Second, it provided that appropriations and reimbursements thereto shall be available for obligational expenditure only after the Secretary of Defense has approved scheduled rates of obligation in order to prevent overdrafts or unwarranted deficiencies in any fiscal year.

That also is covered in S. 2054.

Third, it authorized the establishment of working-capital funds for the organization of inventories of the military departments into stock funds, and for the operation of commercial-type and for industrial-type activities as separate working units.

That is a provision that I believe is not covered by S. 2054.

Fourth, it authorized the establishment of departmental management funds to facilitate the carrying out of joint and special operations. That is a provision that does not appear in S. 2054.

The CHAIRMAN. It probably would not apply to every department. Mr. MCNEIL. I touch on that just a bit later, if that is all right, sir. Fifth, it provides for the adjustment of accounts when, under authority of law, any function or activity is transferred or assigned from one organizational division within the Department of Defense to another such organizational division.

Again that privision is covered by Senate 2054.

Sixth, it provides that the Secretary of Defense shall cause property records to be maintained in the three military departments, so far as practicable, on both a quantitative and monetary basis.

Seventh, it contains provisions relating to such matters as the availability of reimbursements, the common use of disbursing facilities, and the establishment of uniform terminologies, classifications, and procedures in budget and accounting matters.

Earlier in this statement the organization and duties of a Comptroller's functions were outlined. As Secretary Johnson mentioned a moment ago, a Comptroller has been named for the Department of Defense and similar designations have been made in each of the military departments.

The CHAIRMAN. May I interrupt there? That departmental Comptroller has no relation to the duties of the Comptroller General. Is that official not set up only to provide the required services within the Department?

Mr. MCNEIL. It is the focal department within the Department. It has no duties outside the Department of Defense, and in the case of the Army, Navy, and Air, the Comptroller has duties within that military department.

The CHAIRMAN. The Department of Defense, including its Comptroller, is checked by the Comptroller General just like all other departments of the Government?

Mr. MCNEIL. Exactly. But it provides a focal point in each of the departments for such functions to be carried on.

Substantial progress has been made in developing Comptroller's organization in the Department of Defense, particularly in the fields of budget, accounting, and progress and statistical reporting. Plans are also being developed in respect to internal auditing and management engineering. Immediate implementation of the authority in the field of management engineering is being developed in consonance with the Department of Defense Management Committee, which has

been active in this field since its creation in August 1949. That is the group that is headed by General McNarney.

Fiscal functions in the three military departments are being organized in a manner consistent with the procedures in the Office of the Comptroller of the Department of Defense. Eventually there will exist only those variations resulting from the fact that the comptrollers of the military departments must place greater emphasis upon certain organizational subdivisions than is necessary in the Office of the Secretary of Defense.

As an initial basic step in fulfilling the congressional requirement that as far as is practicable, budget estimates and programs of the military departments shall be of comparable form and uniform pattern, a category system has been developed and is now being used as a basis for comparison of the three service budgets. This divides all military requirements into seven major categories covering the major things we are doing: Personnel; operation of each of the services; major procurement; public works, a capital item; civilian components, and other military requirements. We separate establishment-wide activities, being a type of undistributable overhead.

Probably the most familiar provision of title IV was the requirement for a performance type budget, which was intended to assist in the correction of weaknesses in budgeting, and improving administration and management of authorized programs. At the outset it was determined that the primary objective would be to provide management, including review levels such as the Joint Chiefs of Staff, Secretary of Defense, Bureau of the Budget, and the Congress-with adequate information for purposes of consideration and control on the basis of areas of primary interest or significance.

It was planned that all costs relating to a logical and identifiable program would be included as a separate project or budget program for presentation and justification by the organization concerned to the Secretary of Defense, to the Bureau of the Budget, the President. and the Congress, and after the appropriation to be followed by administration reporting along the same lines.

Afte: the determination of what constitutes a logical and identifiable program, there would be a logical, and so far as practicable, uniform grouping of projects or budget programs by primary functions, with this grouping paralleling so far as possible the organization and management structure of the military departments. Next, there would be a segregation between capital and current operating categories. A further consideration in determining the programs to be adopted by one of the military departments was that those selected. should lend themselves to comparison with similar programs of the other two military departments.

In addition to the program identification, it is considered essential, from the standpoint of internal management, that the diffusion of fiscal responsibility which has existed in the past be corrected.

Management is handicapped when fiscal responsibility is diffused. The financing of an identifiable program from a single source of funds clearly fixes management responsibility, simplifies reporting and permits departmental management and the Congress more easily to determine costs and to evaluate programs.

I might interpolate there that I think that is one of the secrets. of proper administration and management and one of the secrets of

presenting an understandable budget to Congress, that is, to have an identifiable activity financed with a single source of funds. Then you can put your hands on the problem.

The development of a proper budget structure has been emphasized because it not only affects the presentation of budget estimates, but runs to the root of management and fiscal responsibility.

To this end it is planned that fiscal management should parallel management or command responsibility. With few exceptions this will be accomplished in the initial development of the performance budget in the Department of Defense.

The basic appropriation structure for the Department of the Air Force for the current fiscal year was designed to be readily adaptable to the performance-type budget. Studies are under way which may result in some revision of the project or program structure in order to achieve, for this military department, the objectives of performance type budgeting. The 1951 budget for the Department of the Navy has been constructed on the performance-type basis, and is now being considered in that fashion before the House Appropriations Committee.

Detailed studies are under way in the Department of the Army with a view toward conversion of its budget structure to the performance-type basis in the 1952 budget, which will be submitted to the Bureau of the Budget by September 15, 1950.

It is worthy of note that, soon after the Commission's recommendation for a performancet-type budget, administrative action was taken in the executive branch looking toward the development of such a budget structure throughout practically the whole of the executive branch and that these efforts were intensified when the Congress included a performance budget requirement in title IV of the Security Act amendments.

In the case of the Department of Defense, the budget cycle for any given annual appropriation extends over a period of about 3 years. We have already begun preparation of the fiscal year 1952 budget, which will be presented to the Bureau of the Budget in September of this year. The 1952 budget estimates will be considered by Congress next spring, and the funds appropriated will require administrative. action and control during the following year-in certain instances for much longer periods or until obligations created thereunder are liquidated.

If a change to performance type-budget required waiting until some succeeding year's budget had been prepared, submitted, and acted upon, it would be several years before the full benefits of the improved budget could be realized. For this reason it is important that authority be given for the conversion from the present basis, to the cost-ofperformance basis, for the budgets in process of preparation, justification, or administration. With this authority the benefits of the performance-type budget can be realized at a much earlier date.

I think you cover that point in S. 2054, and I think it is a very important point. The adoption of the performance budget should be complemented by authority to convert the budgets that are then in

process.

The CHAIRMAN. The authority for what?

Mr. MCNEIL. To convert to the performance-type basis the budgets that are then in process because the cycle is at least 3 years. Unless

the section you have in S. 2054 is provided giving authority to convert, it means it is years before you get the actual benefit.

The section of title IV which authorized the establishment of working-capital funds for stores accounts and for commercial and industrialtype operations was of vital importance to the Department of Defense. This is a section of our title IV which does not appear in S. 2054. I don't know that I am competent to say that it might be of real help. I know it would not be to all agencies, possibly, but there are possibly a number of other large agencies with rather complex organizational structure or with certain types of activities to which this title might apply.

This section provides for the businesslike operation of activities in the Department of Defense which most readily lend themselves to such an arrangement. One primary use is the carrying of standard stock common-use items in a funded inventory. Such funds are not a new and untried proposal. The Department of the Navy has, during the past 50 years, developed a successful central inventory account under a working capital type of fund. Inventories financed by such a working capital fund have been carried both in quantitative and monetary control. The Navy's working capital funds have stood the test of two world wars and the subsequent demobilization periods. The experience has been excellent. This experience has proved the wisdom of the further extension of this principle in the Navy-and more important still-of making the economies and advantages of such funds available to the Department of the Army and the Department of the Air Force. Several specific advantages of such inventory accounts are listed below:

To the extent that items are included in a stock fund, procurement, storage, and issue policies and procedures are standardized, thus facilitating interservice utilization and balancing of stocks.

Material, particularly standard stock items which are needed or consumed by two or more appropriations, can be carried in a single inventory, procured in a single operation, and be available on the shelf for issue to appropriations which have the money in their current year's budget to pay for the material when issued. This has the effect of reducing over-all inventory and/or stock-level requirements. It facilitates procurement of commodities of a seasonal character at times when the market is most favorable.

Another point also is that material issued for consumption appears as a charge to appropriations in the period in which it is used, thereby facilitating the development of job or activity costs. Thus management is furnished with a tool for cost control.

I think one of those important things we got by title IV is to carry inventory in stock in the working capital fund, and it cannot be used unless there is money in the current appropriaton legally available to draw the material from stores. When it is drawn for consumption the charge is made to the appropriation at that time and you have a measure of the material consumed by the activity during the period covered by the appropriation.

The CHAIRMAN. Where do you keep the stock? Do you have a revolving fund, an operating fund that keeps the stock available? Then when one department or one agency of the department desires to make a purchase, it purchases through that stock reserve?

Mr. MCNEIL. That is correct, sir.

The CHAIRMAN. Then the purchase price is charged against that fund.

Mr. MCNEIL. It is charged against the activity and the program. That is one way to get the cost of material into the job that is then being undertaken.

The CHAIRMAN. In that way you are able to ascertain quickly what the cost of a particular service or a particular activity amounts to. Mr. MCNEIL. So if you have the labor cost and the cost of the material used, you have the principal elements of cost of accomplishing the task.

The CHAIRMAN. You say the Navy has been following that general system or practice for a number of years?

Mr. MCNEIL. It started as far back as 1893 with a very small fund and during this last war it developed into a substantial operation. They are now carrying some 70,000 items on the shelf available for issue to any organization or project of the Navy which has funds legally available for the purchase of material.

The CHAIRMAN. Are you applying that same principle and practice throughout the entire Defense Department?

Mr. MCNEIL. Studies are under way at the moment in the Army and the Air Force with a view of establishing it there as quickly as the procedures can be developed and the material in inventory priced and put under that type of control. Studies have been made at various times as to the management of the industrial and commercialtype activities. An example of this type of study was covered by a report of the subcommittee of the Committee on Naval Affairs of the House of Representatives in 1945. It stressed the necessity for developing some means of ascertaining the cost of work performed.

The administration of appropriated funds, the contemporary allotment control direct from appropriations, can be developed to a satisfactory point in administrative or strictly military-type functions. If I may interpolate there, we have two principal things we have to finance. One is the administrative type of operation and the other is the manufacturing or service type. I think you can group practically all the things that are done in Government into those two very broad categories. The appropriation and what is known as the allotment type of administration seems to me quite satisfactory for an administrative type of thing; that is, running a department headquarters, where the end product is difficult to measure. But that type of administration of funds doesn't seem to me to meet the requirements of a commercial- or industrial-type activity. There I believe that can best be handled under a working-capital fund and run as a business, receiving no money directly from appropriations, receiving money only by billing for the cost of services performed.

However, such an administrative type of management and financial control fails utterly in contributing to the proper management of industrial- and commercial-type activities and, without complete duplication of systems, cannot provide information as to the cost of work performed. A cost system could be devised, installed, and maintained in establishments of this type under the present budget structure, and financed as at present by numerous appropriations. This would, however, involve expensive duplication, and its operation would never be simple, economical, or effective. Its confused results would be difficult to utilize for management purposes. The problem