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Testimony: 

Before the Commission on the National Guard and Reserves: 

United States Government Accountability Office: 

GAO: 

For Release on Delivery Expected at 10:30 a.m. EDT: 

Wednesday, June 20, 2007: 

Guard and Reserve Personnel: 

Fiscal, Security, and Human Capital Challenges Should be Considered in 
Developing a Revised Business Model for the Reserve Component: 

Statement of David M. Walker: 
Comptroller General of the United States: 

GAO-07-984: 

GAO Highlights: 

Highlights of GAO-07-984, a testimony before the Commission on the 
National Guard and Reserves 

Why GAO Did This Study: 

Over 580,000 reservists have been activated for military operations 
between September 2001 and March 2007. The challenges of continuing to 
mobilize large numbers of reserve component servicemembers for ongoing 
operations while balancing their support to homeland defense missions 
have led to questions about whether changes are needed in the way the 
reserve components are structured and resourced, particularly in light 
of mounting 21st century fiscal imbalances. 

This testimony focuses on: (1) the nationís fiscal and security 
challenges and their implications for the Department of Defense (DOD) 
and the National Guard and Reserves; (2) the need for DOD to better 
align its reserve component business model, including human capital 
strategies, with the reserve forcesí current and future needs; and (3) 
the extent to which DODís current compensation system for reserve and 
National Guard personnel is helping the department to meet its human 
capital goals of recruiting and retaining a high-quality force. The 
testimony is based on GAOís body of work on the nationís long-term 
fiscal outlook, National Guard and reserve readiness, military 
personnel issues such as recruitment and retention, and the report GAO 
is issuing today on reserve and National Guard compensation issues. GAO 
has made several recommendations to address these challenges. 

What GAO Found: 

The nationís growing fiscal imbalance and changing security environment 
require a fundamental reexamination of defense activities, including 
the role and structure of the reserve components. The fiscal imbalance, 
which is due to factors such as mounting budget deficits and rising 
health care costs, could threaten the nationís future economy and 
national security. As the fiscal imbalance constrains federal funding, 
future defense budgets are likely to be affected. DOD faces significant 
fiscal challenges due to rising compensation and acquisition costs, 
military operations, and inefficient policies and business practices. 
To put DOD on a more sustainable path, GAO has suggested that DOD 
reexamine defense policies and practices, address high risk areas, and 
develop budgets that set clear priorities based on current and future 
threats. Reexamining reserve component policies and practices should be 
included as part of an overall DOD-wide effort to address long-term 
affordability and sustainability challenges. 

DODís heavy reliance on the reserve components in recent years to 
support military operations and homeland security needs has highlighted 
the need to better align the reservesí business model with their 21st 
century roles. GAOís work has shown that the reserve components face 
several human capital challenges that will need to be considered as 
part of an overall effort to develop a new business model. 
Specifically, GAOís past work has shown that the reserves face 
challenges including (1) recruiting and retaining members with needed 
skills, and (2) developing policies, procedures and business processes 
that facilitate a smooth transition between reserve and active duty 
status. GAO has made numerous recommendations to assist DOD in 
addressing these issues. 

DOD also does not know the extent to which its reserve compensation 
system is helping to meet recruiting and retention goals because (1) it 
has not established a strategy to identify the appropriate mix of 
compensation and (2) its approach does not provide decision makers with 
adequate transparency over total costs to compensate reservists, which 
have risen 47 percent since fiscal year (FY) 2000 in constant dollars. 
DODís and Congressí piecemeal approach of adding pays and benefits has 
contributed to a shift in the mix of compensation toward more deferred 
benefitsósuch as retirement pay and health careófrom 12 percent of 
total compensation in FY 2000 to 28 percent in FY 2006, primarily due 
to costs for enhanced health care for retirees. This allocation is 
questionable from an efficiency perspective since only 24 percent of 
those who join the reserves will ultimately receive retirement 
benefits. Further, reserve compensation costs are found in multiple 
federal budgets, which does not provide decision makers with adequate 
transparency over total costs. GAO is recommending today that DOD (1) 
establish an overall compensation strategy and (2) compile costs in a 
transparent manner to enable decision makers to determine the 
affordability, effectiveness, and sustainability of the reserve 
compensation system. DOD partially concurred with the recommendations. 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-984]. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Janet A. 
St. Laurent at (202) 512-4402 or stlaurentj@gao.gov. 

[End of section] 

Mr. Chairman and Members of the Commission: 

It is a pleasure to appear before you today to discuss the challenges 
the National Guard and reserves are facing as the nation moves into the 
21st century with mounting fiscal imbalances and new national security 
concerns overseas and homeland security needs at home. The work the 
Commission is undertaking is very important, and it is a tribute to the 
Commission that Congress and the Department of Defense (DOD) have 
already begun implementing some of the recommendations in the 
Commission's March 2007 report. As you know, between September 2001 and 
March 2007, over 580,000 reservists have been activated in numbers not 
seen since World War II, and reservists from all the services have made 
major contributions to sustaining ongoing overseas operations as well 
as homeland security activities. The challenges in mobilizing large 
numbers of reservists on an ongoing basis have led to questions about 
whether changes are needed in the way the reserve components are 
structured and resourced. Over the last few years, we have undertaken a 
body of work examining the National Guard and reserve's changing roles 
and missions and recruiting, training, and equipping challenges. Today, 
I would like to provide you with our observations based on this work. 
In addition, I would like to highlight our report that is being issued 
today that focuses on reserve component pay and compensation.[Footnote 
1] 

My statement today will focus on three main issues: (1) the nation's 
fiscal and security challenges and their implications for DOD and its 
reserve components, (2) the need for DOD to better align its business 
model with the reserve forces' current and future needs, and (3) the 
extent to which DOD's current compensation system for reservists is 
helping the department to meet its human capital goals of recruiting 
and retaining a high-quality force. My statement is based on our 
analysis of the nation's long-term fiscal outlook, as well as 
challenges in maintaining U.S. military readiness for overseas and 
homeland missions. In addition, this testimony relies heavily on our 
past work on human capital issues, including recruitment, retention, 
and pay and compensation. We updated some of our information during 
recent discussions with DOD, Army, and National Guard Bureau officials. 
To perform our assessment of DOD's reserve pay and compensation we 
analyzed relevant regulations, legislation, and budget justification 
books, and we interviewed appropriate officials at DOD and the 
Department of Veterans Affairs. Our scope included fiscal year 2000 
through fiscal year 2006 to capture costs prior to the increased use of 
reservists and associated changes to reserve and Guard compensation. We 
conducted our work in accordance with generally accepted government 
auditing standards. A list of our past reports can be found in the 
Related GAO Products section at the end of this statement. 

Summary: 

The nation's growing fiscal imbalance and changing security environment 
require a fundamental reexamination of defense activities, including 
the role and structure of the reserve components. The nation faces 
large and growing structural deficits due primarily to known 
demographic trends and rising health care costs. If left unchecked, 
these fiscal imbalances will ultimately impede economic growth, which 
could impact our ability to address national and homeland security 
needs. The imbalances are so significant that neither slowing the 
discretionary spending growth nor allowing certain tax provisions to 
expire--nor both together--would eliminate them. Rather, a fundamental 
reexamination of major priorities is needed to ensure that federal 
programs and priorities respond to emerging social, economic, and 
security changes and challenges. To facilitate this reexamination, we 
issued a 21st Century Challenges report which highlighted the need for 
reexamining the base of federal government in 12 areas, including 
national defense.[Footnote 2] Within national defense, we suggested 
several key issues that need to be addressed including whether the 
role, structure, and business model of the reserve components are 
appropriate in light of the changing securing environment. These issues 
will need to be addressed in the context of DOD's overall fiscal 
challenges, which include rising compensation and acquisition costs, 
the cost of supporting ongoing military operations, and inefficient 
policies and business practices. To put DOD on a more sustainable path, 
we have suggested that DOD reexamine key defense policies and 
practices, develop budgets that set clear priorities based on current 
and future needs, establish a Chief Management Officer to oversee 
business transformation, and address areas within defense that we have 
identified as high risk.[Footnote 3] As the Commission completes its 
work, it will be important to examine reserve component policies and 
practices and evaluate future funding requirements for the Guard and 
reserves in the context of DOD's broader affordability and 
sustainability challenges. 

DOD's heavy reliance on the reserve components in recent years to 
support operations in Iraq, Afghanistan, and at home has highlighted 
the need to better align the reserve components' business model to 
support their 21st century roles. An effective business model-- 
including an integrated set of strategies and policies for recruiting, 
training, and compensating individuals and equipping units--is needed 
to support the National Guard and reserves in conducting 21st century 
missions within fiscally sustainable resource levels. Although each of 
the services' reserve components face challenges in adapting to the new 
security environment, our work has shown that the current business 
model of the Army National Guard and Army Reserve is not sustainable in 
the long-term given their changing roles and high pace of operations. 
In addition, our past work has shown that all of the reserve components 
face human capital challenges that will need to be addressed as part of 
a systematic effort to reassess and revise the reserve component 
business model. These challenges include: (1) addressing inefficiencies 
in recruiting and retaining personnel in high-demand career fields and 
occupations, and (2) developing policies, procedures, and business 
processes to facilitate a smooth transition of personnel between 
reserve and active duty status. We have made numerous recommendations 
intended to help the department address these issues. For example, we 
have recommended that DOD assess the Army Reserve's requirements for 
full-time support servicemembers and develop a strategic framework that 
integrates and aligns personnel policies to meet organizational goals. 
While DOD has taken some recent steps to address our recommendations, 
such as establishing new mobilization policies intended to achieve more 
predictable deployments, DOD has not fully addressed these challenges 
in a way that supports an integrated business model. 

An appropriate compensation strategy that supports human capital goals 
is another key component of a sustainable business model. However, DOD 
does not know the extent to which its current compensation system for 
reserve and Guard servicemembers is helping it meet its human capital 
goals of recruiting and retaining personnel. Two primary reasons for 
this uncertainty are that (1) the department has not established an 
overall compensation strategy to identify the appropriate mix of 
reserve compensation to efficiently maintain its force, and (2) its 
approach to compensation does not provide decision makers in Congress 
and DOD with adequate transparency over total costs for reservists. 
Using fiscal year 2006 constant dollars, the federal government's total 
cost to compensate part-time and full-time reserve servicemembers-- 
including cash, noncash, and deferred benefits--has increased about 47 
percent since fiscal year 2000, rising from about $13.9 billion in 
fiscal year 2000 to about $20.5 billion in fiscal year 2006. Much of 
the total growth in compensation is driven by the costs for deferred 
compensation--that is, funds set aside today for future compensation 
such as retirement pay and health care. The cost for deferred 
compensation has tripled over this period, primarily due to costs to 
provide enhanced health care benefits for retirees. This allocation is 
questionable from an efficiency perspective, since fewer than one in 
four of those who join the reserves will ultimately earn retirement 
benefits. The shift in the mix of compensation can be attributed to the 
fact that DOD and Congress have added pays and benefits for reservists 
and Guard service members in recent years using a piecemeal approach 
that has not been based on an established strategy and does not 
adequately consider the appropriateness, affordability, and 
sustainability of the increased compensation costs. Moreover, DOD does 
not know the efficiency and effectiveness of these changes in meeting 
its recruiting and retention goals because it has not established 
performance measures. Furthermore, because costs to compensate 
servicemembers are found in multiple budgets both within and outside of 
DOD and are not compiled in a single source to provide total cost, 
DOD's approach to reserve compensation does not provide decision makers 
in Congress and DOD with adequate transparency over compensation-- 
including the allocation of costs to cash, noncash, and deferred 
compensation, as well as the cost for mobilized reservists. Until total 
reserve compensation costs are compiled in a transparent manner--and 
decisions are based on established compensation strategies--decision 
makers will be unable to determine the affordability, cost 
effectiveness, and ultimately the sustainability of the reserve 
compensation system. In our report on reserve compensation that we are 
issuing today, we are making recommendations that DOD (1) establish an 
overall compensation strategy and performance measures and (2) compile 
costs in a transparent manner to aid decision makers. In commenting on 
a draft of our report on reserve compensation, DOD partially concurred 
with our recommendations. 

Background: 

DOD has six reserve components: the Army National Guard, the Army 
Reserve, the Air National Guard, the Air Force Reserve, the Navy 
Reserve, and the Marine Corps Reserve. The six reserve components 
combined are authorized about 830,000 personnel (see fig. 1). 

Figure 1: Reserve Component Authorized Personnel: 

[See PDF for image] 

Source: GAO analysis of DOD data. 

[End of figure] 

Sixty-five percent of the total authorized personnel in all of the 
reserve components combined are in the two Army reserve components. 
Each of the reserve components are composed primarily of citizen 
soldiers who balance the demands of a civilian career with military 
service on a part-time basis, usually 1 weekend a month and 2 weeks a 
year for annual training. In addition, reserve forces have some full- 
time servicemembers who enhance readiness by assisting unit commanders 
in administrative, training, and maintenance tasks. 

DOD's fiscal year 2008 budget request for the Army National Guard and 
Army Reserve is about $13.5 billion and $7.1 billion respectively. When 
combined, these amounts equate to about 16 percent of the Army's total 
budget request. DOD has also requested about $8.2 billion for the Air 
National Guard and $4.3 billion for the Air Force Reserve, which equate 
to about 9 percent of the Air Force's total budget request. In 
contrast, the Navy and Marine Corps allocate about 3 and 5 percent 
respectively of their service's budgets to their reserve components, 
which are significantly smaller in size than the Army and Air Force 
reserve components. 

On September 14, 2001, President Bush declared that a national 
emergency existed as a result of the attacks on the World Trade Center 
in New York and the Pentagon in Washington, D.C., and he invoked the 
partial mobilization authority[Footnote 4] which enabled the activation 
of up to 1,000,000 reservists for periods of active duty not to exceed 
24 consecutive months. The Office of the Secretary of Defense 
implements the activation of reservists under this mobilization 
authority, and provides policy, programs, and guidance for the 
mobilization and demobilization of the reserve components. 

The National Guard, comprised of the Army National Guard and the Air 
National Guard, has a unique dual mission that consists of both federal 
and state roles. In its federal status, along with the Army Reserve and 
Air Force Reserve, respectively, the National Guard has been deployed 
to Afghanistan and Iraq, as well as to other locations around the 
world. In this status, National Guard members are paid using federal 
funds. The National Guard may also be activated under state law to 
provide critical infrastructure protection or respond to state 
emergencies under control of the governor. In this status, the National 
Guard is paid using state funds. In addition, the National Guard may be 
activated under Title 32 of the United States Code by which Guard 
forces remain under the control of the state governor but are 
compensated with federal funding. This authority has been used to 
assist states in responding to large-scale, multistate events, such as 
Hurricane Katrina in 2005. 

Long Term Fiscal Challenges Require DOD to Balance Wants, Needs, and 
Affordability of Its Active and Reserve Forces: 

The nation's growing fiscal imbalance and changing security environment 
require a fundamental reexamination of defense activities, including 
the role and structure of the reserve components. Our nation is on an 
unsustainable fiscal path. Long-term budget simulations we and 
others[Footnote 5] have performed indicate that, over the long-term, we 
face large and growing structural deficits due primarily to known 
demographic trends and rising health care costs. Absent policy changes 
on the spending and /or revenue side of the budget, the growth in 
mandatory spending on federal retirement and health entitlements will 
encumber an escalating share of the government's resources. By 2040 
federal revenues may be adequate to pay little more than interest on 
the federal debt. The imbalances are so significant that neither 
slowing discretionary spending growth nor allowing certain tax 
provisions to expire--nor both together--would eliminate them. If not 
addressed in the coming years, these fiscal imbalances will lead to 
serious budgetary pressures on federal discretionary spending which 
includes defense accounts. A symptom of these budgetary pressures is 
seen in the declining proportion of federal spending available for 
discretionary spending. For example, while the proportion of federal 
spending for mandatory programs doubled from 26 percent in 1966 to 53 
percent in 2006, the proportion of federal spending available for 
discretionary spending has decreased from 67 percent to 38 percent in 
the same period (see fig. 2). 

Figure 2: Federal Spending for Mandatory and Discretionary Programs: 

[See PDF for image] 

Source: Office of Management and Budget. 

[End of figure] 

Another sign of the existing budgetary pressure on defense spending is 
seen in the declining share of defense spending as a proportion of 
total federal spending. Since 1966 defense spending as a proportion of 
total federal spending has declined from 43 percent to 20 percent (see 
fig. 3). 

Figure 3: Composition of Federal Spending: 

[See PDF for image] 

Source: Office of Management and Budget. 

Note: Numbers may not add to 100 percent due to rounding. 

[End of figure] 

Federal spending on defense in constant 2000 dollars has fluctuated 
over the years in response to changing economic conditions and a 
changing security environment (see fig. 4). For example, defense 
spending declined in real terms from 1990 to 1998 following the end of 
the Cold War. More recently, defense spending has increased as result 
of the Global War on Terror. However, future pressures on the federal 
budget are likely to lead to a downturn in defense spending in the 
future. 

Figure 4: National Defense Outlays in Constant Fiscal Year 2000 
Dollars, 1962-2008: 

[See PDF for image] 

Source: Office of Management and Budget. 

Note: Amounts exclude supplemental funding to support military 
operations. 

[End of figure] 

To address the tough choices for our fiscal future, a fundamental 
reexamination of major priorities is needed. This will enable us to 
recapture our fiscal flexibility and ensure that federal programs and 
priorities respond to emerging social, economic, and security changes 
and challenges. Our capacity to address a range of important challenges 
reshaping American society and our place in the world will be 
predicated on when and how we deal with this historically unprecedented 
long-term fiscal challenge. Absent action to avert this fiscal crisis, 
these forces will ultimately erode, if not suddenly damage, our 
economy, our standard of living, and ultimately our national security. 
Ultimately, this reexamination should entail a national discussion 
about what Americans want from their government and how much they are 
willing to pay for those things. 

In addition to these growing fiscal constraints, DOD faces a number of 
other near-and long -term challenges. DOD's near-term challenges 
include paying for operations in Iraq and Afghanistan and maintaining 
readiness. To pay for its operations, DOD has been given a significant 
infusion of funds, with an annual appropriation totaling over $430 
billion for fiscal year 2007 and additional funding for homeland 
defense and operations in Iraq, Afghanistan, and elsewhere 
approximating $380 billion over the past 3 fiscal years. Despite this 
infusion of funds, DOD still faces significant challenges in 
maintaining readiness in all components active and reserve. For 
example, the significant use of Army National Guard forces for overseas 
and homeland security missions since September 11, 2001, has resulted 
in declining readiness, weakening the Army National Guard's 
preparedness for future missions.[Footnote 6] In addition, DOD faces 
the long-term challenge of determining how it will reorganize its 
forces and identify the capabilities it will need to protect the 
country from current, emerging, and future conventional and 
unconventional security threats. Specific issues that will need to be 
addressed while DOD meets these long-term challenges include weapons 
modernization, force transformation, and military pay and benefits. 
Striking an affordable balance between near-and long-term needs will be 
an ongoing challenge, particularly with the federal government's 
current and projected fiscal imbalances. 

Although DOD's budget is likely to be constrained by future fiscal 
limitations, DOD continues to pursue some inefficient programs and 
practices, including, directly or indirectly, 15 of 27 areas that we 
have identified as high risk.[Footnote 7] Since 1990, we have 
periodically reported on government operations that we identify as high 
risk and which need urgent attention and transformation in order to 
ensure that our national government functions in the most economical, 
efficient, and effective manner possible. Out of the 27 items on our 
list of high-risk areas governmentwide, DOD has sole responsibility for 
8. These 8 areas are: (1) business transformation, (2) business systems 
modernization, (3) personnel security clearance program, (4) support 
infrastructure management, (5) financial management, (6) supply chain 
management, (7) weapon systems acquisition, and (8) contract 
management. In addition to the DOD-specific high-risk areas, DOD shares 
responsibility for 7 other high-risk areas that are governmentwide in 
scope, such as strategic human capital management. DOD has thus far 
failed to effectively address many of these high risk programs 
resulting in billions of dollars spent annually to sustain inefficient 
policies and business practices in key operations that support our 
forces. 

To address these critical inefficiencies, we have suggested that DOD 
reexamine defense policies and practices, develop budgets that set 
clear priorities and consider long-term resource implications, address 
high-risk areas, and designate a Chief Management Officer[Footnote 8] 
who would be responsible for overall business transformation efforts. 
In addition, to facilitate decision makers in this process of 
reexamining the base of the federal government, we have drawn on our 
past and pending work to produce a 21st Century Challenges 
report[Footnote 9] which provides examples of the kinds of hard choices 
the country will need to make stemming from these fiscal challenges. 
This report identifies challenges in 12 broad areas including homeland 
security, international affairs, and national defense. Within the 
national defense area, we draw attention to specific challenges DOD and 
the nation face concerning the reserve component. These challenges 
include addressing the following questions: 

* Are the active and reserve components appropriately sized, 
structured, and used to meet the current and future national security 
demands? 

* Is the current business model sustainable for the reserve component? 

Reexamining reserve component policies and practices should be included 
as part of the overall DOD-wide reexamination effort we advocate. 
Moreover, as the Commission evaluates potential changes to the Guard 
and reserves' structure and policies, it will be important to consider 
the funding implications of alternative approaches within the context 
of the nation's and DOD's fiscal challenges. A variety of competing 
proposals are being made to restructure and enhance funding for the 
reserve components, such as expanding personnel benefits and procuring 
equipment. It will be important to understand the analytical basis for 
such proposals and assess the extent to which they address long-term 
affordability and sustainability challenges. 

Guard and Reserve Business Model Should be Revised to Better Align with 
21st Century Roles and Missions: 

Although DOD recognizes that the changing security environment has 
placed new demands on reserve components, DOD has not yet fully adapted 
the reserve component business model to support reservists' evolving 
roles and missions. An effective business model--including an 
integrated set of strategies and policies for recruiting, training, and 
compensating individuals as well as for equipping units--is needed to 
support the National Guard and reserves in conducting 21st century 
missions within fiscally sustainable resource levels. Although each of 
the services' reserve components faces challenges, our work has shown 
that the Army National Guard and Army Reserve do not have a sustainable 
set of policies and resourcing strategies that aligns with their 
changing roles and high pace of operations. In addition, we have found 
that all of the reserve components face human capital challenges that 
will need to be addressed as part of a systematic effort to reassess 
and revise the reserve components' business model. These challenges 
include: (1) addressing inefficiencies in recruiting and retaining 
personnel with needed skills, and (2) eliminating inefficient policies, 
procedures, and business systems which impede the smooth transition of 
personnel between reserve and active duty status. While DOD has taken 
some recent steps to address these challenges, such as establishing new 
mobilization policies intended to achieve more predictable deployments, 
DOD has not fully addressed these challenges in a way that supports an 
integrated business model. 

Reserve Component Business Model Is Not Fully Aligned with Heavy 
Reliance on Reserves in the New Security Environment: 

The changing security environment has had significant implications for 
the Guard and reserves and led to a need to reexamine and revise the 
reserve component business model. Although each of the services' 
reserve components has faced challenges in adapting to the new security 
environment, the Army National Guard and Army Reserve are most in need 
of a fundamental rethinking of the manner in which they are organized 
and structured to support operations at home and abroad. We have 
previously reported and testified to the Commission that DOD's business 
model for the Army National Guard is not sustainable over time at the 
current pace of operations as evidenced by the significant personnel 
and equipment shortages that nondeployed National Guard units have 
experienced in order to fully equip and staff units deployed 
overseas.[Footnote 10] The ongoing demand for Army National Guard units 
to support overseas operations represents a fundamental change from the 
strategic reserve mission for which its units were structured. We have 
also reported that the Army National Guard historically has been 
structured primarily to serve as a strategic reserve force and has 
faced significant challenges and worsening personnel and equipment 
shortages as a result of supporting ongoing operations.[Footnote 11] In 
addition, potential threats against the homeland have implications for 
the reserves' missions and business model. Both the Army National Guard 
and Air National Guard have increasingly been called upon to prepare 
for and respond to domestic disasters such as Hurricane 
Katrina.[Footnote 12] Moreover, the National Guard could potentially be 
called on to play a key role in responding to terrorist events. In 
January 2007, we reported that the types and quantities of equipment 
the National Guard needs to respond to potential large-scale terrorist 
events and natural disasters have not been fully identified because the 
multiple federal and state agencies that would have roles in responding 
to such events have not completed and integrated their plans.[Footnote 
13] Establishing plans and requirements for National Guard units to 
respond to homeland security missions should be a key starting part of 
a comprehensive reassessment of the Army and Air National Guard's 
business model. 

The other reserve components are also playing key roles in supporting 
ongoing operations and adapting to new missions which require them to 
reexamine long-standing policies and ways of doing business. For 
example, numerous Marine Corps reserve units have deployed to Iraq and 
Afghanistan to help meet the high demand for ground forces, and 
nondeployed units face equipment and personnel challenges. In addition, 
the Air National Guard, Air Force Reserve, and Navy Reserve have 
contributed in numerous ways such as providing airlift and intelligence 
capabilities. Although Air National Guard and Air Force Reserve units 
have historically been resourced at higher levels than their Army 
counterparts, senior leaders have recently testified about increasing 
readiness challenges in supporting ongoing operations and an aging 
aircraft inventory. 

The reserve components have taken some steps to adjust their business 
models to align with their new roles, but face challenges in equipping 
and training personnel. The Army is implementing a new modular brigade 
structure for its active and reserve components. However, implementing 
this restructuring is complicated by challenges such as significant 
retraining of personnel into reassigned specialties that will take 
several years to complete. In addition, the Air Force's planned changes 
to its reserve force structure will have significant impacts on 
personnel and training requirements. 

DOD Needs More Effective Strategies for Recruiting and Retaining 
Personnel with Required Skills: 

DOD will also need to develop more effective strategies for recruiting 
and retaining personnel in needed occupational specialties as part of 
an overall effort to adapt the reserve components' business model to 
meet the needs of the new security environment. Even when the reserve 
components have met their overall goals for recruiting and retaining 
servicemembers during the last few years, they have faced difficulties 
recruiting and retaining personnel with certain skills. DOD must 
recruit and retain tens of thousands of reserve and National Guard 
members each year to fill almost 860 occupational specialties. The 
current pace of operations and the likelihood of deployment of 
reservists from all the services, coupled with a growing economy that 
offers opportunities in the private sector, have made recruiting and 
retaining members for all the services and components a significant 
challenge. In addition, DOD reports that over half of today's youth 
between 16 and 21 cannot meet the military's entry standards for 
education, aptitude, health, moral character, or other requirements. In 
addition, future retention challenges will also include the dynamics of 
a new generation that appear to be increasingly likely to make frequent 
job changes over the course of a career. 

We reported in November 2005 that even when DOD met aggregate 
recruiting and retention goals, it had too many personnel in some 
occupations and not enough in others. For example, the services were 
not consistently able to fill all their requirements for about 47 
percent of their reserve and National Guard occupational specialties, 
while other occupational specialties were consistently 
overfilled.[Footnote 14] Underfilled occupations included: combat 
engineers, intelligence analysts, field artillery surveyors and data 
systems specialists, and explosive ordnance disposal technicians. On 
the other hand, the services consistently were able to recruit more 
personnel in about 21 percent of reserve and National Guard 
occupational specialties than they were authorized. Examples of 
specialties that were overfilled included: avionic mechanics, personnel 
clerks, supply specialists, motor vehicle operators, and patient 
administration specialists. 

We also noted that while DOD had taken several steps, such as adjusting 
its recruiting, advertising, and financial incentives programs, to help 
meet recruiting and retention goals, DOD lacked information on 
financial incentives provided for certain occupational specialties. 
This made it difficult for the department to determine whether the 
financial incentives were being targeted most effectively. We found 
that while DOD requires some reporting by the active components on 
their over-and underfilled occupational specialties, the department has 
levied no such requirement on the reserve components. Further, DOD 
requires the service components to provide minimal justification of 
their use of financial incentives paid to service members in some 
occupational specialties and lacks the information needed to ensure 
funding spent on recruiting and retention is appropriately and 
effectively targeted to occupational specialties for which the 
components have the greatest need. We recommended that DOD require the 
services to report all their over-and underfilled occupational 
specialties, including reasons why the specialties are over-and 
underfilled, and to justify the use of financial incentives provided to 
service members in occupational specialties that have more personnel 
than authorized. Based on this information, we also recommended that 
DOD develop a management plan to address recruiting and retention 
challenges. DOD acknowledged the importance of annually tracking fill 
rates across occupations and the need to closely manage bonus programs. 

DOD Policies and Procedures Should Facilitate Individuals' Smooth 
Transition between Reserve and Active Duty Status: 

If the nation expects reservists to routinely support domestic and 
overseas contingencies rather than serving as a strategic reserve, DOD 
will also need to develop an integrated set of policies, procedures, 
and business systems to more efficiently enable reservists to move from 
peacetime to operational status. The processes that DOD uses to 
transition reservists from their reserve status to active duty status 
to support national security objectives--particularly those used to 
support involuntary mobilization--have not been efficient in providing 
a sustainable flow of trained forces to meet the changing operational 
needs of combatant commanders in the new security environment. 

Following the start of military operations in Iraq, we reported that 
the processes DOD used to activate reserve personnel to support 
military operations after September 11, 2001, were hampered by 
inefficiencies and DOD lacked adequate systems for tracking personnel 
and other resources.[Footnote 15] Specifically, DOD's mobilization 
process relied on multiple layers of coordination between the services, 
the Office of the Secretary of Defense, and the Joint Staff to 
validate, approve, and fill mobilization requirements. In addition, DOD 
officials did not have visibility over the entire mobilization process, 
including the readiness of the force, primarily because DOD lacked 
adequate systems for tracking personnel and other resources within 
small units and some systems used by the active and reserve components 
were incompatible.[Footnote 16] We recommended that DOD (1) capture 
readiness information for all the units that are available to meet 
combatant commander requirements so that resources would be visible to 
key mobilization officials, (2) develop a single system or fully 
integrated automated systems that would provide for the seamless 
transfer of reservists' information, and (3) develop a strategic 
framework that integrates and aligns personnel policies to meet 
organizational goals. We also reported that the Army Reserve and the 
Army National Guard were not provided the number of full-time support 
personnel they needed to maintain unit readiness and had not been 
provided additional staff as units made preparations for 
deployments.[Footnote 17] We recommended that the Army reassess the 
full-time support needs of the Army Reserve in light of its new 
operational role. 

DOD has agreed with many of our recommendations to improve the 
transition of reserve personnel from peacetime to operational status 
and has begun to take actions intended to address mobilization 
challenges. For example, in January 2007, the Secretary of Defense 
authorized a decrease in the length of mobilizations, such as those to 
Iraq and Afghanistan, from 18 months to 1 year[Footnote 18] and 
directed the services to manage mobilizations of reservists with the 
goal of mobilizing reserve personnel for no more than 1 year for every 
5 years. Further, to improve unit cohesion, the Secretary directed that 
the services mobilize forces on a unit basis rather than mobilizing 
individuals and transferring them to deploying units. However, the 
extent to which DOD will be able to implement these policies in the 
midst of ongoing operations is unclear. Also, it is not clear what 
impact these policies will have on employer support for the reserves. 
We recently reported that additional actions are needed to improve 
oversight of reserve employment issues, such as improving reporting of 
information on reservists' complaints to Congress.[Footnote 19] 

We have also identified numerous problems with DOD's data bases and 
business systems, which have impeded the smooth transition of personnel 
from reserve to active duty status. For example, we found numerous 
errors in pay and benefits provided to reservists who were mobilized to 
support operations.[Footnote 20] These problems are symptoms of a 
larger DOD-wide problem resulting from the proliferation of numerous 
service-and component-unique business systems during the past few 
decades. DOD initiated the Defense Integrated Military Human Resources 
System (DIMHRS) program in fiscal year 1998 to consolidate the 
personnel and pay systems across the military components. However, 9 
years after program initiation, DOD has yet to deploy DIMHRS, and the 
concerns it was intended to address persist.[Footnote 21] In 2005, we 
reported that DOD was not effectively managing the DIMHRS program, 
thereby jeopardizing the likelihood that it would deliver promised 
system capabilities and benefits on time and within budget.[Footnote 
22] We made several recommendations aimed at improving the department's 
oversight of the program. We are currently evaluating DOD's 
implementation of our prior recommendations. 

DOD Does Not Have a Compensation Strategy and Lacks Transparency over 
National Guard and Reserve Compensation Costs: 

Developing compensation strategies targeted to recruit and retain 
individuals with needed skills is another key element of a sound 
business model. However, DOD does not know the extent to which its 
current compensation system for Guard and reserve servicemembers is 
helping it meet its human capital goals of recruiting and retaining 
personnel. The cost to compensate National Guard and reserve 
servicemembers has increased about 47 percent since fiscal year 2000. 
In addition, the mix of compensation--cash, noncash, and deferred 
compensation--has shifted more toward deferred, even though this may 
not be the most efficient use of resources. Moreover, the department 
does not know if the current mix is appropriate or sustainable to 
efficiently maintain its force primarily because (1) it has not 
established an overall compensation strategy and performance measures 
and (2) its approach to compensation does not provide decision makers 
in Congress and DOD with adequate transparency over total costs for 
reservists. 

Cost to Compensate National Guard and Reserve Servicemembers Has 
Increased Significantly Since Fiscal Year 2000: 

The total cost to the federal government to compensate both part-time 
and full-time reserve and National Guard servicemembers has increased 
significantly--about 47 percent--since fiscal year 2000, increasing 
from about $13.9 billion in fiscal year 2000 to about $20.5 billion in 
fiscal year 2006. This cost includes: (1) cash compensation, such as 
basic pay and other allowances; (2) noncash compensation, such as 
education assistance and health care; and (3) deferred compensation, 
such as retirement pay and health care. However, this cost does not 
include all compensation, such as accrual costs for veterans' 
benefits.[Footnote 23] Moreover, these costs do not include National 
Guard and reserve members who were called to active duty to support 
military operations. 

Health care costs are a primary factor contributing to the growth in 
reserve compensation. Since fiscal year 2000, total health care costs 
for reservists have grown about 500 percent, from $835 million in 
fiscal year 2000 to $4.4 billion in fiscal year 2006. This increase is 
largely due to new and enhanced health care benefits for retirees. For 
example, in 2001 Congress added TRICARE for Life, a health care benefit 
for Medicare-eligible retirees,[Footnote 24] and DOD estimates that 
TRICARE for Life represented 48 percent of the increase in DOD's 
spending on health care from fiscal years 2000 through 2005.[Footnote 
25] Additionally, Congress added a premium-based health care benefit 
for Selected Reservists and their dependents known as TRICARE Reserve 
Select that provides a continuation of health coverage as reservists 
transition on and off of active duty.[Footnote 26] According to DOD 
estimates, the cost for this new health care benefit will increase in 
fiscal year 2008 to about $381 million, and will continue to increase 
to about $874 million by fiscal year 2013. Moreover, DOD predicts that 
the cost for health care will continue to increase significantly and 
consume more than 12 percent of its total budget by fiscal year 2015, 
compared to 7.5 percent in fiscal year 2005. 

Over this same time period, the per capita cost to the federal 
government for part-time drilling reservists[Footnote 27] almost 
doubled, from about $10,100 in fiscal year 2000 to about $19,100 in 
fiscal year 2006. This per capita cost is an average of what it cost 
the government to compensate servicemembers; it is not what the 
servicemembers "receive in their paycheck." Servicemembers' individual 
cash compensation will vary significantly depending on individual pay 
grade and other factors such as years of service and family 
status.[Footnote 28] It is noteworthy that this increase in per capita 
cost occurred during a time when the average number of part-time 
drilling reservists declined by about 6 percent from about 746,400 in 
fiscal year 2000 to 699,800 in fiscal year 2006. This decline in the 
average number of part-time servicemembers may be attributed to many 
factors, such as the Navy's restructuring of its force as part of its 
Active-Reserve Integration process, which reduced the number of part- 
time reservists. Moreover, Army National Guard and Army Reserve 
officials attributed the decline in average strength to their 
recruiting difficulties. 

In addition to the drilling reservists, about 9 percent of reservists 
work full-time, and their per capita cost to the federal government 
also increased, from about $90,100 in fiscal year 2000 to about 
$115,200 in fiscal year 2006, or about 28 percent.[Footnote 29] Unlike 
their part-time counterparts, the full-time reservists' average 
strength increased by about 9 percent during this time period, 
increasing from about 64,500 in fiscal year 2000 to 70,300 in fiscal 
year 2006.[Footnote 30] Full-time reservists are eligible to receive 
the same compensation as active duty servicemembers, whose per capita 
cost for compensation was about $126,200 in fiscal year 2006. Figure 5 
shows the trend in per capita costs for part-time reservists, full-time 
reservists, and active duty servicemembers from fiscal year 2000 
through fiscal year 2006. Although full-time reservists are eligible to 
receive the same compensation as active duty service members, the per 
capita cost for compensation presented here is less than the per capita 
cost for an active duty servicemember. This is because some costs were 
not associated with the full-time reservists, such as accrual costs for 
veterans' benefits or costs for installation-based benefits, such as 
exchanges and family support programs. 

Figure 5: Trend in Per Capita Costs for Part-Time Reservists, Full-Time 
Reservists, and Active Duty Servicemembers, Fiscal Years 2000 through 
2006: 

[See PDF for image] 

Source: GAO. 

[End of figure] 

DOD Does Not Know the Extent to Which Its Mix of Reserve Compensation 
Is Meeting Its Human Capital Goals: 

DOD and Congress have reacted to the current environment of increased 
mobilizations and recruiting difficulties by adding to reservists' 
compensation. However, these efforts have been done in a piecemeal 
fashion that has shifted the mix of reserve compensation toward more 
deferred benefits, even though this may not be the most efficient 
allocation to enable DOD to meet its recruiting and retention human 
capital goals. Significant increases in the frequency and length of 
mobilizations to Iraq and Afghanistan have led to family separations 
for longer periods and interruptions in reservists' civilian careers. 
In recent years, Congress and DOD have added benefits and pays to 
address reserve component recruiting problems. For example, the reserve 
incentive program, which primarily provides discretionary cash bonuses 
for enlistment and reenlistment, increased more than 1000 percent from 
fiscal year 2000 to fiscal year 2006. According to service officials, 
this increase was to address potential recruiting shortfalls. 

The resulting complex accumulation of pays and benefits has shifted the 
mix of reserve compensation toward deferred compensation--that is, the 
promise of future compensation like retirement pay and health care. 
Figure 6 shows that deferred compensation increased from 12 percent of 
total reserve compensation in fiscal year 2000 to 28 percent in fiscal 
year 2006. Deferred compensation affects the current cost of 
compensation because funds must be set aside today to provide these 
benefits in the future, over the reservist's lifetime. 

Figure 6: Allocation of Reserve Compensation to Cash, Noncash, and 
Deferred in Fiscal Years 2000 and 2006: 

[See PDF for image] 

Source: GAO. 

[End of figure] 

While DOD and Congress have added pays and benefits over the past 6 
years, it is questionable whether DOD and Congress adequately 
considered the appropriateness of the changes, including how the 
changes compared to compensation in the civilian sector, what the 
efficiency and return of these changes would be in terms of meeting the 
department's human capital goals of recruiting and retention, or 
whether the compensation changes were affordable and sustainable over 
the long-term. DOD defines efficiency of its compensation system as 
paying no higher or lower than necessary to fulfill the basic objective 
of attracting, retaining, and motivating the kinds and numbers of 
servicemembers needed.[Footnote 31] However, this increase in deferred 
compensation may not necessarily provide the most efficient allocation 
or the best return on the compensation investment. In fact, DOD does 
not know the most efficient allocation of compensation needed to meet 
its recruiting and retention goals because it has not evaluated reserve 
compensation to determine the appropriate mix of compensation to 
attract and retain sufficient numbers of qualified servicemembers. 

Although the efficiency of noncash and deferred compensation is 
difficult to assess because the value servicemembers place on them is 
highly individualized, studies indicate cash compensation is not only 
preferred to noncash and deferred compensation, but it is also a more 
efficient recruiting and retention tool for active duty servicemembers. 
In our 2005 report on active duty compensation, we stated that it is 
generally accepted that some deferred benefits, such as retirement, are 
not valued as highly by servicemembers as current cash 
compensation.[Footnote 32] Cash pay today is a far more efficient tool 
than future cash or benefits for the recruiting and retention of active 
duty servicemembers. For example, a study assessing the military 
drawdown in the early 1990s found that when active duty servicemembers 
were offered a choice of lump-sum cash payments or annuities, a vast 
majority selected the lump-sum payment, even though it had considerably 
less net present value.[Footnote 33] This preference for cash 
compensation has a profound impact on the efficiency of DOD's 
compensation system, especially considering that less than one in four 
part-time reservists will receive these costly deferred 
benefits.[Footnote 34] More specifically, about 24 percent of those who 
join the reserve and Guard will ultimately earn nondisability 
retirement pay and health care for life. Typically, deferred and 
noncash compensation is offered across the board, which limits the 
department's flexibility to offer incentives, target servicemembers, or 
turn on and off compensation as it is needed to recruit and retain 
servicemembers. Moreover, these changes may not be sustainable over the 
long-term. Some of the noncash and deferred compensation that have been 
added in response to the department's recruiting problems are, in fact, 
inflexible benefits and long-term costs that the department will find 
difficult to stop providing, such as health care for reservists. 

DOD Has Not Established a Compensation Strategy and Performance 
Measures to Gauge Efficiency of Reserve Compensation: 

DOD is unable to gauge the efficiency of the mix of reserve 
compensation and its compensation tools because it has not established 
an overall compensation strategy or performance measures.[Footnote 35] 
We have previously found that programs such as compensation systems 
need performance measures and goals to guide decision makers and 
program policy.[Footnote 36] Moreover, DOD's Personnel and Readiness 
strategic plan states the importance for DOD to identify requirements 
and tailor compensation and other programs to achieve objectives and 
continuously review personnel management.[Footnote 37] In addition, we 
have also reported that it is necessary for an agency to monitor and 
evaluate its progress toward its human capital goals and the 
contribution that human capital outcomes have made toward achieving 
program results.[Footnote 38] 

The lack of a strategy to guide compensation policy is a long-standing 
problem faced by DOD. We identified the lack of explicit compensation 
principles in 1979 and again in 2005 in our reports on active duty 
compensation.[Footnote 39] Our past reports pointed out that DOD lacked 
explicit compensation principles, which creates challenges in making 
major changes to compensation. Moreover, DOD does not have performance 
measures to gauge the efficiency of its compensation system or the 
various compensation tools. Without performance measures, DOD does not 
know which of its compensation tools--cash, noncash, or deferred--works 
best at recruiting and retaining servicemembers, and it does not know 
the most effective, efficient mix of compensation. 

Determining the return on investment for compensation and the impact of 
compensation on recruiting and retention is not an easy task and should 
be approached with caution. DOD and service officials often point to 
meeting end strength or recruiting and retention goals as evidence that 
compensation is appropriate or working. Although end strength is an 
important indicator, we do not believe it is sufficient alone. Meeting 
recruiting and retention goals does not indicate if the compensation 
system is efficient or yielding the best return on the department's 
investment. In fact, numerous other factors, such as the economy, 
ongoing contingency operations, and DOD's own recruiting and 
advertising program also influence the department's ability to recruit 
and retain servicemembers.[Footnote 40] As a result, DOD does not know 
if the additions to the compensation system--which are becoming 
increasingly costly--are appropriate to enable the reserve components 
to recruit and retain a high-quality workforce in sufficient numbers 
and that the federal government has the best return on investment. 
Until DOD establishes a strategy for determining the best mix of cash, 
noncash, and deferred compensation and develops performance measures to 
evaluate the efficiency of compensation tools, DOD and Congress will be 
unable to make informed decisions about which compensation tools will 
provide the best return on investment, be sustainable in the long term, 
and be effective in recruiting and retaining the future reserve force. 

DOD Does Not Have Transparency over Total Costs of Reserve 
Compensation: 

Decision makers in Congress and DOD do not have adequate transparency 
over total costs for providing reserve compensation--including the 
allocation of costs to cash, noncash, and deferred compensation and the 
cost of mobilized reservists. Good business practices require adequate 
transparency over investments of resources, especially in times of 
fiscal balance constraints. However, today there is no single source 
where decision makers can go to see all the costs of reserve 
compensation. In addition, the cost of mobilized reservists is also not 
transparent. 

Part of the lack of transparency is due to the fact that about a 
quarter of the costs of reserve compensation are found outside the 
military personnel appropriation for DOD. In fact, costs are located 
within three federal agencies--DOD, Department of Veterans Affairs, and 
Department of Treasury--depending on the type of compensation and the 
status of the reservists--active reserve or mobilized. Furthermore, 
within DOD, compensation costs are found in four different budgets--the 
reserve components' military personnel, active components' military 
personnel, active components' operation and maintenance, and the 
Defense Health Program. Most of the cash costs--such as basic pay, 
allowances, and special pays and incentives--are located in either the 
reserve or active military personnel budgets, depending on whether the 
reservist is mobilized.[Footnote 41] In addition, the reserve military 
personnel budgets combine some cash costs. For example, pays and 
allowances includes such costs as retired pay accrual, basic allowance 
for subsistence, basic allowance for housing, and special and incentive 
pay as authorized. Furthermore, some noncash costs are located in the 
active operation and maintenance budget and active and reserve military 
personnel budgets.[Footnote 42] Some of these noncash costs, such as 
those for commissary and morale, welfare, and recreation facility use 
are not broken out by active and reserve costs because usage of these 
facilities is open to both components. Moreover, deferred costs for 
health care for the Medicare-eligible retirees and their dependents are 
found in the Defense Health Program budget, while some of the costs for 
concurrent receipt of disability retirement are found in the Treasury 
budget.[Footnote 43] 

Transparency over compensation costs is further limited when reservists 
are mobilized because mobilized reservists are paid from active duty 
budgets. Moreover, compensation costs for mobilized reservists are 
difficult to determine within the active components budgets, in part 
because they are paid out of the supplemental funding the active 
components receive for the global war on terrorism. The absence of 
information about the compensation costs of mobilized reservists 
further dilutes decision makers' ability to see the full picture of the 
costs of reserve compensation to the federal government. In addition, 
as mobilizations are expected to become a regular part of reservists' 
careers, these costs will become a part of doing business for the 
reserves, which increases the importance of being able to identify 
them.[Footnote 44] 

In our report on reserve compensation that we issued today,[Footnote 
45] we are making recommendations to assess the appropriateness of the 
reserve compensation system and to improve transparency over total 
reserve compensation costs. Our recommendations are that DOD (1) 
establish a clear compensation strategy that includes performance 
measures and (2) compile total costs to provide reserve compensation 
for part-time, full-time, and mobilized reservists and communicate 
these costs as well as the allocation of these costs among cash, 
noncash, and deferred compensation to decision makers within the 
administration and Congress. 

In commenting on a draft of our report on reserve compensation, DOD 
partially concurred with our recommendations. In response to our 
specific recommendation to develop a compensation strategy and 
performance measures, the department partially concurred and described 
several steps that they had taken including chartering an independent 
commission to review military compensation. In addition, the department 
noted that it has primarily sought cash compensation in recent years, 
and that many of the increases in deferred compensation were not sought 
by DOD. In response to our recommendation to improve transparency, DOD 
stated that the Office of Management and Budget could more 
appropriately address this recommendation because it has visibility 
over all parts of the budget. We continue to believe that DOD needs an 
explicit compensation strategy to underpin its business case to 
decision makers, and transparent information that compiles the total 
costs of compensation as part of the military budget submission. 

Conclusions: 

A general reassessment of the Guard and reserves' business model and 
human capital strategies is critical to enable DOD to continue to 
achieve its goal of having a sustainable all-volunteer force. The 
current business model that was developed under Cold War assumptions is 
not well aligned with the Guard and reserves' new operational role. The 
Commission has the opportunity to take a comprehensive look at how DOD 
and Congress need to work together to craft a business model for the 
reserve component that addresses both current and future challenges. A 
revised business model for the reserve component should include 
integrated policies, procedures, and business systems for recruiting 
and retaining personnel; facilitation of individuals' movement between 
reserve and active duty status; and compensation of personnel with a 
combination of cash and benefits that best supports the achievement of 
human capital goals. In the past, DOD and Congress have reacted to the 
reserves' new operational role by adding compensation without adequate 
consideration of how additional compensation and benefits compare with 
civilian sector compensation; whether they are appropriate, affordable, 
and sustainable over the long-term; or their return on investment in 
terms of recruiting and retention. The Commission has the opportunity 
to consider how DOD should construct a pay and compensation strategy 
that addresses these challenges to ensure that DOD uses its 
compensation resources more efficiently which ultimately would improve 
DOD's ability to recruit a highly qualified force in sufficient 
numbers. Addressing these challenges as part of a comprehensive 
reassessment of the reserve component's business model is especially 
important in light of existing budgetary pressures. Without a 
sustainable business model, DOD may not be well positioned to support 
operations at home and abroad and achieve its long-term goals of 
transformation and modernization. 

Mr. Chairman and Members of the Commission, this concludes my prepared 
statement. I would be happy to answer any questions you may have at 
this time. 

For further information regarding this testimony, please contact Janet 
A. St. Laurent at (202) 512-4402 or stlaurentj@gao.gov. Contact points 
for our Offices of Congressional Relations and Public Affairs may be 
found on the last page of this statement. Individuals who made key 
contributions to this testimony are listed in enclosure I. 

[End of section] 

Enclosure I: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Janet A. St. Laurent, (202) 512-4402 or stlaurentj@gao.gov: 

Acknowledgments: 

In addition to the contact named above, Derek B. Stewart, Director; 
John H. Pendleton, Acting Director; Margaret G. Morgan, Assistant 
Director; David E. Moser, Assistant Director; Lori A. Atkinson; Alissa 
H. Czyz; Linda S. Keefer; James P. Klein; Susan C. Langley; Tom C. 
Murphy; Hilary L. Murrish; Erin S. Noel; Kristy C. Williams; Steve 
Woods; and Suzanne K. Wren made key contributions to this statement. 

[End of section] 

Related GAO Products: 

Military Personnel: DOD Needs to Establish a Strategy and Improve 
Transparency over Reserve and National Guard Compensation to Manage 
Significant Growth in Cost. GAO-07-828. Washington, D.C.: June 20, 
2007. 

Military Base Closures: Management Strategy Needed to Mitigate 
Challenges and Improve Communication to Help Ensure Timely 
Implementation of Air National Guard Recommendations. GAO-07-641. 
Washington, D.C.: May 16, 2007. 

High-Risk Series: An Update. GAO-07-310. Washington, D.C.: January 
2007. 

Military Personnel: Additional Actions Needed To Improve Oversight Of 
Reserve Employment Issues. GAO-07-259. Washington, D.C.: February 8, 
2007. 

Military Personnel: Reserve Components Need Guidance to Accurately and 
Consistently Account for Volunteers on Active Duty for Operational 
Support. GAO-07-93. Washington, D.C.: October 31, 2006. 

Reserve Forces: Actions Needed to Identify National Guard Domestic 
Equipment. GAO-07-60. Washington, D.C.: January 2007. 

Military Recruiting: DOD and Services Need Better Data to Enhance 
Visibility over Recruiter Irregularities. GAO-06-846. Washington, D.C.: 
August 8, 2006. 

Reserve Forces: Army National Guard's Role, Organization, and Equipment 
Need to be Reexamined. GAO-06-170T. Washington, D.C.: October 20, 2005. 

Military Personnel: DOD Needs Action Plan to Address Enlisted Personnel 
Recruitment and Retention Challenges. GAO-06-134. Washington, D.C.: 
November 17, 2005. 

Force Structure: Assessments of Navy Reserve Manpower Requirements Need 
to Consider the Most Cost-effective Mix of Active and Reserve Manpower 
to Meet Mission Needs. GAO-06-125. Washington, D.C.: October 18, 2005. 

Reserve Forces: Plans Needed to Improve Army National Guard Equipment 
Readiness and Better Integrate Guard into Army Force Transformation 
Initiatives. GAO-06-111. Washington, D.C.: October 4, 2005. 

Military Personnel: Federal Management of Servicemember Employment 
Rights Can Be Further Improved. GAO-06-60. Washington, D.C.: October 
19, 2005. 

Reserve Forces: An Integrated Plan Is Needed to Address Army Reserve 
Personnel and Equipment Shortages. GAO-05-660. Washington, D.C.: July 
12, 2005. 

21st Century Challenges: Reexamining the Base of the Federal 
Government. GAO-05-325SP. Washington, D.C.: 2005. 

Military Personnel: A Strategic Approach Is Needed to Address Long-term 
Guard and Reserve Force Availability. GAO-05-285T. Washington, D.C.: 
February 2, 2005. 

DOD Systems Modernization: Management of Integrated Military Human 
Capital Program Needs Additional Improvements. GAO-05-189. Washington, 
D.C.: February 11, 2005. 

Reserve Forces: Actions Needed to Better Prepare the National Guard for 
Future Overseas and Domestic Missions. GAO-05-21. Washington D.C.: 
November 10, 2004. 

Military Personnel: DOD Needs to Address Long-term Reserve Force 
Availability and Related Mobilization and Demobilization Issues. GAO- 
04-1031. Washington, D.C.: September 15, 2004. 

Military Pay: Army Reserve Soldiers Mobilized to Active Duty 
Experienced Significant Pay Problems. GAO-04-911. Washington, D.C.: 
August 20, 2004. 

Reserve Forces: Observations on Recent National Guard Use in Overseas 
and Homeland Missions and Future Challenges. GAO-04-670T. Washington, 
D.C.: April 29, 2004. 

Military Personnel: DOD Actions Needed to Improve the Efficiency of 
Mobilizations for Reserve Forces.GAO-03-921. Washington, D.C.: August 
21, 2003. 

Reserve Forces: DOD Actions Needed to Better Manage Relations between 
Reservists and Their Employers. GAO-02-608. Washington, D.C.: June 13, 
2002. 

FOOTNOTES 

[1] GAO, Military Personnel: DOD Needs to Establish a Strategy and 
Improve Transparency over Reserve and National Guard Compensation to 
Manage Significant Growth in Cost, GAO-07-828 (Washington, D.C.: June 
20, 2007). 

[2] GAO, 21st Century Challenges: Reexamining the Base of the Federal 
Government, GAO-05-325SP (Washington, D.C.: Feb. 1, 2005). 

[3] GAO, High-Risk Series: An Update GAO-07-310 (Washington, D.C.: Jan. 
31, 2007). DOD has sole responsibility for eight high risk areas and 
shares responsibility for seven other areas with other federal 
organizations. 

[4] 10 U.S.C. ß12302. 

[5] As we reported in 2005 (GAO-05-352T), the Congressional Budget 
Office has also produced long-term budget simulations that show over 
the long-term the nation faces a large and growing structural deficit. 

[6] GAO, Reserve Forces: Actions Needed to Better Prepare the National 
Guard for Future Overseas and Domestic Missions, GAO-05-21 (Washington, 
D.C.: Nov. 10, 2004). 

[7] GAO, High-Risk Series: An Update GAO-07-310 (Washington, D.C.: Jan. 
31, 2007). 

[8] GAO-07-310. 

[9] GAO, 21st Century Challenges: Reexamining the Base of the Federal 
Government, GAO-05-325SP (Washington, D.C.: Feb. 1, 2005). 

[10] GAO, Reserve Forces: Army National Guard and Army Reserve 
Readiness for 21st Century Challenges, GAO-06-1109T (Washington, D.C.: 
Sept. 21, 2006). 

[11] GAO, Reserve Forces: An Integrated Plan is Needed to Address Army 
Reserve Personnel and Equipment Shortages, GAO-05-660 (Washington, 
D.C.: July 12, 2005). 

[12] GAO, Hurricane Katrina: Better Plans and Exercises Needed to Guide 
the Military's Response to Catastrophic Natural Disasters, GAO-06-643 
(Washington, D.C.: May 15, 2006). 

[13] GAO, Reserve Forces: Actions Needed to Identify National Guard 
Domestic Equipment Requirements and Readiness, GAO-07-60 (Washington, 
D.C.: Jan. 26, 2007). 

[14] GAO, Military Personnel: DOD Needs Action Plan to Address Enlisted 
Personnel Recruitment and Retention Challenges, GAO-06-134 (Washington, 
D.C.: Nov. 17, 2005). 

[15] GAO, Military Personnel: DOD Actions Needed to Improve the 
Efficiency of Mobilizations for Reserve Forces, GAO-03-921 (Washington, 
D.C.: Aug. 21 2003). 

[16] GAO-03-921. 

[17] GAO, Reserve Forces: Army National Guard and Army Reserve 
Readiness for 21st Century Challenges, GAO-06-1109T (Washington, D.C.: 
Sept. 21, 2006); GAO, Reserve Forces: Observations on Recent National 
Guard Use in Overseas and Homeland Missions and Future Challenges, GAO-
04-670T (Washington, D.C.: April. 29, 2004). 

[18] Services can, at their discretion, exclude individual skill 
training required for deployment and post-mobilization leave activities 
from the 1-year activation period. 

[19] GAO, Military Personnel: Additional Actions Needed To Improve 
Oversight Of Reserve Employment Issues, GAO-07-259 (Washington, D.C.: 
Feb. 8, 2007). 

[20] GAO, Army National Guard: Inefficient, Error-Prone Process Results 
in Travel Reimbursement Problems for Mobilized Soldiers, GAO-05-79 
(Washington D.C.: Jan. 31, 2005). 

[21] GAO, Military Pay: Army Reserve Soldiers Mobilized to Active Duty 
Experienced Significant Pay Problems, GAO-04-911 (Washington, D.C.: 
Aug. 20, 2004), and Military Pay: Army National Guard Personnel 
Mobilized to Active Duty Experienced Significant Pay Problems, GAO-04-
89 (Washington, D.C.: Nov. 13, 2003). 

[22] See, for example, GAO, DOD Systems Modernization: Management of 
Integrated Military Human Capital Program Needs Additional 
Improvements, GAO-05-189 (Washington, D.C.: Feb. 11, 2005); Defense 
Management: Foundational Steps Being Taken to Manage DOD Business 
Systems Modernization, but Much Remains to be Accomplished to Effect 
True Business Transformation, GAO-06-234T (Washington, D.C.: Nov. 9, 
2005); and Defense Business Transformation: A Comprehensive Plan, 
Integrated Efforts and Sustained Leadership Are Needed to Assure 
Success, GAO-07-229T (Washington, D.C.: Nov. 16, 2006). 

[23] Veterans' benefits include health care, compensation and pension, 
education and training, vocational rehabilitation, guaranty home loans, 
life insurance, burial benefits, and dependents' and survivors' 
benefits. Reservists who have served honorably on active duty establish 
veteran status and may therefore be eligible for veterans' benefits 
including health care and monthly compensation, depending on the length 
of active military service and other eligibility factors. In addition, 
reservists who are never called to active duty may qualify for some 
veterans' benefits such as education, home loan guaranty, vocational 
rehabilitation, disability pension, and life insurance. In the absence 
of a formal actuarial model, we were unable to determine the deferred 
or accrual costs for reservists' benefits provided by the Department of 
Veterans Affairs. Furthermore, the Veterans Affairs budget does not 
distinguish between active and reserve cost, which prevented us from 
associating current noncash costs for programs such as vocational 
rehabilitation and disability pension with reserve compensation. In 
addition, we decided to associate all installation-based noncash 
benefits (such as commissaries and morale, welfare, and recreation 
centers) with the active components compensation costs although 
reservists are eligible to take advantage of those benefits. As a 
result, our compensation cost for reserve and guard personnel is likely 
understated. 

[24] In fiscal year 2001, Congress expanded retiree health care 
coverage to supplement Medicare. 

[25] GAO, DOD's 21st Century Health Care Spending Challenges, 
presentation for the Task Force on the Future of Military Health Care, 
GAO-07-766CG (Washington, D.C.: April 18, 2007). 

[26] In the National Defense Authorization Act for Fiscal Year 2004, 
Congress established TRICARE health care coverage for unemployed 
reservists or those ineligible for health care coverage from their 
civilian employer. However, this provision was not implemented by DOD. 
The Ronald W. Reagan National Defense Authorization Act for Fiscal Year 
2005 included provisions for reservists to receive 1 year of TRICARE 
standard for each period of 90 consecutive days served in a contingency 
operation given that the reservists signed a commitment to serve 
continuously in the Selected Reserve during the covered period. When 
implemented by the DOD, the program was called TRICARE Reserve Select. 
The National Defense Authorization Act for Fiscal Year 2006 enhanced 
this coverage by creating a three-tier system of eligibility, based on 
the percentage of co-pay. The John Warner National Defense 
Authorization Act for Fiscal Year 2007, further expanded the program to 
give access to the benefit to all Selected Reservists and eliminated 
the tiered eligibility system. TRICARE Reserve Select is scheduled to 
be implemented in October 2007. 

[27] Part-time drilling reservists drill 1 weekend a month and 
participate in active duty training for 2 weeks a year. These personnel 
are referred to as pay groups A and B in the services budget 
justification books, and they also may participate in special and 
school training, such as operational, refresher, and proficiency 
training. In addition, we included pay groups F and P in our part-time 
analysis. 

[28] This compensation does not include all of the costs required to 
support additional servicemembers, because it does not include those 
costs associated with recruiting and training personnel. 

[29] Full-time reserve and National Guard personnel are referred to as 
"Administration and Support" in the budget justification books, but are 
often referred to as active guard and reserve (AGR) or full-time 
support (FTS), depending on service culture. These personnel are called 
to active duty for reasons including organizing, administering, 
recruiting, instructing, and training reserve component personnel, and 
special work such as security. 

[30] The percentage of full-time reservists varies by component. For 
example, in fiscal year 2006 the Navy Reserve and the Air National 
Guard had the highest percentage of full-time reservists, about 12 and 
18 percent, respectively while the Air Force Reserve and Marine Corps 
Reserve had the lowest percentage, about 3 and 6 percent, respectively. 

[31] Department of Defense, Office of the Secretary of Defense, 
Military Compensation Background Papers: Compensation Elements and 
Related Manpower Cost Items, Their Purpose and Legislative Backgrounds, 
6th ed. (Washington, D.C.: April 2005). 

[32] GAO, Military Personnel: DOD Needs to Improve the Transparency and 
Reassess the Reasonableness, Appropriateness, Affordability, and 
Sustainability of Its Military Compensation System, GAO-05-798 
(Washington, D.C.: July 19, 2005). 

[33] John T. Warner and Saul Pleeter, "The Personal Discount Rate: 
Evidence from Military Downsizing Programs," The American Economic 
Review (March 2001). 

[34] GAO, Military Personnel: DOD Needs More Data Before It Can 
Determine if Costly Changes to the Reserve Retirement System Are 
Warranted, GAO-04-1005 (Washington, D.C.: Sept. 15, 2004). 

[35] Department of Defense, Office of the Secretary of Defense, 
Military Compensation Background Papers: Compensation Elements and 
Related Manpower Cost Items, Their Purpose and Legislative Backgrounds, 
6th ed. (Washington, D.C.: April 2005). 

[36] GAO, A Model of Strategic Human Capital Management, GAO-02-373SP 
(Washington, D.C.: Mar. 15, 2002). 

[37] Under Secretary of Defense for Personnel and Readiness' (OUSD-- 
P&R), Strategic Plan, FY2006-2011 (April 18, 2006). 

[38] GAO, Human Capital: Key Principles for Effective Strategic 
Workforce Planning, GAO-04-39 (Washington, D.C.: Dec. 11, 2003). 

[39] GAO, Military Personnel: DOD Needs to Improve the Transparency and 
Reassess the Reasonableness, Appropriateness, Affordability, and 
Sustainability of Its Military Compensation System, GAO-05-798 
(Washington, D.C.: July 19, 2005); The Congress Should Act to Establish 
Military Compensation Principles, GAO/FPCD-79-11 (Washington, D.C.: May 
9, 1979). 

[40] DOD, 9th Quadrennial Review of Military Compensation (Volume I; 
May 17, 2002); Commission on the National Guard and Reserves, 
Strengthening America's Defenses in the New Security Environment (March 
1, 2007); GAO, Military Recruiting: DOD Needs to Establish Objectives 
and Measures to Better Evaluate Advertising's Effectiveness, GAO-03-
1005 (Sept. 19, 2003). 

[41] The military personnel budgets include such things as basic pay, 
allowances for housing and subsistence, special and incentive pays, 
other allowances, and retired pay accrual. The pay and benefits for 
mobilized reservists are located in the active military personnel 
budget. 

[42] The operation and maintenance budget includes costs for morale, 
welfare, and recreation programs and commissaries. The Veteran's 
Affairs budget includes costs for the Home Loan Guaranty program and 
disability compensation. The military personnel budgets include costs 
for noncash items such as death gratuities and clothing and travel 
allowances. 

[43] The Health Affairs budget includes costs for all health care 
benefits except for health care for retirees younger than age 65. The 
Treasury budget includes contributions to retirement pay accrual to 
offset concurrent receipts. 

[44] Secretary of Defense Memorandum for Secretaries of the Military 
Departments, Chairman of the Joint Chiefs of Staff, Under Secretaries 
of Defense, "Utilization of the Total Force" (Jan. 19, 2007). This memo 
states that the planning objective for involuntary mobilization for the 
Guard and reserves will remain a 1-year mobilized to 5-year demobilized 
ratio. However, today's global demands will require a number of 
selected National Guard and reserve units to be remobilized sooner than 
this standard. 

[45] GAO-07-828. 

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