQ procurement shall cover,
at a minimum, the estimated termination liability of the EOQ procurement.
31 Excerpt from GAO report of February 17, 1969, entitled “Application of the Full Funding
Concept and Analysis of the Unobligated and Unexpended Balances in Selected
Appropriations,” reprinted as Enclosure I to GAO letter report B-165069 of February 23,
1978 (letter to The Honorable Butler Derrick, Chairman, Budget Process Task Force)
“regarding the advisability and feasibility of applying the full funding concept to additional
programs and activities in the Federal Budget.”
32 The GAO report does not explain how or why the principle came to be applied to the
shipbuilding program that was authorized by this law. The explanation apparently lies
outside the text of this act itself, since the act does not contain any language that on its face
creates a statutory basis for the full funding policy. Described as “An Act to authorize the
construction of modern naval vessels, and for other purposes,” the act is somewhat
analogous to the Shipbuilding and Conversion, Navy (SCN) portion of today’s defense
authorization and appropriation bills. It simply authorizes the construction, acquisition,
conversion of Navy ships (Sections 1, 2), authorizes the appropriation of such sums as may
be necessary for these ships (Section 3), places limits on selling, transferring, or otherwise
disposing of Navy ships (Section 4), and rescinds authorizations for Navy ships made in four
laws passed between 1941 and 1943 (Section 5). The last of these provisions, however, may
have some bearing on the situation leading to the adoption of the full funding policy: As
reprinted in United States Code Congressional and Administrative Service (82nd Congress
— First Session, 1951, Volume 2, pages 1336-1337), the Senate Armed Services
Committee, in its report (S.Rept. 118 of February 21, 1951) on the bill (H.R. 1001) stated:
Section 5 of the bill rescinds certain of the outstanding authorizations [for
(continued...)

CRS-35
the act, the Navy shipbuilding program operated under contract authorizations
with funds appropriated in annual increments as estimated to be required for
contract expenditures during the budget year. After passage of the act, the
Congress appropriated funds for the entire cost of Navy shipbuilding programs
as then envisaged on the basis of prevailing prices, regardless of the period of
expenditures under the individual contracts. No provision was made for
anticipated increases in costs of materials and labor.
In a letter dated May 15, 1957, to the Secretary of Defense, Congressman
[George Herman] Mahon, as Chairman of the Department of Defense
Subcommittee, House Committee on Appropriations, stated, in part, that:
“The general prevailing practice of this Committee is to provide funds at
the outset for the total estimated cost of a given item so that the Congress
and the public can clearly see and have a complete knowledge of the full
dimensions and cost of any item or program when it is first presented for
an appropriation.
“During the course of these hearings, the Committee has learned that one
or more contracts have been executed for material on a partially funded
basis with the apparent expectation of completing the financing by
ultimately fully obligating the transactions with succeeding years
appropriations.”
* * * * *
“It is recommended that all necessary action be taken to prevent such
practice in the future and to insure that procurement funds are administered
so as to accomplish the full program for which the appropriation was
justified.”
32 (...continued)
ships] presently held by the Navy. It is the opinion of the committee that this is
an incomplete approach to a problem which must be solved at the earliest
possible moment. Checks indicate that there are many additional authorizations
still outstanding under which the Navy could construct or convert [ship] tonnage
which makes it extremely difficult for the committee to visualize just what is the
current situation insofar as authorization to construct vessels is concerned
.
Accordingly, the Navy Department has been instructed to submit to the
Congress at the earliest possible date legislation which will clean up all
outstanding [ship] authorizations which are not needed to implement the present
[naval modernization] program. The committee was informed that such
legislation has been drafted and is in [the] process of being cleared by the
executive branch for submission to the Congress. For this reason the committee
does not intend to recommend any changes in section 5 of the bill as it passed the
House but fully expects that this plan of cancelling old authorizations be
completed in a systematic manner within the shortest time possible. (Emphasis
added.)
The committee’s report also states: “The bill authorizes a total of 140 major new vessels
weighing approximately 500,000 tons, and the conversion of 292 vessels. The cost of the
program is $1,070,949,000 for new construction and $1,297,143,000 for conversion, totaling
$2,358,092,000.” This may be a statement of the fully funded cost of the ships in question.

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On May 21, 1957, the Office of the Secretary of Defense issued DOD
Directive 7200.4[,] “Funding of Procurement Contracts and Interdepartmental
Requests and Orders for Procurement,” which had been in preparation. This
directive was responsive to the suggestions expressed by Congressman Mahon
in his letter of May 15, 1957. The directive was issued for the purpose of
ensuring the orderly execution of the procurement programs within the
appropriations and funds available. It states in part, that:
“No procurement of material, equipment, or work or services in connection
therewith shall be directed or authorized unless adequate appropriations
and funds are available under the applicable Department of Defense
Financial Plan (1) for obligation, (2) set aside in the form of a commitment,
or (3) set aside in a reserve account in an aggregate amount sufficient (a)
to complete the procurement of a specified number of end items (including,
where applicable, initial spares and spare parts) usable either in service
units or for test and evaluation, or (b) when specifically provided for under
a current apportionment of funds, to complete a pre-production program or
procure components in advance of the fiscal year in which the related
programmed end item is directed to be procured.”
The directive also requires that:
“... all estimates shall be based upon the latest available firm prices. In the
event firm prices are not available the best current working estimate of cost
shall be used and adjustments will be made promptly when evidence of
significant variation in costs becomes available.”
The directive expressed funding policies for all procurement actions
subsequent to fiscal year 1957 and requires that all procurements not wholly
consummated but entered into up and including fiscal year 1957 be modified to
conform to the full funding concept. Procurements from research and
development appropriations are not subject to the provisions of the directive, and
other procurements may be specifically excepted by the Secretary of Defense
from its provisions. Under these provisions, exceptions were granted to the Air
Force for activities undertaken under procurement appropriations for
development-type projects, such as the intermediate range ballistic missile and
the intercontinental ballistic missile.
Though the directive does not employ the term “full funding,” it states the
concepts which express the essentials of full funding.
Further, in a letter dated June 22, 1957, to the Chairman of the
Subcommittee on the Department of Defense, Senate Committee on
Appropriations, the Assistant Secretary of Defense (Comptroller) summarized
the answers to certain questions which had arisen during the hearings on DOD
appropriations concerning DOD Directive 7200.4. This letter, subsequently
placed in the record of the hearings, explained the provisions of the subject
directive and its implementation in fulfillment of the full funding principle
which, it noted, had been applied generally by the Congress in providing funds
for DOD procurement programs. DOD officials still cite the letter as
authoritative in describing their procedures. In illustration of the full funding
principle, the Assistant Secretary stated in his letter that:

CRS-37
“It has the merit of providing, at one time, for the total estimated cost of a
given item or program so that the Congress and public can clearly see its
full dimensions and costs at the time it is first presented for approval and
appropriations. As you are well aware this system provides that when any
Department directs a contracting officer to procure a hundred aircraft,
tanks, etc., funds must be available (and set aside — some for obligation at
once and some for obligation at a later date) to cover the total estimated
cost to be incurred in completing delivery of one hundred usable end items
plus their initial spares and spare parts when required.”
The letter from the Assistant Secretary also clarified the use of full funding
of preproduction preparations for new items to be procured and placed in
production in a subsequent year. The latter clarified also the treatment of advance
procurement of long-lead-time components, budget estimating, and cost increases
under the full funding concept.
The military services issued formal implementation instructions on the full
funding concept at different points in time. The Secretary of the Navy
Instruction 7043.2 was dated June 22, 1957. Army Regulations 37-42 was [sic]
issued on July 1, 1957. A letter from the Deputy Chief of Staff, Material, United
States Air Force, to the Commander, Air Force Materiel Command,
implementing DOD Directive 7200.4 was dated August 20, 1957.
As noted [above], the Air Force was granted exceptions from the full
funding requirements for certain programs. In the fiscal year 1963 budget, these
included the ATLAS, TITAN, MINUTEMAN, and SKYBOLT missile
procurement programs which were incrementally funded to cover only
expenditures plus contractor commitments.
The Assistant Secretary of Defense (Comptroller) felt, however, that the
capability existed in 1962 to develop realistic programs and budgets for Air
Force ballistic missiles on a fully funded basis and establish a consistent policy
for funding all procurement programs.
Subsequently, the Deputy Assistant Secretary of Defense (Comptroller)
issued instructions to the military services on March 30, 1962, that the fiscal year
1964 budget be developed on the basis of providing new obligational authority
to fully fund all budget line items and specifically the Air Force’s ATLAS,
TITAN, MINUTEMAN, and SKYBOLT missile procurement programs.
It was recognized with the Office of the Secretary of Defense that the
implementation of the full funding policy would require a change in Air Force
missile contracting from the “work effort” basis to the basis of the total cost of
delivery for a specific number of missiles. The exception for Air Force ballistic
missiles, which had been in effect for several years, represented a carry-over of
research and development funding policies of those items.
Shipbuilding has been the procurement program most consistently reviewed
and revised within DOD with respect to full funding. This is due to the length
of procurement lead time, 3 to 7 years depending primarily on the type of ship.
Procedures have been refined as the need arose from the unique nature of the
product. Prior to the fiscal year 1961 budget, ship cost estimates were based on
the design concept and labor and material rates existing at the time the estimates
were prepared with increases over the initial estimates being provided for by

CRS-38
requesting additional funds in subsequent years or by reducing shipbuilding
programs.
The fiscal year 1961 budget initiated a new policy in financing shipbuilding
programs termed “end cost” budgeting. Construction and conversion cost
estimates in that budget represented the full amount required to complete all
ships in the 1961 fiscal year and prior years’ programs and included allowances
for such growth factors as design and minor characteristics changes and changes
in labor and material rates which would affect costs during construction and
conversion periods.
Through the fiscal year 1965 budget, the projected costs included estimates
for the correction of deficiencies in a new ship through its first overhaul. This
period was curtailed by NavShips Instruction 7301.25A, dated November 24,
1967, to a period of 11 months following preliminary acceptance trials or through
post shakedown availability, whichever is earlier, for fiscal year 1964 and
subsequent ship programs.
A recent Navy Program/Budget Decision[,] “SCN [Shipbuilding and
Conversion, Navy] Financial Policy and Funding of Prior Year Programs,”
approved by the Deputy Secretary of Defense on December 9, 1968, refined the
definition of full funding as it applied to ships. Estimates for outfitting and
postdelivery deficiency corrections would be funded when required, that is
funded on a lead-time basis rather than as part of the basic estimate. This change
in application of the full funding concept to shipbuilding put shipbuilding
procurement on the same basis as aircraft and electronics procurement with
respect to postdelivery costs and outfitting. It also resulted in a substantial
reduction of fiscal year 1969 and prior years’ funding requirements for
shipbuilding programs still in process.
Bureau of the Budget [now Office of Management and Budget] Circular
No. A-11, issued in July 1962, stated that:
“Requests for major procurements and construction programs will provide
for full financing of the complete cost...”
A revision to Circular A-1133 on July 25, 1968, stated:
“Request for major procurement programs will provide for full financing
of the entire cost.”
Although the Bureau of the Budget uses the terms “full financing,”
“complete cost,” and “entire cost” and the Office, Secretary of Defense, uses the
term “total cost of an end-item” as stated in DOD Instruction 5000.8 “Glossary
of Terms Used in the Areas of Financial, Supply and Installation Management,:
dated June 15, 1961, it is generally understood that all four terms refer to the
same concept as does the term “full funding.”
33 The GAO report at this point states in a footnote: “The revision treated the financing of
construction programs separately.”

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To supplement the concept of full funding as expressed in DOD Directive
7200.4 quoted [above], we have formulated the following expression of the
concept based on our discussions with DOD personnel.
Full funding exists when adequate obligational authority is available in the
procurement appropriation to meet the currently estimated cost of a budget
line item. A budget line item includes a specific quantity of end items, the
procurement of which is authorized to be initiated in the program year.
1973 House Appropriations Committee Report. In its report (H.Rept.
93-662 of November 26, 1973) on the FY1974 DOD Appropriation Bill (H.R.
11575), the Committee on Appropriations affirmed the full funding policy and issued
a warning against the abuse of the exception permitting advance procurement
funding:
The Committee is concerned that there is a growing tendency in the
Department of Defense (DOD) to abuse the advance procurement exception to
the long-established principle of “full funding” the procurement appropriations.
It is important to understand that the technique of “advance procurement” is
intended to be a well defined and narrowly-applied exception to a general rule.
The basic rule of financing procurement appropriations, commonly known as
“full funding”, is that each annual budgetary request for a quantity of end items
of military equipment will contain all of the obligational authority required to
deliver those end items in a complete and militarily useful fashion. Said another
way, no procurement budget request should be dependent upon future year
appropriations to make it whole.
This general rule of “full funding” is well defined in DOD’s own Directive
7200.4. This same directive also clearly defines and limits the one recognized
exception to “full funding”, i.e., the advance procurement technique. Where an
end item of military hardware contains components meeting specified criteria,
it is permissible for those components to be budgeted in the year prior to the year
in which their intended end items will be budgeted....
The foregoing rules have been carefully drawn after extensive discussions
between Congressional staff members and representatives of the DOD. They
represent sound policy. Unfortunately, the Department of Defense has not
always adhered to these rules....
The Secretary of Defense is requested to personally review advance
procurement funding requests proposed for the fiscal year 1975 budget in light
of the foregoing direction and DOD Directive 7200.4. If there are future abuses
of the advance procurement funding concept, the Committee will have to
reconsider the advance procurement technique itself.34
34 H.Rept.93-662, 147-148.

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1978 House Budget Committee Hearing. The full funding policy was
reviewed at a 1978 hearing before a House Budget Committee task force on budget
process. The hearing focused on the Carter Administration’s proposal to expand the
application of the full funding policy to additional programs in the Federal budget.35
At this hearing, John R. Quetsch, Principal Deputy Assistant Secretary
(Comptroller), Department of Defense, provided DOD’s perspective on the full
funding policy. He began by summarizing the history of the policy in a fashion very
similar to the above excerpt from the 1969 GAO report: He stated that the policy
was first applied to the Navy shipbuilding program authorized by the act of March
10, 1951,36 and “That once the principle was established for shipbuilding it was
gradually applied to procurement programs in general.” He cited the May 15, 1957
letter to the Secretary of Defense from Representative Mahon and the Secretary’s
issuance on May 21, 1957, of DOD Directive 7200.4, which he, like GAO,
characterized as “responsive to the suggestions expressed by Congressman Mahon
in his letter of May 15, 1957.” He stated that
In 1961, because of the problems that were developing as a result of the
exception for shipbuilding wherein costs for changes and escalation were not
being included in the original budget request, the Department [of Defense]
proposed, and both the House Appropriations Committee and the Senate
Appropriations Committee concurred the funds should be included for all
predicted costs through completion of ship construction.
He stated that as a result of GAO’s 1969 report, “DOD directive 7200.4 was
updated and strengthened on October 30, 1969. This version of the directive
continues in full force and effect today.” He then noted the endorsement of the
35 U.S. Congress. House. Committee on the Budget. Task Force on Budget Process. Full
Funding of Capital Expenditures, Hearing Before the Task Force on Budget Process of the
Committee on the Budget, House of Representatives, 9th Cong., 2nd Sess., February 22, 1978.
(Washington: GPO, 1978)
36 Secretary Quetsch’s testimony, like the 1969 GAO report, does not explain how or why
the principle came to be applied to the shipbuilding program that was authorized by this law.

CRS-41
policy in the 1973 House Appropriation Committee report.37 As part of a list of
“some considerations which are derivative from the policy,” he stated:
Once funds are appropriated by the Congress, the principle creates an incentive
for us to try to manage the program within our estimate....
The whole system for the reprogramming of funds for procurement and military
construction programs, a system which has been carefully worked out with the
Congress over many years, is predicated on the full funding principle. If we were
able to apply all current year funds to current year requirements and defer
consideration of cost growth to the year in which the expenditure would be
required, the Congress and the public would lose substantial visibility....
If major procurement and construction programs were incrementally funded,
future Congresses would be committed to financing the balance of incremental
starts....
Incremental funding would inject more uncertainty into our planning and cause
the defense industry to be more skeptical of the stability of DOD procurement
and construction programs. This, we believe, would translate into higher costs
because long-term, cost-saving capital investments are highly dependent upon
perceived program stability.
Comparing full funding to incremental funding in terms of its effects on
unobligated balances, he stated:
Now, if the objective were to reduce unobligated balances, this incremental
approach does that. However, some unobligated balances would still be required
to cover contingencies, termination liabilities, and other uncertainties.
The key point, in my judgment, centers on the fact that the expenditures,
under both approaches, are the same. It is expenditures and not unobligated
balances which influence the Government’s need to borrow money. Since the
37 He also noted that the House Appropriations Committee affirmed the full funding policy
in its report (H.Rept. 94-530 of October 3, 1975) on the FY1976 military construction
Appropriations bill (H.R. 10029). The committee’s affirmation, which appears on pages 22-
23, relates to military construction projects rather than to the procurement of weapons and
equipment in the DOD appropriations bill. The committee stated that it
notes the comments of the Committee on Armed Services of the Senate on
phasing or incrementing the authorization of major projects. The Committee
agrees with the Committee on Armed Services of the Senate’s comments on the
undesirability of such procedures, and wishes to remind the services and the
Department of Defense that it is the policy of the Committee on Appropriations
of the House of Representatives to provide full funding of major construction
programs for the military. In those few situations where phased funding is
necessary to provide adequate congressional control over the use of appropriated
funds, partial funding of certain projects may be necessary, but these instances
are few and far between and usually result from unexpected developments in a
major construction program or poor management. In particular, partial funding
is not to be recommended as a way of sharing the wealth by dividing a service’s
annual construction budget between as many major claimants as possible.

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approaches are equal in this regard, the Department of Defense continues to
prefer full funding for procurement and military construction because of the
stronger management control and discipline inherent in this policy.
While there is the temptation to reduce a given fiscal year’s budget by
abandoning the full funding policy and applying prior year unobligated balances,
this temptation should be resisted. The net result would be little change in our
annual requests for appropriations. Instead of dealing with the full cost of new
starts in our procurement and construction programs, the Congress would have
to address not only the incremental costs of new starts, but also the incremental
requirements of previously approved programs. In the absence of any advantages
of incremental funding in the areas of reduced expenditures or requirements for
budget authority, the advantages of full funding in the other areas I mentioned
are evident.38
When asked whether DOD has experienced any operational or procedural
problems with the full funding policy, he replied:
We have. We like the policy, but nothing is free. There are two kinds of
problems, basically — those internal and those external. The external ones I
think you are familiar with; primarily the criticism of our unobligated balances.
We basically feel if you go for the principle which is good you have to
accept the unobligated balances. I will discuss the internal ones. Basically, they
are the human resistance to discipline. We expect a fully funded program to be
some sort of commitment on the part of the program manager that he can produce
that program, that end result, that thing, at that price and what often happens is
people do not like to do that. They want to get their foot in the door — they want
to get us; they want to get OMB; they want to get the Congress committed to
programs to the point where we have to bail them out. Almost all the internal
procedure problems stem from that.
We have to review, as almost every level in DOD does, the cost estimates
to make sure they are realistic and achievable. We have not always been
successful.
Again, going back to the shipbuilding program which is most dramatic, we
have to include line items for cost growth and escalation because our original
estimates were not adequate particularly in a period of high and unpredicted
inflation.
We have resisted that in recent years successfully but it can be a problem
when you run into unexpected inflation or any other unexpected amounts.39
When asked whether he thought DOD has saved any money by using the full
funding approach, he replied:
Yes, sir, sometimes at some expense to other programs, that is in enforcing
the discipline.
38 Ibid, p. 10-14.
39 Ibid, p. 16-17.

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In some cases, rather than come back to the Congress for the [additional
needed] money, we have had to cancel programs in order to complete others, or
have had to reduce some programs in order to complete others, but we certainly
feel the discipline on the program manager has paid off substantially because he
does know that he has made a commitment and he will have to live with it and
that he or some fellow program manager will suffer if he does not come in at the
budgeted price.40
Later in the hearing, he stated:
By appropriating the money on a full finding basis, you automatically subject it
to the reporting and accounting discipline of the agencies involved. In addition,
you have an obligated balance to look at under full funding.
You do not have any unobligated balances to look at under incremental
funding. You have no measure on the books. You have no original plan which
you can hold the agency to and actually expect them to reflect on the books.
They can come up every year and explain what happened in the preceding year,
but not by month [sic].
You cannot see how the project manager is spending against his original
estimate and his obligation against his original estimate. It [full funding] gives
you on the books of the Government, a record.41
At this same hearing, W. Bowman Cutter, Executive Associate Director for
Budget at OMB, testifying in support of the Carter Administration’s proposal to
apply the full funding concept more comprehensively through the federal budget,
stated:
The President believes that full funding is desirable because it:
Provides a clearer understanding of the total effect of budget proposals, since
full funding requires appropriations in terms of total costs for an entire project
at the time any funding is provided.
Increases flexibility in programming and the ability of the Government to speed
up the project if changes in economic conditions warrant acceleration.
Permits construction progress at more economic rates with resulting savings to
the Government by providing program continuity and eliminating uneconomic
start-up and stop costs that sometimes accompany incremental funding.42
Donald Scantlebury, Director of Financial and General Management Studies at
GAO, stated at the hearing:
The significance of the full-funding concept is that it permits an agency to
contract for the full cost of an item or items, such as ships, with the knowledge
40 Ibid, p. 17.
41 Ibid, p 22.
42 Ibid, p. 5. Italics as in the original. See also page 4.

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that full obligational authority is available to complete the item or items and that
completion of the work will not be held up or stretched out by budget cuts or
funding delays.
Prior to the institution of full funding, funds were provided in annual
increments. Shipbuilding has often been used as an example of explaining the
full-funding concept because of the length of procurement lead which ranges
from 3 to 7 years depending primarily on the type of ship.... Each year authority
was granted for only a portion of the ship or ships being contracted for. Over the
length of the contract budget reductions and constraints could delay timely
completion of the ships and result in additional cost of the total ship....
We believe that full funding has the advantage of permitting agencies to
complete long-term projects at optimum efficiency and reduces delays caused by
funding restraints.43
1996 GAO Report. A 1996 GAO report on budgeting for federal capital
assets44 stated:
Despite the potential problems for individual agencies, up-front funding is
critical to safeguarding Congress’ ability to control overall federal expenditures
and to assess the impact of the federal budget on the economy. Without up-front
funding, projects may be undertaken without adequate attention being given to
their overall costs and benefits. Moreover, failure to fully funding projects
before they are undertaken can distort the allocation of budge resources and
obscure the impact of federal budgetary action on the private sector. Only a few
agencies, including the Army Corps of Engineers (one of our case studies) have
been exempted from the up-front funding requirement. Despite these agencies’
use of incremental funding,45 OMB has taken steps to encourage consistent
application of up-front funding across government in the future. 46
The report amplified on these points two pages later:
Although possibly problematic for individual agencies, up-front funding has long
been recognized as an important tool for maintaining governmentwide fiscal
control. The requirement that budget authority be provided up-front, before the
government enters into any commitment, was established over 100 years ago in
the Adequacy of Appropriations Act and the Antideficiency Act. These acts
responded to past problems in which agencies committed the government to
payments that exceeded the resources made available to them by Congress.
43 Ibid, p. 6.
44 U.S. General Accounting Office, Budget Issues: Budgeting for Federal Capital.
GAO/AIMD-97-5, Nov. 1996.
45 The GAO report has a footnote at this point defining incremental funding as follows:
“Incremental funding occurs when the Congress provides funds for a capital acquisition
based on the obligations estimated to be incurred with a fiscal year when such funds will not
produce a usable asset.”
46 GAO/AIMD-97-5, op cit, p. 34.

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The importance of the principle was reinforced by the 1967 Report of the
President’s Commission on Budget Concepts, which emphasized the primary
purposes of the budget as being the efficient allocation of resources and the
formulation of fiscal policy to benefit the national economy. The up-front
funding requirement advances both. It is essential for efficient resource
allocation decisions because it helped ensure that the Congress considers the full
cost of all proposed commitments and makes trade-offs based on full costs. To
be useful in the formulation of fiscal policy, the budget must be able to highlight
the impact of the federal budget on the economy. For this purpose, the
requirement for up-front funding also serves the Congress well. The point at
which capital spending has the largest and most direct economic impact on the
private sector occurs at the point the commitment is made — that is, up-front —
not over the expected lifetime of a long-lived asset.
Failure to recognize the full cost of a particular type of expenditure when budget
decisions are being made could lead to distortions in the allocation of resources.
In other words, if particular types of spending, such as for physical assets, were
given preferential treatment in the budget by virtue of recognizing only a fraction
of their total cost, then it is likely that relatively more spending for those types
of assets would occur. While advocates for purchasing some federal assets may
see this as a desirable end, such an outcome may not accurately reflect the
nation’s needs. In particular, other types of federal spending that also provide
long-term benefits but that are not physical assets (including research and
development and spending for human capital) would be arbitrarily disadvantaged
in the budget process, even if national priorities remain unchallenged.
Furthermore, failure to fully fund capital projects at the time the commitment is
entered into can force future Congresses and administrations to choose between
having an unusable asset and continuing projects’ funding for years even after
priorities may have changed. For example, if the Congress provides funding for
only part of a project and that part is not usable absent completion of the entire
project, then the Congress and the administration may feel compelled to continue
funding in the future to avoid wasting the initial, partial funding that was already
spent. Thus, if capital projects are begun without full funding, future Congresses
and administrations may, in effect, be forced to commit a greater share of their
annual resources to fulfilling past commitments and thus have less flexibility to
respond to new or changing needs as they arise.47
In the final chapter of its report, GAO stated:
Full up-front funding is one of the tools that has been important to facilitating
fiscal control and comparisons of the long-term costs of spending alternatives.
An essential part of prudent capital planning must be an adherence to full up-
front funding. When full up-front funding is not practiced, the Congress risks
committing the government to capital acquisitions without determining whether
the project is affordable over the long-term. Incremental funding also compels
future Congresses to fund a project in order to prevent wasting resources
previously appropriated. As budget constraints continue, incremental funding
may lock the Congress into future spending patterns and reduce flexibility to
respond to new needs. In the budget process, fully funded projects may be
47 Ibid, p. 36-37.

CRS-46
disadvantaged in competition with incrementally funded projects — even when
the fully funded projects actually cost less in the long run.
However, full up-front funding can impede agencies’ ability to economically acquire
capital in an environment of resource constraints. Full up-front funding of relatively
expensive capital acquisitions can consume a large share of an agency’s annual
budget, thereby forcing today’s decision-makers to pay all at once for projects with
long-lived benefits. While various capital budgeting proposals have been advanced
to address this, the proposals themselves have raised significant concern because of
their potential diminution of fiscal accountability and control. Consequently,
agencies need financing tools that can provide the fiscal control of up-front funding
and can enable them to make prudent capital decisions within the current unified
budget frame work.48
GAO observed and concluded the following:
The requirement of full up-front funding is an essential too in helping the
Congress make trade-offs among various spending alternatives. However, in an
environment of constrained budgetary resources, agencies need tools that can
help facilitate these trade-offs and that enable them to accommodate up-front
funding. Furthermore, to successfully implement GPRA’s requirement for
program performance measures,49 managers will also need to know the full costs
of their programs — including capital usage.
Some have recommend that the government adopt a full-scale capital budget, but
this raises major budget control issues and may not be necessary to address
agency-identified impediments to capital spending. Rather, our case studies50
demonstrate that more modest tools, such as revolving funds, investment
components, and budgeting for stand-alone stages, can help accommodate up-
front funding without raising the congressional or fiscal control issues of a
separate capital budget.51
As a “matter for congressional consideration,” the GAO report recommended the
following:
Although requiring that budget authority for the full cost of acquisitions be
provided before an acquisition is made allows the Congress to control capital
spending at the time a commitment is made, it also presents challenges. Because
the entire cost for these relatively expensive acquisitions must be absorbed in the
48 Ibid, p. 81.
49 This is a reference to the Government Performance and Results Act of 1993.
50 The GAO report was based on case studies of five government agencies: the Army Corps
of Engineers, the Coast Guard, the Interagency Fleet Management System (IFMS) and
Public Buildings Service (PBS) of the General Services Administration (GSA), and the U.S.
Geological Survey (USGS). The report also provides supplementary information on the
Food and Drug Administration (FDA), the Forest Service, the Information Technology
Service (ITS) of GSA, and the National Oceanic and Atmospheric Administration (NOAA).
51 GAO/AIMD-97-5, op cit, p. 80.

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annual budget of an agency or program, fixed assets may seem prohibitively
expensive despite their long-term benefits.
This report describes some strategies that a number of agencies have used to
manage this dilemma. The Congress should consider enabling agencies to use
more flexible budgeting mechanisms that accommodate up-front funding over the
longer term while providing appropriate oversight and control. For agencies
having proven financial management and capital planning capabilities and
relatively small ongoing capital needs, these techniques could include revolving
funds and investment components. Such techniques enable agencies to
accumulate resources over a period of years in order to finance certain capital
needs, promote full costing of programs and activities by including costs related
to capital usage in program budgets, and provide a degree of funding
predictability to aid in long-range planning. As GPRA move toward full
implementation, these and other tools may take on increasing importance in
helping managers and the Congress to identify program costs and to more
efficiently manage capital assets.52
2001 GAO Letter Report and Briefing. In response to an August 2000
request from the Senate Budget Committee, the GAO prepared a briefing on
incremental funding of capital asset acquisitions, including an assessment of “the
implications for future DOD budgets if the Navy’s shipbuilding and conversion
account were to change from incremental to full funding....” The briefing was given
to the staff of Senate Budget Committee in December 2000, and was subsequently
given to staff from the Senate Armed Services Committee, the Senate Appropriations
Committee, and the House Appropriations Committee.
In February 2001, GAO prepared a letter to the Senator Pete Domenici, the
chairman of the Senate Budget Committee, and other congressional recipients,
summarizing the briefing and enclosing the briefing slides.53 As summarized in the
letter, the GAO briefing concluded the following, in part:
If the Navy shipbuilding and conversion account were to be moved from full to
incremental funding for a given period of time, this would not allow the Navy to
procure more ships for a given amount of funding. Additional ships would
require additional funding. After the initial year, incremental funding reduces
the amount of budget authority available to fund new ships in any given fiscal
year because a portion of the funding must be devoted to completing ships
partially funded in prior years. In addition, there is risk of cost growth associated
with all capital projects — cost growth has occurred with fully funded projects
as well as incrementally funded projects. Any cost growth on ships partially
funded in prior years would further reduce the funding available for new ships.
In addition, costs and commitments continue beyond the year depicted in the
briefing slides in all scenarios.
52 Ibid, p. 84-85.
53 Letter dated February 26, 2001, to The Honorable Pete V. Domenici, Chairman,
Committee on the Budget, United States Senate, from Paul L. Posner, Managing Director,
Federal Budget, Strategic Issues, General Accounting Office, on the subject “Budget Issues:
Incremental Funding of Capital Asset Acquisitions.” (GAO-01-432R Incremental Funding
of Capital Assets) 42 p. (4-page letter and 38 attached slides).

CRS-48
There are several other budgetary implications as well as acquisition
management issues related to incremental funding for the Navy and for agencies
in general. In general, full funding ensures that the full estimated costs of
decisions are recognized at the time that the commitment is made. Incremental
funding erodes future fiscal flexibility for programs such as shipbuilding because
funding is dedicated to completing procurements begun in previous years.
According to DOD and OMB officials, incremental funding also limits cost
visibility and accountability. These officials believe that acquisition estimates
are likely to increase because there would be an incentive to “low ball” the
estimate at the beginning. Additionally, contractors may hedge their bets on
pricing because they may not be able to take advantage of economies of scale
that can come with longer-term and more certain commitments.
The use of incremental funding and lease-purchase arrangements in the past has
had some negative consequences. For example, a 1996 GAO report54 cited
incremental funding as a key factor underlying Department of Energy project
cost overruns and schedule delays. Another GAO report55 found that the use of
long-term leases for auxiliary ships in the 1970s and 1980s resulted in higher
costs per ship.
Promoting effective management of capital asset acquisitions is important. We
recognize that some incremental funding for high technology acquisitions is
justified because, while such projects are intended to result in a usable asset, they
are closer in nature to research and development activities. However, for other
capital projects, as we have previously reported,56 full funding is an important
tool for maintaining governmentwide fiscal control. Failure to recognize the full
costs of proposed commitments when budget decisions are made could lead to
distortions in the allocation of resources.57
54 The GAO letter report at this point cites the following GAO report: “Department of
Energy: Opportunity to Improve Management of Major System Acquisitions
(GAO/RCED-
97-17, Nov. 26, 1996).”
55 The GAO letter report at this point cites the following GAO report: “Defense
Acquisitions: Historical Analyses of Navy Ship Leases
(GAO/NSIAD-99-125, June 25,
1999).”
56 The GAO letter report at this point cites the following GAO reports: “Accrual Budgeting:
Experiences of Other Nations and Implications for the Untied States
(GAO/AIMD-00-57,
Feb. 18, 2000) and Budget Issues: Budgeting for Federal Capital (GAO/AIMD-97-5, Nov.
12, 1996).”
57 Letter dated February 26, 2001, to The Honorable Pete V. Domenici, op cit, p. 2-3. The
passage as quoted here omits references at the end of each paragraph to the specific briefing
slides that discuss the points made in each paragraph.