search; selectivity in development; and greater selectivity in production." I further believe that the decisions which have to be made can be materially facilitated by greater emphasis upon consideration of our requirements in terms of major mission areas, such as strategic, tactical, and support, as well as in terms of specific major weapon systems. We are continually striving to improve the effectiveness of both approaches, in order to provide additional management devices upon which not only we in the executive branch, but also the Congress, can more confidently rely. I do not believe that the decision, whenever made, should be a forced decision based upon rigidly predetermined expenditure limitations. Certainly cost is a major consideration. But so too are military needs, weapon effectiveness, time, and produceability within the time period required. Costs must be considered in relation to these other important factors. As the committee so aptly pointed out in its report on the fiscal year 1961 appropriation bill, the imposition of expenditure ceilings for a given fiscal year, plus the effect of expenditures against prior years' appropriations and the current year's "fixed expenses" for operation and maintenance and for military personnel, creates an intolerable management burden in trying to find expenditure leeway for new programs without sacrificing essential going programs upon which substantial sums have already been expended." Paradoxically, this has forced more than a few program cancellations, stretchouts, and cutbacks when new obligational authority was no problem; that is, sufficient NOA was available to continue the programs as planned but expenditure controls precluded it. A good example is the cancellation of the F-108, a promising long-range interceptor which had to be canceled because expenditure problems forced a choice between the F-108 and other weapon systems. Our cost projections have enabled us to forecast-with reasonable accuracy-appropriations requirements and expenditures for succeeding years. While our techniques are yet far from perfected, and the entire process is subject to the dangers inherent in any kind of forecasting, our projections are proving to be very useful. We are able to get much earlier a "feel" for where we are headed in budget and are better able to tailor our programs to reasonable levels-without, we hope, costly major mistakes. There is one particular aspect in our budget forecasting which I wish to call to your attention-that is relating, where practicable, weapon systems cost to mission areas, as I mentioned earlier. This enables us to weigh the relative importance of our mission responsibilities. For instance, our fiscal year 1962 budget on a mission basis Las some $8.2 billion or 43.9 percent of the total for the strategic misson, some $2.2 billion or 12.7 percent for the tactical mission, some $2.4 billion or 12.8 percent for air defense, and some $5.9 billion or 36 percent for the support area. Dividing our budget into these mission areas over a period of years and projecting them into the future, using individual weapon systems as the primary basis for costing, gives us an invaluable "retrospective" look into the validity of or future planning. It enables us, in effect, to weigh in competitive dollar terms the advantages to be gained by the introduction of a variety of solutions to a given problem. These aspects of fiscal management set forth in the committee report offer a feasible means to good, long-range defense budgeting. We must avoid the practice of "1-year" budgeting-particularly as it impacts the spending process. I do not suggest here that expenditures can ever be ignored in either the defense budget process or subsequent program execution. I do say that the spending process is a phenomenon which requires a treatment quite different than that given other aspects of the annual budget derivation. So-called budget guidelines have given this fact too little recognition. PROGRAM, NOA, AND EXPENDITURE PROJECTIONS In response to this committee's desire for further projections of new appropriations and expenditures, which was indicated in its report on the fiscal year 1961 bill, I have furnished you tabulations which indicate program value, NOA, and net expenditures through fiscal year 1964. Lacking program approval beyond fiscal year 1962, it has been necessary to make some assumptions as to the direction of programs. For example, we have assumed that the leval of program effort would be roughly of the same magnitude as that reflected in the fiscal year 1962 budget. Operating expenses (Military Personnel, O. & M., and a large part of R.D.T. and E.) spend almost concurrently with the program. Therefore associated fiscal year 1963 and fiscal year 1964 expenditures must be provided for first, along with expenditures from prior year programs. These expenditures-those for current year operating programs and those which result from prior year capital-type programs are function of earlier decisions. They cannot be signifcantly influenced except by the most drastic kind of program upheaval. This aspect of the program/expenditure relationship has the effect of greatly restricting choices, and indeed possibilities, in the field of modernization. Since O. & M. and Personnel-operating overhead-are straight forward computations, I will limit my discussion to other areas. COST PROJECTIONS In the procurement area, the Aircraft account reflects a larg requirement for the B-70 than in prior years, which is of course w one would expect as the development effort progresses. The F-1 continues it a pstantial rate of production during this period i The EF-15 reaches production during this time period. The KC150 times in production at a rate somewhat higher than the ter progamed Other significant programs include the T-38 T-3 If the missile procurement account, MINUTEMAN costs as to increase along with quantity production. Increases are also for the GAM-87. ATLAS and TITAN costs decreases. equipping of the presently programed force is completed. The GAM 72 (QUAIL) and GAM-77 (HOUNDDOG) also reflect a 5:vivin trend. It is gesumed (consistent with the President's budget) that the relopment of the SOR aircraft will be completed and the ist in deton quantiting will be finanood in fiscal years 1963 and tour abs toptennis a sizable requirement in fiscal year 60 with, ment muling in fiscal year 196k T The "Other procurement" appropriation assumes that presently programed communication and control systems will continue to be prosecuted, with attendant substantial requirements for funding. Increased emphasis on future technology is assumed in the projection for research, development, test, and evaluation. In addition to the projections which I have discussed we are also furnishing to the committee projections of total estimated costs of the major weapon systems carried in the fiscal year 1962 budget. The specific systems involved can be discussed today, or in later detailed hearings. In concluding my discussion of this subject, I should like to remind the committee that these projections will change to the extent that the new administration may wish to amend the budget or to alter going programs. They certainly would change to some degree, anyway, due to the fact that defense programs are anything but static, as this committee is well aware. Therefore, the projections beyond the budget year can give one a "feel" for the problem, but should not be considered as fixing the size or composition of our forces for those years in any sense. Mr. SHEPPARD. We shall recess until 10 o'clock tomorrow morning. Mr. MAHON. We shall resume our hearing. FEBRUARY 21, 1961. Yesterday I had gone through my statement up to page 18. I had covered very briefly the makeup of the current budget. I discussed the new obligating authority, the program, obligations, expenditures, unobligated and unexpended balances. I then discussed the section in the committee's report last year on financial management, cost projections, weapons systems cost. We are now on page 18, "Working Capital Funds." That will be followed by budget highlights. Mr. MAHON. I was very much impressed with the budget statements made by representatives of the Army and the Navy. Mr. Sheppard acted as chairman of that committee yesterday afternoon. I had in appointment at the Department of State but I will read your atement and of course listen to the testimony today. You may proceed. WORKING CAPITAL FUNDS General FRIEDMAN. You have been provided a brochure setting forth the background and operation of the working capital funds. I will, therefore, talk but briefly to each of the elements involved. INDUSTRIAL FUND There have been no changes in the financing activities of the industrial fund during this past year. No changes are contemplated during al year 1962. Total revenues in fiscal year 1960 were $303.8 million. This amount veeded expenses by $12 million, mainly as a result of the operations f the airlift service: Total expenses ($291.8 million) included prorement of commercial airlift at $64 million. This is $21 million than the $85 million floor provided for such purpose in section. 1 of the Department of Defense Appropriation Act for fiscal year The $12 million profit earned by the airlift service during fiscal year 1960 has been returned to the U.S. Treasury in partial satisfaction of the $21 million shortfall. The balance ($9 million) was returned to the Treasury out of available fiscal year 1960 appropriations. Fiscal 1961 revenues and expenses are expected to balance out at $337.1 million. The net creditable commercial airlift for fiscal year 1961 is currently estimated at $75 million. This is $5 million less than the $80 million floor specified in section 531 of the fiscal year 1961 act. This shortfall will also be returned to the Treasury from current year appropriations. During the current year, the Airlift Service was assigned responsibility by the Office of the Secretary of Defense to reimburse the Post Office Department for commercial airlift of military airmail overseas. This new financial responsibility is currently estimated at $25.4 million and, since it was not considered by Congress in conjunction with section 531, it is not creditable commercial airlift against the reserve amount established by that section for fiscal year 1961. During fiscal year 1962, revenue and expense for the Air Force industrial fund are estimated at $342.3 million. Proposed language for fiscal year 1962 would exclude section 531 of the fiscal year 1960 Department of Defense Appropriation Act. Current plans anticipate that commercial transportation services must continue to be relied upon. Such use should not, however, take precedence over the efficient and economical utilization of military-owned transportation resources. STOCK FUND Scope and level of operation of the Air Force stock fund for fiscal year 1962 remain about the same as I discussed last year except for activities related to organizational clothing, medical-dental supplies and equipment, and certain general materiel stocks recently trans ferred to the newly established single manager in the Department of the Navy. On the basis of a thorough analysis of stock fund operations relat ing to organizational clothing and medical-dental supplies and equip ment, we determined that these classes of materiel could be manage just as effectively through normal supply management channels. I addition, the cost of operation would be less because of the eliminatio of dual controls on reporting systems. Consequently, with the ap proval of the Office of the Secretary of Defense, the Air Force wi eliminate organizational clothing and medical-dental supplies an equipment from the stock fund in fiscal year 1961. Sales and obligations, programed for some $1.3 billion in 1961, wi drop approximately $100 million in 1962 due primarily to the reduce scope of operations just discussed. A transfer of $30 million in cas to "Military personnel, Air Force," was effected in 1961. The transf of an additional $25 million is proposed for 1962. APPROPRIATION HIGHLIGHTS Having covered the fiscal aspects of our requests generally, accor ing to the major budget categories, I would like now to highlight t individual appropriations. For the committee's convenience, I ha included pertinent comparisons for the current year and the bud year, after the heading for each appropriation. The program of $4,116 million represents an increase of $43.4 million over the fiscal year 1961 amount and results primarily from computation of man-years. While the end strengths for 1961 and 1962 remain level at 822,900 the man-years for fiscal year 1962 are projected at 824,000. This is an increase of 8,043 man-years over the curent fiscal year 1961 projection. The lower man-years for fiscal year 1961 result from the fact that the actual end strength for fiscal year 1960 was 814,213, about 11,000 below the programed strength as included in the fiscal year 1961 budget. The program amount of $4,116 million consists of $4,063 million of new appropriations, plus $25 million cash transfer from the Air Force Stock Fund account and reimbursements of $28 million. A projected unobligated balance of $7.5 million for fiscal year 1961 was generated by a programed decrease in force levels subsequent to enactment of the fiscal year 1961 appropriation. For "Reserve personnel, Air Force," the budget includes $52 million $2 million less than that appropriated for fiscal year 1961. The flying unit structure will remain the same, that is, 15 troop carrier wings and 5 air rescue squadrons operating from 36 flying installations. However, an important change to the Air Force Reserve individual training program will be implemented in fiscal year 1962 as a result of a test program conducted this year. Basically, individual trainees are to be organized into recovery groups and base support units to increase the recovery and reaction. capability of the Air Force in its wartime mission. Reserve personnel assigned to these new units will be expected to participate in 48 training periods per year, of which 24 will be in paid status from funds included in this budget. The Air Reserve Officers' Training Corps program will be conducted at 173 institutions. This program is expected to provide the Air Force with approximately 3,600 commissioned officers in fiscal year 1962, of which about one-half will enter pilot or navigator training. 6686561-pt. 1——9 |